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Identifying upcoming technological trends and the ability to predict which companies are expected to benefit from them are essential requirements for educated investment in technology companies. Basing decisions on relative value in the form of profit multiples or discounting future cash flows is practically impossible in the technology sector, due to high standard deviations of both the multiples, and future revenues and profits.
The technological trend that I believe will benefit Top Image is the rising dominance of smartphones as a primary means of communication between banks and their customers. The advantages of smartphones as a means of customer communication with banks are obvious: speed, efficiency, and the ability to operate anytime, anywhere. In coming years, mobile devices are expected to become a dominant platform for executing payments and depositing checks, as mobile devices increasingly grow to serve as points of contact between banks and their customers. The advantages to customers of using mobile devices for bill payment and check processing are: saved time, full control over when payments can be made, and lower transaction fees. For small businesses, there is the added advantage of being able to check online whether a check received from a customer is valid.
A study published by Aite Group LLC found that 75% of mid-sized and large banks in the US already offer mobile banking services to their customers, and the remaining 25% stated that they would begin offering the service in the next 12-24 months. The study further found that among young smartphone users, half check their bank accounts using their mobile devices, a quarter use them to pay their bills, and 20% use them to deposit checks. The report predicted a significant rise in adoption rates of solutions for photographing and depositing checks, and paying bills, using mobile devices.
According to information technology research and advisory company Gartner, Inc, the dollar size of the total accounts paid using mobile devices grew 60% in 2012 compared with 2011, and reached a total of more than $170 billion. The average annual growth rate is expected to be greater than 40%, through 2016.
The growth rate in the mobile bill payment industry is significantly higher than the growth rate in online payment on personal computers, due to the fact that a significant percentage of young users opt to use their smartphones instead of PCs.
Top Image is a software company that specializes in the Document Capture Market (DCM). The company has developed a platform for intake, identification, and digital processing of information, including documents and bills, and routing the information to the appropriate party within an organization. The company's flagship platform is eFLOW, which combines Optical Character Recognition (OCR) technology and Workflow Management technology. eFlow is able to identify and analyze a broad range of texts, and employs multiple OCR methods to determine how to classify a given document, and what its degree of urgency is. Top Image has developed distinct versions of eFLOW for automatic invoice processing, automatic document processing, and a Digital Mailroom application, which automatically processes all of an organization's inbound documents. Top Image's product is easily customized for the specific needs of customers in a broad range of industries, such as banking, energy and utilities, insurance, retail, and more.
Over the past two years, Top Image has been building a product line for the mobile-payment industry, and has harnessed its twenty years of experience in the field of (DCM) to that end. The company has launched two smartphone-payment products to date: MobiCHECK, for depositing checks, and MobiPAY, for bill and invoice payment. Both products rely on Top Image's core technology in order to parse and process texts accurately, to understand a given document's context and objective, and to deliver it to the bank. Both these products involve the customer photographing the check or bill using a mobile device, and sending it to the bank using the bank's mobile app.
The reason I believe that Top Image is an ideal choice for exposure to the mobile-payment industry lies in its unique technological ability to execute automatic check verification and processing on the smartphone itself. This stands in contrast to competitors for whom the smartphone serves only as a means of photographing the document, while the verification and processing of data is carried out on an external server, meaning that the action is more complicated, and is exposed to more risks. One major risk is that a blurry photo may be uploaded, and may be found to be undecipherable after having been uploaded to the server. Top Image's technology eliminates this risk by processing the check on the device itself.
Another technological advantage of Top Image's lies in the technological foundation on which the company's mobile app rests, eFLOW, and the range of supplementary capabilities that it provides, foremost of which is the ability to transmit the processed data from an account to its correct destination within the bank. Competitors lack equivalent supplementary services, which limits their effectiveness for the bank, as, after the server has processed the data, it does not always know where to send it.
The company is expected to broaden its offering of mobile solutions using its patented technology for scanning wide documents by photographing sections of the document using a smartphone or tablet, and processing the photos in order to recreate the document in its entirety. The company plans to incorporate wide-document scanning and processing capabilities in a future mobile product that is expected to be marketed under the name MobiFLOW. This product will allow customers to scan a wide range of documents using their smartphones and to send them to the desired recipients. The market for this new product is estimated between $600-800 million.
In October, 2013, Top Image signed a non-exclusive agreement with Fiserv (NASDAQ: FISV), a global leader in electronic information management and electronic trading systems for financial industries. Under the terms of the agreement, Fiserv will integrate Top Image's mobile platform in its mobile-electronic-payment systems. In the future, Fiserv is expected to expand its use of Top Image's digital parsing and processing technology for other applications, such as registering accounts, processing documents, and more. The deal includes a multi-million dollar license for the technology, as well a fee for every transaction made using the Top Image's platform.
As of the signing of the deal, Top Image has agreements with the two biggest US players in the field of electronic payment: Jack Henry (NASDAQ: JKHY), and Fiserv, which together account for 65% of the total electronic payment systems market in the US. Exposure to 65% of the mobile-payment market will undoubtedly contribute, over the course of a few years, to revenue of proportions that Top Image has not yet seen. The fact that the two leading companies in the US have chosen to integrate Top Image's mobile platform in their products is a testament to the fact that Top Image is an industry leader in the field of smartphone-based digital data processing for electronic payment applications.
The new mobile products complement Top Image's core products, which specialize in routing data reaching the bank's computers to the appropriate systems, following an analysis of text and context. For this reason, we believe that the mobile products, in addition to boosting the company's sales, may increase demand among banks for Top Image's core products, to complement the mobile products.
Unique technology and complementary products combine to make Top Image an optimal means of gaining exposure to what is currently a $500-700 million industry, which is expected to grow by a rate of 40-50% over coming years.
Top Image's revenue from sales of licenses for MobiPAY and MobiCHECK are expected to reach $2.5-3 million in 2013, and in 2014, they are expected to double, or more. The gross margin on mobile activity is expected to be close to 80% -- significantly higher than the gross margin that the company reported in recent years, which was close to 60%.
Aside from the standard risks involved with investments in small cap technology companies with relatively low trading volumes, it should be noted that Top Image has focused its marketing operations in Europe, and the company's presence in the US is low (16% of total sales). In terms of the company's strategic growth plan in the mobile payment market, Top Image is expected to try and increase its penetration in the US market. This process will require significant financial and operational investments in order to establish marketing channels in the US, a market in which the company's marketing experience is, as of yet, unproven. That said, success in the US market could translate into a significant increase in company value.
With a market cap of $64 million and a sales base of nearly $30 million, with almost no mobile activity, Top Image is a very interesting way to gain exposure to the up-and-coming field of mobile payment.