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EBIX > SEC Filings for EBIX > Form 10-Q on 9-Nov-2016All Recent SEC Filings

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Form 10-Q for EBIX INC


9-Nov-2016

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," 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 in Part I, Item 1A, "Risk Factors" in our Form 10-K for the year ended December 31, 2015 which is incorporated by reference herein and identified, and in Part II, Item 1A "Risk Factors" for the three months ended September 30, 2016 in this Form 10-Q, 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, Asia, Latin America, and Europe wherein we have significant and/or growing operations); fluctuations in the 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.
Other important 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:

Our ability to efficiently and effectively integrate acquired business operations, as discussed in Note 3 of the Condensed Notes to the Condensed Consolidated Financial Statements pertaining to the business acquisitions we have made;

Note 4 of the Notes to the Condensed Consolidated Financial Statements, "Debt with Commercial Bank" and our future liquidity needs discussed under "Liquidity and Financial Condition" regarding 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;

Note 5 of the Notes to the Condensed Consolidated Financial Statements, "Commitments and Contingencies", and "Contractual Obligations and Commercial Commitments" in Managements Discussion and Analysis of Financial Condition and Results of Operation ("MD&A") regarding uncertainties pertaining to the actual ultimate cost of our legal contingencies;

MD&A and the analysis of the three and nine month revenue trends regarding actual realized level of demand for our products during the immediately foreseeable future, and fluctuations thereof.

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 MD&A contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

Company Overview
Ebix, Inc. is a global supplier of software and e-commerce solutions to the insurance, financial, and healthcare industries, as well as e-governance solutions to governmental agencies in the health and education sectors. Ebix provides a variety of application software products for the insurance industry including carrier systems, broker 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 transaction processing 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 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. Such consolidation has involved both insurance carriers and insurance brokers and is directly impacting the manner in which insurance products are distributed. In particular the insurance industry has continued to experience an increase in initiatives designed to reduce paper-based processes and to improve efficiency both at the back-end and consumer-end sides. Management believes the insurance industry will continue to experience significant change and increased efficiencies through online exchanges. Changes in the insurance industry are expected 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 Johns Creek, Georgia with its international operations being managed from its Singapore offices, and it also has domestic operations in Santa Barbara, Pasadena and Hemet, California; Miami, Florida; Pittsburgh, Pennsylvania; Salt Lake City, Utah; Grove City, Ohio; Bohemia, New York; Norwalk and New Britain, Connecticut; Portland, Michigan; Birmingham, Alabama; Iselin, New Jersey as well as an additional operations office in Johns Creek, Georgia. The Company also has multiple operating facilities and offices in Australia, Brazil, Thailand, New Zealand, the United Kingdom, Canada, Singapore, Dubai, and India. In these operating offices, Ebix employs insurance and technology professionals who provide products, services, support and consultancy to thousands of customers across six continents. Results of Operations - Three Months Ended September 30, 2016 and 2015 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. International revenue accounted for 27.2% and 20.9% of the Company's total revenue for the three months ended September 30, 2016 and 2015, respectively. Ebix's revenue streams come from four product/service channels. Presented in the table below is the breakout of our revenues for each of those product/service channels for the three and nine month periods ended September 30, 2016 and 2015.


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                                       Three Months Ended         Nine Months Ended
                                         September 30,              September 30,
(dollar amounts in thousands)           2016         2015         2016         2015
Exchanges                           $    52,016    $ 46,209    $ 151,424    $ 139,712
Broker Systems                            3,557       3,812       10,654       11,067
Risk Compliance Solutions ("RCS")        18,076      15,754       53,489       41,218
Carrier Systems                             959       1,038        2,681        3,281
Totals                              $    74,608    $ 66,813    $ 218,248    $ 195,278

During the three months ended September 30, 2016 our total operating revenues increased $7.8 million or 12%, to $74.6 million as compared to $66.8 million during the third quarter of 2015. Revenues increased primarily due to the signing and initiation of new customer contracts in the exchange and RCS channel areas; most notably the PPL insurance underwriting exchange platform contract in London and the e-governance contracts in India. Also generating the comparative year over year revenue increase are the revenues from each of the EbixHealth JV and Ebix Vayam Limited JV which Ebix acquired a 51% controlling equity position (refer to Note 8 accompanying the enclosed condensed consolidated financial statements for discussion of the EbixHealth JV). Partially offsetting these revenue increases was the adverse effect of the weakened foreign currencies in which we conduct operations (particularly in Australia, Brazil, Great Britain, and India) as compared to the U.S. dollar. Specifically, the adverse impact from fluctuations in the exchange rates for the foreign currencies in the countries in which we conduct operations in the aggregate reduced reported revenues for the third quarter 2016 by $348 thousand.
With respect to business acquisitions completed during the years 2016 and 2015 on a pro forma basis, as disclosed in the table in Note 3 "Business Combinations" pertaining to pro forma financial information to the enclosed Condensed Consolidated Financial Statements, combined revenues increased $4.8 million or 6.8% for Q3 2016 versus the Q3 2015 whereas correspondingly, the reported revenue for the three months ended September 30, 2016 increased by $7.8 million or 11.7% from the reported revenue during the same period in 2015. The 2016 and 2015 pro forma financial information assumes that all business acquisitions made during this period were made on January 1, 2015, whereas the Company's reported financial statements for Q3 2016 and Q3 2015 only includes the revenues from these businesses since the effective date that they were acquired by Ebix, being March 2015 for Via Media Health, June 2015 for PB Systems, and July 2016 for the EbixHealth JV. The 2015 pro forma financial information includes a full three months of results for Via Media Health, PB Systems, and the EbixHealth JV as if they had been acquired or consolidated on January 1, 2015.
The above referenced pro forma information and the relative comparative change in pro forma and reported revenues are based on the following premises:
2016 and 2015 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, whereas the 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 obtained through a newly acquired customer base, are assigned to the acquired section of our business.

Pro formas do not include post acquisition revenue reductions as a result of discontinuation of any product lines and/or customer projects by Ebix in line with the Company initiatives to maximize profitability.

Cost of Services Provided
Costs of services provided, which includes costs associated with maintenance, customer support, call center, consulting, implementation and training services, increased $4.6 million or 26%, to $22.4 million in the third quarter of 2016 as compared to $17.8 million in the third quarter of 2015. This increase is primarily due to costs associated with fully consolidating the EbixHealth JV and Ebix Vayam Limited JV, and increased costs associated with supporting the increased revenue streams from new e-governance service contracts executed within the Ebix Vayam Limited JV, partially offset by $989 thousand of reductions in Ebix's pre-existing core internal personnel costs. Product Development Expenses
The Company's product development efforts are focused on the development of new processing technologies, software, systems and related services for use by healthcare professionals, consumers, insurance carriers, brokers and agents, and the development of new data exchanges for use in the domestic and international insurance markets. Product development expenses


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increased $0.2 million or 3%, to $8.6 million during the third quarter of 2016 as compared to $8.3 million during the third quarter of 2015. This increase is attributable to additional personnel costs for our growing employee base in our continually expanding product development facilities in India. Sales and Marketing Expenses
Sales and marketing expenses increased $658 thousand or 17%, to $4.46 million in the third quarter of 2016 as compared to $3.81 million in the third quarter of 2015. This increase is due to additional direct mail marketing costs in support of our continuing medical education services. General and Administrative Expenses
Reported general and administrative expenses remained flat at $12.13 million for the third quarter of 2016 quarter and 2015. Personnel and related expenses were up $735 thousand, audit and legal expenses were up $465 thousand, and facilities expenses were up $350 thousand, with these comparative cost increases being offset by a $1.4 million comparative reduction to accounts receivable bad debt expense (being $243 thousand in Q3 2016 versus $1.6 million in Q3 2015), and a $1.2 million reduction to contingent earn out liabilities resulting from the remeasurements of and adjustments to the contingent earn out liabilities associated with the acquisitions of Via Media (March 2015), and PB Systems (June 2015) for which the liabilities were reduced by $889 thousand and $326 thousand respectively
Amortization and Depreciation Expenses
Amortization and depreciation expenses decreased $27 thousand or 1% to $2.74 million in the third quarter of 2016 as compared to $2.77 million in the third quarter of 2015, due primarily to lower amortization costs associated with certain fully amortized intangible assets previously acquired in connection with purchased businesses.
Interest Income
Interest income increased $573 thousand or 924% to $635 thousand in the third quarter of 2016 as compared to $62 thousand in the third quarter of 2015, due to a 196% increase in average cash balances held during Q3 of 2016 versus Q3 of 2015 which increased to $88.9 million from $30.0 million. Interest Expense
Interest expense increased $864 thousand or 82%, to $1.9 million in the third quarter of 2016 as compared to $1.1 million in the third quarter of 2015. Interest expense increased due to the increase in the average outstanding balance on our commercial banking credit facilities, which increased 46% to $244.5 million during Q3 2016 from $167.9 million during Q3 of 2015, as well as an increase in the underlying interest rate which increased to 2.81% for 2016 versus 2.00% for 2015.
Foreign Currency Exchange Loss
Net foreign currency exchange gains for the three months ended September 30, 2016 in the amount of $578 thousand consists of $551 thousand of gains incurred upon the settlement of receivables or payables denominated in currencies other than the functional currency of the respective operating division recording the instrument, and $27 thousand of unrealized gains pertaining to the remeasurement of outstanding receivables or payables denominated in currencies other than the functional currency of the respective operating division recording the instrument.
Non-Operating Income
The non-operating income for the three month ended September 30, 2016 in the amount of $1.2 million is due to the recognition of a gain on the Company's previously carried 40% equity interest in the EbixHealth JV, for which a new contemporaneous valuation of the business was completed in conjunction with Ebix purchasing and additional equity stake in the joint venture providing the Company a 51% controlling interest in the joint venture during the third quarter (refer to Note 8 to the accompanying Condensed Consolidated Financial Statements).
Income Taxes
The Company recorded an income tax expense of $789 thousand (3.2%) and $1.1 million (1.6%) during the three and nine months ended September 30, 2016, respectively, which included discrete items for additions to the reserve for uncertain tax positions and prior year true-ups ups that resulted in a net tax expense charge that was more than offset by a tax benefit from transferring certain intellectual property intangible assets in Q2. The income tax expense exclusive of discrete items for the three


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months ended September 30, 2016 and 2015, respectively, is $139 thousand (0.0%) and $1.7 million (7.5%). Our tax expense and effective tax rate decreased year over year, exclusive of discrete charges, due to favorable changes in the proportion of our taxable income in certain foreign jurisdictions relative to total pre-tax income. The Company expects its full year tax rate before discrete items to be approximately 6%.

The Company's effective tax rate reflects the benefits of having significant operations outside the United States, which are generally taxed at rates lower than the US statutory rate of 35% and where the Company enjoys a tax holiday in India. During 2015, the Company secured an additional tax holiday in India until the year 2020 to support certain portions of its expanding operations there. The Company also had income during the quarter ended September 30, 2016 in Singapore, the United Kingdom, Dubai, and Sweden, where the statutory tax rates are lower than the US rate of 35%.

Results of Operations - Nine Months Ended September 30, 2016 and 2015 Operating Revenue
During the nine months ended September 30, 2016 our total operating revenues increased $23.0 million or 12%, to $218.2 million as compared to $195.3 million during the same period in 2015. Revenues increased primarily due to the signing and initiation of new customer contracts in the exchange and RCS channel areas; most notably the PPL insurance underwriting exchange platform contract in London and the e-governance contracts in India. Also generating the comparative year over year revenue increase are the revenues from the EbixHealth JV and Ebix Vayam Limited JV for which Ebix acquired a 51% controlling equity position (refer to Note 8 accompanying the enclosed condensed consolidated financial statements for further discussion of the EbixHealth JV), and comparative incremental revenue from the June 2015 acquisition of PB Systems (2015 YTD results only have 4 months of said revenue). Reported revenues were adversely effected by the weakened of the foreign currencies in which we conduct operations (particularly in Australia, Brazil, Great Britain, and India) as compared to the U.S. dollar. Specifically, the adverse impact from fluctuations in the exchange rates for the foreign currencies in the countries in which we conduct operations in the aggregate reduced reported revenues for the nine months ending September 30, 2016 by $3.3 million. International revenue accounted for 27.8% and 22.7% of the Company's total revenue for the nine months ended September 30, 2016 and 2015, respectively.
With respect to business acquisitions completed during the years 2016 and 2015 on a pro forma basis, as disclosed in the table in Note 3 "Business Combinations" pertaining to pro forma financial information to the enclosed Condensed Consolidated Financial Statements, combined revenues increased $13.5 million or 6.4% for nine months ended September 30, 2016 versus the same nine month period in 2015, whereas correspondingly the reported revenue for the nine month ended September 30, 2016 increased by $23.0 million or 11.8% from the reported revenue during the same period in 2015. The 2016 and 2015 pro forma financial information assumes that all business acquisitions made during this period were made on January 1, 2015, whereas the Company's reported financial statements for the nine months period ended September 30, 2016 and 2015 only includes the revenues from these businesses since the effective date that they were acquired or fully consolidated by Ebix, being March 2015 for Via Media Health, June 2015 for PB Systems, and July 2016 for the EbixHealth JV. The 2015 pro forma financial information includes a full nine months of results for Via Media Health, PB Systems, and the EbixHealth JV as if they had been acquired on January 1, 2015.
The above referenced pro forma information and the relative comparative change in pro forma and reported revenues are based on the following premises:
2016 and 2015 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, whereas the 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 obtained through a newly acquired customer base, are assigned to the acquired section of our business.

Pro formas do not include post acquisition revenue reductions as a result of discontinuation of any product lines and/or customer projects by Ebix in line with the Company initiatives to maximize profitability.

Cost of Services Provided
Costs of services provided increased $6.6 million or 12%, to $62.6 million in the the nine months ended September 30, 2016 as compared to $56.0 million during the same period of 2015. This increase is primarily due to costs associated with fully consolidating the EbixHealth JV and Ebix Vayam Limited JV, and increased costs associated with supporting the increased revenue


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streams from new e-governance service contracts executed within the Ebix Vayam Limited JV, partially offset by $2.9 million of reductions in Ebix's pre-existing core internal personnel costs. Product Development Expenses
Product development expenses increased $2.2 million or 10%, to $24.9 million for the nine months ended September 30, 2016 as compared to $22.7 million during the same period of 2015. This increase is attributable to additional personnel costs for our continued growing employee base for our expanded product development facilities in India.
Sales and Marketing Expenses
Sales and marketing expenses increased $2.2 million or 20%, to $13.0 million in the the nine months ended September 30, 2016 as compared to $10.8 million during the same period of 2015. This increase is due to additional direct mail marketing costs in support of our continuing medical education services offerings.
General and Administrative Expenses
General and administrative expenses increased by $2.0 million or 6%, to $37.0 million in the the nine months ended September 30, 2016 as compared to $35.0 million during the same period of 2015. This comparative year over year rise in general and administrative expenses is due to $3.2 million of increased personnel related costs (principally salaries, share-based compensation, payroll taxes and insurance benefits), and $384 thousand of increased legal, audit, and investor relational professional costs. These cost increases were partially offset by a $1.3 million comparative reduction to accounts receivable bad debt expense (being only $700 thousand for the nine months ended September 30, 2016 versus $2.0 million for the same nine month period in 2015). Also, favorably impacting reported general and administrative expenses was a net $1.8 million reduction to contingent earn out liabilities resulting from the remeasurements of and adjustments to the contingent earn out liabilities associated with the acquisitions of Vertex (October 2014),Via Media (March 2015), and PB Systems (June 2015) for which the liabilities were reduced by $720 thousand, $1.5 million, and $326 thousand respectively and Qatarlyst (April 2013) for which the liability was increased by $780 thousand. $326 thousand of the PB Systems earn out liability reduction was recorded as a reduction to general and administrative expenses, and $664 thousand recorded as a reduction to goodwill based on the facts that were available at the time the business acquisition was consummated. The terms for the contingent earn out payments in most of the Company's business acquisitions typically address the GAAP recognizable revenues achieved by the acquired entity over a one, two, and/or three year period subsequent to the effective date of their acquisition by Ebix. These terms typically establish a minimum threshold revenue target with achievement of revenues recognized over that target being awarded in the form of a specified earn out payment. The Company applies these terms in its calculation and . . .

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