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Kofax Reports Financial Results for its Third Quarter and Nine Months Ended March 31, 2015

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Kofax(R) Limited (NASDAQ:KFX) , a leading provider of software to simplify and transform the First MileTM of customer engagement, today reported unaudited financial results for its third quarter and nine months of its fiscal year 2015 ended March 31, 2015.

Non-GAAP Financial Highlights:

  • Software license revenue increased 4.8% to $30.9 million (PY: $29.5 million), and for the nine months increased 2.9% to $90.8 million (PY: $88.2 million)
  • Total revenues increased 4.2% to $75.3 million (PY: $72.2 million), and for the nine months increased 3.9% to $225.6 million (PY: $217.1 million)
  • Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased 14.0% to $8.6 million (PY: $7.5 million) or a 11.4% margin (PY: 10.4%), and for the nine months decreased 5.6% to $27.2 million (PY: $28.9 million) or a 12.1% margin (PY: 13.3%)
  • Adjusted diluted earnings per share (EPS) was $0.07 (PY: $0.05), and for the nine months was $0.18 (PY: $0.17)
  • Adjusted cash generated by operations was $12.1 million (PY: $19.7 million), and for the nine months was $19.6 million (PY: $42.8 million)

GAAP Financial Highlights:

  • Software license revenue increased 7.5% to $30.2 million (PY: $28.1 million), and for the nine months increased 7.4% to $89.2 million (PY: $83.1 million)
  • Total revenues increased 4.6% to $74.0 million (PY: $70.8 million), and for the nine months increased 5.6% to $222.3 million (PY: $210.5 million)
  • Income from operations1 decreased to a loss of $1.7 million (PY: $0.2 million) or a -2.3% margin (PY: 0.3%), and for the nine months decreased 33.4% to $2.8 million (PY: $4.2 million) or a 1.3% margin (PY: 2.0%)
  • Diluted EPS was $0.02 (PY: $0.01), and for the nine months was $0.04 (PY: $0.05)
  • Cash generated by operations was $10.4 million (PY: 16.1 million), and for the nine months was $15.8 million (PY: $33.7 million)

Quarter end cash was $55.6 million (PY: $93.1 million).

A summary of Kofax’s unaudited revenues and adjusted EBITDA for its third quarter and nine months compared to the prior year on both a GAAP and non-GAAP basis is as follows:

Non-GAAP
Quarter Nine Months
Y/Y % Y/Y %
$M Change Total $M Change Total
Software Licenses 30.9 4.8 % 41.1 % 90.8 2.9 % 40.2 %
Maintenance Services 34.5 5.2 % 45.8 % 106.2 7.2 % 47.1 %
Professional Services 9.9 -0.6 % 13.1 % 28.6 -3.9 % 12.7 %
Total Revenues 75.3 4.2 % 100.0 % 225.6 3.9 % 100.0 %

Adjusted EBITDA

8.6 14.0 % 27.2 -5.6 %

Margin

11.4 % 12.1 %
GAAP
Quarter Nine Months
Y/Y % Y/Y %
$M Change Total $M Change Total
Software Licenses 30.2 7.5 % 40.8 % 89.2 7.4 % 40.1 %
Maintenance Services 34.0 4.2 % 45.9 % 104.5 6.3 % 47.0 %
Professional Services 9.8 -2.3 % 13.3 % 28.6 -1.8 % 12.9 %
Total Revenues 74.0 4.6 % 100.0 % 222.3 5.6 % 100.0 %

Income from Operations1

-1.7 -826.7 % 2.8 -33.4 %

Margin

-2.3 % 1.3 %

1 Includes $2.3 million of legal and other expenses related to the Company’s acquisition by Lexmark.

Commenting on the Non-GAAP financial results for the quarter, Reynolds C. Bish, Chief Executive Officer, said: “We had a solid quarter with strong growth in new and acquired software products and a continuing year over year increase in the number of six and seven figure software license transactions. Despite this, the strengthening of the U.S. dollar since we last provided guidance on January 29 again negatively impacted our revenues. On a constant currency basis, using exchange rate levels in the prior year period, software license revenue would have been approximately $1.8 million and total revenues $5.0 million higher. The effect on Adjusted EBITDA was less pronounced as a result of the global nature and distribution of our employees and expenses. We expect Lexmark’s acquisition of Kofax to close in the second calendar quarter of 2015, and look forward to working with its management to combine the two businesses.”

Operating Highlights:

  • Announced a definitive agreement for Lexmark to acquire all of Kofax’s outstanding shares for $11.00 per share in cash at a total value of more than $1 billion. The acquisition is contingent on Kofax shareholder approval at a special general meeting of Kofax shareholders scheduled for May 18, 2015, applicable regulatory clearances and other customary closing conditions.
  • Acquired Aia Holding BV, a provider of customer communications management (CCM) software for $19.5 million. Aia’s CCM software helps organizations manage interactive and ad hoc customer correspondence both electronically and on paper, and will be fully integrated within Kofax TotalAgility(R).
  • Launched Kofax Mobile IDTM, a mobile capture framework that powers the capture and submittal of proof of identity documents, including U.S. and most international driver licenses, passports and national identity cards, and their content. This capability is an essential part of an account opening or other process initiated by taking a picture of such documents using a smartphone or other mobile device.
  • Delisted Kofax’s shares from the London Stock Exchange effective March 31, 2015.
  • Gartner’s reports on its Magic Quadrants for Intelligent Business Process Management Suites and BPM-Platform-Based Case Management Frameworks were issued and recognized Kofax for its TotalAgility Platform.

About Kofax

Kofax is a leading provider of software to simplify and transform the First MileTM of customer engagement. Success in the First Mile can dramatically improve the customer experience, greatly reduce operating costs and increase competitiveness, growth and profitability. Kofax software and solutions provide a rapid return on investment to more than 20,000 customers in financial services, insurance, government, healthcare, supply chain, business process outsourcing and other markets. Kofax delivers these through its direct sales and service organization, and a global network of more than 800 authorized partners in more than 75 countries throughout the Americas, EMEA and Asia Pacific. For more information, visit kofax.com.

Safe Harbor Statement

This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are subject to risks and uncertainties that could cause actual results to vary materially from those projected in the forward-looking statements. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. The Company may experience significant fluctuations in future operating results due to a number of economic, competitive and other factors, including, among other things, our reliance on third-party manufacturers and suppliers, government agency budgetary and political constraints, new or increased competition, changes in market demand, our ability to consummate and the timing of the consummation of software revenue transactions and the performance or reliability of our products and the ability of the Company and Lexmark to complete the transactions contemplated by the merger agreement, including the parties’ ability to satisfy the conditions to the transaction set forth in the merger agreement (including obtaining necessary Company shareholder and regulatory approvals) and the absence of facts, circumstances, changes or events resulting in a material adverse effect on the Company. These factors and others could cause operating results to vary significantly from those in prior periods, and those projected in forward-looking statements. Additional information with respect to these and other factors, which could materially affect the Company and its operations, are included in certain forms the Company has filed with the Securities and Exchange Commission. Although the Company believes that the expectations reflected in any forward-looking statements are reasonable based on its current knowledge of the business and operations, it cannot guarantee future results, levels of activity, performance or achievements. The Company assumes no obligation to provide revisions to any forward-looking statements should circumstances change.

Non-GAAP Financial Measures

Management uses financial measures, both GAAP and Non-GAAP, in analyzing and assessing the overall performance of the business and making operational decisions. The Company has provided and believes that the Non-GAAP financial measures and supplemental reconciliations to GAAP financial measures are useful to investors and other users of its financial statements because the Non-GAAP financial measures may be used as additional tools to compare our performance across peer companies, periods and financial markets. Please refer to the forms the Company has filed with the Securities and Exchange Commission for a discussion of the Non-GAAP financial measures and supplemental reconciliations to GAAP financial measures for more information regarding the Non-GAAP measures.

(c) 2015 Kofax Limited. Kofax, and TotalAgility are registered trademarks and Kofax Mobile ID and First Mile are trademarks of Kofax Limited.

Source: Kofax

KOFAX LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, 2015 June 30, 2014
Assets
Current assets:
Cash and cash equivalents $ 55,567 $ 89,631
Accounts receivable, net of allowances of $971 and $881, respectively 59,431 58,392
Other current assets 9,622 9,690
Income tax receivable 7,126 7,209
Deferred tax assets 5,579 3,502
Total current assets 137,325 168,424
Property and equipment, net 6,403 6,753
Goodwill 201,925 186,103
Acquired intangible assets, net 49,883 36,085
Deferred tax assets, net of current portion 3,897 1,877
Other non-current assets 4,638 4,105
Total assets $ 404,071 $ 403,347
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable and accrued expenses $ 41,572 $ 37,445
Deferred revenue 79,746 78,497
Income taxes payable 2,699 1,101
Deferred tax liabilities 1,301 217
Contingent acquisition payables 6,086 4,775
Total current liabilities 131,404 122,035
Minimum pension liability 5,121 4,078
Deferred revenue, net of current portion 8,143 8,079
Deferred tax liabilities, net of current portion 10,729 3,243
Contingent acquisition payables, net of current portion 2,456 3,927
Other non-current liabilities 7,148 7,519
Total liabilities 165,001 148,881

Commitments and contingencies

Shareholders’ equity:
Common stock 98 97
Additional paid in capital 65,969 60,695
Employee benefit shares (17,685 ) (18,207 )
Treasury shares (15,980 ) (15,980 )
Retained earnings 210,778 207,141
Accumulated other comprehensive income (loss) (4,110 ) 20,720
Total shareholders’ equity 239,070 254,466
Total liabilities and shareholders’ equity $ 404,071 $ 403,347
KOFAX LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
March 31, March 31,
2015 2014 2015 2014
Revenue:
Software licenses $ 30,243 $ 28,137 $ 89,215 $ 83,082
Maintenance services 33,951 32,584 104,494 98,290
Professional services 9,818 10,052 28,585 29,096
Total revenues 74,012 70,773 222,294 210,468
Cost of revenue:
Cost of software licenses 2,347 1,955 6,579 7,640
Cost of maintenance services 5,497 5,218 15,894 15,104
Cost of professional services 8,518 8,129 24,323 23,976
Amortization of intangible assets 1,532 1,275 4,761 4,186
Total cost of revenues 17,894 16,577 51,557 50,906
Gross profit 56,118 54,196 170,737 159,562
Operating expenses:
Research and development 10,383 10,318 30,258 29,346
Sales and marketing 32,670 31,418 96,857 89,853
General and administrative 10,417 10,428 32,010 29,562
Amortization of intangible assets 1,253 889 3,272 2,542
Acquisition-related costs 711 504 2,960 400
Other operating expenses 2,392 404 2,567 3,638
Total operating expenses 57,826 53,961 167,924 155,341
Income from operations (1,708 ) 235 2,813 4,221
Interest (expense), net (96 ) (153 ) (367 ) (507 )
Other income, net 2,931 1,495 2,990 5,445
Income from operations, before tax 1,127 1,577 5,436 9,159
Income tax expense (credit) (451 ) 951 1,799 4,336
Net income $ 1,578 $ 626 $ 3,637 $ 4,823
Net income per share:
Basic $ 0.02 $ 0.01 $ 0.04 $ 0.05
Diluted $ 0.02 $ 0.01 $ 0.04 $ 0.05
Weighted average shares outstanding:
Basic 88,997 88,948 88,888 88,729
Diluted 92,694 92,944 92,449 92,087
KOFAX LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
Nine Months Ended
March 31,
2015 2014
Cash flows from operating activities:
Net income $ 3,637 $ 4,823

Adjustments to reconcile net income to net cash flows from operating activities:

Depreciation and amortization 10,807 10,817
Share-based compensation expense 4,809 3,253
Other income (2,990 ) (5,445 )
Restructuring payments (588 )
Changes in operating assets and liabilities:
Accounts receivable, net (4,887 ) 13,185
Other assets (584 ) 1,935
Accounts and other payables 6,189 (5,346 )
Deferred revenue 4,384 14,448
Other liabilities (1,126 ) (1,724 )
Deferred income taxes (4,857 ) (729 )
Income taxes payable 414 (913 )
Net cash inflow from operating activities 15,796 33,716
Cash flows from investing activities:
Purchase of property and equipment (1,979 ) (2,776 )
Acquisitions of subsidiaries, net of cash acquired (48,450 ) (45,387 )
Interest received 105 77
Net cash used in investing activities (50,324 ) (48,086 )
Cash flows from financing activities:
Issue of common stock 212 521
Excess tax benefits on share-based compensation 536 208
Proceeds from initial public offering in the United States 12,366
Proceeds from EBT shares, net 523 (135 )
Net cash inflow from financing activities 1,271 12,960
Effect of exchange rate changes on cash and cash equivalents (807 ) 1,048
Net decrease in cash and cash equivalents (34,064 ) (362 )
Cash and cash equivalents at the beginning of the year 89,631 93,413
Cash and cash equivalents at the end of the year $ 55,567 $ 93,051
Supplemental cash flow disclosure:
Cash paid for income taxes, net $ 3,809 $ 8,447
Cash paid for interest $ 98 $ 437
KOFAX LIMITED
UNAUDITED RECONCILIATION OF NON-GAAP FINANCIAL MEASURES TO GAAP FINANCIAL MEASURES
(in thousands, except per share amounts)
Acquisition Fair Value Adjustment to Revenue
Three Months Ended Nine Months Ended
March 31, March 31,
2015 2014 2015 2014
Non-GAAP Software License
Software License $ 30,243 $ 28,137 $ 89,215 $ 83,082
Acquisition Fair Value Adjustment 698 1,400 1,544 5,102
Total Non-GAAP Software License $ 30,941 $ 29,537 $ 90,759 $ 88,184
Non-GAAP Maintenance Services
Maintenance Services $ 33,951 $ 32,584 $ 104,494 $ 98,290
Acquisition Fair Value Adjustment 524 197 1,694 801
Total Non-GAAP Maintenance Services $ 34,475 $ 32,781 $ 106,188 $ 99,091
Non-GAAP Professional Services
Professional Services $ 9,818 $ 10,052 $ 28,585 $ 29,096
Acquisition Fair Value Adjustment 39 (136 ) 55 694
Total Non-GAAP Professional Services $ 9,857 $ 9,916 $ 28,640 $ 29,790
Non-GAAP Total Revenue
Total Revenue $ 74,012 $ 70,773 $ 222,294 $ 210,468
Acquisition Fair Value Adjustment 1,261 1,461 3,293 6,597
Total Non-GAAP Revenue $ 75,273 $ 72,234 $ 225,587 $ 217,065
Three Months Ended Nine Months Ended
Non-GAAP Income from Operations March 31, March 31,
2015 2014 2015 2014
Income (loss) from operations $ (1,708 ) $ 235 $ 2,813 $ 4,221
Acquisition fair value adjustment to revenue 1,261 1,461 3,293 6,597
Share-based compensation expense 2,205 1,387 4,809 3,253
Depreciation and amortization expense 907 1,349 2,774 4,020
Amortization of acquired intangible assets 2,785 2,164 8,033 6,728
Acquisition-related costs 711 504 2,960 400
Other operating expenses 2,392 404 2,567 3,638
Non-GAAP income from operations $ 8,553 $ 7,504 $ 27,249 $ 28,857

Three Months Ended Nine Months Ended
Adjusted Diluted Earnings Per Share March 31, March 31,
2015 2014 2015 2014
Net income $ 1,578 $ 626 $ 3,637 $ 4,823
Acquisition fair value adjustment to revenue 1,261 1,461 3,293 6,597
Share-based compensation expense 2,205 1,387 4,809 3,253
Amortization of acquired intangible assets 2,785 2,164 8,033 6,728
Acquisition-related costs 711 504 2,960 400
Net finance, other income and expense, net (443 ) (938 ) (56 ) (1,300 )
Tax effect of above adjustments (2,054 ) (391 ) (6,263 ) (4,228 )
Adjusted net income $ 6,043 $ 4,813 $ 16,413 $ 16,273
Adjusted diluted earnings per share $ 0.07 $ 0.05 $ 0.18 $ 0.17
Diluted shares outstanding 92,694 92,944 92,449 92,087
Reconciliation of Adjusted Cash Flow from Operations
Three Months Ended Nine Months Ended
March 31, March 31,
2015 2014 2015 2014
Cash inflows from operations $ 10,380 $ 16,098 $ 15,796 $ 33,716
Cash paid for income taxes, net 1,675 3,577 3,809 8,477
Payments under restructuring 588
Adjusted cash inflows from

operations

$ 12,055 $ 19,675 $ 19,605 $ 42,751
Income Statements – Non-GAAP
Three Months Ended Nine Months Ended
March 31, March 31,
2015 2014 2015 2014
Non-GAAP Software licenses $ 30,941 $ 29,537 $ 90,759 $ 88,184
Non-GAAP Maintenance services 34,475 32,781 106,188 99,091
Non-GAAP Professional services 9,857 9,916 28,640 29,790
Non-GAAP Total revenue 75,273 72,234 225,587 217,065
Cost of software licenses (1) 2,344 1,950 6,570 7,613
Cost of maintenance services (1) 5,381 5,080 15,564 14,688
Cost of professional services (1) 8,388 7,920 23,952 23,313
Research and development (1) 9,779 9,617 28,664 27,486
Sales and marketing (1) 31,329 30,282 93,850 86,978
General and administrative (1) 9,499 9,881 29,738 28,130
Non-GAAP operating costs and expenses 66,720 64,730 198,338 188,208
Non-GAAP income from operations $ 8,553 $ 7,504 $ 27,249 $ 28,857

(1) Excludes depreciation, amortization and share-based compensation expenses

Definition of Non-GAAP Measures

Non-GAAP Revenue – We defined Non-GAAP revenue as revenue, as reported under GAAP, increased to include revenue that is associated with our historic acquisitions that has been excluded from reported results for a limited period due to the effects of purchase accounting. In accordance with GAAP purchase accounting, an acquired company’s deferred revenue at the date of acquisition is subject to a fair value adjustment which generally reduces the deferred amount and revenues recognized subsequent to an acquisition. We include non-GAAP revenue to allow for more complete comparisons to the financial results of our historical operations, forward looking guidance and the financial results of peer companies. We believe these adjustments are useful to management and investors as a measure of the ongoing performance of the business. Additionally, although acquisition-related revenue adjustments are nonrecurring, we may incur similar adjustments in connection with future acquisitions. At times when we are communicating with our shareholders, analysts and other parties we refer to Non-GAAP Revenue as Adjusted Revenue.

Non-GAAP Income from Operations – We define non-GAAP income from operations as income/(loss) from operations, as reported under GAAP, excluding the effect of Acquisition fair value adjustment to revenue, Share-based compensation expense, Depreciation expense, Amortization of acquired intangible assets, Acquisition-related costs, and Other operating expense, net. Share-based compensation expense, Depreciation expense and Amortization of acquired intangible assets in our non-GAAP income from operations reconciliation represent non-cash charges which are not considered by management in evaluating our operating performance. Acquisition-related costs consist of: (i) costs directly attributable to our acquisition strategy and the evaluation, consummation and integration of our acquisitions (composed substantially of professional services fees including legal, accounting and other consultants and to a lesser degree to our personnel whose responsibilities are devoted to acquisition activities), and (ii) transition compensation costs (composed substantially of contingent payments for shares that are treated as compensation expense and retention payments that are anticipated to become payable to employees, as well as severance payments to employees whose positions were made redundant). These acquisition-related costs are not considered to be related to the continuing operations of the acquired businesses and are generally not relevant to assessing or estimating the long-term performance of the acquired assets. Other operating expense, net represents items that are not necessarily related to our recurring operations and which therefore are not, under GAAP, included in other expense lines. Accordingly, we exclude those amounts when assessing non-GAAP income from operations. At times when we are communicating with our shareholders, financial analysts and other parties we refer to non-GAAP income from operations as adjusted EBITDA.

We assess non-GAAP income from operations as a percentage of total non-GAAP revenue and by doing so we are able to evaluate the relative performance of our revenue growth compared to the expense growth for those items included in non-GAAP income from operations. This measure allows management and our Board of Directors to compare our performance against that of other companies in our industry that may be of different sizes.

At times when we are communicating with our shareholders, financial analysts and other parties, we refer to adjusted income from operations as a percentage of revenues as EBITDA margin.

Non-GAAP diluted earnings per shareNon-GAAP diluted earnings per share is calculated using GAAP net income/(loss) excluding the effect of Acquisition fair value adjustment to revenue, Share-based compensation expense, Amortization of intangible assets, Acquisition-related costs, Net Interest-Other Income and Expense, and the related tax effect, divided by weighted average fully diluted shares outstanding. Therefore, we include this non-GAAP measure in order to provide a more complete comparison of our earnings per share from one period to another. At times when we are communicating with our shareholders, financial analysts and other parties we refer to Non-GAAP diluted earnings per share as Adjusted EPS.

Non-GAAP Cash Flows from Operations – We define Non-GAAP cash flows from operations as cash flows from operations as reported under GAAP, adjusted for income taxes paid or received and payments under restructurings. Income tax payments are included in this reconciliation as the timing of cash payments and receipts can vary significantly from year-to-year based on a number of factors, including the influence of acquisitions on our consolidated tax attributes. Payments for restructurings relate to a specific activity that is not part of ongoing operations. At times when we are communicating with our shareholders, financial analysts and other parties we refer to Non-GAAP cash flows from operations as Adjusted cash flows from operations.

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