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EBIX > SEC Filings for EBIX > Form 10-K on 1-Mar-2017All Recent SEC Filings

Show all filings for EBIX INC

Form 10-K for EBIX INC


1-Mar-2017

Annual Report


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, pricing 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 investigations. 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 a leading international supplier of on-demand software and e-commerce solutions to the insurance, financial, and healthcare industries. Ebix provides application software products for the insurance industry including carrier systems, agency systems and exchanges, as well as custom software development. Approximately 76% of the Company's revenues are recurring. Rather than license our products in perpetuity, we typically either license them for a few years with ongoing support revenues, or license them on a limited term basis using a subscription hosting or ASP model. Our goal is to be the leading powerhouse of back-end insurance transactions in the world. During 2016, combined subscription-based and transaction-based revenues increased by $21.0 million to $225.8 million, while as a percentage of the Company's total revenues decreased to 76% in 2016, as compared to 77% in 2015. In 2016 subscription based revenues increased by $14.5 million to $189.0 million, and as a percentage of the Company's total revenues decreased to 63% in 2016, as compared to 66% in the year 2015.
The Company's technology vision is on the convergence of all insurance processes in a manner such that data can seamlessly flow from entity to entity once an initial data entry has been made. Our customers include many of the top insurance and financial sector companies in the world.
The insurance markets continue to focus on initiatives to reduce paper-based processes and facilitate improvements in efficiency both at the back-end side and also at the consumer-end side, involving both insurance carriers and insurance brokers and directly impacts 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 reduced paper-based processes are becoming increasingly a norm across the world insurance markets.
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 our business is efficiently managed and that effective controls are maintained.
The key performance indicators for the twelve months ended December 31, 2016, 2015 and 2014 were as follows:

                                                               Key Performance Indicators
                                                            Twelve Months Ended December 31,
(Dollar amounts in thousands except per share data)        2015            2014           2013
Revenue                                               $   298,294      $  265,482     $  214,321
Revenue growth                                                 12 %            24 %            5 %
Operating income                                      $   100,281      $   88,714     $   79,672
Operating margin                                               34 %            33 %           37 %
Net Income                                            $    93,847      $   79,533     $   63,558
Diluted earnings per share                            $      2.86      $     2.28     $     1.67
Cash provided by operating activities                 $    83,748      $   48,686     $   58,510


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RESULTS OF OPERATIONS

                                               Year Ended December   Year Ended December   Year Ended December
                                                    31, 2016              31, 2015              31, 2014
                                                                       (In thousands)
Operating revenue:                             $      298,294        $      265,482        $      214,321
Operating expenses:
Costs of services provided                             85,128                72,437                47,388
Product development                                    32,981                30,702                26,860
Sales and marketing                                    17,469                14,917                13,840
General and administrative, net                        51,689                48,078                36,880
Amortization and depreciation                          10,746                10,634                 9,681
Total operating expenses                              198,013               176,768               134,649
Operating income                                      100,281                88,714                79,672
Interest income (expense), net                         (5,525 )              (4,080 )              (2,655 )
Non-operating income, gain on joint venture
investment                                                  -                     -                     -
Other non-operating income                              1,162                     -                   296
Non-operating expense - securities
litigation                                                  -                     -                  (690 )
Foreign exchange gain (loss)                               13                 2,005                   829
Income before taxes                                    95,931                86,639                77,452
Income tax expense                                     (1,637 )              (7,106 )             (13,894 )
Net income including noncontrolling interest   $       94,294        $       79,533        $       63,558
Net income attributable to noncontrolling
interest                                                  447        $            -        $            -
Net income attributable to Ebix, Inc.          $       93,847        $       79,533        $       63,558

TWELVE MONTHS ENDED DECEMBER 31, 2016 AND 2015
Operating Revenue
The Company derives its revenues primarily from professional and support
services, which includes subscription and transaction fees pertaining to
services delivered over our exchanges or from our ASP platforms, revenue
generated from software development projects and associated fees for consulting,
implementation, training, and project management provided to customers using our
systems, and business process outsourcing revenue. 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 years ended December 31,
2016 and 2015.
                                                                   For the Year Ended
                                                                      December 31,
(dollar amounts in thousands)                                      2016          2015
Exchanges                                                      $  206,427     $ 190,746
Broker P&C Systems                                                 14,105        14,481
Risk Compliance Solutions ("RCS"), fka Business Process
Outsourcing ("BPO")                                                74,196        55,917
Carrier P& C Systems                                                3,566         4,338
Totals                                                         $  298,294     $ 265,482

During the twelve months ended December 31, 2016 our total revenue increased $32.8 million, or 12.4%, to $298.3 million compared to $265.5 million in 2015. The Company leverages 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 years 2016 and 2015 on a pro forma basis, as disclosed in the table in Note 4 "Pro Forma Financial Information" to the enclosed Consolidated Financial Statements, combined pro forma revenues increased $20.5 million or 7.0% to $315.8 million for the year 2016 from the $295.3 million of pro forma revenue for the year 2015, with the change in exchange rates adversely affecting reported revenues by ($3.3) million, whereas there was a 12.4% increase in reported revenues for the same comparative periods. The cause for the difference between the 12.4% increase in reported 2016 revenue versus 2015 revenue, as compared to the 7.0% increase in 2016 pro forma versus 2015 pro forma revenue is due to the effect of combining the additional revenue derived from


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those businesses acquired during the years 2016 and 2015, specifically Wdev Solucoes em Technologia SA, Hope Health ("Hope"), the EbixHealth JV, Via Media Health, and PB Systems with the Company's pre-existing operations. The 2016 and 2015 pro forma financial information assumes that all such business acquisitions were made on January 1, 2015, whereas the Company's reported financial statements for 2016 only includes the operating results from the businesses since the effective date that they were acquired by Ebix, and thusly includes only two months of Wdev Solucoes em Technologia SA, two months of Hope, and six full months of the EbixHealth JV. Similarly, the 2015 pro forma financial information includes a full year of results for Wdev Solucoes em Technologia SA, Hope Health ("Hope"), the EbixHealth JV, Via Media Health, and PB Systems as if they had been acquired on January 1, 2015, whereas the Company's reported financial statements for the 2015 includes only ten months of financial results for Via Media Health, and seven months for PB Systems, and no financial results for Wdev Solucoes em Technologia SA, Hope, and the EbixHealth JV.

The pro forma analysis is 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. 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.


              2015 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.

The impact from fluctuations of the exchange rates for the foreign currencies in the countries in which we conduct operations also partially adversely affected reported revenues. During each of the years 2016, 2015 and 2014 the change in foreign currency exchange rates decreased reported consolidated operating revenues by $(3.3) million, $(10.7) million, and $(3.2) million, respectively. The specific components of our revenue and the changes experienced during the past year are discussed immediately below.
Exchange division revenues increased by $15.7 million, or 8%, principally due to new exchange clients primarily in the US and Europe, and cross selling of products and services to existing clients as facilitated by the 2016 and 2015 acquisitions of Via Media Health.
Broker P&C Systems division revenue decreased by $0.4 million, or 3%, principally due to the effects of exchange rate fluctuations adversely affecting our Australian operations. During the past two years the reported revenues in the Broker Systems channel have been decreasing due essentially to the effects of changing currency exchange rates.
Risk Compliance Solutions division revenues increased by $18.3 million, or 33%, primarily due to new e-governance revenues associated with our Indian operations, consulting service revenues generated by the 2015 business acquisition of PB Systems, November 2016 acquisition of Wdev and the full consolidation of the Ebix/IHC joint venture.
Carrier P&C Systems division revenues decreased by $772 thousand, or 18%. Revenues in this division have decreased during the last two years due the completion of certain large projects resulting in decreased professional service revenues.
Costs of Services Provided
Costs of services provided, which includes costs associated with customer support, consulting, implementation, and training services, increased $12.7 million or 18%, from $72.4 million in 2015 to $85.1 million in 2016. Correspondingly, the Company's gross margin decreased modestly from 72.7 % in 2015 to 71.7% in 2016. The increase in the Company's costs of services provided is due in part to additional personnel, consulting, customer support, and merchant bank service fee costs associated with the 2016 and 2015 business acquisitions of Wdev Solucoes em Technologia SA, the EbixHealth JV, PB Systems, the amortization of capitalized software development costs in connection with the Company's previous development of its property and casualty underwriting insurance data exchange platform servicing the London markets, and finally increased hardware costs to support the growing revenues generated from our government sector services division in India. During 2015 and through the 3rd quarter of 2016 the useful life over which certain capitalized continuing medical education products costs were being amortized was eighteen months. In the fourth quarter of 2016 the amortization period for these these costs was revised to a five-year straight-


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line methodology and additionally now all continuing medical education products costs are being capitalized. This change had the effect of reducing reported services and other costs by $2.9 million Product Development Expenses
Product development expenses increased $2.3 million, or 7%, from $30.7 million in 2015 to $33.0 million in 2016. The Company's product development efforts are focused on the development of new technologies for insurance carriers, brokers and agents, and the development of new data exchanges for use in domestic and international insurance markets. Product development expenses increased due to additional staffing and personnel costs incurred in connection with our continued expanding product development facilities in India. Sales and Marketing Expenses
Sales and marketing expenses increased $2.6 million, or 17%, from $14.9 million in 2015 to $17.5 million in 2016. This increase is due to increased commissions paid to our sales personnel.
General and Administrative Expenses
General and administrative expenses increased $3.6 million, or 8%, from $48.1 million in 2015 to $51.7 million in 2016. The cause for the increase in general and administrative expenses were $3.6 million of additional personnel and office costs in connection with the 2016 and 2015 business acquisitions of Wdev Solucoes em Technologia SA, the EbixHealth JV, and PB Systems, partially offset by $1.5 million of reduced accounts receivable bad debt costs. Amortization and Depreciation Expenses
Amortization and depreciation expenses remained relatively steady at $10.7 million for 2016 versus $10.6 million for 2015. Interest Income
Interest income increased $1.6 million, or 701%, from $231 thousand in 2015 to $1.9 million in 2016. The increase in interest income is associated with a 114% year over year comparative increase in the Company's average cash balances and short-term investments from 2015 to 2016. Interest Expense
Interest expense increased $3.1 million, or 71% from $4.3 million in 2015 to $7.4 million in 2016. Interest expense increased primarily because of the combined effect of an increase in the weighted average interest rate on the Company's revolving credit facility from 2.08% in 2015 to 2.73% in 2016, and an increase in the average outstanding balance on the revolving line of credit and term note from $156.2 million in 2015 to $234.8 million in 2016. Foreign Exchange Gain
Net foreign exchange gain of $13 thousand in 2016 consisted of $305 thousand of gains realized upon the settlement of certain transactions within our foreign operations that were denominated in a currency other than the subsidiary's functional currency which were almost completely offset by $292 thousand of losses recognized upon the remeasurement of other transactions within our foreign operations that were denominated in a currency other than the subsidiary's functional currency.
Income Taxes
The Company recognized income tax expense of $1.6 million in 2016 compared to the $7.1 million of income tax expense in 2015, representing a $5.5 million, or a 77%, decrease. Our effective tax rate decreased to 1.7% in 2016, compared with 8.1% in 2015, largely due to favorable changes in the proportion of our taxable income in certain US and non-US jurisdictions relative to total pretax income. Our tax rate decreased partly because of the $3.4 million deferred tax liability reversal due to the sale of assets from Singapore to Dubai. The Company tax rate also decreased due to the R&D tax benefits available to the Company in the United States and also its usage of net operating losses in the UK, where the Company still has significant accumulated net operating losses. Overall the Company enjoys a relatively lower effective tax rate from conducting significant operating activities in certain foreign low tax jurisdictions, specifically in Dubai, India and Singapore.
The pre-tax income from and the applicable statutory tax rates in each jurisdiction in which the Company had operations for the year ending December 31, 2016 are as follows:


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(dollar amounts in thousands)   Pre-tax income     Statutory tax rate
United States                            (80 )               35.0 %
Canada                                   555                 26.9 %
Brazil                                 1,984                 34.0 %
Australia                              2,291                 30.0 %
Singapore                              1,218                 17.0 %
New Zealand                             (396 )               28.0 %
India*                                40,444                 34.6 %
Mauritius                                472                  3.0 %
United Kingdom                         1,127                 20.0 %
Sweden                                 5,919                 22.0 %
Dubai                                 42,397                    - %
Total                                 95,931

*Note - While the normal tax rate in India is 34.6%, the majority of Ebix's income in India is earned in jurisdictions with a tax holiday.

TWELVE MONTHS ENDED DECEMBER 31, 2015 AND 2014
Operating Revenue
The Company derives its revenues primarily from professional and support
services, which includes subscription and transaction fees pertaining to
services delivered over our exchanges or from our ASP platforms, revenue
generated from software development projects and associated fees for consulting,
implementation, training, and project management provided to customers using our
systems, and business process outsourcing revenue. 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 years ended December 31,
2015 and 2014.
                                                                   For the Year Ended
                                                                      December 31,
(dollar amounts in thousands)                                      2015          2014
Exchanges                                                      $  190,746     $ 169,437
Broker P&C Systems                                                 14,481        17,948
Risk Compliance Solutions ("RCS"), fka Business Process
Outsourcing ("BPO")                                                55,917        21,813
Carrier P&C Systems                                                 4,338         5,123
Totals                                                         $  265,482     $ 214,321

During the twelve months ended December 31, 2015 our total revenue increased $51.2 million, or 24%, to $265.5 million compared to $214.3 million in 2014. The Company leverages 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 years 2015 and 2014 on a pro forma basis, as disclosed in the table in Note 4 "Pro Forma Financial Information" to the enclosed Consolidated Financial Statements, combined pro forma revenues decreased $8.2 million or 2.9% to $272.2 million for the year 2015 from the $280.5 million of pro forma revenue for the year 2014, with the change in exchange rates adversely affecting reported revenues by ($10.7) million, whereas there was a 23.9% increase in reported revenues for the same comparative periods. The cause for the difference between the 23.9% increase in reported 2015 revenue versus 2014 revenue, as compared to the 2.9% decrease in 2015 pro forma versus 2014 pro forma revenue is due to the effect of combining the additional revenue derived from those businesses acquired during the years 2015 and 2014, specifically Via Media Health, PB Systems, Curepet, HealthCare Magic, Vertex, Oakstone, and i3, with the Company's pre-existing operations. The 2015 and 2014 pro forma financial information assumes that all such business acquisitions were made on January 1, 2014, whereas the Company's reported financial statements for 2015


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only includes the operating results from the businesses since the effective date that they were acquired by Ebix, and thusly includes only nine months of Via Media, and seven months of PB Systems. Similarly, the 2014 pro forma financial information includes a full year of results for HealthCare Magic, Vertex, Oakstone, and i3 as if they had been acquired on January 1, 2014, whereas the Company's reported financial statements for the 2014 includes eight months of financial results for HealthCare Magic, eleven months for CurePet, three months Vertex, and one month each for Oakstone and i3.

The pro forma analysis is based on the following premises:
2015 and 2014 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.


              2014 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.

The impact from fluctuations of the exchange rates for the foreign currencies in the countries in which we conduct operations also partially adversely affected reported revenues. During each of the years 2015 and 2014 the change in foreign currency exchange rates decreased reported consolidated operating revenues by $(10.7) million and $(3.2) million, respectively.
The specific components of our revenue and the changes experienced during the past year are discussed immediately below.
Exchange division revenues increased by $21.3 million, or 13%, principally due to new exchange clients, and cross selling of products and services to existing clients as facilitated by the 2014 acquisitions of HealthCare Magic and Oakstone.
Broker P&C Systems division revenue decreased by $3.5 million, or 19%, principally due to the effects of exchange rate fluctuations adversely affecting our Australian operations. During the past two years the reported revenues in the Broker Systems channel have been decreasing due essentially to the effects of changing currency exchange rates. From 2014 to 2015, in terms of native currencies, the Broker Systems channel revenues have increased.
Risk Compliance Solutions division revenues increased by $34.1 million, or 156%, due primarily to the consulting service revenues generated by the 2015 business acquisition of PB Systems, and the 2014 business acquisitions of i3 and Vertex . Carrier P&C Systems division revenue decreased by $785 thousand, or 15%, due the effect of certain completed projects resulting in decreased professional services.
Costs of Services Provided
Costs of services provided, which includes costs associated with customer support, consulting, implementation, and training services, increased $25.0 million or 53%, from $47.4 million in 2014 to $72.4 million in 2015. Correspondingly, the Company's gross margin decreased modestly from 77.9% in 2014 to 72.7% in 2015. The increase in the Company's costs of services provided is due to additional personnel, consulting, and customer support costs associated with the 2015 and 2014 business acquisitions of PB Systems, Vertex, Oakstone, and i3. . . .

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