Ebix, Inc.
Q2 2015 Earnings Call Transcript

Published: 7 Aug 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the Ebix Q2, 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 is being recorded. I would like to introduce your host for today's conference, Mr. Darren Joseph, Corporate Vice President of Ebix. Sir, you may begin.

[Darren Joseph:]

Thank you. Welcome, everyone to Ebix Incorporated’s 2015 second quarter earnings conference call. Joining me to discuss this quarter is Ebix' Chairman, President and CEO, Robin Raina; and Ebix' Executive Vice President 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 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 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 Q2, 2015 results was issued earlier this morning. The audio of this investor call is also being webcast live on the web at www.ebix.com/webcast. You can look at Ebix's financials beyond what has been provided in the release on our website, www.ebix.com. The audio and text transcript of this call will be available also on the Investor homepage of the Ebix website after 4 p.m. Eastern 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 Q2, 2015 increased 26% from a year ago to $64.7 million. On a constant currency basis, Ebix’s Q2, 2015 revenue increased 31% year-over-year to $67.4 million as compared to $51.5 million in Q2 of 2014. Also on a constant currency basis, year-to-date revenue increased 29% to $133.1 million as compared to $102.9 million during the same period in 2014. The continued strengthening of the US dollar year-over-year as compared to the Australian dollar and the Brazilian real decreased revenue by $2.7 million in Q2 2015 and $4.6 million during the six months ended June 30, 2015 across the Exchange and Broker System Channels. In Q2, our exchange revenue continued to be the largest channel for Ebix, accounting for 72% of the company's revenues. The year-over-year revenue has increased as a result of revenue growth from life, annuity, underwriting, CRM, healthy, e-commerce services in addition to revenue growth generated from the company's 2014 and 2015 acquisitions, partially offset by the drop in revenue from international locations as a result of the strengthening US dollar and a decrease in revenues from the company’s pharmaceutical and P&C carrier backend operations. Life exchange revenues grew 11% year-over-year in Q2, 2015, while annuity revenues grew 14% and life underwriting exchange revenues grew 54%, CRM revenues grew 2% in the same year-over-year period. Health content revenues were up 72% aided by the recent acquisition of Oakstone’s continuing education business. RCS revenues were up 310% because of the recent acquisition of consulting companies. Revenues in Q2 of 2015 were impacted negatively by the recent decision of the company to de-emphasize certain operations which we do not think can give us the same margin profile and market positioning that fits in with our present strategy growth plans. We have a quarterly scale on a [ph] number of product related initiatives, for example, one of those decisions resulted in life sciences division, generating revenues that were 35% lower year-over-year. Carrier business was down approximately by $0.5 million 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 product sales. The strengthening of the US dollar had a big impact on revenues from Australia with its year-over-year revenues going down, approximately $1.5 million [ph] for Q2 of 2015 and $2.7 million for the first six months of 2015, since the US dollar has appreciated in an average of 14% year-over-year as compared to the Australian dollar, impacting Australian revenues adversely. Our broker business revenue, which is primarily international-based decreased by approximately $1.2 million in Q2, 2015 as compared to Q2, 2014 due to the strengthening of the US dollar. I will now turn the call over to Bob.

[Robert Kerris:]

Thank you, Darren and thanks to all on the call for your continued interest and support for Ebix. Q2, 2015 diluted earnings per share of $0.54 was up $0.19 or 54% [ph] from the second quarter of 2014. For purposes of the Q2 EPS calculation, there was an average of 35.3 million diluted shares outstanding during the quarter as compared to 38.6 million diluted shares outstanding last year this second quarter. As of today, the company expects the diluted share count for Q2 2015 to be approximately 34.8 million. Operating income for the second quarter was $20.4 million as compared to $17.5 million of operating income in 2014 second quarter. Operating margins for the second quarter [indiscernible] stood at 32% compared to 34% for the second quarter of 2014. The operating margins in the second quarter were adversely impacted by lower margins associated with our strategic consulting business. Operating margins for this consulting portion of the business were 24%, while being 33% for the remaining portion of our business. While we are pleased with the second quarter results, we believe that the company can improve its operating margins significantly through a number of efficiency initiatives that have already been put in to place. In our viewpoint, one of the true measures of the company’s fundamental strength is the ability to generate strong sustainable cash flow from its operations. In the second quarter 2015, we grew operating cash flow to $17.5 million, actually the same levels as compared to $17.8 million last year but significantly improved from $7.3 million of outflow experienced during the first quarter of this year. During this past second quarter, in spite of robust returns to shareholders, we obtained 12.2 million back to repurchase of 414,258 shares of our common stock, and paying $2.7 million through the company's quarterly dividend of $0.075 per share. In spite of that, and however, from a liquidity perspective we still have $28.4 million of cash and short-term investments on hand and access to $89.5 million of potential available capacity from the expanded line of credit with Regions [Technical Difficulty] through accretive acquisitions, integration of recent business acquisitions, due to repurchased shares of our common stock as well as [Technical Difficulty] is a very attractive 1.94% presently. Furthermore, as of today, our balance sheet and the health of our balance sheet, as at the end of the second quarter our working capital position stood at $34.8 million, our current ratio stood at [Technical Difficulty]. Finally, Ebix’s Form 10-Q will be filed this coming Monday, August 10. I will now pass the call on to Robin.

[Robin Raina:]

Thanks, Bob. Good morning. 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 diluted EPS growth on a constant currency basis. Our diluted EPS on a constant currency basis would have been $0.60 for Q2 of 2015, an increase of 71% over second quarter of 2014 diluted EPS of $0.35. I am pleased with that trend as it is on the lines that we expected it to be. Diluted EPS growth is a function of many things, including but not limited to; one, income growth accompanying revenue growth; two, accretive acquisitions; three share buybacks that allow us to retire the stock bought back by us. We feel that we have momentum on our side to fuel revenue growth. We also have a strong pipeline of accretive acquisitions that we are targeting at present. We intend to keep using our operating cash flows to fund share buybacks over the next 12 months. Accordingly, we feel that over the next 12 months, we will have many of these drivers still in place to possibly fuel further earnings growth for Ebix. We see many opportunities ahead of us that can increase our 2016 EPS substantially. We expect to be getting substantially higher operating margins from any large committed deals in 2016 which can add a substantial impact on our diluted EPS. Also, we are going to be opportunistic in terms of acquisitions and that acquisitions can also help fuel this diluted EPS growth. Let’s now talk about the top line. On a constant currency basis, Ebix’s Q2 2015 revenue increased 31% year-over-year to $67.4 million as compared to $51.5 million in Q2 of 2014. Also on a constant currency basis, the year-to-date revenue increased 29% to $233.1 million as compared to $102.9 million during the same period in 2014. We feel that we have momentum on our side now. The last few quarters have been very eventful for us in terms of setting the foundation for revenue growth. Among other deals, we have inked many contracts with large life carriers in the area of exchanges. We are in contract stages of many multi-million dollar deals with large life carriers. We are in contact stages for a multi-million dollar recurring deal with a leading health insurer. We did have the rather material London reinsurance exchange deal generating our largest revenue stream from any one contract beginning on January 1, 2016. Our momentum can be best exemplified by the fact that allows underwriting exchanges grew organically by 54% year-over-year in second quarter of 2015. This growth is in spite of the fact that most of the deals generating revenue in this area are still in the early stages of ramp up. As we ramp up our efforts over the next few quarter and the other deals in contracts start generating revenues, we will see revenue further go up substantially in this area. Our life exchange revenues grew 11% year-over-year in second quarter of 2015 while our annuity revenues grew 14% and life CRM revenue grew 2% in the same period year-over-year. Cumulatively our life exchanges grew by a healthy 18% year-over-year. In the second quarter of 2015, we expect that this momentum will continue in the quarters and years to come as we implement the deals we already have in hand and sign up new contracts. All of this growth have been organic. Health content revenues were up 72% aided by the recent acquisition of Oakstone’s continuing education business. RCS revenues were up 310% because of the recent acquisition of consulting companies. We expect the health ecommerce group to join this momentum as they scale up some of their existing implementations and implement some of the recently committed large value recurring deals. We expect that RCS revenues will keep looking up as we implement some of the newer deals that we recently secured and also because of our acquisition strategy in the domain-specific insurance consulting area. We believe that we will start generating revenues from the London reinsurance exchange deal beginning January 1, 2016. Clearly it will be by far our largest revenue generating deal both on an annual and a five year rolling basis. This deal has already opened many door for us since reinsurance is a competitive market and key financial hubs would not want to be competitively less behind and that opens up new possibilities for us. We are excited about the opportunities ahead of us in the field on e-governance and Telemedicine. We have a very defined strategy in both these areas that we are rigorously pursuing at present. In the press release, we talked about a type of strategic alliance with a key advisory firm to target certain growing markets; we see that as opening many large opportunities for us, more on that later when we announce the detail on that front in coming days. Let’s not talk about Telemedicine. Telemedicine is a whole industry by itself; we feel that we have powerful solution and operational skills in that area. We are now trying to focus our efforts in this area in a few countries in the beginning. We presently have multiple solutions in this area, we can provide a doctor on-demand service today over the web in a guaranteed four-hour period through 33,000 strong doctor network. Our target market in this segment is both business-to-consumer, B2C and business-to-business, B2B clients. We see B2C and B2B as separate divisions who can create sizable revenue streams. On the B2B side, our target end user is an employer or an employee who gets access to the service through a TPA or an insurer. The insurer will provide the service with the goal of ensuring that the insured uses the service cost before going to a doctor or hospital in person, this saves tremendous amount of money for the insurer, who on an average pays $250 per doctor visit and $750 for any other [ph] visit. At the least, it saves money by ensuring the right referral, the employer gets a discount in terms of insurance premium from the insurer if the user service has its share of the insurance money – insurer money in return. The employee gets fast turnaround and thus everyone benefits. Ebix charges for such a service to an insurer on a PEPM model, per employee per month model. Today, we are in discussions with many large and small insurers, super brokers and PPAs as regards to this opportunity. Ebix has the technology and operating model now to, one, get the insured medical advice from specialist doctors, second advice at times from doctors across the globe in a guaranteed four-hour period, two, get the insured connected to a doctor over the phone, and three, hand the claim for Telemedicine payment to a claimed exchange and get it processed and paid over the web. On the B2C side, the opportunity is to figure out how to scale the service on a large scale, the goal has to be to provide service in a four-hour guaranteed period, create a paid-for doctors network by ZIP code for each specialty or medicine which can be provided to the consumer for a video or an audio call as a referral after the web advice is provided. And lastly, connect them to the doctor for a visit to the doctor’s clinic. Ebix intends to bring tens of thousands of doctors to this service by charging doctors manual fee to be lifted on a Telemedicine exchange. This fee will include them getting access to our A.D.A.M. Encyclopedia and rich content in their specialty area as a reference to and also CME programs aided by Oakstone acquisition getting doctors continuing education credit, we will pay the doctor in turn also anytime they offer medical advice to paying consumer over the web on our Telemedicine exchange, this is a win-win for the doctor and the patient. We believe that our end-to-end operating model and technology in this area is ahead of anybody in the world. At the same time, the key in this area is to target mass volume in terms of getting new users. We do not like the idea of spending on Super Bowl ads or spending mega dollars over the web to bring consumers to the service as that has traditionally created loss-making, cash doubling, but growing [ph] ventures. We are trying a different approach in this area, we are carving out exclusive tight deals with large telecom providers in seven countries to preload our Telemedicine in the phone provided by them and mass market, our solution to the tens of millions of subscribers on a revenue sharing model. We are very hopeful of a major effort in that area which could be a game changer for us in the Telemedicine arena. We are also creating a new business area of BOT exchanges, build-operate-transfer exchanges, wherein we take a minority stake in a TPA operation with the right to increase it to a majority or 50% ownership position on the condition that they outsource their technology and manpower to our offshore operations. We will charge them for the manpower on a normal P&M rates while charging for the use of Ebix Enterprise in terms of transaction and subscription fees for each employee live on their system, cumulatively creating a large revenue opportunity for us. This model allows the TPA to make their business highly efficient and profitable while providing Ebix with a new opportunity to keep replicating the service for other TPAs through this unique model, more on this soon, as and when we announce any deal in this area. As you know, over the last decade, the Company has made many acquisitions, acquisitions have allowed us to add new functionality at times enter new business areas, at times open up a particular country audience for us and add another spoke in the wheel to achieve [indiscernible] in any business area. One thing -- one thing that you might find common in most of our acquisitions is that the acquired company is in a bit of distraction. We like situations wherein the company has all the right things going for it but still have a distracted situation in terms of profitability, cash flow of just a deficit in terms of common sense management. We are able to pay a lot less for such companies. We enter such situations and put the EBIX centralization and operating business model at the center of it. We give up on bad revenues that are low income intensive while focusing our attention on revenues that have high margin associated with them. We are willing to be highly discipline as also are ready to take revenues down initially if need be to ensure that they have a highly profitable business model. Once we have a great proven operating model, then we concentrate on growing the business profitably by compensating on the good revenue streams. We intend to keep doing that as we look at new acquisition opportunities. We are clearly quite excited about the opportunities ahead of us. We believe that the Company’s recurring revenue stream, cash flow characteristics, sticky client base, on-demand business model, rich domain expertise, strong barriers to entry along with the highly diversified client base, et cetera are not fully reflective in the Company’s present valuation. Accordingly, we are committed to expanding our share repurchase plan substantially as we see share repurchases as one of the most accretive areas of generating value for our shareholders. In August 2014, the Company had announced its intent to purchase up to $80 million of EBIX shares over the next 12 months. As of July 31, 2015, the Company has already purchased 4 million shares bought approximately $80 million since August 2014. The Company Board of Directors is likely to authorize a new $100 million share repurchase plan once the previously authorized amount of $100 million is fully utilized. As Bob conveyed during his talk, we have access to $118 million of financial resources as of June 30, 2015 in the form of cash and cash equivalents and access to a bank credit facility. This $118 million number does not include a prospective cash flow 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 the goal of delivering improved diluted EPS and increased shareholder value. We are a growing Company today who believes that it can be a lot larger Company in the years to come than it is today. We have ambitious goals on that front and believe that we can do so while reducing strong operating margins and cash flows. We expect our operating margin profile to increase quite a bit and we roll out many high margin large size deals over the next year or so. Lastly, let me say that our 2,800 plus EBIX employees are at the heart of the accomplishment for the Company over the last decade and continue to be so. I’m proud of their continued innovation, passion and dedication that make all the accomplishments possible. This brings me to end of my talk. I’ll now hand it over to the operator to open it up for questions. Thank you.

[Operator:]

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

[Jeff Van Rhee:]

Thanks. Can you hear me?

[Robin Raina:]

Yes.

[Jeff Van Rhee:]

Okay, great. The audio quality was really, really difficult in some of Bob’s comments. I didn’t catch everything here. So, some of this maybe repetitive, but Robin with respect to -- with respect to the business that you’ve concluded that you’re going to walk away from that doesn’t meet the strategic margin or other criteria that you established, can you put a little finer point on it exactly what that is, how big it is and in particular, do you see other portions of the existing business that fall into that same basket?

[Robin Raina:]

Well, I think I was referring more to things that we’ve already done. I -- there are no specific areas in the future that I’m -- that I was referring to in this discussion, but basically my sense of what I was trying to say was that we have done some of that in this year in 2015 actually and we’re done with that already, at the same time, we’ll be -- we will be keep looking at it as an ongoing exercise. I’m not aware of another area where we need to do something like that in the near future.

[Jeff Van Rhee:]

And could you quantify how much business or what kind of drag that represented in terms of business that you chose not to renew?

[Robin Raina:]

Well, for us, the business was more related to taking decisions like moving our entire employee base in a particular region in a particular area, for example, to an offshore facility and that obviously we knew would affect our revenue stream for a substantial amount of time until we can get it effective and working and so on and we’ll -- there are specific areas that we were doing quite well in terms of revenue stream at the same time they were not really profitable revenues and we move that business. We do think that we will finally get back to the levels that we use to do once our offshore units are fully functional and at the same level as they -- as the onshore units, but at the present moment, numbers have come down pretty substantially from virtually, to give you a simple example, from – in some where we will do close to $1 million in a quarter or we would probably be down to $0.5 million or so a quarter.

[Jeff Van Rhee:]

Okay, got it. And then with respect to the cost improvement or efficiency improvement opportunities that you referenced, can you expand on that a little bit, specifically what those opportunities are and quantify those give us a sense of the magnitude of what the opportunity there is?

[Robin Raina:]

Well, cost improvement is in multiple areas. First of all, as you know, we recently combined all our offices in Atlanta, we have moved everything into a combined global campus in Atlanta. As we consolidate some of our other offices into Atlanta, we are going to see substantial slowing in the – in basically in terms of rentals, in terms of some of our internal hosting infrastructure, telecom, but then you – we are in the process of moving quite a few other functions over to India and Singapore and as we do that, that’s going to result in substantial savings. The other area is primarily the area of the fact that as we bring in more higher margin deals, and some of these deals have much larger size and they have a much higher margin profile than the 40% that we were used to. So we believe that that will end up, including the margins overall quite substantially. I hesitate to give you particular numbers out there.

[Jeff Van Rhee:]

Okay. And obviously the London deal is transferred – is obviously a meaningful number and you I think outlined that one well. With respect to the other I think what you term transformational deals, I know there were several that you have referenced in the past, couple of plus quarters that seem to be pretty mature in the pipelines. Can you update us on a little progress [indiscernible].

[Robin Raina:]

Jeff, I don’t know whether I would say they are mature or they are not mature, simply because I hate to comment on anything that have not been announced. All I will say at this point is that, clearly our goal is to make sure that we can keep bringing in larger size deals then cutting revenue value, that’s going to make us a much stronger company and we don’t want the London deal to be one of its kind, we would like to see many deals like this. So we are going to try and target some of the larger deal. So as and when we get them we will announce them. As of now, I would not – right now, probably either ways, whether we are at a mature stage or whether we – it’s a done deal, I prefer to wait and when the time is right and if we do the deal, we will definitely announce that.

[Jeff Van Rhee:]

Okay. And then I guess just last one for me, you referenced in the release coming strategic relationships, stay tuned essentially and you talked about large strategic alliance, can you just talk a little bit more about what those – put a little finer point on that what those might look like, not necessary giving us names, but what might it look like?

[Robin Raina:]

Well, first of all, I believe we will be announcing them pretty soon and these are in my mind very transformative for Ebix, because what type of deal like that look like, to give you an example, Ebix could be tying up in a partnership with a -- go-to-market partnership with let’s say a key advisory firm and we could virtually create a partnership for number of countries, specific countries where we would jointly market, we would jointly go to the market via the common brochures, common marketing, common sales programs then selling all of the Ebix products and so on. It’s very rare to have an advisory firm do that, but if you see a key firm willing to do that I think it will speak volumes about first about Ebix products, second what they believe they can generate out of it because all these firms have a wide reach, they are in the midst of – they deal with the government all the time, they deal with the private sector all the time, they have – it brings in a different level of scale to Ebix. So that’s basically the kind of stuff that we are referring to. I also believe, I specifically talked about telemedicine today and while I was trying to talk about, I do believe that there are transformative things that can happen in the telecom – in the telemedicine sector for Ebix. And to me an example of a transformative deal would be, if there is a large telecom provider who has got let’s say – a telecom provider who has got tens of millions of subscribers, if they decide to preload Ebix as a telemedicine exchange and they stop promoting it aggressively to their audience, that’s a transformative in my view because of the volumes that bring to us. So those are the kind of examples that I was referring to.

[Jeff Van Rhee:]

And I guess just one last one on the aspirational goals, I think you outlined a couple of pieces last quarter, any updates there still comfortable with those, any tweaks that you’re thinking about how those play out?

[Robin Raina:]

Jeff, as you know, I don’t give guidance. I classified them as aspirational goals. My aspirations have only increased, they haven’t come down. Let’s put it this way. I feel very good about where Ebix is today and I think Ebix ambitions are much more defined right now, much more – we are very aggressive, we feel we have momentum on our side. We would like 2016, for example, to be bigger for us and we do feel we have all the right ingredients to make that happen. So I am going to – well, we want to keep our fingers crossed and keep looking through it. So as things happen, we are going keep announcing them. But right now, I feel good about where we are.

[Jeff Van Rhee:]

Okay, sounds good. Thank you.

[Robin Raina:]

Thank you.

[Operator:]

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

[Robin Raina:]

Thanks everybody. I think, we look forward to being again on the call and presenting our third quarter results. Thanks again. With that I will close the call. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation on today’s conference. This concludes the program. You may now disconnect. Everyone have a great day.