Sunday, February 27, 2011

Questions I think Financial Analysts should have asked ARC Management

Several “financial analysts” follow, and issue reports (for investors), on ARC and/or Service Point Solutions. Other “financial” people who follow ARC are investment analysts who work for institutional investors and mutual funds. Both ARC and SPS are players in the “reprographics” industry, and both are publicly-traded companies. (ARC trades on the NYSE; SPS trades on the Bolsa/Spanish Stock Exchange. In fact, ARC and SPS are the only publicly-traded companies who are players in the “reprographics” industry, at least that I’m aware of.)

Every quarter, ARC’s Chairman/CEO (Suri) and Chief Financial Officer (Jonathan) host “earnings calls”; these earnings calls give them the opportunity to talk about ARC’s recently released results (be it for a quarter or for the full year), enable them to talk about ARC’s sales and growth-strategy initiatives, and, after they’ve concluded their comments, financial analysts who participate in the earnings calls are allowed to ask questions, and ARC’s guys respond to those questions, as best they can, confidentiality considered. (Suri, for sure, does not want to reveal ARC’s plans and initiatives in great detail, for that would be “spilling all the beans”, and no CEO would want to, or should ever, do that. ARC’s competitors do listen to the earnings calls and do read the transcripts of the earnings calls.)

I don’t take the time to listen in on the “live” calls. But, I do read the “transcripts” of the earnings calls; they are prepared and posted on, and they are available for free (at

I read the transcripts to find out what Suri and Jonathan said about ARC’s “results” and to find out what Suri says about ARC’s achievements and about ARC’s plans and initiatives going forward. I also find it very interesting to find out “what questions the financial analysts are asking” and to see how Suri responds to the questions he’s asked.

Every time I read a transcript of an ARC’s earnings call, I find myself asking, (a) do the financial analysts know what questions to ask?, and (b) when they get “this or that” response to questions they did ask, do they know what follow-up questions they should be asking? So, after reading the most recent earnings call transcript, I decided that I would compile a list of questions that I think analysts should have asked, either initially or as “follow-up” questions to responses that were given. I will also try, as best I can, to elaborate on my suggestions for questions.

A. Questions about “FM’s””

1) Question: What is ARC’s definition of an “FM”?

2) With respect to the newly added FM deals, what’s the “net new incremental” revenue expected from the “#” FM deals?

During the earnings call, Suri mentioned that ARC added another 100 FM’s. That’s an impressive number. But, in terms of “sales revenues”, what does that number really mean? If you speak to 10 different reprographers, you will get at least 3 different definitions of “what an FM is.”

A “staffed FM” is, typically speaking, where the reprographer has entered into a relationship with a customer whereby the reprographer will be providing equipment, one or more FM operators, supplies, consumables, service for the equipment and, very often, accounting for output generated on the equipment that’s provided. Some “staffed FM” relationships require (but some do not require) that the customer use the reprographer “exclusively” for reprographics orders than cannot be, or would best not be, accomplished “on-site” at the customer’s office. Typically, a “staffed FM” is a “larger” deal than would otherwise be the case with an “unstaffed FM” deal. (That’s not always the case, for some unstaffed FM’s could be considerably large in scope and in terms of revenues generated.) Some “staffed FM” deals include all of the imaging equipment on-site at the customer’s office, but some deals only include equipment for a “central print room.” In the latter case, a customer would still, on its own, provide all of the other equipment needed at its office. So, as you can see, the “scope” of a “staffed FM” can vary quite a lot.

An “unstaffed FM” is the same as I’ve explained above, with the exception that the reprographer does not provide “FM operators” to work at the customer’s office. Again, like a “staffed FM” deal, an “unstaffed FM” deal may or may not include a requirement that the customer use the FM-vendor-reprographer for “off-site” reprographics work. Some reprographers ask for exclusivity, but not all do. I have no idea what ARC asks for, or requires. (We always asked for exclusivity; we did not like to “share” our accounts with our competitors.)

Further “unstaffed FM’s” can be large deals or small deals, and sometimes the small deals are very small deals. Such as would be the case if the FM-vendor-reprographer is only going to be providing one small-format multifunction copier/printer, or one inexpensive large-format HP plotter, or one HP laser printer. Revenues for an “unstaffed” FM could easily range from as much as thousands of dollars per month to as little as $100 per month. Scope varies widely. Revenue opportunity varies very widely.

One other point is that, if a reprographer commits to doing an “FM” for a customer who was already a customer before the FM deal was signed, is the “FM” revenue going to replace some of the revenue the reprographer already had, or is the “FM” revenue going to be incremental (additional, new) revenue?

Some reprographers consider “FM’s” to be any deal where customers are going to pay “per copy”, “per sq foot”, in other words, for “output generated”. However, some reprographers consider equipment rentals and equipment leases to be “FM’s” (if they continue to own the equipment during the rental or lease term and even it output isn’t billed “per copy” or “per sq ft.”)

So, with respect to “adding 100 FM’s”, what’s that really mean in terms of revenues? Were those net new 100 FM’s big deals, medium deals, small deals?

B. Questions about “Global Solutions” deals (or “Premier Accounts” deals)”

1) Question: What is ARC’s definition of a “Global Solutions” (or “Premier Accounts”) deal?

2) With respect to the newly added “Global Solutions” deals, what’s the “net new incremental” revenue expected from the new, “#” “Global Solutions” deals?

My understanding of an “ARC” global solutions (or premier account) deal may be very different from ARC’s definition. My own personal definition is completely irrelevant.

During the earnings call, Suri talked about “global services”. According the transcript of the call posted on, Suri said this …..

“The first is global services, already a strong contributor to our top and bottom lines. Global services added nine new accounts to its roster in 2010 including AECOM, a $7 billion industry giant in design and engineering. These new customers represent $14 million of annualized revenue. In total, global services brought $46.8 million in sales, for 2010. We have exciting prospects in the pipeline for 2011 and we are targeting some of the largest companies in the design and engineering space as well as smaller, regional targets to help fill in the gaps.”

During my time as the COO of T-Square, which was in 1997, (T-Square was formerly an independent reprographer purchased by ARC in 2006 or 2007, can’t recall which year it was), T-Square had a “staffed FM” relationship with the largest A/E firm in the South Florida market. By the time I joined T-Square, that relationship was already more than 20 years old. That particular customer was “exclusive” to T-Square, meaning that that firm used only T-Square for its reprographics requirements, on-site and off-site. That firm had long been T-Squares largest account. A few years ago, that large A/E firm was acquired by DMJM. DMJM was/is the “core” of AECOM. T-Square’s relationship with that Miami A/E firm was still in place at the time ARC acquired T-Square. Also as to AECOM, it is my understanding, and of course I could be wrong about this (but I don’t think I am), that Ford Graphics (one of ARC’s operations in L.A.) has, for years, been providing services to AECOM’s huge DMJM office in L.A. In addition, a former ARC-insider mentioned to me, last year, that, when an existing customer of an ARC division commits to an ARC “global solutions” (premier accounts) deal, forward sales to that customer are counted as “global solutions” revenues, meaning that the revenues that were already being generated from the existing account are simply ‘transferred’ from the “division’s sales” to “global solutions’” sales.

So, where Suri said this, “these new customers represent $14 million of annualized revenue”, does the word “new” mean new customers to ARC or does the word “new” simply mean “customers newly committing to ARC global solutions deals, some of whom were already doing business with ARC?” Of the “nine” new Global Solutions customers, how many of those customers were already doing business with ARC before they signed on as “global solutions” accounts? Of the $14 million of annualized revenue, how much business was ARC already doing with those customers prior to those customers signing on as global solutions accounts? I would imagine the same questions could be asked about the $46.8 in sales reportedly generated by ARC’s global solutions accounts? If one has one “bucket” of customers, goes out and buys a second bucket and then pours some of its customers from the first bucket into the second bucket, what’s that really mean in terms of real growth?

Further, is a “global solutions” account a customer who has committed to use ARC “exclusively”? Or, is a global solutions account a customer who has been given “preferred pricing” and “preferred status” by ARC, but who is not required to use, nor has the intention of using, ARC exclusively? The other evening, when I asked a ReproMAX organization guy about that issue, he said, “our member companies continue to do business with many of ARC’s “global solutions” accounts; it varies by market area and it depends on customers’ local management decisions.

Don’t get me wrong. I applaud ARC’s efforts and initiatives to pursue larger customers. They are doing it the right way. It was a great idea for ARC to put together a team of people devoted to pursuing “national” account deals, and it’s the right approach to develop a national “account strategy” to pursue each and every large target. My questions have to do with the numbers put forth in the earnings call. So my question remains, and this is the question I think analysts should have asked, “with regard to the $14 million in annualized global solutions revenues, does that number represent “net new incremental” revenues? Or not? And, if not, what’s that number?”

C. Questions about Re-Branding and about Divisional management changes:

1) At the beginning of 2011, ARC rebranded all of its divisions (all of its locations throughout the U.S. and maybe even outside of the U.S.) with the ARC name. Early on, ARC maintained that it was beneficial to ARC’s business model that, post-acquisition, each acquired company continue to operate under its long-standing brand name (and ARC gave several reasons why that was a good idea). Given ARC’s rebranding initiative, does that mean that ARC feels that there will be no negative repercussions from discontinuing the use of the acquired companies’ brand names?

2) Some (maybe even several) ARC divisions are, by now, no longer managed by the former owner/managers who sold their businesses to ARC. Early on, and even after that, ARC said that it had or was retaining 90% of the owner/managers who sold their companies to ARC, and ARC explained that the benefit to ARC was that these people were the ones who built their companies and established and grew relationships with their customers, …. and that the latter was very important to ARC. Given the changes in management (at divisions where former owner/managers have departed), is it ARC’s position that the replacement of those owner/managers with ARC team members who have never before owned their own businesses presents minimal risk to ARC? Elaboration on that point would be useful.

3) Have their been any instances, yet, of former owner/managers, who previously sold their companies to ARC, coming back into the industry to join companies ARC competes with or to start up their own new companies to compete with ARC? If yes, please elaborate.

D. Questions about iShipDocs:

It’s my understanding that Mahil Maurice is the ARC team member who is Product Manager for ARC’s iShipDocs product. Mahil is a very smart young man, has a terrific personality and has a passion for what he’s involved in.

During the earnings call, Suri talked about iShipDocs. Pulled from the transcript on, here’s what Suri said …..

“iShipDocs generated more than $4 million in sales in 2010, and several of our larger customers are now insisting on its use over conventional shipping services. A new version of iShip Docs incorporating managed file transfer, storage and sharing services is schedule for the release in second quarter of 2011.”

Later on in the earnings call, one of the financial analysts (Brad Safalow) who follows ARC, asked Suri about iShipDocs. Here’s the “back and forth” (questions and answers), pulled from the transcript of the earnings call:

Brad Safalow – PAA Research

And then just on iShip Docs I want to make sure I understand that number correctly. Is the $4 million was that total revenue for the iShip Docs eco-system versus what you actually generated for ARC?

Suri Suriyakumar - ARC

Say that again? I didn’t quite understand the question.

Brad Safalow – PAA Research

The $4 million number you disclosed for iShip Docs in terms of revenues, was that revenues to ARC or just revenues of printing volumes on the platform – across the entire platform? Because I know – obviously, your network participates with our third-parties that also participate?

Suri Suriyakumar - ARC

Oh yeah, yeah exactly. So remember in our business model, Brad, everything is done inside ARC – at least 95%. We might actually sometimes use a third party vendor maybe when we are in Poland or Hungary or someplace like that. So this total $4 million is our revenues, out of which about 60% I would estimate to be print revenues. About 40% of that would be related to the digital shipping itself. So it is very attractive in terms of gross margins.

Brad Safalow – PAA Research

Do you have the – I guess I can extract – okay I got it. The total print revenues are simply if I take the 60% I can get to the total print revenues across the -

Suri Suriyakumar - ARC


Brad Safalow – PAA Research

Actually, I don’t know the royalty rate, but okay. I can try and work with that.

I think Brad Safalow did a good job getting to the main point he was apparently interested in getting to, which, I think, is best summed-up by this question (which would have been the question I would have asked Suri):

Regarding the more than $4 million in sales that iShipDocs generated in 2010, of which apparently 60% (approximately $2.4 million in sales) were revenues fromprinting”, how much of that printing work represented “new” (meaning, incremental) printing revenues to ARC, as opposed to printing revenues that ARC would have had, anyway, even without iShipDocs?

With respect to the other 40% of iShipDocs revenues (approximately $1.6 million in sales), were those revenues purely attributable to iShipDocs “cloud” services, or were some of those revenues generated from fees/charges for the “ground delivery” service required to get the printed order to the recipient’s office?

(Please note: even when orders are submitted to the ARC’s iShipDocs cloud-printing-service, the ARC division on the receiving end of an order has to physically deliver the completed order to the recipient’s office. For many, many years, many reprographers use to offer “free” pick-up and delivery. But, most reprographers, including most ARC divisions prior to their purchase by ARC, charged for delivery of completed orders.)

So, all in all, my primary questions about iShipDocs revenues in 2010.

1) What portion of the $4 million in “total” iShipDocs revenues were just for the use of the iShipDocs software, network, cloud? (All printing charges and physical delivery charges excluded.)

2) What portion of the $4 million in “total” iShipDocs revenues were “new incremental” revenue to ARC (in other words, revenues that ARC would not have generated if it had not implemented iShipDocs?

If you have any comments, please post them (or you can e-mail them to me, if you would rather not use the comment-posting feature.)

Thank you for bearing with me; I realize this was a long, very-wordy post.

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