Kofax Reports Financial Results for Its Second Quarter and Six Months Ended December 31, 2012

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Kofax Reports Financial Results for Its Second Quarter and Six Months Ended December 31, 2012

IRVINE, Calif.--(BUSINESS WIRE)-- Kofax plc (ISE: KFX) , a leading provider of smart process applications for the business critical First Mile™ of customer interactions, today reported its unaudited financial results for the quarter and six months ended December 31, 2012.


Second Quarter and Six Month Financial Highlights:

  • Total revenue for the quarter declined 9.0% to $63.7 million (Prior Year: $70.0 million) and 8.2% in constant currency (CC), and for the six months declined 3.6% to $123.8 million (Prior Year: $128.5 million) or 1.6% in CC
  • Software license revenue for the quarter decreased 24.8% to $25.0 million (Prior Year: $33.3 million) or 24.0% in CC, and for the six months decreased 18.0% to $47.1 million (Prior Year: $57.5 million) or 16.6% in CC
  • Income from operations for the quarter decreased 38.3% to $3.8 million (Prior Year: $6.2 million), and for the six months decreased 51.9% to $3.9 million (Prior Year: $8.0 million)
  • Adjusted income from operations1 (Adjusted EBITDA) for the quarter decreased 39.7% to $9.9 million (Prior Year: $16.4 million), or a 15.5% margin (Prior Year: 23.5%), and for the six months decreased 29.0% to $16.1 million (Prior Year: $22.6 million), or a 13.0% margin (Prior Year: 17.6%)
  • Adjusted diluted EPS2 for the quarter was $0.06 (Prior Year: $0.11), and for the six months was $0.10 (Prior Year: $0.15)
  • Adjusted cash generated from operations for the quarter increased to $3.6 million (Prior Year: $2.4 million), and for the six months increased to $14.9 million (Prior Year: $2.0 million)
  • Quarter end cash increased to $87.0 million (Prior Year: $62.3 million)

Second Quarter Operating Highlights:

  • Announced the availability of Kofax Mobile Capture™ for Mortgage App, which allows lenders to bring the loan application process directly to borrowers at the Point of Origination™ by leveraging mobile devices to dramatically accelerate loan processing and improve the customer experience
  • Kofax Web Capture received the Editor's Choice Award and Kofax's implementation at Exmoor National Park was named Government Project of the Year at the 2012 Document Manager Awards hosted by DM Magazine
  • Commissioned a market assessment by Forrester, a leading global research and advisory firm, which concluded that the market for Kofax's software and maintenance services at the end user level was $7.1 billion in 2012 and forecast to grow at an 18% compound annual growth rate to $14.0 billion in 2016, and the findings of the research validated the market expansion and growth opportunities resulting from the Company's acquisition and new product development strategies

A summary of Kofax's revenues and adjusted EBITDA for the second quarter and six months ended December 31, 2012 compared to the prior year periods is as follows:

         
   Quarter   Six Months
Unaudited   Y/Y   In   Y/Y   In
$M   Change   CC   $M   Change   CC
 
Software Licenses25.0-24.8%-24.0%47.1-18.0%-16.6%
 
Maintenance Services30.84.6%5.4%60.76.3%9.1%
 
Professional Services 7.9    8.1%   8.4%    16.0    14.8%   16.5%
 
Total Revenue63.7-9.0%-8.2%123.8-3.6%-1.6%
 

Adjusted EBITDA

9.9-39.7%16.1-29.0%
 

Adjusted EBITDA Margin

    15.5%   -33.8%        13.0%   -26.3%    
 

Commenting on these results, Reynolds C. Bish, chief executive officer, said: "Our second quarter software license revenue was lower than anticipated, principally due to a mid seven figure sale in EMEA slipping, which we now expect to close in a future quarter. Software license revenue in the Americas was also lower than expected as we implemented significant changes in our sales organization to improve its focus, execution and productivity. The overall decline in software license revenue occurred in our legacy capture products. We're pleased to report that our new mobile capture product revenue is growing faster than we expected and product revenues from the Singularity and Atalasoft acquisitions grew more than 100% in both as reported and constant currency during this last half year. We're also pleased with the high level of cash generated from operations and our cash of $87.0 million at quarter end."

Bish continued: "In line with our expectations, global macroeconomic conditions continue to be unpredictable and the recessionary environments evident in many Western European countries have not improved. However, because the growth in our professional services revenue is lower than we had previously expected - as a result of the mix of our software license revenue and relatively more indirect than direct sales, with our channel partners often providing these services - and the lower than expected software license revenue in Q2, we are therefore taking a conservative view and lowering our guidance for fiscal year 2013 to no to low single digit growth in total revenue on a constant currency basis and an adjusted EBITDA of approximately 10% less than that reported in fiscal year 2012."

Bish concluded: "Our new product development and acquisition strategies, coupled with the changes we've effected in our sales organization, position us to take advantage of the market expansion and growth opportunities validated in Forrester's market assessment. As a result, we believe we are now at a turning point and should begin to once again report software license and total revenue growth."

Webcast

Reynolds C. Bish and chief financial officer Jamie Arnold will present and review the results and conduct a question and answer session in the London offices of FTI Consulting on February 11 at 8:00 a.m. UK time / 3:00 a.m. Eastern Time in the US. The event will be webcast live and can be accessed as follows:

    Live Call   Access Code
U.K.   +44 (0)20 7784 1036   8511545
U.S.   (646) 254-3366   8511545

Participants are advised to dial in 15 minutes before the call in order to register in time for the start of the presentation.

The live webcast can be accessed through the investor relations section of the Company website. A replay of the webcast will be available on the investor relations section of the Company website by 1:00 p.m. UK time / 8:00 a.m. Eastern Time in the US on February 11. These can be accessed at www.kofax.com/ir/presentations.asp.

About Kofax

Kofax plc (ISE: KFX) is a leading provider of innovative smart capture and process automation software and solutions for the business critical First Mile of customer interactions. These begin with an organization's Systems of Engagement, which generate real time, information intensive communications from customers, and provide a fluid bridge to their Systems of Record, which are typically large scale, rigid enterprise applications and repositories not easily adapted to more contemporary technology. Success in the First Mile can dramatically improve an organization's customer experience and greatly reduce operating costs, thus driving increased competitiveness, growth and profitability. Kofax software and solutions provide a rapid return on investment to more than 20,000 customers in banking, insurance, government, healthcare, business process outsourcing and other markets. Kofax delivers these through its own sales and service organization, and a global network of more than 800 authorized partners in more than 75 countries throughout the Americas, EMEA and Asia Pacific. For more information, visit kofax.com.

1. Adjusted income from operations (Adjusted EBITDA) is IFRS based income from operations excluding the effects of share-based payment expense, depreciation expense, amortization of acquired intangible assets, acquisition related costs, restructuring costs and other operating expense, net.

2. Adjusted diluted EPS is calculated using adjusted income from operations (Adjusted EBITDA) reduced by depreciation and income taxes and the fully diluted shares outstanding.

© 2012 Kofax, plc. "Kofax" is a registered trademark in the US, the EU and other regions, and "First Mile", "Kofax Mobile Capture" and "Point of Origination" are trademarks of Kofax, plc. All other trademarksare the property of their respective owners.

Chief Executive Officer's Review

Financial Highlights

Total revenue for the six months declined 3.6% to $123.8 million or 1.6% in constant currency. This was driven by seasonally weak software license revenue during our first quarter and disappointing software license revenue during the second quarter, principally due to a mid seven figure sale in EMEA slipping, which we now expect to close in a future quarter. During the second quarter, software license revenue in the Americas was also lower than expected as we implemented significant changes in our sales organization to improve its focus, execution and productivity.

The overall decline in software license revenue occurred in our legacy capture products. We're pleased to report that our new mobile capture product revenue is growing faster than we expected and product revenues from the Singularity and Atalasoft acquisitions grew more than 100% in both as reported and constant currency during the last half year.

During that same period, maintenance and professional services revenues grew and offset much of the decline in software license revenue. However, the growth in our professional services revenue is lower than we had previously expected as a result of the mix of our software license revenue and relatively more indirect than direct sales, with our channel partners often providing these services.

Consistent with the decline in software license revenue and more indirect than direct sales, during the six months we closed fewer six and seven figure sales, with only six greater than $500,000, down from 14 in the prior year period, and one greater than $1 million, down from five.

Adjusted income from operations (Adjusted EBITDA) for the six months decreased 29.0% to $16.1 million, or a 13.0% margin, as a result of the decline in software license revenue, and adjusted diluted EPS for the six months was $0.10.

We're pleased with the high level of adjusted cash generated from operations for the six months of $14.9 million, compared to only $2.0 million in the prior year period, and the quarter end cash of $87.0 million, compared to only $62.3 million one year ago.

Operating Highlights

Our investments in research and development have continued to improve and add to our software product offerings in order to better serve the needs of our customers and help grow our revenue. During the six months we successfully launched:

  • A free Kofax Mobile Capture app through the iTunes App Store and Google Play for demonstration and use with business cards, receipts and other documents
  • Kofax Mobile Capture™ for Mortgage App, which allows lenders to bring the loan application process directly to borrowers at the Point of Origination™ by leveraging mobile devices to dramatically accelerate loan processing and improve the customer experience

This continues to exemplify how we are prudently reallocating our research and development expenditures to better focus on mobile capture in order to expand our vision well beyond the traditional capture market and access additional growth opportunities. The importance of mobile capture was recently reinforced by The Association for Information and Image Management (AIIM) in a report entitled "Distributed and Mobile Capture - Moving the Process Closer to the Customer," which contained the results of a survey revealing that mobile capture is considered a "Game Changer" for customer focused initiatives.

We were also pleased to receive continuing recognition for our software products and market presence:

  • Kofax Web Capture™ was named to KMWorld Magazine's prestigious listing of "Trend Setting Products of 2012"
  • Kofax Web Capture received the Editor's Choice Award and Kofax's implementation at Exmoor National Park was named Government Project of the Year at the 2012 Document Manager Awards hosted by DM Magazine
  • I was honored at the 2012 British American Business Awards for leadership in the Southern California business community
  • Kofax was added to the FTSE4Good Index Series, a family of share indexes for companies meeting globally recognized corporate responsibility standards

Perhaps most importantly, during the period we commissioned a market assessment by Forrester, a leading global research and advisory firm, which concluded that the market for Kofax's software and maintenance services at the end user level totaled $7.1 billion in 2012 and is forecast to increase at an 18% compound annual growth rate (CAGR) to $14.0 billion in 2016. This is composed of the capture, business process management (BPM) and information intensive vertical smart process applications (SPAs) segments:

Segment   2012   2016   CAGR
 
Capture$2.1B$2.5B4.5%
BPM$4.4B$7.6B14.6%
Vertical SPAs$0.6B$3.9B59.7%
 
Total$7.1B$14.0B18.5%
 

The findings of this research also validated the market expansion and growth opportunities resulting from Kofax's acquisition and new product development strategies, reinforcing our belief that we are uniquely positioned to succeed in each of these three segments:

  • The assessment concluded that Kofax had a number one, leading 15% share of the capture market, and in Forrester's recently published first "Wave" for Multichannel Capture, Kofax was shown as a "Leader" and number one in all three categories used for the ranking
  • In the BPM market segment our TotalAgility product is considered to be "Visionary" in Gartner's "Magic Quadrant" for BPM and a "Leader" in Forrester's "Wave" for Dynamic Case Management
  • Our vertical smart process applications strategy - first initiated almost 12 months ago - is focused on leveraging our capture, business process management, dynamic case management and mobile capabilities to provide packaged solutions for information intensive customer engagement needs across many of our existing vertical markets

No one else has the comprehensive product set needed to effectively automate and simplify the business critical "First Mile" of customer interactions and thereby optimize their experience and greatly reduced operating costs. Our solutions provide a fluid bridge between an organization's constantly evolving "Systems of Engagement" and typically rigid, large scale "Systems of Record," which are enterprise applications and repositories that cannot easily adapt to more contemporary needs such as the explosion in mobile devices. Our solutions capture and streamline the flow of business critical information throughout an organization in a more accurate, timely and cost effective manner, enabling our users to be more responsive to their customers and better grow their businesses. We have a proven track record of providing these solutions with an installed base of over 20,000 active end user customers, and we have the vertical market expertise and global hybrid go-to-market model and reach needed to penetrate a broad spectrum of the market. As a result, we are enthusiastic and confident about our future prospects.

Guidance for the Fiscal Year Ending June 30, 2013

In line with our expectations, global macroeconomic conditions continue to be unpredictable and the recessionary environments evident in many Western European countries have not improved. However, because the growth in our professional services revenue is lower than we had previously expected - as a result of the mix of our software license revenue and relatively more indirect than direct sales, with our channel partners often providing these services - and the lower than expected software license revenue in Q2, we are therefore taking a conservative view and lowering our guidance for fiscal year 2013 to no to low single digit growth in total revenue on a constant currency basis and an adjusted EBITDA of approximately 10% less than that reported in fiscal year 2012.

Our new product development and acquisition strategies, coupled with the changes we've effected in our sales organization to improve its focus, execution and productivity, position us to take advantage of the market expansion and growth opportunities validated in Forrester's market assessment. As a result, we believe we are now at a turning point and should begin to once again report software license and total revenue growth.

Thank You

Our performance is the direct result of the dedication and hard work of our valued employees, channel partners and suppliers, and the continued support of our customers and shareholders. I would like to once again thank these stakeholders for their on-going contributions to our success.

Reynolds C. Bish

Chief Executive Officer

February 11, 2013

 

Chief Financial Officer's Review

Revenue

Total revenue decreased $4.7 million, or 3.6%, in the six months ended December 31, 2012 compared to the six months ended December 31, 2011 due to an $11.2 million, or 8.8% decrease in core capture revenue partially offset by a $6.6 million increase associated with our acquisition of Singularity. The decrease in core capture revenue resulted from a $12.0 million decrease in software license revenue, a $0.8 million decrease in professional services revenue and a $1.6 million increase in maintenance services revenue.

The following table presents the revenue by geography in dollars and as a percentage of total revenue.

   Six Months Ended December 31,   % of Total Revenue
2011   2012   % Change2011   2012
(in thousands, except percentages)
Revenue by Geography
Americas$70,652$67,109(5.0)%55.0%54.2%
EMEA49,01347,683(2.7)%38.1%38.5%
Asia Pacific8,8559,0472.2%6.9%7.3%
Total revenue$128,520$123,839(3.6%)100.0%100.0%
 

Software license revenue decreased $10.4 million, or 18.0%, in the six months ended December 31, 2012, due to a $12.0 million, or 21.1%, decrease in core capture software license revenue partially offset by a $1.7 million increase associated with our acquisition of Singularity. Core capture software license revenue declined in all geographies due to a combination of sales execution issues and continued economic weakness in EMEA. Software license revenue, as a percentage of total revenue, decreased 6.7% in the six months ended December 31, 2012, due to the weakness in license sales compared to the relatively stable maintenance services revenue and the growth in professional services revenue.

Maintenance services revenue increased $3.6 million, or 6.3%, in the six months ended December 31, 2012 due to a $1.6 million, or 2.8%, increase in core capture maintenance services and a $2.0 million increase associated with our acquisition of Singularity. Our core capture maintenance services revenue, on a constant currency basis, increased in each of our geographies due primarily to high maintenance contract renewal rates as well as the expansion of our user base.

Professional services revenue increased $2.1 million, or 14.8%, in the six months ended December 31, 2012 due to a $2.9 million increase associated with our acquisition of Singularity, partially offset by an $0.8 million, or 6.1%, decrease in our core capture professional services. Core capture professional services revenue was relatively flat in EMEA and declined in the Americas and Asia Pacific (AP). Many, but not all, of our professional services engagements are associated with new software license sales, with the timing of revenue recognition of our professional services often lagging that of our software license revenue. Accordingly, the decrease in our core capture professional services in the Americas and AP has followed the relative pattern of the decrease in our software license revenue.

Costs and Expenses

Cost of Software Licenses

Cost of software licenses primarily consists of royalties to third-party software developers as well as personnel costs related to the distribution of our software licenses. The following table reflects cost of software license revenue, in dollars and as a percentage of software license revenue:

   Six Months Ended December 31,      
2011   2012

$ Change

% Change

(in thousands, except percentages)
Cost of software licenses$5,260 $4,726 $(534)(10.2)%
 
As a percentage of software license revenue 9.1% 10.0%
 

Cost of software licenses decreased by $0.5 million, or 10.2%, in the six months ended December 31, 2012, which is generally in line with the decrease in our software license revenue. Royalty costs vary by product, as applicable, and accordingly, the cost of software licenses as a percentage of the software license revenue can fluctuate based on the mix of software licenses sold.

Cost of Maintenance Services

Cost of maintenance services primarily consists of personnel costs for our staff who respond to customer inquiries as well as associated costs such as facilities and related overhead charges. The following table shows cost of maintenance services, in dollars and as a percentage of maintenance services revenue:

   Six Months Ended December 31,      
2011   2012

$ Change

% Change
(in thousands, except percentages)
Cost of maintenance services$8,082 $8,763 $6818.4%
 
As a percentage of maintenance ser
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