Ebix Inc (EBIX) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by , and welcome to the Ebix Incorperated third quarter 2013 investor call. (Operator Instructions). I would now like to turn the conference to our host, Mr. Steve Barlow. Sir, you may begin.

Thank you, Eric. Welcome everyone to Ebix third quarter 2013 earnings conference call. Joining me to discuss the quarter is Ebix Chairman, President and CEO, Robin Raina; and Ebix Senior Vice President, CFO, Robert Kerris. Following our remarks, we will open your call to your questions.

Let me remind you that the primary purpose of today's call is to provide you with information regarding our third quarter of 2013. 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 reported Form 10-K, for the year ended 31st December 2012, under the heading Risk Factors, as well as in reports that we subsequently file with the SEC.

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 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 the third quarter of 2013 earnings was issued earlier this morning. The audio of this investor call is also being webcast live on the web on 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 text transcript of this call will be available also on Investor homepage of Ebix's website after 3 PM today.

Let's start by discussing the results of the third quarter announced today. Revenue in Q3 decreased by 7.0% from a year ago to $50.3 million. On a constant currency basis Ebix's revenue increased sequentially to $61.9 million in Q3 2013 as compared to $51.5 million in Q2 of 2013. During the nine months ended September 30, 2013 , revenue increased $8.5 million or 6%, to $153.9 million compared to $145.3 million during the same period 2012. In constant currency and primarily to the weakening of the Australia dollar and Brazilian real 3Q revenue would have been $51.9 million and nine month revenue would have been $156.4 million.

On a year-over-year basis Ebix's quarterly revenue and more specifically Exchange revenue was negatively effected by approximately $1.6 million on the count of the strengthening of the U.S. dollar. While the profession services revenue from one of our 2012 acquisitions, PlanetSoft dropped by $1.3 million on account of certain delayed implementations announced earlier in our Q4 2012 call. This resulted in Exchange revenue being down 7% year-over-year while holding steady at 81% of total revenue. The Company's gross margin was 79.8% for the third quarter. Our GAAP operating margin for Q3 2013 was 37.0% , as compared to 38.5% in Q3 2012.

The operating margin in Q3 2013 was positively impacted by a $4.1 million gain from the reduction of the earn out accrual from PlanetSoft and Trisystems while being negatively impacted by certain legal and extrodinary operational costs adding up to $3.7 million in Q3 of 2013. The Company expects some of the legal cost to abate, but the should continue for a few more quarters impacting our operating margins negatively. Q3 2013 net income was $13.1 million a 27% decrease on a year-over-year basis as compared to Q3 2012 net income of $18.1 million. During the nine months ended September 30, 2013, net income decreased $7.8 million or 15%, to $44.0 million compared to $51.8 million during the same period in 2012.

The Company's net income in Q3 2013 was impacted by the one time charge to earnings associated with a contingent liability of $4.23 million accrued in Q3 2013 for the possible resolution of the federal class action matter and also by the Company increasing its reserve for uncertain tax positions by $1.0 million in Q3 2013.

Q3 2013 diluted earnings per share decreased 26% year-over-year to $0.34 as compared to $0.46 in the third quarter of 2012. For purposes of the Q3 2013 EPS calculation there was an average of 38.5 million diluted shares outstanding during the quarter, compared to 39.1 million during the same period in 2012.

I will now turn the call over to Bob Kerris, our CFO

Thanks, Steve, and thanks to all on the call. We have always believed that the Company's ability to generate sustainable robust cash from its operating activities is one of the more important financial metrics of how Ebix runs its business. That being said, cash generated from operations during Q3 2013 was $12.9 million up 22% from $10.5 million in Q2. During the nine months ending September 30, 2013, the Company generated $37.8 million of net cash flow from operating activities. A decrease of 30% as compared to the $54 million in the first nine months of 2012. This decrease is due to lower operating income net of non cash items primarily caused by certain nonrecurring legal and corporate expenses. We are focused on taking our operating cash flows, though, to much higher levels in the coming year.

The Company's working capital position increased $12.3 million to $24.7 million at September 30, 2013, versus the $12.4 million as of June 30, 2013, due to lower trade payables and accrued liabilities and reduced current obligations for acquisition earn out liabilities. The Company continues to hold substantial cash , cash equivalent and short term investments, which in the aggregate had a combined balance of $37.7 million at September 30, consistent with the $37.4 million held at year end 2012.

This is despite of the fact that during the last nine months the Company has reduced debt by $22.2 million , paid $13 million in taxes, spent $4.7 million on a strategic business acquisition, paid $3 million for earn out obligations in connection with prior business acquisitions, used $2.4 million to purchase 251,000 shares of our common stock and finally paid $2.8 million in dividends. As of September 30, the Company's net debt which is our outstanding debt balances less our cash and cash equivalent balance, stood at $22.2 million.

Our bank revolving line of credit was $22.8 million as of the end of the quarter, by the term loan balance of $34.3 million. Since this quarter end oft September 30, we have also further reduced our term loan by an additional $2.4 million. Total bank debt then today stands at $54.8 million. Ebix presently has access to a total bank line of $100 million out of which $45.2 million is unused at present. Our net debt again as of today stands at $16.5 million debt.

In summary, our financial position remains strong. We have $38 million in aggregate cash and cash equivalents and short term investments. $25 million of working capital, and a debt leverage ratio of only 0.75.

As to legal matters, Ebix's income this quarter was impacted by a $4.23 million contingent liability booked against earnings as our current estimate of the potential liability in the federal class action matter. Also with respect to the earn out suit related to our 2009 acquisition of Peak ,the Company and the other parties to the action recently reached a mutual agreeable resolution, which resulted in a dismissal of the action with prejudice.

Finally on the tax front , as previously mentioned the Company paid $13 million in cash taxes in the first nine months of 2013. With $8.3 million of the payment being made in India in the form of advance minimum alternative tax payments that will be used to fund future tax obligations in that country from 2015 onwards. We also increased our FIN 48 tax reserves by another $1 million in the quarter and by $3.4 million over the last nine months to address potential uncertain tax positions. Our remaining available U.S. NOLs at present is $50.8 million as of September 30. Ebix will be filing our 10-Q later today.

And at this point I would now pass the call onto Robin. Thank you.

Thanks, Bob. Good morning to all of you. Let me first start by summarizing the quarterly results. As elaborated in the press release I believe that these results demonstrate that we are moving in the right direction. Considering the challenges that the Company has recently faced , we are pleased with the progress we made in Q3 of 2013. On a constant currency basis the Company's revenue grew sequentially from $51.5 million in second quarter of 2013 to $51.9 million in third quarter of 2013.

We continue to strengthen our recurring business, sign new deals with key named accounts which included Walmart, Swiss Re, Sanofi US Services, Pershing LLC, TD Ameritrade, Ohio Cooperative Exchange, Purdue, Bayer, Pfizer, Glaxo SmithKline, Jazz Pharma, Northeast Utilities Service Company, Thai Re, HSBC, Zenith Insurance, Four Seasons Financial Group, LifeMark, American General, Mass Mutual Insurance, Federal Reserve Bank, Los Angeles County Office, eClinical Works, Security Life , Truven , Merrill Lynch, Consolidated Health Plans, AON, Sempra Energy , Automobile Club of Southern California, QBE America, City of Roseville, MetLife, Guardian Life, Nationwide Insurance, Prudential, AIG, Wells Fargo and Omaha Insurance Company. This list of names is a sample representation of contracts signed by the Company in the third quarter of 2013.

In the last quarter conference call I talked about a variety of possible key deals that the Company is pursuing. I am pleased to report that we were successful in closing a few of them in Q3. Our focus has also been on pursuing deals that are recurring in nature and these deals were no different. In Q3 of 2013 the Company signed two material five year recurring revenue contracts with one of the largest brokers in the world. With the signing of these two contracts, this client has the potential to overtake Ebix's current largest client in terms of annual revenues generated for Ebix in future years.

We continue to pursue a number of other deals that can have a material impact on our revenue in future years. One of those deals involve us aggregating the entire market in a specific insurance area in a large western country on our Exchange and become the utility of choice for all the brokers and carriers. While there is no guarantee that we will ultimately secure this business, yet we are pleased to be the only player who has the ability to aggregate the market and offer this solution in that country.

We believe that our end-to-end solution set and cloud based solutions place us in unique position with respect to any such opportunities. We believe our growth in future years can be fueled by our end-to-end solution set and our competitive positioning in certain areas of insurance. While we have always believed in a highly diversified product portfolio and would like to see growth in each of the areas addressed by us, a few areas deserve special mention; CRM, health, life and annuities, reinsurance exchanges are areas where we believe we have tremendous opportunity to grow.

Let me elaborate on CRM life and annuity area first. The Company views this as a major strategic initiator in view of its existing dominate leadership position in the life and annuity sectors. As reflected by a number of facts, Ebix today processes over 50 billion in annuity premiums annually. That number represents over 90% of all electronic annuity business process while the Company's combined competition represents less than 10% of the market. The Company's annuity client base consists of over 200 of the largest banks, broker dealers and financial service providers in the U.S. with the Company's competitors having a fraction of that number. 18 of the top 20 annuity producers in the United States are users of Ebix's Annuity Exchange.

Ebix is the largest single provider of complete life e-applications in North America. The Company processes over 1 million fully underwritten electronic life insurance applications annually across the globe. Ebix Life Illustration solutions are utilized by a vast majority of the independent life brokerage firms in the U.S. Ebix runs over 22 million compliant life policy illustrations annually and over 40 million life insurance quotes annually. Ebix offers one of the most widely used agency management systems for life brokerage agencies in the U.S. The Company's combined competition in the agency management space represents a fraction of the Company's market share.

The Company already has the widest portfolio of solutions in the sector while providing true end-to-end Straight Through Processing for its client. To add to it, Ebix has a record of not having lost any of existing clients to its competition in the space. In our view we are positioned for the right fundamental framework to grow our business. The work that extend we intend to now launch a number of new products in this area of our business to substantially expand on our reach Internationally and also within the U.S.

The Health Content Exchange area is another large opportunity for our focus. Health content tends to be usable across the world and thus offers the Company with the potential ability to create a higher margin source than any other area of our business. In recent times we have converted all of our assets in this area of business into lego blocks that can be mixed and match any where to create highly customized and intelligent health content solutions. One example of such a solution is to potentially offer patient education to tens of thousands of physicians in the U.S.

The Affordable Care Act, ACA, requires that physicians provide with patient specific education, and the inclusion of this ability is a must for an EHR vendor, for an electronic health record vendor to be certified. Recently Ebix has signed deals with large healthcare solution providers who have tens of thousands of such of clinicians on their network. The recurring nature and the volume associated with these solutions make them potentially both revenue and income intensive for us.

We believe that our best opportunity to expand in the health content area is through the indirect channel, using partners, resellers, health aggregators, search engine and government bodies, et cetera. Accordingly we are making an honest effort to build up this indirect channel while continuing to sell to the traditional direct channel as well. In third quarter of 2013 we were able to take many steps forward in this direction. Also we reported our highest renewal rates in the last three years in the health content area in the third quarter of 2013.

The area of health e-commerce exchanges is an area where more than 90% of our business stands to be recurring in nature. We do not want to change that. We have thus stayed away from any state exchange deals that seem large in terms of professional service revenue, but have unlimited indemnity and riders attached to it. We along with our partners just decided to pass on, on one such prospective state exchange deal in the third quarter of 2013. We believe that we possibly have the broadest end-to-end health exchange solution in the United States and can provide a solution to all constituent, be it brokers, carriers , third party administrators, et cetera.

In the near future we have a few key clients going live on our end-to-end health e-commerce exchange solutions in the U.S. We believe that the success of these implementations will put us in a unique position in terms of the viability of the end-to-end solution provisioning by one vendor. We are presently pursuing many deals in the area of private health exchanges that in our view point is going to be one of the most emerging areas in the health insurance sector.

In third quarter of 2013 we took many steps forward in the direction of strengthening our present user base while expanding our blueprint for the future. We are uniquely positioned as the only player in the reinsurance arena who can offer end-to-end solution to constituents across the world. We see that as a large opportunity for Ebix because of this competitive position and also our ability to created reinsurance of subscription markets in individual countries, we are pursuing a few such aggregations opportunities at present that could have official endorsements attached to them for the requisite players in that region.

In the third quarter 2013, we launched some of our new bootstrap technology which will allow Ebix software solutions to work across a variety of platforms in a secular manner without any programming changes. Imagine a software application intelligently changing its graphical user interface and fields based on what device it was accessed from, whether it is an Apple base Safari browsers or Google Chrome browser or a Nokia phone or Samsung Note 3 or Apple iPhone or a Windows computer or a Microsoft device like the Microsoft Surface RT. This technology offers Ebix the ability to deliver its solution across a wide variety of platforms while minimizing development work Ebix , and also offering the end user tremendous flexibility to use a wide variety of devices.

We remain focused on trying to create and sustain a strong healthy long-term future for Ebix, and thus took many steps forward towards that goal in 2013. While the non recurring costs associated with some of these steps effected our short term profitability, they have the potential to clear up the air on many fronts. For example, with respect to the earn out litigation filed in the Federal Court in Ohio related to our acquisition of Peak, the Company and other parties to the action recently reached a mutually agreeable resolution, which resulted in the dismissal of the action with prejudice.

We are fully aware that a Company's true strength is measured by its ability to generate recurring revenue streams with strong operating margins and cash flow from operations. Our business fundamentals continue to be strong, and we are committed to working towards ensuring that the year 2013 can possibly be one of our best years in history in terms of financial performance.

One of the strengths of Ebix that is sometimes taken for granted is the stability of its senior management team. Our senior management team has taken Ebix from a small software vendor a decade back to a leading force in the insurance operating industry. The senior team has been rock solid in terms of its faith in the Ebix's solution and prospects. The recurring nature of our services , our staff strength in lower cost countries, the global nature of our products et cetera, all position us to grow our profitability in the future. I am one of those who believes that with this team at the helm Ebix has the potential ability to work the words of 45% operating margins in the future.

Lastly , let me comment on two questions that are repeatedly asked by our investors; what about stock buy backs, what about dividend resumption. As the CEO of Ebix I see one of my most important responsibilities as managing our capital allocation. Over the last decade or so I have tried to do that by making opportunistic acquisitions and buy backs. We the recent temporary increase in legal and associated costs, the Company had to ensure that is in full compliance with its lending covenants in terms of areas ratios.

Accordingly we chose not to buy back shares until we comfortably exceed those ratio. As our net income returns to past levels, we intend to resume the buy back plan. The good news is that the Company has continuously been in full compliance with all its lending covenants, and has at its own option continued to reduce its debt. Today Ebix has access to a total bank line of $100 million out of which $45.2 million is unused at a present. Our net debt as of today stands at $16.5 million. With respect to dividends, the management team intends to recommend dividend resumption beginning in 2014 to the Board. We will keep you updated on the issue.

With this, I will hand over the call to the operator to open it up for questions.

Thank you. (Operator Instructions). And our first question comes from Jeff Van Rhee with Craig-Hallum. Please go ahead.

Thank you. Robin, a number of questions. First, to follow up on that last comment you were making about capital allocation, can you expand on that a little bit? Specifically, what ratios are the triggers for us watching from the outside that once you reach level of X, you be comfortable then buying back stock? And if you are not willing to be that specific, can you at least narrow it down to just the ratio in particular and how to think about that?

I would rather not get too specific about it. Some of these ratio are a function of net income numbers, and when you look that net income numbers as your cost in certain areas, these nonrecurring costs go up your net income obviously is hurt and some of these ratio are hurt. Now having said that, we have been in full conformance with these ratios, and again it comes down to the comparative comfort that an company would like to be in. So having said that, as some of these nonrecurring costs go down and our income starts to come up, we will reveal more stock buy back.

Okay. Over to the accrual for future taxes with the IRS. Can you walk through your thinking in terms of the timing and amounts of these accruals? What are the triggers in terms of the way you are thinking about? Obviously I am thinking about the IRS auditing ongoing. You have increased your accruals but it has been very modest in that context, so I'm trying to get a sense of whether or not that is a reflection of things you feel like you are aware of based on feedback from the IRS as opposed to what else might be the triggers for those modest increases both the amount and the timing?

This is Bob. I will take that question. The increase in our FIN 48 reserves were potential on certain tax positions. It had nothing to do with anything forthcoming from the IRS audited. It is strictly our assessment of current operations and current tax provisions and provisions we are taking in positioning our tax returns that is all.

Is that based on the conclusion that something about the existing tax regime changes , namely you are making the assumption that your effective rates are going to climb? And maybe asked differently, you have given in the past some thoughts of directionally where you expect the tax rate to go over some period of time, could you help us in that respect?

Again, it is not a factor of concerns we have with our effective tax rate. It is rather -- again this all surrounds the kinds of announcements that come in guidance around certainty or lack thereof perhaps for certain solutions being taken in tax positions and tax returns , that is all.

Okay. The second part of the question was then do you have any thoughts as to how we should think about the effective tax rate over the next year or two?

I think you should expect to continue to see the tax rate to rise modestly as we go forward.

Okay. All right. And then, Robin, you called out a lot of brand-name customers and some big deal signing's, specifically, the two 5 year deals with an existing customer that can make that customer your largest. Maybe could you use those as an example and maybe expand on it in two ways. What's the timing to revenue on those deals and, contractually, how are those deals structured? Are there guaranteed minimum revenues or are they purely transactional? Just help us understand those two deals as a proxy of what's going on.

Yes. I hate to go into specifics of the deals since we have a confidentiality agreement with this player. At the same time, I can talk at a high-broad level. So if you look at these two contracts, specifically the deal we are discussing, one of them is a pure subscription-based kind of a contract where the revenues are fairly locked, simply because that is subscription-based. It's on the back-end side of our business, and it's a global deal. But then, the second deal, which is more like an exchange deal has a portion of it as subscription, a portion of it completely linked to transactions. However, the good news is, this particular player conducts 28% of the business in that particular market. So as long as they're putting their business on our system, there's a good chance we're going to get that revenue.

And so with respect to just the components that are locked and not transactional in nature, this 5-year contract, when does that start to roll into the quarterly results?

2014.

Okay. And could you be more specific? Is this early, late or you just really don't know?

Early. It starts beginning Jan. of 2014, so as you go forward, you'll start seeing revenue come out of these contracts.

Got it. Okay. Great. And then, obviously, I realized there's limitations to what you can comment. Is there any update whatsoever with respect to either SEC, DOJ? Well, let me start with that one, and then I have a couple of other follow-ups.

With respect to SEC and DOJ, I think we are under obligation. If there is anything happening, we will absolutely be disclosing it. So I think as we go forward, we'll continue to tell you. It's an issue where if there was anything material or s anything negative, we would absolutely be disclosing it. So at this point, I think that's where I would stop at but, basically, we're absolutely very respectful of the regulatory bodies and anything that we knew of has already been disclosed.

Okay. And then, obviously, the two suits and the progress in putting those behind you, it looks very encouraging. At face value, it looks like big steps. The specifics of the Peak, maybe coming out differently in the past, you've disclosed contracts that you've deemed litigation and potential litigation damages that you believe are potentially material all the way down to $1.5 million. Obviously, you're not disclosing what the terms of the settlement are of the Peak suit but asking it differently in the past, you have seemingly disclosed things of $1.5 million and up. So would that then be fair to make some conclusion that if it was that level or higher in terms of settlement, we would see numbers in the filings or?

You're absolutely correct that if it was a number of any materiality, it would be disclosed. So, clearly, the number is absolutely immaterial.

Okay. Material, immaterial?

Immaterial.

Yes. Okay. And then back to the fundamentals. The PlanetSoft acquisition, you had commented on some pushouts, and, obviously, you've had some reversals of earn outs, but, specifically, the large transaction your commented in Q4 of 2012 was pushed. Can you just expand, refresh me on what the reasoning behind the pushouts and the delayed customer acceptance there?

Basically, it's all related to customers and their budgets and their internal way of thinking. And two of the projects got delayed, and that obviously hurt our revenue streams. And I think, we, in Q4 of 2012, we actually disclosed it, now, are hopeful that it's going to start. And the initial plan was that by the second quarter of 2013, those projects will start again. Unfortunately, they haven't started as yet. So that's basically that.

Just to follow up on that, the deals themselves are these situations where they have changed their mind and are going into a different direction, is it just purely them getting the budget?

It's nothing associated with going to competition or us losing the deal. It has nothing like that. It's nothing like that, it's simply internal decisions, related to being ready. When you take these implementations, these are large implementations. Your internal IT has to be absolutely ready. They have to do a lot of internal work before Ebix steps in and takes you from there. Until that internal work is ready, they are not ready, and that's basically the reason that those implementations haven't started. And sometimes, it's also to do with the budget ratios internally. It's a combination of both.

Okay, great. Thank you. That is it from me.

(Operator Instructions). I am showing no further questions.

We will wait for another 30 seconds see if there is a question.

(Operator Instructions).

Since we don't have any question --

Actually we just got one from [Dirk Golden] of JMP Capital. Please go ahead. Mr. Golden, your line is now open. And it appears he has removed himself from queue. And it looks like we have Jeff Van Rhee queueing up once again. Please go ahead.

Great. Last couple for me then. With respect to the growth, realizing you don't dial it in terms of giving forward guidance, you commented to the effect of the sequential growth at constant currency. At this point, based on what you see in your pipeline, do you think that's sustainable, mainly, we should grow sequentially? Asked differently, was there anything onetime in nature here that drove that sequential growth in the quarter?

Jeff, we would definitely like to see sequential growth and we would like to see the revenue go up from here. As you know, these have been challenging times for us. Considering the challenges we have faced, I'm pretty pleased with where we are with respect to revenues. Meaning, we haven't been removing any clients, we have continued to retained our clients, we have continued to sign new clients. The nature of our revenue stream is that some of this revenue kicks in over a period of time. Our revenue quarter have been a lot of higher except for two main reasons.

One, we already talked about the exchange rate issues. The second is, which we don't have control over, the strengthening of the U.S. dollar. But the second one is, there's quite a bit of professional services work that we aren't doing anymore, and that's the nonrecurring nature of professional services and that's one of the reasons why we don't go after professional services business. So having said that, we are very hopeful that as we go forward, our revenue streams will continue to improve. Based on what we see today, we feel good about the future, and time will tell how well we do.

Okay. And last one for me then. The specific country deal that you cited was a large , I think you narrowed it to a North American country, if I heard that right. Can you just expand on that in particular? Obviously, I'd love a sense of how material those kinds of contracts can be based on discussions you've had or experienced from that transaction thus far.

The deal, if you're talking about the aggregation deal that I gave an example of, that's not a North American deal. That's outside the U.S. Having said that, basically those deals sizes can be large. To give you some examples, it's just an example, a 5 year contract, could be worth $75 million to $80 million. Again, as I have always said, there is no guarantee to any of these deals, but we'll keep making an effort. And, hopefully, these are transformational deals for us, but they also are binary deals. Either they happen or they don't and so, we're going to keep our fingers crossed and keep tugging a lot, pushing along and, hopefully, we can close some of these deals.

Got it. That is it from me. Thank you.

Thank you.

And we have no further questions.

Thanks, everybody, for joining in today's call. We appreciate everybody joining into the call. Thanks, everybody, and with that, I'll close the call. Thank you.

Ladies and gentlemen, this does conclude today's conference. Thank you for your attendance. You may all disconnect. Have a great day.