EBIX Deep Dive (finally...)

Ebix was originally a software provider for the insurance industry, but it has grown to have quite a diversity of businesses under its umbrella. Although Ebix is U.S.-based, it is very much an international business. In 2018, Ebix’s revenue of ~$0.5 billion was split between the U.S., India, and the rest of the world in roughly a 40%:40%:20% ratio. Although I couldn’t find specific numbers regarding how many of Ebix’s employees are U.S.-based, it would appear to be a distinct minority. Ebix disclosed that the total compensation of its median U.S.-based employee is ~$84,100 while the total compensation of the median employee is ~$12,700. Please note that those numbers are for the median employee, but I think the discrepancy is telling. If I’m not mistaken, Ebix has a fairly large team of computer programmers (and other Information Technology specialists) located in India.

For several years, Ebix was a Motley Fool recommendation, although it no longer is. During the years it was recommended by TMF, I studied it carefully. That was years ago, though, and I had definitely lost currency with Ebix news, although I’ve tried to regain some to make this presentation. During those years, Ebix was one of my larger holdings. I viewed inexpensive Indian computer programmers as a career threat, and felt as if owning shares of Ebix helped me hedge that risk. In hindsight, that’s kind of silly – and it wasn’t my only reason for buying shares – but I clearly remember thinking that at the time, and it probably influenced the size of the position I took. Within two years, Ebix had roughly doubled. I sold half of my position. It has roughly doubled again since then (roughly doubled twice, if you look at the all-time highs rather than the current price), but I don’t regret the sale, as it brought Ebix down to a size I considered reasonable for the company in my portfolio. As you’ll learn as you read further, owning Ebix is generally a wild ride. The Chief Executive Officer (CEO) is a character, the company is very acquisitive, but never reveals organic growth, and it suffers short attacks from time to time. Wild ride aside, Ebix has nicely beaten the market for me over the years that I’ve held (more than a decade now), even though the price is down a lot this year. Lately, though, I’ve been wondering whether Ebix is a great company for me to own going forward. So, when Saul expressed an interest in learning more, I said I’d do a deep dive. This post will be that deep dive.

I’ll start with more detail about the business. In its 10-K SEC filing, Ebix uses two sections to describe its business. That, in and of itself, is not unusual, but one of the sections is a bit unusual. To quote the 10-K (p. 6) “Ebix operates data exchanges in the areas of finance, travel, life insurance, annuities, employee health benefits, risk management, workers compensation, insurance underwriting and P&C insurance.” [Sorry if this is obvious, but P&C is property and casualty.] Years ago, when Ebix looked at the insurance industry, it saw the sales process as being very paper-intensive and people-intensive. They knew that computer systems could make the process more efficient and less error-prone. They developed deep insurance industry expertise and set about automating the process. In the years since, they’ve branched out into other areas beyond insurance, although they mostly relate to finance or payments. Exchanges represent 80% of Ebix’s current business. It is their fastest-growing segment. Some of its software is sold as SaaS, but most of it is sold “on demand”. That said, Ebix prides itself on continually updating its software to keep it technically current, hoping to avoid disruption. Ebix reports three other segments, but they tend to be legacy businesses that Ebix isn’t especially trying to grow. These other businesses can add some lumpiness to quarterly and annual results, though. Quickly, they are Broker systems for the P&C industry, Carrier systems for the P&C industry, and the tracking of Certificates of Insurance (called Risk Compliance Solutions). The other section describes the acquisitive nature of Ebix’s growth, going out of the way to state (p. 3) “Once an acquisition is consummated, the infrastructure, personnel resources, sales, product management, development, and other common functions are integrated with our existing operations … Consequently, the concept of “acquisitive growth” versus “organic growth” is obscured…” Ebix made thirteen acquisitions in 2018. Most were very small, although one was ~$180 million and another ~$84 million. All but one of the acquisitions was India-based. There were six acquisitions in 2017 and two in 2016. Most of the late-year 2017 and the first 2018 acquisition were all designed to bolster their Money Transfer Service Scheme (MTSS) business.

Make no mistake about it… Ebix is “The Robin Raina Show”. CEO Raina was born and educated in India, and joined Delphi Systems (the predecessor to Ebix) in 1997. Several quick promotions followed, and he was CEO by 1999, a member of the Board of Directors by 2000, and Chairman of the Board by 2002. The company changed its name to Ebix in 2003. Mr. Raina has somewhat of a larger-than-life personality. In the past, CEO Raina has disclosed that he spends about as much time on his charitable foundation (Robin Raina Foundation “Provides education, healthcare and nutrition to thousands of underprivileged kids worldwide”) as he does on Ebix. He says he is able to do this because he needs and gets very little sleep each night. I don’t know if he still claims those things. Back when I studied Ebix more carefully, there was talk of his liking to spend time in Bollywood circles, but I would suspect that has calmed down a bit – he now has growing children. He does like to be around sports celebrities, though, and Ebix sponsors several tennis players. CEO Raina is the largest shareholder of Ebix. As of July 2019, he owns more than one-eighth of the company, which is pretty impressive for a non-founder. Recently, he asked that his salary be paid in shares of stock at market prices on the pay date, and that this arrangement continue until the EBIX share price reaches $150 per share (or the equivalent, should the shares be split). For comparison, EBIX recently trades around $40/sh., although the all-time high is above $80. One aspect of CEO Raina’s stewardship of Ebix that has always impressed me is that he is very focused on operating margin; he’d rather walk away from low margin business and focus solely where he can get attractive prices for what he’s selling. He generally wants to see a minimum of 30% operating margins in any business he’s contemplating. As a result, Ebix is quite profitable. That said, I found some very interesting information as I worked my way through the geographic breakdown of revenue and pretax income by country. Assuming I am reading Ebix’s disclosures correctly, Ebix has transferred at lot of its intellectual property to subsidiaries in Dubai, where it pays no taxes. As a result, although the revenue it recognizes in Dubai isn’t meaningful, the lion’s share of its pre-tax income (70% in 2018 and 82% in 2017) is recognized in Dubai. I suppose that one can argue that is smart business – recognizing profit in low-tax locales – but it can’t be endearing to governments where this overall-profitable company does significant business, but records a loss (particularly the U.S., where Ebix is headquartered). Over the years, Ebix has shown a preference for smaller accounting/audit firms, and in 2018 it changed its auditor to a company based in India (although it still adheres to U.S. generally-accepted accounting principles (GAAP)). In 2019, it has changed auditors again to the fifth-largest U.S.-based accounting firm. In contrast to auditor turnover, the membership of the Board of Directors has been fairly steady. Six board members have served together since 2005. In 2015, two new board members were added – bringing the total to eight – as part of an agreement with activist investors. The “Standstill Period” expired in 2018. In 2019, one of the two members nominated by the activist group chose to retire, and Ebix reduced the size of the board to seven. Regarding board membership, if I’m not mistaken, good governance practices suggest a balance between continuity and new members with fresh ideas. Ebix seems to skew strongly toward continuity.

Enough talk for a while… Let’s get into some numbers…


Revenue
          1Q        2Q        3Q        4Q
2013   $52,566   $51,004   $50,293   $50,847 = $204,710

2014    51,404    51,476    50,808    60,633 =  214,321
         -2.2%      0.9%      1.0%     19.2%       4.7%
Notes: In 4Q14, acquired Vertex and Oakstone Publishing for ~$50 mill. total

2015    63,753    64,712    66,813    70,204 =  265,482
         24.0%     25.7%     31.5%     15.8%      23.9%

2016    71,066    72,574    74,608    80,046 =  298,294
         11.5%     12.1%     11.7%     14.0%      12.4%

2017    79,103    87,387    82,800   104,681 =  353,971
         11.3%     20.4%     11.0%     30.8%      18.7%
Notes: 2Q17 acq. ItzCash for $120 mill.; in 2H acq 3 MTSS bus for ~$55 mill.; 4Q17 acq. Via for ~$81 mill.

2018   108,230   124,626   128,643   136,327 =  497,826
         36.8%     42.6%     55.4%     30.2%      40.6%
Notes: 2Q acq. Centrum for ~$180 mill.; 4Q acq. Weizmann for ~$84 mill.

2019   142,924   144,275
         32.1%     15.8%

There were numerous other acquisitions, but I only highlighted those where a business (or set of related businesses) cost more than $20 million. As you know, Ebix doesn’t like to talk about organic growth, but it appears to me – based on periods with little acquisition – to be in the very low double-digit range. Looking forward, Ebix has announced an “aspirational goal” of a revenue run rate above $800 million by year-end 2019, acknowledging that they’ll require some inorganic growth to get there. One rather large acquisition that Ebix is trying to close is Yatra Online. CEO Raina dove deeply into India’s travel arrangements landscape during the 4Q18 earnings conference call (before the Yatra acquisition was announced) but, to make a long story short, MakeMyTrip is the largest player in travel in India, and their primary focus is B2C travel arrangements, which is basically the least profitable travel business. Yatra is number two overall, and number one in B2B travel arrangements, but with significant B2C presence. EbixCash is number three overall, second in B2B, with virtually no B2C presence (remember what I said about CEO Raina eschewing low-margin business?). Ebix announced in July 2019 that it intends to buy Yatra and make it part of EbixCash (in essence, all their operations in India, not just travel). In September, Ebix announced that both parties were still diligently working towards consummation of the deal.

Before I move to earnings, let’s look at debt leverage against cash flow from operations (CFFO). This seems appropriate given Ebix’s acquisitiveness. Way back when, I seem to recall that Ebix had this under control, using their cash flow to keep debt manageable. With 2017 and especially 2018, I see that the acquisitions are getting more ambitious (and frequent). I’ll treat “short-term investments” as cash equivalents, which may overstate cash. Debt may be somewhat overstated as the numbers Ebix reports include capital lease obligations.


       Total Debt    Cash    Net Debt     CFFO    Leverage
2014   $121,994    $52,300    $69,694   $58,510	   1.19x
2015    207,106     57,179    149,927    48,686    3.08x
2016    272,226    117,223    155,003    83,748    1.85x
2017    409,131     89,487    319,644    76,807    4.16x
2018    735,687    178,958    556,729    89,869    6.19x
2019*   723,207    107,070    616,137    76,484    8.06x (5.24x?)
* Cash and debt are as of June 30, 2019; CFFO is 1H19 annualized.

Debt as a multiple of cash flow seems to have grown significantly. The reason I’ve given two (very different) leverage number for 2019 is that Ebix settled a long-standing legal suit in 2Q19, which pretty much erased their entire second quarter’s CFFO, after a record first quarter CFFO. Adding the settlement cost back to 2Q19 CFFO yields the lower leverage number. As you’ll see when we get to the earnings numbers, Ebix’s second half is typically stronger than its first half, so annualizing the first half’s cash flow probably understates full-year CFFO, settlement or no.

While we’re (loosely) on the topic of cash, Ebix has announced that it intends to IPO its EbixCash subsidiary, but that it intends to retain a significant number of shares. From a January 2019 press release, “Ebix intends to use that prospective cash to grow its business organically and inorganically in the US and abroad, to repay bank borrowings and to continue share repurchases.” Such a move could alter the company’s leverage dramatically, depending on how many shares are sold, how much debt repayment occurs, and how much CFFO comes from EbixCash. I haven’t found much information beyond that, except that Ebix announced in September 2019 that it has retained three of India’s largest investment banks to manage the proposed IPO. Ebix occasionally breaks out EbixCash revenues, but not consistently enough for me to create a table. When they present EbixCash revenues, the year-over-year numbers are outstanding, but one must consider that part of the growth is acquisition-fueled. The EbixCash IPO is tentatively-scheduled for 2Q20.


Diluted Earnings (GAAP)                         (non-GAAP)**
         1Q      2Q      3Q        4Q             1Q      2Q
2013   $0.45   $0.35   $0.34   $0.40 = $1.54

2014    0.40    0.35    0.47    0.45 =  1.67
       -11.1%    0.0%   38.2%   12.5%    8.4%

2015    0.51    0.54    0.59    0.65 =  2.29
        27.5%   54.3%   25.5%   44.4%   37.1%

2016    0.67    0.70    0.74    0.76 =  2.87
        31.4%   29.6%   25.4%   16.9%   25.3%

2017    0.83    0.74    0.76    0.84 =  3.17
        23.9%    5.7%    2.7%   10.5%   10.5%

2018    0.83    0.92    0.92    1.06* = 3.73
         0.0%   24.3%   21.1%   26.2%   17.7%

2019    0.84    0.94                            $1.04   $1.08
         1.2%    2.2%
* 4Q18 GAAP earnings were $0.27, but I’ve stripped out the effects of the Tax Cut and Jobs Act
** Ebix only started reporting non-GAAP earnings in FY2019

Earnings growth has been spottier than revenue growth. Part of the reason for that is I’m using GAAP numbers (sorry, Saul) and there are often many one-time costs associated with acquisitions and acquisition integrations. I’m sure that non-GAAP growth would have been smoother. Then again, please recall that I said Ebix did thirteen acquisitions in 2018. At what point do these costs cease to be “one-time”?

Are Ebix Shares Expensive or Cheap?
I have an approach that I personally like to use, although it is typically a secondary or tertiary factor in whether I decide to buy, sell, or maintain a holding. I know I’m not quoting Saul here, but my impression of the basic gist is: if you’ve lost confidence in a company, sell it; if you want to own shares of a company, buy some – if things go as expected, you’ll regret having held out for a lower price; you can adjust the size of your holding as your understanding of the company improves. I think that is absolutely sound advice, but I also like to have some sense about where the company’s stock currently is on the continuum of “it hasn’t been this cheap in a long time” to “it hasn’t been this expensive in a long time”. To do this, I create a spreadsheet with roughly five years of financial reporting data and roughly four years of stock price data (1000 trading days, to be precise). For each day of stock price data, I calculate financial ratios based on the data that was publicly-available on that day (often using trailing-twelve-months financial data, which is why I need the extra year of financial data). If 4Q data was released the morning of 3/1 and 1Q data was released on the morning of 5/23, then I’ll attach 4Q financial data to the stock price data on 3/1 through 5/22. I can then sort the spreadsheet by each of the various financial ratios to see where that financial metric (based on the current stock price) stands along the cheap-expensive continuum. I perform statistical analysis to determine which financial ratios seem to offer the strongest signal regarding share price. To quickly state the “bear case” for this methodology, (1) all of the data is backward-looking, while the market is forward-looking; (2) major corporate events can call into question the relevancy of older data – is pre-SendGrid Twilio data still worth anything?; (3) am I tracking the appropriate financial ratios? to date, I haven’t included Net Retention Ratio since the companies for which I have spreadsheets don’t report it; and (4) there are plenty of companies of interest where five years for financial data hasn’t been accumulated yet. While I acknowledge flaws, I am not convinced that the methodology is so deeply-flawed as to not offer some utility, especially for a company with as long a history as Ebix. I am happy to share more of this methodology, but I think that offering details here is EXTREMELY off-topic for Saul’s board. I created a board to discuss this methodology a few years ago. It is now closed due to inactivity, but if I get a few requests (please respond via e-mail, not by a post on Saul’s board), I could probably cajole the powers that be into re-opening that board for further discussion.

Using this analysis, how did Ebix do? Well, the first thing I want to note is that none of the correlations were as strong as I typically see (I don’t have a TON of experience with this analysis, but I think I’ve used it for more than a dozen companies now, perhaps as many as twenty). I can’t say for certain the reason for this, but my best guess is that correlation is low because the price is sometimes driven by factors other than financial metrics – short attacks, in particular. That caveat out of the way, this analysis tells me that Ebix is pretty cheap right now. The metric with the strongest correlation is the GAAP PE ratio and – within the last 1000 trading days, ending on October 4, 2019 – EBIX shares have carried a cheaper GAAP PE ratio only 6% of the time. When I look at Enterprise Value (EV) to Sales, EV/EBITDA, P/EBITDA, and Price to adjusted earnings, EBIX shares have only been cheaper 3% of the time. Sorting on price to free cash flow, EBIX shares are only cheaper 11% of the time. My conclusion based on this analysis is that this would be a lousy time for me to sell my EBIX shares – I should wait for stronger sentiment. I want to be very clear that this analysis doesn’t drive my buy/sell decisions; it is an input – one data point to consider.

Other Random Musings
Robert Kerris rejoined Ebix as Chief Financial Officer (CFO) in September of this year. He had been gone for almost three years after serving as Ebix’s CFO for more than nine years. After a one-year stint at another company, he was doing contract work for various firms. It is not clear what prompted him to leave Ebix, why he wanted to come back, or why Ebix wanted him back. In my opinion, Ebix needs a strong CFO right now, as they try to IPO EbixCash and manage all the debt they have taken on. I hope Mr. Kerris is the right man for the job. He certainly has familiarity with the company and experience working with CEO Raina. Ebix’s leverage numbers were better when Kerris was the CEO. At least according to LinkedIn, the man that Mr. Kerris replaced still serves as Ebix’s Controller, a position he has held for many years.

Ebix has been very shareholder-friendly when it comes to outstanding share count. The diluted share count was above 38.6 million for most of 2014, and is likely to be below 30.7 million for most of 2019. Ebix pays a seven-and-a-half cent per share quarterly dividend, unchanged for many years. At current prices, that is roughly a 0.75% dividend yield.

In August 2019, Roper Technologies (a company I know well and have previously mentioned on this board, but no one seemed interested) acquired iPipeLine from private equity firm Thoma Bravo. I mention this because iPipeline is listed in Ebix’s 10-K as a competitor in three important lines of business for Ebix: Life Insurance Exchange, Annuity Exchange, and Ebix CRM (customer relationship management). The valuation especially caught my attention – Roper is willing to pay up for businesses it likes, but if it overpays, it is not by a wide margin; the corporate headquarters staff are very skillful capital allocators. Roper paid about $1.6 billion for iPipeLine, whose expected 2020 revenues are about $200 million. Wall Street expectations for Ebix’s 2020 revenues are currently over $730 million, yet its market cap is less than $1.25 billion. Ebix’s business portfolio is a bit more diverse than iPipeLine’s, but that is an enormous valuation discrepancy, it seems to me – another data point that Ebix is currently under-valued.

What Am I Going To Do?
Please let me respond to that question with a different question and answer. Coming from a mindset of “I’m buying today because I believe in this company and intend to hold until the underlying investment thesis has changed”, would I buy today? My binary answer would have to be “No.” Saul, and this board’s other participants, have identified other companies that exceed Ebix in that regard. But I have an existing holding, and I’m willing to accept some nuance in my personal answer because I think shares are currently very under-valued. I also believe that the EbixCash IPO has the potential to unlock some of that value. Furthermore, I don’t prefer a portfolio as concentrated as Saul’s (or as many others here), so I see room in it for a potential “sleeper” with a decent chance of significant upside potential. I’ve held Ebix for more than a decade – I can wait a few more quarters for a potentially transformative event (the EbixCash IPO), given the current negative sentiment. If things work out positively, my position is significant enough that I’ll be glad I waited. If things turn out negatively, I’ll see if I can identify take-aways to learn from, but my retirement won’t be placed in jeopardy. If the transformative event I foresee turns out to be a non-event, I’ll probably sell. But EbixCash is too interesting an asset to ignore, especially if Yatra Online becomes part of the picture. The Ebix management team thinks they can improve B2C travel arrangement delivery and pricing to the point that it would meet their operating margin requirements, given their physical footprint in India and their digital prowess, despite the money-losing subsidies that MakeMyTrip currently offers to hotels. It will be interesting to watch how it all plays out.

What more can I tell you? Please let me know.

Fool on!
Thanks and best wishes,
TMFDatabaseBob (long: EBIX, ROP)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

Please note: I am not a member of any newsletter team. My opinions are my own and do not necessarily reflect those of the TMF advisers. I am not an investment professional, merely an investor.

26 Likes

Very thorough review. The nuance you state in the narrative is concerning. Hearing about the CEOs tactics seems to be in line with company performance, but not, necessarily on the right side of questionable. If the numbers are muddled and the CEO has an inspirational, if not crystal clear moral compass, how would you look past those issues to seek investment returns?

I know you state “Hold” through the narrative above, however, I sense this deference to better opportunities (for performance) elsewhere. If EBIX is growing at 140% and all metrics equal to AYX (another long run company), would you still dismiss the issues with CEO and reporting obscurity?

Again, thanks for the very excellent write up.

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Ebix is a different investment than the high flying gazillion times Revs.

It is a value proposition, trading about 10 times to EBITDA, with a catalyst.

While its somewhat colorful CEO is weird, it is a solid business, and has already returned 10 bagger for some. I think it is a good place to put money esp. if the port. is heavily aligned to very expensive SAAS plays.

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