Ebix is one of the most interesting, and controversial, Industry in the Cloud (IC) providers I follow. (It’s stock symbol is also EBIX.)
Ebix describes itself as ” a leading provider of On-Demand software and e-commerce solutions to the insurance industry…provid[ing] end to end solutions ranging from infrastructure exchanges, carrier systems, agency systems and Business Process Outsourcing services to custom software development for all entities involved in the insurance industry and financial industries… power[ing} multiple exchanges across the world in the field of life, annuity, health and property & casualty insurance, while conducting in excess of $100 billion in insurance premiums on its platforms. Ebix’s goal is to be the leading backend powerhouse of insurance transactions in the world.The Company’s technology vision is to focus on convergence of all insurance channels, processes and entities in a manner such that data can seamlessly flow once a data entry has been made.”
Ebix seems to have done many of the things I’ve seen successful IC providers do: add applications on either side of transactions, acquire the competition, build geographic concentration, move to SaaS solutions and subscription pricing, etc. And its financial/operational results over the past 5 plus years are unbelievable:
- Revenue has increased from $24 million in 2005 to over $132 million in 2010. (A CAGR of 41%.)
- Over the same time, net income grew from $4 million to $59 million.
- Operating margins are consistently around 40%.
- Ebix has little debt.
- 75% of the revenue is said to be recurring.
- Ebix claims a 99.5% client retention rate.
- 78% of the revenue comes from the exchange part of the business.
The bottom line is that this company seems to be the “poster child” of a successful IC provider in an enormous industry which supports another major IC-type provider, IVANS, and has spawned several interesting software companies (e.g., the soon-to-go-public Guidewire Software, which has similar revenue and “only” $15 million in net income.)
As a SaaS provider with these financial results, you would expect Ebix to have a stratospheric valuation. And you would be wrong. Even with its recent run-up from $15/shr to over $20/shr, the stock sells at a below market multiple of 12.6x trailing twelve month earnings! Its EV/EBITDA ratio is 10.68, not shabby, but nowhere near the stratospheric valuations of other SaaS comparables and nowhere near ones with Ebix’s growth rate.
Why the discrepancy between the financial results and the valuations? A few reasons:
1. Trust. Investors are spooked by a bunch of issues: a lawsuit from a recent acquiree alleging inflated revenue recognition, aggressive accounting and tax strategies, and a revolving-door of auditors over the past five years–leading to the current use of a relatively “no-name” auditor. See Barron’s for the full scoop. Simply put, many investors feel the numbers may indeed be too good to be true.
2. Complexity. As you can see from the description Ebix provides for itself, Ebix plays in several distinct insurance markets, sells software, operates exchanges, provides custom development and BPO services. (It may also be a dessert topping and a floor wax.) Even though most of the revenue seems to come from exchanges and SaaS products, the market hates complexity.
3. For me, the lack of metrics is scary. As I have mentioned previously, great ICs provide a clear view into the underlying metrics that help the investor or platform participant understand the health of the ecosystem. These longitudinal metrics are hard to find in the Ebix 10-K. It is very hard to understand exactly how the company makes money at the “micro” economic level.
Either Ebix is one of the great stock buys of 2011, or it is a sham. I have no idea which it is–though I am hoping for the former. I’m also hoping that one of you from Atlanta, the Guidewire team (many ex-Ariba folk), or the insurance industry will have some insights. If you do, please share them!
(Please note that I am not long EBIX. I bought the stock in late 2010 in the low $20s and sold after just a few months at a small loss, as I was scared by the auditor issues.)