What happened
Donnelley Financial Solutions(NYSE: DFIN) got roughed up this week, as the stock price dropped 13.8% from last Friday's close through 10:30 a.m. ET today, according to S&P Global Market Intelligence. The stock is trading at about $42.70 per share, up 10.5% year to date as of Friday morning at 10:30 a.m. ET.
It was a bad week overall, as the S&P 500 was down 3.2% and the Dow Jones Industrial Average fell 3.3%, while the Nasdaq Composite dropped 3.6% this week, as of Friday morning at 10:30 a.m. ET.
So what
Donnelley Financial provides risk management and compliance services for public companies and investment managers and financial services firms, with a clientele that includes more than 700 of the Fortune 1000. Its main focus is helping clients stay in compliance with Securities and Exchange Commission (SEC) and other financial regulations. It is the largest filer of data on the SEC's EDGAR database, with more than 170,000 filings annually.
The company posted fourth-quarter earnings on Feb. 21, and the stock tanked on the earnings miss. Net sales declined 28% to $168 million, while net income dropped 57% year over year to $10.9 million, or $0.36 per share.
The company's fortunes are tied to the movements of capital markets, so when mergers and acquisitions and initial public offerings are down, like they have been, there are fewer opportunities for its services, thus the revenue drop. However, the declines in that business were offset somewhat by decent sales in its software-as-a-service (SaaS), which provides risk management and compliance solutions for investment managers and financial services firms.
Now what
The numbers for the fourth quarter look especially bad, considering the fact that M&A activity was through the roof in the fourth quarter of 2021. But overall, the global M&A market was down 40% in the fourth quarter compared to the previous year, so CFO David Gardella was somewhat encouraged that sales for Donnelley's virtual deal room, Venue, were down only 19% year over year.
But unfortunately, the M&A market is not looking much better in 2023, which should result in another challenging year for Donnelley.
Gardella said in the fourth-quarter earnings call:
As it relates to our outlook for the first quarter of 2023, we expect continued weakness in the trajectory of our transactional sales offerings. The transactional pieces of our business remain challenging to forecast, and though we are very well positioned to secure the opportunities when market activity returns, we are planning for ongoing weakness in the near term.
Donnelley is a market leader in its niche, but until it further transforms its SaaS business, it will remain largely cyclical.
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Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool recommends Donnelley Financial Solutions. The Motley Fool has a disclosure policy.
