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5) Letter To SEC 3.24.16
5) Letter To SEC 3.24.16
It has been nearlytwo years since we first shared with you some of our concerns regarding EBIX. We have attached a memoto
this email that focuses on deeply concerning issues observed at the Company since our last letter to you in February 2015.
Among other items, we note:
1. Continued highly questionable acquisitions
2. Continued low quality of earnings
3. Continued use of contingent earn-out reversals used as an earnings "cookie jar"
4. 10-Ks filed in the US before Singaporean audits were completed
5. Not one but two auditor resignations in 2015 (India and Europe)
Most critically, we were highly disturbed to see a Form 4 filed by the Rennes Foundation that indicated the Foundation sold
call options on EBIX stock in December 2015 while EBIX was actively engaged in a major M&A transaction—an attempted
takeover of UK-listed Xchanging FLC (XCH)—that would have more than doubled the size of EBlX's business. As you may
be aware, the Rennes Foundation is a major shareholder in EBIX (currently an 11.1% holder of EBIX's common stock).
Critically, the named fiduciary for the Rennes Foundation, Rolf Herter, is a Board Member and therefore an insider at
EBIX. By selling these call options, the Rennes Foundation was able to avoid a loss when it ultimately became clear to the
public markets that EBIX would fail in its attempted takeover of XCH. We find it incomprehensible that the Rennes
Foundation—a major shareholder overseen by a Board Member of EBIX—was able to transact in EBIX's securities during a
material corporate M&A event. For your reference, we have copied below a timeline of events related to the XCH transaction
and as always would be happy to discuss any of the foregoing with you at your convenience.
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Best Regards,
Ruby Sekhon
General Counsel & Chief Compliance Officer
Enclosures:
EBIX Update Note 3 24 16_FINAL
March 24, 2016
Executive Summary
This memo serves as an update to our prior letters, highlighting subsequent business developments and
financial disclosures by Ebix. Ebix continues to have no organic growth, a questionable M&A strategy,
extremely low earnings quality, and other critical unresolved questions.
1
Defined by Ebix as "Pro forma" revenue: for 2014, assumes all acquisitions
were completed on 1/1/13, and for 2015, assumes all acquisitions were
completed on 1/1/14
2014 10-K
1Q15 10-Q
2Q15 10-Q
3Q15 10-Q
1 Source: US SEC Filings
II. Questionable Acquisition Practices
We suspect Ebix acquired businesses that were in poor condition or unrelated to its core operations in part
to mask the company’s declining organic revenue growth.
Healthcare Magic – this was an $18MM acquisition (including earnout) of an India-based
healthcare Q&A platform whose sales fell 53% from 3/31/12 to 3/31/152
Via Media Health – this was a $1.37MM acquisition (including earnout) of a healthcare PR
agency, a business completely unrelated to Ebix’s technology business with much lower margins
than the corporate average3
Curepet – in 2012, Ebix acquired 19.8% of Curpet for $2MM, which designs veterinary practice
management software, implying a $10.1MM valuation for the business
o Ebix subsequently acquired Curepet (which was valued at $10.1MM in 2012) for
$1.35MM (plus a $5MM earnout which is now estimated to be zero) in 2014
o The $1.35MM acquisition price was offset by an equivalent amount owed by Curepet to
Ebix4
We suspect this was a tidy way to avoid a write down of the initial investment
2 Source: Indian MCA filings, CIN #U25517KA2008PTC045385
3 Source: Indian MCA filings, CIN #U74300DL2000PTC104259
4 Source: 2014 EBIX 10-K
o In 2015, Ebix contributed Curepet to a JV with IHC Health Holdings Corporation, and
valued the contribution of Curepet at $2MM – we suspect Ebix moved Curepet into the JV
to avoid a write down of the asset
o Of the $82MM in assets acquired in 2014, acquisitions for which a purchase price
allocation was disclosed, over $68MM, or 84%, was allocated to goodwill, which is not
amortizable and continues to become an increasingly larger part of Ebix’s balance sheet4
Taxes: Ebix’s effective tax rate is considerably lower than its actual cash tax rate
o In 1Q15, Ebix made a $20.5MM payment to IRS to settle income tax audits for 2008-2012
o After applying this payment to cash taxes over the audit period in question, it is apparent
that Ebix’s cash tax rate meaningfully exceeds its reported effective income tax rate
$000s 2008 2009 2010 2011 2012 2013 2014 1Q15 2Q15 3Q15
Cash taxes 1,937 4,752 2,396 3,796 8,590 13,779 11,433 20,163 763 3,737
Adjusted cash taxes 1 6,037 8,852 6,496 7,896 12,690 13,779 11,433 (337) 763 3,737
Cash flow from operations before income taxes 30,608 41,244 57,928 80,365 88,390 81,209 71,909 12,982 24,113 18,980
and deferred tax payments
Adjusted cash tax rate2 19.7% 21.5% 11.2% 9.8% 14.4% 17.0% 15.9% -2.6% 3.2% 19.7%
Reported effective income tax rate 4.8% 2.5% 1.1% 2.9% 9.6% 15.5% 17.9% 11.6% 5.6% 8.5%
1
Spreading $20.5MM tax payment across 5 years of audits reviewed by IRS
2
Adjusted cash taxes as a % of CFFO before income taxes and deferred tax payments
o Ebix’s effective tax rate is persistently lower than its cash tax rate. It appears that Ebix’s
reported earnings are benefiting from a tax rate that doesn’t reflect the actual cash
obligations the company has to its taxing authorities
o If Ebix had a 20% tax rate over the last 12 months, its TTM EPS would have been $1.84
instead of the reported $2.09
Earnout Reversals: Most critically, Ebix has continued to use a reversal of contingent earnout
liabilities to boost earnings – since 2008, Ebix has reversed 52%, or $29MM, of its earnout
liability into earnings, suggesting either an inability to assess whether earnouts are attainable or
creation of an earnings cookie jar5
5 Source: EBIX 10-Ks and 10-Qs
Contingent Liability for Accrued Earn-out Acquisition Consideration ($000s)
2008 2009 2010 2011 2012 2013 2014 1Q15 2Q15 3Q15 Total
Beginning balance 0 4,049 4,700 8,911 7,590 17,495 14,420 5,367 5,330 10,080
Total remeasurement adjustments:
Gain or losses included in earnings 0 0 (1,500) (4,589) (699) (10,253) (10,237) 0 0 (1,533) (28,811)
Gain or losses recorded against goodwill 0 3,279 0 0 0 0 0 0 0 (2,000)
Foreign currency translation adjustments 0 0 0 0 (143) 730 (314) (37) 50 (60)
Acquisitions and settlements
Business acquisitions 4,549 1,500 8,700 4,000 16,258 9,425 4,312 0 4,700 1,526 54,970
Settlements (500) (4,279) (2,992) (577) (5,511) (2,977) (2,814) 0 0 0
Adjustment to tie-out 0 151 3 (155) 0 0 0 0 0 0
Ending balance 4,049 4,700 8,911 7,590 17,495 14,420 5,367 5,330 10,080 8,013
oEbix’s earnout reversals contributed 13% of Ebix’s 2014 operating income and 22c to EPS
of $1.67
o In the most recent TTM period, earnout reversals contributed 5% of operating income and
6c to EPS of $2.09
Foreign Exchange: In the most recent TTM period, gains on foreign currency have contributed
3% to pretax income and 7c to EPS of $2.09
Excluding earnout reversals, forex gains, and bringing the effective tax rate inline with the cash tax
rate (assume 19%), TTM earnings would have been 18% lower than reported, implying that Ebix,
a business with negative organic growth, is trading north of 21x TTM EPS
Ebix has not filed 2014 or 2015 financial statements with the Singaporean regulator (despite
completion of 2014 and 2015 US 10-Ks and audits)…after having filed its 2012 and 2013
Singaporean filings far after already filing its consolidated 2012 and 2013 10-Ks
o This is particularly problematic as Singapore is the parent entity for at least six
other subsidiaries, including the India operations
Completed/Filed
Annual filing US 10-K Singapore
FY12 3/18/2013 12/19/2014
FY13 3/17/2014 12/4/2015
FY14 3/16/2015 Not filed
FY15 2/29/2016 Not filed
6 Source: 3Q15 and 2Q15 EBIX 10-Q
Ebix appointed a new auditor in India in late 2014, but that auditor subsequently expressed its
“inability to continue as Statutory Auditors of the Company for the Financial Year 2014-2015”7
In 2014, Ebix restructured its European subsidiary by merging Ebix Europe into Ebix UK, with the
resulting company named Ebix Europe – the company did not disclose this in any of its SEC filings
o Effective August 1, 2015, Ebix Europe’s auditor, Akshar & Company, resigned – Ebix did
not reveal this change in the 3Q15 10-Q
7 Indian MCA filings CIN #U72900DL2002PTC115124