Description

Ebix is as cheap now as my initial write up 17 months ago.  At the time, I expected 1.92 in earnings for 2006, putting the stock at 12x earnings. Today you have a company that just released 2007 fourth quarter earnings of 1.20 a share or 63% of 2006 earnings. I think Ebix could generate somewhere around $6 a share this year, putting it below 12x earnings.  Admittedly, in this environment, 12x earnings isn’t all that cheap as you can buy some great franchises right now for this multiple.  But I have yet to find another company trading at 12 times with a similar growth and revenue predictability profile as Ebix.

My contention is that the torrent earnings growth of the past 17 months will continue into 2008 and shareholders have a favorable risk/reward even without a re-rating in the stock.  

Rapid Expansion of the “E”:

Why 2008 looks good:

I will touch on two recent acquisitions that should help drive 2008 to a record year.

Telestra Acquisition – “a fat pitch”:

Ebix made the largest acquisition in its history with the purchase of Australian based Telestra eBusiness at the beginning of this year for $43mm. Why I’m excited about this deal:

1)      “Extremely accretive deal” – Robin has publicly stated that the deal will be “extremely accretive.” I’ve never heard him this bullish on any deal which leads me to believe that we will start to see the reason why in the first quarter of 2008. I’m assuming Telestra generates $5mm in net income in 2008 which equates to 70 cents a share accretion (I’m using 3.9% interest on the $16.5mm in debt used to finance the transaction and assuming a little over 300k incremental shares outstanding from the $20mm convertible issued). My base case then assumes that the other businesses ex Telestra grow 10% YOY which I think is a modest assumption.   

2)      Sell dynamics – Telestra is a $50 billion + market cap Australian telecom company that Ebix has worked with for a long time (Heart sells broker software that runs on the exchange).  I think Ebix was able to get a good price because 1) this was a non core and fairly immaterial asset to Telestra. 2) the timing of the sell (credit markets imploding), and 3) Ebix not only had a relationship with the seller but a competitive advantage as far as domain knowledge on what it was buying.

3)      Monopoly business with highly predictable revenue stream – The primary product of this acquisition, Sunrise Exchange, allows insurers and brokers in Australia to process insurance policies electronically. This is THE engine brokers use in the Australian property and casualty insurance market with close to 90% market share. Ebix intends to maintain this foothold in the P&C market while branching out to other segments for growth.

4)      Great manager – Leon D’Apice will be running the show and is one of the most capable managers in Robin’s “inner circle.” Leon has worked with Robin for over 10 years.  

Insurance Data Services Acquisition – “A business model fit”:

Ebix paid $11.25mm for IDS in late 2007. IDS pioneered the first outsourcing application for Certificate of Insurance tracking and is considered the leader in the space. This business relieves corporations from the time-consuming work and administrative hassle involved in managing Certificate of Insurance compliance. IDS is the perfect “data crunching”, “recurring revenue” type business Ebix looks for. It also serves as a gateway for cross selling opportunities. I think Robin is paying around 6x earnings based on a $6.6mm revenue run rate and 30% operating margin assumptions.

While I’m excited about both of these acquisitions, my ultimate comfort stems from the man who is steering the ship – Robin Raina. The fact that Robin has the preponderance of his net worth in Ebix and basically hasn’t sold a share despite the price increase is meaningful. Furthermore, I’m confident that Robin has no plans on “cashing out” anytime soon.

Robin Raina:

To understand where Ebix is going, you have to understand where Ebix has been and the inner workings of the man responsible for one of the most impressive turnarounds in small cap land I have seen.  

How would you like to be handed the reins in late 1999 of a company whose P&L looked like this?

1994: (8.9mm)
1995: (1.6mm)
1996: (11.8mm)
1997: (5.0mm)
1998: (3.4mm)
1999: (19.0mm)

The board may have had a “swinging for the fence” mentality when they handed the company over to a young (31 at the time), talented, and aggressive Indian kid who had quickly shot up the ranks at Delphi. Bankruptcy was probably on the horizon anyway, so why not try something drastically different?

Timeline:

In his first full year on the job, Ebix lost $11mm. With a declining revenue base and bloated infrastructure, Robin cut costs as fast as he could. By early 2001, with the potential for bankruptcy looming, Robin cut a deal to bring $5mm into the company through a strategic investment from Brit Insurance at $1.25 a share. When I would later ask the former CEO of Brit why he made the investment given the declining top line and the consistent history of losses, he simply said “Robin.” Needless to say, it was a good bet.

A few months later, Robin would make a decision that would pay big dividends for the company down the road by moving a substantial part of Ebix into India. This move was instrumental in establishing a competitive advantage in a data driven industry where the lowest cost operator wins.  

“U.S.-based online insurance company ebix.com plans to enter the Indian market following deregulation of its insurance sector.”Boasting the world's largest population and an annual growth rate of nearly seven per cent, India offers great opportunities for us," the company's President and CEO Robin Raina said.  Ebix.com's expansion into India is a major step for Ebix to become a global supplier of internet-based insurance tools for consumers and insurance professionals.”

By 2002, Robin had made the strategic decision to let the legacy Delphi product run off and to all but abandon the online insurance consumer marketplace that many of his peers stuck with (Insweb, insure.com etc.) Instead, Ebix would strive to provide the products and services that would help converge the 3 channels of insurance – agent, broker, and consumer. Much of the work in 02 and 03 involved customized projects for clients – the “here is 500K go build me a customized system” type work.  At some point, Robin started believing that the Indian “body shop” type businesses would increasingly become commoditized and that establishing a more proprietary, recurring “pay per click” model with minimal operating variability was the way to go.

In 2004, he took the first step forward with this strategy with the acquisitions of Lifeline and Heart consulting. Both provided software to the insurance industry, had dominant market share, and a highly predictable revenue stream.  Since the acquisition, both have also shown solid organic growth with Heart’s top line growing 67% and Lifelink 62%.   

Rather than buying another company in 2005, Robin bought back 7% of Ebix shares outstanding at 13.50 and spent the year integrating the two acquisitions of 2004. Revenue grew 25% in 2005 and earnings jumped almost 100%.

This now brings us back to 2006, and the Finetre and Infinity acquisition. Like the 2004 acquisitions, both have showed meaningful top line growth at 55% and 50% respectively.

Feedback: 

I originally found the company after calling the author of a bullish piece on Ebix. He proceeded to tell me how he ran the investor relations firm that Ebix hired, and that he was fired by Robin in fairly short order for “costing too much money.” After explaining how Robin refused to listen to anything he said (no investor conferences, no road shows etc.) because “he had a business to run,” he explained how Robin was the cheapest CEO he has ever encountered. The fact that this wasn’t a Dutton Associates (issuer-paid firm) or lower tier IR firm increased the credibility of this data point. He went on to say how Robin was very smart, driven and how “everything comes through him.” He also mentioned how he made Ebix the largest position in his PA the day he was fired. 

The checks after this point weren’t always flattering, but were always consistent. The former Brit CEO remarked how Robin was the most passionately committed and driven person he knew and that the only risk to owning Ebix stock was that Robin would “get hospitalized for exhaustion.” A consultant summarized the competitions view of Robin with “begrudging respect.” A former employee was less than enthusiastic about Robin. He recalled with frustration the frugal culture and day to day micro management saying - “I had to get his permission to go the bathroom and then had to be sure not to use too much toilet paper.” Unfortunately, the same passion and drive that makes Robin such an effective CEO can also make him a difficult person to work for. While this former employee (who had been let go) was trying to make a dig at Robin, he was really shedding some insight into why Ebix had survived back in 2000. The benevolent democracy that existed at Delphi and enabled the bureaucracy and bloat effectively ended the day Robin Raina arrived.

Conclusion:

The challenges ahead will be a function of how well Robin handles success. From optimizing the tradeoff between investing in the future and delivering results today to effectively managing a rapidly growing revenue base, the complexities that growth brings will be numerous. In addition, there is significant key man risk. In the same way that Apple would crater if Steve Jobs were to get hit by a truck, the future of Ebix is inexorably tied to its CEO. While you get a collection of high margin, sticky revenue stream businesses that could probably be run by a dummy, all the gluing and growing is being driven by the vision and execution of one man. This architect, who has managed to steer a company from near bankruptcy to a business that should generate over $20mm in cash flow in 2008, is just at “restless” and “unsatisfied” as when I first met him. If history is any guide, this is a dissatisfaction you want to embrace.  

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