Suri Suriyakumar - Chairman, President, CEO Dave Stickney - VP Corporate Communications, IR John Toth - CFO, Secretary Dilo Wijesuriya - COO.

Scott Schneeberger - Oppenheimer Brandon Dobell - William Blair Matthew Kempler - Sidoti & Company Alan Weber - Robotti & Company Glenn Primack - PEAK6 Michael Fox - Park City Capital.

Good day and welcome to the ARC Document Solutions Second Quarter Earnings Call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Dave Stickney. Please go ahead, sir..

Thank you, Jennie 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; John Toth, our Chief Financial Officer; and Jorge Avalos, our Chief Accounting Officer.

Our second quarter financial results for 2014 were publicized earlier today in a press release; the press release and other company releases are available from our Investor Relations pages on ARC Document Solution's Web site at e-arc.com. A taped replay of this call will be made available several hours after its conclusion.

It will be accessible for seven days after the call. The dial-in number is in today's press release. Per our usual practice, we are webcasting our call today and the replay of the webcast will also be available on ARC's Web site.

Today's call will contain forward-looking statements that fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the company, including the company's financial outlook. Bear in mind that such statements are only predictions.

And actual results may differ materially, as a result of risks and uncertainties that pertain to our business. These risks are highlighted in our quarterly and annual SEC filings.

The forward-looking statements contained in this call are based on information as of today, August 5 6, 2014, and except as required by law the company undertakes no obligation to update or revise any of these forward-looking statements.

Finally, this call will contain references to certain non-GAAP measures; the reconciliation of these non-GAAP measures is set forth in today's press release and in our Form 8-K filing. With that in mind, I will now turn the call over to our Chairman, President and CEO, Suri Suriyakumar.

Suri?.

Thank you, David. Good afternoon everyone. I'm pleased to report an excellent second quarter. We are quickly putting the brutal downturn of the past five years behind us. While the non-residential construction market is still in recovery mode, ARC's performance in the first half of this year is clear evidence that we have turned the corner last year.

Momentum is building and the company is moving in the right direction. Our strategy to transform a legacy Reprographics organization into a document solutions and information management company is firmly on track. This is best demonstrated by our year-over-year sales growth of 4.2% during the quarter.

Our success was driven largely by our new revenue line. Our performance was characterized by double-digit growth in our onsite service programs significant accomplishments with our technology, new account wins and growing interest in archiving and information management as well as new activity in the project management space.

What is equally encouraging is our ability to generate gross margin in our new lines of business similar to what we have generated with our traditional business in the past. This performance can only improve as our digital services continue to play a growing role in our business mix.

I'm pleased to report the overwhelming majority of this gross margin gain fell to the bottom line and improved our adjusted EBITDA significantly. Finally, I would reminisce in my coverage of the quarter's highlight if I didn't mention the strength of our cash generation and the year-to-date $16.5 million reduction of our senior debt.

While the generation of free cash flow as always been a hallmark of our business, I doubt many observers of the company have realized the strength we maintain in this area and how powerful our new business line is with regard to delivering value to our investors.

As we move forward, ARC Document Solutions will be a strong player in the document solutions and information management business with an addressable market which is much larger and broader than the Reprographics business.

Our business lines are futuristic and technology driven and have the ability to significantly improve efficiency and reduce cost for our customers. We are indeed excited about the future of our processes.

At this point, I would like to turn the call over to our Chief Operating Officer, Dilo Wijesuriya to provide some operating highlights of the quarter.

Dilo?.

Thank you, Suri. Our onsite services line grew by 11.6% year-over-year driven primarily by our MPS offering. During the second quarter, we were pleased to announce major account win with Cardno and exp.

We also singed a new four year contract with design and construction firm Ammann & Whitney as well as a four year renewal of our contract with the $1 billion global engineering firm Louis Berger. In July, we also announced a five-year renewal of our contract with HOK, who is among our largest and longer standing customers.

While these wins are very important to us, we also continue to bring focus on our regional onsite services program with additional employee trainee. We will be expanding our regional salesmen as well.

This team will address our customers and prospects who have multiple offices around the U.S., who are looking to standardize their services technology tools and pricing. Reprographics remained our second largest business line and we saw continuing stabilization here with year-over-year revenue falling just 1%.

These are declines narrowing in several regions and even some growth in our Texas Gulf course region. We also grew our Color business year-over-year by $1.3 million led by our division in the United Kingdom competition for color services is tough in the U.K.

and our team capitalized on an opportunity to acquired two customers list from struggling competitors. Year-over-year sales by shipment and supplies were relatively flat and digital sales rose slightly on some small but important games in our archiving and information management sales that I will talk about in a moment.

Among all these activity with our sales force and customers, we also concluded a civil trail in which we filed a complaint against a competitor and former employee in Southern California.

We alleged among other thing, that the competitor unlawfully misappropriated our trade secret in the form of proprietary customer list in an attempt to unfairly acquire their business. We saw similar behavior from this competitor before. In 2007, we settled trial lawsuit against them which included an injunction.

We brought the current case to stop the defendant from using what we felt was similar unfair business practices against us. The case went to trial in May and a jury verdict was entered for the defendant.

The verdict got based on a technical finding that we did not have reasonable controls to maintain the secrecy of our customer list primarily because they had been told on the former employees’ personal mobile phone. As you might expect, we have since updated this control.

We are still in the process of post-trial motion, so we can't say too much about this matter. But, we are considering all our options for further action. In revenue, we have been pleased to receive significant recognition for our technology.

In July, we announced the partnership with China Architectural Research and Design Group where we provide MetaPrint software to drive their new digital blue printing machine.

HP also recently announced that Abacus, our flagship NPS software has been certified as printer fleet management and cost recovery and allocation software for use with HP's entire fleet of design jet printers. During the second quarter, we also introduced our interactive PlanWell SmartPrint to our design and construction customers.

This large touch-enabled white board persist our customers to communicate, share and work with their drawing and other information in a highly collaborative entirely digital environment, minimizing the need for paper.

Our goal is provide our customers with information wherever and however, they need it including on their computers and handheld devices or large wall-mounted tablet such as our SmartScreen. These products fit nicely into our NPS progress.

Earlier Suri mentioned some traction we gained with our AIM program, in talking with our municipal customers; we discovered that a good solution for infrastructure related content management has been missing from the market. In a few recent cases, we have been able to fill that gap with our offering.

Recent wins have come from many city agencies that are digitizing their documents and work flow. We have had early success with power and energy agencies, school districts and city government.

They need a simple cloud-based solution that can capture catalog and organize both large and small format files in the context of a construction document work flow. As most of you know, we maintain our leadership position by not only offering technology solution but using technology ourselves to improve our business.

In the second quarter, we improved and upgraded our storage area network or SAN in support of our cloud-based services and we also purchased a web marketing automation program to help us more effectively communicate with our customers and prospects. Overall, our AEC customers are continuing to show increases in project activity.

This is helping ARC to create new opportunities with its customers in management services and content related technology solution. We also see more demand for our color services. During the second quarter, we opened two new service centers for Riot Creative Imaging, one in the U.K. and in Chicago a vibrant and growing market for color.

With that as an orbit of our significant sales and operations activity, I will turn the call over to John Toth, our CFO for a brief update on our finances.

John?.

Thank you, Dilo. I think a number of our investors have heard me speak to the idea of acceleration as we move to our P&L. And this quarter's financial performance demonstrates that concept extremely well.

Our revenue improvement was a welcome outcome, but it was the increase in our margins and ultimately our generation of free cash that tells our story best. By acceleration through our P&L, I mean that the year-over-year growth in the profit line items on our income statement increases as you move down the P&L from revenue to net income.

In Q2, our revenue grew 4%. However, gross profit dollars grew by 10% roughly twice the rate of growth of our revenue. Continuing down our P&L adjusted EBITDA grew 14% outpacing our gross profit growth and continuing to the bottom of the P&L, our earnings grew by more than 500% year-over-year.

We get this acceleration not just from revenue growth, but from fundamental margin expansion. Revenue growth alone would produce consistent growth rates in these line items as you go down the P&L. Our growth and profitability in cash flow is accelerating and it is fundamental.

This is the result of a combination of modest sales growth and aggressive business management both in cost and product mix.

We have been working hard through our product and service diversification to drive sales growth through our high contribution margin services thereby leveraging our fixed cost and aided by expanded management reporting capabilities, our continued surgical focus on improving margins at the customer location and service center levels increase the margin expansion momentum that our sales growth started.

Lastly, by improving the business mix towards higher margin largely technology driven services and away from sales that require a higher material costs also helped us achieve a 36% gross margin for the quarter fully 200 basis points higher than the same period last year.

As you heard the majority of that improvement flowed to the adjusted EBITDA line, this is in spite of the fact that we continue to invest in the evolution of our sales force with sales and marketing expenses increasing year-over-year $800,000 for the quarter and $2 million for the first six months of the year.

We will continue to invest in sales and marketing as part of our long-term strategy to grow our newer more technology based services. Finishing of the P&L, our earnings grew over 500%, thanks in large measure to the lower cost of interest on our swiftly diminishing Term B loan.

Our improved performance in dramatic reduction in cash interest expense has also allowed us to accelerate the growth of our free cash flow. Our free cash flow for the quarter grew 199% aided in part by our reduction of CapEx in favor of the lease market now that our lease rates are below 6%.

In addition, our cash taxes will be less than $1 million for the year as we use our net operating losses of over $90 million. As one of our investors has observed, we consistently convert cash out of our income statement much more efficiently than most other companies.

As we pointed earlier, we used this accelerating generation of cash to aggressively reduce our debt thereby concentrating our enterprise value into our equity and significantly improving the quality of our credit. In recognition of this Standard & Poor's raised our corporate rating one-notch from B+ to BB-.

And they moved the rating on our Term B loan up two-notches from B+ to BB flat. Our total debt to trailing 12 month adjusted EBITDA stood at 3.0x on June 30, that's compared to 3.6x a year ago.

And taking into account our additional $4 million pay down in July after the quarter closed, our estimated debt to adjusted EBITDA stands at 2.9x breaking the 3.0x threshold.

In terms of the specific items we guide to, we delivered adjusted earnings per share $0.10 for the quarter, cash flows from operations of $14 million and adjusted EBITDA of $20.9 million.

I should point out that our cash flows from operations were $6 million higher than the second quarter of 2013 despite the expenses of the litigation Dilo spoke of earlier. I should also note that on a year-to-date basis cash flows from operations are up $1.7 million suffering in comparison to last year, when we received a $3.8 million tax refund.

When you follow the growth rates of our margins, through the P&L, it's easy to see how powerful this acceleration is. Sales increased by 4%, gross margin, gross profit increased by 10%, adjusted EBITDA grew by 14%, free cash flow grew by 199% and earnings grew by over 500%.

Although I expect the rate of acceleration for free cash flow and earnings to decrease, I expect to see this pattern of acceleration through the P&L continues for the foreseeable future. At this point, I will turn the call back over to Suri.

Suri?.

Thank you, John. At this time, we are available to take our callers questions. Operator, please go ahead..

Thank you, sir. (Operator Instructions) We will take our first question from Scott Schneeberger, Oppenheimer..

Hi, hello.

Guys, can you hear me?.

Yes. We can..

Okay. Suri, thanks. I want to start out, just struggling in a bit on the project base work, the construction market, continued stabilization and it feels like it's getting a little bit better, didn't shine through in the result, did you guys sound upbeat for the second half of the year.

I just want to [gate] (ph), how upbeat and what you are seeing? Thanks..

Basically, the project activity is definitely starting to pick up across the country, there is no doubt about that no matter where you go, you are starting to see cranes, especially in large cities. So that's indicative of what's going on in the project market. And we are sensing that in the work we are doing Scott.

But, what we are saying is that non-residential as a whole if you take the statistics, given the decline we have had over a period of time has been in a deep hole. And therefore the recovery relatively is still low, slow but in terms of activity, we are seeing more activity than we saw last year. So there is definite sign that's its picking up.

It's going in the right direction..

Excellent, thanks Suri. On the AIM business, could you talk about any guys the challenges that you are facing, the progress you are making, how you are feeling at this juncture, talk about your interactions with your customers, just give us a feel for the progression in the trajectory? Thanks..

So AIM business as you know is one of our new business lines that we have been working at developing over the last year and a half or so. We have been actively developing tools -- technology tools, search engines for large format drawing. There are several initiatives we have done on the technology side to make them more effective and more powerful.

Now, we can have all that information available not just on computers but also on tablets, on SmartScreens. So there are several pieces we have put that together for – put together for the AIM solution. So the solution itself is very exciting but this is a new market and this is a new concept for our customers.

And what we are doing is, we are introducing this concept to the customers and getting them to think about converting all the traditional hard copy storage and documents to digital storage and so that they can view them from the cloud.

The great with which we are actually engaging the customers is very encouraging because every time we make a presentation the significant interest especially at the digital transformation takes the poll.

However, the customers are still reluctant because most of them have large volumes of documents especially in the construction was both large and small. But even, customers who are not related to construction, the amount of documents they store are pretty significant. So it takes a little while for them to understand the impact of this transformation.

How the documents are going to be used in the future, the benefits they are going to derive from it. How are their document retention policy is going to be impacted? All those questions come into play. So it's slow to move because customers are still adapting to this change and we expect this to pick up momentum.

All we know is that every time we present a solution like this to our customers, they are very excited to hear about it. They suddenly realize how easy it is easy for them to access their legacy documents which are buried deep down in some ware house or in the basement never accessible and now it's accessible with a touch of a button so to speak.

So there is a lot of excitement on the AIM business. And it will take a little – it will take sometime for us build this business like the management services we have – like we have done in the managed print services segment, but it’s definitely off to a great Scott..

Great. Thanks. And then Dilo, in your section you mentioned your legal matters with competitor in Southern California and I apologize I had some phone issues during Jonathan's piece, I don't know if he talked about financial impact or consideration going forward.

But, could you just say, you spend a bit of time on that, is that something that has a ripple effect or is there a larger message from the discussion there that you wanted us to infer? Thank you..

Yes. So Scott, I will take that one. Absolutely, I mean it’s basically fundamentally, we want to make sure, as you know, we are across the nation. We are large company with – company does across the nation.

We want to make sure that none of the competitors do to something like what happened here in Southern California where they accessed our information, customer information, trade secrets illegally and putting to use against us. It's more than anything else we sending the message that this is not something that ARC will tolerate.

Not in Southern California, Northern California not anywhere. And if this particular we have had the experience in the past and there has been injunction. And in spite of the fact, they very daringly did the same thing again and we want to take them to task. And protect our assets basically that's been our strategy.

We didn't have rippling effect, I think it's largely over, I hope they got the message by now because they know what it took for them to come to trial and actually have to deal with the legal issues. So we don't expect this to be continuing in any big form.

But, if they continue their behavior you can be rest assured that we are not going to sit back and watch. We would take action against anybody who inappropriately access our customer information. But, I don't see this continuing at all from my perspective..

Great. Thanks. I just want to be clear on that. I appreciate it. I will turn it over. Thanks so much..

Thank you. We will take our next question from Brandon Dobell with William Blair..

Thanks. Good afternoon guys..

Good afternoon..

Just want to focus on the construction market for a second, in the markets where you guys are seeing a recovery in business for you. How does that mix look I guess let's call it paper based products versus electronic. And I'm trying to get a sense of recovering construction market.

How – what the market size may look like compared to backend of 2004, 2005, 2006 meaning how much has been migrated away from a traditional solution and is now going to be more of an electronic solution. So again trying to gauge that the space and the magnitude of recovery in those markets where you are seeing construction come back..

Brandon, you know, the markets definitely recovering. There is no question, like I said previously Anthony Scott's question. We have been in the deep recession especially non-residential. There has been a lot of excess capacity. So the market is still coming back. However, compared to where we were in 2013, the significant recovery which is happening.

But we have also seen very clearly the customer behavior is changing increasingly people are using the technology to significantly reduce the time lag between our RFIs or our request for information or change order. All the changes they are making.

Customers are starting to get very comfortable using digital devices and accessing information digitally. To my knowledge, I will ask Dilo to give a little more color on this because obviously he is in touch with the ground.

To my knowledge, even larger projects people are not printing large scale project documents instead, they are selectively printing. And they are using adopting digital technologies to be more effective.

Dilo, would you like to add?.

Yes. Brandon, I mean one big thing that I see between the pre-downturn and post-downturn is the fact that the speed of getting project to completion is as accelerated hugely.

So the pattern, any time you work with paper that process is slow, right? Now because of the speed at which they want to get things moving they are embracing digital, right? It may not – the whole project may not take get into 100% digital cycle but more and more distribution, document management and consumption is continuing to move towards digital and just because of speed and as a company our strategy is to influence the speed with our digital technology and make it happen because we know it is going to happen, it's not a matter of whether it will happen, it's going to happen, we are just escalating and assisting our customers to get into the flow.

And so that they can work faster and get their project delivered quicker..

Okay.

Maybe as a segue to that, you mentioned the opportunity with the SmartScreens, how is that aligned with your comments Dilo about customers looking for shorter construction times, planning times, those kinds of things, I guess if the sales force out there looking to get those SmartScreens into markets where you are seeing construction recover or is it specific customers that are on the cutting edge or mega scale, I guess I have finally conferred due to market strategy but also how to launch with what you are seeing on the ground for kind of pay recovery in volumes..

Yes. So basically the way we – the large, smart tablets that we talk about for us it's another device cloud connected device – connected to the PlanWell cloud. And that's how information is going to flow through to the device. And the way we are doing is our sales force are taking the smart devices right to the project site..

Okay..

Because if you look at larger project sites, you have the project office and the project site pretty much in the same vicinity, right? So the teams together in the project office have their morning meeting and then they go to the project site, right? And when they meet in the morning to hurdle, they always hurdle around set of documents.

While they look at it, they look at what means to be done, they look at the issues that comes around physical construction and if they was around paper.

What we are doing, as we are bringing changing that paper set to digital SmartScreen where you can digitally download that most current set of documents and view it, right? And once they need to take action, they need to make some highlights mark-up and so forth.

They can immediately do that on the touch screen and push it into the digital PlanWell work flow that it will move to a – to the architect or to the owner and make those questions clarifications done quicker. Earlier they would have had to pay make a print and push it through delivery mechanism to back to the architect.

Now, it's very basically instant. So we are basically forcing the replacement of paper at the project office with the PlanWell SmartScreen..

Brandon, probably interesting I would just add to say to what Dilo said, it's amazing in some of the projects we have had let's say there is a project going on and it's a 25-storey building and the project crew is working at the 20th floor.

Remember this one extra crane lift and you can only imagine how many crane lifts they have big projects like that. One extra crane lift, 60 inch SmartScreen goes to the 20th floor, it's connected wirelessly all what you need is power and suddenly you can see the 800 drawings right then and there just by touching that screen.

So it's really powerful, and it's become integral part of our solution offering to the construction customers where we can actually deliver them documents anywhere they want it..

Got it. And maybe a question for John, given the second quarter EPS performance relative to what you guys have laid out for 2014, anything in the back half of the year expense wise or seasonality wise that would I guess really change the trajectory of the earnings compared to second quarter.

I know there was some noise around the winter, so I know there was some timing issues between Q1 and Q2, but just trying to look at second quarter first half of the year relative to the full year EPS guidance?.

No. There is nothing that that we are aware of other than Q4, it's a full seasonality of a little lower activity and a little higher equipment sales out of China. But, nothing that you haven't seen before..

Okay. Great. Thanks guys. Appreciate it..

All right..

We will hear next from Matthew Kempler from Sidoti & Company..

Thank you. So I wanted to dig a little deeper into the stabilization of the service revenues.

Is this surely the printing volumes picking up on the Reprographic services side or other services or shared gains that are driving stabilization?.

It's actually Matt, it's a combination. There is no question there is something to volume. But, like we described it previously, when the number of projects we have in the system have significantly gone up. Every quarter it has been going up obviously, there is recovering going on.

So the number of projects we typically have in the PlanWell in our systems has gone up. So there is no question the number of projects are going up. And therefore, any printing which comes out of it also is going out.

However, what's not happening is the customers are not printing in the same scale that they used to print previously that is what dealer was saying.

The stabilization which is resulting in the Reprographics line of it, we have the project revenues are coming from is largely a combination of just not print but also other activities related to the project document work and management work, Dilo would you?.

Yes. So the way we look at it again the amount of prints per project continuing to be challenged and we will probably continue to go down. But, the way we look at it those customers that have new project that we are selling to the enterprise we are going after the customer because every time these customers have more projects they are getting busier.

So we are able to speak about in – we are able to speak about can I get you upgraded and managed print service agreement including the news SmartScreen color, because if you go to every project site nobody puts a tent out there and leave it empty. They have nice color images of the project, which covers the whole fence.

But we have new opportunities that we did have prior to 2008 to go after with these new enterprises. So that's where when we talk about the stabilization of our revenue lines is coming because of the same customers are getting busier but we have more tools to sell through them today..

Okay.

And then could you also revisit the offering that you mentioned you are providing to power and energies, school districts and city governments, what exactly are we offering and then what gap are we filling in their current processes?.

These are I would say medium to small size government city agencies. They are – they want to get into a complete digital work flow. They want to manage their documents digital, they want to manage their renovation in a digital format and so forth. But they never moved from that paper-based workflow to a digital workflow.

But, today because of the sheer need, they are converting the paper-based archives to a digital archive, right? So we have been able to obviously provide the services onsite and offsite for – to digitize their content and most importantly our PlanWell archive cloud system is meeting their needs.

They can see okay where these documents once you get digitized, where is it going to go. How am I – how easy is it for me to search? How can I quickly share it with my architect my general contractor.

That workflow that has been built around PlanWell collaborate has been – is becoming a nice friendly pool for customers to say that's what I need from you because they are small medium, city government that doesn't have a massive budget. So they have to do it in shoe string budget. But work with off to get that performance.

So that's what we are seeing from that segment of the work..

Most of the work there is Matt just to add this way, most of the work there is related to their facility drawings. So it' construction related in a way it's their building, hospitals or school districts most of them are actually facilities drawing which has been archived and they have been struggling to recover them or struggling to search them.

And now, when we show them that this can be done they are really excited about the prospects. So more and more of these agencies are looking at these options to just – it's lower cost as well as otherwise they have army of people searching these documents they never seem to get them in time and then also it takes a lot of time accomplish the goal.

Now that we have them digitally they realize how easy it is for them to access these documents, so that's the part which is very attractive for them..

Okay.

So this is kind of a hybrid of your AIM services which your team will collaborate?.

It is one service when you look at – when you say archiving information management that runs on our PlanWell cloud. Right, so it's a one technology platform that we have for scanning and managing the data..

So from a technology perspective Matt, it's the same cloud, right? I mean the information resides in the same place. So you can use any kind of graphic interface user interface to access this thing.

Because we have the construction based user interface for PlanWell collaborate, we can pretty much use that interface also for AIM where the documents are properly organized and structured in the same form as the construction drawings are. So that makes it easier.

So if they have project documents or if they have facilities document, if they are mechanical, electrical, whatever they maybe, they are in the same format in the same file format as the construction driver.

So for us we are selling it as AIM service but the back bone of that, the cloud and the software that we use is pretty much identical is the fact that it's now in an archival form as against the current set.

Does it make sense?.

That's great.

I'm just wondering so it's – do you view this as more as one-time project based work or they repeat revenues comes from these customers over time?.

At the time when of this project work, its active live documents, they are changing it all the time and the project in the set of documents keep changing. Once they have completed their project they become off bill.

And then that move into archival form where it actually comes back into the archival and now the facilities -- people occupy the facility whether it's a school or a hospital or whatever, they use those drawings for tenant improvement, upgrades any repairs et cetera.

At that time its recurring revenue we are not scanning and uploading anything all the existing drawings are there. So now it's a service thereby we will have a long tail because they will consistently have these licenses and access charges, for accessing those documents whenever they want, wherever they want..

Okay, great. And then I just also wanted to talk on the gross margin, so obviously we have seen some significant improvements here but you made the comment that we will see continued improvements, digital services play a larger role in revenues.

I'm wondering what are the confidence levels around digital becoming a bigger growth driver that what we have seen so far and would be the primary contributors, I guess, we just talked about one of them what else you have in mind?.

So the digital if you think about our business Matt, whether it is in the project related revenue or whether it is in the managed print services or whether it is in the archival information management which you call AIM even in color the digital is basic ingredient in other words that is the backbone.

All of the documents are stored in the cloud accessed from the cloud and then they are viewed or downloaded or distributed or shared from the cloud. Now most of these customers are starting to use the digital services to upload it and put it in AIM all for the purpose of managing the document.

But they are not really fully into making use of these documents on the cloud and then accessing in downloading them. So the use of the cloud, is somewhat limited now only by customers who are focused to get in enough to understand how we use the cloud.

Now construction, all of our customers that – it's a huge base of customers we have almost a 100,000 customers and as they use more of our digital services as we convert more AIM customers, you will see that the user base for those AIM business will start to grow over a period of time.

And of course, when we take hardcopy documents and convert them there is a front loaded charge for that AIM business to convert that to digital but once you convert it to digital for the next x number of years like in the documents storage business that Iron Mountain or Cintas or whoever else does, first to get in, there is a certain amount of charge.

But once you get it in that always going to be there and the customers will have charges for accessing and then viewing downloading, feet licenses et cetera. So over a period of time, it's a slow build but it's a rock solid build because customers will then start using that and the margins on the tail end is much greater.

John, would you like to add a little going there?.

Yes. To speak to your question Matt about signals one thing you are going to see in these Q2 results in the Q is that the digital service line grew 1% this quarter year-over-year. And you remember from prior calls digital services has really been tracking traditional repro historically and traditional repro went down, digital services went up.

And it went up off the AIM revenue of our SoCal division. In SoCal digital services was up 10% and that's the first division where we have – or first region excuse me where we have AIM center.

Though in terms of confidence level between the pipeline activity, we see the enthusiasm of the customers, the engagement and these very preliminary signs on the numbers, we feel very good that AIM is going to be a powerful contributor going forward in the near future..

Okay. That was helpful. Thank you guys..

Welcome..

Thank you. We will hear next from Alan Weber with Robotti & Company..

Good afternoon.

Can you talk – two questions, can you talk about the onsite services like in the quarter over the six months, the amount of tax – the managed print services?.

Sorry, Alan.

Dilo, you want to answer?.

Are you referring to the number of contracts that we have added….

No, no. The revenues actually..

Revenue..

John, do you want to…?.

Hey, Alan, it's John Toth. I'm sorry, I'm still not clear on the question..

Could you repeat that question Alan?.

Sure.

When you break out the onsite services, you have the facilities management and the MPS, right?.

Yes..

Are you just curious what percentage MPS roughly?.

Of the growth or the total?.

Of the total.

And of the growth?.

Of the total it's probably about 60%, 65% of the total onsite line, with FMs being about 35%..

Okay.

And in terms of the growth?.

Growth, MPS is growing, is really driving the growth at probably at about 12% to 15% FMs are growing at probably of rate about 5% estimate..

Okay. Okay.

And my other question was you talked about several renewals and I realize you can't go through the absolute revenues and margins by a customer, but can you talk about conceptually, what you hope to drive on renewals in terms of comparing the future revenues that the contract is expiring margins and like that?.

For us it's very important that the renewal ongoing management services with the customer because then we do our first rollout, there is quite a bit of expenses we incur in the rollout designing, installation of software, hardware training of employees, there is quite a lot of upfront cost that we take.

So when we renew the agreement for the second time, all those costs are not there except for newer machines that we put in place the – we are able to not spend so much of money and get the renewal going. So continuing our margin should continue to improve when we have a good renewal of that contract from another period..

So simply Alan, another way of putting it is that when renewing a contract can be competitive because we have now organized the customer, identify the issues, put all the machines in place and know how many machines are in how many locations, how it's working. So in terms of that, you can get a competitive base.

However, for anybody who is coming in new is going to be a harder transition because they have to remain all the equipment, train all the people put in new software, getting – get everything installed together.

So from our perspective, if we can renew an existing customer it's beneficial for us because we get a new lease of life but we don't have all that upfront cost because the customer is already up and running.

In addition to that as Dilo said, many of the equipment we have already installed we have actually used it and some of them don't have to be always renewed in three years or two years or whatever. So the existing equipments can continue to actually function and we can get some use out of it.

So we like renewals although they are challenging every time because we have to compete for it, successful renewal is always very margin accretive would you agree Dilo?.

Yes..

But then as your offer becomes more complex, you do more of the management services shouldn't that, shouldn't the percent of renewal continue to be high and actually drive future revenues and future margins for - really for the long period of time?.

Absolutely, so what's happening now Alan is that we are starting to incorporate some amount of AIM into this management services.

In other words, if you are actually, if we are managing all their machines and we have a software connecting all their machines that means we see every document they print, which means even without they printing, even without -- even before they could think that they want to store these documents. We have the ability to draw them into storage.

So there are other techniques that we are doing with them and then we are giving them also other financial information to manage their print services better. We have dashboards, we have tracking information available, we have other similar uses what kind of people to machine ratios they have in the offices.

So, we'll offer a lot of information which makes it very compelling. And over a period of time like Dilo previously mentioned, if you have a management services customer, we also want to make them a AIM customer. If you have a AIM customer, we want to make them a management services customer.

And if that customer happens to be in construction, we also want to get all of their project documents and it simplifies things for the customer we become a single source vendor and the fact that we are in 200 location helps that cause us well..

Okay great. Thank you very much..

All right, thank you..

Thank you..

Thank you. And we'll take our next question from Glenn Primack with PEAK6..

All right, I made at this time..

Okay, okay go ahead..

Lots of great questions been asked, but just I thought of put some down on the notebook paper here that – in the traditional repro you actually saw a market that grew?.

Yes, yes. That's the southern region for us..

Okay, great.

And that little acquisition made in the first quarter in the U.K.?.

Yes, go ahead..

Are they trained on, are they trained on like having more arrows in the quiver that's something like….

Yes, I mean that's, yes exactly, Glenn so I'll let Dilo answer that, he is the one who handles that directly. Fundamentally, the two acquisitions we had in U.K. are largely related to sophisticated color business in England, as you know U.K.

is a very large color market and there is a lot of color activity and our color has been growing there and it's a way to access different types of customers also the mix of customers in U.K. are very different. And now that they have gotten -- they are getting to see the rest of the arrows we have in the quiver.

So they are starting to kind of sense and feel that for the AIM business and for the project-related work and for the management services work.

Dilo would you like to comment?.

Yes, I think one major benefit that this particular customer base that came to ARC is enjoying is the fact that we are global, right? Earlier this particular company or the vendor that was servicing them had only a U.K. location, but these customers are bigger than they were very large customer.

So they couldn't expand their services through this one vendor. So by coming to ARC, they immediately got the whole of the U.S. and Canada access. So whenever they have large delivery of marketing information, if digitally gets send to our 13 Riot centers in the U.S.

and we produce it for them, similarly, they are able to get it across to China to India, and Hong Kong. So we have basically given a good footprint to this new customer base that came over and that's the biggest benefit that we have seen and obviously, our financial strength in able to sustain large marketing campaign that these customers do..

Okay, so for a relatively low cost to attain the list and two little companies return is giant would be my guess?.

We've already in a month-and-a-half of working with the assets acquired, we've already more than made back, multiples made back of the cash we put out..

Okay. The reason I asked is, you're going to continue to generate a bunch of cash and move from unlike term loan B to perhaps term loan A and you're interest cost will come down, then you're going to have to find applies the bit more cash, so if there is more little deals like this that would….

Absolutely, big return deals, we have..

Big return deals?.

Yes..

Okay.

Oh, this is the next thing like there have been some acquisitions within your customer base?.

Yes, absolutely..

So potentially, if you know all of the people to machine ratio and the acquiring company needs to get synergies, is that a big opportunity for you land some more top 55 accounts?.

Absolutely, and this is something that which is actually continuing to grow Glenn. I mean, we saw wave of M&A activity in the construction space in the early part of like -- latter part of 2012 and 2013 in that space. If you follow the construction market there has been significant amount of mergers and acquisitions.

And it's predicted that, going forward this year and next year that kind of activity will pick-up again and there will be another round of consolidation which is going to go on. All the big customers we deal with either have acquired other customers or in the process of acquiring, and of course we get to know that as well.

You know right as we speak we know of three or four large deals spending out there, many of them are billion dollar deal. Of course, everybody knows about the big one which is announced which is Acom and URS.

But there is many more being considered and we have been told, because in one instance, this particular customer, knows this is going to happen and in fact they've already told us look you guys want to think about this.

So our strategies going forward that we can actually become partners with our customers in their endeavors when they have M&A transaction. That's where we want to be..

Sure, because it helped levered the synergy..

Exactly, if you look at the company and if you look at what we do, for any large mega construction company, we fall within their top five expenses, right? I mean if you take document management cost, if you add AIM to that and if you add all other logistics cost we fall within the top five.

I will argue if you add AIM to that we are within the top three cost. So when a company acquires another company, one of the definitive ways of they delivering value in that acquisition is, consolidation streamlining of document management and information management cost and which is something that we can play a big role in.

And this is why we are excited about our technology and the digital strategies going forward, because further activity in the M&A marketplace is going to significantly improve our opportunities to deliver real value to our customers. And you know it's all in the large customer space..

Okay. That's great. And then on AIM, I went to your Web site and I watched a couple of detail study..

Video, right?.

Yes, those are really helpful in terms of understanding what you're doing, but those wins both they happened this year?.

Yes, they are both this year and they….

One win was last year, JCJ that's the one we played last year, yes..

JCJ last year..

But JCJ as re-up for the West Coast now and that's this year win..

There is activity and the interesting part is because, this does deliver significant value we feel very confident that its going to pick up momentum, we just need to fine tune our sales teams and open more AIM center so we can facilitate at this business..

Okay.

And then on the software sales to China, I guess it's hard to predict when those are going to come through, but I'm guessing the gross margin on that does, more than double where you are at right now?.

Yes, so Dilo is the China guy, Dilo you want to comment on that?.

No, no those are handsome opportunity for us, obviously we got our first order from China last month and we are going to get a second order very soon. And the forecast for next year and year after from our Chinese partner is very encouraging.

So we're very anxious about it, we'll in the next couple of quarters will continue to keep you informed of our progress there..

Excellent that kind of juices John's 410, 14 -- I can't get the 410 14 out of my head..

Double, double, double..

Yes. Because it is impressive and speaking to doubles, if I just take the 37 million in adjusted EBITDA and double that that gets me ahead of where the guidance is for the year. Just thinking..

We're going to say try it on that one Glen..

Okay. No, I'm good at the multiplying by two. The other stuff on the growth rate and that is hard for me, doubling but, doubling is pretty easy for me to do, I don't even need my calc for that. Okay, great..

All right. Thank you..

The last one I like is – obviously being a shareholder I could maybe a little bit frustrated to see what's happening with the stock, but your story is kind of morphing into like this kind of software servicing versus freight company in those, those the enterprise content management companies go for like multiples of revenue versus one-time maybe..

Yes, yes. I think the markets still coming to terms with who we are and obviously we have several investors how are very knowledgeable about what's going on and who can see it. But, understandably, people gear up on those plans three, four years ago during the downturn because nobody expected opt to actually number one survive the market.

And 2013, when we survived, they said okay, you have survived but are you going to be strong and are you going to be powerful and I guess 2014, we are showing we are on track to become that company who can deliver significant value to our investors and we are excited.

But I think as we do this more and more and the numbers show it up, more investors will realize that the potential we have..

Sure. I mean because your model is like so much better than it used to me, right. I mean because I have that much more visibility going forward on the top-line and the lousy 4% to get a hand from 2014 without the Chinese software..

The majority of our revenue is quickly moving to recurring service based revenue, it's very predictable, very seeable, in contracts that our software-as-a-service based and we're going to continue that ARC over the next 18 to 24 months to be an enterprise content management company..

That is fundamentally technology-driven, it's technology-driven, then that's what it is and so we are excited as you can see and we will continue to stay on top of it..

Okay. Thanks..

All right. Thank you..

(Operator Instructions) We'll take our next question from Michael Fox with Park City Capital..

Hello. Hi, Suri, good afternoon..

Good afternoon. Good afternoon, Michael.

How are you?.

The last part of the last question – good, thanks. The last question kind of touches on what I was going to talk to you about. It's been impressive to see kind of transformation of the business and profitability through the difficult times and especially the cash flow generation.

And obviously, you're a significantly large shareholder, so can you talk about kind of how you think about shareholder maximization and how you think it could play out over the next couple of years as the business transitions and perhaps it could be attractive to some sort of a software company – a software services company?.

Yes. So, I mean it's obviously, it's in the horizon Michael, I mean Michael different people will look at it differently. Fundamentally, I think the fundamental shift is that we are from reprographics which is very traditional or print based.

And our revenue model was based on print, that's just how the nature of the beast was for 100 years in the construction industry. So our revenue model was largely print-based. And therefore, even though we had significant technology influence, we were still considered a reprographics company and a print-based company that kind of put us in that slot.

What – on the one hand, as bad as this downturn is, then as good as it has been. The good news is, when we come out of the recession and we predicted that, that we will be a completely different company and that is because not only because we want to be, but our customers want to do things differently and the behavior has changed.

So what is happening now is, the customers are still the same, the industry is still the same and what we do for the customers is still the same, we still manage documents, distribute documents and we store documents, we help them share documents, we do the logistics. But, what has changed is how we do it for them.

So that is the key change as to how our business has changed and that is largely driven by technology instead of it being physically done like we did in the past. So the business has transformed, what transformed is the technology behind the business, kind of showing the same thing to be done, but done how we do it, done differently.

So we will become a company which delivers document management services and information management to our customers in a very, very efficient way so much so that will improve the services for our customers and significantly reduce their cost. And as long as we deliver that value, I think we'll continue to grow.

And the other aspect large shareholder like me, the way I always think about the business, is that the market addressable market had significantly increased. Previously, we would largely do project related work for our customers in the projects and that's what you call reprographics. Now, we do management services that's our largest revenue line.

Now, we are starting to do AIM work, we never had that revenue line. They – those market segments are equally and some of them are bigger than the reprographics market segments.

So from a future perspective, it's a technology-driven, document management and information management service with the potential to grow much more than what it was and what it is today. So that's how the – that's how the company will continue to expand. But now as to where that will take us, it's anybody's guess Mike, you can probably guess it too..

Right, right. Okay. And then from a competitive landscape, in the reprographics business, you guys used to compete primarily with local mom and pops, and I would imagine the transformation has been hard on them because they don't have the capital and the resource that you guys have.

Does your competition change a lot or you compete more with software companies now or who is the main competition?.

So, we – in our different businesses we compete in different spaces, Mike. So in the reprographics business, we don't do – have a whole lot of competition.

And the traditional reprographers would be not been able to change are probably fast becoming copy companies who just basically make copies of documents which is – which as you know is time limited with regard to how long you can do that.

There will be always a small minority of people who want prints, but that market will be shrinking and will continue to shrink. In the Managed Print Services segment, we don't compete with reprographics companies; we largely compete with large manufacturers.

We would compete with large manufacturers like Xerox, HP, Canon, Ricoh, Savin, big companies like that. And they are also our largest suppliers. So it's a very interesting business mix we have there, but that segment is largely dominated by equipment manufactures in that segment.

In the AIM business, we – in the new world, we compete with lot of small scanning companies and whereas other companies which are legacy companies which do some of the archival information business. But, what we are competing is against hardcopy companies who actually and the people who store their documents in the basement.

So here it's converting the customers to – encouraging them to show – to convert all the existing hardcopy documents into digital documents showing them the benefit we can deliver. So in different markets, in different segments of the business we have different competitors..

Right. Great. Well, thanks for the color and congratulations on the progress..

All right. Thanks Mike, appreciate it. .

And it appears there are no further questions at this time. Mr. Stickney, I like to turn the conference back over to you for any additional or closing remarks..

Ladies and gentlemen, we appreciate your attention and your continued interest in ARC Document Solutions. Have a great evening. Thanks so much. Bye-bye..

And again, this does conclude today's ARC Document Solutions' Second Quarter Earnings Call. We thank you again for your participation..