ARC Document Solutions Inc (ARC) 2017 Q4 法說會逐字稿

Good day, and welcome to the ARC Document Solutions fourth quarter and fiscal year-end financial results and webcast. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. David Stickney. Please go ahead.

Thank you, Justin. Welcome, everyone. On the call with me today are Suri Suriyakumar, our Chairman, President and Chief Executive Officer; Dilo Wijesuriya, our Chief Operating Officer; and Jorge Avalos, our Chief Financial Officer.

Our fourth quarter and fiscal year-end results for 2017 were publicized earlier today in a press release. The press release and other company materials are available from our Investor Relations pages on our ARC Document Solutions' website at ir.e-arc.com.

Please note that today's call will contain forward-looking statements that fall within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are only predictions based on information as of today, February 27, 2018, and actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual SEC filings.

This call will also contain references to certain non-GAAP measures, which are reconciled in today's press release and in our Form 8-K filing.

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

Thank you, David, and good afternoon, everyone. As you may recall, last year, at this time, we made an important announcement with regard to our transformation strategy. In addition to investing in our technology solution, we also unveiled our plans to invest and strengthen our legacy print business. Being the largest service provider in the space, our intention was to capture market share in order to minimize the decline in our print revenues and provide more time to build our technology services revenue. So in short, we chose to make more investments even in the face of declining revenue. While it was an aggressive move, our options were limited. Either we took such steps or resigned ourselves to secular trends that would drive a constantly shrinking business. History shows that secular changes of this nature can often cripple companies who don't undertake bold measures to condemn with them. In retrospect, I'm pleased that we took that challenge and executed on it. While there is no doubt there is still work to do to complete our transformation, in 2017, we made significant progress. The work we've put in throughout the year delivered encouraging results as overall sales fourth quarter improved slightly over the third quarter despite well-established historical trends.

CDIM declined just 1% year-over-year in the fourth quarter, delivering its best performance of the year. Likewise, year-over-year MPS sales were flat for the same period, a marked improvement over every other quarter in 2017. Both were welcome achievements and give us reason to believe that we can counter the negative sales trends in print for the foreseeable future with aggressive measures to gain market share.

On the technology services front, we continue to fine-tune our marketing effort and refine our sales force as we're making roads into this space. We created significant interest throughout the year, and by year-end, we began seeing greater level of adoption of our facilities management solution. In fact, earlier this month, ARC was voted the best provider of facility software and reporting tool by the Facilities Executive magazine's readers for our mobile facilities dashboards.

Our pipeline for sales is excellent, and the attention we have gained in the market is certainly noteworthy. As I noted in our press release today, it is an -- it is exciting to disrupt and improve such an enormous market. The facilities management segment spreads across all verticals of the commercial real estate industry, but at the same time, it is a segment that is not kept up with the technological changes that we've seen in the broader construction market. Therefore, penetrating this segment of the business continuously requires persistence and patience. Even with prospects who demonstrate tremendous enthusiasm and for the productivity and the efficiency gains that are so obvious with our solutions, making progress towards a purchasing decision consistently requires more education and time than we anticipated when we began this new initiative.

The plan we laid out in early 2017 was bold and challenging to execute, yet we have done that and we have accomplished what we set to do. We have slowed the declines in our legacy business, giving us time for our technology business to gain traction in the marketplace, and we did it while maintaining a relentless focus on the financial health and well-being of the company. Despite overall revenue declines during the year, we generated very healthy cash flows, bought back stock and remained aggressive in paying our debt down to strengthen our capital structure.

As I stated in our press release earlier today, we still have our work cut out for us. However, I'm immensely proud of my management team, who has had the strength and courage to execute under such difficult circumstances. I'm confident that we will have even greater success with our transformation in the year ahead.

Our focus remains conservative for 2018, but we expect that our progress will be evident in the second half of the year as additional sales begin to offset the shrinkage in print volumes we have experienced in the past. We are more than halfway through the transformation we announced in 2016. While the volume of printing continues to decline in construction projects and the use of technology is growing, we are doing more than building something new. We are maintaining a still healthy business while leveraging its success and resources to create more value for our customers and investors in the future. We appreciate the patience of our long-term investors and are looking forward to working with others who find this environment as exciting as we do.

With this as a backdrop for further discussion, I'll turn over the call to Dilo for some operational detail, and then we'll conduct a brief overview of finances with Jorge before we take your question. Dilo?

Thank you, Suri. We were happy to see the CDIM revenue line improving in the fourth quarter. While white-format printing in construction continues to move towards digital workflows, our sales teams have been successful in acquiring new customers, new projects and improved their penetration of other print services to the same customer base. We are focusing on selling other specialized print services, such as construction and environment of graphics to our existing customers.

The use of color in architectural and engineering drawings continues to grow. We are seeing more traction in the use of our smart color services and more project color printing in the form of red lines and change tracking. It has become less expensive and more efficient to print in color, and our recent investment in new print technology has helped us to penetrate and grow this market.

Project activity remains robust in many parts of the country, and we will continue to sharpen our competitive advantage to win more market share in our print services. We continue to add valuable new workflows to supplement our SKYSITE platform as customers who use competing pure-play technology product are finding out working with project documents outside of this proprietary technology is sometimes impossible. By contrast, the flexibility we've built into SKYSITE to support print workflows, file exports and close-out management offers greater usability throughout the life of a project. They put us in the position to be able to position and prove our services as being formal, comprehensive and practical in the hands-on environment of construction management.

Customers who use our cloud-based software tools are also a good source for sales team to sell other print, scanning and Digital Services of ARC. MPS revenue was flat year-over-year, and we were able to secure a few national customers to strengthen our customer base. We continue to improve our Abacus technology, the middleware that manages print at our customers' offices. It remains a key differentiator in our MPS offering. Our continuing strategy is to make it easier to unify and manage customers' print environment and assist them to reduce wasteful printing habits. Our AIM and strategy services, though a small part of our revenue mix, are used by our customers to digitize their paper content into a digital format. Our print and technology sales teams are building a strong pipeline of opportunities and we hope to convert them in the coming quarters. Our strategic investment in sales are clearly making a difference in how we're approaching the market and how our customers are viewing us. I look forward to continuing progress in 2018.

I'll now turn the call over to Jorge to run through the numbers. Jorge?

Thanks, Dilo. Sales in 2017 declined by 2.9%, driven by the declines in our print business. Items worth noting in the year were the negative effects of the hurricanes and flooding during the quarter but also the improved performance we achieved in the fourth quarter, especially in regards to our CDIM and MPS sales.

Historically, the fourth quarter is very soft for our traditional business, yet our teams managed to significantly reduce the year-over-year decline we've seen in the past. As we discussed on our last call, we did not anticipate a catch-up effect to emerge in those areas affected by weather events in the third quarter, and we didn't see one. Instead, what we saw were improved sales coming from all over the country.

Our gross margin for the year was 31.4%. It was challenged primarily by lower sales and their effect on our ability to leverage our fixed cost and labor. Also negatively impacting our margin were increased equipment sales in China, which carry considerably lower margin.

SG&A costs rose by 1.7% in 2017, with lower G&A costs offset by investments we made in sales and marketing. As we did throughout 2017, we will remain focused on managing costs in other areas of the company during 2018 to help offset additional expenses driven by aggressive marketing and employment of a higher-caliber sales force.

As Suri noted earlier, our financial health in 2017 was characterized by very strong cash flows. Despite an $11.7 million decline in sales, cash flow from operations only declined $800,000 year-over-year. This allowed us to continue to pay down our senior debt and manage our leverage ratio in light of our lower adjusted EBITDA performance of $54 million. Our current debt-to-EBITDA ratio, net of U.S. cash, is 2.4x, and total payments on our credit agreement in 2017 were more than $20 million.

Our strong cash position also gave us the ability to purchase 1.2 million shares of our own stock during the fourth quarter and still have $28 million of cash on the balance sheet at the end of the year.

As we wrap up the look at our year-end results, it is important to remember that our third quarter result included a noncash $17.6 million goodwill impairment, and our year-end results included an $11.9 million revaluation of our deferred tax assets due to the federal tax reform act that reduced the corporate tax rate from 35% to 21%.

On a far more favorable or positive note, I would remind you that we also amended our senior credit agreement in July. The amendment lowered our required annual principal payments from $17.5 million to just $4.5 million, reduced applicable interest rate by 25 basis points and relaxed our financial covenants to provide the company with even more flexibility in its capital structure.

Finally, for those of you modeling your estimates for 2018, the new tax reform act will lower our effective tax rate to 30% for the year. From a cash tax perspective, we still have historical operating losses of more than $80 million at our disposal, though we will not be paying meaningful taxes for the next several years. Also, we do not expect further goodwill impairment charges for the foreseeable future.

Our transformation has challenged us to drive new growth while maintaining a healthy and financially sound operating environment. Clearly, our preference has been to do so by maximizing cash flows, paying down debt and maintaining a healthy balance sheet during our transition. This is a strategy that will remain in place throughout 2018 as we work to create a base of new business that will help us renew growth. Suri?

Thank you, Jorge. Operator, we are now ready for the questions.

(Operator Instructions) Our first question will come from Aman Gulani with B. Riley FBR.

So I guess with the MPS business, what do you think a good number is for new customers for the MPS business to sort of transition to growth?

So you're basically asking if indeed we were to grow the MPS business, how many customers we should have? Is that the question?

Yes, yes. This quarter, you added 700 customers. You were pretty much flat in that business. What sort of number should we be looking at to sort of see some growth in that segment?

Got it, got it. Okay, now I understand the question. Yes, so as you know, we -- our MPS revenues come from largely -- I mean, largely speaking, come from 2 buckets. We have these customers you are talking about, adding the new customers, which are smaller MPS installations, and then we also have global customers who actually deliver MPS revenues, which are -- like if you sign up a big global client. So between those two, we would actually get new customers, that's just how it works. So the small ones are like the ones we sign every quarter. How many did we sign last quarter, Dilo?

Something as about 100.

Okay, that was 100. Yes, but the...

700 for the year.

700 year-over-year. So we sign a quarter maybe 150, some quarters 100, sometimes 200, depending on the market's pace. So we add those customers. Then of course, depending on the sales cycle, sometimes we get a very large client, which is a global client, which is -- which we call the Global Solutions, MPS revenue come from that as well. Interestingly, what will happen is, there is no specific answer, and I'll tell you why. Even though we sign a client this year, exactly after 12 months, for 12 months obviously whatever revenue they give us will be seen as growth because that same customer will be printing less the year after, just the nature of the -- just how the print industry works. So there is no specific number. So the acquisition of these customers, whether they are small customers or the combination of small customers and large customers, if we continue to acquire more aggressively, then there is a chance we can offset that. The idea is, without even growing, at least to hold on to the current business. Would you say that, Jorge?

Yes, and I think the key point to point out there, as Suri mentioned, we can't here give you a specific number. I mean, we've always said in the past, the needle movers are the regional or big accounts. And we've characterized our GS customers being those accounts that are bring in $1 million-plus in revenues. So part of our growth strategy on that one is, we have to get a feel of those larger customers in there. We could get 500 of the small customers, but they won't make up the revenue that one big customer could -- can bring in. So at the end of the day, that -- it's got to be a mix of large customers, and the smaller customers kind of maintaining the day-to-day. Does that help answer your question?

Yes. No, it certainly does. So I guess on that front, in terms of big regional customers that -- where we can sort of see some growth in the MPS business, do you have those in the pipeline that you think might be able to convert in 2018?

Yes.

Yes.

Yes. This is -- so we have a fairly strong pipeline. And maybe in the last many quarters, we have also mentioned that we don't necessarily focus on large global clients. We focus on large global clients as well as large regional clients as well because sometimes regional clients creates more revenue opportunity for us. So all in all, we have a very -- we have a good pipeline, and we have many, many of those deals, which are towards closing during the year. And we will continue to -- you should see some growth in the coming year.

Got it. Okay, that's very helpful. And then just the A-I-M -- the AIM business, sorry, what sort of steps are you taking for your clients to adopt the technology at a faster pace?

Right. So the technology comes in many pieces. It's a good thing you asked that question. There are many facets of our technology. Fundamentally, the technology we have developed over a period of time, that platform can be used in several fronts, largely described as projects, which is actually new buildings, which are new projects which are coming up; and then for facilities, that is what we have been doing quite a bit last year. That's a new front where these -- the same technology is used for built space. Not just new buildings, but the buildings which already exist for facilities management. And then as you know, we also use that in the AIM business, which we refer to as archiver business. So the same customers, if they want to store their documents for a long period of time, they can use the same platform. Or if they want to use the documents to manage the buildings, they can use it. That is for the built space. Or if somebody is building something new, they use the same thing. So we are using our technology on multiple fronts, and what we are doing is we are training sales people, getting some new sales people and introducing that concept to the customers. That's what we talked about facilities management that new dashboards we created using the existing software to address different needs of our customers, and that is being received very well. So we are hoping, in 2018, we'll get a little more acceleration. The whole idea is our -- if you take our revenues, last year, about $12-plus million is what we lost in terms of revenue erosion. Right, Jorge?

Yes.

So our #1 objective is how do you offset that. So the way to offset that is continue to drive market share in the print business itself. So look at ways and means of reducing that $12 million, maybe $10 million or $9 million or whatever that might be, which is what we are seeing, the trends are starting to happen, and then in the meantime, adding some technology revenues to offset it. So that's the big-picture plan to do that. The challenge we have, though, we may actually see this erosion accelerate. This is the use of technology and print, but we are basing our strategy based on all the information regarding 2015 and '17. It seems like, 2018, we have a better chance of (inaudible). Does it make sense?

Got it. Yes, that make sense. I guess then turning to the CDIM business. There -- a bit of an improvement there, is that largely due to the color business growing a little faster than previous quarters?

Yes, that's what Dilo was addressing. The CDIM is primarily legacy business, that is driven by the legacy business. And the way we are approaching that business is not only selling to the existing customers what we sell, but also selling newer products to those customers in terms -- even in terms of print business. And Dilo gave some examples. Dilo, would you like to add to that?

Yes, so we -- the last quarter's success came from twofolds. Number -- first one is focusing on the traditional project-based spending. We were able to secure more projects and also win additional customers, so that give us new revenue, plus we also were able to secure newer projects from existing customers for other print services. So I talked about construction signage, safety signage, environmental graphics for our customers. So what we do is -- idea is to when we win the project, not only focus on the Reprographics, the plan printing work that we normally get, we also focus on other services that goes into a project. Whether it's on the project site or if it is during the construction or design phase of a project. So idea is to sell all our print services to the same client base. And I think our sales team has been successful in penetrating many of them during the last quarter, and we hope to continue that throughout 2018 as well.

And one other thing, just to add to what Dilo said there, one of the encouraging parts -- you mentioned was it color that was driving the growth there, offsetting the drop in our traditional graphics, our large-format black-and-white? And that wasn't the case, it was, as Dilo mentioned, us getting more traction and stabilization and, frankly, flatness in the traditional black-and-white business that really was probably the bigger driver of CDIM moderating the decline. So once again, that gives us encouragement that some of the things we're doing to protect the print side of the business are coming to fruition.

Helpful. Okay, last question for me, and then I'll, sort of, pass it on. You bought some stock in the fourth quarter. With the price of the stock where it is now, do you see further repurchasing in maybe Q1?

I don't know whether it'd be Q1. I mean, certainly, that's a possibility, especially, like you said, given the stock price. Our focus has been for the last several years drive towards reducing -- aggressively reducing the debt, and I think it has served us very well. Right now, we don't have a bank allocation because based on the renegotiations we had with the banks, the focus was on paying that debt down fast with very, very attractive rates, which is exactly what we wanted and they agreed to that. Last year, we had a bucket of allocation, which we have actually extinguished now. And if the situation remains and the cash flow is good, we might try to go back to the banks and get that approval. Jorge, would you like to add?

Yes. No, that's exactly right, nothing to add. I mean, if we continue on this trajectory then I'll just have to go back to the banks, see if we get a bucket there for stock buybacks. And obviously, it we would require another board approval, but that's something that's definitely on our radar.

(Operator Instructions) No further questions at this time.

Great. Thank you, Justin. And thanks, everyone, for joining us on tonight's call. We very much appreciate your continued interest in ARC Document Solutions, and we look forward to talking with you next quarter. Thanks so much, Bye-Bye.

Well, thank you. And that does conclude today's conference call, we do thank you for your participation today.