The last couple of years have been frustrating for Ebix (NASDAQ:EBIX) and its shareholders, as the company has been the subject of regulatory proceedings and short attacks. During these investigations, the company has allocated most of its resources to defend itself, and as a result, has had its business operations struggle. Though nothing has been determined, it seems the dust is settling and Ebix will come out in one piece. With all these dealings in the rear-view, Ebix will go back to its bread and butter to fuel growth.
Missing Component to Slowing Revenue: Acquisition Strategy
Like most software companies, Ebix utilized acquisitions to grow its business (as seen by the growth rates from 2010-2012). However, during 2013, the company moved away from its acquisition strategy due to the legal issues and allegations that it was facing. Ebix made only one acquisition in 2013, as resources were going towards legal fees and obligations to settle the class action suit. As a result, operations were affected.
Thus far in 2014, Ebix seems to be heading back to what made the company successful. With the HealthcareMagic and CurePet acquisitions, Ebix has added two businesses that broaden the pipeline and add to the top line. Looking forward, Ebix intends to use the available funds, through generated cash flows and accessible credit, to make accretive acquisitions both in the short and long term.
A $200M Spending Spree?
Recently, Ebix announced that the company had closed on a $150M credit line (with option to increase to $200M) to fund growth and share repurchase initiatives. The revolving credit bears interest at an initial rate equal to LIBOR+1.75%, and thereafter, the interest rate margin over LIBOR will vary between 1.50% and 2.25%, depending on Ebix's leverage ratios. 12-month USD LIBOR is currently at 0.56%, so Ebix rate is expected to be around 2%-3%. To put this into perspective, Apple is paying 1.85% on its debt, and the current 5-year US Treasury yields 1.63%.
The fact that a syndicate of banks was willing to commit a revolving credit line of up to $200M to Ebix is validation that some of the prior risks associated with the company have diminished. Additionally, when comparing the rates of Ebix, a relatively small company, to those of Apple and the US Treasury, it can be concluded Ebix received favorable terms. Obviously, the banks conducted their due diligence and trusted Ebix with their money, thereby dismissing any surrounding allegations. This extended credit line, along with the fact that no additional information has been requested by the SEC or the US Attorney Office since 2013 should give investors confidence that the worst is over.
During the Q2 conference call, Ebix CEO, Robin Raina made it clear that the five-year revolving credit will be used primarily for stock buybacks and pursuing acquisition targets that will revamp growth.
Debt Cycle in Relation To Acquisitions
Due to Ebix's ability to generate strong cash flows each quarter, the company can change its leverage position rather quickly. Throughout 2013, Ebix was paying down the debt incurred from its prior acquisitions that fueled growth during 2010-2012. As seen below, the company has paid off about $20M just in 2014 alone, lowering its D/E to ~8%.
Having gained access to as much as $200M through revolver, Ebix debt levels will likely rise in 2014 to fund acquisitions, and in turn, grow the company. The same process has been done successfully in the past.
Improved Cost Structure
Ebix management has said on several occasions that nonrecurring legal and advisory costs are expected to fall in the future, which in turn, should bring operating margins back to the 38% average range and potentially as high as 42%. To hit the higher end of this projection, Ebix has consolidated and purchased real estate in hopes of reducing our ongoing rental and infrastructure expenses. To give investors an idea, below are the comparisons of Ebix's H1 2014 and how H1 2015 may look like with the implemented changes.
The above assumes revenue grows a conservative 5% in the next year, and that G&A expenses see a 4% decline due to reduction in legal fees and real estate changes. This would drop G&A expenses to ~16% of revenue, what the figure was before Ebix got into the investigations. As a result, these changes would raise operating margins to 39%, the midpoint of the Ebix forecast.
Repurchase of Common Stock
Ebix management indicated during the latest conference call that one of the main uses of the $150M revolver will be to repurchase common stock. Obviously, management believes that EBIX shares are currently being undervalued by the market. The company has an approximate $106M repurchase authority, which could repurchase about one-fifth of outstanding shares.
Ebix projects that without any repurchases, there will be approximately 38.4M shares outstanding by Q3 2014. Of this, about 34.2M are floating shares and 16.2M are sold short. That results in 47% of float being short, one of the highest in the market.
On August 8, 2014, Ebix purchased 30,600 shares of its outstanding common stock for at an average rate of $13.18 per share (totaling approx $403K). Repurchases were completed using available cash resources and cash generated from the operating activities. On average, Ebix has allocated $2.5M semi-annually the last two years on repurchasing shares.
The table above assumed Ebix allocates $20M for the remainder of 2014 to repurchase a total of 1.25M shares, at an average price of $16. A $20M repurchase figure for H2 2014 could be seen as conservative, if you take into consideration that the company repurchased $64M worth of common stock back in 2011. Additionally, as shares are repurchased, the price of Ebix stock is expected to rise above current levels, which may trigger a short squeeze. This is especially true given the high amount of short interest. Reducing shares outstanding by 1.25M shares would also boost H2 2014 EPS by an approximate 3%, if all other inputs stayed constant.
The moves that Ebix has made thus far this year indicate that the company is going back to the acquisition strategy that originally prompted growth. The company has completed two acquisitions that are expected to be accretive, while also mentioning that it is using the revolver money to initiate growth. This tactic, with the assistance of financial engineering, is expected to add great value to shareholders after the recent tough times the company has gone through.
Disclosure: The author is long EBIX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.