Top Image Systems' (TISA) CEO Brendan Reidy on Q3 2016 Results - Earnings Call Transcript

| About: Top Image (TISA)

Top Image Systems, Ltd. (NASDAQ:TISA)

Q3 2016 Earnings Conference Call

November 15, 2016 10:00 ET

Executives

Shelli Zargary - Director of Corporate Marketing & IR

Brendan Reidy - CEO

Yossi Dagan - CFO

Analysts

Mark Schappel - The Benchmark Company

Ishfaque Faruk - WestPark Capital

Operator

Greetings, and welcome to Top Image Systems' Third Quarter 2016 Earnings Release Teleconference. 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 your host, Shelli Zargary, Director of Corporate Marketing and Investor Relations. Thank you, Ms. Zargary, you may begin.

Shelli Zargary

Thank you, Doug. And thank you all very much for joining us today. Our earnings release was issued before the market opened this morning and it's been posted on our website in the investors financial release section at www.topimagesystems.com. If you'd like to see the press release with all the financial tables in the PDF format, you can download the press release from the Financial Releases section in the Investors Page of our community area; just go to the bottom of the page of the Financial Release, and there you will see a button or a link where you can download the file.

In addition, we've posted the webcast presentation in the same place at the bottom of the financial release; so go to the bottom and you will see a link where you can download the webcast presentation. And tomorrow you will be able to download an audio recording of the call as well.

Representing the company on the call today is our newly appointed CEO, Mr. Brendan Reidy; and our CFO, Mr. Yossi Dagan.

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 section 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 these details 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 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, so go there to 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 on the site for 90 days.

At this point, I would like to turn the floor over to our CEO, Mr. Brendan Reidy to make his opening remarks. Brendan?

Brendan Reidy

Thank you, Shelli. I'd like to start by thanking everyone on the call for joining us today and I'd like to point out that I joined the Company on August 23 as the Company's new CEO. This is our first quarterly earnings call together, and I'll look forward to this as well as our future calls.

So I'll begin by introducing myself and then I'll discuss our Q3 financial results as well as sharing my 90 day operational and strategic priorities with you. Since joining the company my top priority was to visit all of our operations globally, to listen to our employees and management teams, as well as to meet with our customers and our partners. Our challenges, notwithstanding, I'm encouraged by what I found on these visits and especially by the passion and shared enthusiasm of all our employees, each of whom is committed to supporting our growth ambitions. I've participated in business reviews in each region to evaluate the execution of our sales and marketing strategies, and to consider how to improve our execution and accelerate our development and accelerate rather our achievement of our targets.

We're very fortunate to have an impressive list of marquee customers and a network of valued partners globally that drive demonstrated value from our product portfolio and service offerings. Based on these initial interactions, I'm encouraged by the potential we have for building on our strengths, achieving consistency on our financial performance and transforming our business by focusing our investments on the rapidly growing cloud applications software market; and as a result, achieving a more predictable and scalable top line revenue growth trajectory. My mandate is to institute with a high sense of urgency the measures necessary to better capitalize on our market potential to improve our execution, accelerate growth and return value to our shareholders. My remarks will highlight the key areas on which we need to focus to deliver on these ambitions.

Following my remarks, I will turn the call over to Yossi Dagan, our Chief Financial Officer, who will discuss our financial results in greater detail, and then at the end we'll open up the call for questions-and-answers. Beginning with my background, I most recently served as President, Chief Operating Officer and Chief Technology Officer of XRS Corporation. XRS was the supplier of mobile fleet management software which was subsequently acquired by Omnitracs Limited Partners, a joint venture with Vista Equity Partners. Following a strategic restructuring at XRS under my leadership, we achieved a nearly twelve-fold increase in valuation leading to XRS being acquired at a substantial premium over the price at which it was when I joined.

In parallel over the course of about 10 years, I served as a board member of eGistics Inc. where I remained current with the document process automation market and subsequently participated in the due diligence for the acquisition of the eGistics by Top Image Systems. Previously, I held the position of Chairman, President and Chief Executive Officer of a software supplier named Clara Systems Inc. which was a developer of unified communications management software and was acquired by OPNET Technologies. Before that I was a venture partner at Trident Capital which is a Top Tier private equity firm and venture capital firm in Silicon Valley for whom at various times I served on the Board of Directors of Trident portfolio companies, held full-time positions with portfolio companies and provided strategic advisory services to a number of portfolio companies.

I will now turn to a discussion of our Q3 results. Quarterly revenues were $7.7 million compared to $8.5 million in the second quarter of 2016 and $9 million in the third quarter of 2015. The shortfall was due in part to a delay in the final negotiations of a large government contract; during this period recovering revenue -- recurring revenues were $4.9 million representing 64% of total revenue in the quarter. Q3 expenses were $8.2 million which represents a decrease of $1.7 million compared to third quarter 2015 expenses which were $9.9 million. Our net loss was $200,000 compared to a net loss of $1.5 million in the third quarter of 2015. Adjusted EBITDA was $234,000 compared to a negative $162,000 in the third quarter of 2015.

While these results are not satisfactory, we closed several significant transactions in the quarter which demonstrates that this transformational initiatives we instituted this year are moving us in the right direction, albeit not as consistently as we had anticipated. Highlights of some of the significant deals that we closed in the quarter, financial process automation contract for $420,000 with a leading energy supplier that will extend the use of eFLOW accounts payable for SAP, globally including to North Central and South America. We signed an agreement valued at over $525,000 for licenses and services for forms processing project in the government sector in Latin America that we're deploying with a key strategic partner. We had a contract for an upsell of the eFLOW accounts payable solution to an existing customer in the European power sector.

We had an agreement on a high profile time sensitive large-scale forms processing project with a total contract value of $350,000 that we carried out with an affiliate of one of our strategic partners for government in the Asia-Pac region. We have signature on an agreement with a total contract value of over $450,000 for licenses and professional services to deploy eFLOW in the U.S. public sector and the framework of this project will be classifying and extracting data from over 100 document types and have volumes of upto 40 million documents per year. So we're encouraged by what we see among these deals that are continuing to increase the sales of eFLOW accounts payable which is the primary financial process automation solution on which we're focusing most of our sales and marketing efforts.

We're also pleased to note that several of our key wins involved cooperation with strategic partners. And we're confident that by continuing to invest in these partnerships we will continue to grow our joint pipeline and to increase our joint closures over the coming quarters. So in addition to the early adopter sales that we oppose this year, we're especially encouraged by the growth of our pipeline for the newly released eFLOW accounts payable for SAP solution and that provides end-to-end accounts payable processing for customers using SAP on premise which is a solution that enables full management of invoice capture, validation and approval work close from directly inside SAP. We released the first version of the solution in Q1 on schedule and continue to upgrade and deploy it throughout the year.

Throughout the quarter we delivered a steady stream of lead generation campaigns for each FLOW AP which leveraged our successful execution of the new marketing automation programs that we installed this year. These campaigns included a series of online webinars, blog and video blog posts, along with sponsorships at regional industry events and trade shows. This quarter we also ran a campaign in SAP Insider, an online community of SAP users where we prominently promoted our AP solution to SAP customers. Another important proof point during the quarter was that our credibility is enhanced by the publication of Gartner Research's IT market clock for financial management applications in which the analyst firm named us as a sample vendor for AP and voice automation solutions. Gartner recommends that CIO should consider purchasing the solutions within the next twelve months.

We're also encouraged by the momentum we are building in the Asia-Pac region for our banking automation solutions. Within the framework of this campaign we have been presenting our banking process automation solutions at a series of financial events in Hong Kong, Singapore, Sydney, and other financial centers in the region. We're proud to mention that Top Image Systems was one of a select few vendors chosen to present at the influential Synovate Asia Impact [ph] event that took place this month where we were invited to demonstrate our eFLOW trade finance solution. We continue to provide support and services to our numerous commercial and corporate banking customers in APAC while also extending our reach to other growing markets in the banking sector.

In the area of mobile capture and imaging for banks, we focused on expanding our partnerships with financial service providers to whom we provide our mobile imaging software development kit, mobiFLOW or SDK. We have established credibility in this market through positive relationships with mobile banking industry analysts, journalists, and with leading financial services providers; evidence this quarter by the mention of Top Image Systems as a sample vendor in both Gartner Research's Hyped Cycle for Digital Bank Transformation 2016 and the IT Market Clock for mobile imaging for banks 2016. This quarter we did sign a mobile check deposit when at a leading North American bank with -- along with our partner Aligent [ph] which is a Jack Henry Company, and our participation at the Money 2020 Event in Las Vegas last month which reinforced our presence in this market.

Another key proof point reinforcing our continued strength in the enterprise capture market which we announced this quarter was the issuance of a U.S. patent to Top Image Systems protecting our advanced innovative data classification technologies.

Let me now turn to a discussion of our 90-day operational and strategic priorities. Our imperative is to return the company to profitable growth from our core capture and process automation portfolio while we transform our business to focus on the higher velocity cloud application software market opportunity. Well, first focus on the operational as such we are instituting. As you know in March of 2016, the Company announced and began the execution of a restructuring initiative to reduce costs and improve profitability. These measures have resulted in a decrease in our non-GAAP operational costs in Q1 and Q2, as well as an improvement into adjusted EBITDA in both quarters. However, we continue to post inconsistent quarterly topline revenue results.

As mentioned in my introductory remarks, I participated in in-depth business review in each of our regions. Based on the outcome of these reviews we have identified and started to implement the following six measures to deliver more consistent topline revenue growth. We've instituted rigorous opportunity pipeline reviews to anticipate possible interventions that maybe necessary to help close our big deals and identify the steps needed to balance large transactions with higher volume of smaller transactions that can fill the gap, additional capacity and leads qualification to increase the size and shape of our opportunity pipeline, targeted campaigns to excel rate upsell of our portfolio to install base of customers with a particular focus on our recently released eFLOW accounts payable for SAP. We have continued to focus on services delivery with better controls and implemented best practices that improve efficiency and capacity to support more projects in areas that we've already made significant progress in the last quarter. Steps to better leverage and expand our remittance business in the U.S. and investments to support our strategic partners, particularly partner sales enablement and support.

In the IDC worldwide document or Closed Services Markets Gate [ph] published in September which named Xerox as one of the leading vendors, the report specifically cites Top Image Systems as Xerox's key partner for enterprise capture, one of only three partners mentioned in the report. I'm very encouraged by the strength of our Xerox pipeline. However, the sales cycles are exceedingly long due in part to not having more focused partner enablement tools and resources to accelerate deal closure. In short, our biggest challenge and opportunity in improving our topline revenue is better execution from lead to deal. I will be relentlessly focused on addressing this challenge to ensure that our revenue perform is more consistent.

Turning to strategic priorities, in addition to enhancing the core capabilities of our existing products, we are now on a journey to transform our Company with cloud application software company by focusing on the rapidly growing mid-market with particular focus on the accounts payable segment. The cloud mid-market is growing at 30% compounded annual growth rate according to Goldman Sachs, and the accounts payable automation capability is at an early stage of adoption with only 40% of mid-market companies having digitized invoice processing and implemented straight through processing. The recently published Gartner Research report, Finance Is Moving To The Cloud; posted strategic planning assumption that by 2025 demand for financial management application deployments delivered via the cloud will equate to more than 65% of the total market spend.

Within this broad category, Gartner determines that AP Invoice Automation Technology in particular is considered cloud viable and goes on to indicate that the cloud is likely to become the preferred deployment model for the software within three years, if not already. Furthermore, in accordance with recent market research, companies that have already adopted accounts payable automation are now planning to upgrade to the newest generation of cloud based accounts payable solutions given the potentially significant reductions achievable in total cost of ownership. Our ambition is to capitalize on this under-served market opportunity, and we are confident that we have the assets and the expertise to achieve those ambitions.

First, we have already developed a private cloud infrastructure through our remittance processing business. We know how to manage highly secure data centers, we are leveraging this expertise to deliver a public cloud infrastructure that is secure and which can scale to support the largest multi-tenant cloud operations. Second, our cloud docs archival solution provides a highly scalable platform for achieving large volumes of financial documents in the cloud. Third, our product team has developed a born-in-the-cloud end-the-end accounts payable solution that is designed to capture incoming vendor invoices in the cloud, provide machine learning technology to extract and validate invoice data in the cloud, and a workflow to process and approve invoices in the cloud, as well as to integrate this backend ERP platforms, both on premise and cloud-based. Fourth, we have just concluded a series of business planning sessions relating to our transformational cloud application software program. This program is being used to build on our initial business plan and will be the basis for an aggressive and sustained investment strategy beginning in fiscal 2017 and for creating scalable high velocity recurring cloud-based revenue streams.

Let me conclude by stating here my personal commitment. I along with the executive management team and our valued employees are fully committed to this journey to deliver customer value by transforming our company into a high growth cloud services business. I believe in the vital importance of delivering high quality products that ensure high levels of customer loyalty and repeat business, all of which are designed to deliver value to our shareholders. I'm pleased to have joined you on this transformational journey.

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, Brendan. Let's look at our Q3 financial results. Our revenues for the third quarter of 2016 were $7.7 million, compared to $8.5 million in the second quarter of 2016 and $9 million in the same quarter last year. Revenues in Q1 and Q2 of 2016 were $88.5 million, the fluctuations below $5.5 million Q3 is attributable to the long sales cycle of core capture agreements compounded by the traditional impact of seasonality in Q3 due to extended clarifications in Europe.

Growing FPA revenues will decrease these revenues fluctuations as FPA yields have shorter sales cycles and faster revenue recognitions. We expect FPA on premise to increase in our contribution in 2017 having only being launched in March of 2016. Furthermore, we expect FPA in the cloud to start to having an impact towards the second half of 2017. Recurring revenues for the third quarter of 2016 were $4.9 million to $4.9 million in the second quarter of 2016, and $4.7 million in the third quarter of 2015.

Gross profit for the third quarter of 2016 was $3.6 million, compared to $4.3 million in the second quarter of 2016, and $4.7 million in the third quarter of 2015. Gross profit for third quarter of 2016 was 47%, compared to 50% in the second quarter, and 52% in the third quarter of 2015. In March, we announced that we would undertake a restructuring program to reduce costs and bring the company back to profitability. This effort resulted in an accumulated non-GAAP cost reduction of $3.7 million. GAAP net loss for the third quarter of 2016 was $0.3 million compared to a loss of $0.2 million in the second quarter of 2016, and compared to the net loss of $1.5 million in Q3 of last year.

Third quarter 2016 GAAP loss per share was $0.02 compared to GAAP loss per share of $0.01 in the second quarter of 2016 and compared to a loss per share of $0.09 for the third quarter of 2015. Third quarter 2016 non-GAAP profit per share was $0.02 unchanged from the second quarter of 2016, and non-GAAP loss per share of $0.06 for the third quarter of 2015. Due to our cost reduction in working capital management, we succeeded in showing positive adjusted EBITDA of $234,000 in Q3 2016 despite the fact that our revenues decreased. In Q3 of this year, we utilized cash in the amount of $290,000 in connection with the restructuring we initiated in Q1. We continue to strictly control our cost in accordance with plans in order to maintain the company's positive adjusted EBITDA, which is critical for the long-term financial results of the company and to stick ways to augment the important our company's finances.

Before giving the floor back to Brendan, I would like to emphasize the importance of having Brendan on our management team. He brings to TIS, decades of experience in software industry, representing activity to shareholders in evaluating and optimizing the value of technology firms, as well as well as important track record in successful turnarounds and maximizing shareholders value. As the Company continues to focus full force on our growth drivers, with Brendan's guidance on the direction of the executive management team, we believe that we will be able to capitalize on the Company's potential.

This concludes my remarks, and I would like to turn the call back to our CEO, Brendan Reidy. Brendan?

Brendan Reidy

Thank you very much Yossi. As I said before, we're faced with a great challenge to improve our topline revenue through smoother and more consistent execution. Our management team and I are personally very involved in this turnaround and will be placing our primary focus in the next 90 days on addressing this challenge to ensure that our revenue performance is more consistent. At the same time we are moving forward rapidly in the development and execution of our long-term strategy for developing and bringing to market directly with our partners cloud-based financial process automation applications for the under-served mid-market solutions that we expect will thrive -- will drive rapid profitable and repeatable sales over the next several years. The combined impact of the restructuring which caused a reduction in sales staff together with the transition in our product strategy which is still under way cost us from the start of the year to maintain conservative short-term revenue expectations. This need for caution is compounded by the fact that a significant proportion of our revenues are still generated from long-term capture products -- projects rather characterized by high fluctuation and unpredictable deployment schedules.

We expect in the longer term that the steady progress we are making in transitioning our product strategy and the some impact of our growth drivers will compensate for this temporary shortfall, and bring the company back to steady profitable revenue growth. On the financial side, we have been implemented strict adherence to cost controls in alignment with restructuring and relatively low cash burn. The steady stream of recurring revenues ensures predictable income received from our strong base of long-term satisfied customers. Together with the cost controls, this supports the company's efforts to regain and maintain financial health and profitability. Looking at the bigger picture, I am confident that we have the talent, knowledge, resources and dedication to overcome our challenges and are thus well positioned to drive increased profitability and create sustainable shareholder value.

Thank you all very much for your time and attention so far. Now, I would like to open the call for our questions-and-answers.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Mark Schappel from The Benchmark Company. Please proceed with your question.

Mark Schappel

Hi, good morning, thanks for taking my question. Brendan, welcome aboard. I'm wondering if you could provide some additional details on the missed government contract; for instances, is that deal still in play? Did it go to a competitor? What were some of the reasons for the delay?

Brendan Reidy

Mark, thank you for joining us. This is a -- as with other government contracts, sometimes the final process is significantly longer than expected. This is one where we have a letter of intent from the customer, and of course, we're not going to recognize revenue just strictly on a letter of the intent. So we're still expecting to close it but final negotiations have been prolonged and at this point we're not stating a date by which it will close, however, we do expect it to close.

Mark Schappel

Okay, thank you. And then I was wondering if you could provide some additional details on the mobile check deposit win. So for example, was that a displacement of a competitor in the deal or was it -- was there greenfield opportunity?

Brendan Reidy

Yes, so that was a greenfield opportunity with a major bank that we've been involved with historically, and this was a new win for us.

Mark Schappel

Was that the only U.S.?

Brendan Reidy

No, it was not.

Mark Schappel

Okay, great. And then in your prepared remarks…

Brendan Reidy

I'm sorry. It was a North America deal, just not U.S.

Mark Schappel

Okay, great, thanks for clarifying that. And then in your prepared remarks, you noticed an increasing focus on the markets and I was wondering if you could just speak a little bit to what implications you think they will have on your sales force as some your salesforce is historically chased larger deals with larger banks.

Brendan Reidy

Yes, that's an excellent question, Mark. So when we look at the first release of the software, the focus is on SAP -- marketplace, that SAP has approximately 54,000 installed customers. And they are -- SAP identifies the mid-market as companies with revenues of between $20 million and $1 billion in annual revenues. So what we believe for our salesforce is that the primary difference and sales efforts will be around -- really the pre-sales teams and that's where we're bolstering our skills right now to make sure that we have the people who can speak to a horizontal application across industries for a particular application. So we have added strength in the sales team, we have specialists in North America, in particular, that are very focused on this marketplace, who have decades of experience in the space.

Mark Schappel

Okay, thank you. That's all for me.

Brendan Reidy

Okay, thanks Mark.

Operator

[Operator Instructions] Our next question comes from the line of Ishfaque Faruk with WestPark Capital. Please proceed with your question.

Ishfaque Faruk

Hi, good morning. Just a couple of quick questions; your gross margins were down like 300 basis points from the last quarter; like -- what are some of the things that you're seeing with respect to that?

Yossi Dagan

So gross margin this quarter was 47% versus 50% in the last quarter. This is actually mainly due to lower revenues this quarter versus the previous quarter. We have a bunch of expenses which are fixed expenses, that are not related to revenues and this is actually impacted by other revenue as -- lowered the gross margin -- I'm sorry, as higher the gross margin will get.

Ishfaque Faruk

Okay. Another question, your current sales and marketing expenses ever since the Xerox partnership; do you expect your sales and marketing revenues to stay at this level going forward or do you expect them to come down a little more or move a little higher?

Yossi Dagan

We expect to keep the sales and marketing at this level; we're doing a lot of activities with our partners, as well as automated marketing campaigns. We used since the beginning of the year a lot of social events and social media. So we do not expect this to increase significantly but as Brendan mentioned, we are investing in -- in fact -- I'm sorry, not [indiscernible] to make sure that we had the right stuff to still be at FPA [ph]. So it might be a slight increase but I would not expect a significant increase next year.

Ishfaque Faruk

Okay. With respect to your pipeline, do you have like -- significant FB&A or content processing automation contracts in your pipeline with respect to government contracts or enterprise contracts?

Brendan Reidy

So our marketing pipeline today has just gone through a very detailed -- I would call it scrubbing activity where we've gone through and basically we're requalifying every lead that's in the pipeline to make sure that it actually is a real sales opportunity. I'm getting very -- we're getting excellent results from the marketing automation, capabilities that we've added, I'm especially impressed with our Chief Marketing Officer and with his team, and the capabilities that they've brought to the company, most of whom are relatively recent hires over the past year to the company. The government contracts are more difficult to predict and often times they're done with a partner. So the government contracts tend to be much larger, tend not to come through marketing automation tools but really through the dedicated sales forces that combine from our partners and our own activities to generate and follow through with.

Ishfaque Faruk

All right. Thank you very much.

Brendan Reidy

Thank you.

Operator

Our next question comes from the line of George [ph] with MKH Management Company. Please proceed with your question.

Unidentified Analyst

Hi guys. Brendan, nice to have you with the company. A few questions, is it fair to be in the deals that you've mentioned and also in the one that was delayed. There seems to be a lot of government deals. Is that unusual for the company? I know we've always had government deals but this needs to be a bigger focus in any remarks. Can you just elaborate on that?

Brendan Reidy

So George, first of all, thank you for the welcome. You're right, we do have a large number of government deals and I think the government deals that we have really illustrate our strength in processing very large volumes of documents. So when I look at the government deals that we have -- they tend to be related on things like processing election results, processing census materials where there is really a time critical aspect to processing an extraordinarily large volume of documents. So those are contracts where we are very likely to win because we see very few competitors who have our capabilities to accomplish the end goal of the client in that case.

Unidentified Analyst

And is this a very lumpy business, so is there -- it tweaked every few years because of [ph]. And are we moving towards -- is that moving towards a higher peak; a higher level or is it going to bottom down out; is it going to come decline?

Brendan Reidy

I think you've hit it on the head that that will always be a lumpy business and the danger for a company that focuses only on government contracts is that their revenues and earnings tend to have highly seasonal periodic spikes based on government budgets, and based on -- to your point, how frequently one does a census or not. What we're doing is, we will continue emphasizing those opportunities, we'll continue to win those opportunities but what we're really going to do is counterbalance the lumpiness of those revenues with these smooth flow that will be enabled from our cloud business. So I think that you know going forward what you will see is that we continue to have those large contracts but over the next several years what I'm hoping to do is very significantly ramp the cloud business and that at some point in the future the cloud business will overtake the core business. So we're not going to neglect the core but we're going to place primary emphasis on the cloud business.

Unidentified Analyst

Okay. And just the governing business, is it at unusually high level this quarter or this year or not really?

Brendan Reidy

I don't think it's unusually high when I've looked at previous years revenue streams. We've always actually had a good concentration of government business.

Unidentified Analyst

Okay, great.

Brendan Reidy

In fact less than 50% but it's clearly a very meaningful market segment for us.

Unidentified Analyst

Okay. And I just wanted to ask again a question that was mentioned before, I look at these sales and marketing lines, it's down 41% year-over-year, it's down $1.1 million. I'm just wondering any change like 20% of sales or it's unusually high for a software company. Is this a sustainable and we've had investments on the marketing; so it means that the sales side has come down even more. Can you comment on that Brendan? Does that make sense?

Brendan Reidy

So George, I would say at this particular point in the transformation the company is going through, it's difficult for me to apply some of the historic metrics to see what the right number is within the context of any particular quarter. We have a situation where -- when the Company restructured earlier in the year, sales was affected as was every aspect of the company, and now we're -- it really introducing a heavier marketing spend as we're filling the pipeline and that as we add cloud customers those marketing expenses as a percent of revenues will decline while have the absolute dollar amount remains the same. So right now I would say the numbers are distorted by the fact that we're so investing into the cloud business and you don't have the revenues there yet.

Going through a transformation like this, one has to be careful not to say, well, you know in the past I paid 20% of revenue in sales and marketing, if we were to do that we would never be able to grow the cloud business.

Unidentified Analyst

Okay. And then one more question; you talked about some of the -- you said you were encouraged by the pipeline deals with partners in particular with Xerox but those are very, very long sales cycles. And then you mentioned what you guys can do -- shrink that sales cycle but [indiscernible]. Can you elaborate on that?

Brendan Reidy

So I think first of all we're going in on a deal-by-deal basis and scrapping the pipeline and then making sure that we're putting management's attention on the opportunities that we can most strongly influence. But then the other thing that we're really investing and is our partner enablement program where to-date it or historically it was more a partner identifies an opportunity and then one of our sales people goes along with the partner to demo the product and to move the opportunity along. Now what we're doing primarily in cooperation with Xerox is giving them the tools that they need so that their own sales people can manage the process. And we've put that in the category of partner enablement; it ranges the whole gamut [ph] of marketing activities such as producing collateral and documentation and so forth.

We've invested quite heavily in this, over the past several months we've actually trained 400 Xerox employees on the capabilities of our product and that includes both sales from -- here is how to sell it, here is how to integrate it with Xerox's capabilities; and then also here is how to operate it. So that Xerox has really made this co-investment with us in terms of the investment they've made in training their people.

Unidentified Analyst

And it's a question on efficiencies, would that actually speed up the sales cycle?

Brendan Reidy

I think it will significantly speed up the sales cycle, especially from the fact that Xerox will be able to pre-screen a significant number of the opportunities so that before we're actively involved, it's already a highly qualified lead. In the early stages of joint selling like this, we'd be required to invest far more heavily in sales that aren't necessarily qualified but now as we train their people, they will be doing the pretty identification to make sure that the right deals are the ones that are focused on.

Unidentified Analyst

Thank you. And then a final question; just on -- I've been wondering if you can give us some color on sales by geography and maybe some comments to see where there is strength and where there is weakness?

Brendan Reidy

Okay. So we don't produce or we don't publish detailed information by region. I will say that my expectations for the cloud offering are significantly higher in the U.S. than in other markets just because the adoption curve for cloud offerings is so significantly more advanced in the U.S. than it has been in the other geographies in which we operate.

Unidentified Analyst

Okay. And again, thanks for taking my question.

Brendan Reidy

Okay, thank you George.

Operator

Thank you. Our next question comes from the line of Anthony [ph], a private investor. Please proceed with your question.

Unidentified Analyst

Hi, good morning. Question for you, I guess should we look at your third quarter as being your historically low quarter of the year in terms of profitability and revenue?

Brendan Reidy

Yes, that's correct.

Unidentified Analyst

Okay. Do you guys feel as though you can maintain -- you talked about increasing marketing spend, do you -- is that as a percentage of sales or do you anticipate that you'll continue to remain -- let's call it EBITDA positive in spite of the increase in marketing expenses?

Brendan Reidy

Okay, very good questions. I'll address the first part which is the seasonality in the business. So a meaningful percent of our revenues are derived from Europe and in third quarter, of course, deals signed in August are few and far between in August due to vacation schedules. So I think we'll always have seasonality in the third quarter especially to the extent that the European revenues are so high. In terms of the go forward spend, I see our marketing expenses remaining pretty close to what they currently are but diminishing as a percent of revenue. So we really revamped the marketing team, the marketing tools and so forth over the past year. So we will now be seeing the significant results of that investment going forward. I don't anticipate adding in a meaningful way additional resources to marketing, I think they are doing a great job there and we're also at the early stages of seeing their results.

Unidentified Analyst

Great. Okay, thank you very much.

Operator

Our next question comes from the line of Victor Helper [ph] with Hudson Capital. Please proceed with your question.

Unidentified Analyst

Hi Brendan, welcome aboard. A question regarding the market size of the opportunity that exists for Top Image Systems. How would you qualify today the environment for data capture and where you operate, is there any growth? Is the market declining? Are you losing market share or are you gaining, any idea about that?

Brendan Reidy

Thanks for joining us Victor and thanks for the warm welcome. So industry analysts tell us that the core capture market should continue growing at about a 5% per year rate and what we are seeing as there is a lot of flux in the marketplace today with competitors consolidating, being acquired -- two of our primary competitors are going through organizational restructurings right now. So I would suspect that's causing a lot of customers to hesitate and that certainly would have influenced a revenue slowdown across the entire marketplace over the past year. So going forward though, we still see that growing just not at the rate that it may have historically and that further justifies our need for investing in the alternative cloud application where we expect to see very substantial growth.

Unidentified Analyst

So you would say that organic growth should be around 5% and beyond that will be particularly market share?

Brendan Reidy

So organic growth in the core business and the capture business and the historical; so that's an on promise large system on sales cycle business, it basically if you think of -- you could almost think of Top Image Systems as two companies, the legacy, and then the new growth which will be the cloud financial process automation business that we're now just entering.

Unidentified Analyst

Okay. And -- so basically on the core organic business, you think there is a 5% organic growth -- I mean expected growth from now and that you should be able to generate in the future?

Brendan Reidy

That's correct. So those revenues -- the growth will really be taken over in the financial process automation business.

Unidentified Analyst

Okay. My second question is related to your partnerships; in the past Top Image Systems had a lot of different partnerships with a lot of different firms, and today on the call you're mostly highlighting Xerox; so what is the status of the other partners?

Brendan Reidy

So we have approximately 17 partners and frankly, that's way too many for a company of our size. So I've asked some of my executives to help me rationalize the program and figure out who are the partners that can really help move the needle for us. Xerox of course is our most strategic partner, and I believe that we have a very good relationship with them. Some of our other partnerships tend to be more regionalized as you would expect, and have isolated but effective contributions. I've really though asked why so many and where are the ones that we should really place our emphasis.

Unidentified Analyst

If I understand correctly between the lines, you're going to prioritize certain partners?

Brendan Reidy

Yes, absolutely. My belief is that we're living in a world where sometimes companies define themselves as partners and what it means is they exchange logos on websites. And I'm really looking for partners who can help take us to market, partners who can provide technologies that enhance our technologies, and really emphasize what our channel strategy should be, which partners are we selling through and with to grow the topline.

Unidentified Analyst

Okay, all right, I got it. Thank you.

Brendan Reidy

Sure, you're welcome.

Operator

There are no further questions in queue. I'd like to hand the call back over to management for closing comments.

Brendan Reidy

Okay, thank you. I'd like to thank all of the participants who listened today and especially for the insightful questions that were asked. And thank you to each of you that gave me such a warm welcome today, I'm looking forward to our next call and hopefully to showing some better results than we reviewed today.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!