It was important for Izhak Nakar, founder, chairman and largest shareholder in Top Image Systems Ltd. (Nasdaq: TISA; TASE:TISA) to be interviewed. Very important. Nakar, 58, who founded Top Image Systems 20 years ago, chose to break a silence of many years and for a moment take the place of company CEO Ido Schechter on the media center stage “to give my decisions the attention they deserve” he says with a smile.
Nakar, a man with a well-developed sense of humor when it comes to himself, is not leaving the company. He isn’t selling it yet, and is still far from thinking about the next start-up to initiate. For the last two years, he has invested all his energies and most of his time in Top Image Systems, which has recently completed a rather successful restructuring; this included complete and unexpectedly early repayment of the debenture it issued five years ago just before the credit crisis erupted and put Top Image Systems on the black list of companies suffering from cash deficiency.
The repayment of the debenture, which was completed three weeks ago, was the stimulus that drove Nakar to sit down next to our tape recorder and talk about Top Image Systems and its future, and about the way that the software company, the longest-standing among the small Israeli companies traded on the US stock exchange, succeeded to repay the entire debt to the debenture holders - without a “haircut” and even without making an appointment at the local barbershop and cancelling at the last minute.
Nakar's behavior is understandable. In days when many public companies are having difficulties paying their debts to debenture holders, being challenged in the courts and trying to get away with avoiding paying up, Top Image Systems, a company whose nominal value is only $20 million and in whose coffers at the end of the second quarter contained only $7.2 million, paid out debentures worth $14.7 million (or NIS 61.9 million in terms of the issue date) a year before their original due date (2012) and five years before the due date that was set following an arrangement reached between the company and its debenture holders.
“Paying out the debenture was for me a significant event,” Nakar told “Globes”. The issue of the debenture, although Nakar doesn’t admit it, was itself a significant event for him, although he left the company before it took place.
Purchased the Stock at Bargain Prices
Top Image Systems, developer of software for managing enterprise content and organizational work processes, was bitten by the debenture bug five years ago. As part of its duel registration on the TASE, the company raised $14.7 million via bond issue. One year later, the credit crisis became evident and Top Image Systems stock, on Nasdaq, plunged to a bottom price of $0.45. The largest stockholder in the company at the time, the investment fund Charterhouse Group International lost faith in its investment, and in early 2009 looked for a buyer.
They found Nakar, who had left the company in 2001 and was in no hurry to return. “It was a difficult decision to reach,” admits Nakar. “I was doing other things, and once I had moved on, I didn’t really want to reopen an old bag of troubles.” After giving it some thought, and perhaps because this was a company he had after all founded, Nakar downed an aspirin and together with Schechter acquired the holdings from the fund (some 20% of the capital) at a price of $0.50 per share. Top Image Systems is today trading at a price of $2.19.
Nakar and Schechter, by the way, joined up to lead the company a decade ago (Schechter replaced Nakar as CEO upon his departure) and that is apparently the reason that Nakar never publicly criticized Schechter on his decision to issue the debenture that almost brought the company to its downfall. “A software company can’t issue a debenture. It doesn’t have a regular cash flow, and if it invests the cash it has in returning the debt, it won’t get far. Its like pedaling on a bicycle and falling down,” says Nakar. “I always believed that a company’s results were determined by its entrepreneur, up to a point. When I brought Ido into the company and we know each other for many years already, for better and for worse I thought that together we would put the company on the high road, and that is indeed what has happened.”
Deep Restructuring
After the company changed hands, Nakar and Schechter rolled up their sleeves and got to work to revive Top Image Systems. “Picasso once said, ‘There are some people that take the sun and turn it into a yellow dot, and others that take a yellow dot and turn it into the sun.’ I turned the dot into a sun," says Nakar.
Sun or not, when Nakar came back to Top Image Systems, he mainly saw darkness, and was forced to carry out a deep restructuring of the company. Unprofitable branches abroad were closed (mainly in the Far East) - an inheritance from failing companies that were acquired with the funds raised by the debenture - and 168 employees were fired. “I focused only on the bottom line, and I completely neglected the top line,” recalls Nakar. “I had only one bullet in the chamber, and I had to decide what to do with it: shoot myself or someone else,” again he uses humor, confessing “I decided that if I wouldn’t succeed, I’d collect the junk that was left and sell it to someone else.” But Nakar succeeded, and the junk rose in value. The company closed 2007 with an operational loss of $7.3 million, by 2008 it reached equilibrium, 2009 finished with an operating profit of $1.1 million which grew to $1.8 million last year. Now, after two years of restructuring, Nakar has freed up to deal with the top line and return the concept of “growth” to the company’s frame of reference. This year Top Image Systems foresees revenue growth of 20% - 25%, with a growth in operating profits of 40% - 60%.
Making Every Process Productive
So what exactly does Top Image Systems do? As indicated above, the software company falls in the category of ECM (Enterprise Content Management). “Every process in an enterprise starts with an event,” explains Nakar. “Take for example an invoice that reaches a company from one of its suppliers. Top Image Systems’ software eFLOW takes that invoice, no matter how it arrived, by fax, post or e-mail, and processes the content of the invoice with the aim of verifying the original order that the invoice represents.”
Invoice processing, as Nakar explains, is just one example of enterprise content management. The global ECM market reached $4.3 billion last year, and is expected to reach at least $6.1 billion by 2015, and its applications are diverse. “It is a huge domain,” says Nakar, “we can manage any process based on content.”
A market spending billions of dollars each year, in which most players are much larger than Top Image Systems caused Nakar, as part of the restructuring exercise, to focus the company on a very specific set of vertical markets, the primary being banking. As a result, Top Image Systems developed on eFLOW a banking platform tailored for its customers in this market segment.
The banking platform enables banks, such as Citibank, to process just about any document (and banks have many documents), and the company charges the bank for each application it adds to the platform, starting from an application for account initiation, through granting of loans and issue of checks, and through to signature verification. “It’s just like an App Store,” says Nakar, explaining that by changing their business model the company was able to increase its average deal size for banks from a few hundred thousand dollars to $3-5 million.
The company’s choice has proven to be correct, and since its launch in 2009, the eFLOW Banking Platform has brought revenues of $4.6 million. Among its customers are: Citibank, Standard Chartered Bank, Deutsche Bank, HML and others.
But Nakar wasn’t satisfied by one vertical alone, and at around the same time the company’s second growth engine was introduced - the eFLOW Digital Mailroom - mail management software that has already been implemented at 38 customers. “Let’s say that a cellular operator’s subscriber updates on a change of address. Our software captures this information and delivers it to the right department that needs to process It.” explains Nakar.
Alongside these growth engines, Top Image Systems didn’t abandon its more traditional source of income - even if less significant and regular than the above mentioned - censuses. “Developed countries carry out censuses once every ten years, while less developed countries every five years,” explains Nakar, and reminisces about the company executing an animal census in Kenya and a steer census in Ireland. “Counting people and livestock is more or less the same activity.”
The one thing that has been set aside, at least for now, is the strategy for M&A. I have no reason at present to carry out any acquisitions,” clarifies Nakar, admitting that the failed acquisitions that were carried out with the monies from the debenture prevent him from taking a similar action. “The only thing that the debenture issue gave the company was a big headache,” he concludes, adding that an acquisition will be considered only if the company should decide to break into the US market. “We have begun to evaluate the US market, and we already have some ideas as to how to make our entry.”
“I’m working to correct the company’s value”
Nakar has no trouble declaring that the present value of the company is unsatisfactory, or in economic terms: Top Image Systems is traded at discount in comparison to the companies with which it competes.
“I am working to rectify the company’s value, and that is what is most important to me right now,” he says, pointing at a comparison table of competitors. Nakar has almost no doubt that the discount at which Top Image Systems is traded has until now been because of the weight of the debenture hanging around the company’s neck. He hopes that from now on the market will push the value of the stock up.
Top Image Systems has three much larger main competitors, and in addition the company competes with giants such as EMC, Oracle and IBM. The Israeli company’s share of the ECM market is marginal. The competitor holding the largest market share (15.4%) is IBM and second is EMC (10.4%) and OpenText (5.11%).
These figures don’t disturb Nakar. He has no plans to reduce prices to steal market share from IBM. Neither IBM nor EMC are as focused as we are in our area of the market; we are the Rolls Royce of our domain. Our prices are the highest and our customers don’t have a problem with that. High price for high end that’s our approach.”
Another figure that encourages Nakar regarding the company’s future value is the recent trend of mergers and acquisitions that have taken place lately in this market most of them against an average revenue multiplier of 3.6, an average EBITDA multiplier of 20 and an average multiplier of net profit of 33.6.
For example, IBM acquired the private company Datacap; OpenText purchased Kofax; Vignette acquired Systems 170 and HP purchased Ving. According to these multipliers, Top Image Systems ought to be traded around a value of $80 million, and this is at least one of the reasons why Nakar hurries to declare: “I’m in no hurry to sell the company.”
Published by Globes, Israel business news - www.globes-online.com - on November 15, 2011
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