Tuesday, October 22, 2019

Age of Intelligent Robots Approaching

A couple weeks ago, I noticed that when my 13-year old son and his friends were insulting each other, they used the term "bots." I thought this was interesting, because in our industry, we have typically  considered bots to be a good thing -as in you can deploy "a bot" to automate a process. In fact, the rapidly growing billion-dollar RPA industry has been built on bots.

I asked, "Why do you call each other bots as a put down?"

"Because in video games when you play against the computer, even the highest level is dumber than playing against the worst real person," my son answered . "You're playing against a bunch of 'bots.'"

That made perfect sense to me. In fact, a few months back, I realized that despite many people thinking that robots are intelligent, the way they have been deployed in RPA doesn't really manifest that. Sure, RPA 'bots' can copy repetitive human tasks, but when it comes to anything outside of that, well that just hasn't been happening. And it seemed to me that the promise of RPA (especially as it has risen in parallel with AI) is that is should be more intelligent.

Well, this seems to be on the minds of RPA vendors as well. In a recent interview I did with Chad Gailey, VP, channels and ISV partners, Americas, for RPA market leader Blue Prism, he said, "RPA is today, but it’s really simple processing. The future is leveraging machine learning and computer algorithms to mimic and behave in a human manner. We want to infuse vision from AI and cognitive learning platforms into our RPA software to move to our next generation."

Then, a couple weeks later, we found ourselves interviewing Kashif Mahbub, VP, product marketing and global head, RPA for another market leader, Automation Anywhere. He was briefing us on Automation Anywhere Enterprise A2019, the ISV's next-generation RPA platform.  It includes, "infused AI skills and capabilities throughout the platform."

So, RPA is getting more intelligent. Interestingly, document capture has already embraced AI. As their ability to capture data from structured documents became commoditized, document capture vendors introduced AI to help them deal with capture from a wider variety for forms. For some RPA vendors, capture has actually been their first step towards "cognitive automation." Automation Anywhere, for example, markets a product called "IQ Bot" that was presented to me at AIIM as a document capture platform.

So, it seems that as RPA moves toward intelligent automation, there are even more synergies with capture that can be realized. In addition, workflow vendors like Hyland are also looking to leverage AI to automate more processes within their platform, which should definitely create some more crossover and possible synergies with RPA.

We know one thing: that RPA leaders like Blue Prism, Automation Anywhere, and UiPath certainly have a lot of funding to invest in AI technology if they choose to, and it sounds like they are choosing to. There seems to be a bit of an intelligent automation arms race beginning - as part of the larger Digital Transformation market as whole. And as AI more deeply enters into this fray, maybe the idea of "dumb bots" will become archaic. In fact, there is already a well known story about an AI program that beat a champion of the Chinese board game "go." Wait 'til Madden gets ahold of that technology. Thirteen-year-olds will have to most certainly adjust their lexicons and come up with a new insult for dumb. Perhaps something like "paper user," will be in vogue next.

Monday, February 11, 2019

Kofax Being Opportunistic with Capture Acquisitions

Is Kofax doing a capture roll-up? It may look that way, but I would describe it more as an opportunistic short-term play in order to fund a more strategic plan around intelligent automation.

"Kofax is in a unique position in that we are trying to protect our base while also funding the future growth portion of our business," explained Chris Huff, Kofax's Chief Strategy Officer, during a recent call to discuss the ISV's acquisition of Top Image Systems (TIS). "The consolidation play (including recent acquisitions of both TIS and Nuance Document Imaging) protect our base in the capture market where we now command (a greater than 25%) share. Our position there provides us with cash flow to fund the future."

After the recent acquisitions, Kofax is now a $600 million a year entity, with the good majority of that coming from capture, although RPA is acknowledged as the fastest growing part of the business. In addition, Kofax has technology in areas like digital signatures, customer communications and business process management. These originally were assembled  to be part of Kofax's "First-Mile" of customer interaction strategy for connecting systems of engagement with systems of record. It doesn't necessarily seem like this strategy has changed, as the intelligent automation platform offers similar functionality and addresses similar problems.

As far as building the capture business, in Nuance, Kofax picked up an operation with $200 million in annual revenue and historically high margins (37% in its fiscal 2017 and 32% in 2018) for less than two times its annual revenue. With TIS, it picked up a $25-$30 million per year business for well less than one-time revenue (by our calculations at least, as the official purchase price was only announced on a per share basis). And both businesses have technology and customer bases that fall into Kofax's market-leading capture wheelhouse. 

So, while we didn't necessarily expect Kofax to acquire capture companies when CEO Reynolds Bish told us in early 2018 that, with the backing of Thoma Bravo, Kofax was getting back in the acquisition game, we can see certainly see the strategy here. Per our conversation with Huff, we expect Kofax to continue to be aggressive in M&A, but not necessarily with more capture vendors. 

Nuance and TIS were fairly unique situations. Nuance had gone through a change at the top and the new CEO didn't have the same connection to document imaging as long-time CEO Paul Ricci did. Nuance's main focus is speech technology and quite frankly, we had been predicting for some time that they were going to spin off DI in some manner. It seems like a really good buy for Kofax.

And TIS also seems like a good buy. TIS has a relatively blue chip customer base, between its capture and hosted remittance processing businesses. But, the company has historically had a tough time turning a profit, has consistently been losing money and was down to like a million and a quarter in cash as of mid-year 2018. Sure, there was financing in place to keep it in business, but TIS has done plenty of financing deals over the years, Also, the company had recently revamped the cloud capture strategy is had invested a lot of R&D in, so it didn't sound like us they would be turning things around anytime too soon. Bish has a fairly good track record of turning profits, so rolling TIS' into Kofax's infrastructure should be a positive in that sense. In addition, perhaps some of the extensive cloud work that TIS has done (in addition to the SaaS infrastructure it picked up when it acquired eGistics's payment processing operation) can help Kofax as it develops a more cloud services oriented architecture for its intelligent automation platform.

The bottom line here is that we think Kofax's recent capture acquisitions were opportunistic, as well as strategic, but might not be part of some greater capture roll-up plan. They do represent the type of strategic play you can make when you have are backed by a strong financial partner like Thoma Bravo. We next expect Kofax to flex that muscle in some sort of AI-related buy, not another capture acquisition.