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 doc.com 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: www.aiim.org

Lexmark ES Rebounds in Q2

Lexmark's Q2 results for its Enterprise Software (ES) division do not appear to be terrible. On Friday, the Lexington, KY-based MFP vendor announced its Q2 2016 results, and while overall earnings were disappointing, ES seemed to have rebounded from a very disappointing Q1. For Q2, Lexmark reported ES revenue of $167M, which represented an 11% YOY increase. But, before you get too excited, Q2 2015 only contained about a month and a half worth of Kofax revenue, as Lexmark's acquisition of the capture market software leader closed in mid-May last year. In the first complete quarter of Kofax revenue (Q3 2015), Lexmark reported ES revenue of $165M.

Of course, immediately upon announcing its Q3 numbers last year, Lexmark announced it was looking at selling either the whole or parts of its company, which sent the ES business into a bit of a tailspin. Things bottomed out in Q1 of this year when Lexmark reported ES revenue of just $143M, a 14% decline from the combined revenue of Lexmark's Perceptive Software and Kofax (which were combined to create Lexmark ES) in Q1 2015.

So, it's good to see that now Lexmark's ES business appears back on track in spite of April's announcement that the entirety of Lexmark was being acquired by a group of China-based investors led by Apex Technology Co., Ltd. and PAG Asia Capital. A week previous to the Q2 earnings announcement, it was announced that Lexmark shareholders had approved the "merger agreement." There was a lot of speculation that being owned by a Chinese entity could adversely affect enterprise software sales due to concerns about security related to a lack of regulation in China. In my research and conversations, I could find nothing to substantiate these concerns and apparently they didn't negatively affect sales in Q2.

I'm not exactly sure what led to the turnaround from Q1, except that perhaps once the deal for the acquisition was in place, the ES team was better able to focus on its business. ES President Reynolds Bish had told me in a conversation at Lexmark ES's Inspire event in early April, that the distractions related to a potential acquisition had taken a toll on his organization.

Of course, rumors continue to swirl that Lexmark ES will still be spun off and a decent quarter like Q2 should help increase its potential value. Although it's still hard to see Lexmark recouping the approximately $2B in spent rolling up ES in the six-year period from 2010 through 2015.

Management Changes Continue at Kodak Alaris

A week after announcing a restructuring of the sales management team at Kodak Alaris Information Management (IM), Kodak Alaris announced it is looking for a new CEO. In an announcement we received today, Kodak Alaris states, "To better position ourselves to achieve our long term growth plans, the Kodak Alaris Holdings Ltd. Board of Directors decided the time is right to initiate a search for a new CEO."

Effective May 1, Ralf Gerbershagen, who was named CEO of Kodak Alaris in 2014, has stepped down. According to statement DIR received from Kodak Alaris: "Today’s announcement is about looking forward. This was not a performance based decision but more an assessment of the future leadership needs of Kodak Alaris. The Board felt this represented the ideal time to begin the new search for a CEO. [Gerbershagen] leaves the company better positioned than when he arrived and with our best wishes for his future."

 Kodak Alaris was launched in September 2013, with the sale of Kodak Document Imaging (now IM) and Kodak Personal Imaging to the Kodak UK Pension Fund for a combination of $2.8 billion in debt relief and $650 million in cash and non-cash considerations. The sale was part of the bankruptcy proceedings for Eastman Kodak.

Gerbershagen, who is based in the UK was brought in from Motorola Mobility in April, 2014. During his tenure, Kodak Alaris reportedly saw a strong rebound in its scanner sales, which were negatively affected by the uncertainty related to the bankruptcy proceedings. Kodak Alaris was less successful with a intelligent document recognition (IDR) venture. After signing a partnership with German ISV ITyX in 2012 and struggling to generate any sales momentum, in 2015 Kodak Alaris launched a subsidiary, AI Foundry, which is totally focused on IDR sales. However, shortly after the launch of AI Foundry, Kodak Alaris broke off its relationship with ITyX, which then filed suit.

According to Alan Swahn, VP, marketing for AI Foundry, in an e-mail to DIR last month, “We are working with other suppliers that more closely align with new opportunities in the marketplace. We are working on exciting new solutions and you can expect announcements later this year.”

Jeff Goodman has been appointed as Kodak Alaris' CEO on an interim basis. Goodman had been serving as COO. Kodak Alaris has not set a timetable for hiring a new CEO. Following is a statement form Kodak Alaris: "We are looking for an outstanding and inspirational leader with a proven global track record of identifying and driving long term profitable growth for large international companies.

"As we need to conduct a comprehensive search for our next CEO, we don’t have a specific timetable. Jeff’s presence, combined with the company being in a solid place, allows our board to conduct a thorough search for our next CEO. Jeff is committed to filling this role until we find our new CEO and will support his/her transition to the role."

We asked a Kodak Alaris representative if the organization's goals have changed since Gerbershagen was brought in two years ago. Here was the reply: "We continue to transform the company and our current focus has shifted from restructuring to growth. Our plans and our ongoing programs, developed by the Kodak Alaris Executive Committee (of which Jeff was and is a part) and approved by our Board, remain unchanged and have our absolute focus and commitment."

Lexmark ES Q1 Numbers Disturbing

For those of you that haven't done the math for yourselves, Lexmark Enterprise Software (ES) saw about a 15% decline in revenue for Q1, YOY. Yes, we realize Lexmark reported 60% growth for ES on revenue of $143 million, but last year's Q1 didn't include Kofax's numbers. In calendar Q1 last year (Kofax's fiscal Q3), the ISV did $75 million in revenue, and it also acquired a $9 million a year business in Aia Software towards the end of the quarter. So, we'll put Kofax's Q1 2015 revenue at around $77 million.

In the meantime, Perceptive Software, operating as a division of Lexmark, reported $90 million for the first quarter of 2015. If you put those two figures together, it gives you a Q1 2015 revenue number of $167 million, $24 million more than the two combined businesses reported this year for Q1 as parts of Lexmark ES. We don't have any insight into the breakdown of the Lexmark ES in numbers - in particular, how much was from generated in software sales, but we had heard rumors that Lexmark was struggling in that area in particular.

The 15% erosion in revenue is disturbing, and we hope it is not indicative of the industry's direction. We realize Lexmark has been struggling with integration issues, as well as uncertainty related to the recent sale of the company, so maybe the first quarter was an anomaly and the organization will bounce back strongly. That said, Lexmark's competitors are certainly trying to keep the FUD (fear, uncertainty, and doubt) levels pumped up, as I heard a lot of talk at the recent AIIM Conference related to the potential challenges of being owned by a group of investors from China.

In addition to Lexmark, Open Text failed to show organic growth in Q1 (its fiscal Q3), EMC's Enterprise Content Division (ECD) revenue continued to shrink, down to $134 million in Q1 2016 from $138 million in Q1 2015 (not to mention the fact that EMC is reportedly trying to sell ECD to help fund the Dell acquisition), and Top Image Systems (TIS) struggled in Q4 '15 with its Q1 2016 numbers still to come. It has not been all bleak news, as smaller companies like DocuWare and M-Files reported strong growth for 2015, and Hyland Software had another strong year as well.

What is somewhat interesting is that DocuWare, M-Files, and to some extent Hyland, are focused on the SMB space (Hyland stressing the "M"), while EMC, Kofax, and to some extent ReadSoft (also part of Lexmark ES) and Open Text are more focused on the enterprise space. So, maybe the growth in the ECM market is in the traditionally underserved SMB space (as we've been predicting would happen for years). This would certainly bode well for TIS, which recently put a stronger focus on shopping financial process automation to the mid-market.  Then again, the Perceptive Software's content management business is a major part of Lexmark ES and it focuses on the mid-market (we're really not sure how the individual components within the division made out).

When you add these recent ECM software struggles to the steady erosion we've seen in margins in the document scanner hardware market (as well as some of the reogranization at the leaders ), it makes us doubt the future of our industry. That said, the attitude at this week's AIIM Conference in New Orleans was not wholly pessimistic. There were plenty of optimistic vendors, a bevy of end users looking for solutions, and the usual group of energetic and imaginative people that combine to make our industry so exciting at times. New solutions stressing, the cloud, mobile, and emerging technology like natural language processing - as well as a new vision embracing enterprise content as data and thus creating a bridge for mainstream IT crossover, certainly created plenty of positive buzz at the AIIM event (or was that just the alcohol on Bourbon Street?). We'll have more details on what we learned at AIIM in the next issue of DIR.

In the meantime, let's hope for a stronger Q2 for everyone (well, except for your competitors in some cases, I guess.)

Lexmark Apparently for Sale

Today, Lexmark announced that its Board of Directors has "authorized the exploration of strategic alternatives to enhance shareholder value." After the announcement was made, Lexmark's stock rose more than 6% (as of this posting), lifting the company's market cap to $2.1B. This is not that great of a valuation for a company that bills itself as a "$3.7B global technology company that includes a $1.5B Higher Value Solutions business comprised of Enterprise Software (ES) and Managed Print Services (MPS)."

That Enterprise Software business, of course, includes Perceptive, Kofax, ReadSoft, Brainware, and some other ECM-focused companies that have been rolled up since 2010. Most recently, Lexmark acquired Kofax for $1B in a somewhat surprising deal. It followed up by appointing Kofax CEO Reynolds Bish as president of Lexmark ES, which has about a $700M annual run rate.

Unfortunately, investors were less than thrilled with the guidance Lexmark presented for its overall business in conjunction with its Q2 earnings report, which dropped the company's valuation by 20% on a single day in July. Although the stock has bounced back slightly over the past few weeks (including today), it is still trading at more than 25% below its July peak.

Lexmark has made a concerted effort to shift its business from hardware-centric to a software and services focus, stressing its growing ES and MPS revenue. Unfortunately, it appears that investors are still valuing the company based on its declining hardware and supplies revenue. Stated Jean-Paul Montupet, lead director of the Lexmark Board of Directors, in relation to this, "We are extremely proud of what the Lexmark management team and employees have accomplished in the transformation of Lexmark. While the Board is encouraged by the company's future prospects, the Board does not believe Lexmark's current share price fully reflects the intrinsic value created by the company, and the Board has concluded it is appropriate to explore strategic alternatives as the next step to unlock this value."

What specifically those strategic alternatives are is not mentioned, but speculation is that the company could be sold either to a private equity company or another high-tech company. HP, which had long been discussed as a possible landing point for Kofax and has a partnership history with Lexmark, is one possible buyer. However, to me, a private equity buyout at this point would seem to make more sense. After all, less than six months ago, Lexmark paid $1B to pick up Kofax, so selling the whole company to someone else for anything close to its current market valuation would seem unlikely. After all, Kofax was a $300M-plus company and Lexmark is a $3B-plus company. The math just doesn't make good sense.

What makes more sense is to take the company private, which would conceivably enable those who agree with Lexmark's management's transformative vision to stay on board as investors. The company would then be able to work on really affecting the changes it wants to without the worry of meeting quarterly numbers - which are going to be very hard to meet as the formerly hardware-driven company de-emphasizes hardware. When the transformation is complete, and Lexmark is operating as primarily a software and services business, it can then go public again, conceivably with a more favorable valuation.

At least that's the way I see it shaking out.

Your thoughts?

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.

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!

Recent Quarterly Financials Show Signs of Maturing Market

As I mentioned in the latest issue of our premium publication, over the past two weeks, a number of document imaging software vendors released their numbers for the three months ended Dec. 31, 2014. I would have liked to cover some of these numbers in the newsletter, but since all the information is publicly available anyhow, I bumped it for some original content. Anyhow, here are some of the highlights I pulled off of news releases, presentations, and transcripts of analyst calls:

Lemark/Perceptive Software

• For Q4, Lexmark reported Perceptive Software revenue of $99M, which represented 37% YoY growth. 
• For FY14, Lexmark reported Perceptive Software revenue of $313M or 31% growth. 
• That sounds great, until you get to the fine print where it says, "Perceptive Software organic growth of -10% for Q4, excludes acquisitions completed in the past four quarters. Perceptive Software organic growth of -3% for the full year 2014. (ReadSoft and its $100M of annual revenue was the big acquisition).
• In the analyst conference call, CFO and VP David Reeder said Perceptive revenue was negatively affected by "large deal timing and a shift from perpetual license to subscription sales."
• Perceptive did, however, manage an operating income of $11M in Q4, up considerably from 2013's $2M income for Q4, and up $3M from Q3. The fourth quarter boosted Perceptive's operating income for the year to $14M - a $16M improvement from the previous year.
• Commented CEO Paul Rooke, "We also expect continued growth and margin expansion in Perceptive Software as we strengthen our solutions offerings, factor in a full year of the cost and expense reductions taken in the second half of 2014, optimize maintenance pricing, and execute the expected cost synergies with the integration of ReadSoft."
• Rooke also commented that he felt Perceptive was on target for hitting Lexmark's 2016 goals of $500M in annual revenue and 25% operating margins. "Perceptive Software revenue and operating income continued to make steady progress to our 2016 revenue and operating margin targets. We are quite pleased with the trajectory of the business as revenue and operating margin grew year-over-year and sequentially."

Kofax

• As pre-reported, Kofax showed growth in both its software license sales and total revenue for its FY15 Q2.
• However, the net total revenue growth was only $4M, the bulk of which could theoretically be attributed last fall's acquisition of SoftPro last fall, which had reported $13M of revenue for 2013. So, like Perceptive, Kofax really didn't see much organic growth in the quarter.
• Unlike Lexmark, Kofax can't blame the slowed growth on a switch to more subscription sales. When asked about recurring revenue during the analyst conference call, Bish estimated that 90% of Kofax's was coming from maintenance and only 10%, from what he called "term" licenses, which I assume means subscriptions, with most of the term licenses coming from Kapow, which primarily followed a subscription model when Kofax acquired it.
• Bish also said that going forward, Kofax will no longer differentiate between "core capture" sales and sales from "mobile and new or acquired products." In the call with analysts, he explained, "Software license revenue from core capture products declined year-over-year in both the second quarter and six months ended Dec. 31, 2014, but at a lower rate in the second quarter than the first quarter. These declines were primarily driven by customers increasingly choosing to purchase Kofax TotalAgility and solutions built on that platform as well as our mobile capture, Web capture, and electronic content transformation products rather than our legacy Kofax Capture and Kofax Transformation Modules products.
  
  "The capture market is not in a state of decline nor is Kofax losing market share. Rather, we are undergoing a rather dramatic shift in buying preferences from our legacy capture software products to our mobile and new or acquired products.
  
  "As a result of the complexity of these issues discussed above and the challenges associated with accurately calculating Kofax's multi-channel capture revenues, we will no longer report core capture revenues or attempt to report multi-channel capture revenues. Instead, we will only report total software license revenue.
   
• Kofax's profitability was way up compared to its FY15 Q1 with its operating margins coming in at 17.7% for Q2, compared to just 6.3% in Q1.
   
• Subsequent to its earnings release, Kofax announced that its shareholders voted in favor of a plan to delist the company's shares from the LSE, so they would be listed exclusively on the Nasdaq. Plans to carry out that motion are underway.
   
• The deslisting was one of four matters voted on by the shareholders, with all being approved except for a call to change the company by-laws to make them more "customary for a Bermudian company with shares only listed on NASDAQ." It sounds like the Kofax board would still like to get that proposal passed.

Nuance

• Nuance reported Document Imaging revenue for its FY15 Q1 of $60.1M, a slight increase over its FY14 Q1 revenue of $58.3M, but it's important to note that the previous year's Nuance's revenue did not include Notable Solutions, Inc. which was acquired this summer.
• Most likely buoyed by NSi sales, had had a very strong FY14 Q4.

EMC

• EMC's reported its 2014 Q4 revenue for its Information Intelligence Group (IIG), which includes Documentum and Captiva, as $174M, which represented an 8% YOY drop. For the year, IIG's revenue was $640M, which represented only a 1% drop.
• Also, at its recent sales meeting for the group, EMC announced it has changed the name from IIG to the Enterprise Content Division (ECD).

So there you have it. A brief analysis would tell you that there wasn't a lot of organic growth in the past quarter among these market leaders, which is not a good sign. Profitability on the other hand was up. Add these two trends together, and it seems like we now have a fairly mature market.

All quotes from analyst calls were transcripts compiled by Seeking Alpha.

TIS Meets 4th Quarter Expectations

A day after Kofax reported a rebound for its fiscal '15 Q2, capture competitor Top Image Systems (TIS) has reported that it met its guidance for the fourth quarter - at least in terms of local currencies. Like Kofax, TIS does quite a bit of business outside the U.S. but reports its financials in U.S. Dollars, as its stock is traded on the Nasdaq. According to the TIS press release, "The Company anticipates the significant devaluation of the Euro, as well as of the British Pound and leading Asia Pacific and Latin American currencies, to impact its reporting in U.S. dollars."

For those of you keeping score, when TIS announced its Q3 results, which were impacted by its recent acquisition of eGistics, it projected its Q4 "revenues will range between $10.5 million and $11.5 million and expenses will range between $9.3 million to $9.7 million."

TIS also announced today that it expects to be profitable in all four quarters of 2015.

TIS plans to announce full, audited Q4 and year-end results in early March.

Kofax Q2 Numbers Look Strong

Kofax appears to have had a fairly strong second fiscal quarter for 2015 (ended Dec. 31), based on the selected preliminary results it reported yesterday. Kofax pre-reported non-GAAP software license revenue of $34M-$35M, total revenue of $80-82 and an adjusted EBITDA of $13.7 to $14.7M.  This represents about a 6% growth in software license revenue over the numbers Kofax reported for its fiscal Q2 2014, and about a 5% growth in total revenue. EBITDA, which had been down severely in Kofax's Q1, increased YOY by 7-8%, to $13.7M-$14.7M, which represented about a 3x sequential quarter increase.

Kofax CEO Reynolds Bish said the numbers could have been better if not for worldwide currency exchange decline vs. the U.S. Dollar. In the press release he said, "Given the large amount of our software license revenue and total revenues arising in Euros, British Pounds, Swiss Francs and other currencies that have weakened against the U.S. dollar, this effect was substantial. On a constant currency basis - using exchange rate levels in the prior year period - software license revenue would have been approximately $1.1 million and total revenues $2.7 million higher."

In the press release, Bish noted that sales of "new of acquired products" showed strong growth and that core capture software sales also improved - as we noted previously, Kofax reported a number of significant capture software deals in November and December. Bish noted that the number of six-figure software deals, an area of focus for the company, also continued to increase.

Full results are due out Jan. 29.

Top News Stories in 2014

 This article originally appeared in our Dec. 19, 2014 premium issue.

What Went Down in 2014

A review of our five biggest news stories/trends in the past year. We’ve listed them in reverse order, like a countdown.

5. Convergence of call center and capture markets: It’s the natural evolution of multi-channel capture to eventually include voice. Conversely, as call centers evolve into contact centers, they are starting to embrace document-centric communication. Then there is everything in between: e-mails, Web sites, text messages, social media, etc., that is somewhat unconquered, and this is where the convergence is starting to occur.

At this year’s Harvey Spencer Associates Capture Conference, customer experience management (CEM) consultant Michael McBrien showed a slide depicting an ideal contact center where social, Web, in-person, phone, and mobile communications were all integrated. When asked if anyone is actually doing this, his answer was no.

That said, from the capture market perspective, we are starting to see these elements come together through initiatives like Kofax’s First Mile SPA (smart process application) strategy [see DIR 3/28/14], Kodak Alaris’ partnership with German IDR/AI specialist ITyX, and even document outsourcing specialist BancTec’s recent merger with Dataforce Group [see DIR 8/22/14]. From the contact center side, it was good to see a respected industry veteran like McBrien show up at the HSA Conference.

4. Kofax misses consecutive quarters: The year started so auspiciously for the Irvine, CA-based capture and SPA vendor. At the annual Transform conference held in March, Kofax was riding four straight quarters of software license and overall growth. In addition, an IPO on the Nasdaq (which was completed in Dec. 2013) was paying off, with Kofax’s market cap soaring to around the $750M mark

Then came Kofax’s fiscal Q4 2014 and Q1 2015. For the quarter ended June 30, Kofax reported a non-IFRS YOY decline in software license revenue of 7.5% and a YOY decline in EBITDA of 38.9%. For the quarter ended Sept. 30, Kofax reported a YOY non-GAAP decline in software license revenue of 3.5% and an adjusted EBITDA decline of 47.8%. For Q1, Kofax’s margin was just 6.3%—when in March CEO Reynolds Bish had set a goal of reaching 20% margins within three years.

In both quarters, Bish blamed the shortfalls on large seven- and high-six-figure “core capture” deals that had slipped into future quarters. After the more recent miss, Bish went so far as to say that Kofax will be putting more focus on its “mobile and new or acquired products,” hoping they will pull through traditional capture sales—and get capture back to “single-digit growth.” “We are now accelerating the reallocation of resources and expenditures into this fast growing part of our business,” said Bish [see DIR 10/10/14].

But then a funny thing started happening. In the past month and a half, since Kofax announced its fiscal Q1 results on Oct. 30, the ISV has issued no less than five press releases touting software deals in the high-six to seven-figure range, mostly focused on automating document capture processes. When you couple this with Kofax’s continuing to increase its number of $100,000 (mostly capture) deals (even during its Q1, the number of six figure deals increased by 33%), maybe the capture market isn’t in as bad of shape as Kofax had thought.

3. Increase in onboard imaging processing (IP) technology in document scanners: We’ll admit this isn’t a very sexy story in and of itself, but to us it is the sign of something bigger. In 2014, three leading scanner vendors announced enhanced on-board image processing features: Fujitsu introduced PaperStream IP, which has replaced Kofax VRS as its bundled IP technology [see DIR 1/31/14]; Visioneer embedded IP on a chip with its new On Board Acuity [see DIR 7/18/14]; and Kodak Alaris introduced a new embedded version of its PerfectPage technology [see DIR 6/13/14].

So, what’s the big deal? This trend may help scanners run at closer to rated speeds today, but down the road is when the big benefits could come. More onboard IP creates the potential for removing the PC (where IP has historically been run) from the scanning equation. Not surprisingly, Fujitsu, Visioneer, and Kodak Alaris are all members of the TWAIN Working Group, which is actively working on a new TWAIN Direct standard, designed to connect scanners to applications without going through traditional drivers. EMC Captiva (which develops ISIS drivers) has undertaken a similar initiative with its Cloud SDK.

One end game of these initiatives is that they will enable scanners to be run by a multitude of alternative computing devices such as network devices, phones, tablets, netbooks, and who knows what else. They should also simplify development of capture applications. This trend of more onboard IP is helping move document scanning into the 21st century and beyond.

2. Rise of Cloud computing in ECM: I don’t think we’ve hit the tipping point yet, but in 2014 there were multiple small movements this way that are starting to add up: You had reseller IDT telling us that 40% of its new business is coming from cloud sales [see DIR 11/7/14]. You had Captricity, a 100% cloud-based crowdsourcing capture ISV, securing a $10 million round of Series B funding [see DIR 8/1/14]. You had Ephesoft, which has a purely Web-based cloud friendly capture platform, getting a minority investment from Fujitsu [see DIR 8/1/14]. You had capture ISV TIS buying cloud document management provider eGistics [see DIR 7/18/14]. And you had Box announcing workflow technology at BoxWorks and Dropbox revamping its Dropbox for Business; in the meantime, you had SharePoint experience some growing pains as Microsoft tried to reposition it as part of its Office 365 cloud offering.

As I said, there wasn’t a tidal wave of ECM cloud adoption, but rather a large number of smaller waves in that direction that combined can be equally powerful, especially if they continue to gain momentum in the upcoming year.

1. Lexmark acquires ReadSoft: Far and away the biggest story of 2014 was Lexmark’s acquisition of ReadSoft. The drama played out publicly over a period of four months, from May to August, with the Lexington, KY-based MFP vendor finally paying the equivalent of US $255 million for the market leading capture ISV, which is based in Helsingborg, Sweden. Counter bidding by Hyland Software drove up the price from Lexmark’s initial offer of $182 million.

By all appearances, the acquisition began innocuously enough when Lexmark announced its initial bid on May 6. Although the price seemed relatively low by capture market standards based on its multiple of 1.5x ReadSoft’s 2013 revenue, it did represent a record premium of 117% over market cap for a company trading on the Stockholm Exchange. Lexmark’s offer was unanimously recommended by ReadSoft’s board and included a provision that the board would only consider a competing offer if it was at least 7% higher than the Lexmark offer.

About a week before the acceptance period for the offer was scheduled to conclude, in mid-June, Hyland, probably Lexmark’s Perceptive Software’s most direct competitor in the ECM market, made a bid of approximately $198M, which was 8.7% higher than the Lexmark bid. Lexmark quickly countered with a $200M bid, because, well, they did not have to adhere to the same 7% premium.

Reading the ReadSoft and Hyland statements surrounding the bids led DIR to believe that Lexmark has made some promises regarding future employment of ReadSoft personnel that Hyland was unwilling to match [see DIR 6/27/14]. We also got the impression that Hyland was feeling a bit jilted by ReadSoft’s preference of Lexmark as a suitor. Apparently Hyland had been in talks with ReadSoft prior to the original Lexmark bid that had reportedly ended abruptly.

This all led to Hyland’s buying up of approximately 11% of ReadSoft’s outstanding shares, which it felt voided a 90% share requirement provision in Lexmark’s bid, and then making another bid of approximately $210M. Lexmark countered with a bid of $224M, which included an option to waive the 90% provision [see DIR 7/18/14]. Hyland took one more shot, which Lexmark answered with its $255M bid that included purchasing outright all the shares of ReadSoft’s two co-founders. This gave Lexmark a voting majority and effectively closed the deal [see DIR 8/22/14].

The bidding war was great for the capture industry, as it effectively increased the acquisition multiple of one of the market leaders to 2.2x revenue, a much healthier figure than the one associated with the original bid. The reasons for the acquisition on Lexmark’s side are clear. These include helping it reach its goal of $500 million in revenue for Perceptive Software in 2016 and increasing its European ECM presence. At the same time it helps Lexmark avoid the higher tax rates associated with repatriated profits by investing them in a European acquisition.

Hyland would also have benefited greatly from ReadSoft’s European presence, including its well regarded SAP integration in accounts payable applications. But, in the end it could not compete with Lexmark’s deeper pockets and whatever employment agreements were reached between Lexmark and ReadSoft. Curiously, at the same time it was acquiring ReadSoft, which has recently operated at around a break-even level, Lexmark was touting a goal of reaching 25% operating margins for Perceptive, which, for Q3 (minus some partial quarter numbers from ReadSoft), reported just 3.8% margins [see DIR 11/7/14]. Lexmark clearly has its work cut out.

Somewhat ironically, a couple months after it bowed out of the ReadSoft bidding, Hyland signed a partnership with Xerox. Part of the goal of that relationship is to help the ECM ISV expand its international reach [see DIR 11/21/14]. This should help even the playing field with Perceptive somewhat, although we still wouldn’t be surprised to see Hyland acquire a European ISV to supplement its efforts.
Those are some of the high points of our news coverage in 2014, a year which also included another successful AIIM Conference [see DIR 4/11/14], a strong rebound in Kodak branded scanner sales (now being sold by Kodak Alaris) [see DIR 10/24/14], Harvey’s Spencer Associates celebrating its 10th annual Capture Conference [see DIR 9/12/14], and Nuance buying MFP capture rival Notable Solutions.

Industry Pioneer Passes
Finally, we would be remiss if we didn’t mention that 2014 was also the year that we lost one of the industry’s true pioneers, Nien-Ling Wacker. Wacker founded Laserfiche in 1987, a company that has been one of the leaders in the document imaging and management space since I started working in the market in 1998. Despite the company’s consistent growth, Wacker did her best to maintain her personal touch in the business. Whenever I would see her at events, should always made time to hold a real conversation and never failed to ask how I and our publication were doing, even as I interviewed her about Laserfiche.

Wacker received many accolades throughout her career, including the AIIM Pioneer of the Year Award in 2002, National Luminary of the Year by the Mothers in Business Network in 2005, and City National Bank’s Entrepreneur of the Year in 2009. In 2006 she was inducted into the National Association of Women Business Owners Hall of Fame in Los Angeles. She is also remembered for her “Red Shoes” story, the moral of which is along the lines of “make hay while the sun shines,” which Wacker certainly did during her tenure with Laserfiche.

Nien-Ling’s husband Chris has taken over as Laserfiche CEO. Karl Chan has been promoted from CTO to president.

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.

Follow-up on Health of Capture Market Article

As you can imagine, at last week's ReadSoft Conference, I received quite a bit a bit of feedback on the article I ran in our last premium issue (May 9) asking the question "Is the Capture Market in Trouble?"  Basically, the article asked the question if in light of Lexmark's recent offer to acquire ReadSoft, for approximately 1.5x revenue, coupled with Kofax's recent fiscal Q3 quarterly report (for 3 months ending March 31) - which included a YOY decline in sales of core capture products - might indicate that the document capture market had lost some of its luster.

Thankfully, Top Image Systems, although significantly smaller than Kofax and ReadSoft, recently reported numbers that are a positive sign for the industry. Highlights include

• 19% increase YOY in total revenue to $8.1M
• license revenue growth of 43%
• growth in all regions, including 100% growth in the Americas were revenue reached $1M
• almost .5M in SaaS sales, which led to a 36% YOY growth in recurring revenue (COO Michael Schraeder from Seeking Alpha transcript of financials conference call on the SaaS revenue: "This amount will be paid again regularly over the next 10 quarters dealing up with solid growing base of returning revenues. The total license revenue of these contracts is equivalent to approximately $4.4.")
• projected double-digit revenue growth for 2014

TIS also raised $13.7M in capital during the quarter through a "public offering or ordinary shares" that will be used to fund potential acquisitions. " At present we are actively targeting growing accretive assets that consolidate our cloud SaaS and mobile organically strategies," said Schaeder.

Of course, unlike Kofax, TIS includes does not break out its mobile capture revenue as separate from its "legacy products," so it's quite possible that TIS and Kofax are experience more similar growth rates that at first glance, as both seem to be reporting robust and healthy mobile capture practices.

Some ReadSoft Acquisition follow-up
As far as the ReadSoft price goes, Bob Fresneda, president of ReadSoft NA and SVP, Americas and Asia Pacific, stressed that ReadSoft's owners and co-founders did not just seek out the highest price for the organization. "Lexmark is a nice landing spot for ReadSoft to be drafted by a company that is willing to invest in the technology and the people," he told us.

ReadSoft CEO Per Åkerberg stressed that Lexmark has plans to enable ReadSoft to continue to operate as a "standalone company."

All that said, it was pointed out that there is a provision in the acquisition agreement that enables ReadSoft to do another deal of someone offers a bid that is at least 7% higher than Lexmark's before the acquisition closes, which is supposed to occur in about a month. 

In our opinion, ReadSoft would make a great takeover target for Open Text, which is its main competitor in the invoice processing space in SAP environments. ReadSoft also has a strong install base - an asset that Open Text typically covets in its acquisition targets. And 7% over $182M would only be $195M, which still seems like a bargain for ReadSoft. Of course, Open Text doesn't exactly have the reputation as "a nice landing place" for acquired company, so I don't know how the board would take to an offer. It might just server to drive up Lexmark's offer.

DIR Top Stories of 2013: 7 thru 10

Here are the final three of our top 10 Document Imaging stories for 2013 as covered in DIR. (Here are links to posts on our top, second, and third, as well as fourth through sixth top stories):


7. Captricity Secures Round of Financing: Berkeley, CA-based ISV that specializes in automating data entry leveraging crowdsourcing, announced a $2.4 million round of financing led by The Social+Capital Partnership, a Palo Alto-based group founded by former Facebook executive Chamath Palihapitiya.

8. Kofax Hires New CMO; Former Kofax CMO Joins ReadSoft: Okay, it wasn't quite that cut and dried, but these hirings happened within about a month of each other. Former FileNet and Pagasystems executive Grant Johnson joined Kofax in October in the wake of the resignation of Martyn Christian. Then a month later, Andrew Pery, who worked as Kofax CMO from 2006-2010, joined ReadSoft full-time after working there as a consultant for almost a year. Additionally, in 2013, former ReadSoft Marketing Manager Alayne Pregeant joined TIS.

9. BancTec Lands Its Largest Scanner Deal Ever: This was a cool story as the Dallas-based imaging hardware, software, and service provider sold more than 30 high-volume scanners, through a reseller partner, to a Japanese shared services center. The kicker is that the center was opened in the Fukushima Prefecture, where a partial nuclear meltdown occurred in 2011, in the wake of an earthquake and tsunami.

10. TWAIN Working Group Launches Driverless Scanning Initiative:  Pam Doyle, Chair: "We are working on changing the conversation and taking out native drivers. We want to make the conversation occur directly between an application and a scanner. This will eliminate the need to develop drivers for multiple platforms.”

 

Top Image Sysems Reorganizes Sales Force

Top Image Systems, the Tel Aviv-based ISV that specializes in document capture solutions, recently announced it would reorganizing its worldwide sales force. According to a press release, "The Company is setting up a Global Solutions group to develop, manage and support market-driven solutions worldwide." Michael Schrader, who was formerly the managing director of TIS EMEA, has been appointed CTO and SVP, Global Solutions for TIS.

Historically, the majority of TIS' revenue has come EMEA, with invoice processing and digital mailroom solutions providing the primary markets. TIS also has a strong business in census processing worldwide. Last year, TIS launched a suite of mobile capture products aimed initially at the U.S. banking market and opened on office in New York City.

With the new re-organization, it sounds like TIS is now going to be selling both the mobile technology and its invoice and digital mailroom products worldwide. CEO Ido Schechter has been put in charge of TIS customer facing Field Operations Group.

Like many other public companies, TIS should be announcing its year-end 2012 results shortly. It has already projected 2012 revenue to come in at around $31 million, which represents close to 10% growth, but is lower than TIS previous guidance. In an earlier press release, TIS blamed delays in some major deals and the falling value of the Euro for the shortcomings.

There has been little mention of sales of the mobile capture technology yet, although the U.S. office has been only open since last summer. TIS has tried on previous occasions to market its traditional capture technology in the U.S. and has had some success in recent years working through its partner TransCentra - a partnership that began with J&B Software.

However, now TIS is a larger and more established company. It has also done acquisitions in the U.K. and Asia-Pacific, and with the U.S. office, it certainly has a global sales footprint established.

TIS Reports 'Q4 Shortfall

Document capture ISV Top Image Systems reported that it's year-end revenue will be approximately 8% lower than the low end of its previously announced guidance. TIS expects to end the year with revenue between $30.9 million and $31.5 million, which still represents 8-10% year-over-year growth, which is about in-line with Harvey Spencer Associates projections for the capture market in 2012. TIS also expects to report a non-GAAP operating profit of $4 million to $4.2 million, which represents 10-15% growth over the previous year.

In a press release, TIS blamed the shortfall on two major factors: delays in closing several major deals (now expected to close in 2013) and the devaluation of the Euro vs. the U.S. dollar (TIS does the majority of its business in Europe, but trades on the Nasdaq.)

From the press release, "In parallel, several orders that were to close in 2012 are expected to be finalized in 2013, and the pipeline of potential sales internationally and in the United States has increased. Therefore, management remains confident regarding its ability to deliver solid growth in 2013 and will announce formal guidance in conjunction with the release of full-year results."

TIS also announced today a win for an invoice processing solution with a large U.K. retailer. The retailer liked TIS' multi-channel approach for ingesting multiple invoice formats: "paper or electronic, in any format – including pdf files by means of the unique eFLOW® PDFR (PDF Reader), xml and other popular e-invoice file types – all via one efficient workflow - integrated with SAP - on one consolidated platform." Click here to read the full press release.

Percetive Growth Still Not Fast Enough for Lexmark

This week's issue of the DIR newsletter features a cover story on the re-branding that is underway at Perceptive Software. Perceptive was an ECM vendor that was acquired by Lexmark in 2010 and is now operates as the Enterprise Software Group within Lexmark. Its ECM suite has been fleshed out by a series of software acquisitions that Lexmark completed in 2011-2012. These include capture, search, and BPM technology, as well as vertical market specialist ISV. The details of how these products are being integrated, as well as still taken to market separately, are in the DIR article.

This week Lexmark reported its third-quarter results, and Perceptive's quarterly revenue came in at $41 million, which represented 88% growth from the previous year's third quarter. A good bit of that was due to the aforementioned acquisitions, but organic growth was still 22%. This is no doubt above market growth rates, but, it is apparently significantly below what Lexmark had budgeted.

According to Rooke (as quoted in a transcript of Lexmark's recent conference call to discuss quarterly results, "While Perceptive Software's revenue was up strongly year-to-year, it was less than we expected, driving a larger-than-expected operating income loss as we continue to invest for growth. Now for the next several quarters, we plan to limit Perceptive Software's expense levels to allow expected revenue growth to catch up and deliver positive operating margins in 2013."

Unfortunately, despite Perceptive's growth, Lexmark reported that its segment operating income was negative $8 million. This begs the question: What kind of growth is Lexmark expecting?

Lexmark certainly paid a good premium for Perceptive and some of the complementary ECM technology it bought, so it obviously was expecting some significant returns. But, to tell the truth, a lot of people I talked with thought an MFP hardware vendor like Lexmark could not successfully run an ECM software operation like Perceptive. But, to date, it seems that Lexmark has done everything it can to nurture Perceptive's business, buy acquiring complementary technology, while also allowing it to operate fairly autonomously. And this has worked to the tune of 22% organic growth - which certainly seems like a far cry from failure. Let's hope that unrealistic expectations don't spoil this success and that limiting expenses doesn't end up limiting Perceptive's success.

 
Rooke added that Perceptive's growth reflects, "slower growth in EMEA than expected and the delay in the closure of a number of large transactions in North America. With regards to EMEA, we continued to make progress, although slower than expected, and are making changes in sales leadership that we believe will accelerate growth. In North America, although we are disappointed that several large transactions did not close in the quarter, the majority of them, we believe, were deferred and not lost, and we expect them to close over the next several quarters."

Kofax Hits Q4 Projections; Dratler Back w/ Bish

Big day for Kofax. Couple of important announcements this morning. First, the Irvine-based document capture ISV seems to have hit the fourth-quarter numbers that CEO Reynolds Bish projected after a sluggish third-quarter. When the third-quarter results were announced, Bish had projected at least $69 million in revenue from Kofax's core capture business in fiscal Q4 (ended June 30), which would have represented 5% growth over Q4 2011.

According to the Kofax press release, "The Company ended the fiscal year with record total revenues in the range of $261 to $263 million and expects to report an EBITA of at least the $40.2 million realized during the previous fiscal year, both of which are in line with Company expectations previously communicated to the financial community."

There is a conference call scheduled for this morning. I'm on vacation and haven't had a chance to review the details yet, but, the London investment community seems to approve of the Kofax preliminary report. Kofax shares were up almost 5% in early trading. Of course, that could also be reflective of the news that Kofax has named Howard Dratler as its new EVP of field pperations. Dratler held a similar position at Captiva.

Bish probably would have liked to hire Dratler as his right-hand man when he first took over Kofax. In fact, here is a quote from Bish in our April 4, 2008 issue: “The new EVP position is pretty much identical to the
position I created at Captiva, for which I recruited Howard Dratler who had experience at Veritas. Howard is a very talented guy who did a very effective job. Unfortunately, he is not currently available."

At the time Dratler was occupied as the CEO of Anacomp and Bish hired former HP sales executive Alan Kerr to fill the EVP of field operations role. Kerr enjoyed mixed success, but Kofax seemed to recover more slowly from the 2009 economic downturn than many of its competitors and really didn't have a very strong first three quarters of its fiscal 2012.

Dratler was with Bish when he built Captiva from a company with market cap of less than $10 million to one he was able to sell to EMC for $300 million in a matter of three years. So, the Bish-Dratler combination clearly has a history of success in driving up investor valuation - which was Bish's main charge when he was hired by Kofax, and a goal I'm sure he is still working towards, as by my calculations at least, Kofax's current market cap of around $350 million is about the same as the Kofax (then known as Dicom) market cap when Bish was brought in.This unrealized goal of driving up the value of the company and the recent hire of Dratler would also indicate to me that the rumor circulating about Oracle buying Kofax has no substance behind it.

Psigen Completes Strong Fiscal 2012

Psigen has announced that it achieved 70% growth for its latest fiscal year, ending June 30. According to a press release, "Growth has come from a strong expanding domestic market, and significant growth in Europe and the Asia Pacific Region." Psigen is an Irvine, CA-based ISV that offers a versatile document capture software application.


On the additional strength of some OEM deals, Psigen had reported 90% growth for the six months ended Dec. 2011. Bruce Hensley, president of Psigen, said the new year was off to a good start with a strong July. He cited sales to large companies, including competitive replacements, as helping to drive Psigen's growth.

“In this past year, we brought on a large number of Fortune 500 clients who were looking to enhance their current capture application set and lower their total cost of ownership," said Hensley in a press release.

Kofax Lands $2 Million Deal

During Kofax's third-quarter financials conference call, CEO Reynolds Bish certainly expressed confidence that the Irvine, CA-based document capture and BPM ISV would rebound strongly in the fourth quarter. A couple of large wins indicate that Bish's predictions may be on target. A little more than a week after announcing a $5 million sale to "an agency of the U.S. government [that] has selected Kofax for a large scale, nationwide capture project," Kofax has followed up by announcing a sale exceeding $2 million to "a top 10 global banking group headquartered in Western Europe."

The deal is an extension of a current Kofax implementation and includes Capture, Transform, and Monitor licenses. In addition to helping Kofax reach Bish's Q4 goal of $69 million in revenue from Kofax's "core capture business," the deal should help boost Kofax's European sales, which have been sluggish as of late.