Face the facts at Kofax

Kofax licenses software to over 20,000 customers spanning the financial services, healthcare and government departments, helping them to digitise and process dense documents such as insurance claims and mortgage applications. Consumers really like the company's mobile capture technology, which enables them to photograph a form using their smartphone or tablet and then submit it to Kofax's client company, whose costs are cut in the process.

Innovative technology such as that may explain why Kofax's shares trade at about 31 times forecast earnings for the year just begun, according to broker Panmure Gordon. Even though forecast growth pushes the earnings multiple down to 23 times for 2015-16's forecast, that rating still looks stretched. After all, the company's software licensing sales - which account for 40 per cent of its revenues and lead to maintenance fees, which contribute another 45 per cent - have stagnated in recent years. They slumped 18 per cent in the first half of 2012-13 and, despite a second-half rally, still registered a full-year decline of 4.3 per cent to $112m (£66.7m). And Kofax estimates they grew by as little as 4 per cent in the year just ended, leaving them the same as 2006 levels.

Kofax's dependence on large deals whose timing is unpredictable is to blame for that persistent weakness. The response has been a mixture of acquisitions - last year it bought data-integration software specialist Kapow Technologies and business intelligence and analytics firm Altostore - plus bolstering its sales teams and research spending. That hasn't worked especially well. Kofax's licensing sales are essentially flat even after it boosted its sales headcount by more than a third, suggesting the extra sales people haven't contributed much. And its ramped-up R&D, sales and acquisition costs in the first nine months of this year contributed to a 45 per cent slump in operating profit to just over $4m.

Erratic performance is another concern - Kofax warned in June that its full-year licence revenue, total sales and cash profits wouldn't meet the City's expectations, blaming the shortfall on $6m in licensing sales slipping into 2014-15. Shareholders won't have been overly surprised, given that the group has issued profit warnings five times since 2011. But a new worry may be Kofax's recent listing on the US Nasdaq exchange. This may expose it to a more aggressive bunch of investors whose response could amplify the effect of any future warnings.

Broker Panmure Gordon, which has a 417p price target for Kofax shares, is "weary" of the company's downgrades and believes its latest may indicate a deeper sales problem. It expects underlying pre-tax profits of $33.4m for the year just ended, giving EPS of 24.3¢, down from $37.4m and 30.3¢ last year.

Happily, Kofax has made some progress. It managed to double its maintenance sales in five years, despite its tepid licensing performance. And chief executive Reynolds Bish says he is confident that the $6m-worth of slipped licensing revenue will be secured in the first half of the year just begun.