Ebix Inc (EBIX) 2012 Q3 法說會逐字稿

Hello and welcome to your Ebix Inc. Third Quarter 2012 Investor Call. At this time, all participants will be in a listen-only mode but later, we will conduct a question and answer session and instructions will be given at that time.

(Operator Instructions)

And now I would like to introduce your host for today, Steve Barlow. Steve, please go ahead.

Thank you, John. Welcome everyone to Ebix's third quarter 2012 earnings conference call. Joining me to discuss this quarter is Ebix Chairman, President and CEO, Robin Raina, and Ebix Senior Vice President and CFO, Robert Kerris. Following our remarks, we will open up the call for your questions.

Let me remind you that the primary purpose of today's call is to provide you with information regarding our third quarter 2012 performance. However, some of the discussion and 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 these forward-looking statements.

All of these risks, uncertainties, and assumptions as well as other information on potential factors that could affect our financial results, are included on our reports filed with the SEC, including our most recently reported Form 10-K for the year ended December 31st, 2011, particularly under the heading Risk Factors.

During the course of this call, we may reference historical non-GAAP financial measure to provide a greater understanding of our business or financial results. Management at times may review certain non-GAAP financial information and metrics in evaluating the company's historical and projected financial performance, and believe that it may assist investors in assessing its ongoing operations.

The presentation of this additional information is not meant to be considered in isolation or as a substitute for or superior to measures of financial performance prepared in accordance with GAAP.

Please be advised we may or may not update these additional metrics in future calls. Our press release announcing 3Q 2012 results was issued a few hours ago. The audio of this investor call is being webcast live on the web at www.ebix.com/webcast.

You can also look at Ebix' financials beyond what has been provided in the release on our website, www.ebix.com. The audio and text transcript of this call will be available also on the Investor homepage of the Ebix website after 3.00 p.m. Eastern Daylight Time today.

We reported record quarterly revenue and continued our history of strong cash flow generation for the third quarter. Bob and I will talk about the company from the financial perspective and Robin will address the business in the quarter and our recent acquisitions and contract pipeline.

Revenue in Q3 increased 26% from a year ago to $53.8 million. There were several factors that contributed to revenue growth in Q3, including the fact that our exchange business in Q3 of 2012 grew 32% over Q3 of 2011 to become 81% of total revenue this quarter compared to 78% in Q3 2011. The Broker P&C back in systems channel revenue decreased by 4% while the BPO channel was up 19% year over year. Carrier system revenue was up 12% over 3Q '11.

Looking at expenses in margins, year over year; the company's operating margin for Q3 2012 was 38.5% as compared to 42.1% in Q3 2011. In 3Q 2011, the above the operating margin line, we record a one-time gain of $1.2 million related to the reduction of certain contingent earn out accrued liabilities related to acquisitions made in 2010. Excluding the gain, our operating margin 3Q '11 would have been 39.4% based on the related non-GAAP operating income of $16.8 million.

In Q3 2012, our operating expenses grew 34% to $33.1 million as compared to the same quarter year earlier, mostly owing to acquisitions. Our cost of services increased by only 9.1% in a record gross margin of 82.3% for the quarter. Our continued focus on new products led to a 43% increase in product development cost and our sales and marketing cost rose 26%.

Q3 2012 net income grew 9% to $18.1 million as compared to Q3 2011 net income of $16.5 million. However, excluding the effect of the one-time non-recurring gain of $1.2 million in Q3 '11 discussed earlier, Q3 2012 GAAP net income of $18.1 million increased 18% as compared to the Q3 2011 non-GAAP income of $15.3 million. Q3 2012 diluted earnings per share rose 13% year over year to 46%, as compared to 41% in the third quarter of 2011.

And I would now turn the call over to Bob.

Thank you, Steve. And again, welcome everyone for our third quarter investor conference call. The third quarter was focused on the continued integration of our previous business acquisitions completed during the year. I wanted to quickly leverage cross-selling opportunities and realize expected operating synergies.

As Steve noted, operating margins improved quarter over quarter as we centralize support functions and integrated product development sales efforts globally. In Q3, operating cash flow was $19.3 million, a 13% decrease from Q3 2011 due primarily to increased levels of trade receivables and accrued liabilities.

However, throughQ3, Ebix has generated $24 million of operating cash flow in 2012, a 4% improvement over the same period in 2011 and would represent four realization of the company's net income of $51.8 million in the form of positive operating cash flows.

This sustainable, robust operating cash flows has enabled Ebix to continue to return capital to shareholders during the year with 15 million of share repurchases and $5 million of cash dividends paid. Furthermore, during the most recent quarter, the company continued to invest in the growth of our business with $9.3 million of accretive business acquisitions and approximately $400,000 of capital expenditures.

Our balance sheet remains strong with aggregate cash, cash equivalents, short-term cash deposits of $31 million as of September 30th, 2012. Working capital working is $15.8million, and a current ratio of 1.26. With our combined aggregated cash reserves and the available financing from our bank financing facility, the company presently has access to approximately $48 million of readily available funds to continued growth of the company both organically and with accretive acquisitions.

Our accounts receivable DSO stood at 51 days as of the end third quarter continuing on an 18-month improving trend, as this reflects reduction of three days from year end 2011 and 6days from a year earlier at September 30th, 2011.

In summary, finally, our annual shareholders' meeting is scheduled for next Tuesday, November 13th and our next quarter dividend of $0.05 per share will be paid to shareholders of record and will be paid out on November 30th. The shareholders of record on November 15th. Ebix's Form 10-Q will be filed tomorrow, Friday November 9th.

And finally, thank you for your attention, and I will turn the call over to Robin.

Thank you, Bob. Good morning everyone, and thank you for joining us today. Before I get started, I'm going to tell that I have a bad cold so bear with me on it. Let me start by first addressing key issues. One, the result of the recent presidential election have a direct bearing on the health exchange side of our business.

We believe that the result of the presidential election is a positive event for our health exchange division (inaudible) and shows that Republican states will now be creating the health exchanges under the current government mandate.

Keeping the timelines mandated by the federal government, Ebix has created a special offering to our dear Republican states to be able to conform to the federal guidelines in the area of health exchanges. We intend to pursue the opportunities in that area vigorously.

Two, in the last week, there have been misleading articles about me having sold my holdings in Ebix except 415,889 shares. As the press release, yesterday I clarified by current beneficial ownership in Ebix is at 3,671,560 shares as mentioned in the 2012 proxy statement filed by the company. Just to reiterate, I have not sold any shares since our proxy was filed on October 10th, 2012.

Third, let me reassert and reiterate that we do not know of any SEC investigation into Ebix. We have not had any direct or indirect communication with the SEC regarding any such investigation.

Now, let's talk about the quarter. The company reported a rapid quarter in terms of revenues. In the second quarter in last call, I had talked about Ebix crossing the $50 million quarterly revenue run rate soon. We are pleased to do that with revenue in Q3 increasing by 26% from a year ago to $63.8 million.

Our sales and marketing cost year-over-year in the quarter grew 26% resulting our continued investment in sales and marketing. We believe that we are now position today to grow our revenues substantially over the next 12 months.

In October, we organized a worldwide sales conference of all our senior sales management to review our sales pipelines, our sales leadership, our sales motivation methodology and design new sales metrics. One of the few decisions that we have implemented recently was to create a single sales organization worldwide across all pipelines under one worldwide sales leader.

This strategy is targeted at further improving cross-selling opportunities across platforms and a multinational account management approach so that any one senior sales manager is managing a named account across all geographies with people in different regions managing that account reporting to the global sales manager.

Our big focus today is revenue growth and we believe that we have the people with the right skills both in the short- and long-term to achieve that goal. We are pleased that we are reporting our highest revenue ever this quarter while keeping our operating margins at 38.5% in the 40% plus or minus 2% range.

As I communicated last quarter, we are not interested in emulating some of the so-called success stories on the fast world, companies that have grown revenue substantially while producing extremely low non-GAAP profits. We intend creating our own benchmark by growing revenues substantially while not compromising on our operating margins.

Last quarter, I talked about some of our recent acquisitions and the pace of integration. We continued to be excited by the opportunities offered by some of these newer acquisitions. We are especially excited about having a present in London now through our acquisition of TriSystems and the inception of EbixEurope.

London is arguably one of the top two largest insurance markets in the world. And our presence in London now offer us an opportunity to be a leader in selling exchanges in UK special equity and in Europe where we intend to maximize cross-selling opportunities with our international clients. You can expect us to look at investing in Europe in coming quarters.

One of the areas that we are excited about in the health sector is the area of private exchanges. Quite a few large corporate retail means are expected to enter the area of private exchanges and we believe we are now positioned to be the technology partner towering some of these private height exchanges.

Ebix today has a universe that spent six continents, 60 plus countries and hundreds of thousands of users. This creates an opportunity for Ebix. For example, a new monthly charge of $10 per user (inaudible), $12 million per year in new revenue from every EUR100,000 while price increases are an obvious area to look at. Ebix has identified a number of other opportunities to maximize value from this strategy.

One of those strategies is to create a new training [goal] that can offer package training, costing and participation in a continued manner to all these users. This initiator will utilize a new gained training sense from the acquisition of Taimma. We intend pursuing this initiative and few other initiatives to maximize value from the user aggregation that Ebix has created.

We are also presently working on creating a standardized product out of our internally built operations management to our employee. This particular SaaS-based service that is used today by all Ebix employs across both PC-based and all Apple products including the iPhone, iPad, Mac computer with tetra allows Ebix to have extremely tight controls on its business across the world.

In my view, the iEmployee service in combination with rigorous testing by Ernst and Young, our SaaS advisors has allowed Ebix to be at the frontier of the (inaudible) controls. We intend to offer the service to our customer-base, so that they can have the same kind of controls that had allowed Ebix to be able to track internal activity closely.

Examples of its power include our (inaudible) approval and decisions involving multiple levels of controls in opportunities of having decision, access to tracking ability expenditures in order to control cost and security controls across the company et cetera. We are excited about the opportunities to create a new revenue source from prospective customers that value controls.

Cash is one of our driving principles in the company. I believe that nothing speaks more to the operating center of a company than its continued strong calculation abilities. Cash from operations total $19.3 million in the quarter. This translates into more than $0.49 per share of operating cash flow in a single quarter.

Also, at the end of September 2012, we had already recovered 104% of a nine-month net income in targeted operating cash flow. That to me summed up the financial strength of Ebix today. Ebix has had fantastic success over the years and stronger [part] leadership, customer retention, stronger cutting revenue stream, great operating margins and consistently high cash flow.

We believe that we now need to have the same fantastic success in the area of top line growth. We are focused on converting Ebix into a sales-centered organization that can carve a niche for itself as one of the few companies in the world that can achieve great top line growth while keeping its operating margins consistently high.

We are focused on our long-term objectives of $500 million in revenue by 2017 and also dealing our short-term goal of $100 million in annualized EBITDA. We believe that our employee base of approximately 2,000 employees spread across 38 offices is looking in forward to the challenge of reaching our goals.

Bob has already talked about our success -- Bob has already talked about our access to readily available cash. We are focused in utilizing that cash to maximize shareholder value through accretive acquisitions and other shareholder friendly actions such as increased dividends and share repurchases.

I am pleased to use this forum to announce that the Ebix Board has decided to increase its dividend by 50% from $0.05 to $0.0705 beginning February 14th 2013. A press release announcing the same will be crossing the wire in the next few minutes.

On that note, I would like to close my remarks today and request the operator to open the call for questions. Thank you.

Okay. Thank you. (Operator Instructions). At the moment, I'm showing no active questions. (Operator Instructions). Okay, we'll take our only question at the time from Jeff Van Ree from Craig Hallum. Please, go ahead Jeff.

Thank you. A number of questions. Robin, when you talk about the adoption of straight through processing as an industry, it has been something you've been executing towards in terms of trying to deliver the capabilities. But the industry, in terms of tipping in the sense of adopting straight through approach to [paper] seems to be slowing [down].

Just walk through where you think we are in that curve and what needs to happen to really drive the percent of the applications being handled electronically to really start to take off here.

Jeff, that's a great question. If you would just talk to the industry leaders today, if you talk to the insurance companies, large brokers, (inaudible) broker-dealers, banks or associations whether it's Life or P&C or Health, you're going to have one common message that all of them are committed to straight through processing. All of them are looking for more efficiency. All of them are absolutely eager to get there sooner rather than later.

We see that as the single biggest opportunity that is our insurance health care market. In fact, that drives me to something of which was currently discussed in one of our recent conferences and one of the key decision point for (inaudible) had it and points me toward the region of Ebix.

Ebix today, has come to a point where we are seriously moving towards the direction of becoming a single-product company. And what I mean by that, today, when we talk about Ebix and you hear all the different services we offer and we try and address all kinds of issues on the backend side, the frontend side, the exchanges and BPO and so on in the different areas across many lines. And you could virtually talk about tens of lines or at times more than a hundred lines.

What we are now thinking of and what we are focused on today is creating one product, just one product and let's call this product for the time being an Ebix STP, an Ebix Straight-Through Processing product. What we mean by that is that as we become a single product company, whatever the need in the area of health, that has been needed in the area of life, we want to offer and we want to be a solution-oriented company rather than product oriented company.

What will happen is the product with a modular design, you will get the functionality you want with the same product. You would have seven pieces of what you don't want or you would have all the pieces if you are willing to go through in the Straight-Through Processing.

Today, Ebix has been -- we are in the midst of lots of deals with lots of (inaudible) large carrier who are extremely committed to the concept of STP. We are on the confidentiality agreement with all of these players so we can't name them. But let me tell you, some of these are who's who in the US and we are working on ensuring that we provide a complete end-to-end straight-through processing solution.

What we wish to happen overall on the industry as a whole for this happen is more standardization that needs to happen, in terms of standardizing data streams, in terms of standardizing XML data streams and so on. And the insurance (inaudible) we're committed to that and we are a few member in terms of meeting up that straight-through processing challenging today.

And in terms of just quantification of the percent that might process straight-through [chronically] now versus, say, a year ago.

Well, that's a complicated to answer, Jeff, because that will depend on the line of business. Winning every line of business, you're going to get a dramatically different answer. When you will see for example in life insurance, you see an increase of almost 7% in terms of what were being processed earlier electronically versus what is being processed today. At the same time, meaning [arms] happens to be very different for each and every product line.

So insurance is highly complicated and so what really happens is that every line of business, I could give you just answer. In summary, there is a clear momentum to go in that direction, in the direction of straight-through processing.

You commented on health exchanges in the script. Can you talk to where you are in terms of those cycles, what do you think is a reasonable timeline where we would then start to see some of deals potentially closing?

Sorry. Can you repeat the first part? I missed the first part of the question.

You referenced the move of the election changing the momentum towards the health exchanges and the Republican seat. And the question, just where are you in terms of the existing health exchanges that are already working through the pipe? Just give a sense on when we might start to see some of those close and see some news along those lines.

Yes. I think we are working with different states and then we've obviously had gone (inaudible). We'll be working with different states in terms of addressing their requirements directly as one of the bidders. We are in a way (inaudible) we talked the Republican states and product interview have created some kind of unique offer in some of the Republican states because the fine line, the very sharp and believe that we can help the conform to those federal guidelines. So we are going to be very rigorously pursuing those opportunities.

So health exchanges is a big area. There is a big opportunity in private exchanges today. We are in various discussions, serious discussions that (inaudible) large institutions who are very interested in launching private health exchanges. We believe that private health exchanges are here to stay in a very big manner.

And we are positioning ourselves to play in that area. So we have worked very hard on customizing our offering, our five exchange offering, making it end-to-end, making it tolerable to have these private exchanges through.

So in terms of when do you start seeing (inaudible), that's anybody's guess. At the same time, I think on a generic level, I can tell you that we are bullish about what we see on our health pipeline. Our health pipeline continues to grow, our health people continued to do -- open more accounts. We believe that we're just getting started. We think that 2013 will be a very good year. We believe Q4 will be a good quarter in terms of revenues. We are pleased with what we see today in terms of our pipeline.

(Operator Instructions). We'll take our next question from [Josh Smith] from Epcot. Josh, please go ahead.

I was wondering, how much of you revenue growth for the last three months and nine months were due to organic growth and how much was due to acquisitions.

Well, I think what I said in the past is that the way we run our business it's very different, difficult for us to differentiate between what we got out of acquisition and what we get out internally. (inaudible) we integrate these products very tightly. As I was just talking through the STP (inaudible), I actually talked about one product. What is going to happen is Ebix will become one product company.

So everyday as I thought we are doing, so we don't really -- everything is so entangled in each other, that's so difficult for us (inaudible). Our [oppression] (inaudible) and that's selling processes integrated, our product sell integrated, it's very difficult for us to disintegrate and stop breaking up that kind of revenue in that (inaudible).

So it's almost impractical for us to do it. One of the reasons for Ebix' success is to (inaudible). This is one of the reasons why we produce better (inaudible) fee and better margins than anybody else because we integrate extremely tightly. We sell in a very tight manner and so on.

And one last question. I noticed your income taxes rose, tripled roughly, on the last nine months from $1.7 million to $6.3 million. Can you just give us some color on what the cause of that is? Thanks?

Bob, do you want to generally address that?

Sure. In the current recognized income tax expense, we have $6.7 million for the nine months ending September 30th, 2012 as compared to our net tax benefit. We have 158,000 recognized for nine months in 2011. Compared to that same month or period from a year earlier, income tax increased due to several factors; one an increase in the effective tax rate. The provisions recorded this year increased our reserves (inaudible) recognized tax benefits.

The fact that in the third quarter of 2011, the company recognized a net tax benefit of $4.6 million in connection with the release of valuation allowances that had been held against NOLs, DTA, deed for tax assets and anywhere else came from further business acquisitions. And during the third quarter 2011, the company recorded a small net cash benefit in the amount of $400,000 resulting from R&D tax deductions applicable to our Singapore operations back from 2010. So that explains the relative increase in income expense for the two nine-month periods.

Great. That's all for me. Thank you.

Thank you. And we'll take our next question. We have another one from Jeff Van Ree from Craig Hallum. So please go ahead, Jeff.

And Robin, back to the sale side, you had been ramping the sales force really aggressively. Would you just update us on where you are headcount now, headcount wise and then maybe an update in terms the ramps of productivity? I know a lot of them have been giving up the speed but hasn't got any productivity in terms of closing deals. Just some updates there will -- the numbers you've had and where you think you are in the ramp of productivity.

Well, I think we are somewhere in the positive. The sales growth in terms of the number of staff, will continue to have an aggregate (inaudible). We're pretty clear as where we are but I thought that sales force. So we believe we'll keep growing this. Meaning, I don't have the direct numbers to give you. I think in a few, you will more of the number of the (inaudible) to where we were. I honestly don't have it.

Having said that, I think we took up our target and almost doubling our sales force. And we're pretty close to that now. This is going to be an ongoing issue. We're going to continue adding more sales people out here, simply aggregating success. Meaning, I had promised you in the previous investor call that we're going to do that as we gain traction in the market and other otherwise, I mean, there's no point of continuing to hire sales people which are not getting success out of what you already hired.

So having said that, that's going to be a continued process for us in terms of hiring sales force.

And the ramp to productivity?

The productivity (inaudible) in terms of productivity many other sales force. I think we had (inaudible). We invested in sales people. But having said that, I think we are continuing to free the pipeline, continuing to go up and we absolutely feel pretty good about where we are of that sales force. I think from a productivity perspective, we are starting to feel (inaudible) or hopefully you will see even more results, and 2013, you will see even more results and so on. So I think it's going to be a continued (inaudible).

And then last one for me. In terms of the tax rate for the four year, I know you don't give guidance overall in the financial model. But how should we think about the overall tax rate for'13?

I think tax rate will keep -- we've already given our guidance in the past. So we'll stick to that for now and see if we have anything we need to communicate on the tax rate. We will absolutely communicate in an open manner through a press release or something like that.

Thank you.

Okay. Thank you. At this time, I would like to close the Q&A session and turn it back to your host for any concluding remark.

Thank you. That brings me to the end of the third quarter 2012 investor call. We look forward to speaking to you again at the end of the year and discuss our annual numbers for 2012. Thank you all for being here.

Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.