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

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

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

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

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

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

Lexmark Attempting To Corner the Market on Capture

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

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

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

Ephesoft's Vision for the Future of IDR

Coming out of AIIM last year I had come up with a vision on the potential future of the document imaging industry. I've repeated the mantra several times since - and it goes like this: "Capture it all and let the technology sort it out."

In fact, I recently completed a piece for Quality Associates' upcoming Insights newsletter detailing what I see as some of the driving forces behind this vision. They include trends like increased multi-channel capture and increasing intelligence in capture driven by emerging technology like natural language processing.

This year I attended the Ephesoft Innovate conference  prior to heading down to San Diego for AIIM 2015. At Innovate, Ephesoft founder and CTO Ike Kavas presented on his vision for the future - which I thought dovetailed nicely with mine. Kavas and his team at Ephesoft have even gone so far as to developing a brand new product - Ephesoft Universe - designed to enable organizations to mine their documents.

Due for release later this year, Universe leverages Big Data tools like Hadoop. According to Kavas, Universe is able to leverage 16 different characteristics to classify a document and recognize a field. Ephesoft is developing machine learning algorithms to consider these characteristics. The bottom line is that this is a lot of data being put through a process that requires a lot of computing power - hence the need for the Big Data tools, especially if a user is throwing a high-volume of documents at it.

The end game for Universe is trying to reduce the time it takes to implement a classification and extraction application from months to minutes. Also, the idea is to enable individual users (not system admins) to set up personalized auto-classification and extraction applications.

Kavas was brave enough to show a demo of Universe, which he expects to be released, in Version 1.0, later this spring. Basically, a user creates their own document classes, feeds it examples, and chooses and labels which fields it wants to extract based on the highlighted fields that Universe was able to recognize. Once the data is extracted, it is fed into an analytics application that is also built into Universe. An example Kavas showed utilized hot/cold zone graphing to show the average price of houses in different states in the country.

Other potential application ideas tossed about included mining medical records for various reasons including enforcing records retention policies, mining expense reports to enable more informed negotiations with vendors, and examining financial documents for at-risk loans or security risks.

There is a lot here, and I'll have more detail in my next premium issue of DIR. Ephesoft's current goal is to find some customers and partners to help it determine what needs to be done next on the road to productizing Universe. But, there is clearly a lot of potential, mainly because it offers to make accessible what has historically been very high-end technology, whose adoption has been slowed somewhat I feel by paralysis by overanalysis.  If Ephesoft can really make Universe a universal tool, I think we'll start to see a slew of new IDR applications developed on top of it.

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.

Xerox Signs on As Kofax Reseller

Today Kofax announced that it has signed a global partnership with Xerox. Under the terms of the agreement, "Xerox will sell, market, deploy and support Kofax TotalAgility," with support from Kofax sales and services staff. Kofax TA represents its integrated line of products including capture, BPM, analytics, e-signature and data integration technologies.

Couple interesting points about this:

• The Xerox executive quoted in the press release talks about Kofax TA being part of Xerox' next-generation MPS offering. The concept of MFP/printer vendors moving more deeply into ECM was factored into our recent 2015 DIR prediction that there will be a major ECM/Capture acquisition by any MFP vendor in 2015.
• Somewhat along those lines, Hyland Software also recently announced a new global partnership with Xerox. Can we connect some dots here?

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.

EPM Sells Service Business to Kodak Alaris

Just about a year after acquiring Imaging 411 in order to launch its own service business Eastman Park Micrographics (EPM) is selling its service business to Kodak Alaris, its biggest competitor. From what I heard, EPM was not entirely happy with the way its court case against Kodak Alaris was going. EPM had sought to bar Kodak Alaris Document Imaging from marketing its service to EPM ImageLink micrographics customers - but after originally receiving a court order that supported this position, that order was reversed.

Previous to EPM's acquisition of Long Island-based imaging service specialist Imaging 411 in December 2013, Kodak Alaris had been the official service provider for ImageLink equipment through a contract with EPM. After EPM acquired Imaging 411, it took over the ImageLink service contracts and attempted to bar Kodak Alaris from competing for them. From what we understand, this strategy was not entirely working out, which prompted EPM to sell its service business to Kodak Alaris.

EPM had previously signed on Kodak Alaris to provide support for its hardware customers in Europe, Asia, and Latin America. EPM Service and Kodak Alaris were competing in North America.

With the acquisition, Kodak Alaris also picks up a competitor for scanner service. Imaging 411, and then EPM, employed several ex-Kodak DI technicians and had aggressively pursued document scanner service contracts.

EPM will now focus on hardware manufacturing, with Crowley doing the sales and marketing, as well as media distribution.

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.

No Need to be Scared of Paper

As you may have heard, Thursday was World Paper Free Day. Officially, it is AIIM initiative that encourages people and businesses to not use paper for one day. I was Tweeted, I did not go paper free: 

Yes. I'm a heretic printing on @WorldPaperFree day! More in upcoming DIR Talk blog post. pic.twitter.com/GBNi5dWZQa
— Ralph Gammon (@DIREditor) November 6, 2014

I was writing and on a deadline for my newsletter--and to tell the truth, absent three or four monitors, I just find it easier to compile a story using multiple sources, when I at least have my notes on a paper. Then I can utilize my computer screen for additional research. And the proofreading....I did go paper free for a year, just to see how it worked, and it was certainly possible to publish the newsletter without printing anything. However, I think it is easier to do it when I can print certain items.

Yes, I think there are situations where paper is more efficient than electronic documents, which brings me to the major discrepancy I currently have with the ECM industry--Everyone is always trying to go paperless! All I hear is about how much more efficient and secure EDM systems are over paper. And this may be true on some levels, but certainly not all.

Let's start with security because I think that's more black-and-white. Yes, I think a properly controlled electronic document in an ECM system is more secure than a paper document. This seems obvious. I mean you can pretty much control who accesses it and changes it and track whoever sees it and provide an audit trail. It's harder to do this with paper. 

Of course, this doesn't quite explain why people in the healthcare industry consciously choose to use fax over e-mail. Apparently they still feel that analog is more secure than digital. I'll explore this more in an upcoming issue of DIR. 

As far as efficiency, I am a fan of paper for many collaborative exercises, as I think it's easier to share because in many cases it represents a least common denominator. I mean you don't have to worry about your paper being compatible with another system. And your annotations, notes, signatures, et al, work across systems as well. And if you need to contact someone in a remote location - a scanned image should work just fine.

Now, I agree that electronic processes are generally more efficient than paper ones - but I also firmly believe that there are times when paper can be more useful - and that we should take advantage of the fact that we have access to such great printing and scanning technology. In fact, I think we've reached a tipping point, where if managed correctly, it really doesn't matter if information comes in on paper or digitally, it can be dealt with just as efficiently either way.

In other words, don't be scared of paper, embrace it where it makes sense. Don't try and eliminate it, try to set up the most efficient processes you can that take full advantage of paper as a medium of communication. There is great document imaging technology out there. Don't be afraid to use it.

And of course, there are these guys.

Cheers.

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.

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.

@DIREditor they are two different businesses. PC-with Dell going private they have to be competitive and Solutions needs freedom.
— Chad Stigall (@chadstigall) October 6, 2014

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.

SourceCorp, BancTec Merger Makes Sense

This week's announcement that SourceHOV has merged with BancTec made complete sense from a strategic standpoint-although the announcement admittedly caught us somewhat by surprise. Here's a true story: I was in Birmingham last week visiting ibml when the topic of BancTec came up. I said I could not figure out why they did not just merge with SourceHOV, especially since they had a common investor after BancTec was acquired by HandsOn3 in February.

BancTec's story was that HandsOn3 was only a minor investor in SourceHOV and that the plan was to integrate BancTec with the smaller Dataforce, which would create a $300M business combining BancTec's document capture outsourcing with Dataforce's call center business. Well, apparently, plans changed. It seemed that others agreed with my thoughts that it made just too much sense to merge BancTec and SourceHOV, which are in  a similar market and are both headquartered in Dallas.

SourceHOV, which is actually the result of the merger of the former Lason and SourceCorp that happened in 2011, must have been doing about $600M in annual revenue, as the new organization is being touted as having annual revenue of more than $900M. Here's a quote from the press release the discussion the complementary nature of the organization's services operations. " “SourceHOV’s deep domain expertise in healthcare and legal claims processing, alongside BancTec’s 40+ years of banking payment processing know-how, enables the creation of a global powerhouse provider for Transaction Processing Services,” said Ron Cogburn, Chief Executive Officer of SourceHOV and Mark Fairchild, President of BancTec in a joint statement.

As you might guess from the dual-attribution, decisions have not been announced as to who is going to be managing what going forward. Fairchild was only recently appointed president of BancTec in the wake of the acquisition by HandsOn3. Nothing will likely be finalized until the deal closes, which is apparently subject to Hart Scott Rudino review. DIR caught up with Ray Wise, VP Sourcing and Treasury at SourceHOV, who said he doesn't foresee any problems. The press releases states the closing is expected to happen this year. Wise said SourceHOV would like to close it sooner, but a lot depends on how long the government review takes.

HandsOn3 will become the owner of the entire organization, as it is buying out SourceHOV's other major shareholder. Related to the transaction, SourceHOV will receive a new $1.1B line of credit.

What Ray Rice & Donald Sterling can Tell Us about the Future of Capture

For those of you who attended the Harvey Spencer Associates (HSA) Capture Conference last week, you got to see a cool presentation by HP Autonomy's Christopher Surdak on doing automated capture from video files. Examples that Surdak presented included matching license plate numbers with car models to protect against stolen vehicles and analyzing faces taken on video at airports for matches against dangerous persons databases.These aren't exactly examples of the transaction-oriented capture that HSA typically focuses on, but you can see where it could lead. Harvey likes to give the example of being able to take a video of a car engine that is not working right, and sending that video to the cloud - where analysis is done and then the user is sent a list of parts that they can order to fix the problem.


In DIR's annual news review and predictions presentation, I offered my opinion that as millennials and born digitals take over the workforce and smart phones and other computers continue to advance, videos and photos are going to become increasingly important to conducting business. Traditional documents are destined to become so yesterday.

A recent sports news story helps bring the point home about how much more powerful video cam be as a means of communication than traditional text. Many of you have by now surely heard the story of Ray Rice, the Baltimore Ravens running back that has been driven out of football due to his being caught beating up his fiancee this past offseason. Here's the timeline:

• Story comes out about Rice beating up girlfriend/fiancee. 
• Rice gets suspended for two games.
• People get up in arms about the light punishment and NFL commissioner Roger Goodell stiffens NFL's domestic abuse policy - but nothing more happens to Rice
• Video comes out showing what Rice admitted to
• Rice's team (Baltimore Ravens) terminate his contract and league suspends him indefinitely

 From this ESPN story on the Rice incident: "The source said that Rice admitted to the Ravens from the start that he was guilty of striking Janay and, for the most part, accurately described what they eventually saw on the video. But the brutality of the assault when seen on the security video made a different impression."

So, basically, until everybody actually saw what Rice was doing, the full impact of the event was not realized. As a text-oriented guy, this kind of disturbs me, because I really wasn't surprised by the video and had a hard time believing many people are just now becoming outraged with Rice's behavior. But then again, we had a similar situation with Los Angeles Clippers owner Donald Sterling earlier this year.

If you remember, Sterling was essentially driven out of the NBA after a recording surfaced with him making racial comments to his ex-girlfriend. Shocking right? Well, not so much.  As far back as 2006, Bomani Jones wrote this article for ESPN's Page 2, entitled "Sterling's Racism Should be News." In spite of this, big name athletes and Coach Doc Rivers continued to sign with the Clippers from 2006 through 2013. Then, they acted all surprised when his racist rants were caught on audio recording this spring.

The bottom line is that apparently, nobody in the mass market pays attention to text media anymore. Which brings me back to my point about multi-media being so much more powerful than text. Maybe traditional documents still have a place in business today, just like there is still print/text media out there being published. But as things move more toward video, audio, and the like in mass media, I don't think there is any question they will also move that way in business transactions. Didn't Blackberry rule the business world before iPhones took over the consumer market and then moved into business? The momentum in favor of video is just too great. Expect more video in business in the next few years!

10 Years of Capture Market Evolution

On my way to Harvey Spencer Associates Capture 2014 Conference, where I will be presenting for the 10th straight year. The industry has certainly evolved quite a bit in that time, as has the content of the conference. Here's a look at the agenda for this year's event. Here's an article I did previewing this special 10th anniversary edition of the event.

My presentation this year reflects the history of the conference, as Harvey has asked me to take a look back at how the market has evolved since 2005. I have a fairly detained presentation (that will be delivered in 15 minutes or so, so it will be action packed), but here's a preview of one slide, which includes what I consider to be the five biggest capture trends in the past 10 years:

1. Consolidation of Capture with ECM
2. Aggressive Movement of Hardware Vendors into Capture Software & Services
3. Emergence of Mobile & Cloud Technologies
4. SharePoint’s Emergence as an ECM Platform
5. Acceptance of Distributed Capture

 That's just a teaser. Lot more to come in my preso, such as a fairly detailed list of all the major M&A activity in capture market over past 10 years and my opinion on what it tells us.

Cheers.

Kofax Aquires Digital Signature Specialist

Kofax, in an interesting move to continue to beef up its "First Mile" and smart process application (SPA) technology portfolio, acquired digital signature specialist Softpro. Headquartered in Boeblingen, in southwestern Germany, Softpro had revenue of $13.3M in 2013, and Kofax is paying $34.7M in cash, so that a valuation of over 2.5x revenue and more than 34x profit, as Softpro reported an EBITDA of $1M for 2013.

From a technology standpoint,  the acquisition a great fit. As Kofax transitions from paper toward capturing more types/channels of electronic information, digital signature technology is a natural way to extend its portfolio. Softpro actually has two types of digital signature technology - both of which dovetail nicely in to the Kofax technology stack. The majority of Softpro's revenue comes from enterprise e-signature technology packaged under the SignDoc brand. Softpro also has strong signature fraud detection technology, branded FraudOne, which is utilized by many large banks.

SoftPro fits nicely into Kofax's emerging smart process application (SPA) play.  For example, Grant Johnson, Kofax's CMO explained to DIR, how it's a natural fit with Kofax's recently announced Mortgage Agility solution. "E-signatures really helped facilitate digital business and transactions," said Johnson.

"It's a great fit for any SPA where there is customer onboarding and it's essential for a signature to be part of the documentation," added Dave Caldera a senior VP with Kofax.

While FraudOne has its place within an SPA hierarchy, it's also a nice traditional capture add-on. In addition to being used for checks, the technology can also be utilized for applications like verifying signatures on contracts. (Coincidentally, Parascript, which recently announced a FormXtra for Kofax Capture module, has touted success in similar types of applications.)

Bottom line is that Kofax paid a bit of a premium to increase its footprint of multi-channel capture/SPA technologies. Kofax CEO Reynolds Bish has said that he will not buy capture market share- and Kofax certainly is not doing that. Instead, as with its other recent acquisitions, with Softpro, Kofax is buying technologies that complement its strong traditional document capture stack and help it evolve as the market continues to increasingly embrace digital transactions over paper ones. I think the M&A landscape has shown that the more digital-transaction-oriented a vendor is, the higher valuation it will achieve.

Nuance Numbers Reveal Acquisition Motive

Nuance's Document Imaging division revenue was down significantly in its fiscal Q3 2014. For the three months ended June 30, the Burlington, MA-based ISV reported $52.4M in revenue for the division, a drop of 16% compared to last year's Q3 results. According to Nuance's prepared remarks associated with its financials release (which came out on Aug. 11), " Bookings strength was supported by two new partnership extensions with HP and Lexmark. Growth from these partnerships was tempered by weakness in the MFP scan business."

This would explain Nuance's decision to acquire Notable Solutions, Inc. last quarter, which was its main independent competitor in the MFP scanning market.

How Google's Acquisition of JetPac is Relevant to You

One of the sessions at the upcoming Harvey Spencer Associates Capture Conference is entitled "Photo and Video Understanding: Augmented reality used in transactional information." It is being presented by (and this is a pretty long title, so get ready) Christopher Surdak, Global Subject Matter Expert, Information Governance, eDiscovery and Analytics, HP Autonomy. Anyhow, Harvey gave me brief explanation of why he felt this is relevant to his audience of mainly capture ISVs.

"[Surdak] is going to talk about some things I think are exciting," said the principal of HSA. "This includes the ability to lift up the hood for your Nissan, take a picture, and have an application figure out what engine parts you need and then take you to a list where you can order them. The ability to place the order and have it fulfilled is what creates the transaction. The subject matter is basically about capturing photos and video, instead of a static document, to trigger a transactions. Insurance claims adjustment is another example where this is relevant."

I was thinking about this session (HSA Capture is being held Sept. 3-4 at the Glen Cove Mansion on Long Island), this morning when I read that Google had acquired image recognition start-up JetPac. JetPac apparently makes technology that can analyze facial expressions on sites like Instagram and use those analytics to make recommendations about the best places to go (for example, best bars) in a geographical area. This is interesting because it also combines another topic that was covered at HSA last year, which was "sentiment analysis." Last year Brian Garr of LinguaSys, presented on how his company analyzed the sentiment expressed in texts on social media sites and is able to let businesses know what people are saying about them. When you think about combining the power of JetPac and LiguaSys and introducing it into current capture applications, the possibilities are fairly powerful. Let's just say it could make Smart Process Applications even smarter.

As we wrote in a recent article in our premium edition of DIR, the capture market sure has come a long way in 10 years.

A Look at the New Face of ECM

Smart Process Applications (SPAs), iBPMS, and dynamic case management are all relatively new terms that have come about the describe a next generation ECM solution - based on what we have historically called workflow. Like workflow, they are all designed to get the right information to the right people.

From what I can tell, there are two key differences in definitions of these new terms and what we have traditionally called workflow:

1. timeliness: Not that workflow didn't always tout improvements in timeliness as one of its benefits, but it seems the goal now, as opposed to just improving processing times, is to provide near instantaneous turnarounds. For example, if I am applying for a loan, leveraging one of these new technology sets, can I get instantaneous feedback on whether I qualify or not, as opposed to waiting a week?
2. multi-channel capture: Instead of starting a process with a paper or even an e-form and combining that with some supporting documentation, these newly defined ECM processes can be initiated and fed through not only paper and e-forms, but also social media, mobile devices, data from other systems, and more.

These two factors bring these next-generation ECM systems into direct contact with what Geoffrey Moore has defined as "systems of engagement" and what, on some level at least, I understand to be Customer Experience Management (CEM) systems. I have to admit I was wholly unfamiliar with the acronym "CEM" until recently, when it showed up on the agenda for the upcoming Harvey Spencer Associates Capture Conference.Then, earlier this week, I received an offer from an industry pundit who wanted to contribute a piece on CEM meeting case management. So, this seems like this is something we are going to be hearing more about in the future.

I'm going to now try and put all the pieces of the puzzle together:

1. Looking to communicate with an organization, you have customers, partners, vendors, analysts/media and some others.
2.  These communicators interact with the organization through a number of channels, including Web sites, e-forms, paper documents, social media, call centers, and mobile devices.
3. All communications require a response, and the best way to manage that response is through a structured workflow - fed by a multi-channel capture system.
4. This workflow must be two-way street. ECM has always had the ability to connect with back-end systems, but now, it must be able to take information from these back-end systems (ERP, CRM, etc.) and feed it back to the communicators through multiple channels. This loop must be maintained until a transaction is completed.
5. The ECM system must also act as a system of record and catalog all information and documentation related to a transaction- while it's going on, as well as when it is completed. That record must remain open and interactive to be able to incorporate additions to the transaction or future related transactions.
6. There is also some stuff that can be done with predictive analysis of processes to help automate this loop.

Anyhow, that's my understanding of this new wave of ECM - whatever you want call it. I think it's also important to note that the key components continue to be capture, workflow, and records management, albeit in an evolved form. Your thoughts?

Lexmark, Hyland Still at it for ReadSoft

We had heard rumors that Lexmark executives have been saying that they will not be outbid for ReadSoft, but Hyland Software sure is trying. Yesterday, the Cleveland-based ECM ISV attempted to trump Lexmark's offer for the Swedish capture vendor for a third time. This time,  Hyland topped Lexmark's bid by 10%, offering the equivalent of $246M for ReadSoft. This was significant because it showed that Hyland was once again willing to play by Lexmark's rules.

If you remember, Hyland's previous bid offered only a 4.7% premium over Lexmark's previous bid - even though ReadSoft's board had stipulated that it would only consider other bids if they were at least 7% higher than Lexmark's previous bid. Hyland felt they had worked around this stipulation by acquiring an 11% stake in ReadSoft, which meant that another provision of the Lexmark bid (that it acquire at least 90% of the outstanding shares) could not be met. Lexmark countered by topping Hyland's offer (and allowing for the 90% provision to be waved).

Well, Hyland was quiet for awhile and it seemed like the matter was done - even though I have always been of the opinion that ReadSoft would provide a bigger strategic boost for Hyland than it would for Lexmark. After all, Lexmark already has the Brainware product line that clearly competes with ReadSoft in the invoice capture space. Yes, Hyland has AnyDoc, but from my perspective, Lexmark has invested a lot more in Brainware (including a much higher acquisition price) than Hyland has in AnyDoc. There are other reasons as well. (Here are some of Hyland's reasons why they think ReadSoft is a good fit.)

But, on the other side, Lexmark is a profitable multi-billion dollar company that has deeper pockets than Hyland-which does a few hundred million in annual revenue. And leveraging those resources, Lexmark has quickly countered Hyland's latest bid, if only by less than 1%.  The bottom line is that ReadSoft's actions, if not their words (well maybe some of their words too) have made it clear that they would prefer to be acquired by Lexmark, but you have to give Hyland credit for their continued efforts. Plus, they have helped drive up the price of ReadSoft to a much more respectable 2.1x revenue than Lexmark's initial bid, which was worth slightly more than 1.5x ReadSoft's 2013 revenue of $117M.

And it's my opinion that Hyland is not done yet. They've known they were behind the 8-ball from the beginning and yet continue to put effort into making bids. Maybe they are just trying to drive up the price to weaken their competitor - Lexmark's Perceptive Software. But, then again, maybe they have some legal action plan, because it doesn't really seem fair that Hyland has to make a bid at least 7% higher for ReadSoft's board to consider it, and then Lexmark's can just come in with a nominal raise on Hyland's bid and have the ReadSoft board automatically give its blessing. But then again this isn't poker, which apparently has more rules than the  M&A game. Anyhow, it's my opinion that Hyland may have an ace up its sleeve, that it is waiting to play.