ARC Posts Solid Quarter Despite Adverse Weather

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ARC Document Solutions reported a solid first-quarter despite the adverse weather that undoubtedly negatively impacted the industry in January and February. While the company’s traditional reprography business (down roughly 2%) modestly suffered as a result of the weather, ARC’s onsite services, which increased roughly 8% compared with last year, more than offset the weakness from less reprographic volumes. Continued growth in the company’s onsite segment, in our opinion, bodes well for the efficacy of ARC’s offerings to the AEC industry, the overall market opportunity, as well as benefits to consolidated financial results (e.g., higher-margin revenue stream with greater visibility).

The company also continues to drive strong gross margin leverage as it benefits from past restructuring efforts as well as a favorable mix shift to higher-margin services. Gross margin increased 140 basis points year-over-year, despite total revenue basically flat with last year’s first quarter. More specifically, total revenue increased 0.3%, to $100.4 million; adjusting for adverse weather that negatively impacted the quarter, management highlighted total revenue would have increased roughly 2%. Nonetheless, we view revenue results as positive, given the consensus estimate of $100.5 million and the components of revenue drivers, which appear to be showing progress regarding management’s strategic initiatives. Adjusted EPS were $0.03, which were in line with consensus and compared to our $0.00 estimate.

Adjusted EBITDA of $15.7 million compared favorably to our $14.4 million estimate, as management continues to benefit from efforts put in place over the last few years to enhance profitability. The company maintained its 2014 guidance for adjusted EPS between $0.19 and $0.23 and cash from operations of $51 million to $56 million. Consistent with moving toward more-shareholder-friendly actions, management began providing adjusted EBITDA guidance. ARC expects adjusted EBITDA between $69 million and $73 million for 2014, which compares to our estimate heading into the quarter at the bottom end of guidance. While management didn’t shy from the fact that nonresidential construction was off to a slow start to the year, they still expect a solid result for 2014 as the company benefits from secular trends as it relates to the ARC’s growth drivers.

Management remains optimistic, based on trends in March, conversations with clients, and customer adoption of the company’s refreshed onsite services. We believe pipeline metrics and conversion rates in the onsite services business remain solid; reprography momentum is more difficult to ascertain, but in our view, the gradually improving commercial construction market bodes well for slight growth in activity levels for ARC’s legacy segment.

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