Top Image Systems ($TISA) sells multi-channel document capture
software to business. The software
efficiently manages the handling of scanned paper, fax, email and increasingly
mobile data correspondence.
Top Image’s software enables the intake, identification and
digital processing of information as well as the routing of this information to
the appropriate divisional area within the enterprise. The company has
tailored its core technology platform 'eFLOW' to distinct business functions
including automatic invoice processing, automatic document processing, and
a digital mail room application.
TechNavio forecast the Global Document Capture Software Market to
grow at a respectable CAGR of 9.65% over the period 2013-2018 with this growth consistent
with the double digit revenue growth Top Image management talk about.
The enterprise content management competitors with a focus on data
capture are numerous and include the likes of IKNO, ReadSoft, Kofax ($KFX-LN),
EMC ($EMC) and Open Text ($OTC-TSE) while the leading competitor in the mobile
capture space is Mitek Systems ($MITK).
Mitek ($MITK) specifically concentrates on the mobile channel and
has signed an impressive 3000+ banks to its flagship mobile check depositproduct. This mobile space is fast growing highlighted
by Mitek’s revenues growing 29% in its 2014 September financial year, although
investors in this story are frustrated around the pace that transaction revenue
growth has translated into profit growth.
While not as leveraged to mobile transaction growth Top Image’s
more important mobile exposures are indirect through tie ups with Fiserv ($FISV) in its Snap-To-Pay product as well Jack Henry
& Associates ($JKHY) check deposit product The contracts were
signed in October 2013 and 2012 respectively so have the potential to starting
contributing to license fee income more meaningfully in coming years
The growth in the use of smart phones and tablets is expected to
result in significantly more business to consumer transactions being processed
through mobile channels. Top Image has positioned itself for growth here
with check deposit, bill payment and a cloud based remittance products which represented
10% of 2013 revenues. Mobile commands
higher gross profit margins and faster revenue growth compared to the rest of
the Top Image business.
Top Image has an intellectual property patent around the
processing of clearer and larger photo imagery which they maintain is
competitively relevant. The other core
strength of the company is its eFlow technology platform which offers a relatively
comprehensive range of back end services and integration ability.
While Top Image’s roots are in the data capture subset of enterprise
content management software, its growth is coming from mobile data capture and
more recently through the acquisition of cloud delivered documents management
and remittance company 'eGistics'.
The eGistics cloud products assists in the electronic storage,
management and retrieval of client data. eGistics was founded way back in
1994 and offers documents management functionality in the cloud to participants
largely in the financial industry. While the $18 million purchase price
for a business doing $10.6 million revenue and $1.49 million EBITDA (in 2013) suggests
Top Image is not overpaying, it does lead to questions around the growth
outlook for this 20 year old business.
On face value the eGistics acquisition represented a subtle step from enterprise software towards business process outsourcing, but the acquisition rationale was really about putting the eFLOW multichannel capture platform into the cloud. This would combine eGistics skill in cloud and security with Top Image’s data capture knowledge.
The pro-forma 2013 revenue for the combined businesses was $39.7
million, while pro-forma EBITDA is a miserable $1.4 million, after the existing
Top Image Systems business posted a disappointing EBITDA loss of $0.1 million
in 2003.
The 2013 numbers were reportedly weighed down by higher research
and development costs in cloud and mobile as well as higher selling costs. The eGistics acquisition does however
strengthen recurring revenues with 49% of pro-forma 2013 revenues, either
subscription, maintenance or recurring professional service type revenues.
The 2014 year was going ok, with sales in the six months to 30
June up 24% against the corresponding period and encouragingly the company was profitable. The combination of one off costs associated
with the acquisition of eGistics, and new accounting policies around revenue
recognition resulted in the September quarterly headline operating profit
numbers looking ugly. The share price
weakness associated with this poor headline result is providing a decent entry
opportunity in my opinion.
I take encouragement with the company acknowledging in their September
conference call they have invested heavily in Product, R and D and Sales and Marketing in USA in 2013 and 2014 with the future focus now firmly on
profitability.
The company has outlined long term operating metrics below.
INVESTMENT RATIONALE
The Top Image story is revenues can grow at 10% in-line with the capture industry to around $47 million in 2015. This places the $61 million capitalised Tisa Images Systems (share price $3.40) on an attractive Enterprise Value to prospective Revenue ratio of 1.2 times, with nearly 50 percent of earnings recurring in nature.
The company has guided $1.5 million operating profit in the 4th quarter 2014 which isn’t too far away from their long term 15% EBITDA guidance, which gives you an indication of management’s current confidence. This targeted 15% EBITDA margin if achieved in 2015 or 2016 would put the company on approximately 12 times earnings. These investment metrics are pretty appealing in my book for a company with real growth options in mobile and cloud capture. I believe a return to reasonable profit generation in the December quarter will be enough to get investors back interested in this name.
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