EBIX Presentation IT Sector

Ebix Inc. (NASDAQ: EBIX)

Information Technology SectorApplication Software Industry

Stock Pitch

Price Target: $68.85Current Price: $62.75

Fall Term 2016 Applied Portfolio Management

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Students: Joel Julio, Greg Hempt and Yifang Guo

I.T. Stock Report 11/2016 FIN 660: Advanced Portfolio Management

I. Investment Summary Ebix Inc. (NASDAQ: EBIX) Recommendation: BUY

Valuation Metrics Consensus

Price (11/20/16) $60.30 2015A 2016E 2017E52 Week Range $28.28 – 61.90 Revenue 265.5 294 319Consensus Target $66.59 Operating Margin 37.4% 38.1% 38.2%Market Cap (M) $2,005 EPS $ 2.23 $ 2.83 $ 2.90Ent Value (M) $2,160 EBITDA 99.3 112 122Net Debt/Cash 1.98x P/E 14.38x 21.31x 20.79xDividend Yield 0.5% FCF/share -0.35 1.08 3.44LT Growth 10.0% EV/EBITDA 16.0x 11.9x 6.2xFloat 65.5% EV/sales 0.8x 1.5x 1.2x

1.1 Company Highlights Ebix, Inc. supplies software and electronic commerce solutions to the insurance

industry. The Company provides a series of application software ranging from carrier systems, agency systems, and exchanges to custom software development for all entities involved in the insurance and financial industries. Ebix offers products, support, and consultancy to customers on several continents.

The company’s technological vision is to focus on the convergence of all insurance channels, processes and entities in a manner that data can seamlessly flow once an entry has been made. The company intends to accomplish this by designing innovative new products and services that are several years ahead of the competition and believe profitability and revenue growth must go hand in hand.

Ebix, Inc. has an expansion strategy in the Indian market and is looking for strategic acquisitions. They illustrated their commitment to invest in India by forming two joint ventures and pursuing opportunities in the sectors of healthcare, e-governance and education. Ebix sees the Indian government as potentially one of the largest buyers of technology in the world over next decade and wants to help the government build a digital India.

1.2 Industry Highlights Life Insurance: This segment has lost some ground globally to alternative savings

vehicles in the last few years, and we expect this trend to continue. The pattern is driven by mature markets, where growth has been extremely volatile and weighed down by the low interest-rate environment, regulatory challenges (such as commission bans) and erratic performance of bancassurance volumes in some European markets. Emerging markets have been performing better. However, the

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rebound in life insurance penetration rates – as measured by the share of life insurance in personal financial assets (PFA) – may possibly have come to a temporary halt in some regions, such as Emerging Asia.

P&C (Property & Casualty): Premium growth has been roughly in line with nominal GDP. In emerging markets, auto insurance has been the growth engine, both as a result of rapid vehicle growth and a rise in the average value of new cars. In mature markets recent growth has been helped by a positive cycle, but is under pressure structurally. Auto insurance in mature markets has been declining relative to nominal GDP growth; premiums have been falling due to lower accident frequency, and growth in other lines has not made up for the decrease, leading to a decline in the broader market.

1.3 Industry impact on EBIX Over the longer term, the insurance industry has become more global. In the mid- 1950s,

the 40 largest property-casualty global carriers drew 95 percent of revenues from their home country; in 2013 domestic revenues for the top 40 decreased to 64 percent (Exhibit below, page 4). Carriers with a diverse global mix have also been shown to perform better: between 2004 and 2012, the combined ratio of the largest carriers with a more global footprint was three points lower than that of the largest carriers with a less global footprint. Global insurers benefit from diversification, increased staff mobility, and more leverage with distribution partners and other advantages.

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1.4 Industry looking forward Our latest profit pools demonstrate the change that has been occurring over time. In both

property-casualty and life insurance, global markets (outside of the U.S.) continue to gain share, particularly due to fast growth in emerging markets. This, combined with the fact that the U.S. insurance market remains among the world’s most mature and competitive, suggests that it is only a matter of time before more U.S. carriers seek a larger presence outside their borders.

1.5 3-month Timeline 11/11: Rober Kerris, Ebix’s CFO, sold 1,171 shares of the company at the spot

market price of $59.20. After the fact, the stock dropped to the $58 mark. Since 11/15, the stock has risen to as high as $62.80. From our understanding, the market may have overreacted to the news of upper management trimming some its position with the company.

11/10: CEO Robin Raina announced on the 8-K filing his response to the company’s inability to acquire Patriot National Inc. “With worldwide cash and cash equivalents of approximately $111 million, growing operating cash flows and the solid backing of our banking syndicate led by Regions Bank, we feel that we are well positioned today to fund all our growth plans, in addition to continuing our investor friendly initiatives like share repurchases and dividend payments.”

11/06: Patriot National Inc. announced that its board of directors had rejected the proposal. The $475MM enterprise value valuation was deemed low by Patriot’s standards.

08/11: Ebix announced the proposal to acquire Patriot National Inc (a leading provider of technology and outsourcing solutions located in Fort Lauderdale, FL). At the time, Ebix stock price stood at $53.49 before declining until $51 by 08/03. The stock price has consequently risen since then.

1.6 Investment Positives Summary Cloud M&A: A wave of cloud M&A may be sparked by potential cash repatriation

under a Trump administration following recent high-profile deals including Oracle-NetSuite, Microsoft-LinkedIn, Salesforce.com-Demandware and Vista's acquisition of Marketo and Cvent. Large technology vendors with huge cash balances held mostly offshore may be enticed to use that money to boost exposure to the cloud through acquisitions. High valuations of pure-play cloud vendors may be a deterrent.

Industry Leadership Opportunity by Leveraging Ebix’s Strong Market Presence: The U.S. insurance IT market is a highly fragmented $60 billion industry. Ebix’s innovative exchange strategy and its global reach positions it as a possible leader in the worldwide insurance exchange markets

High Growth and Profitable Recurring Revenue Model: Approximately 80% of its revenue generated from recurring sources, derived from a 99% plus customer

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retention rate, Ebix has a solid revenue base to build a high degree of visibility to its growth and future revenues

1.7 Investment Risks Summary Stronger Dollar: As the US dollar is becoming stronger, the revenue of branches in

other countries has been influenced, which decreased the overall revenue of the company and will affect in the near future.

Artificial Intelligence: Artificial intelligence software solutions will likely be the top disruptor in technology in the next decade, such as smartphones and the cloud. Software's ability to self-learn by processing data may spur consumer and enterprise applications. Companies embracing AI may get a competitive edge; ones that don't run the risk of being disrupted and phased out. AI is nascent, but the pace of innovation and disruptive potential of startups will accelerate as computed costs shrink and machine-learning algorithms advance.

1.8 Ebix Inc. Geographic Reach

1.9 Technical Behavior Unlevered Beta: 1.21

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77.3% United States

1.7% Canada

11.5% Australia

1.3% India

2% Singapore



3.2% Europe

Re-levered Beta: 1.14 6-Month Price Momentum ROC: 102.6%

Consolidation: Starting in May of 2015 EBIX went through a 127-day consolidation period where it broke out on 3/1/16, labeled as the first breakaway gap, as the price and volume surged 11.3% and 218% respectively in just one day.

Flat Base Breakouts: After the first breakaway gap the share price consolidated again into a flat base which it broke out from 7/5/16 with share price running up 6.1% in one day. The stock then formed a second stage flat base, which it recently broke out from on 11/9/16 in heavy volume, showing institutional accumulation (something investors should always look for when taking considering a long position).

II. Detailed Analysis of Catalysts and Risks

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127-Day Consolidation

Breakaway Gap

Flat Base Consolidation

Breakaway Gap

2nd Stage Flat Base

Source & concentration of revenueIn Millions of USD except Per Share FY 2011

12/31/2011FY 2015

12/31/20154-Year

Concentration Change12 Months Ending

Revenue 169.0 100.0% 265.5 100.0% Exchanges 130.6 77.3% 190.7 71.8% -7.1% BPO 14.9 8.8% 55.9 21.1% 138.1% Broker Systems 18.0 10.7% 14.5 5.5% -48.8% Carrier Systems 5.4 3.2% 4.3 1.6% -48.7%Source: Bloomberg

Investment Positives

Cloud M&A Ebix, Inc. has announced that it is going to acquire Patriot National, Inc., a provider of technology-enabled outsourcing solutions for the insurance industry, with 100% of the outstanding stock of Patriot National for $9.50 per share.

If this transaction can be successful, it would bring tremendous benefits to Ebix. First, this acquisition will integrate acquired products, services and companies in a highly disciplined and efficient manner, with resulting cash flow and earnings per share being key endpoint metrics. Ebix believes that the combination of the two companies can be highly accretive for the shareholders of the combined post-merger company.

Then, it may help to build a leading technology and insurance services platform. Currently, Ebix has established its insurance related products, services and deep domain expertise that serves over 16,000 clients in 50+ countries with more than 500,000 users. The addition of Patriot National's workers compensation insurance technology and outsourced services will complement and strengthen a world leading insurance domain focused company with an unparalleled repertoire of products and services. The merged company would become the world's largest provider of straight through processing in the insurance services industry, offering on-demand based front end systems, back end systems, exchanges, strategic consulting and risk compliance services all under one roof.

Thirdly, this acquisition would help expend Ebix’s global selling opportunities. With approximately 3,000 employees located in over 40 offices servicing clients in 50+ countries across 6 continents, Ebix provides a truly global platform with "on-the-ground" presence in major insurance markets worldwide. Global offices are staffed with local nationals possessing language skills and a deep familiarity with local customs, business norms and regulatory frameworks. A merger further enhances this footprint while providing substantial cross selling opportunities.

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Higher End-to-End Demand

For the revenue growth, revenue in Q3 2016 increased 12% from a year ago, to $74.6 million. The revenue improvement reflected growth in the companies exchange channel, as well as higher revenue from the risk compliance channel. As usual, exchange revenue continued to be the largest channel for Ebix accounting for 70% of the company’s revenues.

In the oversea market, the European division Show 156% year-over-year growth in a nine-month period ending September 30, 2016, by growing $13.5 million from $5.3 million the same period in 2015. This revenue growth is largely associated with PPL insurance underwriting exchange platform contract. In addition, the revenue growth is largely associated with the company’s e-governance efforts in India. Quarter-over-quarter revenues for India grew by over 354% to $3.8 million in Q3 2016, from $0.8 million and Q3 2015.

In the insurance industry where most revenue of Ebix comes from, insurance agents and brokers are experiencing a major shift in what their customers and clients have come to expect. As the millennial generation matured and enters into its peak buying power, digital and more-automated ways of doing business will become a fundamental part of daily workflows. In the end, the easier it is to onboard a customer and make agents more available to prospects and clients, the more insurance entities can grow their clientele, reduce operational inefficiencies and grow revenue. So, this will create a higher demand for the services and products of Ebix.

Cost Management and Operational Discipline

Ebix is presently working on a cost rationalization exercise that is expected to deliver reduced expenses of $1.5 million per quarter beginning in Q1 2017. Actually, the profit margin of Q3 2016 has been improved though expense management and operational discipline. The company pays attention to this part since they want to try and improve the

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cost structure of Ebix, which may help the company grow both organically and inorganically.

In regard to initiatives targeted at enhancing shareholder value, Ebix utilized $8.6 million of cash during the third quarter towards repurchasing 118,200 shares of their common stock, for $6.1 million and paying $2.5 million towards the quarterly dividend. As the ultimate goal of Ebix, it would focus on delivering continued growth in business and substantial returns to shareholders over the long turn.

Investment Risks

Stronger DollarThe Brazil, New Zealand and Australian divisions continue to show reduced year-over-year revenues in a nine-month period of 2016, because of the strengthening US dollar. Over the last three years, the US dollar has kept strengthening and that is obviously not helped the reported results of Ebix foreign operation. As the currency continually kept declining each year over the last few years, cumulatively affecting Ebix’s revenue by much larger numbers when compared it to three years back. So, stronger dollar is becoming a more and more important risk, which reduces the revenue of Ebix.

Artificial Intelligence (AI)

Per a case by Deloitte on AIs, within the next three to five years, an exponential increase in the number of commercial AI-based applications is expected to unfold. The breadth of applications for this technology falls within three categories: Process Application, Insight Applications and Product Application. Although the Product Application may cause less of a disruption, given that Ebix’s offering is customized for the end user, the remaining categories may stir the strategy within the company’s management. The Insight Application of an AI may arguably present the highest risk to the company. By definition, Insight Application harnesses the analytical capabilities, such as a machine learning, to uncover insights that can inform operational and strategic decisions across an organization. For example, better informed insurance recipients may in turn demand lower premiums given the low risk profile extrapolated by AIs. With lower revenue streams, although not conducive to eliminate the source of revenue altogether, will prompt Ebix to become more creative with its efforts of finding new avenues to improve its top line.

III. DCF Analysis

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WACC = 11%

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Scenario Analysis

Upside Assumption –Target Price $68.25

We calculated the target price using the average of the consensus price, the DCF Value per Share shown above, $66.59 and the target price $71.12 that was given by the MarketSmith research platform, which specializes in growth stocks. MarketSmith uses a complex algorithm that takes into account many different factors some of which are current market direction, sector strength, stock performance relative to the S&P 500, historical stock price behavior, institutional support, and common consolidation patterns recognized using a database of tens of thousands companies dating back to 1881. Conclusively, we advise that profits should be taken if the share price reaches or exceeds our target of $68.25, roughly a 9.72% return.

Base Case & Downside Assumption

A Monte Carlo simulation was used to project a base and downside case. The simulation consisted of 10,000 iterations and replicated at 20-week price path, taking into account the current spot price, historic volatility, dividend yield, and discounted the future returns using the risk-free rate of interest (10-yr treasury yield). The base case simulation showed the price running up to $66.00 the first two weeks and then dropping back to $62.76 in the third week and trading sideways from there finishing at $62.47 (-0.45%). The price path of the downside case crept up slowly over the first four weeks and then began to decline for the remaining 16 weeks of the simulation falling to $58.19 (-7.26%). The purpose of these simulations is not to show exactly what we think will happen, rather the cash flows associated with similar cases if the stock goes sideways or executes as bearish reversal.

The price behavior simulated in the downside case can happen if institutions want to scare or “shakeout” individual or weak investors from a stock. Sometimes after a breakout institutional investors in the stock will run the price down temporarily to force out weak holders who sell their positions so as to not lose any more money. The institutions then come in and buy these shares for cheaper, which inevitably runs up the share price and allows them to rake in profit as the stock price continues to rally. However, it is always smart to have solid sell rules so losing positions can be effectively managed, “The whole secret to winning big in the stock market is not being right all the time, but to lose the least amount possible when you’re wrong”(O’Neil, 245). Therefore, we recommend a stop loss rule of 8% from the current share price.

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IV. Relative Valuation Key Comparables

Guidewire Software, Inc. (GWRE): “Guidewire Software, Inc. provides software products for property and casualty insurers. Its software product serves as a platform for transformation for property and casualty insurance carriers, enabling them to replace their legacy systems and transform their businesses such as underwriting, policy administration, claims management and billing.”

Computer Sciences Corporation (CSC): “Computer Sciences Corp. provides information technology solutions. It operates through the Global Business Services, Global Infrastructure Services segments. The Global Business Services segment provides technology solutions including consulting, applications services, and software. The Global Infrastructure Services segment provides managed and virtual desktop solutions, unified communications and collaboration services, data center management, cyber security, cloud solutions, cloudmail and storage as a Service, compute and managed storage solutions.”

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Works Cited

Algolytics Capital Ventures, 2016©

Artificial Intelligence (AI) goes mainstream, Revolutionizing businesses, Deloitte 2016

Bloomberg Terminals, 2016.

Cognitive technologies: The real opportunities for business, Deloitte Review Issue 16, Deloitte 2015

FactSet Research Systems, 2016.

Global Insurance Industry Insights, Global Insurance Pools, fourth edition, 2014 by McKinsey&Company

MarketSmith, Incorporated, 2016

Nasdaq, 2016

O'Neil, William J. How to Make Money in Stocks: Complete Investing System. New York: McGraw-Hill, 2011. Print.

Tech Trends 2015: An insurance perspective, The fusion of business and technology,

Deloitte 2015

Wm Smith & Co. an event-driven, special situations institutional research firm.

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VI. AppendixEBIX INC. COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)

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EBIX Presentation IT Sector

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