eHealth Inc (EHTH) 2007 Q4 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the fourth quarter, 2007 eHealth earnings conference call.

(OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Miss Deidee Shill. Please proceed.

Thank you. Good afternoon and thank you all for joining us today, either by phone or by web cast, for the discussion about eHealth Inc.'s fourth quarter and fiscal year 2007 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 line for questions. As a reminder, today's conference call is being recorded and web cast 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 [search], strategy and execution as a cost effective source and barrier to competitors; plans to continue to test traditional media advertising; expansion of the HSA platform, offering a traditional state; the launch of the HSA platform with strategic partners during the first half of this year; expansion of the use of our platform in China; the launch of EPI III in the first half of 2008; EPI III as a compelling reason to purchase from eHealth and at a competitive advantage; the growth in the number of carriers licensing our ecommerce technology; the licensing of our technology platform allowing us to participate in traditional agent business; the potential for legislation impacting the individual health insurance market in the next two to three year; the economic environment encouraging the use of the Internet; reduced employment, resulting in more people searching for individual health insurance; the future potential of our licensing and sponsorship business; growth in marketing and advertising costs; the period of time to recover marketing and advertising costs on a per member basis; the average life a member holds a product; a decline in general and administrative costs as a percentage of revenue in 2008; the issuance of equity awards; availability of NOLs to offset future income taxes; cash flow benefit from tax reductions; guidance for revenue; GAAP diluted earnings per share; stock-based compensation expense and cash flow from operations for the year ending December 31st, 2008; estimated GAAP and cash tax rates for 2008; the operating margin percentage for 2008; interest rates for 2008 and seasonality in future quarters, relating to marketing and advertising expenses and submitted applications.

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 10K, our quarterly reports on Form 10Q filed with the Securities and Exchange Commission, which you may access through the SEC's website 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 advise any forward-looking statements made during this call, whether as the 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 a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to 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.

Good afternoon. eHealth performance for the fourth quarter of 2007 and the entire year in total illustrate progress, execution and momentum across all important areas of our business. Revenue grew 39% compared to the fourth quarter a year ago and cash flow from operations in the fourth quarter increased by 61% to $7.9 million, notably, our largest cash flow quarter ever, giving us a quarter-end cash balance in excess of $121 million.

During the fourth quarter, we also initiated a strategic increase in our cost of marketing and advertising spending, which successfully resulted in a 28% year-over-year individual and family plan submitted application growth. We are also enthused about progress we've made during the quarter in three important initiative areas: Ubao.com in China; our beta version HSA platform and our emerging technology licensing and sponsorship business.

I will made additional comments on each of these but first I want to expand on our marketing and advertising initiatives. During the fourth quarter, we made significant progress accelerating demand for eHealth products and reinforcing our position as the leading online source of health insurance for individuals, families and small businesses.

Our progress was demonstrated by the 28% individual and family plan submitted application growth rate we achieved, which was our highest quarterly growth rate during 2007, surpassing the 23% growth rates in the first two quarters and 25% application growth in the third quarter. Importantly, our fourth quarter submitted application volume exceeded our third quarter volume, an exception to the seasonality in demand that we typically experience.

Significant individual and family plan submitted application growth occurred in all three of our channels, direct, online advertising and marketing partner channels. All grew in excess of 20% over the fourth quarter of 2006. Our marketing partner channel results are particularly noteworthy, with a 32% growth rate, representing a substantial acceleration when compared to all prior quarters of 2007.

Several areas of focus and investment were critical in successfully driving our fourth quarter application volume. First is online advertising, specifically, search marketing. Search, both organic and paid listings, continues to be the primary tool consumers use to navigate the Internet. And search is an important element of our customer acquisition strategy.

During the fourth quarter, we significantly strengthened our leadership within search, for both pre-organic and paid listings. We increased our overall search share of page, both directly and with our marketing partner relationships. On high traffic search keywords, such as health insurance and health insurance quote, on Google, for example, we directly or indirectly, for many of our marketing partners and our carrier partners, like Aetna and United, receive traffic from sources that generally comprise approximately 50% of first page organic listings and first page paid listings. And adjusting for non-commercial sites, like Wikipedia, which offer no competitive services, our search share on Google generally comprises approximately 75% of first page organic listings.

Our strategy and execution for search dominance is important, not only because it is a very cost effective source, but also because it is a very important barrier to potential future competitors. It is also important to note that our traffic from key words we pay for directly on search grew significantly during the fourth quarter and contributed to our accelerated growth.

Second, we accelerated our outreach to important customer segments through our marketing partners in the latter part of the year. For example, we are currently marketing to millions of students and college grads in partnership with the nation's largest holder of student loans. We are reaching people recently laid off from their jobs in partnership with COBRA Administrators. And we are targeting the 47 million uninsured through joint marketing programs with non-profit organizations, helping people to secure government-sponsored programs.

Through associations, banks and credit card issuers, we support small business. And through national drug store chains, that market our services to customers on the backside of prescription drug receipts. These partner programs are examples of our strategy to raise the visibility and awareness of the individual health insurance products we offer online.

Finally, we launched pilot work in the traditional media area during the fourth quarter. Specifically, we began running a television commercial on a national satellite venue, the Dish Network. The commercial aired across a wide variety of channels and programs at varying time periods. We are encouraged with the results of our initial testing and we will be continuing to test the effectiveness of traditional media advertising, including television and print advertising in this current first quarter.

In summary, we did strategically increase our application growth rate in the fourth quarter by effectively and thoughtfully increasing our marketing spends in a controlled and, as Stuart will describe, profitable manner.

During the second half of 2007, we launched two very important initiatives; Ubao.com in China and the beta mode HSA platform. The HSA platform is designed to allow small businesses the ability to easily fund or co-fund health savings accounts for employees. Our initial experience with the HSA platform pilot is encouraging and we are evolving this new online application based on customer feedback and focus group work with marketing partners.

We plan to expand the HSA platform offering into additional states in the coming months and are planning a launch with key strategic partners during the first half of this year. By the way, there was a good article in the Wall Street Journal on January 29th, about businesses looking for alternatives to group health insurance, including a quote from a small business customer of ours, who is successfully using the HSA platform.

Ubao.com is the ecommerce platform that we began piloting in China during the third quarter. Through Ubao, which means best insurance, we are currently offering health, accident and life insurance products in the city of Xiamen, China. We believe that Ubao addresses a growing need of many of China's citizens, access to a private health system.

We have had Chinese consumers come to Ubao.com, apply for insurance online and purchase products. We are continuing to refine the platform in light of our experience and hope to expand the use of the platform to other cities in China. While we were enthused about our early experience in China, it is important to note that we have assumed no meaningful revenue contribution from it in our planning for 2008.

On the product supply front, we continue to add to our product portfolio; United, Celtic, Blue Cross/Blue Shield of New Mexico, Blue Cross Northeastern Pennsylvania and ODS Alaska all launched new products through eHealth during the fourth quarter. We were also authorized to sell new products or appointed during the quarter with Kaiser Washington, Clear Choice in Montana and Blue Cross/Blue Shield in Arizona.

EPI III is the proprietary technology we have been developing, which will allow consumers to apply online, electronically transmit signature and payment, receive an instant underwriting response and print membership material at the point of approval on the eHealth site. We are now working with several carriers to implement EPI III and we are targeting launch with at least one carrier in the first half of 2008.

We believe EPI III, in its instant underwriting capabilities, offers consumers yet another compelling reason to purchase from eHealth and that these carriers utilizing EPI III may be competitively advantaged.

Our emerging technology licensing and sponsorship business again experienced triple digit growth. Through our sponsorship business carriers may purchase advertising on our quote page, much like paid online search results at Google and Yahoo. We have progressed to the point of now having at least one carrier using sponsorship in 46 of 50 states.

During the fourth quarter, we introduced a new bidding platform, automating the process for carriers to compete for preferred sponsorship positioning on our quote page. Feedback from carriers, using the new bidding platform, has been very positive.

The number of carriers licensing our ecommerce technology continues to grow. During the fourth quarter, we entered into licensing agreements or launched our technology with Celtic, Blue Cross/Blue Shield of Massachusetts, HealthAmerica in Pennsylvania, KPS Washington, Kaiser Mid-Atlantic and IHC, which owns or represents several carrier brands.

Celtic launched in 37 states during the quarter and is using our ecommerce platform for its direct sales in these states. Through Celtic, we also have extended the use of our technology to Celtic offline agents and brokers for the submission of applications online.

In a similar fashion, we recently announced a multi-state agreement with Kaiser Mid-Atlantic for our technology to be used by Kaiser offline agents and brokers. These new technology partnerships are strategically important for us because they allow us to participate in and monetize business transacted in the traditional agent distribution channel. They're a new and important component of our strategy and mission to be the online distribution standard through which individuals, families and small businesses find the right health insurance.

There have been recent developments in the public policy area. In California, the California Healthcare reform proposal, which garnered much attention nationally over the past year, went down to defeat in the California senate. The defeat was primarily centered on budget concerns as the result of the legislative analysis, which projected the cost to be much greater than originally estimated. I believe the California experience illustrates how difficult it is to legislate sweeping reform in healthcare and how staggering the associated costs can be.

The California proposal also contained policy elements, which appear to be opposed by both Democrats and Republicans, again showing how difficult sweeping change in healthcare is to impose.

Nationally, there is discussion about healthcare among the presidential candidates but it is our opinion that there is no legislation on the horizon for at least the next two to three years, which would have any meaningful impact on the individual market.

We obviously are aware of the current status of the U.S. economy and the projections by some that we are heading into a recession. Like most ecommerce companies, we, as a company, have not existed long enough to experience a real recession. We believe that an economic environment, in which consumers are more conservative and careful in their spending, encourages use of the Internet to research products and save money, a major factor in our value proposition.

In addition, if businesses do contract and reduce employment, it is likely that more people will be searching for individual health insurance as an alternative to the high cost of COBRA, something se did experience when unemployment was higher in 2001 and 2002. I am pleased with the progress we made at eHealth during the fourth quarter in many areas, in particular our application growth and operating cash flow. 2007 was a strong year for eHealth, providing many new opportunities for us to capitalize on in 2008.

Stuart will be giving financial guidance today for 2008. Just let me say we are optimistic about the year, our position in the market, and our ability to capitalize on the opportunities before us. Now I'll turn the call to Stuart.

Thanks Gary. Good afternoon everyone. I'm pleased to announce our financial results for the fourth quarter and full year of 2007. This was a year of continued company wide execution in penetrating our market and showing the significant scalability and cash flow potential of our business model.

Starting at the top line, our revenue for the fourth quarter was $24.2 million, an increase of 39% over the fourth quarter a year ago. For the full year our revenue was $87.8 million, a 43% increase over 2006. Our year-over-year revenue growth is primarily due to our continued growth in our membership base. Our total estimated membership at the end of Q4 2007 grew by 32% over our estimated membership at the end of Q4 a year ago. More importantly, our individual and family plan estimated membership, which generates the majority of our revenue, grew by 36% during the same time period.

Our product retention, which includes all of the products in our portfolio, on a weighted average basis, continues to be consistent with our historical range and exceeds two years.

A significant highlight this quarter was an acceleration in our year-over-year growth in sponsorship, licensing and other revenue, which grew by 147% over the fourth quarter of 2006 following 112% year-over-year growth in the third quarter. These revenues increased from $896,000 in the fourth quarter of 2006 to $2.2 million in the fourth quarter of 2007 and represented 9% of our overall revenue this quarter. We continue to be very enthusiastic about the future revenue potential of these emerging areas.

We are very pleased with the results of our marketing programs in the fourth quarter. We achieved 28% year-over-year growth in individual and family plan submitted applications in the fourth quarter compared to 25% year-over-year growth in Q3 and 23% growth in both the first and second quarters. Meanwhile our unit cost of acquisition increased modestly in Q4 compared to our average cost over the prior three quarters. This was as expected and planned, as we continue to be very disciplined with our programs and are very focused on the return on investment of every dollar that we spend.

Given our strong application growth, our marketing and advertising expenses increased in the fourth quarter in both absolute dollars, and as a percentage of revenue, as we indicated they would in our third quarter conference call. Marketing and advertising expenses, as a percentage of revenue, increased to 35% of revenue in the fourth quarter from 32% in the fourth quarter of 2006, within the range that we've maintained over the past year, and well within the range that works for us. As a reminder, the vast majority of marketing and advertising costs to acquire members are expensed when they're incurred, while the revenue stream resulting from that spend comes in over future periods with very high margins, since ongoing costs associated with supporting existing members are nominal.

Therefore, in periods of accelerating application growth like we had this quarter, our marketing and advertising costs can grow at a faster rate than our revenue. Although margins are impacted in the period of accelerated application growth, our longer term revenue and margins are positively impacted.

As we've said in the past, our cost of member acquisition is low relative to the revenue that we earn over the average period that a member holds a product. This allows us a significant amount of incremental margin to work with when considering the return on investment of increased marketing spend. One way to think about these incremental margins is to take the number of months of revenue needed to recover the cost of acquiring new members and compare that to the average life that a member holds a product.

By our calculation, based on Q4 2007 commission revenues earned per member per month it would take approximately six months of commission revenue to recover the up front marketing and advertising costs per new member we incurred in the fourth quarter of 2007. To put this in perspective, the comparable number for the third quarter of 2007 was a payback period of approximately five months. Given the more than two year average life that a member holds a product, we continue to have a substantial amount of incremental profit margin on our member adds.

We continue to achieve scale in several areas of our business, as evidenced by a year-over-year decline in our aggregate expenses on a non-GAAP basis as a percentage of revenue, excluding stock based compensation. Our non-GAAP customer care and enrollment costs, as a percentage of revenue, which excludes stock based compensation expense, improved from 17% of revenue in the fourth quarter a year ago to 13% of revenue this quarter. Non-GAAP technology and content costs, as a percentage of revenue, which also excludes stock based compensation expense, improved from 16% of revenue for the comparable period to 13% in the fourth quarter of 2007.

One area where costs as a percentage of revenue have increased over the prior year is in the general and administrative area, driven mainly by public company costs. Our non-GAAP general and administrative costs, as a percentage of revenue, which again excludes stock based compensation expense, increased from 16% of revenue in the fourth quarter a year ago to 17% of revenue this quarter.

Since we became a public company during the fourth quarter of 2006, making 2007 our first full year as a public company, the benefits of scale were offset by public company compliance requirements and other public company costs. However in 2008 we expect general and administrative costs to start declining gradually as a percentage of revenue.

Our operating margins in the fourth quarter of 2007 were 18% on a GAAP basis. On a non-GAAP basis, excluding stock based compensation; our operating margins were 20% in the fourth quarter of 2007. For the year as a whole we made significant progress in increasing our operating margins. On a non-GAAP basis, excluding stock based compensation expense, operating margins increased from 14% in 2006 to 20% in 2007. We are pleased with our progress in that area during this period of rapid growth.

GAAP pre-tax income increased from $3.7 million in the fourth quarter of 2006 to $5.7 million in the fourth quarter of 2007, a 54% increase. On a non-GAAP basis, excluding the effect of stock based compensation in both years, pre-tax income increased by 62% from $3.9 million in the fourth quarter of 2006 to $6.3 million in the fourth quarter of 2007. Our stock based compensation expense increased to $544,000 in the fourth quarter of 2007, up from $350,000 in Q3 2007 and $158,000 in the fourth quarter of 2006. We issued equity awards in the fourth quarter and will continue to do so, as we consider this an important employee incentive.

On a GAAP basis, net income in the fourth quarter was $22.4 million or $0.86 per diluted share, compared to net income of $11 million or $0.45 per diluted share in the same quarter of the prior year. GAAP net income for the full year 2007 was $31.6 million or $1.22 per diluted share compared to net income of $16.5 million or $0.80 per diluted share in 2006.

Excluding an $18.9 million tax benefit, and $0.5 million of stock based compensation and related tax effects, non-GAAP net income in the fourth quarter of 2007 was $3.7 million or $0.14 per diluted share. The tax benefit that we recognized in the fourth quarter relates primarily to benefits from net operating losses which we incurred in past years, which were previously un-benefited but are now reflected as an asset on our balance sheet. In the fourth quarter of last year we recognized a $7.4 million tax benefit, representing a portion of the future potential benefits from NOLs and other tax attributes, leaving a remaining reserve on our books of $18.9 million.

In Q4 of 2007 we met certain accounting criteria, triggering a full release of our remaining reserve, resulting in a tax benefit of $18.9 million. These items were accounting benefits and did not generate cash flow during 2006 and 2007, and given that the reserve was fully released, we will not be recognizing such benefits in the future.

One of the most significant indicators of performance for any company, in our opinion, is cash flow. In the fourth quarter we registered our eleventh consecutive quarter of positive operating cash flow. Cash flow from operations increased by 61% from $4.9 million in the fourth quarter of 2006 to $7.9 million in the fourth quarter of 2007, making it our largest operating cash flow quarter ever. This amount was up from our third quarter 2007 operating cash flow of $7.7 million, which is significant given the $1.2 million of incremental marketing investment that we made in the fourth quarter compared to the third quarter. For the full year 2007 we generated $26.2 million of operating cash flow, compared to $11.4 million in 2006, an increase of 130%.

Capital expenditures for the fourth quarter of 2007 were again very modest, at approximately $700,000, bringing our full year capital expenditure total to $1.8 million. Our low capital expenditure requirements are an important feature of our model that contributes to our operating leverage and scalability. One of the results of this low capital spending is also strong free cash flow.

Primarily driven by our positive operating cash flow, our cash and marketable securities balance has increased to $121.5 million at December 31, 2007, up from $112.7 million at the end of the third quarter. Our cash and marketable securities constituted more than 93% of our total assets, excluding deferred income tax assets, at the end of 2007. Given this and the fact that we have no debt we have a very strong balance sheet heading into 2008.

As an additional note related to future cash flow, we have generated additional NOLs relating to stock option deductions that are available to offset future corporate income taxes, but are not considered as an asset for accounting purposes. The additional deductions result from the exercise of company stock options and other equity awards, and total more than $58 million thus far for federal tax purposes. 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, I'd like to comment on our expectations for 2008. But before I do that, I want to remind you that these comments are based on current indications for our business, which may change at any time. We undertake no obligation to update these comments.

We are currently forecasting revenues for 2008 to be in the range of approximately $114 million to approximately $117 million. GAAP diluted EPS is expected to be in the range of approximately $0.58 to $0.63 per share. Our GAAP EPS guidance includes the effects of stock based compensation expense. For full year 2008 stock based compensation expense is expected to be approximately $4 million to $5.5 million. Our GAAP EPS guidance also includes a tax rate of approximately 42%. Remember that we will not be paying cash taxes at that rate. We expect to pay cash taxes at a rate of 3% or less in 2008.

Finally, we expect cash flow from operations to be in the range of approximately $33.5 million to $36 million in 2008. It is important to note that while we are increasing our marketing and advertising cost of acquisition in 2008, like we did in the fourth quarter of 2007, we expect our operating margin percentage for the full year 2008 to be at least the same as it was in 2007. I'd also like to comment that we have reflected in our EPS and operating cash flow guidance the possibility of additional interest rate reductions during 2008, which would impact our interest income.

Please remember when analyzing our performance on a quarterly basis that we experience seasonality in our business. Accordingly you should expect our marketing and advertising expenses, as a percentage of revenue, to be higher in the first quarter compared to our just completed fourth quarter, and also in our third quarter compared to our second quarter. Conversely, you should expect marketing and advertising expenses, as a percentage of revenue, to be lower in the second quarter compared to the first quarter, and in the fourth quarter compared to the third quarter.

As Gary said, we are pleased with our 2007 results and we are looking forward to 2008. And with that we will open the call for your questions. Operator?

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Youssef Squali from Jefferies and Company. Please proceed.

Thank you very much, hi Gary and Stuart. A couple of questions, first maybe Stuart, if I look at the non-IFP business it looks like the net adds there were pretty small. The churn on the year on year basis went up pretty dramatically, at least by our math to 9.2% up from 6.9%. I was wondering if you could, gross adds though were okay; I was wondering if you could maybe comment on that. And Gary, I think you said something earlier about the EPI III to the effect that you're networking with several carriers and a launch scheduled with at least one of them in the first half. Can you just expand on that a little bit? Will it be fore a handful of products and plans, or will it be for the whole product and plans that you're offering from that carrier? And is there a difference in pricing to you from the carrier?

I'll tackle the first one there on the non-IFP products. One of the significant products within that category is short term product, and by definition people buy that for a very short period of time, they hold it two to three months on average. So it is a high turnover product for us, but it is a valuable product, obviously, to our consumers who need it. But that tends to run fairly high from a turnover standpoint.

The growth rate isn't a big net add this quarter; we actually have had some of the recent quarters where there was similar or even flatter growth than that. It really mainly is a function of the short term products that are in that category.

Youssef, it's Gary. On EPI III, in today's comments on our update on EPI progress I think I said we now are working with several carriers to roll out EPI III and hope to, plan to have at least one of them rolled out in this quarter. And I believe that you'll see the majority of that carrier's products offered having instant underwriting capability.

Okay, great. And just a quick question here, what's the organic traffic number versus paid this quarter?

We don't differentiate or disclose that. But I will tell you that in the fourth quarter we grew, we think, quite nicely both with paid and organic traffic and search, both at Yahoo!, MSN and especially Google.

Great. Nice quarter, thanks.

Thank you.

Your next question comes from the line of George Sutton with Craig-Hallum. Please proceed.

Hi guys, three questions. First, Gary, with respect to the policy makers, and I know you've been speaking with a number of them, can you just discuss what they're discussing with respect to tax subsidies? I'm sorry, subsidies for people who can't afford insurance otherwise, and then any sort of tax changes that you're hearing about.

Number two, if you could talk about how much the carriers are influencing your increased spending, in other words, they're suggesting you should spend more money.

And then lastly, I'm curious with respect to this Kaiser/Mid Atlantic deal. You've always suggested that if you were able to put this technology in the hands of the actual brokers that's what is really most important for your platform. And I'm curious if that's what I should be reading from that deal. Thanks.

You bet, I'll take those in order. First on policy, as you hear in the news on television and as you read, all the candidates, especially the democrats, are talking about healthcare reform. Of the three leading candidates today, or four if you can count Mike Huckabee as one, McCain for the most part is focused on choice for individuals and families and tax incentives, I'll talk about tax incentives in a moment.

Both Barack Obama and Hillary Clinton are talking about universal coverage, which doesn't mean by the way that it's government managed. It simply means that people in the universe of the U.S. all have access to healthcare and health insurance products. Hillary Clinton's platform is more defined than Barack Obama's, hers includes a number of tax incentives for people to be buying individual products. Barack Obama has talked some about that, but not quite as developed.

The really interesting point to be made here is that many people don't know that health insurance products that are purchased by businesses, all of that expense is tax deductible from businesses revenue and expenses and taxes, for individuals it's not. And both democrats I've spoken to, including some very liberal members of the House as well as the Senate, and republicans all agree that that's an inequity and needs to be addressed, that these individual products should have tax treatment with deductibility.

Hillary Clinton takes it to the point of actually suggesting that there be a tax credit so that if someone's at an income level where they're not paying income tax they would essentially get a refund back that would cover the cost of the health insurance, i.e. as a way to help many of these millions of people who are part of the 47 million uninsured who can't afford health insurance. We think in all three of those scenarios those could be beneficial to our business obviously.

Second George on the additional spending, I don't think it would be fair of me to say that carriers are directly influencing our spending right now. Although we've got a number of carriers who are very enthused about this individual market, like Aetna, like United, like Cigna, and they're all beneficiaries of what we're doing here as we bring additional applications into the fold and into them as well.

Then with Kaiser, our mission has been, since the inception of the company, to be the online distribution standard through which individuals find and purchase the right health insurance products, individuals, families, and small businesses. We ideally have always wanted everyone to buy directly from eHealth. I know that in practice that's not going to happen. People are still going to go to carriers for various reasons, and still deal with agents and brokers.

So our strategy here is to make the technology ubiquitous that every time there's a health insurance transaction or health insurance product that's purchased online it's done on the eHealth platform, whether it's done directly underneath the eHealth logo, whether it's done on a carriers site, or now with 37 states at Celtic and with Kaiser as well in a number of states as agents and brokers, and we get to monetize that transaction wherever it happens.

The margins on this are very attractive, but I think the strategic implications are what's most important here.

Thanks guys.

Your next question comes from the line of Peter Costa with FTN Midwest Securities. Please proceed.

Hi guys, good quarter. A couple of questions for you. Can you characterize the increased marketing spend in terms of what that produced for the better leadership or the better draw that you had on search? And also, the second question after that, a little bit lower guidance on share based compensation than I thought you said third quarter, what's the reason for that for 2008? And then what are your plans for the cash that you're generating?

Peter why don't I take the first and third questions and I'll let Stuart handle the stock based comp. On search we've always maintained a very, very strong, if not dominant, position both in paid and organic or natural search. In some of the comments I made we continue to do that. We've increased our cost a bit there obviously because some key words don't convert as well as others in the paid area. We're going after a number of those, but we're finding ways to convert on those. And frankly just the front and center key words like health insurance, and medical insurance, and some of the others that I noted, we've experienced very, very good growth with those and we're quite pleased about that.

Could you quantify that?

We don't quantify it, but I can tell you that that channel grew in excess of 20% like the others did as well, and you can see the contribution, I believe it's in our press release as well. You can see what we had from search. One of the comments I will make about search, that I've always been pleased about for our company, is that we're not significantly dependent on search directly. Lots of e-commerce companies are, we're not. I think certainly our sourcing base is much more diverse than that.

On the second question with the stock based compensation, last quarter we talked about it, specifically about the fourth quarter, made some very general comments with respect to 2008, but really very broad. We hadn't really given out fully guidance on that. This is the first point at which we've really sat down and mapped out the 2008 timing and amount of options for the year, and built a range with a lot of science behind that, and that's what's behind our guidance.

And I would also add to that when it comes to stock based comp, that's always been an important incentive for employees, and will continue to be. It's something we look at every quarter, and something we take action on every quarter as well. Peter I apologize, the third point or question that you asked I didn't write down, I should have.

Just what you were going to do with the cash that you generated.

Oh thank you, the cash. Well obviously we're in a good cash position and it continues to increase quite nicely for us as a result of operating cash flow, which is one of the metrics that I continue to try to point people toward as they look at our business and evaluate it as well. We have said this before, and I'll say it again, if there was an acquisition that looked to us to be accretive and strategic and could make a difference in our business, we would give it serious consideration.

Obviously the more cash we have the better, I think the better leveraged we are to be able to explore something like that. But finding something frankly that is strategic and accretive, given the uniqueness of our business, is not an easy thing. The history of acquisitions and mergers in the technology world is not a good one, more fail than succeed. I've been through some of those. We would be very thoughtful and very careful about this as well, but it's something we think about, we continue to think about and look at as well.

The other question that sometimes is presented to us, especially given the current environment right now in the stock market, is would we buy back stock? And it's something I can't tell you that we're actively pursing right now, but I think it's something that we would look at and give consideration to as well.

Okay, thank you.

Thank you.

Your next question comes from the line of Justin Post with Merrill Lynch. Please proceed.

Hi. Looking at the number of applications submitted versus new members it looks like conversion rates are down a little bit year-over-year. Do you see any way of improving that? Is that really going to be EPI III? Is there anything else that you can do to get those kind of moving in the right direction as we look out to next year?

Sure Justin, you know we a year ago made an awful lot of progress on the back end conversion rates through a number of things, including the rollout of EPI. And EPI had, we found some pretty remarkable impact for us. There's not as much low hanging opportunity there for us today as there was a year ago with where we are. However, we think that EPI III certainly has the potential to have some very favorable impact on those back end close ratios or conversion ratios as we roll that out. That of course is yet to be seen, but if it's anything like what we experienced with EPI I, I think we'll all see some impact that's quite favorable there.

The other thing, that I think we noted last quarter, we've seen a little bit of it -- sorry we noted in Q3 and we saw a little bit of it in the fourth quarter as well, is that the carriers do go through underwriting cycles and we've got some carriers that frankly are a little bit more rigid and probably a little bit more conservative in their underwriting now than they may have been 12 months ago. We've seen this over the history of our company, it kind of ebbs and flows. So we see a little bit of impact from that right now as well. But we're not seeing anything unusual there.

Is the mix of traffic affecting that at all, or are they all pretty good channels as far as conversion rates?

The comments I made about the HSA platform is that we continue to make progress. I referenced an article in the Wall Street Journal on January 29th, about businesses looking for alternatives to the high cost of group health insurance and the individual products being won and actually, one of our executives and one of our small business customers, who has used the HSA platform successfully were quoted in there. We would expect, in this first half, with some of our marketing partners and so on to be more formally rolling that out.

But I think I should make a comment here that's important for everyone to know. And that's that, in our guidance, we have assumed essentially very, very little contribution from the HSA platform; very little contribution from EPI III as well. We wouldn't have invested in these if we didn't think we could get contribution. We're enthused about them but we're blazing a trail there that nobody's been down before. We don't have any signposts behind us that we could look at and we're taking a rather conservative approach, in terms of what we expect for impact from those. But, we're pursuing both of those very aggressively.

And my last question, how will you internally measure the increased marketing spend, the results of that? Is it based on just making sure you get the right number of ads per dollar? As you move off of online channels, it would be tougher to measure. How're you going to do that internally?

Well, we're going to measure it the way we always have, which is we look at the ROI calculation on it. We look at the submitted applications that come from the spend. We look at how those are converting into approved members and, you know, the whole chain of yields in between there. And we measure that against our lifetime value of the members that we expect to come from that. We look at every channel in extreme detail there.

We've always been really hawkish about this and I would also like to add to what Stuart commented on, which is television advertising. We have got some very strict ROI guidelines that we've set for ourselves with TV advertising. And that's the standard by which we measure the results of TV and it's a standard by which we'll make decisions to go forward with television as well. And those ROI parameters we apply to television or print media are not any different than the parameters that we're applying to search to direct into marketing partners as well.

Okay and last question; you know, obviously, with marketing spend about six month's payback and a two-year-life and a profitable model per ad, are you seeing new competition emerging? People looking at your model and trying to do an actual ecommerce platform, as opposed to being a lead referral competition?

You know, again, we really don't see anything significant out there that way; no. We continue to have competition for paid search with lead aggregators and that's not exclusive to us. That's a phenomenon in an industry that grew up around search. And it pertains to all ecommerce but no, nothing significant from a direct standpoint or an ecommerce standpoint.

Great; thank you.

Thanks, Justin.

And your next question comes from the line of Carl McDonald with Oppenheimer. Please proceed.

Great, thank you. I just wanted to spend a minute on the commission growth. You know, as I look back to, like, '05, commissions were up about 39%; '06, 41% and '07 was another 40% year. This year, it looks like the guidance is for commissions growth to slow to less than 30%. I'm just wondering, should we read that as just that the revenue base has gotten big enough that you're not going to be able to sustain the historical growth rate? Or is there something that you're seeing in the '08 outlook that's causing that growth rate to fall but, you know, may not be a recurring theme?

Yes. We're not seeing anything, any change in the model, I guess, if that's what you're asking. You know, nothing different than what we've seen before in the basic model itself.

You know, every year, year-over-year, the loss of a large number comes into play. And again, I guess, going back to Gary's earlier comments on the guidance, we're looking at what we see today, being in front of us in terms of setting our guidance for next year.

And Carl, we've, for the last several years, we've every year planned for growth in the 30 percentage kind of ranges. We fund it that way. This year's no exception. One of the things about our model is it's very predictable. We know what we see in front of us. We're funding it that way but we also know that there are opportunities that could allow us to do more than that, as we did in 2007. And as we see those, we'll invest in those and pursue them, like EPI III, like the HSA platform, like some of this additional spend that we're doing, for example.

Okay and then, putting together your comments on the marketing spend, do you expect the cost of acquisition to be directionally up or down in the first quarter, relative to the 56% in the fourth quarter?

You know, the primary way that we look at cost of acquisition is really as marketing and advertising as a percentage of revenue. And we look at a range that we'd like to stay within. And the range that we look at, as we sit here today, is 35% to 39% of revenue, is a reasonable band for us. It works for us from a return on investment standpoint, you know, based on our current programs. And that's what we would look for, for this year.

As you noted in my script, there is seasonality. So, we've been thinking about those percentages of marketing costs to revenue. They're going to be heavier in Q1 and Q3 and then lighter, relatively speaking in Q2 and Q4.

I think it's also important to add here; Stuart did make a comment that, as we are increasing and have increased, very deliberately, what we're spending on marketing and advertising as a percentage of revenue, we still expect our margins in 2008 to be at least the same as our margins in 2007.

Okay and then the final question; I appreciate the comments around not being in the business the last time there was a real recession. And I'm sure you've done some work around that. The data that I've looked at tends to show that individual enrollment hasn't really changed all that much in bad economies. I don't know if that's a fact of more people being eligible for insurance, but those with individual insurance not being able to afford it anymore or something along those lines. Does the data that you've looked at contradict that, or look different than that?

Well, yes and no. I guess, first of all, if that data is correct, that would say that a recession would be neutral for us, because there's really no change. The only thing we can point to, Carl, right now is our experience in 2001 and 2002, when unemployment was much higher than it is now. And we pursued COBRA at that time, quite aggressively, that is individual products as an alternative to COBRA and were very successful and saw some pretty significant growth and acceptance of these individual products as a result of that.

I think the other point I would make here is that the individual market today is a much more mature market than it was several years ago. You know, if you go back 10 or 15 years, for example, you've even got to reach further than that for a real recession. You know, the portfolio of products is much greater. The visibility is higher and I think the awareness of the affordability is better. And you've got some of these very large carriers participating here because it's the one place that they see growth.

So, it could be that the market is different now as well. That's speculative on my part, let me say. But again, our experience had been that people who were losing jobs were looking for an alternative to COBRA. But if, in fact, the market doesn't change at all, then I would conclude that it's probably a net neutral to us.

I appreciate it. Thank you.

Thank you.

Your next question comes from the line of William Morrison with [Think] Equity. Please proceed.

Thanks, hi. That range is helpful but I want to push you a little bit, Stuart, on the example you used on the incremental margin. You said you've got payback of six months or so and your churn has been very steady in both the IFP segment and the non-IFP, year-over-year for a while now.

Yes.

And so, I guess what I would ask is, where is your [pain] point on how far you're willing to go before getting the payback? Will you go to, you know, eight months, 10 months? Over the longer-term, not necessarily this year? And then, I guess that's the first question. I may have a follow up.

Hey Bill, it's Gary. You know, you're asking a really important question and it's one that I think we're just going to need to watch. You know, at five, six, seven or eight months, you know, compared to the life of these products and the kind of margin we realize from them, it's very profitable, if you apply those ranges. And, as Stuart talked about a 35% to 39% ranges, the percentage of marketing advertising we would spend as percentage of revenue, that'll give you a flavor for this year.

We're thinking, really, about it in terms of percentage of revenue and not number of months. We've used number of months as an example to further illustrate the profitability of the ads that you're running at this kind of a level. And surely we could be seven or eight months and as you can do the math, you know we would still be very, very profitable.

But I have to say, we don't think about it in terms of months. We're thinking about it, right now, in terms of percentage of revenue. And all of the discipline, all of the process we apply to our marketing and advertising spend is predicated on that.

Well, maybe let me just, to have a follow up on that point, Gary, then. Are you saying that your goal is to get 35% to 39% this year? Or would you say that's a longer-term goal to keep sales and marketing costs as a percentage of revenue? In other words, should we expect that range to shift up in '09 to, you know, 36% to 40% or higher?

You know, actually, over time, I'm not sure what timeframe you're talking about. Because, if you go out into '09, and into '10, 2010, the low end of that range actually could be lower than the 35%. Not all of our costs are variable in that line item. There are some fixed costs there, so we very well could see lower than the 35%. And, you know, I don't know, 39%, 40%, you know, depending on how fast we're growing, I guess, is reasonable.

You know, Bill, I think the question would be, is that, take the number, the high number, 39% of 40%. For us to operate at that level, we'd have to see growth rates that could justify spending that much. You can see a 35% percentage of revenue, the market advertising. We grew at 28%. One would think that to grow at a higher rate, we'd be willing to spend more. You're probably in these numbers, though, at 39% and 40%, getting to thresholds where we are looking really hard and hard at it. I think it's fair to say that we're not planning for those a year or two out at this point.

Right, that's really helpful. One more, Stuart; what was the share count you assumed for your EPS guidance?

The share count that we used was, I guess, roughly 26.5 million.

Okay and then lastly, on China, I know you're not counting on anything in your guidance there, but, just curious if you could give us maybe a range of numbers that, you know, you might expect by the end of the year in China? And maybe if you could talk a little bit more about, you know, the similarities or differences in the business model? Do you think and I know it's early, but, you know, just based on the research you did to start the beta program, do you think that the churn rates are going to be similar? Or the revenue per member, the customer acquisition costs? Just kind of those basic drivers of your model, how similar or different is it in China? Thanks.

Yes, well Bill, in China, we're -- the first part of that is how big can it be? We just don't know. There is no market there today. We're really, in some ways, helping to establish the market. We had some consumers buy from us in the fourth quarter so we know that something does work here and it's got appeal to some people. We need a lot more than we had. Frankly, it was a handful but that's what we were hoping for.

The part of the strategy here is that, since we have it working effectively and efficiently in Xiamen, would be to go to other parts of the province and probably other cities in other provinces. We're looking at that right now as well.

We are applying to this business many of the processes and the approaches, the practices that we have here in the business in the U.S. in terms of watching cost of acquisition. We're finding some success right now with search online in China, to bring consumers to us. We're really pleased about that, not unlike the U.S. But, there's still an awful lot yet to be determined.

I can tell you in Asia the people are younger, on average, than in the U.S. Most of the Internet users in China, as a matter of fact, are less than 30 years of age. We think a lot of the potential consumers for us are less than 30 years of age. That's a big percentage of the population anyway. But we need another quarter or two to get a better flavor for where this is and probably need to be in another city or two, another part of the province to, I think, to really start to have more of a calibration on what the market looks like and what it could do and what it could be for us.

I'll make one last point; you asked about revenue. Just in terms of the differences in currency and so on and the cost of things, one of the reasons we went to China years ago is that, frankly, it's less costly than the U.S. And I'm talking about a very large factor here, or factors. Well, the same is in the case of products you can buy in China. You know, health insurance in China is a lot less costly, in terms of U.S. dollars or yields a lot less than health insurance in the U.S. There's a big difference there; we're working through all of that as well.

Hey look, so far, so good. We've got it up; we're running and we're selling products to people.

Thank you very much.

Thanks, Bill.

Your next question comes from the line of Willis Taylor, with [Gagnon] Securities. Please proceed.

Hi. Could you talk about your market share goals? Did you gain market share this year? Where do you stand and what do you think your fair share is in three to five years from now?

Well, we clearly gained market share and, depending upon what you believe the size of the market is, the census bureau thinks it's about 18 million people holding individual products today. We think it's larger than that but if you use the census as a basis, we've got more than 3% of the market today. And that's significantly more than we had a year ago. We're, by far and away, the largest in this area by a lot.

But I think that 3% is small and I think double-digit market share is clearly within reach and I don't think it necessarily has to be years away as well. It's really about awareness, visibility and us continuing to execute here. So, that is one of our priorities, I can tell you and it's kind of our strategic goals of the company is a market share one. And I think double-digit market share, as I said, nationally is very, very achievable for us.

Okay and then onto your licensing business; does this recent success you're having make you rethink how big that could be as a percentage of your total business?

That's a great question. We're fast approaching double digits there in terms of percentage of revenue. We are delighted with the adoption and the acceptance by carriers and the interest in what we're doing. We're especially pleased with the results that the carriers are having using our technology, that's probably the most important thing of all.

You know I said in the past it could be 10% or 15% of our overall revenues. Let's see how this track continues, but I think we'll approach those numbers sooner rather than later, and maybe a bit beyond that. But the primary business here, and the reason that eHealth exists is to market and sell health insurance directly to individuals, families, and small businesses, and that's where our emphasis is, and I think that's always going to be the core and the majority of the business that we generate.

But we sure like this licensing and sponsorship business a lot, we like the margins, we're starting to like the revenue contribution. But I want to emphasize again most importantly the strategic implications of being there in terms of increasing our footprint in the industry.

Okay and does your current version contain EPI III and is that something that you're planning on including in the future?

Well no one's using EPI III today; including us, but the idea with EPI III once again it's the promise of the internet. We'd like it to be, for anyone who buys a product online to be able to be underwritten online here with the carriers and with agents and brokers as well. Yet another compelling reason to use our platform and the technology. So clearly that would be part of the strategy going forward, yes.

Okay thank you.

Thanks Willis.

Your next question comes from the line of Christine Arnold with Morgan Stanley. Please proceed.

I have a couple of questions here. You said that the marketing and advertising spending today produces applications tomorrow. How do I think about the fourth quarter spend and the timing and volume of applications from this quarter's spend? Just so I can think about it the way you do.

Well there is a little bit of a shift there in terms of when applications get approved, and then when those approvals get communicated to us. Typically you're looking at a few months, it could be one to up to three months before we get the whole chain of all the information communicated to us, and then the revenue stream coming from a submitted application follows the same pattern, it could be several months before we see revenue coming from a new application.

So if we spent this quarter, is it safe to say it's five or six months before we see the revenue?

No, it's safe to say, I'd say a couple months, two to three months.

Okay.

One thing I should add there is that some people expect that when they start to see the revenue that they would see some sort of spike in revenue, and that's not typically how it works for us. Given our recognition policy as we receive cash each month on these month to month policies, we add layers of revenue on top of our current bases of members. So you don't typically see a spike up all of a sudden, what you see is a gradual increase over time as you add bigger layers on.

Okay so if we spent, so how much of the benefit from spending this quarter did we see this quarter, because you bucked your seasonality? Or was it spending in prior quarters that produced the application volume this quarter?

Most of it would have come from prior quarters.

Okay so we haven't seen the benefit of this spending yet?

Christine it's Gary. What you saw in terms of the benefit of spending, marketing and advertising spending in the fourth quarter was the applications that we got in the fourth quarter, the 28% application growth. What Stuart is referring to is converting those into revenue generating members, which as you know there's a lag, and that's going to happen several months after that. So the money that we spent in the fourth quarter increased our application growth, which theoretically, we expect in practice as well, allows us to have another layer of recurring revenue we wouldn't have if we hadn't spent that money.

As we spend in Q1 to increase the application growth a similar thing occurs, and so on, and so on. That's one of the reasons to do this, we think the market's allowing us now to spend more profitably, bring in more applications and generate more recurring revenue over time.

Okay, so the commission per member should rise next year, is that the right way to think about it?

Not necessarily. Commission per member is a combination of things it's the premium value of what consumers chose to purchase, it's the commission rate of the carrier for the products that they do purchase, and those vary between carriers. So, I mean I think the best guide for commissions per member is really to look at a trail of quarters going back and kind of look at the year-over-year increases that you see on our commissions per member, and kind of use that as a rough guide.

Christine the money we're spending is not going to increase any unit of commission that we get, but it's going to increase the number of units that generate commission for us.

Right, but we've already seen the applications; I'm just confused as to how the revenue flows through.

Well the members will roughly, as they come into our membership, they'll roughly line up with the cash flow coming in; the new members should come in with new cash flow.

Okay. And then next question is, EPI III, how many markets, you said you're launching with all the products, how many markets are carriers looking at using EPI III for? Is this in community rated states, is it broader than that? How do I think about kind of the momentum you have on that product.

Let me be really specific about this. So in our third quarter earnings call we announced that we had a carrier that agreed with us to launch EPI III; we'd do it sometime in 2008. Our update today is that we have several carriers now that we're working with to launch EPI III and at least one of them will launch in the first half of this year. Some of them are multi-state carriers, some are not. Frankly at the request of the carriers, and for some other reasons, we haven't yet released who the carriers are or what states we're going to be in. But as soon as we go to market, you'll know.

Are there multiple -- are there non-guaranteed issue states that you're going to be entering with this?

Yes.

Oh, great. And then final question is, a lot of your growth, which I should have anticipated but didn't, was carriers are running headlong into the individual market, so we're seeing Aetna entering 13 markets last year and five this year, and Cigna's discovering the individual market, and on, and on, and on. How many, at this time last year, kind of entering '07, how many new carrier markets, so for example Aetna in California would be one market, Aetna in Arizona would be another. How many new carrier markets are you looking at today entering '08 versus a year ago entering '07.

That's a really good question, I don't have it at hand, but there's a good number of new markets that we'll be launching in '08 as we did in '07, most of them very recognizable carrier names like Aetna, like Cigna and like several others as well. We're in one state with Cigna right now that they're coming into the market, and like Aetna, that's a well known trusted brand name, and we think that portends really good things for us and for them. But you'll see as the year goes on a number of new state markets that we bring on under these names.

So can I ask, can I refine this again, and you can refuse to answer or whatever. But I'm curious, is the number of new carrier markets today looking into '08, bigger, smaller, or the same as entering '07?

I'm not going to refuse to answer, I'm going to defer because I don't have the number in front of me. But we'll get that for you because I think it's a really good question.

Okay, cool. Thanks.

You bet.

Our last question comes from the line of Alan Fishman with Thomas Weisel Partners. Please proceed.

Hi guys, I just have one quick question. So the $58 million in NOL tax assets added to the tax assets on the balance sheet, when do you expect to pay really material cash taxes? I mean we're looking out maybe two or three years, right?

Yes we're looking out several years. You could see us be a partial taxpayer, by our calculation, in 2011, and a full taxpayer in 2012 is probably my best estimate right now.

Great, thank you.

There are no additional questions at this time. I would now like to turn the call over to your host for closing remarks.

Well we thank you all for your time this afternoon and look forward to talking with many of you in the future.

Thank you for your participation in today's conference, this concludes the presentation, you may now disconnect. Good day.