Seeking Alpha
Value, long only, medium-term horizon, micro-cap
Profile| Send Message| ()  

This article discusses the turnaround of Top Image Systems (TISA), the intrinsic value of the stock, and the role of management in energizing the investment bet.

Background

Top Image Systems develops automated data capture solutions for managing and validating content gathered from customers, trading partners and employees. Solutions deliver seamlessly the extracted data, regardless of source and format, to applications such as document and content management, enterprise resource planning, or customer relationship management.

TISA's software improves clients' business processes by integrating different types of data and controlling their flow throughout the enterprise. The platform solution integrates multiple information sources into a single enterprise-level solution that increases effectiveness in the clients' business processes and boosts their shareholder value.

Story

Izhak Nakar, Founder and Executive Chairman, left the company in 2001 and returned to TISA in 2009 when he purchased 20% of the company from Charterhouse Group International. Since then he has been involved in the business along with CEO Ido Schechter. Currently, both gentlemen own 25%.

Since 2009, TISA's strategic focus has been on the core eFlow software platform -banking (launched end of 2009), digital mailroom (launched end of 2009), and mobile solutions (2012 launch, growth in 2013); and on growing distribution through third parties.

Operationally, the firm increased effectiveness; specifically closing non-profitable officers and expanding third party distribution. TISA's data management is input to a broader enterprise management function, the domain of large enterprise software partners.

Financial stability was improved and business risk reduced. In the fourth quarter of 2011 the company extinguished convertible debt with equity and operationally generated funds.

Value Metrics

Table --TISA, Selected Value Metrics

(Amounts in millions of US$, unless otherwise noted)

FYE 12/08

FYE 12/09

FYE 12/10

FYE 12/11

Yr. Avg.

Q 6/11

Q 6/12

Revenues

32.22

23.53

21.76

28.67

26.55

7.06

8.02

Revenue Growth (y-o-y)

39%

-27%

-8%

32%

9%

14%

EBIT

-1.70

1.14

1.76

3.38

1.15

0.97

0.90

EBIT / Revenues

-5%

5%

8%

12%

5%

14%

11%

NOPAT

-1.70

1.14

1.76

3.21

1.10

0.97

0.90

NOPAT / Revenues

-5%

5%

8%

11%

5%

14%

11%

Operating Capital

10.71

10.34

9.06

8.08

9.55

8.31

8.86

Operating Capital / Revs.

33%

44%

42%

28%

37%

29%

28%

ROIC

-16%

11%

19%

40%

14%

47%

41%

Cash Flow from Ops.(Adj.)

1.77

1.02

2.51

4.37

2.42

1.22

0.37

CF f/Ops. / Revenues

5%

4%

12%

15%

9%

17%

5%

CF f/Ops. Growth (y-o-y)

nm

-42%

146%

74%

59%

-70%

Free Cash Flow

-5.06

1.14

1.88

4.13

0.52

2.28

0.35

FCF / Revenues

-16%

5%

9%

14%

3%

32%

4%

FCF Growth (y-o-y)

nm

nm

65%

120%

92%

-85%

Cash & Mkt. net of Debt

-0.96

-3.93

-2.32

2.61

-1.15

7.29

4.53

# Shares

8.93

9.32

9.39

11.11

9.69

11.00

12.49

# Shares Growth (y-o-y)

0%

4%

1%

18%

6%

14%

  • ROIC (Return on Invested Capital) = NOPAT / Operating Capital
  • NOPAT (Net Operating Profit after Taxes) = EBIT (1- Tax Rate)
  • OC (Operating Capital) = NOWC (Net Operating Working Capital) + OLTA (Operating Long-Term Assets)
  • WACC (Weighted Average Cost of Capital)
  • EVA (Economic Value Added) = (ROIC - WACC) OC
  • FCF (Free Cash Flow) = NOPAT - (Changes in OC). As an approximation FCF = CFO (Cash Flow from Operations) minus Depreciation and Amortization
  • EV (Enterprise Value) = PV of prospective FCF, growing at g; discounted by WACC
  • Stock Value = (EV + Surplus Cash - Debt) / # Shares

The table shows the improvement over the last four years, notably in ROIC and in FCF. ROIC grew 19% in FYE 12/10 and 40% in FYE 12/11. FCF increased by 65% to $1.88 million in FYE 12/10, and by 120% to $4.13 million in FYE 12/11.

Driving these metrics are improvements in EBIT margins and NOPAT, and tight management of Operating Capital.

Improvement was achieved by concentration of business in Europe, despite troublesome economic conditions. Europe represented 70% of total revenues in FYE 12/11.

Q2 Earnings and 2012 Guidance

On August 8 TISA reported Q2 financial results. Notably, Q2 ROIC was maintained at over 40%. Revenues increased by 14% y-o-y. Decrease in FCF was due to the confluence of a relatively low Net Operating Working Capital (NOWC) amount in Q 6/11 ($0.14 million) and a high amount in Q2 ($1.05 million); mostly due to the timing of transactions in the vicinity of the end of the quarters. Such confluence, in the short term, is expected to reverse and normalize over the medium term.

The company reiterated FYE 12/12 revenues guidance, between $33.5 million and $35.3 million, or 17% to 23% growth y-o-y; and raised Non-GAAP Operating Income guidance to the range of $4.4 million - $4.7 million, from $4.2 million - $4.5 million.

Evidently, management expects revenues to accelerate in the second half of the year. In order to achieve guided revenues of $35.0 million in FYE 12/12, revenue for the second half of the year must reach $19.3 million, 22% growth over $15.7 million, revenues for the first six months.

During the Q2 quarter, the company opened its North American headquarters in New York City and initiated Mobile solutions sales and marketing campaigns in the USA.

Market Opportunity

The market for document capture is characterized as sizeable, rapidly-growing; and supplier-dispersed with many competitors having substantial clout and greater resources than TISA; specifically regarding product suite, customer rosters, global reach, and financial resources. TISA's competitors include EMC (EMC), Kofax (OTC:KFAXF), Readsoft (RSOF B.ST), Mitek (MITK), and many data entry systems.

Noteworthy is TISA's presence, as a leader, in Forrester's most recent industry review. Forrester Wave for Multi-channel Capture, 3Q 2012, distinguishes TISA (at the trailing end) among a group of leaders --Kofax, EMC, Open Text (OTEX), IBM (IBM) -- in accordance with three ranking categories; current offering, strategy, and market presence.

TISA indicates that the global document capture market is expected to double to $4.0 billion by 2015.

Active industry consolidation activity is likely to continue in the foreseeable future.

Fundamental Value

The intrinsic value of the stock is conservatively estimated at $5.0/share based on $2.68 million in FYE12/12 FCF, growing 10% in 2013, 9% in the following two years, and 5% in perpetuity thereafter. Weighted Average Cost of Capital is 11% through 2015 and 10% thereafter.

The $2.68 million, FYE 12/12 FCF estimate, represents 8% of guided revenues. This is a reasonable estimate in view of the comparable percentages in the two previous years; 14% in FYE 12/11 and 9% in FYE 12/10.

The current stock price is $4.22/share.

Management

Izhak Nakar has a background particularly suited to TISA's purpose. He is experienced in early stage high-tech, having founded NIR4YOU, a privately held investment company that sold three out of fourteen companies in portfolio to major enterprises, such as SAP (SAP) and Microsoft (MSFT).

Mr. Nakar received "Man of the Year Award" in Business and Management ('95-'96) in recognition of his contributions to the growth of Israeli high-tech companies; and the "Israel Defense Award" for the development of high-tech systems for the Israeli Defense Force. He served in the Israel Air Force from 1970 to 1987, where he led various large-scale highly technical development projects. Mr. Nakar earned a B.Sc. in Computer Science from Bar Ilan University, and an MBA from Tel-Aviv University.

Ido Schechter joined the company in 1996. After working in Sales and Marketing he became CEO in 2002. Previously he worked in processing services. Mr. Schechter earned a B. Sc. from Hebrew University in Israel, and M. Sc and Ph.D from the University of Guelph, Ontario, Canada.

Summary

This turnaround story is remarkable judging by the firm's performance in value metrics.

After clean up and damage control beginning in 2009, core business development is now increasingly at the center of management's attention. Strategy is reasonable and clearly presented, and the financial position is stable. Momentum is positive.

The firm's small size, relatively narrow product offering and modest distribution are competitive challenges. Nonetheless the company has proven adept at strengthening product and distribution and expanding economic benefit.

Management's skills and experience are well suited to expand and harvest value. Management's economic interest is well aligned with that of shareholders in general.

Source: Top Image Systems: Improving Value Metrics, Strong Momentum, Shrewd Management

Additional disclosure: The material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Views and opinions in this article may be wrong. The analysis, including financial computations, presentation, and views, do not necessarily conform to any sanctioned or accepted standards. Presentation and computations entail a probability of error, which is entirely possible. I am not an investment management professional; please do not rely on this material, do your own due diligence.