Transcript of the 2007, Q2 Investor Conference Call

EBIX.COM
Moderator: Robin Raina
August 07, 2007
10:00 am CT

Operator: Good morning. My name is (Tamika) and I will be your conference operator today. At this time, I would like to welcome everyone to the 2007 Second Quarter Investor Call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

I would now like to turn the conference over to Robin Raina, President and CEO of Ebix, Inc. Please go ahead, sir.

Robin Raina: Thank you. Good morning everybody. Thank you for attending Ebix 2007 Second Quarter Investor conference call.

Our Q2 2007 results were announced yesterday. Let me summarize those results for you from our perspective.

Q2 results were yet again record results -- the best ever in Ebix’s 32 year young history, in terms of diluted EPS.

To look at these results and compare them to the same quarter last year, or to the previous quarter in 2007, would reveal to you that the company has shown consistent growth over any of these periods.

Incidentally, this fact becomes even more apparent, if you were to compare any of our results in previous quarters in a similar manner.

Q2 results were pleasing to us. Since there was nothing spectacular that accounted for these results. No large one-time deals were booked in this quarter that accounted for this quarter. It was simply normal organic growth with each of our divisions contributing to the increased revenue in the quarter.

In the Ebix model of keeping a tight control on costs, increased revenue is likely to result in increased margins, as is evident in this quarter.

Revenues grew consistently in Q2 of 2007, if you were to compare it to Q1 of 2007, or Q2 of 2006.

Revenues grew to 9.82 million in Q2 2007, from 9.02 million in Q1 of 2007 -- a 9% growth. Or if you were to compare it to Q2 of 2006, the number was 7.03 million at that time, which means the growth was 40%, as compared to Q2 of 2006.

As revenues grew, net margins in Q2 2007 grew to 26%, from 22% in Q1 of 2007, and 21% in Q2 of 2007 - 6, directly revealing the basic fact that increased revenue is likely to result in increased margins in the Ebix model of things.

Net income after taxes for the quarter rose 68%, to 2.51 million, or $0.75 per diluted share, up from 1.5 million, or $0.48 per diluted share in the second quarter of 2006, and earnings per-share growth of 56%.

Net income after taxes for the quarter rose 28% to 2.51 million or $0.35 per diluted share, up from 1.96 million, or $0.61 per diluted share in the first quarter of 2007, and earnings per share growth of 23% quarter over quarter, when you compare Q2 with Q1.

Results for the second quarter of 2007 were based on 3.37 million weighted average diluted shares outstanding, as compared to 3.14 million in the second quarter of 2006, or 3.22 million in the first quarter of 2007.

The company also reported basic earnings per share in the second quarter of 2007 of $0.85, as compared to 54 in the second quarter of 2006, and $0.69 in the first quarter of 2007.

The company also reported that its cumulative net income at the end of six months of 2007 grew by 70%, to 4.48 million, as compared to the cumulative net income of $2.63 million at the end of six months of 2006.

The six month cumulative diluted EPS for 2007 also grew by 62% to $1.36, as compared to cumulative diluted EPS of $0.84 at the end of six months of 2006.

In June, the company sold 400,000 shares to (Luxar Capital). Part of the proceeds were used to pay LaSalle Bank 10 million to become a (Viodett) company.

With improved cash flows, resulting from an increased income, Ebix had 11.7 million of cash in the bank as of the 30th of June 2007. With an unused credit line from LaSalle was 14 million. The company is presently well-poised financially.

We intend to use this cash to fund our future growth, in terms of acquisitions in complementary markets.

From a future perspective, Ebix remains committed to keep striving to increase its top line and bottom line. Our goal remains to be a back end convergence player that can follow transaction in the insurance industry across all phases and regions across the world.

Ebix tends to let the numbers speak for itself. In our efforts to protect our competitive edge and not provide too much data to our competition, we have normally abstained from issuing (unintelligible) to announce any business deals.

However, if the cumulative deal size of a few deals seems material to us, with respect to Ebix’s present revenue, then we would tend to let the market know about the size of those deals.

In the same spirit of disclosure, I am pleased to convey that in the last one week, Ebix Ebix Advantage Carrier division has signed deals with two insurance companies -- Princeton Insurance Co. and (Double OR) of America, totaling between 6.6 million, to 10.3 million.

This range means there's a low end to the range, and there's a high end to the range. The low end is 6.6 million. At the high end, the deals would give us 10.3 million.

These deals involve licensed revenue and professional service revenue. We expect to pick this revenue up over a period of two years as we implement these projects.

We are also in discussions with another large carrier, and we expect the deal to be closed over the next few days. And when that happens, we will declare that to the market.

As declared earlier, Ebix has signed a non-binding letter of intent to acquire a company in Europe in the insurance industry. We have finished our due diligence of the company, and are presently working towards a closing date of first of October, subjective to satisfactory (unintelligible) of the contract.

This acquisition is likely to be accretive to our results, and will provide us with various cross-selling opportunities in those markets in Europe.

As always, the audio transcript of this and any of our previous calls can be heard and downloaded from the investor homepage on the Ebix site -- www.ebix.com.

Also, I would encourage you to visit the comprehensive investor homepage on the Ebix site with a view to providing a one-stop place to analyze Ebix from an investor perspective.

With that I am going to hand it over back to the moderator to open the call for questions. Thank you.

Operator: As a reminder, in order to ask a question, press star then the No. 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of (Gregory Wilburn).

(Gregory Wilburn): Robin, the insurance industry has been notoriously slow at technology improvements for the processing of their business. And I am wondering if you could give us some sense of what is going on in the current market in the IT budgets of companies that you are doing business with and that you hope to do business with?

Robin Raina: Well, you see the way we see it, in terms of insurance companies, we are primarily selling two key products to them. We are either selling to them insurance company back end systems, or we are selling to them development services - BPO services and at time, in certain markets we are selling exchange services to them, depending on what geography, and depending on what sector we are discussing. Whether its life, annuity or BMC.

Having said that, in the insurance markets today. Meaning, from our IT perspective, there is clearly a realization that paper needs to be reduced in insurance.

Clearly, as I have said earlier in previous calls, the industry does realize the fact that it's not the most efficient of industries today. And the margins can improve. The margins can go up if they can remove some of the paper out of the process. So clearly, the industry is moving in that direction. However, this is an industry which has a lot of resistance to change. So it takes time for the industry to move forward.

So if I was to give you the short answer, I would say that the IT folks are out there and doing what needs to be done. However, there is the resistance to change. So there is - people are at times tied into technologies which might be outdated. But however, there is the tendency to protect one's own job.

So I can give you some examples of, there could be an insurance company that's using an old mainframe and does realize that it is not smart to anymore be on that mainframe. However, the IT folks there are scared if they move to a newer technology -- whether it's a J2E, or .Net, or Java, they are scared that they don't understand the technology and it could cost a few jobs in the IT group. So it becomes a psychological issue more than anything.

But other than that, on a - if I have to look at the high-level and see what the direction of the industry - clearly the industry does understand it needs to get the paper out, and it needs to streamline its operation. So that's a good thing.

(Gregory Wilburn): Okay, could you talk about the competitive landscape in the markets that you are serving?

Robin Raina: Well, the competition it varies fortunately in every area that we go into.

To give an example - first of all, there's nobody in the market which has the expanse of what we do.

To give you one example, on the broker system side, on the broker system side, we do not know of a single player worldwide who can walk across five continents or even across two continents and say, I can offer you a product and offer you the same product across two continents.

So let’s say if I’m a big large customer and I have offices across the globe, I really have a problem to go with somebody else and that’s where - so the competition typically in the broker markets outside the US tends to be local regional players. Like we could go to France and we’re going to be competing with a French company rather than a global player. We could be in Ireland and we’d be competing with a local Irish company and so on.

Or at times the competition in broker markets are the IT department - internal IT departments of large players who have typically failed, however there’s a big company mentality where they only once they fail then they start thinking of making amends.

On the exchange side of things we have different competitions and different players. Again, there is no single player around the world that we compete with not even across two countries do we come across the same player anywhere; so we go to Australia we’ll have a different competition; New Zealand we’ll have different competition and so on.

In the life markets here in the US, we have a number of smaller players who we compete with. Our basic fight; our basic effort in the life exchange market is simply to teach the market that they need to get off paper and the need to move into a more streamlined process - onto a more streamlined process.

We have the same challenge on the annuity side where the industry is almost $230 billion - outside of $230 billion in the annuity industry. We have close to $18 billion of that industry and that’s the kind of transactions we run on our exchange, but in reality, what is conducted over the net today is less than $25 billion, and we have $18 billion of that.

So it’s not really why we are the leader in that, but there is a big part of the market that’s still running on paper-base processes, so we need to teach the market and move them forward.

And then you walk in - the other industry we are - the other area is carrier systems. In the carrier system area, again, in that area there are larger players. You can have one large player could be CSC, Computer Science Corporation who is a global company who offers similar products across the world. You can deal with (SIRIUS) in different parts of the world or you could be competing against a PMSC in the US or a Rebus in the US and so on.

The competition really varies. As you get into consulting and development arena, you tend to compete increasingly with large development companies out of India like Infosys or Wipro or Tata Consultancy Services. So it kind of varies for us. We have no real one competition.

Man: Okay, thank you.

Robin Raina: Thank you.

Operator: Again, as a reminder, in order to ask a question, press star 1 on your telephone keypad.

Your next question comes from the line of (James Lenard).

(James Lenard): Good morning folks.

Robin Raina: Good morning.

(James Lenard): Would you talk a little bit about your proposed acquisition primarily of how it fits into your existing company and whether it diversifies you geographically or as to your technology?

Robin Raina: Thank you. As we indicated, it’s in Europe, so we’re already doing business in Europe, however, we’re getting into a new part of Europe where we don’t really have - we really haven’t reached out.

It’s an important part of the market for us, and it’s an extremely important part of the market. This player, they are the leader in that market. We are hoping we can recreate what we did in Melbourne when we acquired Heart Consulting a few years back. This player is in a similar position as Heart Consulting was, which means there’s recurring revenue, they’re a strong player in the exchange market and in the broker systems market.

Our effort is since they are a strong player in that market, our belief is that if we can acquire this company, we can go in and cross-sell our other services in those market which means we can sell our carrier systems in that market simply because they are already dealing with those entities out there, core (unintelligible) exchange and have a large size of the market.

It blends it into the convergence concept that we always talk about which means if you have the broker side of the market, you have the exchange already there and now you offer the other side of the telephone which is insurance company systems. You can truly offer true convergence.

So from a perspective of - we believe this is likely to be accretive to all of those, but more than that I think there are two or three reasons we acquired it. One is clearly to have good technology. They’re a leader in that market. It allows us cross-selling opportunities.

We also feel that it also offers a slightly - in Europe it will be a slightly lower cost base for us to be in. As we expand our services in Europe, we had been trying to identify areas where from which base -- a strong base -- from which we can build - where we can build a strong knowledge base of insurance and from there handle Europe rather than go haywire in Europe and have offices in much more expensive economies.

So this actually will fit in well into our strategy.

Does that answer your question?

(James Lenard): Yeah. Thank you.

Robin Raina: Thank you.

Operator: Your next question comes from the line of (Tony Topido).

(Tony Topido): Good morning.

Robin Raina: Good morning.

(Tony Topido): Just a couple of quick questions for you. The first one is I noticed the company’s tax rate is extremely low. I was wondering if you could comment on what the coming expecting tax rate in 2007 and how sustainable this is over the next 12 months.

Robin Raina: I think it’s a great question. We truly expect our tax rate to be in single digits in the year 2007, as it was in the year 2006.

We have implemented a tax strategy worldwide and that should help us doing that.

Also, to - and I think this is an important number, we have cumulative NOL close to $59 million in our books today. So we expect that to help us at some time.

(Tony Topido): Excellent. My next question is I was wondering if you could give a little bit more color on what you believe the revenue and EBIT contributions from (Synorteric) will be in third quarter and fourth quarter.

Robin Raina: Finetre?

(Tony Topido): Finetre, I’m sorry.

Robin Raina: Yeah. You see we have a policy of not issuing guidance and talking about future revenues. It’s very rare that Ebix will ever talk about future revenues of a division. I can talk to you about the fast revenue, though, and Finetre did, for example, in the second quarter. The second quarter, they did $2.185 million, and basically when we acquired them which means their revenue, if you had to do a run rate, they’re pretty much running at a run rate of $8.8 million a year right now.

When we acquired them, the run rate was around $6.7 million, so we have grown their revenue quite a bit and we hope to keep the trend.

(Tony Topido): Excellent. I’ve got one last question on the topic of M&A. If you could give any idea of what deals you might be considering as far as would the metrics you’re looking at as far as valuation, size, future pipeline, etc.

Robin Raina: In terms of acquisitions?

(Tony Topido): Yes.

Robin Raina: In terms of acquisitions, you know, we will be - we are extremely open to anything that makes sense. We are not going to put our company’s future at risk by going in and making a wild acquisition and gamble at it. We’re not just going to do that. We work very hard at getting the company to this point, so we’re going to try and be sensible.

Now if we so find that we can - a sensible acquisition would be, clearly the acquisition has to be accretive. Clearly the acquisition has to generate cash flow, positive cash flows. Clearly it has to fit into our technology stream, and clearly it has to fit into our region plans.

All that is a given. But beyond that, we will clearly try to make sure that at the end of the day it has to make economic sense for our investors in the short term and the long term.

Now, to get to that point whether we have to do that - whether the answer is that it is a really small company, less than - whether it’s $3 million to $5 million revenue, whether it is a $10 million revenue company or maybe it’s a $30 million revenue company, we don’t go into an acquisition strategy with set ideas. We clearly - the set ideas that we carry are that clearly we’re not going to take risks.

So it has to sound - it has to - clearly there is risk and reward in anything. At the same time, you calculate your risk. You don’t want to take heavy risks. You don’t want to put what we’ve done until now at risk.

So once you have that in mind and as long as the basics are right, which means the selling price of that company is a lot higher than it costs, right? I think we basically would look at that acquisition. So we’re not going into the market looking with a set process in terms of size.

However, we do have clear ideas of what industries we want to get into. We have set ideas of what geographies we want to expand into. Clearly we want to - to give you an example, and one example, we clearly identified BPO, insurance BPO, as an area that we want to expand into. So we’re looking at opportunities in that area, also, so that’s just an example.

So we have identified the geographies. We’ve identified the industries. We’ve identified the sectors, but at the end of the day, we’re not really going to make a decision based on whether it is a small company or a large company. It just has to be digestible by us and it has to be finally accretive for our shareholders in the short term and the long term.

(Tony Topido): Perfect. Thank you very much and keep up the good work.

Robin Raina: Thank you.

Operator: Again, to ask a question, press star and the number 1 on your telephone keypad.

At this time there are no questions. You may proceed with your presentation.

Robin Raina: Well, actually, that brings us to the end of the call today. Thank you all for attending the call. As I’ve said, there is a lot more data available on the Ebix Investor Home Page on the Ebix site.

I look forward to speaking to you next quarter.

Thank you.