Ebix Inc (EBIX) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Ebix Incorporated second quarter 2011 investor call. At this time all participants are in a listen-only mode. (Operator Instructions).

I would now like to turn the conference over to your host for today, Neil van Helden, the Corporate Manager of Marketing. Sir, please go ahead.

Welcome, everyone to Ebix Inc.' s second quarter 2011 earnings conference call. Joining me to discuss the quarter is Ebix's Chairman, President and CEO, Robin Raina and Ebix's CFO, Robert Caris. Following their remarks we will open up the call for your questions to be addressed by Robin and the CFO, Robert Caris. Let me take this time to remind you that the purpose for this call is to provide you with information regarding our second quarter fiscal year 2011 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 our assumptions prove incorrect actual 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 most recently reported form 10-K for the year ended 31st December 2010, particularly under the heading risk factors. At times in our prepared remarks in response to our questions we may offer certain additional 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 in the future calls.

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

Mr. Raina will open today's call with a few prepared remarks and then will open things up to 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. With that let me turn the call over to Mr. Raina.

Thank you, Neil. Good morning, gentlemen. We reported today the strongest quarter in Ebix's history on many fronts. I'm going to take this opportunity to discuss these from a financial perspective. On the financial front we are extremely pleased with these. Our press release this morning details our results so I'll concentrate on talking about a few important financial metrics.

Revenue this quarter increased by 31% from a year ago to $42.3 million. Six-month cumulative revenue at the end of June 2011 increased by 29% to $82.3 million as compared to the same period a year ago. Our Exchange business grew 42% year-over-year to become 76% over total revenue this quarter. Nothing speaks more to the operating scent of a company than it's continued strong cash generating abilities. Cash from operations totaled $19.6 million in this quarter and increase of more than 22.5% from a year ago.

During the six-month June 2011 the company generated $29.9 million from net cash flow from operating activities as compared to $28.3 million in the first month of 2010. The company reported an operating margin of 44% for Q2 2011 as compared to 40.4% for the same period during 2010. Q2 2011 operating income was $18.6 million, an increase of 43% on a year-over-year basis as compared to Q2 2010 income of $13 million. The operating income included a gain of $1.9 million from the reversal of contingent on our accrued liabilities related to a few acquisitions made in 2010. The company's freighting income excluding this one time non-recurring event was $16.7 million for the quarter accounting still for a 40% operating margin. We are pleased with these numbers as they are in spite of the fact we continued to increasing our sales force substantially in all of these Exchanges.

Q2 2011 net income was $22.3 million, an increase of 59.5% on a year-over-year basis, as compared to Q2 2010 net income of $14.0 million. Net income for the quarter was affected by certain non-recurring matters including a net $4.5 million benefit resulting from the reversal of the remaining valuation allowances that had been held against our NOL carry forwards in the United States; and a non-operating loss of $577,000 resulting from decrease in the fair value of the put option that was issued to the two former stockholders of E-Z Data who received shares of Ebix common stock as part of the acquisition consideration paid by the Company in October 2009.

Q2 2011 diluted earnings per share rose 48% year-over-year to $0.53, as compared to $0.36 in the second quarter of 2010. For purposes of the Q2 2011 EPS calculation, there was an average of 42.3 million diluted shares outstanding during the quarter, as compared to 39.3 million diluted shares outstanding in Q2 of 2010. Our consistent cash flows allowed us to execute on our already announced share repurchase plan. During Q2 2011, the Company repurchased 1.2 million shares of our common stock at an average price of $19.80 per share for an aggregate amount of $23.8 million. Subsequent to June 30, 2011, the Company has purchased another 1.059 million shares of fixed common stock at an average price of $19.00 for an aggregate amount of $20.1 million. Year to date, the Company has repurchased 2.37 million shares of Ebix common stock in 2011, for an aggregate consideration in the amount of $46.3 million, representing an average price of $19.56 per share.

In second quarter of 2011, the diluted share count was $42.34 million shares. Based on our share repurchase til yesterday we expect the diluted share count for third quarter 2011 to be around 40.74 million and for the fourth quarter of 2011 to be 40.59 million which would be 4.1% lower than the second quarter diluted share count used for EPS calculation. This diluted share count is likely to be even lower if the company continues to repurchase the common stock from the market.

The company's current ratio was 1.61 and a working capital position was $25.4 million at the end ever Q2 2011. This reflects an increase from 1.56 at the end of 2010. The company started the second quarter with $35.6 million of cash in the second quarter of 2011. The company paid approximately $23.8 million in cash for stock buy back. $6.8 million in cash for retiring a convertible note. $1.67 million in cash to Bank of America toward debt reduction, $0.6 million in cash towards (inaudible). A $1.4 million investment banking fee in connection with the ADAM acquisition and $0.7 million in cash toward acquisition related severances. After paying approximately $33.5 million in cash, in second quarter of 2011 towards these activities, the company's cash balance as of 30th June 2011 was approximately $23.8 million. As of 30th of June, 2011, the company has no remaining convertible debt now. Also at June 30th, 2011, the company had only used $8.75 million of Bank of America revolving line of credit leaving $26.35 million of borrowing capacity.

The company's income tax expense specific to the quarter was $1.72 million at an effective tax rate of around 9% excluding the benefit of discreet items. The company still has domestic NOL carry forward of around $61 million available to offset future U.S. federal and certain state taxable income. As announced earlier, we expect our effective tax rate to gradually increase to 16% to 20% between now and the year 2013.

Recently, we decided to engage the services of Ernest & Young to augment the Company�s management and execution of our worldwide SOX compliance work regarding internal controls. The engagement deliverables include redesign of testing plans, testing of all controls related to Finance, HR, IT, Transfer Pricing, Income taxes and other operations; identification, analysis and reporting of any control deficiencies; remediation and retesting of controls if any deficiencies are identified. The engagement involves assisting in compliance with Section 404 of the Sarbanes-Oxley Act of 2002, across United States, Singapore, Australia and India. Internal financial controls that any company in the world can aspire for. It is not just because SOX mandates for us to do that, it is because controls make any business efficient, cost effective, and better than others.

Ebix runs all of its operations and bit processes over the internet using internally built systems with checks, controls, and balances in it. Our entire business is run using an internally built enterprise tool iEmployee that is accessible in an anytime, anywhere, any place basis over iPad, Droid, iPhone, Blackberries, Mac's, pc's et cetera. This was implemented in the year 2007. All our contract demonstration is done using that system. Our sales management, travel booking and payment, human resource recruitment, lead tracking, attendance management, payroll, banking, CapEx management, I.T. management, revenue for tracking expense forecasting et cetera. Everything is done using our iEmployee system.

All processes require multiple approvals, central head off approvals, finance approval at various levels, tracking of payments, automated creation et cetera, an audit trail of every transaction is kept by the system. All this is done over the internet across many continents in minutes while ensuring budget sanctity approval, sank tau tee and controls that can be brought back at anytime. We implemented these systems because besides controls it gave as you better handle on a business. We can predict things more easily than others. We have better controlled overall aspects of our business as we have the systematic centralized system that checks everything and keeps everybody at all levels in check. To us it is about efficiency besides checks and balances.

If a company aspires to run a 40% or more operating margin business, it does not have a choice but to put internal controls in place. We believe that we do extremely well in controls and do it in a rather systematic manner on a large scale. We actually plan on launching this new iEmployee service on an on demand basis over the cloud to help companies implement better controls in place. We believe there is a big market for these kind of services in the financial world we see us selling this on demand product to large accounting firms besides insurance companies and banks. Besides that, improving the internal controls is an on going process that can never stop. Like any other company, we keep testing our controls and fixing anything that needs improvement. That will obviously continue. The engagement of the reputed firm like Ernest & Young for SOX assistance is another step forward in that direction.

With the overall economy being sluggish, our revenue from existing clients in many of our business has dropped on a year-over-year basis. However, we have been able to still keep our revenues growing by signing new clients who substitute for these revenue drops and also provide us new sources of recurring revenues. As regard to signing new contract, second quarter of 2011 has been our best quarter til date. We signed contracts in all areas of our business. Be it Exchanges, new Carrier system deals, or broker system deals . Exchange continued to be the biggest contributor in terms of new deals.

We signed in excess of 130 contracts in the U.S. alone in the second quarter of 2011. Our exchange business continues to do well. We believe that we have an opportunity to grow the market substantially by pioneering new exchange functionalities and by increasing our reach to an expanded sale force. We believe our straight through processing vision has locked up interest from large financial institutions and insurance Carriers. In recent times we have received a go ahead to implement the straight through vision from two of the leading names in the life insurance industry. We are presently under non-disclosure agreements not to disclose those names. Both these players have asked us to implement straight through processing in borrowing end to end functionality delivered in an on demand manner over the cloud on a transaction orientated utilities based model.

The functionality compresses quoting, illustrating, underwriting, compliance, research, binding of policy, eSignature and ePolicy delivery across their entire network of constituents. One of the deals involve us creating a CORBA portal that one of the largest distributors in the United States will provide jointly, with Ebix, to its entire network of partners, carriers, sub-brokers, etc... The other deal involves a leading life insurance carrier implementing the straight through processing in addition to CRM functionality across its entire network of tens of thousands of brokers. We are excited about these kind of deals as they give real shape to our vision and also competitive pressure on other insurance Carriers and distributors to follow suit.

As of 31st of December, 2010, Ebix had 44 sales managers in the U.S. Exchange division. As of 30th of June, the company had 58 sales manager in the U.S. Exchange division. The company intends to hire an additional count of approximately 30 more sales managers for this division. We are investing in building a focused industry vertical based sales growth, while expanding our CRM solutions in Life and Annuity to other areas like PNC and Health Insurance. We are also hiring additional new sales managers in all other channels of our business worldwide. We are continuing to expand our sales reach to drive increased growth. We are presently working on taking all our life and employee benefit services to Asia Pacific, Middle East, Africa and Latin America.

Our operating margins could have been even more if we were not investing as much in future growth initiative on the research development front, infrastructure front, and sales front. In summary, we are pleased with the results announced today. We continue to believe in our ability to grow revenues organically and through accretive acquisitions. We intend to remain focused on creating new benchmarks in operating margins and insurance technology leadership. Finally, I look forward to describing our future progress when we reveal the third quarter 2011 results in the early part of November.

With that, let me turn the call back to the Operator so we can take your questions. Thank you.

Thank you sir. (Operator Instructions). Our first question today come from the line of Jeff Van Rhee from Craig-Hallum. Please go ahead.

Thanks guys. Two questions for you. Robin, these two deals on the straight through processing certainly seems to be quite an accomplishment given this is where you've been going product wise for a while. Can you talk to the economics of these deals, namely, I think in the past you've talked about most participants in the exchanges using a modular to the straight through processing. What are the economics on a per policy processed basis going to be on these versus what they were in the past or are for a traditional customer in the exchange?

Well, the economics are going to be pretty similar to what we had in the past, I am under severe NDA so it is difficult for me to talk the specifics of the value related to these transactions. When you look at these deals that we talked about, one of these deals involves a very Life large distributor who would like to create a portal and market this entire exchange and not only use it for their own purposes, but market it across to their entire network of Carriers and while they process their business. Which means it's a win-win so while we get all of the transactions out of that network, they get to do -- handle the business processing and handle the insurance commissions.

When you look at those economics, these deals are of large sizes. These deals can be on a recurring basis, they don't have to be scaled up as we go over the years. At this point it is hard for me to give you specific number and tell you that what these deals will entail. But let's say each of the deals recurring revenues in terms of millions of dollars versus smaller amount. Now how many million? I am not at liberty right now to talk about, but I think one of the deals can be very large for us and in our view once it fully -- if it fully scales up and it moves well, it is kind of a life changing deal for us. If it is fully implemented well and if it is scaled up in the right time frames.

The second deal is with a very large Life Carrier, a household name in the U.S. who basically would like us to -- who has taken a leadership role and would like to implement straight through processing and when you look at that, first of all I think that the deal involves a pretty decent amount of revenue streams and recurring revenue streams every year. But then there are many aspects to it.

First of all, this particular Carrier is a worldwide deal too which means the deal could have worldwide ramifications for us. The second important fact which we are paying a lot of attention to is in the Life Insurance industry when one Carrier, a leading name goes in and implements complete straight through processing that particular Carrier has a huge competitive edge now over their competitors in the industry. And no -- and what would happen is that the Carriers in the industry are not going to take it lightly. They would probably want to have the same functionality and so we do believe that the pressure will bring a lot Carriers to the table to us and who would want to follow suit.

And then two other real brief ones. On the sales heads you are adding capacity. It sounds like you have more room to go to get to your target. Can you talk to the ramp in terms of the hedge you have added and when you believe they will be productive in terms of revenue contribution. And then the last question was you commented on record bookings. Can you expand on that? How much greater are bookings versus a quarter ago. Any other color in terms of what the bookings are telling you? Thanks.

Thank you. I think the first one is in terms of the sales at ramping. I will give you some examples of what we have been able to do. Meaning, look at, for example if you look at our Q2, we faced a few challenges. I will also cover these challenges. One of our challenges was that our ADAM revenue was down $600,000 from our expectations. But that's growing pains of an acquisition and we expect that to change in -- one of the changes we made is we hired two senior Vice President people alone in ADAM, and they have all been hired, and we have added a few more sales people in ADAM alone. That's a ramp up that will start showing results probably in -- we expect that to happen in probably 120 days, 150 days, something like that we will start seeing results out of these new hires from ADAM, for example.

But then when you look at we have hired people in the Exchange side of things. I think a typical cycle that is two functionality areas. There is a retail area and a corporate area. The corporate side of things probably the results will start happening in six months or so, but then on the retail side of things, the results start happening more in 90 to 120 days. So I think That's the first answer. And we are continuously ramping it up. We are presently interviewing, we are hiring people across the board in Exchanges in both in the U.S. and outside the U.S.

In terms of record bookings and the comment about how does it compare to last year same quarter for example. I think if you look at the number of deals, we are basically, if you look at the sheer number of deals , he count and the number of deals is probably 60% to 70% higher. In terms of the number of deals that we assign. Now when you look at the recurring revenues coming out of all of these, it depends on how soon we can scale it up, and how soon we can get some of these clients up and running in various areas of our business. Many of these deals -- most of -- many of these deals have revenues that scale up because they have network angles involved with them. So many of these deals involve Carriers who join in and once they join in they start bringing their network of Brokers on to it and so on which is really where our transactions come in.

Right now when you look at our revenues that we pick up -- when we pick up revenues from some of these deals we basically see us picking up whatever little we are able to do in terms of time and material services versus anything related to the transaction oriented services because you are not going to get those until the platform is up and running. I couldn't offer you specific terms of what does this mean in terms of revenue in specifics right now. I think in coming quarters you will start seeing it. I will suffice it to say that the present booking has given us reason to feel very good about our coming quarter in terms of revenue and in terms of possibility to start growing our income streams.

Great. I will let somebody else jump on. Thank you.

Thank you.

Thank you, sir. (Operator Instructions). Our next question comes from the line of Mark Rye from Singular Research. Your line is now open. Please go ahead.

Hi, good morning Robin and Robert. Congratulations on another good quarter. I wonder if you could talk to us about your software product calendar in terms of the new product --

Hello? Mr. Rye, are you there?

Mark, we lost you seemingly.

It would appear Mr. Rye has disconnected from the conference. (Operator Instructions)

I think his question was probably related to the development cycle in terms of the software cycle in terms of what are the newer products coming out, so I will try to address that and hopefully will join in the meanwhile. The cycle basically if you look at our new streams of products, I mean we are obviously very excited about launching the next stream of Exchange product. And some of the key products that we intend launching this year one is Ebix Enterprise. Ebix enterprise is basically our end to end vision of an enterprise tool presented over the cloud and Enterprise Exchange presented over the cloud. In the first instance it will be covering the Health functionality. The health functionality perspective it will cover claims, employee benefits and so on. And in the later versions of the product which will come into next year, we are basically -- basically launching more functionality attached to it with respect to CRM and with respect to some of the other things we do on the Life side of things. Basically with the Health and Life side of things and the new design of things. Another key product we code named it BNW, Brave New World. It is basically our latest and greatest version of AnnuityNet we basically rebuild the system from scratch. The reason for that was AnnuityNet is already pretty cutting edge which is on demand, asb and so on.

The reason for this one was one, we felt without the growth that we are experiencing, we need a very highly scalable platform. Two, we wanted to pass on the power of customization in the hands of our Carriers, in the hands of a large financial institution, the large distributors, and what that does is today when they want to on board hundreds of thousands of Brokers, they need to come to Ebix and we charge them professional services to on board them. We actually want to change them at the cost of almost moving professional services. We will pass on the power of the ability to customize a platform and on board all these Brokers. Why are we doing that and why are we willing to give up on revenues? it is simple because we believe we can cut short the time to get these thousands of Brokers live on our platform because if they are live quickly we make a lot more revenue a lot more quickly and that would actually fast-forward our revenue growth from our perspective. So that's another key product that is coming out over the next few months, actually.

We have other products which are going to go live pretty soon. We have Annuity Maintenance Exchange which is going live pretty soon in terms of being able to service an Annuity policy, for example. We are also launching our version of Health Exchanges which means interface and exchange. We basically have everything from all the ADAM products, the research into health, the front end portal and then from there taking the exchange and taking it to an exchange and passing on data back to the back end provider of the Carrier. And doing that in an end to end basis. So these are some of the products. I can go on on multiple other products. We're trying to put -- we are trying to put products in our group functionality . But for reasons of time I will stop at that. Thank you.

Thank you and we have a follow-up question from the line of Jeff van Rhee from Craig-Hallum. Your line is open. Please go ahead.

Sure, just two follow-ups, if I could then. On the Exchanges at the Analyst Day you had commented in 2009 there was roughly a 10% to 20% head wind in terms of volume of premiums going through the exchange really just driven by economic head winds. Can you talk to, I guess two questions about those head winds. One, what have you seen thus far in terms of those kind of head winds and their impact on exchange volumes? And, then, two you just commented to the affect of while bookings are encouraging the revenue from existing customers are challenged. Can you talk to the revenue of existing customers and just how that's progressed. How you view or how you are seeing this challenge play out in your existing customer base?

Jeff, great question. That challenge continues today. Meaning, I think we all know what is going on with economic markets. To give you a simple example, when this rating change happened, one of -- we basically were put on alert by all the players. Because as the debt rating changes, people's approach to Annuities changes. At time people, if they start losing faith in the government, people stop investing in Annuities , stop taking money out of Annuities and so on. So this is -- it is something that we -- it is a continuing phenomenon right now. The revenues from existing customers continue to be challenged a little bit. At the same time I think we are seeing what keeps us feeling very good and bullish on the whole business is it is fact that we are able to see -- we are able to see the movement toward Exchanges is becoming much, much faster. We are able to bring in a lot more newer players on to the platform who are able to now -- and bringing them to a platform we are able to fulfill for some of those jobs and we clearly believe that as we keep adding up these newer players, even with the challenged economy, we will be able to show substantial revenue growth. And that's what we are focused on right now.

Does that pace of decline, that 10% to 20% pace of decline, if you look at the environment we are in right now, is the decline in that range faster, better, how would you characterize it?

It is pretty much around that. I wouldn't call it faster right now but it is pretty much around there

Ok.

What is happening is normally there is very little seasonality to these Exchanges, but what has started happening with continuous turmoil in the economy, there has been more sensitivity in recent times than we have seen in the past. Especially so in let's say the last 30 days. What we are seeing is a lot more weightiness in our Exchanges, especially in Exchanges that are kind of driven by confidence in the government and first of all that's the Annuity Exchange. And to some extent Life Exchanges start suffering. You can see people -- it's a cycle ultimately, f people are struggling on their market, if people have issues with paying their bills, ultimately life insurance looks like a luxury and that starts impacting business a bit. However, like I said, if there is reason to feel dejected on that ground, but again the momentum of newer people wanting to join the platform who feel they have been left out, I think that momentum is pretty strong. And we believe that sheer momentum can get absolutely not only fulfill the drop but it can really improve our revenue streams quite substantially.

And last one for me, just in terms of top line you don't give precise guidance. You are adding a lot of sales heads. It would certainly seem to drive momentum. You have talked about good bookings particularly new customers offset by slowing volumes overall and economic head winds. If I throw that all in and mix it up, do you feel comfortable -- I mean how would you generally guide us in terms of revenue growth rates, namely steady? Should we see accelerating growth? Should we see stable growth in these ranges? Should we see declines? How would you view the growth rate going forward?

I think the important question is what time scale are we discussing? I wouldn't want to give uh short-term kind of an approach because we will have to wait and watch and see how we perform in Q3 and Q4. But I will tell you that we believe -- we have the potential to -- we have the potential and the ability to generate organic growth rates anywhere close to 15% or so. As we start getting some momentum on these -- especially with these new sales people as they get in, we do believe that we have the ability to fast-forward some of these sales. Good news is we are in the front of a lot of deals now, and we are realizing that if we had more sales, we probably would be in front of a lot more deals than we are today.

And sometimes we lose out because we don't just know that a deal exists. Especially in the CRM area. That's one area where there are very strong players like Salesforce are virtually everywhere. We believe if we can be in front of them in more deals, our opportunities absolutely multiply. There is another angle to it, and as we are taking the business worldwide, what we are able to do, what we -- it took us some time to customize these platforms to the world market. As we are customizing these and we are starting to make in roads in individual countries around the globe, those -- the revenue from those should start accelerating and so on. If I were to look forward I would basically say that we would like to see organic growth rates somewhere close to 15% or so. And that means -- and that is why we are heavily investing in sales right.

Ok, great. Thank you.

Thank you.

Thank you. And with no further questions, I would like to return the conference to management for any closing remarks.

Well, thank you very much for being on the call. Bob, have you something to add in terms of closing remarks?

Nothing in particular other than the fact that again we are very pleased with our cash generated from our operating activities and look forward to continue to see positive results for investors and shareholders.

Thank you very much and we look forward to being back again for the third quarter 2011 call. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's program. Thank you for your participation. You may disconnect. Have a wonderful day.