Friday, October 31, 2014

Kofax Places its Bets on SPAs

As many of us know earlier this month, Kofax pre-announced that its fiscal 2015 'Q1 results would be below expectations. The final results came out yesterday, and, pretty much as expected Kofax's revenue came in at $69.3M (growth of just 2.3%), sales generated from software licenses fell by 3.5%, and earnings decreased almost 50% to $4.3M or just a 6.3% margin.

In a call discussing the pre-announcement, Kofax CEO Reynolds Bish blamed the shortfall on some larger capture deals that did not close as expected. This was the second quarter in a row for which he used to same excuse. Investors were none too happy, and Kofax's stock plummeted - losing almost 25% of its value overnight. The stock has since gained back some of its value, but as of right now, Kofax's market capitalization is around $550M, which is less than two times revenue and about 30% below Kofax's high-water valuation mark reached this summer.

On the follow-up call to the recent final earnings announcement, Bish stated that Kofax had closed one of the two seven-figure deals that had slipped at the end of Q1, as well as several six-figure deals. He also reiterated that mid-market capture sales through the channel remained strong-but that increased scrutiny at the higher end of the capture market, especially in Europe, through both direct and indirect sales channels, was making sales tougher.

While Bish did not come right and say that the capture market, which still accounts for the majority of Kofax sales, was weak, he did restate that new sales reps are primarily being hired to focus on sales of newer/acquired product lines (including mobile), which in Q1 accounted for 35% of Kofax's software license revenue. "Most of the new quota bearing sales reps we've added over the 18 months have been in the mobile and newer acquired products part of our business," Bish said (from the Seeking Alpha transcript of the analyst call).

In the Q&A portion of the call, Bish added some color to comments he had made previously about reallocating resources and expenditures to focus more on the faster growing parts of Kofax's business specifically "mobile and new or acquired products." "There are a number of additional steps that we've taken here more recently to do so and most of them are aligned along the demand generation efforts," he said.

Bish added that because of Kofax's longevity and reputation the capture market, cutting back on demand-generation efforts in that market "hasn't historically tended the impact that business or ability to generate business there."

Bish then added that Kofax's current salespeople, many of whom also have a strong legacy in capture, have been given stogner incentives to sell the newer products. "There are a lot of reps out there, that have been with the company for many years, who certainly find things like Kofax Capture and Kofax Transformation modules to be their comfort zone, and so we've implemented a number of incentives as well as management processes in order to move them faster from the old legacy products to Kofax TotalAgility."

TotalAgility is the platform that Kofax introduced last year, which combines multiple of its acquired technologies in areas like BPM, business intelligence/analytics, application integration, and presumably e-signatures, and combines them with capture and IDR in a single Web-based and mobile platform. Said Bish, "[TA] can program capture functions, but more importantly can also automate the downstream synergistic business processes, provide a much higher value, a much more comprehensive solution and can also ultimately lead into providing true Smart Process Applications."

Attacking this potentially lucrative SPA space, which is squarely addressed with Kofax's First Mile marketing program, seems to where this market-leading capture ISV wants to train its focus, although it's likely that its market presence, technology set, experience, and momentum, will enable Kofax to maintain its leadership position in the enterprise capture space as well.

Focused on the Future
I think it's worth noting that when Kofax says that 35% of its new license revenue is coming from sales of "mobile and new or acquired software products" that does not necessarily mean these are true SPA sales. They may be of technologies that can be leveraged in SPAs, but capture fits under that bill as well. The majority of these sales, from what I understand, are more or less point solution sales - that said, some are into new and exciting markets, like in the case Kapow's data integration technology.

Yes, Kofax seems to be treating capture like a cash cow, but that's not necessarily a bad thing. As we've said several times over the past year, the capture market is maturing, especially at the enterprise level where Kofax often competes. This may have something to do with the delays in larger sales. There is nothing wrong with a market leader taking its profits from a mature technology and investing them in a potentially higher growth emerging market. Let's just hope that the SPA market proves to be the correct bet for Kofax.

Friday, October 10, 2014

Is HP Split the Right Move?

Last week's big news (well, aside from Kofax pre-reporting disappointing fiscal 15 Q1 numbers) was HP's announcement that it plans to split its software, services, and storage business from its PC and printers business. From what I can tell, it appears to be about an even split revenue-wise. In HP's more recently reported quarter (ended July 31), revenue from Personal Systems and Printing (which will become HP, Inc.) was $14.2B, while revenue from everything else, including Enterprise Group & Services, and Software (which will become Hewlett-Packard Enterprise), was $14.3B. Earnings of $2.7B were similarly split.

So, why is HP breaking up the company? Well, the most straightforward answer was given to me by Chad Stigall, senior manager, solutions portfolio at value-added document imaging distributor Cranel.




And that certainly makes sense, and maybe I'm looking at this from too narrow of a perspective, but my perspective is one that comes the document imaging industry and from the context of that market, I'm not sure splitting up the two business makes sense.

I already felt this way, and then here's the quote I got from Canon's Tom O'Neill last week when working on a story on the latest version of the MFP vendor's uniFLOW fleet management software. "“You’re going to hear more from us on the benefits of an integrated solutions and platform strategy,” he said. “We have several Canon group companies based in Europe, like NT-ware [which develops uniFLOW], I.R.I.S., and Therefore [a document management ISV]—we are able to integrate their technologies with each other, as well as directly into the imageRUNNER ADVANCE platform.

"This will help us create a very strong integrated solutions platform that we believe will relieve a lot of the frustration and pain for our dealers and channel. Nobody wants to have to manage three or four different vendors to create a solution, and Canon understands that. Also, customers aren’t looking to buy a device or software like uniFLOW or Therefore. They are looking to buy solutions to their problems, and we want to provide that to them in a way where the technology is transparent."

So, Canon is talking about combining hardware and software into solutions and HP it talking about splitting up its hardware and software businesses. Lexmark, which continues to roll up software under the Perceptive Software flag, seems to be heading the same direction as Canon. And so is Konica-Minolta, although in its case it is rolling up services businesses to combine with its hardware business. Xerox took a similar approach to KM-although on a much bigger scale when it acquired ACS a few years back, which is now known as Xerox Services and is a very large focus for the copier pioneer.

So, why is HP heading in a different direction than these competitors and spinning off its printer business on its own? Well, for one, the printer business is not being spun off on its own. It's being tied to the PC business--which is ironic if you remember that a few years ago there was a war when some of HP's investors wanted to split off the printer business from the PC business. But, the two were kept together and since then HP has made two huge acquisitions, of EDS (services) and Autonomy (software)--and now the plans are to spin off those two acquisitions as part of Hewlett-Packard Enterprise.

Here's my issue. EDS was acquired in 2008 and Autonomy in 2011- and I really don't think HP has done a good job integrating them into their core business. So, it seems to me they are punting. Really? Is now the time to give up on this integration just when all your competitors are either moving towards this type of model and/or have already achieved it on some levels?

The only plausible excuse for this split from my standpoint is that HP is ahead of the game. In other words, the integration of hardware, software, and services is all a big sham and what every hardware vendor really wants to do is move to a strictly higher margin software and services model and eliminate their hardware. Isn't this what Kofax did when it sold DICOM? And HP is just the first MFP vendor to admit this and dump the hardware-albeit in a fairly graceless fashion.

Now, I'm not saying this is valid, and I certainly don't expect Perceptive to dump the Lexmark hardware business anytime soon, but, really, isn't that what HP is kind of trying to do here?

So, the next move would be for them to pick up the hardware-free Kofax, whose market cap has dipped below $600M and add it to their Hewlett-Packard Enterprise business and move on from there. Where does this leave the MFP/Printer/Scanner business? Well back where it started before any software and services were brought into the mix, and if one is to believe the current trends in the market, that's not necessarily an advantageous place to be.