Is Kofax Worth $3B?

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Recent valuations would seem to say, yes.

Last week, Bloomberg reported that the private equity firm Thoma Bravo was exploring a $3B sale of Kofax. Based in Irvine, CA, Kofax is a long-time Capture market leader that is attempting to expand into the Intelligent Automation space. $3B would be a nice return for Thoma Bravo, which is estimated to have paid $1.5B to Lexmark in 2017 for its Enterprise Software portfolio, which included the former Kofax, ReadSoft, Perceptive and Brainware businesses.

The legacy Kofax and ReadSoft businesses (which I estimate were responsible for slightly more than half of Lexmark’s Enterprise Software revenue)  were spun off to create the current iteration of Kofax. The rest went to Hyland Software, which is also owned by Thoma Bravo.

I had understood that Hyland and Kofax were being managed in separate buckets, with Hyland considered a long-term investment, while Kofax was being groomed for a sale. As part of its cultivation of Kofax, Thoma Bravo spent $450M-$500M on acquisitions of Nuance Imaging, Top Image Systems, Psigen, and ApS.

So, even if you credit two-thirds of the Lexmark software portfolio acquisition price to Kofax/ReadSoft (which is generous) and factor in the high end of my post-sale acquisition cost estimate, Thoma Bravo has invested at most $1.5B in an entity it is looking to sell for $3B.

How does that happen? For one, it seems the value of Capture SW vendors is on the rise. In 2015, it was considered steep when Lexmark acquired Kofax for $1B. Kofax was the market leader at the time and had annual revenue $300M. Three and one-third times revenue was considered a generous valuation. (Lexmark of course had established a pattern of generous valuations, in part to convince the SW vendors that being acquired by a HW vendor was a good idea—historical evidence to the contrary.)

Now, fast-forward six years to what we saw a couple months ago involving capital investment in a pair of Capture vendors. Ocrolus, a New York City-based start-up that so far has focused on a cloud-based service for processing bank statements for fintechs, received a series C round that reportedly valued it north of $500M. This was for a company that at the end of H1, 2021 reported an annual run rate (ARR) of $20M.

Meanwhile, Rossum AI, a Prague-based Capture ISV that has to date specialized in invoices and has an estimated annual revenue of around $20M, received a $100M series A round that reportedly values it at $500M – $1B.

Granted, one thing those start-ups have in common that Kofax does not, is rapid organic growth. At the start of 2018, Ocrolus had an ARR of just $1M, which it grew 20x in the following 3.5 years. Meanwhile, when Rossum announced its series A round in October, it reported that it had grown 5x in the last six months.

What Kofax does have is a large, blue chip install base and a strong sales channel. In addition to Capture, Kofax has mature RPA and workflow, all of which it has combined in its TotalAgility platform, on which it recently expanded the low-code capabilities. At AIIM 2020, a Kofax VP spoke to me at length about the company’s focus on “hyper-automation”— a market in which a low-code Capture/Workflow/RPA platform could certainly be positioned. A quick glance at the market leaders in that space includes UiPath and Appian, both of which are publicly traded with current valuations well over 10x projected 2021 revenues.

So, if at first glance, a $3B price tag for Kofax gave you sticker shock, maybe it’s time you reconsidered the current valuation of Capture and related technology vendors.

(A version of this article was included in last week’s third-quarter Capture market update that went out to clients of the Infosource Capture Software service. Let me know if you have any questions regarding our services. [email protected])

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