Ebix, Inc.
Q3 2018 Earnings Call Transcript

Published: 8 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Ebix Third Quarter 2018 Results Investor Call. [Operator Instructions]. As a reminder, this conference may be recorded. I would now like to turn the conference over to Darren Joseph, Corporate Vice President. Sir, you may begin.

[Darren Joseph:]

Thank you. Welcome, everyone, to Ebix Inc. 2018 third quarter earnings conference call. Joining me to discuss the quarter is Ebix’s Chairman, President and CEO, Robin Raina; and Ebix CFO, Sean Donaghy. Upon our remarks, we will open up the call to your questions. Now let me quickly cover the safe harbor. Some of the statements that we make today are forward-looking, including among others, statements regarding Ebix’s future investments, our long-term growth and innovation, the expected performance of our business and our use of cash. These statements involve a number of risks and uncertainties that might cause actual results to differ materially from those projected in the forward-looking statement. Please note that these forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise or publicly release the results of any revisions of these forward-looking statements in light of new information or future events. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements made today is contained in our SEC filings, which list a more detailed description of the risk factors that may affect our results. Our press release announcing the Q3 2018 results was issued earlier this morning. 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 the release on our website, www.ebix.com. The audio and the text transcript of this call will be available on the Investor homepage of the Ebix website after 4

[Sean Donaghy:]

Thank you, Darren. Q3 2018 results were record results on many fronts. Firstly, these are the highest top line results ever reported by the company. On a constant currency basis, the annualized revenue run rate translates to approximately $526 million against our targeted aspirational revenue run rate of $500 million by Q4 of 2018. Secondly, it is the highest operating income or EBITDA plus stock-based compensation ever recorded by the company in any quarter. The $39.2 million operating income in Q3 2018 translates to an annualized run rate of approximately $157 million, the highest ever in our history. The $42 million EBITDA plus SPC for Q3 2018 translates to an annualized run rate of approximately $168 million, again the highest ever in our history. Thirdly, Q3 2018 operating cash flow of $34.3 million is the highest operating cash flow ever reported by the company. Thus, we are quite pleased with the company’s third quarter 2018 financial results and the operating performance associated with these results. As compared to Q3 2017 operating income of $27.9 million, the Q3 2018 operating income was 41% higher at $39.2 million. This translated to operating margins of 31% in Q3 of 2018. Q3 2018 net income was 21% higher at $29.2 million as compared to Q3 2017 net income of $24.2. The company continued to grow efficiently, consistently producing operating margins of 31% through the third quarter of 2018, while revenues increased 39% for the same interim nine-month period a year earlier. The net income in Q3 2018 showed the effect of higher interest expenses associated with our bank lines, increased foreign exchange losses and higher income taxes. With a $521,000 higher foreign exchange loss in Q3 2018 versus Q3 2017, a $3.9 million increase in net interest expense in Q3 2018 versus Q3 2017 and a $1.9 million higher tax expense in Q3 of 2018 versus Q3 of 2017. The Q3 2018 taxes reflect a provision for the global intangible low-taxed income, GILTI tax, as per the 2017 Tax Cuts and Jobs Act. Q3 2018 diluted EPS was 21% higher at $0.92 as compared to Q3 2017 EPS of $0.76. Ebix’s weighted average diluted shares outstanding was 31.63 million shares in Q3 of 2018 compared to 31.62 million shares in Q3 of 2017. As of today, the company expects the diluted share count for Q4 2018 to be approximately 31.4 million shares. This does not take into account our pending load on the stock split. Cash generated from operations grew 138% as compared to Q2 2018 and 81% as compared to Q3 2017 to $34.3 million in Q3 of 2018. In Q3 2018, we spent a total of $7.7 million on dividends, tax payments and PP&E. Specifically during the quarter, we paid $1 million in taxes, spent $4.4 million on capital expenditures and paid dividends of $2.4 million while drawing $41 million from our bank credit facilities as well as spending $37 million in the purchase of Indus, Mercury and Leisure. After these significant uses of cash, Ebix still ended the quarter with $155 million of cash, cash equivalents and short-term investments, an increase of $66 million as compared to December 31, 2017, with available cash reserves of approximately $306 million, including the available borrowing capacity and the accordion available to the company. We are very pleased with the company’s continued ability to generate cash and fund its growth and investor-friendly initiatives. We will soon be announcing the record date for the Q4 2018 dividend payable to our shareholders. Finally, Ebix’s Form 10-Q will be filed tomorrow, November 9, 2018. I’ll now pass the call over to Robin.

[Robin Raina:]

Thanks, Sean. Good morning, everyone. I’m dialing into this call with Ebix CFO, Sean Donaghy, from our headquarters, campus at Ebix Noida in India. The time here is 9

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Jeff Van Rhee with Craig-Hallum. Your line is open.

[Jeff Van Rhee:]

Thanks for taking my question. Robin, I had a handful of them I’ll probably jump through them relatively quickly. Thank you for the insights on the domestic business. I know on the consulting side in particular, that had been an area of headwind. It looks like if you back India out, you’ve gotten some pretty good stabilization in the core business. Would you talk about two things

[Robin Raina:]

Thanks, Jeff. So look, insurance is our core strength. We recognize that, and we made a lot of efforts to try and strengthen ourselves further in that business area. We’re actually quite excited about a lot of opportunities in the insurance arena. Actually tried to talk to some of them. But having said that, have we bottomed out? So if you look at our business, we’ve actually continued to do extremely well, but in a few areas, and the few areas are mainly the areas of – it was mainly in the area of RCS. It was in the area of A.D.A.M. And – but when you look at some of these consulting areas, we do believe that we have bottomed out there. We do believe we have bottomed out on the A.D.A.M. area because it’s relatively stable now when you look at the declines in the A.D.A.M. area. So when you look at RCS area, I think part of it was influenced by President Trump’s immigration plan. There’s a little bit of confusion in the overall market with respect to how to use consultants and so on. We, however, believe we made some conscious decisions on trying to focus a bit differently on the consulting business now. We believe it give us the results now. We’re trying [Technical Difficulties]

[Jeff Van Rhee:]

I lost you. If you can hear me, Robin, I can’t hear you.

[Operator:]

[Operator Instructions]

[Robin Raina:]

I’m here. Can you hear me?

[Jeff Van Rhee:]

Hope, now I can hear you, Robin. You said our sales was influenced by immigration, and you started talking about consultants and then you went that.

[Robin Raina:]

Okay, got it. So what I was basically saying, we believe we kind of bottomed out in those areas. We believe that, we made a lot of changes in that area, we have – we’ve tried to dovetail that nicely with our product business. Having said that, we have made management changes at the senior level, trying to strengthen and bring people from the – senior people from the consulting arena. So we kind of believe that we have kind of bottomed out in that area. We like to believe that. At the same time, we have – we’re making strong efforts in that area to try and prop those areas up. But other than that, when you look outside the consulting area, our businesses are continuing to do nicely. We believe we have so many large opportunities in many areas, which can move the needle. So we would like to see our core business grow at double digits as we go into 2019 and beyond. And we see no reason why we can’t do that.

[Jeff Van Rhee:]

That’s great. That’s helpful. Thank you. And then on the e-governance side, I think you commented to the effect of $2.6 million in Q3, down from a prior run rate of roughly $6.5 million. What was it doing prior quarters so for instance, what was that running in Q2?

[Robin Raina:]

It’s been almost running at $6.5 million average over the last two quarters, over the last few years actually. So that’s been our average run rate. The challenge we had with – you see we’re very committed to ensuring that operating margins are at 30% or above levels, and the challenge we have with the e-governance wall, that if we continue to pick up larger business, that’s going to hurts our operating margins. We’re also – as you heard me talk through, we’re making a lot of investments in new areas, and we’re also investing in the brand and the marketing and so on, which means we need that leverage. To do that, so we just can’t afford to pick up a low-margin area. So in e-governance, our margins tend to be a lot lower as compared to what they are used to, 30%-plus. And so we felt that we needed to kind of take that business down, so that we don’t have to compromise in the 30%-plus margin area. So that’s why you saw kind of take that margin level down.

[Jeff Van Rhee:]

That’s helpful. Got it. Ebix India, the two numbers, the $60.3 million and the $71.5 million, just can you clarify because the $71.5 million is the statutory consolidated basis. What’s the delta between the two?

[Robin Raina:]

So the delta between the two, these are two different numbers because technically what happens when India goes for an IPO, all even the transfer pricing revenues going to counted as a stand-alone revenue for it. So the delta actually has transfer pricing revenue. Sister companies of Ebix paying it money. So when you – so the reason I mentioned that number is simply because that’ll be important from an EbixCash IPO perspective on a stand-alone basis as it goes for an IPO. It’s statutory numbers are going to be important because every dollar it makes, whether directly with customers, outside clients or with a sister company, technically becomes a customer to it, and so that number becomes important from an IPO perspective.

[Jeff Van Rhee:]

Okay. So when you talk about a $450 million aspirational goal and that being the trigger for the IPO, you’re referring to the $71.5 million number this quarter?

[Robin Raina:]

Not really. I’m actually referring to a number that we would like to get to with respect to a pure outside client number. Look, part of it is we also have to be – we also have to keep resetting the goal as the currency fluctuates. So the challenge with all this has been that when I set up these goals, it all depends on whether currency ultimately plays itself out. But just because – just between Q2 and Q3, the currency depreciated by 10%. And since then, it’s depreciated by another 3% or 4%. So it’s – that’s the challenge with giving goals in dollars right now. But yes, we would like to believe the $450 million that I’m talking about, that’s referring to a number that can – that will also factor into our Ebix numbers, which means it will not include any intercompany transfer pricing.

[Jeff Van Rhee:]

Okay. So yes, just to be clear then quarter that $60.3 million number obviously will change currencies, but that’s the one we should be looking for to track to that $450 million number.

[Robin Raina:]

Right.

[Jeff Van Rhee:]

Got it. On the IPO, I don’t want to split hairs, but it seems last quarter, I remember the commentary about the IPO timing was second half 2019 and the commentary this quarter was late 2019, and I also remember you referring to run rates well below the $450 million as being the trigger for the IPO. So, I guess, two questions embedded in there. Did your thinking change on the timing? And, I guess, if so, why?

[Robin Raina:]

Well, we actually didn’t change the timing. I actually said in the last call I talked about doing it after elections, sometime after elections. That’s all we said. So that’s exactly what we are saying right now. There’s no firm timing as yet. Frankly, the timing will get dictated more by our results than done by anything else because we’re very committed to this whole idea that we would like to go for an IPO when our top line is $450 million with 30% or more in operating margins. We believe that’ll get us the right valuation that we would like to get. So that would be the delay if there is any delay. So we right now feel good about getting there. We feel that we want to do this sometime in 2019 towards the second part of 2019. Look, the elections in India are going to go – it’s a long process of four months. And elections are very involved period in India. We don’t want to do an IPO in the midst of elections in India. So we will do it. That’s what I said the last time, and that’s what I’m saying now.

[Jeff Van Rhee:]

Got it, okay. And then one more from me. I’ll let somebody else jump in. The acquisitions, you had Mercury, Leisure and Indus in the quarter. What were the close dates trying to get a sense of what kind of impact they had during Q3?

[Robin Raina:]

I think the Leisure was virtually we got three months of Leisure. We got two months of Mercury, and we got three months of Indus.

[Jeff Van Rhee:]

Got it, okay. Great thanks for taking my question.

[Robin Raina:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Allen Klee with Maxim Group. Your line is open.

[Allen Klee:]

I was encouraged to see the improvement in operating cash flow this quarter. And I was just interested if you could maybe talk about that and also the fact that you’re going to be it seems like cutting back on the e-governance business, which given India’s government has been slower to pay then you overall average for the company that may be that give us some insight on that, the free cash flow numbers could potentially be stronger going forward.

[Robin Raina:]

Well, look, it’s very hard to predict the cash flow number. At the same time, we believe that all our business is cash flow oriented. So the good news in our – especially in our India business is if I take my e-governance business out, all of our businesses are cash oriented. The business, the cash happens in days or weeks rather than months. So we feel good about the cash flow. As long as India continues to make more money, the cash flow will continue to happen in India. So I think that’s pretty simple. And with respect to insurance businesses worldwide, the only area where we get delays in terms of cash is mainly Brazil, and that, too, is virtually one client. So we feel that we should see decent cash flows coming out of Ebix, although I think the only area where we’ve had a decent AR go up is mainly when we deal with government of India because government of India has their own payment terms and the way they work is slightly different in terms of how they pay, and we have to follow their rules. So if we are going to reduce our e-governance business, then our cash flow will automatically improve.

[Allen Klee:]

Thank you, that’s what I was thinking. And then just some minutia a little bit in the modeling. I know sequentially your gross margin has improved the last three quarters sequentially. I was just wondering if you could comment on what’s behind that. And if that’s a trend that you feel comfortable with. And then also there’s been a pickup in G&A and product development as a percent of sales. And do I think of those as kind of as a good run rate going forward?

[Robin Raina:]

I think, yes. You can think of those as good run rates on both fronts. So I feel – we feel good about that. Frankly, we don’t really care that much about gross margins. We’re very focused on the net operating margin, ultimately, because that’s what, ultimately, we care about. But having said that, I think the present ratio of what you’re seeing with respect to G&A and others I think makes sense. We feel those are good numbers.

[Allen Klee:]

Okay. Thank you so much.

[Operator:]

Thank you. And I’m currently showing no further questions at this time. I would like to turn the call back over to Robin Raina for closing remarks.

[Robin Raina:]

Thanks, Shannon. I think we have – since there are no more questions, we’ll finish the call. We look forward to speaking to all of you as we announce our Q4 results. We’re quite excited by the conference we have a few days from now. This is the first time we’re doing a conference on that scale, and I think the whole idea of this conference is to try and figure out the way to propel our growth, and that’s why we named it ready to race. So having said that, we will report on the conference and on the future growth story as we speak to each other over the next quarter and year-end. Thanks, everyone. With that, I’ll close the call.

[Operator:]

Thank you. Ladies and gentlemen. This concludes today’s conference. Thank you for your participation, and have a wonderful day.