Tuesday, July 21, 2015

Aggressive Cost Cutting in Store for Lexmark Enterprise Software

Lexmark reported its Q2 2015 earnings today. Overall, Lexmark reported $891M in non-GAAP revenue and $139M in earnings. Apparently, Wall Street traders were not impressed with these numbers along with lowered earnings forecasts, as Lexmark shares were down more than 20% in early trading. I don't pretend the understand the complete dynamics of Lexmark's business, but I do follow its Enterprise Software division fairly closely, and this was the first quarter it reported that includes any revenue and income from Lexmark's Kofax acquisition, which closed on May 21.

For Q2, Lexmark reported $150M in total Enterprise Software revenue, with margins of 20%. On the surface, this looks great, considering that Lexmark's Enterprise Software margins for 2014 were around 5%. But, if you look closely, the Kofax Q2 operating margins are listed at 42.6%, which has something to do with the timing of the acquisition. Apparently, some Kofax operating expenses in areas like IT, finance, HR, facilities, and legal and corporate staffing were charged to "All Other," instead of Enterprise Software.

"The software segment benefited from the timing of the Kofax closing which coincided with the most profitable portion of what is traditionally Kofax’s strongest quarter," explained David Reeder, VP and CFO, of Lexmark in an analyst call. "Kofax added $48 million of revenue and $20 million of operating income to second quarter results." (Quotes are from the Seeking Alpha transcript of the analyst call.)

When you take Kofax out, Enterprise Software reported operating margins of 9.8%, which is not great, but is an improvement over what we've seen historically from the Enterprise Software group. And, of course, we all know that Lexmark has set a goal of exiting 2016 with 25% operating margins for Enterprise Software. So, how does it get there?

In conjunction with today's quarterly financials report, Lexmark announced plans to eliminate about 500 positions. "We are announcing a restructuring action today, the vast majority of which reflects the cost synergies targeted for the ReadSoft and Kofax integrations," announced Chairman and CEO Paul Rooke. "In total, we’re eliminating about 500 positions worldwide, primarily across the G&A, marketing, and development organizations with about one-third of the impacted positions being shifted to lower cost countries, and we expect to complete these actions by the end of 2016. Financially, these actions are expected to generate annualized savings of about $65 million in 2017, the vast majority of which will benefit the Enterprise Software segment."

Basically, it sounds like Lexmark is expecting to save more than $33M in operating expenses annually in Enterprise Software - as well as grow the division due to "revenue synergies." When you do all the math, this should work out to 15% operating margins for 2015 and 25% by the time 2016 ends.

Obviously, there are going to be some challenges growing Enterprise Software while simultaneously reducing headcount, but Lexmark at least has a vision to try and executive on. I feel badly that it sounds like many people in our industry are going to lose their jobs as part of this vision, but as document imaging and ECM gets subsumed into more general IT and larger organizations, this type of evolution is inevitable.

Now, I'm not saying Lexmark is guaranteed to succeed at what it has set out to do, specifically in terms of margins and more broadly in terms of transforming from a hardware player to establishing itself as a leader in the ECM space. But, I will say it's definitely worth watching - and I'm sure most of its competitors are. Lexmark is clearly betting big here. We should know the results of those bets in another couple years at the latest.


Thursday, May 21, 2015

Bish Appointed President of Lexmark Enterprise Software

You can't accuse Lexmark of being predictable and boring. Almost two months after announcing its surprise $1B bid for document capture market leader Kofax, today, Lexmark not only announced it had closed the deal, but that Kofax CEO Reynolds Bish was taking over as president of Lexmark Enterprise Software.
Most people in the industry had assumed that Bish, who has hired by Kofax in 2007 to drive up its valuation and sell the company, had successfully completed his mission and would move on.

Instead, we have Bish taking over for Scott Coons, who was basically the founder of Perceptive Software -  the rock on which Lexmark Enterprise Software was built. Lexmark acquired Perceptive in 2010 and followed that with several other software acquisitions all rolled up under the Perceptive flag. The result was a software business with run rate of approximately $350M, prior to the acquisition of Kofax, which now doubles the size of that business. The curveball, however, is that Coons, who is some 15 years Bish's junior, is taking his retirement while Bish takes the reins of Lexmark Enterprise software (which is what Perceptive was renamed earlier this year).

The said, Bish's appointment really makes perfect sense. When you add together the revenue of Kofax, ReadSoft (which Lexmark acquired last year) and the former Brainware (now Perceptive Intelligent Capture), capture now makes up at least $450M of Lexmark Enterprise Software's projected annual run rate of $700M. And who better to run a $450M capture software business than Bish?

In addition, for the past couple years at least, Bish's vision has been wider than capture. He executed a series of acquisitions while at Kofax to help transition the company into the emerging smart process application (SPA) space. In many ways, the portfolio that Kofax adds with Lexmark, will further beef up its SPA play. But the bottom line is that, as reflected in its name, Lexmark is striving to be an "enterprise software" company and that has also been Kofax's goal since Bish took over.  Bish put a lot of infrastructure and strategies in place to execute on this goal and will now be able to carry them over into Perceptive.

One other thing, as Lexmark Enterprise Software moves to reach its goal of a 25% operating income margin by 2016 (from approximately 10% at the end 2014 for the combined Kofax and Perceptive businesses), there are certainly some personnel cuts that are going to have to be made. Technically coming in from the outside may make this easier for Bish to do than Coons, who to date had been operating Perceptive on fairly low margins in part due to Lexmark's laissez-faire approach to software.

Not that Coons was doing a bad job. In fact, when Lexmark first acquired Perceptive, it promised it would let Coons run the software business without interference and to date, Coons noted in a call with DIR, Lexmark has done a great job of keeping its promises. This hands-off approach really enabled Lexmark to establish itself as a major ECM player - which many doubted it could do.

Coons told us he was flat out ready to retire after 20 years in a very competitive market and that he supported Bish as the man to succeed him. Bish is certainly no stranger to personnel turnover, as he was an agent of change when he took over Kofax in 2007 and helped mold it into a true enterprise software vendor. As a result, Bish is probably the best man for the job now that it is time to do some remolding at Lexmark Enterprise Software as well.

Congratulations Reynolds on your new appointment and Scott, best wishes in  your retirement!

Thursday, April 30, 2015

Xerox CFO Comments Seem to Rule Out Kofax Bid

Xerox recently adjusted its outlook for 2015 in the wake of fairly weak Q1 results. But, the big news for our readers may be Xerox CFO Kathryn Mikells' comments on the company's acquisition goals. Mikells told Reuters: "We're expecting to do up to $900 million in acquisitions this year and early next year." This would seem to rule out a bid for Kofax, for which Lexmark has already bid $1B.

Monday, April 27, 2015

Kruchten to Depart Kodak Alaris

Dolores Kructhen, who has served as president of Kodak Alaris Document Imaging - DI (recently renamed Information Management- IM), since it was launched in 2013, is leaving the company at the end of May. Here's the official statement from Kodak Alaris:

"Dolores Kruchten, President of the Information Management division, has decided to leave Kodak Alaris at the end of May. All of us at Kodak Alaris thank Dolores for her contributions over the years and wish her all the very best for the future. We are actively recruiting – in the interim, Ralf Gerbershagen and Jeff Goodman will work closely with the existing Information Management Executive leadership team to ensure a smooth transition."

Kruchten started with Kodak  in 1981. She held numerous positions at Kodak Document Imaging, including running the hardware service business for Kodak Graphic Communications before taking over as GM of DI in 2007. Kruchten oversaw that transition of DI from a division of Eastman Kodak to one of the two principal divisions of Kodak Alaris - which were spun off as part of Eastman Kodak's bankruptcy proceedings.

The DI business struggled with uncertainty in 2012 and most of 2013, before bouncing back with a strong year for scanner sales in 2014. Like many hardware vendors, it is attempting to move towards more of a solutions approach and has added more software to its portfolio. Last week, DIR ran a story on Russell Hunt's retirement as Regional GM of the US&C for DI/IM. He is being replaced by Martin Birch, who had previously served as regional GM for EMEA at DI/IM.




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Tuesday, April 07, 2015

Xerox Leaves Door Open for Kofax Bid

Here's the statement I received from Xerox after asking for a comment on Lexmark's $1B bid to acquire Kofax: "While we cannot comment on Lexmark’s decision to acquire Kofax, we can say that today we are more confident than ever in our capability to deliver outstanding Next Generation Managed Print Services, Document Outsourcing and workflow to our customers and prospects. If and when the transaction is completed, we will re-evaluate our strategic partnership with Kofax.  In the meantime, we will continue to maintain our partnership with them to support  existing customer engagements where Kofax has been adopted. We are committed to open standards and when customers choose Xerox and another partner or competitor, we will work diligently to ensure that their environment works flawlessly."

Sounds to me like their might be conversations brewing within Xerox to make a higher bid, as I don't know what else could prevent the transaction from being completed. The "if and when" certainly makes it sound like Xerox is not considering this a done deal. If the deal is completed, it also certainly sounds like Xerox will be moving on from Kofax.

Wednesday, March 25, 2015

A Dialogue with Xamcor's Paul Carman on Lexmark-Kofax Deal

The following is a correspondence between Ralph Gammon, the editor of the Document Imaging Report, and Paul Carman, President and CEO of Xamcor, discussing what this deal means to the companies involved, as well as the industry as a whole.

Ralph Gammon of DIR: So, no surprise that an MFP vendor has announced plans to acquire Kofax. What is surprising is that it was Lexmark, instead of Xerox.

Paul Carman of Xamcor: I agree. Of course, it’s no surprise that Lexmark made another software acquisition , as they have been very active in building their software capabilities. However, Kofax does come as a bit of a surprise. With Brainware, an earlier acquisition, and then ReadSoft closing some months ago, the capture space didn’t seem to be the next logical area of opportunity.

To read the rest, please click through to the Xamcor site

Part II of the interview, in which we discuss if there is any merit to a shareholder rights-focused law firm filing a complaint against Kofax for not maximizing shareholder value.

Tuesday, March 24, 2015

Lexmark Attempting To Corner the Market on Capture

Wow. That really caught me by surprise. About 4:30 today it was announced that Lexmark was acquiring Kofax for $1B net of cash. I was just finishing up my Kofax Transform conference story and about to start writing my piece about how Xerox was going to integrate the Kofax technology into its organization. It really made a compelling story. And the rumor circulating around AIIM last week, was the the Xerox-Kofax deal was going to close any day...Then I heard something about Kofax asking for too much, and the next thing I know Lexmark announced it had made a bid of $11 per share, or about a 47% premium over what the Kofax stock was trading at today. It's also more than 3x Kofax's 2014 reported non-GAAP reported revenue of $297M -so from that perspective it's not a bad deal.

There is a lot to like about this deal from Perceptive's standpoint. It's latest and most aggressive move in an already aggressive ECM software strategy. That said, there is certainly some overlap with the recent ReadSoft acquisition, as well as its previous Brainware acquisition. But, if you are going to transition from a hardware to a software vendor, you might as well go hard.

I wouldn't be surprised to see Xerox make a counter offer, but if $1B was already too rich for their blood. But still, if I was Xerox, I would be looking to find some money somewhere, because they really were planning on investing a lot in this partnership and now Kofax is in danger of being taken off the market by a competitor. Exciting times.