Top Image's new image
CEO Ido Schechter promises $40 million in sales in 2007, acquisitions, and an end to the company’s loss-making ways.
Gitit Pincas 13 Mar 06 13:55
What does a company need to succeed? The answers are varied, and are also related to the definition of “success”. In general, it can be said that a company needs smart management, strong shareholders, impressive technology, market, money, and vision. Quite a list. Founded in 1991, Top Image Systems Ltd. (Nasdaq: TISA) seems to have met most of these conditions.
Founded by Izhak Nakar, CEO of the company until 2002 and now a director, Top Image was able to raise $1 million in its first two years from men whom Nakar called the “Magnificent 11”. These included Adv. Yigal Arnon, Formula Systems chairman Dan Goldstein, Yeoshua Agassi, Meir Shannie, Rami Lipman and Reuben Zimmerman, as well as IBI Investment House Ltd. (TASE:IBI). Although each investor owned only a few percent of the company, it was enough to see that this great and respected group believed in Top Image’s future. Even American-Jewish investor Broidy Capital Management chairman and CEO Elliott B. Broidy, one of the hottest names in Israeli investment today thanks to his involvement in Markstone Capital Partners Group LLC, where he is a partner and chairman, was a minor shareholder in tiny Top Image at one time.
Top Image’s technology and market also seemed to have immense potential. Every year, enterprises were spending money on processing documents, usually manually, because computerized solutions had not yet gained traction. What could be more natural than offering this market fairly low-cost smart solutions for the computerized processing of documents? It had to work; everyone wanted to computerize their enterprises.
No was money exactly lacking either, although it was never plentiful. In 1996, Top Image raised $6.5 million on Wall Street, and subsequently raised $15 million from US private equity company Charterhouse Group Inc. The proceeds were supposed to enable the company to carry out its plans properly. Top Image later raised more money in a private placement.
There was no lack of vision either. Here are some quotes: “Our mission for the next three years is to turn Top Image into a company with a market cap of $500 million” (Nakar, 2000); “Over the next three years, we’ll be the global market leader” (Nakar, 2000); “We can continue 100% annual growth” (Nakar, 1997); “The share is traded at a bargain” (CEO Ido Schechter, today, in 2004, and at every other point in time). The truth is that the archives of “Globes” and other newspapers are full of unrealized declarations, not all of which came from Top Image’s management, of course.
A brief reality check shows that Top Image’s current share price is $3.70, reflecting a company value of $33 million. The company held its IPO at $5 per share in 1996, and the share peaked at $15. The company posted $16.8 million revenue in 2005, an all-time high, and 50% year-on-year growth. It also posted a net loss of $461,000. The company does not have a market cap of $500 million, it does not grow by 100% a year, and it is not a bargain - at least not the bargain investors thought in recent years, and they have not rushed to buy.
“We’ve put the past behind us”
When Nakar resigned his post in 2002, Dr. Ido Schechter filled his shoes. In 2002-03, Top Image initiated a three-year strategic plan that is now being completed, and will initiate a new plan in June or July. Schechter does not deny the company’s past; it is clear to him, too, that the company is a somewhat oversized start-up that has never delivered the goods in full. Nevertheless, he says the future is promising.
“When we began restructuring the company, investors told us, ‘You’ve been promising for years that all would be well. What’s different now?’ I think we’ve done it. We’ve changed things at the company. People should understand that we’re a different company now,” says Schechter.
“The company has the same name, but we’ve changed, and put the past behind us. Top Image is to blame for its poor performance, but we’re now in a different place - a place of growth, profitability, consolidation, and the goal of being leader.”
Schechter says that in the past, Top Image’s technology could only look at a document, see what was written on it, implement a recognition engines, and issue the relevant details. In other words, the technology was merely an enterprise document recording and processing program. “Our present solution manages and verifies content entering an enterprise. We gather all the content, whether it originates from wireless, electronic, or paper, and our platform manages it,” he explains. “The simpler solutions constitute only a fifth of our revenue, and the rest comes from semi-structure, which can read everything on the basis of preset keywords, and directs information to the right place in the enterprise. The platform is integrated with SAP and Oracle systems.”
Top Image is based in Japan, Germany and the UK. “In 2003, we told ourselves that we were fine,” says Schechter. “Although we only had $3.8 million revenue, we knew we had stabilized. We initiated our plan to change from a product company to a service company. At the same time, we realized that we would focus only in these countries, which was why we left the US. The reason was that we entered the US commando-style: we charged into the market when we were too small. We wasted a lot of money on subsidiaries there. Therefore, as part of our positioning, we realized we had to forego the US. In contrast, we bought our Japanese distributor, Toyo Ink, for $2 million. Toyo Ink brought Orbotech Ltd. (Nasdaq: ORBK), HP-Indigo, and Scitex Corp. (Nasdaq: SCIX; TASE: SCIX) to Japan, and it turned us into the market leader there.”
Schechter, who is married with two children, served in the Israel Air Force airborne intelligence unit. His doctorate was not in the usual Wall Street subjects of economics or business administration. He researched plant physiology at the University of Guelph in Ontario, specifically how to increase apple crop yields. He arrived at his present field via the management of a joint document scanning start-up founded by Israel Credit Cards-Cal (ICC-Cal) and Top Image. He met Nakar during their military service, and joined Top Image in 1996, before its IPO.
“Globes”: What are you goals for the future? What about acquisitions?
Schechter: “We’ll continue to grow and be profitable. In the first quarter of 2005, when we experienced a jump in revenue, we wondered whether we’d reach $16 million revenue for the year. We reached $16.8 million revenue. I predict a further jump in 2006, and that we’ll exceed $20 million revenue. We plan to make acquisitions, and I hope that the first of them will be made in the first half of 2006, probably in England or elsewhere in Europe. It will bring us sales on the same model we used in Japan. We’ll pay cash for half of the acquisition and the rest in shares. I hope that such an acquisition will contribute $5-10 million to revenue.
“In the next stage, we’ll make another acquisition in Europe, and I hope we can then be the leader there, as we are in Japan. When that happens, we can again think about entering the US. In other words, in 2007, we can reach $40 million revenue, while maintaining profits. Does this sound small scale to you? True, but it’s definitely more than the $8 million revenue we had three years ago. We’re not talking about some future plan that will materialize in 12 years, but the medium term. By the way, we have good organic growth, even without acquisitions.”
When talking about day traders, it’s hard not to remember how, in 2000 and even later, a contract in India could skyrocket the share 20% in one day, and how it would subsequently plummet at a dizzying rate.
“That’s true, but I’m not focusing on the fast. I don’t think there have been many such cases in recent years. I’m giving realistic forecasts; I’m not telling tall tales intended only to boost the share. I want investors to tell me that we have good performance and good delivery,” says Schechter. He adds that Top Image increased its liquidity through a financing round in 2004, which significantly reduced the holdings of its Magnificent 11.
What are your plans after reaching the $40 million revenue point?
“Then, as I said, the focus will be on the US. We might merge with a company with the same amount of sales as our own - $40 million a year - or we might pursue acquisitions. I believe that if we become a company with $80 million in sales after a possible merger, that will be a large enough jump in magnitude for IBM, Accenture or Xerox to call with an offer to buy us. We’re now working a lot with SAP. Could they call us tomorrow? Yes, but today, Top Image is very small. I’m not deceiving myself; SAP works with dozens of small niche companies.”
Are you getting acquisition offers now?
“Even if we were, at our current share price of $3.50, no one on the board or any other shareholder would want to sell. There used to be a feeling, ‘Let’s sell, because business is bad, and we’d like to get rid of it’. That’s no longer the feeling, and we now have a strong tail wind from the board.”
In October 2002, an investment manager named Asi Shmuely made an offer to buy Top Image at $1.20 per share, claiming that he had formed a consortium for the purpose. Top Image’s board rejected the offer, claiming that the company had good technology, a lot of cash, and a true value in excess of its market cap. Top Image’s share was traded at $0.50 at the time.
EMC Corporation (NYSE:EMC) recently acquired Top Image’s competitor, Captiva, for $275 million, reflecting a p/e ratio of 3. “This sale also shows that we’re traded at a discount,” says Schechter. “We have cash, growth, and even if the same p/e ratio is used, we definitely don’t deserve our present market cap.”
90% of Captiva’s business is in the US, and Schechter says the company has meanwhile disappeared from the market. “However, I’m old enough to know that it will need a year to return to the market on a large scale after the merger,” he says.
Another competitor of Top Image is Swedish company ReadSoft AB.
Top Image was once supposed to merge with Captiva. “There was such a proposal in 2000, but we didn’t go for it. The board rejected it, preferring to grow alone. In retrospect, this was a serious mistake, because it was difficult to achieve organic growth while maintaining profitability in our market,” says Schechter. “The entire market is a niche, and there are a lot of local private companies in different countries, which is why the market is ripe for consolidation. We hope we can find the right companies to buy; companies that will boost our growth.”
Schechter estimates Top Image’s market at $850 million. “As you see, with our $17 million, there’s where to grow,” he concludes.
Published by Globes [online], Israel business news - www.globes.co.il - on March 13, 2006
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