Friday, October 28, 2016

A Look at Lexmark's Q3 Results

Lexmark reported its Q3 2016 results this morning. The focus in the news was that overall the company increased profits by 40% YOY, to $49M from $35M last year. Our main focus in DIR is the Lexmark Enterprise Software (ES) division, which over the past few years rolled up several companies covered by us, including, Kofax, Perceptive, Brainware, and ReadSoft.

The Kofax acquisition, which practically doubled the size of Lexmark ES, was completed in Q2 2015, so Q3 2015 represented Lexmark ES' first full quarter including Kofax results. Lexmark ES Q3 2015 revenue was reported at $165M with operating margins increasing to 19% - a positive trend. Of course, these results were released just three days after Lexmark had announced that is was "exploring strategic alternatives to enhance shareholder value." So, a lot has happened between then and now, including, in April, Lexmark agreeing to be acquired by a consortium of Chinese investors led by Apex Technology and PAG Asia Capital.

As Apex's primary business is the manufacture of ink cartridge chips, there have been questions about its use for Lexmark ES, and rumors have been flying that Lexmark ES would be sold in its entirety or piecemeal prior to the Apex acquisition closing, which is supposed to happen before the end of this year. In the meantime, Lexmark ES struggled through a rough first quarter before rebounding somewhat in Q2.  For Q3 Lexmark has reported revenue of $157M or about a 5% YOY decrease. Not great numbers, but considering all the FUD in the market surrounding who is going to own Lexmark ES going forward, not terrible. We didn't get any other numbers, like profitability related to Lexmark ES, as Lexmark corporate is keeping reporting to a minimum, and "will not conduct quarterly conference calls while the [acquisition] is pending."

To us the Q3 numbers indicated that Lexmark ES is still a very viable business, albeit with a run rate closer to $600M than the $700M that was originally projected when Kofax was acquired. ES has a large install base, along with plenty of maintenance revenue, as well as a stack of technology that it continues to invest in. So, what's it worth? Probably not the $1.89B we were speculating on in the wake of Open Text's acquisition of EMC's Enterprise Content Division (ECD). That was based on the projected $700M run rate.

Let's scale back that run rate to a more realistic $640M. Applying the same multiple of 2.7x revenue that Open Text paid for ECD, that puts a price for Lexmark ES closer to $1.73B, which still wouldn't be a bad price, considering Apex and PAG are paying $3.6B for the entirety of Lexmark, which is about equal to the revenue that the entirety of Lexmark reported for 2015. So, if they were to get even $1.5B for Lexmark ES, they would still be getting an approximately $3B hardware entity for close to $2B, which seems like a great deal. That said, Apex and PAG may be willing to go even lower on Lexmark ES, depending on what they value that hardware business at.

The bottom line is that Lexmark ES, even with its recent growth struggles, could be had at a relative bargain it seems. The question is, of course, who would buy it? Open Text is presumably out of the picture after the ECD acquisition, but you never know. Hyland owner Thoma Bravo has been rumored to be in play, but at their recent conference Hyland executives gave us no indication that was under consideration. Xerox wanted to buy Kofax before Lexmark did, and Xerox has stated they are on the ECM acquisition trail, but if the $1B price that Lexmark paid topped their original bid, would they be inclined to pay more for something larger, or would Apex and PAG be willing to break off Kofax separately for Xerox and sell it to them at their original bid? Or could Lexmark ES execs like Reynolds Bish and Carl Mergele cobble together enough financial backing for a private equity bid?

We still expect something to happen with Lexmark ES before the Apex/PAG acquisition closes. That would give us a little over two months. Stay tuned!

Tuesday, October 25, 2016

Today's Financial Services Market Demands Innovative, Stable Capture Solutions

Dell EMC’s Enterprise Content Division (ECD) has been a long-time leader in the document capture software market. It is probably best known for high-volume, back-office implementations, but like everyone else trying to stay competitive in the market, ECD has done a lot to address more modern capture initiatives. This includes the introduction of Web services, cloud, and mobile technology.

Following is a piece I developed with input from ECD, discussing how its software addresses the evolving requirements of today’s financial services organizations:

I recently had the opportunity to attend to a presentation by Chris Surdak, the author of a book titled “Jerk” with the subtitle, “Twelve Steps to Rule the World.” It’s about how to thrive in the emerging era of digital transformation. One of his main premises is that “information is the new wealth,” which he attempted to demonstrate through a slide showing that the three most highly valued public companies in the world today—Apple, Google, and Microsoft—are in the information management business.

Financial services companies, of course, are involved in managing traditional wealth, but that doesn’t mean information management is not important to them. The current movement of big banks toward partnering with Fintech start-ups or launching their own Fintech spin-offs, is an example of this.

Document capture is another area where financial services organizations must stay current if they want to keep pace. Banks and other organizations specializing in wealth management have been long-time users of document capture technologies. But, as the technology continues to evolve, and innovations like agile deployment and mobile capture are introduced, many financial services providers have not fully embraced these advancements. Rather, they continue to operate their capture operations like monolithic, hard-coded silos.

In his presentation, Surdak noted that three pillars for success in this era of information management include immediacy, quality, and intimacy. A modern document capture platform can help a financial services organization build all three. It can help them more quickly turn around customer submissions with more accurate and targeted responses, which will in turn increase their levels of intimacy.
Let’s take a look at some of the characteristics financial services organizations should be looking for in their capture platform:

It was an ancient Greek philosopher who first came up with the idea that “the only constant is change.” In today’s world of constant information flow, change comes even faster. And customers don’t care if back-end systems can keep up with this change, they just want results. (This attitude was defined by Surdak as “disengagement,” which is another user characteristic in the information economy.)

If a financial services organization needs to make a change, such as adding a capability or workflow to their capture process, they better be able to do it fast. Unfortunately, according to a 2015 World Retail Banking Report by Capgemini, less than 15% of banking executives rate their back-office digital capabilities as “advanced.”

One characteristic of an advanced back-office system would be openness. In other words, how easy is it to integrate a new capability like an OCR engine to handle a different language or to integrate to a different repository to quickly onboard an ECM system that might have been part of an acquisition?

One example of an open capture platform is ECD's Captiva. From its early days, the software has been designed to accommodate third-party services, and over the years the APIs have matured and become even more accessible. Captiva offers its own set of services that can be inserted where needed and its platform can also leverage third-party software to add capabilities like handwriting recognition, foreign language OCR, specialized PDF processing, advanced forms recognition, and more.

To complement its on-premises Captiva application, earlier this year Dell EMC’s Enterprise Content Division (ECD) announced Snap as part of its new LEAP cloud ECM platform [a brief video presentation on Snap]. Optimized for lower volume distributed capture applications, like account opening at a branch office, Snap doesn’t offer Captiva’s complete breadth of capabilities. But it’s designed to be very easy to deploy—with a target time of five minutes to configure a new document type. To assist with set-up, ECD is offering an option of outsourced document capture design available through the Snap interface.

The simple and fast set-up of Snap has two big advantages in today’s information age. If everything works well, an organization will have improved both accuracy and the turnaround time compared to manual capture operations. If it does not work out, which we all know is the case all too often with capture, the user finds out quickly and can try again. The concept of reducing time to failure is gaining traction in this age where there is so much pressure to reduce turnaround times in all areas.

The bottom line is that Snap offers a relatively inexpensive and quick way to launch multiple document capture workflows. This enables a financial services organization to keep up with business models that also need to be able to change rapidly based on intelligence being gained from an ever-increasing influx of information.

As the volume of transactions completed over mobile devices continues to gain momentum, mobile document capture can’t be far behind. After all, the primary reason people implement document capture is typically related to some sort of business transaction. For a financial services organization this might be new account opening, a money transfer, or applying for a loan. Well, guess what? As more users embrace mobile banking (According to the Federal Reserve’s 2016 Consumers and Mobile Financial Services Report, 43% of adults that have both mobile phones and bank accounts reported using mobile banking—up from 39% a year earlier ), more financial services transactions are also going to move to mobile.

Users have already proven they are comfortable depositing checks into their accounts utilizing their smartphones. According to the 2016 Mobile Deposit Benchmark Report, about 41% of banking customers have used a mobile deposit service. Because of their small size and relatively simple and consistent layout, checks were a natural place to start with mobile capture. Technology has now advanced to the point where automating capture of data from larger and more complex documents is also possible.

What if a customer is applying for a loan through their smartphone, for example, and the bank requires copies of W-2s and recent pay check stubs? Or what if an insurance company is asking for proof-of-loss documentation to settle a property damage claim? There is technology, like Captiva Mobile Capture, that can enable users to easily and successfully capture high quality images of these types of documents. Captiva Mobile Capture can be integrated with Captiva’s RESTful services or with an automated data extraction application on a server to complete the transaction processing. This type of integrated system can be configured to provide an end user with immediate feedback on if their document was received, if it included the appropriate information, and whether or not their submission can be moved along to the next step. This is the type of turnaround that people are seeking in today’s world.

ECD Capture – innovative yet mature
A lot of what we are talking about is cutting edge and modern technology. As a long-time capture market leader, ECD might not be the first vendor you think of as developing next-generation technology. ECD’s duplicity, however, is one of the advantages to working with them. They not only can address and understand high-volume traditional back-office capture applications, they can also help organizations move forward with their cloud and mobile initiatives. As so often happens during a period of transition, there will also be instances where legacy applications and modern initiatives will need to be weaved together. As one of the few vendors with interests on both sides, ECD can be counted on not only to provide expertise across the board, but also to be impartial with respect to the type of technology being deployed.

So, if you are a financial services organization looking to move your capture technology to the next generation, don’t look at ECD as purely a legacy vendor. Yes, their history in the market guarantees they are that, but their introduction of a modern architecture, as well as cloud and mobile capabilities, demonstrates that proven technology vendors can also drive innovation.

Putting a Price Tag on Information

Guest Column

Intro: It seems that recently we are running into more and more technology industry visionaries who are saying we now have entered the “Age of Information.” At the recent Harvey Spencer Associates Capture Conference, for instance, author Chris Surdak showed a slide "Information is the New Wealth" that listed the top six companies in the world by market capitalization. Apple, Google, and Microsoft, which he said basically specialize in "information management" topped the slide, followed by more traditional companies like Exxon Mobile, Berkshire Hathaway and PetroChina. The problem is, as AIIM Chief Evangelist John Mancini points out in his excellent piece, there is no standard in place for measuring information as a tangible asset. 

Check it out: 

By John Mancini, chief evangelist, AIIM

No company in the digital age could run without it and it is arguably the most important asset any organization has—but how do you put a price on information?

Intellectual property is listed as an intangible asset in financial reports. But there is no line on the balance sheet for information. No standard method or process for giving it a value, despite the fact that we are churning out more and more information every day. To put this into perspective it is estimated that Facebook users share around 2.5 million bits of content a minute. IBM estimates we create 2.5 quintillion bytes of data every day.

Information is coming at us from everywhere—from social media, purchase transactions, blogs, GPS data, sensors etc. This list is endless. The consumerization of IT, cloud, mobile, and the Internet of Things, have all contributed to a surge in big data that is literally changing our world and the way we operate in it.

Information is now one of a company’s most precious assets. When used correctly it can provide companies with a wealth of insight about their customers and competitors that can give them a business edge. Companies are investing heavily in protecting, securing, analyzing and documenting this data. 

Business leaders increasingly talk about how information is their most valuable asset. Yet information still does not appear on the balance sheet. As Doug Laney, vice president at Gartner so concisely puts it: “We are in the midst of the information age, yet information is still considered a non-entity by antiquated standards”. 

In this age of digital transformation, it comes as a surprise that there is no standard model for valuing information.

Accounting for information

As far as I can see, there is a growing gap between the traditional ways we value organizations, in terms of the tangible and intangible assets reported in financial statements, and the value the market puts on organisations. The huge sums paid for some companies shows our inability to measure and value the information assets of an organization.

According to Laney, in 1975 on average the tangible assets of a corporation represented 83% of its value. Today that number is 20%. Therefore, more than 50% of merger and acquisition exchange simply can’t be accounted for.

Take for example Microsoft’s acquisition of LinkedIn. Look at the accounting value of LinkedIn—$3.2 billion in revenues—and compare it to the price paid by Microsoft—$26 billion—and it doesn’t appear to make sense. We immediately start asking the obvious questions: Are we on the verge of another bubble?  Why is the accounting value of the company so different from its market value? Has Microsoft lost the plot?

The answer, I believe, is quite straightforward. The disharmony comes from our inability to measure and value information assets in an organization. This is reflected in the growing division between what we actually report about companies and what we actually inherently know about them. But it is also linked to the way we continually undervalue the investments companies have made in creating, analyzing, protecting and storing their data to create real customer value.

Finding a measure

The nearest thing we have to measuring information right now is ‘Infonomics’. This is essentially a framework for organizations to measure, manage, and monetize information as a real asset. But it has still to be taken on board fully by organizations.

Early this year, in a bid to come up an answer to assigning a value to information, AIIM brought together industry leaders in information management from the likes of Shell and Gartner, to discuss this pressing issue.

One particular point soon became crystal clear—we need a standardized way to measure the value of information, and we need it fast.  Although most organizations now understand how valuable their information is, they have no way of valuing it as an asset. This is an important job for information professionals and accountants to get to grips with over the coming months and years, and one that AIIM will be devoting considerable energy to. 

As business becomes more and more information driven, it is imperative that there is a standard in place that can measure the usefulness and monetary value of information. How this is to be done has still to be decided. But it is a problem that isn’t going to go away.

For more information: