Ebix, Inc.
Q4 2017 Earnings Call Transcript

Published: 3 Mar 2018

[Operator:]

Good day, ladies and gentleman, and welcome to the Ebix Fourth Quarter 2017 Investor Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] And as a reminder, today’s conference call is being recorded. I’d now like to turn the conference over to Darren Joseph, Corporate Vice President. Please go ahead.

[Darren Joseph:]

Thank you. Welcome everyone to Ebix Incorporated's 2017 fourth quarter earnings conference call. Joining me to discuss the quarter is Ebix's Chairman, President, and CEO, Robin Raina; and Ebix's CFO, Sean Donaghy. Following our remarks, we will open up the call for your questions. Now, let me firstly 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 businesses 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 statements. 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. Additionally, 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 Q4 2017 results was issued yesterday 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 to this call will be available also on the Investor homepage of the Ebix website after 4

[Sean Donaghy:]

Thank you, Darren, and thanks to all in the call for your interest in and support of Ebix. Q4 2017 diluted earnings per share increased 11% to $0.84 as compared to $0.76 in the fourth quarter of 2016. Ebix’s weighted average diluted shares outstanding decreased to 31.7 million in Q4 2017, compared to 32.5 million in Q4 2016. As of today, the company expects the diluted share count for Q1 2018 will be approximately 31.7 million shares. Q4 2017 operating margins increased sequentially to 32%, as compared to 30% in Q3 of 2017 and were down compared to 35% in Q4 2016, mainly because of the short-period associated with brining the right synergies in place for the recent acquisitions in India. Operating income for Q4 2017 rose 20% to $33.1 million, compared to $27.7 million in Q4 2016. Q4 2017 net income increased to $26.6 million, compared to $24.6 million in Q4 2016, primarily due to 5.4 million of higher operating income offset by an increased bank interest expense of 2.4 million, reduced interest income of 535,000, and increased net income of 638,000 attributable to non-controlling interests. We are pleased by the fact that the company continues to report sequential quarterly revenue growth, robust cash flows from our operating activities, consistent operating income, and attractive operating margins above 30%. As we scale our business up over the next six months, we expect our operating margins to grow by a few points. Cash generated from operations was $26.7 million in Q4 2017, compared to $30.7 million in Q4 2016, and $18.9 million in Q3 2017. The operating cash in Q4 2017 reflected the increased receivables associated with some of the contracts in Brazil, the U.S., and India that have longer payment terms. During Q4 2017, we invested a total of $2.4 million on dividend payments, $1 million on CapEx, $3.1 million on principle payments towards the term loan, and $1.7 million on tax payments. We funded these initiatives from existing cash plus operating cash flows of $26.7 million during Q4 2017, while drawing $60.5 million from our bank credit facilities to fund the closing of our three acquisitions in Q4. Ebix ended the quarter with cash, cash equivalents, and short-term investments of $89.5 million with available cash reserves of approximately $119.5 million, including the available borrowing capacity and the accordion available to the company. As of February 27, 2018, we announced the expansion of our existing credit facility from $450 million to $650 million to assist in funding our growth. Ebix also announced that we now access to total funds of approximately 331 million to fund any of our working capital or any other growth or share repurchase initiatives. This includes the worldwide cash balances in the bank of approximately $85 million in addition to an available credit line of approximately $246 million. Furthermore, as to key balance sheet metrics, our balance sheet remains healthy and our company's financial position remains solid with a current ratio of 1.72, a working capital to short-term liquidity position of $106 million, a debt-to-leverage ratio of 3.31 and a debt-to-equity ratio of only 0.81 as of December 31, 2017. Finally, Ebix's Form 10-K was filed yesterday. I'll now pass the call on to Robin.

[Robin Raina:]

Good morning everyone. I just want to start by congratulating our entire company and all of our shareholders and investors on just what has been an outstanding Q4. It has capped off just a truly record year for Ebix. This has been an outstanding quarter for the company. This is the first time ever that it got Ebix across the $100 million a quarter milestone. What is exciting is that we did that while achieving 32% operating margins and while setting 2018 goals that are more ambitious than ever. I remember the days, when Ebix revenues were $7 million a quarter and I talked about setting up a company that could report 30% plus operating margins consistently. I used to hear quite often that it is easier to report these margins when you are small, but these margin levels would be unsustainable when you become a bigger company. I feel great about the fact that we are still reporting 32% operating margins in Q4 2018, while reporting annualized revenue run rate of $418 million. Ebix is today set on a path to be the largest exchange in the world that would have converged insurance and finance, while establishing a leading role in each segment. We could not have got to this point without the support of all our employees our customers, our partners and of course all our shareholders. I’m dialing into this call from our Indian headquarters in Noida, Delhi. While it is a public holiday today in India on account of Holi, the festival of colors, I still see employees working here at 9

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Jeff Van Rhee of Craig-Hallum. Your line is now open.

[Jeff Van Rhee:]

Great, thanks. Congratulations guys. Numbers look just outstanding here. A handful of questions for me, if I could. First, I wanted to just start, Robin, as you look at the EbixCash business, you referenced the opportunity for IPO. I have a couple of follow-ups there. First, just with respect to the EbixCash business, you set this benchmark of $200 million run by the end of Q4 2018. What do you think is this - what's your sense of sustainable growth, organic growth in that business? You're putting a lot of things together. Obviously, there's been a lot of synergies, as evidenced by your margin commentary. But how do you think about the growth opportunity, from just an apples-to-apples organic basis in this business?

[Robin Raina:]

Well, we would be disappointed if we couldn't grow this EbixCash business 25% year-over-year organically.

[Jeff Van Rhee:]

And do you - so with respect to that benchmark of $200 million for India, what's included in there? Are you thinking the, for instance, if you get Educomp or you have the e-governance business already, those right now, I sort of think of outside of your core EbixCash business. So, just to be clear, what's included in the $200 million and when you talk about both the top and bottom line, just what exactly is in there?

[Robin Raina:]

Well, what is in there is it includes all our - it will include any new remittance, outward remittance businesses or any outward ForEx businesses. It will include everything else that's already contained in the EbixCash business today or any new initiative that we launch over the next few months.

[Jeff Van Rhee:]

And would that be Educomp as well or the e-governance, which dipped from the typical $6 million down to whatever, a couple hundred K this quarter, does that include those 2?

[Robin Raina:]

Well, frankly, it better not. We would like to see Educomp be outside that number. At the same time, we have - this is an ambitious target, so let's see how we perform over the next few quarters and months.

[Jeff Van Rhee:]

Got it. And then also with respect to the EbixCash, I'm just curious, with these couple hundred thousand-plus now franchisees out there, you're adding these new tablets, you're adding a lot of capabilities, you're adding more products. How has that - I realize it's early, but how has that been reflected thus far in terms of the retention of existing franchisees and the attraction of new? So, any visibility there with respect to churn or new partner capture from an organic basis as a result of just them seeing the vision of what you're trying to build here?

[Robin Raina:]

Jeff, it's just been an incredible experience. What we have experienced is that not only has it helped retention, but it has also helped us get into new distribution outlets. So, this 231,500 number is actually a bit old. We are presently at 250,000-plus outlets already in India. So, we have continued to grow the outlet base. And basically, what is happening is because we are able to bring so many new revenue opportunities to a same outlet, that makes us very powerful in the market, because we have such a wide spectrum of products that we have available. And we are the ones who can bring insurance and we are presently bringing travel, we're bringing the inward remittance, that's easy money for them. When you bring inward remittance, for example, to an outlet, they really don't have to do anything except hand over money. They're servicing it, they're like a BPO arm, so they would welcome it with open arms. And clearly, because we are the dominating player in the market, it clearly makes them - makes us very attractive to them. And so, it's like a carrot for us to offer, because we can kind of guarantee them business if they start working with us, because we bring inward business. So that actually starts the whole conversation. And having said that, we bring so many different other opportunities to them that, that makes it - the retention a lot more easier and the growth a lot more easier. So, it's been a fantastic experience.

[Jeff Van Rhee:]

Yes, makes sense. The India e-governance revs, typically running at $6 million, dipped this quarter, what drove the dip? And is the message that you would expect that to return to kind of prior run rate?

[Robin Raina:]

It will come back to $6 million or more. So, to give you a simple example of what happened was we, we just had a late delivery of some software or some hardware that had to come in and it got stuck in customs, and net result was we couldn't pick up that revenue. So, it was - we recognize revenue on a percentage completion basis. So, really, all that has happened is that revenue got pushed into - we now have a much bigger chunk of revenue rather than $6 million that we would have recognized in the next quarter, we possibly now have double that revenue available to us. But again, we are going to only recognize what is done on a percentage completion basis, so you could - we will for sure be back to our normal levels of $6 million.

[Jeff Van Rhee:]

Okay. And last for me, I'll let somebody else hop on. So many things here seem like you're crushing it. Let me take the flip side of it. It sounded like from the description, the biggest challenging areas have been health e-commerce, health content and annuities. I don't want you to spend too much time on it, but as you look at that basket of businesses, just talk to me about where you think you are with those challenges. Have we seen the worst of it? Do growth rates improve from here? How do you think about it?

[Robin Raina:]

Look, annuities is an area where Ebix just - it's an industry trend right now. What's happened is all this DOL reform has shrunk the industry a bit, because there's so much regulation around the DOL reform that the business is - lesser business being written. It's as simple as that. So, we'll have to wait and watch the impact of if they can delay some of that DOL reform. There's all kinds of discussion happening right now in the industry, whether that will be delayed and so on. And we're hoping that it will come back. So, it's early days for me to predict what's going to happen with that industry. So, we obviously are the dominant player in annuities, so it impacts us. The good news is we've taken that impact and grown in other areas. So, having said that, we feel - if you take annuities out - and the health content arena is another arena where we think we've kind of touched the bottom. It's not really - when you look at the revenue stream, it's not when you get to a low point and we got to a low point on health content, any more drops, first of all, won't make a difference to us, but more importantly, we don't see that happening. So, I think the crux of that is that outside those two areas, we actually feel pretty good about all the remaining areas of our business.

[Jeff Van Rhee:]

Got it. Great. Well, congrats again. Just an outstanding quarter. Thanks.

[Robin Raina:]

Thank you. I appreciate that.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from Allen Klee of Sidoti. Your line is now open.

[Allen Klee:]

Hi. I think it would be helpful for investors to understand a little bit. In your 10-K, you show pro forma revenues for 2017 if all the acquisitions were owned for 2017 and 2016, and I think it shows revenue growth rate of around 1.4%. And I think intuitively, we might think it would have been a higher number with some - with these new growth businesses. So, could you maybe help people understand what's going on there?

[Robin Raina:]

Well, Allen, first of all, you believe all the assumptions on how those pro forma growth are calculated. That pro forma showed you that what is included and what is not included. So, it's more like an - while on paper, it looks like an apple-to-apple comparison, what you're doing is you can't control we're buying distressed businesses at times. And when we buy distressed businesses, the first thing that happens, we take over a business, and for example, give up on the revenue. I'll give you a very recent example, travel. We bought a company called Via. Via was running at a revenue run rate that the plan was to be running at a revenue run rate of around $55 million. We took that revenue run rate down on day 1. First of all, we took that revenue run rate down to closer to $30 million or lower, simply by changing the way they recognize the revenue. We decided to do - we gave up on a few products that we thought were a loss-making product. Part of the rationale - reason is why do we do that? Part of the reason is we bought a company, which has never made - who wasn't making money, who had NOLs, who was not growing at the pace that we wanted it to and was indulging more in unprofitable kind of sources of revenue. So traditionally, that's just an example, each and every business that we enter, we either give up on - this is our business line. Like if we go into Educomp, right? This is a distressed asset. We're going to buy Educomp, we're going to get rid of a lot of things that we don't want. That's a simple trick to basically inheriting the good pieces of the business and then giving up on the bad pieces of the business. But when you do a pro forma comparison, by law, by rules, I can't, for example, take Via's revenue, I can't take the revenue down to my way of doing things. I still have to report their revenue from the past, whatever it was, which I had no control over. So that's the kind of - that's why under the pro forma table, it actually shows you the basic - it shows you the basic assumptions, so that you will know what the assumptions were when we calculated that. So, the pro forma really wouldn't give you a true picture of what the revenue growth rate has been, is what I'm trying to say, simply because you're comparing, in a way, apples and oranges. You're comparing a past period of somebody with our present period, where we have made dramatic changes in their business.

[Allen Klee:]

Okay. Thank you. And then I just wanted to confirm for the RCS segment, the reason for the decline, is that due to the e-governance business in India?

[Robin Raina:]

First, yes, absolutely. First of all, that $6 million number became $300,000 number, right, in this quarter, because I told you it's percentage completion, all that we did. We delayed the revenue, simply because on a percentage completion basis, we couldn't have picked it up. And in the year, we had one more development happen in RCS that we think we're going to be able to overcome and we - I talked about, in my talk, I talked about a few very large possibilities. I talked about in the RCS arena, we are in discussions with some very large named financial institutions, insurance carriers. We are talking about possible deals which could have hundreds of people involved or thousands of people involved, where you would basically move jobs from U.S. or Canada into an offshore center of Ebix and where we would process business. So, we feel very good about the RCS sector. But having said that last year, one of the major developments that happened, one of our large clients, a named insurance carrier, one of the large ones in the U.S., decided to do a joint venture with Cognosante. And when they did a joint venture with Cognosante clearly, from one day to another, we had to - that revenue kind of dropped. Now, it's coming back, actually. That revenue, we believe, will come back because after they went into the JV, they realized that they still probably needed Ebix kind of players, because of our domain knowledge, so we had a bit of a blip [ph] at that time on that revenue stream, but we expect that to come back. So, we feel pretty good about the RCS sector overall.

[Allen Klee:]

Okay, great. And then you talked about PPL and how Lloyd is recommending mandating your solution. Can you help me understand how that can translate into how you make more money from it? Does it work that you're just sort of getting paid a set fee for what you've done? Or can this shift to getting paid more?

[Robin Raina:]

Yes, so, I can talk in generalities, simply because I have a very tight NDA with PPL, with Lloyd's, I couldn't talk about the specifics of the deal. But at a high level, we have - we get a guaranteed amount of money from them every year, but that money is linked to X number of transactions. Once we cross that transaction number, we're going to get more money, per transaction and for - then the second part to it is when you mandate these things, you're going to have multiple other opportunities that will happen. First of all, you will have custom development opportunities involved. You will also have to interface it with all kinds of vendors. You would also have to make these things work, for example, for LMA, IUA, the large, you know all the underwriter associations, the London market association and so on, which would mean that you would need dedicated teams of people. You would need more customization to be done and so on. Also, when you mandate something like this, what is going to happen is it's going to bring newer opportunities because our contract covers X number of products. So, if we now bring in something new that's not under the contract, but we already are being used by everybody in London, we would be able to bring in newer products into the mix a little bit more easily. We will also be able to possibly bring in more interface solutions that we have. For example, our CRM solution and possibly get them - get it to be used a lot more in other places. So, it opens a lot of different opportunities, just in the London market per se. Now remember, when we say London market, London market is not truly just London market. Why London is the largest market in the world is, because London market, you could be a broker sitting in Dubai. You could be sitting in Europe. You could be sitting in Asia. It could be anywhere, and you are part of the London market and you are writing - you are subscribing to a policy, you're taking 5% of a policy, 10% of a policy, negotiating it with somebody, all of those opportunities, because as they mandated, all of them will also have to use us. What that does is it also allows us that opportunity that now we have brokers within Europe, within Asia, who will be kind of forced to use this. And as they start using it, it will increase transaction count, because part of it is, that technically is outside the scope of our transaction count. And also, what will also happen is it will also allow us a say in those markets. As we launch other exchanges outside PPL, whether it is in the markets like Singapore or Bermuda or U.S. or wherever, it kind of opens up that opportunity also for us. In addition, frankly, in London, one of the good things that's starting to happen when you're outside the PPL, is the exchange rates are starting to come back. And because of Brexit, the rates have dropped quite sizably. So, now that the rates are starting to come back, hopefully, that also helps us in the future.

[Allen Klee:]

Okay, great. And lastly, it was very interesting you talking about getting into electronic wallets. My understanding is, it's a large opportunity, but the margins for that has tended to be kind of thin. What's your view on that?

[Robin Raina:]

You are absolutely correct. The margins on this are thin. But when you say margins are thin, look, it depends on how you're recognizing your revenue. If you're going to recognize your margin as your revenue, then it really doesn't matter, because to you, that's like 100%. So, in our case, the advantage we have is our cost on that business is going to be minimal, simply because we are not going like other vendors and marketing ourselves to get an electronic wallet consumer. We already have that consumer. We have the consumer walking into our Phygital stores and we have the means of converting them into our e-wallet customers. So, we don't have to do that advertising that some of the other companies have to do, and that's why they're losing a lot of money. So, for us, we have a ready-made client who we are putting on a wallet. And what we are doing is, if this client now runs a utility transaction, for example. Let's say if that translated even to, let's say, something we make $0.10 on it. Let's say that $0.10 translated to 4% of revenues or 2% of revenues. That 2% to us is 100%, simply because for us, we're recognizing that 2% as our revenue stream. We're not recognizing 100 [ph] revenue and then taking 2% as our margin. We're taking that 2% as our revenue and that to us is a starting point. Now we will see whatever cost on that 2%, if our cost on that 2% is minimal, we could still generate our 30% margin, or 35% margins that we want out of that business. Because we have the advantage of not being dependent on this business and we are indirectly generating this client, because you already have the client coming to our outlet or doing this business with us, in many, many, many different ways, whether they - because they are already using us, that puts us in a very strong position. And that means we are not bound by the industry's low-margin rate. They are getting low margins simply because they - first of all, they are picking up - simply because they have a very high advertising cost and also, it also depends on what is the revenue recognition, whether they're recognizing the gross revenue and then taking - whether they're recognizing the gross value of the transaction and then taking the 2% margin as their margin. And so, it all depends on how you set it up. Our intent in the electronic wallet is to pick up our margin as the revenue, and that becomes our starting point. So that puts us in a very strong position, because for us, it's an add-on stuff and because of the minimum cost associated with it for us.

[Allen Klee:]

Okay, great. Thank you so much.

[Robin Raina:]

Thank you.

[Operator:]

Thank you. And I'm showing no further questions at this time. I'd like to turn the conference back over to the company for any closing remarks.

[Robin Raina:]

Thank you, Candace. I think we've had a - I feel really good about the quarter, and I thank each one of you for participating in the call. I look forward to speaking to you at the end of the first quarter. Thanks, everyone, for joining in the call.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.