Ebix Inc (EBIX) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ebix Third Quarter 2010 Conference Call. At this time, all participants in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Neil van Helden, Corporate Manager of Marketing. Please go ahead.

Welcome everyone to the Ebix, Inc.'s Third Quarter 2010 Earnings Conference Call. Joining me to discuss the quarter is Ebix's Chairman, President and CEO, Robin Raina. Following Robin's remarks, we'll open up the call for your questions to be addressed by Robin and the Ebix CFO, Robert Kerris.

Let me take this time to remind you that the primary purpose of today's call is to provide you with information regarding our third quarter fiscal year 2010 performance. However, some of our discussion or responses to your questions may contain forward-looking statements. These statements are subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize, or should ours a assumptions prove incorrect, actual Company results could differ materially from these forward-looking statements.

All these risks, uncertainties, and assumptions, as well as other information on potential factors that could affect our financial results are included in our reports filed with the SEC, including our Form 10-K for the year ended December 31, 2009, particularly under the heading risk factors. At times in our prepared remarks, our response to your questions today, we may offer certain addition metrics to provide a greater understanding of our business or quarterly results. Please be advised that we may or may not update these additional metrics on future calls.

Our press release announcing the third quarter results was issued a few hours back. The audio of this investor call is also being webcast live on the web at www.ebix.com/webcast. You can look at Ebix's financials beyond what has been provided in the release on our website, www.ebix.com. The audio and the end text transcript of this call will be available also on the investor home page of the Ebix website after 2PM Eastern Time.

Robin will open today's call with a few prepared remarks, and then we'll open things up for your questions. Because we want to address as many of you as possible, I do ask that you limit yourself to a single question today.

Now, let me turn you over to Robin Raina.

Thank you, Neil. Good morning, gentlemen.

Our third quarter 2010 results were record results again for Ebix in terms of the diluted EPS, net income, and revenues. We reported today the strongest quarter in Ebix history. I'm going to take this opportunity to discuss the results on the financial and quarterly fronts, while giving you an insight into where Ebix would like to go from future perspective.

A comparison of the third quarter 2010 numbers to the third quarter 2009 numbers reveals that all four areas, namely revenue, income, EBITDA, and diluted EPS grew in this quarter as compared to third quarter 2009. Revenues in the third quarter of 2010 were $33.3 million as compared to $23.3 million in the third quarter of 2009, a 43% increase. Nine-month cumulative revenues at end of September 2010 increased by 46% to $97.1 million, as compared to $66.4 million in the same period a year ago.

Our exchange business grew 66% year-over-year to become 71% of our total revenues this quarter. Net income of our taxes in the third quarter of 2010 was $16.7 million as compared to $9.4 million in the third quarter of 2009, a 77% increase. EBITDA for the current quarter was $19.1 million, a 57% EBITDA margin, which is a 75% improvement over the $10.9 million EBITDA of 46% of EBITDA margin in the third quarter of 2009.

The Company's operating expenses for the quarter grew by 50% to $20.2 million, as compared to $13.5 millionfor the third quarter of 2009. The results for the third quarter of 2010 were based on $39 million rated average diluted shares outstanding as compared to $37.8 million in the third quarter of 2009. Diluted EPS in the third quarter of 2010 rose 77% to $0.43 as compared to $0.25 in the third quarter of 2009.

Our net margins after taxes grew to 50% in the third quarter of 2010, as compared to 41% in the third quarter of 2009 primarily because of the non-cash operating income of $3.9 million associated with the decrease in the fair value of the put option issued to former shareholders of EBITDA. Ebix's business is broken into four channels. Carrier channel, exchanges, broker channel, and BPU channel. To look at the performance of these channels, I have a few numbers for you. Exchanges this quarter was 71% of our revenues, BPU 12%, broker systems is 10%, and carrier systems is 7%.

Exchanges, broker and BPU channels grew this quarter in comparison to third quarter of 2009, while the carrier system sales tempting to be affected by the delay decisions, tight budgets and implications of the major downturn in property and casualty insurance industry. The exchange channel grew 66% year-over-year to $23.5 million, or 71% of the third quarter revenues. The BPU channel grew 13% year-over-year to $4.1 million or 12% of third quarter revenues. The broker channel grew 18% year-over-year to $3.5 million or 10% of third quarter revenues.

The carrier channel dropped 14% year-over-year to $2.2 million or 7% of third quarter revenues. Let me run through a few balance sheet metrics now. One, cash flows. As regards of cash flows, we continue to generate strong cash flows that are bound to continue to grow even more with the recent acquisitions.

During the nine months ended September 30, 2010, the Company generated $33.8 million of net cash flow from on-going operations as compared to $22.1 million for the same nine-month period in 2009. This will prevent in 93% realization of our cash-based net income as defined in our press release for the nine-month period. So how have we continued to use our cash flows? Let us look at our performance on that front.

Overall debt. The Company's overall debt, both long and short-term, is down to $42.5 million as of the September 30, 2010, as compared to $63.7 million as of September 30, 2009. This is in spite of the fact that since September 30, 2009, the Company has spent $48.41 million in cash for making acquisitions and additional $10.65 million for share repurchases and an additional $2.8 million for making on our payments. Use of cash flow for acquisitions, we spent $14.88 million of cash was invested in acquisition of MCN, Trade Monitor, Connective, eTrack, and USIX.

Use of cash flow for reducing convertible debt, $12.02 million was omitted during the third quarter with respect to the settlement of convergent elections made by White Box in regards to their August -- August 2009 convertible promissory note. Convertible debt balance stood at $15.5 million as of September 30, 2010, and now stands at $5 million as of today.

During third quarter 2010 White Box and IAM Mini-Fund elected to convert $9.5 million of their August 2009 convertible promissory note. The Company settled these convergent elections by paying $9.5 million in cash with respect to the principal component, paying $2.5 million in cash for a portion of the convergent spread and issuing 58,357 shares of Ebix common stock for the remainder of the conversion spread. Accordingly, the Company's total convertible debt as of September 30, 2010, was reducedto $15.5 million.

As of November 9, 2010, the Company's convertible debt was further reduced to a total of $5 million, as we settled all remaining convergent elections made by White Box and IAM Mini-Fund since the end of Q3 2010 by paying an additional $10.5 million in cash with respect to the principal component and as showing 225,000 shares of Ebix common stock for the conversion spread. The $5 million of convertible debt that remains is [inaudible] the foundation. Use of cash flow for share repurchases, the Company spent $10.65 million year-to-date during 2010 for repurchases of 669,978 shares of the Company's common stock.

Commercial bank debt. Commercial bank revolving line of credit balance stood at $21 million, and the term loan balance was at $6.25 million as of September 30, 2010. Receivables over 12 month, despite our rapid growth, as of the September 30, 2010, only $408,000 of receivables was outstanding for more than a year, implying that virtually all our operating revenues are realized in the form of cash and flows, within our annual reporting cycle.

Besides these, let me now talk about a few other events. A few important events that happened in third quarter of 2010. One, acquisition of USIX, the Brazilian exchange. We consider this acquisition an important step forward in the direction of establishing ourselves as a powerful player in the insurance software industry in Latin America. With this acquisition, our portfolio of exchange solutions in Brazil now includes pricing, multi-quoting for brokers, underwriting, contract binding, broker system solutions, etc, in the motor, property, and life. Both individual and group life sectors of the insurance industry.

These solutions are already utilized by some of the largest insurance companies in Brazil, including the largest insurance carrier in Latin America, Bradesco Seguros and the second largest carrier, SulAmerica. We now can cross-sell our EbixExchange suite of services to their existing customers like Bancobras, Banrisul, Porto Seguro, Brasilveiculos Seguros, HDI Seguros, HSBC, MAPFRE Seguros, and Liberty Seguros, in addition to Bradesco and SulAmerica. With this acquisition, we now also provide internet-based on-demand solutions to purchase two-wheeler insurance at dealerships of Honda, Yamaha, and Sundown Motors across Brazil.

What excites me most about this acquisition besides the cost-selling opportunities is existing deal to deploy an on-demand exchange-based broker system solution for the thousands of brokers of Bradesco Seguros. The solution is targeted to be deployed across 30,000 brokers of Bradesco. The fact remains that every time one can provide a solution to a broken system in any market, it leads to many new opportunities as providing a broken system could make us the gatekeeper to their data. That is a good position to be in. Since our goal is to interface our other services like CRM encryption tools, [inaudible], etc., to their system.

The second important event that happened in the third quarter 2010 is the signing -- is the normal signing of new contracts. In the third quarter, we were able to sign many validated deals in the area of exchanges, BPU and carrier channel. The Company signed new contracts with named accounts like Zurich Data Exchange, Transamerica, Fidelity, Security Mutual, Aegon Canada, ING North America, Arrowpoint, [inaudible], Special Risk Insurance, Metro Life Insurance, MFB, Bristol Financial Group, Marsh, Mutual of Omaha, National Capital and United Medical Alliance.

And it's a long list of other names which are all included in the press release and some of the other names that I would like to mention are [inaudible]. This list of names is just a sample representation of contracts, signed by the Company in these -- in this period, with large accounts easily recognizable to the investor community and by no means it presents a comprehensive list of contracts signed by Ebix in the third quarter of 2010.

The third important event that happened in the third quarter of 2010 was the "Fortune" Magazine recognition. In the September issue of "Fortune" Magazine, Ebix was ranked third on the 2010 100 Fastest Growing Companies list. Ebix was also ranked first on the 2010 list of 100 Fastest Growing Technology Companies by the magazine. This was the second consecutive year that Ebix was named in the top five fastest growing companies by the magazine. We value this recognition since it provides us tremendous marketing exposure and credibility in the insurance industry worldwide.

The fourth important event from our perspective was the signing of our first utilities-based carrier systems deal in Brazil. In the third quarter of 2010, we signed a contract with the Brazilian carrier [inaudible] to provide them a back-end insurance company system delivered over a cloud to them on a utilities basis. I'm mentioning this deal since it spells the successful customization of our Ebix Advantage Carrier System in Portuguese, as also Ebix becoming the only vendor to provide a back-end policy administration system on a utilities basis to its clients.

The fifth important event that happened -- the fifth issue that I'd like to talk about with respect to Q3 is operating margins. As our exchanges grew -- as our exchanges grow in volumes, our margins are likely to grow as each new deal beyond the threshold volumes on exchange comes at incremental margins. We believe that we still have scope to grow our margins substantially.

I would request that investors do not pay much attention to plus/minus 2% changes in margin beyond 40% operating margin for next few quarters, as we are consciously making an attempt to reinvest our incremental margins back into the business towards developing new exchange range of services as also carving out an ambitious sales and marketing plan. We are presently focused on a number of key initiatives designed to expand Ebix's growth opportunities worldwide, and accordingly have consciously accepted the premise of operating margins at the 40% level approximately for the next12 months or so. We basically intend to invest our remaining margins as below, amongst other things, one, investing in doubling our sales force.

We are planning to double our sales force over the next 12 months in many key channel areas across the world. Two, we intend investing our margins to expand our services portfolio. We are presently designing many new key services that will expand our portfolio services considerably in our channel areas. For competitive reasons, we prefer that we do not talk about them at present. We intend to reinvest our margins in developing our incremental margins -- in developing end-to-end services in our channel areas. We also intend to launch a comprehensive mobile commuting plan for the insurance industry encompassing iPad, Droid, Blackberry, iPhone, Windows phone, etc.

I'm often asked about providing future guidance on our results. While we have always preferred to stay away from providing guidance and letting the past numbers speak for us, yet our attempt discuss the future at a correlated level. The first point I would like emphasis is that the best -- that from our perspective, the best year is ahead of us. We believe that we are just getting started and our best deals in terms of top-line growth and margin growth are ahead of us. While there are no guarantees for increased success, we believe that with each passing day, our ability to land larger, multi-million recurring revenue deals is increasing as we gain in size and respect in the eyes of the worldwide insurance company community.

Two, we are bidding on larger deals today. Today, we are in the race for many deals that involve tens of millions of dollars. While our success in any of these deals cannot be taken for granted, yet, the fact that Ebix is in the race for such large deals is a produce development from our perspective. Any of these deals has the potential of changing the financial landscape of Ebix quite positively.

Three, our ability to use our aggregation. With the aggregation that we have built, we have strong pricing power that we take very seriously in terms of not misusing it. However, the aggregation allows us opportunities to provide new services in a volume manner by bundling these services in our on-demand systems. For example, we carry an aggregation of 100,000 plus advisors on our fee-item systems. If we decided to bundle a service for say data security vault into our A.D.A.M. system, by increasing our monthly subscription fee from each advisor by $5 per month, we would generate $6 million additional revenue per year from just this one new addition to one of our services. Our long-term vision is to provide small utilities at low recurring monthly prices on a similar basis as Apple for the insurance industry, the idea is to gain from the aggregation volumes.

Four, our ability to define industry trends. With the strong aggregation that we have created, we have the unique ability to provide the industry with trends by data mining transactions. We can, for example, at a correlative level, tell the carriers what sells, what is not working, and so on. That has immense value for the industry. We intend to convert the service into an on-demand recurring revenue stream.

As I reminded all of you in the last quarter investor call, Ebix has delivered these results at a time when the insurance industry is still reeling from the after effects in the economic crisis in the United States, and in spite of the headwind on many fronts. For those who were not present in the call, let me repeat a few specific headwind examples for you. With consumer confidence being rather low, the energy production industry-wide is down 20% year-over-year. The property and casualty sector has had one of the worst years in a decade. The health insurance industry is still dealing with uncertainty created by the healthcare reform bill package and now the new elections. The construction industry that accounts for approximately 40% of insurance aggregates in the US, continues to struggle.

In addition, we continue to believe that the economic recovery is still tenuous. A number of legislative initiatives in the US and worldwide continue to create uncertainty and a mind-set of risk in the insurance industry for our clients. In spite of all of that, Ebix has continued to move forward with record revenues, earnings, cash flows, and net income. We have continued to substitute production drops in the industry to organic growth means by bringing new clients to our exchanges. We have always believed that a company's true strength is tested when the times are bad for the industry. A company that can produce record results in an economy like this has a much better chance of producing spectacular results as a tailwind gets behind us and things become better for the industry as a whole.

At Ebix, we have continuously kept evolving and learning from both our failures and successes. How did the company handle headwind at anytime? In today's world, any company that wants continued success needs to adopt change as a mantra. By that, I imply in the fast-changing world today, any company needs to adapt continuously to the times to face the headwind and keep discovering ways to still grow. We continue to be bullish about our business prospects, both in the short and long-term. How have we managed to do that?

For those of you who are new to the Ebix story, let me say that there are few terms that define Ebix today. One, convergence. Our vision to convert our processes in insurance above all entities so that data can move seamlessly through. to go across all entities so data can move seamlessly through. Second term,

Second term, change. Our readiness to keep adapting to the changing technology trends and regulations in the insurance industry.

Three, discipline. Our desire and ability to run the Company in a highly discipline mode, both on the financial and business fronts. For example, for every acquisition we do, we walk away from many that might be highly lucrative in terms of profitability, but are volatile or seasonable or license oriented in nature.

Four, simplicity. Our desire to keep the business economics simple ensuring that we generate consistently high margin each time, rather than get carried away by mega business plans.

Five, centralize. Our focus on centralizing HR, marketing, finance, administration, IT, legal, etc., while deploying internal A.D.A.M. systems to facilitate that.

Six, airport. Our focuses on being an airport, an infrastructure-based service rather than being an airline.

Seven, recurring revenues. Our focus remains recurring revenue streams at all times which are 75% plus at present.

Eight, on-demand. Our focus is 100% on deploying on-demand services across the world.

Nine, exchanges. They compromise 71% of business today.

Ten, technology agnostic. We prefer to be technology agnostic and build open architecture services to ensure maximum adoption across the world.

Eleven, off-shore. We prefer to build our Carnegie Mellon Level Five off-shore facilities at learning centers being at the nucleus of our international technology efforts.

Twelve, retention. We have not lost a client in five or more years who account for more than 1% of our business.

Thirteen, [inaudible]. Our belief in [inaudible] successful building a McDonald's while ensuring, for example, that French fries tasted the same say in Russia or the Middle East. We follow the same discipline quality approach across the world by deploying common code-based systems across the world.

Fourteen, cash. We prefer to deploy our services in a manner where clients pay as they use our system while the ownership of the IP stays at Ebix. This has been key to our ability to have an exemplary record a record on receivable. For example, we had only $408,000 in receivable pending for more than a year as of September 30, 2010.

Fifteen, last but not the least, integrity. We prefer to do business at our terms with utmost integrity within [inaudible] and purpose with whomever we are doing business with. In my eyes, focus on these key attributes has been at the center of our efforts to keep the Company growing.

With that, I'm going to finish my talk. I look forward to describing the future progress when we release our 2010 annual results next year. Let me turn the call back to the operator so we can take your questions. Thank you.

Thank you, sir. (Operator Instructions) . We have a question from Walter Ramsey with Walrus Partners.

Thank you. Question I have has to do with the Company's tax rate. You know, you're up $51 million in retained earnings now, but you're still paying a pretty low tax rate. Are you going to pay a more normal one in the near future and what do you think that would be?

Well, I think we have already issued guidance on taxes in the past, and we have basically said over the next two years, we expect our tax rate to grow somewhere close to a 10% number. Part of it is that our tax rates are low because most of our IT is based abroad. We also get worldwide lower tax rate on account of having a lower tax rate than some of the other foreign jurisdiction, and most of our income lies there.

Okay. So the ongoing rates, I mean, there's no carry-forwards that are currently reducing it?

Pardon, I didn't hear you.

The 10% doesn't include any tax carry forwards? I mean this is the actual ongoing normal business tax rate, 10%?

Well, I think at this point, we'd like to give you a general guidance with respect to the 10% rate. Having said that, I'm not sure I really understand your question. But this is the overall number, a worldwide effective number that we have referenced in the past.

Okay. Thank you very much.

Thank you. I'm going to request everybody to limit their question to one question so that we can address questions from other shareholders.

Thank you. (Operator Instructions). Our next question comes from Mike Latimore with Northland Capital.

Good morning. Nice quarter there, Robin.

Good morning.

Just on -- you mentioned a little bit about doing some reinvestments and I think you said over the next 12 months you'd expect -- I think you said a 40% operating margin. I wanted to clarify that was right. Is that a change from the long-term guidance you gave I think a your analysis of maybe 42% by the end of 2011?

Well, I think I did not -- first of all, Mike, thank you for your question. I did not issue any guidance related to a 42%. I think what I said at that time was that we would like to be at a $200 million kind of a run rate by Q4 of 2011 with an operating income of around $80 million plus. Having said that, I don't think that has changed. That's our goal, but that was not a guidance. There's no guarantees to that goal. Having said that, what we have said -- what I have said in today's call is the fact that -- you're absolutely correct on saying that we would like to keep, for the next 12 months -- we would keep to keep our operating margins in the plus/minus 2% range of 40%.

And we would like to reinvest the remaining margins back into the business. Incidentally, frankly, even at this point, if our key focus was simply margins, we could have probably produced much better results, even in the third quarter of 2009, for example. We have consciously made the decisions over the last few quarters where we decided -- for one, we decided to double our sales force over the next 12 months. That's a pretty ambitious exercise, first of all. We're increasing our marketing budgets, we're focusing a lot more on product management, we're focusing a lot more on our research and development.

Just to give you an example, just in the life area alone, in the life exchange area alone, we plan to launch six different services in the year 2011. Now, we are not at liberty today to give you more details of what those services are. Simply for competitive reasons, we don't want to pre-warn our competition about what we're going to launch. And in each -- and we're going to continue in all the areas, be it life exchanges, annuity exchange, health areas, CRM.

We have, for example, we're taking CRM systems from life into PMC. We have done a lot of that work already. We are customizing all these platforms into multiple languages to be able to show them, for example, in Portuguese or Chinese, and so on. So all that effort has already begun. Our goal is to ensure that we do that while still maintaining our operating margins somewhere close to 40%, like I said, plus/minus 2%.

Thank you.

Thank you. Our next question comes from Mark Rye with Singular Research.

Hi, good morning, Robin and Robert. Congratulations on your quarter. I wonder if you could expand a little bit more on your plans to double the sales force and talk us through a little on how you're structuring your sales and marketing organization worldwide to sell these four lines of business, and as you acquire companies, how you go about integrating their sales forces?

Mark, great question. Our main focus remains exchanges. And if we can grow our exchanges, the remaining services will sell by themselves because we'll be able to interface them into our exchanges and we'll able to cross-sell those services.

Today, what is happening is -- I'll give you -- I can't name clients, but it's the Who's Who of financial institutions in the US. Who -- we first signed them for one exchange service , and then we got them hooked on to another exchange service, and got them hooked on the another -- you know? Another service, another fee item service, and so on. And we kept bundling in these services and kept getting them to -- we got them to continue signing on to our services.

Now, having said that, our goal is to double our sales force across all channels. Our approach is, first of all, on our sales approach on a worldwide basis, we have multiple initiative on it. One is a multi-national account program, we call it. The MAP program. And what we mean by that is if you have a large player, a multi-national insurance company, that multi-national insurance company should have one key account manager, whatever their level.

Whatever the level that person's level might be even as high as the Vice President or General Manager, but that person would be solely in charge of that multi-national account. Even if we sold six different exchanges to them in 20 different countries, let's say, but that person would be the main point of contact. And from there onwards, this gentleman would have multiple people reporting to him or her across the globe at handling that account. Clearly larger accounts, larger multi-national accounts require a single window, very coordinated approach, and that's what we're trying to do to give them the special edge in terms of service from Ebix. Both in terms of sales and support and implementation.

Having said that, all our -- in our scheme of things, all salespeople need to be focussed on cross-selling. We are not in the mode of -- if we have a salesperson selling an exchange, we expect that person to be able to sell multiple exchanges to the same large carrier or the large account or large bank, and so on. So our people need to be cross-trained on all the new exchanges. So that's another key initiative that we have in place.

In terms of how we compensate these people, we have a slightly different philosophy from our other players. Our -- one of our big strengths is we don't really lose clients. And -- because we are providing infrastructure-based services, we are in a vertical industry where the stickiness is very high. The customer stickiness is very high.

So having said that, we provide -- we basically compensate our salespeople mainly on the first year of sales that they made based on cash collected. This is in addition to obviously their -- these are -- our salespeople that are highly paid senior salespeople, especially people who sell exchanges to large accounts. These are Senior Managers. And in addition to their base, they basically have an incentive structure. A lot of companies pay their salespeople for multiple years in terms of commissions, whereas our plan has always been to continue paying them for the first one year and primarily because of the stickiness, because our implementation group takes on from there, and the salesperson is expected to sell newer services to the same client and make commissions, increase commissions from there.

And so having said that, those are some of the initiatives that we have in place. As we make any acquisition, we completely integrate the sales group. We don't like keeping sales group separate. If that acquisition fell into the category of an exchange, for example, I'll give you a real example. In October of last year, we made the acquisition of Easy Data. The sales groups were completely integrated into our exchange sales group. So everybody sells everything on exchanges today, across retail and across the enterprise sector. Thank you.

Well, great, thank you for that answer, Robin.

Thank you. Our next question comes from Walter Ramsey with Walrus Partners.

Thank you. I was wondering about the A.D.A.M. acquisition. Can you talk about what you plan to do with those product lines once that deal is completed?

Well, I think we have already talked about A.D.A.M. in pretty much detail. I think it's provides the health front end and it provides us the benefit portal solutions and the content portal solutions and so on. And we expect to completely integrate it into our health offering and basically provide on an end-to-end offering from perspective of integrating the back-end systems into the front-end system, and so on. And the idea is to be able to take a transaction -- to take the data at the front-end and be able to take it all the way to the back-end.

Primarily when you look at any large carrier who uses a back-end system, they work with thousands of businesses, and each of those businesses is a possible customer for A.D.A.M., A.D.A.M. services, as also for all the services. And any of their prospective customer -- any of their customers is a prospect for our back-end services and so on. So it's a perfect compliment. And I couldn't talk more than that as of now as regards to A.D.A.M. primarily because we've already made our SEC filings and we are in a quiet period for now.

And do you have an idea when that deal might be completed?

I think it all depends on the SEC, so I couldn't comment on it as of now.

Thanks.

Thank you. I am showing no further questions at this time.

Thank you very much. I think there are no further questions at this time, so I'm going to close the call for now. And thank you very much, and we look forward to speaking to you again at the end of the year.

Thank you. Ladies and gentlemen, this does conclude the conference for today. Thanks for your participation. You may now disconnect.