David Stickney - VP, Corporate Communications and IR Suri Suriyakumar - Chairman, President and CEO Dilo Wijesuriya - COO Jorge Avalos - CFO.

Chris McGinnis - Sidoti & Company Juan Molta - B. Riley.

Good day everyone welcome to the ARC Document Solutions First Quarter Earnings Report. As a reminder today's call is being recorded. At this time I'd like to the turn things over to Mr. David Stickney, Vice President of Corporate Communications and Investor Relations. Please go ahead sir..

Thank you Farah, 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 first quarter financial results for 2016 were published 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 May 3rd, 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?.

Thank you David, and good afternoon everyone. The first quarter of 2016 was encouraging relative to our ongoing initiatives to transform the company. Sales performance was solid and performed to our expectations. Our gross margin was well above 30% despite our continuing investment and an increasing increase in lower margin business.

We made good progress in diversifying our customer base and we continue to drive adoption of our technology enabled offerings. Overall I'm pleased with the progress we are making in transforming our business.

We know we face challenges in the market but I believe we're making the right investment in people, training, technology and marketing and that we are focused on the right drivers to deliver success.

To reiterate my comments from earlier this year our traditional business will continue to be challenged due to secular headwinds and our customers desire to use cloud and mobile services to distribute documents.

We expected these challenges and we have communicated them to you, but we are also maybe clear that in the end we're creating more opportunities over the long-term. I should take a moment to point out that we don’t expect a significant inflection point or a sudden change in the market over the next few years.

Unlike the consumer markets, where our cloud applications are adopted quickly and often accelerated by wild growth, the construction market is more likely to adopt technology as a slower and incremental pace.

Transformation like this don’t happen overnight and we’ll be using the time to establish greater traction with new solutions to offset the slow declines in our larger and more traditional business with faster growth of our smaller but technology enabled solutions.

As noted in today’s press release, our sales were $103.6 million and on track with regard to our expectations and plans.

While our continued investments over the past eight quarters have challenged our SG&A cost and affected our EBITDA margins, we continue to keep these costs sharply in focus and continue produce inherently strong cash flow as shown in our results today.

Unlike the start up venture, we are self funding the growth of a new segment of business, while continuing to operate a healthy existing business.

At the same time, we attractively de-levering the Company, including our cash allocation for the benefit of our shareholders and developing new and innovative ways to deliver unprecedented value to our customers. Our to-do list is impressive and we are crossing tasks of the list every quarter.

With this in mind, I think you can see why I am proud of what my team has accomplished so far. There’s still much to do, but not so much to distract us from our plans for steady incremental improvement in sales.

In just a moment, Dilo will give you some information on where we are headed within each business line and Jorge will review the numbers we expect to build on. And the highlights are continuing strengthening cash generation that has defined us from the beginning.

While there are bound to be temporarily setbacks and challenges along the way as we work our way through this transformation, I am confident in our ability to overcome them and move forward. As such, I am maintaining our forecast for 2016 in its entirety. For fully diluted adjusted earnings per share, we expect to be in the range of $0.30 to $0.35.

We expect annual adjusted cash provided by operating activities to be in the range of $55 million to $60 million. And we expect our annual adjusted EBITDA to be in the range of $66 million to $71 million. At this point, I’ll give the floor to Dilo for a brief operational overview.

Dilo?.

Thank you, Suri. As we look at progress within our CDIM business line, the number of customers using SKYSITE for project information management and distribution continues to grow. We are continuing to develop new features that will strengthen our customers’ information work flows.

BIM and hyperlinking services also continue to generate strong interest as our customers outsource their valuable information management services to ARC. Our domain knowledge in construction and our nationwide footprint is helping us to grow these services and offer new variations that increase our value.

Our basic hyperlinking services, for example, link project plans and other documents from one to another much as anyone might use link on the Web.

While this is useful when working within a directory of documents by offering these linked documents wider dashboard, a graphically oriented touch screen interface, these links deliver far more than just the documents.

We offer an entire project information management system that makes access to critical information fast, simple to use and portable within the usage on a computer, a cloud based mobile device or even a large touch screen.

By simply configuring our technology and services in different ways, we have seen growing interest in these offerings and we’ll have more to report on the progress of them as the year progresses. Wide format construction related project printing, which now makes up less than 25% of our consolidated sales, declined at 5% year-over-year.

This slowed decline was offset by strong results in the production of [indiscernible] and other color imaging services. Once we secured in customer, we have tremendous opportunities to cross-sell all other solutions of ARC.

We continue to focus on building out new customers in our regional and local markets for MPS which makes up more than 60% of our overall revenue in this segment. Nearly 400 new locations are added over the past year.

Today, we operate 9,050 MPS installations nationwide despite the lots of approximately 200 locations we experienced at the end of 2015 due to non-renewing of a contract once again we saw gratifying results in AIM for the period. This is another area we are finding new ways to configure our services to deliver unique value.

While many of our sales over the past year have been driven by our approach to archiving digital documents in the cloud more of our customers are seeing the value of converting their facility and business documents to a digital environment with cloud and mobile access.

These documents are often archived but in a much more active way as they are retrieved frequently for the operations and management of existing facilities like the project information management system I mentioned earlier. We configure our AIM services in a similar fashion to provide facilities, information management system.

These graphic portable and cloud based dashboards make it simple for a building or a facilities manager with an iPad to instantly pull up diagrams of water shutoff valves, review evacuation and other safety plans or access an operating manual for a piece of equipment on the spot.

Manufacturing, healthcare, education and city governments are some of the markets we have had success with this new service.

Our ability to provide a comprehensive solution of scanning services, and a hosting platform with mobile access is proving to be a key differentiator, overall demand for AIM services are strong and we expect continued success throughout the remainder of the year.

With this brief review as a backdrop for financial comments I'll let Jorge continue from here.

Jorge?.

Thanks Dilo. As noted in our earnings release year-over-year sales decreased by $800,000. The decrease was primarily driven by large national NPS accounts that did not renew their agreement with us at the end of 2015 following the recent merger.

While we are focused on building back our NPS business with a strong emphasis on regional and local accounts we remain focused on growing our newer offering such as AIM which grew 33% year-over-year for the quarter. We also saw continuing strength in new technology enabled services in CDIM.

The outlying sales for the quarter was a nearly 18% increase in equipment supply sales that was driven by one-time non-recurring low margin sales in China. Despite the unfavorable business mix resulting from the increase in equipment and supply sales our gross margins remain strong for the period surpassing 32%.

Moving down the P&L to SG&A, we were able to reduce to our year-over-year cost by more than $1 million thanks to disciplined cost containment in light of lower sales. With that said we continue to invest in strategic growth areas primarily focused on our technology enabled solutions.

Interest expense for the quarter decreased by more than $400,000 largely due to aggressive debt paydown. Cash taxes will remain minimal for the foreseeable future thanks to our over $80 million in net operating losses from previous years. We continue to encourage the use of a pro forma tax rate of approximately 40% for year projections in 2016.

Between the decrease in sales and the business mix driving down gross margin adjusted EBITDA dropped approximately $2 million for the period but still produced a healthy adjusted EBITDA of $14.8 million or 14.3%. The balance sheet remains very strong along with our operating cash flow.

Despite the decrease in EBITDA cash flow from operations remain consistent with prior year at $5.3 million. As was the case last year we expect cash flow to accelerate through the year primarily due to the timing of sales and collection of those sales.

As we mentioned in today's press release we paid down an additional $4.4 million of senior debt during the quarter. From the inception of our Term A loan in December of 2014 we paid down $36.4 million or $14.5 million above the required principal payment significantly improving our capital structure in a very short period of time.

In addition we were actively repurchasing our own shares in the open market, our stock repurchase plan that was initiated at the end of February of 2016 authorizes the company to repurchase up to $15 million worth of the company's outstanding common stock through December 31st, 2017.

In just one month we acquired 700,000 shares for $2.7 million or $3.88 per share. Overall our performance for the quarter was in line with our expectation with the one exception being the double digit increase in China sales which temporarily skewed our margins.

When we reported our results for 2015 several months ago, we promised growth in our technology based solutions with a nearly $1 million increase in our AIM solution continued adoption and in SKYSITE and accelerated sales in new service lines like project information management systems. We made significant progress on this front.

We also committed to and produced strong gross margins and disciplined cost containment, which drove our cash generation and allowed us to use $7 million for stock buyback and debt reduction during the quarter. We will continue to execute on these initiatives during the next several quarters, providing a solid foundation for the rest of 2016.

At this point, I’ll turn the call back to Suri.

Suri?.

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

Thank you [Operator Instructions]. We’ll hear first from Chris McGinnis with Sidoti & Company..

Suri I guess just starting off with the comments you made about the turnaround and it will be lengthy.

Looks like there is early success on AIM, and I was just wondering if I could just maybe get your thoughts around what are the things that we need to really look at that show that the Company is on plan for the targets? And is that more about the AIM growing in this rate and sustainable? Or are there other key components that help gauge the turnaround as we progress through it?.

So fundamentally we are looking at three segments, Chris. One is obviously AIM, the other one is managed print services, and then the third component of that is what we traditionally referred to as SKYSITE, which is construction document and information management, we call that SKYSITE which is our software solutions.

All three of these segments are growing in the right direction. I’ll go one by one just for that you get clarity on it. SKYSITE is showing growth but obviously it's a productive list last year, early last year, and it's starting to get more and more traction.

Again that’s the tool that we need to get right into our customers’ mindset about using those tools, the cloud tools as a way to distribute and manage documents. So that will continue to go, I don’t expect a hockey stick but there will be healthy growth.

Management services have two components; one is the global solutions component, which is the large massive companies, which actually are in several parts of the country, we call them global customers which are billion dollar customers. And then we have regional customers.

The upper segment of that market space is challenged right now because of oil crisis, what’s going on in the larger engineering and construction industry. Many of those companies are going through reorganizations and mergers and variety of other things. So that is stalled for now.

Now there is way to go away but there is a temporary slowdown in MPS activity in that space, which is large construction companies, which are globally major. Fundamentally you can put them in the billion dollar bracket. Then you have regional and divisional companies, which are the thousands of small construction companies.

They are showing good growth. so we are actually growing in that part and we are very comfortable in many ways the growth there is offsetting the fact that the larger accounts are stagnated. 60% of our revenue on MPS comes from regional and smaller accounts. So that’s the second part. The third part is AIM. AIM we’re having a lot of structures.

Whether we’ll have the same level growth quarter-after-quarter, it's hard to predict. Do we expected to be very a healthy growth during the year, yes. Is there a chance that in the next two-three quarters AIM can even grow faster? Absolutely. It's a new segment, customers like our solution and we are getting a lot of traction on that.

So that’s the combination of the three segments on CDIM, which is largely work we do for projects in customers. Second one is Archival and the third one is MPS. Now that growth there which obviously is a small pie, we are continuing to accelerate the growth there, is offset by the shrinkage in our traditional business.

That’s what Dilo was trying to point out; our traditional business, which is related to print.

That shrinkage is still continuing to be -- Jorge, what is it now?.

5%....

5% to 6% is petering around that demand, but its shrinkage on the larger volume of difference we have, Chris. So, we might have situations in the next quarter.

We had a shrinkage, it's ahead of the growth with the -- what we call new tools or there could be some quarters where the growth in the new tools far outweighs the shrinkage in the big segment of the business.

So it's a thing that we’re going to battle through this year and next year, that’s why I’ve always said it’ll take 24-36 months for these new businesses to grow enough to offset the shrinkage we have in the larger print related business..

Sure, no I appreciate -- and I guess just on the SKYSITE it is relatively at least changing in new -- maybe just talk about the acceleration on a monthly basis in terms of the customer growth or just maybe a little bit more depth on that, on that offering in the trajectory..

So what SKYSITE fundamentally does is distribution of documents and information for projects. You know we haven't still been able to -- I mean there're a lot of customers on trial, there're a lot of customers who are coming on board.

We haven't still come to a stage where we can consistently say okay growing at this rate, it’s really early stages, Chris we have good growth but we're not disclosing those numbers just yet.

And you know one of these quarters when we feel that we have come to stage we can talk about it we'll give you more color but it’s growing healthily now, it is also very competitive space and unfortunately all of the other companies that I have are startups so they don't have to disclose any of their numbers but because we're a public company our numbers are often asked for but once we get into a better place I think we’ll be able to give you directionally how much we are growing..

Great, and then lastly just on MPS and the numbers you did put out about the customers on a year over year basis. Does the up to 200 accounts, is that reflected in the loss of a customer base from last year or the end of the year..

You know if -- that's a net of the loss Chris..

Alright, and so I guess those are smaller accounts and sort of revenue doesn’t offset or it just takes time to ramp. .

Yes so what happens there Chris is that obviously when we install hundreds of these every month, these are at project sites, they're at customer sites, they've undertaken a new project so they want formations, they'll ask us and we'll install it and when the project is finished they'll wrap it up. So they'll be constantly turned around.

Our focus is to make sure we are growing faster than the projects which get wrapped up.

They're generally three year contracts and we sign anywhere from a 150 to 150 plus contracts every month in that range every month and then of course you will have you know 15-20-25 coming to a close because the projects close, our customers are wrapping up certain projects..

And could you give the amount that the -- the larger contract loss weighed on the quarter itself, whether on a percentage basis or a dollar basis..

And when we look at it we'll track it to by the number of contracts as -- to just elaborate on your initial question the 200 add was add a new MPS location excluding the loss of the customer that chose not to renew the contract.

In regards to the dollar impact as we disclosed last year it was 10-10.5 million in MPS revenue on an annual basis, we lost the contracts or stopped doing service for the most part at the end of December so we started seeing that impact start in Q1, so you can take that number and divide by four..

I appreciate Jorge, thank you very much, I'll jump back in the queue..

[Operator Instructions], and we'll take our next question from Juan Molta with B. Riley..

Hi, guys, thanks for taking the question, couple here. Regarding the health of the non-residential construction market currently did you guys not see much there or could you comment on that and how much of a benefit that was for you..

In terms of non-residential construction you were saying..

Yes, yes. It seemed like the numbers were pretty good for the quarter. .

Excuse me, yes absolutely, we certainly see the numbers to be pretty good, but if you take our two segments of the business the print related business is actually, lags because that's how it is, you know the print related distribution of documents lags the industry number so it'll take about two-three-four quarters for us to catch up to those numbers because we are actually lagging the industry statistics.

But you know we certainly saw the quarter numbers to be pretty healthy..

Okay so that was a benefit, and could you also -- you mentioned in the prepared remarks in the earnings release that you're seeking out candidates to have a technology background, can you talk about level candidates do you know what type of candidates you're looking at to add to your technology initiatives..

Yes, absolutely, absolutely.

So one of the things which is happening is that as the company as we transform and move into more technology services and software related services which is what we're doing now you know our strategy and our vision and our direction is largely exciting to what we are going to do, we're in a completely playing in a different place altogether in other words our revenues which were largely transactional is now going to become more consultative so the whole shift and the business is completely shifting to a different space altogether so I need actually to continue to bring in new thinking and new talent at both levels, one also at the board level in addition to that at senior management level and executive level.

So that's what we're looking at so we have had a board for almost 10 years now. And so some members are transitioning.

So I am taking that opportunity to actually bring in Board members who are in the technology space more so related to and have some experience with cloud based products and having understood the go to market strategy on cloud and mobile products. That’s the kind of people we are looking for.

Anybody who is more involved in technology and understood how the technology functions because largely we have been a non-technology company for the first half or three quarter of our life, and obviously now we are transforming into a technology services and a software company.

And we’ve continued to do these and you will see us coming back and telling the market some of the other things we are doing to continue to bring in people who are experienced in this space..

And how has the search gone in terms of the quality of people you’ve been able to interview and collect resumes, et cetera?.

We actually have one of the industry leading search firms under job. Obviously, this is -- now talk about competing with other big technology companies for this talent.

And it is not something that we are not used to because as you know we are in Northern California which is Silicon Valley South so we fight for talent these days regularly with other technology companies within the marketing space, operation space, or the tech space. We weren’t used to it.

So, we actually have engaged very high end search firms who have brought us some phenomenal talent to be able to interview and get candidate from..

And another question, you mentioned in the prepared remarks that you’re investing in technology.

Is it possible, can you [indiscernible] how much of the operating expenses are actually investments in technology that they wouldn’t be there, you’ll be delivering a higher EBITDA?.

Actually we’ve been working on this number. We’ll probably give a little more color next quarter on that. But just so you know over the last 24 months, I’ve been constantly saying we are investing in technology, we are investing in new business because the business is transforming.

It's becoming more defined now and I clearly see the need to start talking about those numbers.

As existing public company, when you transforming the company from very analog model or print related bonds into cloud and mobile based services, technology services company, you could be challenged to be able to continue to operate the company with good profits and margins and EBITDA and with your obligations but also have the same time build technology.

So we spend money in technology itself, developing technology and then in training our sales people in selling technology services to our customers. And then marketing, which is a big part so that customers do see us as a company within this space that includes just not only sales and marketing but also PR.

And then internally changing the mechanics to make sure -- obviously we have a tech center here in Northern California, we have bought 50 plus people in the tech center and about 140 people in Calcutta. So we will be able to quantify that more and more going forward but a substantial amount of money is being invested in transforming this business.

So the short answer is if we deemed actually have to invest, based on today’s revenues we have on the current revenues, our EBITDA number could be much-much greater. Anything to add Jorge….

No, I think you covered it up..

And one final one, and I’ll step back into the queue. You left guidance the same from what you released in the Q4 earnings.

Has there been any changes in what you’re seeing assumed in that guidance internally more in one bucket less than another bucket, et cetera?.

So the buckets keep changing. Like for example, the first quarter we had a very healthy AIM bucket. We knew AIM was doing very well, but it was exceptionally healthy for that bucket for the first quarter. It’ll be easy to continue to be same for second and third, and fourth, we don’t know yet.

I mean, we’ll only know that because it's transforming the customers and getting them to actually look at the archival product and facilities management and project management, that’s -- project information management and facilities information management. These are really-really growing products.

MPS was softer than we expected not on the regional side, that was pretty strong but on the global site, softer than we expected and we think it looks like based on everything, but the market is telling us, for the rest of the year that maybe -- maybe it will remain softer, we don’t know that yet. But that’s the sense we are getting.

So overall I am still keeping the guidance because we feel confident that we’ll meet those numbers. But maybe if the market remains soft like this and given that it's election year, maybe we would be closer to the lower end of the guidance.

But we get a better understanding of the ramps we go through another quarter when we can put our answer on those numbers specifically. .

[Operator Instructions] And it appears we have on further questions at this time. Mr. Stickney, I’d like to turn the call back to you for any additional or closing remarks..

Ladies and gentlemen, we appreciate your time attention and continued interest in ARC Document Solutions. Have a great evening. Thanks for joining us. Good night..

Ladies and gentlemen, again, that does conclude today’s conference. We do thank you all for joining us..