Ebix, Inc.
Q2 2014 Earnings Call Transcript

Published: 8 Aug 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Ebix Second Quarter 2014 Investor Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Mr. Darren Joseph, Corporate Vice President. Sir, the floor is yours.

[Darren Joseph:]

Thank you. Welcome, everyone, to Ebix, Inc.'s Second Quarter Earnings Conference Call. Joining me to discuss this 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 first 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 results of any revisions to 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 are 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 second quarter 2014 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 a text transcript of this call will be available also on our investor homepage of the Ebix website after 4

[Robert F. Kerris:]

Well, thank you, Darren. And thanks to all on the call for your interest in Ebix. Q2 2014 diluted earnings per share of $0.35 were essentially at the same level as in the second quarter of 2013. For purposes of the EPS calculation, there were an average of 38.6 million diluted shares outstanding during the quarter, as compared to 38.8 million diluted shares outstanding a year earlier, in Q2 2013. As of today, the company expects the diluted share count in Q3 of this year to be approximately 38.4 million. Operating income for the second quarter was at $17.5 million, as compared to $19.3 million of operating income a year earlier, in Q2 2013. Operating margins for this quarter were at 34%, as compared to 38% for the same quarter last year. The operating margins in Q2 2013 were favorably impacted by a $5.8 million reversal of earnout contingent liabilities, primarily pertaining to the PlanetSoft acquisition made in June 2012. In our viewpoint, the true measure of the company's fundamental strength is its ability to generate strong cash flows in existing business. In Q2 2014, we grew operating cash flow to $17.8 million, an increase of $7 million or 65% from the previous quarter and $7.2 million or 68% from the same quarter in 2013. During the second quarter, the company used approximately $42 million of cash for the following purposes

[Robin Raina:]

Thanks, Bob. Good morning. Darren and Bob have discussed the quarter in quantitative terms. I'll try to address it, as usual, on more qualitative but at a specific level. Consistency, strong operating margins and strong cash generation are characteristics that are at the core of Ebix fundamentals. All of them are linked to our high customer retention rates. Ebix has a business model that thrives on providing infrastructure-based On-Demand services and charging for them, typically on a utilities model. It's a model wherein growth of our revenues is linked to the usage metrics of the customer and their own business success. As usage increases, revenue increases and operating margin increase too. In any given quarter, our revenue streams tend to be extremely stable, both subscription and transaction revenues, with the main variability coming out of the amount of professional services in a quarter. Any drop in professional services has to be substituted by increased transactions and/or subscriptions from existing and new clients to ensure that we continue to grow our business. Q2 of 2014 was no different in that respect. Our customer retention rates were exemplary and as stable as ever. However, we had to substitute for sizable revenue drops in professional services on a PPP and PSF lines from the PlanetSoft acquisition and our Pharma businesses. To explain in more specificity. We reported $50.85 million in revenues in the fourth quarter of 2013 and $51.5 million in the second quarter of 2014. Out of it, professional services drop between Q4 2013 and Q2 2014 was $1.83 million quarter-on-quarter from these 2 product lines. When you compare the 2 quarters, you realize that the company's revenue from remaining businesses outside these 2 product lines have cumulatively grown $2.5 million quarter-over-quarter or a growth run rate of $10 million year-over-year. This implies that, once the professional services revenue streams from these 2 product lines start to grow again, our numbers will look a lot better. We have reason to hope that we can improve our revenues from these 2 product lines now. In recent times, the company has agreed on long-term deals with a few key insurance carriers on the PPP and PSF product lines that will get the professional services business back into good territory. That's a good sign for our efforts to grow revenue. We also have made honest effort in our Pharma business to convert the professional services business into a recurring subscription business. That effort will get us high-margin recurring revenues over a period of time, but we will have to compromise on the short-term professional services business in Pharma sector, to some degree for now. At present, we're excited about many areas of our business, namely health E-commerce and content exchanges, PPP- and PFS-related underwriting services, reinsurance exchanges, CRM services and our life and annuity exchanges. These are areas in which we are in the midst of large-sized deals that can make a significant difference to our future revenue streams. We feel good about the organic opportunities ahead of us. In terms of operating margins, the company has continued to be fairly consistent. Our non-GAAP operating margins continue to be consistently at a traditional levels of approximately 38%, if we were to exclude certain recent costs associated with legal and advisory services. We pride ourselves on the strength of our financial discipline and the checks and balances in our cost control systems. In coming days, we intend to continue to look at our cost structure so as to improve operating margins and to make our operations even more efficient. As we grow our top line and put some of the nonrecurring legal and advisory costs behind us, we hope to get our operating margins in the 41% to 42% range. We're always looking to find efficient ways to improve our cost structure, and our recent investments in real estate are a step in that direction. We believe that will allow us to consolidate 3 Atlanta offices, besides consolidating a few other non-core offices in other cities in the U.S. This will help us reduce our cost structure substantially, both on the rental and infrastructure fronts. Our increased investments in lower-cost offshore bases in India and Singapore will allow us to reduce our cost base further worldwide. Bob talked about the recent $150 million credit line. We're highly appreciative of the strong vote of confidence reposed in us by these leading financial institutions. We wanted a credit line that allows us -- that allowed us the flexibility to make share repurchases while utilizing money for working capital needs and to fund our acquisition pipeline. We wanted a credit line that allowed us to do that at highly competitive economic terms. The syndicate of Regions, Union and Silicon Valley Bank put a credit line in place for us which allows us to do that at terms that we are very happy with. In second quarter of 2014, we had an outflow of approximately $42 million towards investments, capital purchases and loan prepayment, and yet we had $34.3 million of cash at the end of the quarter, with the new credit line in place and fund availability of $150 million to $200 million, assuming we exercise the rights for the additional line of $50 million. I've been asked by some of you as to what we intend to do with this available money. The quantum of available money would be substantially higher if we were to model for the cash generation by the company in the next 12 months. Let me promise you that we intend to put this money to good use. To start with, we already have a board-authorized share repurchase plan. Clearly, we intend to put substantial money into share repurchases over the next 12 months. We had to put some of these plans in advance since we were in the midst of negotiating a new bank line for many months now. For us, a share repurchase plan is not about driving stock prices up in the short term. It's about providing long-term value to our investors, who have believed in the inherent value of Ebix fundamentals by reducing dilution and improving diluted earnings per share. We have a number of acquisition targets that we intend pursuing. We have consistently proven that we have the ability to make accretive acquisitions with strong cash flows. We have a strong pipeline of complementary acquisitions in certain geographies that we have eyed for some time now, and we intend to pursue them. Many of you have asked the company for an update on the SEC and DOJ front. The company can report that it has not been asked for any additional information from either the SEC or the U.S. Attorney's Office since 2013. Also, the company is not aware of any further investigative steps by the SEC or by the U.S. Attorney's Office since 2013. On the governance front, the company intends to announce a series of steps to further enhance its controls and strengthen its audit, tax and governance functions across the world. The company's stock testing is presently undertaken by E&Y. We now have E&Y as our tax advisers in India, Singapore, Australia, Brazil, U.K. and the United States. We have a number of other steps planned in the direction of strengthening our audit and internal control functions; more on that in coming weeks. Lastly, let me say that Ebix employees are at the heart of the accomplishments of the company over the last decade and continue to be so. I'm proud of their continued innovation, passion and dedication that make all of these accomplishments possible. That brings me to the end of my talk. I will now hand it over to the operator to open it up for questions.

[Operator:]

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

[Jeffrey Van Rhee:]

Robin, first, as it relates to the fundamentals of the business. Would you talk about the underlying pipelines? We're sort of treading water, flattish year. There obviously have been quite a few distractions and other issues to focus on, but I want to understand what's going on in the pipeline. The revenues, like I said, are roughly flattish, but just can you give us some quantification of the health of the pipe? And then, well, I'll leave it there. I had a few follow-ups.

[Robin Raina:]

Yes, I think, Jeff, first of all, I think, as I explained in my talk, our -- if you look at our revenue streams and you dissect it a little bit more, you'll basically see that we've actually done quite well in terms of growing our Exchange product lines and in growing our revenues. What is starting to happen there is that we have basically been hit on the professional services front on 2 of our product lines

[Jeffrey Van Rhee:]

Okay. And I guess, second question for me. And thank you for the update on IRS, SEC, the various stages and the update, I guess, on the time line of the back-and-forth. What -- from investors sitting here on the outside sort of looking in, what -- you announced intentions to make a number of changes to strengthen internal controls. You mentioned E&Y. There's all these SOX compliance and other work for you. What else can you tell us about the board's efforts overall these months to give assurance to themselves and to outside investors that they've done their own work, as opposed to responding to the IRS, SEC; that they've done extensive due diligence to get to comfort and ultimately, hopefully to communicate that to us investors.

[Robin Raina:]

Jeff, I can't speak for the board here, but I can -- all I can -- I could just summarize it in one line

[Jeffrey Van Rhee:]

And then on the buyback front, what is -- what remains in terms of what's been authorized?

[Robin Raina:]

Bob, do you want answer that? I think it's close to $100 million. I don't have that exact number. It's probably close to $97 million, $98 million that's left. And Bob, do -- will possibly answer that either during the call or offline for you, but I think it's closer to $97 million, $98 million. I don't have the exact number. And having said that, I think one of the good things about our new credit line is, and this is why it took us long and, I think, in-between created a high test of events [ph] where we couldn't buy stock and sell because we once you're in the midst of changing banks, it's a long process. And we couldn't buy stock, and we can't make -- we couldn't have made stock purchases during that period of time. And so having said that, we have negotiated a very flexible line. The banks have been fantastic in supporting us in terms of giving us the ability to do stock buybacks, to make acquisitions, issue dividends. It's been -- in our viewpoint, we're very happy with what we've been able to negotiate. And that, too, at extremely competitive terms.

[Robert F. Kerris:]

Yes. And the figure is approximately $106 million left of repurchase authority.

[Jeffrey Van Rhee:]

Okay. And then Bob, is -- the G&A run rate from this quarter, is that a good number to model going forward?

[Robert F. Kerris:]

Again, there were some -- we continued to bear some of the unusual legal and adviser expenses that we'll expect to come down as we go forward. So we think that this period's operating margin is abnormally depressed. I think, going forward, it would look to be operating margins more in the 38% range.

[Jeffrey Van Rhee:]

Okay. And then the Health Magic acquisition, I don't believe we got any details. Can you fill in some gaps in terms of what the impact there is revenue-wise? I think we've got the purchase price.

[Robin Raina:]

That is extremely [ph] small. It's a meaningless operation. It's an extremely small operation as of now. At the same time, this is an operation where we expect a lot of growth. Our -- the reason we bought it was pretty simple, Jeff, that basically, when you look at Healthcare Magic, we, today, at Ebix have 25 million employee lines on our health and wellness, on our back-end platforms, on the EbixEnterprise and the platforms. So when you consider that, the way we look at it, ask a doctor or the AAD [ph] service that we are launching -- and we're launching a number of products around it. As we launch these, we basically believe that the -- our pricing model is going to be, it's going to be a few dollars per month per employee that we want to charge. So we feel this is a pretty good business line to pursue. So we are -- right now, we're pursuing deals with insurance carriers. We're pursuing deals with large health and fitness firms in the country who have millions of users. We're doing deals with the large retail outlets and companies and so on and so on. So we are in the midst of what believe this is a big opportunity. At the same time, when we bought it, it was, basically their entire business, it was a pure B2C business, and the numbers are fairly meaningless right now.

[Jeffrey Van Rhee:]

Okay. Last one for me, and then I'll let you work through the queue. The timing on the full -- you mentioned 41% to 42% operating margins as a goal to get back to. I know you don't guide on any financials, but can you give us a sense of the initiatives that it takes, that you're going to put in place to drive those margins? Are these initiatives that will be put in place and should yield results in 2, 3, 4 quarters? Or is that kind of operating margin largely dependent on revenue growth and the cost savings? So just a sense of timing there.

[Robin Raina:]

So Jeff, there's 2 things that can happen on that operating margin. So I will give you 2 example. One is -- on one side of things is what is linked to that operating margin? There's, one, our legal costs start to go down. Obviously, we're very hopeful that, that will happen. But on the other side, you absolutely rightly said that even if that doesn't happen but, in the meanwhile, our revenue initiatives that we feel good about right now start to happen, then we'll get back there. So I think it will all be a function of I do believe that, over the next -- I think, over the next 3 or 4 quarters, I would expect then us to be getting in out there. We also have this big area of facility consolidation that we're working on. That will also help us. So we have a number of cost measures. So it's both sides. It will be a function of cost reduction on -- it's even nonlegal costs you see, internally as companies grow. I believe that we still have -- Ebix as a company has a decent amount of fat now existing within the company, and we got to keep doing that exercise of churning out [ph], looking at our inefficiencies and making ourselves more efficient. We're in the midst of one such exercise. But on the other side, we have all the facility consolidation, then we have all the extraneous legal and advisory costs. Some of those are high. And we believe that, as we go forward, they should start to come down. But on the other side, we have revenue growth. When you consider all of those, the -- even if all of those don't happen, and some of those happen, I think we can get there.

[Operator:]

[Operator Instructions] And pardon me, speakers, I'm not showing any further questions in the queue at this time.

[Robin Raina:]

Great. I think we'll -- this brings us to the end of the investor call. I look forward to speaking to all of you at the end of the third quarter. And thank you, all.

[Operator:]

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