Ebix Inc (EBIX) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ebix Inc fourth quarter 2012 investor relations 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 introduce your host for today's conference, Steve Barlow, Vice President and Investor Relations. Sir, you may begin.

Welcome everyone to Ebix's fourth quarter and full year 2012 earnings conference call.

Joining me to discuss the quarter is Ebix Chairman, President, and CEO, Robin Raina, and Ebix Senior Vice President and CFO, Bob 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 fourth quarter 2012 and fiscal year 2012. 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 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 filed form 10K for the year ended 31st December 2011, particularly under the heading risk factors.

During the course of this call we may reference certain Non-GAAP financial measures to provide a greater understanding of our Business or financial results. Management, at times, may refer to certain non-GAAP financial information and metrics and evaluate in the company's historical and projected financial performance and believes 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 is a substitute for or superior to measures of financial performance prepared in accordance with GAAP. Please be advised that we may or may not update these additional metrics in future calls.

Our press release announcing the fourth quarter and full year 2012 results was issued earlier this morning. The audio of this investor call is being webcast live on the web at www.ebix.com/webcast. You can look at Ebix's financials beyond what we have provided in the release on our website www.ebix.com. The audio and text transcript of this will be available on our investor web page after 3.00 today.

Now, to the matter at hand, as we have done every quarter in 2012 we reported record quarterly revenue and continued our history of strong cash flow generation for the fourth quarter. Bob and I will talk about the Company from a financial perspective and Robin will address the Business, our 2012 acquisitions, and 2013 strategy.

In Q4 we increased revenue by 22.6% from a year ago to $54 million. All the acquisitions we made in 2012 fell into the exchange segment. In Q4 our exchange revenue increased 26% over Q4 of 2011 to become 80% of our total revenue this quarter compared to 78% in Q4 of 2011. The broker P&C back end system channel increased revenue by 3% while the BPO channel was up 11% year-over-year.

Carrier system revenue was up 29% over 4Q 2011 making two quarters in a row with higher revenue with the addition of new contracts. For the full year 2012, Ebix's revenue increased 18% to $199.4 million, equivalent to a gain of $30.4 million, a record. Highlights for the year included our five acquisitions which strengthened our software solutions in life with PlanetSoft and Fintechnix, in health with BSI and Taimma and the opening of Ebix Europe with the purchase of TriSystems.

In the Exchange segment revenue increased 22% in 2012. This was accompanied by substantial growth in transaction metrics across all of our exchange segments at a time when the industry at large was experiencing the reverse.

Our Broker business increased revenue by 9% in 2012. The large insurance brokers are directionally feeling better about the world economy and still need to extract cost efficiencies in all countries. We signed deals with several brokers expanding our partnerships to more countries in 2012, which are expected to possibly affect revenue in 2013 as the deals are implemented.

In our BPO Insurance Certificate Tracking business revenue increased 8% for the year. We mentioned a year ago that about 35% of our insurance certificates are related to the construction industry which has been depressed, which was detrimental to growth. In 2012 construction-related revenue fell to 31% of sales. Our sales force has been successfully selling to other market segments which pushed our retail consumer packaged goods vertical up by 5 percentage points of total sales. And, our state and local government non-profit vertical was up by four percentage points in 2012. We expect these two verticals will lead to further growth in 2013.

Carrier systems improved as the year progressed. For the year, carrier revenue declined 8% but increased 20% in the second half of 2012 with the signing of new deals. Looking at Australia, our largest international market, revenue increased 14% to $36.3 million. The increase was due to the Company entering a life insurance business in Australia with the acquisition of Fintechnix and the sale of more services available for clients on our exchanges.

The Company's operating margin for Q4 2012 was 37.5% as compared to 37.6% in Q4, 2011. Our gross margin was 80.8% for the fourth quarter. In Q4 2012 our operating expenses grew 18.4% to $33.1 million as compared to the same quarter a year earlier, mostly owing to the acquisitions. Our continued focus on new products lead to a 58% increase in product development costs and our sales and marketing costs rose 4%.

G&A expenses in Q4 increased 10%. We are pleased with our expense control integration. For the full year, operating expenses rose 22% to $122 million. Based in part to the business acquisitions, we added to our headcount which drove up expenses in all line items. Total headcount at year end was 1,903, a 33% increase from 1,426 at the end of 2011.

Specifically, our product development costs increased 29% due to the expansion of our research and development efforts to create new, on demand-based products and services. Our sales and marketing expenses increased 22% based on higher personnel costs, including commissions, and higher marketing expenses.

G&A was higher by 28% because of additional personnel and facility expenses offset by a $971,000 benefit in Q1, 2012 related to an unconsummated acquisition termination fee paid to the Company. In 2011, the G&A line recorded a $2.1 million reduction due to a previously recorded contingency based earnout accrual, making the growth in G&A expenses in 2012 seem higher. Q4 2012 GAAP net income grew 8% to $18.7 million as compared to the Q4 2011 net income of $17.3.

For the full year, net income before tax increased 6.2% to $78 million, but net income fell 1% to $70.6 million owing to a higher tax rate of 9.6% in 2012 as compared to 2.9% in 2011, or equivalent to about a $0.14 swing in EPS. Q4 2012 diluted earnings per share rose 9% to $0.48 as compared to $0.44 in the fourth quarter of 2011. For 2012, diluted EPS grew to $1.80 from $1.75.

I will now turn the call over to Bob.

Thank you, Steve.

Again, welcome everyone to Ebix's fourth quarter and year end 2012 investor conference call. The fourth quarter was focused on further integration of our acquisitions and planning for 2013. The Company continues to produce attractive operating margins which have been consistently in the 38% to 39% range throughout the year 2012.

Our working capital position improved to $25.2 million at year end 2012 from $15.8 million at September 30th and $14 million from a year earlier. Operating cash flow was $18.3 million for Q4, a slight decline from $19.3 million for Q3 and $19.4 million for fourth quarter 2011, due primarily to the payment of certain acquisition earnout liabilities.

For the year, operating cash flow was $72.3 million up $1.7 million or 2% from 2011. In Q4 2012 we returned $1.9 million to shareholders in the form of cash dividends and $3.2 million in the form of share repurchases. In the fourth quarter 2012 our diluted share count was 39.1 million shares.

With respect to total operating cash flow for the full year 2012, the Company generated $72.3 million of operating cash flow, which, in combination with access to our commercial banking facility, enabled Ebix to spend $57 million on new strategic business acquisitions and investments, to re-acquire 984,000 shares of our common stock at cost of $18.4 million, and to return $7 million of capital to our shareholders in the form of cash dividends.

Our financial position is strong with $36.4 million in aggregate cash, cash equivalents, and short term deposit investments at year end with a working capital and short term liquidity of $25 million, a debt leverage ratio of only 0.89 and accounts receivable DSO of 63 days. The Company's net debt stood at $43.4 million as of December 31, 2012. And, Ebix presently has access to approximately $55 million of readily available cash resources from its financing facility with Citibank combined with cash on hand to support continued organic and acquisition based growth and to expand existing operations of the Company.

Finally, as of year end 2012, the company had approximately $53 million of remaining domestic NOLs available to offset future US taxable income. Ebix's form 10K will be filed on Monday, March 18. Thank you for your attention and interest in Ebix.

I will now turn the call over to Robin.

Thank you, Bob.

Good morning, everyone, and thank you for joining us today. I'm pleased to report that Ebix has delivered a very strong finish to the year. The year 2012 was another superb year for Ebix on all fronts with record revenues, cash flows, and diluted earnings per share. 2012 was a very good year for Ebix. At a time when the insurance industry was struggling on many fronts Ebix, has continued to report excellent results and generate very strong cash flows.

Success is a journey and never a destination. When I took over as the CEO of Ebix in the year 2000, I vividly remember a time clock of a 90 day period or so being run on a political message board by some folks who ardently believed that within the next 90 days Ebix would be reporting bankruptcy. We had, at that time, reported around $12 million in revenue and $19 million in losses. With little cash to support the Business, a $19 million cash bond rate a year, the writing seemed to be on the wall for the Company. So, you can understand the skepticism of those people with the vision of a new CEO who felt that Ebix could be a powerhouse of insurance transactions and be a large insurance services player.

At that time, I set out certain ambitious goals and objectives for the Company in this journey to success. With these 2012 results, we achieved an important goal that we had set for ourselves, getting Ebix to have revenues of approximately $200 million with 40% or so in operating margins. That was not a simple goal when many were debating our very existence.

With the 2012 results announced today we achieved that goal with annualized revenues of $216 million and excellent operating margins consistent with our goals. As we crossed that important landmark with our eyes set on the next goal of $100 million in annualized EBITDA, I want to take the opportunity to thank all the employees at Ebix who have made this dream a possibility.

I'm extremely proud to have worked with a management team that has believed in the company, stayed with us all through this journey, and has kept creating new benchmarks for itself. I salute each one of our 1,900 plus employees across the world to have gotten us to this point.

We closed the year 2012 with the company being on stronger fundamental grounds than ever. Company's continued cash flows, recurring revenue streams, utilities based business model, and its large aggregation of users across the world has set it on a strong footing for the future. When we entered the year we did not think we would make five acquisitions. But, the opportunities we found were compelling in terms of product extensions and geographical reach.

I see capital allocation as a very important role -- as a very important part of my role as CEO of Ebix. So, any time we see companies that meet our desired criteria and that are available at reasonable prices, we go for it. Clearly, we want to invest in ventures that can generate high margins besides having at least an opportunity to dominate in a niche market segment.

In spite of us having not yet completed all our cost synergies related to these acquisitions our operating margins have continued to be strong. We are pleased with that. We integrate acquisitions rather tightly within Ebix since that is key to our plans to ensure end to end, straight through processing and also maximizing operational efficiencies. When we make an acquisition we're prepared to make an existing product redundant, or make an acquired product redundant, whatever makes sense. We sell our existing products to new customers and as also sell new products to existing customers or, if need be, just discontinue one of the products, whatever allows us to maximize the opportunity.

When a company is focused on generating 40% or so in operating margins it does not have the liberty to take in revenues for the sake of revenue growth. It has to have razor sharp focus on margins, and ability to say no to unhealthy revenues, and a discipline not to get carried away by the lure of large license revenue dreams -- and a discipline not to get carried away by the lure of large license streams with low operating margins.

We remain focused on protecting our biggest accomplishment in the last decade, the high profitability percentage that we have created for Ebix. We did not shy away from difficult strategic decisions which cost the Company millions of dollars in revenue in the year 2012. For example, we exited from certain unprofitable health insurance and P&C related activities in the US and deemphasized certain customer channels in Brazil that were associated with time and material services and lower margins.

We are pleased that we made those decisions since they allowed us to keep the Company focused on cutting edge technology services that have high operating margins. Steve and Bob discussed our individual channels and their growth already, so I will contain my remarks to talking about 2013 and beyond in terms of growth.

In 2012 we continued to expand our presence both in the broker and carrier markets. In Q4 of 2012 we signed a number of important deals in all areas of our Business that will allow us to go into 2013 with a strong backlog of business deals that will generate revenue in 2013 besides our regular recurring revenue streams from pre2013 clients.

These deals include leading names like Guardian Life, TD Bank, [Villas] of Columbia, Microsoft Bing, MSN Health, Truman who was formerly known as Reuters, and a long list of contracted and new maintenance platform clients who once live can generate strong and sustainable amounts of revenue in 2013. We have never issued guidance and backlog numbers, and thus I will stay away from doing so today.

On the acquisition front our pipeline remains strong. Ebix will continue to examine and pursue accretive acquisitions. We have a great record and we believe there are more acquisitions that meet our requirements which include, amongst other things, immediately accretive to earnings, 75% plus recurring revenue stream, fast and cloud based solutions in our core verticals of life, health, and new deals in P&C, geographic expansion, operating margins that can reach 40% within six months of acquisition, high cash flow generation consistency. We see many opportunities that will allow us to expand our exchanges across the world.

With a view on the future and to staff ourselves for the growth opportunity ahead of us, we recently decided to invest in two new buildings to house approximately 800 additional employees in India. I am pleased to report that the government of India has recently approved tax free status for another five years for these two new set ups from the date we start production in them. With this, we will now own five properties in India that already have substantial embedded property gains worth millions of dollars besides providing us the ability to continue growing our world class base in India.

At a time when certain anonymous skeptics keep reminding Ebix investors that one day cows are likely to fly, I have to thank our shareholders who have continued to believe in the Company's products, services, management's 14-year record, the company's consistent ability to generate strong cash flows, and the defining truth that cannot be faked, sometimes called cash by Wall Street.

To conclude, I would like to thank, again, all the Ebix employees worldwide for helping produce record sales and earnings for the Company as well as working together to drive excellence in our products and our customer service. Thank you. Operator, we're ready for questions please.

Thank you.

(Operator Instructions)

Jeff Van Rhee, Craig-Hallum.

Great, thank you. Robin, a number of questions. First, just competitive landscape wise, there have been some acquisitions, notably SAP, but a few others have made some acquisitions in portions of your broader offering, if you will. Would you talk to competitive landscape and any conjunction with that your vision of straight through processing? Clearly, obviously with industry headwinds it can be obscured somewhat, but it certainly appears the industry hasn't hit the tipping point in terms of wanting to process transactions electronically using -- or leveraging straight through processing. I guess competitive landscape and then tie that into your vision of straight through processing if you would.

Jeff, great question. Thank you. Good morning to you. I think in terms of some of the recent acquisitions that have happened when you look at SAP entering the market I think it's but natural. All the larger players would like to take some kind of a position in the market, in the insurance market, simply because it allows them the ability to sell their particular platforms. They realize that one faster way to sell their platforms is basically to get it into the market, get an entry door through niche insurance services companies, and that's what SAP did. Having said that, from a competitive landscape we had obviously focused on straight through processing.

Our vision in the future is we would actually like Ebix to be simply a one product company and that product would be Ebix STP, Ebix straight through processing. We are working towards that vision wherein if you are a life insurance company you could buy our one service, Ebix STP, and we will give you switch on and switch off features. At a particular date you can switch on a feature related to recording or you could switch off a feature related to binding a policy. Or, if you so wanted, you would then our straight through processing. And, when you say straight through processing people give different definitions to it.

When we talk about straight through processing we mean everything in -- anything and everything related to the sale of an insurance policy, servicing of an insurance policy. So, starting all the way from -- you have a front end system, like a BRM system or an agency management system by a bank, by a life house, by a broker dealer, by a insurance company rep, by an independent agent, by a captive agent, you name it, by an RIA. All of this, starting from there getting the illustration, getting the code, for example in life, ability to research the data from an insurance company, ability to get multiple codes, ability to now take that data, validate that data, take it through directly into the carriers back end form and show the compliance is there and ensuring that the binding of the policy can be done, ensuring that the ESIC nature policy can be done, all the policy can be delivered on a very secure basis, can be bound online. Money can be transferred, go ahead so money can happen. A transaction can be handed over to an outside clearing party if need be, servicing up a policy can happen, portability of a policy between the furnisher of carriers can happen and, while doing all this, moving that data back into the carrier's back end system, and ideally, Ebix would like, as a part of the Ebix STP offering, we would like to be the provider of that back end system also. The back end system for that life insurance company, that's our vision today.

That is why, for example, you saw us make the acquisition of Fintechnix in Australia. What we were trying to do, we were trying to take a position in the back end market of life, trying to ensure that we wanted a quasi exchange, come back end solution. A SaaS based, cloud based, subscription based model on a carrier system -- on a back end system which tightly integrates into the exchange so that it almost becomes an anomaly whether it's an exchange or a back end system because it ultimately just streams through. So, that's our Ebix vision. Now, when you compare, look at the comparative landscape, and see who is doing what you will basically see that when I define these functions, every function that I talked about, if I talk about ESIC nature there will be different companies who do that. In every market in every region. If I talk about coding it will be a different vendor in each -- and, again, we are just talking life right now.

If I go into P&C or health or annuities it will be totally different companies. Each functionality, there is a niche market player in a different country that would be competition. There is no one player whose thinking through straight through processing. There is none in any part of the world. That gives us the unique ability to do that.

Also, when you are deploying these SaaS based -- this straight through processing, we are going to do it on a utility basis. What a utility basis means we are going to create this segregation, we own the intellectual property. The intellectual property will always be with Ebix. As a user, you are paying for it as you use it. The technology's always kept current, technology's always owned by Ebix. In the process, you are delivering all these solutions over the cloud saving the insurance company, the broker, the user tons of money in the process. But, while doing all this, you are also ensuring audit compliance, you're ensuring that there is all kinds of audit drills to the transaction, you're in line with absolute compliance with all the regulatory stuff and so on.

I think it's -- the sum total of all of this is what we are trying to focus on. We really don't see any one player in the market that I could tell you about that that is our competition today in the STP space because there is none. So, there is only niche market players who are focusing on an individual functionality in an individual country. That's not our vision.

I guess what I was trying to get at was -- so, I understand that higher level vision, but I guess what I am trying to understand is the pace of uptake from customers. You added a lot of capabilities in that food chain that you just outlined of straight through processing. Some homegrown, some acquired. The vision, I know, is at some point as you get enough of those strung together it really will -- one and one is three, there is real synergies to those offerings. I know the industry has headwinds but judging from the organic numbers it looks like things are still flattish. So, I guess what I was trying to get at is based on your sales pipe lines, or other indication from your customer base, what's your sense of timing when the volumes of policies actually taking you up on that end to end offering really start to accelerate?

Jeff, first of all, we're extremely pleased with the numbers. When you look at the 2012 numbers this has been one of the most difficult years for the insurance industry. At a time -- if you read the reports out of [industry] and so on, you will see. If you look at what had happened to the life insurance premium, the new deal premium and so on, you will see what has happened to the industry. At a time when individual transactions from institutions were down we are still growing the company. And, we are still keeping our margins very high.

Part of it is while we are building this company we are also making very crucial decisions like what I talked about. We are also giving up on revenue streams that we don't want. For example, I talked about revenue related to certain operations in his Brazil, certain operations in health and so on. Wherein we felt we don't want to be in those businesses because the margins will be a lot lower. We are not in the business for growing revenue for the sake of revenue. That's the first thing.

Having said that, we're continually building our pipeline. To give you an example, Q4 of 2012 was one of our strongest quarters in terms of bookings. However, the way the business works in our case, we will -- as the customers get live, we will continue getting more revenue. So, we do expect that 2013 should be a good year in terms of revenues. We, as you know, we delayed the launch of AnnuityNET, M4, and AMP, annuity maintenance platform, wherein we already have signed contracts, we have a strong backlog of clients, there's real revenue existing that we haven't taken in yet. And, we decided to move it for certain customer reasons. As we go live on those the revenue will automatically happen.

EBIX is not losing clients. That's the first thing. Ebix is continually building clients and we are continually signing one large player after another. We're in an absolutely a rather unique position. But, while we're doing it, the challenge is we don't just want that -- there are two models.

One model is to keep growing for the sake of it. We're not into that. This is a decision we made a long time back. We're going to grow the company but we're going to grow while making sure that the margins continue to grow. Having said that, is there a tipping point in all this? Absolutely.

We do believe we are getting closer to that tipping point wherein we do start seeing a lot more growth. Again, industry hasn't been -- the overall economy hasn't been that supportive. The health reform movement wasn't really helping the cause. The construction industry demise has hurt our BPO mod business and so on. But, overall, when you consider all of that and then you see the overall performance of Ebix I think we feel pretty good about what we have achieved.

Okay. Fair enough. I just had two remaining then. One was related to the EBITDA. I appreciate the guidance at least -- or at least an outline of hitting that $25 million a quarter run rate as we get into '13. I know -- I don't have the exact date in front of me, but I know sometime mid '12 here you were targeting that $25 million by Q4. You hit the revenue run rate, the EBITDA fell a little short. I know you just outlined a lot of things going on in terms of industry headwinds. Was there anything else you would point to that, relative to your original expectations for the end of year or at least your broad thoughts on the end of the year, how things played out?

In terms of EBITDA or in terms of revenue?

No, EBITDA.

EBITDA actually -- the EBITDA number could have been a little bit higher in Q4 than what we reported. We basically -- and so would have been the revenue number. We slipped one particular deal, a rather large deal that basically we didn't lose it, it just got delayed. For budgeting reasons, one large carrier decided to delay the implementation of one of their projects. That was a pretty large project. You are talking about more than $1 million in revenue in a quarter that got delayed by two quarters. That moved to Q2 or so. That hurt us a bit.

That's the main reason why. We would have expected an even much more stronger quarter as also an even much more stronger profitability. Having said that, we haven't even finished our synergies associated with the acquisitions. Meaning we started on some of those, we are in the process of doing that. We made, as you know, a number of acquisitions. We haven't done any of the synergies yet in some of those acquisitions. So, as those synergies come in the margins will happen automatically.

Frankly, in terms of the quarter, we do believe that we could have done slightly better in overall in the sense that while these are great numbers we had a bit -- for reasons beyond our control. When you are dealing with an industry where there are budget issues, one of the largest carriers in the US, they had some kind of a budget issue and they decided to delay a particular implementation by six months. So, we are finally at the mercy of our clients in such situations. I wouldn't say -- it was just a delay rather than anything else. We still feel very good about our EBITDA numbers. I think the fantastic numbers over all when you consider the fact that we haven't even implemented the synergies as such.

Yes. Okay, great. And then, last one for me. The tax rate, I know you have commented from time to time you expect it to continue to creep higher. I know there's a lot of moving parts. I appreciate the data point on the remaining domestic NOLs. It was lower than I modeled this quarter. And, again, I know it bounces around. How do you think about that in the go forward year? To whatever degree you can give us some parameters on how to think about that.

I think we have always said we expect the tax rate to go up and it will gradually go up. And, again, it will depend on how our US income goes up, accordingly our tax rate will go up. I think I will leave it at that. We've already given, in the past, guidance about our tax rate gradually going up.

Okay. Great. Thank you.

Thank you.

Thank you.

(Operator Instructions)

At this time, I'm not showing any further questions. I'd like to turn the call back to management for any further remarks.

Thank you. Having said that, I think since we have no further questions we're going to finish the call. Thank you, for all of you for being on the call. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.