To The Moon

Summary

• Ebix's pivot towards a debt-free model could unlock significant value for investors, enhancing shareholder equity, and boosting the company's valuation.

• The journey to debt-free status involves several strategies including potential divestments, IPO of EbixCash, and strategic cutbacks, but carries inherent risks and uncertainties.

• Success in this transition could bolster Ebix's strategic ambition to become the global leader in insurance transactions, opening up new growth opportunities for the company.

Contract signing!

Ebix Inc. (NASDAQ:EBIX) is a buy as it pivots towards a debt-free business model. I believe that not only is Ebix fully capable of making such a transition, but also that once it realizes its debt-free ambitions it will unlock a considerable amount of value for investors. This article delves deep into this investment thesis surrounding this transition as well as its implications, providing a comprehensive analysis of Ebix's position and potential in the face of this promising transformation.

Company overview

Ebix provides software and e-commerce services, primarily to the insurance industry. However, it also has a sizable presence in the financial, healthcare, and e-learning sectors too. The business has an impressive portfolio of products that range from infrastructure exchanges to risk and compliance solutions for entities in these industries.

The company was founded in the 1970s and has since grown via a mix of organic growth and strategic acquisitions into a multinational entity. It operates in most western countries including the United States, Canada, New Zealand, and the UK, and also has significant exposure to India and Singapore.

Ebix's most known for its work in insurance automation, with its main operating segments being EbixCash exchanges, risk compliance solutions, and broker solutions. These segments allow it to provide a range of services such as insurance, annuities, workers' compensation products and more.

The overall strategic goal of Ebix is to become the number one conduit for insurance transactions worldwide, which is where my thesis begins to take shape.

My thesis consists of two halves. The first is that it's likely that Ebix will achieve its goal of reaching debt-free status, and the second is that once it is free from debt that substantial value for shareholders will be unlocked.

Ebix becoming debt-free

To begin, it's crucial to understand the size of the debt problem we're dealing with here, as well as some potential implications for shareholders if it reaches debt-free status. According to Ebix's financial report for 2022, it reported a total debt of $657,261,000, while its total liabilities were $878,115,000. So debt contributes around 75% of Ebix's total liability structure, which is important to understand for the next section. If Ebix is able to become free from short and long-term debt, while leaving in other line items such as accounts payable, accrued expenses and others, it gives a new total liability amount of $220,854,000, using figures from FY22. Ebix's total assets for 2022 were $1,153,035,000, and its total shareholder equity was $617,225,000. However, if Ebix can pay off all its debt, shareholder equity would increase 51% from $617,225,000 to $932,181,000, calculated by subtracting the new total liability amount of $220,854,000 by total assets of $1,153,035,000.

The implications of Ebix shedding its debt burden close to zero is highly significant for investors. First, a substantial increase in shareholder equity would represent an increase in total shareholder ownership in the company. As liabilities and monies owed to creditors decreases, it essentially increases the residual value that belongs to shareholders, which also boosts the company's attractiveness as an investment, financial stability, and potential for further profits. Since the stock prices of tech companies like Ebix are highly predicated on their future growth potential, the elimination of debt would allow more resources to be allocated toward R&D, acquisitions, and other growth initiatives, rather than looking backwards and servicing interest payments and repaying what it owes. This, in turn could accelerate growth rates and drive up the company's valuation.

For context, Ebix paid $55,068,000 in interest payments alone in 2022, and also repaid $25,419,000 worth of debt. For simplicity, let's add and round that to $80 million. That figure is just under twice the amount it spent on R&D for the year, which was $41,188,000. $80 million is also around 10% of the company's total retained earnings for the year, which stood at $814,780,000. This $80 million could then be reallocated elsewhere if Ebix is free from debt, such as by potentially doubling its R&D budget, or added back to its retained earnings which would boost metrics such as earnings per share (EPS), return on equity (ROE) and others.

Change in valuation

In a more direct sense, a sharp reduction in the company's total liabilities would also increase Ebix's book value, which is a peripheral yet important aspect when assessing the company's fair value and ultimately, stock price. One ratio that illustrates this change to Ebix becoming debt-free is the price-to-book (P/B) ratio, which currently stands at 0.71.

Author supplied

For context, the P/B of Ebix's peers stands at 1.18 at the time of writing. We can forecast what Ebix's P/B would be if it frees itself from debt, assuming the same share price and other constants using today's values. With the new total liability amount of $220,854,000 I calculate its new book value per share to be $30.16. Ebix's share price is currently $15.43, so its new P/B debt ratio would be around 28% lower at 0.51, meaning its peers would trade at double Ebix's valuation using P/B, assuming all else is equal.

Although likely not a primary consideration, a significantly lower P/B ratio could imply to some investors its stock price is undervalued, especially since Ebix could then pursue aggressive and riskier growth strategies than its competitors can since it has a much wider margin of error that can account for increased financial and execution risks thru being debt-free. These riskier strategies could give it the flexibility to play hard to reach its strategic imperative of becoming the number one company in the insurance payments space worldwide, and with less downside risk than its peers who must operate more cautiously.

We can extrapolate this idea further by taking that $80 million Ebix is spending on debt and interest repayments and model a favorable scenario I believe is likely for investors in terms of cash flows. The cash previously spent for paying down debt (operating cash flow) as well as for interest payments (financing cash flow) will decrease and instead be put towards much more valuable use in investing cash flow activities, such as through increased R&D. Additionally, its valuation on a price/cash flow (P/CF) basis would decrease significantly, implying it has become cheaper in relation to its cash generation ability after going debt-free and assuming the same share price.

We can therefore surmise that there are a multitude of benefits for shareholders that will be unlocked if Ebix is able to pivot towards a debt-free capital structure, which includes a substantial improvement in its valuation, shareholder equity, and strategic positioning to reach its long-term objectives. The questions with more uncertainty is how Ebix plans to make such a pivot, the risks involved, and ultimately the overall probability of such an event occurring.

How Ebix can turn debt-free

First we must address how utterly focused Ebix is on reaching debt-free status, with its CEO Robin Raina and other c-suite executives all aligned in this purpose. Raina recently emphasized the importance of technology in facilitating transactions and streamlining operations, suggesting a business model that's leaning towards efficient and tech-driven strategies. Moreover, the urgency for Ebix to alleviate its debt burden is made evident by an article from The Wall Street Journal, which indicated the company's efforts to raise cash to pay back some $600 million in debt due in the near future. More recently in the company's Q1'23 earnings call, the word "debt" appeared 21 times in the provided transcript, and "debt free" appeared five times. The focus of the company is therefore very clear: Ebix is intent on reaching this goal and it's pursuing all available options, deuces wild. I suspect this includes some solutions that have yet to be publicly announced.

Here's an excerpt from the transcript that summarizes Raina's position and underlines his urgency of getting the job done.

Let me tell you that Ebix is today again fully committed to the aspirational idea of a debt free company in 2023 itself. We have various alternate ways to possibly get there, including the EbixCash IPO, a product asset carve-out or/and a few other alternatives. We have moved forward on all these alternate paths with the stated goal of not having a debt overhang beyond 2023.

Judging by the language provided in the above excerpt and throughout the earnings call, the IPO of EbixCash and possible divestments or carve-outs of its various businesses are perhaps less attractive alternatives of reaching debt-free status, but may be necessary risks. This is comparable to reducing costs elsewhere in the business to reduce its burden gradually, or organic sales growth.

I also believe the time frame for reaching the goal (in 2023) is more symbolic of management's intentions than something to be taken literally or at face value. We're halfway through the year at the time of writing, and it has over half a billion in debt. Negotiating any divestment or sale of Ebix's businesses may be time consuming, and an IPO is an equally lengthy process. Therefore, although miracles are not unheard of, I find it to be more of the case that significant improvements can be expected this year, rather than a total elimination of debt.

As to why, (in my opinion), an unlikely time frame is made here? I think the explanation is that the financial media has accepted hyperbole as the norm, and that outlandish claims get people's attention. For instance, does Cathie Wood really believe Bitcoin, which is presently valued at $27.2k, will be worth $1.5 million in seven months? Whether she believes it or not, it drives clicks and gets people to talk about what she invested in, as well as herself as an investor. These claims make for interesting headlines, so hyperbole may be an effective part of a company's promotional strategy.

EbixCash IPO

Coming back to the issue at hand, Ebix's IPO of EbixCash may be seen as the ace up its sleeve to significantly reduce its debt burden. The success or failure of such an offering largely depends on timing. If tech stocks are in hot demand, the IPO may generate a large amount of cash it can use to pay off its debt. In a less bullish backdrop, however, it would generate far less. At present I feel the markets are in a state of limbo and confusion as to whether stocks, particularly tech stocks, should rise or fall. The specter of a recession seems to draw closer each month, with an inverted yield curve and a strong yet cooling job market throwing mixed signals. Originally poised for March this year, I believe a delay in announcing the IPO is a wise and strategic move in this uncertain environment. I also don't see the IPO as a savior of Ebix's ambitions of becoming debt-free, but should rather be seen as a catalyst. I believe a multi-pronged approach of an IPO, divestment, and other cost-cutting and sales-driven endeavors will be the practical solution given the size of the debt and urgency of eliminating it.

Divestments

Ebix has certainly defined its strategy over the last few years, with the concrete goal of becoming a leader in the insurance payments industry. This means that it may confidently divest operating segments or parts of its business that aren't part of its laser focus. It should be noted that it was confirmed in Ebix's most recent earnings call that it is "moving forward" in divesting parts of its business.

All nonperforming and out of focus operating areas are therefore on the chopping block. Some ideas for divestment include its gift card business, which generated operating income of 1% or lower between December 2020 and December 2021. If the gift card payment business gets the ax, it follows logically its Payment Services should too, which drives more than 95% of its revenue from gift cards.

These examples are just illustrative and the most obvious ones that come to mind. In reality, Ebix will have a number of underperforming acquisitions and parts of its business that aren't strategically aligned with the core purpose. The company has made over 30 acquisitions, so it has plenty of opportunities to make tough compromises and obvious choices of which parts to divest.

The other benefit of selling parts of its company is that managers can operate a sleeker and more efficient company; one that has less moving parts to it. Downsizing then becomes a possibility, which reduces complexity further. These measures directly and indirectly lead to reduced costs, which can free up cash for accelerated debt repayments.

I believe we'll see some divestments and heavy cost-cutting measures be announced over the rest of the year, as well as significant winding down of operating segments that are not in alignment with its core strategy. The changes will be sudden and drastic, and although realistically its debt won't drop near $0 this year, we'll see some significant improvements as outlined by management's strategic decision making and indications these plans are already in motion. Divestments are perhaps the most certain route of freeing up cash to pay off its debt, whether that's from finding a buyer for its businesses or simply winding down parts of its operations until a buyer can be found for them.

Risks

It's important to consider the potential risks associated with this transformation.

As Ebix explores options to sell off assets or subsidiaries to reduce its debt, there is a risk that it may not get the expected value for these assets. Market forces, value of assets, and interest of buyers play a part here.

In terms of the IPO, in a volatile market or economic downturn, it could raise less capital than expected. It's also an uncertain initiative that carries large risks.

The transition to a debt-free model could require Ebix to tighten its operational expenses, which may lead to cuts in research and development, marketing, or other critical areas. This could affect the company's competitiveness and its ability to innovate and grow. Furthermore, the success of this transition depends heavily on the management team's ability to execute their strategies effectively. Any missteps could lead to further financial distress or a loss of investor confidence.

Conclusion

The journey of Ebix towards becoming a debt-free company promises to be an intriguing and potentially rewarding one. By prioritizing the elimination of its substantial debt load, Ebix could unlock significant value for its shareholders and put itself in a much stronger financial position. I believe Ebix has plenty of room to navigate this transition, and although it may not happen in 7 months or so, significant and rapid progress will be made. Management is firmly on board and the wheels are already in motion. For these reasons I believe the potential upside outweighs the risks, which makes Ebix a buy.

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