On 8 November 2011, insurance industry software developer Ebix Inc. (EBIX) hosted a conference call to disclose results for the September quarter. It was excellent: management was confident, assertive and delivered the report with mounting conviction about the company's future prospects.
Most importantly, they talked about the Exchange segment in detail, and its strength offsetting other segments (naturally impacted by the downturn in the Carrier channel due to the current chaos in P&C services) implying a year-over-year (YOY) organic growth rate above 25% (actual rate including acquisitions was 40.5%). In the quarter the Exchange division represented 77% of overall sales. Remember recurring revenue in this segment is 93-99%!
I have done extensive work on EBIX over the last few months and would like to share the following:
Short Shares of 26! Days of daily trading:
On Yahoo Finance, the top 20 institutional shareholders and CEO holdings (4m) amount to 29m shares. So of the remaining non-dilutive float (37.3-29m), there's 8.3 million small shareholders holding shares, of which 11.7m are shorted as per the latest figures dated 14 October. This represents 26 days of average volume traded.
I find it difficult to believe this represents small individual shareholders, as it would imply a 140% loaned out rate of their shares, probably from grouped accounts on online broker platforms such as Schwab and Ameritrade.
The only conclusion is a large institution has leant its shares out, which incidentally, I think is perverse; why would they allow shares they own to be used to short their own underlying conviction in a stock? It's just like shooting yourself in the foot!
In time this institutional culprit will wake up to its folly. Could this lead to the mother of all bear squeezes?
One very important point raised by Rumour Mongers:
There was a long and highly misleading article by 'Copperfield Research' on Seeking Alpha dated Mar 24 2011:
Ebix: Not a Chinese Fraud, But a House of Cards Nonetheless, Part I (and continued in 'Part 2 and Part 3' of above). These articles make many allegations, many of which are intertwined and many which are incoherent, so it is extremely cumbersome to detail them here.
However two main criticisms are detailed below and appropriately summarised in a Barron's article detailed below also.
There has been major confusion on the Indian Subsidiary Revenue and profit, namely the discrepancy between SEC filings and filings with the Indian Accounting Board.
One concern has been revenue being stated lower than operating profit, obviously impossible on first examination.
This is fully explained in the annual results; in essence the problem is resolved on the inter-company consolidation, See Investor Relations Comment on this point:
On the EBIX website there is a press release dated July 18th 2011:
Basically the press release clarifies that the sum total of revenue of individual foreign subsidiaries is a lot higher than mentioned in the consolidated foreign revenue since inter-company revenue is removed from the consolidated foreign revenue. Inter-company revenue becomes revenue in one subsidiary but an expense in the US and is thus eliminated in the consolidated books. This is how GAAP accounting mandates it. Income in each of these foreign subsidiaries is a function of this higher revenue and has no co-relationship with the lower consolidated revenue reported.
India requires all businesses to publicly file financial results with the government. According to those filings, the company's two Indian subsidiaries reported about $38 million in revenue from other Ebix units in 2010 (although the U.S. parent's 10-K shows net revenue in India of zero).
In my opinion based upon the EBIX response (as stated per the annual report and repeated on the press release stated above) these numbers make perfect sense and are entirely consistent with the GAAP prescribed method of Inter-company Consolidation.
PS: I am a chartered accountant and do speak an auditor’s language.
There was also a highly misleading article in Barron's:
"Prolonging a Foreign Tax Holiday," which stated the following:
In my opinion this problem and misleading conclusion also arise because Barron's took the Indian subsidiary accounts and compared them with the consolidated accounts where inter-company figures are eliminated. As a result their comparison is totally meaningless.
To boot, this Barron's article was often quoted in the highly misleading article by 'Copperfield Research' mentioned above.
In my opinion, the September quarter results just disclosed are in no way reflected by the current share valuation, which stands at a forward PE of 10 and trailing yearly earnings growth rate of 21% for the first nine months of 2011. This implies a PEG Ratio of 0.5, an outstanding metric for a growth share. If one takes just the YOY growth rate in EPS for the September quarter (25% on a clean apples-to-apples basis), the valuation is even more attractive.
Conclusion: I’m sticking with Ebix, despite the massive bear vested interest and the incredible rumour mongering. I hope this article plays its part in dispelling some of the misinformation.
Disclosure: I am long EBIX.