EBIX - Ebix Inc

[Liberty]

Yeah, I've listened to a good amount of their conference calls (haven't heard the last few, but listened to them all during the couple years I owned shares). There are a lot of things I like about Raina, but calling the company a growth stock is not something I want to hear any CEO say. And it's not like he's just said it once. He's said it a few times.

 

You know the company better than me, so I hope you're right for the sake of you and any other shareholders on here.

 

IMO the words aren't as important as what was meant by them. In the mouth of some CEOs, referring to the company as a "growth stock" could definitely be a red flag. But in the context of the mental model of Raina that I have, I sincerely believe that he meant "we see a lot of opportunities to keep growing the company" and nothing more.

 

Heck, I had started studying BRLI a few months ago and just the fact that the CEO provided guidance on revenue and income and seemed a bit too obsessed about the stock turned me off the company, so if I felt Raina was anything like that I'd be heading off.

[DCG]

THIS is what I hate about Raina, and part of the reason I sold out of Ebix a while back. He constantly refers to Ebix as a stock, rather than a company. I worry that he runs the company around trying to increase the stock price in the short term, rather than growing the business. I worry that he is too focused on meeting/beating analyst etimates on a quarter to quarter basis, and companies that do that sometimes tend to fudge the numbers to do that.

 

I am surprised that this one line has caused such a fuss. I think that it is just semantics. I'm a whole lot more interested in what the CEO / company does than what he / it says. Any CEO is part politician, part strategist, etc. and may have a number of reasons for using certain language, including an inadvertent choice. I don't see this sentence "We see ourselves as primarily a Growth stock" reflected in the actions of management.

 

For DCG and others who have mentioned this, can you give any examples of actions that correspond to management's short-term view of the company?

 

What I said earlier was that it is something I worry about, not something I know that he's definitely doing. His actions with the company have been fine outside of things that he has said.

[Liberty]

What about the report was factually flawed?

 

Pretty much everything, but I won't write a 10-page essay here.

 

Lol, ok.  ;D

 

I won't spend hours to write a detailed dissertation for you, but I can go up one meta-level so it's clearer what my process was.

 

When I first read the Copperfield report, I was pretty scared. Whatever the factual merits of the thing are, it does what it was intended to do, which is to scare EBIX shareholders. All the right keywords are there (they even found a way to fit "fraud" and "chinese" in the title!), they attack from all angles, throwing everything but the kitchen sink at the company, hoping something will stick. Even though 95% of people who saw it probably didn't read past the introductory summary, it also had to be long and detailed, with tables and numbers to make it appear as authoritative and overwhelming as possible (who has the time to fact-check all of that quickly? better just sell now and think later!). It was well designed as a short attack.

 

But over the past few months I've read that report over a dozen times, I almost feel I know it by heart at this point. Every subsequent read made it less scary, until it wasn't scary at all and became very transparent. In between each of these readings I learned more about the company and did what scuttlebutt I could...

 

The more I researched, the more convinced I became that Raina and EBIX were the real deal and the more I liked their model, and I also became more convinced that whoever Copperfield is (I'm guessing hired by a competitor of EBIX, but who knows?) has no idea how EBIX operates and why it does what it does, or if they know, they didn't put any of it in the report because it wasn't convenient.

 

Over time, I became convinced that about 90% of the claims in the report were false, and the remaining ones that I couldn't completely eliminate were of the "this guy's word against that guy's word" variety.

 

So I had to make a judgement call: Either believe an anonymous source that had boldly lied about 90% of the things they have talked about (I mean, 'EBIX isn't a real SaaS vendor because they don't bill customers on the same model as Salesforce.com'? (to preserve pricing power and because their product is even stickier than SF CRM, btw) Who came up with that one? How about just checking EBIX's products or asking a customer? And how about claiming that R&D is too low when indian engineers housed in wholly-owned buildings are a lot less expensive than US engineers, and when acquiring technologies can be a substitute for developing in-house, and when EBIX's model of sharing code base across countries and products makes their R&D efforts very efficiently leveraged.. anyways), or I could believe the named managers of a audited US public company (not a Chinese RTO, as Copperfield subliminally implied) that have everything to lose (money, reputation, personal relationships, and in the case of Raina who's a minor celebrity in India and has around 90k followers on Facebook alone, how the public in his native country sees him), and who seem to have told the truth over the past decade as far as can be verified from documentation.

 

It wasn't a very tough choice for me on that last part. Whenever we invest we must place some trust in management, and so far I don't have any reasons to doubt EBIX management. Others should make their own choices and do their own DD, though...

[Liberty]

Something else I've been meaning to post here, about EBIX's acquisition strategy:

 

Anyone who did their due diligence (listen to all the available conference calls on the official site, read all the 10Ks and 10Qs, interviews, customers of EBIX, etc) should know all this, but since many don't seem to do DD, here's a summary of how EBIX's strategy is different from what most people expect:

 

The shorts imply that EBIX acquires businesses to kind of keep running them as they are, and since they often make cuts when they acquire, they say "how can they possibly grow those businesses and keep them healthy?".

 

What they don't understand (possibly on purpose because it suits them) is that EBIX makes acquisitions first to acquire customers, and then second to acquire technology (EBIX has technology that is as good if not better as anyone else, so that's not their limiting factor).

 

In insurance, it's all about relationships, and things move very slowly. This has pros and cons.

 

The pros are that once you have a customer, chances are they'll stick with you almost forever if you do a good job. Cons are, it's very hard to get new customers unless you are an established player in that sector, and even then, companies don't switch back-end systems or join an exchange every day. It's especially hard lately because the insurance industry isn't spending too much on back-end systems (soft market).

 

Now maybe EBIX could have decided to chip away at that problem slowly, taking years to get a beachhead into a new market. But what they've decided to do is get a foot in the door much more rapidly and decisively with strategic acquisitions of companies that already have thousands of customers in the desired market. (Raina has said on calls that EBIX will only acquire companies that position them to be #1 or #2 in a desired sector, and they only launch a new exchange after they've got on board a couple of the top carriers and/or brokers who they've identified as key 'pressure points' to generate the strongest network effect.)

 

Why do these acquisitions make financial sense for EBIX? It's simple: Because the customers are worth more to EBIX than to the acquired company. Here's how it works:

 

Let's say that a customer of EZ Data is worth X dollars to EZ Data.

 

To EBIX, that same customer is worth at least X if they just continue running the business as is, but what EBIX does is 1) cross-sell many other EBIX products to those customers, such as exchanges (this can be done transparently by plugging in the exchange directly in the existing CRM software), carrier or broker systems, BPO services. This makes each customer be worth much more than X dollars to EBIX. They also 2) have lower costs than EZ Data because they can do new product development in India and benefit from lower tax rate (they don't move US IP outside the country, but they do rewrite some software from scratch in India and make new products there), which means an even higher multiple of X per customers. And they also do 3) they can take EZ Data's products, and cross-sell them to other EBIX existing customers.  (that's one reason why EBIX's sales and marketing costs are so low -- they know who their potential customers are, and most of them are already customers, they just try to cross-sell them new products. They basically do zero mass-marketing or trade show stuff, the kind of expensive stuff that Salesforce.com must do. They also have lower costs because of great centralized cost controls (using a software they want to eventually sell as a product, btw), but that's a whole other post...).

 

These three things taken together means that each customer of EZ Data is worth many multiples of X to EBIX on top of giving them entrance to a market where they can now much more easily acquire new customers organically because they are seen as "big enough" in that market to be worth dealing with (we can already see this with EBIX hiring more salespeople and being in the running for more big deals). The beauty is that those customers almost never leave and revenues are highly recurrent, and the short billing cycles leave EBIX with pricing power if they ever need it.

 

Wells Fargo does something similar with cross-selling. It's a beautiful strategy, and they've shown it works.

 

One last thing to consider. The customer list of EBIX is basically a who's who of big insurance and financial companies (Wells Fargo, Allstate, Merrill Lynch, etc), and the products that EBIX sells are very intimate to these companies. It directly touches how they make money and manage their own sales and customers. Each and every one of these hundreds of the savviest of companies has the ability to do thorough due diligence and make EBIX jump through all kinds of hoops to get a deal, and I'm pretty sure that they do exactly that. No company wants to take a gamble with its financial future by replacing its backend systems or committing to an insurance exchange with a company that hasn't been fully vetted first. In fact, that's another opportunity for EBIX: Nobody wants to give a 20m contract to a 100m dollar company, so as EBIX becomes bigger, the size of the contracts that they compete for (and hopefully win) should also become bigger.

[enoch01]

This thread has been helpful.  Thanks.

[Guest Hester]

Over time, I became convinced that about 90% of the claims in the report were false, and the remaining ones that I couldn't completely eliminate were of the "this guy's word against that guy's word" variety.

 

So I had to make a judgement call: Either believe an anonymous source that had boldly lied about 90% of the things they have talked about (I mean, 'EBIX isn't a real SaaS vendor because they don't bill customers on the same model as Salesforce.com'? (to preserve pricing power and because their product is even stickier than SF CRM, btw) Who came up with that one? How about just checking EBIX's products or asking a customer? And how about claiming that R&D is too low when indian engineers housed in wholly-owned buildings are a lot less expensive than US engineers, and when acquiring technologies can be a substitute for developing in-house, and when EBIX's model of sharing code base across countries and products makes their R&D efforts very efficiently leveraged.. anyways), or I could believe the named managers of a audited US public company (not a Chinese RTO, as Copperfield subliminally implied) that have everything to lose (money, reputation, personal relationships, and in the case of Raina who's a minor celebrity in India and has around 90k followers on Facebook alone, how the public in his native country sees him), and who seem to have told the truth over the past decade as far as can be verified from documentation.

 

It wasn't a very tough choice for me on that last part. Whenever we invest we must place some trust in management, and so far I don't have any reasons to doubt EBIX management. Others should make their own choices and do their own DD, though...

 

I'll ignore the emotional response against shorts, as well as the whole "who's got more credibility" argument. Both are irrelevant, as has been demonstrated over and over with "short attacks" on Chinese frauds by the evil Carson Block and the criminal Andrew Left. It hasn't stopped Sino Forest, CCME, and Longtop from making like a firework. The credibility argument is riduculous in this case because one half of the players are anonymous  :P

 

As for "90% is a lie" that is laughable. Saying R&D is too low is an opinion and you might disagree with it, but that doesn't make your opponent an evil liar. Actually I'm glad you mentioned that, as product development and sales/marketing are up as a percentage of revenue last quarter/six months. The latter is up large. So Copperfield's lie (actually an opinion) in this case is proving right. Does that make you a liar?

 

Take the audit history, is that a lie? Is that just his word versus Ebix's?  ;D No it's a fact. They've switched auditors repeatedly. You may disagree on the importance and shadiness of that, but don't call it deceptive.

 

The acquisition strategy is partly my point. It's what keeps me away as a short, but if an acquisition strategy works why act like you've got money to burn? I'm not convinced the new customers are as reliable and sticky, but that's another story. The cross selling benefits are undeniable.

[Guest Hester]

Raina made $2.4 million in salary from EBIX in 2010. I don't know how much goes to his foundation, but I'm guessing that's enough to comfortably make some open market purchases. I'm not sure how a 2.4 million dollar cash salary could be not considered wealthy.

[Liberty]

I'll ignore the emotional response against shorts, as well as the whole "who's got more credibility" argument. Both are irrelevant, as has been demonstrated over and over with "short attacks" on Chinese frauds by the evil Carson Block and the criminal Andrew Left. It hasn't stopped Sino Forest, CCME, and Longtop from making like a firework. The credibility argument is riduculous in this case because one half of the players are anonymous  :P

 

If you think the credibility of management or of the source of a report is irrelevant, that's your prerogative, but I don't. EBIX isn't a Chinese company listed in a foreign country, with products that you can't go see or customers that you can't talk to, btw, so context there is very different.

 

What matters are facts, and analyzing a business isn't just about accounting. When you have to make a judgement call about people, facts about these people matter even if you'll never get a mathematical equation that shows you someone is trustworthy or not.

 

I don't have anything against shorts in general, but I do dislike market manipulators who just make stuff up and post it anonymously to create panic.

 

As for "90% is a lie" that is laughable. Saying R&D is too low is an opinion and you might disagree with it, but that doesn't make your opponent an evil liar. Actually I'm glad you mentioned that, as product development and sales/marketing are up as a percentage of revenue last quarter/six months. The latter is up large. So Copperfield's lie (actually an opinion) in this case is proving right. Does that make you a liar?

 

Laugh all you want, but it's kind of a jerk thing to say, and I didn't even go into detail about what I consider claims and why I think they are wrong except for a quick parenthesis, so don't pretend like you know my reasoning. This makes me glad I didn't go to more trouble for you.

 

The increases in R&D and SGA aren't that big (actually, SGA is down the last Q, and R&D is only up a little) and are due to them reinvesting any margin above 40% in hiring (senior level salespeople, mostly, but afaik also engineers, as always - they have a very high ratio of engineers to total employees). Results from the increased salesforce should be seen over the next year, as these types of deals don't happen overnight. I'd worry if they were up enough to drop margins below 40%, which is the company's current target, but since they aren't, things appears to be going according to plan. I think part of the increase is also due to something that was addressed in the last call, something about yearly bonuses being paid or something like that, but I can't remember exactly (you'll have to look it up). But to pretend that any increase in those areas are a validation of CR's thesis is ridiculous.

 

When a report claims that R&D levels are too low to sustain a business and you show that they can in fact be high enough to sustain it because of the model employed, that can also be called proving a claim false. You might not agree with me, but what I addressed wasn't just an entirely subjective opinion that couldn't be countered.

 

Take the audit history, is that a lie? Is that just his word versus Ebix's?  ;D No it's a fact. They've switched auditors repeatedly. You may disagree on the importance and shadiness of that, but don't call it deceptive.

 

The changes are fact, but the circumstances surrounding them are important, and it appears that the picture that CR is trying to paint is based on made up quotes and weak circumstantial evidence at best (and old, to boot).

 

The acquisition strategy is partly my point. It's what keeps me away as a short, but if an acquisition strategy works why act like you've got money to burn? I'm not convinced the new customers are as reliable and sticky, but that's another story. The cross selling benefits are undeniable.

 

There isn't a limitless number of accretive strategic acquisitions out there, and the valuation of potential aquirees isn't always going to be attractive. This appears to leave plenty of cash for other things, and the company doesn't have much debt, so it could easily lever itself some if it needed even more than operating cash flow can provide. It also doesn't need to keep acquiring, it could just consolidate in the sectors where it already operates (P&C in Australia/New Zealand, Life in USA, etc..), but they probably won't stop yet since they see a big first-mover advantage in the area of exchanges and want to grab as much of that as possible before others move in.

 

Why don't you think customers are sticky? Also, what do you think of the claim that 'EBIX isn't a Saas' company?

 

Have you read the Crystal Equity report? What did you think?

[Liberty]

Raina made $2.4 million in salary from EBIX in 2010. I don't know how much goes to his foundation, but I'm guessing that's enough to comfortably make some open market purchases. I'm not sure how a 2.4 million dollar cash salary could be not considered wealthy.

 

I wasn't precise enough with my word-choice. I meant that he probably doesn't have tens of millions in an eggs nest like many other CEOs who have built and sold businesses for hundreds of millions or been paid rockstar CEO salaries for years. Raina is relatively young and his current cash salary is a recent thing, and while he has a lot of wealth on paper, afaik he hasn't really sold any significant amount of his EBIX shares (those that he disposed of were mostly given to his foundation, afaik).

 

After taxes, charitable donations (which in his case are probably significant) and living expenses (I don't know what kind of lifestyle he leads), that 2.4m becomes smaller. Raina made a $500k purchase on the open market. That seems proportionally significant.

[Liberty]

As for "90% is a lie" that is laughable.

 

Let's see quickly:

 

1) The History of a Roll-up & Its "Slash & Burn" Strategy. The $970 million of "value creation" imbedded in EBIX's valuation is likely to collapse given the myriad of issues the company currently faces.

 

BS on slash & burn and imminent collapse of value. Their acquisition strategy has been detailed elsewhere and makes a lot of sense and generates lots of sustainable value in a way that can easily be built on organically (especially via cross-selling, but also launching greenfield exchanges and such).

 

2) EBIX's Atrocious Organic Growth and Manipulative Metrics. Investors have a distorted view of the company's growth profile. We estimate organic growth was negative in 2009 and was less than 4% in 2010. Management's definition of organic growth is highly manipulative and demonstrates the deceptive nature of the CEO.

 

BS. Depending on how you define things and how long you exclude acquisitions, the numbers will be different, but what matters to me is that almost all the growth at acquirees post-acquisition is generated by cross-selling in both directions and costs synergies, things that the acquired company couldn't do on its own, so it is very much EBIX-originated growth. Also, the exchanges that aren't part of acquired companies are growing very rapidly, which is a very positive sign.

 

3) Growth Crippled by Suspiciously Low Sales and R&D Expense. EBIX's extremely low sales and marketing and product development expenses are not consistent with a technology company. EBIX's company-wide sales and marketing expense was $2 million less than the stand alone run-rate of a recent acquisition. This acquired company that outspent EBIX was 1/20th of EBIX's size. EBIX's margins are overstated and will be crippled by massive reinvestment to avoid larger declines in organic growth. The only segment of EBIX's business that has not benefited from a recent acquisition declined 27% in the fourth quarter.

 

BS on so many levels.

 

4) ADAM Assumptions are Incomprehensible and Will Drive Disappointment in 2011. EBIX recently closed its largest acquisition to date. EBIX must improve ADAM's margins by 2,500 basis points on day one, grow faster than ADAM did in the previous 3 years, recognize no D&A expenses and recognize a zero percent tax rate to generate the $0.15 of accretion that the company has guided to. This overly aggressive guidance will result in negative earnings revisions relative to analyst's elevated expectations.

 

Halls of mirrors distortions and BS, as the facts are demonstrating this year.

 

5) Potentially Illegal Tax Strategy and Impact on Earnings and Valuation. EBIX utilizes two strategies to reduce taxes to nearly zero. The first strategy suggests a lack of oversight from auditors and earnings manipulation. The second is more sinister and potentially illegal. Through a series of superficial transactions that pose no business purpose other than to avoid U.S. taxes; EBIX was able to turn each dollar of foreign revenue into $1.40 of profits in 2010. This tax strategy is not sustainable in the near, or intermediate, term. A higher tax rate in the future will dramatically change the economics of EBIX's business, significantly impair its earnings expectations, and could subject the company to significant fines, penalties and back taxes.

 

Total BS. EBIX doesn't move IP outside of the US and there's nothing superficial about its offshore presence.

 

6) Free Cash Flow Myth. Many investors use free cash flow to justify EBIX's valuation. We believe EBIX's free cash flow is a highly distorted metric given limited cash R&D expense and its questionable tax strategy. In fact, if investors simply adjust for a normalized tax rate, then EBIX trades at 37x free cash flow.  Taken a step further and adjusting for R&D expense for acquired technology costs (acquisitions in the cash flow from investing segment), then EBIX trades at nearly 50x free cash.

 

BS based on other BS in the report.

 

7) Significant Quality of Earnings Issues. EBIX appears to manage earnings through accounting shenanigans, including accounts receivable and its allowance for doubtful accounts. The very low level of acquisition price allocated to non-indefinite intangibles is highly suspicious for a technology company and points to a lack of auditor oversight and a desire to overstate earnings through lower amortization. In 2010, EBIX generated almost $0.20 of earnings that are unlikely to repeat in 2011, which could drive incremental earnings disappointment.

 

More BS.

 

8 ) History of Auditor Turnover, Shockingly Low Audit Fees and Accounting Red Flags. Investors should view EBIX's stated financials with extreme skepticism given the myriad of accounting and oversight issues. EBIX has had four different auditors over the past seven years. Management's explanation for the high auditor turnover does not reconcile with the company's filings. EBIX pays its tiny regional auditing firm less than $350,000 a year in audit fees, a tiny fraction of the audit fees that are paid by companies EBIX's size.

 

Audit fees are in line with industry (even a bit higher than average, actually). Auditors did change more often than what is usual, but I haven't seen anything verifiable (there's a quote in the CR report that nobody found in the actual docs) to convince me that something terribly bad was going on back then, and many years have passed since without problems.

 

9) Controversial CEO Appears to Demonstrate a History of Misrepresentation. EBIX's CEO does not allow analysts or investors access to other members of his management team. This alone is cause for concern about what Robin is hiding. The CEO makes 1,250% more than any other employee. The company's lack of bench strength will again be on full display at their second ever analyst day on April 1st. The CEO's charity appears to make outlandish claims relative to its size and scope.

 

More ad hominem BS.

 

10) SaaS Provider? We Think Not. EBIX's management and analysts claim EBIX is the next great SaaS provider. This is a gross misrepresentation. SaaS companies measure their deferred revenue in quarters and years due to the subscription nature of the business. EBIX's deferred revenue can barely be measured in days and weeks.  As a result, EBIX has minimal visibility relative to real SaaS providers. Also, management misrepresents its products by classifying the majority of its business as "exchanges." These misrepresentations are consistent with management's historical actions.

 

High-on-drugs BS. If Copperfield was shorting Microsoft, he'd probably say that they can't be in the OS business because the pattern of their revenues is different from Red Hat's.

 

Drilling down into sub-claims for each section leaves the ±90% ratio pretty much intact.

[enoch01]

Interesting -  the company has some motivation to keep the share price above $15.11 starting October 1 of this year:

 

"In connection with the acquisition of E-Z Data effective October 1, 2009, Ebix issued a put option to the each of E-Z Data’s two stockholders. The put option, which expires in November 2011, is exercisable during the thirty-day period immediately following the two-year anniversary date of the business acquisition, which if exercised would enable them to sell the underlying 1.49 million shares of Ebix common stock they received as part of the purchase consideration, back to the Company at a price of $15.11 per share, which represents a 10% discount off of the per-share value established on the effective date of the closing of Ebix’s acquisition of E-Z Data."

 

http://sec.gov/Archives/edgar/data/814549/000081454911000005/ebix-2011630x10q.htm

 

As of the latest Q they are carrying only a $1.462M liability for this.

 

Also, has there been some explanation provided by the company why they recently increased their revolving credit facility from $25M to $35M and their secured term loan from $10M to $20M?

[Liberty]

The puts were mentioned in a recent interview:

 

Fool member SimFool777 asks:

I am wondering if the current short attacks might be related to the EZ Data Puts. Does Ebix know if EZ-Data still holds the put options or if they sold them to someone who might have the financial clout to implement a short attack? Is the stock buyback intended to try to keep the price above $15.11. Does Ebix intend to offer put options in future acquisitions?

 

Raina:

We do not believe that it has anything to do with the EZ Data puts. Those puts anyway run out in October of 2011. We are not buying our stock back to keep the stock above a particular price. We purchase stock because it is an accretive transaction for our shareholders.

 

Stock puts, constructed properly, have a good upside for the acquired shareholder, and very limited downside for Ebix. When we gave the $25 million stock put to EZ Data shareholders, it provided for us to pay them $22.5 million against that $25 million value in the 25th month. For us, that would be like an interest-free payment after two years, and we get to pay 10% less. For EZ Data owners, it gave them an upside into the future, with a 10% downside cover. That interested them and ultimately got the deal done.

 

Whether we use it in the future for another acquisition will depend on many metrics associated with that acquisition. I do not rule it out neither can I tell you that we will use it for sure.

 

I don't remember if they've mentioned the credit line specifically, but I imagine that since they can borrow pretty cheaply, it's good to have if they ever need to do a big acquisition and don't want to issue stock at current prices. As the company grows, I think it's normal for their credit line to grow (doesn't mean they have to use it - in fact they've been reducing debt lately - but it's always good to have a safety net).

[alpha231616967560]

Good questions. Raina touched on both in the recent Motley Fool interview: http://www.fool.com/investing/general/2011/07/29/ebixs-ceo-chats-with-the-fool.aspx

 

Fool member SimFool777 asks:

I am wondering if the current short attacks might be related to the EZ Data Puts. Does Ebix know if EZ-Data still holds the put options or if they sold them to someone who might have the financial clout to implement a short attack? Is the stock buyback intended to try to keep the price above $15.11. Does Ebix intend to offer put options in future acquisitions?

 

Raina:

We do not believe that it has anything to do with the EZ Data puts. Those puts anyway run out in October of 2011. We are not buying our stock back to keep the stock above a particular price. We purchase stock because it is an accretive transaction for our shareholders.

 

Stock puts, constructed properly, have a good upside for the acquired shareholder, and very limited downside for Ebix. When we gave the $25 million stock put to EZ Data shareholders, it provided for us to pay them $22.5 million against that $25 million value in the 25th month. For us, that would be like an interest-free payment after two years, and we get to pay 10% less. For EZ Data owners, it gave them an upside into the future, with a 10% downside cover. That interested them and ultimately got the deal done.

 

Whether we use it in the future for another acquisition will depend on many metrics associated with that acquisition. I do not rule it out neither can I tell you that we will use it for sure.

 

 

Fool member EricLin asks:

Given the amount of cash committed to share buybacks, does this mean the end of acqusitions? If not, how will acquisitions be financed? Via debt or equity?

 

Raina:

Our business continues to produce good amount of cash. We expect and believe that our cash flow generation abilities will continue to grow over time, as we expand our business and sales force.

 

We have a strong acquisition pipeline at present. We believe that we have the means to finance these acquisitions. With interest rates being very low and our continual ability to generate strong cash flows, our preferred medium of financing an acquisition is debt. Any company's bankers keep a close watch on the company's AR, cash & collection record; and they have the best understanding of whether a company deserves that debt. Thus, Bank of America could be a logical choice for us though it will always be a decision made on the best possible interest rate and the best possible flexible terms given by an institution.

[enoch01]

Sounds like he didn't remember when the puts expire.  He said October, but the Q says November (doesn't say what date).

 

Anyway, I don't see how it doesn't focus his attention on the stock price.  If they have to pay these off, then the company will either:

 

1)  Use up the large majority of its cash on hand (assuming they are continuing the buyback at current pace),

2)  max out the revolver,

3)  or dilute shareholders by ~4%

 

I suppose they'll issue shares to pay them off.

 

Look at it another way: if you are the put holders, would you take $1.5M (the latest liability estimate), or hold out for more?  Next, I'm not sure I understand this:

 

Stock puts, constructed properly, have a good upside for the acquired shareholder, and very limited downside for Ebix. When we gave the $25 million stock put to EZ Data shareholders, it provided for us to pay them $22.5 million against that $25 million value in the 25th month.

 

Here's what the 2010 10-K says about the transaction:

 

"We acquired the business operations and intellectual property of E-Z Data for an aggregate purchase price of $50.5 million paid to E-Z Data’s shareholders consisting of cash consideration in the amount of $25.5 million paid at closing and $25.0 million in shares of our common stock valued at the average market closing price for the three most recent days prior to September 30, 2009."

 

So what "$25 million value" is Raina referring to?  It seems to me like they gave E-Z Data owners $25.5M cash, $25M worth of stock, and also these put options, that potentially could be exercised for another $22.5M.  Is that correct?

[Liberty]

Sounds like he didn't remember when the puts expire.  He said October, but the Q says November (doesn't say what date).

 

Chances are it's on November 1st at midnight + 1 second or something like that, which in practice is the same as October 31st. (EZ was acquired on Oct 1, and the puts are for 25 months, so that should be oct 31st/nov 1)

 

I believe that the puts are the "stock" part of the price paid for EZ Data, not something additional.

[Liberty]

btw, since there seems to be a regain of interest in EBIX lately, members of the VIC should know that there are 3 writeups about EBIX in the archives there (pointing it out in case you hadn't thought of looking there).

[enoch01]

Sounds like he didn't remember when the puts expire.  He said October, but the Q says November (doesn't say what date).

 

Chances are it's on November 1st at midnight + 1 second or something like that, which in practice is the same as October 31st. (EZ was acquired on Oct 1, and the puts are for 25 months, so that should be oct 31st/nov 1)

 

Yeah I think you're right, thanks.

 

I believe that the puts are the "stock" part of the price paid for EZ Data, not something additional.

 

After further digging, it looks like it's the option to put back the shares they were issued:

 

"Furthermore, under the terms of the agreement the E-Z Data sellers hold a put option exercisable during the thirty-day period immediately following the two-year anniversary date of the business acquisition, which if exercised would enable them to sell the underlying shares of common stock back to the Company at a 10% discount off of the per-share value established on the effective date of the closing of Ebix’s acquisition of E-Z Data."

 

That makes more sense.  Still, I'm guessing they're going to have to find a way to fund this.

[Liberty]

"Furthermore, under the terms of the agreement the E-Z Data sellers hold a put option exercisable during the thirty-day period immediately following the two-year anniversary date of the business acquisition, which if exercised would enable them to sell the underlying shares of common stock back to the Company at a 10% discount off of the per-share value established on the effective date of the closing of Ebix’s acquisition of E-Z Data."

 

That makes more sense.  Still, I'm guessing they're going to have to find a way to fund this.

 

Easy. They have a 100mm share buyback plan (which they want to increase to 160mm). Buying back shares from EZ at such a low price fits perfectly in what they're already doing. Worse case they're paying above current market value on that day, but it would still be a couple bucks lower than even what Raina bought for himself (he bought $500k worth of shares at 17.23, IIRC). I bet Raina structured the deal this way because he knew that 25 months later the probability was very, very high that he would be more than happy to buy back those shares around $15.

 

As a shareholder, I'd be glad if they retired such a large block of stock at that price.

[enoch01]

"Furthermore, under the terms of the agreement the E-Z Data sellers hold a put option exercisable during the thirty-day period immediately following the two-year anniversary date of the business acquisition, which if exercised would enable them to sell the underlying shares of common stock back to the Company at a 10% discount off of the per-share value established on the effective date of the closing of Ebix’s acquisition of E-Z Data."

 

That makes more sense.  Still, I'm guessing they're going to have to find a way to fund this.

 

Easy. They have a 100mm share buyback plan (which they want to increase to 160mm). Buying back shares from EZ at such a low price fits perfectly in what they're already doing. Worse case they're paying above current market value on that day, but it would still be a couple bucks lower than even what Raina bought for himself (he bought $500k worth of shares at 17.23, IIRC).

 

But either way, they have to spend the money: on the open market, or for the put holders (if they exercise).  That was my point.

[Liberty]

But either way, they have to spend the money: on the open market, or for the put holders (if they exercise).  That was my point.

 

Indeed. What's the problem? It's money they were planning to spend to retire stock anyway, so no harm done, no? Just in Q2 of this year plus part of Q3 (the announcement was a month ago, so they've probably bought a lot more since then) they spent over 46mm in buybacks (and that's not counting the ±6mm convertible that they retired from the Rennes Foundation). Another 22.5m isn't going to break their stride, especially since they can see it coming.

 

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.

 

Notice that those buybacks were mostly around $19. Buying back 22.5m of shares at 15.11 would be much better.

[mankap]

Thanks Liberty

I went to VIC and read the latest posts.I bought my first Ebix shares 4 years ago after reading VIC writeup.

If you look at history of Ebix acquisitions , you will find that it is part of well thought after strategy and vision.

If you look at two of the biggest revenue streams i.e. Life and Annuity exchange and P7C exchange in Australia ,you will notice how Ebix has built the business over time with the help of acquisitions.

In 2004 Ebix acquired Heart Consulting in Australia which provided broker software for P&C.Then in 2007 they acquired P&C exchange business from Telestra.They were able to combine the two.Now they have highly recurring P&C exchange business in Australia with 90% marketshare.

Heart acquisition was much smaller and Telestra was much bigger.

There is a similar story for life and Annuity exchnage.

In 2004 Ebix acquired Lifelink which provided it entry in life insurance business. Ater that in 2006-2007 they acquired Finetre and Infinity and expanded Life Insurance and Annuity exchanges.

Now they have acquired USIX in Brazil , Acclamation in health and E-Z data in CRM.I am sure they will be expanding in these areas in near future and building on what they have.

If you see acquisitions in Australia and life insurance , when Ebix did second acquisition , they had already established their products and had grown the revenues from existing products.

 

Also in 2005 after Ebix took a breather after doing two acquisitions in 2004.In the absence of acquisitions , they bought back 7% of the outstanding shares.

It is not first time that they are buying back the shares .

 

[Liberty]

Indeed, Mankap. And the beauty is that they haven't overpaid for any of those. To paraphrase a Buffett story, Raina is the guy who counts the squares on the toilet paper rolls.

[Guest Hester]

The EBIX gods must of got wind of my skepticism because I got a very uncomfortable 24 hour stomach flu, or something similar I'm no doctor. Liberty I don't even feel like responding to your rebuttal of Copperfields piece (obviously you think it's BS  :P), some of which I agree with hence my lack of short position. I'll just remind you that an opinion that differs from your's is not a lie. But I have no money on EBIX and you seem very passionate so I wish you the best of luck. We'll see how the EBIX story plays out.

 

 

[Liberty]

I'll just remind you that an opinion that differs from your's is not a lie.

 

I won't quarrel with that. Totally agreed. But it's not that binary.

 

Saying: "I don't think X is going to happen" is an opinion in the most abstract form. That can't be right or wrong.

 

But if you add to that sentence "...because of Y" and you manipulate that data to make your point, if you make things up or try to deceive your readers by comparing apples with oranges or implying things without basis in fact (or only based on half-truths, the most insidious form), then it's not longer just an opinion that can't be argued with. It's fair game to set the record straight and disagree because of gaps in the logic or because the data doesn't apply or whatever.

 

Sometimes it's possible to be wrong in good faith, having just missed something or misunderstood something, but reading Copperfield's piece, that's obviously not what this is.

 

You seem to greatly admire activist short sellers who uncover frauds and lies and bring them to the light. Well, it works both ways: Short sellers can also be frauds and liars. And I'm sure more frequently than not it's the anonymous ones who gladly try to destroy someone but won't put their own reputation on the line to back up their claims, so that they have nothing to lose. It's not for nothing that they say a good reputation is one of your most precious assets...

[enoch01]

But I have no money on EBIX and you seem very passionate so I wish you the best of luck. We'll see how the EBIX story plays out.

 

Hester,

 

I'm starting to think the put redemption could be a catalyst to the downside.  In October, we know that over $20 million will leave the company (through repurchase to keep the share price up, or private placement).  If it's a private placement, that will hit the quarterly bottom line, since they only have a $1.5 million liability as of the last Q.  So the put redemption could result in a big miss of earnings expectations.  Now I see why Raina wants to thwart the shorts.

 

I think they need continued acquisitions to keep the margins up, as I'm persuaded that the reported margins are inflated due to cost cutting upon deal closings.  But without an inflated currency, the deals will be harder, and there go the margins.

 

I keep reading about the margins resulting from cross-selling, but I still don't see it yet after studying for a little while.  I find the corporate website lacking.  They have links to demos of their software that simply refer back to a sales contact, which always annoys me.  Where can I demo exposure to the multiple offerings the company has for its clients?

 

Just thinking out loud.  Still, puts look expensive to me - not short yet.