IZHAK NAKAR - TOP IMAGE SYSTEMS - (TISA)
CEO Interview - published 11/13/00

DOCUMENT # KAZ629

IZHAK NAKAR co-founded Top Image Systems and serves as Chairman of the Board of the company. From 1987 to 1988, Mr. Nakar worked for Team Computer, the Israeli representative of Data General Corporation. From 1970 to 1987, Mr. Nakar served with the Israeli Air Force, where he led various large-scale highly technical development projects and later oversaw the entire technology allocation budget for the Israeli Air Force. Mr. Nakar received his BSc in Computer Science and a Master’s of Business Administration from Bar Ilan University in 1982 and 1984, respectively. Mr. Nakar is a recipient of the Prize for Israeli Security, which is awarded each year in recognition of major contributions to the national security of the State of Israel.

Sector: Application Software

TWST: Could you give us a brief overview and profile of Top Image Systems?

Mr. Nakar: Top Image Systems was formed nine years ago as a start-up company. Our mission was to develop technology in the data recognition arena, to recognize any kind of text, handwriting or information based on paper. More recently, we have developed solutions to collect data from non-paper sources such as e-forms and mobile wireless devices. Over these nine years, we have tried to develop a full, end-to-end solution for document management and form processing.

TWST: Do you have products in the marketplace today?

Mr. Nakar: Yes, we do. We just recently announced three new products. The first is called e-FLOW, which is a global data collection portal for e-business solutions. We have another two products, called Freedom and FreeTab, from which we can capture information from incoming supplier invoices, or incoming faxes. By utilizing these products, we can identify data, collect it and distribute it throughout a customer’s organization.

TWST: Who are the customers for these products?

Mr. Nakar: Actually, there are many organizations and corporations that need to collect data from various sources like paper forms, electronic forms, faxes and from employees out in the field. Some of our largest customers to date have been large organizations such as Blue Cross/Blue Shield, FedEx and Deutsche Post, the German Post Office.

TWST: What’s the advantage of your system versus what they had been doing?

Mr. Nakar: Historically, form processing and data collection has been mainly handled manually. This has meant many people collecting the data on forms and then more people manually keying in that data. Clearly, this process has been lengthy and labor intensive. I’ll give you a few examples. We did the processing for the population census in Turkey, a process that historically has taken four years in order to process all of the data. We completed the processing in just 30 days. Another example is the Deutsche Post, where they had approximately 220 people keying in their data. We were able to cut their labor to approximately 20 to 25 people. So, we are able to save an organization time and significant labor costs when they use our system to automate their processing.

TWST: What’s the cost saving per transaction process, or how do you measure it?

Mr. Nakar: The cost saving or ROI isn’t measured on a transactional basis. Rather, from the two examples I described above, there are different benefits or motivating factors in utilizing the Top Image Systems solution. In the case of the census, it was the shortening of the time in took to process and deliver the data. In the case of the Deutsche Post, it was the savings in manpower. The organization’s return on investment would be the basis of the value proposition that our solutions provide.

TWST: How big is the market that you are addressing?

Mr. Nakar: The market right now is approximately $3 billion dollars in the document processing space. Since this has been a labor-intensive industry to date, much of the physical data processing has been done offshore, in countries such as India and China, where labor costs are much lower.

TWST: Is it growing at this point?

Mr. Nakar: Yes, it’s still growing. Of our $3 billion dollar potential market, $2.8 billion of that market still enters data manually, while only $200 million is automated. There is a perception that we are moving toward a paperless office, which we do not believe to entirely be the case. Form-based data is alive and well, as is the need to automate the process. We believe that Top Image Systems is well positioned to capitalize on the growth of the overall data processing market and the automation of the data collection process in particular.

TWST: Who are you competing with in this space?

Mr. Nakar: We have two types of competitors. One is the software company that develops a similar technology. These competitors target large companies and organizations, mainly in the United States. The second type of competitor is the large system integrator or a company like IBM or Unisys, which provides a full solution to its customers. A company like Top Image Systems develops the software, which can be licensed by one of these large companies and which can be integrated as part of their complete solution. While we mainly compete directly with the software companies that develop a technology similar to ours, we have frequently partnered with the large system integrators to provide an integrated solution.

TWST: On the software side, where do you stand in terms of market position?

Mr. Nakar: We believe that we are the leader in terms of technology and that there really is no clear leader in market share. In the past few years, we have received numerous industry awards from trade magazines, professional newspapers, and professional organizations. We have been tabbed as the best product in our market, as well as the best of AIIM show, which is the biggest professional trade show in our market. These honors have affirmed our position in the industry. We feel that with our new products like e-FLOW, we are now able to penetrate the e-business market and establish a solid position for market share.

TWST: What is your share of the market today?

Mr. Nakar: It’s very difficult to assess because it’s a really young market. But we are currently doing 90% of our business outside of the United States, and only 10% in the US. We entered the US market just last year and establishing a presence in the US is a major goal for us. We believe that the US will be our largest market within the next few years and feel that in two years, we will be among the two or three companies that lead this market.

TWST: Who is the market leader today?

Mr. Nakar: Actually, there is no clear market leader, since the market is so young. Captiva and ReadSoft are the biggest companies in this market right now. We believe that these companies, along with Top Image Systems, will be the main players in the next two or three years.

TWST: What is it that gives you the competitive advantage to be the technological leader at this point?

Mr. Nakar: We believe that there are several aspects of our products that give us this competitive advantage. First, we believe we have the best data recognition capability of any product in the market. If you have hand-written forms and you need to capture all of the data automatically, we have the best recognition technology on the market and can capture the most data accurately. In the past few years, we have conducted many competitive benchmark tests and, in most cases, our products achieved superior results. Second, with the new platform that we have launched, we have open architecture that is extremely flexible. We believe it provides a lot of benefit to customers to be able to work with other complementary products and software easily and in a very flexible manner. Also, our new product e-Flow enables the customer to collect data from both electronic forms, as well as from paper-based forms. We have also recently created a subsidiary company called e-Mobilis, which will develop solutions for capturing data from mobile wireless devices out in the field. With the e-Mobilis solution, a company’s field staff will be able to transfer data directly to the enterprise via wireless communications. With the emergence of e-Mobilis, we believe that we will be able to provide a full, comprehensive solution, processing data from paper, electronically and from mobile devices.

TWST: Is this intellectual property protected, or can somebody else do the same thing?

Mr. Nakar: Other companies can do similar things functionally, but each of those companies uses different algorithms. While we did not protect our technology, we believe that we are years ahead of our competition and that another product could not easily duplicate the performance and efficiency of Top Image Systems’ solution.

TWST: What’s to keep some of the bigger players from coming in and taking market share given the size and growth that you are looking at?

Mr. Nakar: This is a niche market. It isn’t likely that a big player would start to develop a product like ours because of the experience that would be needed to design such a product. Starting such a project from scratch would be a lengthy and costly endeavor. In fact, in our experience we find that the larger players prefer to partner with a company such as Top Image Systems. We provide the software and expertise within our core competencies, and they would handle the integration for the bigger projects. The large companies see it as a niche, and they can more easily team up with the smaller company that developed the software to provide the full solution. Even though a company such as IBM or Siemens has developed a product in this area, we sometimes compete with them, but can also at times team up with them as well.

TWST: How would you describe the strategy the company is going to follow over the next two to three years?

Mr. Nakar: Actually, our strategy moving forward is threefold. First, we have our Top Image Systems core software products, which we believe will be growing at an annual rate of around 50% over the next three years. Second, we plan on establishing our subsidiary e-Mobilis as a major player in the mobile data capture space. Third, we will be concentrating on exploring mergers or acquisitions within our industry in order to solidify our ability to be a major player in our market. The M&A scenario will unfold primarily in the ASP market. Our strategy is to acquire Application Service Providers (ASPs), or service bureaus and build an ASP offering. We will call this organization ASP2 (ASP squared). The ASP will utilize Top Image Systems’ and e-Mobilis’ core technology to provide a virtual service. With these three elements from TIS technology, form processing software, mobile data transfer technology and ASP technology, we can provide a comprehensive solution for organizations to capture data from anywhere and deliver it to any part of an organization. We believe that in three years, we will be one of the major players in the data capture and processing space.

TWST: When looking for acquisitions, is it just to gain size, or is there some technology you are missing and want to acquire?

Mr. Nakar: Probably, it will be both. It is size and technology. We have developed a substantial amount of technology that has been packaged into a solution. We have taken great care to use standards such as XML within our developments. We are looking at some companies, which are experts in data flow, in XML and in work flow. Our primary strategy is to select complementary technologies to ours that fit and deliver us growth in the new market as well.

TWST: Are you likely to become a target for somebody, given your growth and expertise in this area?

Mr. Nakar: We could be. But our main focus right now is to be in this market and to become a leader in this market. However, any move that could maximize the value to our shareholders would certainly need to be considered.

TWST: What changes or developments do you see taking place in the next couple of years?

Mr. Nakar: We foresee more of what we have been seeing in recent years, which is business that is becoming more and more efficient. What we have seen is the shift toward technology that is revolutionizing the speed and the accuracy by which business is conducted. Activities that used to take weeks or months are now being completed in hours and minutes. This is what people have come to expect. With the proliferation of e-business, transactions are moving toward real time. The key challenge for us has been how to capture the data faster than before and how quickly that data can be turned into knowledge. Our solutions enable customers to do more business than ever before in much less time than ever before. We are seeing that products are becoming more of a commodity and are no longer a proprietary technology. What I mean is that the integration of all of the individual products within the total solution must be simple and must use standards. This is another key element to grow in this market. So as the product becomes a commodity, you need to keep it as an open architecture so that everyone can talk with everyone. XML, which is a relatively new standard for exchanging documents and data takes this process a step forward. XML has enabled different systems to communicate with each other. If we take the speed of data and the product as a commodity, then, if you bring a knowledge base and professional services, I believe this is what is going to be the major change in the market.

TWST: Does the new product position you correctly for that changing marketplace?

Mr. Nakar: Definitely, yes. You can see the ASP model has put us in the virtual services arena. The mobile device is going to speed transactions from the field. The automation that we are doing with Top Image Systems products for electronic and paper-based data is going in the same direction.

TWST: Will there be any other changes that will have to be made at the company to make sure you are positioned to take advantage of the marketplace?

Mr. Nakar: Definitely, we are going to be making some new changes in the company in both technology as well as the growth aspect. To address these changes that we see taking place in the future, we recently raised $50 million for the company to invest in growth opportunities over the next two to three years.

TWST: What part of your business today is Internet-related, and what is it likely to be in a couple of years?

Mr. Nakar: The Internet has certainly become fundamental in shaping the landscape of our market as well as our company. Actually, e-Flow is an Internet-related business that we just started. e-Mobilis will definitely be influenced by the Internet, as information is transmitted from the field to the home or enterprise database. The ASP concept is based on the Internet as well. The ASP model is what we see as the future virtual employee. Employees will be able to perform their work outside of the confines of the office. Employees will be able to work from home and perform all kinds of tasks for their employer. We will be able to provide the backbone for this future work environment. We believe that the future will also extend into a more B2E market, which is business-to-employee, and we want to be a part of it.

TWST: What kind of growth should investors expect from the company over the next two or three years?

Mr. Nakar: Organically, the company can grow in the range above 50% yearly in the next two years. However, if there were to be mergers or acquisitions, that figure could be substantially higher.

TWST: Do you have the management team in place you need to handle that kind of growth?

Mr. Nakar: Recently, we put in place a new management team for both Top Image Systems and e-Mobilis. We plan to further develop the management team over the next several months. Having the right management team in place is vital to a growing company, and we are aware of the need and are prepared to hire more qualified people in the next few months.

TWST: Have you been able to find the people you need despite the tight labor market?

Mr. Nakar: It is not always easy. We have had some difficulty finding programmers, both in Israel and in other countries, including the US. There is even a shortage of skilled management candidates, as many experienced individuals have gone on to be become involved in the financial industry as investors, brokers or investment bankers. Many others have become a part of another start-up business or have started businesses of their own. It is an extremely important undertaking to have the right people on board, and this is part of our M&A strategy: to get more quality people and to add quality to the management team as well.

TWST: What should investors worry about, and where is the risk in the story today?

Mr. Nakar: The main risk we have is how fast we can get to market. I do not think our technology is a risk. We have a proven technology. We have experience in this market over the past nine years. We have been able to show success stories with customers and demonstrate value to our customers. The risk is in market penetration. So I believe that how fast we are going to get to market and how fast we can become a leader in the market are the biggest risks that we see.

TWST: Is there a risk that somebody can invent a better optical character recognition system and overtake you in the marketplace?

Mr. Nakar: There is always that risk, as technology never stands still. But building better technology is only a small part of the success equation. I believe that if you are able to build a strong customer base and establish a solid reputation in the market (which I believe that Top Image Systems has done), we would not be so adversely affected if someone were to come along with a new technology. If that were to happen, I don’t believe that it would be a major leap from where we are in terms of technology. If we are able to provide value to our customers, and we are very comfortable that we have, we feel confident about our place in the market. That said, we have not stood still ourselves, as we have continued to invest in our company’s future. So far this year, we have released three new products in which we had invested heavily over the past several years. We continue to look forward to new developments as we grow our business. Establishing our presence in the mobile and ASP markets will allow us to stay at the forefront of this still emerging market, and these initiatives show our commitment to R&D and our desire to remain ahead of our market curve.

TWST: Why set up a new company with e-Mobilis, and why not just keep it as a division of TIS?

Mr. Nakar: We want to keep Top Image Systems focused in on its core business and market. We want to separate the companies so that we can receive the proper market valuation for each company. e-Mobilis, being a start-up company, would change the financial landscape of the combined company, and we believe that it makes sense to separate the resources and the operations of the two companies. Another factor in separating the companies is our desire to have our employees in each company focus and work in one field. The mix of R&D in the combined company is not in our best interests, nor is it in the best interests of our shareholders.

TWST: Where are you spending your time as CEO of the company?

Mr. Nakar: The majority of my time is being spent with e-Mobilis, trying to grow it from the ground up. Developing the proper business model for the company as it grows from concept to marketable business is quite an undertaking. I also spend time on mergers and acquisitions, considering potential companies for us to acquire or to work together with on a joint venture.

TWST: How would you describe the culture at TIS?

Mr. Nakar: Actually, it is very typical of many Israeli companies. We approach our business as a mission. We place a strong emphasis on teamwork and everyone working together to achieve our goals. We are committed to doing the job quickly, but more importantly, doing it well for the benefit of our customers. We know the consequences of not serving the customer, as we know there will always be another company that can take our business. At the same time, we accept and encourage our employees to take risks. If you take a risk, mistakes can and will be made. We understand that and have built a culture of learning from our mistakes, so that mistakes are not repeated, but rather are springboards toward knowledge. We feel that by taking a patient approach to risk and their inherent mistakes, the end result is a superior product and a more knowledgeable workforce for the future. We truly do consider Top Image Systems to be a family. We strive to work together and grow together, while knowing each other and each other’s families. We believe that by creating a sense of connectedness within the company, everyone is motivated to work together to build the best company that we can.

TWST: What do you have in the way of cash?

Mr. Nakar: At this time, we do not have any problems with cash. From our TIS operations, we have $16 million to $17 million in cash, and our cash flow is positive. That, of course, excludes e-Mobilis, since that is a new start-up company in which we will invest heavily.

TWST: Are you generating cash now, or are you eating cash?

Mr. Nakar: We are eating cash.

TWST: How much per month?

Mr. Nakar: Approximately $500,000, mostly due to our establishing e-Mobilis as a start-up company.

TWST: When do you expect to break even?

Mr. Nakar: Again, the core of TIS operations is already at break even. We expect to break even in overall operations by the end of 2001, once e-Mobilis has begun to sell products and penetrate its target markets.

TWST: What kind of an operating margin should you be able to generate in these businesses?

Mr. Nakar: In 1998 we generated a 17% margin. We should be able to generate margins consistent with 1997 and 1998, which were between 15% and 20%. Given our current financial performance and outlook, our margins may be as high as 22%.

TWST: How do you feel about the value the market is currently putting on your stock?

Mr. Nakar: That I am not as happy with. While I am disappointed by our recent valuation, there are several factors that can explain it. One would likely be the size of the company. We are just not on the radar screen of many investors. But if one were to look at the company’s performance, they’d see 14 consecutive quarters of year-over-year growth. We have built a profitable company. While the document market may not be as sexy as some other industries, we are really a solid business with good customers, and we generate tangible, repetitive income. This is evident in the growing number of customers, as well as with the deals we have signed in the past several years. We sell worldwide, and it is not easy to build a bridge between so many cultures, so many mentalities and so many countries. So, we believe that we have built solid platforms that will continue to grow nicely in the future.

TWST: What do investors worry about when you talk to them, and what questions do they ask?

Mr. Nakar: Investors tend to worry about the growth prospects for the market in which we compete. The perception out there is that it is a paper-based market and, like I mentioned earlier, it may not be considered to be a hot market or one that has whet the appetite of investors. Investor sentiment has shifted toward e-business, and that is something that we are addressing. We believe that it is important that investors understand the nature of our business and just how comprehensive our solution is and how our business has and will continue to grow. We have built platforms for our customers to turn data into knowledge, whether from paper, electronic media and forwarding the near future, from mobile wireless devices. This truly is a growth industry, and we feel confident that investors will see past their perceptions of the market and embrace the opportunity that Top Image Systems presents. Over the past four years, the average annual growth rate of the company was 58%. If investors wonder: Can you continue to grow at the same rate? My answer is yes. We have done it and I believe our future is brighter than ever. We have built a business that has provided a tremendous value to our customers and along the way, have invested in our future. We find ourselves on the verge of realizing the value of the company that we have created and look forward to what we believe is a promising future of growth, based on our fundamental mission statement of changing the way information and data is converted to knowledge.

TWST: Thank you. (TM)

IZHAK NAKAR
 Chairman
 Top Image Systems, Ltd.
 2 Habarzel Street
 Ramat Hahayal
 Tel Aviv 69710
 Israel 
 972 3 648 7722
 972 3 648 6664 - FAX
 www.topimagesystems.com
 e-mail: contact@topimagesystems.com

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