ARC Document Solutions, Inc. (NYSE:ARC) Q4 2023 Earnings Call Transcript

ARC Document Solutions, Inc. (NYSE:ARC) Q4 2023 Earnings Call Transcript March 2, 2024

ARC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, everyone. Welcome to the ARC Document Solutions to report 2023 Fourth Quarter and Year End Results Conference Call. At this time, I would like to hand things over to David Stickney, Vice President of Investor Relations. Please go ahead, sir.

David Stickney: Thank you, Lisa, and welcome, everyone. On the call with me today are Suri Suriyakumar, our CEO and Chairman; our President and Chief Operating Officer, Dilo Wijesuriya; and Jorge Avalos, our Chief Financial Officer. Our fourth quarter and full year results for 2023 were publicized earlier today in a press release. The press release and other company materials are available from our Investor Relations pages on ARC Document Solutions website at ir.e-arc.com. Please note that today’s call will contain forward-looking statements and are only predictions based on information as of today, February 28, 2024, and actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual SEC filings. Any non-GAAP measures discussed today are reconciled in our press release and Form 8-K filing. I’ll turn the call over to our Chairman and CEO, Suri Suriyakumar. Suri?

Kumarakulasingam Suriyakumar: Thank you, David. If there was a year that validated our efforts to transform the company, 2023 might have been it. The challenges were easy to see, but so were the opportunities that balance them. Watching the progress we made in offsetting declines in our older business lines with our more contemporary services, namely color and document scanning, was extremely gratifying. I can see a time in the not-too-distant future when our strategic business lines will come to dominate our revenue mix. Business conditions were fairly predictable for us after the first quarter of 2023. Capital spending was constrained due to interest rate hikes, market activity was strong but focused on short term, return-to-office initiatives lost much of their momentum, and while the country and the general business environment seemed like it was improving, sentiment was muted.

As much as we prefer bigger long-term projects, seasonal and event-driven marketing work helped us build growth in our color services throughout the year. The trend for converting paper documents to digital information that began with the pandemic continued to gain momentum throughout the year and dramatically increased demand for scanning historical documents from the office and from warehouse storage. While the short-term growth of this service is gratifying, the volume of such information and the compelling need for it to be converted are both enormous and likely to last for decades. While you’ve seen declines in our on-site services as employees continue to work from home, sales in 2023 began to stabilize, and we had significant success in the fourth quarter.

You will hear more about that from Dilo later on this call. In this economic environment, construction projects were much more difficult to justify as for the purchases of large equipment. So it wasn’t much of a surprise when construction plan printing got off to a sluggish start, and the equipment and supply sales followed suit. But our ability to adapt to changing market conditions drove an increase in the fourth quarter revenue, limited declines in annual revenue to less than 2%, and our skill and experience in managing costs held gross margin steady for the year. We had higher hopes, of course, but the continuing progress we made in identifying new markets, launching new and exciting products and finding new partners and making the necessary investments to take promising services to the next level positioned us well for 2024 and beyond.

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Q&A Session

To help explain some of the details about our efforts throughout the last quarter and to help with the entire year end perspective, I’ll turn the call over to Dilo and Jorge for their comments. Dilo?

Dilantha Wijesuriya: Thank you, Suri. In the fourth quarter, we achieved encouraging results, particularly in our strategic revenue lines, as Suri mentioned. Despite facing a decline in plan printing revenue, we successfully offset this loss by growing our document scanning and digital color revenue streams. Notably, our sales in document scanning services were 34% higher than they were in 2022, and our digital color services saw a surge in demand, driven by significant projects supporting year-end promotional activities across various business verticals. Beyond the holidays, our consistent focus on expanding retail, trade show and small and more operations, coupled with increased tourism activity in the hotel vertical, contributed much of the business that led to our growth in digital color printing.

Leveraging our premier digital print services brand, Riot, we continued to attract major brands across North America, positioning ourselves as a leading provider of on-demand, high-quality color printing solutions in all major markets in the U.S. In North America, a few companies offer anything close. Achieving this level of service demands meticulous planning and a cohesive, dedicated production team, qualities that define our operations. Over the past three decades, we honed these capabilities with plan printing, resulting in a dominant market presence in construction. Now we are applying the same expertise and core competencies to our digital wide-format color services, ensuring consistent quality and efficiency to our clients. The demand for document scanning remains robust as businesses prioritize moving their critical content to digital platforms.

Hybrid work models and the growing trend of office space reduction further propel the adoption of document digitization projects among our clientele. Our teams conduct thorough site audits and collaborate closely with clients to tailor solutions to their specific requirements. Our Scan by the Box program caters to smaller clients seeking efficient and cost-effective scanning solutions for a file cabinet or two. And our success in securing enterprise-level scanning contract in the past few months, with several contracts exceeding six figures, has significantly improved our production backlog. Through targeted marketing campaigns, we are actively educating clients on the advantages of digitizing documents, and our performance is solidifying ARC’s reputation as a trusted nationwide provider of document scanning services.

Additionally, our continuous enhancement of technology tools enables us to streamline project management, elevate quality standard, manage labor costs and provide improved accessibility via cloud-based solutions for our valued customers. By contrast, we have yet to observe any significant improvement in plan printing from new construction projects. Our assessment indicates that positive momentum in this revenue stream hinges on a substantial decline in interest rates, which we have yet to witness. Nonetheless, we remain proactive in showcasing and promoting other services offered by ARC to diversify our revenue streams. Our long-standing relationship with construction clients serve as a valuable foundation for introducing and expanding our new services within their accounts.

As office customer behaviors evolve, we’ve also noted a decline in on-site print services, along with equipment sales. However, over the past year, we have made a constant — concerted effort in renewing our on-site service contracts with our key clients. I’m pleased to report that we’ve achieved successful renewals for multiple years with several major MPS customers. Their continued satisfaction with our service and confidence in our comprehensive on-site service solution bode well for maintaining revenue in the service line. Moving forward, our revenue performance in the fourth quarter serves as a clear indication of the positive direction our company is headed. Our emphasis on scanning and digital color printing is driving overall company expansion, and our management team is — every market is 100% on board.

Our strategic investments, ongoing staff training initiatives and targeted marketing and selling strategies are all directed towards advancing this primary objective. Key areas of focus for our management teams include production management, customer service, margin optimization and planning capacity. We are also doubling down on our online and social media marketing efforts to generate new customer leads while maintaining a steady sales representative headcount. I encourage our investor community to follow us on LinkedIn and other social media platforms. Creating and sustaining a fun and secure workplace environment for employees remains a top priority for management. We consistently implement initiatives to support our team members, including various employee assistance programs and a profit-sharing bonus plan.

As we further establish ourselves as a prominent presence in digital color printing, document conversion and more, fostering a dedicated and inspired team is crucial to our success. I look forward to sharing our first quarter results. So at this point, I’ll hand over to Jorge for more on the financials. Jorge?

Jorge Avalos: Thank you, Dilo. While sales of equipment and supplies, on-site services and construction plan printing were soft during the first three quarters, we saw signs of stabilization in the fourth quarter, combined with strong sales in color and scanning that led to incremental sales during the period. As Suri and Dilo noted, our work in 2023 has created a favorable environment for new sales opportunities. With rates forecasted to come down, a limited chance of recession and confidence building and the resilience of the economy, we’re in a good position to capitalize on them in 2024. Gross margin held steady for the year but fell in the fourth quarter as a result of our fourth quarter mix of business. High-margin plan printing decreased as it normally does during the fourth quarter.