Ebix, Inc.
Q1 2015 Earnings Call Transcript

Published: 8 May 2015

[Operator:]

Good day ladies and gentlemen and welcome to the Ebix Q1 2015 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 follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Darren Joseph, Corporate Vice President. You may begin.

[Darren Joseph:]

Thank you. Welcome everyone to Ebix Incorporated’s 2015 first 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 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 date of this presentation, and we undertake no obligation to revise or publicly release the 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 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 2015 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 Web site, www.ebix.com. The audio and the text transcript of this call will be available also on the Investor homepage of the Ebix Web site after 4 p.m. Eastern Standard Time today. Let's start by discussing the results announced today. Bob and I will talk about the company from a financial perspective, and Robin will sum up and provide some added color on the quarter and the times ahead of us. Revenue in Q1 2015 increased 24% from a year ago to 63.8 million. On a constant currency basis, Ebix’s Q1 2015 revenue increased 28% year-over-year to 65.7 million as compared to 51.4 million in Q1 2014. Also on a constant currency basis, sequentially, the revenue increased 7% to 64.9 million as compared to 60.6 million in Q4 2014. In Q1, our exchange revenues continued to be the largest channel for Ebix accounting for 73% of the company’s revenues. The year-over-year revenues increased as a result of revenue growth from life, annuity, underwriting, CRM and health e-commerce services in addition to revenue growth generated from the company’s 2014 acquisitions of HealthcareMagic, VERTEX, Oakstone partially offset by the drop in revenue from international locations as a result of the strengthening U.S. dollar and the decrease in revenues from the company’s pharmaceutical and P&C carrier backend operations. Life exchange revenues grew 13% year-over-year in Q1 of 2015, while annuity revenues grew 3% and underwriting exchange revenues grew 15%. CRM revenues grew 2% in the same year, over a year period. Health content revenues were up 84% aided by the recent acquisition of Oakstone’s continuing education business. RCS revenues were up 255% because of the recent acquisitions of VERTEX and i3 consulting businesses. The revenues in Q1 of 2015 were primarily impacted negatively by the recent decision of the company to scale down its life sciences division as a part of its focus on increased margins resulting in pharmaceutical group revenues being [50%] [ph] lower year-over-year. The carrier business was down 16% year-over-year due to reduced professional services associated with certain P&C carriers going into production as also lesser emphasis in the company and non-reoccurring license and professional services based product sales. The year-over-year exchange and broker revenues were also impacted by the strengthening of the U.S. dollar that resulted in Q1 2015 revenues being negatively impacted by 1.9 million. In-spite of Australia reporting one of its strongest top-line revenue performances ever in local currency, its revenues year-over-year were down by approximately 1.2 million U.S. since the U.S. dollar has appreciated 12% year-over-year as compared to Australian dollar impacting Australian revenues adversely. Our broker business revenue which is primarily international based decreased by approximately 750,000 in Q1 2015 as compared to Q1 of 2014 due to strengthening of the U.S. dollar. Our carrier P&C policy administration revenues dropped year-over-year by approximately 550,000, due to reduced professional services associated with certain P&C carriers going into production, as also lesser emphasis in the company on non-reoccurring license and professional services based product sales. I will now turn the call over to Bob.

[Robert Kerris:]

Thank you, Darren, and thanks to all of you on the call for your continued interest and support of Ebix. Q1 2015 diluted earnings per share of $0.51 were up $0.11 or 28% from the first quarter of 2014. For purposes of the first quarter 2015 EPS calculation, there was an average of 36 million diluted shares outstanding during the quarter as compared to 38.6 million diluted shares outstanding in Q1 of a year earlier. Assuming we look at the anticipated impact of all stock repurchases made today as if they have been in-place at January 01, 2015 of this year, the diluted share count would be 35.2 million implying the diluted EPS would have been $0.52 or $0.01 increase over our reported numbers. As of today, the company expects the diluted share count for Q2 of 2015 to be approximately 35.2 million shares. Operating income for the first quarter of this year was 20.5 million as compared to 19.4 million of operating income in the first quarter of 2014. Ebix’s Exchange business continued to have strong margins of 35% while the recently started Ebix Consulting Group had margins of approximately 16%, cumulatively resulting in the aggregate and 32% operating margins for first quarter for the full company. The company recently undertook several steps to improve operating efficiency including increasing use of offshore resources in many areas of the business such as the Life Sciences group and so we expect our operating margins to improve going forward. Operating cash flow for the first quarter as reported was actually a net cash outflow of 7.3 million. However, before the payment of the IRS settlement and legal fees in connection with the securities litigation, it would have been net cash inflow of 13.9 million as compared to 10.8 million for the first quarter of 2014. First quarter 2015 was negatively impacted by the previously disclosed one-time cash payment of 20.5 million, which included interest of 1.6 million in regards to the settlement of the assessment of the company’s internal revenue service audit for its tax returns for the year 2008 through the 2012. In addition to the above, the company also returned 25 million to our shareholders in the first quarter of 2015 as a result of $22 million share repurchase, reacquiring 995,000 shares and dividend payment in the amount of 3 million for the quarterly dividend of $0.075 per share. The company also spent 1 million towards the acquisition of [indiscernible]. During the past quarter, the company drew 15 million from our revolving credit facility with Regions, leaving approximately 105 million of available borrowing capacity from this recently expanded commercial banking credit agreement, which together with our aggregate cash, cash equivalents and short-term cash deposit investments in the amount of 20.7 million as of quarter end provides Ebix with approximately 132 million of financial resource to support the continued profitable growth of the company both organically and through accretive acquisitions, to efficiently integrate recent business acquisitions and repurchase shares of our common stock. This cash flow model in our view validate the sustainable value of Ebix's business model. Furthermore as to keep balance sheet metrics and the health of our balance sheet, as of the end of the first quarter our working capital position stood at 35.2 million, our current ratio stood at 1.74 and our cash receivable was a healthy 64 days. Finally, Ebix’s Form 10-Q will be filed this coming Monday, May 11th. I will now pass the call to Robin.

[Robin Raina:]

Thanks Bob, good morning. Before I get started, I just wanted to say that I have a bad throat, so please bear with me. Darren and Bob have already discussed the quarter in numerical and qualitative terms. I will discuss the quarter briefly and then focus my talk on what I see ahead of us. Let me first address the top-line. On a constant currency basis, Ebix’s Q1 2015 revenues increased 28% year-over-year to $65.7 million as compared to $51.4 million in Q1 of 2014. Also on a constant currency basis, sequentially, the revenue increased 7% to $64.9 million as compared to $60.6 million in Q4 of 2014. During his talk, Darren talked about the drivers behind this top line growth in Q1 of 2015. The area of life exchanges appears to be a good growth driver of top line in the short and long term future. In the 2014 Annual Investor call, we had announced the signing of four new enterprise deals with large carrier in the life exchange area. That trend continued in the first quarter of 2015 with three large carriers deciding to deploy our enterprise life exchange platform. We expect to continue on the momentum that we have built in this area. We signed new contract with clients in every facet of our business including RCF broker systems, health ecommerce, health content exchanges, underwriting exchanges, annuity exchanges, backend system and consulting contracts etcetera. I’m pleased that our top line grew in spite of the currency rates hurting us substantially to the tune of 1.9 million year-over-year and the concept exercise we carried out in Q1 2015 to move our life sciences and pharmaceutical business completely offshore to ensure that the business generated higher margins. This decision in the short term came with the substantial drop in Q1 2015 revenues from the life science of growth, until our offshore operations were ready to handle the new workload. I can report that we have now successfully transitioned the work to our offshore center and we now have the ability to service scaled up revenues from this business at sufficiently improved margins. We are pleased with our pipeline of new opportunities and the healthy list of clients who are in the deployment queue. We are in the midst of a number of large value deals that can have a material impact on our top line. These deals are in the area of e-health, e-governance, enterprise life exchanges and reinsurance. While I cannot discuss these deals on specifics for competitive reasons yet I’ll try to cover the opportunities at a broad level. Let’s first start with the news of Ebix having being selected to deploy an end-to-end London Market Exchange solution by PPL for the entire London market. There has been a lot of speculation on the size of the deal, the public announcement, the timeline for the contract and the backing that the aggregation exchange will receive in the London market. Firstly, let me state that PPL is a body that has the backing of all the key London market players who control premiums in the market. PPL Board comprises all the leading insurers, leading underwriters and broker associations. Super brokers like Aon, Marsh, Willis and JLT with Lloyd serving us the observer. PPL represents the mic of one of the largest insurance markets in the world with Accenture serving as the advisor to them for the selection process. Let me confirm that we are at very advanced states of contract finalization with PPL, while PPL is working through the cost allocation with its 150 plus key market participants. This is the first deal of its kind in the world insurance market where in all the market participants will be engaged on one common aggregation exchange. Accordingly, this involves complex negotiation to ensure that the rights of all participants are protected. We believe that this is a highly prestigious and strategic exchange that’s going to show the way to the rest of the world insurance market. While we cannot reveal the size of the contract at present let me just say that the five year contract is likely to have substantial guaranteed annual revenues associated with it from inception as the intent is to aggregate the London market on this exchange. We expect to make a public announcement on the details of the arrangement jointly with PPL, once that contract is formally signed and we have worked out the announcement details jointly with PPL. We are also presently in the midst of a number of deals in the area of e-governance and e-health that are even larger in size than the PPL deal that I just talked about. We have a very strong pipeline of large opportunities in the government sector in international market, which can have a big impact on our topline. To give you an example of the scale of these opportunities, one contract in the government sector can be worth $25 million in one year for Ebix. While there are no guarantees that we will secure any of those large size contracts, yet we believe that we are well positioned to pursue such opportunities. Some of these large size deals involve a consortium of vendors working together with Ebix as a lead bidder in the consortium. As a lead bidder we are teaming up bid, a few of the big four consulting firms to pursue such opportunities. For example, we are presently pitching various versions of state funded healthcare to government in certain international geographies as a infrastructure end-to-end technology and systems integrator player. These opportunities involve connecting 100s of state funded hospitals with insurers to manage the health insurance and medical needs of people below a particular level of income through a state funded program with Ebix providing the entire backend infrastructure. We're also bidding on an opportunity to provide a national health portal through the government of our country with patient education, health PR, health media, TV planning and execution etc included as a part of the deal. Two quarters back I had said that we are focused on ensuring that by fourth quarter of 2015 Ebix has an annualized run rate of $250 million to $260 million. Our Q1 2015 results show that the annualized Q1 2015 revenues translate to an annual run rate of $255 million already. I am accordingly revising our Q1 2016 annualized run rate goal now to be $300 million. 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 aided by all the growth initiatives that I discussed as also by our acquisition strategy. Now, let me talk about our aspirations as regards earning growth. We believe that we can grow our earnings by following a multi-pronged plan. One, growing our exchange, topline organically through the initiatives discussed earlier. We believe that topline growth will be accompanied by incremental operating margins as the exchange business model delivers increased margins with each new deployment beyond a threshold level. Two, being opportunistic and making large accretive acquisitions of complementary insurance and financial services in international markets, we believe that the strengthening of the U.S. dollar provides us with the increased ability to get a lot more in international markets at present. Also, our ability to streamline businesses allows us to generate margins at a traditional high operating margin levels sooner rather than later. With past of that being at a historical low the acquisition has the potential of being relatively more accretive now. Three, not using stock as an instrument to make acquisitions. We are not intending to use stock as an instrument to make acquisitions, as the cost of stock is a lot more than the cost of debt and it reduces accretive nature of an acquisition especially with stocks, with our stock trading at low multiples at present in our view point, we do not feel comfortable using Ebix stock as an instrument. Four, continued use of our operating cash to repurchase our own stock back. The company repurchased 994,869 shares of the company's common stock in the first quarter of 2015, while the company has repurchased an additional 289,365 shares of the company's stock since April 1, 2015. On 25 August 2014 the company announced its intent to purchase up to 80 million dollars of shares over the next 12 months. I'm pleased to report that we’ve already repurchased 3.54 million Ebix shares for $65.6 million since that announcement in approximately eight months period. We intend to continue the share repurchase plan for the next few years. Until our Board believe that our stock is trading at multiple that suite our company with our operating margin levels, operating cash flow levels and recurring revenue characteristics. Five, continued focus on high margin services being serviced from low cost high quality offshore centers. All of this allows us the opportunity to set a goal of increasing our margins and earnings per share by as much as 50% in terms of earnings from the present levels sometimes in 2016. Again this by no means this guidance for diluted EPS, but an aspiration goal for the company. As Bob conveyed during his talk, we have access to $132 million of financial resources as of March 31, 2014 in the form of cash and cash equivalents and access to a bank credit facility. This $132 million number does not include the prospective cash flows generated from operations by the company over the next 12 months. Thus, we believe that we have the financial resources to carry out all the growth initiatives discussed here with a goal of delivering improved diluted EPS and increased shareholder value. Lastly, let me say that the 2400 plus 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 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 Jeff Van Rhee of Craig-Hallum. Your line is now open.

[Jeff Van Rhee:]

Robin, the multiple sizable deals you referenced that clearly could move the needle, can you just expand a bit further competitive landscape? Who do you typically see in those type deals and then also any clarity you can give us, I know it sounds like there were several of them in there that you’re talking about, but some sense of timelines? Are these multi-year cycles? Are they cycles that are relatively mature, just a little better sense of where we are in those cycles?

[Robin Raina:]

Yes, Jeff, first of all let’s talk about the competitive landscape. Because we’re talking about the variety of deals, these deals involve variety of factors, so competition will tend to be different. In some of the larger deals in the area of eHealth, the competition is going to be – I don’t want to name players here, but these are large system integrator players that we all are familiar with across the world. We also at times will deal with – the competition would be a consortium, so for example I’d just give you an example of one kind of the deal where Ebix would be a lead bidder and we would have also other small software vendor for a particular solution set because the overall solution is complex. Also as a consortium partner, there would be a hardware vendor as a consortium partner and then there would be a big four form providing some of the data center for example for that particular requirement with Ebix being the lead software player, lead system integrator, lead bidder in the whole process. You would have – our competition will tend to be similar who would bring in consortium to play. Now we believe we have an edge in some of these deals simply because of the expanse of services we provide, because of our ability to provide a solution that on day one can exhibit that we already have the largest number of pieces of what they are looking for. So we do feel that we’re well positioned on that front with respect to these deals. So the competition would be, at times you could have a big four – another big four player teaming up with another large system integrator player, another insurance, large financial services player, at times a pure E&M, a pure project shop, pure large company who just specializes in doing mercenary software application jobs, project and things. So in terms of timing, to address your next question, in terms of timing these deals are, are deals which don’t go on for years in terms of decision time. If your question is related to the timing of a decision, these decisions can happen anytime, they could start happening in the next 90 days or they could take the next, I mean basically there are a lot of deals out there, decisions will continue to happen with respect to whether we win or lose, they will be decision that will continue to happen.

[Jeff Van Rhee:]

Okay, and then one point of clarification along the lines of the big deal. The PPL, you referenced here, just clarify for me last quarter when you referenced that you said you could confirm that you had won it and in this call you said you’re in final contracting terms or something similar to that. Can you just walk me through the differences between those two?

[Robin Raina:]

So the difference between the two is that yes we’ve won the deal, we’ve been officially notified that we have won the deal at the same time basically what happen there this is a deal where all the money is coming in from PPL to us. And PPL in turn has to have constituents out there, who are, they have to allocate all that cost out with everybody else. So they are somewhere in that process. So what happens when the deal like this is that you have to have back-to-back agreements with all the players. And so somewhere we are in the process of that in that, of that contract finalization. So the first step of it was running through a complete detailed RFP which [Accenture ran] [ph], the second step was conveying the decision to one of the bidder that hey you’re out, to one of the bidder that yes you’ve been selected. The third step of it is finalizing the contract, we believe we are in a very advance stages of getting that finalized. I think parallely the basic delay is not associated with the contract finalization. It is with respect to, I wouldn’t even call it to delay it’s basically when you do a deal of this nature, you have to make sure that there rights of everybody are protected and they’re doing the right thing at the back that’s where we are.

[Jeff Van Rhee:]

Couple of margin questions. You talked about Ebix Consulting at 16% gross margin, obviously it’s clearly out of the norm giving your very intense focus on margins in the past. So talk to me about, I guess two things margin related, one, where can you take that the Ebix Consulting margins in general and then two at a higher level, as you look at the overall business, what are the puts and takes as we navigate through 2016 that would push operating margins overall higher or lower?

[Robin Raina:]

I think the first question, let’s talk about a use, talked about 16% for Ebix consulting. Now that’s an operating margin not a gross margin. I think by mistake 16% gross margins. So that’s operating margin as far as consulting benefits concern. Now coming back to it, I mean you will see that overall, I think I’ll address one more different question that you will see that a gross margins as overall will look a little bit lower, I think at 71% for example. And that’s primarily because so what will happen is, that really does not reflect anything about operating margin, simply because when you buy, when you have a consulting business, a consulting business across services going to be very high. At the same time, in a consulting business, you don’t really have any other costs, the remaining costs are so minimal that your overall operating margins, it doesn’t really reflect on the operating margin. But coming back to what is our goal with respect to the consulting business? I think our first goal is to take that 16% or 25% margin. We do believe, we can take it there, we have actually made or taken a lot of steps already in that direction and we do think that we’re going to get there sooner or rather than later that’s the first answer do it. Where can we ultimately take it? We do believe that there is a place for a strategic consulting player in the market, part of it is we believe the reason we entered this market, when Ebix is an end-to-end player, we want to be instrumental in decision making, in carriers, in associations, in defining what are the technology trend and as a consulting player, it gives us the business process reengineering which gives us the sheet at the table in terms of BPR, in terms of business process engineering making decisions. Having said that, when you look at niche forms in consulting, we are not going to compete with some of the system integrators or some of the normal software project players coming out of different destinations from across the world, we are niche player, our portage insurance, our portage healthcare, our portage finance. We’re going to focus on these three niche areas and as we get more deep into it we do believe we can charge much higher rates than other simply because we bring that different level of knowledge, we bring a different level of successful knowledge of having done that rather than just providing a development body to somebody, that’s not our focus. So, having said that, we do believe that there the margins can be a lot higher than 25%. Now, with respect to I think, what was the last part of your question?

[Jeff Van Rhee:]

The overall, so roll it up, what is the overall EBITDA or operating margin front looks like in the next few years in terms what are pluses and minus are, how do you think about that?

[Robin Raina:]

So, we feel that we want to be absolutely back to the 40% kind of a range. We believe that we’re going to get there, part of it is that we believe that if we, some of the things that we have already in hand, some of the deals that we have already agreed to, as they start getting deployed the margin characteristics of those deals are much higher and because they’re exchange related deal they will automatically bring up our margins as also as we take -- some of the key decisions we took I mean many for example, I talked about the life science in pharma group, Q1 we consciously took our revenue down. We basically we terminated quite of few employees, we moved operations down to India and our goal was rather simple, our goal, we won’t getting an up margin out of that business and we felt that’s hurting us, that revenue is not good revenue for us, we want good revenue coming with higher margin. So, we took consciously our revenue down because we had to be ready first in India be to be able to handle that kind of -- be ready for handling that, build the knowledge base first of all, we did that and now as we do that that will bring increased margins for example in that business. We’re doing the same things on the consulting side of the business. So, we and as we deploy some of these exchanged deals, every exchange deal, the nature of exchanges is that every new dollar that comes on an exchange comes with an incremental margin and the reason is rather simple that if you have an exchange where you’ve already deployed X number of participants the next participant that you bring in, you’re not adding necessarily new hardware on new infrastructure added, on new data bases added, you’re basically making them a constituent of that existing infrastructure accordingly it generates a lot more margin for you. So we do believe we will get back to at least to 40% mark that we need to first get back to before we start thinking about the overall growing that beyond that point.

[Jeff Van Rhee:]

Got it. I guess then just three other quick ones, two for Bob. Bob on the PPD side, 5.8 in a quarter, what was that for and then EPS what was the currency impact in the quarter.

[Robert Kerris:]

Sure, as far as the PPD is concerned, our investments in the quarter are primary consistent of, hang on one second please. In the quarter, 5 million was used for the continued build out of our global corporate headquarters here in the area and the corporate head quarters, another million as usually acquisition of data mitigate health and additional $400,000 for general capital expenditure for expansion of our network. What was your question on EPS?

[Jeff Van Rhee:]

The currency impact in the quarter on EPS?

[Robert Kerris:]

I don’t have that, I’ll have to get back you on that one.

[Jeff Van Rhee:]

Okay. And then the last one for the Robin. Robin, obviously with the cash flow characteristics did you get a lot of flexibility, you’ve been very aggressive on the buyback side. You’ve got some liquidity, it sounds like you want to make some acquisitions, how do you think about debt levels mainly there is room on the existing facility, do you feel like larger levels of debt beyond what’s available on that facility, is something you’re comfortable with or should we think of acquisitions, should they be cashed to come out of that existing facility in current cash and cash flow operations?

[Robin Raina:]

Yes. Let me push and address your previous question, you’ve talked what was the currency impact, I actually have that sheet, I’m just look at it right now. The impact of on earning was somewhere slightly more than $0.02 of exchange variation on EPS. That’s the first part of the question. And the second as part of the question you asked about with respect to did you say -- is your question basically that do we have sufficient capacity to do what the things that I talked about or do we need to take more debt?

[Jeff Van Rhee:]

Correct.

[Robert Kerris:]

Let me address that. In terms of our future growth, funding organic growth, integrating our recent acquisitions, we are doing new acquisitions. We will fund that so that combination of both use of our credit facility as well as cash on hand and cash being generated by our ongoing operations.

[Robin Raina:]

And Jeff if you needed, I remember that where I talked about my -- during my talk I talked about $132 million available to us on top of it layering the operating cash on top of that, that takes you to obviously a number which is substantial, when you add the operating cash versus over the next 12 months with the 132 million. Now, beyond that are banks willing to step up? We believe so. Again, I can't speak for the banks right now, but I will tell you that every indication we have from everybody is, banks like to see increased growth. Banks like to see increased operating characteristics, increased EBITDA, increased cash generation and as they see that the banks are up, we have a fantastic syndicate of banks backing us. We feel that they will be ready to step in if we have a need that arises.

[Operator:]

[Operator Instructions] And I’m showing no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

[Robin Raina:]

Thanks everybody for joining in into the call. We look forward to speaking to you soon as we announce our second quarter results. Thanks again and with that I'll close the call. Thank you.

[Operator:]

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