I think Ebix is a multi-bagger over the next five years. The combination of a great CEO, large market opportunity, cheap price, and tiny market cap are four of the reasons why.

 

 

There are two ways I have reached my conclusion that CEO Robin Raina is somebody you want to bet on.

 

The quantitative:

 

First, and what attracted me initially to the company, was simply the numbers and how Robin’s tenure with the company as CEO coincides with a sharp reversal in the firm’s fortunes.

 

 

 

Ebix began operations in 1976 as Delphi Information Systems, a supplier of agency management software primarily to the property & casualty industry. A succession of CEO’s in the 90’s coupled with a cash guzzling product-based software business led to questions regarding the viability of the company. Named as CEO in late 1999, Robin came into the company when the firm had an NOL of over $60mm and completely changed the way the firm operated - everything from the product line, where he shifted the company toward Internet based software and services, to implementing tight operating expense controls (anything over 1K in expenses goes through him).

 

By focusing on reducing costs while simultaneously growing the top line, Robin has been able to double the revenue base during his tenure while consistently growing operating margins (6% in 2002 to 21% in the latest reported quarter), which has fueled significant EPS growth.

 

While operating expense as a percent of revenue has steadily fallen from 252% to 79% today (annualizing the first two quarters of ‘06), it has not come at the expense of product development.

 

 

 

 

 

There are two primary reasons why Robin has been able to lower costs and increase revenue: India on the cost side and acquisitions on the growth side. I will touch on both later.

 

 

The qualitative:

 

The second manner in which I got conviction in Robin’s ability as a CEO is from speaking to a number of different constituents of Ebix (board of directors, shareholders, employees). What emerged was a picture of a guy who fits neatly into Buffett’s three simple hiring criteria – energy, integrity and intelligence.

 

Energy – Born in India, Robin has displayed a strong worth ethic his entire life. Before becoming CEO of Ebix at an early age (mid 30’s), he quickly rose through the ranks at Mindware – an international technology consulting firm. Common words references used to describe Robin were “passionate” and “driven”. One member of the board said that he worries that Robin will someday get hospitalized from working too hard (on the typical day you can reach Robin up until 3am).

 

Integrity – While Robin works long days, he will be the first to tell you that it doesn’t all involve Ebix. He spends a great deal of his time on charity issues regarding India.

He has set up a foundation that takes up good deal of his time.

See http://www.rainafoundation.com/ 

 

Intelligence – Robin has an engineering degree from Thapar Univeristy in Punjab, India. References described him as very bright. Most importantly, I think the intelligence extends to how he effectively handles and motivates his employees (i.e. not just book smart) which is extremely important given his growth by acquisition strategy. The fact that there has been little senior management turnover under Robin (note – other than the CFO who is nearing retirement age and will be retiring very soon) is extremely important. Robin doesn’t like to have contracts with his employees and tries to build trust and empowerment through a pay for performance culture.

 

Arguably, the best testament to Robin’s ability was the fact that about a year ago, he was offered the CEO position at a $1 billion company that was in need of a turnaround. Robin thought about it for less than a day and declined the offer. As the second largest shareholder of Ebix and with a board that is now fully conflict free (research indicates it was somewhat dysfunctional until the last few years), I think the decision to remain at Ebix was an easy one.

 

 

 

Insurance itself constitutes around 15% of the U.S. economy and IT spending within the industry is estimated to be around 8%-9% of its overall revenue so we are talking big numbers. Ebix estimates that the insurance industry wastes an estimated $50 billion on paper-based processes every year. So the first big challenge is to get paper out of the process. The second big challenge is convergence. Ebix wants to get all the different insurance entities data (agent, broker, carrier) to flow seamlessly from end to end. Today, data entry happens five or six times during the end to end process which leads to inefficiency and ultimately higher prices for the consumer. Finally, the insurance industry tends to be slow moving in response to adapting new technologies. Decisions that should take three months can take three years and entrenched legacy architecture, hardware, and software takes time to replace.

 

So the challenges are there for Ebix but the opportunity set is large. The goal for Ebix is to be eventually regarded as “the Cisco” of the insurance industry - providing products, services and support that help’s move data back and forth among the insurance players (agents, brokers, carriers). This is a good business because of the recurring nature of it – Robin thinks around 70% of his current revenue stream today is recurring. The rest he would classify as more one off in nature like a consulting project.

 

 

Ebix is trading around 12x this years earnings and somewhere between 7x-9x next years earnings. If this is indeed the case, the stock price will eventually adjust upward so that the earnings yield goes down. It is important to note that operating cash flow should track even higher than earnings because of the way they recognize revenue (typically get paid up front and then recognize revenue as the service is performed), the light working capital requirements, and the depreciation & amortization associated with the acquisitions that runs through the p&l but is a non-cash event. Additionally, it should be noted that Ebix still has an NOL in the $11mm range which will get used up over the next few years. However, the tax situation is a bit more complicated because of the different tax structures overseas (almost half of last quarter’s revenue came from overseas which is taxed at various rates. For instance in India, they pay no tax). Management offers little guidance on how to forecast this other than to say that they believe the favorable tax treatment will continue even when the NOL has expired (Ebix recently spent $250K to get help on how to minimize taxes going forward given the different geographies that they operate in).

 

 

 

 

 

 

 

As discussed earlier, India explains what is going on with regards to the cost side of the equation while several smart acquisitions explain the growth side. I will touch on both.

 

India:

 

Robin describes India as “his secret genie” because of the cost advantage it has provided Ebix.  In 2001 Robin decided to use move software development effort offshore to India. Today, of the 222 total employees, 100 are based in two buildings in India (and some of employees stationed elsewhere are Indians working on a specific project – other regions include 80 in the U.S., 29 Australia, 7 New Zealand, 4 Singapore and 2 in London.) While this cost advantage has been commoditized in the overall IT market (thanks to the Wipro’s of the world), Ebix has been able to take advantage of its history, knowledge, and focus in the niches it provides within insurance IT to maintain a competitive cost advantage. 

 

Acquisitions:

 

I think the light bulb went off in Robin’s head a few years ago that there was an opportunity for him to take advantage of favorable borrowing rates and acquire companies that fit Ebix from a product perspective (i.e. synergies from the top line perspective) while overlaying his lower cost structure on the bottom line. Below is a quick overview of the four acquisitions to date:

 

February 2004: Lifelink (now Ebixlife).

Paid: $10.5mm. ($5mm cash, $2.5mm notes, $3mm in stock). Paid 5x EBITDA. Growing 20%+ on the top line.

 

Software to the life insurance industry. Brought Ebix 35 life insurance companies as customers and many more brokers. Has given Ebix opportunity to cross sell development services and products to these companies.

 

2005 Revenue: $6.1mm or 26% of total 2005 revenue. Considered recurring revenue.

 

July 2004:  Heart Consulting.

Paid: $7mm. ($3.6mm cash, $1.4mm notes, $2mm stock). Paid 3.8x EBITDA. Growing 30%+ on top line.

 

This is a gem of a business that is basically a monopoly. Provides software to more than 700 Australian insurance intermediary sites with over 3,500 users Australia-wide. Ebix now controls over 90% of the broker market in Australia.

 

 2005 Revenue:$4mm or 17% of total 2005 revenue. Considered recurring revenue.

 

May 2006: Infinity Consulting.

Paid: $2.9mm cash. Additional possible earn out of $4.5mm if certain revenue targets are met.

 

Not as good of business as Lifelink or Heart (doesn’t have the same recurring revenue characteristics) but will be accretive and complementary to the product line of Ebix. Services small to medium sized P&C carriers. Below is what Robin said publicly about the merger which sheds a little bit of light on how he thinks about acquisitions.

Mr. Raina added, "Infinity Systems Consulting is a natural fit for Ebix since it met all our requirements of growth strategy. Firstly, it is expected to be accretive in terms of positive cash flows and earnings both with no existing debts as on date. Secondly, the acquisition provides Ebix with an established presence in the small and mid-size insurance company markets in the United States. Thirdly, the acquisition provides us with a cohesive management team and an employee base that has delivered consistently and brings extended business insurance expertise to Ebix. Finally, the acquisition will allow us increased opportunities in terms of providing on site and offshore development and consulting services to the insurance company customers."

September 2006: Finetre Corporation.

Paid: $13mm cash. Additional earn out of $3mm over the next 3 years.

 

Finetre processes over $15 billion in annuity premiums over the Internet via their annuity exchange platform, AnnuityNet. The company recently sold the other part of their business to Morningstar. Robin is extremely excited about this acquisition because of the technology he acquired and the big opportunity he believes exists in the annuity processing market. This acquisition should help drive earnings in 2007 (I think it is anywhere from 25 to 50 cents a share accretive to ‘07 earnings).

 

At a 5% after tax borrowing cost, as long as Ebix isn’t paying more than 20x earnings, all these acquisition are going to be accretive to Ebix. While the first two have been accretive and I have confidence in the last two, you could argue that it is not that hard of a bar to jump over. This is especially the case when you can also layer on the synergies from a top line and bottom line perspective (i.e. we are not just getting the benefit of the multiple spreads initially at purchase). What ultimately give’s me comfort in this growth strategy is Robin’s conservative nature (extremely conservative guy who is very willing to walk away from a deal) and his ability to control costs and keep the management teams he acquires intact. It is also worth noting that Robin decided not to use stock for the last two acquisitions. This, coupled with the recently announced stock buyback program, tells you what he thinks about the future prospects of the company.

 

 

This is self evident. My only point here is that elephants can’t dance and this is certainly no elephant.

 

 

 

 

Channel checks: It appears that the pipeline is very strong. I believe that owners of the equity today have enormous upside potential in the form of options that could surprise on the upside in regards to significant deals getting announced over the next year.

 

Real estate value and excess capacity: Robin paid 200K for one of the two building that is assessed at $3mm today. There is over 40K square feet total for both buildings (other worth around 600K). Additionally, there are a total of 500 seats that could be filled in the two building that Ebix owns should they wish to fill these up. They are currently renting this excess capacity.

 

Competition multiples: It is hard to find any pure comps to Ebix given the different niches they are in. Applied Systems and AMS Services are the closest two I have found and both are private. Applied just got bought out by Bain at what I understand was around a 6.5x revenue multiple. I’m working on confirming this number. This would imply a double if you applied it to Ebix. 

 

Brit and Aon: I expect revenue from the largest shareholder of the company, Brit, to continue to decline (has declined 20% YTD). I expect this decline to be made up by the increases from Aon (second largest customer) where revenue is up 100% YTD.

 

 

 

Risks:

 

Robin gets hit by a truck.

 

My assessment of Robin is wrong.

 

The company bites off more than they can chew on the acquisition front.