EBIX - Ebix Inc

[Liberty]

Another rough day for EBIX on the secondary market, but this time on average volume (for a change).

 

They are releasing their Q2 next week (conf call on Tuesday).

 

I'll be curious to hear about the new Singapore strategy and about the pace of buybacks since our last update.

[Liberty]

http://www.businesswire.com/news/home/20110805005679/en/Ebix-Receives-ISO-27001-Certification

 

Ebix, Inc. (NASDAQ: EBIX), a leading international supplier of On-Demand software and E-commerce services to the insurance industry, announced today that it has received the coveted ISO 27001 security certification. The ISO 27001 certification establishes that Ebix' infrastructure and practices meet ISO's stringent standards for security capabilities. Ebix’s development and BPO facilities have already received the coveted Carnegie Mellon CMMi 5 certification and the ISO 9001:2000 certification.

 

The International Standards Organization (ISO) creates stringent and rigorous standards that specify worldwide requirements for products, services, processes, materials, and systems. ISO 27001 is the new international standard created specifically for Information Security Management Systems (ISMS). Many companies hold a much earlier version of the standard, ISO 9000, which speaks to the quality of information management systems. However, the ISO 27001 standard also speaks to data integrity, especially as it pertains to the Sarbanes- Oxley Act. The ISO 27001 certification, however, is currently the only internationally accepted certificate of information security.

 

The ISO 27001 certification audit included a security audit of the company’s Hosting Services Group, Database Group, Network Operations Center, Conversion Services Group, MIS, Data Migration Group, Technical Support, Human Resources, and Administration & Legal department.

 

Curt Rynties, VP of Technology, M Financial Group said, “Knowing that the facility where we host our client data meets the rigorous security standards and policies required for ISO 27001 certification is reassuring. We are pleased to be partnered with a company that takes information security and risk management as seriously as Ebix.”

 

Using state-of-the-art technology, processes and tools, Ebix' global support team of industry veterans manage and monitor both premise-based and network-based security solutions 24x7x365. Backed by aggressive, performance-based Service Level Agreements (SLAs), Ebix's Managed Security Services support a user base of tens of thousands of insurance customers with a consistent on-demand service delivery model across all global regions.

 

From vulnerability and threat protection to identifying and accessing management solutions, insurance companies look to Ebix’s stringent security implementation of on-demand systems to help satisfy their key governance and compliance requirements while reducing complexity and cost.

[Liberty]

http://www.ebix.com/pressrelease_text.aspx?artid=207

 

• Revenue of $42.3 Million, up 31.2% Year-Over-Year

• Net Income of $22.3 Million, up 59.5% Year-Over-Year

• Operating Cash Flow for Q2 2011 of $19.6 Million, up 22.2% Year-Over-Year

 

Margins: The Company reported an operating margin of 44% for Q2 2011 as compared to 40.4% for the same period during 2010.

 

Up 11.25% in pre-market trading.

 

Share Repurchases: During Q2 2011, the Company repurchased 1.2 million shares of our common stock at an average price of $19.80 per share for an aggregate amount of $23.8 million. Subsequent to June 30, 2011, the Company has purchased another 1.1 million shares of its common stock at an average price of $19.00 for an aggregate amount of $20.1 million. Year to date, the Company has repurchased 2.37 million shares of Ebix common stock in 2011, for an aggregate consideration in the amount of $46.3 million, representing an average price of $19.56 per share.

 

Controls: The Company also announced that it has engaged the services of Ernst & Young to augment the Company’s management and execution of our worldwide SOX compliance work regarding internal controls. The engagement deliverables include redesign of testing plans, testing of all controls related to Finance, HR, IT, Transfer Pricing, Income taxes and other operations; identification, analysis and reporting of any control deficiencies; remediation and retesting of controls if any deficiencies are identified. The engagement involves assisting in compliance with Section 404 of the Sarbanes-Oxley Act of 2002, across United States, Singapore, Australia and India. The Company believes that this endeavor will further strengthen Ebix’s control structure and internal processes over financial reporting and disclosures.

[smo001]

Liberty,

 

If you dig a little deeper the quarter wasn't that great especially if you view it in terms of the Street's expectations due to the one time gain. But with that being said, it is still growing at an incredible rate as they continue to buy back shares. No reason to sell. Just going to be unloved a little longer. But need to read the 10q to find out further details. Should've bit my tongue on this post. O well.

[Liberty]

Liberty,

 

If you dig a little deeper the quarter wasn't that great especially if you view it in terms of the Street's expectations due to the one time gain.

 

Could you elaborate on what you mean here? You are addressing this at me, but I just reposted the announcement without interpretation, so I'm not sure what you are responding to.

[smo001]

Sorry Liberty. Didn't mean any disrespect. Just seems like you are the main person (or rather one of the few) following this company.

 

What did you think of their quarterly earnings?

 

[Liberty]

Overall I'm quite satisfied with the quarter. Keep in mind that they are facing an industry tailwind. I'll be curious to see how they do in a hard market.

 

Based on the conference call, they seem to have a strong pipeline of new products (and upgrades to existing ones), which is a very good sign since - like Wells Fargo - cross-selling multiple products to existing customers is a big part of their strategy. I also think the salesforce expansion is a well-timed idea because their opportunities are changing now that they are bigger and have beachheads in more markets (we should see results of that in a couple of Qs).

 

I'm also quite happy with the repurchases. Robin has publicly said he's going to ask the board for 160m if he comes close to running out of the current 100m. In the mid-term there are three possible scenarios, IMO:

 

1) Short thesis is right. something bad comes to light, all bets are off, could be very bad. Though unless the problems are so massive that the stock goes to zero, a lot of this seems already priced in. Obviously if I agreed with the short thesis, I wouldn't have put some of my money in EBIX, so I don't believe it likely at all (but I'm not saying it's impossible, so do your DD)..

 

2) Operational problems lead to decline in fortunes. Somehow they can't execute their business plan, or strategy is flawed, or competition picks up, or market changes, or Robin makes stupid decisions, etc. I don't think it's too likely based on what we can know now, and 2008-2009 has shown EBIX can make good decisions and play defensively during downturns, but you never know..

 

3) EBIX keeps buying back shares by the truckload and keeps growing profits by double digit % until at some point the P/E can't compress anymore and share price gets traction, eventually leading to the mother of all short squeezes. Unless Graham was wrong, fundamentals and share price can't go in opposite directions forever.

 

edit: Looks like they still have plenty of NOLs:

 

At June 30, 2011, the Company had remaining available domestic net operating loss (―NOL‖) carry-forwards of approximately $60.1 million which are available to offset future federal and certain state income taxes. Approximately $40.0 million of these NOL carry-forwards were obtained as a result of the recent acquisition of ADAM in February 2011.  The Company expects to fully utilize these NOLs before they begin to expire in 2019.

[smo001]

Liberty,

 

Thanks for the info and your thoughts. I'll have to listen to the cc later.

 

Agree with your thoughts, especially #1. I've read all the financials and I can't spot any huge discrepancies. But I'm def not as experienced as some here. Maybe I'm the fish at the table?  ???

 

 

One can only hope they're busy buying back shares today hand over fist.

 

[Liberty]

You can bet they are making repurchases. Robin himself spent 500k of his own money to buy shares when price was around 17, so at 15 they definitely must be buying a lot. I'm just not exactly sure how much daily volume they can get based on SEC rules. I'll have to look that up at some point...

 

From my point of view, if shares stay cheap for a long time, that's great because the repurchases will bring more value. As long as the fundamentals of the business don't deteriorate, share price can go down, it'll just mean a bigger payoff for the patient investor.

[smo001]

I think the limit is somewhere around 25% of the average daily volume for the last 4 weeks. Don't quote me though as this is off the top of my head.

[twacowfca]

http://www.ebix.com/pressrelease_text.aspx?artid=207

 

• Revenue of $42.3 Million, up 31.2% Year-Over-Year

• Net Income of $22.3 Million, up 59.5% Year-Over-Year

• Operating Cash Flow for Q2 2011 of $19.6 Million, up 22.2% Year-Over-Year

 

Margins: The Company reported an operating margin of 44% for Q2 2011 as compared to 40.4% for the same period during 2010.

 

Up 11.25% in pre-market trading.

 

Share Repurchases: During Q2 2011, the Company repurchased 1.2 million shares of our common stock at an average price of $19.80 per share for an aggregate amount of $23.8 million. Subsequent to June 30, 2011, the Company has purchased another 1.1 million shares of its common stock at an average price of $19.00 for an aggregate amount of $20.1 million. Year to date, the Company has repurchased 2.37 million shares of Ebix common stock in 2011, for an aggregate consideration in the amount of $46.3 million, representing an average price of $19.56 per share.

 

Controls: The Company also announced that it has engaged the services of Ernst & Young to augment the Company’s management and execution of our worldwide SOX compliance work regarding internal controls. The engagement deliverables include redesign of testing plans, testing of all controls related to Finance, HR, IT, Transfer Pricing, Income taxes and other operations; identification, analysis and reporting of any control deficiencies; remediation and retesting of controls if any deficiencies are identified. The engagement involves assisting in compliance with Section 404 of the Sarbanes-Oxley Act of 2002, across United States, Singapore, Australia and India. The Company believes that this endeavor will further strengthen Ebix’s control structure and internal processes over financial reporting and disclosures.

 

It looks like  a very positive development that they are making a serious move to become SARBOX compliant.  Ebix is not on my "A" list, but it is notable from their recent filings that they have made the optional payments on some of their acquisitions.  Companies that are borderline frauds often have a history of not having to make optional payments in the year(s) after an acquisition and then counting the omission of bonus payments as income under GAAP.  :)

[Guest Hester]

Everyone seems very impressed with the buyback so far. Keep in mind that they are just reversing the shares issued from the ADAM acquisition in February. Shares outstanding is still 4% higher than at the beginning of the year. They need to repurchase about another 1.4 million shares just to be back to where they were in January! They are really just transitioning a prior acquisition from a stock purchase to a cash purchase. Granted, the stock issued was valued at $24 and the stock bought was at $19, creating a ton of value. However, so far this buyback is nothing more than buying back what they just gave up. At this point anyhow.

 

Raina kind of acts like this is a cash rich company swimming in money, proclaiming $100-160 million buyback plans (which would take the shares outstanding back to 2009 levels), saying the acquisitions won't stop, and even saying a dividend wasn't out of comprehension. They really don't have much excess cash though, and even after the massive pullback in the shares it's still selling at 9-10 operating profit, which is roughly the market's historic multiple. It will be interesting to see if Raina uses free cash flow or debt, or both to finance all these capital intensive investments. Historically the precedent has been to pay with acquisitions through stock. Clearly thats out. I think how Raina handles all this cash allocating he wants to do will be a large factor in the company's eventual fate.

 

Another interesting note, all organic expenses are rising faster than organic growth, except for G&A which was reduced because "$1.9 million net reduction to previously recorded contingency based earn-out accruals pertaining to business acquisitions made during 2010. The Company reduced these estimated accruals after considering both information available at the date of the business acquisitions and information currently available, and analyzing the ongoing performance of these businesses since they were acquired." Ok I'll have to take your word for that Raina.

 

Sales and marketing expenses are rising rapidly. From 5% of revenue to almost 8% quarter over quarter. This was a part of Copperfield's thesis. It'll be interesting to see which way this goes in future Q's. Margins will be under pressure in the future if the previously recorded contingency reductions run out   :P ;D

 

 

[Liberty]

Everyone seems very impressed with the buyback so far. Keep in mind that they are just reversing the shares issued from the ADAM acquisition in February. Shares outstanding is still 4% higher than at the beginning of the year. They need to repurchase about another 1.4 million shares just to be back to where they were in January! They are really just transitioning a prior acquisition from a stock purchase to a cash purchase. Granted, the stock issued was valued at $24 and the stock bought was at $19, creating a ton of value. However, so far this buyback is nothing more than buying back what they just gave up. At this point anyhow.

 

What matters is not just the number of shares in a vacuum but how much value each of these shares has. The ADAM acquisition has, IMO, brought a ton of net value because each ADAM customer is much more valuable to EBIX than it was to ADAM (because of cross selling in both directions (EBIX stuff to ADAM customers, and ADAM stuff to EBIX customers), especially with the very lucrative and sticky exchanges; because of how it allows them to enter a new area; because EBIX acquires mostly to get relationships, not technology, and not to run the business a it was run pre-acquisition; and because barriers to entry are very high in this slow-moving, relationship-based industry, and sometimes it can be cheaper over the long run to acquire rather than to grow these organically), and EBIX's model can drastically reduce ADAM's costs (move coding to india, strict cost controls, f.ex.).

 

The buybacks aren't just buying back what was given up if you believe that ADAM was worth more to EBIX than what was paid for it, especially since part was in stock that they're now buying back at 16..

 

Raina kind of acts like this is a cash rich company swimming in money, proclaiming $100-160 million buyback plans (which would take the shares outstanding back to 2009 levels), saying the acquisitions won't stop, and even saying a dividend wasn't out of comprehension. They really don't have much excess cash though, and even after the massive pullback in the shares it's still selling at 9-10 operating profit, which is roughly the market's historic multiple. It will be interesting to see if Raina uses free cash flow or debt, or both to finance all these capital intensive investments. Historically the precedent has been to pay with acquisitions through stock. Clearly thats out. I think how Raina handles all this cash allocating he wants to do will be a large factor in the company's eventual fate.

 

Time frame matters. Obviously it depends how many things he tries to do at the same time and how long it takes to get to that level of buybacks; right now it wouldn't be surprising if he believed that cash is best used for buybacks because there's more value there than in acquisitions, but if a good acquisition opportunity came along or if share priced went up significantly, buybacks might slow, or debt might be raised, or whatever. But EBIX generates quite a substantial amount of cash for a company with the level of revenue and with so little debt, and that gives it many options.

 

They've probably only really started the big buybacks at the very end of Q1 after the big drop, and so they've only had about 1 full Q of them and they've already bought for over $46m. Since Raina bought shares for his personal account at $17, we can safely assume that they probably consider the shares very undervalued at the moment and, if anything, they will probably accelerate the rate of buybacks if prices stay low a while longer.

 

I doubt they'd do a dividend any time soon. Raina was asked the question, and he said it's always a possibility that must be rationally examined, and that's the correct answer, but right now it just doesn't make sense. Buybacks are a much better way to return capital, and spending on additional accretive acquisitions to enter and consolidate new markets would make more sense since they benefit from a pretty substantial network effect (I'd like to see them keep pushing hard into P&C in the US, and open more offices in South-America, Asia, and Africa to be on the ground level for exchanges there).

 

Sales and marketing expenses are rising rapidly. From 5% of revenue to almost 8% quarter over quarter. This was a part of Copperfield's thesis. It'll be interesting to see which way this goes in future Q's. Margins will be under pressure in the future if the previously recorded contingency reductions run out   :P ;D

 

They're doubling the salesforce and have stated that they're reinvesting any margins above 40% into that area, so we shouldn't expect margins to grow over the next few Qs. Any benefits from this will lag by at least a couple quarters, so we'll have to wait and see if it paid off with more than $1 of benefit per $1 invested (but the track record is good there, and I like how they incentivize their sales force). Margins would probably be closer to 45% if they hadn't decided to do this.

[mankap]

I agree that they are reversing the shares issued for ADAM.But ADAM is accretive to Ebix shareholders.It is going to add 0.15 in EPS.If we add 0.15 to EPS and in 6 months and end up with the same no. of shares as before ADAM then ADAM acquisition is almost free to shareholders.This means they got ADAM even cheaper at 6 time cashflow.Cash sitting on Ebix balance does not generate any EPS or cashflow.Plus it brings cros selling opportunities to Ebix.

Couple of things that I would like to point out from 2Q call.

 

1. With the increased sales force , Ebix expects 15% organic growth rate.Personally I want Ebix to spend more money on sales force and try to increase sales rather than increasing margin beyond 40 or 45% .

2. Robin talked about winning two new customers for life exchange which could be life changing for Ebix.He said we will see the impact, once it is fully ramped up in one or two qtrs.He mentioned that it will add millions to the revenue.

[Liberty]

A bit old, but belongs in this thread:

 

http://crystalequityresearch.blogspot.com/2011/03/short-sale-saga.html

 

(a lot of good stuff in the analysis, but at least one glaring mistake: "Raina holds over a million options but few Ebix common shares." --> false, Raina holds around 4 million shares.)

[Fairfaxnut]

Looking very enticing at this price point......picked up some today.

[smo001]

Decent article on Ebix CRM for RIA's. Sounds like a sticky business model.

 

[ftp=ftp://www.riabiz.com/a/7240601]http://www.riabiz.com/a/7240601 [/ftp]

[Liberty]

Not strictly EBIX, but a documentary produced by Raina is premiering on US tv soon:

 

http://www.rainafoundation.com/PressReleases/dilli_TV_premier.asp

 

Robin's producer note on the film:

 

Infrastructure development in any large city across the world means different things to different people today. What is perceived as infrastructure development in one person’s eyes could be actually resulting in homelessness for another person. Dilli attempts to capture the stark comparison of the rampant progress and development of the megalopolis of Delhi vis-à-vis thousands who are left homeless while the whole city is modernized and revamped.

 

In the year 2003, Delhi Government decided to host the 2010 Commonwealth Games. In the name of cleansing the city to show off the new prowess of the country, tens of thousands of slum homes along the banks of the Yamuna River were razed to the ground, in the name of safety and environment. Soon thereafter, Government sanctioned large projects like the Commonwealth games village for athletes, on the banks of the same Yamuna River.

 

As an involved world citizen, who has always believed in the cause of the underprivileged, I felt something had to be done to provide a sense of identity to these dislodged slum dwellers who had been thrown away from the confines of the city into a slum area called Juggi Jhopri (JJ Colony) in Bawana. We decided to work on various fronts - to provide education, meals, medical care, clothing to the children of these slum dwellers; to provide vocational training to these people; and most importantly to provide 6000 free concrete homes to these slum dweller families. We came up with a $20 million project to do so and today have handed over 1157 free homes already.

 

I approached Sushmit Ghosh and Rintu Thomas with the idea of making this film. The thought was to provide a voice to these underprivileged people through the power of cinema. Both of them loved the idea and agreed to write and direct the film. From day one, we wanted the film story to be told directly by the real cast of the film – the dislodged slum dwellers and the underprivileged faces that power the city’s “development” today as laborers, workers, rickshaw pullers, masons, cobblers etc. The goal was to convey their story in their words from their lips. As these folks deal with the dismal civil conditions around them, they still manage to keep a smile on their faces and keep their families together. The goal was to let the film be the voice of these people who are still struggling to have an identity in the same city that they are building with their own hands.

 

Rintu and Sushmit did a fantastic job of capturing the above in a very non-fictional and matter of fact manner without making the film treatment depressing for the viewer. I am proud of the end product and intend to ensure that the world gets to see this film and hears the voices of the underprivileged of Delhi. This could happen in another city in another part of the world tomorrow!

 

http://www.dillifilm.com/

[Liberty]

http://www.gurufocus.com/news/144526/ebix-improvement-in-operating-efficiency-with-high-return

[Liberty]

I disagree with this move, but oh well.. It's not bad per se, but IMO it's sub-optimal allocation of capital.

 

http://www.marketwatch.com/story/ebix-board-of-directors-authorizes-regular-quarterly-dividend-of-004-per-share-2011-09-07

[mankap]

Ebix initiates quarterly dividend

 

http://www.marketwatch.com/story/ebix-board-of-directors-authorizes-regular-quarterly-dividend-of-004-per-share-2011-09-07

 

Ebix has taken lot of steps recently to increase shareholder value

Huge share buyback

Insider buying

Big Insider holding

Dividend initiation.Dividend amount will be reviewed in future and CEO they hope it will be revised upwards.

They are commiting 90% of cashflow to growth initiative and share repurchases

 

I think Ebix cashflow is $80m/year for 2011.

 

[mankap]

I agree that it may not be the best use of capital.

Hopefully they can kill the shorts with the dividend .

The questions is which is more effective method of killing the shorts ,Dividend or sharebuyback.

Dividend cost them $6.4m/year and buyback will cost much more.

When the share price moves up , they can issue shares at higher price for the acquisition.

[Liberty]

I guess I'm the only one who isn't in a hurry to kill the shorts :)

 

I would have loved to see them buy back boatloads of stock at sub-$20 prices for one more year at least.

 

But you never know, whoever is attacking EBIX is resourceful and we might see another attack soon that could keep prices low for a while longer despite the dividend...

[tooskinneejs]

"We see ourselves as primarily a Growth stock"

 

Is this statement bothersome to any one?

[Liberty]

"We see ourselves as primarily a Growth stock"

 

Is this statement bothersome to any one?

 

Please elaborate on what you find bothersome.

 

From what I understand from an interview where he said that (or maybe a call), he means that he still sees a lot of opportunities for the company to grow (revenue, number of clients, enter new countries), as opposed to a mature company that is expected to stay more stable in size.