Ebix, Inc.
Q3 2013 Earnings Call Transcript

Published: 8 Nov 2013

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Ebix Inc. Third Quarter 2013 Investor Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference to our host, Mr. Steven Barlow. Sir, you may begin.

[Steven N. Barlow:]

Thank you, Eric. Welcome, everyone, to Ebix's Third Quarter 2013 Earnings Conference Call. Joining me to discuss the quarter is Ebix Chairman, President and CEO, Robin Raina; and Ebix Senior Vice President and CFO, Bob Kerris. Following our remarks, we will open your call to questions. Let me remind you that the primary purpose of today's call is to provide you with information regarding our third quarter 2013. However, some of our discussion or responses to your questions may contain forward-looking statements. These statements are subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize, or should our assumptions prove incorrect, actual company results could differ materially from these forward-looking statements. All these risks, uncertainties and assumptions, as well as other information on potential factors that could affect our financial results are included in our reports filed with the SEC, including our most recently filed Form 10-K for the year ended 31st December 2012, under the heading Risk Factors, as well as in reports that we subsequently file with the SEC. During the course of this call, we may reference certain non-GAAP financial measures to provide a greater understanding of our business or financial results. Management, at times, may review certain non-GAAP financial information and metrics in evaluating the company’s historical and projected financial performance and believe that it may assist investors in assessing its ongoing operations. The presentation of this additional information is not meant to be considered in isolation, or as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Please be advised that we may or may not update these additional metrics in future calls. Our press release announcing the third quarter 2013 earnings 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 the text transcript of this call will be available also on the Investor homepage of Ebix's website after 3

[Robert F. Kerris:]

Thank you, Steven. Thanks to all on the call. We have always believed that the company's ability to generate sustainable robust cash from its operating activities is one of the most important financial metrics of how Ebix runs its business. With that being said, cash generated from operations during Q3 2013 was $12.9 million, up 22% from $10.5 million in Q2. During the 9 months ending September 30, 2013, the company generated $37.8 million of net cash flow from operating activities, a decrease of 30% as compared to the $54 million in the first 9 months of 2012. This decrease is due to a lower operating income, net of noncash items, primarily caused by certain nonrecurring legal and corporate expenses. We are focused on taking our operating cash flows, though, to much higher levels in the coming year. The company's working capital position increased $12.3 million to $24.7 million at September 30, 2013 versus the $12.4 million as of September 30 -- excuse me, as of June 30, '13, due to lower trade payables and accrued liabilities and reduced current obligations for acquisition earn-out liabilities. The company continues to hold substantial cash, cash equivalents and short-term investments, which in aggregate had a combined balance of $37.7 million at September 30, consistent with the $37.4 million held at year end 2012. This is in spite of the fact that during the last 9 months, the company has reduced debt by $22.2 million; paid $13 million in taxes; spent $4.7 million on a strategic business acquisition; paid $3 million for earn-out obligations and actual prior business acquisitions; used $2.4 million to repurchase 251,000 shares of our common stock; and, finally, paid $2.8 million in dividends. As of September 30, the company's net debt, which is our outstanding debt balances less our cash and cash equivalent balance, stood at $22.2 million. Our bank revolving line of credit was $22.8 million as of the end of the quarter, while the term loan balance was $34.3 million. Since this quarter end at September 30, we have also further reduced our term loan by an additional $2.4 million. Total bank debt then today stands at $54.8 million. Ebix presently has access to a total bank line of $100 million out of which $45.2 million is unused at present. Our net debt, again, as of today, stands at $16.5 million then. In summary, our financial position remains strong, with $38 million in aggregate cash and cash equivalents and short-term investments, $25 million of working capital and a debt leverage ratio of only 0.75. As for legal matters, Ebix's income this quarter was impacted by a $4.23 million contingent liability booked against earnings as our current estimate of the potential liability in the federal class-action matter. Also, with respect to the earn-out suit related to our 2009 acquisition of Peak, the company and the other parties for the action recently reached a mutually agreeable resolution, which resulted in the dismissal of the action with prejudice. Finally, on the tax front, as previously mentioned, the company paid $13 million in cash taxes in the first 9 months of 2013, with $8.3 million of the payments being made in India in the form of advance minimum alternative tax payments that would be used to fund future tax obligations in that country from 2015 onwards. We also increased our FIN 48 tax reserves by another $1 million in the quarter and by $3.4 million over the last months -- the last 9 months, to address potential uncertain tax positions. Our remaining available U.S. NOLs at present is $50.8 million as of September 30. Ebix will be filing our 10-Q later today. And at this point, I will now pass the call on to Robin. Thank you.

[Robin Raina:]

Thanks, Bob. Good morning to all of you. Let me first start by summarizing the quarterly results. As elaborated in the press release, I believe that these results demonstrate that we are moving in the right direction. Considering the challenges that the company has recently faced, we are pleased with the progress we made in Q3 of 2013. On a constant currency basis, the company revenue grew sequentially from $51.5 million in second quarter of 2013 to $51.9 million in third quarter of 2013. We continue to strengthen our recurring business, sign new deals and with key named accounts which included Walmart, Swiss Re, Sanofi US Services, Pershing LLC, TD Ameritrade, Ohio Cooperative Exchange, Purdue, Bayer, Pfizer, Glaxo SmithKline, Jazz Pharma, Northeast Utilities Service Co., Thai Re, HSBC, Zenith Insurance, Four Seasons Financial Group, LifeMark, American General, Mass Mutual Insurance, Federal Reserve Bank, Los Angeles County Office, eClinical Works, Security Life, Truven, Merrill Lynch, Consolidated Health Plans, AON, Sempra Energy, Automobile Club of Southern California, QBE America, City of Roseville, MetLife, Guardian Life, Nationwide Insurance, Prudential, AIG, Wells Fargo and Omaha Insurance Company. This list of names is a sample representation of contracts signed by the company in the third quarter of 2013. In the last quarter conference call, I talked about a variety of possible key deals that the company is pursuing. I'm pleased to report that we were successful in closing a few of them in Q3. Our focus has always been on pursuing deals that are recurring in nature and these deals were no different. In Q3 of 2013, the company signed 2 material 5-year recurring revenue contracts with one of the largest brokers in the world. With the signing of these 2 contracts, this client has the potential to overtake Ebix's current largest client in terms of annual revenues generated for Ebix in future years. We continue to pursue a number of other deals that can have a material impact on our revenues in future years. One of those deals involve us aggregating the entire market in a specific insurance area in a large Western country on our exchange and become the utility of choice for all the brokers and carriers. While there is no guarantee that we will ultimately secure this business, yet we are pleased to be the only player who has the ability to aggregate the market and offer the solution in that country. We believe that our end-to-end solution set and cloud-based solutions place us in a unique position with respect to any such opportunities. We believe our growth in future years can be fueled by our end-to-end solution set and our competitive positioning in certain areas of insurance. While we have always believed in a highly diversified product portfolio and would like to see growth in each of the areas addressed by us, a few areas deserve special mention

[Operator:]

[Operator Instructions] And our first question comes from Jeff Van Rhee of Craig-Hallum.

[Jeffrey Van Rhee:]

Robin, a number of questions. First, just to follow up on that last comment you were making about capital allocation. Can you expand on that a little bit? Just specifically, what ratios are the triggers for us watching from the outside that once you reach the level of x, you'd be comfortable then buying back stock? And if you're not willing to be that specific, can you at least narrow it down to just the ratio, in particular, and how to think about that?

[Robin Raina:]

Well, I think I would, rather than get too specific about it, I think every -- some of these ratios are a function of net income numbers. And when you look at the net income numbers, add your cost in certain areas, these nonrecurring costs go up. Your net income, obviously, is hurt and some of these ratios are hurt. Now having said that, we have been in full conformance with these ratios. And again, it comes down to the comparative comfort that a company would like to be in. So having said that, as we -- as some of these recurrent -- nonrecurring costs go down and our income starts to come up, we'll review more stock buyback.

[Jeffrey Van Rhee:]

Okay. And then over to the accrual for future taxes of the IRS. Can you walk through just your thinking in terms of the timing and amounts of these accruals? What are the triggers in terms of the way you're thinking about it? Obviously, I'm thinking about the IRS audit ongoing. You've increased your accruals but it's been very modest in that context. So I'm just trying to get a sense of whether or not that's a reflection of things you feel like you're aware of based on feedback from the IRS, as opposed to what else might be the triggers for those modest increases, both the amount and the timing.

[Robert F. Kerris:]

And this is Bob. I'll take that question. The increase in our reserve, FIN 48 reserves, were potential uncertain taxes issues. It has nothing to do with anything forthcoming from the IRS audit. It's just strictly our assessment of current operations and current tax provisions and positions we're taking in our tax provisioning and our tax returns. That's all.

[Jeffrey Van Rhee:]

So does that mean it's a -- is that based on a conclusion that something about the existing tax regime changes, namely, you're making the assumption that your effective rates are going to climb. I mean, I think maybe asked differently, you've given in the past some thoughts of directionally where you expect the tax rate to go over some period of time. Could you help us in that respect?

[Robert F. Kerris:]

Again, it's not a factor of concerns we have that affect the tax rate. It's rather just -- again, this all surrounds the kinds of announcements that come in guidance around certainty or lack thereof, perhaps, for certain positions that's being taken on your tax positions and on your tax returns. That's all.

[Jeffrey Van Rhee:]

Okay. So the second part of the question was, then, do you have any thoughts as to how we should think about the effective tax rate over the next year or 2?

[Robert F. Kerris:]

I think that you should expect just, continuously, the tax rate to rise modestly as we go forward.

[Jeffrey Van Rhee:]

Okay. All right. And then, Robin, you called out a lot of brand-name customers and some big deal signings. Specifically, the 2 5-year deals with an existing customer that can make that customer your largest, maybe could you use those as an example and maybe expand on it in 2 ways. What's the timing to revenue on those deals and, contractually, how are those deals structured? Are there guaranteed minimum revenues or are they purely transactional? Just help us understand those 2 deals as kind of a proxy of what's going on.

[Robin Raina:]

Yes. You see, I hate to go into specifics of the deals since we have a confidentiality agreement with this player. At the same time, I can talk at a high-broad level. So if you look at these 2 contracts, specifically the deal we are discussing, one of them is a pure subscription-based kind of a contract where the revenues are fairly locked, simply because that it's subscription-based. It's on the back-end side of our business and it's a global deal. But then, the second deal, which is more like an exchange deal, has a portion of it as subscription, a portion of it completely linked to transactions. However, the good news is, this particular player conducts 28% of the business in that particular market. So as long as they're putting their business on our system, there's a good chance we're going to get that revenue.

[Jeffrey Van Rhee:]

And so with respect to just the components that are locked and not transactional in nature, when -- this 5-year contract, when does that start to roll into the quarterly results?

[Robin Raina:]

2014.

[Jeffrey Van Rhee:]

Okay. And could you be more specific? Is this early, late, or you just really don't know?

[Robin Raina:]

Early. It starts beginning Jan. of 2014. So as you go forward, you'll start seeing revenue come out of these contracts.

[Jeffrey Van Rhee:]

Got it. Okay. Great. And then, obviously, I realized there's limitations to what you can comment. Is there any update whatsoever with respect to either SEC, DOJ, on -- well, let me start with that one and then a couple of other follow-ups.

[Robin Raina:]

With respect to SEC and DOJ, I think we are under obligation. If there is anything happening, we will absolutely be disclosing it. So I think we're -- we will -- as we go forward, we'll continue to tell you. It's an issue where if there was anything material or anything that we -- was anything negative, we would absolutely be disclosing it. So we're not -- at this point, I think that that's where I would stop at. But, basically, we're absolutely very respectful of the regulatory bodies and anything that we knew of has already been disclosed.

[Jeffrey Van Rhee:]

Okay. And then, obviously, the 2 suits and the progress in putting those behind you, it looks very encouraging. At face value, it looks like big steps. The specifics of the Peak, let -- maybe coming at it differently, in the past you've disclosed contracts that you've deemed litigation and potential litigation damages that you believe are potentially material all the way down to $1.5 million. Obviously, you're not disclosing what the terms of the settlement are of the Peak suit but asking it differently, in the past you have seemingly disclosed things of $1.5 million and up. So would that then be fair to make some conclusion that if it was that level or higher in terms of settlement, we would see numbers in the filings or...

[Robin Raina:]

You're absolutely correct, that if it was a number of any materiality, it would be disclosed. So clearly, the number is absolutely immaterial.

[Jeffrey Van Rhee:]

Okay. Material or immaterial?

[Robin Raina:]

Immaterial.

[Jeffrey Van Rhee:]

Yes. Okay. And then back to the fundamentals. The PlanetSoft acquisition, you had commented on some pushouts. And obviously, you've had some reversals of earn-outs. But specifically, the large transaction your commented in Q4 of '12 was pushed. Can you just expand, refresh me on what that -- the reasoning behind the pushouts and the delayed customer acceptance there?

[Robin Raina:]

It was -- basically, it's all related to customers and their budgets and their internal way of thinking. And 2 of the projects got delayed and that, obviously, hurt our revenue streams. And I think, we, in Q4 of 2012, we actually disclosed it, now are hopeful that it's going to start. And the initial plan was that by the second quarter of 2013, those projects will start again. Unfortunately, they haven't started as yet. So that's basically that.

[Jeffrey Van Rhee:]

And just a follow-up on that. The deals themselves, are these situations where they've changed their mind and are going in a different direction? Is it just purely them getting the budget...

[Robin Raina:]

Correct. It's nothing associated with going to competition or us losing the deal. It has nothing like that. It's nothing like that, it's simply internal decisions, related to being ready. When you take these implementations, these are large implementations. Your internal IT has to be absolutely ready. They have to do a lot of internal work before Ebix steps in and takes you from there. Until their internal work is ready, they are not ready. And that's basically the reason that those implementations haven't started. And sometimes, it's also to do with the budget ratios internally. It's a combination of both.

[Operator:]

[Operator Instructions] And I'm showing no further questions. [Operator Instructions]

[Robin Raina:]

Okay. Since we don't have any questions...

[Operator:]

And it looks like we have Jeff Van Rhee queuing up once again.

[Jeffrey Van Rhee:]

Great. Last couple for me then. The -- just with respect to the growth, realizing you don't dial it in, in terms of giving forward guidance, you commented to the effect of the sequential growth at constant currency. At this point, based on what you see in your pipeline, do you think that's sustainable, namely we should grow sequentially? Asked differently, was there anything onetime in nature here that drove that sequential growth in the quarter?

[Robin Raina:]

Jeff, we would definitely like to see sequential growth and we would like to see the revenue go up from here. These have been, as you know, these have been challenging times for us. Considering the challenges we have faced, I'm pretty pleased with where we are with respect to revenues. Meaning, we haven't been removing any clients, we have continued to retain our clients, we have continued to sign new clients. The nature of our revenue stream is that some of this revenue kicks in over a period of time. Some of our -- our revenue quarter have been a lot of higher except for us, 2 main reasons, one is -- one, we already talked about the exchange rate issues; the second is -- which we don't have control over, the strengthening of the U.S. dollar -- but the second one is, we -- there's quite a bit of professional services work that we aren't doing anymore and that's the nature of -- nonrecurring nature of professional services and that's one of the reasons why we don't go after professional services business. So having said that, I -- we are very hopeful that as we go forward, our revenue streams will continue to improve. Based on what we see today, we feel good about the future and time will tell how we -- how well we do.

[Jeffrey Van Rhee:]

Okay. And last one for me then. The specific country deal that you cited was a large -- I think you narrowed it to a North American country, if I heard that right. Can you just expand on these -- that in particular? I mean, obviously, I'd love a sense of how material those kinds of contracts can be based on discussions you've had or experienced from this one -- that transaction thus far.

[Robin Raina:]

Yes, that -- the deal, if you're talking about the aggregation deal that I gave an example of, that's not a North American deal. That's outside the U.S. Having said that, basically, it's -- those deals either can be large. To give you some examples -- it's just an example, a 5-year contract, could be about $75 million to $80 million. Again, these are -- again, as I have always said, there's no guarantee to any of these deals, but we'll keep making an effort. And hopefully -- these are transformational deals for us, but they also are binary deals. Either they happen or they don't. And so, we're going to keep our fingers crossed and keep tugging a lot, pushing along and, hopefully, we can close some of these deals.

[Operator:]

And we have no further questions.

[Robin Raina:]

Thanks, everybody, for joining in, in today's call. We appreciate everybody joining in to the call. Thanks, everybody. And with that, I'll close the call. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. Thank you for your attendance. You may all disconnect. Have a great day.