Ebix, Inc.
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the Ebix Third Quarter 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] And as a reminder, this call is being recorded. I would now like to turn the conference over to Darren Joseph, Corporate Vice President. Please begin.

[Darren Joseph:]

Thank you. Welcome, everyone to Ebix Incorporated’s 2015 third quarter earnings conference call. Joining me to discuss the 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 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. 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 material differently 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 Q3, 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 Ebix website after 4

[Robert Kerris:]

Thank you, Darren, and thanks to all of you on the call for your interest in and support of Ebix. Q3 2015 diluted earnings per share of $0.59 were up $0.12 or 24% from the third quarter of 2014. For purposes of the Q3 EPS calculation, there was an average of 34.5 million diluted shares outstanding during the quarter as compared to 38.3 million diluted shares outstanding last year same period. As of today, the company expects the diluted share count for Q4 2015 to be approximately 34 million. Operating income for the third quarter was 22 million as compared to 21.7 million of operating income in Q3 of last year. Operating margins for Q3 2015 was 33% aided [ph] by the consulting margins growing 4% sequentially and 22% to 28% other business is generating operating margin of 24%. We expect our operating margin to continue to grow over the next 12 months as we continue to implement our various cost efficiency initiatives. In terms of cash flow during this past quarter, we generated $15.5 million from our operations an increase of $5.7 million or 59% from the same period year-over-year and representing 70% operating income and cash compared to Q3. During the third quarter, Ebix utilized 33.3 million to repurchase 1.17 million shares of our common stock, $6 million for the investment of IHC joint venture $2.6 million for the payment of our scheduled quarterly dividend, $2.4 million for the continued build out of our new headquarters’ campus here in Johns Creek, Georgia and to purchase a building for our continuing expanding operations in India. With 45 million in current available cash balances as of today and 54 million in unused borrowing capacity from our credit line occurring operating cash flow generation, which will keep adding to our cash flow generation. Continued interest and support from banks to increase our credit line even further, we’re well positioned to continue to fund all organic growth initiatives to make accretive [ph] business acquisitions and repurchase shares of our common stock as market conditions [indiscernible]. Furthermore add to the balance sheet metrics, our balance sheet is healthy with $44.5 million of working capital and current ratio of 1.91, accounts receivable base sales outstanding of 66 days and net debt position of $154 million and debt-to-equity ratio 0.4 so. Finally, Ebix’s Form 10-Q will be filed this coming Monday, November 9. And now I will pass the call on to Robin. Thank you all.

[Robin Raina:]

Thanks Bob. Good morning. Let me first apologize for the quality of the call, I’m not sure whether it’s our phone or whether is nasdaq.com telephone service, but I apologize for this. I’ll focus my talk on the qualitative aspects of the quarter and also try to prevent our perspective of the future ahead of us. Let me start by saying that insurance marketplace still lags many industries in its effective use of technology and technology driven services to reduce costs, improve service, eliminate redundant activities and paper intensive processes and to better leverage the value and potential of its data. Ebix has committed to delivering cost effective solutions that support our customer success, while also helping to improve efficiency and lower costs. Our Q3 2015 results are a reflection of that effort on our part to continue to establish Ebix as a leader in the insurance, financial and healthcare services space. With many large customer contracts and implementation, a number of key new contracts signed in third quarter of 2015 and a few material commitments in the contract stages we believe we are on track to deliver solid top and bottom line results in 2015 and beyond. While revenue growth remains a top priority, we remain highly focused on maintaining our operating margin discipline and striving towards our 40% operating margin goal. Let me first address, the diluted EPS growth on a constant currency basis. For the nine months year-to-date period, our constant currency diluted EPS would have been $0.08 higher at $1.72. Our diluted EPS on a constant currency would have been $0.61 for third quarter of 2015 and increase of 30% over third quarter 2014 diluted EPS of $0.47. I’m pleased with that trend as it is on the lines that we expected it to be. Darren talked about our revenue growth in various areas already. I’m especially pleased with the momentum we have generated in the area of life, annuity, reinsurance, education, health and e-governance sectors. In the third quarter we closed the number of key deals in the area of health, life and annuities, while getting our sales position extremely well for many large deals in all these sectors. Today we are in active negotiations for many such large deals that have their potential of ensuring a very strong 2016 and beyond for us. We continue to be the largest life and annuity insurance services player in the market with annualized revenue of approximately $129 million, we have seen a lot of momentum on this side of our business, we continue to secure contracts with top insurance carriers in the U.S. also we are pleased with the fact that a number of top life distributors in the U.S. decided to move their business to Ebix from their existing software vendor. We expect all this to translate into continued growth in 2015 and beyond, our momentum in the life sector can be best exemplified by the 53% growth in company’s life underwriting revenues year-over-year. We are presently in active negotiations for a number of large contracts in the education, reinsurance, life and health sectors. We are positioned as the only end-to-end services provider in these areas and that has helped us become the frontrunner for many of these prestigious deals. Our recent announcement of strategic relationship with Ernst & Young for certain emerging markets positions us uniquely to hand our both government and private projects that involve lots of program management and interfacing with multiple agencies along with a highly successful record of success. Recently, we announced a contract with a leading health carrier in the U.S. to provide a complete IT solutions and also establish their backend operations offshore, we are aggressively working at present to service the deal and expect substantial revenue beginning fourth quarter of 2015 from this contract. I am pleased to report that we continue to work aggressively towards the date of 1 of January 2016 in terms of getting the PPL solution ready for primetime. Our dedicated team of technology staff both in London and offshore had been working closely with the PPL program management group to ensure that we are ready with all their enhancement request and additional functionality request by their intended effective date of 1 of January 2016. We expect the deal to contribute substantial revenue in the beginning Q1 of 2016 and a consistent recurring and predictive momentum. We are very excited with the opportunities in the education, e-health and e-governance areas, these opportunities tend to be large and can have a material impact on a top-line. We believe that we have the solution set and financial equipment to service such large deals. We are working on many such opportunities at present and hope to make our present out in these areas soon. We are also pursuing a number of key acquisition opportunities that expected to be accretive for our shareholder from the outset. Had a netback at present of around $143 million and annualized EBITDA of $100 million plus, our leverage ratio is rather low that gives us the ability to take more debt at low rates of 2% or so to make acquisitions. Our intend is to use cash of the instrument to make any acquisitions in the sub $150 million range, however for a larger strategic acquisitions that have high amount of synergies, strategic play and can bring immediate accretive value for our shareholders, we would be willing to use stock as an instrument of purchase in some proportion provided it results in the right result and accretion for our shareholders. As Bob detailed out, we bought stock worth $33.3 million from the open markets in the third quarter of 2015. We believe that the company has stable client base and the cutting revenue streams unrivalled domain expertise, operational discipline and resulting strong free cash flows provide a very compelling investment opportunity. Accordingly, we continue to view opportunistic share repurchases has an excellent accretive use of excess cash that should deliver significant long-term benefits to our shareholders. As Bob conveyed during this talk, we have accessed to approximately $100 million of financial resources in the form of cash and cash equivalents and access to our bank credit facility. This $100 million number does not include the perspective cash flows generated from operations by the company over the next 12 months that we believe that we have the financial resources to carry out all the growth initiative discussed here with the goal of delivering improved diluted EPS and increased shareholder value. We believe that our operating margins are headed in the right direction at present. We also believe that these margins can substantially improve as we entre 2016 and some of the newer large value margin intensive deal that implemented. Lastly, Ebix will be 40 years old in 2016. I’ve been involved in this journey with Ebix for 17 years now and have seen the company delivered 60 quarters of profitability, growth and consistency. I’ve seen the company rise from a loss of $19 million in 1999 to become one of the most high margin technology companies in the United States. I have witnessed the company delivered top-line compounded annual growth rate CAGR of approximately 21% in this time. I’ve also seen the company delivered a total shareholder return of approximately 9000% in these 17 years. I’m still here with the basic belief that the best is yet to come. I’m hopeful that the 40th year of Ebix’s birth starts the beginning of a new era of growth and profitability. That brings me to the end of my talk. I’ll now hand it over to the operator to open it up for the questions. Thank you.

[Operator:]

Thank you. [Operator Instructions] We do have a question from Danny Nguyen of Merrill Lynch. Your line is open.

[Danny Nguyen:]

Hey, how are you going guys?

[Robin Raina:]

Hello.

[Danny Nguyen:]

So, my question is on, is there anything in regards to investor relations because a lot of times clients will ask me questions through the way you know investor relations, I’ll leave messages here and there. And it feels like nobody is home when it comes to that?

[Robin Raina:]

Well, I’m not sure, I understand your question, but we have an IR firm that you absolutely can call, there are number of contacts that are listed in every press release, virtually are from our IR site and also on the investor relations site. If you want to e-mail me personally, I will make sure that you get response, but in any case, we’re absolutely there for you.

[Danny Nguyen:]

Okay.

[Operator:]

Thank you. [Operator Instructions] And I’m not showing any further questions in the queue at this time sir.

[Robin Raina:]

We’ll give them another few seconds

[Operator:]

Yes, sir.

[Robin Raina:]

And if nobody has the question then we will close the call.

[Operator:]

Yes sir. [Operator Instructions] The next question is from [Indiscernible] Capital. Your line is open.

[Unidentified Analyst:]

Hi, thank you. Thanks for taking the question. I just, yes – in your remarks Robin you’ve mentioned a lot about PPL substantial revenues from a large deal that’s going to hit in the fourth quarter, do you think margins are going to substantial improve in 2016 looking at accretive acquisitions. Can you dimensionalize at all what you expect, your growth rate to be or what your aspirational revenues are, anything like that so we can…

[Robin Raina:]

Sure.

[Unidentified Analyst:]

Kind of get a sense of what direction, how quickly or how slowly things will move?

[Robin Raina:]

Yes, so Alan [ph] thank you for your question. I think let me put it this way, as you know I don’t give guidance, so I give you a view as for my aspiration goals, I’ll give an aspiration goal. Basically we are highly disappointed if we do not generate close to 20% growth – revenue growth, top line growth in the year 2016, that’s a first aspiration. The second aspiration is on the top-line on the margin side, I’d like to see the company inch closer to 40%, I believe anywhere between 37% to 40% would be my aspiration of goal. The third in terms of EPS from an aspiration goal perspective, I’d like to see the company get to 75% sooner rather than later and again I’m going to talk about aspiration in terms of when I would like to get the 75% or let’s say that we’d like to get there sooner rather than later. So having said that one of the challenge is always there, when you’re building a company, and this – when I had a $100 million revenue company one of the challenges investors used to tell me was that right now you have close to 35% - you are between 35% and 40% margin, when you double this company to $200 million you probably won’t have that margin, simply because the scale, it becomes more difficult to have those kind of margin. Having said that, we have succeeded, we still succeeded, I want to make sure that Ebix continues to succeed and grows on this margin rather than lets this margin go down. We are not in business to pickup just each and every deal. There is a lot of deals out there that we refuse where anything that is below that margin rate where we feel if that is a non recurring deal, license deal we are not really interested in that business, if there is business where we feel that the margin profile is going to be somewhere in the 20s we really aren’t interested in that business. So that puts a lot of pressure on the way we operate our business, but within those constraints we still have pretty aggressive aspirational goal as I define for you and we want to do that while retaining our margin and we’ll continue to grow our business. Now, and rest the jury [ph] will be out on this one if we get into 2016.

[Unidentified Analyst:]

Sure, sure, just a follow-up then, when you say 20% top line growth, how do you come up with that number, I mean you don’t disclose any sort of bookings or backlog or sales funnel, sales – your pipeline things like that, I mean how do you come up with 20%?

[Robin Raina:]

It will be a mix. Yes, so we have our internal ways of figuring it out, meaning if I said more than that then I would be basically talking a bit too much right now and that…

[Unidentified Analyst:]

Okay.

[Robin Raina:]

So, I think at this point, all I would say to you is that we, our aspirational goals are based on some kind of commonsense methodology or internal methodology of what and where, how do we get there and so on. So, we believe we have a plan, at the same time, like I said there is no guarantee that we are going to get there, we are going to, this is an aspirational goal at the same time, we have we are sitting on lots of good size contracts, some of them are known to the market, some of them are not known to the market simply because we traditionally don’t disclose the deal until we have an absolute sign from our clients. And sometimes we do not comment on the margin profile of an individual deal, even if the margin profile is extremely high simply because that’s not smart from our customer point of view and for competitive reasons. But having said that we have a lot of – we have already signed a lot of deals which are high revenue intensive and we have already signed a lot of deals which are high margin intensive which by itself should drive our margin up. Now on top of it, we as I indicated during the talk we had an active negotiations for quite a few deals some of them are large size deals, of the size of larger than the PPL deal, so we feel that we can get those deals linked this, we will do quite well in 2016. Now on top of it, we also, we are sitting on decent amount of cash, we are going to continue to generating more cash, we feel we want to utilize that cash both for share repurchases as also for making accretive acquisitions. Now acquisitions as I said in my talk and we have two different sizes, there is an acquisition which could be a less than a $150 million kind of an acquisition which cost us around $50 million or lower there we would like to utilize cash. We are not leverage much today, we also feel that we have a very strong banking from our banking syndicate like by regions. We also feel on the other side, if there is an acquisition which is of a larger size but it is very synergistic, very strategic, highly accretive for the shareholders then we would be willing to use stock, but that’s only going to be for something that’s extremely large.

[Unidentified Analyst:]

Okay, I’m sorry, so the 20% top line growth is that organic or includes acquisitions?

[Robin Raina:]

I’m not going to break that up right now for you in terms of what part of that is organic and what part of that is inorganic, but right now I will say on substantial part of that is intended to be organic.

[Unidentified Analyst:]

Okay. And I understand. And then lastly, the – you said that relative to the PPL deal some of the deals you are working or I couldn’t quite make out – did you say they are larger than that?

[Robin Raina:]

They are, yes, absolutely. That’s what I said.

[Unidentified Analyst:]

Yes, okay. All right, okay. Thank you very much. Thank you very much, have a good weekend.

[Robin Raina:]

Thank you. Thank you. You too.

[Operator:]

Thank you. [Operator Instructions].

[Robin Raina:]

[Indiscernible] Since we don’t have any more questions I think we’ll close the call. Thanks everyone for joining into the call and again apologize for the initial quality of the call and we’ll make sure that this doesn’t happen in the next time. I’m sure that it’s our phone systems or not, but we’ll make sure that we have better infrastructure between our conference service NASDAQ and between us to ensure the call quality is good. Thanks a lot again. I look forward to speaking to you again. Thank you.

[Operator:]

Thank you. Ladies and gentlemen this concludes today’s conference. You may now disconnect. Good day.