Donnelley Financial Solutions, Inc. (DFIN) Q3 2018 Earnings Conference Call Transcript
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Donnelley Financial Solutions, Inc. (NYSE: DFIN)
Q3 2018 Earnings Conference Call
Nov. 07, 2018, 9:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning and welcome to the Donnelley Financial Solutions Third Quarter 2018 Results Conference Call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session (Operator Instructions) Please note this conference is being recorded.
And I will now turn it over to Sanja Burklow. Sanja, you may begin.
Sanja Burklow -- Investor Relations
Thank you, Brandon. Good morning, everyone and thank you for joining Donnelley Financial Solutions third quarter 2018 results conference call. This morning, we released our earnings report, a copy of which can be found in the Investors section of our website at dfsco.com.
During this call, we'll refer to forward-looking statements that are subject to uncertainty. For a complete discussion, please refer to the cautionary statement included in our earnings release and further detailed in our Annual Report on Form 10-K and other filings with the SEC. Further, we will discuss non-GAAP financial information.
We believe the presentation of non-GAAP results provide 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 press release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information. I'm joined this morning by Dan Leib; Dave Gardella; and Tom Juhase.
I will now turn the call over to Dan.
Daniel N. Leib -- President & Chief Executive Officer
Thank you, Sanja and good morning, everyone. We are pleased with our third quarter results which continued to highlight the business mix shift we've outlined in our long-term guidance. Total organic revenue grew 5.1% in the quarter due to strong performance within US capital markets and across the company in our SaaS offerings. Disciplined cost management along with the positive mix shift led to expanding non-GAAP adjusted EBITDA margins.
Our software offerings achieved nearly 15% revenue growth in the quarter and now represent approximately 20% of total revenue. For reference, as a percentage of revenue, software was 13% in 2016. Third quarter growth in software was primarily driven by our FundSuiteArc content management platform and the active disclosure, each of which grew by more than 20% on a global basis.
On our second quarter conference call, we said we expected to see stronger relative performance within our global investment markets offering in the back half of the year and the third quarter performance improved as expected. Our software sales were supported by key arc reporting wins with top-tier financial services firms and growth in our report modernization regulatory platform.
Overall, print revenue declined 4.7% in the quarter in line with the longer-term trend and consistent with our expectation we communicated on our last call with you. We're pleased with the steady balance of our revolving revenue mix as we shift from print to software and related services. Early in the quarter, we finalized the sale of our Language Solutions business, an important step in executing our long-term strategy. Proceeds from the sale were used to pay down debt, creating additional financial flexibility.
Now I'd like to cover our operating priorities. We continue to make strong progress against our long-term strategic plan with a focus on driving growth in our core and adjacent markets, accelerating innovation and investing in our people. As I mentioned, we saw positive results in our US capital markets business driven primarily by an increase in IPO and secondary offerings and increased M&A activity. We are pleased with the progress we made within our software offerings.
As we've discussed previously, we're committed to investing in best-in-class artificial intelligence within our Venue Virtual Data Room solution to provide clients improved operational efficiency. Our partnership with eBrevia, an integration with our Venue offering differentiates us and gives clients industry-leading artificial intelligence to streamline and expedite the standard deal cycle.
And we're expanding what Venue can do for our clients even further with our recent partnership with Ceridian. With the adoption of Ceridian's Intelligent Cloud routing, our clients are getting the best performance from any location globally to complete the due diligence process. This adds another layer of speed, ease, reliability and security to our Venue product and ultimately our clients. We've made significant investments in developing our active disclosure offering. We saw a substantial number of clients on board to the solution. Our compliance business has benefited from a strong IPO market as well as our strong market share within that business.
The third quarter was marked by a focus on delivering a holistic proxy solutions to capital markets' clients. This included numerous proxy-focused events across the country and the recent distribution of our 6th addition of the guide to effective proxies, a comprehensive review of innovative and shareholder-friendly best practice disclosures drawn from the public filings of Donnelley Financial Solutions' blue clip -- blue-chip client base.
The guide has become a trusted go-to resource for companies looking to transform proxy statements from traditional compliance documents to compelling shareholder communications. Investor expectations have shifted and proxy statements have evolved dramatically to keep pace. By sharing our expertise, companies can meet these changing requirements and promote greater transparency and enhanced communications with shareholders. We see opportunity in the proxy space, offering new and innovative ways to service and support the business evolution of our clients.
Shifting to investment markets, we continue to see the effects of the change in revenue mix and stronger growth in software sales, particularly with the addition of N-CEN, N-PORT and Prep solutions. Last quarter, we saw the implementation of SEC modernization and the related implications N-CEN and N-PORT reporting. In September, we went live with our solution to support clients' filings, through our arc filing platform and completed the first ever successful submission of the new Form N-CEN with the SEC.
The filings are the first to use the XML-based Form N-CEN, part of the SEC's modernization initiative along with Form N-PORT. To handle the new complexity and scale, our arc filing product was developed as a cloud native solution capable of scaling to meet the high demands of the increase in data.
We expect to complete N-CEN filings covering approximately 4,000 investment funds in the first year of the new requirement. To-date, we filed with 100% success rate. Donnelley Financial remains the largest EDGAR filer by volume, as reported by the SEC and the only company offering end-to-end solutions that provide a single cloud-based application to create package and submit documents directly to the SEC.
As we head into the fourth quarter, we've commenced test filings with the SEC for N-PORT via our regulatory platform. This is a critical step ahead of the April 2019 N-PORT filing requirement. We're excited about the future direction of our regulatory platform as we continue helping our clients, not only with US regulatory requirements but also on a global basis.
Also in the quarter, we announced the partnership with Bloomberg, integrating their liquidity assessment tool into our arc filing platform, which helps mutual funds comply with the new requirements mandated by the SEC's liquidity and report modernization rules. Our Bloomberg partnership as well as integration with ICE and MSCI, leading providers of research-based indexes and analytics, position us as a leading provider of data and analytics for clients meeting compliance and regulatory filing requirements.
As we continue to make progress against our strategy and evolve our business model to meet the needs of our clients, we are diligent in managing the business effectively, simultaneously reducing costs while also investing further in the business. We've made very good progress on the balance sheet, while also increasing our organic investment back into the business.
We ended the third quarter with $341 million of net debt, representing net leverage of 2 times. In the two years since the spin, we have reduced our net debt by $242 million or 42%, while we have continued to invest more in the business and are looking for ways to accelerate our strategic plan, we continue to be disciplined around all investments.
With that, I will turn it over to Dave. Dave?
David A. Gardella -- Chief Financial Officer
Thank you, Dan and good morning, everyone. Before I discuss our third quarter operating performance in more detail, I'd like to recap a couple of significant items in this quarter that are impacting our year-over-year comparability. As we previously announced, we completed the sale of our Language Solutions business on July 22nd, 2018 for $77.5 million in cash. Our third quarter 2018 results include Language Solutions through the disposition date, while the third quarter of last year includes Language Solutions for the whole quarter.
In addition, third quarter of 2018 GAAP results -- include the gain on the sale of Language Solutions of $38.4 million on an after-tax basis, as well as a gain on equity investment of $8.5 million. Both gains are excluded from our non-GAAP results that I will be discussing today and our organic revenue was adjusted to exclude the impact of the Language Solutions sale.
On a consolidated basis, net sales for the third quarter were $216.9 million, a decrease of $5.7 million or 2.6% from the third quarter of 2017, primarily due to the sale of Language Solutions. After adjusting for the sale of Language Solutions, changes in foreign exchange rates and the impact of the adoption of the new revenue recognition standard, organic sales increased 5.1% as strong capital markets' transactional volume and growth in our SaaS offerings more than offset declines in capital markets' compliance volume and healthcare and commercial print volume within investment markets.
Adjusted for the sale of Language Solutions, our total services revenue grew by $12.5 million or 10.2% driven by double-digit growth in both capital markets' transactional revenue and our SaaS revenue, which was partially offset by a $3.9 million or 4.7% decline in print-based revenue. Third quarter gross margin was 38.5% or 170 basis points higher than the third quarter of 2017, primarily driven by a favorable mix between higher margin services and lower margin products revenue.
Non-GAAP SG&A expense in the quarter was $52.3 million, $1.8 million higher than the third quarter of 2017. As a percentage of revenue, non-GAAP SG&A was 24.1% or 140 basis points higher than the third quarter of 2017. The increase in SG&A was primarily driven by higher investment spending in support of our strategic priorities as well as a revenue mix that continues to be more heavily weighted toward our SaaS offerings.
Our third quarter non-GAAP adjusted EBITDA was $31.3 million, a decrease of $0.2 million from the third quarter of 2017. The sale of Language Solutions negatively impacted the year-over-year EBITDA comparison by approximately $1.7 million. Non-GAAP adjusted EBITDA margin in the quarter of 14.4% was 20 basis points higher than the third quarter of last year, primarily driven by the favorable mix of revenue.
Turning now to our segment results. Revenue in our US segment was $185.5 million in the third quarter of 2018, a decrease of 0.3% from last year's third quarter. On an organic basis, after adjusting for the sale of Language Solutions and the impact of the new revenue recognition standard, revenue increased 3.2%. Revenue in capital markets grew 9.3% on an organic basis, primarily due to strong transactional volume driven by continued strong market activity in IPOs and a couple of large M&A deals in the quarter.
Higher transactional volume was partially offset by lower compliance revenue where we had a tough year-over-year comparison with a couple of non-recurring proxy deals in last year's third quarter. We did however, continue to see strong growth in active disclosure revenue which grew 15.9% from the third quarter of 2017.
Revenue in investment market declined 3.6% on an organic basis, driven by secular declines in print-based revenue in our healthcare and commercial offerings. The decline in print-based revenue was only partially offset by growth in our FundSuiteArc's SaaS solution. Non-GAAP adjusted EBITDA margin for the segment of 18.5% increased 80 basis points from the third quarter of 2017, primarily due to the favorable mix between services and products revenue.
Revenue in our international segment was $31.4 million in the third quarter of 2018, a decrease of 14% from the third quarter of last year. On an organic basis, excluding the impact of the Language Solutions' disposition, an unfavorable impact of changes in foreign exchange rates and the new revenue recognition standard, revenue in the third quarter increased by 14.8%, driven by growth in our SaaS offerings and strong transactional volume in Asia. Non-GAAP adjusted EBITDA margin for the segment of 8.3% increased 10 basis points from the third quarter of 2017 as mix of revenue and cost savings initiatives more than offset stranded costs related to the Language Solutions' sale.
Our third quarter 2018 non-GAAP unallocated corporate expenses, excluding depreciation and amortization were $5.6 million, an increase of $1.1 million from the third quarter of 2017, primarily driven by investment in strategic initiatives. Consolidated free cash flow in the quarter was $53.4 million, a $11.7 million lower than the third quarter of 2017, primarily due to less cash generated by working capital, partially offset by lower tax and interest payments.
Net proceeds from the sale of Language Solutions of approximately $60 million were used to reduce the outstanding debt under our term loan. We ended the quarter with $397.2 million of total debt and $341 million of net debt with nothing drawn -- on our revolver and we had net available liquidity of $265.3 million. As of September 30th, 2018, our gross leverage ratio was 2.4 times and our net leverage ratio was 2.0 times, down 0.4 times from year end 2017 and down 0.8 times from a year ago.
Based on the seasonality of our cash flow, we expect to drive this down further by year end.
As we enter the last quarter of the year, let me share more detail on the full year 2018 guidance that was summarized in this morning's press release. We expect 2018 revenue to be in the range of $970 million to $990 million. This range implies fourth quarter organic growth of approximately 5% at the midpoint.
We expect our non-GAAP adjusted EBITDA to be in the range of $160 million to $170 million. Depreciation and amortization is expected to be $45 million, $3 million lower than previous guidance. We expect interest expense of approximately $36 million. Our full year non-GAAP effective tax rate is expected to be in the range of 30% to 31%.
We project the full year fully diluted weighted average share count to be approximately 34 million shares. We expect capital expenditures in the range of $35 million to $40 million, $5 million lower than previous guidance, as we continue to be disciplined around not spending if the appropriate returns are not available. And lastly, we expect free cash flow in the range of $35 million to $40 million.
Regarding the fourth quarter comparison to last year, the most notable item impacting comparability is the sale of Language Solutions, which will negatively impact our reported revenue comparison by $21.2 million, and negatively impact our non-GAAP adjusted EBITDA comparison by approximately -- $3.9 million, inclusive of net stranded costs.
And with that, I'll turn it back to Dan.
Daniel N. Leib -- President & Chief Executive Officer
Thank you, Dave. In closing, we are pleased with the progress we've made this year in driving our strategy forward, and are excited by the opportunities to grow, while reasonably managing our shifting mix of business. Our focus has not changed, we are committed to serving our clients well and leading them through a digital transformation, while also remaining purposeful in how we execute our strategy. Well, our balance sheet has been well managed and we now sit at 2 times leverage on a net debt basis, we'll continue to be disciplined while investing in growth opportunities to improve our overall portfolio.
Finally, before I open it up for questions, I'd like to share a recent addition to our Board of Directors, Juliet Ellis, Chief Investment Officer of US Growth Equities for Invesco joined the Board on October 11th. Juliet brings expertise in the investment management industry, and has a long track record in financial leadership and investment oversight for strategy spanning asset classes and industries. We're looking forward to the critical insights we know she will bring to the Board as we continue to execute on our business plan to drive growth and enhance shareholder value. Juliet replaces Oliver Sockwell, who has retired after over 20 years of service as a Board member to Donnelley Financial and RR Donnelley. We thank Oliver for his contributions over the years, and wish him well in retirement.
And with that, let's open up the line for Q&A.
Questions and Answers:
Operator
Thank you and we will now begin the question-and-answer session. (Operator Instructions) And from CJS Securities, we have Charlie Strauzer. Please go ahead.
Charles S. Strauzer -- CJS Securities -- Analyst
Hi. Good morning.
Daniel N. Leib -- President & Chief Executive Officer
Good morning, Charlie.
Charles S. Strauzer -- CJS Securities -- Analyst
Just to clarify on the revenue guide, Dave, you talked about the 5% at the midpoint, does that exclude Language from the comparison there?
David A. Gardella -- Chief Financial Officer
Yeah, yeah. So that's an organic number in Q4.
Charles S. Strauzer -- CJS Securities -- Analyst
Got it, great. And then how -- you expect to strip that out of the kind of your segmentation going forward?
David A. Gardella -- Chief Financial Officer
That will be left in the results that we report, given the way that we've done the accounting on it, going forward. But we intend to continue throughout next year to quantify the impact as we go through the quarters there.
Charles S. Strauzer -- CJS Securities -- Analyst
Got it. And then on the lower CapEx, I know you said about $5 million less. Are you -- I guess, satisfied is a word, I guess, like I'm looking forward in terms of the spend that you've made this year in terms of you know, keeping your products fresh and competitive?
Daniel N. Leib -- President & Chief Executive Officer
Yeah, absolutely. We increased the spending on CapEx from the prior year, quite a bit. And when we did that said, we have a disciplined process around how we spend. So it just ends up being that balance of spending responsibly with continuing to grow those products and so as you can see by the growth rate that we've achieved, and some of that is obviously not yet in the product, given the timing between spend and realizing the benefit. But feel very good about what we've invested back into the products, and the pace at which we're going. Always like to move faster, but we want to balance being disciplined around how much we're putting in, and the benefit we get now.
David A. Gardella -- Chief Financial Officer
And Charlie, just to clarify, most of that spend still goes to the software offerings that Dan was referring to.
Charles S. Strauzer -- CJS Securities -- Analyst
Excellent, thank you. And then just lastly, when you look at the competitive environment with Toppan buying Merrill, just maybe some thoughts there, and just overall any other major changes in the competitive environment that we should pay attention to? Thanks.
Daniel N. Leib -- President & Chief Executive Officer
Yes, thanks. So certainly we have seen a fair number of assets move in our environment. The one you mentioned being one and then we've seen other assets that have moved to both strategics, as well as private equity and we look at those as opportunities for us. There's always some amount of disruption. But we don't see a major change in the competitive environment, driven by M&A happening with the competitor.
Charles S. Strauzer -- CJS Securities -- Analyst
Great. Thank you very much.
Daniel N. Leib -- President & Chief Executive Officer
Thank you.
Operator
From JPMorgan, we have Michael Cho. Please go ahead.
Michael Cho -- JPMorgan -- Analyst
Hi. Good morning, guys.
Daniel N. Leib -- President & Chief Executive Officer
Good morning.
Michael Cho -- JPMorgan -- Analyst
Just given the growing, I guess, presence of mixes with SaaS business or SaaS revenues. Can you just give a comment on margins today, and then I guess where you hope to kind of roughly get to when it is more closer to the longer-term target of quarter of the business?
Daniel N. Leib -- President & Chief Executive Officer
Sure. Yes, you're cutting out a bit. I think I got the question though. So yeah we see among the three main customer-facing products, Venue, ArcSuite and active disclosure, while we haven't broken out the margins for public consumption. We do see what you would expect at a gross margin level and then some of the products are at scale and generating pretty high margins, and others that the products are coming up that scale ramp. But we do think, and do see on an incremental basis, very good flow through on margin. So the growth is very helpful.
We made a couple of comments on it in terms of the flow through an impact to margin, if you reflect back, excuse me, on our prior calls in our discussion around investing more in the business, so back to Charlie's question on the CapEx side, with that CapEx also often comes expense. And so we highlighted that we would be investing more in the business. So we're seeing the level of performance that we have, which is this growth and the profitability flow through is offsetting the incremental investment. So very happy with the model as it's playing out this year.
Michael Cho -- JPMorgan -- Analyst
Okay. Great, thanks that's helpful. Just one quick follow-up on the fourth quarter guide on organic. I don't know if you've mentioned it, but can you give the comment on the rough I guess, mix that's implied in terms of the capital markets and investment markets segments when you are -- when you up about the 5% organic like the fourth quarter?
David A. Gardella -- Chief Financial Officer
Yeah, yeah. Thanks, Mike. So, and we didn't mention it specifically, but I can tell you, as we mentioned on the last call with respect to investment markets, we said that we expected the year-over-year comparisons to improve in the back half of the year, relative to the comparisons that we saw in the first half of the year and obviously that did come through in Q3. And then from a capital markets perspective, we would expect that the transactional activity remains relatively healthy, similar to what we saw in Q3.
Michael Cho -- JPMorgan -- Analyst
Okay, great. Thank you.
David A. Gardella -- Chief Financial Officer
Thank you.
Operator
From D.A. Davidson, we have Peter Heckmann. Please go ahead.
Peter Heckmann -- D.A. Davidson -- Analyst
Good morning, gentlemen.
Daniel N. Leib -- President & Chief Executive Officer
Good morning.
Peter Heckmann -- D.A. Davidson -- Analyst
I wanted to follow-up on that organic growth question. In terms of the shift -- the continued mix shift as well as divestiture of Language, does that change in any way some of your thoughts around kind of the intermediate term, organic -- growth outlook and for that matter as we start to look to 2019, even though I know you're not giving guidance, any particular tough comparisons that we should be keeping an eye out for as we model 2019?
Daniel N. Leib -- President & Chief Executive Officer
Yeah. So, Pete, I think with respect to Language Solutions and how that sale impacts our longer-term guidance, I think if you go back to Investor Day in May, we had given a range of organic growth that amounted to 1% to 1.5% baked in their Language Solutions was growing faster than the overall, I think in a few presentations that we've posted to revise for the sale of Language Solutions that longer-term organic range comes down by about 25 basis points, so it's basically 1% at the midpoint.
Peter Heckmann -- D.A. Davidson -- Analyst
Okay, the Language. Okay. And then --
Daniel N. Leib -- President & Chief Executive Officer
And which -- and then underpinning that right at the same growth that you've seen in the software offering so continue to see the expansion there with print declines continuing in that 5% or so range.
David A. Gardella -- Chief Financial Officer
Yeah and then the only thing I would say about 2019 and again relative to kind of the five-year CAGRs that we gave at Investor Day, the impact of 33, then the negative impact was built in to that five-year CAGR, and with that being deferred till 2021, the expectation would be that the '19 revenue growth would exceed what we had laid out in that presentation.
Peter Heckmann -- D.A. Davidson -- Analyst
That's right, that's right. Okay. And then just in terms of any updated thoughts on capital allocation continue to have an appetite for M&A, do you sense that that you're not able to source and negotiate favorable terms for acquisitions, how do you feel about other capital allocations specifically we purchased down here?
Daniel N. Leib -- President & Chief Executive Officer
Yeah. Thanks, Pete. So yeah, as you mentioned, we're certainly pleased with the progress we've made in deleveraging since the spin. And as I mentioned on the call and Dave hit as well, just for reference, we spun out in October of '16 with about $584 million of net debt and we expect our net debt at the end of this year to be less than the $300 million. We do feel good about the underlying business performance and free cash flow generation and then the sale of Language Solutions that's allowed us to accomplish this. And we've also been, as I mentioned, investing more in the business organically and then we've had some spin-related cash costs running through as well.
So we do continue to look at a lot of M&A opportunities in the current environment. Things are expensive and we're certainly very disciplined around the acquisition criteria, we did share our capital deployment priorities at Investor Day and continue to believe that there are great opportunities in our end markets. That said, as we think about capital deployment, we do think about all avenues, including return of capital to shareholders and we're always assessing the best use of capital.
Peter Heckmann -- D.A. Davidson -- Analyst
Great. Okay. I'll get back in the queue. Appreciate it.
Daniel N. Leib -- President & Chief Executive Officer
Thank you.
Operator
From Bank of America Merrill Lynch, we have David Ridley-Lane. Please go ahead.
David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst
Yeah. Good morning. Back in the first quarter you gave us some numbers around the impact of ASC 606, the revenue rack change. Do you have any update around what that would be in the fourth quarter?
David A. Gardella -- Chief Financial Officer
So we said, on a full year basis, we expected it to be approximately flat and I think if you look at the year-to-date organic revenue schedule that we have in the press release, we show that it was -- 0.1% impact on the organic growth rate and so I think overall, pretty close to zero impact for the year still holds.
David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst
Okay. And then what give you confidence in the capital markets revenue in fourth quarter, given the volatility that the market shared in October. Is it pipelines, is it things that you know are already in the market, just how much visibility you have, how much confidence do you have in that expectation?
Daniel N. Leib -- President & Chief Executive Officer
Yeah. So a lot of it just based on the deals that we're seeing that we know are in progress, I would say, and we've talked about it pretty consistently quarter in and quarter out, that remains the part of the business that does have the most volatility and that can change quickly. So it's our best view at this point in time.
David A. Gardella -- Chief Financial Officer
Yeah. And as we sit here, the first week of November, obviously, the benefit of seeing some activity levels in October and then to Dave's point, what we've seen come through in the market in pipeline gives us a level of confidence with the caveat that Dave laid for this one.
David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst
Okay. And then the benefit that you're going to get from implementing the N-PORT and N-CEN solutions that you have. Is that full revenue run rate start in the fourth quarter since you went live in September or does it kind of build gradually as we go into 2019?
Daniel N. Leib -- President & Chief Executive Officer
Yeah, it builds gradually with the biggest impact that will start to see it in the second quarter of 2019.
David A. Gardella -- Chief Financial Officer
Yeah. The big N -- N-PORT kicks off in April of '19.
David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst
Got it. So the solution is launched. But the revenue racks really doesn't start until the client turns it on.
Daniel N. Leib -- President & Chief Executive Officer
Yeah, those are small amount rogers through now, but it's --
David A. Gardella -- Chief Financial Officer
the lion's share of it starts in April of '19.
David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst
April of '19, OK. And then last one for me, what's the aggregate dollar amount of stranded costs from Language Solution's sale and how quickly could you kind of work on that?
Daniel N. Leib -- President & Chief Executive Officer
Yeah. So, we think on a run rate basis it will get it down to about $3 million. We obviously start from a much higher level, the expectation would be that that probably from a run rate perspective, we would be pretty close to that by the end of '19 or early 2020.
David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst
And just a last one from me real quickly. You gave that dollar amount for Language Solutions contribution for revenue and EBITDA just you went pretty fast at the end of the guidance.
David A. Gardella -- Chief Financial Officer
Yeah. So Q4, $22 million of revenue -- the $21.2 million of revenue and $3.9 million of EBITDA.
David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst
Okay. And that's what Language Solutions contributed in the fourth quarter of '17?
David A. Gardella -- Chief Financial Officer
Yeah, and that's inclusive of the kind of the some of the stranded costs that will absorb this year, so the year-over-year delta we've reached (ph).
David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst
The year-over-year delta. Okay.
David A. Gardella -- Chief Financial Officer
Yeah, yeah.
David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst
Okay, thank you.
Daniel N. Leib -- President & Chief Executive Officer
Thank you.
Operator
From Wells Fargo Securities, we have William Warmington. Please go ahead.
William A. Warmington -- Wells Fargo Securities -- Analyst
Good morning, everyone. So on the lower -- on the free cash flow guidance, I noticed that you had lowered the CapEx guidance by about $5 million you kept the free cash flow guidance the same, you had mentioned working capital, just wanted to ask what was going on there if I can get some color?
David A. Gardella -- Chief Financial Officer
Yeah, so the comment on working capital was specific to Q3, to your point on the math around the CapEx coming down and free cash staying the same, interest was up a $1 million. The effective tax rate is up a little bit higher than the previous guidance. And we've had some cost it kind of running through spin-related expense that had it -- and been anticipated as capital and so you combine all those things and the fact that we're frankly not that precise on the -- what the year end working capital number is, we're just holding that same free cash range.
William A. Warmington -- Wells Fargo Securities -- Analyst
And then I wanted to ask a question on rule 30e-3, just was curious if that was -- your finding that's now been a catalyst for conversations with clients or is that still too far off?
Daniel N. Leib -- President & Chief Executive Officer
There is quite a bit of conversation with clients and in the industry about alternative solutions and how Investor Communications can be delivered to enhance that access to information, et cetera. And so there is quite a bit of conversation at all levels with clients, with the industry, with the regulator, et cetera.
William A. Warmington -- Wells Fargo Securities -- Analyst
Okay. Well, thank you very much.
Daniel N. Leib -- President & Chief Executive Officer
Thank you.
Operator
From Citi, we have Peter Christiansen. Please go ahead.
Peter Christiansen -- Citigroup -- Analyst
Good morning, thanks for taking my question. I was wondering if you could talk about the -- how the pipeline for international has shifted if any at all in the last couple of months, not only given what we've seen in terms of added volatility in the market, but is there any impact that we should be concerned about as it relates to trade tariffs?
David A. Gardella -- Chief Financial Officer
Yeah, so Pete I think the -- now that Language Solutions is out of the mix. The biggest piece of international is the capital markets' transactional work and so the same comments that I made earlier around the volatility and visibility, I mentioned in the third quarter, a lot of what we saw in international was driven by transactional work in Asia. This is really that -- that's transactional work outside of the US acts very similar to what we see within the US and just don't have the great visibility, but I don't think anything specific on trade tariffs influencing our numbers.
Daniel N. Leib -- President & Chief Executive Officer
Yeah and the only thing I'd add to that is, we -- we've talked a bit about this previously, the -- we pushed into the global filing area and have added capabilities internationally within our investment markets business. And so some of this success I mentioned it in my prepared comments on Prep some of the success that we've had in growth and technology has being driven out of the investment markets area as well.
Peter Christiansen -- Citigroup -- Analyst
Great, thanks. And then, do you see any benefit from implementation of FAS -- FASB 842 that the new lease reporting requirements that kick in next year. Do you see that as a potential tailwind at least for the -- some of the active disclosure sales?
David A. Gardella -- Chief Financial Officer
No, I think it's -- not really, we've -- additional disclosures will exist, but relative to that driving incremental opportunity for us there will be, our domain expertise will be helpful for customers around the service organization and things like that, but relative to the software product, it will just be another disclosure that we need to make and that our customers need to make as well.
Peter Christiansen -- Citigroup -- Analyst
Great. And last one from me. Dan, I was wondering if you could help us understand some of the AI capabilities that you now have with the eBrevia partnership and with the Venue Data Room. And how much of that do you believe is a competitive advantage?
Daniel N. Leib -- President & Chief Executive Officer
Sure. Yeah. So we have a partnership with an ownership stake in eBrevia and it's a contract analytics capability. So in the diligence process drives additional efficiency and it's proven to resonate quite well with customers and has been a very good arrangement for both, for us and for eBrevia. So that's on the AI side within Venue. And then, if we look at within our own operations, we're looking at machine learning in AI, in terms of driving some efficiencies within our own business. But specific to eBrevia, we think it's a very nice capability that have added to the Venue Data Room and it does make the diligence process more efficient.
Peter Christiansen -- Citigroup -- Analyst
How does this change the user experience?
Daniel N. Leib -- President & Chief Executive Officer
So it's quite a nice thing on the legal documentation for the most part to allow faster cycle time. And so from our user experience, it just makes the process smoother, less time intensive and it allows people to focus on higher value-added activities, because the intelligence in the tool is certainly through some of the lower value-added type of things. And then obviously as the process learns itself, you can move higher up the value chain. So we've had very positive feedback from corporate clients and then also from the legal community on that relationship and that capability.
Peter Christiansen -- Citigroup -- Analyst
Okay, thank you.
Daniel N. Leib -- President & Chief Executive Officer
Yeah, thank you.
Operator
And from Baird & Company, Bill Mastoris. Please go ahead.
William McGoldrick Mastoris -- Robert W. Baird & Company -- Analyst
Thank you very much. A lot of my questions have been answered, but I'd like to go back to the capital allocation question. Dave, one of the things that you indicated and Dan, I think you also touched on it. Is that, in your capital allocation policy nothing has yet been really finalized or determined. You have 8.25 coupon out there that's really expensive. Would part of that capital allocation policy include open market purchases of debt?
David A. Gardella -- Chief Financial Officer
Yeah, Bill. So the first thing I would say is, we have communicated our priorities for capital allocation, reinvesting back in the business. And then at the low-end or at the bottom-end of that kind of the share repurchases and dividends, and Dan talked about that earlier. And Dan also mentioned, I think when Pete asked the question that we're always assessing the best uses of capital, which obviously includes the full gamut of the structure.
Daniel N. Leib -- President & Chief Executive Officer
Yeah, specific to your question. Yeah, those -- that bond was put into place at the spin. There are certain restrictions on time to call, et cetera, relative to whether or not we would make open market purchases we certainly wouldn't comment on that.
William McGoldrick Mastoris -- Robert W. Baird & Company -- Analyst
Okay, that does it for me. Thank you.
Daniel N. Leib -- President & Chief Executive Officer
Okay, thank you. And with that operator, I understand no more questions. So I appreciate everyone's time and look forward to talking to you again soon. Thank you. Bye.
Operator
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.
Duration: 45 minutes
Call participants:
Sanja Burklow -- Investor Relations
Daniel N. Leib -- President & Chief Executive Officer
David A. Gardella -- Chief Financial Officer
Charles S. Strauzer -- CJS Securities -- Analyst
Michael Cho -- JPMorgan -- Analyst
Peter Heckmann -- D.A. Davidson -- Analyst
David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst
William A. Warmington -- Wells Fargo Securities -- Analyst
Peter Christiansen -- Citigroup -- Analyst
William McGoldrick Mastoris -- Robert W. Baird & Company -- Analyst
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