What the heck is going on at Kofax? For the second quarter in a row, the Irvine, CA-based ISV has reported lower than expected results—and blamed them on its failure to close big deals in the capture space. This Wednesday, a few minutes after trading on the nasdaq closed, Kofax reported “selected, unaudited, preliminary” results that indicate that is fiscal Q1 2015 (ended Sept. 30) revenue would basically be flat to 3% higher compared to ‘Q1 2014, and that its software license revenue would be down slightly.

“Our overall results were lower than our expectations for the quarter due to six- and seven-figure core capture software license revenue transactions primarily in the ‘enterprise’ or the more direct segment of the market, slipping into future quarters,” said Reynolds Bish, Kofax CEO, in a press release accompanying the announcement. “This has now occurred in two consecutive quarters, and we have to recognize that this segment of core capture continues to be dependent upon such six- and seven-figure transactions.

“Although we know these [larger deals] are difficult to predict and impossible to control, they also now appear to be subject to a higher level of scrutiny and extended purchasing processes. We believe at least some of this is attributable to increasing concerns about the current and future macroeconomic environment, particularly in EMEA.”

Bish does not believe that these deals were lost or canceled. “They were evenly split between the U.S. and Europe and we believe they will close during the remainder of the year,” he said during a conference call with analysts.

Bush also gave some insight into the increased scrutiny Kofax is seeing for its larger sales. “On all these deals, we have had sales teams working with the decision makers throughout the process,” he said. “Despite that, inevitably, it seems like one or more issues arise at the last minute—like the customer is not completely comfortable with the ROI, or they want to have the legal team go over the contract again, or they missed a step in their due diligence. 

“A specific example is with a long-term Kofax customer in the U.S. that’s in the financial services market. Over the course of the years they have purchased more than $20M in software from Kofax. They were planning to buy another $.5M, and despite all our history, at the last minute they said, ‘We have never bought this particular product from you and want to check with IT to make sure it fits with our infrastructure.’

“It was not a competitive or market issue. Basically, it conveys to us that customers are showing a much greater level of caution when making purchases, and they don’t feel compelled to move with a sense of urgency. They want to take all the time they can. We’ve all read the news, which leads us to wonder if concerns about macroeconomic conditions are causing organizations to take a more cautious view related to larger transactions.”

In contrast to its capture business, which was clearly down because of those slipping larger transactions, Kofax reported that “Mobile and new or acquired products software license revenue grew by more than 80% YOY and accounted for approximately 35% of total software license revenue during the quarter.” As a result, it seems like Kofax will be putting more focus on those product areas in the future—hoping they will pull through traditional capture sales—which Kofax is hoping to get back to “single-digit” growth. “We’re now accelerating the reallocation of resources and expenditures into this fast growing part of our business,” said Bish.

Aside from hiring more salespeople to focus on mobile and new or acquired products (which Kofax was apparently already doing), we’re not sure what this reallocation involves. A Kofax spokesperson indicated more specific information should be available during the company’s full Q1 earnings call scheduled for Oct. 30.

One interesting point that came out of the Q&A session with analysts is that Kofax is not seeing any weakness in its channel sales. Bish indicated that overall Kofax increased the number of $100,000 plus deals it did in Q1 2015 YOY to 38 from 27. So, we’re not quite sure that Kofax’s troubles with higher-end deals indicate weakness in the capture market.

To get a better read on this, we pinged Mike Spang of capture market analyst firm Harvey Spencer Associates (HSA). HSA had been predicting a strong second-half for capture software sales worldwide to offset a slower first half, which saw only a 4% YOY growth. “Well it’s early in reporting Q3 results and Kofax is the first to indicate weak sales,” Spang told DIR. “I think the market fundamentals are still solid for capture and would tend to stick with our earlier market assessment [projected full-year growth of approximately 8% in 2014] until more data is available.  This may be a Kofax-only issue (as they are somewhat unique). I do not hear other clients indicating that the market is going in the wrong direction. Time will tell.”

For more information: http://bit.ly/KofaxprelimQ115