Ebix Inc (EBIX) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ebix, Incorporated, third-quarter 2011 investors conference call. At this time all participants are 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 your conference over to your host for today, Mr. Steve Barlow, Vice President of Investor Relations for Ebix, Incorporated. Sir, you may begin.

Thank you. Welcome, everyone, to Ebix's third-quarter 2011 earnings conference call. Joining me to discuss the quarter is Ebix Chairman, President, and CEO Robin Raina, and Ebix Senior VP and CFO Robert Kerris. Following our remarks we will open your call up to questions.

Let me remind you that the primary purpose of today's call is to provide you with information regarding our third-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 Company results could differ materially from those 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 December 31, 2010, particularly under the heading Risk Factors.

At times in our prepared remarks and response to your questions today 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 the record third-quarter results was issued a few hours ago. 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 text transcript of this call will be available also on the investor homepage of the Ebix website after 3 p.m. today.

We reported today the strongest quarter in Ebix history on many fronts. Bob and I will talk about the Company from a financial perspective, and Robin will address the business in the quarter and our ongoing strategy.

Revenue this quarter increased by 28% from a year ago to $42.6 million. Nine-month cumulative revenue at the end of September 2011 increased by 28.7% to $124.9 million as compared to the same period a year ago. Our Exchange business grew 40.5% year-over-year to become 77.5% of our total revenue this quarter.

In keeping with our past history, Ebix continued its strong cash generation abilities. Cash from operations totaled $22.1 million in the quarter, more than doubling from a year ago. During the nine months ended September 30, 2011, the Company generated $51.9 million of net cash flow from operating activities, which is 53% more as compared to $33.8 million in the first nine months of 2010.

Before I go into comparing operating income, net income, and EPS, let me at the outset mention the nonrecurring events in both Q3 2010 and Q3 2011. In Q3 2010, we were favorably influenced by a $3.9 million nonoperating gain resulting from the gain recognized in regard to the decrease in the fair value of the put option issued to the stockholders of E-Z Data, an acquisition made by the Company in October of 2009. Q3 of 2011 was favorably influenced by an operating gain of $1.18 million from the reversal of a contingent earnout accrued liability associated with an acquisition made in 2010.

Now I will go into comparing the income, margins, and EPS year-over-year. Q3 2011 operating income was $18.0 million, an increase of 37% on a year-over-year basis as compared to Q3 2010 operating income of $13.1 million. The Company reported an operating margin of 42.1% for Q3 2011 as compared to 39.3% for the same period ending 2010.

The Company's operating margin for the nine-month period was 41.7% as compared to 40.1% for the same period a year back. Excluding the impact of the $1.18 million nonrecurring gain in Q3 associated with the reversal of the contingent earnout and accrued liabilities, our operating margin in Q3 would have been 39.4% as compared to 39.3% in Q3 of 2010.

Q3 2011 net income was $16.5 million as compared to Q3 2010 net income of $16.7 million. If we were to excluding the nonrecurring gains pertaining to acquisition earnout of adjustments and put option fair value remeasurement for both periods, Q3 2011 non-GAAP net income would have been 20% higher at $15.4 million as compared to $12.8 million of Q3 2010.

Q3 2011 diluted earnings per share decreased by 4.7%, one year over year to $0.41, compared to 43% in the third quarter of 2010. Q3 of 2010 EPS was favorably influenced by $0.10 because of a nonoperating gain in that quarter. For purposes of Q3 2011 EPS calculations, there was an average of 40.4 million diluted shares outstanding during the quarter as compared to 39.0 million diluted shares outstanding in Q3 of 2010.

Now looking a little deeper into our operating expenses, we remain committed to smart top-line growth without sacrificing margins. In our second-quarter call we indicated further expansion of our sales force to drive revenue growth.

For the nine months our sales and marketing expense doubled from a year ago to $9.6 million or 7.6% of revenue compared to 4.9% for the first nine months of 2010. This was partially due to the addition of ADAM, our purchase of USIX in Brazil in September 2010, and the increase in our US Exchange sales force by 20 since the end of last year. We are pleased with these numbers as they are in spite of the fact that we have continued to invest in increasing our sales force substantially in all areas of Exchanges.

I will now turn the call over to Bob.

Thank you, Steve, and a good day to all. There are a few things that have been hallmarks for the business for many years now, specifically consistent operating margins in the 40% range, a very high customer retention record, high recurring revenue streams, and the Company's strength to consistently generate excellent and increasing cash flows from those operating activities. This quarter fared extremely well on all four of these metrics.

Operating margins continued to be in the 40% range. Our recurring revenues were approximately 83% for the nine-month period ending September 30.

In terms of cash flow this was an extremely strong quarter. Ebix generated $22.1 million in operating cash flows in the third quarter of 2011 and $51.9 million for the nine months ended September 30, representing a full recovery of net income produced by the Company during the last three quarters.

In Q2 of 2011 we spent $34.8 million repurchasing a little over 2 million shares of our common stock at an average price of $17.28 per share. In the third quarter of 2011 our diluted share count was 40.4 million shares. Based on the share repurchases settled to date this year we expect the diluted share count for the fourth quarter to be approximately 39.42 million or a decline of approximately 3%.

This year, through September 30, after spending $61 million for share repurchases, settling all of our remaining convertible debt for $6.7 million, reducing our commercial bank debt by $3.4 million, and spending $1.8 million for capital expenditures, we still ended the quarter with net debt of $11.6 million -- net debt being defined as debt less cash and short-term investments.

We continue to generate cash flow from our operating activities at a brisk pace. Also, our accounts receivable days sales outstanding declined to 67 days at September 30 from 79 days a year earlier. Our current ratio is 1.08, consistent with the current ratio from a year ago, and our working capital position was $3.9 million as of September 30.

Our debt leverage ratio -- defined as debt compared to a trailing 12-month of EBITDA -- stands now at 0.35. While our net debt at the end of the quarter was $11.6 million, our total bank facility is $55 million; so we have ample borrowing capacity available at present.

Finally, in August Ebix declared its first dividend. The quarterly dividend of $0.04 is payable on November 30 to shareholders of record at the close of business on November 15. Thank you for your attention. I will now turn the call over to Robin.

Thank you, Bob. From my perspective this was a great quarter on many fronts. One, our strong cash flows reflect our focus on cash generation. Two, in spite of all the recent initiatives that we have undertaken in many areas like sales, building new health exchanges, hiring additional senior people, funding new development initiatives, etc., our operating margins continued to be in the range of 40%.

For those of you who track revenue growth closely, let me say that Ebix is strongly focused on growing its revenues organically. What makes it a bit challenging is to do so while attempting to grow our operating margin at the same time.

We recently undertook a big exercise to strengthen our sales infrastructure. We are not just adding new salespeople, but we are also attempting to redefine how we sell across the world markets. We are creating new verticals, we are creating a worldwide account management approach, and we are bringing in new, proven sales leaders to the Company. All this means that we are strongly focused on revenue growth. We expect the results to start coming in over the next few quarters.

Recently we undertook an analysis of our revenue streams in terms of the transaction fees versus subscription fees versus license fees or professional services fee splits. The result of that analysis revealed that at the end of the third quarter of 2011 subscription revenues were the largest component of our revenues today, comprising 65% of our year-to-date revenues. Transaction revenues were at 18%, while the remaining was at 17% of our year-to-date revenues.

We are pleased with that since it speaks to the predictability of our revenue streams, especially with the subscription fees and transaction fees adding up to such a high number.

We continue to be pleased with acquisition of ADAM, a company we acquired in February of 2011. We are on target to generate income in excess of $11 million within a period of 12 months from the date of acquisition from ADAM. Assuming a diluted share count of approximately 40 million shares, ADAM would have delivered in excess of $0.25 in diluted EPS to Ebix. This obviously beats our earlier forecast of $0.15 related to the ADAM acquisition by a big margin.

The current state of the economy and the insurance markets is reason to be concerned for some and reason to be cautiously opportunistic for some. CNN yesterday reported that in the worst quarter for US stocks since the financial crisis, investor Warren Buffett went on a stock buying spree. As per CNN, a filing late Friday from Buffett's Berkshire Hathaway shows that it bought $20 billion in stocks in the three months ended September 30.

Whether the glass looks half full or half empty, depends on the eyes of the beholder. I am reminded of what Mr. Buffett once said, and I quote -- a simple rule dictates my buying; be fearful when others are greedy and be greedy when others are fearful.

I believe that the present time is an opportunity to make good accretive acquisitions at reasonable costs. With our ability to generate recurring strong cash flows, it will be a good use of our cash to make opportunistic acquisitions in the current fearful climate.

Our preferred mode of funding acquisitions will be cash, with debt rates being at historical lows at present. In case we buy something strategic, where we want to align the interests of target shareholders with Ebix, then we might issue converts at substantial premiums to the present stock price.

While we are pleased with the results of this quarter, we see this quarter simply as another step forward rather than a destination. We are focused today on many opportunities, increasing our reach through increased number of salespeople, cross-selling our products to existing customers, growing our presence in international markets, and identifying newer acquisition in niche areas to provide us end-to-end play. While doing all this we are continually strengthening our resource base around the world, in addition to designing newer cutting-edge products that can keep us a few years ahead of our competition.

As always, the audio transcript of this call and any of our previous calls can be heard and downloaded from the investor home page on the Ebix site, www.Ebix.com. Also, I would encourage you to visit the comprehensive investor home page on the Ebix site with a view to provide -- with a view to having a one-stop place to analyze Ebix from your perspective.

With that, I'm going to hand it over back to the moderator to open the call for questions. Thank you.

(Operator Instructions) Jeff Van Rhee, Craig-Hallum.

Hey, guys. Thanks. A couple questions; maybe Robin first. Just appreciate the color on the mix at this point, sales and transactions.

Can you give us a sense of where directionally and maybe to what magnitude you think those numbers will be a year or two out? To give us I guess maybe a little better read on how the business might shift to more transaction-based as volumes go through your Exchanges. Or if you actually expect the subscription side to outgrow transactions, a little color there would be helpful.

Okay. Jeff, I think a great question. We pretty much feel that we work pretty hard at making sure that our subscription revenues can proportionately keep growing. The reason for that is, as you can imagine, that we would rather have predictability in our business rather than have continuous variability. So increase in subscription revenue means most stability in revenue; and we clearly like that.

Having said that, if you look at a few years from now, we do believe that a subscription revenue component is going to grow from where it is today.

Just so I'm clear, so you are saying a couple years out you would expect not only for subscriptions to grow absolute, but also as a percent of the mix?

We expect both; yes, absolutely. The answer is absolutely right. Basically we expect the overall numbers obviously to grow as we go into the next few years. But we also expect the proportionate percentage of subscription revenues to grow from where it is today, which is 65%.

Okay, all right. That's helpful.

Then on the sales side, can you give us more detail about the number of heads added, where we are in terms of the progression to doubling the headcount?

And in particular can you also talk to gross adds versus net adds? You have obviously talked a little bit about some of your restructuring, vertical, named accounts, etc.

How much transition has that meant to the existing sales force versus just new additions? Some color there would also be helpful.

Well, I think as -- when I think Steve was presenting he talked about the number of salespeople. I think the number was probably adding another 20 additional salespeople.

Having said that I think you have a great question in terms of -- is this just simply additional salespeople or is it more than that? In reality, when you add new salespeople, it won't be doing justice to the sales effort if we don't bring in new sales leaders also. And we brought in a lot of new sales leaders per se to take us forward.

These are proven sales folk from really large organizations that we brought in. As we brought them we also vowed to give them -- we needed to give them the freedom to grow the sales force in a fashion that they feel best in terms of they needed to bring in people that they feel comfortable about and so on.

So we also went into redefining our sales process, which means earlier -- in the earlier days we were -- if you looked at it till now we were selling primarily on a channel basis; versus today we are trying to break our business into a more vertical basis.

To give you an example, earlier we were selling a CRM system just to the life and annuity market. Today, we are selling a CRM system. We are breaking it down by vertical. We will sell it to a life and annuity; we also sell to P&C; we will also sell to health.

So we accordingly had to create some verticals in it. We also created individual leaders for those verticals to make sure that there is a high degree of focus across that.

And then we went into -- as we started hitting the -- as we started bringing in all the large players onto our platform, and which we have been quite successful with, we felt that we wouldn't be doing justice if we weren't knocking on the doors across the world to get their business from the same account. So what I mean is, if there is a bank ABC, and this bank we signed up in the US, we clearly want their business in other countries across the globe.

So we decided we are going to create a worldwide account management approach wherein we have a common account manager who is managing that account. And from there onward there are multiple people reporting to that person just for that account.

So it has been a bit of a redefining of the entire process. So we are somewhere in the process today, meaning we are going to -- between now and the end of the year we expect to hire probably another seven, six, seven new salespeople just in the Exchange arena, and this is going to continue for some more time.

So clearly this is more than just hiring of salespeople. It is we are trying to make Ebix into a very sales-centric organization. We are trying to make sure that we are very vertically focused. We have worldwide multinational account management program approach.

So that takes a little bit of time, besides the fact that there is a bit of training involved, as you can imagine, in doing all of this. So that is what we are doing on that front.

Okay. That's helpful. The last one and I will let somebody else jump on. I think it would be helpful if you would go through and do -- just touch on the segments real briefly. In particular while you don't quote organic growth rates, could you maybe comment in terms of the individual segments as to whether or not they are seeing acceleration, deceleration, or steady rates of organic growth?

Well, Exchanges have continued to do well. Many -- I think I will give you an example of what we had to deal with.

We are still dealing with headwinds in the industry. That is the first issue. And when you have a headwind in the industry, meaning the two businesses that have been very -- kind of heavily hurt are our Carrier business and the BPO business.

When you look at these businesses -- meaning if you look back a few years, we are down in these two businesses by almost -- between the Carrier business, at a time we were doing $2.8 million a quarter a few years back; and now we are virtually at less than $1 million a quarter. Similarly on the BPO business, we almost have $1 million drop a quarter virtually.

So when you consider these two, you are virtually talking about anywhere between $11 million and $12 million drop annually between these two channels. Now, how do you substitute that?

In spite of all of that, if Ebix is showing growth the other channels have obviously grown quite well. Which is our main channel that is -- what is the largest portion of our business? That is Exchanges, and Exchanges have continued to grow.

The challenge Exchanges had was that exchanges had to substitute for all the drops in these two areas. And Exchanges have continued to do that.

In Exchanges, we continue our -- if you look at our booking cycle or in terms of -- first of all the booking cycles have reduced we believe on our Exchange, in terms of the Exchange sales cycle. We also believe that on Exchanges if you looked at the sheer number of deals that we are signing in a quarter, the overall -- the number of deals we are signing more contracts. So overall booking volumes have increased, but we are having to make for the headwinds.

That is one. But we are also having to wait for some of these exchanges to go to live. Until they go live, we get professional services but we don't really get the real transaction volumes out of it. So we have a few other exchanges that we expect to start going live in the first quarter and the second quarter of 2012; and as they go live we expect 2012 to be a much better year.

And in the meanwhile, we are making a lot of efforts to try and figure out how do we deal with the headwind in the industry on the Carrier business side. Meaning, good news is on the Carrier business side, what do you see? We are building a highly recurring revenue stream now. And the same is true for the BPO stream, which was a bit different.

Earlier when we used to do those higher books of revenue, they were a lot -- the majority of them were license and professional services. We have moved away from it and in the process we have hurt our ability to generate quick-fire revenues in the Carrier business. But we believe this approach will finally help.

Okay, great. Thank you.

(Operator Instructions) I am showing no additional questions in the queue.

Okay. Since there are no more questions in the queue, we will close the call here. And we look forward to speaking to all of you the next time as we announce our year-end results. Thank you very much for being on the call.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.