ARC Document Services - 2012 Third Quarter Update

ARC Document Services reported a predictably soft third quarter, given difficult end markets, and the secular shift away from traditional reprographics services.  Simply put, customers are printing less, and moving instead to cheaper and more efficient digital distribution.  In fact, in September, for the first time, large format black and white printing accounted for (just) less than half of ARC’s revenues.  In response to this shift, the company cut 10% of its staff, and more than 10% of its locations in October, in order to squeeze unnecessary costs out of a declining business.  The focus is now on devoting resources to the growing areas of managed print services, high-quality color printing and digital services.  ARC has landed several large contracts with multi-billion dollar firms, giving some visibility in future years.  In managed print services in particular, ARC has a solid competitive advantage, because it can support on-site printing with company branches located nearby - for example, to handle printing overflows.

Given the declining sales, margins have remained quite firm, and are almost certain to widen in the future, as end markets come back to life, and costs come down.  Operating cash flows, too, were a solid $14 million in the quarter, and at $31 million for the first 9 months, were up slightly year-over-year.  Capital expenditures, though they remain fairly low, have risen in recent quarters, as the company now purchases some equipment that it chose to lease in the past.  The company reiterated previous operating cash flow guidance, which is still expected to be $35-45 million.

My original analysis of ARC Document Services is here.

Disclosure: At the time this article was written, the author was long ARC stock.

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