Ebix, Inc.
Q1 2016 Earnings Call Transcript

Published: 9 May 2016

[Operator:]

Good day, ladies and gentlemen and welcome to the Ebix Incorporated First Quarter 2016 Investor Conference 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] As a reminder, this call is being recorded. I would now like to turn the conference over to Darren Joseph, Corporate Vice President, Ebix. You may begin.

[Darren Joseph:]

Thank you. Welcome everyone to Ebix Incorporated's 2016 first quarter earnings conference call. Joining me to discuss the quarter is Ebix Chairman, President and CEO, Robin Raina; and Ebix EVP and CFO, Robert Kerris. Following our remarks, we will open up the call for 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 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 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 revision to these forward-looking statements in light of new information or future events. Additional information concerning factors that could cause actual results to materially different 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 Q1 2016 results was issued earlier this morning. The audio of this investor call is also being webcast live on the web on 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 text transcript of this call will be available also on the Investor homepage of Ebix website after 4

[Robert Kerris:]

Thank you, Darren, thanks to all on the call for your continued interest in and support of Ebix. At the outlet, let me say that we are very pleased with the company's first quarter 2016 financial results, operating performance and look forward to the rest of the year. Q1 2016 diluted earnings per share increased 30% to $0.67 as compared to $0.51 in the fourth quarter of 2015. For purposes of the Q1 2016 EPS calculation, there was an average of 33.3 million diluted shares outstanding during the quarter compared to 36 million shares in Q1 2015 and 33.9 million at the end of the year in Q4 2015. As of today, the company expects the diluted share account for Q2 2016 to be approximately 33 million shares. Q1 2016 operating margins rose to 35% as compared to 32% in Q1 2015. Operating income for the first quarter 2016 rose 21% to $24.8 million as compared to $20.1 million in Q1 2015. We are pleased with the fact that the company continues to deliver attractive topline growth, cash flows and operating profits resulting in robust revenue growth from the combined effect of our expanding operations and the businesses we have acquired. The consistent generation of cash flows from our ongoing operating activities and sustainable operating margins in 35% to 40% range. The Ebix consulting group had operating margins for approximately 24% which is consistent with this type of business. Our Ebix's other businesses generated strong margins of 37% which cumulatively in the aggregate resulted in a 35% operating margin for the company for our first quarter of 2016. Cash provided by our operating activities rose $10.5 million in Q1 2016 compared to the use of cash from operations in the amount of $7.3 million a year ago in Q1 2015 where in Q1 2015 operating cash flows were negative impacted by the one-time cash payment of $20.5 million as previously announced for the resolution of the IRS or for the company's income tax returns 2008 to 2013. And Q1 2016 operating cash flows were negatively impacted by tax payments of around $7 million which included $6 million of advanced minimum to alternative tax payments in connection with our operations in India. Cash, cash equivalents and short-term cash deposit balances were in the aggregate $71.3 million at the end of the quarter, at March 31, 2016, up by some $13 million as compared to year end 2015, just three months ago. In regards on initiatives targeted enhancing shareholder value, Ebix utilized $17.2 million of cash in the first quarter. On repurchasing 406,000 shares of our commonstock for $14.8 million and paying $2.4 million for our quarterly dividend. The company offers an additional $1 million for the continued build out of our headquarters office campus facility in Johns Creek and the build out of our new facilities in India in support of our expanding product development operations in that country. Subsequent to the quarter, March 31, and through the current - through May 6, 2016 currently, the company purchased an additional 217,487 shares of stock for cash consideration in the aggregate of $9.1 million. With these additional share repurchases, to-date the company has now repurchased approximately 5.0 million shares of its common stock for an aggregate amount of $138.8 million and an average price of $23.60 since our - since August 1, 2014 when the company had announced that the Board of Directors decision to repurchase the stock consistently over the next few years. We expect to continue this share back utilizing our operating cash flow from the business as market and business conditions want. After spending a cumulative $18.2 million on share buybacks, dividends and CapEx during the quarter as of March 31, 2016, the company still had access to approximately $85 million of readily available cash from our financing facility with a syndicated bank group combined with our cash on hand to actually support continued, organic, accretive growth and - of the company to expand our existing operations as needed to meet the demand for our products and services. Furthermore, our balance sheet is healthy and our company's financial position remained strong and solid but at current ratio of 3.23, our working capital, short-term liquidity position of $96.2 million at debt leverage ratio of 2.14 and debt-to-equity ratio of only 0.54 as of the end of the quarter at March 31. We currently anticipate that the company will pay its next quarterly cash dividend of $0.075 per common share to be payable on or about June 15, the shareholders of record on or about May 31, 2016. Finally, the company's Form 10-Q will be filed this coming afternoon on Tuesday May 10, 2016. I will now pass the call onto Robin.

[Robin Raina:]

Thanks, Bob. Good morning. Now that Bob and Darren have already discussed the quarter in numerical terms, I will focus my talk on the qualitative aspects of the business and the aspirational goals that we have today for Ebix. I'm pleased with the Q1 2016 results and the fact that these results are close to the aspirational goal that are set for Ebix one year back. While announcing the revenues of $63.8 million during Q1 of 2015 investor call, I had talked about an aspirational run rate of $75 million in the first quarter of 2016. I'm pleased that we got pretty close to that goal with the Ebix Q1 2016 revenues being $72.8 million on a constant currency basis. We did that while announcing large deals and having a large deal pipeline like never before. Q1 2016 EBITDA plus stock-based compensation added up to $28.5 million approximately that if annualized translates to approximately $114 million. I'm pleased with that trend of reporting EBITDA consistently higher than $25 million in the quarter. Our Q1 2016 diluted EPS of $0.67 is a record number for the company. Between our accretive acquisitions, new deal pipeline and our stock buybacks, we are hopeful that we can keep it moving in the right direction. Darren talked about the effect of foreign exchange on our Q1 2016 results. Over the last three years, U.S. dollar has kept strengthening and that has obviously not helped Ebix. It's reassuring that in spite of that our results have continued to improve. In recent times, we announced a number of large deals in India and London that along with the strong momentum in a number of areas has helped Q1 results. During his talk, Darren talked about the drivers behind this topline growth in the first quarter of 2016. The area of life exchanges had been a consistent growth driver, a pipeline through the year 2015. That trend has continued in the first quarter of 2016 with many large players like Nationwide Insurance, Des Jordan [ph] and Merrill Lynch deciding to deploy our enterprise life exchange platform. We expect to continue on the momentum that we have built in this area as we are in the midst of many such deals. We signed new contract with clients in the first quarter of 2016 in every facet of our business including RCF, broker systems, health e-commerce and health content exchanges, underwriting exchanges, annuity exchanges, backend systems, consulting contractor's etcetera. Our Q4 2015 results included a $2.5 million revenue bounce in the area of continuing education for health. That increase in the fourth quarter is traditionally, every year, as the doctors tend to claim tax deductibility on continuing education and accordingly the fourth quarter tends to be strong in terms of revenues. In the first quarter of 2016 we had to make up for that $2.5 million revenue drop from Q4 2015 in continuing education. I'm pleased that not only did we make up for that drop but sequentially the revenue increased 2% to $71.4 million as compared to $70.2 million in Q4 of 2015 on a constant currency basis. It means that in the first quarter of 2016 we reported new revenues adding up to $3.7 million as compared to fourth quarter of 2015. Our deal pipeline is strong with Ebix being a contender for many transformational deals. I prefer not to provide any details about these prospective deals at this time for competitive reasons. While there are no guarantees that any of these deals will come through, yet, if secured, these deals could make our previously announced large deals look rather small in comparison. We are putting in our best efforts to secure these contracts and will announce them formally if and when any of these deals are closed. We have a number of strategic opportunities ahead of us. Let me talk about a few here. The London Exchange deal will create a competitive dynamic across the world in countries like Dubai, Bermuda, United States, and Singapore. With this exchange, London has set an efficiency, contract certainty, errors and omissions, audit trials, and collaboration benchmark for the insurance industry that none of these countries can compete with. As the only player worldwide, who has the expertise, functionality and technology expertise in terms of building such enterprise subscription exchanges, Ebix is uniquely positioned for quite a few possibilities in these world markets. Our intent is to be a key player helping London Marketing Association and Lloyds, LMA and Lloyds, in project TLM, The London Modernization Program. And work closely with them to make the initiative a huge success. We expect many new opportunities to emerge out of that close coordination driven by Ebix PPL exchange being at the center of project TLM. As Lloyds and the London insurance markets drive paper out of the process, Ebix intends to be a key player helping them make that transformation. We are looking at the area of health-TPA as a strategic area to target. This niche BPO industry, traditionally has low margins and is labor intensive with the recent JV with IHC we have now established world-class back-end health processing operations in India that allows us to potentially buy or partner with U.S. based TPA's and take their back-end processing operations to India and in the process create a current revenue line and bottom-line for Ebix. We are looking to enter two new areas of business through acquisitions. The area of hospital management system has intrigued us for long as we believe that it is a missing fork in the health wheel for us. A SaaS-based on-demand hospital systems service could provide us an even stronger end-to-end solution for the health market. We intend to make the right acquisition in this area to inherent a strong system. Another area that we are looking at deeply is the area of on-demand e-learning as it is a natural progression from the Adam line of content education-based products and services that we have today. The area has rich possibilities in terms of recurring revenues and operating margins. There are some very interesting and large possibilities in this area and we intend to pursue acquisitions as a means of getting there. Our acquisition pipeline is strong, and we have many prospective targets at various stages of discussions. We'll keep you updated as and when, and if, we acquire any of these target companies. For now we will not discuss the associated geographies for competitive reasons. We like to pay for companies in cash rather than using the Ebix stock as an instrument. We are committed buyer of our own stock as evidenced by the approximately 5.9 million share repurchases by the company for $138.8 million since August 1, 2014 when we announced the Ebix Board's decision to repurchase its own stock consistently over the next few years. Since January 1, 2016 the company has repurchased 683,487 shares of Ebix stock for $23.9 million. Thus given a choice, we don't intend to be using our stock to make acquisitions unless it is very strategic and important for us to do so. If we do not have all the cash required to fund the acquisition, then we will look to the bank to fund the acquisition. However, the key requirement for us is to find that that low interest rate as we are not willing to risk our fiscal successes by taking a high-risk SAP instrument. We are very encouraged by the support provided by our lead bankers in expanding the banking syndicate to address larger bank lines for Ebix, again, will keep you informed in this direction. That brings me to the two topics that investors have kept quizzing me about; one, a new aspirational goal for Ebix and two, the possibility of a stock split. As regards the aspirational goal for Ebix, I would like the company to aspire - to be at annualized revenue run rate of $350 million by the first quarter of 2017. I would like to get there while keeping our operating margin percentages intact. Let me emphasize that this by no means is guidance for the future but an aspiration that we will strive for. This goal will be added by all the growth initiative that I discussed, as also by our acquisition strategy. Now let me talk about the topic of stock split. With a firm believer in increasing our stock liquidity, as also a believer in the fundamentals of our company, we have done 3 for 1 stock split in the past with successful results, both qualitatively and quantitatively. Thus the possibility of a stock split cannot be ruled out. More on that later. That brings me to the end of my talk. I will now hand it over to the operator to open it up for questions. Thank you.

[Operator:]

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

[Jeff Van Rhee:]

Great, thank you. Congrats on a great quarter, the numbers look really good here. A couple for me, first, Robin, obviously the LMG details are now out there after a long bake-off process, we've got into the point where you can take some revenue and talk about some numbers. It was a very lengthy process getting to that point, what about the other geographies that you've referenced? Any sense of timeline in terms of barriers or the things that need to happen, are these all things we should think about over two, three, four or five years? Just any color there would be great.

[Robin Raina:]

I think we - Jeff, that's a great question, incidentally the competitive dynamic is huge. So basically what it means is that London now has a huge edge over countries like Dubai and Singapore and U.S. and so on. Let's put it this way that we are at an advanced discussion stage with a few of these countries. Again, we would like to see a few of these deals happen this year. Again, the size of the deals will vary upon the size of the country. So I think let's just hold on that discussion for now and see where we end up there so I would be disappointed if we haven't gotten success in this year on that front.

[Jeff Van Rhee:]

Okay. And then to your goals, you outlined interest in hospital management systems as well as the on-demand e-learning is a couple of opportunities. Could you just take a minute and talk about each of those? And in particular, just flush out a bit of what the competitive landscape is, who the players are there? And then what Ebix can bring to the table that's not already in those markets?

[Robin Raina:]

First of all, the hospital management system and e-learning are very specific areas. We are going to enter specific geographies first rather than target the whole world with these two systems. So our intent there to attack certain geographies where the competition is going is different. So I can't really go into details right now simply because then I would have to talk about that particular geography and I don't think that will be fair at this time for me to be able to talk about it. But to give you a simpler answer is that, we're not looking at the world landscape initially when we target these two areas. We're going to be looking at specific geographies because we think in those geographies there is a huge opportunity and that's what we are first going to focus on and then slowly as we normally do, we will roll it out across the world. But initially our competition is going to be limited to that particular geography, that particular country.

[Jeff Van Rhee:]

Okay. And then you had touched on a number of detailed sort of recaps of the sub-sectors and the one's that we're seeing tailwinds. And in particular, I just want to spend a second on one that seems the headwinds. You talked about the pharma side in the health content, and that you've taken some steps to bring that to lower cost delivery geographies where the margins made sense. Can you explain just a little in terms of where we are with respect to the revenue headwinds from those moves?

[Robin Raina:]

Well, we went through the normal process. When you move something offshore, you're going to take a bit of time to get it setup in the right fashion, I think we're at - we've done quite a while with moving that knowledge base over - we're trying to - we've actually created backend sales operations out of India to support our U.S. operations and so on. So we have moved various levels out there so we feel deal pipeline is quite strong, I think when you bring the price element down in terms of your cost of melding those products, you get a little bit more price competitive and that's what we wanted to do to ensure that we are competitive and in the process we don't give up on our margins. So that we could do it with respect to India. So we are in the midst of large deals, quite big chunk of deals. We've also been creating end-to-end straight through processing products in the content arena so our goal now is, we're targeting at times addressing, providing an end-to-end kind of a solution from a perspective of health and wellness, from perspective of providing an solution whereby you can integrate health e-commerce with health content and provide everything ranging from consumer knowledge, consumer education, patient education, doctor education, monitoring of hospitals by government, government is providing that education, and so on and telemedicinces and started all that in between. So when you look at that end-to-end solution that gives us a little bit of an edge. So this has been, there has been a process for us to do all of that; creating that integration, creating that product there. So we feel good about it, we made some key hires in the area of health content which has really helped us. So we feel good about it now.

[Jeff Van Rhee:]

Okay. And couple of other briefings for me, the - with respect to the margin and margin profile, I mean you counted on the operating margin performance this quarter, as you look at the pipeline of potential acquisitions, as well as the deal flow, and you think out over the next 12 to 24 months, can you comment specifically with respect to gross margin operating margin the things that may push those higher - may push those lower, just a little more color in terms of how you're thinking about margin as I said in context to both the pipeline as well as what you see as the probable acquisition paths?

[Robin Raina:]

So Jeff, I really don't focus on gross margins, that's a simple honest answer to you, simply because gross margins are a factor of what industry we're targeting, I mean it can be - it depends on if you're in a consulting industry, it's going to be very different from anything related to an exchange. So coming back to it, our focus always is the operating margins. So in terms of operating margins, what I would like to do, I've already defined an aspirational goal, I'd like to get there with 35% kind of operating margins impact. If we are keeping that kind of margin number and we have grown our revenues that substantially that I talked about I would be happy and that's going to be our aspirational goal.

[Jeff Van Rhee:]

Got it, okay. And last one for me, just maybe take a minute - I mean obviously, I would love to hear some detail about these transformational deals, I did hear your commentary that you don't want to go there for competitive reasons but beyond that or right up to the edge of what you're willing to share can you just expand a bit more about what you're seeing in the pipeline for the respective businesses?

[Robin Raina:]

Jeff, our deal pipeline is extremely strong right now in terms of especially the large and the so-called transformational deals. What has really happened over the last one and half years is that we have really opened up the large deals, we're really a player in that market. So there are two kind of deals; one is deals that are in the range of - you will find a pretty five-year contract which virtually is in the $50 million and $60 million range, there is another range of contracts where you could do $100 million deal a year, that in my definition is clearly a transformational deal and if it's more than $100 million, then even better. But having said that we have quite a good pipeline of such deals. So in such deals what are you trying to do, you're trying to provide an end-to-end solutions. At the end we're trying to make sure that as we provide this we want a recurring revenue line, right, that's our key, we'll be looking for recurring revenue line, we're looking for decent operating margins and that's been our key. So when I'm not at liberty to talk more than that right now simply because I would be revealing what those deals are, and where they are and which geography and so on, and that will hurt us at this point because we're at various stages of discussions on each of these deals and I feel it's - if and when we are able to get these deals done, we're absolutely going to announce them.

[Jeff Van Rhee:]

Got it. And I guess just last one, with respect to balance sheet and DSOs/AR increase, was there anything in particular that was invoiced late in the quarter that reverses, how do you think about DSOs next quarter?

[Robert Kerris:]

This is Bob, we expect our DSOs to improve significantly the second quarter. We are already seeing in the early part of second quarter significant improvement in cash collection. So we think that this is just a temporary phenomenon, we'll get back into our mid to 60s very quickly.

[Robin Raina:]

So just to answer the question did we - was that related to - so to give you a simple example; a lot - in the quarter, in the first quarter, we also signed some deals where basically the way our payment terms were linked, we haven't collected the money yet, some of the larger deals, so that's partly what has pushed the DSO bid.

[Jeff Van Rhee:]

Got it, fair enough. Okay, great quarter. Thanks guys, appreciate it.

[Robin Raina:]

Thank you.

[Operator:]

Thank you. [Operator Instructions]

[Robin Raina:]

Great. Since we don't have any more questions, I'm going to close the call and thanks, everyone. And we look forward to speaking to you in the second quarter investor call. Thank you. And with that we'll end the call.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.