ARC Document Solutions Inc (ARC) 2010 Q4 法說會逐字稿

Good afternoon, my name is Ryan and I will be your conference operator today. At this time, I would like to welcome everyone to the American Reprographics fourth quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions)I will now like to turn the call over to Mr. David Stickney, Vice President of Corporate Communications.

Thank you, Ryan, and thanks everyone for joining us. With me today are Suri Suriyakumar, our Chairman, President, and Chief Executive Officer, and Jonathan Mather, our Chief Financial Officer.

The Company's release reporting financial results for the full year and fourth quarter, ending December 31, 2010, was issued earlier today. We will review and expand on the information contained in the press release and then we'll open the call to your questions. For your reference, you can access the press release and the Company's other releases from the Investor Relations section of American Reprographics Company's website at www.e-arc.com. A taped replay of this call will be made available beginning about an hour after its conclusion and you can access the call anytime within 7 days from today. You can find dial-in information in our press release. As usual, we are webcasting our call and a replay of the webcast will be available on our website.

This call will contain forward-looking statements that fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, regarding future events and the future financial performance of the Company, including the Company's financial outlook. Please bear in mind such statements are only predictions, and actual results may differ materially as a result of risks and uncertainties that pertain to our business. These risks are highlighted in our quarterly and annual SEC filings. The forward-looking statements contained in this call are based on information as of today, February 22, 2011, and except as required by law, the Company undertakes no obligation to update or revise any of these forward-looking statements. Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures is set forth in today's press release and in our form 8-K filing. With that as a background for the call, I will introduce our Chairman, President and CEO, Suri Suriyakumar. Suri?

Thank you, David, and good afternoon, everyone. Well, we have completed another tough year in this unprecedented downturn of our times. The Company reported 2010 annual revenue of $441.6 million, adjusted annual earnings per share of $0.03, and annual cash flow from operations amounted to $53.9 million. Revenue for the fourth quarter of 2010 was $105 million. We recorded a fourth-quarter loss in adjusted earnings per share of $0.03 and cash from operations for the quarter was $15.9 million.

While our results may not have met our expectations on all fronts, given the difficult circumstances, I am proud of our performance. If you recall, earlier last year we expected 2010 to be a year of recovery. Although we did feel that the first half of the year was likely to be weak, we certainly expected the markets to begin to recover during the second half. Unfortunately, that was not the case. The second half of the year turned out to be much lighter from a revenue perspective. The only consolation was the fact that the daily sales was stabilizing month over month. What was conspicuously absent were new projects, which are the primary driver of strong sales and healthy profit margins. However, in spite of all the challenges in the market, we have been able to accomplish our main goals. We generated strong cash flow, continue to aggressively reduce our operating costs, and maintain a healthy capital structure throughout the tumultuous year.

I'm glad 2010 is behind us, and I'm excited and looking forward to 2011. I am by no means suggesting that 2011 will be without its' challenges. I have always maintained that considering the depth of the financial crisis we've experienced over the past several years, short-term setbacks are bound to be part of any recovery. In that light, we expect this year to be bumpy, especially the first half, but at the same time there is tremendous reason for optimism. We now have a stable capital structure that will allow us to take advantage of the opportunities ahead of us. As bad as this downturn seems, the longer it lasts, the stronger our position becomes in the marketplace. We are clearly emerging to be the only viable option for large AEC companies that need a single provider of document solutions across the nation.

The proprietary technology we have developed is starting to become more of a standard throughout the industry. While other reprographic companies are finding it difficult to stay afloat, given the depth in technology, we have started exploring new, but related, areas in document management such as managed file transfer and cloud printing. In 2011, we are focused on five growing initiatives, each with an experienced and savvy senior vice president leading the way.

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 $40 million of annualized revenue. In total, Global Services brought $46.8 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.

The second initiative is our Core business aimed squarely at gaining market share from competitors who are floundering or failing. Most of these competitors are $5 million to $10 million companies; in many cases they are struggling with the loss of more than half their revenues. Armed with new tools, technology, and buying power we are re-energizing our local sales teams to target this market share.

Our third initiative is our on-site services, a direct extension of our Facilities Management business. More than half of the global services accounts we secured in 2010 were directly attributable to our ability to manage all of our customer's print network, not just the reprographics portion. Our intention is to step that effort up and reconfigure a whole suite of services that address our customers whenever they work with their documents. On-site services will include our traditional FM services. In addition, it will also include our newest offerings in managed printing services, outsourced services, black-and-white and color printing, large and small format production, cloud printing, and the administrative and software solutions required to make these services a seamless part of our customers' information workflow.

Our fourth initiative is the expansion of our digital color printing initiative. With 10 new supercenters, [Riot] has been successful in capturing new business from customers outside our traditional base. In addition, our new AEC clients have taken a renewed interest in our color services as well. Despite the lack of new construction activity, our AEC customers are continuing to market themselves, taking on projects in the production of interior signage and in environmental graphics and more.

Finally, we will continuing to drive our technology licensing efforts to capitalize on the gains we've made in 2010. The conversion of customers from document management fees to seed licensing in PlanWell Enterprise had made steady incremental progress since its introduction in the second half of 2010. We have also generated some real excitement among early adopters with PlanWell Collaborate as our customers are finding new ways to communicate and work closer with their project teams. 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 ishipdocs, incorporating managed file transfers, storage, and sharing services is scheduled for release in the second quarter of 2011. To top it off, in 2010, we sold more than 15,000 [seeds] of our print cost recovery tool, AbacusPCR.

Armed with the focus on these five key areas, we believe there is reason for optimism. However, should new construction projects remain sidelined for another year, our products mix may be affected. For example, we're aggressively pursuing non-AEC color business, as I noted earlier. With the activity in the US construction market at its current lows, our equipment and supplies business in China represents a greater portion of our revenues. If activity from these initiatives continue to make up a greater percentage of overall business, our margins may suffer from the un-dilutive effects. On the other hand, when activity returns in the AEC market and our technology services become a more meaningful percentage of our sales, other gross margins should improve, especially given our low operating costs due to the cuts made during the last couple of years.

Going forward, I remain confident in the help and strength of ARC and in our ability to ride out the peaks and valleys we are likely to experience as our economy recovers. That is our forecast for the coming year. It is conservative, but realistic.We anticipate annual registered earnings per share in 2011 to be in the range of $0.01 to $0.15 on a fully diluted basis, and annual cash flow from operations to be in the range of $40 million to $60 million.

At this point I'm going to turn the call over to Jonathan for some commentary on the financial performance on the Company during the fourth quarter and full year of 2010, and then we can take your questions after that. Jonathan?

Thank you, Suri. The mix of AEC to non-AEC customers changed just slightly from the third quarter to fourth quarter. 24.7% of our total revenue from the fourth quarter came from the non-AEC segment, with 69.9% coming from nonresidential customers and 5.4% from our residential customers. We saw more significant changes in our product and service mix with equipment and supply sales taking up a larger portion of our overall revenue in the fourth quarter. Equipment and supply sales made up 14.7% of our sales in the fourth quarter. Facilities Management made up 21.3% of sales, digital services delivered 8.7%, and the remaining 55.3% came from our base of reprographic services.

The fourth quarter remains the strongest sales period for our Chinese operation, and the lower margins on these sales weighed down our quarterly gross margin. There were 62 working days for the fourth quarter of 2010, compared to 64 days in the third quarter. There were 63 days in quarter four of 2009. On a regional basis our year-over-year revenue performance for 2010 was as follows. Southern California was down 10.5%. Northern California was down 3.1%. The Pacific Northwest was down 7.1%. Our Southern region was down 9.4%. The Midwest was down 7.5%, and the Northeast was down 12.6%. Our international operations, excluding Canada, are up 48.1%. Once again, this can be attributed to China's strong performance during the period.

We changed our capital structure significantly in December of 2010 by replacing our previous bank loan and revolver with a high yield bond and a new revolver. We incurred a loss of $2.5 million as we wrote off deferred finance cost related to the previous loan. Since the Company's debt is now financed by a fixed rate bond, as opposed to a loan with a variable interest rate, our interest rates swap contract is no longer considered a cash flow hedge. Due to accounting conventions required by the SEC, the value of the swap agreement that was on the balance sheet as of December 1, 2010, will be now amortized to the P&L on the interest expense through December 31, 2012, the original term of that credit agreement. In addition, we are accelerating the amortization of our acquired trade name as a result of consolidating our brand across the country. The value of the those names was previously being amortized over 20 years. We now will be amortizing these trade names over 18 months, and it will be reported as an increase of $2.4 million per quarter in amortization costs.

In [leaving] the balance sheet, we ended the fourth quarter of 2010 with a cash balance of $26.3 million. This is just $3.1 million less that we reported at the end of 2009 despite reducing our debt by more than $34 million. Day sales outstanding, or DSO, were 45 days in the fourth quarter of 2010, considerably lower than 48 days in quarter three, due to our continuing aggressive collection efforts. Total debt, including capital leases, at the end of the fourth quarter 2010 was $239.6 million, down from $274.2 million for the fourth quarter of 2010. The ratio of debt to trailing 12 month adjusted EBITDA at the end of the fourth quarter was 3.2. Cash flow from operations was $53.9 million in 2010, which translates to $1.19 for a fully diluted share.

I think that covers the fundamentals for the moment, so at this point I will turn the call back to Suri.

Thank you, Jonathan. Operator, at this time we are available to take our callers' questions.

(Operator Instructions) We will pause for a brief moment to compile the roster.

Our first question comes from David Manthey from Robert W. Baird.

Good evening.

I was wondering, do you track the number of square feet of plans and the pages and specs that you print and if so, could you discuss how much those were each down in 2010?

No, that's a metric we don't track, David -- square foot of printing we did on the large format or the small format. On the small format, also, we don't sell that by square foot. It's by page, but we certainly don't track the large format. We know it's down because the absence of new products; new products is the biggest driver of that large format printing, but we don't track them.

Based on your commentary about market share gains, would you suspect the industry is shrinking faster than ARC in reprographics services?

In the reprographic services -- well, based on -- yes. If you look at what FMI projects and the numbers we have seen, if you look at the construction dollars placed, it's pretty clear in 2010, especially in the segments we are focused on, lodging, office, and commercial, the drop is pretty substantial year over year. However, we have dropped 12% in revenues, but that's because of the downturn we are experiencing right now and then hopefully when the market comes back, then we will be able to take advantage. But the whole idea right now is for us to take market share from -- by gaining new customers who may be not doing as big a volume as they would have done in the past, but the idea is to gain the customer's loyalty, so when the projects come back we will get that share of the work.

Your FM revenue is pretty flat all year, did you sign up any new FM at this quarter in the AEC or non-AEC?

For the year we have 100 new FMs. All of the FMs in customers' offices, David, where we find are not being used on productive or not producing the numbers, we would terminate those FMs in conjunction with an agreement with the customer. But, the new ones we have installed -- we have installed about 100.

Is that a net or gross number?

Net number.

Then, final question for me Suri. Thanks.

The $2.4 million higher amortization, does that start in the first quarter of 2011 -- this could be a question for Jonathan -- or was there some impact in the fourth quarter?

Yes. There was an impact in the fourth quarter. The amount is $1.6 million.

Okay.

Any impact from the change in accounting for the swaps in the fourth quarter?

Yes, there is -- the impact for the -- one second, I'll give that to you. It's in the press release in the earnings and it is $1.241 million.

That's all I had.

Thank you, David.

Our next question comes from the line of Andrew Steinerman with JPMorgan.

Hi ,there.

My first question was to go over the mix shift points you made. You were saying -- I think you were talking about Chinese business, but I might not have caught the whole thing. You said there was a possibility of margin pressure and that there will be a lower margin business or more nascent margin business growing faster than your Core business. Which lower margin businesses do you think could grow faster than your Core business this year?

What we are doing, Andrew, obviously, in the absence of new large projects, that's the biggest driver of the higher margins in our traditional business because of the fact there are no new projects and the revenues are challenged, we are driving hard in two or three different areas. One is non-AEC; we are pushing after Non-AEC. We are also pushing color. When we say color we always had a traditional color business in the AEC market, but what we are pushing is non-AEC color which is also much more competitive. We will be competing with regular digital bureaus out there.

And the third aspect is our equipment and supplies. Volumes have gone up especially because of the involvement in China where we sell more equipment, so the three of them actually make a bigger portion of our revenue as a percentage. So, that is why our margins are getting pressure, because the mix has changed, and if indeed, when the large projects come back and our technology services become a larger portion, then because the gross margins in those areas are much higher, then it should come back and get back on its track.

My next question is about the AIA index, the architect billing index. That index actually has moved up for a couple of months, now. I would think that would be the front of your food chain in terms of activity level going on, at least the architect side of an AEC, but it doesn't sound like you are seeing that.

We are definitely sensing that. Some of the architects are highering more, but what's happening is, Andrew -- is they had a hundred people and now they've gone down to 40, they're at 50. So, that's certainly good news. They are going in the right direction.

And AIA considers 50 to be the activity, about 50 they say activity is showing, which is definitely what we are seeing in the market without a question at the early stage, but that's the design stage, so you are working on schematics and design at this stage. When it goes out for bid is when we really see a real uptick in our revenues. So, there is a gap for a period of time and what is slowing that down, is if you look at the status takes, and I know David showed it to me this morning, where the project cancellations and project holdups are much greater than they were before because of the financial issues. In fact, he is just giving it to me right now -- project delays are three times normal at 15%. Project cancellations are two times normal at 5%. These are FMI numbers I am giving you, Andrew.

I understand. Okay. No, that helps a lot. Thank you so much.

Our next question comes from the line of Scott Schneeberger with Oppenheimer.

Thanks. Good evening, guys.

First to start off, Suri could you address how monthly trends were through the fourth quarter and what you have seen into the early first quarter? I realize this is the slow time at the year, but any color you could provide would be helpful. Sure. So, the last quarter, the daily sales were -- our own daily sales seemed like they leveled off. We completely -- we always talked about it, got leveled off. The difference there is, Scott, all of our new initiatives did kick in as we planned. For example, the color definitely brought in additional new business. Our Global Services definitely brought in some additional business. Management Services. We had some come from FM. Large amount of volumes came from, of course, day coupon in sales which is obviously part of our Chinese business.

All of that actually made up for the loss of revenues in the traditional AEC business. In fact, December, construction put in place is the lowest in 10 years -- the December numbers according to the US Census Bureau. Am I right, David? The Census Bureau stated that the new dollars -- construction dollars put in place -- December is the lowest in 10 years. That's just an indicator of the fact that there are no new projects. So, when you don't have new projects, we miss that revenues out of new projects, but we have replaced that with all of our new initiatives we talked about earlier in 2010, which is helping us keep our sales up.

That is the trend in the last quarter. Going on to the first quarter, needless to say, generally started off softly. That's a little exaggerated by weather. Weather didn't play a huge role, but it certainly slowed down a lot of activity which was going to come online. And then, that is what we are sensing going into January and going into February. The best month of the year for any reprographer, as you know, is -- you should see the previous historical numbers -- is March. So, March will tell us how the first quarter is going to go, but starting slow for sure and it's not surprising us based on what we experienced in December. Thanks, Suri.

How much visibility do you have? Obviously, March is a big quarter -- month, rather, and -- do you have any feel for that yet? Or not that much visibility into that?

Not much. We are hoping the pent-up stuff, which means the projects which have been on hold, which we just talked about in answering Andrew's question -- if those things just get released and things pick up, then march will be tremendous because March is also from the number of working days' perspective, the longest month -- very little holidays, Easter is not falling on there. There are a lot of things which attribute positive to March, but we just don't have any visibility as to what kind of things can actually come up. There's so many projects in the pipeline, but they are held for whatever reason.

Okay. Thanks, Suri.

Strategically, longer term, obviously, you are biding your time with some of these other revenue generating businesses albeit at a bit lower margin. What is the -- for a prolonged downturn although it sounds like we are starting to see some favorable early indications, but from the prolonged downturn, is it just continue to grow these new revenue generators and then hopefully layer on top the more cyclical revenues, thereafter?

I think, this year, especially the first half, all of the new business as we have gotten -- and we will continue to push that hard -- is helping us a lot. In keeping our revenues up, keep the Company healthy, generate the cash, meet our financial obligations. I think the second half there is a lot of hope that the new projects will actually kick in.

Now, I am just citing it from my numbers. If you looked at last year FMI numbers, for lodging, office, and commercial with largely the sector we play in, lodging was down 30%; office was down 24%; commercial is down 35%. For my predictions for this year for 2011 is 1%, 2%, and 5% negative, but it's much, much lower.

So, there is going to be -- there's a huge change from this year to next year in terms of outlook and I think it's starting to show. We are sensing that in what customers are doing, that they are hiring back. There's suddenly a lot of optimism, but given the fact that we are connected to construction, I think the first half would be bumpy and then the recovery will begin. But, in the meantime, we are growing all that extra business using our existing infrastructure technology and the capacity we have to compensate for the loss we are currently experiencing.

A couple more, I'll ask them both up front.

One is what you're doing with regard to cost controls at this point? I think last we spoke you had basically slowed down your cost reduction and were hoping for the top line turn; just an update, there.The second, it seems a little bit early for you to be opportunistic with regard to doing tuck-ins, but you did mentioned that you're putting your sales force aggressively out, basically going after those smaller than you that may have struggled more. Is tuck-ins now part of the story there or is it more just grab their share directly without the formal engagement? Thanks.

Right, so to answer your first question, Scott, obviously cost reductions is always mindful because we are continuing to fine turn to our operating costs. When we're talking about cost reductions, we closed locations, branches -- there can be two approaches. One is we close a branch because we simply want to cut costs, because we are compelled to cut costs, we want to reduce our operating costs, so we would just cut the branches; and we did some of that at the early stage, but we refrained from doing too much of that because we want to position the Company for growth.

The second reason we would close a branch is because of the technology transition which is going on, combined with the fact that we are becoming more and more with a single identity as one Company, there's a lot of savings we can gain by centralizing the back offices, by centralizing some of the branches, so technology is driving that. We are seeing more and more customers employ technology, so we are starting to see benefits of that.

So, those kinds of branch closures or consolidations will continue and we continue to do that aggressively, because it actually makes us more efficient and reduces our cost and allows us to actually leverage our existing assets, so that will continue. We don't see any reason for drastic cutting of branches yet and thanks to the high-yield we have, we feel like we have a stable debt structure so that we can focus on the growth and invest in our technology.

With regard to tuck-in exercises, absolutely. It's more and more on our radar screen and we are watching it and we will continue to work on those because we are constantly bumping into companies, either they are really -- lost a large amount of sales, finding it difficult to continue to continue to operate, looking for exist strategy. And most of these are private companies and where we find that we can provide an exit strategy for an existing owner, we will pick them up because that wouldn't be like a traditional acquisition. It would be much more attractive. Thanks, Suri. I appreciate the call.

Our next question comes from Matthew Kempler with Sidoti.

Just a follow-up on the last commentary regarding 2011, so -- when you look at your guidance of $0.01 to $0.15 and you're seeing a bumpy first half, are you embedding it against an assumption that revenues are flat to slightly up by the second half of the year.

Yes, absolutely, because again, we are seeing bumpy, Matt, because we still like to wait and see how March performs. We might see much more life; there's a chance that we can see life in March because there are projects which are being held. So, hopefully, there will be positive impacts on that, but in general, I would say your observation is correct. Keep it bumpy in the first half, but more stabilization and better returns the second half of the year.

Okay.

It sounds like the Management Services initiative played a good role in helping to expand your global account base. Can you give us some sense of the contract values, specifically just for MPS? And then, what are your thoughts around opportunities into 2011? Are you retooling your strategy around that or do you think the current effort and the current approach is the right way?

The current effort is going very well, Matt, and we are starting to see, like I said, definite progress on that. What makes us unique is the fact we can not only do outsourced work, outsourced work for our customers, but we can also do the on site, so we do on site, we do off site, and then we do the cloud, which means that if a customer wants work done at site or printed at site, we can provide that too.

Tied in with the fact that we provide management services, color and black-and-white, large format and small format, we can really be the solution provider for large customers taking over their complete document issues tied with technology. So, that part is really exciting. As we do it, it is becoming better for us and we are starting to see larger companies saying yes, we want to do that, because remember end of the day, we take their 20, 30, 40, sometimes 50, 60 locations and convert services to a single platform service and give them one invoice which tremendously saves them money.

With regard to contract values, because this is a public call, we would like to keep that confidential. It's also competitive nature, but overall, in the Global Solutions revenue, quite a few of them are contracting PS package. That is because for larger customers, it is attractive to buy all of the services from us, Matt.

Okay.

And then on the color side, it sounds like we are at the full run rate now in terms of the number of service entries we wanted to have for color, so what are the plans in 2011 regarding that?

And then, if you could give us a sense of the growth you saw in color in 2011, breaking it out by the impact from the AEC segment, which probably had some decline versus non-AEC?

I will ask them to look at the color -- Jonathan will-- I'll ask Jonathan to look it up and quickly comment to you on the new revenues we got on color, Matt.

With regard to the 2011, absolutely we are going to continue to stay on track. Like I said if we do that, if the new projects don't come on line and our AEC customers don't grow their business, because AEC color is specialized color and is not something that you will going and get it done in regular digital color bureaus, so if that volume of the business doesn't come back -- and we continually expand our non-AEC color, which means all of the work we are doing out in the market now from Adobe to marketing presentations to Ducati to large-format posters, building wraps, if you take that kind of stuff, which will continue to grow, that is a part which actually somewhat keeps our margins down.

That business will grow anyway because we already have the coupon, we have the locations, our operating costs is low. One of the other reasons our color margins might be a little challenged at the beginning, Matt -- because remember, we opened these 10 centers and launched Riot. It's for competitive reasons. We want to go out there and take business from the competitors, so sometimes when you kick off of a business, you want to be really aggressive in taking market share. So, those are the things which contributed to slightly lower margins.

Jonathan, can you comment on color volumes?

To answer your question, based on information that we make available, color, year over year, was almost flat, so compared to 2009, 2010 was comparable numbers, flat. However, when you take into consideration the fact that the -- color was, prior to us getting into the non-AEC initiatives, we were servicing the AEC segment. What you're seeing is the decline in the AEC segment; if you took that into consideration, we would have had a decline in color. Fortunately or because of our initiative, we have been able to negate that decline by getting at least getting it to flat and that's the increase from the new initiatives.

Okay.

And then, last question, the EPS guidance, does that exclude the impact of the stepped up amortization's end from the branded trade names and the swap?

Yes. So, basically, we call it the adjusted EPS. It adjusts for each quarter, net of taxes because that is the $2.4 million for trade amortization and then there is about $700,000 a month for the swap costs or $5.8 million for the whole year. Net of taxes, you're talking about a $2,700,000 adjustment each quarter for those charges.

Okay. Thank you.

Our next question comes from the Brad Safalow with PAA Research.

Hi. Thanks for taking my questions.

Oh, you're welcome, Brad.

Just a couple factual questions, how many branches did you have at the end of the fourth quarter?

I'll give you that in a second. End of quarter, number of branches -- I think it's no change if I recall right, it's 271.

271. Okay. Just on ishopdocs, I want to make sure I understand that number correctly. Is the $4 million, was that total revenue for the ishipdocs ecosystem versus what you actually generated for ARC?

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

The $4 million number you disclosed for ishipdocs in terms of revenues, is that revenues to ARC or just revenues of printing volumes on the platform -- across the entire platform, because I know a lot -- some of -- obviously your network participates, but there are third parties that also participate.

Oh, yes, exactly. So, remembering now, 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. It is very attractive in terms of gross margins.

Do you have the -- I guess I can extract the -- so -- 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 -- I don't know the royalty rate, but okay. I can try and work with that.

Separately, going back to this -- your branch network, depending on what happens with the construction market, you're sitting here at that about $1.1 million in revenues per branch. Are you anticipating closing any branches in 2011 or do you feel like you'd rather wait to see what happens with the marketplace?

We might actually close a few of those, Brad, because we are increasingly, like I said, looking at technology, how it can help us. For example, very few customers come to pick up from us. Almost all of work is coming to us digitally. When it goes for bidding and then when it goes to the site, it has to be printed, but customers are comfortable sending the work to us, so we are starting to see benefits we can draw from that with regard to closing the branches.

But, I still think there will be more consolidation, more from the perspective of right-sizing for Company for the visibility that business is going to come back. We suddenly recognize when the business comes back, the way it would be configured would be different to what we traditionally had, which is largely print volumes related and very local, so there is definitely opportunities for us to consolidate and we will consolidate some branches, but, like I said, we won't close a branch because we want to cut the cost, we will close a branch because using the infrastructure, we can still draw the work out of that place.

Okay. That's helpful.

On then on the Riot color side, you had 10 at the end of the year. Do you plan to open any more in 2011?

Were not planning to open anything dedicated, Brad, but we are realizing the Riot color has been so well accepted even by our AEC clients because we created a single brand name, we created marketing materials, and in positioning the kind of work we do. We did work for Adobe. We did work for Ducati. We have done work for some prestigious department stores, so the AEC clients we have are saying, wow, you guys can do all this stuff, so what is happening is we are thinking about converting some of the existing color centers with virtually very little cost into the additional Riot centers if that goes that way.

So, that's a thought we have of -- you might end up in 2011 a few more Riot centers, but they are not as dedicated that we had to spend money to open, so to speak.

Okay. Understood.

And then, can you -- just on the Global Services, the $14 million of annualized revenue, can you give us an idea of how much of that revenue you actually -- I assume these are annual contracts, but how much have saw of that in 2010?

Out of the $14 million?

Yes.

Jonathan?

About $4 or $5 million.

About $4 million or $5 million, Jonathan says, because I think we started some of them in the third quarter, we signed a few and then we signed a few in the fourth quarter. Around $3.5 million to $4 million, so we would have the same impact. If the market is starting to show life and there is new projects, Brad, we expect that number to go up fast.

And just so I understand, does that mean you expect to see an additional $10 million in 2011 or is that $14 million number you gave us is just what you had in aggregate from when you signed the contracts?

Annual number of accounts already signed up.

We had $4 million last year. We will have that $14 million this year.

Okay. Understood.

And then, last question, can you talk a little bit more about your monetization strategy on PlanWell? I know this has been something that both you and others in the reprographics industry are trying to figure out, so can you talk a little bit about how you're approaching pricing and how you've succeeded in terms of penetrating your customer base in terms of seat licenses?

Sure thing.

So, obviously, from an industry perspective, it's a major challenge because almost all of the reprographers and anybody who is involved in the business from the early days -- this is, I'm going back, Brad, six, seven years ago -- started having planned rooms so they are basically storage of documents and retrieval of documents, just planned rooms. At that stage the whole planned room concept was incorporated into the print cost because print played a more dominant role and we simply stored it because we can get print out of it.

In ARC, there's a greater reason why we dole up these planned rooms and the technology at the early stages because we wanted to improve the efficiency inside ARC branches, because we still have at that time nearly 300 locations and we wanted to improve the internal work flow. What has happened in the last two or three years increasingly, with the suite of tools we have, we are making a greater technology impact on the customer, so it's just not PlanWell Enterprise. We help them bid their projects, we use a call we just call Bidcaster. We also released one, which is very new which is called PlanWell Collaborate.

This is probably going to be the most impactful tool we have released because it actually involves the workflow of our customers where they are sharing documents, distributing documents, keeping all the updates, keeping all of the records. It's a very versatile tool we've just released.In addition, to that, Brad, we have tools like AbacusPCR, which does this tracking on the FM side and then we have MetaPrint. And, of course, then we have a series of other things like EWO or electronic work orders.

So, the competition of all this, we are providing customers services on many fronts and they are starting to see the technology value we provide. So, for the first time, we are starting to see our customers, although we did get some resistance at the beginning for selling PlanWell licenses from some of our traditional customers, more and more customers are saying, yes, they are using this, we would want to use it. And we are going back to those customers who are basically saying, well, we won't want to pay for seat licenses, we are saying you're print revenues have gone down by almost half, so if you don't give us this seat licenses, we will just remove PlanWell and we'll continue to provide you very attractive print services like the other reprographers, but however, if you want to have the utilization of PlanWell, you have the access to these documents from where ever you want, then you have to pay the services.

We have seen some really good successes and we are starting to sense a change of behavior, especially in larger clients where they say we want the whole thing bundled together, tied in with MPS, so in that aspect, we are actually driving that and we are able to make the difference.

So, sorry to put a finer point on this, can you help us understand in terms of your total install base or users of PlanWell, what percentage are actually paying any fees for seat licenses at this point?

Right now, that's a low number because we just started doing many of them. David, do you have a number at all?

I don't have a number, but that is something we can provide.

We can look into that and get some numbers. The Abacus' licenses we said 15,000 uses we sold. That Abacus seat license number is that now in excess of a couple hundred thousand in terms of seats.

Overall, Abacus?

Yes.

Overall, it's probably more in the $30,000 to $40, 000 range in terms of overall.

No, not the dollars.

Seats, sorry. We have those numbers available.

Brad, what we can do, we can dig into that a little bit more and give you those numbers. We are not sharing those numbers because they are not making -- they are not meaningful enough to make the difference, but the trend is in the right direction, though.

Okay. That's very helpful. I'll follow up. Thank you.

I want to make a quick correction to the question that was asked about the adjustment of the EPS in 2011. Per quarter, it's not $2.7 as I said, it is $2.4 million. This is for the trading amortization swap cost net of taxes is approximately $2 million.

(Operator Instructions)

Our next question comes from Michael Terwilliger from Bank of America.

Hey, Jonathan. Hey, Suri. Can you guys hear me okay?

Sure. Absolutely.

Largely asked and answered, but I wanted to jump one quick question before we wrap up here. Based upon the cash you have outstanding, about $26 million and your projections for the year, it looks like 2011, you are going to have a pretty big cash hoard. You don't have any pre-payable debt anymore. Besides tuck-in acquisitions, how can we think about your use of proceeds for the coming year?

Cash flow from operations range $40 million to $60 million, but again we will have our capital expenditure, which trends in the $8 million to $10 million for capital expenditures. And then, of course, paying down our leases, we have in our debt, we still have capital leases and seller notes that we'll have to pay, so between those two, if we are on the low end of the cash flow from operations, we would use up $25 million to $30 million.

Between cap leases and CapEx, do you think it could be as much as $25 million?

Yes. About $20 million, $25 million.

$10 million (multiple speakers) and then the balance (multiple speakers) and seller notes which will come up for payment, et cetera.

If you could also remind me what your potential dividend capability is after the issuance of your most recent notes? I believe the basket is under $20 million, but I just wanted to know if you knew that number off hand?

I don't have the number off hand, because that is not something on top of our radar.

We are not thinking in those terms yet, but obviously to answer, that is what I was going to say. If we do end up hoarding cash, meaning that if the market is strong in the second quarter and third quarter and we start generating that kind of cash, that's a good problem to have. Of course I hope I have that problem. Then, obviously, we will be looking at various other options of how we can use that cash.

Obviously, if that is the case, it is likely the market is coming back, and if the market is coming back, we can think about acquisitions. That's one option. Secondly, there's a fair amount of investments that we can make in order to go off to the new segments of the business, so that's -- expanding the existing market is another opportunity.

And, of course, then we can look at options such as paying dividends or buy back stock or all those things. They are all options available to us, but our objective now is to make sure -- keep the Company healthy and strong until the market comes back and when it comes back then we will have a lot of options.

Would it be safe to say 2011, barring some sort of miraculous comeback, shareholder-friendly activity, it looks like it's off the table for 2011?

In terms of?

In terms of shareholder-friendly activity, either dividends or buying back shares, it sounds like that that doesn't seem like a priority for the coming year.

Yes. Unless otherwise something happens in 2011 and then activity picks up and then we end up having a whole lot of cash. Jonathan would you like to add to that?

Again, to answer your question, we give (inaudible) conservative, but realistic guidance, and we give cash flow from operations low end, $40 million, high end $60 million. As I said, we have our capital expenditure $8 million to $10 million current. If you look at the balance sheet, the current portion of our capital leases is about $20 million, so just those two would use up the $40 million and leave us with $10 million, adding to our cash flow, of course.

And at a certain point, we could have some extra cash that we would consider, should the stock prices, go low, of course, that's better than doing an acquisition -- buying all the stock back.

Okay. Well, great. I appreciate the color, gentlemen. Thanks.

Thank you.

And at this time, I am showing no further questions.

All right. Ladies and gentlemen, thank you much for your attention and your continued interest in the Company today. We look forward to talking with you in the future. Have a great evening. Good night.

This concludes today's conference call. You may now disconnect.