eHealth Inc (EHTH) 2008 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth-quarter and fiscal-year 2008 eHealth earnings conference call. My name is Kamisha, and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Good afternoon, and thank you all for joining us today either by phone or by webcast for a discussion about eHealth, Inc.'s fourth-quarter and fiscal-year 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 future growth, the introduction of CIGNA products into additional markets, the addition of more carrier partners to Ubao, the significance of our business opportunity, future healthcare reform, healthcare reform increasing the markets we address, the stimulus bill creating additional interest in COBRA options, future revenue growth, future non-GAAP operating margins, generation of operating cash, our future investment of cash and marketable securities, product retention, future interest income, expected GAAP and cash tax rates, use of net operating losses, and realization of cash flow benefit from net operating losses, guidance for 2009 revenues, revenue growth, stock-based compensation, and earnings per share, 2009 marketing and advertising expense as a percentage of revenue, future benefits of scale in operating expenses, 2009 target operating margins, and the impact of expected 2009 interest income and stock-based compensation expense on 2009 GAAP earnings per share.

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 these 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 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.

And at this point I will turn the call over to Gary Lauer. Gary?

Good afternoon, and thank you for joining us today.

I would like to begin by commenting on some of our financial highlights for the fourth quarter. Revenue of $29.5 million grew 22% over the fourth quarter a year ago. Individual and family plan application growth was 18%.

Marketing and advertising expense as a percentage of revenue improved to 39% compared to 40% in the third quarter of 2008.

Earnings per share was $0.14.

And non-GAAP operating margin excluding the effect of stock-based compensation was 22%, up from 20% a year ago.

We generated $7.4 million in operating cash flow during the quarter and over $30 million for the entire year, bringing our overall cash and marketable securities balance to over $150 million with no debt on our balance sheet as of the end of the year.

As our financial results illustrate, we continue to execute on our operating plans and grow our business in the midst of an extraordinary macroeconomic environment. As we all know, the economy continued to deteriorate in the fourth quarter of 2008 with unemployment reaching 7.2% in December, up from 6% in the third quarter; consumer confidence dropping to an all-time low; and December retail sales declining almost 11% year over year.

Initial estimates indicate that fourth-quarter ecommerce sales were down year over year for the first time since the U.S. Department of Commerce started to track this sector in 2000. And we are unfortunately seeing many businesses and industries in various states of decline.

Against this backdrop, we're very focused on operating efficiency and aggressive marketing to keep growing eHealth at high rates relative to many other companies, and most importantly to help people find quality health insurance options. We would like to grow even faster and think we can in the long run. Like everyone else, however, we are operating in a very challenging economy.

The fourth-quarter results are reflective of our disciplined approach to spending in order to grow our membership base profitably. Even though margin optimization is not our highest priority, we maintain a close focus on operating efficiencies and watch carefully where and how we spend in this environment.

In the past quarter we deliberately brought our marketing and advertising expense down within our range for 2008 of 35% to 39% of revenues. We also exercised discipline in other operating expense areas resulting in year-over-year improvement in our non-GAAP operating margins for the fourth quarter and for the full year.

Additionally, we saw improvement in our member retention rates, as Stuart will describe more fully.

In the fourth quarter we maintained a diversified approach to member acquisition and delivered year-over-year growth in each of the member acquisition channels. Our direct channel generated 40% of total IFP-submitted applications, representing 26% year-over-year application growth. The performance marketing partner channel did 32% of IFP applications, and the online advertising channel contributed 28%. We like the balance of contribution we continue to maintain from these channels and the economics of our channels.

During the fourth quarter we brought onboard a new Senior Marketing Executive, Scott Sanborn, who is managing all major marketing and demand-generation functions for eHealth. Scott has extensive experience in online and traditional consumer marketing, having previously been Senior Vice President of Marketing at Home Shopping Network. Scott's addition adds strength to our Senior Executive Team and enables Bruce Telkamp, who had been very effectively managing our marketing activities to focus more of his attention on our corporate and business development areas, which are critically important for us.

In the fourth quarter we continue to pursue high-relevance marketing campaigns tailored to the current environment. We aggressively pursued people coming out of the group market as a result of recent layoffs and corporate bankruptcies, as well as continue to reach employees of companies that cannot afford to support health benefits in the current economy. We believe eHealth can help these individuals by providing timely information on their health coverage options and an efficient platform to research and buy affordable products.

We proactively reached out and got a positive response from companies that recently announced large-scale layoffs. For example, we're working with a national retail chain to offer our services to their terminated employees. The State of Ohio's Workforce Investment Board and the Foundation for Health Coverage Education added eHealth to their online resource centers dedicated to assisting employees in companies going through layoffs.

We also continue to enhance our COBRA Learning Center and saw it move up significantly through the natural search rankings for COBRA-related terms during the quarter.

As we enter 2009, eHealth's value proposition in the COBRA-alternatives market is highly relevant, and in fact, we believe we are now seeing a growing number of people coming to eHealth who are recently unemployed.

Our PR team was successful in increasing our coverage in leading online and print publications during the quarter, and as unemployment levels continue to climb, many national and local TV and radio stations tapped into our expertise to offer advice on affordable health-care options. Our message is resonating with people as evidenced by the contribution from our direct member acquisition channel.

We are also pleased with our search results in the fourth quarter as we maintained our leadership position both in paid and natural organic search.

In the marketing partner channel, we continue to add high-profile marketing partners. We are now featured on the homepage of U.S. News & World Report Online Health Channel. Waterfront Media, a major destination for health and wellness content, is marketing our services on its leading websites including everydayhealth.com.

We also launched a new reciprocal partnership with JPMorgan Chase through which we offer JPMorgan Chase HSA bank accounts on our platform, and JPMorgan Chase markets our individual and family plans to their customers.

In January we announced a revenue sharing partnership with Hays Insurance Services, one of the fastest-growing privately held insurance brokers in the country. The agreement enables Hays to sell individual health insurance products online in a co-branded environment using eHealth's ecommerce platform.

In addition, our new partnership with Citigroup, which we announced last quarter, is gaining momentum. We already reached millions of their cardholders in other customer segments and have recently expanded our relationship to include their student loan subsidiary.

The eCommerce On-Demand, or EOD, business of licensing our ecommerce platform to insurance carriers continues to develop. We added two new carriers to the EOD platform in the quarter and expanded geographic coverage with several existing EOD clients. We now have carriers utilizing our EOD solution in 43 states and the District of Columbia.

eHealth also expanded our EOD partnership arrangement with CareFirst by launching a Medicare supplement EOD platform for this major carrier. As you may recall, we originally announced bringing on CareFirst as an EOD partner during the last earnings call. This is eHealth's initial foray into the Medicare EOD business.

I would also like to note that in many of these EOD relationships, carriers are extending our technology to the desktops and laptops of their agents and brokers. In fact, in excess of 7500 brokers and agents today now use eHealth's platform.

In another development in the carrier relations area, we rolled out eApproval to LifeWise in the State of Washington to support instant approval of applications for their individual and family major medical policies. LifeWise Health Plan of Washington is a member of a family of companies headquartered in Washington State with operations in Washington, Oregon, Alaska, and Arizona. LifeWise and its affiliates provide healthcare coverage and related services to over 1.5 million subscribers and their families.

We are pleased with this most recent addition and with the application growth we are observing on our eApproval platform with WellPoint in California and IHC.

In our sponsorship business, 40 carriers participated during the fourth quarter by paying us to sponsor or highlight a specific plan for their brand in a specific geography. This represents a 29% increase over the third quarter of 2008 when 31 carriers participated in our sponsorship program.

We also added new inventory to our offerings. Of particular note, CIGNA pushed ahead with its expansion plan in the IFP market and used our platform as part of its rollout strategy. During the fourth quarter we introduced CIGNA's IFP products in Texas and Colorado, and expect to launch into additional markets with this major brand in 2009.

We also added Coventry Health in Texas and Florida, Assurant in the State of Washington, and [UnitedHealth Dental] in four states.

Finally, we are pleased to announce a new partnership with AARP to market their Essential Premier Health Insurance plans underwritten by Aetna to the 50-to-64-year-old segment online. The AARP brand is well-recognized for their endorsement of high-quality products for seniors. This program is underway in Pennsylvania, and we hope to add additional states in the coming months.

In China we expanded our relationship with Taikang, one of the largest life insurance companies in China. On the 24th of January we expanded Ubao.com across the entire mainland of China with Taikang's medical and accident insurance products. It's important to note that the Taikang model is one where eHealth acts as an Internet technology provider allowing Taikang to market and sell their insurance products online nationally under their licensure. We're enthused to now be operating Ubao across all of China after piloting Ubao.com in Xiamen and Shanghai.

Ubao.com, by the way, is our online health insurance platform in China developed and managed under eHealthChina Inc., our wholly-owned subsidiary. We hope to be adding more carrier partners to Ubao this year.

As before, our business in China is new and developing, and the market is not yet defined, so we are not currently projecting any material revenue contribution from China in 2009.

In the public policy area we continue to be very active and involved. As you may know, we have a full-time executive, John Desser, who resides in Washington D.C. and manages our public policy and government relations activities.

I was in D.C. with John very recently, and we had meetings with several members of the House and Senate, mostly Democrats, to discuss healthcare reform. There's clearly a desire among many legislators to address healthcare and the uninsured. However, there appears to be growing concern about timing, breadth of change, and affordability. Several Democratic congressional members have very recently commented that any substantive change is unlikely in 2009. And clearly, the country's economic situation and stimulus spending are taking precedence over everything else.

It's likely that effective reform efforts will include a combination of private health insurance and public programs. The focus is on how to expand access to insurance coverage for all Americans. Combinations of ideas being discussed like mandates, guaranteed issue, tax reforms, and so on can significantly increase the market opportunity we address and provide individuals and businesses more access to affordable products. And the President's focus on healthcare IT as a way to reduce costs and increase efficiency is precisely what our business is all about.

The most recent version of the stimulus bill includes a COBRA subsidy for people who have recently lost jobs. As currently written -- and this is just very recent, in the last half hour -- this subsidy is 65% for nine months, administered through a business's payroll taxes. Unfortunately this may not be enough to help many people but we believe can create additional interest for COBRA options, our sweet spot.

We see a growing number of people coming to us every day looking for affordable COBRA options, as well as many people recently unemployed who have no COBRA offering. We plan to continue to be very involved in many of the discussions surrounding healthcare reform, lending the experience and knowledge we've gained over the past several years helping people find quality, affordable health insurance coverage.

Before turning the call to Stuart, I would like to share some thoughts on this year's outlook. We're very optimistic about our Company and the market opportunity. The current environment may be unprecedented but does not affect eHealth's value proposition. The business opportunity is very significant, and our unique online approach is more relevant than ever. Our growth, profitability, and strong cash position allow us to invest aggressively in technology and content, the cornerstones of our business.

In planning for all of 2009, we assume that the economy would not be any better than the fourth quarter of 2008 and could deteriorate even more. Even so, we believe our execution and business proposition will allow us to continue to deliver strong revenue growth this year and maintain non-GAAP operating margins at levels at least equivalent to 2008.

We plan to once again generate significant operating cash in 2009 and will remain conservative in our investment philosophy for our cash and marketable securities.

Most importantly, we continue to develop and refine our approach to the market, which is allowing us to grow in the current environment and we believe positions eHealth strongly for growth when the economy begins to improve.

Stewart will provide you with our detailed guidance for the year.

Our strong belief in the fundamental value of our Company and its growth prospects is reflected in the decision to implement a stock buyback program, which was announced in November. As we stated at the time, our Board authorized a repurchase program of up to $30 million, or 10% of our outstanding shares of common stock, whichever is less. We put in place a 10b5-1 trading program and in late December began buying back shares. We believe that buying our shares at attractive market prices is a good use of our cash.

Now, I'll turn the call over to Stuart, who will take you through our financial results in some detail. Stuart?

Thanks Gary, and good afternoon everyone. I will now review our financial results for the fourth quarter and full year of 2008.

As Gary mentioned, we generated solid fourth-quarter performance in a challenging environment and grew revenues at a healthy pace. We also increased our operating margins both sequentially and year over year.

Starting at the top line, our revenue for the fourth quarter was $29.5 million, an increase of 22% over the fourth quarter a year ago. For the full year, our revenue was $111.7 million, a 27% increase over 2007.

Commission revenue for the fourth quarter was $26.2 million, an increase of 19% over Q4, 2007. Our year-over-year commission revenue growth came mainly from growth in our membership base.

Sponsorship, EOD, and other revenue was $3.3 million, or 11%, of total revenues in the fourth quarter of 2008, a 48% increase over $2.2 million in the fourth quarter of 2007.

The year-over-year growth in our individual and family major medical plan submitted applications was 18% in the fourth quarter. For the quarter we had 131,200 new approved members. Our total estimated membership at the end of the year was over 621,000 members, which represents 20% growth over estimated membership reported at the end of the fourth quarter of 2007.

I would like to comment on member retention, but before I do, I would like to remind you that we estimate retention using trailing historical data, and so are fourth-quarter view of retention is based on data from the second quarter of 2008.

Based on this information, our estimated member retention rate remained within our historical range and improved as compared to the estimate retention rate we discussed on our last earnings call. We see this as a positive result given that the economy started to deteriorate sharply during the second quarter of 2008. It is too early to say with certainty what impact this tough economic environment may have on our retention rates, but we continue to estimate our revenue weighted average product retention to be in excess of two years.

Turning to operating expenses, our non-GAAP operating expenses excluding stock-based compensation improved as a percentage of revenue both for the fourth-quarter and the full-year 2008 as compared to the comparable period a year ago.

This was achieved despite the deliberate increase in marketing and advertising spend this year and demonstrates our management rigor and the operating leverage of our model.

I will now review our operating expenses line by line.

Non-GAAP marketing and advertising expense, which excludes stock-based compensation, was 39% of revenue in the fourth quarter as compared to 35% in the fourth quarter a year ago.

On a GAAP basis our marketing and advertising expense was 39%, within our target range for 2008 of 35% to 39% and down from 40% in the third quarter of 2008. As Gary mentioned earlier, we're very judicious about our marketing spend and pleased that we brought it down sequentially since the third quarter as a percentage of revenue.

Non-GAAP technology and content costs which exclude stock-based compensation expense declined from 13% of revenue in the fourth quarter of 2007 to any 11.5% for the comparable period of this year.

General and administrative costs also declined on a non-GAAP basis from 17% of revenue in the fourth quarter of 2007 to 14% in the fourth quarter of this year.

Our non-GAAP customer care and enrollment costs declined from 13% in the fourth quarter 2007 to 12% in the fourth quarter of 2008.

The economies of scale and discipline in these areas allowed us to increase our sales and marketing spend in 2008 while improving our overall operating margins.

Our fourth-quarter non-GAAP operating margin, excluding the effect of stock-based compensation was 22%, or $6.5 million, as compared to 20%, or $4.9 million, in the fourth quarter a year ago.

Fourth-quarter non-GAAP operating income grew 35% as compared to the fourth quarter of 2007.

We saw similar dynamics for the full year with non-GAAP operating margin increasing to 22% in 2008 as compared to 20% in 2007. This is 41% growth in 2008 non-GAAP operating income.

Interest and other income was $0.6 million during the quarter, down year over year from $1.4 million in the fourth quarter of 2007. For the full year of 2008 our interest and other income was $3.7 million, down from $5.3 million in 2007.

Our approach to investing and managing our cash remains conservative. Currently over 85% of our cash and marketable securities consist of cash, U.S. Treasury funds, U.S. government agency funds, or direct investments in U.S. government agency securities. The remaining investments are in high-grade corporate bonds, commercial paper, and CDs that we plan to hold to maturity.

As I shared with you on the last earnings call, we believe this is a prudent approach to investing and cash management given the prevailing economic environment. At the same time, our approach yields minimal returns on our investments.

Our interest income will continue to be in impacted by declines in interest rates and is expected to decline further in 2009 from the $2.5 million annual run rate implied by interest income earned in the fourth quarter of 2008.

Our GAAP pre-tax income of $6.3 million in the fourth quarter of 2008 grew 9% over the $5.7 million generated in the fourth quarter of 2007.

On a non-GAAP basis, excluding the effect of stock-based compensation in both years, our pre-tax income was $7.2 million, or 14% growth, from $6.3 million in Q4 of last year. The key factor behind our non-GAAP, pre-tax income growing significantly slower than -- year over year than our non-GAAP operating income, is lower interest income in Q4, 2008 as compared to the fourth quarter of 2007 levels.

Our 2008 effective tax rate for GAAP purposes was approximately 43% while our cash tax rate was 5% for the year. For 2009 we expect our GAAP tax rate to be in the range of 43% to 45% while we expect to pay cash taxes at a rate of 6% to 7%. The difference between our GAAP tax rate and our cash tax rate is mainly due to significant net operating loss carry-forwards that reduce the cash taxes we pay.

Going into 2009, our federal NOLs are approximately $78 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 total approximately $66 million for federal purposes coming into 2009, 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.

Of note, in 2009 we expect to use the majority of the remaining tax benefits related to our past federal operating losses. The impact of these tax benefits is reflected each quarter in our operating cash flow.

In 2009, we also expect to begin using the federal NOLs related to our past stock option activity. Based on GAAP guidelines, the impact of these NOLs will be reflected in the financing portion of the cash flow statement. This will obviously have no impact on total cash flows but will shift the benefit to a different category of our cash flow statement.

We also have a significant amount of California State NOLs that remain available to us. However, due to the severe budget issues in California, the Legislature recently suspended the use of NOLs related to past operating losses to offset corporate state taxes due in 2008 and 2009.

At the same time, we continue to use state NOLs related to our past stock option activity.

These changes do not affect the amount of NOLs that we expect to ultimately use to offset future taxes, but it did result in higher than expected cash taxes in 2008 and will have a similar impact in 2009.

Fourth-quarter 2008 GAAP net income was $3.6 million compared to $22.4 million in the fourth quarter of 2007. The 2007 fourth-quarter GAAP net income included a tax benefit of $18.9 million from the reversal of valuation reserves against our deferred tax assets, primarily related to past NOLs.

Non-GAAP net income for the fourth-quarter 2008 was $4.2 million compared to $3.7 million in the fourth quarter of 2007. Non-GAAP net income for the fourth quarter of 2008 excludes $0.5 million of stock-based compensation and related tax effects, while non-GAAP net income for the fourth quarter of 2007 excludes the tax benefit of $18.9 million and $0.3 million of stock-based compensation and related tax effects.

Non-GAAP net income for the full year increased 19% to $16.5 million in 2008 compared to $13.8 million in 2007. Non-GAAP net income for 2008 excludes $2.4 million of stock-based compensation and related tax effects, while non-GAAP net income for 2007 excludes the previously mentioned tax benefit of $18.9 million and $1.2 million of stock-based compensation and related tax effects.

Our cash flow from operations in the fourth quarter was $7.4 million, down from $7.9 million in the fourth quarter of 2007 primarily due to timing of several working capital items. For the full year we generated $30.2 million in operating cash flow, reflecting 15% growth over 2007.

Capital expenditures for the fourth quarter of 2008 were approximately $240,000 and were approximately $2.5 million for the full year.

As a reminder, for a company of our size, we are not a capital-intensive business.

Moving on to the balance sheet, primarily driven by our cash flow from operations, our cash and marketable securities balances increased to approximately $151 million at December 31, 2008. Our cash and marketable securities constituted more than 94% of our total assets, excluding deferred tax assets, at the end of Q4. Given this and the fact that we have no debt, we continue to believe we have a very strong balance sheet.

Finally, I would like to comment on our expectations for 2009. 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're forecasting revenues for 2009 to be in the range of approximately $131 million to approximately $136 million, representing an annual growth rate of 17% to 22%.

For the full-year 2009, stock-based compensation expense is expected to be approximately $5 million to $6 million, and GAAP diluted earnings per share is expected to be in the range of approximately $0.51 to $0.61 per share.

I also want to provide a little more color on our margin guidance. Going into 2009 we are targeting our marketing and advertising expense as a percentage of revenue to be in the 38% to 40% range for the full year. However, we expect this number to fluctuate above or below this range from quarter to quarter based on the seasonality of our application volume.

We should continue to see benefits of scale in operating expenses excluding marketing advertising this year. As a result, we are targeting our non-GAAP operating margins for the full-year 2009 to be at least equal to what we reported in the full year of 2008.

Also, please note that the impact on our 2009 GAAP EPS of the expected decline in our 2009 interest income from its 2008 levels is approximately $0.04 per diluted share. And the expected impact of the increase in 2009 estimated stock-based compensation expense as compared to its 2008 levels is approximately $0.03 to $0.05 per diluted share.

Now we would like to open up the call for questions. Operator?

(Operator Instructions). Youssef Squali, Jefferies & Co.

A couple of questions. First, Gary, if I look at the applications growth of 18%, that's still somewhat shy of what you're -- of your goal of the 20% plus that you've been talking about of late. If we -- yet if we look at the acquisition cost of roughly $64, that was relatively flat sequentially, obviously -- albeit it a big jump from a year ago. So the question is, was there -- did you decide not to pursue or not to push for applications growth this quarter for whatever reason to protect margins? Or what happened? -- because certainly the assumption out of your last call was that maybe you were going to continue to let your acquisition costs go up a little more in order to drive further growth.

And the other question -- Stuart maybe. Can you comment in the close ratio? This is the second quarter in a row where we're seeing a sequential decline. I think it topped at 59% last -- Q3, I think it was around 57%. It's at 55% right now.

Hey, Youssef, it's Gary. I'll start. Yes. On the application growth, frankly, as we got into the fourth quarter we saw the economy and the environment continue to deteriorate fast, and as we looked at that and we saw that, frankly, we just decided to get judicious -- I guess is one word, way to describe it -- about how we were spending money and where we were spending it.

At the same time, we saw our direct content starting to, frankly, strengthen, which we were pleased about. And so, yes, we made a conscious decision that we wanted to keep the spending in check. We certainly could've spent quite a bit more, but last quarter at 40%, as I think you remember, we commented -- I commented, we were at the higher end of where we wanted to be, and we were outside the range of guidance that we had given for the year as well, although when we gave that guidance, no one anticipated an economic environment like it is today or like it was in the fourth quarter.

But we thought that at that spend level getting that kind of application growth, that that was an awfully good balance. And frankly, relative to everything else that we are learning now about how other companies have fared in this environment, what we're seeing in terms of ecommerce momentum and growth and so on, carriers in this marketplace and on and on, we feel good about the decisions we made, and we feel really good about the growth.

It's a relative world, and that world out there right now is really tough. And the fact that we're able to grow 18% and spend what we did, we are very satisfied with that.

And then on the close ratio, yes, you are right. It has come down a little bit from where it was last quarter. We do continue to see a tight underwriting cycle that we've been talking about over the past several quarters.

It's not down as much as it would appear when you take our metrics and try to back into that. As I've talked about in the past, there's some lag effect to when we get a submitted application and when that gets reported to us. So our internal numbers, based on partial data for Q4 that's not fully lagged yet, would show a small decline in the conversion rate there.

One other comment that I would make is that we're starting to see a little bit more in recent periods of family policies as a mix of our business, and those seem to close at a little bit lower rate than individual policies. So it's a little bit of mix as well.

That's helpful. But just kind of a follow-up to your answer, Gary. What is baked into your guidance in terms of application growth? Do you think -- or does your guidance -- embeds a return back to the 20% plus type of range, or are you still going to be pretty frugal with the -- relatively as frugal with the marketing spend?

We -- yes, Youssef, we really based our guidance on what we experienced in the second half of the year and certainly the fourth quarter of the year as well. So if you assume that within that guidance range that we're working kind of off of growth rates and metrics similar to what you saw in the third and the fourth quarter, you're probably in an assumption area that's around where we're looking at.

We think that there's -- as unemployment is fast increasing -- you know, it's interesting. Two or three quarters ago as the economy was continuing to deteriorate, we didn't -- we weren't seeing accompanying unemployment increases at kind of the rates that people thought the economy was declining. But now we're seeing that, and we're seeing it very significantly. And unfortunately for a lot of people out of work, that may have some positive impact on our business, which certainly could change some of the assumptions or at least add to the assumption that we had going into this.

But let the point out again that we came -- we've come into this year assuming that the economy at best-case is equivalent to the latter half of what we saw last year. If it deteriorates, we think we've got a lot of programs and things in place that keep us running at the kind of rates we've been running at. If it gets better or if we get some pickup from unemployment and so on, then obviously that has a countering effect there.

George Sutton, Craig-Hallum.

With respect to the COBRA elements that you mentioned from the stimulus plan, how did you factor that into your guidance given that it was fairly late in the process?

George, it's Gary. Only in that we think -- I'll make several comments on the stimulus plan. First of all I think it's unfortunate that the subsidy is only for people who are looking at COBRA, because there are a tremendous number of people losing jobs today who don't have COBRA as an option. For example, most people -- many people don't know this, but federal COBRA law -- it precludes businesses with 20 employees or less, for example. Businesses that go bankrupt no longer have a health insurance offering or COBRA, as well. Plus, the vast number of businesses that had no health insurance to begin with.

And then you add to that the fact that even at a 65% subsidy -- and the subsidy is someplace between 60% and 65%. I don't know at this moment where it's landed. But in either case, it's -- for many people it's still prohibitively expensive, and many, many of the products that we market are less expensive even in the 40% or 35% contribution you'd have to make out of pocket.

So we actually think that there may be some uplift from all of that.

We assume coming into this that -- because we saw this -- that there would be some -- could be some COBRA help and work in the stimulus package, so that's certainly reflected in our guidance. And in fact, I really do believe that the stimulus package and what's in there with COBRA probably brings more visibility to this marketplace, forces people to go look at options and helps our business.

There were two deals that you mentioned that I wanted to just make sure we get a little more detail about -- big brand names. JPMorgan -- the referral deal sounds interesting. If you could just give a little bit more clarity there. And then also AARP.

What would you hope to accomplish with these two programs?

Well, with JPMorgan Chase it's just a great name, and being able to introduce them into the HSA world with their banking -- with the Chase banking is really good. Every time we bring a brand name into our marketplace it seems to attract consumers, whether it's Aetna or CIGNA or JPMorgan Chase, we believe, so we think that's going to be good. And they've got a very, very large customer base, as you know, and they're marketing us into that customer base as well. So it's early yet, but we are enthused about that.

The American Association of Retired People, AARP -- we're very enthused about. That's a well-known, well-respected brand name. We've launched a first product with them only in Pennsylvania, but our hope and plans are to expand that. And once again, having a name like that in our marketplace we think just is -- further legitimizes what we do and brings more people to us.

Additionally, they are focused on people 50 years of age and older, which is a fast-growing -- Internet-centric as well. There are more baby boomers aging into that, so there's a lot of demographics that we think having AARP here with us help us to get to and expose us to as well, so AARP I'm particularly excited about.

A third brand name you didn't mention that I would like to emphasize as well is CIGNA. CIGNA is a well-respected, well-known name in the insurance world and in the health insurance world as well. They historically have only been supporting large employers. We've now got them in three states, grown from one just a few short months ago, and the plan and the hope is to go to more. And if their experience is anything like Aetna, once again consumers will gravitate toward that brand name, and we think that's good as well.

Okay. Lastly, with respect to the share repurchase, it sounds like you began that late in December. Can you just give us a sense within the constraints of the 10b5 plan what your plans would be there given the low rate of interest you're getting on your cash?

Yes. We've got a 10b5-1 in place, and it's -- as you know, as 10b5-1s are constructed, they've got -- typically got different bands and so on, and at different price points and different bands, we're buying back shares, and we've been active in the market.

Neil Gagnon, Gagnon Securities.

I really have two questions for Stuart. On the interest -- on the reduction (technical difficulty) it looks to me like that's about what, $0.04 or $0.05 lower in '09 than '08; is that correct?

That's correct. About $0.04.

Okay. On the amount of money that goes to shares options, I think you said $5 million to $6 million, so after-tax that's roughly $3 million plus. So that's $0.10 or $0.11?

No, it's $0.03 to $0.05 after taxes are applied.

No, I'm sorry. Let's do that again. $5 million to $6 million -- that's your pre-tax options (technical difficulty) to the P&L; correct?

Correct.

Okay. If you tax it, then 60% of it after tax would be $3 million or more. I don't understand why that isn't $0.11. I don't get $0.04.

Delta.

$0.04 is the delta between what we had last year and what it is this year.

Okay. That I understand, sir. But the absolute expense -- if we go from your earnings [estimate] (technical difficulty) you gave as GAAP, we'd have to add roughly $0.11 to that.

No. What I'm strictly looking at is the delta between what we ran last (multiple speakers)

Stuart, I understand that, but please just stay with me. You have to add to your $0.51 to $0.61 -- or whatever that number is -- roughly $0.11 to get to a non-GAAP earnings per share.

The full -- I'm sorry. I'm blanking on this. I'm not -- I don't follow the (multiple speakers)

Okay. Well, I'll repeat it one more time. Your stock options expense is $5 million to $6 million. I used $5.5 million. I taxed it at 40%, so that's $3.3 million or $3.2 million. That's $0.11 a share. That's what has to be added back to your GAAP earnings per share number if I want to get to a non-GAAP number.

Yep.

Good.

That's correct.

That's all I wanted to understand. Thanks.

Oh, I'm sorry. Okay.

Richard Fetyko, Merriman.

Just a quick question. With respect to seeing the impact from unemployment on your applications growth, is it fair to say that if we look at your direct traffic channel, direct channel of -- for applications acquisitions, which was up -- actually accelerated in terms of a year-over-year growth rate, is that perhaps (technical difficulty) indication of that increased interest?

Well, Richard -- this is Gary. It may be. We did quite a bit of public relations work in the quarter, almost all focused on the unemployed, the state of the economy, and the plight of people with no health insurance. As I noted, our search ranking for what we do in COBRA and our COBRA outreach and so on and the COBRA Learning Center, increased significantly as well.

So we definitely saw some strong pickup, and as I think I noted, our year-over-year direct was 26% growth, so although I can't tell you specifically that every single person that came to us direct, what their origin is -- because we don't know by definition -- I think it's fair to assume that there's some influence there from people recently unemployed and from the unemployment ranks growing.

If you look at that fourth quarter, unemployment just in that quarter alone went from 6% in the third quarter to 7.2% in the fourth. So we are kind of operating under the assumption that there's definitely some content there of people unemployed looking for options to COBRA or simply looking for health insurance because they don't have a COBRA option.

Okay. Thanks. And then a follow-up. You mentioned CIGNA, and we've heard CIGNA talk about how they want to be more aggressive in individual markets to offset their sort of membership losses on the corporate accounts, and I've kind of picked up that kind of tone from the others. But are you seeing the other insurance carriers follow through with also product launches and new region launches as well, or is it more of a just kind of talk and discussion as opposed to actual actions and seeing some new product launches from those carriers?

Oh, no. We're definitely seeing a lot of activity. We saw more sponsorship in the fourth quarter for example, on -- as they're actually spending more in this market. We're certainly seeing more plan design in this market. We're seeing more carriers come to the market. CIGNA is the most notable right now. We're seeing other carriers looking to expand into other markets, so there's a lot of activity. And we have noted as well that in several of the large health insurance carriers earnings reviews recently, there have been comments about the individual market and growth there as well, as well as comments about healthcare reform probably having some positive impact for them in this marketplace also.

Okay. Thanks. And then if I may, one more. With respect to your cash, is there a sort of a active look or search for acquisitions as well as part of your strategy? And I mean, how far along are you at reviewing some ideas out there?

Well, we continue to be interested in ways to grow our business other than just organic growth. I've said this before. If we did anything, we would like it to be strategic and accretive. It's got to be health-related. Most likely it's going to have to have a strong online part or element to it.

Bruce Telkamp, who is really focused on this as part of his responsibilities, is spending a fair amount of time there as well.

As you might imagine in this environment, we see more and more private companies looking for capital because they can't get it from the sources they used to, which makes them more affordable -- not necessarily more attractive but more affordable. But we're looking at all kinds of things.

But I can assure you that anything we do, we'd be really thoughtful and careful about. And as you know, to this point we haven't done anything of any significance on the acquisition or merger side of our business, but we've certainly got the ability to do that, somewhat with our stock currency and certainly with our cash as well.

But we'd really want something that would help us to either grow the business as we continue to move into -- in and around the marketplace, or be a parallel business that's very closely aligned with our core business today.

Jim Friedland, Cowen and Company.

First just a quick one on guidance. Is there -- is the buyback -- or is any portion of the buyback assumed in terms of making the EPS guidance?

And second, on marketing, in terms of the range you are giving this year, it's a little tighter and a little higher than it was in the past. At what point do you say, okay, well we've been growing in marketing faster than revenues for a while -- and you just -- you stop increasing that as a percentage of total because obviously there will be a lot of leverage when that does occur. Or is it just, as long as we are in this current difficult environment, that you are likely to push marketing a little bit more aggressively? Thanks.

Thanks, Jim. This is Stuart. On the question on the guidance, we didn't assume a material amount from the stock buyback. As you can see, we didn't do much last year in that the program went into effect right at the end of the year. So we're coming into the year with very little adding to the -- or taking away from our weighted shares.

And then the stock price has increased fairly significantly since the time that we put that in place. And so it's hard to say where the price goes from here, but we've assumed, at least for guidance purposes, very little in the way of stock buyback.

And on the marketing and advertising at 38% to 40%, we just took a look at where we have operated over the past six months, and as we said I think in Youssef's comment, what do we predicate a lot of this on? We predicated an awful lot of our guidance after what we've experienced in the fourth quarter and what we expect to see going forward, even with a more challenging environment, and we think 38% to 40% is a good area to operate in. We think we can grow at a very nice rate. In fact, we think we can grow faster than almost any other company we are aware of in this really tough environment.

But there's a point at which we don't -- there's a point at which we will stop spending, and you can see it's probably around that upper limit. But as Stuart said, there may be some quarters we spend more than others. So you might find a bit of fluctuation this year, but we know at these numbers we could be highly profitable, and we also feel optimistic that we can grow at very good rates as well.

Thanks. And one quick follow-up on the sponsorship in the EOD, the other line item. That is growing at a much faster rate than the commission business, and you are signing up a lot of partners. How well penetrated are you as a percentage of the total on the sponsorship side and the EOD side? Do you think you are 25%? 50%? So just trying to get a sense of how that could grow going forward.

Well, in the sponsorship we are probably more penetrated. In fact, not "probably," we are more penetrated than we are the EOD business simply because we only let out so much real estate that will sell in the different markets that we're in. And we are in the majority of states right now with sponsorship, although as time goes on, we'll start to break it down to metropolitan areas and zip code by zip code, so there's certainly opportunity for us to market more sponsorship there, and that's more up to us than anything else as we continue to expand that business and how we want to expand it.

On the EOD business, I feel like we're just scratching the surface. We are in, as I said, 43 states, and I think we are 31 carriers currently today. As you know, there's over 180 carriers that market and sell on the eHealth platform today. They are all certainly potential partners for us here, plus those that we're doing business with today, we've got the opportunity to expand into other markets that they may be in. And yet there's the whole broker/agent community which we've just really started to focus on and started to talk about as well.

It's -- the strategy here quite frankly is that every time there is a health insurance transaction that occurs online, it's on the eHealth platform, whether it's directly through us or it's through the hands of an agent or the computer of an agent or broker, or directly through a carrier as well. But we have the opportunity to monetize it no matter where it happens. And we're -- I can tell you, I'm personally very enthused about this EOD business and especially the momentum we've been gaining and where we see this going.

William Morrison, ThinkEquity.

I jumped on after the call in the Q&A, so I apologize if you already talked about this, Gary. But I was wondering if you could talk just broadly about the regulatory environment, what the departure of Daschle from the nomination to HHS means in your view, and what your government-relations folks are hearing from the Hill.

And then secondly, I was wondering if you could comment on any impact or not from the SCHIP legislation passing. Thanks.

Yes. Hey, Bill; it's Gary. Yes, I made some comments in my script and a few others after, but I was actually in D.C. a week ago with John Desser, who is our government-relations executive, and we had many meetings with members of the Senate and the House as well -- individual meetings.

And there's certainly desire on the part of -- and by the way, we met almost exclusively with Democrats. There's certainly desire among all of them to do some things in terms of healthcare reform. There's not a lot of specificity, I might add. I think that the -- clearly the stimulus -- it seems clear to us -- and we are hearing this from the Hill as well -- that the difficulty in getting the stimulus package through and agreed to has -- it certainly may portend things for other legislative activities.

There's the question of affordability, which everyone that we met with a week ago acknowledged and talked about. And then I think Daschle now not being the -- no longer being the nominee for Health and Human Services doesn't speed things up, it slows things down. He had a real passion for this. We had a relationship -- or have a relationship him and think a lot of him. I think he was taking that position because he really cared about getting healthcare reform done and in place. That leadership is gone from the Administration and from the Cabinet. Don't know who's going to take that position, but that certainly slows things down as well.

We heard Sen. Max Baucus last week, who is the Chairman of the Senate Finance Committee who's been talking a lot about health, say that it's probably not going to happen this year. We've heard that from Steny Hoyer in the House, and others as well. So your guess may be as good as mine. But -- although I think that there was probably more anticipation several weeks ago, my gut is that people are getting to be a bit more pragmatic about this, and it's slowing down.

I've heard some people say that if it doesn't happen this year, it probably doesn't happen at all in this Administration. I am the last person to know whether that's the case or not. But it certainly doesn't feel that it's moving at a speed that it was previously, and it's expensive.

The other concern I heard last week is that more money may be required for stimulus than is in whatever bill gets passed, and that would probably take precedence over healthcare or anything else.

And the SCHIP?

Oh, sorry, Bill. Yes. In fact I wrote that down. SCHIP, yes. As you know, the President signed SCHIP legislation last week, which extends SCHIP, which is -- by the way, it's for everyone -- it is the State Children Health Insurance Program. It's federal funding for children to get health insurance. It's administered through the states, not by the federal government. A child who is a member of a family that is at 300% of the national poverty level or below -- and that's about $66,000 -- or, I'm sorry -- about $64,000 of family income would qualify.

It's estimated that there's about 9 million -- about 11 million people today who are eligible for either Medicaid or SCHIP but aren't enrolled, in the ranks of the uninsured.

Look, we felt that the last President should've signed this legislation. We just think it's the right thing to do and it's good stuff. It has probably -- it has no negative impact on our business that we can see except that maybe it reduces the ranks of the uninsured a bit -- but kind of by definition, these are people who weren't going to be coming to us anyway -- and in some ways could help the business because it brings more visibility to health insurance and may get their parents thinking about it. And who knows, there may be some families out there that once the children are covered, it's more affordable for the parents now to buy themselves some health insurance because government is paying for the children.

But we don't -- we don't see any material impact to our business one way or another right now from SCHIP.

Justin Post, Merrill Lynch.

Gary, you've talked about the economy affecting the buy rates in some of the activity for you as well as everyone else. Why do you think that is? Are people just generally going without insurance right now? Do you think that's just what people are forced to do in the environment?

Yes. Here's what I think, Justin. I think every time you turn on the television you hear about how bad the economy is and people economizing and so on. I think that influences consumer behavior in my -- one person's opinion, mine. I know it's influencing my house and my family members.

I think there are people who looked at health insurance as something they wanted to buy but didn't have it, and they decided to put it off longer for various reasons. I think there are others who are just feeling that although it may be not discretionary, they are treating it as being discretionary.

As you know, this economic situation seems to be impacting everything, everywhere. And unfortunately health insurance is part of that. Intellectually it seems like health insurance should be a nondiscretionary item for everyone. But we wouldn't have so many people uninsured who have incomes in excess of $75,000, for example, who we think could afford it but don't, if everyone did believe it was discretionary. So there's no doubt in my mind that there has been for several quarters for us some downward pressure from this economic environment.

But I want to add that we may see some counter -- we could see some counterbalance to that as unfortunately the ranks of the uninsured seem to -- or, I'm sorry -- the ranks of the unemployed appear to be continuing to increase.

And in our numbers we do calculate a conversion rate, and I think the assumption maybe 12 months ago was that some of the electronic processing would help kind of drive that up. And it looks like it was down a little bit. And I think you mentioned that in you're prepared remarks. What are some of the maybe one or two big initiatives this year to either help stabilize that, or can you get that to start going in the right direction again?

Well, we are constantly working in our customer care center on ways to improve that ratio, and underneath it all, that -- we've been able to move the needle in a positive direction in that regard.

In this past year we've added call center software to make it more efficient, make everyone's efforts more efficient, and we believe that that will help boost things going forward. We just -- we're in a cycle that we've seen before. It's longer than it's been in the past, but there's a piece of it that we can't do anything about, and that's what the carriers control.

Okay. Any time frame on when you think this could kind of become a little easier and they could loosen the standards? Any thoughts on timing on that?

You know, it seems to have somewhat coincided with the economic downturn, and so I think the hope would be that when the economy turns around, maybe we will see something change there.

And then the last thing. Any changes in the quality or type of person applying for health insurance? Is it weighting more towards people in the small businesses or more towards unemployed? And any changes in the demographics of your membership base? Anything you can report there?

You know, Justin, there's nothing to report at the moment. As Stuart commented, we're seeing more families applying. You know, whether you conclude from that that's because of the rising unemployment, I don't know. We haven't been able to tie that yet. We're doing a lot of survey work right now for people who come to us. We don't have anything of substance there yet, but we are observing some interesting trends that I don't want to comment on yet till I feel more confident that they are accurate.

As you've heard in our prepared remarks, I think we said several times that every day we feel that we're seeing more people coming to us who are recently unemployed, so you shouldn't be surprised to see that trend, especially given what's happening with unemployment and so on.

But we don't see anything in (inaudible) from a product mix standpoint, as well as a demographic of a customer standpoint, that stands out right now that says that there's any kind of an important shift one way or another.

Carl McDonald, Oppenheimer.

I was just wondering if you had seen any studies or had any internal projections on what you thought the take-up rate of COBRA would be with the subsidy as opposed to where it was before?

Yes, Carl -- this is Gary. That's a really good question. I met with some people, some policy people in D.C. a week ago, and we had that discussion. They are thinking it's someplace in a kind of a 20% to 30% range.

I'll tell you what the concern with it is, and it's a very real one in fact. This recently came from a compensation firm -- Buck Consulting -- who looks at these things, and their concern is that what you're going to have with this subsidy is people who have got pre-existing conditions or have got health issues today, who aren't healthy, are going to be those who are going to take advantage of this. And what that's going to do is it's going to imbalance the pools that businesses have and over time increase the premium costs quite significantly.

Those who are healthy either aren't going to take the COBRA or are going to go into the individual market. That is a prediction. There's nothing to substantiate that from a historical standpoint, so we will see. But it's an interesting one, and it does make some sense.

But we think, Carl, that if you have a take rate of 25% or 30% of people who are unemployed who then take COBRA, which by the way is much higher than the take rate today. I'm talking about with the subsidy. It -- believe it or -- we think that that's got really good impact for us, because that's going to get a lot of these people thinking about options and so on before they go to spend that 35% or 40% of whatever the premium value is out of their pocket.

We did an interesting study here in our Company, by the way. We offer good quality health insurance to our employees. It's not a Cadillac version, but it's -- we think it's very good. And for someone in their mid 30s who elects COBRA with us, it's a little bit less than $500 a month -- in fact, $493.62, to be exact. 35% of that, if the government paid to 65% for me, means that I pay $172 out of my pocket. If I had a family, I would pay $1,530.24 a month. That's to extend the eHealth health insurance benefit today through COBRA. If I had to pay 35% of that, the government paid 65%, I would pay $535 out of my pocket. That's quite a bit of money when you don't have a paycheck coming in, and that's going to get people to think.

If you take a look at our cost and benefits survey, across the country the average of health insurance for a family of four is $366 per month, and that's with benefits similar to what we offer. So I just bring this up as an example of how this is still I think going to be very challenging for a lot of people, yet it may give people pause to think and to come to us to take a look at options.

Thank you. The second question would just be on the growth assumptions that you touched on terms of the guidance. When you look at the growth rate over the last couple of years, it's been a pretty consistent downward trend throughout '07 and into 2008. So when you say the assumptions you've made in '09 are similar to the second half of '08, does that mean you're assuming a similar kind of decline, or you're assuming that you see some stability in that growth rate similar to what you had in the third and fourth quarter?

Well, as you probably would note, the economy has been in decline in all of '07 and '08, as well. And if you look at the growth rates that we have, they're pretty much in line with the kinds of things that we've seen over the past several quarters.

And I think you'd also look at our overall topline growth rate of 17% to 22%, fairly strong growth rate there, all things being equal.

And final question just on the licensing, the $3.3 million in the fourth quarter, is that a good run rate or is there anything in there that we're not going to see recur in '09?

That's recurring revenue.

Peter Costa, FTN Equity Capital Markets.

Is there anything in your guidance for pressure on commissions going forward, or have you assumed very similar commissions to what you've had the past year?

Yes. No, there isn't anything in there in terms of commission rates changing in any way. It's all based on our current structure. And it's really constructed more around application volumes and the potential of retention rates changing. But I haven't seen anything that would cause us to want to change the commission rate assumption.

Randy Katz, JMP Securities.

Just one question for you. Considering the deteriorating environment, it was nice to see churn come down in the quarter. Is there anything that you can point to that brought it down to these levels? And as it relates to guidance for '09, churn has bounced around quite a bit from the first quarter through the fourth quarter. So how do you think about churn going in '09, and what -- how does that play in the guidance?

Yes. I think about churn in terms of what we've seen over the last several quarters. It is somewhat seasonal. It is typically a little bit better in the fourth quarter. And so we look over several quarters, and I've always said in the past, never take a single quarter and draw a straight line off of that. So I just really need to look at kind of a rolling kind of outlook on that.

There are no more questions in queue. I would now like to turn the call over to Mr. Gary Lauer for closing remarks.

Well, great. I would just like to thank everybody for your participation this afternoon and look forward to speaking with you in the near future. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. And have a wonderful day.