Friday, May 6, 2011

Joel’s comments about ARC’s Q1 2011 results

ARC reported Q1 2011 Sales of $106.5 million and EPS (loss per share) of ($.08). In a recent post on this blog, I SWAG’d that ARC’s Q1 2011 Sales would be $107.5 million and that ARC’s Q1 2011 EPS (loss per share) would be ($.07). So, my SWAG estimates were pretty close. (SWAG = silly-wild-ass-guess.)

Again, another “earnings call” where there was no mention of ARC’s BIM strategy, so, as I pointed out in a recent previous post on this blog, I continue to wonder if ARC’s decision to purchase RCMS Group – and extend ARC into the BIM services arena - has paid off, …..or not. Any reprographer who attended the recent IRgA Convention knows, by now, that BIM adoption and implementation is building momentum and that it is highly likely that quite a bit of plan and spec printing “for bid sets” will be eliminated over time, as A/E/C customers learn how to use BIM “databases” to produce “cost-estimates” for bids for A/E/C projects instead of estimating off of paper plans. As I’ve pointed out in a number of different posts on this blog, it is expected (maybe not by all, but at least by many) that the “volume of printing per-project” will continue to decline. So, while there will, at some point in time, be a very meaningful – and very robust - recovery in the A/E/C industry that does not mean that reprographer revenues from printed-plans-on-paper will rebound in direct proportion to the A/E/C industry’s rebound. Based on the lack-of-questions about this particular subject (I’m referring to the ARC Q1 2011 earnings call transcript (which you can find on, it’s “my take” that the financial analysts who follow and report on ARC have little, if any, clue about the severe headwinds ARC and other A/E/C reprographers are facing and will continue to face because customers have already found ways, and because customers will continue to find ways, to reduce the need to print.

To his credit, Suri did say this….

“We have a unique position in the management services market, especially in the construction space. Our distinct advantage is driven by our technology, but as we all know, the impact of digital document management and the desires of our customers to go green, will lower our print volumes over a period of time.”

The only part of his statement that I disagree with is that lowered print volumes are attributable to the “desires of our customers to go green.” Personally, I don’t think that “going green” plays much of a role, if any role, in customer initiatives to drive down printing volumes. To me, the initiative is all about customers finding ways, and wanting to continue to find ways, to make their business processes more automated, productive and efficient. If I’m the cost-estimator on an A/E/C project and can use an electronic take-off software program or the database inside a BIM model to complete my “cost-estimating” task – versus doing take-off’s by measuring and counting from a “paper drawing” – and if using electronic take-off software or the database inside a BIM model will save me hours and hours and eliminate many of the mistakes that result from doing take-off’s manually, then is my need to print less driven by “the desire to go green”, or is my need to print less driven by the savings that result from “business-process-automation?” To me, the answer is perfectly clear. And, since I’m not all that smart, pose the question to the VP of Estimating or PreConstruction Services at any General Contractor. I’d be willing to bet hard-cash that the answer you’ll get from people in the GC business is that “business process automation” is driving the need to print less and that “going green” is simply a nice (feel-good) by-product.

It was nice to hear Suri say that his outlook on ARC’s MPS initiative is bright. He said …..

“From our perspective, the revenue stream generated by MPS is pretty clearly encouraging. This is brand new business in the design and engineering segments of the construction industry, and interest is growing. It has been strongly fueled by major consolidation in the industry, which in turn, has been driven by the downturn in the economy.”

I hope that ARC has great success with its MPS initiatives. However, that said, I do not agree that ….. “this (MPS) is “brand new” business in the design and engineering segments of the construction industry.” If you read the “IRgA Convention wrap-up” article we posted on this blog (and, if you did not, then I encourage you to read that article), I am of the opinion that MPS is simply an extension of the FM business. Many, many reprographers have been providing MPS services for years – to firms in the A/E/C industry - even though reprographers have not traditionally used the “MPS” acronym, but, instead, used the term “FM” services to describe what they were doing for A/E/C customers. Frankly, I find it remarkable that not a single financial analyst has yet to ask Suri to define the difference between “FM” and “MPS.”

ARC recently announced that it would be participating in RW Baird’s upcoming Growth Stock Conference. You’ll see that announcement below. In the announcement below, you’ll see ARC’s description of ARC’s business. Nowhere in the description does the word “PRINTING” appear! For a company that generated more than $350 million (in 2010) in revenues from “printing”, I find it fascinating to see a description of the business that excludes the word “printing.” Will other reprographers adopt the practice of referring to themselves as “document management” and “technology” companies and exclude the word “printing” from what they do? Will the IRgA be renamed to the IDMTA? (International Document Management & Technology Association). That has kind of a nice ring to it, but, inasmuch as the bulk of the industry’s revenues still come from generating “prints on paper”, is IDMTA truly descriptive of what reprographers do? Has the industry reached the point where reprographers are embarrassed to use the word “printing?

ARC to Attend the 2011 Baird Growth Stock Conference

WALNUT CREEK, CA--(Marketwire - May 5, 2011) - ARC (NYSE: ARC), the nation's leading provider of document management services and technology to the architectural, engineering and construction industries, today announced that K. "Suri" Suriyakumar, Chairman, President and CEO, and Jonathan Mather, Chief Financial Officer, will be attending the Baird Growth Stock Conference at the Four Seasons Hotel in Chicago on May 11, 2011.

About ARC

ARC (American Reprographics Company) is the leader in business-to-business document management technology and services to the architectural, engineering and construction, or AEC industries, in the United States. The Company also provides document management services to companies in non-AEC industries, such as technology, financial services, retail, entertainment, and food and hospitality. ARC provides its services through its suite of technology products, a network of hundreds of service centers around the world, and on-site at more than 5,500 customer locations. The Company's service centers are digitally connected as a cohesive network, allowing the provision of document management services both locally and nationally to more than 120,000 active customers.

Joel’s summary comments:

So far, 2011 looks like it will prove to be another challenging year for ARC and for many other reprographers as well. As we pointed out in our recent IRgA Convention wrap-up post, McGraw Hill recently revised its estimate of 2011 construction to 1% growth, down several points from its previous estimate. If, as we believe has been the trend for at least the past 3 to 4 years, customers are finding ways to print less (plans and specs), then minimal growth in the construction sector could mean that reprographers - ARC and many others – will, as we move further into 2011, continue to see revenues decline. However, I did not say “all.” Some reprographers are experiencing increased year-over-year and quarter-over-quarter revenue gains. A large regional reprographer recently mentioned to me that his/her company’s revenues increased, indicating that that increase came from market share growth; this, in spite of the fact that the company competes heavily with ARC-owned operations. Another reprographer reported a 15% increase, Q1 over Q1. That company also competes in a market where ARC conducts operations.

In the ARC Q1 2011 earnings call transcript, I read where Suri talked about ARC’s expense reduction and consolidation initiatives. Suri indicated that ARC’s initiatives will further reduce ARC’s expenses by approximately $14 million on an annualized basis. Right after the end of Q1, ARC apparently eliminated 250 people, country-wide, in an effort to continue the “right-sizing” of its business. To me, the big question is, “how deep can ARC cut (people) and still maintain a stellar level of customer service, quality and production?” Given the fact that I’ve been involved in the reprographics industry for nearly 40 years, I, like most reprographers, know that customers are very unforgiving when a company’s service level falls. You can have the best technology and the right products, but if your people do not perform up to the level of customer expectations, you lose their business. From a customer service, quality and production perspective, it has long been my opinion (as well as my experience) that smaller owner-operated reprographics companies can actually outperform larger regional and national reprographics companies, if the employee-managers at the larger companies are not as “market savvy” or “customer savvy” as the owner-operators of the smaller independent companies. ARC’s business model, for several years, was based on acquiring leading independent companies and the management teams that ran those leading independent companies. ARC so much as said that acquiring well-known, well-respected local “brand name” companies and the management teams that grew their businesses to become market leaders was very important to ARC’s forward success. Effective January 1, 2011, ARC implemented a company-wide “rebranding” action. The strong, local market “brands” (that ARC acquired) are now history. And, by now, many of the former owner-operators of those well-branded, well-respected, acquired companies have retired and have been replaced by managers who did not have the experience, on their own, of developing and growing highly successful reprographics businesses. For any reprographics company to be successful, it not only has to have the right technology and products, it must have an excellent, pervasive, well-thought-out sales strategy, and the most effective sales strategy is one that’s developed at the highest management level and then “driven down” throughout the organization. This principle applies not only to a company that conducts operations in one market or one region, but to a company that conducts operations nationally or internationally. If a company leaves sales strategy (development and implementation) up to a local general manager or branch manager who did not have that experience due to his/her prior position as a production person, then you run the risk of a “sales strategy” that’s nothing more than “selling price.” On a long-term basis, that carries significant risk. Dilo, the COO of ARC, is a highly intelligent, very experienced, fantastic guy. But, he can’t be in 50 markets at the same time. His big challenge, ARC’s big challenge, is to ensure that the non-former-owner-operators, who have, by now, been moved into top management positions at the companies ARC previously acquired, are fully-capable of effectively running their business units, including local-area sales strategy development and implementation, with a heavy dose of that sales strategy coming from the top down.

I don’t think there’s any question, in any reprographer’s mind, that large-format color services are a revenue segment that A/E/C reprographers can grow, at least at the present time and in the near-term future. Reprographers were actually the first in that segment (back around 1991). Unfortunately, most reprographers were, from 1992 to 2006, too caught up in “plans and specs” to meaningfully grow their large-format color business, and, thusly, most reprographers let that business go to screen printers, offset printers, sign companies and color photo labs. Now, because of the dramatic decline in plan and spec printing revenues, reprographers have reentered the large-format color market, only to find it heavily populated with non-reprographers and impacted with very competitive (i.e., lower) pricing. And, like the “plan and spec” business, we will, as time progresses, continue to see “digitalization” further impact the large-format color business. The use of electronic sign-boards, poster-boards and billboards is growing, not declining.

The next five year period will be a very challenging period for reprographers. Perhaps even more so than has been the case the past five years.

Finally, before ARC announced its Q1 2011 results, RW Baird & Co raised its guidance on ARC stock to “outperform.” And, after ARC announced its Q1 2011 results, Oppenheimer & Co reiterated its “perform” rating on ARC stock. Just to the opposite, on May 5, 2011, Zacks apparently issued a 5 rating (strong sell) on ARC stock. Just goes to show you that there are differences of opinion as to where ARC’s stock may be headed from here. For my friends who own ARC stock, I certainly hope that RW Baird’s call is “right on.” We’ll see.


  1. Yeah Joel, it's not "green" driving GC's to do less printing so much as it is doing it "digitally" to save green (meaning green money!). I thought the analysts questions or lack there of was surprising. What about questions like "did your color division sales increase in Qtr 1 versus Qtr 4 of 2010", etc. and what percentage of sales is color? Suri also mentioned the words "MPS" and "FM" together as if there wasn't much difference so that is confusing. I would think there would be a question to get specific differences and revenue numbers on MPS and FM separately in my opinion. Those revenues for ARC are up so the thought is that by the end of the year or early 2012 that could pay off in project printing, but as Suri mentioned, when or to what extent of printing and related services that may happen is unknown.

    There was a good question regarding a lot of money which was partly spent in getting color sales reps trained for the color divisions starting around the 2nd qtr of 2010.

    The bottom line is that color type services and equipment are the future of repro companies like ARC, plan printing and to an extent, online services, is likely not. Do the analysis understand that? Probably not.

  2. Tom meant to say "analysts", not "analysis"