Monday, September 12, 2016

Based on ECD Deal, what is Lexmark ES Worth?

Big day today for M&A in the enterprise content management (ECM) space. No less than three significant announcements:
  1. Open Text announces plans to buy EMC's Enterprise Content Division (ECD) for $1.62B or 2.7x ECD's fiscal '15 revenue of $599M.
  2. Apparently Bloomberg News is reporting that Apex Technology Co. and PAG Asia Capital, which in April announced plans to acquire Lexmark, "are in talks with a number of private equity firms about a sale of [Lexmark Enterprise Software (ES)]."
  3. Finally, HP announced plans to buy Samsung's printer business for $1.05B. 
Not that this last item is insignificant, but, despite some recent efforts, Samsung had yet to emerge as a real factor in the ECM/document capture space. So, in this post, we'll focus on the significance of those first two announcements. 

ECD had been rumored to be for sale since it was first announced that Dell was planning to acquire EMC. There were two reasons that were offered for the rumored sale: 1. Dell wanted to focus on storage and ECD did not fit with that strategy. 2. Dell reportedly needed to generate some cash to help with the financing of the deal. Well, there must have been some truth behind this talk, as less than a week after the Dell/EMC deal closed, the deal with Open Text for ECD was announced. The ECD sale to Open Text is expected to close within the next 3-4 months.

Open Text has done a lot of acquisitions over the years, and I'd have to say that the $1.62B price tag and 2.7x revenue multiple represents a pretty good premium for them to pay. So, Open Text obviously thinks they are getting something of value. ECD is, of course, a good fit, as Open Text and ECD are both serious ECM players with some overlapping, but also a lot of complementary, technology. The move pushes Open Text forward even further as a market leader. 

It also likely removes Open Text from the bidding for Lexmark ES, which Open Text had been rumored to be looking at fairly recently. So, with rumors obviously still floating around that Lexmark ES is for sale, who is out there to buy them? The other name I have been hearing is Thoma Bravo, which owns Hyland. Coincidentally, I am going to be at Hyland's CommunityLive Conference this week. 

One of the big story lines associated with the conference is that this is going to be former CTO Miguel Zubizarreta's final event with the company where he has worked practically since it was founded. Zubizarreta has always had a reputation of wanting to build rather than buy technology, so the fact the Lexmark ES is now on the market as he is retiring could be a fortuitous coincidence - if indeed it's a coincidence at all. I hope to get some insight into Hyland's direction over the next few days.

So, how much would Thoma Bravo have to pay to pick up Lexmark ES, or even just the Kofax piece, which is rumored to be on the market separately as well? Well, first off, let me say that the Bloomberg article's statement that Lexmark ES "could fetch as much as $1 billion" seems to be way off. Remember, from 2010 to 2015, Lexmark invested approximately $2B in rolling up the components that make up ES, so to think they would turn around and sell it for less than what they paid just for Kofax last year ($1B), seems preposterous. (Of course, EMC paid $1.7B for Documentum alone in 2003, not to mention $275M for Captiva two years later, plus more for some other stuff included in ECD, but those acquisitions and valuations were a long time ago compared to the Lexmark ES acquisitions.) 

Okay, so what can Lexmark's investors expect to get for ES? Well, in my opinion, Lexmark ES lines up pretty closely with ECD. They both own market leading capture software (Kofax and Captiva, respectively) as well as large ECM practices - Perceptive and Documentum. Granted, Documentum is a higher end business than Perceptive traditionally has been, but Perceptive has traditionally been one of Hyland's most direct competitors, just as Documentum has been one of Open Text's. 

So, let's just say Lexmark's investors want to get a premium similar to what Open Text paid for ECD. To start, we'll value Lexmark ES as a $700M a year business, as that's about the run rate that was being projected when Lexmark bought Kofax last spring. Using that 2.7x revenue multiple that Open Text paid, that would value Lexmark ES at $1.89B, which is not a bad number, because it enables Lexmark to save some face on their $2B investment. (Kofax made up about half the ES run rate, so based on the ECD revenue metric, a Kofax sale would be about $950M). I guess it just depends if Thomas Bravo or whoever is going to make the purchase agrees that Lexmark ES is worth what ECD was worth. If they do, I bet a deal gets turned pretty quickly.

Monday, August 01, 2016

Lexmark ES Rebounds in Q2

Lexmark's Q2 results for its Enterprise Software (ES) division do not appear to be terrible. On Friday, the Lexington, KY-based MFP vendor announced its Q2 2016 results, and while overall earnings were disappointing, ES seemed to have rebounded from a very disappointing Q1. For Q2, Lexmark reported ES revenue of $167M, which represented an 11% YOY increase. But, before you get too excited, Q2 2015 only contained about a month and a half worth of Kofax revenue, as Lexmark's acquisition of the capture market software leader closed in mid-May last year. In the first complete quarter of Kofax revenue (Q3 2015), Lexmark reported ES revenue of $165M.

Of course, immediately upon announcing its Q3 numbers last year, Lexmark announced it was looking at selling either the whole or parts of its company, which sent the ES business into a bit of a tailspin. Things bottomed out in Q1 of this year when Lexmark reported ES revenue of just $143M, a 14% decline from the combined revenue of Lexmark's Perceptive Software and Kofax (which were combined to create Lexmark ES) in Q1 2015.

So, it's good to see that now Lexmark's ES business appears back on track in spite of April's announcement that the entirety of Lexmark was being acquired by a group of China-based investors led by Apex Technology Co., Ltd. and PAG Asia Capital. A week previous to the Q2 earnings announcement, it was announced that Lexmark shareholders had approved the "merger agreement." There was a lot of speculation that being owned by a Chinese entity could adversely affect enterprise software sales due to concerns about security related to a lack of regulation in China. In my research and conversations, I could find nothing to substantiate these concerns and apparently they didn't negatively affect sales in Q2.

I'm not exactly sure what led to the turnaround from Q1, except that perhaps once the deal for the acquisition was in place, the ES team was better able to focus on its business. ES President Reynolds Bish had told me in a conversation at Lexmark ES's Inspire event in early April, that the distractions related to a potential acquisition had taken a toll on his organization.

Of course, rumors continue to swirl that Lexmark ES will still be spun off and a decent quarter like Q2 should help increase its potential value. Although it's still hard to see Lexmark recouping the approximately $2B in spent rolling up ES in the six-year period from 2010 through 2015.

Tuesday, May 03, 2016

Management Changes Continue at Kodak Alaris

A week after announcing a restructuring of the sales management team at Kodak Alaris Information Management (IM), Kodak Alaris announced it is looking for a new CEO. In an announcement we received today, Kodak Alaris states, "To better position ourselves to achieve our long term growth plans, the Kodak Alaris Holdings Ltd. Board of Directors decided the time is right to initiate a search for a new CEO."

Effective May 1, Ralf Gerbershagen, who was named CEO of Kodak Alaris in 2014, has stepped down. According to statement DIR received from Kodak Alaris: "Today’s announcement is about looking forward. This was not a performance based decision but more an assessment of the future leadership needs of Kodak Alaris. The Board felt this represented the ideal time to begin the new search for a CEO. [Gerbershagen] leaves the company better positioned than when he arrived and with our best wishes for his future."

 Kodak Alaris was launched in September 2013, with the sale of Kodak Document Imaging (now IM) and Kodak Personal Imaging to the Kodak UK Pension Fund for a combination of $2.8 billion in debt relief and $650 million in cash and non-cash considerations. The sale was part of the bankruptcy proceedings for Eastman Kodak.

Gerbershagen, who is based in the UK was brought in from Motorola Mobility in April, 2014. During his tenure, Kodak Alaris reportedly saw a strong rebound in its scanner sales, which were negatively affected by the uncertainty related to the bankruptcy proceedings. Kodak Alaris was less successful with a intelligent document recognition (IDR) venture. After signing a partnership with German ISV ITyX in 2012 and struggling to generate any sales momentum, in 2015 Kodak Alaris launched a subsidiary, AI Foundry, which is totally focused on IDR sales. However, shortly after the launch of AI Foundry, Kodak Alaris broke off its relationship with ITyX, which then filed suit.

According to Alan Swahn, VP, marketing for AI Foundry, in an e-mail to DIR last month, “We are working with other suppliers that more closely align with new opportunities in the marketplace. We are working on exciting new solutions and you can expect announcements later this year.”

Jeff Goodman has been appointed as Kodak Alaris' CEO on an interim basis. Goodman had been serving as COO. Kodak Alaris has not set a timetable for hiring a new CEO. Following is a statement form Kodak Alaris: "We are looking for an outstanding and inspirational leader with a proven global track record of identifying and driving long term profitable growth for large international companies.

"As we need to conduct a comprehensive search for our next CEO, we don’t have a specific timetable. Jeff’s presence, combined with the company being in a solid place, allows our board to conduct a thorough search for our next CEO. Jeff is committed to filling this role until we find our new CEO and will support his/her transition to the role."

We asked a Kodak Alaris representative if the organization's goals have changed since Gerbershagen was brought in two years ago. Here was the reply: "We continue to transform the company and our current focus has shifted from restructuring to growth. Our plans and our ongoing programs, developed by the Kodak Alaris Executive Committee (of which Jeff was and is a part) and approved by our Board, remain unchanged and have our absolute focus and commitment."

Friday, April 29, 2016

Lexmark ES Q1 Numbers Disturbing

For those of you that haven't done the math for yourselves, Lexmark Enterprise Software (ES) saw about a 15% decline in revenue for Q1, YOY. Yes, we realize Lexmark reported 60% growth for ES on revenue of $143 million, but last year's Q1 didn't include Kofax's numbers. In calendar Q1 last year (Kofax's fiscal Q3), the ISV did $75 million in revenue, and it also acquired a $9 million a year business in Aia Software towards the end of the quarter. So, we'll put Kofax's Q1 2015 revenue at around $77 million.

In the meantime, Perceptive Software, operating as a division of Lexmark, reported $90 million for the first quarter of 2015. If you put those two figures together, it gives you a Q1 2015 revenue number of $167 million, $24 million more than the two combined businesses reported this year for Q1 as parts of Lexmark ES. We don't have any insight into the breakdown of the Lexmark ES in numbers - in particular, how much was from generated in software sales, but we had heard rumors that Lexmark was struggling in that area in particular.

The 15% erosion in revenue is disturbing, and we hope it is not indicative of the industry's direction. We realize Lexmark has been struggling with integration issues, as well as uncertainty related to the recent sale of the company, so maybe the first quarter was an anomaly and the organization will bounce back strongly. That said, Lexmark's competitors are certainly trying to keep the FUD (fear, uncertainty, and doubt) levels pumped up, as I heard a lot of talk at the recent AIIM Conference related to the potential challenges of being owned by a group of investors from China.

In addition to Lexmark, Open Text failed to show organic growth in Q1 (its fiscal Q3), EMC's Enterprise Content Division (ECD) revenue continued to shrink, down to $134 million in Q1 2016 from $138 million in Q1 2015 (not to mention the fact that EMC is reportedly trying to sell ECD to help fund the Dell acquisition), and Top Image Systems (TIS) struggled in Q4 '15 with its Q1 2016 numbers still to come. It has not been all bleak news, as smaller companies like DocuWare and M-Files reported strong growth for 2015, and Hyland Software had another strong year as well.

What is somewhat interesting is that DocuWare, M-Files, and to some extent Hyland, are focused on the SMB space (Hyland stressing the "M"), while EMC, Kofax, and to some extent ReadSoft (also part of Lexmark ES) and Open Text are more focused on the enterprise space. So, maybe the growth in the ECM market is in the traditionally underserved SMB space (as we've been predicting would happen for years). This would certainly bode well for TIS, which recently put a stronger focus on shopping financial process automation to the mid-market.  Then again, the Perceptive Software's content management business is a major part of Lexmark ES and it focuses on the mid-market (we're really not sure how the individual components within the division made out).

When you add these recent ECM software struggles to the steady erosion we've seen in margins in the document scanner hardware market (as well as some of the reogranization at the leaders ), it makes us doubt the future of our industry. That said, the attitude at this week's AIIM Conference in New Orleans was not wholly pessimistic. There were plenty of optimistic vendors, a bevy of end users looking for solutions, and the usual group of energetic and imaginative people that combine to make our industry so exciting at times. New solutions stressing, the cloud, mobile, and emerging technology like natural language processing - as well as a new vision embracing enterprise content as data and thus creating a bridge for mainstream IT crossover, certainly created plenty of positive buzz at the AIIM event (or was that just the alcohol on Bourbon Street?). We'll have more details on what we learned at AIIM in the next issue of DIR.

In the meantime, let's hope for a stronger Q2 for everyone (well, except for your competitors in some cases, I guess.)

Thursday, April 14, 2016

Management Changes at Kodak Alaris IM

Word came out yesterday that Kodak Alaris Information Management has changed its management structure. C├íssio Vaquero, who had been serving as regional director of emerging markets (Asia-Pacific and Latin America) has apparently been appointed to a new head of global sales position. In conjunction with that, Martin Birch, Kodak Alaris' IM's regional manager for the US&C, and Erwin Schwarzl, regional manager for EAMER, have been let go. 

Here's a quote from Kodak Alaris on the shake up: "With the global integration of key business functions, including sales, within IM, we are transitioning to a new worldwide operational model. We thank Martin and Erwin for their contributions and wish them well in the future as we continue to help our customers grow their business using Kodak Alaris scanners, software and services."

The move is a bit surprising as Birch and Schwarzl have only been in their current positions for about a year. Last April, Birch, who was serving as regional director for EAMER, moved to the U.S. to take over for Russell Hunt, who retired. Schwarzl had been serving in another capacity at Kodak Alaris. Both Birch and Schwarzl worked at Kodak (and then Kodak Alaris) for several years.

These moves are part of a tumultuous few months at Kodak Alaris IM, which has also included some changes within its AI Foundry intelligent document recognition (IDR) software business.  

Wednesday, January 13, 2016

Lasefiche EMPOWER Event Continues to Grow

LONG BEACH, CA – It was good to return to the Laserfiche EMPOWER Conference this year after a three-year hiatus. Last time I had the opportunity to attend was 2012. I had planned to go in 2013, but a snowstorm changed that. 

Since that 2012 event, I haven't really had a chance to connect with the Laserfiche executive team. And there have been big changes to that team over that time. In 2013, Tom Wayman, VP of marketing and product strategy, died. The next year, his mother and company founder and CEO Nien-Ling Wacker passed away. (Both had awards named after them that were presented at this year's conference.) Nien-Ling's husband Chris Wacker has taken over as CEO, with CTO Karl Chan having added president to his title. In 2014, Laserfiche named Thomas Phelps IV as its VP of corporate strategy and marketing.

During the last few years, Laserfiche has continued to grow. For the 2012 conference, which was held at the Anaheim Marriott, I reported 1,600 people attended. For this year's event, which was moved to the Long Beach Convention Center (a much bigger venue), Laserfiche announced 2,700 attendees. Chris Wacker also told me the company enjoyed 10-12%  revenue growth in 2015 over 2014, which was also a growth year.

Overall, 880 organizations were represented at EMPOWER. This included a mix of end users, resellers, and vendor partners. The big announcement was the release of Laserfiche 10, which features improvements in collaborative and mobile capabilities, as well as the introduction of a library of more than 100 pre-built workflows across several vertical markets and horizontal applications. New analytics tools for BPM were also introduced.
A few things that have not changed in the four years since I last attended EMPOWER:
  1. Laserfiche remains very strong in state and local government market.
  2. There is still a big push toward getting many of these government customers to expand their implementations enterprise wide. It seems to be working. For example, I attended a presentation by the City of Boca Raton, which has expanded its implementation from the clerk's office to the A/P department and now has 50 more projects either currently being implemented or that have been requested. Many of the attendees I spoke with were considering similar (if not quite as big) expansions.
  3. Epson is still the event's premier sponsor, although Epson's scanner business has grown considerably since 2012. According to Mark Pickard, senior product manager, Document Scanners, Epson America (citing numbers from the NPD group) through the first 11 months of 2015, the company's revenue from commercial scanners grew 24% over 2014, which was twice as fast as Epson's nearest competitor. He credited Epson's relationship with Laserfiche and its channel as contributing to that growth.
We'll have more detailed coverage of the event in our next newsletter, but that's a quick summary for you.

Friday, October 23, 2015

Lexmark Apparently for Sale

Today, Lexmark announced that its Board of Directors has "authorized the exploration of strategic alternatives to enhance shareholder value." After the announcement was made, Lexmark's stock rose more than 6% (as of this posting), lifting the company's market cap to $2.1B. This is not that great of a valuation for a company that bills itself as a "$3.7B global technology company that includes a $1.5B Higher Value Solutions business comprised of Enterprise Software (ES) and Managed Print Services (MPS)."

That Enterprise Software business, of course, includes Perceptive, Kofax, ReadSoft, Brainware, and some other ECM-focused companies that have been rolled up since 2010. Most recently, Lexmark acquired Kofax for $1B in a somewhat surprising deal. It followed up by appointing Kofax CEO Reynolds Bish as president of Lexmark ES, which has about a $700M annual run rate.

Unfortunately, investors were less than thrilled with the guidance Lexmark presented for its overall business in conjunction with its Q2 earnings report, which dropped the company's valuation by 20% on a single day in July. Although the stock has bounced back slightly over the past few weeks (including today), it is still trading at more than 25% below its July peak.

Lexmark has made a concerted effort to shift its business from hardware-centric to a software and services focus, stressing its growing ES and MPS revenue. Unfortunately, it appears that investors are still valuing the company based on its declining hardware and supplies revenue. Stated Jean-Paul Montupet, lead director of the Lexmark Board of Directors, in relation to this, "We are extremely proud of what the Lexmark management team and employees have accomplished in the transformation of Lexmark. While the Board is encouraged by the company's future prospects, the Board does not believe Lexmark's current share price fully reflects the intrinsic value created by the company, and the Board has concluded it is appropriate to explore strategic alternatives as the next step to unlock this value."

What specifically those strategic alternatives are is not mentioned, but speculation is that the company could be sold either to a private equity company or another high-tech company. HP, which had long been discussed as a possible landing point for Kofax and has a partnership history with Lexmark, is one possible buyer. However, to me, a private equity buyout at this point would seem to make more sense. After all, less than six months ago, Lexmark paid $1B to pick up Kofax, so selling the whole company to someone else for anything close to its current market valuation would seem unlikely. After all, Kofax was a $300M-plus company and Lexmark is a $3B-plus company. The math just doesn't make good sense.

What makes more sense is to take the company private, which would conceivably enable those who agree with Lexmark's management's transformative vision to stay on board as investors. The company would then be able to work on really affecting the changes it wants to without the worry of meeting quarterly numbers - which are going to be very hard to meet as the formerly hardware-driven company de-emphasizes hardware. When the transformation is complete, and Lexmark is operating as primarily a software and services business, it can then go public again, conceivably with a more favorable valuation.

At least that's the way I see it shaking out.

Your thoughts?