Let’s give Ebix (Nasdaq: EBIX) a chance to prove that it has nothing to hide – no accounting fraud, no money laundering, no intentional tax evasion – by challenging the company to a good, old-fashioned game of “Truth or Dare.”
We’ll go ahead and present Ebix with its two options right now. When the company hosts its quarterly conference call tomorrow morning, it can choose to answer the questions raised in this report – and provide the necessary documentation to verify its claims – or it can dare to remain silent and encourage us to stick with our own jarring conclusions instead.
Let’s get started. Since Ebix has grown so accustomed to fielding softball questions from the only analyst who recommends (over even follows) its stock, the company might need a little bit of extra time to prepare.
Question #1: In total, how much money does Ebix currently owe to the Internal Revenue Service for cheating on its taxes? Could that bill take some investors by surprise?
Our conclusion: Ebix must pay the IRS a whole lot more than the company would like to admit. When Ebixannounced that long-awaited settlement in early January – igniting a powerful rally that sent its stock rocketing toward a multi-year high – the company simply mentioned the $1.4 million charge that it would need to take in order to cover a mere fraction of its staggering tax bill. By then, Ebix had already established a hefty $22.1 million reserve (including millions earmarked for likely penalties and interest payments) in order to prepare itself for that pending liability. Forced to further supplement those generous reserves by taking a fourth-quarter charge, Ebix owes the IRS an estimated $23.5 million – or the rough equivalent of half the cash in its entire bank account.
Question #2: Was Ebix ordered to pay any serious penalties?
Our conclusion: Almost certainly. While Ebix has convinced its sole analyst that it simply owes back taxes on the profits generated by one of the firms that it acquired between 2008 and 2012, the company never even purchased a firm capable of making enough money to result in such a hefty tax bill during that five-year period. In the largest of those acquisition deals, Ebix paid $43.4 million for a firm that – less than two years later – it proceeded to transfer into a foreign country with a much lower income tax rate. During the seven quarters when it kept that asset here at home, Ebix reported a total of $56.4 million in pre-tax income for the entire company. Even if Ebix paid a normal U.S. tax rate on all of its earnings, instead of taking advantage of the single-digit rates that it has secured by shifting assets overseas, the company would still owe less than $23.5 million – enough to easily cover the tax bill on more than $70 million in profits here in the U.S. — unless the IRS tacked on some pretty stiff penalties.
Question #3: Has Ebix learned its lesson and made sure to pay its fair share in taxes so that it can avoid running into this sort of trouble again?
Our conclusion: Don’t count on it. Excluding generous additions to its liability reserve for the gigantic IRS bill that it now owes, Ebix has barely earmarked any money for routine income taxes at all. While Ebix reported $11.55 million in taxes on the $58.6 million in profits that it generated during the first three quarters of last year, its most recent financial statements show, the company earmarked $9.34 million of that for its expensive IRS settlement. With barely million left over, Ebix has allotted the equivalent of just 3.8% of its profits to cover its regular tax bill. Even in tax-friendly Singapore, where so many of its valuable assets are now based, Ebix must pay taxes at almost triple that dirt-cheap rate.
Question #4: Has Ebix found some way to artificially inflate its reported earnings, too?
Our conclusion: Yes. When Ebix acquires a company, it typically offers the firm some kind of “earn-out” payment if it manages to hit lofty financial targets that always seem to lie conveniently out of reach. Even so, Ebix automatically books those earn-out payments as future liabilities that it later reverses back into its reported profits when its acquisition targets invariably fall short of its ambitious goals. With government authorities focusing so much attention on its income taxes, Ebix has grown increasingly dependant upon this particular crutch over the past couple of years. During the seven quarters since 2013 began, for example, Ebix has relied on the reversal of earn-out payments for almost 15% of the profits that it has trumpeted to Wall Street. In contrast, during the same seven quarters two years earlier, those earn-out reversals accounted for just 2.3% of the company’s reported profits instead.
Question #5: Does Ebix have any reason to believe that the U.S. Securities and Exchange Commission and/or the Department of Justice continue to move forward with their respective investigations of the company?
Our conclusion: We sure think so. If those government agencies know even half as much as we do – and we highly suspect that they probably know a whole lot more – we wouldn’t be surprised if they decide to crack down on both Ebix and its CEO once they finish investigating company. We find it far more difficult to believe the opposite instead.
Question #6: How on earth did Ebix manage to book a handsome $65 million gain by essentially transferring an asset – worth barely $1 million a couple of years earlier – from one foreign subsidiary to another, magically creating a gigantic profit out of thin air?
Our conclusion: To be perfectly honest, we don’t know. Now that another 18 months have passed since Ebix first encountered that question, however, we’re hoping that the company has finally come up with some kind of explanation that might actually make a little sense.
Question #7: Who really provided the gigantic related-party loan that the company’s Singapore subsidiary now owes?
Our conclusion: Not the party identified by Ebix when suspicious investors originally exposed that mysterious deal. While Ebix indicated that the parent company initially loaned the money to an Australian subsidiary, which in turn transferred the loan (along with the asset supposedly purchased with those funds) to its Singapore subsidiary, the financial statements for those foreign subs seem to rule out that possibility. That convoluted arrangement makes no legitimate business sense, anyway. Why would Ebix even want to extend a big loan – with a 9% interest rate – to a subsidiary based in Singapore, when the parent must then pay hefty U.S. taxes on the interest that it receives? It wouldn’t. So maybe Ebix simply wanted to funnel a bunch of money into a country with a much lower tax rate instead.
Question #8: Why does Ebix need so many subsidiaries in the first place?
Our conclusion: It doesn’t. Despite its modest size, Ebix literally operates about twice as many subsidiaries as Google (Nasdaq: GOOG), Apple (Nasdaq: AAPL) and Oracle (Nasdaq: ORCL) combined. Ebix conducts very little, if any, business in some of the countries where it has established foreign subsidiaries, too. By creating so many subsidiaries with so many different sets of books, Ebix has basically made its business a whole lot more complicated than it really needs to be.
Question #9: How can Ebix possibly expect its dinky auditing firm to verify the accuracy of its consolidated financial statements long before its foreign auditors even complete their own reviews?
Our conclusion: Ebix knows that’s impossible, and it doesn’t really care. Thanks to that weak oversight, in fact, the company has probably spared itself from some unwelcome headaches.
Question #10: Is Ebix ready to stop this game and start answering questions from others, besides the friendly analyst who recommends its stock, for a change?
Our conclusion: We seriously doubt it. Look what happened to Ebix that last time that the company found itself cornered by a stranger in a public forum like that. When EBIX fielded a rather straightforward question about its organic growth rate (a figure that it had openly trumpeted in the past), the company responded with such a convoluted answer that its message sounded like an evasive mess.
Just go back to November of 2012 – before the IRS, the SEC and the DOJ started investigating the company – and review that bizarre interchange for yourself.
Unknown Analyst: “How much of your revenue growth for the last three months and nine months was due to organic growth, and how much was due to acquisitions?”
Ebix CEO Robin Raina: “Well, I think we’ve answered that in the past that, the way we run our business, and it’s very different. It’s difficult for us to differentiate between what we get out of acquisitions and what we get out internally. Part of it, we integrate these programs very tightly. There is no – Ebix, as I was just talking through the STP region, I actually talked about one product. What is going to happen if Ebix will become a one-product company? So every day, that’s what we are doing.
“So we don’t really – everything, that’s so entangled in each other; that’s so difficult for us to read. Our operations are integrated, and that’s – our selling process is integrated. Our products are integrated. It’s very difficult for us to disintegrate and start breaking up that kind of revenue in that sum.
“So it’s almost impractical for us to do it. And one of the reasons for Ebix’s success is precisely this. This is one of the reasons why we produce better efficiency and better margins than anybody else, because we integrate extremely tightly. We sell in a very tight matter and so on.”
Good grief. Can somebody fetch a translator, please?
No wonder Ebix decided to start playing it safe after that happened. If the company seemed that flustered by a simple question about the nature of its growth, the firm must feel absolutely panicked right now.
Let’s see how Ebix behaves during its conference call tomorrow. Maybe the company will pleasantly surprise us and – for the first time in more than two full years – finally open up the phone line to strangers for a welcome change. We’re not holding our breath, though; we fully expect more of the same.
Just in case Ebix feels brave enough to accept a serious challenge, however, we triple-dog dare the company to take its chances and prove us wrong.
Regardless, be sure to stay tuned. For now, we’re just having a little fun. We’ve barely even scratched the surface on this company yet.