Today we published a report on Ebix (NASDAQ:EBIX). It can be found in its entirety at:
Below is a piece of the report. THE REPORT SHOULD BE READ IN ITS ENTIRETY AS THE SEGMENT BELOW ONLY CONTAINS HIGHLIGHTS AND THE APPROPRIATE REFERENCES ARE FOUND IN THE FULL REPORT:
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. 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. 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.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." 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.