Top Image Systems' (TISA) CEO Michael Schrader on Q2 2016 Results - Earnings Call Transcript

| About: Top Image (TISA)

Top Image Systems, Ltd. (NASDAQ:TISA)

Q2 2016 Earnings Conference Call

August 04, 2016 10:00 AM ET

Executives

Shelli Zargary - Director of Corporate Marketing and IR

Michael Schrader - CEO

Yossi Dagan - CFO

Analysts

David Hynes - Canaccord

Richard Baldry - ROTH Capital

Kevin Dede - Rodman

Ishfaque Faruk - WestPark Capital

Operator

Greetings, and welcome to Top Image Systems’ Second Quarter 2016 Earnings Release. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Shelli Zargary, Director of Corporate Marketing and Investor Relations. Thank you, you may now begin.

Shelli Zargary

Thank you all very much for joining us. Our earnings release was issued before the market opened this morning and has been posted on our website at www.topimagesystems.com. If you'd like to see the press release with all the tables in the PDF format, you can download that press release from the Financial Releases section in the Investors section of our community page, just go to the bottom of the page, on the Financial Release, and you will see there the link to download the file.

Additionally, we've posted today's webcast presentation in the same section of the website, again, just go to the bottom of the press release in the Financial Releases section, and at the bottom of the page, you will find a link to download the webcast as a PDF file.

Representing the company on the call today are our CEO, Mr. Michael Schrader; and Mr. Yossi Dagan, our CFO.

Before we begin, we would like to remind everyone that today's conference call may contain projections or forward-looking statements and the Safe Harbor provision in the press release issued today also applies to the contents of the call with the prepared remarks and the question-and-answer section. Top Image Systems expressly disclaims any obligation to update or revise any of these forward-looking statements whether due to future events, new information or change in our views, expectations or otherwise.

The prepared remarks and the question-and-answer session that follows may also include non-GAAP financial measures, including without limitation, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP income per share. These measures are presented in addition to our quarterly results determined in accordance with GAAP and management believes that they may provide additional use for information and help to understand our results. Non-GAAP measures are reconciled to comparable GAAP measures in the tables contained in our earnings release that we released this morning.

The call is the property of Top Image Systems Limited; and any distribution, transmission, broadcast, or rebroadcast of the call in any form without the expressed written consent of the company is, of course, prohibited. A replay of the call will be available from the day after the call in the Investors section of the website, again from the same place where you downloaded the press release or the webcast, you can also tomorrow download the audio file. It will be zipped file, or you can use the webcast link to review a recorded version of the webcast. The audio archive of the call will be available for 90 days.

At this point, I'd like to turn the floor over to our CEO, Mr. Michael Schrader to make his opening remarks. Michael?

Michael Schrader

Thank you, Shelli, and thanks to everyone on the call for joining us today. I’m pleased to share with you our Q2 financial results and highlight our growth drivers. Yossi, after this, will discuss our financial results in greater detail, and then we’ll open the call up for Q&A.

Let me begin with a summary of our key financial metrics. Revenues from second quarter were $8.5 million, compared to $8.5 million in Q1, which exceeded our expectations for the quarter. Recurring revenues for the quarter were $5.9 million, representing 57% of our total revenues. Although recurring revenues had a decrease due to the condition of one of our US-based customers, these still high percentage of recurring revenues within our total revenues contributes to improved operating margin.

The updated slide that following the restructuring we initiated in Q1, we have succeeded, as planned, to improve our financial results and to achieve a positive adjusted EBITDA in Q2 of $667,000, compared to breakeven in Q1, which represents a meaningful improvement.

Our cash flow for the quarter was impacted by payments of $575,000 related to the restructuring and by timing of collections. We are making continuous improvements to our receivables which will strengthen our cash flow going forward.

Let me now turn to a discussion of growth drivers. In Q1, we launched on-time and on-budget our eFLOWAP for SAP Financial Process Automation solution, [Technical Difficulty] and running on the SAP HANA platform. Our solution offers SAP with the ability to easily and efficiently process all incoming invoices and their prudent workflows with no need to leave their familiar SAP environment.

The solution provides complete end-to-end functionality that handles multi-channel invoice capture, line item extraction, validation, automatic posting, matching, highlighting for possible early payment discounts and automated [indiscernible] exceptional handling and improvement.

As an integral part of our launch activities in Q2, we have invested in and continue to accelerate our lead generation initiatives, included targeted SAP events in the US and in EMEA, and digital and social media programs, focusing on all primary target OEMs.

Our investments are using high-quality marketing leads that feed our sales pipeline. And we also, notably in Q2, signed contracts with several early adaptors. These things include an agreement with a road construction and civil engineering company operating in nine sites across Switzerland, an agreement valued at over $100,000 within the aerospace component manufacturer who selected eFLOWAP for SAP to integrate the two different SAP systems. The deal valued at $125,000, with a mid-sized European medical device manufacturer operating 10 subsidiaries worldwide to ultimate their invoice and purchase order processing at $115,000, and an agreement with a technology supplier based in the US to process some 100,000 invoices per year across several global shared services centers.

We are encouraged by the momentum we are building for eFLOWAP for SAP accounts payable solution. We are also working towards the release of eFLOWAP for the Cloud, which is planned for launch in the second half of fiscal 2016. Our Cloud release will then provide our customers with flexible deployment options. The Cloud ERP adoption trend is accelerating within the mid-market, especially.

According to Gartner Research survey analysis, 60% of companies in the $10 million to $1 billion revenue range are expected to adapt Cloud ERP within the next three to five years. We are confident that the Cloud ERP markets represent sustainable growth opportunities, which is under-served for accounts payable automation today.

While we are focusing our investments on levering our Financial Process Automation portfolio as the foundation of our growth strategy, we continue also to maximize revenues and profitability from our core capture business. In particular, we are investing in expanding our market coverage through strategic partnerships. Last quarter, we announced the global partnership agreement with Xerox to provide customers with end-to-end workflow automation solutions to industry-specific content-driven processes. Xerox calls this initiative Workflow Automation as well.

In Q2, we have worked together with Xerox to identify and pursue joint opportunities globally. Both companies are investing in programmatic initiatives, including marketing and sales campaigns, ramp-up of sales and pre-sales training, and training of Xerox technical teams. While the sales title remains long, the pipeline was rising from our joint activities have increased, and we do expect tangible traction this fiscal year.

We expect to see return of these investments in some significant deals in progress that we look forward to seeing close in the coming quarters. We continue to practically develop new partnerships to expand our channel, taking advantage of the frequent changes in the markets we are seeing today.

We continue to focus on developing partnerships in the area of mobile imaging. This quarter, we announced the new partnership with US-based financial service provider iStream to offer innovative Mobile Field Capture solutions based on TIS’s mobiFLOW. We also announced deployment of a mobile check deposit solution for one of Israel’s top five banking groups. These new partnerships complement our continued cooperation with leading financial service providers such as Fiserv, FIS, Jack Henry, in both; the mobile capture and in the remittance processing markets.

In Gartner Research recently published Hype Cycle for Digital Banking Transformation 2016, TIS was named as a sample vendor in the categories of mobile imaging for banking staff and of mobile imaging for banking customers, make sure technology that is expected to reach mainstream adoption with two to five years.

Our core capture business via [indiscernible] continues to generate high-value transactions. During the second quarter, we announced more than $700 [ph] in revenues from two banking process automation wins with partners at leading banks in Italy. In one deal, the company signed a partnership with a leading Italian financial service provider, serving more than 100 banks. And the second deal, one of Italy’s top five banks, operating over 1,500 branches and employing over 17,000, has contract with TIS and another local partner to implement a Digital Mailroom mortgage processing solution.

In the area of content process automation this quarter, we also announced upsell contract worth of $350,000 in total contract value with two long-standing customers that lead the global logistics market. We also announced delivery of an eFLOW project to an Asian-Pacific BPO subsidiary of a national Postal Service, valued at some $100,000.

These wins show that the market is active, and reinforces Top Image continued strong position in this market. A recent Forrester Research report recognized TIS as one of their experts [ph] in Digital Mailroom and production capture. We will continue our efforts to maximize revenues from our core business, while we move up value, delivering end-to-end application software that enabled us to accelerate sales volume and improve sales velocity.

We have also made investments in strengthening our service deliveries by brining on-board to the position of Chief Services Officer, a highly experienced executive, Kristian Niklasson, with a strong track record of success in improving sales, delivery, efficiency. Kristian will focus on facilitating growth and profitability in TIS service offering, as well as maximizing quality of service and customer satisfaction. The addition of the Chief Services Officer will strengthen our capabilities for delivery of these solutions and supporting services while in parallel allows us to increase the productivity and profitability of our existing software-as-a-service and project services operation.

At this point, I will turn the call over to our CFO, Yossi Dagan, who will provide more details about our quarterly financial results. Yossi?

Yossi Dagan

Thank you, Michael. Let’s take a look at our Q2 financial results. Five-year [indiscernible] initiative we initiated in Q1 to reduce cost, which reduced our total headcount. We, nevertheless, delivered revenues in Q2 consistent with revenues in Q1. Our revenue for the second quarter of 2016 were $8.5 million, compared to $8.5 million in the first quarter of 2016 and $9.9 million in last year - in the same quarter last year. Recurring revenues for the second quarter of 2016 were 4.9 million, compared to 5 million in the first quarter of 2016 and 5.2 million in the second quarter of 2015. This slight reduction in recurring revenue was mainly driven by an acquisition of one of our customers in the US.

Gross profit for the second quarter of 2016 was 4.3 million, compared to 4.2 million in the first quarter of 2016, and 6.1 million in the second quarter of 2015. Gross profit for the second quarter of 2016 was 50%, compared to 50% in the first quarter of 2016, and 62% in the second quarter of 2015. In March we announced that we would like - we would undertake a restructuring program to reduce costs and bring the company back to financial health and profitability. As a continuation of this activity, we initiated in Q4 to monitor cost and manage our working capital, which continued with a restructuring initiative in Q1 2016, that’s resulted by a cost reduction of $680,000. In Q2 2016, we reduced our expenses by additional $600,000. As a result, the quarterly operating loss of 96,000, compared to an operating loss of 1.9 million or a loss of 736,000, excluding the restructuring charges of 1.2 million in Q1 2016.

GAAP net loss for the second quarter of 2016 was $180,000, compared to a loss of 2.1 million in the first quarter of 2016, and a profit of 368,000 in the second quarter of 2015. Q2 2016 GAAP loss was $0.01 per share, compared to a loss of $0.12 per share in the first quarter of 2016, and earnings per share of $0.02 in the second quarter of 2015. Q2 non-GAAP earnings was $0.02 per share, compared to a loss of $0.02 per share in the first quarter of 2016, and earing of $0.05 per share in Q2 2015. Due to our forecasting improvements, consistent predictable revenues, cost reductions and working capital management, we are succeeded to show positive adjusted EBITDA of $667,000 in Q2, compared to breakeven in Q1 2016. In Q2, we utilized cash of $575,000 in connection with restructuring that was funded by a nearly acquired credit lines from a bank in Israel. Going forward, we continue our efforts to provide management with real-time visibility into our financial results, as well as true efficiencies, timely financial decisions, and additional steps, which ultimately contribute to the company’s long-term value.

This concludes my remarks and I would like to turn the call back to Mr. Schrader. Michael?

Michael Schrader

Thank you very much, Yossi. We expect our Group financial performance to be sustainable and we are excited about the prospects ahead of us, which, including continued consolidation of our product portfolio, growing pipeline and sales of our on-premise FPA solution, launching of our Cloud FPA solution, expanding development of existing partnerships in both the banking and content process automation markets, securing of new partnerships and continuing the excitement of our improved sales and marketing processes. Furthermore, as I mentioned at the start and Yossi reinforced that, we have enhanced our cost controls and we are almost $700,000 EBITDA productive this quarter. As such, TIS is in a good position to improve shareholder value.

Thank you all very much for your time and attention so far. And I would like to open the call for questions and answers. And thank you all for listening so far.

Question-and-Answer Session

Operator

Thank you. At this time we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of David Hynes from Canaccord. Please proceed with your question.

David Hynes

Thanks, guys. Nice job with the cost controls in the quarter and good to see some early traction with SAP. Question along those lines. And when you look at the pipeline with SAP, does it feel like the customers that are waiting for a Cloud AP solution, or is that kind of more futures as they upgrade their ERP to the Cloud. And, I guess, adjacent to that, help us - maybe think about right-sizing the opportunity on-prem versus Cloud, trying to gauge us the introduction of this new product is going to be a really material event.

Michael Schrader

Yeah, thanks. Hi, David. I think that it’s a good question. I mean, we should differentiate two different kind of opportunities. On one hand, we have the typical SAP accounts payable or Financial Process Automation opportunity, which is usually in on-premise or hybrid installation. As I said before, our product is really integrated deeply into SAP and people don’t have to leave their SAP environment. Whereas, if we look a bit more into the future, and the launch of our Cloud FPA solution, this is really more for the typical Cloud ERP customers. I’m talking about the Dynamics and the Dynamics 365 and NetSuite and those kind of Cloud ERP customers.

Usually, if somebody decides for Cloud ERP system, he want to install like an accounts payable automation solution on premise. So, I would differentiate these two opportunities, we still see a strong traction in the SAP on-premise opportunities. These are the ones that I also mentioned before. And then, in the future, we’ll see a strong potential in the typical mid-market, $10 million to $1 billion revenue companies. We are more and more implementing Cloud ERP systems and there is a strong growth in that market. And this is the typical target client for our end-to-end Cloud FPA solution.

David Hynes

Yeah, okay. That makes perfect sense. And then second, Michael, can you talk a bit about the eGistics pipeline? I understand, one of the challenges, one of your customers was acquired, but those deals can obviously move the needle as they tend to be a little bit larger. So what do you see in the pipeline there? Is there a possibility that we can get an eGistics deal done, I don’t know, in the next two or three quarters?

Michael Schrader

Yes. There is still a pipeline and there is a possibility that we will do deal it there. Let’s not forget, we announced some quarters ago the close of BNY Mellon, which is the big project for us and we are increasing the revenue recognition of this project going forward. As I explained in previous calls, those typical eGistics clients are bigger in size or longer in sales cycle, and are bigger projects in general. I think what is important to note is that, we really did that acquisition, okay, for getting our step into the Cloud, for having the Cloud operation, but also to use Cloud docs as infrastructure and as a product to build our Cloud FPA solution on.

So, I could also answer that question, say, yeah, the eGistics clients of the future will be an FPA client, this is really our strategy is. It’s not necessarily our strategy to only save the existing solutions.

David Hynes

Yeah, okay. And then one last one maybe for Yossi on the numbers. Where are we in terms of kind of cost savings? Is there still more that can come out of the model? Does this feel like a good run rate for OpEx going forward? And then, do you expect to see sequential revenue growth in the back half of the year?

Michael Schrader

Yossi?

Yossi Dagan

Yeah. Hi, David. Regarding the cost reductions, as you recall, we started this in Q1, and Q1 reduced $680,000 compared to Q4. And in Q2, we succeeded to reduce another $600,000. We expect the cost level to be decided in the next two quarters. Actually, we are done with the restructuring and, from now on, we are maintaining this cost level. So, in terms of profitability, we expect to have - to keep the company profitable for the next periods, and to keep also the revenue in a constant way.

Michael Schrader

If I look at revenue, David, you need to see, I mean, we have this typical pattern that usually Q4 is a stronger quarter than Q3. If there are no, like, specific one-time deals, et cetera. I mean, we have in Q3 a bit more vacation time and it’s usually a bit less professional services revenues, but we exceeded our expectations in Q2. And we usually would assume that Q4 would be a bit stronger than Q3. But, overall, we are positive to continue the trend of Q1 and Q2.

David Hynes

Got it. Okay. Thanks for the color, guys.

Michael Schrader

Thank you.

Operator

Our next question is from the line of Richard Baldry with ROTH Capital. Please proceed with your question.

Richard Baldry

Thanks. As you move through your cost reduction strategy, can you talk about your ability to retain the key employees that you want, how your - the turnover in key areas has been? And then maybe with a thought to your sales productivity on that side, you kept the kind of the top-performers you wanted to have, how do you feel about sales productivity at current levels?

Michael Schrader

Yeah. Of course, it’s part of the restructuring, we made efforts to keep the top-performers in the teams. I mean, as part of our restructuring, we really try to focus on strong regions in terms of sales, and to focus on certain regions where we will with the full infrastructure to sell direct. And from other regions, we are working with partners such as Xerox and we are rather working fully indirect now, which will give us the higher efficiency in terms of sales costs in those regions.

Richard Baldry

And maybe looking at partners, can you talk about how much they influence or what percentage of deals, revenues, how you think about it, and your revenue streams either, maybe starting a year ago where they are today, where you see them in a year, so that we can kind of get an idea for what type of sales leverage you should be able to get out of or expect to get out of those channels? Thanks.

Michael Schrader

Yeah. It’s still similar to the past that our partner revenue portion is still around 30% overall. Of course, it differs in the regions, I mean, in regions such as the German-speaking market, or for instance, like in Italy or Singapore, et cetera, we are very strong in, what, our direct business concerning. And there are other regions where we are stronger via partners. What we definitely see in the first two quarters and this is, of course, especially via the Xerox partnership, we see that the channel pipeline is increasing. We have some significant deals in that pipeline. We started some of it in Q1, continued in Q2. And if we take the usual step, as I mentioned before, in the next quarters we should see some of those closing.

Richard Baldry

And then, can you talk a bit about those partnerships in what you consider a typical partnership? How much are your employees or will employees be directly involved in sort of the identification, sales, process, closing process, like, how much will you touch the end-customer and be able to influence the success of those deals versus off-loading that effort to partners completely? Thanks.

Michael Schrader

Yeah. Usually, what happens at the lead generation process is almost entirely run by the partner, especially - and this is from the beginning. So the leads are coming via the partners, and especially some of those bigger partners such as Xerox are able to generate a lot more leads in certain deals that we haven’t seen before. And, of course, in the beginning of the partnership, we are helping actually from that point onwards to qualify that opportunity then also go shoulder-on-shoulder to close those deals, because it’s not a secret, for instance, TIS and Xerox are working together in the workflow automation initiative.

Of course, going forward, we will do more and more tradings to train the partners in selling and qualifying, so that we can scale that up much more. But especially in the beginning of the partnership, we are involved in the qualification in the sales, and in the delivery. So - but we see that progressing and we see that scaling up by more trading to those teams.

Richard Baldry

Right, thanks.

Operator

Our next question is from the line of Kevin Dede with Rodman. Please go ahead with your question.

Kevin Dede

Hi, Michael.

Michael Schrader

Hi, Kevin.

Kevin Dede

You mentioned integration, mobile integration with US customer; and I think maybe you mentioned the name, but it wasn’t really clear; number one. And could you kind of, I guess, add some more color on that? Give us a view to the competitive environment, typically Mitek and how - I guess, how much moving you had to do in order to win this deal?

Michael Schrader

Yeah. So the company name or the partner name is iStream. We also announced [indiscernible] during the quarter. And it’s very similar to what we are explaining before. We are selling mobiFLOW, we are selling, mobile capture SDK, it can be used just as an SDK to be integrated into the applications of our partners or clients. But also could use the bag and eFLOW for intelligent document processing, but it’s not necessary. Some of them only use our mobile imaging SDK to integrate it into their application. The environment is similar to what we do with Fiserv and Jack Henry that basically this partner is integrating that into their offerings, for instance, for mobile check process, but also for mobile duty pay, and then offers them to their clients.

I think the difference in the process is just like which banks they are addressing, what kind of size of banks and how many clients they have. But we still see a potential there and, I mean, you are right about the competition. I mean, you mentioned one name, and there are lots of many others. So, usually, this is the competition we are facing in that market.

Kevin Dede

Okay. Can you give us some insight on, I guess, the number of potential banks that you could work with through this partner, and how much of an advantage will it give you, say, I mean, versus Fiserv and Jack Henry, which are fairly sizable partners, at least in that market?

Michael Schrader

Yeah, sure. I mean, we continue to work with Fiserv and Jack Henry, but we see in the mid-market other banking partners that are addressing value, strategy, unions, et cetera, with those solutions. I don’t want to say exactly like how many banks there iStream is serving, I don’t have the information right now in front of me. I’m sure, we can find that on their website and tell you later on. But, usually, they serve smaller banks and probably a bigger amount of smaller banks. And, as I said before, there are the big partners, the big banking providers, but there is a certain mid-market, it also is now growing into mobile capture lead.

Kevin Dede

Okay, fair enough. Thanks. So, on the SAP HANA certification, can you give us a little more color? Now, just because you won certification, and that means that customers can run Top Image Systems and eFLOW on top of whatever Cloud solution they might already have. And does that mean that eFLOW is exclusive in solving the AP problem - the AP solution? Can you just give us a little more color on how your eFLOW works with SAP?

Michael Schrader

Yeah. So, I mean, if you want to run an SAP add-on, which - our solution is in SAP add-on. So it basically handles the whole end-to-end accounts payable process inside SAP. If you want to run that, you have to have an SAP certification, otherwise, especially the big enterprises will not install that in their SAP system. So, the opportunity here is that, we had to take that effort and what has to be an SAP partner and, of course, to participate in their shows and to generate leads while at those shows in the US, and also recently in Austria for the European markets. But the certification is especially important in order to make sure that those clients are, like, allowed or feeling comfortable to install a third-party solution inside their SAP system. That’s why the certification for the right version, for the right system is very important.

Kevin Dede

Yeah. But that doesn’t mean that your solution is exclusive, right? I mean, there are other choices where they can use a homeground SAP solution, know?

Michael Schrader

You’re totally right. We are definitely not the only solution in that market, there is a big accounts payable market for SAP. There are some other successful vendors there as well. It doesn’t mean that SAP will only certify one.

Kevin Dede

Okay. You mentioned - and congrats on this, a number of deals in the press release and in your prepared remarks. I was wondering if you could just comment on how you see some of those contract values breaking down in terms of revenue license versus service?

Michael Schrader

Yeah. The typical accounts payable SAP installation, let’s say, it’s like a standard installation, it’s going into the 70%-30% in the beginning, 70 license, 30 professional services. But what usually also happens over time is that the clients will have certain change request and will have updates and extension to the systems, so that over time the professional services will also increase of those clients. But either could be done by our partners, also directly by us. But there is some good business also with the existing SAP clients.

Kevin Dede

Okay. And you talked a little bit about, answering your previous questioner’s questions, a little bit about the pipeline. Could you give us a little more color on that? I mean, we’re a third of a way through September and are you seeing this quarter come together maybe to be a little bit stronger than June? Certainly you understand the seasonality regarding the December quarter, but it’s still sort of unclear, sometimes your slowdowns, especially in European market in summer months. Just kind of wondering what you think happens here through September? And how you might see the pipeline versus the earlier part of the year, especially in light of the certifications they have with SAP, the Xerox agreement, this new one on the mobile side in the States, the eGistics opportunities?

Michael Schrader

We see, for this year, a stable revenue. And we see positive trends in the pipeline. What you have to consider is that, with the activities that we have done in the last 12 months and even started a little bit before with the new roadmap and the plan to develop two different new solutions; one, the SAP on-premise solution, and then later during the year also the Cloud-based end-to-end experience, and then we have a partnership with Xerox, we are also changing a little bit our pipeline. We saw a trend that - we don’t want to stay just like with our core capture components. We saw that in some quarters last year that, this business is not necessarily the - doesn’t had many sales and highest growth rates. We believe that end-to-end process automation and also Cloud-based process automation has a higher growth rate. We’re definitely preparing for that, and we see our pipeline changing from only traditional core capture into financial process automation.

This is a process that’s going to happen over the next quarters. There are also some process going to happen to move, of course, once we launch that product more into recurring revenues. So, but in general, we see that here still quite stable and this is also why we run the restructuring initiatives with the cost level that we are now at, in order to be positive.

Kevin Dede

All right. Last question from me, Michael. Earlier this year, you said that the end-market or you commented to the point that you saw the end-market in a state of disruption, given some of the major players out there, were negotiating different deals or in the process of being consolidated or divested. And I’m just wondering how you sort of see the end-market now? Do you think things have settled out a little bit or some of the dust settled, are more of your potential customers moving through the decision process? How would you sort of characterize the environment versus what you saw earlier in the year?

Michael Schrader

I would say, it’s still very similar. There is lots of opportunity in our market, there is lots of consolidation going on, there is M&A activities in our market, and there are - because the companies didn’t want to get into that market, such as Europe, so other that are looking for partnerships with companies like TIS. And I think that definitely gives us a good opportunity and it’s still the same and we are still working on that direction. It’s not, I would say, that something drastically changed in Q2, looking at that situation. So it’s still a very similar situation, it’s the right time for TIS to prepare for the future and to make the changes that we’re probably making. And yes, that’s how we characterize it.

Kevin Dede

Very good. Thank you very much.

Michael Schrader

Welcome. Thank you, Kevin.

Operator

The next question is from the line of Ishfaque Faruk with WestPark Capital. Please go ahead with your question.

Ishfaque Faruk

Hi, Michael and Yossi. Just a quick question for you guys. You guys have the Xerox partnership in place right now. Do you guys have, like, similar partnership in the pipeline for your core capture business?

Michael Schrader

Hi, Ishfaque. How are you?

Ishfaque Faruk

Good.

Michael Schrader

Yeah, definitely. Definitely, we have some of those partnerships that we are looking at. Different - maybe a little bit different to the past, we are not trying to - we know that the partnership like we are running it right now with Xerox with all the investments, we cannot do with 20 partners. So we are trying to focus on some of them, which are some partners that - like Fiserv and Jack Henry and others, like iStream, the new partner that we are mainly working on the mobile SDK in the mobile capture area. And then we have others with the core capture, as you rightly said, and there are some other potentials. We always had some regional local partners and we continue to work with them. Even sometimes there are possibilities that those partners would help us in the big partnership with Xerox.

Xerox is not just Xerox, it’s also Fuji Xerox in the Asia-Pac market, which we also are working together with for a while now, in things like traction. But yeah, if we also look at some others of those, it won’t be plenty, it probably will be two, three, four strategic partnerships.

Ishfaque Faruk

Okay. And do you expect your partnership revenue portion to stay around the 30% range?

Michael Schrader

I think it’s going to increase from the portion if our plans work out. Of course, it’s always depending on the total revenue and also it depends on how our other initiatives will go, because the partner thing is not our only growth initiative, the other growth initiative we’re having is around the financial process automation solutions. I wouldn’t have anything again, which, if it stays at 30%, if the other thing will grow much sharper, but I think we have two good, how do you say, we have two good cards in the game to play for our growth potential, combined with the US market that is still the biggest market in our area and where we have still a good room and a good potential to grow further.

Ishfaque Faruk

Okay, got it. Okay, last question on gross margins. You mentioned that we have, like, gross margin targets which are a little higher than what you have right now. What do you expect, when do you expect to be able to hit those gross margin targets? Do you have like a rough timeline in place, maybe?

Yossi Dagan

Yeah. Hi, Ishfaque. How are you?

Ishfaque Faruk

Good, Yossi.

Yossi Dagan

Actually, the gross margin target is between 55% to 60%, more close to the 60%. This is the target of gross margin and this is where we are in today.

Ishfaque Faruk

Got it, got it. Thank you.

Yossi Dagan

Welcome.

Operator

Thank you. At this time, I will turn the floor back to Shelli Zargary for further remarks.

Shelli Zargary

Thank you, everyone, for joining us today. We appreciate your time and concern. And we wish you all have a very - enjoy the rest of your day and enjoy the summer - enjoy the rest of your summer. Thank you very much.

Operator

This concludes today’s teleconference. Thank you for your participation. You may now disconnect your lines at this time.

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