Monday, February 11, 2019
Kofax Being Opportunistic with Capture Acquisitions
Is Kofax doing a capture roll-up? It may look that way, but I would describe it more as an opportunistic short-term play in order to fund a more strategic plan around intelligent automation.
"Kofax is in a unique position in that we are trying to protect our base while also funding the future growth portion of our business," explained Chris Huff, Kofax's Chief Strategy Officer, during a recent call to discuss the ISV's acquisition of Top Image Systems (TIS). "The consolidation play (including recent acquisitions of both TIS and Nuance Document Imaging) protect our base in the capture market where we now command (a greater than 25%) share. Our position there provides us with cash flow to fund the future."
After the recent acquisitions, Kofax is now a $600 million a year entity, with the good majority of that coming from capture, although RPA is acknowledged as the fastest growing part of the business. In addition, Kofax has technology in areas like digital signatures, customer communications and business process management. These originally were assembled to be part of Kofax's "First-Mile" of customer interaction strategy for connecting systems of engagement with systems of record. It doesn't necessarily seem like this strategy has changed, as the intelligent automation platform offers similar functionality and addresses similar problems.
As far as building the capture business, in Nuance, Kofax picked up an operation with $200 million in annual revenue and historically high margins (37% in its fiscal 2017 and 32% in 2018) for less than two times its annual revenue. With TIS, it picked up a $25-$30 million per year business for well less than one-time revenue (by our calculations at least, as the official purchase price was only announced on a per share basis). And both businesses have technology and customer bases that fall into Kofax's market-leading capture wheelhouse.
So, while we didn't necessarily expect Kofax to acquire capture companies when CEO Reynolds Bish told us in early 2018 that, with the backing of Thoma Bravo, Kofax was getting back in the acquisition game, we can see certainly see the strategy here. Per our conversation with Huff, we expect Kofax to continue to be aggressive in M&A, but not necessarily with more capture vendors.
Nuance and TIS were fairly unique situations. Nuance had gone through a change at the top and the new CEO didn't have the same connection to document imaging as long-time CEO Paul Ricci did. Nuance's main focus is speech technology and quite frankly, we had been predicting for some time that they were going to spin off DI in some manner. It seems like a really good buy for Kofax.
And TIS also seems like a good buy. TIS has a relatively blue chip customer base, between its capture and hosted remittance processing businesses. But, the company has historically had a tough time turning a profit, has consistently been losing money and was down to like a million and a quarter in cash as of mid-year 2018. Sure, there was financing in place to keep it in business, but TIS has done plenty of financing deals over the years, Also, the company had recently revamped the cloud capture strategy is had invested a lot of R&D in, so it didn't sound like us they would be turning things around anytime too soon. Bish has a fairly good track record of turning profits, so rolling TIS' into Kofax's infrastructure should be a positive in that sense. In addition, perhaps some of the extensive cloud work that TIS has done (in addition to the SaaS infrastructure it picked up when it acquired eGistics's payment processing operation) can help Kofax as it develops a more cloud services oriented architecture for its intelligent automation platform.
The bottom line here is that we think Kofax's recent capture acquisitions were opportunistic, as well as strategic, but might not be part of some greater capture roll-up plan. They do represent the type of strategic play you can make when you have are backed by a strong financial partner like Thoma Bravo. We next expect Kofax to flex that muscle in some sort of AI-related buy, not another capture acquisition.