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Good morning. My name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the Donnelley Financial Solutions Third Quarter Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]
At this time, I would like to turn the conference over to Michael Zhao, Head of Investor Relations. Please, go ahead.
Thank you. Good morning, everyone, and thank you for joining Donnelley Financial Solutions third quarter 2022 results conference call. This morning, we released our earnings report including a supplemental trending schedule of historical results. Copies of which can be found in the investor section of our website at dfinsolutions.com.
During this call, we'll refer to forward-looking statements that are subject to risks and uncertainties. For a complete discussion, please refer to the cautionary statements included in our earnings release and further detailed in our most recent quarterly report on Form 10-Q and other filings with the SEC.
Further, we will discuss certain non-GAAP financial information, such as adjusted EBITDA and adjusted EBITDA margin. We believe the presentation of non-GAAP financial information provides you with useful supplementary information concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance.
They are, however, provided for informational purposes only. Please refer to the earnings release and related tables for GAAP financial information and reconciliations of GAAP to non-GAAP financial information.
I am joined this morning by Dan Leib, Dave Gardella, Craig Clay, Eric Johnson, Floyd Strimling, and Kami Turner.
I will now turn the call over to Dan.
Thank you, Mike, and good morning everyone. Our third quarter results offered further validation of our strategy, including strong overall adjusted EBITDA margin performance, continued double-digit growth in our SaaS compliance offerings and great progress in expanding the adoption of our offerings in the marketplace.
That said, it was in the context of a very challenging operating environment, which resulted in a nearly 50% reduction in our transactional revenue, as capital markets transactional activities continued to be severely impacted by the combination of macroeconomic headwinds and market volatility.
A weak capital markets transactional environment resulted in lower-than-planned revenue in the quarter, while our third quarter adjusted EBITDA margin of 24% was in line with our expectation and once again significantly higher than historical quarters with similar overall and transactional revenues.
Our third quarter adjusted EBITDA margin performance, which reflects our evolving sales mix, permanent changes to our cost structure and continued cost discipline, further demonstrates our ability to sustainably operate at a higher level of profitability across a range of market conditions.
One of the fundamental drivers of our favorable margin performance against those historical periods with similar overall and transactional revenues has been our strategy to shift sales toward higher-margin software solutions, achieving a higher level of software sales mix has been a central focus of our transformational journey. And during the third quarter we made continued progress in transforming DFIN into a software-centric company.
Total Software Solutions sales accounted for nearly 37% of total third quarter net sales, an increase of approximately 880 basis points from last year's third quarter sales mix. A trailing four-quarter basis, Software Solutions sales reached $285 million, growing 14% from the third quarter 2021 trailing four quarters and represented 32% of total net sales, an increase of approximately 590 basis points from the third quarter 2021 trailing four-quarter period.
The third quarter sales mix positions us well to achieve our long-term target of driving 55% to 60% of revenue from software solutions by 2026 and as importantly, the resulting margin profile consistent with such a sales mix. Our transforming sales mix is enabling DFIN to become structurally and sustainably more profitable. Another factor behind our resilient margin performance has been the progress we have made towards creating a cost structure and operating model that better aligns with our business mix, part of which is driven by cyclical market factors.
Over the last several years, in an effort to establish an optimized and variable cost structure in areas of the business that have both seasonal and cyclical fluctuations, we took aggressive cost management actions that targeted many aspects of our fixed cost base, with focus on downsizing our print production platform, driving internal efficiencies and reducing our physical footprint.
During the third quarter, we took additional actions to reduce our fixed costs, by further streamlining our print and distribution operations and reducing our global real estate footprint. In the quarter, we completed the exit from our Secaucus New Jersey facility and consolidated our digital print operations within our existing facility in Lancaster, Pennsylvania.
Our remaining print operations are 100% digital to serve our clients' demand for higher value, quick-turn distribution requirements, while we have established a third-party network to handle any other print and distribution requirements. The resulting operating model further reduces fixed costs and simplifies our operations. Also, in the quarter, we took additional steps to reduce our global office footprint, permanently lowering our real estate spend.
I'm also encouraged with the continued momentum in our recurring compliance and regulatory-driven software sales. Two main components of our recurring compliance software ActiveDisclosure and Arc Suite, each delivered another quarter of double-digit year-over-year sales growth, the seventh consecutive quarter, where both products grew double digits versus prior year. The continued growth in recurring compliance software, is an important step in the transformation of our business mix and financial profile to become more predictable and resilient.
Arc Suite, our market-leading compliance software offering to mutual funds and other regulated investment companies, delivered solid year-over-year sales growth of 12% or 14% growth on a constant currency basis. I am encouraged by the solid subscription revenue growth across our ArcPro and ArcRegulatory solutions, helping to more than offset a normalized demand profile for ArcDigital, total compliance management solution, which had a very strong adoption in 2021 following its introduction in response to regulatory change.
Arc Suite possesses the characteristics of best-in-class enterprise software products, with a high component of recurring subscription revenue, which makes up nearly 90% of total revenue, as well as long-term contracts with average contract terms in excess of three years. ActiveDisclosure, our cloud-native solution, purpose-built for SEC reporting for corporations, grew 11% in the third quarter. More importantly, subscription-based revenue grew 14% in the quarter, an important metric that will help to accelerate our recurring revenue growth.
During the third quarter, we continue to make excellent progress in the transition of existing customers from our prior platform to new ActiveDisclosure, while also realizing higher price levels and longer-term commitments, resulting in strong annual recurring revenue. Based on the strong progress we have made thus far we are on pace for the cumulative subscription contract value sold on new AD to surpass $100 million by the fourth quarter, driven by higher pricing and longer-term contracts.
Our average contract length on NewAD reached 30 months in the quarter, a great accomplishment for a product that has been in market for less than two years. Since its launch, NewAD has received tremendous market response, resulting in very strong client adoption and renewals. Confirmation our clients see the value of what we have built, with clients adding seat licenses, increasing contract term and adding services packages upon renewal.
Our partner network agrees, in addition to receiving Oracle's built-for-NetSuite approval making ActiveDisclosure the only SEC disclosure solution on NetSuite’s SuiteApp, I am pleased that DFIN has been named by Oracle NetSuite as SuiteCloud "Breakthrough Partner of the Year". This award recognizes DFIN as an influential partner for the growing success of its ActiveDisclosure SuiteApp, which was launched earlier this year and built using the NetSuite SuiteCloud Platform.
NetSuite software is used to close and reconcile the company's financials. Every company private or public, big or small has a closed process prior to reporting. This is a critical step before publishing financials at ActiveDisclosure. The combination of number one cloud ERP with DFIN's purpose-built SEC compliance software solution offers clients a seamless path to regulatory filings. New ActiveDisclosure is the perfect fit for a market that is looking for a solution dedicated to SEC compliance.
Next let me comment briefly on the SEC regulatory landscape and the potential for future rule changes. We are seeing increasing levels of discussions and proposals from the SEC that affect many aspects of regulatory compliance including disclosures, filing and the expansion of iXBRL tagging
In September the SEC adopted the long-awaited pay versus performance disclosure rule. The new rule require public companies to disclose the relationship between executive compensation actually paid to the company's named executive officers and the company's financial performance. Due to our leadership in streamlining the financial proxy process to deliver effective shareholder communications, our clients are turning to DFIN for our expert supported regulatory services and iXBRL tagging as they prepare to comply with the mandate in 2023.
Further just last week, the SEC released its final ruling on tailored shareholder reports, which introduces a new tailored report that requires distribution twice a year as well as iXBRL tagging, impacting mutual funds and exchange-traded funds. Finally, the SEC is in the final stages on the ruling of the EDGAR next project, which is aimed at improving filer access and account management across global capital markets. We are excited by opportunities to expand the usage of our software and services as we assist our clients with their regulatory requirements. DFIN is well-positioned to leverage our software offerings and deep domain service expertise to address the market needs related to future regulatory changes.
Turning to our transaction-driven software Venue, which experienced tremendous growth last year as a result of a robust capital markets transactions environment compared to a very strong third quarter of 2021 when Venue sales were up 53% versus the prior year, third quarter 2022 Venue sales were down 11%, driven by a much weaker transactions environment.
Despite the significant decline in capital markets transactions in the third quarter, Venue continued to perform better than its primary use case M&A. With the global M&A market down more than 30% year-over-year in the third quarter, the level of underlying activity taking place on our virtual data room platform remained resilient.
Venue sales in the third quarter grew sequentially from the second quarter of this year, which is a positive indication of the continued activity taking place on the platform and further demonstrating the resiliency of the underlying activities supporting future M&A. Overall, I am encouraged by the performance of our Software Solutions portfolio and believe both our recurring compliance and transactional software products are well positioned for the future.
Another aspect of our business in the third quarter I want to highlight is the strong performance of our investment companies, Compliance and Communications Management segment. Despite the expected reduction in print and distribution revenue due to regulatory changes overall sales in the third quarter were flat versus last year's third quarter.
More importantly, as a result of our focus on profitable sales in this segment we realized a significant step up in profitability. On a similar level of sales this year's third quarter adjusted EBITDA of $12.1 million is more than three times higher than last year's adjusted EBITDA of $3.5 million. Additionally, our third quarter adjusted EBITDA margin was 33.7% significantly above historical margins.
The adjusted EBITDA margin reflects the shift to a more profitable sales mix more document management, filing and service-related revenue and less print sales as well as price uplift on the remaining print-related work, which combined to structurally increase the profitability of this segment.
The consolidation of our print platform and outsourcing of most of our print-related work, which I mentioned earlier, variabilizes our cost structure affording us greater flexibility to focus on higher-margin offerings such as composition and project management services enabling us to operate at a higher level of profitability than in the past.
As it relates to capital markets transaction sales in the quarter, a weaker-than-expected transactional environment resulted in transactional revenue down by nearly half from last year. For reference, transactional revenue in last year's third quarter was the highest level it had been in the previous five years and grew nearly 50% from the year before.
In the third quarter of this year, we experienced a continuation of the frozen IPO market. With activity at the priced IPO is greater than $100 million on US exchanges down more than 90% year-over-year.
The M&A market while more resilient than the IPO market further weakened in the third quarter and was down more than 30% from a year ago with very few large M&A deals being completed.
As I have stated previously, while it's been a challenging environment throughout 2022, history has demonstrated the change in the transactions market can be swift. We remain confident that with our strong market position and client relationships, DFIN is very well positioned to support the capital markets transactional needs as activity levels return.
Finally, I want to highlight another proof point of the progress we are making transforming DFIN into an employer of choice that attracts, develops and retains talented professionals who share our vision of becoming a leading software-centric regulatory and compliance company. Through continued focus benchmarking with leading companies and investments in our employees, we have made meaningful progress resulting in DFIN being certified as a great place to work.
Our efforts to transform our culture and enhance the employee experience are once again being recognized in the marketplace. I am proud that on October, DFIN was named to Newsweek's list of the 2022 Top 100 most loved workplaces in America. The honor recognizes companies that put respect, caring and appreciation for their employees at the center of their business model and in doing so, have earned the loyalty and respect of the people who work for them.
Creating a strong culture in which the well-being of employees is a strategic priority, has allowed us to transform our business and drive value for clients, employees and shareholders. Our latest recognition in addition to the accolades we received earlier this year from workplace surveys conducted by organizations such as Built In Chicago, demonstrates we are on the right path in becoming the company we strive to become.
Before I share a few closing remarks I would like to turn the call over to Dave to provide more details on our third quarter results and our outlook for the fourth quarter. Dave?
Thank you, Dan and good morning, everyone. As Dan noted we delivered strong third quarter results in the context of a very weak capital markets transactions environment. The volume of capital markets deal activity remained substantially below last year's levels as the market softness in the first two quarters of 2022 weakened further in the third quarter especially in M&A which had performed relatively better than IPOs in the first half of 2022.
Additionally, the third quarter of 2022 faced very tough comparisons, given 2021's record performance and market conditions. Despite the sharp decline in deal volume our focused efforts to execute our strategy have enabled DFIN to become fundamentally more profitable compared to historical quarters with similar level of overall sales and transactional activity.
By continuing to focus on operational efficiencies, while also improving our sales mix, specifically more software and less print sales third quarter adjusted EBITDA margin was 810 basis points and 1030 basis points higher than the third and fourth quarters of 2019 respectively, despite overall sales and transactional sales in this year's third quarter being slightly below the levels we reported in those quarters.
Our third quarter results provide additional positive proof points that our strategy is working allowing us to deliver stronger financial results regardless of market conditions, while also continuing to invest and evolving to a more current sales mix. aggressively managing our cost structure and being disciplined stewards of capital.
On a consolidated basis, net sales for the third quarter of 2022 were $188.7 million, a decrease of $59 million or 23.8% from the third quarter of 2021. Substantially, all of the year-over-year revenue decline took place in the capital markets transactions business which was down $55.9 million or nearly 50% versus last year as Dan noted earlier.
Software Solutions net sales for the quarter were $69.5 million, an increase of $0.2 million or 0.3% which included a $1 million or 1.4% decrease due to changes in foreign exchange rates. Our recurring compliance offerings, which include ActiveDisclosure and Arc Suite continue to demonstrate positive sales momentum.
ActiveDisclosure grew 10.6% in the quarter, the seventh consecutive quarter of double-digit sales growth. Arc Suite net sales grew 11.8% in the quarter driven by subscription revenue growth. Sales of Venue data room was down 11.4% year-over-year, a result of a weak capital markets transaction environment.
As Dan mentioned earlier Software Solutions net sales accounted for nearly 37% of total third quarter net sales, up from 28% in the third quarter of 2021. Tech-enabled services net sales were $87.4 million, a decrease of $54.7 million or 38.5%, primarily due to decreased capital markets transactional activity.
Print-in distribution net sales were $31.8 million, a decrease of $4.5 million or 12.4% due to a decrease in capital markets transactions related print demand as well as regulatory driven reductions in demand for printed materials within investment companies.
Third quarter non-GAAP gross margin was 55.5% approximately 690 basis points lower than the third quarter of 2021, primarily driven by lower sales volume and an unfavorable business mix, both related to lower capital markets transactional activity, partially offset by the impact of ongoing cost control initiatives and lower incentive compensation expense.
Adjusted non-GAAP SG&A expense in the quarter was $59.5 million, a $12.6 million decrease from the third quarter of 2021. The decrease in adjusted non-GAAP SG&A is primarily driven by a reduction in selling expenses, as a result of lower sales volume lower incentive compensation expense and the impact of ongoing cost control initiatives, partially offset by additional investments in product development and technology.
As a percentage of net sales, adjusted non-GAAP SG&A was 31.5%, an increase of approximately 240 basis points from the third quarter of 2021. Our third quarter adjusted EBITDA was $45.3 million, a decrease of $37.2 million or 45.1% from the third quarter of 2021. Our third quarter adjusted EBITDA margin was 24%, a decrease of approximately 930 basis points from the third quarter of 2021, which was a quarterly record for adjusted EBITDA margin driven by less transactional sales, partially offset by lower incentive compensation expenses, as well as the impact of ongoing cost control initiatives.
As we noted earlier, our third quarter adjusted EBITDA margin is much stronger than our historical margins in quarters with similar overall and transactional revenue. To illustrate this in more detail in the third quarter this year with slightly lower overall and transactional sales compared to the third and fourth quarters of 2019, this year's third quarter adjusted EBITDA of $45.3 million is $14.2 million and $19.2 million higher than the third and fourth quarters of 2019, respectively.
From a margin perspective, third quarter 2022 adjusted EBITDA margin was 24% compared to 15.9% and 13.7% in the third and fourth quarters of 2019, respectively. Our focused efforts to reduce fixed costs across the business and to variabilize our cost structure in specific areas have positioned DFIN to be more sustainable and resilient throughout market cycles.
Turning now to our third quarter segment results. Net sales in our Capital Markets Software Solutions segment were $45.8 million, a decrease of 4.8% from the third quarter of 2021. The decrease in net sales is primarily due to lower Venue Data Room activity, partially offset by the increase in our recurring compliance product ActiveDisclosure, which grew 10.6% in the third quarter.
As Dan commented earlier, we continue to make excellent progress in transitioning customers on the AD3 platform to new ActiveDisclosure while also realizing higher price levels and longer term subscriptions resulting in strong annual recurring revenue. Sales of our Virtual Data Room offering, Venue were down 11.4% compared to the third quarter of last year, driven by a much lower level of transactional activity this year. Similar to what we experienced in the first and second quarters of this year, Venue continued to outpace the market trend of its primary use case M&A during the third quarter.
With the global M&A market down more than 30% on a year-over-year basis in the third quarter, we are encouraged by the resiliency of Venue sales. Adjusted EBITDA margin for the segment was 22.5%, a decrease of approximately 180 basis points from the third quarter of 2021. The decrease in adjusted EBITDA margin was primarily due to lower sales and unfavorable sales mix and incremental product development and technology investments, partially offset by lower incentive compensation expense and price uplifts on new AD.
As a reminder, the margin structure for ActiveDisclosure contains costs associated with supporting both the AD3 and new AD platforms. We expect to complete the decommission of AD3 by the end of the first half of 2023, eliminating duplicative operating costs and further improving the margin profile of this segment. Prior to the decommissioning date, we will migrate the vast majority of the remaining AD3 clients onto new AD.
Net sales in our Capital Markets Compliance and Communications Management segment were $83.3 million, a decrease of $59.2 million or 41.5% from the third quarter of 2021, primarily due to lower capital markets transactional activity, as well as lower proxy and traditional compliance revenue.
The Capital Markets transactional environment further deteriorated in the third quarter, as a combination of growing market volatility driven by aggressive Fed action to combat inflation and geopolitical uncertainties further weighed on IPO, SPAC and M&A activities.
Specifically the IPO market was largely frozen during the third quarter, with only five priced IPOs over $100 million taking place on US exchanges compared to 150 priced IPOs in the third quarter of 2021. The M&A market, which had been relatively more resilient through the first half of 2022 slowed sequentially, from the second quarter and was down more than 30% in the third quarter versus last year.
Combined the adverse impact of these factors, caused Capital Markets transactional sales to be below expectations for the quarter. As we've commented previously, we remain encouraged by a pipeline of in-process deals and the pent-up demand for future transactions, given the lack of activity in 2022.
Our industry-leading portfolio of solutions dedicated to our clients' private-to-public journey, as well as our strong market position in the transactional filing business, positions us well to capture a significant portion of future deal activity.
More importantly, these transactions provide a pipeline to recurring software subscriptions to support our clients' ongoing compliance requirements. After five consecutive quarters of sales growth, Capital Markets compliance revenue was down 11% versus the third quarter of 2021. The year-over-year decline was driven by a lower volume, of merger-related special proxies in light of a much weaker M&A and leaseback activity levels versus last year.
In addition, as a result of COVID-related filing delays, certain companies whose traditional proxy filings normally would have been made in the second quarter of 2021 were filed in the third quarter last year. In 2022, we experienced a more normalized proxy cycle after COVID-related filing delays, resulting in a timing shift in certain compliance filings.
Specifically, certain filings completed in the third quarter last year, were filed in the second quarter this year assuming the quarterly year-over-year comparisons. In addition, approximately 15% of our compliance revenue is driven by 8-K and 6-K filings. While these filings have a fairly consistent and reoccurring base, some of these filings are event driven, which results in a modest level of fluctuation depending on the transactional environment.
On a year-to-date basis, our Capital Markets compliance sales are up over 13% compared to last year. Adjusted EBITDA margin for the segment was 30.6%, a decrease of approximately 1,990 basis points from the third quarter of 2021. The decrease in adjusted EBITDA margin was due to the lower transactional sales, partially offset by lower selling expenses, lower incentive compensation expense and cost savings initiatives.
Net sales in our Investment Company Software Solutions segment were $23.7 million, an increase of 11.8% from the third quarter of 2021, which was also a very strong quarter. Excluding the negative impact of foreign exchange rates, net sales increased 14.2% versus the third quarter of 2021. The year-over-year growth was driven primarily by subscription revenue growth in ArcPro and ArcRegulatory, two products within our Arc Suite offering.
As expected the demand for ArcDigital, our total compliance management offering, which was a big driver of the net sales growth for this segment in 2021 following the initial adoption, was more normalized in the third quarter. Going forward, we expect this normalized growth profile for ArcDigital to continue.
Adjusted EBITDA margin for the segment was 29.5%, an increase of approximately 920 basis points from the third quarter of 2021. The increase in adjusted EBITDA margin was primarily due to operating leverage and the increase in sales and lower incentive compensation expense, partially offset by higher product development and technology investments.
Net sales in our Investment Companies Compliance and Communications Management segment were $35.9 million, flat to the third quarter of 2021 as the impact of regulatory changes and a reduction of print sales, related to contracts we proactively exited, were offset by higher service-related revenue and price increases on the remaining print-related work.
Adjusted EBITDA margin for the segment was 33.7%, approximately 2,400 basis points higher than the third quarter of 2021. The increase in adjusted EBITDA margin was primarily due to a favorable sales mix featuring more services and less print, price increases and the remaining print work, and a reduction in overall expense within the segment including lower incentive compensation expense and reduced overhead costs based on the lower activity level in this segment.
Regarding the regulatory change that will continue to reduce this year's demand for print in the segment, we continue to expect a decline in net sales of approximately $30 million and only a de minimis impact on adjusted EBITDA in full year 2022. The vast majority of this year's regulatory-driven decline in print is reflected in our year-to-date results.
Non-GAAP unallocated corporate expenses were $9.6 million in the quarter, an increase of $0.7 million from the third quarter of 2021, driven by an increase in expenses aimed toward accelerating our transformation, partially offset by lower incentive compensation expense and the impact of ongoing cost control initiatives.
Free cash flow in the quarter was $68.7 million $31.7 million unfavorable versus the third quarter of 2021. The reduction in free cash flow reflects our lower adjusted EBITDA the timing of interest and tax payments and additional capital expenditures in technology development during the third quarter of 2022, partially offset by a benefit of working capital, which was primarily a result of the decline in sales.
We ended the quarter with $191.7 million of total debt and $180.9 million of non-GAAP net debt including $67.5 million drawn on our revolver. From a liquidity perspective, we had access for the remaining $232.5 million of our revolver as well as $10.8 million of cash on hand.
As of September 30, 2022, our non-GAAP net leverage ratio was 0.8 times. As a reminder, our cash flow is historically seasonal. We are a user of cash in the first half of the year, generating more than 100% of our free cash flow in the second half of the year. As our sales mix continues to evolve to proportionately more subscription-based software solutions, we expect this seasonality to continue to become less significant.
Regarding capital deployment, we repurchased approximately one million shares of our common stock during the third quarter for $32.3 million at an average price of $33.72 per share. Year-to-date, we've repurchased approximately 4.4 million shares of common stock for $138.8 million, at an average price of $31.78 per share.
As of September 30, 2022, we had $137.9 million remaining on our $150 million stock repurchase authorization. As it relates to our outlook for the fourth quarter of 2022, we expect market volatility to continue to weigh on the capital markets transactions environment. So far in the fourth quarter, price IPOs and SPACs are well below this point last year.
Large M&A deal completions are also below last year's level. With that, as the backdrop, we expect consolidated fourth quarter net sales to be in the range of $170 million to $190 million, and an adjusted EBITDA margin percentage in the mid-20s.
Compared to the fourth quarter last year, the midpoint of our revenue guidance $180 million implies a year-over-year sales decline of approximately 23%, similar in magnitude to our third quarter year-over-year change.
From a margin perspective, our guidance of mid-20% range is similar to last year's fourth quarter adjusted EBITDA margin, despite a much lower level of transactional revenue and once again, much stronger than historical quarters of like size total and transactional sales.
I'll also provide a bit more color on our assumptions for the Capital Markets Compliance and Communications Management segment. At the midpoint of our sales range, we assume transactional sales to be at a similar level to what we reported in the third quarter this year. In addition, and related to my earlier comments, regarding the impact of the transactional environment on certain compliance filings, most notably, special proxies and 8-Ks, our fourth quarter estimate assumes a modest year-over-year decline in our compliance-based sales within this segment.
Finally, we are in the midst of preparing our 2023 operating plan. We expect to continue to navigate through a volatile and uncertain capital markets transaction environment, as well as broader macroeconomic headwinds, similar to 2022.
As we have mentioned previously, our strategy remains unchanged and we are making solid progress toward achieving the long-term targets, we laid out earlier this year. Our focus therefore remains on executing with discipline both in the management of our cost structure, as well as in the allocation of capital in order for us to continue to invest to accelerate our strategy.
With that, I'll now pass it back to Dan.
Thanks, Dave. Our third quarter performance serves as further proof that our strategic transformation is resulting in DFIN, becoming fundamentally and sustainably more profitable, enabling us to deliver a much higher level of profitability compared with historical periods of similar size revenue.
The actions we have taken since the spin, including deleveraging the balance sheet, investing to drive recurring sales, permanently reducing fixed costs and focusing on profitability and cash flow position us well as we operate in a challenging environment.
It is difficult to predict the end to the current downturn in capital markets our solid financial profile provides us with the foundation to continue to execute our strategic transformation. We remain enthusiastic about the opportunities ahead to continue to generate increased value to our customers, employees and shareholders.
Before we open it up for Q&A, I'd like to thank the DFIN employees around the world who've been working tirelessly to ensure our clients continue to receive the highest quality solutions.
Now with that, operator, we're ready for questions.
Thank you. [Operator Instructions] We'll go first to Charles Strauzer at CJS Securities.
Hi. Good morning.
Good morning, Charlie.
Just to clarify a little bit on the shortfall in the quarter. Obviously, your transactional was the key part of that, but is it safe to say that all of the shortfall was related to transactions.
Yes, Charlie, it's Dave. As we noted that was substantially all the driver of the total shortfall versus our guidance, I think when you look at kind of the traditional transactional line as well as some of the -- what we call the carryover impacts, whether it be Venue or some of the other compliance work that's affected by transactional that was really all of the delta we saw relative to the outlook that we gave in August.
Great. And obviously you did a good job of holding margins in that mid-20s range 24%. What do you have to do to kind of kind of maintain that going forward not just in Q4, but kind of going forward from there too?
Yes. It's a great point and one that we've been hitting on all year long that despite the decline in transactional and I think when you look at we pointed this out historical quarters where we saw lower levels of transactional. The margins were much, much lower in the call it mid-teens rate. And throughout this year at similar levels being able to maintain margins in the mid-20s is really just a function of a lot of things that we've highlighted over the years. It's really being disciplined on the cost structure, shifting the mix to much more heavily weighted to software.
And then as we've talked about exiting some of the lower margin print work. Some of that obviously was regulatory driven. Some of it was actions that we've taken to reduce the overall print activity. And then even the last thing, I would say, even on the remaining print work is the higher price levels that we're getting, which really helps profitability across the board.
And I guess more specific to your question on a go-forward basis that will be the same playbook that we're going to use going forward, continue to be disciplined on the cost side, look at pricing opportunities and shifting the mix going forward. And as you know, our long-term guidance is for margins to approach 30%. And we think that the mid-20s with this level of transactional really gets us off to a good way on that path to achieving that.
Great. And then, just, lastly for me, I'll jump back in queue, is just cash flow expectations in Q4. Just kind of some color around that.
Yes. And cash flow is always the one that is a little bit harder to predict, just given a couple of days matter in terms of collections of receivables, et cetera. There are a couple of things that impact, I think, Q4 relative to last year. Overall, I think, my expectation would be that cash flow is pretty similar to last year's level. And, like I said, I think there are puts and takes.
I think, number one, you look at the implied EBITDA in our guidance, certainly lower than what we reported last year. So that's a negative impact. I think, going the other way, we'll have lower tax payments, just given the lower overall profitability this year, lower interest payments, given the debt structure. And so, net-net, I would expect that we're pretty close to last year's fourth quarter free cash.
Great. Thank you.
We'll go next to Pete Heckmann at D.A. Davidson.
Good morning, gentlemen. Thanks for taking the question. I apologize if you had already called it out. But just curious, FX headwind in the quarter and sort of assume that that would have been just marginal, but still trying to keep track of it.
Yes. Pete, it was a pretty small impact that went against us. And you can see we have a page in the earnings release. I think it's the page 11 that shows, on a reported basis for the quarter, the sales were down 23.8%. And on an organic basis, excluding FX, it was about -- down 23%. And that -- some of the impacts vary by segment and I would just refer you to page 11 in the earnings release.
Okay, okay. I'll take a look at that. And then, just in terms of the SEC, I believe, it's a new rule, it may still be a proposal, but new rule on the tailored fund reports, how are you thinking about the trade-offs between potentially shorter reports that might mean more less print revenue, but maybe more in terms of tech-enabled services around consulting, potentially tagging other things. Generally, how would you think about that? And on a net basis to DFIN?
Hey, Pete, this is Eric Johnson. Thanks for the question. As you know and as we've talked about in the past is that, we have a recurring revenue business model and we're driving both software and compliance management solutions focused on financial and regulatory reporting.
So the removal of print and in some cases our exit of print has had really no impact on the ongoing complexity of the financial and regulatory reporting requirements for our clients. Our tech-enabled solutions help our clients meet rigorous regulatory requirements on a daily basis. And we do that via project management, document management and filings.
And as Dan mentioned earlier, the tailored shareholder report will somewhat aligns with what we're already doing in this segment, where our tech-enabled solutions will help our clients meet the new regulatory requirements and the changes associated with Summary reports. It's a great fit for our digital platform by the way, and then from a software perspective, we'll be able to help our clients meet rigorous iXero [ph] and ongoing filing requirements through our Arc Suite.
Yes. And I guess -- Pete, it's Dan. I'd just add a couple of things. One is as the regulation gets rolled out, et cetera. It's probably a mid-2024, beginning 2024 type of impact. And then to Eric's point, when we see the shift there is beneficial to us from a margin perspective and driving software and -- software and tech-enabled services.
Okay. That’s helpful. Thank you.
Thank you.
We'll take our next question from Raj Sharma, B. Riley.
Hi. Good morning. Thanks for taking the questions. My question essentially is in the transaction side of the business. I see that you did slightly better than the overall industry performance. Any sort of color on the breakdown between M&A IPOs and SPAC follow-on, and any sort of color on geographic differences between how the industry did in transactions and how you guys are faring? And then I have a follow-on question.
Sure. Thank you for the question, and then I'll turn it back to you a follow-up. So, as you heard the weakness in the trans market accelerated in the quarter down 50%. It's driven by all the macro issues that we all know too well. It's our lowest level of trans revenue since Q1 of 2020. But Q3 of 2021 last year was a high watermark for us for our transactional business. It’s certainly a challenging comp. The transactional revenue in the third quarter of 2021 was the highest it had been in the previous five years. So that it grew 50% from 2020.
So what's driving it this year? Certainly the US IPO market, it's on track to raise the lowest proceeds in 30 years per Renaissance Capital the one source we all use, it will be the toughest quarter the third quarter for new issues in over a decade. And what did come out of the pipeline and IPOs micro caps, it was most of the deals. There were only three IPOs that raised more than a $100 million. We were fortunate to work with two of those.
And then as you move to M&A, it's been more resilient than the IPO market, but in Q3, as you heard it to weekend down 30% from a year ago. This is primarily US facts. Europe greatly disadvantaged by all the courses and factors they have going there as well as our APAC regions given what's happened in China. So despite all of this, deal-making remain in place from what we hear from our deal teams and investment bankers.
And we believe, as you stated, we're performing better than the market. We have a really robust pipeline of IPOs M&A SPAC, de-SPAC where work is happening. So engagement's high. Clients are working. So this underlying activity gives us confidence that when the volatility subsides these transactions are going to provide a really rich pipeline for us.
And again they are on-ramp to software. All of this is an ecosystem that's driving our Venue virtual data round, typically transactional M&A related, but more importantly our ActiveDisclosure platform, which is driving recurring compliance revenue. So the past has shown, we're all in this business when the transactional market changes it can be swift. And they also can come back very quickly and we think we're really well positioned. Then back to you for the follow-up.
Right. Thanks. Thank you. So also my follow-on question is on visibility. Were you -- you were into the third quarter when you gave a forward guidance. Were you surprised significantly in 3Q transactional performance? And how does visibility into a quarter and trends typically work?
Yes. Go ahead.
Yes. So. Raj, I'll start. Sorry, Craig and then Craig can jump in. So clearly the variance between what we communicated back in, I guess, it would have been August was the transactional market impact. So visibility we had to your point we had one month under the belt in Q3. And you can tell what's being worked on we understand what's coming in et cetera -- when they're actually moving.
And then obviously, as things play out IPOs have a shorter cycle time than most M&A. And so, yes, the visibility is always a bit challenging. And so that was what drove the variance relative to where the guide was on the revenue side and then on the margin side to this point on all that we've done in variabilizing the cost structure and driving margin changing the mix of the business certainly helped. And, sorry, Craig you were going to add.
Yes. I think to just build on that as you rewind August, we had a different view of the optimism that our clients were showing us. We read about that for IPOs that we plan to go in the back part of the year post summer. We announced it here and we have additional visibility on the number second. If you look at the October IPO market, which only had two, but the underlying optimism there those who show that there's still investor demand for these companies.
And certainly if you come back to all the comments that we've had about resilience and endurance or profitability profile, we believe we're in a great position. Our clients are working and that when the market shifts and the window opens we're going to be there for not just these deals, but for recurring software subscriptions.
Got it. Thank you. And then just lastly, any sort of color on how you expect the Venue and the rest of the software products – did you specifically, Venue, do you expecting to kind of do significantly better in 4Q and the quarters beyond or?
Yes, I think great question. I mean if you look at Venue's performance, clearly at leveraging and playing to the M&A market. Last year, full year we grew at 46%. In the quarter last year we grew at 53. And that's outsized and substantially faster than our market peers. So despite the significant decline in the third quarter, we feel Venue is continuing to perform better in its primary use case of M&A. So with M&A down 30%, Venue's performance is pretty good. It also grew sequentially from Q2 of 2022, which demonstrates the continued activity that's taking place here.
Again, what we're seeing within the product, investors are viewing this turbulence as an opportunity for better valuations, more reasonable valuations. I think it's a welcome change and the demand is still high. So headline tends to be to drop-off from 2021 but the big picture is there's still a really great fundamentally active pipeline there. And as we look at that product, we plan to continue to take share, given our product superiority. We're winning deals.
One of the key pieces to this across all of our software products, ActiveDisclosure Venue and Arc is security. So we have a great new trust center on our website. We're winning, based on these benefits. We're going to market in specific recurring use cases for Venue, such as energy, franchise management, healthcare and technology. So we're super excited about the performance and we feel good about Q4 and 2023.
Great. Thank you for that. I’ll take my questions offline. Thanks.
Thanks, Raj.
And that does conclude the question-and-answer session. At this time, I would like to turn the conference back over to Dan for closing remarks.
Great. Thank you Audra, and thank you everyone for joining us. We look forward to connecting in February and in the interim at some investor conferences. Thank you again.
That concludes today's conference. Thank you for your participation. You may now disconnect.