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Copperfield Research is the pseudonym of a research team focusing on publicly traded equities. As of the publication date of our articles, we may have long or short equity positions in the companies covered. We do not discuss unpublished reports, or provide any advanced warning of future reports... More
  • EBIX: If The SEC Cometh, The SEC Will Findeth (Or So We Suspect) 10 comments
    Dec 5, 2012 11:51 AM | about stocks: EBIX

    Today we published a report on Ebix (NASDAQ:EBIX). It can be found in its entirety at:


    On March 24th, 2011, we shared our first research report on Ebix in a three part series that was published on the main page of Seeking Alpha.[1] We argued among other things that Ebix had: misrepresented organic growth, been reporting questionable cash flow generated by a potentially illegal tax scheme, multiple auditor resignations, governance abuses, and a highly promotional, contentious CEO. We concluded that Ebix was nothing more than a roll-up with a misrepresented business model. Further, our analysis detailed a lack of de novo growth, which was supplemented with two tactics: tax arbitrage and destructive cost cuts (headcount reductions and offshoring). We questioned the sustainability of this strategy and notified the IRS and SEC of the material abuses we believed were so pervasive at Ebix. Since our original report, damaging information has materialized, including accusations from former employees of Peak that Ebix made "Fraudulent Misrepresentations" and "acted with utter disregard and recklessness." It is our opinion that the malfeasance at Ebix is even more egregious than what occurred at OCZ, which we wrote about last year.[2] Since our report on OCZ, the CEO and CFO have resigned, the stock has declined by 85%, and the company disclosed an SEC investigation on November 21, 2012.[3]

    Earlier this month, Bloomberg News reported that the SEC is currently conducting an investigation into Ebix in a story titled "Ebix Accounting Practices Said to Be Probed by SEC."[4] According to Bloomberg, the SEC investigation has been ongoing for the past year and is "focused on revenue recognition, internal controls and the accuracy of the company's public statements to shareholders." The Bloomberg article cited information from four different sources, including three former Ebix employees who had conducted interviews with the SEC, as well as naming the specific SEC attorney leading the investigation. The article implied the investigation also focused on "Ebix's strategy of booking U.S. revenues to units based in Singapore and India" which we criticized as the heart of Ebix's potentially illegal tax scheme. Since our initial report, we believe the ingredients for a full blown SEC investigation have only grown. In this brief report, we will discuss: 1) The SEC Correspondence History and a Vociferous Denial. Despite ardently denying any knowledge of an SEC investigation, Ebix has filed 40 comment and response exchanges with the SEC. Mysteriously, the public exchanges with the SEC stopped around the same time Bloomberg reports that an investigation began. 2) The Continued Misrepresentation of Growth and Altered Disclosures. Based on recent public disclosures, we believe Ebix has continued to misrepresent its growth, and in fact organic growth was NEGATIVE in Q3'12. Ebix reported 1H'12 pro-forma organic growth in the most recent 10Q that does not reconcile with the figures provided in the 10Q's from the first and second quarter. An amended 10Q from the first quarter introduced new disclosures for pro-forma revenues that were not presented in the original filing. Based on our analysis, Ebix may have misrepresented its pro-forma revenue growth in the first and second quarter 10Q's by 30x compared to the 0.2% that was implied in the third quarter 10Q. Investors that bought Ebix stock in the first two quarters of 2012 may have done so on the basis of organic growth numbers that were overstated. 3) The Damning Accusations made in the Peak Lawsuit. Another acquired company is suing Ebix for failing to make earn-out payments. The plaintiff's testimony describes countless examples of dysfunction, misrepresentation, and insufficient internal accounting controls at Ebix. The lawsuit provides vivid accusations of behavior that ranges from unscrupulous to incompetent, including an example where "Ebix's own CFO and Controller [were] unable to agree on Peak's revenue….and in fact disagree[d] by more than $800,000 over a one year period." Despite the severity of the accusations, we have been unable to find disclosures of the Peak lawsuit in Ebix's most recent SEC quarterly filings. Should the allegations levied against Ebix be true (failure to manage billing, collection, sales, taxes, regulatory payments, and accounting for Peak), then it would seem probable that those same failures would be found by the SEC at the corporate level. 4) Additional Lawsuits and Contingent Payments. Ebix is facing at least two class action lawsuits that appear headed to trial. One class action complaint includes testimony from a former senior Ebix employee who corroborates the dysfunction and weak internal controls alleged in the Peak lawsuit. This incriminating evidence may be integral to any investigation the SEC has launched. Further, Ebix also faces at least two lawsuits accusing them of failing to pay earn-outs. With $30 million of balance sheet earn-out liabilities, investors may begin to view this line as a debt-equivalent, and question "one-time" P&L benefits from reversing the earn-outs. 5) Our Original $9.00 Target Did Not Consider SEC or IRS Action. For a roll-up business with negative organic growth, overstated margins given limited investment in the business, quality of earnings issues, the potential for a massive overhang from regulatory investigations, lawsuits, and the possibility of significant liability or fines relating to the questionable tax strategy, we now believe that a more appropriate multiple should be 4x to 5x LTM EBITDA. This would be approximately $5.50 to $7.70 per share, or downside risk of 55% to 68%.





    Disclosure: I am short EBIX.

    Additional disclosure: IMPORTANT Disclaimer – You should do your own research and due diligence before making any investment decision with respect to securities covered herein. As of the publication date, the author of this report has a short position in the company covered herein and stands to realize gains in the event that the price of the stock declines. The author does not discuss unpublished reports, or provide any advanced warning of future reports to others. Following publication of this report, the author may transact in the securities of the company, and may be long, short, or neutral at any time hereafter regardless of our initial opinion. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind – whether express or implied. The author of this report makes no representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice and the author does not undertake to update or supplement this report or any of the information contained herein. This is not an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction.

    Themes: finance, tech, saas, SEC Stocks: EBIX
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Comments (10)
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  • p2invest
    , contributor
    Comments (158) | Send Message
    What BS. An ongoing one year plus SEC investigation of revenue recognition? How? By a SEC petition and testimony from shorts or "witnesses" from that bogus shareholder lawsuit? The SEC has no valid information if it doesn't contact EBIX and subpoena financial records like it did in year 2000 which included all .com companies. But the SEC will not comment on anything; it's against their written policy. They did not even publicly close the 2000 probe because there was no actions against Ebix. However, Ebix made reference to that probe until at least 2005 in their quarterly reports. As for the deferred tax liability, all international companies do it. Most of international company's cash is in foreign countries even if most of their sales are in the USA. The SEC is looking at this and encouraging companies to report it to shareholders (most have complied) and the SEC is not investigating its legality as far as anyone knows, because it is legal. Ebix reports their cash in each country that they have operations. Ebix reported their deferred tax liability if they repatriated ALL their earnings at $51.4M as of Dec 31, 2011. Ebix has tax loss carryovers to offset IRS taxes. Ebix like all other international companies do not intend to repatriate all their earnings, but they all pay foreign taxes on earnings. Some pay more foreign taxes than others. Until laws change (including tax holidays in the foreign countries like India and Singapore), this is and will continue to be legal. The tax rate in all foreign countries is different and Ebix lists them in their financial reports.


    Can't you find something else to short, Jon? And Greg Farrell seems to be overly concerned about this small cap company when he has bigger fish to fry.
    5 Dec 2012, 02:20 PM Reply Like
  • Karl Glazier
    , contributor
    Comments (82) | Send Message
    Your hyperbole knows no limits, desperately trying to stampede the longs into selling, so you can make profits at their expense
    You carry on and on about the "damning" Peak lawsuit, but you fail to mention that they are suing over $1.5 million.
    That is a clear intent to mislead and deceive on your part.
    You should be working for the National Enquirer.
    5 Dec 2012, 10:45 PM Reply Like
  • Karl Glazier
    , contributor
    Comments (82) | Send Message
    Ebix's CEO:
    " The agreement with Peak shareholders mandates audited GAAP numbers to be used for the earn-out calculation. The audited numbers were a lot lower than $6.5 million.


    If they had a dispute with that number, then the contract mandates that they need to give Ebix a 30-day notice, then submit reasons for dispute on revenue. After all this, it could lead to arbitration, failing which, it would go to a court. The funny fact is that they have not done any of that, including giving us a 30-day notice or taking it to arbitration. One wonders why they were in a hurry to file a suit and report it to the public, when the contract does not even allow them to do that. So, let us hold our thoughts for now and not pass any judgment on Ebix practices or management, based on this suit that alleges a few hundred thousand in understatement.
    5 Dec 2012, 11:04 PM Reply Like
  • Karl Glazier
    , contributor
    Comments (82) | Send Message


    To put things in perspective, BDO Tax Partners in 2005-2006 put Ebix's tax structure in place. Subsequent to that, it has been reviewed and enhanced by Ernst &Young, with help from other firms like BKD, Frazier Deeter, etc., besides multiple offices of E&Y across the world. Ebix's infrastructure setup of putting development and IP in Singapore & India was put in place much before any tax planning was contemplated. Also, Ebix's inheriting of NOLs in the United States was something that was not planned, but happened since Ebix had lots of losses in the pre-2000 era. Our tax structure worldwide was thus driven by our infrastructure and efficiency needs of putting development & IP in a place, which could give us global economies of scale at the highest levels of efficiency.


    Ebix took care not to transfer any IP out of the U.S. and thus does not expect any issues on that account. All our IP centralized in Singapore was either built and funded by Singapore, or directly acquired by Singapore through an acquisition.


    Our transfer pricing is not done by CB&H. The transfer pricing, updates and reviews are done by E&Y with help from their various offices, and BKD. That is a continuous exercise and not just a onetime exercise. Every position of the company has a strong documented basis, written by these top quality firms who are rated one of the best in this work worldwide. CB&H is our U.S. auditor who checks all this from an auditor perspective and they have an international tax practice that specializes in this field.


    Besides following the advice of the best in the business, the company always has taken conservative positions and built large FIN 48 reserves to offset any adverse transfer pricing rulings. Also our US NOLs in all those periods serve to largely offset the cash impact of any adverse ruling."


    This is from July 2011, and you are still sensationalizing the same issues.


    Have any current Ebix customers or potential customers mentioned Barron's or any of the short-seller articles as a point of concern?


    The short answer is no. My guess is that our customers know a lot more about us than any media article can tell them about Ebix.
    5 Dec 2012, 11:31 PM Reply Like
  • US Investor
    , contributor
    Comments (131) | Send Message
    I want to thank Copperfield for the excellent service. EBIX had been going up a lot and this gave me a great opportunity to add. The company is also buying back shares at low prices which helps long term buy and hold investors.


    Keep them coming copper. I give you the title Goldnugget research
    6 Dec 2012, 03:26 AM Reply Like
  • p2invest
    , contributor
    Comments (158) | Send Message
    That's the only redeeming quality of a short, cheap stock. It's the only one that Warren Buffett could even come up with too. But fraud should never be applauded; it should be condemned instead. Copperfield is part of the financial mafia profiting from investors. Yes, Copperfield is a suitable name since he uses smoke and mirrors. He's even elated with the fact that he caused the founder and CEO of OCZ to resign over a misdemeanors conviction with marijuana.
    6 Dec 2012, 09:50 PM Reply Like
  • srmedava
    , contributor
    Comments (29) | Send Message
    "EBIX: If The SEC Cometh, The SEC Will Findeth (Or So We Suspect)" This title could easily be true for every company. No point wasting time reading your blog and it is getting stale. Please come up with some new dirt. We will get an opportunity to buy more.
    6 Dec 2012, 12:15 PM Reply Like
  • Betty Smith
    , contributor
    Comments (9) | Send Message
    From: Ebix Q3 2012 Earnings Call Transcript


    "[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 - Chairman, Chief Executive Officer and President


    "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."




    As in the recent Autonomy/HP scandal, companies who cannot differentiate organic growth vs. how much was due to acquisitions is one of the biggest signs of accounting fraud.
    6 Dec 2012, 03:20 PM Reply Like
  • srmedava
    , contributor
    Comments (29) | Send Message
    Danaher, another acquisitive company has similar ratio of goodwill/total assets. Is Danaher a fraud too? I know you are attacking the company for not showing the organic/inorganic growth ratio. Is that the only beef that people have with this company? How are they able to purchase all these shares and pay dividends too? Goodwill might be high and there might be an impairment if these units don't perform as expected but that is the risk investors are taking and assigning a low multiple. Calling it a fraud is taking to the extreme and the intention of shorts is very clear.
    9 Dec 2012, 09:46 PM Reply Like
  • joeranger
    , contributor
    Comment (1) | Send Message
    He was right.
    10 Sep 2013, 10:36 PM Reply Like
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