Summary of EBIX INC - Yahoo! Finance

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used herein, the terms "Ebix," "the Company," "we," "our" and "us" refer to Ebix, Inc., a Delaware corporation, and its consolidated subsidiaries as a combined entity.
The information contained in this section has been derived from our historical financial statements and should be read together with our historical financial statements and related notes included elsewhere in this document. The discussion below contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties including, but not limited to: demand and acceptance of services offered by us, our ability to achieve and maintain acceptable cost levels, rate levels and actions by competitors, regulatory matters, general economic conditions, and changing business strategies. Forward-looking statements are subject to a number of factors that could cause actual results to differ materially from our expressed or implied expectations, including, but not limited to our performance in future periods, our ability to generate working capital from operations, the adequacy of our insurance coverage, and the results of litigation or investigation. Our forward-looking statements can be identified by the use of terminology such as "anticipates," "expects," "intends," "believes," "will" or the negative thereof or variations thereon or comparable terminology. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
OVERVIEW
Ebix is focused on the convergence of all insurance channels, processes, and entities in order to facilitate the seamless flow of data. The Company designs products and services that are pioneering and ahead of our competition. The Company's marketing efforts are concentrated on the insurance company, broker, data exchange, and business process outsourcing channels. We offer solutions including an end-to-end insurance portal, exchanges for data transmission, agent management systems, and carrier systems (including end-to-end rating, quoting, policy processing, claims processing, and on-line risk binding). Our customers include hundreds of the top insurance and financial sector companies in the world. 4,500 brokers across 52 countries (including six of the world's top ten insurance brokers) and 70 of the top rated life and annuity insurance companies use Ebix systems and applications. Approximately 70% of Ebix's revenues are of a recurring nature. Typically, rather than license our products in perpetuity, we either license them for a few years with ongoing support revenues, or license them on a limited term basis using a hosting or ASP model.
Management focuses on a variety of key indicators to monitor operating and financial performance. These performance indicators include measurements of revenue growth, operating income, operating margin, income from continuing operations, diluted earnings per share, and cash provided by operating activities. We monitor these indicators, in conjunction with our corporate governance practices, to ensure that business vitality is maintained and effective control is exercised.

Table of Contents

The key performance indicators for the twelve months ended December 31, 2008, 2007, and 2006 were as follows:

                                                   Key Performance Indicators
                                                Twelve Months Ended December 31,
                                                2008             2007          2006
                                                     (Dollars in thousands,
                                                     except per share data)
    Revenue                                 $     74,752       $  42,841     $ 29,253
    Revenue growth                                    74 %            46 %         21 %
    Operating income                        $     29,264       $  12,801     $  6,712
    Operating margin                                  39 %            30 %         23 %
    Net Income                              $     27,314       $  12,666     $  5,965
    Diluted earnings per share              $       2.28       $    1.20     $   0.63
    Cash provided by operating activities   $     26,825       $  15,039     $  4,375

RESULTS OF OPERATIONS

Ebix, Inc. Subsidiaries

                                      Year Ended        Year Ended        Year Ended
                                     December 31,      December 31,      December 31,
                                         2008              2007              2006
                                                      (In thousands)
    Operating revenue:               $      74,752     $      42,841     $      29,253
    Operating expenses:
    Costs of services provided              14,161             7,114             5,916
    Product development                      8,962             7,609             5,234
    Sales and marketing                      4,344             4,116             3,002
    General and administrative              14,715             8,602             6,594
    Amortization and depreciation            3,306             2,599             1,795

    Total operating expenses                45,488            30,040            22,541

    Operating income                        29,264            12,801             6,712
    Interest income (expense), net          (1,151 )             151               (61 )
    Foreign exchange gain (loss)               586               247                (6 )

    Income before taxes                     28,699            13,199             6,645
    Income tax expense                      (1,385 )            (533 )            (680 )

    Net income                       $      27,314     $      12,666     $       5,965

Table of Contents

TWELVE MONTHS ENDED DECEMBER 31, 2008 AND 2007
Operating Revenue
Total revenue-The Company's revenues are derived primarily from the services sector with a smaller portion coming from the software licensing business. Service sector revenue includes transaction fees, hosting fees, implementation, software development and customization, maintenance, consulting, training and project management services provided to the Company's customers using our data exchanges, ASP platforms, and other services. Software licensing revenue includes revenue derived from the licensing of our proprietary platforms and the licensing of third party software applications. During the twelve months ended December 31, 2008 our total revenue increased $31.9 million or 74%, to $74.8 million in 2008 compared to $42.8 million in 2007. The increase in operating revenue is a result of both organic and acquisitive growth with the effect of recently completed business combinations having greater impact. We have consistently demonstrated the ability to quickly integrate business acquisition into existing operations and thereby rapidly leverage product cross-selling opportunities. The specific components of our revenue and the changes experienced during the past year are discussed further below. Services revenue increased $33.7 million or 86%, from $39.4 million in 2007 to $73.1 million in 2008. Essentially all divisions and sales channels achieved revenue increases during 2008, as further discussed below.
Carrier Systems division revenue increased $0.5 million due primarily to system development work being done for large insurance carrier customers of our Infinity division.
Exchange division revenues increased $23.0 million which includes revenue increases of approximately $15.7 million from the EbixExchange-Australia (formerly Telstra eBusiness Services; acquired in January 2008), $4.9 million from the EbixHealth (formerly Acclamation; acquired in August 2008). EbixExchange-U.S. (which includes our annuity and life insurance exchanges) achieved a $3.7 million increase in revenues during 2008.
BPO division revenues increased $7.1 million which includes revenue increases of approximately $5.5 million from EbixBPO's-Hemet, CA operations (formerly IDS; acquired in November 2007), $596 thousand from the EbixBPO's-Portland, MI operations (formerly Periculum; acquired in April 2008), and $1.1 million from EbixBPO's-San Diego, CA operations (formerly ConfirmNet; acquired in November 2008). EbixBPO's-Hemet, CA operation represents the headquarters of the newly formed EbixBPO division.
Broker Systems division revenue increased $1.3 million primarily from growth in our Australian operations.
Partially offsetting these increases to our services revenue is a $412 thousand reduction in support and maintenance revenues associated with our legacy products. We expect that the support and maintenance services associated with the Company's legacy products will continue to decrease due to our pronounced philosophy of finishing legacy support as an offering in the future. Software licensing revenue decreased $1.8 million or 53%, from $3.5 million in 2007 to $1.6 million in 2008. This decrease is primarily associated with two significant contracts executed in 2007 by our Infinity division (an operating component of Carrier Systems division). The customer arrangements involved the sale of source code and application software licenses.

Table of Contents

Costs of services provided
Costs of services provided, which includes costs associated with customer support, consulting, implementation, and training services, increased $7.0 million or 99%, from $7.1 million in 2007 to $14.2 million in 2008. This increase is related to the full year inclusion related costs incurred by IDS and Telstra (acquired in November 2007 and January 2008, respectively) which added $4.4 million to the costs of providing customer services, and to the recent acquisitions of Periculum, Acclamation and Confirmnet (acquired in April 2008, August 2008 and November 2008, respectively) which added $2.2 million to the costs of providing services to our customers. Overall our costs of services provided as a percentage of revenues increased to 18.9% in 2008 from 16.6% in 2007.
Product development expenses
Product development expenses increased $1.4 million or 18%, from $7.6 million in 2007 to $9.0 million in 2008. The Company's product development efforts continue to be focused on the enhancement of the EbixExchange, EbixLife, Insurance Certificate- BPO, AnnuityNet, and LifeSpeed BRICS, and eGlobal, product and service lines, the development new technologies for insurance carriers, brokers and agents, and the development of new exchanges for international and domestic markets. During the year we experienced an $872 thousand increase in support of product development costs in our Exchange division, and a $211 thousand increase in product development costs in support of our Carrier Systems division. Overall our product development expenses as a percentage of revenues decreased from to 12.0% in 2008 from 17.8% in 2007.
Sales and marketing expenses
Sales and marketing expenses increased $228 thousand or 6%, from $4.2 million in 2007 to $4.3 million in 2008. This increase is attributable to $1 million of additional costs attributable to the recent acquisitions of Telstra and Acclamation, offset by approximately $775 thousand of cost reductions in our U.S. operations as a result of deploying more efficient means of reaching out to our market base and cost reductions in support of our legacy products. Overall our sales and marketing expenses as a percentage of revenues decreased to 5.8% in 2008 from 9.6% in 2007.
General and administrative expense
General and administrative expenses increased $6.1 million or 71%, from $8.6 million in 2007 to $14.7 million in 2008. Approximately $4.2 million of this increase is associated with payroll, communications, and facility costs attributable to the recent acquisitions of Telstra and Acclamation. We also experienced increases in general and administrative expenses in our U.S. headquarters aggregating to approximately $2.0 million, which were principally associated with increases in discretionary share-based compensation, travel related costs, audit and legal fees, and investor relations costs. Overall our general and administrative expenses as a percentage of revenue slightly decreased to 19.7% in 2008 from 20.1% in 2007. Amortization and depreciation expenses
Amortization and depreciation expenses increased $707 thousand, or 27%, from $2.6 million in 2007 to $3.3 million in 2008. The increase is primarily due to the amortization of the customer relationship and developed technology intangible assets that were acquired in connection with our acquisitions of Telstra, Acclamation, and ConfirmNet which increased amortization expenses by $469 thousand, $97 thousand, and $43 thousand respectively.

Table of Contents

Interest Expense (net)
Interest expense (net of interest income) increased $1.0 million, from $151 thousand in 2007 to $1.2 million in 2008. The increase is primarily due to additional borrowings on the Company's revolving line of credit in the amount of $9.3 million at an average interest of 4.55% giving rise to approximately $423 thousand of additional interest expense, and the issuance of two convertible debt promissory notes in the aggregate amount of $35 million ($20 million in December 2007 and $15 million in July 2008) at an interest rate of 2.5% resulting in approximately $672 thousand of incremental interest expense. Income Taxes
Income tax expense increased $852 thousand, or 160%, from $533 thousand in 2007 to $1.4 million in 2008. Our effective tax rate was 4.83% for the twelve months ended December 31, 2008, down from 4.04% for the same period in 2007. Primarily affecting the increase in income tax expense and our consolidated effective tax rate is the impact of statutory tax rates associated with the change in the mix of taxable income amongst the various domestic and foreign tax jurisdictions in which the Company operates. Favorably impacting our consolidated effective tax rate is result of advantages the Company has from conducting activities in certain foreign low tax jurisdictions. Furthermore, in the United States, the Company utilized $9.3 million of available net operating losses to offset our taxable income.
TWELVE MONTHS ENDED DECEMBER 31, 2007 AND 2006
Operating Revenue
Total revenue-The Company's revenues are derived primarily from the services sector with a smaller portion coming from the software licensing business. Service sector revenue includes transaction fees, hosting fees, implementation, software development and customization, maintenance, consulting, training and project management services provided to the Company's customers using our exchanges and other services. Software licensing revenue includes revenue derived from the licensing of our proprietary platforms and the licensing of third party software applications. During the twelve months ended December 31, 2007 our total revenue increased $13.6 million or 46%, to $42.8 million in 2007 compared to $29.3 million in 2006. $6.6 million of this revenue increase is attributable to the full year inclusion of revenues generated by Infinity and Finetre acquired in May and October of 2006 respectively, and $1.1 million is attributable the two months of revenue generated by Jenquest acquired in November 2007. The specific components of our revenue and the changes experienced during the past year are discussed further below.
Services revenue increased $11.8 million or 43%, from $27.6 million in 2006 to $39.4 million in 2007. Virtually all divisions of Ebix showed an increase in revenue during 2007 (excluding the expected continued reduction in revenues derived from the support of our legacy product lines).
Carrier systems division revenue increased $2.7 million which includes approximately $1.4 million resulting from full year inclusion of revenue generated by Infinity which we acquired in May 2006.
EbixExchange division revenues increased $9.2 million which includes approximately $5.2 million resulting from the full year inclusion of revenue generated by our Finetre which we acquired in October 2006.
BPO division revenues increased $1.1 million primarily due to our recent acquisition of Jenquest (d.b.a. Insurance Data Services division and renamed to "EBIX BPO") which was acquired in November 2007.

Table of Contents

Partially offsetting these increases to our services revenue is a $480 thousand in reduction in support and maintenance revenues associated with our legacy products. We expect that the support and maintenance services associated with the Company's legacy products will continue to decrease due to our pronounced philosophy of finishing legacy support as an offering in the future. The Company will maintain the support of these legacy products as contractually required or for as long as we deem it is economically feasible to do so, after which we will discontinue further associated support services.
Software licensing revenue increased $1.8 million or 109%, from $1.7 million in 2006 to $3.5 million in 2007. This increase is primarily associated with two significant long-term contracts executed by our Infinity division and involves the sale of source code, software licenses, and customization and implementation services.
During 2007 approximately $1.7 million was recognized as services revenue from Brit Insurance Holdings PLC ("Brit") and its affiliates related to development projects. Revenue from Brit and its affiliates represented 4% of our revenues for 2007. The revenue from Brit relates primarily relates to the customization of BRICS for the London market, hosting services, software development services, and transaction processing fees. As of December 31, 2007, Brit held 730,163 shares of common stock, representing 22% percent of our outstanding common stock as of December 31, 2007.
Costs of services provided
Costs of services provided increased $1.2 million or 20%, from $5.9 million in 2006 to $7.1 million in 2007. This increase is primarily caused by the full year inclusion of payroll and facility costs incurred in our Finetre and Infinity divisions, both of which were acquired during 2006, which added $1.1 million of expense in 2007, and $581 thousand of costs incurred in our recently added Insurance Data Services division acquired in November 2007. Overall our costs of services provided as a percentage of revenues were reduced to 16.6% in 2007 from 20.2% in 2006.
Product development expenses
Product development expenses increased $2.4 million or 45%, from $5.2 million in 2006 to $7.6 million in 2007. Factors causing this increase in costs are the effect of including a full year of payroll and facility costs incurred by our Finetre and Infinity divisions, acquired during 2006 and which added approximately $2.0 million of operating costs during 2007. Overall our product development expenses as a percentage of revenues remained at 17.8% during the years of 2007 and 2006.
Sales and marketing expenses
Sales and marketing expenses increased $1.1 million or 37%, from $3.0 million in 2006 to $4.2 million in 2007. The primary causes for this cost increase are the inclusion of twelve months of payroll, travel, and facility costs incurred by the Infinity and Finetre divisions, acquired in May and October of 2006 respectively and which added approximately $1.1 million to our operating costs during 2007, and $206 thousand of additional payroll related expenses due to headcount and compensation increases. Overall our sales and marketing expenses as a percentage of revenues were reduced to 9.6% in 2007 from 10.3% in 2006. General and administrative expense
General and administrative expenses increased $2.0 million or 30%, from $6.6 million in 2006 to $8.6 million in 2007. This increase is primarily caused by staff additions and increased payroll related costs. Also contributing to the increase in general and administrative costs is the inclusion of a full year of payroll, facility, and communication costs incurred by the Finetre division, acquired in October 2006 and which added approximately $240 thousand to our operating costs during 2007. Overall our general and administrative expenses as a percentage of revenue were reduced to 20.1% in 2007 from 22.5% in 2006.

Table of Contents

Amortization and depreciation expenses
Amortization and depreciation expenses increased $804 thousand, or 45%, from $1.8 million in 2006 to $2.6 million in 2007. This increase is due primarily to the acquisitions of Infinity and Finetre in May and October of 2006, respectively, which resulted in $420 thousand of additional amortization costs with respect to the related acquired intangible assets, and our capital expenditures during year for equipment and facilities which caused a $195 thousand increase to depreciation expense. Income Taxes
Income tax expense decreased $147 thousand, or 22%, from $680 thousand in 2006 to $533 thousand in 2007. Our effective tax rate was 4.04% for the twelve months ended December 31, 2007, down from 10.2% for the same period in 2006. The reduction in tax expense was primarily due to the recognition of certain deferred tax assets (net of the respective valuation allowances) as related to temporary timing differences associated with specific expense and revenue items that are treated differently for purposes of determining book and taxable income. Also affecting the decrease in income tax expense and our consolidated effective tax rate was the impact of statutory tax rates associated with the change in the mix of taxable income amongst the various domestic and foreign tax jurisdictions in which the Company operates. In the United States, the Company utilized $14.0 million of available net operating losses to partially offset our taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are the cash flows provided by our operating activities, our revolving credit facility, and cash and cash equivalents on hand. Our ability to generate cash from operations is one of our fundamental financial strengths. We intend to utilize cash flows generated by our ongoing operating activities, in conjunction with renewing our revolving credit facility, and sales of our common stock to fund capital expenditures and growth initiatives, make acquisitions, and to retire outstanding indebtedness. We believe that anticipated cash flows provided by our operating activities, together with current cash balances and access to our credit facilities and the capital markets, if required, will be sufficient to meet our projected cash requirements for the next twelve months, and the foreseeable future thereafter, although any projections of future cash needs, cash flows, and the general market condition for credit and equity securities may be subject to substantial uncertainty.
We continue to strategically evaluate our ability to sell additional equity or debt securities, to expand existing or obtain new credit facilities from lenders, and to restructure our debt structure in order to strengthen our financial position. The sale of additional equity or convertible debt securities could result in additional dilution to our shareholders. We regularly evaluate our liquidity requirements, including the need for additional debt or equity offerings, when considering potential business acquisitions, development of new products or services, or the retirement of debt. Specifically during 2009 the Company will focus both on reducing our debt structure, and executing synergistic acquisitions of businesses that complement our product offerings. In order to support such activities, the Company may seek additional equity funding. There are no assurances that such equity financing facilities will be available in amounts or on terms acceptable to us, if at all. Our cash and cash equivalents were $9.5 million and $48.4 million at December 31, 2008 and 2007, respectively. A substantial portion of our available cash balances at December 31, 2007 were used to finance the acquisition of Telstra eBusiness Services on January 2, 2008.

Table of Contents

Operating Activities
For the twelve months ended December 31, 2008, the Company generated $26.8 million of net cash flow from operating activities compared to $15.0 million for the year ended December 31, 2007, a 76% increase. The major source of cash provided by operating activities for 2008 was net income of $27.3 million, net of $(2.9) million in working capital requirements, $3.3 million of depreciation and amortization, and $703 thousand of non-cash compensation.
Our net cash flow from operating activities for the twelve months ended December 31, 2007 was $15.0 million compared to $4.4 million for the same period in 2006, a 241% increase. The major sources of cash provided by operating activities for 2007 was net income of $12.7 million, net of $2.6 million of depreciation and amortization and a $142 thousand increase in deferred revenue. Investing Activities
Net cash used for investing activities totaled $73.3 million for the twelve months ended December 31, 2008, of which $43.0 million was used for the January 2008 purchase of Telstra (net of 1.3 million of cash acquired), $21.4 million was used for the August 2008 purchase of Acclamation (net of the $635 thousand of cash acquired), $1.1 million was used for the April 2008 purchase of Periculum (net of the 30 thousand of cash acquired), $7.3 million was used for the November 2008 purchase of ConfirmNet (net of $61 thousand cash acquired), $500 thousand was used to fulfill an earn-out payment to for shareholders of Infinity (a 2006 business acquisition) and $614 thousand was used for capital expenditures pertaining to the enhancement of our technology platforms and the purchases of operating equipment. The Telstra acquisition was financed with a combination of $1.6 million of available cash reserves, $16.5 million from the Company's line of credit, $20.0 million of convertible debt, and $5.7 million from sales of the Company's common stock. The Periculum acquisition was financed using existing cash reserves. The Acclamation acquisition was financed with a combination of $7.0 million of available cash and $15.0 million of convertible debt. The ConfirmNet acquisition was financed using available cash balances.
During the twelve months ending December 31, 2007 net cash used for investing activities totaled $15.6 million, of which $11.3 million was used for the November 2007 acquisition of IDS and $1.8 million was used for capital expenditures related to the enhancement of our technology platforms, and the purchases of operating equipment. The prior IDS shareholders retained the right to earn up to $1.4 million in additional payments over two years if certain revenue and operating income targets were achieved. During the 1st quarter of 2009 $1.0 million was paid to the former owners of IDS. The IDS acquisition was financed utilizing the Company's revolving line of credit. Financing Activities
Net cash provided by financing activities for the twelve months ended December 31, 2008 totaled $12.3 million. During the 2008 reporting period the Company borrowed $9.3 million from our revolving line of credit, received . . .