ARC Document Solutions Inc (ARC) 2013 Q3 法說會逐字稿

Good day, and welcome to the ARC Document Solutions third-quarter 2013 conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. David Stickney, Vice President of Corporate Communications. Please go ahead, sir.

Thank you, Yana, and welcome, everyone. On the call with me today are Suri Suriyakumar, our Chairman, President, and Chief Executive Officer; Dilo Wijesuriya, our COO; John Toth, our Chief Financial Officer; and Jorge Avalos, our Chief Accounting Officer.

Our financial results for the third quarter of 2013 were publicized earlier today in a press release. The press release and other Company releases are available from our Investor Relations pages on ARC Document Solutions website at e-arc.com.

A taped replay of this call will be made available several hours after its conclusion. It will be accessible for seven days after the call. The dial-in number is in today's press release. Per our usual practice, we are also webcasting our call today and the replay of the webcast will also be available on ARC's website.

Today's 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. Bear in mind that 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, November 6, 2013 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.

At this point, I'll turn the call over to our Chairman, President, and CEO, Suri Suriyakumar. Suri?

Thank you, David. Good afternoon.

Today I'm happy to announce our third-quarter performance, especially since it marks the first time in five years we have experienced year-over-year growth. While I would not consider this to be an extraordinary feat under usual circumstances, achieving growth after emerging from this current downturn marks a new era in our company's history.

Let me tell you why. While the financial meltdown and prolonged decline in construction has been brutal, to say the least, I must remind you that a downturn is not the only thing we were battling. We were also experiencing significant headwinds from the secular changes the construction industry was going through during this period.

Changes in the way AEC customers manage their documents made some of our traditional services far less relevant to their needs and wants today. These changes put reprographics companies in every market under tremendous pressure and in many markets devastated the industry.

Had we been less willing to change, the conversations we would be having with you today, assuming we would be having a conversation with you at all, would be entirely different. Instead, we looked ahead, took bold decisions, and made appropriate investments in technology, sales, and new services to expand our addressable market during some of the most difficult times in our company's history.

Today's conversation is, therefore, about new and vibrant opportunities, such as managed print services, archival information management, and more. That's exactly why we feel as though we have crossed a crucial threshold and entered a new era.

The last five years, however, has also provided us with an opportunity to demonstrate our ability to manage our organization through extraordinarily difficult times. Our execution on these initiatives has been excellent, and I'm very proud of what my team has been able to accomplish. We are not out of the woods yet, but I have never been as confident about our future as I am today.

As we highlighted in our earnings release, third-quarter revenue was $101.3 million, a 2% increase over the same period last year. Our gross margin was 32.5%, 310 basis points higher than our gross margin in quarter three of 2012. Adjusted EBITDA margin was 16.3%, 320 basis points higher than a year ago. And cash flow from operations for the quarter was $20 million or approximately $0.43 per share. Adjusted earnings per share were $0.02 for the quarter.

We are maintaining our annual adjusted EPS forecast for the full year of 2013 to be in the range of $0.06 to $0.09. We anticipate cash flow from operations, also, to remain unchanged and be in the range of $38 million to $45 million.

Our year-over-year growth was led by $31 million in onsite services, which once again was our largest revenue line. Onsite services represented more than 30% of our overall revenue and grew by nearly $4 million over the third quarter of last year. It bears mentioning that Gartner Research now identifies ARC as being the ninth largest managed print services provider in the world.

While we've expanded our addressable market in a number of areas, it is here in onsite services and in MPS, in particular, where the market potential is greatest in sheer dollar volume. Five years ago our offering to the AEC industry, and by that I mean traditional reprographics, was driven by construction activity and represented the overwhelming majority of our opportunities in that market. But, it is also very sensitive to the cyclical nature of building activity.

By growing our MPS offering we now focus on the operations of the companies that build these projects as opposed to the projects, themselves. As a result, we can address their document needs, their document distribution needs, their marketing and promotional requirements, their archiving and information needs, their increasing need to collaborate inside their own companies, as well as with their vendors and partners. And we are still in an excellent position to reap the rewards of construction projects returning to the market.

What I would like to point out here is that at the same time we are far less exposed to cyclicality, far better positioned to deploy our technology solutions, and far more capable of providing document solutions for an entire enterprise instead of being limited to the needs of a project team. It is a position in the marketplace we have worked hard to establish, and it is the basis for the most dramatic part of our transformation.

In the third quarter we also saw an impressive increase in color services sales, as we benefitted from some of the operational changes we had instituted over the last few quarters. Color services delivered $20.6 million, which represents a 6.7% increase year over year.

Declines in traditional reprographics mitigated in the third quarter with sales of $28.9 million, a 6.2% decrease, and a much lower rate of decline than we have experienced in the recent past. While we are yet to see a vigorous recovery of nonresidential construction activity, we do expect to see incremental gains and our traditional repro line will benefit from them.

Digital sales declined slightly for the quarter at 3.2% year over year, while our biggest technology success story to date is the enthusiastic adoption of Abacus throughout our MPS engagement. Sales of these popular applications are not reported as a part of our onsite services revenue and are not reflected in digital sales.

Finally, equipment and supply sales were lower in the third quarter by 8.6% compared to the same period in 2012. This decrease is due to a challenging year-over-year comparison caused by aggressive vendor promotions offered to our customers last year, along with some large nonrecurring sales that made a significant impact on our performance, both in the US and in China.

Overall, we expect the trends we are seeing in the third quarter to continue in the fourth quarter, which is traditionally our weakest period of the year. MPS will lead year-over-year growth in onsite services and color will likely benefit from holiday promotions, helping to offset any normal seasonal declines. Traditional reprographics will likely be prone to historical weakness in the fourth quarter, as weather and fewer working days tend to dampen construction activity. As for digital opportunities, we have a healthy pipeline in archival information management, and we are excited about this opportunity. The fourth quarter is typically the best quarter of the year for our Chinese operations in equipment and supply sales.

As we noted last quarter, we have become more aggressive in our use of cash in the last half of 2013, especially as it relates to our debt. Using excess cash we repurchased $7 million of our own bonds in the open market in July, and during the last week in October we repurchased an additional $5 million of our bonds. On a full-year basis this achieves an annual interest savings of approximately $1.3 million.

Our cash position at the end of the quarter and before the last week's bond repurchase was $37.1 million, which provides us with great confidence as we continue to explore the reduction of our debt obligations and alternatives to further improve our capital structure.

As I mentioned in our release today, the markets are picking up steam, perhaps not at the rate we like to see, but it is gratifying to see opportunities grow again in both our traditional and new markets. I expect we'll be able to carry the momentum we've established forward into the new year, and I look forward to sharing those results with you in the near future.

With that, I'll turn the call over to John for a brief review of our financial details, and then we'll take your questions. John?

Thank you, Suri.

The revenue performance of each of our business lines continued along the trends we established in the second quarter of this year, as did our gross margin performance. I think it's important to recognize, however, that this trend wasn't established overnight. Much of what we reported today is the direct result of the steady and ongoing measures we have taken and continue to take from the beginning of the recession, which were capped with the changes we announced in the fourth quarter of last year.

As we predicted, our 2012 restructuring has allowed us to continue making progress in expanding our margins, increasing our cash flow, and it has also provided us increasingly favorable options as we consider our capital structure going forward.

With regard to our restructuring, we incurred $700,000 in additional restructuring expenses during Q3 of 2013, bringing our year-to-date restructuring expense to $1.8 million. As a reminder, the initial restructuring expense of $3.3 million was incurred in the fourth quarter of 2012, making our total expense related to our restructuring activities $5.1 million.

Year-to-date total cash outlays with regard to our restructuring liability have been $3.3 million, including Q4 2012's outlays of $1.1 million this brings our total cash outlays on the restructuring to $4.4 million and a remaining restructuring liability of $700,000 at the end of Q3.

Our cash stands at $37 million as compared to $31 million a year ago. This is a 21% increase, and this $37 million is after payment of $3 million of year-to-date restructuring charges and $7 million of repurchase of our bonds earlier this year. Without these two additional cash outlays our cash would stand at $47 million.

Net interest was down $1.1 million for the third quarter compared to the third quarter of last year. Some of this is a result of favorable comparisons as our interest rate swap ended in December of last year, but it is also due to the reduction of interest payments on the bonds that we repurchased in July.

The result for the quarter was adjusted net income of $795,000 or an adjusted EPS of $0.02 for the quarter. Adding back interest, taxes, restructuring expense, and depreciation and amortization to get to our adjusted EBITDA for the quarter, it was $16.6 million or 16.3% versus a year ago when our adjusted EBITDA margin was 13.1%. The 320 basis points improvement from our adjusted EBITDA margin falls directly from the strength of our gross margin.

Cash flow provided by operations was $20 million for Q3 of 2013 versus $14 million for Q3 of 2012. This is a $6 million increase, despite the $700,000 in cash payments made in the third quarter related to restructuring. The increase in cash flows provided by operations was primarily due to our strong and improving financial performance.

Capital expenditures were $4.8 million in the third quarter versus $4.9 million in the same period last year. Our drive for a 50/50 mix of buy versus lease for our equipment needs has slowed slightly due to the interest savings from deploying our excess cash, as well as a favorable environment, but our intent remains to achieve a 50/50 balance in this equation.

Total debt including capital leases at the end of Q3 2013 was $213 million, down from $224 million for the same period a year ago. This is due to the $7 million of bond repurchase, plus the expiration of capital leases.

And, as noted in our release today, we've also made significant progress on our debt-to-EBITDA ratio via our bond repurchases and the continuing improvement in our margins. The ratio now stands at 3.3 as compared to 3.6 in the second quarter, taking us well below the 3.5 threshold.

In closing, as Suri mentioned, we made an open market repurchase of an additional $5 million of our bonds in the last week of October, which will be recorded in the fourth quarter financials. Similar to the earlier transaction, the repurchase was intended to reduce ARC's long-term debt and annual interest obligations and made no use of the Company's $50 million revolving credit facility, which remains undrawn. This is another step in our longer term campaign to deleverage the Company and make more of our EBITDA available to the equity side of our enterprise value.

As we've said before, we may consider additional steps to further reduce our debt and interest obligations provided conditions favor the Company and as our financial performance and the economy continued to improve.

With this overview as a basis for discussion and questions, I'll turn the call back over to Suri. Suri?

Thank you, John. Operator, we are now ready to take questions.

Thank you, sir. (Operator Instructions)

And our first question comes from Scott Schneeburger from Oppenheimer. Please go ahead, sir.

Thanks. Congratulations, guys, on your year-over-year growth in revenue.

Thanks, Scott.

I guess, first thing, Suri, I'm going to ask about the more traditional business and the nonres construction cycle and just what you're seeing on the street there. Obviously, making great headway in other areas of the business, but curious for a more in-depth update on that. Thanks.

Right. So the number, as I said in my prepared comments, still is yet to take off. There are definitely signs of the improvements and there's activity, there's a lot of green shoots, but we haven't seen the activity in the nonres as strong as, for example, in the residential side. We have much stronger activity going on in the residential side. And we certainly think it will start to pick up in the first half of 2014, Scott, but right now there's not a whole lot of activity going on in the nonres side, but although we see positive signs coming along. So we think that is the real impact of that nonres growth would be maybe second half of 2014.

Okay, thanks, that's helpful. I'm going to jump around here a little bit, Suri. I believe you or John had mentioned on the call that seasonally you have a strong quarter out of China in equipment sales in the fourth quarter. And if I recall correctly, I'm just checking my model, I don't think that kicked in as much last year, maybe it did, but do you expect that impact again this year and to what magnitude?

So last year, you're right, it was a really strong fourth quarter, and obviously it kind of flowed into the first quarter. So that could happen again, especially last year we had a very large contract. Am I right, Dilo?

Yes.

Dilo is sitting right next to me -- we had a very large contract with a big enterprise level customer and that kind of also offset the numbers a little bit. But usually the fourth quarter is the quarter we sell a lot of equipment because many of these large government institutions do have funds available and they want to make sure they're deploying all their funds and they end up investing in equipment. So that's just the trend in China. Right, Dilo?

Absolutely, so fourth quarter will be slightly better than the third quarter, for sure.

Than the third quarter, at least that's the expectation for now, Scott, and some of that may just flow into next year's first quarter, like it happened this year.

Okay, thanks, I appreciate that. A couple more. Suri, did the government shutdown have any impact that you could discern on your business?

All in all, the sentiment I guess was a little soft. I mean people started holding things back a little maybe, but we didn't see any specific -- I don't have any specific evidence to say projects were delayed or held back. I think there was -- general sentiment in the marketplace was that while the economy seems like it's going to have a stutter step, but specifically we can't point to anything. Dilo or John, can you --?

No, I think that's -- with the CFOs I talk to of our customers it comes back to the confidence of their customers to make big capital bets.

Right.

And the shutdown impacted again that confidence to make big capital bets, not as dramatically as prior, but still it caused hesitation.

Okay, that's [it.] And then lastly, the archival information management business, could you give us an update, you know, relative to expectations, what you're seeing the potential for, not only in the long term, but also just comments on over the intermediate term? Thanks.

Right. So that's actually a very exciting project for us. We have started working on it. It's obviously in the last two quarters we actively got engaged in that, and we are starting to see some activity.

But like anything else, every one of those projects we are selling to a lot of customers. There's a lot of inquiries, there's a lot going on in the pipeline. So by the time we put that together and get it rolling it will take a few quarters for us to show you real signs and momentum. But obviously we are talking about it, we are extremely excited about the opportunity. There are a lot of activity and people like -- I mean more and more companies and, what do you call it, customers are looking to digitize their archival material, and have the ability to reach into them, search them, and have better use of the archived material.

So we're really excited about that, and I think it's another nice growth opportunity, equally as exciting as MPS is. Obviously, we started MPS three years ago and it's gained a lot of momentum. I think we'll have similar momentum picking up in AIM business, and we are really excited about that.

Okay, thanks, guys. Thanks for taking my questions.

All right. Thank you.

Thank you. The next question comes from Matthew Kempler from Sidoti. Please go ahead, sir.

Thank you. So I wanted to follow-up on the MPS segment here. Noting that you're the ninth largest business in the segment, do you view any adjacent markets outside of AEC that might make sense or is there just sufficient opportunity in the near term that that's going to remain our focus?

Absolutely. I mean there are market opportunities that definitely are there, Matt. I mean if there's any low hanging fruit we'll go after them, there's no question about it. But because in the construction space the reason why we have made significant headway is because in the construction space there are literally no other player on our level. All the large players don't seem to have impacted the construction space because our ability to provide onsite and offsite at the same time, combine both of those services, makes us a much stronger player in that space.

So we have a lot of opportunities in the construction space, so obviously we are going after the low hanging fruit, and that's where we dominate. But there are definitely adjacent markets, and we are looking at it all the time. For example, we have started working at some of the hospitals. There are some insurance companies, some school districts. So it's starting to take foothold, so where there is low hanging fruit we would go after them. But it's not something that we are focusing on specifically because the opportunity inside the construction space is so huge right now.

Okay. And the growth that we've been seeing is that primarily being driven by the large enterprise adoption or are you getting any boost from your regional effort?

We are getting some boost from the regional effort. I don't think it's big enough to make, you know, show on the radar screen just yet. Dilo, would you agree that we are getting some impact on that?

Definitely. There's local results, but the global type of customers are the ones (multiple speakers) --

The ones who are making the big difference. So in terms of big numbers, Matt, what Dilo is saying is it's the big customers who is making impact. But we are selling at the local level and at the regional level, as well, and we are starting to see results there. I would expect the latter part of next year we will see more of those customers become -- impacting the numbers. Am I right, Dilo?

Absolutely, and then I think we've added almost 200 new contracts here in the last quarter.

Last quarter.

From our regional and local customers, and that will continue to drive revenues.

Drive those revenues, as well. Additional 200 contracts this quarter, Matt.

Okay. And we did see the growth rate accelerate a little for the onsite services. Do you have visibility into sustained growth from rollouts at the low double-digit pace?

I would think we would be able to sustain that kind of growth throughout next year, obviously depending on the deployment, depending how fast we are deploying the new contracts coming on. Sometimes they get held up only because the customers need more time to prepare or some contracts are coming up for renewal, you know, there is sometimes a little bit of gap. But usually based on everything, what we know, Matt, we expect to stay on this pace. Dilo, would you --?

Absolutely. We can continue to stay in the same level, and from the visibility we have it's quite possible for us to maintain the same growth rate.

Same growth rate, yes.

Okay. And then moving on to color, we're seeing resurgence there, and you mentioned that you're benefitting from the operational changes over the last few quarters. Can you just revisit what changes you've put in place and why that's gaining some traction?

Sure. If you recall, sometime back, we created this Riot brand, which obviously in order to go off the more specialist type of point of purchase, marketing high-end graphics related work. And that we did sometime in 2012. And last quarter 2012, that is last year, we made a lot of changes in the Company, given the market conditions at that time we did significant restructuring. During that process, obviously, Riot got affected, too, because of the restructure.

So coming into this year, 2013, we streamlined the sales organization, invested more in marketing, and pushed the Riot services even more aggressively, both in the Riot segment, specialized segment, also through the ARC color reps. And what we are seeing now is the result of those efforts coming to fruition. We have nice big brand name clients using us now, and we get a lot of the high-end graphics work, and that's what's driving those up.

Okay. Thank you.

You're welcome.

Thank you. Your next question comes from Keane Mccarthy from William Blair. Please go ahead, sir.

Thanks for taking my question. If we could look a little bit at the onsite services line, just curious if we could break down the components of growth there, specifically thinking about kind of a same-store growth rate? And then if that growth is coming from either at renewal of the contract or kind of mid-contract with those existing clients?

Right. So, yes, I'll ask John to add a little bit more color to that, but fundamentally some of them are renewals, of course. We have some of the earlier management services customers, we have signed three, four, five years ago. So we have had a couple of renewals that's going on. But in the meantime we are continuing to sign more customers.

So there are two levels (inaudible). One is at the global level, which is large national and global customers, who are in multiple states. That would mean customers like [ACOM] or HOK or Gensler or HDR, who could have hundreds of locations. And then we have smaller customers at the regional level who have single locations, but multiple output devices.

And we don't have a same-store comparison or that's not a metric that we track. We don't think that's applicable to this particular product line or service line, because it depends on how customers are getting projects and where the management services are being used, depending on what products, what services they have and how much activity they have going on there.

But in terms of the growth, we actually see onsite services picking up more steam because customers are starting to do more work inside the offices, using those output devices as against doing offsite work. So that's just a generic trend. But our management services revenues, onsite services, fundamentally shows the revenues we generate for customers inside our customers' offices, right, and that offsite is shown separately. Right, John?

Yes.

Right, yes. Does that kind of explain to you, give you a snapshot of what's going on there?

Yes, yes. No, that's helpful. And then I guess you had mentioned the next quarter being particularly strong in China for the equipment sales. Is there any issues or how should we think about kind of the capital deployment from your guys' perspective around the equipment purchases for the print and the document management services?

Sure. I don't think there's a whole lot of impact. John, you want to give a little color?

Yes. No particular change versus last year's trend; it's just the regular seasonality of that business. China tends to close out budgets with purchases. So if you look at 2012 and capital spend trends we expect it to be the same this year, largely the same.

Got it. Okay, and then I know you guys had spoken to the trends in the ABI and what you're seeing on the street. But could you just remind us again the lag between the index and your guys' core repro business, and then if that kind of tie rate or correlation should look the same going forward, as it did previously?

Yes, usually, I mean historically it's 6 to 12 months. If it's massive projects it could be 18 months depending on the types of projects we are getting engaged in. If you have a large industrial project, which is big, then that could be, of course, a long lag. Usually it's anywhere between 6 to 12 months is the way we look at it.

Okay, thanks. And a last one for me, you guys have shown impressive gross margin leverage over the last year. I'm just curious where do you think about investing kind of that margin improvement, kind of your go-to-market strategy or some more sales efforts? Thanks.

Meaning in terms of investing the money, is that what you are referring to?

Yes, yes.

Yes, so, you know, obviously, one of the things we have done is, which is what we talked about in the prepared comments, during this entire downturn there are two things that we consistently did. One is invested in sales and marketing. We also invested in technology. We expect that trend to continue, but the margin improvement and the cash we are generating is all and about that investment we have been already doing because of the gross margin improvement and our efforts in realizing and putting the Company in its proper structure.

And, of course, any additional cash we have will go to address our ability to pay our debt down. I mean that's the biggest challenge we have in terms of how do we continue to reduce the debt so that we can, like John said in his comments, that move all that into a [credit], right, instead of it being -- paying out that interest.

So what you are seeing is after the restructuring in 2012 we are continuing to fine-tune the operations and make it more efficient. And what you are seeing evidence is that although we do have other lines of business, which we have expanded into, they generally are the same level of profitability as we had experienced previously in reprographics or traditional reprographic services. And I think you will see that trend continuing, as we continue to fine-tune and become more mature in management services, in color, and in archival information management.

Okay, thanks, guys.

Oh, you're welcome.

Thank you. The next question comes from Brad Safalow from PAA Research. Please go ahead, sir.

Hey, thanks for taking my questions, guys.

All right.

Can you guys comment on what level of nonresidential construction growth you need in the market to kind of offset the broader trends for your core reprographics business? Basically, what gets you back to flat?

So it's been declining. So the last quarter -- John, we're 6.3 right now? It used to be 20 and 15, and 8 and 12 and 8, and it's now at 6.3. I think it will go to lower single digits sometime next year, I mean that is my expectation. Would you agree, John?

Yes.

Now, and, Brad, it's impacted by two things, right? One is the fact that there's some work coming back. Secondly, it's the secular change, which is one which is nibbling away in that. And the secular trends will continue, but I think what will offset that is the additional work which will show up, which we expect to pick up steam by middle of next year. We think nonres will start to pick up more steam. I mean there's already indications. Do you want to add something, John?

The only thing I'd like to add is that on an absolute basis in 2012 the amount of nonresidential square footage put in place was at about 40% of the 30-year historic average. So the 30-year historic average is 1.3 billion square feet of nonres space added per year, and in 2012 we added about 650 million square feet. So the percentage numbers look high because we're off such a low base.

Yes.

And one of the things you see in the numbers is a plateauing of activity. And we expect -- what we're beginning to see is we're going to move from one plateau to another. But from a percentage basis it's good to look at the absolute dollars in a historical perspective because we're at a very, very low base. And we're not seeing the big City Center projects in Las Vegas, we're not seeing the big casinos built or some of the big bets that really begin to move the industry. So I want to be very moderate in how we manage our expectations in terms of the percentage growth in nonres impacting our business.

Especially because we are starting off such a low base. And over a period of time it's going to improve, but it's nowhere near where we would want it to be just yet. That's the point we are trying to make.

Sure.

And already the decline has come down to 6.3%, so it says to us that as nonres starts picking up that's going to further (inaudible) down fast, but it all depends on how fast nonres is picking up. But the interesting part of our business is that while that is where it is and we have those opportunities for us, we have actually built other businesses, which is continuing to deliver results to us, Brad, in other areas, such as management services, color. And, of course, AIM will become meaningful in the next year for sure.

Understood. And then can you comment on how the bankruptcy of Service Point, does that present any opportunities for you guys?

So this has been -- and from my perspective, they've been struggling for awhile now because, obviously, what they consider to be diversifying into other areas, they did not do -- our focus was to continue to invest in technology so that we can capture other work from our existing customers and expand our market share. Their strategy was different. They went after different markets and they did not necessarily invest in the technology.

So I think it'll have some impact on us because in the areas, especially in UK and United States where we overlap with them, we would benefit by it. But quite a bit of their work has been in financial printing -- it's an area where we don't actually spend a whole lot of time in -- and other markets. And it's all over the place. So I'm not sure how much of that we'll get, but we definitely will benefit both in the East Coast, which is where their big base has been. They're probably about a $20 million plus?

Northeast segment.

About $20 million, they have mostly FMs, really long-term FMs. And then, of course, in London, which is about 25% of their business, so that's about GBP50 million maybe, so probably $75 million worth of work there in London. I don't see a big impact, but certainly it'll have a positive impact to us, and I think they are in protection right now.

(Inaudible). Yes.

Okay, understandable. And then there's been a lot of activity in the printing space here. Do you expect or have you witnessed any change in behavior or strategy with Pitney Bowes' managed print services business now that it's been acquired by Apollo?

No, we haven't seen to be -- haven't run into them, at all. I mean at least in the construction side we haven't run into them. They are mostly into facilities management and related to mailrooms and they're big into that, and they tie printing into that. They don't approach, at least from our perspective, they don't approach managed print services the same way we approach. And we have that combination of onsite and offsite, which becomes very (inaudible) for our customers because they can tie products in. You know, Pitney Bowes doesn't focus on those things. They are managed print services, but their (inaudible) managed print services is fundamentally going and taking over mailrooms, big mailrooms, and then adding print facilities to that. John, what (multiple speakers) --?

Yes, and we had the opportunity to see some of the materials on the offering, and the decline rates in that business are significant and unabated. And we don't see them aggressively in our space; we don't see them, at all.

Yes.

Okay, and then a last question, what are you guys doing on kind of on the plan archival front on mobile? I know some people are there, other companies in the graphic space partnering with third parties who develop mobile apps so that clients can access their plans on mobile devices. Can you just talk about your mobile strategy [to date] generally?

Absolutely, absolutely. So we already have some segments of plans that are already facilitated on mobile. In fact, our archival information strategy, we can actually provide that viewing on the mobile platform today. That's the investment we have made, and we are showing customers how we not only actually can [hold] their documents and put it in the cloud, but also give access to them on iPads or tablets, Android tablets. And we can even have much bigger, larger tablets or tablet [equivalents,] touch screens, screens where customers can pull up their drawings and view them and actually mark them up. So that technology is already there.

What we are doing, though, Brad, is we are continuing to invest in that technology because that's a moving target. We not only have the mobile viewing facility now, but we are adding more features to it and making the application much more simple. Dilo, would you like to add?

Absolutely. So the strategy is to get the entire plan with the cloud, the platforms that we have into the mobile, including the large tablets that Suri talked about, where tablets can be positioned at project sites from the trailers, where digital data can be streamed right into the device for annotations and markups and so forth.

So our current R&D is primarily spent on much of the mobile workflow. And we are working very closely with our customer base because it's a workflow that they will help us to R&D and build it for them pretty much. And this is going to be a very solid platform for us in the coming quarters.

Okay, thanks for all the detail, guys.

All right.

Thank you. (Operator Instructions)

And the next question comes from Glenn Primack from Peak6. Please go ahead, sir.

Good afternoon.

Good afternoon.

I missed part of the call because I was like coming from a conference in a cab, but I heard -- Suri, I heard you at the beginning talk a little bit about the sad story with the nonres downturn and the [technical] changes in reprographics. And then I saw your top line actually grew. So I guess it's one of those stories where you cry and you laugh, and the ending I hope is pretty good. I'm guessing you mentioned the Riot chapter and the onsite solution chapter. My question, I think maybe the last guy asked. I'm wondering what's happened at [John's] ARC [Mountain] chapter, that division?

The archiving information management?

Yes, you know, how big is the opportunity and the return profile and are you putting capital into that area?

We are, as you know, Glenn, we're driving very hard into that business. We have a very strong pipeline and further developed and refined our offering, and we're getting very good traction. I hope to have some good announcements in the next 60 days or so. We are making capital available, but the return profile on that business is 18 months or so. It's very high margin business on a blended basis in kind of a 60% gross margin range. So we're making capital available, but I don't expect it to be a material drain on our sources of capital. If I'm getting the question right, but we're --

Yes. No, you got it exactly right, that's great. Good story, I can't wait to keep on reading the press releases over the next coming quarters.

All right. Good stuff.

Thanks, Glenn.

Thank you. David, there are no further questions at this time. You may continue.

Ladies and gentlemen, thank you very much for your attention this evening and your continued interest in ARC Document Solutions. Have a great evening, and we'll talk with you next quarter. Bye-bye.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line, and have a great day.