Wed: Paper profits
All the signs are that Top Image Systems is well on track - including Xerox’s entry into its market.
Shlomo Greenberg
Today, I’ll talk about Top Image Systems Ltd. (Nasdaq: TISA), a small company from Ramat Hahayal in Tel Aviv that deals with paper entering and leaving an enterprise. Top Image was founded by serial entrepreneur Itzhak Nakar, who saw great potential in paper sorting. At a time when many claimed that the world was heading in the direction of the “paperless society”, Nakar believed that paper would be with us forever, and founded Top Image.
Top Image won a name for itself on the stock market when it won what seemed to be huge contracts. For example, it won a contract to manage election surveys in India. These contracts greatly boosted the company’s share. It turned out that although the company earned a reputation, it didn’t make money. What it did acquire was unique know-how in processing and scanning paper.
I would say that at this stage, Top Image is more an innovation company than a business. In other words, it is innovative in the field of reading, identifying, and analyzing documents. The company’s systems can process data entering and exiting a company from any direction, from any source or of any kind. The system scan documents, such as invoices receipts, bills of lading, purchase and sales orders, and so on, entering and leaving a company, and send the scanned documents to the relevant person. The system is located in the company’s computer center, and is linked to all computers,. On the basis of data input, the system decides which document goes where.
Take a post office branch, for example. Do you have any idea how much incoming and outgoing paper has to be checked each hour? The same holds for import/export companies, and countless other examples. It’s no wonder that the Swiss Post Office uses Top Image’s systems.
Office equipment giant Xerox Corp. (NYSE:XRX) recently announced that it was entering the digital office field. Those who read the announcement carefully discovered that Xerox is entering Top Image’s precise area of business - the handling of office paper. This means that Top Image is on the right track. This is one reason why I think that Top Image is on the right track. The moment a large entity spots potential in a developing market and enters it, existing companies in the field benefit. This is why Check Point Software Technologies Ltd. (Nasdaq: CHKP) benefited from Cisco Systems’ (Nasdaq:CSCO) entry into the security software market.
On Wall Street, if they discover Top Image, they’ll initially say that if Xerox is entering the sector, Top Image should shut its doors. The opposite is true, however, and Xerox knows this. For eight years, Xerox and Top Image have been working together on Xerox contracts in Germany, France, and Latin America.
This collaboration greatly expanded during the third quarter of 2005, and Top Image now has contracts with Xerox in 16 countries. This method of sales through industry leaders is a decision by the company, and in my opinion, it is the right decision. Top Image works through sales and technology partners. Interestingly, with this method Top Image has more business partners than competitors. Companies such as Accenture (NYSE:ACN), Eastman Kodak (NYSE:KDK), SAP (NYSE; LSE: SAP; XETRA: SAPG), Unisys (NYSE:UIS) use Top System’s E-Flow system.
The important thing at this stage is that sales are growing, and that Top Image is creating a reputation. Sales totaled $16.8 million in 2005, 50% more than in 2004. The company switched to an operating profit in the fourth quarter of 2005. The problem at the moment is that this jump in sales sharply increased the cost of sales, by 98% in 2005. I’m not worried by this figure, because it’s normal in cases of a sudden boost in sales. If this ratio does not improve in a quarter or two, then it will be time to worry, not now. I also don’t see this happening.
Top Image represents a technology that is not yet widespread. At its present market cap, or even double it, the company will begin to become a target for acquisition. However, I’m relying on the company’s management, which is full of talent from the Wall Street production line.
Top Image CEO Ido Schechter has worked at the company for nine years, and was appointed CEO in early 2002. He has a very interesting business and academic resume: he started out in agriculture, with plant physiology. He replaced Top Image’s founder, Nakar, who had left the company, but came back to deal with the Japanese market, with great success. Nakar established very close relations with Japan, to the point of buying a local company and founding TIS Japan, the foundation of Top Image’s global recognition.
Schechter knows exactly what he’s looking for, and the company’s partnership-based growth plan is, in my opinion, a plan that will boost its sales. I have no doubt that the company’s board includes people who know how to run the company both on Wall Street and Main Street. First is Prof. Yehezkel Yeshurun from Tel Aviv University, who became a director in late 2004. Other directors are Zamir Bar-Zion, Victor Halpert, and Elie Housman, all veterans who well understand how investors and shareholders think. Then, of course, there is Nakar, founder and chairman, whose talents are not in doubt at all.
Published by Globes [online], Israel business news - www.globes.co.il - on March 1, 2006
The above recommendations were made by a person/s working in the investment industry who may hold positions in securities mentioned in the column. This column should not be taken as advice to buy, sell or continue to hold any securities, and anyone acting on the advice of this column does so at his or her own risk.
globes.co.il
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