eHealth Inc (EHTH) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2009 eHealth Incorporated earnings conference call. My name is Katrina, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Kate Sidorovich, eHealth's Director of Investor Relations. Please proceed.

Good afternoon, and thank you all for joining us today, either by phone or by webcast, for a discussion about eHealth Inc.'s third quarter 2009 financial results. On the call this afternoon, we will have Gary Lauer, eHealth's President and Chief Executive Officer, and Stuart Huizinga, eHealth's Chief Financial Officer. After management completes its remarks, we will open the line for questions.

As a reminder, today's conference call is being recorded and 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 fourth quarter application growth, the effectiveness of our Medicare Resource Center, evolution of our Medicare Resource Center into a retail platform, outcome of health care legislation, impact of a public plan option and implementation of exchanges as a component of health care reform legislation, (inaudible) expense management, expectations relating to non-GAAP operating margins for this year, operating expense and economies of scale. Also, 2009 marketing and advertising expense as a percent of revenue, effective GAAP and cash tax rates for 2009, and our 2009 guidance for revenue, stock-based compensation expense and net income per diluted share.

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.

Good afternoon, and thanks for joining us today, everyone. I would like to begin by commenting on several of our financial highlights for the third quarter.

Revenue of $35.1 million grew 23% over the third quarter a year ago, our strongest revenue growth so far this year. Our GAAP operating income of $6.5 million grew 45%. Our GAAP operating margin was 18% compared to 16% a year ago. While marketing and advertising expense as a percentage of revenue was flat compared to the third quarter of last year, we carefully managed other operating expenses and increased our margins.

GAAP earnings per share was $0.14. During the quarter, we generated $7.6 million in operating cash flow. We also completed a $30 million share buyback program, bringing our overall cash and marketable securities balance to $143 million as of September 30.

I'd like to note that before the buyback program began, we had 25.1 million common shares outstanding, and at the end of the third quarter, the number of shares outstanding was 23.3 million.

During the third quarter, we also continued to diversify our revenue base by growing our sponsorship, technology and other revenue by 50% year over year, comprising 11% of total revenue in the third quarter of 2009 compared to 9% in the third quarter of last year. Within that revenue category, eCommerce On Demand was by far the fastest growing component, with an annual growth rate in excess of 100%. Our individual and family plan application growth was 12% for the quarter. The number of visitors to our site and those getting quotes for various health insurance products grew at a higher rate than did applications. Said another way, more consumers came to eHealth to get quotes, compare plans and research their options; however, across all three of our major acquisition channels, a lower percentage of consumers actually transacted.

We believe there may be several macro and external factors currently influencing consumer behavior. Among these are the continuing soft economy and more recently, we believe, many consumers may be deferring purchasing decisions because of changes they anticipate through health care reform. However, our retention rate with existing members continues to be stable, as Stuart will describe in more detail.

I should also note that we've observed similar trends and submitted applications on many eOD sites we power for direct online sales by carriers. Given what we've observed and experienced in the marketplace, we do not expect fourth quarter application growth to accelerate to levels above our third quarter performance, and application growth may even be lower.

During the quarter, we tested and launched a number of initiatives aimed at improving our conversion yields. We refined our website messaging to inform visitors that an individual health policy is a month-to-month product, not a yearlong contract, which is important for many people who are now facing an uncertain financial and employment situation.

Changes were made to the account center to add more tools and information and make it more manageable to the consumer. We're now working on a new quote page to streamline the quoting process and simplify the plan comparison experience to allow consumers to narrow down the list of plan choices more intuitively. We continue to follow up with people who started but didn't submit an application, through emails and outbound calls from our Customer Care Center, made more effective through call-center software deployed at the beginning of this year.

More yield-enhancing initiatives are underway, including development of more segmented user paths to our site based on demographics and geographic location. This includes creation of targeted landing pages to increase conversion.

Let me now go through our channel performance. Direct continued to be the best performing channel and the largest source of submitted applications, at 43%. During the quarter, the direct channel generated 23% annual individual and family plan application growth.

I'm also pleased to report that our national search rankings improved after a change in the second quarter of this year. We are currently ranking in the first or second position with leading search engines for such high-volume keywords as "health insurance" and "individual health insurance," and we'll continue to focus on maintaining online leadership in our category.

On the public relations front, we continue to position ourselves as an authority and an objective consumer resource for high-relevance information on health insurance. Through media appearances and press releases, we spoke to the American people about the unfolding health care reform and its implication for consumers. We shared advice about the open enrolment season and provided tips for finding the right policy to specific demographic groups, including women, small business entrepreneurs, college students and others.

We launched a health insurance buyers' guide, an interactive tool which guides consumers through their options and helps them make informed decisions when buying their own health coverage. We also updated our annual cost and benefit study of premiums and deductibles in the individual and family market, based on unique data from hundreds of thousands of policies sold through eHealth.

During the third quarter, eHealth was featured in leading national newspapers and magazines, including the Wall Street Journal, the New York Times, the Los Angeles Times, Fortune Small Business, US Today and even Glamour magazine, as well as top-tier broadcast news outlets, including Good Morning America, CNN, CNBC and National Public Radio.

During an interview I did on the floor of the New York Stock Exchange, CNBC's Squawk on the Street anchor, Mark Haines, referred to eHealth as the nation's de facto health insurance exchange. I was also able to author an opinion-editorial, an op-ed, that was featured in the National Journal's health care expert blog, which is hosted by Marilyn Serafini, an influential writer in Washington policy circles.

Our efforts on the public policy front have been noted in other prominent policy publications, like Congress Daily and The Hill, which published an interview with our vice-president of government affairs, John Desser. eHealth was also covered by reporters in large regional papers, a variety of blogs, consumer lifestyle magazines and a multitude of local TV stations.

We also saw favorable response to our email campaigns that targeted former eHealth members, website visitors that have started but not completed an application, leads provided by our partners and other high-relevance groups. These initiatives continue to drive strong performance in our direct channel.

The performance marketing channel generated 5% IFP application growth and contributed 31% of our total individual and family plan submitted applications. Of note is our new performance-based partnership with Affinion Group, a leader in Affinity marketing programs for financial services companies, particularly small and regional banks. Under this new partnership, Affinion will incorporate our platform into their product suite, targeted to consumer and small business customers. This relationship extends our reach into community banks and credit unions, which have previously been an untapped opportunity for us.

We also launched a new affiliate program with LinkShare during the quarter. This new program complements our existing relationship with Commission Junction, which we use to manage relationships with hundreds of smaller publishers or affiliates that we did not manage through our proprietary, in-house partner platform.

Finally, our online advertising channel submitted application growth was 4% compared to the third quarter of 2008. While this is an improvement from last quarter, the 4% growth is below our historical rates for this channel. As I said earlier, we drove more consumers to our site through marketing initiatives, including online advertising, but they converted at lower rates. Page search leadership is an essential part of our strategy, and we are putting significant efforts into improving our contribution from this channel and stabilizing our cost of acquisition. This involves, but is not limited to, the implementation of new account strategy and yield-enhancing initiatives.

We are also putting more resources into managing relationships with search engines outside of Google, such as Yahoo and MSN, that underperform for us in the second and third quarters.

I'd also like to note that eHealth typically maintains the number one position in paid search on Google for such high-relevance keywords as "health insurance," "individual health insurance," and "health insurance quotes." On these terms, we also continue to receive traffic from many of our marketing partners that are also present on the first page of paid listings on Google.

Now I'd like to make some comments about carrier relations. During the quarter, we added carriers into new states, including Aetna individual and family major medical plans in Kentucky, Coventry plans in Nevada, Cigna in Florida and IHC Companion Life in two new states. We also added three new states with ARP plans underwritten by Aetna, targeting the fast-growing 50-to-64-year-old segment.

During October, we launched eHealth's Medicare Resource Center. This new online service is designed to help senior Americans learn about and obtain access to quality Medicare health plan options. Initially, our Medicare Center will serve as a source of valuable Medicare leads for our carrier partners. Over time, we plan to evolve into a comprehensive retail platform for private Medicare products.

During the quarter, we also signed a contract to launch a Medicare eOD site with Blue Cross Blue Shield of Massachusetts, expanding our existing eOD relationship with this important carrier. This will be eHealth's third Medicare eOD deployment. Medicare is an exciting new opportunity for us as the private Medicare market is a large and fast-growing segment of the private health insurance industry.

In the commercial eOD business, we also launched our licensing platform with one new carrier and extended our relationship with Coventry and IHC Companion Life into additional states. The application growth on our eOD sites grew over 100% year-over-year in the third quarter, driven predominantly by new site launches in the last 12 months.

We also continue to make progress extending the application and license of our technology to traditional general agents and brokers. A general agent is an organization that is contracted by carriers to support smaller local agents and brokers within a specified geographic area. GAs generally provide certain quoting and sales tools to agents. As we discussed in our last conference call, we had our first major win during the second quarter with a major general agent on the East Coast, and this GA is scheduled to launch in November.

In this most recent quarter, we entered into a new general agent licensing relationship that will permit an organization servicing independent agents nationally to incorporate eHealth's quoting and benefit content into the sales automation tools this partner is building. We are excited about this and other GA opportunities that we are actively pursuing.

In the public policy are, there is certainly no lack of activity. The House of Representatives is in the process of trying to merge three different Committee bills into one, which would then be introduced on the floor of the House for debate and a vote. This may occur, we expect, some time during November. Two weeks ago, the Senate Finance Committee voted to approve their approach to a health care reform bill. Like the House, the Senate Finance Committee and the Senate Health Committee bills are being merged with the objective of introducing a bill on the Senate floor for debate and a vote.

All bills in the House and Senate have several elements in common, including guaranteed issue of products, a mandate requiring coverage, exchanges to source health insurance products, and financial subsidies to help some people buy health insurance. The House bills and the Senate health bill contain the controversial public health insurance plan options, while the Senate Finance bill takes a more moderated approach with the co-op idea. However, the initial merged bill, which reaches the Senate floor, may contain a public option with a state opt-out. We have always contended that a public plan simply represents another inventory product for us, and that plan will succeed or fail based on its merit.

At eHealth, our main interest and objective is to be able to support this new legislation in whatever form it ultimately may take by efficiently and economically enrolling Americans into coverage. Additionally, we would like to have the ability to help individuals eligible for the new subsidies, which may be available to millions of qualifying Americans.

We also believe that the implementation of an exchange, either at the national or state level, represents an intriguing eOD opportunity for eHealth. As you may know, we can rapidly deploy our technology for third-party use, and its scalability and power can be a very appealing proposition for exchange implementation.

I'm frequently asked what I think the outcome of all this legislation activity will be, and the answer is that I don't exactly know. But at eHealth, we are assuming that a bill will be passed by year-end, and we believe that we are positioning ourselves to leverage any legislation through our unique enrolment capabilities, technology and experience.

In conclusion, I'd like to underscore that our financial performance during the quarter demonstrates the strength and scalability of eHealth's business model, which allowed us to grow revenues and operating income at a healthy pace. In this uncertain environment, we plan to be very prudent in all areas of expense management, including our marketing and advertising expenses.

This year, we expect to maintain our non-GAAP operating margins at levels at least comparable to those reported in 2008. Going forward, significant economies of scale remain in the customer care, technology and content and general and administrative areas that will continue to realize as eHealth grows.

We also continue to diversify our revenue base by growing contributions from the high-margin sponsorship and licensing businesses.

I'd also like to note that our new member additions remain highly profitable, and we are focused more than ever on managing the cost of acquisition on a per-member basis.

And now I'd like to turn the call to Stuart, who will take you through our financial results in greater detail. Stuart?

Thanks, Gary, and good afternoon, everyone. I will now review our financial results for the third quarter of 2009. As Gary mentioned, the third quarter was our strongest this year in terms of annual revenue growth. It was also our strongest quarter of the year in terms of operating income growth.

Starting at the top line, our revenue for the third quarter was $35.1 million, an increase of 23% over the third quarter a year ago. Commission revenue was $31.1 million, an increase of 21% over Q3 2008. Our year-over-year commission revenue growth was mainly due to growth in our membership base. Sponsorship, technology and other revenue was $4 million in the third quarter of 2009, or 50% annual growth. Within that line item, eCommerce On Demand was the fastest growing category, generating over 100% annual revenue growth, which was primarily driven by new eOD site launches in the past year as well as higher application volume at existing sites.

During the third quarter, we achieved 12% year-over-year growth in individual and family major medical plan submitted applications, down from 17% reported in the second quarter of 2009. As Gary pointed out, third quarter application growth reflected a year-over-year decline in the percentage of consumers coming to our site who submitted applications for individual and family products. While this rate was down across all marketing channels, our direct channel had another strong quarter, generating 23% annual IFP application growth.

In the third quarter, we had over 111,000 approved members for individual and family products. Our close rate, a lagged estimate of the percentage of submitted IFP applications that become approved by our carrier partners, has increased as compared to the second quarter of this year. The average number of individuals per approved application remained flat sequentially, but represented a decline year over year.

Our total estimated membership at the end of Q3 2009 was over 725,000 members, which included approximately 25,000 net members at the end of the quarter who had previously transferred from Health Benefits Direct pursuant to our business development agreement with them. Based on what we have observed so far, the economics for transferred HBD members are similar to that of our core members.

I'd like to comment on member retention, but before I do, I'd like to remind you that we estimate retention using trailing historical data. Our third quarter view of retention is based on data for the first quarter of 2009. Excluding Health Benefit Direct's members from the number of total revenue-generating members in both Q2 and Q3 of 2009, our estimated member retention rate remained with our historical range and improved slightly as compared to our estimated retention rate discussed on the third quarter 2008 earnings call.

In the third quarter, our non-GAAP operating expenses, which excludes stock-based compensation, declined as a percentage of revenue as compared to the third quarter a year ago. This was driven by our increased focus on managing expenses in this environment, as well as continued economies of scale in customer care and enrolment, G&A and technology and content. These savings were somewhat offset by a higher cost of revenue sharing that came in at 4% of revenue for the quarter, as compared to 2% in Q3 '08. The increase in cost of revenue sharing was driven primarily by revenue sharing on the members that were transferred pursuant to the Health Benefits Direct transaction announced earlier this year.

Our non-GAAP marketing and advertising expense, which excludes stock-based compensation expense, was 40% of revenue this quarter, flat as compared to the percentage in Q3 '08. Year to date, our GAAP marketing and advertising spend is at 40.4% of revenue, just above the 30% to 40% range that we've been targeting for the full year 2009.

Our cost of acquisitions per member on an individual and family plan submitted application was $74.73, if measured as our marketing and advertising expense for individual on IFP submitted applications for the quarter. This represents a 2% sequential increase as compared to $73.45 in the second quarter of 2009, and a 14% increase as compared to $65.34 in the third quarter of 2008. The year-over-year increase was primarily driven by lower conversions for our website traffic, and inflation in prices per click in the online marketing channel.

The annual increase in our cost of acquisition during the quarter was also caused by a lower average number of individuals per submitted application that I mentioned earlier on the call.

As I mentioned earlier, in the third quarter we continued to achieve significant efficiencies in several operating areas. Non-GAAP, technology and content costs, which excludes stock-based compensation expense, improved from 12% of revenue in the third quarter of 2008 to 11% in the third quarter of 2009. General and administrative costs also improved on a non-GAAP basis from 15% of revenue in the third quarter of 2008 to 13% in the third quarter this year.

Our non-GAAP customer care and enrolment costs were 10% for the third quarter of this year, as compared to 13% for Q3 '08. Additional efficiencies are expected as we continue to grow our revenue base.

Our GAAP operating margin was 18.5% or $6.5 million, as compared to 16% or $4.5 million in the third quarter a year ago. Our non-GAAP operating margin, excluding the effect of stock-based compensation, was 22% or $7.8 million as compared to 19% or $5.4 million in the third quarter a year ago.

Third quarter non-GAAP operating income grew 43% as compared to the third quarter of 2008. Year to date, our non-GAAP operating margins are comparable to year-to-date margins last year, at 22%. We are pleased with our margin performance, and continue to monitor eHealth's profitability very closely.

Our new member additions remain highly profitable, which is very important to us. I'd like to emphasize that in this environment, we are paying close attention to unit costs of acquisition for new IFP members and aim to balance its effect on profitability versus growth.

Interest and other income was $0.1 million during the quarter, down year-over-year from $0.9 million in the third quarter of 2008. Interest and other income, almost all of which reflects interest earned on our invested cash, cash equivalents and marketable securities, continued to be impacted by the low interest rate environment.

Our approach to investing and managing our cash remains conservative. Currently, over 96% of our cash and marketable securities consist of cash, US Treasury funds, US government agency funds or direct investments in US government agency securities. The remaining investments are in high-grade corporate bonds and commercial paper that we plan to hold till maturity.

Our GAAP pre-tax income of $6.6 million in the third quarter of 2009 was up 22% from $5.4 million in the third quarter of 2008. On a non-GAAP basis, excluding the effect of stock-based compensation in both years, our pre-tax income was $7.9 million, as compared to $6.4 million in the third quarter last year. The lower year-over-year growth for our pre-tax income as compared to operating income, both on a GAAP and non-GAAP basis, is primarily attributable to an 85% year-over-year decline in our interest income.

We estimate our 2009 effective tax rate for GAAP purposes in the 44% to 46% range, even though we expect to pay cash taxes at a much lower rate, due mainly to significant net operating loss carry-forwards that reduce the cash taxes we pay.

Third quarter 2009 GAAP net income was $3.5 million, up from $3 million in the third quarter of last year. Non-GAAP net income, excluding the effect of stock-based compensation and related tax effect in both years, was $4.3 million as compared to $3.7 million in the third quarter of 2008.

Our cash flow from operations was $7.6 million as compared to $8.3 million in the third quarter of 2008. In the third quarter of 2009, we had a $3.2 million cash flow benefit from taxes. For purposes of our Q3 '09 cash flow statement, that $3.2 million cash flow benefit was split with $1.8 million benefiting operating activities, and the other $1.4 million benefiting financing activities.

In the third quarter of last year, the majority of a $1.8 million cash flow benefit from taxes was reflected in cash flow from operating activities, with just $0.2 million being included in cash flow from financing activities.

If you adjust operating cash flow in both periods to reflect the full benefit from taxes, our Q3 '09 cash flow from operations would have been $9 million as compared to $8.5 million in Q3 '08.

Capital expenditures for the third quarter of 2009 were approximately $600,000 and totaled $1.1 million year to date.

As Gary mentioned, during the quarter we completed the share repurchase program authorized by our board of directors in November of 2008. We bought approximately $1.9 million shares in total under the program, at an average price of $15.97, for a total cost of approximately $30 million. As of September 30, 2009, our outstanding common share count was approximately 23.3 million share, down from approximately 25.1 million shares as of September 30, 2008.

Our cash and marketable securities balance was over $143 million as of September 30, 2009. Our cash and marketable securities constituted more than 94% of our total assets, excluding deferred tax assets, at the end of Q3. Given this fact, and the fact that we have no debt, we continue to believe we have a very strong balance sheet.

With respect to guidance and based on information currently available, I'd like to make some comments on our 2009 revenue, GAAP net income per diluted share, effective GAAP tax rate and stock-based compensation.

We expect 2009 revenue to be in the range of $134 million to $136 million. 2009 GAAP diluted EPS is expected to be in the range of $0.53 to $0.61. 2009 effective GAAP tax rate is expected to be in the 44% to 46% range. For full year 2009, stock-based compensation is expected to be approximately $4.6 million to $5 million.

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.

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

Thank you. (Operator instructions). And your first question comes from the line of Youssef Squali of Jefferies & Company. Please proceed.

Hi. Good afternoon. [technical difficulty] a couple of questions. The app growth was obviously very light this quarter. So what has to happen for [technical difficulty] back to the [technical difficulty].

I'm sorry, you're breaking up. We can't understand the question.

Hello?

Hello. You have to repeat it. You broke up. We couldn't hear you here.

Can you hear me now?

That's much better.

Okay. Sorry about that. So the first question was about the app growth being light this quarter, and I was just wondering what would have to happen for it to climb back to the historical high teens range. And you also alluded to this in your prepared remarks, but I seem to remember fourth quarter is seasonally weak in terms of the app growth, so what have you baked into your fourth quarter guidance? So sort of the long-term and short-term perspective on app growth. And I have a follow-up.

Yes, Youssef, this is Gary. I'll make some comments on app growth. I wish I could tell you absolutely with certainty what's occurred, but everything that we see here, test surveys and so on, indicates that there's a bit of a malaise in the marketplace right now over people waiting for health care reform. Unfortunately, there seems to be this expectation on behalf of some people of cheaper policies, government subsidies or even free plans, and of course the reality of what's being discussed and what may pass is much different than that perception. In fact, I noticed just today on the front page of the Wall Street Journal article, it says political uncertainty puts freeze on small businesses. One of the things they talk about there is the uncertainty of health care reform and what it means. So we think we're seeing it a number of different ways. And we expect that there should be some finality this quarter in the next two months on health care legislation. Said another way, we expect a bill to be passed. Assuming that a bill is passed in both Houses and is signed by the President, we'll know with certainty, and everyone else will, what health care reform is about. And I think, don't know for certain but think or hope, that that may help certainly with the uncertainty or the fact that some people may be procrastinating it as a result of this. And let me just add, in the fourth quarter, fourth quarter growth seasonally isn't typically less than other quarters; it's the actual volume of applications that is typically less. And I think the only comment I would make today, and I think Stuart would agree with this, on what we see for fourth quarter in guidance and so on is that, as I said earlier, we don't expect to see application growth in excess of what we had in the third quarter.

That's correct.

Okay. And just in terms of cost of acquisition, just a little more color. Is it partly the costs are partly due to more competition from the carriers directly online to acquire traffic? In other words, are you spending more on paid search and partners, etcetera? Or this is just purely cyclical versus more structural?

I think it's both. I think the structural part of it is simply that the cost of acquisition has gone up on a per-unit basis because the conversion rate has fallen. And we've seen the conversation rate fall across all three channels, and again, we attribute it to the economy, but I think more recently and more importantly, what we think may be occurring is the effect of the result of the uncertainty and all the media attention on health care reform.

I see. And do you see the same lack of conversion on carrier sites as well? You were sort of alluding to that as well.

Yes. Well, the carrier sites that we power, the way we've looked at it is we've had really good growth. As I indicated, our growth is in excess of 100%. But when you back out the recent additions and you simply look at what we kind of look at as a same-store, someone who's been with us for 12 months or more, we're seeing very similar kinds of trends from a conversion standpoint and an application standpoint as well. We're hearing similar things anecdotally from different carrier partners and from their different channels as well. But let me emphasize, it's anecdotal. I don't have anything that's hard and fast on that. But we just hear it from so many quarters, and from what we're seeing, it all seems to point to a similar source or a similar thing.

Okay. Thanks.

And your next question comes from the line of William Morrison of ThinkEquity. Please proceed.

Thanks. I apologize in advance, some of these questions have already been covered in the call, but I joined late. Gary, can you give us an update on the Utah situation and exactly what's going on there. The deal looks like it's changed kind of mid-course, and if there's been any resolution there. And then just I was wondering as you pointed out on the customer application cost, (inaudible) was essentially flat year over year. And just wondering you've said there's rising PPC and other things that are kind of driving higher costs, but as a percent of sales, it was flat. So I'm just wondering if you're managing that down because the conversions have come down, or why is it flat? I was expecting it to be up year over year as a percent of sales. Thanks.

Bill, I'll take the second part of the question first, and Stuart can weigh in as well. We've always been very, very careful about all of our expense management, starting with cost of acquisition. We've got a lot of systems in place, a lot of discipline in our processes and so on. We watch this frankly on an hourly basis. And we're very careful about that, and we certainly have seen, given these kinds of conversions and what we think is happening in the marketplace, a balance that we want to maintain between the cost of acquisition, growth and profitability. And I think you saw the result of that here. So we've been very, very careful about how to manage that. And there is a balance here, once again, between what we want from margins and profitability and what we also want with app growth. Hence, that flatness. So if there's one thing that I think we are pleased with, given this market environment that we find ourselves in right now, which is very, very unusual, is that we're able to manage the expense side of that, we think, efficiently and effectively.

Yes. And I think the other thing is that our topline growth continues fairly strong in this environment. 23% revenue growth this quarter. And at the same time, the markets for new applicants has slowed down vis-a-vis the revenue growth that we have. Creates a bigger gap there.

Hey, and Bill, on Utah, I'm glad you asked about that. So we had announced a quarter ago that we had launched the Utah health insurance exchange. To give everybody background, the State legislature last year in 2008 passed legislation, among other things, to put an exchange in place. In fact, it was Utah House Bill 188. As a part of that, they let an RFP out, a Request for Proposal for vendors to propose how they would put an exchange in place. We and others competed for that. We won. We were awarded the exchange. And we launched the exchange per the bill and so on. What has been interesting to us is that since then, other local brokers and agents have been added essentially to this list that they have of sources and so on, which we don't think, at least in our opinion, necessarily at all meets the spirit of the intent of what was done but may demonstrate the kind of pressure that they're finding from local businesses and so on in the state. But the exchange is up and running, and we are marketing and selling products and have done such through it and will continue to do that. I don't think this portends anything for federal legislation, but it's an interesting situation right now, and we're talking to the state about it as well.

So what are they saying? Last time we talked, you confirmed that your understanding was this was going to be an exclusive deal for you guys. And it's turned out not to be. It certainly doesn't look like an exchange. It looks like a [link farm]. And so what do they say when you go back to them? Do you have legal recourse? Or are you just going to kind of let it be the way it is?

I'll just say that we're in process right now in terms of reviewing this and communicating with them, and recourse or steps we may take and so on are still to be determined. But we're not--it's certainly a different outcome than we had expected and I think that was represented to us and others had expected as well, so let's see how this plays out.

I'll get back in queue and let some others ask questions. Thanks.

And your next question comes from the line of Steve Halper of Thomas Weisel Partners. Please proceed.

Yes, hi. What was the growth in the channel partner applications? I just missed that number.

Steve, let me go back. I believe it was 5%. Yes, 5%.

Okay. And--

5% with the marketing performance partners. 4% with online advertising. And I'm doing this from memory, 23% in the direct channel. Direct was very strong for us.

Right. So what was the reason for the slowdown in channel partners this quarter?

Nothing, other than we think what we've seen in the other channels as well, which is simply that the conversion rates have fallen. I should note, and this is I think important, that the consumers coming to eHealth--and we don't really follow visitor metrics. There are outside firms looking at that stuff, but what we look at are what we call quotes or quoted sessions. When a consumer comes to us and actually takes a look, gets a quote, reviews plans and products and so on. And we actually look at unique consumers who do that as well. And the volume of consumers, of families coming to us was quite healthy. The conversion of those actually transacting was less than we've seen in some time, in some ways precipitously less, right across the boards. In fact, if you applied some of the conversion rates we've had in the past to those that came through the channel partners, the marketing and performance partners, that application growth would certainly be higher. And as good as direct was, direct would have been higher as well. So we found it right across the boards.

Right. So you talked about kind of those same-store numbers on the eOD area, but do you think as more of these carriers pursue a direct strategy, albeit powered by eHealth, do you think that takes away a little bit from your growth rates on the--for people transacting directly at your websites?

It's a good question, and it's something that we follow quite closely. In fact, what we look for is to see if the eOD sites aren't cannibalizing our business. And to this point, we have no evidence that that's the case at all. In several markets, we're working with carriers that have got significant presence. They do really well with the eOD sites, and we do well with their products, selling them directly as well. So no, we don't see that at all, Steve. We don't hear that. We don't see another significant competitor that's out there right now taking business from us. There's nothing that indicates that all of a sudden there's a change in consumer behavior and they're all going to agents and brokers. Again, everything at least that we have learned and observed indicates that there is this kind of malaise right across this individual marketplace.

Right. So are you at liberty to tell us what the number of eOD transactions are that you're seeing?

No, we don't do that, and there's an important reason for that, one of which is that we've got contracts and agreements with these carriers and so on that among other things regard privacy and on and on. All I can tell you is that we've got 30 or 31 carriers today in operation with more coming on, and the growth rates are good in terms of the applications with carriers and so on. But again, for the same-store sales, very similar to what we experienced in our core business.

Right. Okay. Great. Thanks.

And your next question comes from the line of George Sutton of Craig-Hallum. Please proceed.

Hi, guys. Gary, could you discuss how the health care plan delay is impacting carrier rollout of new plans and interest that you're seeing in eOD? And I'm wondering by that question, is there an obvious pent-up demand that we've seen thus far?

George, I don't know how to connect health care reform to eOD rollout. eOD business is really good. We've got what we think is a nice perspective pipeline or pipeline of perspective carriers for eOD. As I noted, we just put up our third, or we will be putting up our third eOD site for Medicare. So all of that seems to be good. Whether this is causing carriers to accelerate their plans here in advance of health care reform or trying to grandfather themselves or whatever, we certainly don't see any evidence of that. I couldn't comment on that. So no, I don't think any effect that way, if that answers your question.

How important would you view the state opt-out of a public plan to be for you?

It's an interesting question. As we best understand what Senator Harry Reid has in mind right now with the state opt-out, what's a little bit more important here I think isn't so much the state opt-out as it is or it may be how providers are paid. And in the most recent description of this, it's not at Medicare rates or not at something called Medicare Plus 5, which is Medicare rates plus 5%; rather, it's a negotiation with the providers much like the private health insurance carriers do. I'm no underwriting expert, but that says to me that if that were the case, you're probably going to have a private plan that's got a financial infrastructure underneath it that's much like you have--a public plan that's going to be much like the private plans. And as a result, you may not have the kind of significant pricing or premium difference that some of these people who were talking about these kinds of policies want to see or hope to see. So again, I view it as another inventory product, assuming that they even get to that point.

Okay. And then finally, Stuart, you mentioned your buyback is complete. Is there a plan to go back [to the core] for additional buyback [technical difficulty]?

There isn't a formal plan, but it is something that we're looking into and putting into our thought process as much as potential acquisitions with our cash and other uses.

Okay. Thanks, guys.

Your next question comes from the line of Jim Friedland of Cowen and Company. Please proceed.

Hi. Thanks. It's Kevin [Koppleman] in for Jim. First I had a regulatory question. You mentioned guaranteed issue and mandate as being one of the common elements in all the bills that are being discussed. Could you give us your view on the mandates that are being discussed, and do you think they're strong enough?

It's a great question. As you know, in the Senate Finance Committee bill, the penalty for not having health insurance as part of the mandate was decreased several times. And there's certainly concern in the carrier underwriting community that the mandates aren't strong enough. I think that anyone who looks at this--in fact, I just read a paper this morning published by the Democratic Leadership Council on this very thing, that for this to work, for guaranteed issue to work and most importantly to keep costs in check, premium prices, premium cost, you've got to have a mandate so that you've got essentially everyone in the pool. Healthy people, moderately healthy and unhealthy people. If you don't have a strong mandate, there's not the incentive there, obviously, whether it's penal or not, to buy health insurance, so people who aren't healthy may not, and those that are unhealthy obviously will want to or will. You get an imbalance. Disregarding who pays for all this, whether it's a public plan or it's a private health insurer, the math is all the same. And the premium prices may rise. So the mandate is very important, and I think it's one of the things we all want to watch over the next several weeks as this debate heats up in Washington and a bill presumably is introduced on the floor of the House and the floor of the Senate.

Okay, great. Thanks. And then just quickly, you mentioned the close rate was up versus the second quarter. Were there any key drivers there?

It was only up slightly, so there's not really a really front-and-center reason for that. We did see a slight uptick in just the rate at which the carriers were underwriting them as we sent them to the carriers. There may be some mix factors as well, but it's pretty small at this point. But to us, to have it kick up like that was a good thing.

Okay, great. Thanks a lot.

And your next question comes from the line of Justin Post of Merrill Lynch. Please proceed.

Thank you. We looked at the churn numbers. Every quarter this year, they've been slightly lower. Have there been any changes in the mix of subscribers or any reason why people are staying longer?

I think we commented in the last few quarters that we believe that people that are holding policies are apt to hold on to those. I think we've seen more of an impact of the recession on people looking for new policies, and we've been very pleased to see a very stable churn rate there. I think one factor of mix that would improve the retention rates over time is as we get more members that are beyond the first year, the churn rates decline, typically. And so some of that is just the mix of the age of the member on our books.

Okay. And then second, on the cost of revenue you mentioned it already in your prepared remarks. Can you just talk a little bit about the mix of subscribers from the deal you mentioned and how that's affecting that line, and should we just kind of think about that as a higher number going forward?

On the cost?

Yes, the rev share, which I think--

Yes. Going forward, we transferred over a group of members. We completed the transfer at this point, and so that member base will decline over time, and so the cost of revenue would decline in association with that in that it's really a revenue share, performance-based plan that we did with them.

Okay. And last one, if you look at the guidance for the year, you definitely narrowed it from where you were, which is good, but it's pretty wide range in EPS. Is there some leverage or some flexibility on the marketing line that's in that EPS guidance, or are there any other bigger factors? And what kind of tax rate did you say in the fourth quarter? I think you already mentioned it.

Yes, there's a little bit of flexibility in there for marketing costs. They did go up a little bit sequentially this quarter, and obviously we've built in a little bit more on top of that into our range. I think the bigger factor on an EPS range is just where the revenue would come out. One thing about Q4 is it is a holiday period, and sometimes if you remember our revenue is very much dependent on what is recorded and paid to us during a given quarter. And so during the holiday period, we have to build in a little bit of flexibility for payments that come in potentially lower than we would have expected in our model. So that's probably one of the bigger factors on the wideness of that range.

Any reason why that might be different this year than last year on the holiday payment timing?

No.

Okay. Great. Thank you.

And your next question comes from the line of Richard Fetyko of Merriman. Please proceed.

Hey, guys. A lot of questions have been answered. Just curious, I guess it would be helpful to assess the decline in conversion rates, it would be helpful to know what the overall traffic to your site has trended like. It sounds like it was up year over year and sequentially, but I was just wondering if you can quantify that or at least bracket it into ranges.

Hey, Richard. It's Gary. We don't focus a lot on traffic, as you know. Like I said earlier, we don't even really look at visitors. We do look at what we call quotes or quoted sessions and individuals there, and I can tell you that in the third quarter, that volume was very healthy. Very, very healthy. And far greater than what you saw in terms of our application growth. And that's interesting to us because it certainly indicates that the value proposition, the resource we represent and so on is a very important one. It also kind of showed us that there are a lot of people who I think were being somewhat nudged or provoked by all this media attention on health care reform, but a lesser number of them than we've seen in the past are making decisions, if you consider a decision actually transacting to apply for health insurance. But that metric of consumers coming to us was quite healthy in the quarter.

Okay. Thanks.

Your next question comes from the line of Sameet Sinha of JMP Securities. Please proceed.

Yes, thank you. A quick question actually on how do you get your confidence about 13% or so application growth in the fourth quarter, considering that you're coming off of a seasonally very strong quarter where this number declined from your usual high expectations of high teens, going into the fourth quarter where customers' wallets are--customers are keeping their cash close at hand. They don't want to be spending. Any sort of marked changes that you're planning to make to your marketing plan, which gives you that confidence?

We're marketing very aggressively. Among other things, we're marketing in and around health care reform, trying to educate people about it and so on. We've got a lot of history in terms of what we expect the actual volume of consumers, again, coming to eHealth can be and what we expect it to be and so on. And once again, we think it's going to be about conversions. I think what's moving in our favor certainly is that what we have to grow off of from a year ago, it's a good base for us, [lending for growth]. What's kind of the headwind that we have right now is health care reform if anything is heating up and it's getting more attention. And I think there's more uncertainty over which way it's going to swing. And if in fact that's influencing people, that's an influence that's not going to change in this quarter, which is one of the reasons why we don't think we're going to see growth that's in excess of what we saw in the last quarter. I made that comment right up front.

I think at one point, Stuart was mentioning that customer acquisition costs might go up sequentially. Is that correct? Is there an expectation?

No. To answer your question as to whether that was built into our range for EPS consideration, it is built in, the possibility that those costs would go up.

So considering the circumstances, consumers there, regulatory headwind, do you think maybe there's an option that you pull back on your marketing and let all the noise kind of just go away before you aggressively come back into the market? Or is the concern that if you step out of the market, competition might just step in and gain market share?

Let me be really clear. We would never step out of the market. We're a marketing organization. This is what we do. So the real question is how aggressive would we be? And I think you saw in the third quarter we're flat year over year. We were judicious about this, and we watched it very carefully. Again, as I said earlier, we want to maintain a balance here between growth and profitability. There's no doubt in our minds that we could spend our way into more application growth, but there's a point that we think it just doesn't make sense in terms of the balance in our business and so on because we also enjoy good margins and generating a lot of cash and so on, and that's important to us as well. So I'm going to say it again. We're not stepping aside or stepping out of the market at all. It's really a question of how aggressive will we be in this environment, in this marketplace, that we find ourselves in?

Sure. Thank you very much.

And your next question comes from the line of Peter Costa of FTN Equity Capital Markets. Please proceed.

Hi, guys. I have two questions. First, the reduced guidance on share-based compensation, was that all just the stock price, or was there any change in performance expectations that caused that to go lower? And the second question is it looks like you accelerated the share repurchase towards the back half of the quarter. Was there any reason that you did that as opposed to just adding the (inaudible)?

In our last call, we mentioned that the initial program that we had put in place was expiring and we were putting a new program in place, and that that would accelerate the buyback process. And so that was pretty much a function of putting that second plan in place. And at that point, our stock price had stabilized versus where it was under the first plan.

And we thought it was an attractive stock price, so we got aggressive.

Yes. And I'm sorry, the first question was on?

The share-based compensation guidance which you lowered a little bit.

Oh, yes. It's been running towards the low end of the range most of the year. It's a combination of where the stock price has been this year and just frankly how many shares have been granted under the equity program just being a little bit lower than kind of the mid point of what we expected for the year.

Okay, thank you.

And there are no questions at this time. I would now like to turn the call back to Gary Lauer for closing remarks.

I'd just like to thank everyone for your time, and look forward to speaking with many of you individually as well. Thanks.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.