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Ebix, Inc. (NASDAQ:EBIX)

Q4 2008 Earnings Call Transcript

March 16, 2009 11:00 am ET

Executives

Robin Raina – Chairman, President and CEO

Robert Kerris – CFO

Analysts

Harry Long [ph]

Vincent Capozi [ph]

Mark Rye [ph]

Brian Graham [ph]

Simon Baruch [ph]

Operator

Good morning. My name is David and I will be your conference operator today. At this time, I would like to welcome everyone to the Ebix.com fourth quarter investor conference call. All lines have been placed on new to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator instructions)

Thank you. I would like to now turn the call over to President of Ebix, Mr. Raina. You may begin your call, sir.

Robin Raina

Good morning, gentlemen. Thank you for attending Ebix’s 2008 Annual Investor Conference call. I have also with me today Mr. Robert Kerris, Ebix’s CFO on this investor conference call.

We announced our 2008 financial results on Friday last week and all of you must have seen those numbers by now. I will take a few minutes to summarize these results for you.

Each of the last few years has been a record year for Ebix, in terms of beating all its results in the last 33 years. This year was no different from the last few to the extent that the financial results for the year 2008 are record results again – the best ever in our 33 year young history.

Ebix’s total revenue rose 74% to $74.75 million in 2008, compared to $42.84 million in 2007. Ebix's operating income rose 129% to $29.26 million in fiscal 2008, compared to operating income of $12.8 million in 2007. In 2008, the company's net income rose 116% to $27.31 million, or $2.28 per diluted share, compared to net income of $12.67 million, or $1.20 per diluted share, in 2007.

Our operating margins continued to improve, increasing to 39% for 2008 from 30% in 2007. Net margins for the full year of 2008 grew to 37% vs. 30% in the full year of 2007. For the twelve months ended December 31, 2008, the company generated $26.79 million of net cash flow from operating activities compared to $14.4 million for the year ended December 31, 2007, a 78% increase in operating cash flow year over year.

In 2008, the company's basic earnings per common share rose to $2.78 as compared to basic earning per common share of $1.36 in 2007. Results for 2008 and 2007 were based on 9.81 million and 9.31 million weighted average basic shares outstanding respectively.

Ebix's 2008 fourth quarter revenue rose 65% to $20.14 million, compared to $12.2 million during the fourth quarter of 2007. Q4 ‘08 net income rose 76% to $7.91 million, or $0.66 per diluted share, versus Q4 ’07 net income of $4.5 million, or $0.40 per diluted share. Results for Q4 2008 and Q4 2007 were based on 12.29 million and 11.33 million weighted average diluted shares outstanding respectively.

Our net margins grew to 39% in the fourth quarter of 2008 vs. 37% in the fourth quarter of 2007.

The sudden strengthening of the US dollar had a clear impact on our revenue numbers in Q4 of 2008, since we convert all international results into US dollars for reporting purposes. For example, our Q4 2008 results would have been approximately $2 million higher if the exchange rates had not strengthened so appreciably since June 2008.

Our revenue in 2008 was split across the four channels that we focus on. The largest percentage was in the area of Exchanges with a 57% share, broker channel had 19%, carrier channel had 12%, and the BPO channel had 11% of our 2008 revenues. We expect this composition to change a bit in 2009 with Exchanges and BPO channel constituting a larger percentage of our revenues in 2009.

In the year 2008, US accounted for 65% of the revenues, while international accounted for 35% of the revenues. This was very much on the lines predicted earlier.

I am often asked about our guidance on future quarters and years. We have always believed in letting our past performance and numbers speak for themselves and thus I will abstain from issuing any guidance on numbers. For those of you who have been investors in the Ebix stock for sometime, you have heard me say this many a times earlier. I am not going to depart from that thought process and issue a future guidance. Instead, I will lay out a few metrics from the past three years, as I do every year, for you to discover an answer for yourself.

Let us look at three measures over the last few years – Revenue, Net income and Diluted EPS.

Ebix's 2008 fourth quarter revenue rose 65% to $20.1 million, compared to fourth quarter revenue in 2007 of $12.2 million, fourth quarter revenue in 2006 of $9.28 million, or fourth quarter revenue in 2005 of $6.16 million. Our revenues grew 74% in 2008 as compared to 2007, grew 155% as compared to 2006 and grew 210% as compared to 2005. Ebix net income in 2008 grew 116% over 2007, 358% as compared to 2006, and 532% as compared to 2005. Ebix diluted EPS for 2008 grew 90% year over year to $2.28, 218 % as compared to 2006, and 341% as compared to 2005. If you looked at the year 2008 itself, each sequential quarter was an improvement over the previous quarter in the year.

I am often asked whether the Ebix net margins of 35% plus are sustainable. Our belief has always been that a business in which the selling price is a lot higher than the cost price is a viable business. A few years back, we publicly announced our goal of getting to a net margin level of 30% plus. Consequently, these margins today are a result of meticulous planning, centralized cost control processes, effective utilization of offshore resources and a rather simple approach to business that requires income growth to be directly proportional to revenue growth. Our net margins have continued to grow in the last few years. Our net margins were 11% in 2004, 18% in 2005, 20% in 2006, 30% in 2007 and 37% in 2008. In the year 2008 itself, if you were to examine the quarters, our net margins were 34% in Q1, 36% in Q2, 37% in Q3, and 39% in Q4. These numbers speak for themselves. While we cannot guarantee that these margins are sustainable, yet our attempt is certainly going to be to live up to the benchmarks defined by us.

As a part of my job, I keep speaking to a broad spectrum of investors across the world. Based on interactions with them and the fact that we have a number of new investors on the call, I felt it important to proactively address some questions that you might have as regards the company. Some of these questions and answers might appear repetitive to some of our older investors, but as I said, we have got a few new investors on the call and I feel it will be useful to have those questions.

So, let us start with the first question; what is Ebix’s vision plan?

Ebix’s goal is to be the leading back-end powerhouse of insurance transaction in the world. The company’s technology vision is to focus on convergence of all insurance channels, processes and entities in a manner that data can seamlessly flow, once a data entry has been made. We intend to do that by designing products and services that are pioneering and are at least a few years ahead of our competition. We believe that profitability and revenue growth must go hand-in-hand. We intend to do this in a sincere manner, while ensuring the highest level of satisfaction to all the entities that we deal with; customers, employees, investors, and the society around us, on whom we can possibly have a positive influence. In the year 2008, we took some strides towards that vision plan.

Second question; Ebix is a rather complex company to understand. Can you sum up what Ebix sells in a few sentences?

Ebix is an insurance services player that provides four different services in the worldwide insurance markets – one, B2B Exchanges; two, Insurance Company Backend Systems; three, Broker Systems and lastly, four, BPO Insurance Services to insurance companies, brokers, large corporate, etc.

Third question; over the years, Ebix has completely transformed itself from a broker system services player to an end to end services player. Does that not defocus Ebix? Who does Ebix compete with most of the time?

Answer; yes, Ebix today is a complete end-to-end insurance services player. Our belief is that efficiencies in insurance can truly happen if a transaction can be electronically carried from one end to another with just one data entry. To do that, one has to drive paper out of the process and converge all the systems that power insurance transactions across all entities – be it brokers, carriers, distributors, corporates or consumers. That is precisely what Ebix is set out to do. Today the need and complexity for this can be best expressed by the fact that outside Ebix, there is no one single entity that can boast of having tried to do this worldwide. That is a challenge and an opportunity by itself. In international markets, increasingly we compete with local regional players or in-house IT departments of insurance companies. There is no one competitor we face across the world or even across the United States on our different products.

Next question; how key is Ebix to the insurance industry today? Are its solutions replaceable?

Ebix remains committed to converging any islands that exist in insurance today – consumers, brokers, insurance companies, converging B2C and B2B processes in insurance, converging front end and back end processes in insurance. Our goal remains to be the powerhouse of the insurance industry – in terms of powering transactions as a back-end player. Today, our exchanges power transactions between hundreds of brokers and carriers in P&C insurance, our life exchange powers close to 12 million life sales illustrations every year, we power an annuity exchange on which close to $36 billion in premiums are presently conducted yearly. We run an exchange in Australia that powers all electronic property and casualty insurance transactions in that country. We recently launched an exchange in New Zealand, while teaming up with the top four property and casualty carriers, who account for 90% of the property and casualty business in New Zealand. We handle 7 million insured lives on our employee benefits exchange in the US.

For a company our size, we have a rather large global reach and domain knowledge. We power businesses in more than 50 countries today across all continents. We have in excess of twenty offices today worldwide, with an employee base in excess of 650 employees. We provide a multi-national broker or a carrier, a common code base world wide and frankly we do not know of a vendor who has geographical reach and can do that in our industry. Our systems are multi-lingual, multi-currency and can work in French, Portuguese, Japanese, Spanish, and of course, English. We have the domain knowledge of insurance that spreads all across the world today. With our fully-owned offshore facilities in India, we have the ability to make an acquisition, bring India to reduce their cost structure and make them more efficient. Our centers in India have Carnegie Mellon’s highest CMMi 5 rating and that establishes the quality of our operations to many of our prospective customers.

There are three kinds of companies today across the world; companies that sell products, companies that sell services and companies that sell infrastructure services. With each passing day, Ebix is becoming an infrastructure company.

In my early years with Ebix, I used to metaphorically ask our employees and our senior management as what they would want Ebix to be in coming days. And the example I used to give to them and the question I used to ask them, would you like Ebix to be an airline or would you like Ebix to be an airport? And the reason for that question was, you could choose, when you are flying out anywhere, you could choose which airline to fly by; but you really don't get to choose an airport, most of the times, the choice of the airport is a given. Ebix’s goal was and is to be the airport, rather than the airline and that is why a lot of our business now is exchanges or infrastructure business.

We are one of the few companies in the insurance industry that can provide solutions across the world for a customer, while keeping the code base same worldwide. That fact by itself, besides the fact that our retention rate of existing customers is something that everybody would like to have and is almost perfect over the last five years in the international markets, coupled with the fact that our solutions are designed to be a few years ahead of our competition in terms of design, technology and functionality, have led Ebix today to a position, where we have a who’s who customer base and a decent order base spanning product implementations across many countries at any time.

Do we intend to pursue acquisitions in the near or long term future?

Answer; we believe in growing the company revenues and income proportionately and have abstained from going after opportunities that provide us market share at the cost of profitability. For us, a key criterion in an acquisition candidate is the chances of dominance in that area of the business. Recurring cash flows, profitability and accretiveness is a given in our book. We intend to pursue acquisitions that help us sell or cross-sell our existing products. For an acquisition to interest Ebix, that acquisition must deliver convergence with our technology, convergence with our existing platforms, cross-selling opportunities, and clearly be accretive for our shareholders, either immediately or in the near future.

We see the present economic time as an opportunity to make the right acquisitions at sensible costs. So, we intend to make use of our cash to make a few acquisitions besides paying down any debt on our balance sheet in this year.

Lastly, let me say that we have recently launched a new comprehensive Investor Home page on the Ebix site, with a view to providing a one stop place to analyze Ebix from an investor perspective. The audio and the text transcript of this call will be available also on the investor home page at the Ebix web site located on www.ebix.com.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from Harry Long [ph]. Harry, your line is open.

Harry Long

Hi, Mr. Raina, fantastic numbers. What a great quarter.

Robin Raina

Thank you, Harry, how are you?

Harry Long

Doing great. It was great meeting with you down in Atlanta. I have a couple of quick questions about your partners. Most of them seem to have pretty self explanatory, but I have a question about two, one of them was Morning Star and the other one was Communication Intelligence Corporation. Could you talk little bit about that?

Robin Raina

I couldn't. I would prefer to not talk about any individual customers on this call, more so because of confidentiality reasons with each of these customers.

Harry Long

Okay, well we (inaudible) use them on your website as partners, but okay, if you are uncomfortable, I won't push it. That is all I had.

Robin Raina

Thank you.

Operator

Our next question comes from Vincent Capozi [ph]. Vincent, your line is now open.

Vincent Capozi

Hi, I would like to ask a few questions. First of all, your comprehensive income is quite a bit down from where it was. Can you explain what that is all about?

Robin Raina

I am not understanding that question. Where is it down?

Robert Kerris

I can answer the question.

Vincent Capozi

Okay.

Robert Kerris

Hi, this is Robert Kerris, CFO. What you are looking at, the only component of the recovery of the income is the $2 million in foreign currency translation adjustment and that reflects the deteriorations on the currency that we operate in.

Vincent Capozi

Is it better for you to have a strong dollar or a weak dollar?

Robin Raina

Weak dollar.

Vincent Capozi

Weak dollar, okay. Also, with the insurance companies having so much problems, especially life and annuity companies, I know that they still have to do business, but they have these sub-prime mortgages or they had investments, toxic assets whatever. Do you find that that is hurting you in any way?

Robin Raina

Well, Vinny, you see the proof line in the pudding. You can look at the Q4 numbers and see it. At the end of the day, I made a comment about something that if the exchange rates had remained the same, our revenue would've been $2 million higher. So really, the exchange rate brought the revenue down in terms of – it could have been a lot higher. Having said that, there are areas in which there is an impact. Meaning, if you look at the back end systems market, where an insurance company is supposed to make a life-changing decision, let us say changing a backend system, those decisions are now being delayed. They are not making those kinds of decisions. However, on the Exchange side of the business, we are not seeing any differences. We are continuing to see, meaning it depends on the business you are in.

For example, on annuity exchange, more and more people are now signing fixed annuities and so we are not really seeing – we have seen increases in volume on our Exchanges virtually, when you cross the life and the annuity exchanges. Again, I think you are now going to see insurance companies trying to stop doing business. That is something that is their bread and butter. They will try and do cost cuts internally, but that cost cut doesn't mean they are going to cut their lifeline, which is their revenue. So we are seeing impact more in the areas where an insurance company is supposed to make nil decisions, which have a big impact on them and those decisions are being delayed, but we're not necessarily seeing carriers or insurers or brokers cut off what they already do or what they – what is driving business to them.

Vincent Capozi

All right. Another question; with your ambition to acquire more companies and to pay down some debt at the same time, do you plan on issuing stock?

Robin Raina

Well, the first issue is, we are generating a decent amount of cash. We are generating – we are starting to generate close to $3 million in cash a month now in terms of a run rate. And so we are generating decent amount of cash. From that perspective, we have a few choices to make for the use of our own cash. One is to possibly pay down any debt that we have and two is to make some acquisitions. Now if we so decide to make a larger acquisition, there is a possibility that we might go and issue some new equity. But if we did, it could only be done if that deal immediately is accretive for our shareholders, but it would not be dilutive transaction for our shareholders. We are not very keen to increase our debt at this point.

Vincent Capozi

Do you know what your cost of capital is?

Robin Raina

Right now, given where our debt is at, we have a $25 million line, which is at LIBOR +130, which pretty much translates to close to 2%.

Vincent Capozi

I'm not talking about just your debt, I am talking about your equity and your debt combined. Your weighted average cost of capital.

Robert Kerris

We don't have the cost of capital right now to speak about on a conference call. That is not available at this point.

Vincent Capozi

Is that something that I can call up and maybe find some better answer?

Robert Kerris

That would be fine.

Vincent Capozi

Okay. All right. I guess that is about all I have at this time. Thank you.

Robin Raina

Thank you.

Operator

Our next question comes from the line of Mark Rye [ph]. Mark, your line is now open.

Mark Rye

Hi, good afternoon, gentlemen. I was wondering if you could take us through your four lines of business and talk about the revenue growth in each of those, the percentage of full net sales.

Robin Raina

Again, it gets a bit complicated, because if you go through the exchanges, the broker channel and the carrier channel and so on, you are going to see there are substantial changes in the percentage growth per se in each one of those. I think the important factor to look at and I think your question is also related to the margin in each of these businesses and I will tell you that the margin is plus/minus 5% between all four channels. So it is not that any one channel is substantially higher than the other one. It all will vary somewhere in the range of 37% to 42% in terms of net margins. And it will go up and down depending on what kind of investments we are making in a particular area in a particular quarter.

We – see the margins, basically, for Ebix, it is a matter of how we have structured our business. It is not just a function of the Exchanges will generate more margin, then the BPO and so on. Traditionally, BPO tends to be a lower margin business for most people, whereas we see BPO as an extremely high margin business because of how we have structured it, because of how we run it, because we sell it more as a package along with the service built in, along with the software built in. So it is a function of how you service it and how you build the functionality. For us, that really – it comes down to the crux of it, that basically the margins are going to vary plus/minus 5%, basically between 37% to 42% and I'm talking about net margins here, after taxes.

And coming back to the revenue question of yours, if you look at in any local currency versus on any of our areas, exchanges have grown the most, but part of it in the – again, it is a rather complicated answer and the reason for exchanges to grow the most also is because as you know, in the middle of last year we made an acquisition. So it is almost not a fair comparison in the sense that exchanges have grown the most partly because if we made an acquisition and also we found that we made the acquisition we have grown revenue substantially in that acquisition. Whereas in reality, we have had each one of the four factors virtually grow quite substantially.

Mark Rye

Okay. Could you comment on whether or not you see any seasonality in any of these four lines of business?

Robin Raina

We do not see any seasonality in any of these four lines of business. We do see – there could have been possible impacts related to – like I said, foreign exchange is the only outside factor that I look at. We are not seeing seasonality in any one of these. You could possibly sometimes in the BPO business, you could sometimes see a few spurts in particular months, but that rarely gets balanced by something else that happened in some other line. What I mean is for example that if there is a real estate downturn in the economy, which for example has happened at present, there are lots of contractors who work on real estate, there are lots of insurance that are issued to them, and so logically, we should have lesser number of transactions on real estate. However, you know, there are 38 different industries that we address and in some of those industries start showing growth, which is what we have seen. So overall, we are not seeing any seasonality to our business.

Mark Rye

Okay, and going on to a couple of your recent acquisitions, can you comment on the performance of those, how they have done for you and how they have been integrated, the Confirmnet and acclamation systems?

Robin Raina

We are extremely happy with both of them, the two that you named acclamation and Confirmnet. Let me start with acclamation, acclamation is now Ebix Cell, it is a part of our Ebix Exchange and we power close to 7 million insured lives on that platform now. That is an area where we are kind of a beginner. What I mean is, we are not a leader in that market. There are larger players than us. But we see that as a big opportunity. Again, with President Obama’s new healthcare plan and the focus on lots of (inaudible) issues, we see that there is going to be quite a boom in that area. In any case, today there is alacrity in the market, we have a world class player. There is no real one employee benefit player who can take solutions across the world. And so what we are trying to with that acquisition has actually given us an opportunity to cross sell employee benefits and claims related to health processing, let us say in Europe or in Australia or in New Zealand and so on are unfavorable and we are continuing to do that. We have completely integrated it in every form of action and we're quite happy with where we are headed with that.

With respect to the other one that you talked about, Confirmnet. Confirmnet has been a tremendous acquisition for us and one of the main reasons is, today, with that acquisition, we have now reached the stage where we have a run rate of close to $13.5 million to $14 million a year on the BPO service side. Now when you look at that run rate, and you compare us to the next player in the certificate insurance arena, the second-largest player has $350,000. So what that has done is, it has created dominance in the market, where when a large deal comes out in the market, we will be one of the only players who probably will have a good chance at that. The reason is, a large player, a large customer is not going to throw a large deal at a small vendor who has never handled a deal of that size. So their choice remains either to do it in house or to outsource it to us. We are already seeing the impact of that acquisition. I am not at liberty to talk too much about it, but to say that we have seen some extremely encouraging results.

Now having said that, we have done the – any time we make an acquisition, we make – we put redundancies in place, we put synergies in place, we put cost synergies in place, we put technology synergies in place, we put marketing synergies in place, we try and look at moving some of the technology to India and so on. And we have done all of these as of now. And in each quarter, you are going to see the – we see the margins from that business, Confirmnet, improving simply because as those synergies keep happening, and termination notices with different vendors start taking place, our margins will continue to improve. So we are very pleased with both these acquisitions.

Mark Rye

I was wondering if you could comment on the acquisition that you attempted of Felt Access back in December. Did you offer simply expire and whatever you can actually disclose on that would be –

Robin Raina

That one, Mark, is a dead end for us. We are off the table completely and the simple reason is they – you know, we made an offer, they didn't like our offer and there were various reasons why they didn't like it, but most of it was related to – they had a few large investors who had clauses which allowed them to veto any deal. And those investors also had good interest in not making the deal go to Ebix, simply because Ebix was not going to offer them any new revenue and they had also a revenue deal with this company and they are providing services. So having said that, that was one of the issues and there were – the shallow pit was that their Board felt that our offer didn’t rise up to their expectations. And we decided to get off the table at some point and we are completely off it today.

Mark Rye

Okay.

Robin Raina

There are enough opportunities in the market that we like at this point in the same industry and we would rather go with those at this point.

Mark Rye

Okay. Moving on to your income statement, and I wonder if you can comment on the – we are seeing an increase in sales and marketing and a decrease in your G&A over the previous quarter. Can you comment at all about some of the things that you are doing in the business in those two areas?

Robin Raina

Well, I wouldn't say that there is any big reason for any of that. Meaning, we run a pretty lean and mean operation at this point. I wouldn't read too much into that virtually. I mean it is a continuous exercise, meaning we have centralized cost control systems, there are changes that keep taking place from time to time and some of them virtually take a bit of time. That is all it is all about. Meaning, there is really no – I wouldn’t read too much into whether our G&A cost is high or low at this point. At the end of the day, we are trying to keep it reasonably consistent. You might see a slight blip a little bit here and there at different times, these different needs that happen for a public company. But other than that, we think we got it pretty nailed down in terms of a tightly knit model.

Mark Rye

Okay. And then on the foreign currency impact you mentioned, you feel that has had an impact on net sales, that is primarily due to Australia?

Robin Raina

Australia and New Zealand and Singapore, but Australia had a big role to play, meaning 35%. The Australian currency has gone down 35%, meaning, let us put it the other way; the US dollar has strengthened 35% almost as compared to the Australian dollar, when you compare these two currencies over the last few months.

Mark Rye

Okay, and then if I just might ask a couple of more questions on your balance sheet. We are seeing accounts payable increasing significantly over the previous quarter. Any thoughts on –

Robin Raina

It is a timing issue. I wouldn't read anything into it. We don't know of any issues or any concerns on it whatsoever. It is a pure timing issue.

Mark Rye

Okay. That is all I have. Thank you, gentlemen.

Robin Raina

Thank you, Mark.

Operator

Thank you. Our next question comes from the line of Harry Long. Harry, your line is now open.

Harry Long

Hi, just going back to your cash flow statement for a second. Can you give a little bit of color on the $2.27 million in deferred revenue?

Robin Raina

You are talking about deferred line?

Robert Kerris

Yes, I can state to that.

Robin Raina

Yes, Bob, please.

Robert Kerris

Yes. That again is primarily a timing issue, but our deferred revenue consists of two primary components. One in regards to long-term system development projects with regards to maintenance and support services.

Harry Long

Okay. And then a couple of other quick things. Can you talk a little bit about labor rates in India and the trend there?

Robin Raina

Labor rates in India have going down at this minute. And the prime reason as you know has some of it is to do with the economy and then in the software industry, obviously Satyam didn’t help the cause. There are lots of companies who are using the time to put cost cuts in place. Now, we are not one of them. We are not one of them who is trying to use the time to reduce cost, but I will tell you that the largest of players in India have come out – the big guys in India, the software guys have come out and put 10%, 15% cost cuts in place for employees. We do not like that strategy. We feel that – you know, we have done very well with retention in India and we don't want to – we kind of feel that that would be almost misusing the present times. We would rather stay with our employees and support them through this. They have done a phenomenal job. They have stayed with us when – and we feel that this not a time to misuse their time and we will pretty much – we are continuing to run business as usual. We are good employees. We give them raises and so on as usual. So for us nothing has really changed. But it is clearly the opportunities – there is no availability in India at this time. For example, if you wanted to hire a few hundred people, it is a lot easier now to do it versus a year back.

Harry Long

In terms of the dynamic that you just discussed, is it easier to pick up some especially talented people who maybe before competitors might have had, just given the dislocations?

Robin Raina

Absolutely. It is a lot more easier as compared to a year back with domain knowledge and so on, because there is lots of insecurity in the market at this time and everybody wants to be with any company that is a bit more solid, you know, and there is quite a bit of confusion in the market. And as you know, some of the problem is that the Indian software industry’s model per se. So what has happened has been when a Lehman dies in the US, seven companies in India also start struggling, and that is not a good business model, meaning if you're going to be dependent on the health of another player; but that has been a learning for the Indian software companies and there is a lot of – you know, it has happened a lot with respect to in the insurance and finance industry. There are lots of players out there, lots of employees who would like to get better opportunities out there at the present time.

Harry Long

And in terms of the current competitive situation, it is clear that you guys are dominant; but in terms of some of the bigger players, who may or may not be entering at this stage, or not at all, who – if shareholders should worry about certain larger competitors, who would they be and in terms of potential competitors?

Robin Raina

Well, you see this is a rather complicated answer. We don't know who is going to emerge out and suddenly try to become our competitor, because at the present time, it is a very fragmented industry and that's what we are trying to undo. We are trying to undo the fragmentation in the industry. I’ll give you a simple example, we talked of four channels. Look at any one channel, pick up an exchange. In each area; on an exchange, first of all, either there is no competition or there will be some player in a local market trying to do an exchange. If you go into a carrier business market, now there we are a smaller player. There are much larger players there. There are players like Computer Science Corporation there, there is Rebus out there, there is PMSC out there. These are large players, much larger players who have been there for a long time. Now we are a beginner in that market, the backend computer, the P&C backend market. That's a market where we need to take away their business, and we feel as we gain in size, we will get more of that business and part of the reason is the larger insurers like to deal with larger companies because they feel their risk factor is lower. And if you – especially, if they have to give a next $30 million deal, they don't want to give it to a company whose revenue is $40 million. They would rather give it to somebody whose revenue is $1 billion or is much higher.

So we think with each passing day as our revenue goes up, our chances of getting that next backend large deal increase. But clearly there are larger players in that market. Again it gets complicated; you know in the broker business in each country we have a different competitor. We don't have any one competitor in the broker business at all. In the BPO market I explained to you how complicated it is and how we are the dominant player and second largest is quite small. So really there is no one player that I could tell you who could come out and say, “Well, we’ll basically go and target Ebix’s business,” because Ebix more and more is continuing to become an infrastructure services player. We are more and more trying to become that airport that anybody would like to visit and not even think that Ebix is the airport. That's the model and that's what we are trying to do. But then again, in areas like backend systems there we will have to struggle and beat the bigger players who are already there like CSCs of the world.

Harry Long

Well, it sounds like your attitude (inaudible) way of winning business is taking up from someone else. And good luck to you doing a great job.

Robin Raina

Thank you, Harry.

Operator

Our next question comes from the line of Brian Graham [ph]. Mr. Graham, your line is open.

Brian Graham

Hi, a quick question about the change in auditors. Can you just kind of address what the rational was? And there has been a few changes, I guess –

Robin Raina

If I could simplify that answer, you see again this is – these issues I can speak to the (inaudible) when we filed these answers in Ks and so on, we express that we had – it was simply a mutual decision, more of a decision where it becomes – sometimes it becomes a pricing decision, sometimes it's a decision where an auditor has to make a decision whether a business is worth it for a particular price and so on. So I couldn’t really, it's a difficult question for me to comment on, but all I can tell you is if your question is did we have any differences of opinion and that’s why they left, no we did not have any differences of opinion, that’s why they left. That is absolutely clear we have gone on and said that in our 8-K and so on. And auditors have given us concurrent since they have left. The auditors have been very helpful to us in terms of giving us concurrence on the previous years and so on. So we have tremendous relation with them. So, there is not a relationship issue at all.

Brian Graham

I know you’re – I wasn’t suggesting there was a difference in opinion. I know you are very tight on your costs. So, I was just wondering at what point does continuity kind of trumps a lower price. That’s all –

Robin Raina

Well, meaning, as you know these are discussions that I would rather not have on a conference call first of all. But having said that, we’ve went through a comprehensive study of, as the company grows what our needs are and who we should go with, and we chose our next auditor who we have chosen. And we take this decision rather seriously when we make any auditor changes. It's not an easy decision for us and we try and do a very thorough job on trying to make sure that we don’t have to do these changes every other day.

Brian Graham

Okay, thanks for your help.

Robin Raina

Thank you.

Operator

Our next question comes from the line of Vincent Capozi. Mr. Capote, your line is now open.

Vincent Capozi

Yes, hi. I just wanted to follow up on a couple of things I’ve just remembered. When will you be having to show taxes, I mean when are your NOLs going to be coming on?

Robin Raina

Well, that depends. We have, as you see we have substantial NOLs out there and it depends on over a period of time, meaning at the end of the day it depends on the way you look at it and so on. It's a rather complicated answer to that. But if you are – meaning, we have the ENY Ebix Partners [ph] helping us work through it. And as we go further into that study, if there is anything meaningful that’s (inaudible) we will share with the market. But right now, there is nothing that we know off that is changing where we are. Meaning you could see slight increases as we go forward. But that’s all we know right now. We are in low tax jurisdictions, which kind of helps us. Meaning, we – for example we are in India, which is as you would have seen our press releases, it’s not something only unique to us as you know all software companies, any software work that happens in India, all the big players have their own software export zone, SEZs as we call them. And we have one too and that give us a tax free status in India and that’s very helpful for any software company.

Vincent Capozi

It was one of the reasons why you wanted to buy that acquisition, the public acquisition because they had substantial tax losses?

Robin Raina

No. That was not the reason. We were going after that – we don’t buy companies just because they have substantial tax losses. I must answer that question a bit more clearly. Anytime we look at an acquisition, we don't even make an acquisition just because they have lots of profits. I will put it the other way around. Buying of a company is a big decision, you got to understand, one has to kind of thoroughly understand – my first criteria in this company is if we are looking at an acquisition does this give us a chance to become a dominant player in the next 2 to 3 years? If the answer is no, we will not enter that business. It's as simple as that. That's the first criteria. The second criteria after that is cutting cash flows.

The third criteria after that is what are the synergies that we can put in place? Where is it going to lead us? What is the customer base they have? Is that a customer base that we want to have? And how does it fit in, is the technology similar to us? Or if they have – sometimes they might have old technology that we want to replace. We feel that we have the current technology that can just fit in and maybe we can get more revenues from the same customer. So it's a rather more complicated answer. We are far from the stage where we will just buy a company just because they have tax losses, meaning, at least in my time, that’s not going to happen in Ebix. We are not going to make decisions just based on trying to make the financial work right. We are a futuristic company. We want to make decisions that will help us not only in the short term but in the long term and also give us something – some dominance in some market if we're going to make that acquisition.

Vincent Capozi

All right. One other thing I noticed from your third quarter to this quarter, I know that your net income was higher, but your cash flow, I believe, was quite a bit lower. Can you speak to that?

Robin Raina

Our cash flow was lower? Bobby, you want to comment on that one?

Vincent Capozi

I think your cash flow in the third quarter was around $8.7 million and the cash flow this time is like $7.1 million or something like that.

Robert Kerris

Yes, I will comment. The acquisition of Confirmnet was done essentially by cash on hand, and that was the biggest reason for –

Vincent Capozi

But (inaudible) cash flow from operations was quite a bit lower.

Robert Kerris

I’ll get back to you with an answer.

Vincent Capozi

Okay, thank you.

Robin Raina

I would like to tell you the answer probably, but we’re going to get back to you on that one.

Vincent Capozi

All right, good. Thank you. Thank you very much.

Robin Raina

Thank you.

Operation

Our next question comes from the line of Simon Baruch [ph]. Simon, your line is now open.

Simon Baruch

Good morning. I notice the fourth quarter revenue was slightly lower than the third. Was that partly due to currency issues or if currency had stayed the same, would revenues have increased?

Robin Raina

Purely because of exchange. It would have been $2 million higher, if you look at it, basically – it’s basically the exchange.

Simon Baruch

Right. So, if currency had not changed from 3Q to 4Q, you are saying that there would have been an additional how much revenue in –?

Robin Raina

There would have been additional revenue. Now, again, when I gave you the $2 million number, I was taking an average through the year. So, I’ll have to give you the exact math, but it will be anywhere between 1.5 million to 2 million, just between third quarter and fourth quarter.

Robert Kerris

Rather I have it in front of me. It’s 1.6 million.

Robin Raina

1.6 million?

Robert Kerris

Yes.

Simon Baruch

Okay. Thank you.

Operator

There are no further questions in the queue, sir.

Robin Raina

Well, thank you very much for all for being here. We are hoping we will see you guys in the next conference call. With having said that, I would end the conference call now. Thank you.

Operator

This concludes today’s conference. You may now disconnect.

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Source: Ebix, Inc. Q4 2008 Earnings Call Transcript
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