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EBIX > SEC Filings for EBIX > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for EBIX INC


10-May-2013

Quarterly Report


Item 2: 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, except where it is clear that the terms mean only Ebix, Inc. Safe Harbor for Forward-Looking Statements-This Form 10-Q and certain information incorporated herein by reference contains forward-looking statements and information within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and
Section 21E of the Securities Exchange Act of 1934. This information includes assumptions made by, and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, acceptance of the Company's products by the market, and management's plans and objectives. In addition, certain statements included in this and our future filings with the Securities and Exchange Commission ("SEC"), in press releases, and in oral and written statements made by us or with our approval, which are not statements of historical fact, are forward-looking statements. Words such as "may," "could," "should," "would," "believe," "expect," "anticipate," "estimate," "intend," "seeks," "plan," "project," "continue," "predict," "will," "should," and other words or expressions of similar meaning are intended by the Company to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements are found at various places throughout this report and in the documents incorporated herein by reference. These statements are based on our current expectations about future events or results and information that is currently available to us, involve assumptions, risks, and uncertainties, and speak only as of the date on which such statements are made.
Our actual results may differ materially from those expressed or implied in these forward-looking statements. Factors that may cause such a difference, include, but are not limited to those discussed and identified in Part I, Item 1A, "Risk Factors" in our 2012 Form 10-K which is incorporated by reference herein, as well as: the willingness of independent insurance agencies to outsource their computer and other processing needs to third parties; pricing and other competitive pressures and the Company's ability to gain or maintain share of sales as a result of actions by competitors and others; changes in estimates in critical accounting judgments; changes in or failure to comply with laws and regulations, including accounting standards, taxation requirements (including tax rate changes, new tax laws and revised tax interpretations) in domestic or foreign jurisdictions; exchange rate fluctuations and other risks associated with investments and operations in foreign countries (particularly in Australia, Brazil, and Europe wherein we have significant or growing operations); equity markets, including market disruptions and significant interest rate fluctuations, which may impede our access to, or increase the cost of, external financing; and international conflict, including terrorist acts. Except as expressly required by the federal securities laws, the Company undertakes no obligation to update any such factors, or to publicly announce the results of, or changes to any of the forward-looking statements contained herein to reflect future events, developments, changed circumstances, or for any other reason.
The important risk factors that could cause actual results to differ materially from those in our specific forward-looking statements included in this Form 10-Q include, but are not limited to, the following:

Regarding Note 4 of the Notes to the Condensed Consolidated Financial Statements, and our future liquidity needs discussed under "Liquidity and Financial Condition" as pertaining to our ability to generate cash from operating activities and any declines in our credit ratings or financial condition which could restrict our access to the capital markets or materially increase our financing costs;

With respect to Note 5 of the Notes to the Condensed Consolidated Financial Statements, "Commitments and Contingencies", and "Contractual Obligations and Commercial Commitments" in MD&A, as regarding to changes in the market value of our assets or the ultimate actual cost of our commitments and contingencies;

With respect to Note 3 of the Condensed Notes to the Condensed Consolidated Financial Statements as pertaining to the business acquisitions we have made and our ability to efficiently and effectively integrate acquired business operations, and our ability to accurately estimate the fair value of tangible and intangible assets;

With respect this Management Discussion & Analysis of Financial Condition and Results of Operation and the analysis of the three month revenue trends including the actual realized level of demand for our products during the immediately foreseeable future.

Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including future reports on Forms 10-Q and 8-K, and any amendments thereto. You may obtain our SEC filings at our website, www.ebix.com under the "Investor Information" section, or over the Internet at the SEC's website, www.sec.gov. The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part 1, Item 1 of this Quarterly Report, and the audited consolidated financial statements and


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notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

Company Overview
Ebix, Inc. is a leading international supplier of software and e-commerce solutions to the insurance industry. Ebix provides a variety of application software products for the insurance industry ranging from carrier systems, agency systems and data exchanges to custom software development for all entities involved in insurance and financial services. Our goal is to be the leading powerhouse of back-end insurance transactions in the world. The Company's vision is to focus on the convergence of technology platforms for all insurance channels, processes and entities in a manner such that data seamlessly flows once a data entry has been made. Our customers include many of the top insurance and financial sector companies in the world.
The insurance industry continues to undergo significant consolidation driven by the need for, and benefits from, economies of scale and scope in providing insurance services in a competitive environment. Furthermore the insurance industry has particularly experienced a steady increase in the desire to reduce paper-based processes and to improve efficiency both at the back-end and consumer end sides. Such consolidation has involved both insurance carriers and insurance brokers and is directly impacting the manner in which insurance products are distributed. Management believes the insurance industry will continue to experience significant change and increased efficiencies through online exchanges, as the transition from paper-based processes are increasingly becoming the norm across world insurance markets. Changes in the insurance industry are likely to create new opportunities for the Company. Ebix strives to work collaboratively with clients to develop innovative technology strategies and solutions that address specific business challenges. Ebix combines the newest technologies with its capabilities in consulting, systems design and integration, IT and business process outsourcing, applications software, and Web and application hosting to meet the individual needs of insurance providers and related entities. We intend to expand both organically and through strategic business acquisitions. Offices and Geographic Information
The Company has its worldwide headquarters in Atlanta, Georgia with its international operations being managed from its Singapore offices. The Company has operations across the United States with offices in Walnut Creek, San Diego, Pasadena, Fresno, Santa Barbara and Hemet, California; Miami, Florida; Pittsburgh, Pennsylvania; Park City, Utah; Herndon and Lynchburg, Virginia; Dallas and Houston, Texas; Norwalk, Connecticut; and Columbus, Ohio, as well as an additional operating facility in Atlanta, Georgia. The Company also has offices in Australia, Brazil, China, Japan, New Zealand, United Kingdom, Canada and India. In these offices, Ebix employs insurance and technology professionals who provide products, services, support and consultancy to thousands of customers across six continents. The Company's product development unit in India has been awarded Level 5 status of the Carnegie Mellon Software Engineering Institute's Capability Maturity Model Integrated (CMMI), ISO 9001:2000 certification, and ISO 2700 security certification.
Results of Operations - Three Months Ended March 31, 2013 and 2012 Operating Revenue
The Company derives its revenues primarily from subscription and transaction fees pertaining to services delivered over our exchanges or from our ASP platforms, fees for business process outsourcing services, and fees for software development projects including associated fees for consulting, implementation, training, and project management provided to customers with installed systems. Ebix's revenue streams come from four product channels. Presented in the table below is the breakout of our revenues for each of those product channels for the three months ended March 31, 2013 and 2012, respectively.


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                                          Three Months Ended
                                              March 31,
(dollar amounts in thousands)              2013         2012
Exchanges                              $    41,686    $ 34,646
Broker Systems                               4,722       4,754
Business Process Outsourcing ("BPO")         4,164       3,571
Carrier Systems                              1,994         856
Totals                                 $    52,566    $ 43,827

During the three months ended March 31, 2013 our total operating revenues increased $8.7 million or 20%, to $52.6 million as compared to $43.8 million during the first quarter of 2012. The increase in revenues is a summation of revenue from business acquisitions completed during 2012 and the continued growth achieved in our Exchange channel, slightly offset by a reduction in Broker revenues. Ebix Carrier and BPO revenues increased by 113% and 17% respectively on a year over year basis. The increase in Carrier revenues are the result of a targeted emphasis on larger scale professional service projects to clients in this product channel. This Carrier channel has four significant ongoing customer projects resulting in a large increase of delivered services. With regards to business acquisitions, the Company continues to immediately and efficiently leverage product cross-selling opportunities across all channels, as facilitated by our operating philosophy and business acquisition strategy. With respect to business acquisitions completed during the fiscal year 2012 on a pro forma basis, as disclosed in the table in Note 3 "Pro Forma Financial Information" to the enclosed condensed consolidated financial statements, combined revenues increased 2.9% for the first quarter of 2013 vs. the first quarter of 2012 whereas there was a 19.5% increase in reported revenues for the same comparative period. The cause for the difference between the 19.5% increase in reported Q1 2013 revenue versus Q1 2012 revenue, as compared to the 2.9% increase in Q1 2013 pro forma versus Q1 2012 pro forma revenue is due to the effect of combining the additional revenue derived from those businesses acquired during the year 2012, specifically BSI, Taimma, PlanetSoft, Fintechnix, and TriSystems, with the Company's pre-existing operations. The 2013 and 2012 pro forma financial information assumes that all such business acquisitions were made on January 1, 2012, whereas the Company's reported financial statements for Q1 2012 only includes the revenues from the businesses since the effective date that they were acquired by Ebix, and therefore includes no revenue for any of the following companies: PlanetSoft, TriSystems, BSI, Taimma and Fintechnix as they were all acquired after Q1 2012. The 2012 pro forma financial information includes a full three months of results for PlanetSoft, TriSystems, BSI, Taimma and Fintechnix as if they had been acquired on January 1, 2012.

Also partially affecting reported revenues was the impact from fluctuations in the exchange rates for the foreign currencies in the countries in which we conduct operations. During Q1 2013 the change in foreign currency exchange rates decreased reported consolidated operating revenues by $355 thousand when using Q1 2012 foreign currency rates as a benchmark.

The above referenced pro forma table and the relative change in pro forma and actual revenues are based on the following premises:

              2012 and 2013 pro forma revenue contains actual revenue of the
               acquired entities before acquisition date, as reported by the
               sellers, as well as actual revenue of the acquired entities after
               acquisition. Growth in revenues of the acquired entities after
               acquisition date are only reflected for the period after their
               acquisition.


              Revenue billed to existing clients from the cross selling of
               acquired products has been assigned to the acquired section of our
               business.


              Any existing products sold to new customers acquired through the
               acquisition customer base, has also been assigned to the acquired
               section of our business.


              2012 pro forma revenues include revenues from some product lines
               whose sale was discontinued after the acquisition date and
               revenues from some customers whose contracts were discontinued.
               This is typically done for efficiency and/or competitive reasons.


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Cost of Services Provided
Costs of services provided, which includes costs associated with maintenance, support, call center, consulting, implementation and training services, increased $862 thousand or 10%, from $9.0 million in the first quarter of 2012 to $9.9 million in the first quarter of 2013. This increase is due to additional personnel costs, professional service expenses, and operating costs in support of expanded revenue streams associated with business acquisitions made during 2012.
Product Development Expenses
The Company's product development efforts are focused on the development of new operating technologies and services for use by insurance carriers, brokers and agents, and the development of new data exchanges for use in the domestic and international insurance markets. Product development expenses increased $2.8 million or 65% from $4.3 million during the first quarter of 2012 to $7.0 million during the first quarter of 2013. This increase is attributable to additional personnel costs and professional service expenses associated with increased software and system development activities within our Exchange channel and at India operating centers in support of further revenue growth for the Company.
Sales and Marketing Expenses
Sales and marketing expenses increased $100 thousand or 3%, from $3.8 million in the first quarter of 2012 to $3.9 million in the first quarter of 2013. This increase is attributable to additional professional service expenses, travel related costs, and trade show expenses in support of the continuing increase in revenues generated from our Exchange channel. General and Administrative Expenses
General and administrative expenses increased by $3.5 million or 55% from $6.4 million in the first quarter of 2012 to $10.0 million in the first quarter of 2013. The primary causes for the increase in general and administrative ("G&A") expenses were $1.4 million of additional personnel related costs associated with certain business acquisitions made in 2012, $392 thousand of increased corporate insurance and employee health insurance costs, $250 thousand of increased telecommunication costs, and approximately $400 thousand of additional legal expenses associated with the recently announced merger with an affiliate of Goldman, Sachs & Co. Also affecting the year over year increase in G&A expenses is the fact that in Q1 of 2012 the Company realized a benefit in the approximate amount of $971 thousand related to a termination fee received by the Company in connection with a failed business acquisition (net of significant directly related internal operating costs incurred by the Company and a portion of the fee that then had to be paid to our investment banker). Amortization and Depreciation Expenses
Amortization and depreciation expenses increased $511 thousand or 26%, from $1.9 million in the first quarter of 2012 to $2.5 million in the first quarter of 2013. This net increase is primarily due to $526 thousand of additional amortization costs associated with the customer relationship and developed technology intangible assets that were acquired in connection with the business acquisitions of BSI, Taimma, PlanetSoft, Fintechnix and TriSystems completed during 2012.
Interest Income
Interest income decreased $74 thousand or 44% from $167 thousand in the first quarter of 2012 to $93 thousand in the first quarter of 2013. Interest income was comparatively less due to less earnings realized from funds in certain foreign banks.
Interest Expense
Interest expense increased $109 thousand or 43%, from $253 thousand in the first quarter of 2012 to $362 thousand in the first quarter of 2013. Interest expense increased due to the fact that the aggregate outstanding balance on the Company's credit facility increased from $46.8 million at March 31, 2012 to $74.6 million at March 31, 2013.
Other Non-Operating Income
Other non-operating income for the three months ended March 31, 2013 in the amount of $82 thousand pertains to the gain recognized in regards to the decrease in the fair value of the put option that was issued to the former stockholders of PlanetSoft, acquired by Ebix in June 2012, who received shares of Ebix common stock as part of the acquisition consideration paid by the Company.


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Foreign Currency Exchange Loss
Net foreign currency exchange losses for the three months ended March 31, 2013 in the amount of $170 thousand pertained to losses realized upon the settlement of or recognized upon re-measurement of certain transactions denominated in currencies other than the functional currency of the respective operating division.
Income Taxes
The Company recognized income tax expense of $1.6 million for the three months ended March 31, 2013, as compared to $2.3 million for the three months ended March 31, 2012. Comparatively the income tax expense decreased from a year earlier due to a decrease in the effective tax rate. The Company's effective tax rate used in the determination of its interim period tax provision for the quarter was 8.32% as compared to the 12.52% effective tax rate for the same period a year earlier. The effective rate decreased due to a greater proportion of our taxable income being generated from jurisdictions with lower tax rates. The Company's interim period income tax provisions are based on our estimate of the effective income tax rate for the full current year, after eliminating discrete items uniquely related to the respective interim reporting period.

Liquidity and Capital Resources
The Company's ability to generate significant cash flows from its ongoing operating activities is one of our fundamental financial strengths. Our principal sources of liquidity are the cash flows provided by the Company's operating activities, our commercial banking credit facility, and cash and cash equivalents on hand. Due to the effect of temporary or timing differences resulting from the differing treatment of items for tax and accounting purposes (including the treatment of net operating loss carryforwards and minimum alternative tax obligations in the U.S. and India), future cash outlays for income taxes are expected to exceed income tax expense. We intend to utilize cash flows generated by our operations, in combination with our bank credit facility, and the possible issuance of additional equity or debt securities, to fund capital expenditures and organic growth initiatives, and to make strategic business acquisitions in the insurance services sector.

In the fourth quarter of 2011 the Company paid its first quarterly dividend in the amount of $0.04 per common share. This same quarterly dividend per share was paid again in February 2012. The dividend rate was increased to $0.05 effective with the dividend payment made in May 2012, and the same dividend payment was made in August 2012 and November 2012. On November 7, 2012 Ebix's Board of Directors increased the regular quarterly dividend by 50% to 7.5 cents per outstanding share of the Company's common stock to be paid in February 2013, which was paid in February 2013.
We believe that anticipated cash flows provided by our operating activities, together with current cash and cash equivalent balances, access to our credit facilities, and access to the capital markets, if required and available, 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 condition of the capital markets in general, as to the availability of debt and equity financing, are subject to substantial uncertainty.
Our cash and cash equivalents were $43.0 million and $36.4 million at March 31, 2013 and December 31, 2012, respectively. Our cash and cash equivalents balance has increased by $6.6 million since year end 2012, as a result of cash generated by our ongoing operating activities partially offset by dividend and term loan payments. The Company holds material cash balances overseas in foreign jurisdictions. The free flow of cash from certain countries where we hold such balances may be subject to repatriation tax effects and other restrictions. Furthermore, the repatriation of earnings from some of our foreign subsidiaries would result in the application of withholding taxes at source as well as a tax at the U.S. parent level upon receipt of the repatriated amounts. The approximate cash, cash equivalents, and short-term investments balances held in our domestic U.S. operations and each of our foreign subsidiaries as of May 8, 2013 are presented in the table below (figures denominated in thousands):

              United
              States       Canada       Latin America       Australia       Singapore       New Zealand       India      Europe       Sweden       Total
Cash and ST
investments $  16,475     $ 4,009     $           767     $    11,176     $     2,458     $       3,353     $ 1,727     $ 2,066     $     16     $ 42,047

Our current ratio increased to 1.56 at March 31, 2013 up from 1.44 at December 31, 2012 and our corresponding working capital position increased to $32.1 million at March 31, 2013 from $25.0 million at the end of the 2012. Our short-term liquidity position has improved due to increased available cash balances and trade receivables in combination with reduced short-term debt.


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The Company's accounts receivable DSO stood at 69 days at March 31, 2013 and reflects an increase of 6 days from December 31, 2012 and 9 days from the first quarter of 2012. We believe that the Company's ability to generate sustainable and robust cash flows from operations will enable the Company to continue to fund its current liabilities from current assets including available cash balances for the foreseeable future.

Business Combinations
The Company executes accretive business acquisitions in combination with organic growth initiatives as part of its comprehensive business growth and expansion strategy. The Company looks to acquire businesses that are complementary to Ebix's existing products and services.
A significant component of the purchase price consideration for many of the Company's business acquisitions is a potential future cash earnout based on reaching certain specified future revenue targets. The Company recognizes these potential obligations as contingent liabilities. These contingent consideration liabilities are recorded at fair value on the acquisition date and are re-measured quarterly based on the then assessed fair value and adjusted if necessary. As of March 31, 2013, the total of these contingent liabilities was $16.4 million, of which $14.0 million is reported in long-term liabilities, and $2.4 million is included in current liabilities in the Company's Condensed Consolidated Balance Sheet. As of December 31, 2012 the total of these contingent liabilities was $17.5 million, of which $14.2 million is reported in long-term liabilities, and $3.3 million is included in current liabilities in the Company's Condensed Consolidated Balance Sheet. Operating Activities
Net cash provided by our operating activities was $14.3 million for the three months ended March 31, 2013. The primary components of the cash provided by operations during this three months interim period consisted of net income of $17.3 million, net of $(72) thousand of net non-cash gains recognized on derivative instruments and foreign currency exchange, $2.5 million of depreciation and amortization, $(5.7) million of working capital requirements primarily associated with increased outstanding trade accounts receivable and deferred tax assets, and $511 thousand of non-cash share-based compensation. Net cash provided by our operating activities was $13.8 million for the three month period ended March 31, 2012. The primary components of the cash provided by operations during this three month interim period consisted of net income of $15.7 million, net of $661 thousand of non-cash unrealized foreign currency exchange losses, $1.9 million of depreciation and amortization, $(5.1) million of working capital requirements primarily associated with reductions to trade payables and accrued liabilities, and $548 thousand of non-cash share-based compensation.

Investing Activities
Net cash used for investing activities during the three months ended March 31, 2013 was $707 thousand, of which $570 thousand was used for the payment of an earnout obligation in connection with our 2010 acquisition of USIX in Brazil and $345 thousand was used for capital expenditures pertaining to the enhancement of our technology platforms and the purchases of operating equipment to support our expanding operations. Partially offsetting these investment cash outflows was $208 thousand of net cash in-flow from maturities of marketable securities (specifically bank certificates of deposit), net of purchases.
Net cash provided from investing activities during the three months ended March 31, 2012 totaled $306 thousand which consisted of $979 thousand from maturities . . .

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