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Top Image Systems, Ltd. (NASDAQ:TISA)

Q3 2012 Earnings Call

November 7, 2012 10:00 am ET

Executives

Shelli Zargary – Director of Corporate Marketing

Izhak Nakar – Founder and Executive Chairman

Gili Shalita – Chief Financial Officer

Analysts

Chuck S. Lipson – CSL Associates LP

George Melas – MKH Management

Richard L. Feldman – Axiom Capital Management, Inc.

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome to the Top Image Systems’ Third Quarter 2012 Quarterly Earnings Release Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)

I would now like to turn the conference over to our host, Shelli Zargary, Director of Corporate Marketing and Investor Relations. Please go ahead.

Shelli Zargary

Okay, thank you, Ian, and good day, every one. Again, my name is Shelli Zargary, Director of Corporate Marketing for Top Image Systems, and the earnings release was issued before the market opened this morning, so you can see it posted on our website at www.topimagesystems.com.

Representing the company on the call today are Izhak Nakar, Active Chairman of Top Image Systems; and Ms. Gili Shalita, our CFO. Before we start, I would like to remind everyone that this conference call may contain projections or other forward-looking statements and the safe harbor provision in the press release issued today, they also apply to the contents of the call. Top Image Systems expressly disclaims any obligation to update or revise any of these forward-looking statements whether because of future events, new information, a change in views or expectations or otherwise.

The call is the property of Top Image Systems Limited. Any distribution, transmission, broadcast or rebroadcast of this call in any form without the expressed written consent of the company is prohibited. A replay of the call will be available from the day after the call in our Investor Relations section of our website, which you can find again at www.topimagesystems.com and via the webcast link, which appears in earnings release that we published today.

Okay, so as we emphasized in this morning’s press release, Top Image Systems continues to excel in achieving its triangle for success with contained increase in revenues, profits, and margins. For the third quarter of 2012 compared to the same period in 2011, revenues were up 16%, non-GAAP profit increased by 65%, and the non-GAAP operating margin rose to 17%. As our balance sheet shows, we ended the quarter with $3 million in cash and no debt.

A 100% of our high-growth results in 2012 derived from our core enterprise capture software business. These results were achieved almost entirely outside of the United States and they are sustainable. Mobile capture sales in the banking and non-banking sectors and expansion of our core enterprise capture business are both new opportunities in the United States that will contribute to our revenues from 2013.

In the long-term we believe that these can add exponential growth opportunities on top of our core business. With regard to mobile captures on September 28, we issued a press release the Top Image Systems intends to vigorously defend ourselves against the patent infringement suit that was recently filed by Mitek Systems Incorporated, in the U.S. District Court for the District of Delaware.

The complaint alleges infringement of U.S. Patent numbers 7,778,457; 7,949,176; 7,953,268; 7,978,900; and 8,000,514. Top Image Systems considers the lawsuit to be entirely without merit. In any case, the claim relates only two infringements in the specific area of MobiCHECK capture and not mobile capture in general. In fact, only two weeks later on October 15, we announced that Top Image signed a reseller agreement with Jack Henry & Associates, a US-based leading provider of technology solutions and payment processing services primarily for the financial services industry.

The reseller agreement specifically entitled Jack Henry to distribute all TIS products, including all of its mobile capture solutions in conjunction with its Alogent Mobile Remote Deposit solution without any geographical restriction. This quarter we further expanded our intellectual property in the area of mobile capture by filing a patent for full page A4 capture using a mobile device. This follows a submission some months prior earlier patents for unique intellectual property in this route.

Top Image have invented and implemented a unique algorithm for capturing and processing documents of any form and shape using its smartphone and tablet, and this makes us ready for the next-generation of mobile capture requirements. Several new partnerships to announce this quarter, such as with Océ, a Canon company and extended cooperation with ECM leader Saperion, these together with many new reseller agreements both for our mobile and our core products and these illustrates another effective channel by which Top Image is growing its market presence.

We were honored the post to research ranks Top Image Systems as one of the five leaders listed in their multi-channel capture wave report, which was issued this quarter; Kofax, EMC, IBM, OpenText and Top Image Systems. This is the first time we’ve received such recognition and to have our technology recognized at industry leading among multibillion dollar organizations, speak to the great potential of Top Image’s offering.

The report points out that the multi-channel capture market is growing and that demand is increasing for the solutions that Top Image offers. In addition, we have effectively extended our adjustable market by entering the United States. It’s our intention to continue the success we have had so far in Europe and in Asia-Pacific and to build the product in the United States. We believe that the Forrester report was the timing publication of our technological leadership.

Now, I would like to review some of the deals and partnerships that we closed this quarter, an eFLOW Invoice Reader contract for $350,000 with one of the New York’s largest logistic company, and $855,000 Digital Mailroom project for automated document processing and workflow and then public administration in Singapore. Our partnership agreements with Saperion for an integrated end-to-end enterprise content management solutions, a contract to deliver in eFLOW Digital Mailroom project to a leading airline.

Our partnership with Fujitsu is to provide an eFLOW Digital Mailroom and Invoice Processing Solution to meeting Dutch and a broader European energy provider Nuon. Selection by the CDSL Group in India, for one of the largest ID digitization project in history, our contracts for invoice processing solutions at the Italian consumer goods manufacturer Fater SpA, which is the joint venture of the team Angelini Group and Procter & Gamble. A Six Figure Project at Leading Croatian Bank to deploy our banking platform.

We also presented our mobile capture solutions suite at The Remote Deposit Capture Summit 2012 in Florida. And shortly, after the IDC comment, we announced the partnership with DATAMARK to be a reseller of our enterprise content management and enterprise capture solutions throughout the United States.

To touch on some of the partnerships and deals that we’ve already announced for the fourth quarter, we mentioned that we have partnered with Océ business services, the Canon Group company to provide an outsource management services solution on cooperating our eFlow Digital Mailroom to our UK financial services customer. This process has potential for expansion within the customers’ organization, and thanks to the new partnerships, can also be the first of many deals that we went together with Océ.

As mentioned earlier in quarter 4, we signed a mobile capture solutions reseller agreement with US-based leading provider of electronic payment solutions primarily for financial services organizations, Jack Henry & Associates. And CIS announced an enterprise-wide eFLOW Invoice win of over a $1 million for over some years to provide a comprehensive paper and invoice processing solutions to the European arm of the leading global, energy, automation and control provider.

We will be announcing additional invoice in DMR projects later this quarter. The area of accounts payable automation continues to be a revenue generator for Top Image as our solutions that extends coverage of the whole capture to payment scenario, we’ve enhanced approval workflow functionality and the new electronic invoice portal, which facilitates the processing of the many forms with electronic invoices in parallel to paper. These are innovative developments with enhancements to recently win several key accounts.

To sum up, we’ve had a busy third quarter of 2012 and it’s a very exciting time for Top Image. We have the healthy core business in eFLOW Banking, Digital Mailroom, and Invoice Solution, and we are experiencing growth in revenues, profits, and margins.

Our target will be to continue to grow in all three dimensions concurrently. We have no profitability and margin, and all this is coming primarily from the business done outside of the U.S. But I assure you that with sales and marketing activities that we are carrying out now, the U.S. is definitely going to be one of the major geographies for us over the next few years.

We are expanding our sales activities in the U.S. for all of our products and have been major successes elsewhere around the globe and we are already seeing up tick in the U.S. We will increase our staff in the U.S. part and parcel with the major growth that we see over the next few years.

This staff expense will happen in direct proportion to actual growth in U.S. guaranteeing that we don’t incur unnecessary overhead and do continue to increase our profitability. Our U.S. activities represent the key growth opportunity for us to diversify and expand our market exposure, this above and beyond our present fall position.

At this point, we are ready to open the floor to your questions. So, Ian, our Top Image executives are standing by to take questions. I’ll turn the floor to you to explain the process.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. We will now begin the question-and-answer session (Operator Instructions) One moment please for first question. Our first question is from the line of Chuck Lipson with CSL Associates. Please go ahead.

Chuck S. Lipson – CSL Associates LP

Good morning, or afternoon I guess. In your guidance you’re basically saying that the fourth quarter will be a $9.5 million to a $11 plus million type quarter. And I was wondering that’s far beyond what we’ve seen recently, it that the new norm, is there something special in that quarter, I know next year you’re saying $40 plus million, which implies $10 million quarters, is there seasonality, or what’s driving that? And then I have another question after that?

Izhak Nakar

Okay. I’ll try to answer to your question that what I really wants to do in the beginning, I just want to emphasize, they can response to an equation about the lawsuit. Our council has advised that we’re referring from any comment about the Mitek lawsuit against TIS due to pending resignation. So we will be limited to answer some question regarding the lawsuit.

Regarding the Q4, I really wants to emphasize that we have not changed our guidance for Q4. We may incur some ad expense in the fourth quarter due to the fact that we are recurring our people and making investment in U.S. This is in order to prepare us for potential in peak, our project development in the market.

However, this expense of investment in new business development, which we expect to bear a fruit probably during 2013, this is what we did. The bottom line of my answer, we didn’t change the expense, we didn’t change the guidance. And as we said before, today we have already reached 70% of our revenue target that we set for 2012.

If you remember on our last call, I mentioned that the first half will be 45%. This quarter, we will do 25%. So in three quarter we’ll reach 70% of the target. So we expect that 30% of the target will be in Q4. We believe that sales staff we hired at the end of 2011 will have a greatest contribution in Q4 that will be in fixed in meeting our Q4 target.

Chuck S. Lipson – CSL Associates LP

But there is no seasonality and this is the $9.5 million to $10.5 million type quarters, is what you see going forward, because next year you said $40 million plus in revenue guidance?

Izhak Nakar

We didn’t change the guidance. This is what I can say right now. And we are still behind the guidance and this is what we say about that. But the guidance as I mentioned before, we didn’t change the guidance.

Chuck S. Lipson – CSL Associates LP

Okay. Moving on to the second question, regarding the U.S. sales office, could you give an idea of you’ve been here for I guess about five months or so. Your expectations and what your encountering, is there any difference that have been some surprises at the U.S. market is different or positive surprises that it can be bigger than you even expect it?

Izhak Nakar

I could say that we have really a great potential. We have a lot of prospect in (inaudible). As I mentioned several time, we target the market from the beginning of June. Just in mobile and the beginning definitely we’re going to expand our activity in U.S. during 2013 for all the line of product that we have like Digital Mailroom or the mobile which is check, invoices and Banking Platform.

We see great opportunity, but as I said in the last few calls, we didn’t expect any revenue in Q4 of this year from U.S. We believe most of the contribution for the revenue will be in 2013 and probably the next few years. But what I can say that we decide to invest heavily in U.S. because we see great potential mainly for all the line of product.

I believe the experience that we did and the install base that we have in Europe really help us to accelerate the process. As I mentioned several time, it take between six and nine months for the sales cycle and this is what going to be. We don’t see any other area in this stage.

Chuck S. Lipson – CSL Associates LP

Okay. And final quick question, that the stock trades very peculiarly, I’ve interrupted the word. Anyway, it’s trades different, does always to seller around. Do you have any idea of is they have a group or is it according to a high frequency trade and a slow frequency stock, do you have any thoughts on that?

Izhak Nakar

Chuck, as you know you asked me lot of time about this question and I’m still ancillary if I really doesn’t have any clue, any really I don’t know. I don’t have any idea who is the seller, whether individual or group, no idea. Sorry about that.

Chuck S. Lipson – CSL Associates LP

Okay. Thank you. Keep up the good work.

Izhak Nakar

Thank you, Chuck.

Gili Shalita

Thank you, Chuck.

Operator

Thank you. (Operator Instructions) We do have a question from the line of George Melas from MKH Management. Please go ahead.

George Melas – MKH Management

Hi, guys, great results.

Gili Shalita

Hello.

Izhak Nakar

Hi, George.

George Melas – MKH Management

Hi, can you elaborate a little bit on the partnership with Datamark. Does it seems at this takes you beyond sort of the mobile, the strategy in the U.S. or that seems a very encouraging? Can you sort of talk a little bit about it and say maybe what would be their focus?

Izhak Nakar

Yeah, what we see George is actually with Datamark is not only mobile. We are start walking with them as a partner, regarding below the all line of product. They’re trying to sell as well as mobile.

George Melas – MKH Management

Yeah.

Izhak Nakar

Not only for the bank or financial. We’re trying to find some other opportunity in non-banking mobile. So it’s just a beginning as we say and you understand that with partner, this is how we drove. We had opportunity, they pick us, it took us in the front of their customer, and its process.

But it’s going well, and it’s a process we need – they put us in a part of customer, represent our solution. Some of the customer likes their solution and they’re going to sell all the line of product include mobile, which is non-banking mobile.

So we are very encouraging about the situation right now with all the partners that we are signing. And as I said several times, its part of our go-to-market strategy is to find a problem and start to work with the problem that they can help us to be on the market faster than what we expect.

George Melas – MKH Management

Okay, very well. So staying on the partner strategy, I think that 2011 and maybe early 2012 from a partner strategy in Europe was maybe a little not quite what you expect it, but it seems like you also making progress on the partner side in Europe? Is that right, is that a right way to look at it, or is it still in the area of that it’s difficult?

Izhak Nakar

Actually, you’re right that it’s slower than what we expect in Europe. But we see more faster adaptation in the partner in U.S. Hopefully, we will change a little of partner program that we put in Europe and hopefully in 2013 it will be much better than in 2012.

George Melas – MKH Management

Okay. Is there percentage of revenue that you get from all license revenue that you get from your partners? Does that something that you share or…?

Izhak Nakar

I don’t think that they have any big change in the proportion between direct and indirect or what we call partner and non-partner. Usually 2012 the proportion is quite...

Gili Shalita

60% direct and 40% we always said in partner.

George Melas – MKH Management

I’m sorry, I didn’t get you. Can you say that again?

Izhak Nakar

Yeah, usually before it was like 75% in 2011, this year is 64%. So we get another 5% from partner, which is increasing. But again as I said before it is lower than our expectation from the partner. We’re going change the program and hopefully it will increasing during 2013.

George Melas – MKH Management

Okay, very good. And can you give us the breakdown in revenue between license, maintenance and services?

Izhak Nakar

First of all yes, no problem as you know we put some slide with your advise as we only call and percentage I never think is there. It’s not in front of me, but we can tell you definitely breakdown. And you have a slide that you can see it nicely, or you see, sorry…

Unidentified Company Representative

Go ahead, I’m sorry.

Gili Shalita

Okay, in Q3, I believe we are talking about 52% in licensing, just a second, I try to put the key here, 23% in professional services, and 25% in maintenance versus in Q3, versus either way you see, the margin is increasing, we sell more licensing.

George Melas – MKH Management

Yes, yes, what growth is about? Yeah, great, thank you very much. Great job.

Izhak Nakar

Thank you, George.

Operator

Thank you. (Operator Instructions) And we do have a question from the line of Dick Feldman with Axiom Capital. Please go ahead.

Richard L. Feldman – Axiom Capital Management, Inc.

Good quarter guys. My question has to do with the Jack Henry relationship. Is that focused on a worldwide basis or mostly in the U.S., what is the Jack Henry’s interest in your mobile captures for the U.S. market, or the rest of the world?

Izhak Nakar

You see even their PR, it’s not permitted in any geographically, so it’s worldwide in U.S. as well and the rest of the world. We mentioned it in our PR, so their relationship is worldwide. And like any relationship we spot there, we expect to put that in the front of customer banking and other (inaudible) and the solution and so far the feedback, and we do great.

It is not just business model that we give us today as advantage. We carry the technology advantage that the partner and the customer like, they are play cards to the customer, in front of the customer and we jointly give a proposal.

We believe that our customer and Jack Henry like what we are doing and we expand our activity in U.S. and even outside of U.S. as well. And it’s not only mobile, we are talking about establishing mobile, but they are talking about all line of product that we are selling like the DMR, Invoice and Banking platform.

Richard L. Feldman – Axiom Capital Management, Inc.

Okay, thank you. And that’s it for my question.

Operator

Thank you. And we do have a follow-up question from the line of Chuck Lipson with CSL Associates. Please go ahead.

Chuck S. Lipson – CSL Associates LP

Yeah, given the economic rose in Europe and that being your base, do you see more of your business coming from the far East in the future, how do you see the, or as Europe given the slowdown in the rapid payback from your systems, you’re getting even more awareness and a high interest?

Izhak Nakar

I could tell you that we see the big growth engine, and I’m talking about geographically in U.S.. And this is also going to invest and definitely as I mentioned several time, we are active in Dutch market, which is the strongest country in Europe like Swiss, Austria and Germany, but we really see the big growth in the U.S. We believe the potential is going to come from there. And Europe probably, we will continue to grow and Far East, I don’t believe it’s going to be glow more than Europe and U.S. in the stage.

Chuck S. Lipson – CSL Associates LP

So in your projections the next year, can you give an idea of what you have for the U.S. in those numbers, is there much, or is it very little?

Izhak Nakar

Okay. So we cannot give it, probably we will give you the guideline of 2013, during next year. But I can say that we are really believed that they have a great potential in this market. We are very encouraging of what we saw, the price, the opportunity and I think this is going to be in the next few years, geographically demand growth engine for us.

Chuck S. Lipson – CSL Associates LP

And do you see that growth coming through partnerships or your direct sales efforts in the US?

Izhak Nakar

I’m talking about both. It’s hybrid strategy. We start with partner to just to put us on the fourth of customer and give us a lot of visibility in the market, so it was both. Next year, we will going to, let’s say, we stop it, already stopped to hire people, hire sales people to expand the team in U.S. and we already stop it in Q4. We saw what’s happened there. And again we believe next year, we will going to do brain of hybrid strategy, which is going to be direct, but mainly it’s going to be partner.

Chuck S. Lipson – CSL Associates LP

And the $500,000 that you had allocated for the U.S. office this year is that still pretty much the budget?

Izhak Nakar

Correct, yes.

Chuck S. Lipson – CSL Associates LP

Okay.

Izhak Nakar

Definitely yes, we are under budget. We still have another two months that we are under budget.

Chuck S. Lipson – CSL Associates LP

Okay. So we can assume that you’ve basically spent an extra $500,000 this year without any offsetting revenues, it was just an investment rather than for your expensing.

Izhak Nakar

You’re absolutely right.

Chuck S. Lipson – CSL Associates LP

Okay.

Operator

Thank you. (Operator Instructions) And we have no further questions at time. I’ll turn it back to Shelli Zargary for any closing remarks.

Shelli Zargary

Thank you and thank you very much. Okay, well, if there are no further questions then we’d like to thank you all for joining us today on this important day when you have probably other issues to follow in the news as well. We thank you for your interest and attention and for taking the time to join us on the conference call. We wish you have continued prosperous and productive 2012. I look forward to meeting or speaking with you again in the near future. Thank you very much and have a nice evening.

Operator

Ladies and gentlemen, this concludes the Top Image Systems third quarter 2012 quarterly earnings release conference call. Thank you for your participation. You may now disconnect.

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