eHealth Inc (EHTH) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the eHealth Inc. conference call to discuss the Company's results for the second quarter of 2008. My name is Lamanuel, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Kate Sidorovich, the Company's Director of Investor Relations. Please proceed, ma'am.

Good afternoon and thank you all for joining us today either by phone or webcast for a discussion about eHealth Inc.'s second quarter 2008 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 our website. A replay of the call will be available from the Investor Relations section of our website following the call.

We 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 the impact of the economy, our search category leadership position as a barrier to competition, the future strength of our business model, favorable industry trends and their drivers, eApproval's potential for driving increased conversion rates, unemployment stimulating demand in the IFP market, brand visibility driving growth and expansion.

Our pursuit of radio and television opportunities, the role of private health insurance and health insurance reform, the Presidential elections impact on our opportunities, a data center expansion project, 2008 capital expenditures, future marketing and advertising expenses, future interest income, our effective tax rate for 2008, and our projected rate for payment of cash taxes.

Guidance for total revenue of stock-based compensation expense, GAAP net earnings per diluted share, cash flow from operations, and GAAP income tax rate for the year ending December 31, 2008.

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 SEC 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 the statements as representing our views in the future. We undertake 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 a 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 Gary Lauer.

Welcome everyone and thanks for joining us today. Let me first go over the highlights of our second quarter results. Our revenue, $27.5 million, grew 31% year-over-year. And operating income grew 53% to $6.4 million, resulting in record operating margins. Additionally, we generated record operating cash flow of $8.6 million, representing 21% year-over-year growth. These results continue to demonstrate eHealth's strength and sound business fundamentals.

Our individual and family plans submitted application growth was 18% year-over-year, less than the 23% growth we achieved in the second quarter of 2007. By channel direct continued to be the largest source of submitted applications at 40%, up from 38% in the first quarter of 2008, and unchanged from the second quarter a year ago.

The marketing partner channel contributed 32%, and online advertising 28% of total submitted applications.

Although we expected to generate higher application growth during the quarter, we are pleased with our channel mix, especially our direct and marketing partner channel contributions.

Based on our second quarter application growth we believe that while our underlying business model is sound, and there are favorable long-term trends in our market, we have been somewhat impacted by the US economic environment.

In the first quarter we saw the potential for some economic factors that could drive demand for our services. For example, an increase in unemployment rates could cause previously insured employees and their dependents to lose employer-based coverage, face expenses COBRA options, and as result consider the individual market, increasing our total market opportunity.

Another example is the attractiveness of our solution for those who currently have coverage, but are looking to save money by replacing it with a more affordable policy.

At the same time, in a challenging economic environment, consumer spending for any new product or service may slow. To the extent that consumers have postponed making health insurance purchase decisions, it can affect our application growth.

At the same time, as Stuart will describe, we have not seen a significant change in our retention rates.

We believe that in the second quarter the negative influences of the current economic environment on our application growth rates may have prevailed.

Search activity in the health insurance category within the major online search engines was indicative of more cautious online shopping patterns by consumers. This was most evident in our online advertising channel. During the quarter we observed slower year-over-year growth for click throughs, or consumers that come to us through search.

I would like yo stress that we did experience growth in the online advertising channel, but at rates slower than we have seen in previous quarters.

It is also important to emphasize that our search category leadership position continues to be strong. For example, on high traffic search keywords on Google, like health insurance and health insurance quotes, we either directly or through many of our marketing partners received traffic from sources that comprised approximately 50% of first page organic listings and first page paid listings.

In addition, our click through share on Google, as compared to other major players in our category is holding steady, and even increasing year-over-year. Our overall leadership within the search remains a very important priority for us, and a continuing barrier to potential future competitors.

Notwithstanding the current economic environment, we believe our business model is strong. We continue to observe favorable industry trends, including increased carrier focus on the individual and family plan market, which is emerging as an area of growth in the managed care space.

As we previously discussed, this is driven by the erosion of employer-based coverage, a slow down in carriers' commercial group enrollment, and a growing emphasis on consumer-directed health care, among other factors.

Our competitive positioning also remains strong with no other comparable commercial platform available in the market.

Our operating model continues to be highly scalable, as demonstrated by this quarter's record operating margin. We continue to generate significant amounts of cash flow from operations, and have a balance sheet with no debt, and $136 million in cash and investments.

We have remained focused on profitable growth, and continue to be disciplined in our sales and marketing spend, especially in this challenging business environment.

During the quarter our marketing spend represented 34% of revenues, down from 37% in the first quarter of 2008, and below our target range of 2008's 35% to 39% of revenues.

Our cost of acquisition per member, if measured using the acquisition cost metric we provide, remained attractive providing for a substantial amount of incremental profit margin on our member adds. Stuart will discuss our sales and marketing and membership metrics in greater detail later on this call.

Our conversion rates appear to have improved during the second quarter. We believe that the tightening of the underwriting criteria that we started to observe during the second half of 2007 persisted. However, it was more than offset by our channel mix and improved efficiency in converting submitted applications into paid members.

We also believe that the penetration of our eApproval technology can over time drive our conversion rates to even higher levels.

Let me now highlight some of our key marketing initiatives. As you know, it has been our strategy for years to have diversified marketing programs not overly dependent on any single channel or partner. We were very pleased to have a 40% contribution from our direct channel this quarter, which, as you know, has a much lower cost of acquisition than our online advertising or marketing partner channels. Our marketing partner channel generated healthy year-over-year application growth.

We also had strong new deal flow during the second quarter, which we hope will assist in driving future application growth. For example, we brought onboard a number of high-profile partners in the financial services vertical, including Sovereign Bank, LendingTree and KeyBanc.

We're also pleased to announce Humana as a new carrier marketing partner for us. This relationship is similar to existing relationships with Aetna and United Healthcare who offer our services to their website visitors residing in states outside of their own product offerings.

We also signed, and are in the process of launching a pilot program with MetLife, targeted primarily to customers of MetLife that are early retirees.

During the second quarter we also launched our first partner program for the BusinessHSA platform with the National Federation of Independent Businesses. NFIB is the nation's leading small-business association with over 475,000 business members nationwide.

Our BusinessHSA product, now live in 35 states and the District of Columbia, allow small-business employers to co-fund and administer their contributions to employee individual health savings account. And provides an easy to navigate account center for the employees.

EHealth generates revenues from commissions on the HSA eligible health insurance purchased by the employees through our platform. We continue to evolve and develop the HSA platform.

Looking forward, we continue to believe that increases in unemployment can stimulate demand in the individual and family plan market, and are expanding our efforts to assist those who have recently lost their employer-sponsored health coverage.

During the quarter we developed a content-rich COBRA learning center and educational collateral to teach consumers about COBRA and the affordable alternatives that may be available to them in the individual market.

We are marketing this COBRA alternative program through new and existing partners. We're also doing outreach to educate people on COBRA alternatives through media, both broadcast and print.

In addition to our focus on driving near-term application growth, we are now increasingly focused on brand building initiatives. Our goal is to increase the number of consumers that are aware of the Internet as a venue to research and purchase affordable health insurance and are familiar with eHealth and our platform. We believe that building the visibility of our Company with consumers is an important driver of long-term growth and direct channel expansion.

As we have shared with you on previous calls, we have been reviewing the opportunities in the television and radio media areas, and introduced pilot programs in limited markets. In June we began running television commercials on national cable networks. We also started a regional radio campaign in several major cities near the end of the second quarter.

We're encouraged with results of our initial testing and plan to continue to pursue this area as an important element of our expanding marketing programs and Company branding.

We're working to increase our awareness through public relations activities as well. The US media is focused on unemployment, inflation and healthcare on a daily basis. We're reaching out to national, regional and local media to educate consumers and small businesses on how they can find affordable health insurance plans that match their needs through eHealth.

Our partnership with over 180 of the leading health insurance carriers is one of eHealth's significant competitive advantages, and an important barrier to entry into our space.

In the second quarter we continued to expand the selection of healthcare plans on our website, and launched new product with Empire Blue Cross Blue Shield in New York, Companion Life in Ohio, the Scott & White Health Plan in Texas, Golden Rule United in several states, including North Carolina, PHPNI, which is a new regional plan in Fort Wayne, Indiana for us, and Clear Choice in Montana.

We also added dental plans from Delta Dental and Ameritas.

As part of our efforts toward enhancing the consumer experience on our site and achieving deeper integration with our carrier partners, eHealth introduced the instant approval technology, eApproval, which went live with Anthem Blue Cross of California in late March of this year.

We now have over three months of data available from our launch of eApproval. In the 95 days between its launch and the end of the second quarter, the application growth for eApproval-enabled Anthem Plans exceeded 30%, as compared to the 95 day period prior to this launch.

While we excluded Anthem's sponsored plans from this data, it is important to recognize that factors other than eApproval technology itself could impact eApproval volumes, such as the prominent marketing of eApproval plans with this feature on our site, carrier marketing activities and some other circumstances.

Our high margin technology licensing and sponsorship business continues to grow. During the second quarter 28 carriers participated in our sponsorship program by paying us to sponsor or highlight a specific plan or their brand in a specific geography. This represents a 22% increase over the first quarter of 2008 when 23 carriers participated in our sponsorship program.

Based on favorable feedback and improved sales conversions from a pilot program, we started to transition our individual and family plan sponsorship program from plan level to brand level sponsorship. With brand level sponsorship a consumer can click on the placement and see all of the plans available from the sponsored carrier. This approach provides more value to carriers, while creating better clarity for consumers of sponsored versus nonsponsored results.

The number of carriers licensing our e-commerce technology also continues to grow. During the second quarter we launched our technology with five carriers in 10 states. In addition, we entered into agreements with two new carries near the end of the quarter, putting the number of total carriers live on our licensing platform at 27 in more than 69 carrier states.

Out of the 27 carriers on eHealth's licensing platform currently, a growing number are using our technology to enable their broker channel, further expanding eHealth's reach.

To date recognizable brand names like Kaiser, Mid-Atlantic, Celtic, GHI New York, [several life wise], Coventry and Blue Cross Blue Shield carriers are utilizing our technology platform.

Now I would like to make some comments on the current political landscape. We receive a lot of investor inquiries on this topic. The campaigns of both major party Presidential candidates have emphasized the need to extend health insurance coverage to the nation's uninsured population. While key differences exist in their various approaches, both leading candidates have indicated support for utilizing private health insurance as a basis for reform, as opposed to a nationalized healthcare system.

We believe in the coming years there is a viable opportunity for the new President to work with Congress to develop a solution for the uninsured. If successful, we believe that such a solution is likely to rely on the continued use of private health insurance. Furthermore, there are several scenarios which could produce a new focus on the use of individual health insurance, where eHealth is well-positioned.

Consequently we believe the increased national focus and attention on health insurance resulting from this year's election does not pose any serious risk to our country's private health insurance system, and in fact may produce significant opportunities for eHealth.

I would like to wrap up my prepared remarks by reiterating that the fundamentals of our business are strong. Obviously, in the second quarter we believe we felt some economic impact as evidenced by our application growth. As a result, we're adjusting our 2008 guidance. We are, however, being very aggressive in the marketplace because we believe there are significant opportunities before us.

We remain excited about eHealth's future and growth opportunities. EHealth has become the leading online store where consumers can easily find, compare and buy health insurance from over 180 brand name companies. Well over 1 million Americans have bought their health insurance through us. And we believe that our value proposition is more relevant than ever.

We continue to make good progress influencing online adoption and raising the visibility of eHealth through our strategic marketing partners, traditional media and other programs. I believe that increased consumer awareness will be crucial in driving the long-term growth of our Company.

Now I would like to turn the call to Stuart, who will go over our financial results for the second quarter.

Good afternoon everyone. I will now discuss our financial results for the second quarter of 2008. As Gary mentioned, we believe the economy had some impact on our application growth during Q2.

At the same time, we continued to generate solid year-over-year growth in revenue, income and cash flows. Our operating model remained highly scalable, allowing us to further enhance our operating margin, both sequentially and as compared to the second quarter of 2007.

Starting at the top line, our revenue for the second quarter was $27.5 million, an increase of 31% over the second quarter a year ago. Commission revenue was $24.8 million, an increase of 25% over Q2 2007. Our year-over-year commission revenue growth was mainly due to continued growth in our membership base.

Our sponsorship licensing and other revenue was $2.7 million in the second quarter of 2008, a 116% increase over $1.3 million in the second quarter of 2007. The $2.7 million of sponsorship licensing and other revenue this quarter included approximately $470,000 in revenue relating to a one-time item.

In the second quarter we had 132,600 new approved members. Our total estimated membership at the end of Q2 2008 was over 579,000 members, which represents 25% growth over estimated membership we reported at the end of the second quarter of 2007.

Our individual and family major medical plan estimated membership, which generates the majority of our commission revenue, grew 27% compared to estimated membership we reported for the second quarter of 2007.

I would like to comment on member retention, but before I do, I would like to remind you that when we look at churn we estimate our membership based on trailing historical data. And so our view of retention is based on estimates that are backward looking. Currently we're looking back at the fourth quarter of 2007 when estimating our Q2 membership.

We are seeing a small uptick in churn for our individual and family and major medical plans based on this data. However, the numbers that we're observing are within our historical range. We're not seeing anything significant here, and will be watching this metric carefully.

We continue to estimate our revenue weighted average product retention to be in excess of two years.

In the second quarter we achieved 18% year-over-year growth in individual and family major medical plan submitted applications, down from 23% year-over-year growth in the second quarter of 2007.

Our GAAP marketing and advertising expenses as a percentage of revenue increased modestly to 34% as compared to 32% in the second quarter of 2007, but declined relative to 37% in the first quarter of 2008.

As Gary mentioned earlier on the call, we have been and plan to remain disciplined in our marketing spend. We intend to invest opportunistically with a goal of keeping marketing and advertising expense on a GAAP basis in the 35% to 39% range as a percentage of revenues for the remainder of 2008.

One of the metrics that we use internally to measure the return on our investment in member acquisition efforts is the length of time we estimate it will take to recover the upfront marketing and advertising costs per new member. We use our marketing and advertising expenses for the quarter from our P&L as the aggregate cost of acquiring new members. This metric continued to be very favorable for us.

Based on Q2 2008 commission revenues earned per estimated member per month, it would take approximately six months to recover the cost of acquiring the new members we estimate that we added in the second quarter. Assuming a revenue weighted average estimated product retention in excess of two years, this leaves us with a substantial amount of incremental profit margin on our member adds.

In Q2 our total expenses as a percentage of revenue continued to decline on a year-over-year basis, resulting in a record operating margin, and demonstrating the scalability of our operating model. When compared to Q2 of last year our non-GAAP operating expenses, excluding stock-based compensation, increased by 21% compared to our 31% revenue growth over the same period.

Our non-GAAP operating margin, excluding the effect of stock-base compensation in both years, increased from 21% in Q2 of last year to 27% in Q2 this year, an all-time record.

We saw improvements in several areas in Q2. Our non-GAAP customer care and enrollment costs, which excludes stock-based compensation expense, declined as a percentage of revenue from 14% of revenue in the second quarter a year ago to 11% of revenue this quarter.

Non-GAAP technology and content costs, which also exclude stock-based compensation expense, declined from 13% of revenue to 12% for the comparable period.

We also continued to realize the benefits of scale in the general and administered area, which declined on a non-GAAP basis from 18% of revenue in the second quarter of 2007 to 14% in the second quarter of this year.

As a result of the above, our Q2 operating income increased by 53% on a GAAP basis and 64% on a non-GAAP basis, excluding stock-based compensation expense, compared to the second quarter of 2007.

It is important to note that these growth rates are much higher than our comparable GAAP and non-GAAP net income growth rates of 30% and 37%, respectively, as our 2008 nonoperating income is being impacted by declining interest income and higher tax rates compared to 2007.

Interest and other income was approximately $900,000 during the quarter, down year-over-year from $1.3 million in the second quarter of 2007. Interest and other income, almost all of which reflects interest earned on our invested cash, cash equivalents and marketable securities, was negatively impacted by declining interest rates, somewhat offset by increasing cash and investments on our balance sheet.

We expect our interest income to continue to decline slightly on a quarterly basis for the remainder of the year relative to this quarter.

Our approach to investments remains conservative. Our marketable securities primarily consist of money market funds and highly liquid investment grade corporate and US government-sponsored enterprise bonds, commercial paper and certificates of deposit.

GAAP pretax income increased from $5.5 million in the second quarter of 2007 to $7.3 million in the second quarter of 2008, a 35% increase. On a non-GAAP basis, excluding the effect of stock-based compensation in both years, pretax income increased by 44% from $5.8 million last Q2 to $8.3 million this year.

It is important to note that we estimate that our 2008 effective tax rate for GAAP purposes will be over 40%, even though we expect to pay cash taxes of 3% or less for the year. This is mainly due to significant net operating loss carryforwards that reduce the cash taxes we pay.

Our federal NOLs coming into 2008 were approximately $100 million. This includes NOLs related to stock option deductions that are available to offset future corporate income taxes, but are not considered an asset for accounting purposes.

The NOLs resulting from such stock option activity, which totaled more than $58 million for federal purposes coming into this year, 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.

GAAP net income increased from $3.2 million in the second quarter of last year to $4.2 million in the second quarter of 2008, a 30% increase. Non-GAAP net income, excluding the effect of stock-based compensation in both years, increased 37% from $3.5 million in the second quarter of last year to $4.9 million in the second quarter of 2008.

This increase once again illustrates the impact of the significant growth in our revenue, and the scale that we're achieving through the efficiency of our operations.

Our cash flow from operations grew 21% to a record $8.6 million from $7.2 million in the second quarter of 2007, primarily driven by our income growth for the quarter. Year-to-date our operating cash flow was $14.5 million, reflecting 37% growth over the first half of 2007.

Capital expenditures for the second quarter of 2008 were $1 million, a significant component of which was the purchase of call center software to enhance the efficiency of our customer care professionals.

Primarily driven by our cash flow from operations, our cash and marketable securities balances increased to $136 million at June 30, 2008. Our cash and marketable securities constituted more than 94% of our total assets, excluding deferred tax assets at the end of Q2. Given this, and the fact that we have no debt, we continue to have a very strong balance sheet.

Driven by the factors addressed by Gary earlier on the call, we are adjusting our guidance for the full year ending December 31, 2008 based on information currently available. Total revenue is expected to be in the range of $111.5 million to $113.5 million compared to previous guidance of $114 million to $117 million.

Stock-based compensation expense is expected to be in the range of $3.8 million to $4.3 million, compared to previous guidance of $4 million to $5.5 million.

GAAP net earnings per diluted share is expected to be in the range of $0.50 to $0.57 per share compared to previous guidance of $0.58 to $0.63 per share.

Cash flow from operations is expected to be in the range of $30 million to $32.5 million compared to previous guidance of $33.5 million to $36 million.

Our GAAP income tax rate is expected to range from 43% to 44.5% for the full year ending December 31, 2008 compared to previous guidance of 43% to 45%.

I want to remind you that these comments are based on current indications for our business, which are subject to change at any time. We undertake no obligation to further update our guidance.

In addition, I would like to mention that we anticipate a onetime project in the second half of 2008 that will impact our CapEx this year. This project is aimed at expanding our data center operations. Currently we expect our full year CapEx to be in the $3 million to $4 million range.

Now I would like to open up the call for questions.

(OPERATOR INSTRUCTIONS). Steven Halper.

Actually it is two questions. Gary, how do you know with certainty that it is the economy which resulted in the slower application growth, as opposed to some other factor, be it competitive or health plan activity, things like that?

I'm glad you asked that. We have looked at a lot of things, as you might imagine. We have looked at what we believe to be the momentum that the carriers are having in the marketplace. We have investigated search and this search channel in the category of health insurance specifically. Looked at our other channels as well, working with partners and so on.

The conclusion we come to is that there seems to be some -- the best conclusion we come to today is that there seems to be some impact from the economy. We have certainly done a very thorough examination of all of our internal metrics and so on. And as you have heard us say, our conversions are either equivalent to or better than they have been in the past, so we don't think there is an execution issue from that standpoint.

From a competitive standpoint, we have not seen, nor are we aware of any new significant competitor in the marketplace.

Have you factored in here just a lower growth expectation for the remainder of the year for submitted applications?

This is Stuart. When it comes to our guidance we looked at what we just did in the second quarter, and use that as essentially a baseline roughly for our expectations for the second half of the year, plus or minus from that point.

But in setting the range, we also looked at the possibility that there may be further deterioration in the economy from here, which could impact us potentially not only on the submitted applications side, but we also factored in some potential should churn pick up from where we are right now.

You have assumed some further deterioration?

We have within our range, in setting the low end of our range we certainly have.

The other question, the more obvious one. You are sitting there with well aware $5 per share in cash. Gary, has the Board considered, or will the Board consider, a share repurchase at these levels?

We have taken a look at that, as you might expect at this level. What we found is at these levels doing a share repurchase is somewhat accretive. Not significantly so. We have also taken a look at what the impact could be two, three and four years out as well. We continue to look at that. We have had some Board discussion and we will have some more of it, yes.

George Sutton.

I know you manage your numbers very closely, and I am curious when you were seeing the quarter evolving, and you saw that the 18% growth in applications was lower than you expected, I am curious that you stayed at that 34% marketing rate. Can you just help us with the logic there?

Frankly, George -- this is Gary -- you could argue we have spent less than we would have liked to have spent. Remember our range is 35% to 39%.

And that is my point.

We at a number of different venues. We certainly could have spent more money to bring in more applications, but they would be outside of our boundaries in terms of what is profitable and what is acceptable and so on. And we feel really strongly, especially in what could be a very challenging economic environment, that we really adhere to the discipline and the processes that we've had in the Company for some time, and that is exactly what we did.

Now having said that, it is important to note that we are doing television advertising right now, as I'm speaking, and radio as well. And if that continues to produce some of results that we've seen, you should expect that we will continue to do that as well, and that is new.

That has a different kind of return for us than some of the more established channels. As you might know, it is harder to track and so on. And at least on an isolated basis, has a higher cost of acquisition. But one area that we're looking at, and I actually feel very, very strongly about right now.

I should also probably make the point, and we have never commented about our application growth or anything else on a monthly basis, but as we look back and really examine the second quarter, both as it was developing but also after the second quarter finished, what we saw and what we experienced what is out of the three months May was the softest month interestingly.

Interesting. A second question on the HSA platform. You began to market that with NFIB. I know you had some presentations with them. Can you just give us a sense of what kind of reaction we are seeing from potential customers?

NFIB is very enthused about it, from the CEO of NFIB through the rest of the organization that is involved with it. We have had very good response to it. We're not ready yet to start to disclosing volumes and so on.

I would note that we're still evolving it. We're still adding software, still developing it and so on. But we remain very enthused and optimistic about what this can do in the marketplace. And we're getting very good feedback from other partners that we approach with this HSA platform proposition as well.

Last thing, if I could ask a quick question on the COBRA side. As you begin to try to pursue that type of an opportunity, what sort of expectations were you factoring in your guidance with respect to that market?

Not a lot, frankly. As you look at the unemployment changes so far this year, I haven't really seen anything major shifting to date, and so we really haven't factored in a lot from that.

Jim Friedland.

Kevin Kopelman in for Jim. I had a couple of questions on conversion rate. Could you give us a little more color just on -- was there anything in particular driving that improvement?

And then on eApproval do you have an idea how many carriers you expect to be using that by the end of year? And then looking out what kind of impact can that have on conversion rates?

This is Gary. Let me take the second part of that first, on eApproval. As we have said in the past, we fully expect to be implementing eApproval with other carriers in new and additional markets. We're very pleased with the growth that we saw in the first 90 some odd days of eApproval with Anthem in California.

We think that that is in many ways is kind of important lighthouse for many other carriers who are taking a look at this and considering it. Whether it was the technology specifically, the marketing we did around it, or the combination of those things, we certainly saw a marked increase in application growth volume there. And we're pleased about that.

And we think other carriers can experience a similar thing with eApproval. And we also believe that it is a very compelling reason for consumers to come online and to buy from us.

On the close ratio side, as we mentioned, we did see a little bit more continuous stringency on the part of the carriers in terms of what they were converting for us.

But the positive factors that we can point to are twofold. One is that our customer center reps have been much more aggressive out in the marketplace following up with consumers to convert. And have seen some good results there.

Another factor is our mix of our submitted applications. As you saw, our direct proportion was about 40% this quarter. It was about 38% previously. And those convert a little bit better than the other channels.

Sameet Sinha.

A couple of questions. For the midpoint of revenue guidance, you took that down by about 2.5%, EPS by about 12%. Can you talk to that? Are you expecting all metrics to deteriorate from here on, application conversion rate, churn, customer acquisition? Could you elaborate on that?

No, at the midpoint as I mentioned, we were really looking at the levels that we saw in applications in the second quarter, and building the midpoint around that. So clearly not deterioration there. As I mentioned, it was our downside case that really included potential increases in churn.

This is Gary. I think Stuart made a good comment earlier that in the range of -- in his response to Steve Halper's question -- in the range of guidance we have given you, we made some assumptions about some deterioration that, if there is some, it is included in this guidance.

We're not planning on that. I want to make that point really clear. At all. If it does occur, if the economy continues to deteriorate, and it has further impact on our application volumes and/or on churn, which we don't think we're observing yet, we built that in.

But right now with what we see and what we have experienced, we think our challenge at the moment is simply on consumers who may be deferring the decision once more to purchase health insurance. And we've got to be even more aggressive and smarter about our marketing to convince people how important this is, that in an economic environment like this that they have health insurance.

I think another comment on the -- at least on the EPS side is one of the things that we have been facing is several issues on the non-operating side of the business.

Interest income, as I suggested, has been a lot lower than when we came into the year. We were already seeing headwinds there. That has continued even further here in the second quarter.

And the other is our tax rate as well is higher than we had originally anticipated. So something we faced. Certainly saw it in the first quarter already. But I thought we're going to be able to navigate around that as we went along, but those are definitely things that have impacted us.

Second question. Gary, you spoke about TV and radio being new channels you are excited about. But you also mentioned these have a higher cost of acquisition. Is that high cost of acquisition offset by getting larger volumes or applications of a large number of members? Is that your initial experience?

Yes, if you isolate television, for example, just stand-alone, it's has got a higher cost of acquisition than our other channels. But if you assume that there is what we look at as really spillage from television. That is that it will influence people who go to search, influence people who recognize us on partner sites, certainly influence word-of-mouth and so on, the real objective here is to get all boats to rise.

We did some TV advertising in the second quarter. Our direct increased to 40%. I can't tell you definitively that that is the only reason, but we think it had some influence there and we like that.

We think right now the message is so relevant about affordable health insurance, and that we're the store where you can buy it and so on. We really want to start to push that message very hard. And that is exactly what we're doing.

(OPERATOR INSTRUCTIONS). Willis Taylor.

Are you seeing health plans change their plans to roll out new IFP products or to market existing IFP plans?

I don't think we have seen, to my knowledge at this point, a major change of plans swapping in out and so on. And we've got a number of new carriers that have joined us. Anthem has -- WellPoint has certainly gotten we think somewhat more aggressive in all the marketplaces and so on. I know they have taken some pricing steps. That is not unusual. We see carriers ebb and flow in the market competitively. But nothing in terms of any major change.

But more and more interest in the individual market by these plans. There's no question about that. In fact, if you look at the comments of several of them in their most recent financial results earnings calls, many of them have point to the individual market and made comments about it. A year ago they didn't talk about the individual market.

You talked about getting smarter in how you market to that consumer who is hesitating to buy insurance. Could you talk about how do you are adapting your marketing message there?

We think it is very, very important that people understand that health insurance is much more affordable than they may perceived it to be. I have always contended that people think that for the most part that health insurance is only affordable by businesses that purchase it for their employees, but that you and I could never buy it for ourselves or afford it for ourselves or our family members. When in fact for many, many people the opposite is true.

We're looking at a lot of our messaging right now. We're going to be focusing much more on the fact that you can buy directly from eHealth. That plans are surprisingly affordable. That many plans are much more robust than people think. We're going to be getting that message out in our TV advertising, some of the radio messaging we're doing, and a lot of other messaging that we're working through right now as well, in addition to a lot of our PR work.

Then finally, it sounded like you had very strong licensing quarter again. Do you think in the current environment that health plans might change their desire to buy your licensed software?

It is a good question. The other thing I would point out in addition to that is that we had a good sponsorship quarter in the second quarter. What we think we may be observing is that as it is a more competitive environment or the market perhaps -- the available market is a little bit smaller because of the economy, that plans are looking for more ways to be able to market and sell their products. And sponsorship on our site is one of them. And licensing of the technology to be able to sell their products efficiently directly is another.

I can't tell you for certain that that is why sponsorship is up and licensing is up, but anecdotally we hear that from the plans. And we believe that is probably one of the influences.

The other thing I would point out that is important to note is that we've got a growing number of these licensees now who are rolling out our technology to the desktops and the laptops of their agents and brokers to get them online as well, which really extends our reach.

I also want to point out that, as I said in the script, we now have 27 carriers who are licensing our technology. And I think in the past we told everybody the number, but it is getting to be what we think is a significant number of carriers.

Peter Costa.

Two questions. Stuart, can you tell us the effect of the average lower share price in the quarter on your EPS?

Then, Gary, can you talk about the growing conversations about health connectors or medical -- marketplaces or whatever you want to call them, exchanges under the various versions of reform, in particular the Wyden-Bennett Bill?

Let me talk about the connectors. As everyone may know, in Massachusetts there was legislation passed. It is commonly referred to as the Commonwealth Act, that requires -- mandates that every resident in Massachusetts have health insurance. There was really no individual market to speak of there. It is what is called a guaranteed issue community rated state, which is a reason why many carriers wouldn't participate.

Part of the approach here is to have something called a connector, which was essentially a technology or Internet way for people to be able to find plans and so on. There is a connector in Massachusetts. In our view, the view of the Boston Globe, and some of the carriers, it is moderately effective at best. There are a few other states who have taken a look at it. We have had some discussions with them.

I think the one to note is the idea that Barack Obama has talked about nationally of having some kind of a national connector or umbrella. It doesn't seem to be any further detailed or thought through than kind of what I have just described to you right here in terms of how it would work.

But we see that, if -- if, we ever got to something like that on a national scale, we see that as a potentially huge opportunity for our Company, because it is exactly what we do today. And maybe in some of the other states as well.

But at the end of all of this, whether there are mandates or whatever kind of focus there is on getting more people covered, more and more of the peers at both Democrats and of course Republicans feel that the private sector in these individual products need to be a very important part of that solution set. We think that is good for us.

On your first question, the impact of the lower share price on our EPS, it is immaterial to us. We had a small step up in the number of weighted shares this quarter. A little bit smaller than last quarter, but really immaterial.

William Morrison.

A couple of questions. I joined late, so I apologize if you have already talked about this. But one modeling question, Stuart. Your sales and enrollment costs were down from last quarter, although consistent with the fourth quarter. Just wondering if there's something one-time last quarter or this quarter that bring that number down?

The main reason it was down this quarter is our production in terms of new approved members was lower than we had as our goals. So some of the compensation at our customer care center is linked to performance incentive plans. So most of that comes from lower incentive payments this quarter.

Gary, did you mentioned -- I thought I heard you talk a little bit about continuous underwriting, and kind of a case study of one of the original managed care companies that has signed up doing some continuous underwriting.

Last quarter I believe you said you had about a half-dozen or a dozen additional companies looking or in the pipeline. I am curious how many or any that you added this quarter?

We indicated last quarter we had several in the pipeline. That is the case today. Although we didn't add any more in the second quarter, as we add them we will be announcing them. And one of the reasons we won't announce them before we add them is that we want to keep the carriers who are participating feeling that they are advantaged, and don't want to do anything to upset the marketplace until we actually get there with the product.

I don't know if heard it, what I did say was that the way we measured the growth of applications for this for Anthem in California over the 95 day period that we've had those plans in place was in excess of 30%. And we are very pleased with that.

Last question for Stuart. If I just look at -- if I grow expense -- nonsales and marketing expenses a little bit, consistent with your history, to get to your guidance, even the high end of your EPS guidance, it looks like you are going -- I am going to have to bring sales and marketing as a percent of revenue up toward the high end of that range that you have talked about in the past, the 35%, I think, the 39%.

Is that generally accurate or where else would the cost be coming to get to your guidance in the back half?

That is more towards the higher end of the range that we put out. There's a few reasons for that. One of them is that the second half is actually seasonally higher than the first half of the year. We have higher volumes and the market expenses rise with that. So that is pretty natural.

We have built in an assumption of the overall cost of acquisition per member being a little bit higher than the average that we saw in the first half.

Then as Gary mentioned earlier, we are looking to continue to spend on TV and radio and some other off-line venues at a little bit higher pace in the second half than we did in the first half.

Justin Post.

This is Nat Schindler for Justin Post. Actually my question was answered a few questions ago. Sorry about that.

Steven Halper.

Gary, when did you say that you started to see some deterioration in the submitted app trends?

The month of surprises was May.

May.

May was the weak month for us. We have looked -- we tried to find a lot of ways to connect that. It is certainly the month where there seemed to be an awful lot of media visibility about gas prices going over $4 per gallon nationally. Over the memorial Memorial Day weekend there was a tremendous amount of focus about that. Did that have some impact? Maybe, probably.

CNN at that time did a segment on what it cost to buy gas and food. And it was about a fellow who decided not to get -- or to drop his health insurance, but keep his family covered coincidentally. There were those kinds of things. But it was certainly in that May timeframe.

Did July pick up?

Well, May followed June.

I'm sorry, June. Did June pick up?

The only comment and I will make about that is that May was the softest of the three months.

Do you want to say something about July?

Yes, but I won't. No, I can't.

Well, you could. I mean --.

I do want to make one other comment than is somewhat related to this. We have seen some analysis that has been done by some of these outside research firms that look at visitors to websites and things of that nature. And we have actually seen some data that has been published that shows that our visitor counts have gone negative year-over-year in the first and second quarter, for example.

I just want to make this comment one time, the accuracy of what has been reported there and what people have picked up is far, far from the reality. In fact, the growth that we have experienced in visitors in the first and second quarter year-over-year is orders of magnitude larger and different than has been reported by some of these research groups.

Where do you think their methodology is flawed?

I don't know. I really haven't studied their methodology or how they are going about it. But we have seen this in the past. But it was really pronounced in this last quarter. And I actually had some people ask me about it, and it just became apparent to me that this was becoming something that was probably important enough for me to address.

I should also tell you that visitors are important to us, but it is not what we drive our business with. What we drive our business with is trying -- working to find consumers or potential consumers who need and want health insurance. And they have got a need that we can satisfy. That is why we're so hawkish about how we spend money and where we spend money and so on.

But I will add that our visitor counts have grown and have grown quite nicely.

(OPERATOR INSTRUCTIONS). I would now like to hand the call back to Gary Lauer for closing remarks.

I would like to thank everyone for your time. And I look forward to talking with some or many of you over this next quarter at different meetings or conferences and so on. Thanks again.

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