Ebix ( Nasdaq - EBIX )

Ebix (EBIX $22.00) is the leading provider of annuity and policy exchange systems for the insurance industry.  The company's on demand software allows brokers and agents to download competing bids, compare them by features and pricing, and automatically prepare the paperwork once a decision is made.  The technology makes it easier to analyze different products from competing underwriters.  In the past agents and clients were required to wade through mounds of paper that didn't lend itself to direct comparison.  The systems also produce 100% correct data for the winning insurance carrier.  The order can't be submitted unless the information is filled out correctly.  Using paper based systems, agents usually have to re-file the material several times.  The computerized exchange format gives annuity and insurance buyers greater selection and transparency, often at a lower cost.  Insurance companies enjoy cost savings, as well, plus they gain the opportunity to address a broader potential market.  Agents and brokers are able to process transactions more rapidly and with fewer errors, reducing their costs; plus customer satisfaction is higher due to the greater selection, transparency, and ease of use.

The automated exchange business accounts for 71% of revenues.  Ebix also sells office management software to insurance brokers (10%), back-end systems for insurance carriers to track policy claims and manage day to day operations (7%), and business process outsourcing ("BPO") services to automate the issuance and tracking of insurance certificates (12%).  Exchange revenues are based on the volume of data that goes through the system, and is recurring in nature.   The BPO work tends to be consistent, as well.  Sales of software products to brokers and insurance companies often lead to exchange and outsourcing business but aren't recurring themselves.  The United States accounts for 75% of sales.  Australia until recently generated most of the rest.  An acquisition in Q3 laid the groundwork for expansion into Brazil, which could become a significant contributor in upcoming periods.

Growth has been explosive.  Organic gains of 15% have been achieved over the past several years.  Acquisitions have provided further impetus.  Ebix recently announced plans to merge with ADAM, a major provider of software in the employee benefits area.  That company has struggled over the years to streamline the software required to run the operation.  Those battles also prevented ADAM from expanding into new areas.  The name of the game at Ebix is high performance software development at a low cost (India).  Once ADAM is in the fold, expected by year end, significant improvement is likely.  ADAM currently generates about $30 million a year in revenues.

Meantime, Ebix is enjoying another great year.  Revenues are poised to climb 33% to $130 million.  Earnings could advance 25% to $1.15 a share despite sharply higher levels of spending on product development and marketing.  (See "Accounting Notes.")  Next year, assuming ADAM is consolidated for the entire year, we estimate revenues will increase 35% to $175 million to support income of $1.40 a share (+22%).  The company is acquiring ADAM in an all stock transaction, so shares outstanding will rise about 10%.  Growth could be maintained at superior levels well into the decade.  Electronic insurance exchanges remain in an early stage of development.  Only 20%-25% of annuity contracts are bid that way in the U.S., while car, home, health, and life insurance remain below 5% penetration.  Foreign expansion promises additional opportunities.  Organic growth has moderated to the 10% range during the last year as a result of the recession.  But higher levels are likely once the insurance market rebounds.  Bolstered by low cost but complementary acquisitions, earnings could reach $2.25 a share within 2-3 years on revenues of $275 million.  Applying a P/E multiple of 20x suggests a target price of $45 a share, potential appreciation of 100% from the current quote.

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