Yesterday afternoon, ARC held an Earnings
Call after it released its results for Q4 2016 and full-year 2016.
(Note: you
can access the full transcript by visiting seekingalpha.com, and, if you are in
the reprographics business, I highly recommend that you do that.)
As pointed out in a post we put up yesterday
about ARC’s Sales Revenues - comparatively, full-years 2012 through 2016, and
quarter-by-quarter for year 2016 - ARC’s Sales for the full year 2016 ($406.36
mil) were down from 2015 ($428.67 mil) and were just barely above ARC’s Sales
for the full year 2012 ($406.12 mil).
This, after ARC’s sales had increased each year from 2013 to 2015. Negative trend? Well,
I’m not sure what else you would call it.
Suggestions?
Before I get
into my comments about what was said by ARC management during yesterday’s
earnings call, please read the two paragraphs immediately below - - -
On November 3rd, 2016, I
put up a post – my takeaways - about what was said in ARC’s Q3 2016 Earnings
Call Transcript. Here’s one of the
paragraphs from that post back in November:
“Based on the statements made in the transcript, I think it’s easy to
conclude that ARC is, and will be, aggressively selling traditional print
(reprographics services) and will be trying to increase its market share of
those services - - and, when in the past I’ve heard companies use the words
“aggressive” and “increase market share”, that often resulted in prices being
lowered to achieve market share gains. ARC’s margin declined year over
year (Q3’s 2016 and 2015 compared); one wonders if “lowered prices” have
attributed to the margin decline.”
Some of what was said by ARC management
during yesterday’s earnings call:
Suri said, “As most of you
are aware, behind the midst (I
think what Suri meant to say is that ARC is in the midst) of a 24- to
36-month transition to both accelerate our technology services revenue and protect our core business, which is largely
driven by print. The challenge, as I’ve described in my previous calls, is
to setup a solid technology solutions team while
minimizing the organic erosion in print solution by capturing new market
share.”
Dilo said, “While customers continue to print less
and move more toward digital communications, our market studies indicate there is still opportunity to capture more
print business and protect our core revenue through the acquisition of new
market share in every market we serve. We
took advantage of advances in production equipment that improves both the
quality and the speed of construction printing. It also increases our
capabilities to produce construction
documents in color at competitive cost.”
Dilo also said, “While overall print volume is declining,
printing construction documents in
color is increasing.”
Dilo also said, “With regard to
technology sales, Suri mentioned our progress in AIM and we continue to generate interest in SKYSITE as a standalone application
for document management and distribution.”
Jorge said, “While sales in
2017 will not be burdened by comparisons to non-recurring events in 2016, the continued decline in print volumes and
our investments in transforming the company will challenge our performance.”
Suri said, “If you look at
the industry as a whole, we use to describe it as a $5-plus-billion with
over 3,500 companies, and we don’t have that level of companies anymore. What we have though, these small
mom-and-pop print shops. All of
them other than ourselves are private companies, small private companies, very regional, $3 million in revenue and $2
million in revenue and they are very local, right next to project sites or
customer sites. So those – that competition is there.”
Suri said, “Overall for
larger customers, we create a different value of proposition. For customers who
are in multiple locations, like they stay in Sacramento or San Francisco, San
Jose and Milpitas, so in multi-cities or multi-states, when we are the central
print services provider that’s very valuable. But for local projects, they keep – they compete with us pretty
aggressively because they can sell it at a much lower price and they are local. Now, the benefit we have though is
we have technology to support our print shelf, they don’t have, so they can’t provide effective managed print
services, that’s number one. Number two, they also don’t have the same buying power we have. So, if necessary,
on big jobs, if you want to compete, we are able to be more price competitive,
but the local competition in local markets are
still very aggressive. Really small
shops, $2 million, $3 million, and, you know, they are mom-and-pop, the dad is
driving the shop, the wife is running the accounts and there are few front
counter people, that’s sort of common for us to run into competition like
that. They are more like coffee shops
but they are focused on providing construction and printing.”
Questions asked by
Glenn Primack (of Promise Asset Management): “On the market share front, within your print
business, could you take share as the year progresses since you can have better
buying power and you’re probably you could still have operating leverage if you
just fill up the shops with maybe some of the stuff that locals are giving?
And......should we expect to see maybe some of that, that your share increases
as the year progresses?”
Suri’s response: “Absolutely, absolutely. Yes, definitely. So that’s
our strategy. In fact, I’ll let Dilo share some specific numbers as to how we
are comparing ourselves from last year to this year. In fact for the first six months to the second six months how our
shrinkage has somewhat reduced Glenn because we are pushing this market share
concept, right because we are saying, look, we have the shops, we have the
buying power, we are local, so let’s
focus and drive that hard and buy ourselves more time to develop our technology because the adoption as it
comes along we want to make sure we are gaining more market share. So that’s exactly the plan. Dilo
would like to give a little color.”
Dilo’s response: “If you look at
it, in Q2 (2016), our CDIM segment which has the large components of printers
part of that CDIM, we are off by about minus 7%. But if you look at quarter
four, the last quarter, we were down to minus 4%. While it will be extremely hard for us to get over zero, what our
print teams by segmenting, they are completely focused on going after every
construction client, every engineering architectural front in the local market
and wining their onsite and off-site work including project work right
because the market strategy is to sell to these different customers and
projects are very different. So we have totally engaged our operations team and
the customer sales organization to protect every client we have in hand by
giving them top class service so we get recurring business from these customers
while the sales reps are focused on aggressively
winning new market share from new projects and new customers and consultants
who work around that project. And we are seeing some early results, we’ve
seen very happy sales reps who knows the job, who’ve done this for a long, long
time have freed them from some of the other technology related training they
had to undergo in the past, they are
focused on attacking the onsite and off-site print. So things are going quite
well for us and we feel that we will little by little capture market share in
different parts of the country, and every city has competition from medium,
small competitors out there but we feel with our network of technology that
revolves around print, our ability to get jobs in and out from our print shops
using the technology means very fast with high quality print and turnaround
times, I think we have a great chance of increasing the market share in 2017.”
My comments – takeaways - on what was said by
ARC management during yesterday’s earnings call (and taking into consideration ARC’s
Q4 2016 and full-year 2016 financial results):
ARC is, and has been at
least for the past two quarters, aggressively
pursuing construction document PRINTING business, which ARC stated as
necessary to protect revenues during the next 12 to 18 months of the overall 24
to 36 month transition from print to digital document management, i.e.,
Skysite.) Does “aggressively pursuing” mean that ARC is cutting prices for
construction document printing?
ARC’s gross margin was 30.8% in Q4 2016, compared to 33.8% in Q4
2015. Generally speaking, it is not out
of the realm of imagination for margin declines to occur because lower prices
are being offered.
Apparently, ARC
has re-tooled at least some of its production center operations (if not all)
with HP PageWide wide-format printers. Fastest
wide-format printers on the market, and they offer B&W and Color printing
at the same speed.
ARC said that it
has buying power that competitors don’t have.
ReproMax and RSA Corporation both have many, many members, and both of
those associations benefit from the combined buying power of their members. While independents (who don't belong to
ReproMax or RSA) are at a cost-disadvantage to ARC in terms of buying power
(for equipment, consumables and media), I
don’t believe that ReproMax or RSA members are at a significant
cost-disadvantage to ARC. (Please,
someone correct me if I’m wrong about that.)
I was VERY AMUSED
at the characterization of smaller reprographics companies as “like coffee
shops!” Perhaps that’s a great opportunity
for diversification! Small reprographics companies
adding Starbucks counters inside their production centers! Who doesn’t like fresh coffee and pastries! All
kidding aside, there are a number of reprographics companies who compete with
ARC and who are not, at all, small.
Take for example companies such as Thomas PrintWorks, BlueEdge (formerly
NRI), Gill Reprographics, C2 Imaging and ABC Imaging. Just a guess, but the combined annual sales
of just those five companies likely come to around 50% of ARC’s annual
Sales. Because of the size and scope of
ReproMax and RSA (the number of member-companies each has), ARC has a
considerable number of competitors who aren’t all that small. Take
it from one who knows this firsthand, it is NOT EASY to grow market share in
any city or region, given the fact that one-city-only or regional-only
competitors generally have very long-standing (i.e., loyal) customers, some of
whom have been customers for decades, and the fact that most reprographers
offer great quality and service. Price is only one factor.
As ARC has been
saying, it is going through a transition, one that ARC feels will take around
24-36 months, during which time, ARC’s technology sales team members are
pushing Skysite, a cloud-based digital document management technology/service – one
specifically designed for the A/E/C space - one that will end up reducing the
need for customers to print hard-copy documents. And, I applaud ARC for being on the
leading-edge of that. But, as to headwinds, ARC faces
considerable competition in the Skysite-like space. Companies such as Bluebeam and ACONEX are
also players (and, of course, there are others) in that space, and neither
of those companies is small. I pointed
out in a blog post, a few months ago, that ACONEX had recently hired three ARC
technology sales team members, for the ACONEX US sales team. Yesterday, I looked at ACONEX’s financial
statements for Fiscal Year 2016 (which ended in mid 2016) and for the First Half
of Fiscal Year 2017 (which ended Dec 31st, 2016).
(Note: inasmuch as ACONEX is an Australia-based public company, I think
the numbers, below, are in Australian dollars.) (AUSD is about $.77 USD right
now.)
ACONEX, Sales Fiscal Year 2015 - $82.4 million
ACONEX, Sales Fiscal Year 2016 - $123.4 million
ACONEX, Sales 1st Half Fiscal Year 2016 - $55.7 million
ACONEX, Sales 1st Half Fiscal Year 2017 – $77.0 million
(Note: ACONEX’s sales did benefit from a couple of acquisitions it
completed in fiscal year 2016; one of those acquisitions was a company called
CONJECT.)
The point being ….. ACONEX is showing significant growth in the A/E/C
space, and I do believe that ACONEX and Skysite compete head to head. Note also that of the $77.0 million revenues
ACONEX reported for the 1st Half of 2017, only $11.6 million of
those revenues came from “the Americas”.
ACONEX has a very large playing field, i.e., market, in the Americas,
and I don’t think ACONEX will be sitting on the sidelines while ARC is
promoting and selling Skysite.
Inasmuch as Bluebeam was privately held before its acquisition by Nemetschek
($100 million acquisition price, deal was announced in October 2014), I don’t
have any Bluebeam revenue numbers, annual or otherwise. But, if you read up on
Bluebeam (its products and services and testimonials), you will know that
Bluebeam is a major technology player in the digital document management A/E/C
space, a force to be reckoned with, a competitor of ARC’s Skysite and ACONEX.
Congratulations to
the ARC management team on another profitable quarter and on another profitable
year.
(If you found typo’s in this post, please kindly report them to me.
Thank you, best regards, Joel.)
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