eHealth Inc (EHTH) 2007 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to eHealth Inc.'s conference call to discuss the Company's results for the third quarter of 2007. At this time, all participants have been placed in a listen-only mode. The floor will open for your questions following the presentation.

It is now my pleasure to turn the floor over to [Deidee Shill] of Ashton Partners, the Company's investor relations consultant. Please go ahead, Deidee.

Thank you. Good afternoon and thank you all for joining us today, either by phone or by webcast, for discussion about eHealth Inc.'s 2007 third-quarter financial results.

On the call this afternoon we will have Gary Lauer, eHealth's President and Chief Executive Officer; and Stuart Huizinga, eHealth's Chief Financial Officer.

After management completes its remarks, we will open the lines for questions. As a reminder, today's conference call is being recorded and webcast from the Investor Relations section of the Company's website. A replay of the call will be available from the Investor Relations section of the Company's website following the call.

The Company will make forward-looking statements on this call. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements made on this call will include statements regarding possibilities of the HSA platform; the type of insurance we offer; expansion plans and potential to develop a new market in China; expansion of and improvements in product offerings in northeastern states; carriers decision to move forward with instant electronic underwriting; implementation of instant electronic underwriting and its significance; rollout and success of a new sponsorship bidding platform; technology licensing as an area of future growth; growing awareness of individual markets and increases in the number of applicants in Massachusetts; lack of national legislative initiatives occurring until 2009 at the earliest; expanding market opportunity; increasing inventory of our products; acceleration of growth through marketing and advertising spending; testing and pilot work in the online and traditional media areas and its effects; increases in advertising spending and the performance of partner and online advertising channels to accelerate application growth; strategic raising of our costs to acquisition to fuel additional growth; our model allowing us to invest in growth while maintaining high levels of profitability; opportunity to increase our market position and growth; revenue potential; the time it takes to recover the costs of acquiring a new member; future issuances of equity awards and revised guidance for revenues, non-GAAP net income, non-GAAP earnings per diluted share and cash flow from operations.

Forward-looking statements are based on assumptions and assessments made by the Company's management based on factors they believe to be appropriate. Forward-looking statements are subject to risks and uncertainties that could cause actual results, developments, and business decisions to differ materially from those contemplated by these statements.

We describe these and other risks and uncertainties in our annual report on form 10-K and quarterly reports on form 10-Q, filed with the Securities and Exchange Commission, which you may access through the Securities and Exchange Commission or from the Investor Relations section of our website.

Forward-looking statements made on this call represent the Company's views as of today. You should not rely on these statements as representing the Company's views in the future. The Company undertakes no duty to update or revise any forward-looking statements made during this call, whether as a result of new information, future events, or otherwise.

We will be presenting certain financial measures on this call that will be considered non-GAAP under SEC regulation G. For reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included in our press release and in our SEC filings, which can be found on our corporate website under the heading Investor Relations.

At this point, I will turn the call over to Mr. Lauer.

Thanks, Deidee. The results for the third quarter of 2007 demonstrate momentum across all major facets of our business. Our revenues grew 38% on a GAAP basis and 44% when adjusted to reflect a unique revenue item we recorded a year ago, most of which flowed to our bottom-line earnings.

While Stuart will describe our revenue and other financial results in detail, giving you both GAAP results and non-GAAP results which exclude the effect of the revenue item we recorded a year ago; I will refer only to GAAP results.

Our operating margins increased to 21% of revenue during the third quarter. And our sales and marketing expenses declined again as a percentage of revenue. This is particularly noteworthy because the third quarter was a strong application-demand quarter for us, in line with historical trends.

Most importantly, cash flow from operations increased to $7.7 million, leaving us a cash and investments balance at quarter end in excess of $112 million; an all-time high for the Company.

Several other highlights I would like to emphasize include acceleration of demand, as measured by submitted individual and family applications; and execution on two important initiatives; Ubao.com in China and our HSA Platform.

In addition, our operating margin growth illustrates the continued leverage we see in our business model and we experienced accelerated year-over-year growth in our performance partner channel, contributing 31% of our submitted applications in the third quarter.

During the third quarter, we continued to build awareness and visibility around the eHealth brand, reinforcing our position as the leading online source of health insurance for individuals, families and small businesses.

Progress here is illustrated by the 25% growth in IFP submitted applications, our highest quarterly growth rate this year. All three marketing channels showed double-digit growth and all three set new record levels of application submissions.

Two very important initiatives we launched during the quarter; our HSA platform for small business and Ubao.com, eHealth China's initiative to market and sell health insurance online in China.

The HSA platform is presently in a beta mode to allow us to test and refine the HSA offering for businesses. We were enthused about the new marketing and channel opportunities that the HSA platform can bring us next year, as we begin to formally launch the program.

As a reminder, the HSA platform makes it easier for businesses to fund individual health savings accounts for their employees and dependents.

Ubao in Chinese means best insurance. And that is precisely what we plan to offer to consumers in China. We have initially launched our online business in Xiamen, a city of 2 million people, where eHealth China is headquartered. We currently are featuring 25 products from four leading carriers in China. Those carriers are China Life, Ping An, Taikang Life and Tianan. Our product offerings in China are medical, accident and life insurance. Within the first few days of launching, we had Chinese consumers complete the process and submit insurance applications.

At some point in the future we hope to expand to the entire Fujian province where Xiamen is located, then to other provinces across China; much like the way we grew eHealth in the United States. China is a very interesting business opportunity where we have the potential to develop a new and important market.

The depth and quality of our product offerings in the United States continue to increase and improve. Aetna, Humana, United and Coventry all launched through eHealth, new products into additional states during the third quarter. Notably with Aetna, we launched individual and family plans into seven new states; Alabama, Kansas, Louisiana, Nebraska, Nevada, Oklahoma and South Carolina. Humana introduced plans through us into Alabama and Virginia.

Across all carriers and product lines, we launched new products in 29 states during the third quarter. I am pleased with the maturation of our business relationships with our valued carrier partners and our ability to grow with them.

We are significantly expanding our product offerings in the northeastern states, a region of the country where the regulatory environment has not fostered the level of choice and carrier participation that exists in other parts of the U.S. For example, we added AmeriHealth in New Jersey, Anthem in New Hampshire and Symetra Dental in Connecticut, Maine, New Hampshire, Rhode Island, New Jersey, and Vermont; all during the quarter.

We are strategically focused on making significant improvements to our northeast product offerings as we see the importance and visibility of the individual market growing in these states.

EPI, the electronic processing interchange; utilization grew to 77.5% of our IFP submitted applications in the third quarter, a record level for our Company. As more consumers utilize EPI, our application processing times, our sales yields and our processing costs all improve.

Importantly, we now have a major carrier partner that has made the decision to move forward with instant electronic underwriting. This is the capability for consumers to apply online, electronically transmit signature and payment, receive an instant underwriting response and print membership materials at the point of approval on our website.

We are targeting implementation of this capability with this carrier for 2008 and believe it will offer another important and very compelling reason to purchase online through eHealth.

Our technology licensing and sponsorship business initiatives continue to evolve and grow. The sponsorship business allows a carrier to purchase advertising on our quote page, much like paid online search results at Google and Yahoo, in a manner that maintains our objective and unbiased product presentation to consumers.

The number of carriers participating in sponsorship grew 24% during the third quarter and we now have at least one carrier sponsor plan in 45 of the 50 states we do business in.

We also plan to rollout a new bidding platform that automates the process for carrier participants and makes us yet a more appealing business opportunity for our carrier partners.

The technology licensing business, which allows carriers to license eHealth ecommerce technology to support the marketing and sale of the carriers' products on their own website, is an exciting area of future growth for us.

In the third quarter, we signed or launched new partnerships with GHI in New York, KPS in Washington, and Celtic in 37 states and Washington D.C. This past week, we announced the launch of BlueCross/BlueShield of Massachusetts; a reflection of the fast-growing awareness of the individual market in Massachusetts. As a part of this relationship, we deployed our platform in Massachusetts for direct-to-consumer business, as BlueCross/BlueShield prepares for large increases in the number of applicants for individual health insurance as a result of the Massachusetts Healthcare Reform initiative.

The Massachusetts Reform initiative, passed under then Governor Mitt Romney, includes an individual mandate requiring residents of Massachusetts to obtain health insurance coverage. The technology licensing business is highly strategic to eHealth, allowing us to monetize health insurance sales directly transacted between carriers and consumers.

Our mission has always been for the eHealth technology to be the distribution standard through which individuals, families and businesses purchase health insurance, no matter where the transaction occurs.

In the public policy area, we have seen little change during the past quarter with the exception of California, where we're headquartered. As you know, Governor Schwarzenegger proposed an ambitious plan during his state of the state address in January and has recently been pushing the state legislature toward adoption of his plan. There is significant opposition to the plan from many quarters.

Nationally, the presidential candidates are all talking about the uninsured and health coverage topics, which bring significant attention and visibility to the growing market we address.

Recent data was also released by the U.S. Census Bureau, showing that the ranks of the uninsured had increased by over 2 million people from 2005 to 2006. This statistic further raises national attention on this important domestic issue and our market.

Additionally, I really don't see passage of any major legislative initiatives occurring nationally until 2009, at the very earliest.

At eHealth, we see a market opportunity which continues to expand, an increasing inventory of quality products on our site, and growing recognition by consumers of the Internet as the best way to evaluate and purchase health-insurance products.

As a result, we also see an opportunity to accelerate our application growth through additional marketing and advertising spending. During the fourth quarter, we plan to increase our advertising spending in the performance partner and online advertising channels to accelerate application growth. We also plan to begin some testing and pilot work in the traditional media area to raise awareness and demand for eHealth as well.

We expect all of these activities to increase our overall cost of acquisition in the fourth quarter and that our sales and marketing expenses as a percentage of revenue, will be higher than the third quarter of this year. As I have stated many times in the past, our overall cost of acquisition is low, allowing us the opportunity to strategically raise our cost of acquisition to fuel additional growth.

I believe our model allows us to invest in growth, while still maintaining high levels of profitability and strong cash-flow growth.

While we plan to spend more during the fourth quarter in the sales and marketing area to drive additional growth, we are also revising our financial guidance upwards for the fourth quarter, which Stuart will describe in detail.

I am pleased with our financial results for the first three quarters of 2007 and believe we have the opportunity now to increase our market position and growth as we head towards 2008.

I'll now turn the call to Stuart. Stuart?

Thanks, Gary and good afternoon, everyone. I am pleased to announce our financial results for the third quarter of 2007. These results demonstrate our continued companywide execution in penetrating our market and the scalability and cash-flow potential of our business model.

Starting at the top line; our revenue for the third quarter was $23 million, a GAAP increase of 38% over the third quarter a year ago, and an non-GAAP increase of 44% over last third quarter, excluding a unique revenue item that we recorded in that quarter.

I will be referring to this prior-year item several more times as that item skews our P&L comparisons with last year, from top to bottom line. As a reminder, from our earnings call a year ago, this unique item was the recognition all in the third quarter of 2006, of $720,000 of previously deferred revenue which had accumulated over the six quarters prior to the third quarter of 2006, with approximately $700,000 of that flowing straight to the bottom line.

Our year-over-year revenue growth is mainly due to continued growth in our membership base. Our total estimated membership at the end of Q3 2007 grew by 35% over our estimated membership at the end of Q3 a year ago. Our new member additions were strong as well, with 125,300 new approved members in the third quarter.

Our product retention continues to be consistent with our historical range and exceeds two years. As Gary described, we continue to see strong year-over-year growth in our sponsorship licensing and other revenue, which grew by 112% from 795,000 in the third quarter of 2006 to $1.7 million in the third quarter of 2007.

As you've heard, we have many exciting opportunities in front of us and continue to be enthusiastic about the future revenue potential of these emerging areas.

In Q3, we continued to achieve positive trends in our operating expenses. When compared to Q3 of last year, our operating expenses increased by 30% compared to our 44% of non-GAAP revenue growth over the same period. Our non-GAAP operating margin, excluding the unique revenue item in 2006 and the effect of stock-based compensation in both years; increased from 13% in Q3 of last year to 23% this year. The growth in our operating margins continues to demonstrate the scale that is intrinsic to our model.

We continue to achieve scale in most areas of our business, as evidenced by a year-over-year decline in our aggregate expenses on a non-GAAP basis, excluding stock-based compensation, as a percentage of revenue.

Starting with our largest area of expenditure, our non-GAAP marketing and advertising expenses, as a percentage of non-GAAP revenue, declined from 36% of revenue in Q3 of last year to 31% of revenue in Q3 of this year.

As I stated last quarter, we view this metric as the best indicator over time from an external standpoint, of the effectiveness and efficiency of our member acquisition programs and also a significant indicator of the scale in our model.

As Gary described, an emphasis in the fourth quarter will be on application growth. Given that, it's important to remember that our current incremental margins on new members is very high. One way to think about these incremental margins is to take the number of months of revenue that it takes to recover the cost of acquiring new members and compare that to the average life that a member holds a product.

Currently on average, it takes less than five months to recover the costs of acquiring a new member. Given the more than two-year average life that a member holds a product, this obviously leaves us with a substantial amount of incremental profit margin.

Also remember that the costs of acquiring members are expensed when they are incurred, while the revenue stream coming from that spend comes in over future periods with very high margins, since ongoing costs associated with existing members are nominal.

Our non-GAAP customer care and enrollment costs, which exclude stock-based compensation expense; as a percentage of revenue declined from 17% of non-GAAP revenue in the third quarter a year ago, to 13% of revenue this quarter. While non-GAAP technology and content costs, which also exclude stock-based compensation expense; as a percentage of revenue declined from 16% of non-GAAP revenue to 13% for the comparable period.

One area where costs as a percentage of revenue have increased over the prior year is in the general and administrative area. Consistent with the first half of this year, this is primarily the result of increased costs of operating as a public company. As I mentioned in our prior earnings call, this is the first year for which our independent auditors will be required to issue a report related to our internal controls under the provisions of Sarbanes-Oxley. As a result, some of the cost increases here relate to our preparation for this requirement. These costs will likely increase over current levels in the fourth quarter and first quarter of 2008, as we are in the final quarters of testing before they issue their report near the end of the first quarter of 2008.

GAAP pre-tax income increased from $2.8 million in the third quarter of 2006, to $6.2 million in the third quarter of 2007; a 121% increase. On a non-GAAP basis, excluding the unique revenue item in 2006 and the effect of stock-based compensation in both years; pre-tax income increased by 194% from $2.2 million last Q3 to $6.6 million this year.

GAAP net income increased from $2.7 million in the third quarter of last year, to $3.7 million in the third quarter of 2007. It is important to note here that net income did not increase as much as pre-tax income did in percentage terms because of the significant difference in our tax rate compared to last year, despite the fact that we expect to actually pay cash taxes at a lower rate this year than we did last year.

We are recognizing tax expense this year at a 41% rate, even though we expect to pay cash taxes of less than 3% for the year. The 41% tax rate we are recognizing this year compares to a 3% rate for tax expense last year.

Non-GAAP net income, excluding the unique revenue item in 2006 and the effect of stock-based compensation in both years, increased from $2.2 million in the third quarter of last year to $4.1 million in the third quarter of 2007. All of these increases, especially the increase in pre-tax income; illustrate the impact of the significant growth in our revenue and the scale that we're achieving through the efficiency of our operations.

One of the most significant indicators of performance for any company, in our opinion, is cash flow. In the third quarter we registered our 10th consecutive quarter of positive operating cash flow. Cash flow from operations increased by 175% from $2.8 million in the third quarter of 2006 to $7.7 million in the third quarter of 2007. This is a record level of operating cash flow for us and was achieved during the third quarter, which is a high-volume quarter as measured by new applicants and associated marketing spend.

Capital expenditures for the third quarter of 2007 were again very modest at $300,000; bringing our year-to-date capital expenditure total spend to $1.1 million through the end of the third quarter. Primarily driven by our positive operating cash flow, our cash and marketable securities balances increased to $112.7 million at September 30th 2007.

Before I discuss our guidance for 2007, I would like to comment on a couple of details for financial modeling purposes. First, you should expect our stock-based compensation expense to increase by around $0.01 per share in the coming fourth quarter, due to the timing of additional equity award grants we expect to make in Q4.

Second, you should also know that we have generated additional tax deductions this year over and above our substantial NOLs available to offset future corporate income taxes. The additional deductions result from the exercise of company stock options and total more than $40 million year to date. This will not reduce our future GAAP income tax expense, but to the extent we can realize these deductions, we will obtain a cash flow benefit from them.

Finally, we are again revising our guidance upwards for 2007 in all categories based on the momentum we perceive in our business. Before I do this, I want to remind you that these comments are based on current indications for our business which are subjected to change at any time. We undertake no obligation to further update our guidance.

We are currently forecasting revenues for 2007 to be in the range of approximately $87.2 million to approximately $88 million, up from our previous range of $85 million to $87 million.

We expect non-GAAP net income, excluding stock-based compensation expense, to be in the range of approximately $13 million to approximately $14 million, up from our previous range of $12 million to $13.5 million.

We expect non-GAAP earnings per diluted share, excluding stock-based compensation expense, to be in the range of approximately $0.51 and approximately $0.55 for the year, up from our previous range of $0.47 to $0.52 per share.

Finally, we expect cash flow from operations to be in the range of approximately $22.5 million to approximately $24.5 million for 2007, up from our previous range of $21 million to $23 million.

And now we'd like to open up the call for questions. Operator?

(Operator Instructions.) Okay, our first question comes from Justin Post. Justin, your line is live. Please go ahead.

Hi, this is Nat Schindler actually calling for Justin Post who is unavailable right now, but wanted to ask you just a couple questions. One, your new member to submitted member ratio has ticked down a little bit this quarter, along with your cost per submitted app. Is that related to a new marketing channel that you're approaching or are you getting towards less expensive but maybe lower-quality marketing? Additionally, I wanted to go a little bit more into the G&A up tick. Your up tick in G&A costs were rather considerable on a quarter-over-quarter basis. And that's all related to the Sarb-Ox report? And you mentioned that you expected that to go through Q1 I believe. Should that tick down after that or is that going to kind of stay at these aggregate levels?

Let me start with the first part of your question regarding the members and applications. First of all, our member growth is about 35% year over year. Our new approved members is 22%. Our submitted application growth is 25%, which is actually the highest growth we've seen this year. And our cost of acquisition went down from $50 to $49 dollars in doing that as well.

And the comment I would make on member growth or approved members, the 22%; we see a number of factors influencing that. The first is that the base we measure against is simply growing and getting larger. Secondly, in 2006 because we had some very significant improvements in what we call our close ratio; and while this is still a focus and we are making gains and have made gains there this year, we don't have the same kind of the improvement leverage we had a year ago. The gains are more incremental.

And thirdly, is that something that most people wouldn't see outside; but we do go through underwriting cycles with the carriers. And there are some periods of time when the carriers are a little bit more liberal, I guess is a way to say it, in terms of underwriting approvals than they are in others. And we've found with some carriers recently the underwriting I think has been a little bit tighter than we've seen in the past. And we've experienced this many times in the history. So those are really the influences there.

On the application growth, I'm very pleased with the 25% growth in submitted applications and would like to point out we did while actually decreasing the cost of acquisition, which I think points out that we've really got I think some very good discipline and management control over all the dials and buttons here we have for cost of acquisition. And it's one of the reasons I think we feel so optimistic and confident about the steps we're going to take in terms of increasing the cost of acquisition and the associated growth.

And on the G&A question; the up tick in Q3 is primarily as a result of the Sarb-Ox. As I suggested in my script here, we're getting into the meat of the project, essentially. And that's why I mentioned that it could continue to increase here into Q4 and into Q1. They'll be issuing a report in Q1. Obviously our business overall is growing significantly and so to a less extent, some of the costs come from just business growth and adding people to support that.

As for next year, some of these costs are one-time costs related to the project. But there will be obviously ongoing costs to Sarbanes-Oxley so it's hard for me to get into that at this stage.

Good. Thank you very much and great quarter.

Thank you.

Thank you.

Thank you. Our next question comes from Christine Arnold. Christine, your line is live. Please ask your question.

Good evening. A couple questions here; could you help me think about China? What's the potential there? How big is the individual market? What does the competitive landscape look like? Is it as wide open as it is here where there's really no other competitors in terms of the online? And is it the kind of growth market that we're seeing here with new carriers offering new products?

Hey Christine, it's Gary. I'm glad you asked about China. It's really fascinating. In fact I had the opportunity to spend time with the mayor of the city we're in, Xiamen, last week. He was here in the U.S. and came to see us. We had a lot of discussion about this. First, there really is not a market today in China for health insurance products. And that makes this very challenging, but we get to blaze a brand new trail here that nobody's been down before.

The fact that in the first few days we actually had submitted applications from consumers, makes me think there is a market. I think we've proven that. We just don't know what the size of the market is. It is estimated there is 100 million to 200 million people in an emerging middle class in China and you see them in all the large cities and they're buying life insurance, they're buying cars, they're buying cell phones, they're buying flat screen TVs and they want private healthcare as well.

The large carriers we're working with, which are predominantly life insurance companies; are very enthused about this market and they've looked at it. We are as well. I wish I could make projections on what this market may be like. I can't. We're really going to have to watch and see how this all unfolds, but we're very, very excited, extremely excited about it. I can tell you the government support we're getting in China for this is really quite remarkable as well.

In terms of competitors, there really are no competitors for us today in this marketplace. We're the only online approach to this that we're aware of right now. I should also talk about-- make the comment that the product are a bit different in China than they are in the U.S. We have medical insurance and accident insurance. And medical insurance covers biological kinds of things, get the flu or whatever, and all of the medical costs associated.

Accident insurance covers medical costs for an accident. So if you only have medical insurance and step on a rake and hit yourself on the head, that policy won't cover. If you have accident insurance, it will. And a number of people still ride bicycles in China are very interested in accident insurance. So it's a new market. It's a fascinating place for us to be and all I can tell you is that we're very, very enthused but I can't quantify the enthusiasm right now.

Okay, and then my usual topic; the EPI III, the 2008. Is that going to be in a few markets with a small carrier beta testing in '08 or are we going to see lots of markets and big carrier in '08? Can you help me get a sense for scale of this EPI III instant underwriting?

Well, we have one carrier committed as we said, and they are committed to exactly what we've been wanting to do for some time, which is instant underwriting approval right then and there, print your membership card, be covered and start to utilize that coverage. That's really, to us, the promise of the Internet. We think it's a distinct competitive advantage for us. It's a compelling reason to come to the Internet to buy the product. And we think it's going to very much competitively advantage this carrier as well. I can't comment right now on the footprint and where they're going to be going and how they're going to go about it, but I can tell you it's a very recognizable name. And it's a high-quality company.

Is it a first half or second half launch?

Well, in our conservatism and so on, we've said 2008. All I can tell you is that we-- you know how strongly I feel about this. We'd like to get this launched as soon as we can get it launched in a very effective way. So I would hope that we can do it in the first half of 2008.

And then final question is-- you talked about the new carriers and new markets. I think it was 29 this quarter. What does you pipeline look like for '08? Are we going to be able to continue this kind of a pace, new carriers, and new markets?

Well, we'll continue to have some good growth with new carriers. Many of these, as you know, are not brand new carriers to us. They're very large carriers who have come into the individual market because of the opportunity they see and they're expanding into new states. And we're certainly going to see more of that. There are some other regional and state carriers we'd still like to get, but we've got an awful lot of that supply here now.

Christine, one thing I should point out as well; which you've asked about in the past and I think it's an important thing to note, is that we actually had an awful lot of our growth fueled this past quarter by what many people would term as same-store sales. That is carriers who have been doing business with us in excess of 12 months. In fact, close to 90% of our growth in this past quarter came from same-store sales category carriers. And we're delighted with that because I think it really represents and illustrates the maturation of these relationships, what we're able to do in these markets and how we're able to grow in these markets with these carriers who are established with us and established in the markets as well. So we're not dependent on new carriers or new supply for growth, it just helps to add to it.

Okay. Thank you.

Thank you. Our next question comes from George Sutton. Your line is live; please go ahead.

Hi, guys; great quarter. With respect to instant underwriting, I'm kind of fascinated by the way a consumer would view this opportunity. Typically in consumer transactions, immediacy is a much greater potential of getting that customer than not. What kind of studies have you done to suggest any kind of lift we might see from that perspective?

Well, George I'd like to tell you that we've got some really good empirical evidence here. We haven't. One of the issues in this entire marketplace, based on I think the localization and regionalization of all these carriers; is there is not a lot of really good market data that exists on any kind of a widespread basis. But with the experience that we've had with EPI in the past, the progress we've made, the conversion rates we've seen increased, the appeal to the consumers; we believe that being able to satisfy that need or desire or demand immediately for the product has to have some very, very good impact for us and our business and for the carriers as well.

Some of you have heard me say this in the past, but there's this basic rule of sales that says, when somebody wants to buy something sell it to them. What's unusual about our business is that people come to us who want to buy, they give us their social security number, they give us their signature electronically, they transfer us payment; yet then they have to go through the underwriting process and they have to wait to see whether they're going to be able to buy the product or not. And that kind of just defies all sales and marketing logic and that's why we think EPI with instantaneous membership approval and so on, has to have some really positive impact for us and we would expect to see that in our business.

I would agree. With respect to the healthcare savings plan, you were in beta this quarter. Can you give us an update of how that has gone and give us some sense of incremental costs and how exactly you expect to market these plans?

With the HSA platform, it's very early. I really can't comment on results yet. It's truly in a raw beta mode right now. We're testing both the-- pressure testing the site itself, the interaction with businesses as they're working with us and so on. It wouldn't be fair for me to make comments on it right now. But fully in 2008, we expect this to be a very, very exciting offering and initiative and I think the early results that we're seeing, reactions and so on, are confirming that for us.

We'll clearly want to spend some marketing money on this because we think it's a very important message. We will also have, we believe, some very significant performance partners working with us here, spending their marketing money to market this product to a lot of their small-business constituents and others. So we-- it's an important initiative. It's one that we're enthused about and it's still a work in progress.

Super. Thanks for your help. Good job.

Thank you.

Thank you for your question. Our next question comes from Peter Costa. Go ahead; your line is live.

Hi, guys; good job. Can I get an understanding a little bit about -- exactly sure what the revenue means from Massachusetts with the Blue plan here and how that's going to grow for you going forward as well as sort of what see the difference between Massachusetts now under the reformed structure versus California if it were to go under a reformed structure, what that would mean to you there as well?

Yes, it's a great question. Well, the first thing in Massachusetts because it's been a guaranteed issue community-rate state, as I think everyone knows; there has essentially been no individual product available at all. Now with the initiative that's in place, the mandate that all citizens, all residents have to have health insurance; it's got some of the carriers interested. So BlueCross/BlueShield, Pilgrim is another for example. And our first entree into the market surprisingly is a technology licensing agreement. Typically we start marketing a carrier's products on our business site and website and then we get the technology licensing. So we're delighted with this.

And we think it's going to be a really nice business opportunity for us, but more importantly an entry into the market. And probably most importantly, now getting some residents in Massachusetts access to some quality products; and part of our plan here strategically and it's obvious is to build this out on our site as well. And we'd like to have some really good choice and good products for people in Massachusetts.

Now California is different. California has been an open-market state. There's probably as much health insurance available in California as any state you're going to find in the country. In California we have Healthnet of California, Pacificare which is now United, BlueCross of California, BlueShield of California, Kaiser of California and Aetna, as an example.

And should some of the Governor's proposals go into-- become law, and should we have some kind of a mandate in this state, we believe actually it's going to be a very positive influence on our business. The products are already here and-- a very, very broad and very deep set of product offerings. And everyone will be required to by one, presumably; that's the idea behind the law. And we're the only marketplace that exists where all of these products where people will have choice and so on.

So from a business standpoint, it's very good for us. It's a whole other discussion as to whether it's good policy or not. And I won't comment on that right now.

On the Governor's initiative, where it stands right now is that the Governor and the democrats and the state legislature are going back and forth. Interestingly, several of the large unions in this state are very much opposed to this and their opposition is having a lot of influence on the democrats. You've got a lot of republicans who are opposed to it. So I think what's being illustrated here is that these are not easy problems to try to address or solve legislatively and we're seeing it here in California.

Additionally, even if the state legislature in California passes something, it's still -- it appears because there is taxes involved, will have to go to a ballot in the state and would be part of the November ballot next year. And at least in the state of California, the history of ballot measures passing that raise taxes is not a very good one. So there is a lot between here and any of this ever becoming a law at this point. I'm not saying it won't, but we're close to it and these are the things we're seeing today.

Okay, great. And then can you talk about your marketing and advertising expenses this quarter? It didn't go up sequentially as much as it did last year. Did you guys kind of control that spend a little bit or is that something that you're expecting-- you talked about it going up again faster in the fourth quarter, just kind of contrast the fact that it went up slower this quarter sequentially than a year ago and then sort of why it's going to go up more next quarter. Did you delay any spending there?

No, no delays at all. In fact, it's important to note that all of our expense in the sales and marketing side is taken when it's incurred. So nothing is ever deferred or can be deferred based on our model. This was just a quarter for us in which we were able to very efficiently get some good growth. Again, I'm pleased with the 25% application growth, pleased to see the cost of acquisition go down. I think the difference between this quarter and a year ago is that we've got even better science about going about this in the Company.

I think our management disciplines are a little bit better. I think a lot of the infrastructure we've built is better. Our knowledge of a lot of these areas is better. It's just a list of things like that. And it's one of the reasons why I'm feeling so optimistic about going into this quarter and some quarters next year as well by spending more on the sales and marketing side. I feel it's a very, very good opportunity for us right now to do this. The market is continuing to expand in front of us, there is more recognition of the individual market, we've got more quality products, there is more recognition of our Company.

The presidential election season is only going to help with all of this. We've got all these winds blowing our way right now. That, combined with the fact that frankly we're generating an awful lot of cash and I think it's a little bit incumbent on us to put some of that to very productive use. And I want to do that because I think we know how to do this in a very efficient way as proven by the fact that we could grow the applications the way did this past quarter and do it at $49 per submitted member on an application.

Great. And then last question on the share-based compensation expense; I expected that to grow this quarter already and it's not going to grow until the fourth quarter. Can you kind of go through how that's going to build out through next year as well?

That really is just based on the timing of when we do grant additional equity awards. And throughout the history of the Company, that's been an important incentive for us within the Company. I would expect that to continue to increase into next year. We'll continue to grant additional awards. Obviously share price fluctuations have an impact on how much that would hit the financial statements. But I would continue to expect that to step up throughout next year.

So if it's sort of $0.01 next quarter, are we talking about $0.02 or $0.03 all of next year? Are we talking about $0.01 very quarter or $0.01 going to $0.02 going to $0.03 going to $0.04. Can you kind of build that for us?

It could be a few cents more additionally per quarter next year.

Okay, and growing through the year?

Yes, it would step up kind of smoothly throughout the year, likely.

Okay, great. Thank you, very much. Good job.

Thank you.

Thank you. Our next question comes from Carl McDonald. Please go ahead; your line is live.

Thank you. I think you touched on this in response to Christine's last question but I wanted to talk about the dynamics of the new market entry. So when Aetna, as an example, expands into a new market do you tend to see a lot of growth immediately and then it sort of dies off and then builds up over time or is it sort of a slow start that builds up over time?

Well, Aetna is an interesting example actually because they have an awful lot of name brand recognition and equity. When we brought them into California a while back, we had some very good established carriers here; BlueCross of California, BlueShield, Healthnet, Kaiser. Yet as soon as we brought Aetna in, we saw an up tick in the business and interestingly it wasn't cannibalizing the other carriers, it just increased the size or the magnitude of the membership that we were able to serve.

So when you bring an Aetna in, yes. Humana has got some name brand equity. Cigna does, for example. But there is a gestation period. Typically it takes some time for-- a few months for people to recognize it, to interact with the carrier's products and so on many times before they make a decision. We find that in other states as well where we just put up a state-specific carrier.

When we launched BlueCross/BlueShield in Texas, for example several years ago, there was a bit of a gestation period but then it continued to grow and to grow. What's interesting is I commented earlier-- our same-store sales in this past quarter we thought were very good and we were pleased about that. So there really is not-- we haven't seen, almost without exception we haven't seen a point at which we start to get diminishing returns or a point at which we don't grow much. In fact, we're growing very nicely right across almost all of our markets with our very established carriers.

Okay. And there are a couple of health plans that are growing the individual business fairly significantly and a couple of others that are shrinking. The ones that are growing are generally offering fairly aggressive broker commissions. Is that just sort of a normal cycle that you see in the individual business or is that something we should pay attention to in terms of it that changes and they go back to sort of a more normal broker compensation system, the growth will slow?

Well, it may have some impact in the agent-broker community. It doesn't with us. Everything that we do in terms of the presentation of products and the interactions with consumers is done in an unbiased and objective fashion. In fact, there are very few people in our Company who know what are commission rates are; our CFO does, a few of the people who work in our carrier relations group and I have access to them. But I can't tell you right now what they are because I don't pay attention to them.

Our objective has always been and I think is always going to be that a consumer who comes to us; we want to present them with as much information and knowledge as we possibly can to help them make the best decision for the product that best matches their needs, disregarding what we're paid for from a commission standpoint. We actually think that over time, that proves out to be the most profitable consumer or member for us.

Got it. Okay. And last question is -- if you could just remind us the economics around licensing the product for direct-to-consumer like the BlueCross Massachusetts that you mentioned; do you get paid a fixed fee for that? Is that a-per transaction or just how do the economics there work?

For almost all of them, without exception, are performance-based. So as you know in the software world, typically software is licensed to users on some kind of a fixed licensed basis, a monthly license or an annual license or whatever. We've elected not to do any of that. We've adopted a model that's transaction-based. It's not unlike the revenue-generation model that we have in our Company.

So typically, for example when BlueCross/BlueShield of Massachusetts has a transaction, they will pay us some kind of a transaction fee for that. And that's the case in almost every single one of these relationships that we have. We host all of the software and run all of this for them. One of the big advantages for them is that they're running a mirror of what we run, so it's not different software; it is our software.

Every time we make an upgrade or a change or a release to our software, they're the beneficiary because they get it the same moment we do on our site. And most importantly, because of the economic model or the financial model we have, it's very appealing to them because there is very little upfront investment. And it also minimizes the risk because if they're concerned about the risk of this not working, they haven't spent much.

We know how well it works so we don't worry about the risk. On the other side of it, the upside potential for us is very substantial. It could far exceed any kind of a license fee we would have because the more they transact, the more we're going to earn on those transactions.

And once again, I want to point out strategically, which is what I'm most excited about; this allows us to monetize a transaction that we wouldn't have been able to previously, which is the transaction directly between the consumer and the carrier.

Great. Thank you.

Thank you.

Our next question comes from Steve Halper. Go ahead; your line is live.

Yes, hi. Two questions; first with the increasing cash balance, Gary can you update us on the Company's views about potential uses of that cash including acquisitions?

Yes, Steve; I appreciate you asking that question. Our view really hasn't changed. We would do an acquisition or acquisitions if we were to find something that was highly strategic and accretive to our business. The history of acquisitions and mergers in the world of technology is not a good one. I've had the opportunity in my career to have lived through a few of them. And I've seen one work really well and several that didn't, so maybe I'm just a little bit jaded that way.

But we want to be really careful and really thoughtful; but at the same time aggressive, if something presented itself to us. I've said this before, if there was an eHealth II out there right now it would be obvious that we could consolidate the marketplace, but there's not. It's got to be something strategic. It's got to be something accretive that adds to what we're doing and that's really our criteria and we haven't found anything as of yet that has matched that.

I would say there is nothing at this moment on the horizon that matches that. But I learned a long time ago to never say never; so you don't know. Additionally because our cash generation keeps strengthening and our cash balance is increasing, I also feel like we need to put a little bit of that to work and that's part of the idea behind actually fueling more of the growth through the sales and marketing spending as well.

And just from a competitive viewpoint, are there any companies or competitors out there that are kind of creeping up the radar screen a little bit?

No. We're seeing absolutely nothing, nothing at all. We're the only ones that -- on any kind of scale that transact online the way that we do. We continue to see some competition in the world of online search where you lead aggregators there and in some ways we compete with them for eyeballs or what you might call clicks. That's not exclusive to us or health insurance. That's really a phenomenon of search and is characteristic of almost all ecommerce on search when you go to Google, Yahoo or MSN. And we actually do very well there; but, no; nothing in the -- nothing directly competitive at all, Steve.

Great. Thanks for the update.

Thank you.

Thank you. Our next question comes from the line of Justin Post.

A quick question on your China initiative; I just wanted to check why you guys started in a Tier II city and what are your plans to move into the larger Tier I cities where there are higher concentrations of middle class and upper class Chinese?

We're being purely opportunistic. eHealth China; which was founded by our Chief Technology Officer, Sheldon Wong and myself years ago. We funded it with the intent of having some really terrific people that could work for us to help us with research and development and it has succeeded beyond our wildest dreams that way.

We also saw this possible opportunity to begin to build a business in China, much like the business in the U.S. We're headquartered in Xiamen, which by the way is a beautiful city in southeastern China on the Formosa Strait that looks at some of the Taiwanese islands. We're right on the ocean. It's really just an incredible place. And because we're there, because we've got very good government sponsorship, we though that city of only 2 million people; small by Chinese standards but not bad by U.S. standards, was a good place to start.

From there, as I said earlier, we hope to move across the province; this is the Fujian province that we're in, which is close to 40 million people, and then continue to grow the business out from there. So it's really a geographic expansion play and we're starting in Xiamen because that's where we are and we know it best. And we think that are chances for success are best there as we're really nurturing this very young business.

Is there any sort kind of testing the concept idea before bringing into Shanghai or Beijing? Is that part of the philosophy?

Well, sure we'd like to test it and really get it working quite nicely and again, we're already selling with it, so it works; but there is nothing beyond that in terms of going to Shanghai, Beijing, (inaudible), or many of the other cities in China as well.

Great. Thank you.

Thank you. Our last question comes from William Morrison.

Thank you. A few questions; I wanted to clarify an earlier question and just kind of distinguish between in the past you've talked about EPI III, which my understanding is that's not instantaneous underwriting. EPI III I thought was kind of moving to more instantaneous underwriting but still a 48 to 72 hour delay. And what you're talking about with instantaneous underwriting is actually a leap ahead of EPI III. I just wanted to confirm that and then should we expect in the future not to hear really about EPI III announcements but just more of these kind of moving direct to instantaneous. That's question one, and then I got a couple others.

Bill, on EPI III you're right. Our objective has always been to get to instant underwriting and approval. And the 48 to 72-hour turnaround was a step toward that. We piloted a few carriers that way. And we just found that we're going to be able to leapfrog that not have to go through that step and we can get a carrier to go directly to where we wanted to be. So you'll hear us refer to it as EPI III, but hopefully EPI III is going to become synonymous with instant underwriting and instant approval and printing the membership card.

Great. And I may have missed this earlier, but Stuart can you give us maybe just some framework, a little bit narrower framework on the sales and marketing next quarter? Should we expect kind of a $52 or $53 per app number or can you just give us I guess a little bit more clarity there?

I'm not going to give you unit cost clarity; but I think the best way to think about our marketing and advertising costs is-- it's most of the increase in expenses that we would expect for the next quarter in the guidance that we put out. So if you take the guidance that we put out for the year and look at the fourth quarter and back into the expenses, the incremental expense that you see there is primarily marketing and advertising driven.

Okay. And then should we-- if we assume that that's around $52 or somewhere in that range, for next year should we expect that level to stay stable or is this just a one-quarter kind of opportunistic strategy?

As Gary described, we're really looking at the overall opportunity expanding here. And so we expect that to continue to expand into the indefinite future. And so as long as that continues to expand, we're going to continue to spend into that.

Okay. And one clarification; you remark Stuart, I thought I heard you say that-- when you were talking about kind of the lifetime value and I thought I heard you say that it takes about five months to recoup your customer acquisition costs. And I just wanted clarify, are you talking about an actual number or an app? Because my understanding was it was more like eight to ten months-- five months to get an app, but you're only converting maybe a little bit north of 50% of apps into members and therefore that would mean the months to recouping the full marketing costs for a member would be higher--or is my math wrong?

Actually I'm talking about a member and I'm talking about all members when I talk about that. If you take our marketing and advertising expenses in total and you divide by the total members; all members that we bring in; I'm looking at it that way, for all members. And then I'm looking at our revenue for all members combined that we earn each month. If you look at our metrics that we put out, you can calculate that our commission per member is north of $14.50 a month. That's the math I'm using to get there.

The important thing to note is it's all members on a group basis.

Okay, got you. I guess that would imply that the cost for acquiring a non-IFP member is significantly below acquiring an IFP member?

You could draw that conclusion in that a lot of the non-IFP members are ancillary products and sometimes we look at it as a byproduct of our spend for IFP. We spend the bulk of our marketing dollars looking for IFP members. But many of those actually end up needing short-term insurance, for example; instead of a major medical policy and so the money was intended to initially bring in a major medical policy, but if the right product for that customer is something else, we absolutely will take that and it's a byproduct of that spend.

Got you. Okay, that's helpful. And then lastly, it looks like the revenue per member, per revenue-generating member if you just take the member revenue and the -- if you just look at the pricing revenue per revenue-generating member was around $45. It looks like it was down 3% roughly. It's been trending down. I'm just curious if for modeling purposes should we expect that number to continue to trend down?

It's actually up, and if you look at the metrics that we put out with our press release, you'll see our total revenue per estimated member for the period-- it went from $46 a year ago to $48 this quarter. I can tell you that part of that is we're significantly growing our other revenue, our sponsorship licensing and other revenues, so that certainly increases our revenue per--

Right, I guess I'm talking if you exclude that, if you just look at excluding the non-member generated revenue it looks like it was down.

Actually if you do that as well; if you take our commission revenue and divide that by our average membership for the quarter; beginning and ending divided by two, it actually increased year over year a pretty healthy amount.

Okay. I'll take it offline with you. Thanks.

Okay.

Thank you. Our last question is from Steve Halper.

Just as a clarification Stuart the stock comp included in the GAAP numbers, it was $0.01 a quarter for the first three quarters, and did you say it's going to go up a little bit in the fourth quarter because of some more equity grants?

That's right. What I was saying is that it will go up an additional penny.

Okay. So it will be $0.02 in the fourth quarter?

That's correct.

Okay, great. Thanks for the clarification.

And I've just got a final that's just popped up and it comes from Bill (inaudible). Your line is live; please go ahead and ask your question.

Good afternoon. Sorry, you may have mentioned this; I stepped off for a second but the cash flow from operations guidance for the year was 22 to 24 and you've already done 18, which would imply a decline sequentially. Is there an explanation for that?

Yes. The explanation for that would be the marketing programs that we're talking about for the fourth quarter. We are looking to increase that spend and that will be cash outflow during the fourth quarter. One thing I should comment here is that we typically don't see a lot of revenue right away from the outflow for marketing dollars. It takes a lag time before we start enjoying those revenue streams and it comes in over the lifetime of a member, out in the future. And so this increased spend; I wouldn't expect that to drop a lot of additional revenue to the fourth quarter. But the main impact of it will be to the expenses and to the cash flow.

Okay, and then the 90%; I think Gary said 90% of the growth in the quarter came from same-carrier growth?

Yes, he did. It actually was a little bit over 90%.

Okay. So that means that new carriers added were only responsible for 10% of the growth--? I just want to make sure I understand the metrics.

Less than 10%.

Okay.

And note that we define same-store carriers as having been with us for 12 months, so the others would be those that have been with us for less than 12 months. But that's more than just those that we added in the third quarter, if that makes sense.

It does make sense, and that was my question. Thank you.

Thank you. There are no further questions in the queue at this moment of time.

Great, well thank you everybody.