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EBIX > SEC Filings for EBIX > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for EBIX INC


8-Nov-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 II, Item 1A "Risk Factors" in this quarterly report for the three and nine months ending September 30, 2013 on this Form 10-Q, and in Part I, Item 1A, "Risk Factors" in our 2012 Form 10-K which is incorporated by reference herein, as well as: the risk of an unfavorable outcome of the pending governmental investigations or shareholder class action lawsuits, and the reputational harm caused by such investigations and lawsuits; 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. 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 and nine 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.


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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 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 provider 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 continue 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 September 30, 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 and nine months ended September 30, 2013 and 2012, respectively.


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                                          Three Months Ended         Nine Months Ended
                                            September 30,              September 30,
(dollar amounts in thousands)              2013         2012         2013         2012
Exchanges                              $    40,554    $ 43,592    $ 122,741    $ 116,420
Broker Systems                               4,390       4,537       13,878       13,713
Business Process Outsourcing ("BPO")         3,604       4,252       11,781       11,713
Carrier Systems                              1,745       1,423        5,463        3,501
Totals                                 $    50,293    $ 53,804    $ 153,863    $ 145,347

During the three months ended September 30, 2013 our total operating revenues decreased $3.5 million or 7%, to $50.3 million as compared to $53.8 million during the third quarter of 2012. The relative comparative decrease in revenues is due partially to a temporary reduction in professional services revenue generated from the PlanetSoft business acquired in 2012 and also due to the effect of exchange rate decreases from Q3 2012 to Q3 2013. During the three months ended September 30, 2013 the change in foreign currency exchange rates (decreased)/increased reported consolidated operating revenues by approximately $(1.6) million. Accordingly on a constant currency basis the Company's revenue increased sequentially from $51.5 million in Q2 of 2013 to $51.9 million in Q3 of 2013.
With respect to business acquisitions completed during the years 2012 and 2013 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 decreased 8.2% for the third quarter of 2013 versus the third quarter of 2012 whereas there was a 6.5% decrease in reported revenues for the same comparative period. The cause for the difference between the 6.5% decrease in reported Q3 2013 revenue versus Q3 2012 revenue, as compared to the 8.2% decrease in Q3 2013 pro forma versus Q3 2012 pro forma revenue is due to the effect of combining the additional revenue derived from those businesses acquired during the years 2012 and 2013, specifically BSI, Taimma, PlanetSoft, Fintechnix, TriSystems, and Qatarlyst 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 Q3 2012 only includes the revenues from the businesses since the effective date that they were acquired by Ebix. The 2012 pro forma financial information includes a full three months of results for TriSystems, Fintechnix, and Qatarlyst as if they had been acquired on January 1, 2012.

The above referenced pro forma table and the relative comparative 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. Reported 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, have 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.

Cost of Services Provided
Costs of services provided, which include costs associated with maintenance, support, call center, consulting, implementation and training services, increased $0.6 million or 7%, from $9.5 million in the third quarter of 2012 to $10.1 million in the third quarter of 2013. This increase is due to additional personnel costs and professional service expenses in support of efforts to grow the revenue streams associated with our health services division, and some of the business acquisitions made during 2012 and 2013. 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 decreased $0.5 million or 7% from $7.1 million during the third quarter of 2012 to $6.6 million during the third quarter of 2013. This relative comparative decrease in product development


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expenses is caused by the combination of realignment and increased cross-utilization of human resources, and the impact on reported expenses from fluctuations in the exchange rates for the foreign currencies in India and Singapore wherein we have substantial product development operations. Sales and Marketing Expenses
Sales and marketing expenses decreased $322 thousand or 7%, from $4.3 million in the third quarter of 2012 to $4.0 million in the third quarter of 2013. This decrease is due to lower personnel costs and less trade show costs resulting from the Company combining many of its product-based user conferences into broad solution based conferences.
General and Administrative Expenses
General and administrative expenses decreased by $1.2 million or 13% from $9.7 million in the third quarter of 2012 to $8.4 million in the third quarter of 2013. General and administrative expenses for third quarter of 2013 include a benefit of $4.1 million resulting from the net reduction of earnout contingent liabilities with respect to certain prior business acquisitions made in 2012. The Q3 2013 general and administrative expenses include a non-recurring costs of approximately $2.9 million pertaining to certain legal and associated costs, and $0.8 million of accounts receivable bad debt provisioning. Amortization and Depreciation Expenses
Amortization and depreciation expenses were essentially flat at $2.5 million in the third quarter of 2013 consistent with the same amount for the third quarter of 2012.

Interest Income
Interest income increased $71 thousand or 81% from $88 thousand in the third quarter of 2012 to $159 thousand in the third quarter of 2013. Interest income increased as a result of increased average cash balances. Interest Expense
Interest expense decreased $122 thousand or 28%, from $440 thousand in the third quarter of 2012 to $318 thousand in the third quarter of 2013. Interest expense decreased due to the fact that the aggregate outstanding balance on the Company's credit facility decreased from $80.7 million at September 30, 2012 to $57.1 million at September 30, 2013.
Non-operating income (loss) - put option Non-operating income for the three months ended September 30, 2013 in the amount of $93 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. Non-operating expense - securities litigation As discussed in more detail in Note 5 "Commitments and Contingencies" to the enclosed Condensed Consolidated Financial Statements, management after recent consultation with the Company's outside advisors concluded that it was appropriate to record a contingent liability and recognize a charge against earnings in the amount of $4.23 million ($2.63 million net of the associated tax benefit), which represents our current estimate of the potential liability in regards to the pending federal class action matter. This contingent liability is reported in the current section of the enclosed Condensed Consolidated Balance Sheet, and the charge against earnings is reported below operating income in the enclosed Condensed Consolidated Statement of Income as of and for the three and nine months ended September 30, 2013.
Foreign Currency Exchange Loss
Net foreign currency exchange losses for the three months ended September 30, 2013 in the amount of $33 thousand primarily pertain to losses recognized upon settlement of certain transactions denominated in currencies other than the functional currency of the respective operating division.


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Income Taxes
The Company recognized total income tax expense of $1.1 million for the three months ended September 30, 2013, as compared to $2.2 million for the three months ended September 30, 2012. The Company's interim period tax provision, exclusive of discrete items, for this three month period during 2013 was an expense of $1.7 million. The Company's effective tax rate used in the determination of its interim period tax provision for the quarter was 8.98%, as compared to the 10.35% for the same period during 2012. The effective rate decreased primarily due to increased taxable income from jurisdictions with lower tax rates. The discrete items recognized during the nine months ending September 30, 2013 included a $1.6 million tax benefit to be realized in connection with the $4.2 million non-operating charge against earnings that was recorded in regards to the contingent loss recognized for certain securities litigation matters, and $1.0 million of additional tax expense recorded to increase the reserve for uncertain tax positions. The Company's interim period income tax provisions are based on an estimate of the effective income tax rate expected to be applicable to the corresponding annual period, after eliminating discrete items unique to the respective interim period being reported.

Results of Operations - Nine Months Ended September 30, 2013 and 2012 Operating Revenue
During the nine months ended September 30, 2013 our total operating revenues increased $8.5 million or 6%, to $153.9 million as compared to $145.3 million during the same period in 2012. The increase in revenues is due to the addition of revenue generated from business acquisitions completed during 2012 and 2013. Ebix Carrier revenues increased by 56% on a year over year basis. The increase in Carrier revenues is the result of a targeted emphasis on larger scale professional service projects to clients in this product channel. 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 years 2012 and 2013 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 decreased 3.4% for the nine months ending September 30, 2013 versus the same comparative nine-month period in 2012 whereas there was a 5.9% increase in reported revenues for the same comparative periods. The cause for the difference between the 5.9% increase in reported year-to-date revenues as of September 30, 2013 versus year-to-date revenues as of September 30, 2012, as compared to the 3.4% decrease in pro forma year-to-date revenues as of September 30, 2013 versus year-to-date revenues as of September 30, 2012 is due to the effect of combining the additional revenue derived from those businesses acquired during the years 2012 and 2013, specifically BSI, Taimma, PlanetSoft, Fintechnix, TriSystems, and Qatarlyst 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 nine months ending September 30, 2013 only includes the revenues from the businesses since the effective date that they were acquired by Ebix. The 2012 pro forma financial information includes a full nine months of results for PlanetSoft, TriSystems, BSI, Taimma, Fintechnix, and Qatarlyst as if they had been acquired on January 1, 2012. Also partially effecting reported revenues was the impact from fluctuations in the exchange rates of the foreign currencies in the countries in which we conduct operations. During the nine months ended September 30, 2013 and 2012 the change in foreign currency exchange rates (decreased)/increased reported consolidated operating revenues by approximately $(2.5) million and $(1.3) million, respectfully.

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. Reported 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, have 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 increased $2.7 million or 10%, during the nine months ended September 30, 2013 to $30.4 million as compared to $27.7 million incurred during the same period in 2012. This increase is primarily due to additional professional service expenses in support of expanded revenue streams associated with business acquisitions made during 2012 and 2013. Product Development Expenses
Product development expenses increased $3.2 million or 19%, during the nine months ended September 30, 2013 to $20.4 million as compared to $17.2 million incurred during the same period in 2012. 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 our India operating centers in support of further revenue growth for the Company.
Sales and Marketing Expenses
Sales and marketing expenses decreased $691 thousand or 6%, during the nine months ended September 30, 2013 to $11.8 million as compared to $12.5 million incurred during the same period in 2012. This decrease is due to lower personnel costs and less trade show expenditures.
General and Administrative Expenses
General and administrative expenses increased by $2.0 million or 8%, during the nine months ended September 30, 2013 to $26.7 million as compared to $24.7 million incurred during the same period in 2012. General and administrative expenses for the nine months ended September 30, 2013 include a benefit of $10.3 million resulting from the net reduction of earnout contingent liabilities with respect to certain prior business acquisitions made during 2012. Offsetting this decrease to general and administrative expenses were approximately $7.3 million of non-recurring legal and associated costs, $2.8 million of additional personnel related costs associated with staff added from certain business acquisitions made in 2012 and 2013, $1.4 million of accounts receivable bad debt provisioning, and the fact that in 2012 the Company realized a net benefit in the approximate amount of $1.0 million related to a termination fee received in connection with a failed business acquisition (net of directly related internal operating costs incurred by the Company and a portion of the fee that had to be paid to our investment banker).
Amortization and Depreciation Expenses
Amortization and depreciation expenses increased $888 thousand or 14%, during the nine months ended September 30, 2013 to $7.5 million as compared to $6.6 million incurred during the same period in 2012. This increase is primarily due to $1.1 million of additional amortization costs associated with the customer relationship and developed technology intangible assets that were acquired in connection with the business acquisitions of Taimma, PlanetSoft, Fintechnix, TriSystems, and Qatarlyst completed during 2012 and 2013. Interest Income
Interest income decreased $22 thousand or 6%, during the nine months ended . . .

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