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Executives

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

Analysts

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

Ebix (EBIX) Q3 2012 Earnings Call November 8, 2012 11:00 AM ET

Operator

Hello, and welcome to your Ebix, Inc. Third Quarter 2012 Investor Call. [Operator Instructions] And as a reminder, today's conference is being recorded. And now I would like to introduce your host for today, Steve Barlow. Steve, please go ahead.

Steven N. Barlow

Thank you, John. Welcome, everyone, to Ebix’s third quarter 2012 earnings conference call. Joining me to discuss this quarter is Ebix Chairman, President and CEO, Robin Raina; and Ebix Senior Vice President, CFO, Robert 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 with information regarding our third quarter 2012 performance. However, some of the 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 of 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 reported 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 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 3Q 2012 results was issued a few hours ago. The audio of this investor call is also being webcast live on the web at www.ebix.com\webcast. You can look at Ebix’s financials beyond what has been provided in this release on our website, www.ebix.com, and the audio and transcripts of this call will be available on the website after 3 p.m. today.

We reported record quarterly revenue and continued our history of strong cash flow generation for the third quarter. Bob and I will talk about the company from a financial perspective, and Robin will address the business in the quarter and our recent acquisitions and contract pipeline.

Revenue in Q3 increased by 26% from 1 year ago to $53.8 million. There were several factors that contributed to revenue growth in Q3, including the fact that our exchange business in Q3 of 2012 grew 32% over Q3 of 2011 to become 81% of our total revenue this quarter compared to 78% in Q3 2011. The broker P&C back end systems channel revenue decreased by 4% while the BPO channel was up 19% year-over-year. Carrier system revenue was up 12% over 3Q '11.

Looking at expenses and margins year-over-year. The company's operating margin for Q3 2012 was 38.5% as compared to 42.1% in Q3 2011. In 3Q 2011, above the operating margin line, we recorded a onetime gain of $1.2 million related to the reduction of certain contingent earnout accrued liabilities related to acquisitions made in 2010. Excluding the gain, our operating margins in 3Q '11 would have been 39.4% based on the related non-GAAP operating income of $16.8 million.

In Q3 2012, our operating expenses grew to 34% to $33.1 million as compared to the same quarter year early -- earlier, mostly owing to acquisitions. Our cost of services increased by only 9.1% and a record gross margin of 82.3% for the quarter. Our continued focus on new products led to a 43% increase in product development costs and our sales and marketing costs rose 26%. Q3 2012 net income grew 9% to $18.1 million as compared to Q3 2011 net income of $16.5 million. However, excluding the effect of the onetime nonrecurring gain of $1.2 million in Q3 '11 discussed earlier, Q3 2012 GAAP net income of $18.1 million increased by 18% as compared to the Q3 2011 non-GAAP income of $15.3 million. Q3 2012 diluted earnings per share rose 13% year-over-year to 46% as compared to 41% in the third quarter of 2011.

And I will now turn the call over to Bob.

Robert F. Kerris

Again -- thank you, Steve -- and again, welcome everyone to our third quarter investor conference call. The third quarter was focused on the continued integration of our previous business acquisitions completed during the year in order to critically leverage cross-selling opportunities and realize expected operating synergies.

As Steve noted, operating margins improved quarter-over-quarter as we essentialized support functions and integrated product development sales efforts globally. In Q3, operating cash flow was $19.3 million, a 13% decrease from Q3 2011 due primarily to increased levels of trade receivables and accrued liabilities. However, through Q3, Ebix has generated $54 million of operating cash flow in 2012, a 2.1 -- or 4% improvement over the same period in 2011, and which represents full realization of the company's net income of $51.8 million in the form of positive operating cash flows.

These sustainable, robust operating cash flows has enabled Ebix to continue to return capital to shareholders during the year with $15 million of share repurchases and $5 million of cash dividends paid. Furthermore, during the most recent quarter, the company continued to invest in the growth of our business with $9.3 million of accretive business acquisitions and approximately $400,000 of capital expenditures.

Our balance sheet remains strong with aggregate cash, cash equivalents, and short-term cash deposits of $31 million as of September 30, 2012; working capital of $15.8 million and a current ratio of 1.26. With our combined aggregate cash reserves and the available financing capacity from our bank financing facility, the company presently has access to approximately $48 million of readily available funds to support the continued growth of the company, both organically and with accretive acquisitions. Our accounts receivable DSO stood at 61 days as of the end of the third quarter, continuing an improvement -- an 18-month improvement -- improving trend as this reflects a reduction of 3 days from year end 2011 and 6 days from the year earlier at September 30, 2011.

In summary, finally, our Annual Shareholders Meeting is scheduled for next Tuesday, November 13th, and our next quarterly dividend of $0.05 per share will be paid to shareholders of record and will be paid out on November 30 to shareholders of record of November 15. Ebix's Form 10-Q will be filed tomorrow, Friday, November 9.

And finally, thank you for your attention. And I'll now turn the call over to Robin.

Robin Raina

Thank you, Bob. Good morning, everyone, and thank you for joining us today. Before I get started, I must tell you I have a bad throat, so bear with me on it. Let me start by first addressing 3 issues. One, the result of the recent presidential election have a direct bearing on the health exchange side of our business. We believe that the result of the presidential election are a positive event for our health exchange division, which incident [ph] shows that the Republican states will now be cleared in the health exchanges under our current government mandate. Keeping the time lines mandated by the federal government, Ebix has created a special offering for these Republican states to be able to conform to the federal guidelines in the area of health exchanges. We intend to pursue opportunities in that area rigorously.

Two, in the last week, there have been misleading articles about me having sold my holding in Ebix, except for 415,889 shares. As the press release yesterday clarified, my current beneficial ownership in Ebix is at 3,671,560 shares as mentioned in the 2012 proxy statement filed by the company. Just to reiterate, I have not sold any shares since our proxy was filed on October 10, 2012.

Third, let me reassert and reiterate that we do not know of any SEC investigation into Ebix. We have not had any direct or indirect communication with the SEC regarding any such investigation.

Now let's talk about the quarter. The company reported a record quarter in terms of revenues. In the second quarter investor call, I have talked about Ebix crossing the $15 million quarterly revenue run rate soon. We are pleased to do that with revenue in Q3 increasing by 26% from 1 year ago to $53.8 million.

Our sales and marketing costs year-over-year in the quarter grew 26%, reflecting our continued investment in sales and marketing. We believe that we are well positioned today to grow our revenue substantially over the next 12 months. In October, we organized a worldwide sales conference of all our senior sales management to review our sales pipelines, our sales leadership, our sales motivation methodologies and define new sales metrics.

One of the key decisions that we implemented recently was to create a single sales organization worldwide across all product lines, under one worldwide sales leader. This strategy was targeted at further improving cross-selling opportunities across platforms and a multinational account management approach, so that any one senior sales manager is managing a named account across all geographies, with people in different regions managing that account reporting to the global sales manager.

Our big focus today is revenue growth, and we believe that we have the people with the right skills, both in the short- and long-term to achieve that goal. We are pleased that we are reporting our highest revenue over this quarter while keeping our operating margins at 38.5% in the 40% plus or minus 2% range.

As I communicated last quarter, we are not interested in emulating some of the so-called success stories from the SaaS world, companies that have grown revenue substantially while producing extremely low non-GAAP profits. We intend creating our own benchmark by growing revenues substantially while not compromising on our operating margins.

Last quarter, I talked about some of our recent acquisitions and the pace of integration. We continue to be excited by the opportunities being offered by some of these newer acquisitions. We are especially excited about having a presence in London now through our acquisition of TriSystems and the inception of Ebix Europe.

London is arguably 1 of the top 2 largest insurance markets in the world, and our presence in London now offer us an opportunity to be a leader in selling exchanges in U.K. specialty fleet [ph] and in Europe, where we intend to maximize cross-selling opportunities with our international clients. You can expect us to look at investing in Europe in coming quarters.

One of the areas that we are excited about in the health sector is the area of private exchanges. Quite a few large corporate retail names are expected to enter the area of private exchanges, and we believe we are well positioned to be the technology partner powering some of these private health exchanges.

Ebix today has a euro base that spans 6 continents, 60-plus countries and hundreds of thousands of users. This creates an opportunity for Ebix. For example, a new monthly charge of $10 per user [indiscernible], $12 million per year in new revenue from every EUR 100,000. While price increases are an obvious area to look at, Ebix has identified a number of other opportunities to maximize value from this strategies.

One of those strategies is to create a new training group that can offer package training, testing and certification in a continued manner to all these users. This initiative will utilize our new gained training sense from the acquisition of Taimma. We intend pursuing this initiative and a few other initiatives to maximize value from the user aggregation that Ebix has created.

We are also presently working on creating a standardized product out of our internally built operations management to iEmployee. This particular SaaS-based service that is used today by all Ebix employees across both PC-based and all Apple products, including the iPhone, iPad, Mac computer, et cetera, allows Ebix to have extremely tight controls on its business across the world.

In my view, the iEmployee service, in combination with rigorous testing by Ernst & Young, our tax [ph] adviser, have allowed Ebix to be at the frontier of fox [ph] controls. We intend to offer the service to our customer base so that they can have the same kind of controls that allowed Ebix to be able to track internal activity closely. Examples of its power include public trade [ph] approvals and decisions involving multiple levels of control [indiscernible] or hiring decisions, access to tracking of daily expenditures in order to control costs, and security controls across the company, et cetera. We are excited about the opportunity to create a new revenue source from prospective customers that value controls.

Cash is one of our driving principles in the company. I believe that nothing speaks more to the operating strength of a company than its continued strong cash generation abilities. Cash from operations totaled $19.3 million in the quarter. This translates into more than $0.49 per share of operating cash flow in a single quarter.

Also, at the end of September 2012, we had already recovered 104% of our 9-month net income in positive operating cash flow. That, to me, sums up the financial strength of Ebix today.

Ebix has had fantastic success over the years in terms of current [ph] leadership, customer retention, strong recurring revenue streams, great operating margins and consistently high cash flow. We believe that we now need to have the same fantastic success in the area of top line growth. We are focused on converting Ebix into a sale-centric organization that can carve a niche for itself as one of the few companies in the world that can achieve great top line growth while keeping its operating margins consistently high.

We are focused on our long-term objective of $500 million in revenue by 2017, as also dealing our short-term goal of $100 million in annualized EBITDA. We believe that our employee base of approximately 2,000 employees, strict costs cutting at [ph] offices, is looking forward to the challenge of reaching our goal.

Bob has already talked about our success -- Bob has already talked about our access to readily available cash. We are focused in utilizing that cash to maximize shareholder value through accretive acquisitions and other shareholder friendly actions such as increased dividend and share repurchases.

I am pleased to use this forum to announce that the Ebix Board has decided to increase the -- its dividend by 50% from $0.05 to $0.075 beginning February 14, 2013. A press release announcing the same would be crossing the bars in the next few minutes. On that note, I would like to close my remarks today and request the operator to open the call for questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Okay. And we'll take our only question at the time from Jeff Van Rhee from Craig-Hallum.

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

A number of questions. Robin, at the high level, would you talk about the adoption of Straight Through Processing as an industry? It has been something you've been executing towards in terms of trying to deliver the capabilities. But the industry, in terms of tipping in the sense of adopting Straight Through as opposed to paper, seems to be slowing currently [ph]. Just walk through where you think we are in that curve and what needs to happen to really drive the percent of applications being handled electronically to really start to takeoff here?

Robin Raina

Jeff, that's a good question. If you would just talk to the industry leaders today, if you talk to insurance companies, large brokers, [indiscernible], broker-dealers, banks or associations, whether it is life or P&C or health, you're going to hear one common message that all of them are committed to Straight Through Processing. All of them are looking for more efficiency. All of them are absolutely eager to get there sooner rather than later. Ebix, we see that as a single biggest -- the single biggest opportunity that is out there in the insurance software markets. In fact, that drives me to something which were currently discussed in one of our recent conferences, and one of the key discussion points of where Ebix is headed, and points me toward the vision [ph] of Ebix. Ebix today has come to a point where we are seriously moving towards the direction of becoming a single products company. And what I mean by that, today, when you hear about Ebix and you hear all the different services we offer, and we try and address all kinds of issues on the back-end side, the front-end side, the exchanges and BPO and so on, in the different areas across many lines, and you could virtually talk about tens of lines or at times, more than hundred lines. What we are now thinking of and what we are focused on today is creating one product, just one product, and let's call this product for the time being an Ebix STP, an Ebix Straight Through Processing product. What we mean by that is, that as we become a single product company. Whether the need is in the area of health, whether the need is in the area of life, we want to offer, we want to be a solution-oriented company, rather than a product-oriented company. What will happen is, the product with the model and design, you will get the functionality you want with the same product. You would have 7 pieces but you don't want, or you'll have all the pieces, if you're willing to go through in this Straight Through Processing. Today, Ebix has been -- we are in them, this stuff [ph], lots of deals with lots of main large carriers who are extremely committed to the concept of STP. We are under confidentiality agreement with all of these players, so we can't name them. But let me tell you, some of these are who's who in the U.S, and we are working on ensuring that we can provide a complete end-to-end Straight Through Processing solution. What needs to happen overall on the industry as a whole for this to happen, there's more standardization that needs to happen in terms of standardizing data streams, in terms of standardizing some of the data streams and so on. And the insurance bodies are fairly committed to that, and we are a key member of -- in terms of leading that Straight Through Processing charge today.

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

And in terms of just quantification of the percent that might be processed straight through electronically now versus, say, 1 year ago?

Robin Raina

Well, that's a complicated answer, Jeff, because that will depend on the line of business. In every line of the business, you're going to get a dramatically different answer. Then you will see, for example, in life insurance, you'll see an increase of almost 7% in terms of what were being processed earlier electronically versus what are being processed today. At the same time, the answer tends to be different for each and every product line. Insurance is highly complicated and so what really happens is that every line of business, I could give you a different answer. But yes, there is a -- in some way, there's a clear momentum, there's a clear momentum to go in that direction, in the direction of Straight Through Processing.

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

You commented on health exchanges in the script. Can you talk to where you are in terms of those cycles? What do you think is a reasonable timeline where we would then start to see some of those deals potential closing?

Robin Raina

Sorry, can you repeat the first part, I missed the first part of the question.

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

You referenced the move, the election changing momentum for the health exchanges in Republican states. And the question was, just where are you in terms of the existing health exchanges that are already working through the pipe? Just give us a sense when we might start to see some of those close and see some news along those lines.

Robin Raina

Yes. I think we are working with different states where we -- obviously, we can't name the particular states -- but we're working with different states in terms of addressing the requirements directly. At one of the bidders, we are in the early -- I've spent -- weekly talked about the Republican states and part of it will be pre-ordered [ph] some kind of a unique offering for the Republican states because the time lines are very short and we believe that we can help them conform to those federal guidelines. So we are going to be very aggressively pursuing those opportunities. So health exchanges, a big area, there is a big opportunity in private exchanges today. We are in various discussions, serious discussions with large retail players, large institutions who are very interested in launching private health exchanges. We believe that private health exchanges are here to stay in a very big manner. And we are positioning ourselves to play in that area. So we have worked very hard on customizing our offering, our health exchange offering, making it end-to-end, making it available for these private exchanges, too. So in terms of when do we start seeing deals, that's anybody's guess. At the same time, I think on a generic level, I can tell you that we are bullish about what we see on our sales pipeline. Our sales pipeline continues to grow, our sales people continue to do -- open up more accounts. We believe that we're just getting started. We think that 2013 will be a very good year, and we believe Q4 will be a good quarter in terms of revenues. We are pleased with what we see today in terms of our pipeline.

Operator

[Operator Instructions] Okay, and we'll take our next question from Josh Smith [ph] from Epcot.[ph]

Unknown Analyst

I was wondering, how much of your revenue growth for the last 3 months and 9 months were due to organic growth and how much was due to acquisitions?

Robin Raina

Well, I think we've answered that in the past that the way we run our business, and it's very different -- difficult for us to differentiate between what we get out of acquisition and what we get out internally. Part of it, we integrate these products very tightly, there is no -- Ebix, as I was just talking through the STP region, I actually talked about one product. What is going to happen if Ebix will become one product company. So every day, that's what we are doing. So we don't really -- everything that's so entangled in each other, that's so difficult for us to read. Our operations are integrated and that's -- our selling process is integrated, our products are integrated. It's very difficult for us to disintegrate and start breaking up that kind of revenue in that sum. So it's almost impractical for us to do it. And one of the reasons for Ebix's success is precisely this. This is one of the reasons why we produce better efficiency and better margins than anybody else because we integrate extremely tightly, we sell in a very tight manner and so on.

Unknown Analyst

And one last question. I noticed your income taxes rose, tripled roughly on the last 9 months, from $1.7 million to $6.3 million. Can you just give us some more color on what the cause of that is?

Robin Raina

Bob, you want to generally address that please?

Robert F. Kerris

Sure, sure. In the account, we recognized income tax expense in $6.7 million for the 9 months ending September 30, 2012 as compared to a net tax benefit in the amount of $158,000 [ph] recognized in 9 months in 2011. Compared to that same month period from a year earlier, income tax increased due to several factors. One, an increase in the effective tax rate. The provisions in the quarter this year increased our reserves for unrecognized [ph] tax benefits. The fact that in the third quarter 2011, the company recognized a net tax benefit of $4.6 million in connection with the release of our valuation allowances that had been held against NOLs, DTA, the deferred tax assets and NOLs taken from prior business acquisitions. And that during the third quarter 2011, the company recorded a small net tax benefit in the amount of $400,000 resulting from R&D tax deductions for our Singapore operations back from 2010. So that explains the relative increase in income tax expense for the 2 9-month periods.

Operator

And we'll take our next question. We have another one from Jeff Van Rhee from Craig-Hallum.

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

And Robin, on the -- back to the sales side. You had been ramping the sales force fairly aggressively. Would you just update us on where you are in headcount now, headcount-wise? And then maybe an update in terms of the ramp to productivity. I know a lot of them had been getting up to speed, but I didn't get a productivity in terms of closing deals. Just some updates there, both in number of heads as well as where you think you are in the ramp to productivity.

Robin Raina

Well, I think we are somewhere in the plus side. The sales growth in terms of the number of staffing will continue to happen as we gain more success. And we're pretty pleased with where we are with that uptick in our sales force. So we believe we'll keep growing this, meaning I don't have the direct numbers to give you. I think in the Q, you'll see more -- the number that are related to where we were, I honestly don't have it here. And then having said that, I think we took up a target of almost doubling our sales force, and we're pretty close to that now. This is going to be an ongoing issue. We're going to continue adding more salespeople all through, simply as we gain success, meaning we -- what I'd promised you in the previous investor call that we're going to do that as we gain traction in the market. And otherwise, I mean there's no point of continuing to hire salespeople if you're not getting success out of what you already hired. So having said that, that's going to be a continual process for us in terms of hiring sales force.

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

And the ramp to productivity?

Robin Raina

The productivity, we're pretty pleased with where we are in terms of the productivity, meaning of the sales force. Meaning I think we hired, 1 year back, we invested in salespeople and we -- but having said that, I think we're continuing to see the pipeline continue to go up, and we absolutely feel pretty good about where we are with that sales force. And we will -- I think on a productivity perspective, some of that are being -- we're starting to see results. Q4, hopefully, you'll see even more results. In 2013, you'll see even more results and so on. So it's going to be, I think it's going to be a continual upside.

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

Okay. And then let one last for me. In terms of the tax rate for the full year, I know you don't give guidance overall and financial model. But how should we think about the overall tax rate for '13?

Robin Raina

I think tax rate, overall -- we've already given our guidance in the past, so we'll stick to that for now. And if we have anything new to communicate on the tax rate, we will absolutely communicate in an open manner, through a press release or something like that.

Operator

At this time, I would like to close the Q&A session and turn it back to your host for any concluding remarks.

Robin Raina

Thank you. That brings me to the end of the third quarter 2012 investor call. We look forward to speaking to you again at the end of the year to -- and discuss our annual numbers for 2012. Thank you, all, for being here.

Operator

Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect, and have a great day.

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