Ebix Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Ebix Inc (EBIX)


Q4 2012 Earnings Call

March 14, 2013 11:00 am ET


Steven N. Barlow - Vice President of Investor Relations

Robert F. Kerris - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Corporate Secretary

Robin Raina - Chairman, Chief Executive Officer and President


Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division


Good day, ladies and gentlemen, and welcome to the Ebix Inc., Fourth Quarter 2012 Investor Relations Conference Call. [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.

Steven N. Barlow

Welcome, everyone, to Ebix's fourth quarter and full year 2012 earnings conference call. Joining me to discuss the quarter is Ebix's Chairman, President and CEO, Robin Raina; and Ebix's 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 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 on our reports filed with the SEC, including our most recently filed Form 10-K 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 a 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 fourth quarter and full year 2012 results was issued earlier this morning. The audio of this investor call was 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 call will be available on our Investor web page after 3:00 today.

Now to the matter at hand. As we've 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 2 quarters in a row with higher revenue with the addition of new contracts.

For the fiscal 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 5 acquisitions, which strengthened our software solutions in life with PlanetSoft and Content Mix [ph]. In Health, with PSI 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 a substantial growth in transaction metrics across all of our Exchange segments at a time when the industry at large was experiencing a 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 positively 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 nonprofit vertical was up by 4 percentage points in 2012.

We expect these 2 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 Content Mix [ph] and the sale 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 led to a 58% increase on 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 cost 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 personal costs, including commissions and higher marketing expenses.

G&A was higher by 28% because of additional personnel and facility expenses, offset by 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 continuously base earn out 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 million.

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 $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'll now turn the call over to Bob.

Robert F. Kerris

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 30, and $14 million from the 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 the fourth quarter 2011, due primarily to the payment of certain acquisition earn out 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. We expect the 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 promotional 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 a 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 aggregate cash, cash equivalents and short-term deposit investments at year end with working capital, 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 continue organic and acquisition-based growth and to expand the existing operations of the company.

Finally, as of the year end 2012, the company had approximately $52 million of remaining domestic NOLs available to offset future U.S. taxable income.

Ebix's Form 10-K will be filed on Monday, March 18. I thank you for your attention and interest in Ebix.

I will now turn the call over to Robin.

Robin Raina

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 a CEO of Ebix in the year 2000, I vividly remember a time clock of our 90-day period or so being run on a particular message board by some folks who ardently believed that within the next 90 days, Ebix will be reporting bankruptcy.

We had at that time reported around $12 million of revenues and $19 million in losses, but a little cash to support the business, a $19 million cash bond write a year, the writing seemed to be on the wall for the company.

So you could understand the skepticism of those people with the vision of a new CEO who felt that Ebix could be a powerhouse of insurance transaction and be a large insurance services player. At that time, I set out further ambitious goals and objectives for the company in this journey to success.

With this 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 cross 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 am 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 benchmark 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, base 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 5 acquisitions, but the opportunities we found were compelling in terms of product extensions and geographical reach.

I see capital allocation has 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 are, 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 real 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 revenue 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 U.S. and de-emphasized 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 the individual channels and their growth already. So I'll contain my remarks to talking about 2013 and beyond in terms of growth.

In 2012, we continue 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 pre-2013 clients.

These deals include leading names like Guardian Life, TD Bank, Birlasoft Columbia [ph], Microsoft Bing, MSN Health, Truman [ph] who was formally known as Reuters and a long list of contracted and new maintenance platform clients who ones can generate strong and sustainable amount of revenues in 2013.

We have never issued guidance on 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 good record and we believe there are more acquisitions that meet our requirements, which include amongst other things immediately accretive to earnings, 75% plus -- 75% plus recurring revenue stream, fast and cloud-based solutions in our core verticals of life, health, annuities and P&C, geographic expansion, operating margins that can reach 40% within 6 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 stop ourselves for the growth opportunity ahead of us, we recently decided to invest in 2 new buildings to house approximately 800 additional employees in India. I'm pleased to report that the Government of India has recently approved tax-free status for another 5 years for these 2 new setups from the date we start production in them.

With this, we will now own 5 properties in India that already have substantial embedded property gains worth millions of dollars besides providing us the ability to continue growing a world-class base in India.

At a time when certain anonymous skeptics keep reminding the 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, the 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 customer service.

Thank you. Operator, we're ready for questions please.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Jeff Van Rhee of Craig-Hallum.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Robin, a number of questions. First, just competitive landscape wise. There have been some acquisitions, notably SAP, but a few others have been 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 that can be obscured somewhat, but it certainly appears the industry hasn't hit the tipping point in terms of wanting to process transactions electronically and using, or leveraging Straight Through Processing. So I guess, competitive landscape and then tied then into your vision of Straight Through Processing if you would.

Robin Raina

Jeff, great question. 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 company, and that's what SAP did. Having said that, from a company landscape, I mean we are 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 and we're working towards that vision where in, 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 coding, or you could switch off a feature related to binding a policy or if you so wanted, you would have the entire 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 -- anything and everything related to the sale of an insurance policy, servicing up an insurance policy, so starting all the way from Europe has front end system like a CRM system or an agency management system by a bank, by a white house, by a broker-dealer, by insurance company rep, by independent agent, by a captive agent, you name it, by RRA, all of these starting from there getting the illustration, getting the code, for example, in life, ability to research the data from insurance company, ability to get multiple codes, ability to now take that data, validate that data, take it through directly into the carriers back in form, ensure the compliance is there and ensuring that the binding of the policy can be done, ensuring that the e-signature policy can be returned, or the policy can be delivered on a very secure basis can be bound online. Money can be transferred, clearance of money can happen, a transaction can be handed over to our outside clearing parties, if need be, servicing up a policy can happen, portability of a policy between the furniture [ph] and carriers can happen and while doing all of these this, moving that data back into the carriers back end system and ideally, Ebix would like as a part of that 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 -- 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 -- so now when you compare, look at the competitive landscape and see who is doing what, you basically see that when I define these functions, every function that I talked about -- if I talk about e-signature, there will be different companies who will do that in every market, in every region. If I talk about courting, it will be a different vendor in each -- and again, we're just talking life right now. If I go into P&C or health or annuity, it would be totally different companies. Each functionality that is a niche market player in a different country that would be our competition. There is no 1 player who is thinking through Straight Through Processing. There is none in any part of the world. So that gives us the unique ability to do that. Also when you're deploying the SaaS base, this Straight Through Processing, we're doing -- we're going do it on a utilities-basis. So what a utility-basis means, we're going to clear this aggregation. 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 is always kept current. Technology is always owned by Ebix and in the process you're 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 these, you're also ensuring audit compliance, you're ensuring that there is all kinds of audit trails to the transaction, you're in line -- absolute compliance with all the regulatory stuff, and so on. So I think it's a sum total of all of these is what we are trying to focus on. So we really don't see any 1 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 we're focusing on, an individual functionality in an individual country. That's not our vision.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

I guess, what I was trying to get at was -- so I understand that higher-level vision, but my -- I guess, what I'm trying to understand is the pace of uptake from customers. So you added a lot of capabilities in that food chain that you just outlined, the Straight Through Processing some homegrown, some acquired. And the vision I know is that some point as you get enough of those strung together, it really will -- 1 on 1 is 3, there's real synergies to those offerings. And I know the industry has headwinds, but judging from the organic numbers, it looks like things are still flattish. And so I guess, what I was trying to get at is based on your sales pipelines or other indications 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?

Robin Raina

Jeff, first of all, meaning we're extremely pleased with the numbers. I mean when you look at the 2012 numbers, and this is being one of the most difficult of our insurance industry at the time if you read these reports out of -- and so on, you'll see -- if you look at what has happened to the life insurance premium, the annuity premium, and so on, you will see what have happened to the industry. At the time when individual transactions, some institutions were down, we are still growing the company and we're still keeping our margins very high. So part of it while we are building this company, we're 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 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. So we're not into the business of growing revenues for the sake of revenue. That's the first thing. Now having said that, we're continually building our pipeline. To give you an example, Q4 of 2012 was one of our strongest quarter in terms of bookings. However, the way the business works in our case, we will -- as the customers get live, we'll 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 AN4 and AMP, Annuity Maintenance Platform, where in we already have signed contracts. We have a strong backlog left line, there's real revenue existing that we haven't taken in yet and we decided to move it for certain customer reasons and 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're continually signing 1 large player after another. Meaning we're in an absolutely a rather unique position, but while we're doing it, the challenge is, we don't just want that we -- there are 2 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 keep making sure that the margins continue to grow. Having said that, is there a tipping point in all of these? Absolutely. We do believe we're getting closer to that kind of tipping point where in 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 call, the construction industry demise has held our BPO of our business and so on. But overall, when you consider all of that, then you see the overall performance of Ebix, I think we feel pretty good about what we have achieved.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Okay, fair enough. And then just 2 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. And I know -- I don't have date -- 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 that you would point to that relative to your original expectations for the end of the year or at least your broad thoughts on the end of the year, how things played out?

Robin Raina

In terms of EBITDA or in terms of revenue?

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division


Robin Raina

EBITDA actually -- you see 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 flipped on 1 particular deal, rather a large deal that basically we didn't lose, it just got delayed for budgetary reasons, 1 large carrier decided to delay the implementation of one of their projects and that was a pretty large project. You're talking about more than $1 million in revenues in a quarter that got delayed by 2 quarters. So that moved to Q2. So that hurt us a bit. So that's why the main reason why we would have expected an even much stronger quarter as also and even much stronger profitability. So 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 and some of those acquisitions. So as those synergies come in, the margins will happen automatically. But 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 of -- for reasons beyond our control, meaning when you're dealing with an industry when there are budget issue, one of the largest carriers in the U.S, they had some kind of budget issue and they decided to delay a particular implementation by 6 months. So we are finally at the mercy of a client in such situations. So I wouldn't say that it was just a delay rather than anything else. So we, overall, still feel very good about that EBITDA number. I mean I see the fantastic numbers overall. When you consider the fact that we haven't even implemented the synergies as such.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Okay, great. And then last one for me. The tax rate I know you've 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, but how do you think about that in the go forward year? To whatever degree and give us parameters on how to think about that?

Robin Raina

I think we've always said, we expect the tax rate to go up and it will gradually go up and again, it will depend on, as our U.S. income goes up, accordingly our tax rate will go up. So I think I'll leave it that. We've already given in the past guidance about our tax rate gradually going up.


[Operator Instructions] And at this time, I'm not showing any further questions. I'd like to turn the call back to management for any further remarks.

Robin Raina

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.

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