DeepValue Insight

Deep Value, Spin-Offs, & Special Situations

Research Profile
July23, 2014
Company: Ebix Inc.
Ticker: EBIX
Industry: Business Software & Services
Market Capitalization: $491.7M
Strategy: Deep Value
Style: Aggressive
Current Price: $12.74 (Market close 07/23/14)
Two-Year Price Target: $22
Thesis
Stocks with high (over 25%) short interest ratios are commonly referred to as
“battleground” stocks. Battleground stocks are nothing new to me and I have no problem
with going big if, after careful analysis, I feel they are misunderstood and provide an
opportunity for a large gain.
Some stocks with high short interest are that way for good reason. Chinese reversemerger stocks were full of fraud. The for-profit education group pre-2011 faced huge
regulatory liabilities and they are now back in the cross-hairs of Attorney Generals
nationwide. I am quite comfortable being on the short side when it is justified, by my 3Fs
– fads, frauds, and failures.
Others have been great investments. When I first profiled JCOM, it had a ridiculous 37%
short interest and went on to return over 100% in the first year. Herbalife had a short
interest of 44% at the time of Bill Ackman’s first (of many) three hour presentations. The
stock hit a low of $24 after his presentation and then went on to triple within 13 months. I
regret not profiling USANA after I saw it had a 40% short interest – it went on to return
almost 60% in a year.
Ebix Inc. (EBIX) is another battleground stock with a high short interest ratio (37%). I
like it for two very good reasons, it is a great company and it is selling at a cheap price.
Exactly what I am always looking for.
Ebix’s main business, more than 80% of revenues, is running insurance exchanges,
marketplaces for agencies, companies, and consumers shopping for insurance. Insurance
companies pay subscription fees to list their product on Ebix’s exchanges and transaction
fees when consumers buy coverage. This is a really great business. Subscription fees are
recurring and renewal rates are very high at 95%+. It has low capital requirements since it
is a software based business. Plus, competition is limited and its scale draws both

providers and consumers. The remaining portion of Ebix’s business consists of back-end
software systems for brokers and providers and insurance certificate tracking.
Despite the best efforts of short-sellers to cloud the picture, the numbers do not lie. The
company has grown at a 5-year compound growth rate of more than 15% a year and
operating earnings at 13.9%. The company is in good financial health with a reasonable
amount of debt. Most impressive is that Ebix generates a lot of free cash flow, averaging
34% of revenues, giving investors a nice dividend yield of 2.1%. The stock is current
trading at under $13, giving investors a chance to buy a company with an earnings yield
of 15.5%, a P/E under 10, and a free cash flow yield of 9%.
Undervalued: EY: 15.5% P/E: 8.58 P/CF: 7.67
Management Effectiveness: ROTC: 195.6% ROA: 11.56% ROE: 14.69%
Profitable: OPM: 31.57% NPM: 28.17%
Stable: Total cash: $58.6M Total debt: $54.4M CR: 1.8
About the Company
Ebix, Inc. provides software and e-commerce solutions to the insurance industry. The
company operates data exchanges, which connect various entities within the insurance
markets and enables the participant to carry and process data from one end to another in
the areas of life insurance, annuities, employee health benefits, risk management, workers
compensation, and property and casualty (P&C) insurance. It also focuses in the area of
broker systems on designing and deploying back-end systems consisting of eGlobal for
multinational P&C insurance brokers; WinBeat for P&C brokers in the Australian and
New Zealand markets; and EbixASP, a system for the P&C insurance brokers in the
United States. In addition, the company offers business process outsourcing services,
which include certificate origination, certificate tracking, claims adjudication call center,
and back office support. Further, it provides carrier systems, such as Ebix Advantage and
Ebix Advantageweb targeted at small, medium, and large P&C carriers in the United
States and internationally that operate in the personal, commercial, and specialty line
areas of insurance. Additionally, Ebix, Inc. offers software development, customization,
and consulting services to various companies in the insurance industry, such as carriers,
brokers, exchanges, and standard making bodies. The company was formerly known as
Delphi Systems, Inc. and changed its name to Ebix, Inc. in December 2003. Ebix, Inc.
was founded in 1976 and is headquartered in Atlanta, Georgia.
Discussion and Analysis
Ebix provides software and e-commerce services to the insurance industry. The company
is made up of 4 different segments. Operating an insurance data exchange makes up 80%
of revenues, it allows prospective clients to shop and compare offerings and buy
coverage. Ebix operates exchanges for life insurance, annuities, employee health,
workers compensation, and property & casualty (P&C). The company also earns revenue
from subscription fees to list on the exchange and transaction fees for applications.
Broker systems makes up 9% of revenues and consists of designing and implementing

back-end software for P&C insurance brokers. The BPO/Risk Compliance business
makes up 7.7% of revenues and provides the creation and tracking of insurance
certificates. Carrier Systems makes up the remaining 2% of revenues and designs
customized systems for P&C insurance companies. Ebix has operations in over 50
countries and has a recurring revenue base of 80% and boasts a customer retention rate of
95%.
Ebix has an impressive track record of growth, with a 5-year compound growth rate of
15%, 14% in operating earnings, and 11% in free cash flow. The company’s stated
mission is to be the leading provider of backend insurance transaction support and it has
pursued an acquisition strategy to increase its product offerings, technology, and
customer base. Recent acquisitions include CurePet (2014) pet insurance exchange and
veterinary management software, PlanetSoft (2012) data exchanges, Connect Solutions
(2011) exchanges, ADAM (2011), health insurance and benefits. Ebix is focusing on
developing their SmartOffice CRM utility, building out CurePet, developing ADAM
OnDemand – an online medical library – and getting back to focusing on business
development. Ebix has good growth prospects going forward.
Competitive Position
While Ebix is unique in the breadth of its offerings, it does compete with different
companies in the various exchanges. In the life insurance exchange market, it competes
with Winflex and Lifespeed, while in annuities it competes with AnnuityNet. Its closest
competitor that offers products across a number of exchanges is iPipeline. Ebix boasts
high customer retention rates (95%+), and other factors that give it an economic moat,
including high switching costs, product diversity, and limited competition.
Management
Rob Raina is 46 and has been Ebix’s CEO since 1999 and has held the Chairman position
since 2002. He also owns 12% of Ebix’s outstanding stock. Operationally, Ebix has
performed very well under Raina’s leadership, growing by an impressive 29.4%
compound rate since 2004 and operating income has grown to $60 million from just $2
million in less than a decade. Ebix started issuing a dividend in 2011 and has raised it
twice, including a special dividend in 2012. Share dilution has been minimal despite
several stock-based acquisitions, and returns on invested capital have averaged 20%.
Overall, Ebix seems to have a competent and successful management team.
Financial Health
Ebix is in solid financial health. It has a manageable cash/debt balance of $58.6 million to
$54.4 million. Debt-to-equity is low at just 13% and current ratio is just under 1.8. Ebix
generates a lot of free cash flow, with over 34% of revenue over the last five years. The
2.1% dividend yield is just 10% of free cash flow. To offset share dilution from
acquisitions, the company has bought back over 5% of outstanding shares since 2012.

Risks
Ebix has been a battleground stock with a high short interest ratio for several years. It
has plenty of doubters with a 37% short interest ratio. The most recent problem was a
little over a year ago, when Goldman Sachs abandoned a proposed merger after the US
Attorney’s office in Atlanta opened an investigation into statements made by the
company to shareholders. Before that there was an SEC probe and a class-action lawsuit
against the company in 2012 that sent the stock to under $10. This past year was about
putting its troubles behind it and the class-action lawsuit was settled for $4.23 million.
One anonymous short-seller, actually his name is Daniel Yu (he doesn’t want you to
know that), continues to put out negative articles on Seeking Alpha. This company has
now been under close scrutiny for over 3 years and no one has come close to finding any
evidence of wrong doing.
The author does not own any shares of EBIX and does not anticipate buying any
shares in the next 72 hours.

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