Jan 31, 2012 | edocr |
K. “Suri” Suriyakumar Chairman, President & CEO Strategy and Direction: Commonly Asked Questions About ARC’s Transition Strategy 2 INTRODUCTION: From an investment perspective, ARC is a unique company that has evolved out of the reprographics industry, largely serving construction companies. It operates in a niche market and plays a dominant role in that space. With the use of technology, the company has widened its service offerings, positioning itself as a leading document solutions provider. ARC is being recognized as one of the mainstream providers of document solutions, especially in the construction segment, by leading research institutions like Gartner. In addition to traditional document management services such as Reprographics, Facilities Management and Plan Rooms, ARC today provides Managed Print Services, Collaboration, Content Management, Cloud Printing, Technology Consulting, and Color Graphics services. Given ARC’s history and how our business has evolved, investors and customers alike often ask about the company’s transition and its impact on the business. The purpose of the Q&A guide is to clarify questions about the strategy and direction of ARC. Strategy and Direction: Commonly Asked Questions About ARC’s Transition Strategy 3 QUESTION #1: Has the impact of technology caused ARC to move away from reprographics? ARC has not moved away from the reprographics industry. However, we have evolved with the changing needs of our customers. We expect this evolution to continue given the impact technology has had on the services we provide. This evolution is being further accelerated by the unprecedented downturn we have experienced in recent years. The primary services of ARC have always been to manage, distribute and print time‐ critical documents for our customers. It is important to understand, What has changed is not what we deliver to our customers, but rather how we deliver to our customers! In the past we mostly managed physical documents. Today, we also manage digital documents and information. In some instances, we do so without ever printing a single sheet of paper. We expect this trend to continue as our customers adopt and embrace technology to improve their efficiency. In response, ARC is playing a leadership role in providing services and solutions which are technology‐driven in order to help our customers improve their workflow and reduce cost. In other cases, we have expanded into new segments of business and now print things we have never printed before. A perfect example of this is our entry into the Managed Print Services segment. Some of our offerings are purely digital in nature. While they facilitate services we’ve always provided – managing a bidder’s list or sharing a design document for example – the method of doing so is radically different and more efficient than the way we provided it before. Technology has changed the way we do business dramatically, but our mission statement still captures the essence of our services: We deliver time‐critical documents and information for our customers where they want them, when they want them, and in whatever form they want them. Strategy and Direction: Commonly Asked Questions About ARC’s Transition Strategy 4 QUESTION #2: How will ARC change in the next few years? Simply put, we will continue to build on our core competencies, leverage our dominant position in the reprographics industry, and use our technology to become the leading document solutions company for the architectural, engineering and construction industries (AEC). In addition, we will use the same document management skills, our technology, and our footprint to engage customers outside of the AEC industry to expand our business. While we continue to expand our scope of work using technology, our core competencies remain the same. None of them represent a significant departure from what we’ve done in the past. Markets and demands change over time, often creating opportunities to expand our business beyond its traditional customers, but the service we provide to these new customers is rooted in the experience and knowledge we have acquired in the past. Consider the following: Since 2009, 15 of the top 50 AEC companies have become ARC’s Global Services customers, seven of which use ARC exclusively. This is in line with the emerging trend in large AEC companies looking to centralize and streamline their document management needs and outsource them to a single vendor. ARC is in an ideal position to capture this business since it is the only company in the industry with more than 200 locations in major cities across North America. Annual revenue in the U.S. for the top 100 AEC companies* is $156.3 billion, which represents approximately 20% of annual spending in the U.S. construction industry**. We certainly expect to capture a significant majority of the document management business from these customers. *Top 100 AEC firms according to Engineering News Record Magazine rankings. Firms include designers and contractors. Figures are based on 2010 revenues. **December 2010 annualized construction spending estimate by U.S. Census Bureau Strategy and Direction: Commonly Asked Questions About ARC’s Transition Strategy 5 ARC has quickly become a leading provider of Managed Print Services (MPS) in the AEC industry. At nearly 5% of GDP and employing more than six million people, we believe the AEC industry represents a market size for MPS of roughly $5 billion. In just over two years of providing MPS to the AEC industry, Gartner has already recognized ARC as one of the nine players in its “Magic Quadrant” of MPS providers, including global giants like Xerox, Canon, HP and Ricoh. Unlike these multi‐billion dollar manufacturing companies, ARC is the only business services company listed in the report, and classified as a niche player for AEC. Given the growing demand for MPS, and the advantages of our extensive existing customer base, our ability to work on‐site and off‐site in black and white or color, and the size of our national footprint, we believe that this service will drive the bulk of our sales with our larger customers. ARC Technology Consulting was recently awarded a contract for providing document management and collaboration solutions for the facilities group of Southwest Airlines. Steel‐manufacturing giant ArcelorMittal recently engaged ARC to provide document conversion, collaboration, and archival services throughout their facilities in the Midwest. The facilities group at Brown University uses the PlanWell Technology Platform to manage and maintain their entire campus of more than 145 buildings. AECOM, the world’s largest design and engineering company, chose ARC for their MPS installations over manufacturers such as Xerox, Canon and HP. Over the past decade, our technology infrastructure has grown from simply hosting data to providing applications and services in the cloud. The services we offer Southwest Airlines, ArcelorMittal, and Brown University are perfect examples of this. As more of our customers recognize the cost savings, efficiency gains, and reduction in IT infrastructure that cloud computing offers, ARC will have greater opportunities to grow this segment of our market. As document use becomes increasingly digital, the type of document – format, size, color, etc. – becomes less relevant to its storage, retrieval, or presentation. Thus, ARC’s document management expertise becomes applicable to any industry, allowing us to diversify our business beyond cyclical or industrial boundaries. Strategy and Direction: Commonly Asked Questions About ARC’s Transition Strategy 6 Outsourcing continues to drive business efficiency for our customers. Whether a customer requires Managed Print Services, in‐house project printing through a facilities management (FM) contract, sends work directly to our production facilities, or prints from the PlanWell cloud, our expertise, service portfolio, and footprint continue to provide compelling value above and beyond any other supplier whether it be another reprographics company or an equipment manufacturer such as Xerox or HP. We have stated that ARC will emerge from this current cyclical downturn as “a different company,” and so it will. But the differences will continue to be in the way we deliver our services, not necessarily in the services themselves. QUESTION #3: Do you expect a return to the same revenue levels that you have seen in the past? Absolutely. Construction is our core market, and it is not going away. While the industry is in a slump given current economic conditions, it is one of the largest and most important industries in the world. There are three primary reasons we expect revenue levels to return once the market begins to grow again. First, revenue generated from projects will increase as the industry returns to normal, and we will grow with our end market. Second, we believe our market share has expanded significantly throughout this downturn. We have not only captured 15 of the top 50 construction companies as Global Services clients, but we have also experienced market share gains in local markets as small reprographers struggle and sometimes fail. Third, our foray into the MPS business has allowed us to capture additional revenues from our existing customers, and develop new clients in this space. Strategy and Direction: Commonly Asked Questions About ARC’s Transition Strategy 7 While the techniques for managing documents may be changing, the need for document management services and outsourcing remains compelling. As such, we expect revenue levels to rise considerably as both the economy, and the construction industry, recover. QUESTION #4: Will the use of electronic documents permanently affect your print revenues? Do you expect to make up for those revenues in other ways? There is no question that the use of electronic documents will permanently affect our revenues in project‐related printing, especially in the large‐format black‐and‐white revenue category. However, we expect to see our print revenues increase significantly in two other revenue categories namely Smart FM’s and MPS (Managed Print Services). MPS – MPS is a new source of revenue for us. Traditionally these revenues, largely related to desktop printers, office copiers, fax machines etc., were captured by copier dealers and printer manufacturers, while we captured the project‐related printing through FM contracts. MPS business in the construction sector has largely been ignored, or gone unnoticed, by large MPS vendors such as Xerox, HP and other equipment manufacturers. Recognizing this opportunity, we took advantage of our dominant position in the industry to launch this business. It has resulted in ARC becoming the MPS provider‐of‐choice to some of the largest construction companies in the world even when competing with multibillion‐dollar equipment manufacturers. In addition, by combining MPS solutions with FM services, and reprographics services in hundreds of locations across the United States, ARC is a unique solutions provider to the top 50 construction companies, unmatched by any other firm. We expect revenues from the MPS segment to substantially increase our print revenues over the next few years. Smart FM’s – These are low‐volume, large‐format printers which are directly connected to the cloud or the network. These new‐generation machines are relatively inexpensive and function much like the walk‐up copiers/printers in the small‐format world. Connected with a tracking device and a touch‐screen interface, these printers enable convenient and easy printing in all AEC customers’ offices. Strategy and Direction: Commonly Asked Questions About ARC’s Transition Strategy 8 All major manufacturers have released several models of low‐volume large‐format printers in the past few years and we expect to see demand for them in every AEC company. In ARC, we have over 100,000 customers but currently have placed only 6,000 FM’s. When construction picks up we expect to see placements of these “Smart FM’s” grow rapidly which will, in turn, increase our large‐format black‐and‐white print revenue. QUESTION #5: What will happen to ARC’s margins as it emerges from the downturn? We expect significant margin expansion once our revenues begin to return to normal levels. Our workforce has been reduced by approximately 50%, we have removed more than $100 million from our cost structure since 2008, and our organization is much more streamlined now that it operates under a single brand. Our locations are smaller with greater capacity in terms of production output. In addition, we have also streamlined our accounting and back offices to further improve efficiency. While we will continue to invest in sales, technology, and strategic acquisitions, we expect our margins to expand with even an incremental improvement to revenue levels. In addition, any revenue generated from our technology products and services will enhance our margins. QUESTION #6: Will ARC’s capital expenditures increase with a return of project‐related business? Capital expenditures for our service centers are relatively minimal and capacity utilization is currently low. As such, capex for our branches is not likely to increase materially in the near future. The bulk of our capital expenditures rise and fall with the amount of equipment we provide our customers through our FM service and, more recently, our MPS offering. As such, we expect some moderate increase in capex and capital leases as this business line continues to grow. In the future we may also see reductions in capital outlays of all kinds due to our ability to acquire equipment on a cost per copy basis, averting the need to commit to leases or purchases of equipment in the future. Strategy and Direction: Commonly Asked Questions About ARC’s Transition Strategy 9 QUESTION #7: Do you expect cash flow to rise or fall with an economic recovery? One ARC’s most attractive characteristics is its strong and healthy cash flow. We have maintained it through this downturn, and we expect to continue to generate healthy cash flow levels in the future, especially as we leverage our streamlined cost structure over increased revenues in a recovering market. QUESTION #8: Who is your competition? Has the competitive landscape changed? The competitive landscape has altered substantially. While we routinely compete on small jobs with other reprographers, we have very little competition when dealing with large construction companies on a national basis. In a nutshell, there is no other company in the reprographics industry with nearly 200 locations in 40‐plus major metropolitan areas, and no one who is capable of providing the service and technology we can offer. On the MPS business we routinely compete with large equipment manufacturers. However, given our dominance in the construction segment and the fact that we can service customers not just on‐site, but also off‐site in our own facilities, our services are more compelling for AEC customers. QUESTION #9: Why did you diversify into digital color printing with RIOT Creative Imaging? High‐end digital color imaging services have always been a part of our service portfolio. Until recently, however, we produced architectural renderings and marketing materials for the AEC market, with only a small percentage of our business coming from local non‐ AEC customers. Strategy and Direction: Commonly Asked Questions About ARC’s Transition Strategy 10 In 2008 an internal analysis demonstrated that our equipment, expertise and infrastructure in color could be positioned to address a larger and more dynamic market. Consolidated properly under a color‐specific brand, and located in strategic areas around the country, we determined that our color capabilities were well‐suited for marketing‐oriented businesses that require short‐run, fast‐turnaround, and frequently updated material to attract and maintain customers. Taken as a whole, this segment of the color graphics market is much larger than the reprographics market and offers us an excellent opportunity to serve a larger base of customers and increase our revenue in this category with very little additional investment. By creating a separate marketing entity within ARC called Riot Creative Imaging, consolidating existing equipment and expertise into 12 regional “supercenters,” and bringing in sales and marketing expertise from some of the largest competitors in the digital color space, we’ve been able to offset some of the cyclical losses we’ve experienced in the AEC marketplace. At the same time, we���ve been able to quickly establish a significant presence in a new and lucrative market. Currently we serve national retailers like William Rast, Whole Foods, and Pet Food Express, specialty brands like Ducati motorcycles, software companies like Adobe, museums, restaurants, educational institutions, hospitality companies, and more. QUESTION #10: What is ishipdocs? Is ARC venturing out of its core competencies? Our ishipdocs application allows users to send, store, share, and retrieve digital files from anywhere in the world, with an option to print these files directly from the cloud. Like all of our technology products, ishipdocs grew out of an existing core competence of ARC. Document logistics – including conventional shipping services – have always made up a significant portion of our business activity. To create more efficiency, add more value to our offering, and capture greater margins on logistics activity, ARC created ishipdocs as Strategy and Direction: Commonly Asked Questions About ARC’s Transition Strategy 11 a digital shipping tool for our AEC customers. We can transmit documents electronically to qualified print professionals anywhere in the world, produce and deliver the prints locally, and be faster, cheaper and greener than any conventional shipping service. Most recently we have further developed this technology to “digitally ship” from desktop to desktop, and added features from our collaboration application to further enhance the value of ishipdocs. These are services we’ve always provided; our technology team has simply enabled them for use in a digital environment. QUESTION #11: How did ARC Technology Consulting come about and how compelling is the service? There is a significant technology shift underway in design and construction firms as management teams realize the value of implementing digital document workflows. Relative to other industries, there is still room for tremendous efficiency gains and responsiveness to changing business conditions in construction. Without a deep understanding of document management and workflow, IT departments are often limited to recommending technology solutions based on technical specifications of hardware and software rather than functionality and efficiency. Given its experience, scale, and technology development assets, ARC has a unique opportunity to offer its expertise and its proprietary document management technology as the platform on which to create practical solutions. By integrating our technology applications into our customers’ networks and workflow, we can help them design systems to capture, store, manage, retrieve, and distribute their information, and offer collaboration tools for all team members on a single platform on the cloud. Strategy and Direction: Commonly Asked Questions About ARC’s Transition Strategy 12 ARC Technology Consulting can also help customize workflows, build data connections to third‐party billing or project management solutions, and offer solutions to repurpose information, eliminate redundant data entry, and reduce storage needs. In our field, ARC Technology Consulting is uniquely capable of delivering solutions that result in significant cost reductions, revenue enhancement, and process improvement for our customers. This initiative is another way to create deeper relationships with larger companies, enhance our credibility as solutions providers, and develop highly‐profitable revenue streams with existing expertise and resources. Our current engagements with Southwest Airlines, ArcelorMittal and Brown University are perfect example of this initiative. QUESTION #12: Has your non‐AEC strategy changed? No it has not. Our strategy has always been to go after non‐AEC business using our existing core competencies and infrastructure to minimize the impact of seasonality and cyclicality in our industry. With the advent of technology, however, we are able to reach out to a wider spectrum of non‐AEC customers than we have been able to service in the past. In short technology is helping us expand our non‐AEC business. Strategy and Direction: Commonly Asked Questions About ARC’s Transition Strategy 13 Forward Looking Statements Statements in this document that are not reported financial results or other historical information are "forward‐looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include the Company's expectations, beliefs, hopes, intentions or strategies regarding the future. Forward looking statements include, but are not limited to: Statements about general economic conditions and the Company's business outlook Assessment of current and future market conditions Business strategies, plans and goals Future sales or performance Future acquisitions Revenue and earnings forecasts Business model Management transition Timing of, and plans for, the introduction of new products and enhancements Competition Market share Revenue growth Operating margins Profitability Capital spending and financing needs Tax rates These forward‐looking statements are not guarantees of future performance. They are based on management's current expectations and various assumptions that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward‐looking statements. Factors that could cause our actual results to differ materially from those set forth in the forward‐looking statements include, but are not limited to, the current downturn in the economy generally and in the architectural, engineering and construction industries specifically; competition in our industry and innovation by our competitors; our failure to anticipate and adapt to future changes in our industry; our failure to complete acquisitions, or failure to manage our acquisitions; our dependence on certain key vendors for equipment, maintenance services and supplies; damage or disruption to our facilities, our technology centers, our vendors or a majority of our customers; and our failure to continue to develop and introduce new services successfully. The foregoing list of risks and uncertainties is illustrative but is by no means exhaustive. For more information on factors that may affect our future performance, please review our periodic filings with the U.S. Securities and Exchange Commission, and specifically the risk factors set forth in our most recent reports on Form 10‐K and Form 10‐Q the Company undertakes no obligation to update or revise any forward‐looking statements, whether as a result of new information, future events, or otherwise, except as required by law. ‐‐end
ARC Strategy and Direction - November 2011.pdf
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