Wednesday, February 22, 2017
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.)
Posted by Joel Salus at 12:09 PM