ARC Document Solutions' (ARC) CEO Suri Suriyakumar on Q4 2015 Results - Earnings Call Transcript

| About: ARC Document (ARC)

ARC Document Solutions, Inc. (NYSE:ARC)

Q4 2015 Earnings Conference Call

February 23, 2016 05:00 PM ET

Executives

David Stickney - VP, Corporate Communications and Investor Relations

Suri Suriyakumar - Chairman, President and CEO

Dilo Wijesuriya - COO

Jorge Avalos - CFO

Analysts

Brandon Dobell - William Blair & Company

Matt Blazei - Lake Street Capital Markets

Alan Weber - Robotti & Co.

Christopher McGinnis - Sidoti & Company

Bradley Safalow - PAA Research

Operator

Good day and welcome to the ARC Document Solutions Fourth Quarter and Fiscal Year-end Earnings Report Conference. Today's conference is being recorded. At this time I'd like to the turn the conference over to Mr. David Stickney, Vice President of Corporate Communications. Please go ahead sir.

David Stickney

Thank you Chelion [ph], and 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 financial results for 2015 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 Solution's Web site 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 23, 2016. 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?

Suri Suriyakumar

Thank you, David and good afternoon everyone. 2015 has been a very good year for us. Contrary to what may appeared to have been a difficult period, we’ve been able to build a solid position for our technology in the market and we saw meaningful growth in all of our new initiatives as we began capitalizing on the transformation we’ve worked so diligently to achieve.

We understand that while we chart new frontiers for our customers, our traditional business will continue to be challenged due to secular headwinds and our customers desire to reduce print. But in the end, we expect these challenges to create more opportunities than threats over the next 24 to 36 months.

In early 2015, we launched SKYSITE, our first cloud-based software for the distribution of documents and information in construction. SKYSITE continues to experience a healthy growth amongst our construction client. Additionally, we built on our hyperlinking services and introduced new technology enabled services for our customers in project and facility information management.

When combined with SKYSITE and our growing BIM offering, we generated more than a $1 million of new sale in 2015. As we expected, AIM grew aggressively at 22% over 2014 and we continue to capture attention and new business wherever we introduce it.

It is important to recognize that we’re now growing and developing our business in a very different environment from a competitive perspective. We’ve to stay ahead of the latest trends in cloud and mobile technologies and we must continue to invest in building innovative mobile and cloud solutions for our customers using state-of-the art technology, at the same time, we must strengthen our sales and marketing initiatives.

Amongst all these challenges, however, we delivered a consolidated gross margin of nearly 35% for the year and generated the highest cash flows from operations in the past six years. That’s why I consider 2015 to be a good year for ARC.

Free cash flow for the year was nearly $1 a share. We continue to use our excess cash to accelerate our required debt repayment by almost 100% in 2015. Since the end of 2013, we’ve reduced our total debt by nearly $47 million or more than 20%. We were extremely gratified to be able to strengthen our balance sheet and improve our Company’s health in 2015 in the phase of declining sales and substantial investments in both technology and in sales.

Technology today is impacting all of us more than ever before. Traditional businesses are being disrupted on all fronts. While construction has not been exempt, the effect of technology disruption is felt much more deeply, given there has -- that there has been literal or no change in this industry for decades with regard to the use of technology to manage and distribute documents.

Here at ARC, we’ve been driven to the forefront of that change. Ironically we’re disrupting our own business, but it is the market that is driving it. Our service is driven by print will remain important for now, but will continue to shrink slowly. Business driven by technology will grow aggressively, we’ve software like SKYSITE, PlanWell Archive and Abacus, and from professional services where we deliver key solutions such as BIM, project and facility information management solutions.

As I mentioned in my year-end letter, we’ve never assumed that these changes would be easy nor will they work overnight. Additionally, while large customer acquisitions can quickly accelerate our growth, they’re also contemporarily disrupt as we experienced last year.

We’ve a cost by an M&A activity, broad economic disturbances or secular shifts; we’re focused on building a solid business that is durable, attractive, and sustainable for the future.

As for 2016, our message to our investors is simple; we’re building a brand new business. We expect to deliver excellent cash generation and solid gross margin performance by the build, new revenues based on our technology driven solutions. The Company will remain strong from a capital structure and balance sheet perspective.

In the short-term, however, we expect softer sales over the next 24 to 36 months. As we capture new business to recover what we loose by the secular changes, the interaction with our new business lines and build on them to the point where we can offset and surpasses slow declines in our traditional business.

As noted in our press release today, our forecast for 2016 adjusted earnings per share to be in the range of $0.30 to $0.35. Annual adjusted cash provided by operating activities is expected to be in the range of $55 million to $60 million, and annual adjusted EBITDA is expected to be in the range of $66 million to $71 million.

Finally, as we announced several weeks ago, we amended our credit agreement to allow us greater flexibility to repurchase our stock. Given our current stock price, we strongly believe that this will yield a great return on investment. With this as a backdrop, I will turn the call over to Dilo, for a review of some key operational details and then we will hear from Jorge, for a financial review. Dilo?

Dilo Wijesuriya

Thank you, Suri. Our MPS solutions continue to be a valuable service for our clients as demonstrated by the fourth quarter renewal of a large global services account and the acquisition of a new large non-AEC contract with a medical device manufacturer. Our regional and local MPS teams also continue to add new customers.

During the fourth quarter, we added approximately 200 locations and surpassed 9,000 MPS locations in total for the Company. With regard to our CDIM business, customers are continuing to move to technology based systems as Suri talked about a moment ago.

I’m happy to report that SKYSITE is continuing to be adapted in the market. As of today, we’ve approximately 400 customers representing nearly 2,800 users who in turn are managing 2,000 construction projects via SKYSITE. In addition to commercial contractors, we’ve seen our technology being adapted by multifamily homebuilders as well.

Our construction information management services also continue to be well received; combining hyperlinking, BIM services, and PlanWell marketing technology creates a powerful solution for projects and facilities -- facility managers.

Sales for these services grew by nearly 100% in 2015. The investments we’ve made in color imaging technology and services in 2015 have also assisted us in attracting new customers. As an example, we’re providing our color imaging installation and consulting services to many of the tech giants here in the San Francisco Bay Area and we also supported many companies with the advertising needs during the recent Super Bowl in Santa Clara, California.

That said, our right brand and our 15 specialized production centers are assisting us to create a differentiated offering to color imaging clients all over the country. Archival and information management services grew by 22% in the fourth quarter and 22% for the year.

While design and construction activities fast moving to a digital workflow, many of our customers who own and manage facilities are behind in the conversion to digital. It has become essential for facility owners to digitize their building document collection and embrace technology in their document workflow.

Medical facility, manufacturing, schools, city and counties, airports, transportation agencies, and power utilities are just some of the customer segments with whom we will have success over the past year. Our domain knowledge, local scanning service centers and easy to use cloud solution for accessing documents, easy financing, and local customer service has been the catalyst in our success.

We will be creating even more value with an enhanced version of our plan will archive cloud platform in the coming months. With that as a review of the operational basics, I will turn it over to Jorge. Jorge?

Jorge Avalos

Thank you, Dilo. As noted in our press release today, we achieved nearly $5 million in consolidated sales growth for 2015, a gain of 1.2% over 2014, and a reflection of the growth in our technology base, document solution such as AIM, project information management and SKYSITE.

For the fourth quarter of 2015, sales fell 3% driven by $2.3 million drop in equipment and supply sales, and secular [ph] declines in traditional reprographic print. With respect to gross margins, we achieved 2015 gross margins of 34.6%, an increase of 50 basis points over the prior year and fourth quarter gross margins of 33.8%, an increase of 130 basis points over prior year.

Our discipline around cost primarily focus on labor and materials, coupled with a favorable sales mix weigh towards new technology services and away from low margin equipment and supply sales were the drivers behind the margin improvement. Driven by a double-digit increase in cash flow from operations, we repaid a total of $30 million and debt principal in 2015, $14.5 million more than what was required.

This reduced our leverage ratio to less than 2.5 times and is a star [ph] contrast to just three years ago, when our leverage ratio was above 3.5. In terms of notable specifics for our financial statements, SG&A for 2015 was approximately $400,000 lower than prior year, primarily due to the trade secret litigation costs we incurred in 2014, which were partially offset by our investments in personnel and marketing and support of our technology based document solutions.

Interest expense for 2015 decreased by more than $7.5 million, largely due to the refinancing of our previous term loan and our aggressive debt paid off. At the end of 2015, our effective interest rate on our new term loan facility was just 2.5%.

Cash taxes were minimal for 2015 and will continue to be in 2016. Thanks to more than $80 million in net operating losses from previous years. We incurred the use of a pro-forma tax rate of 39.5% for your projections in 2016.

As a reminder, we reversed our valuation allowance in the third quarter of 2015, due to the past three years of strong financial performance. You will see the impact of this non-cash transaction in our income tax benefit reported on our 2015 statement of operations.

Sales growth, strong margins, and significantly lower interest expense delivered adjusted earnings per share of $0.35 for the year, which represents a 40% increase over 2014. The fourth quarter of 2015 delivered $0.07 in adjusted earnings per share, an increase of 11% over prior year.

Adjusted cash flow from operations in 2015 grew to $61.2 million versus $54 million in 2014, a 13% increase year-over-year. Our DSO for both 2015 and ’14 was 52 days. Annual adjusted EBITDA for 2015 was $72.2 million consistent with 2014, despite our continued investments in personnel, and marketing in support of our technology-based document solutions.

At $15.9 million, we experienced a 6% decline in adjusted EBITDA during the fourth quarter primarily due to an increase in general, and administrative costs not expected to repeat in 2016.

Finally, with regards to our recently announced share repurchase plans; we’ve every intension of being opportunistic regarding to buybacks in order to maximize shareholder return. This means that our decision to purchase will be predicated on the price of the stock, the timing of our cash generation, which is typically strong in the second half of the year, and the timing of our open trading window.

As we look forward into 2016, we expect to see continued sales growth in our newer technology based document solutions, strong gross margins, discipline in containment of our costs, and the ongoing reduction in interest expense. As I’ve noted before, these are the primary drivers of strong cash generation and creates a foundation on which ARC can grow in the future.

That’s all I’ve for the moment. So I will turn it back to Suri. Suri.

Suri Suriyakumar

Thank you, Jorge. Operator, at this time, we’re available to take our callers questions. Please go ahead.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll go first to Brandon Dobell with William Blair.

Brandon Dobell

Thanks guys. Good afternoon.

Suri Suriyakumar

Good afternoon, Brandon.

Brandon Dobell

Maybe to focus on, I guess, the next couple of quarters in particular, how we should think about MPS growth. I know last quarter you guys talked about, I think it was three or four contracts it just kind of kept getting pushed to the right. Do you expect those influence the first half of the year? Just focus on MPS for a second, I want to come to a broader question.

Suri Suriyakumar

Sure. Okay, so you’re basically asking about the MPS trend in larger -- context of the larger customers Brandon?

Brandon Dobell

Right. Right.

Suri Suriyakumar

Yes, so I don’t expect a much change in the first quarter. Dilo would you comment on that?

Dilo Wijesuriya

Yes. In the first two quarters, Brandon, we do not expect any of the larger sale back contracts to come back. However, one of the contracts that was signed last year that did not rollout. Kumar, has release the roll out, but those are incremental releases at a very slow pace that will continue over the next 18 months. But otherwise on the larger contracts, we don’t expect any big ones to move the needle in the first couple of quarters.

Brandon Dobell

Okay. And then [multiple speakers] sorry, go ahead Suri.

Suri Suriyakumar

Sorry, Brandon, just Dilo is in London, so that’s why there is a time lapse when he responds.

Brandon Dobell

[Indiscernible] I figured he was some place exciting. As you look at the back -- at the second half of 2015, CDIM growth down about a percent or so, is that a good, I guess, a good run rate growth rate to think about for the next couple of quarters or perhaps even 2016 or is there something which you think going on underneath the service in CDIM that could get the growth rate back to positive in the back half of 2016.

Suri Suriyakumar

Jorge, this is excluding repro or is …?

Jorge Avalos

Including repro.

Suri Suriyakumar

Including repro.

Brandon Dobell

[Multiple speakers]

Suri Suriyakumar

Yes, I mean, looking at 2015 that is a good proceed for 2016, but like everything there is upside, there is risk. If the traditional business doesn’t decline as much as it did last year, well then there is more upside if we grow more of our technology services and accelerate that growth and there is more upside. So, but I think in general terms …

Jorge Avalos

It is a good profit to go by.

Brandon Dobell

Okay, absolutely. That’s -- okay, that’s helpful. And then as we think about uses of operating cash, how do I think about kind of traditional CapEx in capitalized leases in ’16, I’m trying to get little closer to just kind of appeared net free cash number, but I also want to get a sense of how you think capital outlays for capital leases should trend in ’16?

Suri Suriyakumar

Yes, I think the rates that you saw or the run rate you saw on the third quarter were a cash CapEx was just a little bit under $3 million is a good run rate to use for 2016, so that puts you at roughly $12 million for ’16. In regards to capital lease we are running right around there as well, roughly $3 million a quarter or roughly $12 million for the year. [Indiscernible] answer your question?

Brandon Dobell

Yep, that’s perfect. Thanks. I will turn it back.

Suri Suriyakumar

All right. Thank you.

Operator

We will go next to Matt Blazei with Lake Street Capital Markets.

Matt Blazei

Hey guys. Good afternoon.

Suri Suriyakumar

How are you doing Matt?

Matt Blazei

Couple of questions, you mentioned that you were committed to maintaining strong gross margins in -- even in the light of obviously more sluggish sales, I’m assuming that means that you expect your gross margins to stay relatively in the same levels or at for 2015 at minimum?

Suri Suriyakumar

Yes, we’re expecting the margins to stay strong at that 34% for the year.

Matt Blazei

Okay. So I think you put the ’15 at 34.6% is that your …?

Suri Suriyakumar

Correct, yes.

Matt Blazei

So, somewhere around 34 might be more appropriate I guess. And when I turn it back into here, because you also talk about disciplined cost controls, which I’m assuming means you’re going to keep your SG&A as flat as possible, to sort of back into your guidance for profitability, means we’re probably going to have to see some growth rates, I should say negative growth rates in either CDIM or more -- or MPS that were greater than 1%. I’m assuming that your aim is going to continue to grow at a 20% plus clip [ph] expecting into 2016. So, I know I’m just trying to get a feel for where the weakest -- the gross margins are solid and this SG&A is flat, where is the decline in profitability coming from both on the EPS and the EBITDA line?

Jorge Avalos

Yes, so there might be a little bit of pressure on the margins like I said, 34.6%, differ into 34% range; there is a range there obviously. In regards to the sales, we will have some pressure on our MPS sales as we go into 2016.

Matt Blazei

Right. But I think you were just saying that to Brian earlier that you thought CDIM would standstill be in that down 1%, 2%, 3% range here for the year?

Jorge Avalos

1%, yes.

Matt Blazei

So that would imply that as long as AIM is continuing to grow that will imply that MPS is going to be down mid single-digits probably year-over-year?

Jorge Avalos

Yes, and it could be in the low single digits to flat. Obviously, it’s a the timing of a lot of different factors when we add accounts, when we roll them out, but yes that is a reasonable assumption you just use there.

Matt Blazei

And if my memory serves me correctly, it was a $5 million share repurchase, is that the number?

Jorge Avalos

It’s $50 million.

Suri Suriyakumar

$15 million.

Matt Blazei

$15 million, okay. $15 million share repurchase. And once you get to the end of 2016, you will obviously be under a two times leverage ratio as you mentioned before. How much is that flexibility that give you after reports in terms of share repurchase?

Jorge Avalos

It gives us flexibility into that tune of another roughly $15 million in 2017. But we will make that decision when we get there. As we said, we’re going to be opportunistic with it. We are looking at as a return on our investment, so there is a lot of factors that will have to play out based on our decision on what we want to do going pass ’15.

Matt Blazei

Got it. Okay. All right. Thank you, guys.

Suri Suriyakumar

All right. Thanks, Matt.

Operator

We will go next to Alan Weber with Robotti & Co.

Alan Weber

Good afternoon.

Suri Suriyakumar

Good afternoon.

Alan Weber

Can you actually -- can you talk about what the decline actually was in traditional business for the year or in the quarter?

Suri Suriyakumar

The decline was in the mid single-digits. Its kind of what we saw in the second half of the year. And as you know that makes up now less than 25% of our revenue or …

Alan Weber

You’re talking TR?

Jorge Avalos

TR, yes, the traditional [multiple speakers].

Suri Suriyakumar

Traditional print related business. And I’m assuming that was your question Alan, did I answer it properly?

Alan Weber

Yes, that’s right. And then the other question was on the MPS you’re talking about a decline -- I think you said a decline in revenue for this year. When you look out several years, how do you see that working out in terms of the natural decline versus getting new contracts?

Suri Suriyakumar

Right. So, I mean, that’s the play which will happen. So there are two types of MPS agreements we’ve. One with larger global clients, so they come in chunks Alan and sometimes they don’t consistently come year after year, because larger companies take a longer period of time to really convert their management services program. So they come in chunks. So every now and then we will get a large client and we know we get a large client, it will have a positive impact. But like Dilo said for the first time, with smaller MPS clients we’ve exceeded 9,000 installations now and they come consistently quarter after quarter after quarter. There was a little bit of softness during the middle of the year last year, but it has picked up again. This has all to do with macro conditions in the market. So we think that MPS decline -- then of course the other key element is that whenever we’ve a managed print services installation, the revenues shrink because we drive print down, we try to save money for our customers in print costs. So naturally there is decline in the paper volumes. As a result there is -- the business will shrink a little, but the number of installations will actually help us grow the business. So that’s how we look at it. And every now and then when you get a large client come on board, then you will get a nice bump.

Alan Weber

And just one more general question. So you know you have obviously really good cash flow, you’re projecting for 2016, 2015. When you look at several years, at what point or how do you see the actual top line growth? When do you see that actually coming back?

Suri Suriyakumar

So what we’ve been talking about is overall. So the simple way to think about this business, Alan, is exactly what I said in my script. Think about it as building a new business. So the way you think about our business is we’ve a large part of the business which is shrinking very slowly, we know that. It slowly go, a large part of the business. And then we’ve small part of the business, which is new technology related, technology services software business, which is growing aggressively. And what fundamentally we’re doing is we’re financing the growth of this new business with our existing business, which is fantastic and in the process generate $30 million plus cash. What I said in the call and this is what I’ve been predicting is we need 24 to 36 months to grow this new segment of the business to a reasonable size, so it can offset the erosion we’ve in the traditional business. Does it make sense?

Alan Weber

It makes total sense. Right, its -- I guess, easier said than to do like this is -- that’s the term, because it’s not that easy to [multiple speakers].

Suri Suriyakumar

Trend, that’s something I try to highlight in my discussion today. Transformations are always very hard, but 2015 we really consider it to be a very good year Alan. And based on how we’re being able to perform is exactly what you’re talking about. Its easier said than done, but we’re doing it and we delivered phenomenal cash, literally doubled our debt repayment back and still invested in technology and sales and grew all of our new lines, granted our large part of the traditional business is shrinking which we know anyway. So from a performance perspective, I think what we’ve done in accomplishing 2015 is phenomenal in terms of transforming a business that’s the nature of it. But if you look at other metrics like the cash flow yield, we got amazing cash flow yield, isn’t Jorge?

Jorge Avalos

Over 20%.

Suri Suriyakumar

Over 20%, so I mean, how is that bad? So we’re feeling really good about how we’ve performed.

Alan Weber

Just one more follow-up question. When you talk about the traditional business shrinking, when you look at like some of the local markets, I assume there has been some capacity that comes out of the markets. Does that offset or is that just really not enough at this point, or do you see changes there, so that’s its traditional business, the volume is maybe down in total, but your market share can actually gain -- grow, because you’re going to be in the business?

Suri Suriyakumar

Sure. I mean, that’s a moving number. We can’t put our arms around it, because very hard, because there are several things in play. One is as construction gets stronger and stronger, you’re going to have more projects come online, which would mean that people who are using traditional means of distributing documents would actually use us more, because that’s the capability we’ve. We are on 200 plus locations on the ground. We can sell that to the customer and not everybody is using fully -- everybody has switched to digital fully. So one -- I mean, one part of -- one element of that is that, with the rising tide, when construction increases there would be great activity in distribution and documents, and not all of them are using technology, so that will actually push our numbers up. Secondly, because we are present in all these markets, and we have the large customer base; that will actually increase our portion of that printed business. On top of that, in the meantime if the transition, our customers are more and more switching to digital, then that’s where we need to capture that part of the business in our SYSITE, and project information and facility information management segments. So it’s a moving number, and that’s what we need to very carefully manage during this transformation and that’s why we say, we need 24, 34 months to really consolidate this growth which will be small business -- small segment of the business growing aggressively, while large segment of the business eroding slowly. It will take some time to offset it. But as long as we keep the company healthy, generate a lot of cash, pay our debt and have a strong balance sheet, we’re really happy about the progress we’re making.

Alan Weber

Okay, great. Thank you very much.

Suri Suriyakumar

Thank you.

Operator

We’ll hear now from Sidoti & Company’s, Chris McGinnis.

Christopher McGinnis

Good afternoon, and thanks for taking my question.

Suri Suriyakumar

Good afternoon.

Christopher McGinnis

I guess just, and now to a [indiscernible] about, just on the MPS business. Can you maybe just talk about maybe, is something happening with larger clients, do you feel or is something changed in that market versus the -- maybe the SMID, small and medium business? And can you maybe just walk through what happened with the contracts that were delayed to -- it sounds like maybe they’ll push-out now for good?

Suri Suriyakumar

Right, absolutely. I can give you a lot of color. It all depends on who wants to really know more. So, in the management services segment like I said, largely you can characterize two segments, because one is large billion dollar companies which are global clients, mostly operating across the United States, North America and then of course globally in places like London, China and Middle East et cetera. And then you have lots of the smaller clients which we call regional clients and divisional clients which are subcontractors, general contractors. So in a nut shell to put it, those clients might be installing five machines, ten machines, two machines, fifteen machines, smaller contracts. That consistently is growing, because we have the 200 sales people on the ground, and we keep driving that market. That growth is pretty consistent. What goes through stop and stuck are the larger clients. And in fact there is a phenomenon which is going on now, which I maybe able to explain. For example, if you take our larger clients, most of our larger clients are in the E&C companies, which are engineering and construction companies, and many of them have invested or had the investments in oil and energy segments. So right now these larger companies are feeling a lot of pain because of what's happening in the energy market. So as I list out they are not paying any attention to manage twin [ph] services or optimizing that, because many of them are restructuring, reorganizing and a lot of M&A going on in that space. In the larger companies you probably would have heard that in construction space large companies, there’s a lot of consolidation going on. And of course that segment especially E&C is affected by the crisis which is, energy crisis. So I think it’s the timing issue. Many of them are very interested; Gartner has identified us on the magic quadrant because of the unique service we provide to these customers. So our value proposition like Dilo said, is still very strong and very compelling, it’s a matter of timing. So, we just recently got one which is outside of the construction industry, we were thrilled to get that. But its something that it will start picking up once the market settles down.

Christopher McGinnis

Great. Now I appreciate the additional color. That really makes a lot of sense. Can you maybe just talk about some of the new wins maybe on the AIM side and how you’re seeing that? And then maybe just touch on the mobile -- the mobile aspects and of the traditional business and how that’s changing in the win?

Suri Suriyakumar

Sure, I mean on the AIM side, what is good about the AIM business, it’s Archiving and Information Management, so that’s also tied to what we refer to as, Project Information Management and Facility Information Management. So think about it like this Chris, you have literally anybody who has facilities will have documents, and they are likely archived. So you’re talking about colleges and universities, the airports, hospitals, school districts, what do you call -- big REITs, nuclear facilities, I mean I can go on and on. So literally where there is a building or a customer who has a group of buildings, they would have drawings and a need to manage that facility. And all those drawings traditionally have been basically been in analog format. So accessing them and using them is very hard and very time consuming. So for example, if you really wanted to have an emergency exit plan in a building or fire shutoff valves, where are the valves? Where are the water shutoff valves in case of an emergency? Where are the drawings for the school district if there is an emergency in a school district? Well, those drawings are all in paper format. What we are able to do is, we are able to take all these drawings and using hyperlinking as a base, create the service which we provide to this customer; literally on the touch of a button they can access all these drawings. So in this phase, which is Project Information Management and Facility Information Management, we not only serve construction clients, but anybody who is operating a facility anywhere. So hospitals, schools, school districts, airports, all of those people become our customers. Similarly those customers might have documents related to the building itself, and they may not necessarily have them in the proper platform. So we can archive them for them. Sometimes they are in boxes in JoBlo [ph] storage or in the basement, and we can take all those things, convert it and put it on the AIM platform. So this is all new business for us. Its something which is growing very nicely and customers are more and more looking to access them on their iPads and their mobile devices, because accessing them through paper means is very time consumer and very slow.

Christopher McGinnis

All right. Well thank you for that as well. Lastly, just on the cash needs for the first half of the year, just with the timing. I guess, just timing around that and it seems like with the cash position today you’d still be able to use the share repurchase program and support the business or would I be thinking that wrong?

Suri Suriyakumar

No, no. I mean, I think you’re right, and I’ll tell -- I’ll let Jorge give you more color. We would actually be -- comfortably be able to buyback the shares and still support the business. And on top of that we have a line which we’ve never touched for some many years. So from a cash perspective that’s least of all. Jorge would you like to give something?

Jorge Avalos

Yes, I mean, just to add a little more color to my commentary on the script. The only point we were trying to make is that, our cash flow usually accelerate throughout the year. For example our cash flow from operations last year was $5 million in the first quarter then it ramped up to $17 million in the second and $20 million in the third quarter. So, the only thing we’re trying to point out there is that, we’ll have more excess cash later in the year obviously to be able to use with -- for stock buyback. But we definitely do have the ability to also start that program once our open window -- or once we get it back into the open trading window even in this first quarter.

Christopher McGinnis

Great. Thanks very much. I appreciate the color on that. Thanks again for taking my question.

Suri Suriyakumar

Thank you. No worries.

Operator

We’ll go to [indiscernible] with B. Riley.

Unidentified Analyst

Hi, guys. Good afternoon. Thank you for taking the question. My question is on the competitive front. Can you comment on what you’re seeing in MPS and technology, if there’s any changes?

Suri Suriyakumar

Yes, so on the MPS side we’ve always done well in that space. There’s not a whole lot of new competition, traditionally that competition comes from manufacturers such as large equipment manufacturers, there are Canon, HP, Ricoh, Konica Minolta, so that isn’t changed and they are the large MPS providers in the United States, and we’ve always competed with them. They are also our largest vendors. So that landscape hasn’t changed. The strength we have is the software we have which is Abacus, which is specifically designed and developed for the construction industry, and none of the manufactures have something specifically developed for the construction industry.

Unidentified Analyst

And in technology? I sort of mean, the construction industry?

Suri Suriyakumar

So, construction -- the technology, we’ve been doing that over the last 12, 15 years developing technology for the purpose of storing managing and distributing documents and logistics. So we always had the technology. What we’ve been doing in the last 12 months or so, 12 to 18 months is we are moving that on to a mobile and a cloud platform, so that we can give easy access to the customers. So originally, because we’ve been in the construction space for a long time, we have developed a tremendous amount of domain knowledge in the construction space. How the documents are moved? How they are used? How they are distributed? How they are stored and so on and so forth. So we have tremendous amount of knowledge there. And we had actually developed solutions for us to do that ourselves, because those days we did most of the documents management and distribution for -- on behalf of the customers, but we conducted those things. What's happening in today's technology is all of that function’s are shifting into customers offices because they want to do it themselves on a mobile device. So what we have done is we have translated most of these domain knowledge into solutions which can be easily accessed by mobile devices in cloud, so our customers can easily use them themselves.

Unidentified Analyst

Right. And in terms of competition there, are you seeing any change in new entrance?

Suri Suriyakumar

Yes, so that landscape is completely new. That landscape we don’t have traditional competitors there; because our traditional competition for paper based distribution of documents used to be the [indiscernible]. But in the new space, we have people, our customers some of our customers use blox.com [ph], some of our customers use Dropbox, some customers used PlanGrid, some customers use Bluebeam, ProCo [ph]. There are variety of different products customers are using in that space. And sometimes many or many a times customers use multiple software solutions to actually accomplish the goal of distribution of documents, and that’s where we come into play. Because our software is totally focused on distribution and management and sharing of documents and we are specialists on that. So many a times we can actually bring that on to a single platform and this is specifically designed for the construction space.

Unidentified Analyst

Okay. Can you comment at least qualitatively on the performance of the retail stores and provide the retail store count?

Suri Suriyakumar

So we don’t look at them as REIT, so we obviously, these are overflow facilities we have across the national, we call them locations or branches. But we don’t have store comparisons because most of the time the work which comes into those stores it depends on the large customers overflow work. So we don’t look at them independently. They are basically, in terms of number of locations we have 187 of them, but we don’t crack those sales because often they -- work from one store can be shifted to another store digitally, because we want to utilize the capacity.

Unidentified Analyst

Okay. But they’re strategic right, so you can sell digital router there and get synergies?

Suri Suriyakumar

[Multiple speakers] strategic in the sense, they are well or most of our customers are, they’re generally within 10 miles radius of our customers. So we can install software for them, we can give support for them; we can do all the overflow work. So it’s a combination of all of those things which, that’s how we have these locations. And that creates a bit differentiation between us and anybody who is competing with us.

Unidentified Analyst

Got it. Okay. Thank you very much, and most of my questions have already been answered. Thank you.

Suri Suriyakumar

Great. Thanks.

Operator

[Operator Instructions] We’ll move next to PAA Research’s, Bradley Safalow.

Bradley Safalow

Hi, guys. Thanks for taking the questions.

Suri Suriyakumar

Sure.

Bradley Safalow

Just, first one on the bank debt, what's your required principal repayment number for ’16?

Jorge Avalos

Our required principal payments on an annual basis is $17.5 million as Suri or I mentioned earlier, we accelerated our repayment of our debt. So, technically this year we only have to payback $4 million or $5 million since we prepaid.

Bradley Safalow

Okay. So, we’re looking at the -- okay, so this year, sorry ’16 you’ll only have to pay back $4 million to $5 million?

Jorge Avalos

No, I’m just saying that’s what's required. I mean, we still intent to repay in that $15 million range. If we have $30 million in excess cash as we did last year, we’re kind of saying 50% of pay down the debt, another 50% -- $50 million to repurchase shares throughout the year. Does that make sense?

Bradley Safalow

Okay, that’s what I was going for. That -- just trying to clear on that.

Jorge Avalos

Okay.

Bradley Safalow

And then on the guidance, are you guys assuming that you’re going to loose a 100% -- that you’ll loose a 100% of the revenue from the $10 million plus contract. My guess is that you probably will be able to recover some of those revenues with that client?

Suri Suriyakumar

Yes, absolutely. That client is actually more than $10 million. So we think approximately $10 million is what we loose. But we find that they’ll come back to us for various services which they’re already doing.

Bradley Safalow

Okay. And then just on SKYSITE, it sounds like you’ve had really good traction, and I appreciate some of the color. I know you guys actually mentioned some homebuilders, my understanding is you’ve gotten some traction [indiscernible] D.R. Horton at this point. Do you have any large scale engagement, I mean, 2,800 users is obviously a great start. But is there anyone who has adopted this at least on an enterprise wide basis at this point?

Suri Suriyakumar

Yea, I mean, there are couple of customers who have kicked it off. And usually as you know these things, once you have -- once we use a particular solution for the project, let’s say the project -- let's say an enterprise started a project. And if they’re using a particular software, [indiscernible] project it is unlikely they’ll change in the middle because it causes them a lot of disruption. So sometimes they’re using three, four solutions at the same time. They’re a little reluctant to switch gears between projects. So often we had to wait till couple of projects however. And there are a lot of enterprise customers who have started using our software. They go regionally, they don’t I mean -- mostly construction companies don’t take it and spread it across the entire global structure at day one, because it takes a little bit of adoption, traction et cetera, so it takes a little while. And finally we usually don’t mention names on the calls, because for competitive reasons.

Bradley Safalow

No, I understand. And the 2,800, is that paying users or just people are actually actively using?

Suri Suriyakumar

They’re all paying users. They’re the only users we track. There are lot more users who are actually on trial basis, trying or whatever that might be. But we count only users with whom we have signed contracts and they are actually using our product.

Bradley Safalow

Okay. And then, in terms of the adoption of the software, again I don’t know if homebuilding is a vertical or niche within the overall AEC marketplace? Are you seeing better adoption? Can you speak to at least, because there is I mean huge differences in the kind of clients you’re working with? I could see where you could get more rapid adoption maybe with the home builders, then you create a necessary you can build out from there or is it some other niche where you’re seeing better traction?

Suri Suriyakumar

Right. I mean, basically the way I would look at it is, one is home builders. That’s just a segment where you could have a lot of traction. But in general the way look at it is, we go after all general contractors, sub-contractors; anybody who is building. So they could be in home building. They could be in commercial real-estate. They could be in retail outlets. But anybody, even a five men electrical firm can use SKYSITE. So SKYSITE is such a scalable product. You can have somebody who is just, who has a 10 man electrical firm, and we could successfully reduce his print cost and distribution cost by 30%, 40%, 50% by he using SKYSITE. All he has to do is get himself an iPad or get a few iPads for the team member and we provide, we encourage them to do that. Now if you take a large general contractor who has 4000, 5000 people. Absolutely, they could put all of them on SKYSITE too. So we have a range of customer but the easiest sale is just generally the large majority of the general contractors and sub contractors who are on the ground day to day running projects. And then of course in the meantime when that traction gets very compelling, then we can go to larger contractors and engage them to buy our product. And that has a doubling effect. Once a large contractor gets on, he would actually insist that all of the subcontractors use the same product because they can access the drawings from that. So it’s basically it [indiscernible]. So it’s something that, it takes a little time, but the traction for our SKYSITE for us has been very good. It’s growing healthily, and consistently quarter-over-quarter. We just have to be patient until, because construction is a very old fashioned industry, it will take a little time to get that traction, but you get that traction it will be amazing.

Bradley Safalow

Okay. And then just last question from a sales perspective, what kind of headcount do you have allocated towards lets say SKYSITE, AIM the other digital initiatives and what are the hiring plans for the ’16?

Suri Suriyakumar

So fundamentally all of our sales people, all our team members sell document solutions for all our clients. So if you think about our clients, our clients have needs -- our clients are typically construction clients, which means most of them do projects. They’ll have management and distribution of project documents and they would have MPS requirement which means contractual documents, legal documents, marketing documents, finance documents that’s being printed in the offices. And once the project is finished, they put all of that in a box and send it to a storage or the basement or wherever that is. So all of our sales people are very comfortable selling either the AIM product which is archival or the management services product or what we call CDIM which is Construction, Document and Information Management. So we generally have all of them selling. We have about 165 sales people, plus about 30 managers and then regional wise specifically you’re talking just over 200 people on the ground.

Bradley Safalow

Okay. I appreciate all the color. Thanks guys.

Suri Suriyakumar

All right. You’re welcome.

Operator

[Operator Instructions] And at this time we have no further questions.

David Stickney

Ladies and gentlemen, we appreciate your attention and continued interest in ARC Document Solutions. Have a great evening. Thank you very much.

Operator

And that will conclude today's conference again. We thank you all for joining us.

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