eHealth Inc (EHTH) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2009 eHealth, Inc. Earnings Conference Call. My name is Deanna, 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 presentation over to your host for today, Ms. Kate Sidorovich, Director of Investor Relations. Please proceed.

Thank you. 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 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. The forward-looking statements made on this call will include statements regarding the outcome and impact of healthcare reform legislation, our involvement in educating individuals with respect to healthcare reform legislation, opportunity afforded by Medicare, projected Medicare enrollment, significance of Medicare as a business source, establishment of a Medicare retail offering, goals relating to the timing of adding Medicare products to our platform, application of e-commerce on demand and sponsorship models to Medicare, testing life insurance referral and direct fulfillment options, expanding the integration of life insurance products to all platforms, our focus on profitable growth and optimizing margins in 2010, outlook with respect to submitted application growth, future growth in EODM sponsorship, implementation of all Medicare strategy, expected 2010 tax rate and cash taxes, our 2010 guidance for revenue, stock-based compensation expense, and GAAP diluted earnings per share.

Planned investment in Medicare and related earnings per share impact 2010 margins, targeted marketing and advertising expense as a percentage of revenue, and future leverage with respect to operating expenses.

Forward-looking statements are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by these statements. We describe these and other risks and uncertainties in our annual report on Form 10-K, and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, which you may access through the SEC website or from the Investor Relations section of our website.

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

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

At this point, I'll turn the call over to Gary Lauer.

Good afternoon, and thanks, everyone, for joining us today. Before I make comments on our fourth quarter performance, I would like to highlight some of our key achievements for 2009. This was an unprecedented year for our industry marked by significant developments in healthcare reform, which consistently dominated headlines and gained significant mind share among the American people. 2009 was also another challenging year for the overall economy, as unemployment rates climbed to a 25-year high, impacting consumer behavior and spending patterns both online and offline. These factors provided for a dynamic and challenging operating environment and against this backdrop I am quite proud of what we accomplished as a company.

In 2009, eHealth grew revenues at 21%, and operating income at 22%, generated over $30 million in operating cash flow, and completed a $30 million share repurchase program. We also reached an important milestone of having over two million people insured through eHealth since our Company's inception. We continue to diversify our business by leveraging eHealth's technology platform and strong carrier relationships. Revenue from the e-commerce on demand business grew over 70% last year, as we added new carriers to our platform and saw higher transaction volumes with existing EOD customers.

In 2009, we also began our entry into a brand-new market that we are very enthused about -- Medicare. [Finally], we remain very involved in Washington DC, sharing our unique insights into the nongroup market with lawmakers and serving as a consumer advocate based on our many years of experience providing Americans with access to quality, affordable health insurance

Now I would like to comment on our financial performance for the fourth quarter. Revenue of $34.4 million grew 17% over the fourth quarter a year ago. Earnings per share were $0.20, and non-GAAP operating margin excluding the effect of stock-based compensation, was 24%, up from 22% a year ago. Our cash and marketable securities increased by $10.1 million to over $153 million as of the end of the year with no debt on our balance sheet. I would also like to note that our annual revenue of $135 million and our earnings per share of $0.61 were well within the range of guidance that we provided a year ago.

For the fourth quarter, our Individual and Family Plans submitted application growth was 6%. On our last earnings call I commented that our fourth quarter application growth would not be higher, it could be less than the 12% generated in the third quarter, as we did not expect any material changes in the macro environment. And, in fact, based on customer feedback and a formal survey conducted by Opinion Research Corporation for us, many consumers indicated that they continue to delay health insurance decisions in anticipation of the healthcare reform passage.

Results of the survey which were published last month reveal significant misperceptions regarding the scope and timing of healthcare reform legislation and its implications for the American people. The course of reform has now been altered by the results of the Massachusetts senate election last month. But at the time of the survey, one in three adults believe that new healthcare reform would be implemented and accessible to consumers within 12 months of the legislation being passed.

In reality, the majority of provisions in the Senate and House bills as passed by both chambers in late 2009, were not expected to become effective until 2013 or later. Of those surveyed that were uninsured, 44% said they would choose to wait for reform legislation to pass before seeking coverage, and among the insured, 21% said they would wait if they lost their coverage.

Achieving final resolution on the healthcare reform front will be an important milestone and provide much needed clarity in our marketplace. Once this happens, we expect to be closely involved in educating consumers, bridging the gap between public perception and legislative realities, and helping individuals make informed decisions regarding their health coverage.

The challenging economic environment -- I'm sorry -- the challenging economic conditions appear to continue to be another factor impacting the health industry in the fourth quarter. Notably, many health insurance carriers recently have reported that they were operating in a very challenging environment similar to what we believe we have been experiencing.

In this environment we continue to maintain strong operational discipline and are especially focused on managing our marketing spend. Notably, our fourth quarter member acquisition costs declined sequentially to $73.38 from $74.73 in the third quarter as we continue to pursue conversion enhancement initiatives and focus on consumers that we convert most profitably.

This discipline also had a positive impact on our fourth quarter operating margins which expanded sequentially and year-over-year. Stuart will provide more details of our fourth quarter operating cost and margin performance later on in this call.

Despite the challenging macroeconomic environment, our fourth quarter retention rates with existing members remain stable and even improved relative to the retention rates we reported in the fourth quarter of last year, as Stuart again will describe in more detail.

Now I would like to comment on our recent conversion enhancement programs. We continue to develop and evolve our technology with a heavy emphasis on consumer interaction. For example, during the fourth quarter we tested a brand-new home page and an enhanced quoting page in select markets. Based on favorable test results we released both features nationwide in December. The new home page design incorporates a modernized look with vivid graphical elements, streamlined messaging around eHealth's value proposition, and a display of endorsements from major news sources, adding strength to our brand and reputation.

It also includes a geolocation feature to immediately determine user location and display tailored products and pricing in their respective market. We also introduced a dynamic filtering feature on our (inaudible) page allowing consumers to intuitively find the product best suited for them.

We continue to develop and test further initiatives in the shopping and enrollment processes to create the best possible user experience and increase conversion rates.

Turning to our fourth quarter Individual and Family Plan submitted application channel performance, our direct member acquisition channel grew 15% over the fourth quarter of 2008 and contributed 44% of submitted Individual and Family Plan applications. We continue to be very aggressive in our public relations outreach earning numerous media placements during the quarter.

EHealth was featured in leading national newspapers and magazines including The Wall Street Journal, The New York Times, the San Francisco Chronicle, the Los Angeles Times, Business Week, USA Today, Kiplinger's magazine, as well as top-tier broadcast news outlets again including the "Today Show" and CNN. 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 are also very pleased that eHealth was once again named Kiplinger's "Best of List." This is the third year in a row that we have received this honor.

Our education campaign in the fourth quarter focused on employees facing higher employer-sponsored premiums during the open enrollment season, as well as the many unemployed Americans looking for COBRA subsidy information and alternatives.

During the fourth quarter we also made good progress in our search initiatives and further solidified our natural search rankings for high volume key words such as health insurance. One initiative in this area involved enhancing and diversifying content on the eHealth site. Our team is also working at optimizing our rankings for secondary terms including state-specific key words.

The page search channel stabilized delivering 4% annual submitted application growth during the quarter. We enhanced our staffing in this area and increased our focus on search providers outside of Google, including Yahoo and second-tier search engines.

In the partner channel, Individual and Family Plan submitted applications declined year-over-year. We believe some of our partners were impacted by the same macroeconomic headwind that we experienced in the fourth quarter and saw weaker traffic growth to their sites. Also, submitted application volume in this channel did not benefit in any meaningful way from our yield enhancing initiatives, which were focused predominantly on our home page, as partner traffic is typically directed to specific landing pages.

Performance partners remain an important acquisition channel for eHealth and we continue to expand our partner network. During the fourth quarter we brought on several high profile partners including LegalZoom, BJs, Medco and Tunecore, among others.

Now, let me turn to carrier relations. In this dynamic environment, eHealth value proposition to carriers is more relevant, we believe, than ever. During the quarter we added carriers in new states including AARP plans underwritten by Aetna in North Carolina and Illinois, IHC [Compania] Life in Oklahoma, Delta Dental Plans in Colorado, and CIGNA individual and family major medical plans in California and South Carolina. As you know, CIGNA is a relatively recent entrant in the individual market and we are pleased to be an essential part of this major carrier's non-group product strategy.

As I mentioned in the beginning of the call, we continue to build on our core unique and strong technology assets and relationships with market-leading carriers to support and grow new business initiatives. At our analyst day in December, we officially announced the launch of our Medicare business. This is an exciting opportunity for eHealth given the size of the Medicare market, attractive member economics, and lack of strong online competition. Total Medicare enrollment is projected to increase by 7.1 million people from 2010 to 2015, or an average of almost 4,000 individuals per day.

Based on these factors and what we have observed with pure organic growth in senior traffic to our main site and the newly launched ehealthmedicare.com, Medicare can become a significant business source for eHealth over the next few years.

We currently don't drive this organic Medicare traffic with any dedicated marketing activity and monetize it primarily through a referral revenue model. The next step for us is to establish a retail Medicare offering with eHealth acting as a broker of record on sold policies and generating recurring revenues similar to our core Individual and Family business.

With respect to our retail rollout, we are pleased to announce that in January we launched our first retail offering of Medicare supplement plans from CareFirst, Blue Cross/Blue Shield in Maryland, and have already started generating applications. Our goal is to add products from major nationwide Medicare carriers to our retail offering in time for the 2011 enrollment season, which starts during the fourth quarter of this year, 2010.

In addition, we believe that our EOD and sponsorship models that have delivered strong growth in the Individual and Family Plan market will have significant application to the Medicare business after we launch retail products.

Currently, we have three Medicare EOD contracts signed in-house. In order for us to establish eHealth as the online distribution standard in this attractive and rapidly growing market, we plan to invest in dedicated Medicare personnel, technology and marketing. Stuart will provide more details on the scope of this investment in 2010, and its impact on our annual EPS guidance for this year.

In the commercial EOD business, we also launched our licensing platform with three new regional carriers during the fourth quarter. The application growth on our EOD sites was over 70% year-over-year in the fourth quarter, driven predominantly by new site launches over the last 12 months.

During the quarter we also expanded our product portfolio by launching a new life insurance offering. EHealth has sold life insurance coverage for several years as a rider to major medical health insurance, and now we are making a strategic decision to add it as a standalone product to cross-sell into our customer base, into our website visitors.

Our first step towards execution of this strategy with the recent addition of a license insurance tab to our home page and our launch of a dedicated life insurance landing page, elifeinsurance.com. Through a new partnership with eFinancial, consumers can conduct side-by-side comparisons of quotes and life insurance policy benefits, and apply for some products online.

We were especially pleased because we were able to provide a broad national and high quality product offering upon launch. Our customers have access to products from leading national life insurance companies such as ING, Transamerica, MetLife, Genworth and Fidelity. Over the next several quarters we will continue to test other life insurance referrals and potentially direct fulfillment options, and we anticipate expanding the integration of life insurance products into our platform.

Now I'd like to make some comments about recent public policy developments. As you may know, during the past year we have stayed very close to the healthcare reform legislation being developed on Capitol Hill. Beyond closely monitoring the process, we have been quite active in meeting with key legislators and staff in an effort to lend our knowledge, experience and data to inform the policymaking process. At various times during the debate, our dialogue has been discernible in the legislation itself.

Unfortunately, it appears that a tremendous amount of momentum that existed as well as progress made as recently as last Christmas to enact comprehensive health reform has, at a minimum, slowed. I say unfortunately, because there were many features of health reform which as a company we actively supported, such as guaranteed issue, coupled with a mandate, subsidies for lower income Americans to purchase private coverage and the creation of basic national health insurance coverage standards.

While it is far too early to suggest that serious health reform efforts will be abandoned by this Congress, it appears that the efforts of leadership in the House of Representatives to find the necessary votes to pass the senate bill, along with certain changes made to it are proving to be a challenge, to say the least.

While discussions continue along these lines, we understand that House and Senate leaders confront substantive procedural as well as political challenges.

On a separate track there is some discussion about pushing the reset button and starting the process over, either with smaller, less controversial bills brought forward one-by-one, or by working with Republicans in a more collaborative process on a list less ambitious reform initiative.

While Congress sorts through these various options by which to proceed, we continue to stand ready to support sensible reform efforts and offer our experience to better inform that process.

Stuart will provide you with our 2010 annual guidance in his prepared remarks, but before I turn the call over to him, I wanted to make some directional comments concerning this year's outlook.

In this very dynamic environment, we are first and foremost focused on profitable growth and optimizing margins. We believe we did a good job with that in 2009, and we will continue on this path in this year. Our operating model is based on recurring revenues, no leverage through debt, cash generation, low capital expenditures, and significant economies of scale. And we continue to benefit from these attractive characteristics as we grow the company.

Even as we carefully monitor our spending in this environment, eHealth maintains its leading online presence, top search rankings in our category, and positive visibility with the consumer. So, we believe that we are well positioned for accelerated growth once the macroeconomic environment improves.

At this point, we are observing macro trends similar to the second half of 2009, including a recent extension of the COBRA subsidy. As a result, Individual and Family Plan submitted application growth will remain challenging during the first quarter. We are also facing a difficult year-over-year comparison with the first quarter of 2009 when we experienced a very strong annual submitted application growth of 23%.

Finally, with our new business initiatives, we expect to continue seeing healthy growth in the emerging areas of EOD in sponsorship and, as I described earlier, 2010 will be an important year for the implementation of our Medicare strategy. And now I'd like to turn the call over to Stuart Huizinga. Stuart?

Thanks, Gary. Good afternoon, everyone. I will now review our financial results for the fourth quarter and calendar year 2009. As Gary mentioned, in the fourth quarter we continued to grow our revenue and operating income at a healthy pace while exercising discipline over our member acquisition spend and focusing on delivering strong margins. Fourth quarter operating margins improved year-over-year to 20%, and for the full year 2009, our margins were equal to our full year margin in 2008 in the face of a challenging macro environment.

Starting at the top line, our revenue for the fourth quarter was $34.4 million, an increase of 17% over the fourth quarter a year ago. For the full year our revenue was $134.9 million, a 21% increase over 2008 and at the midpoint of the updated annual guidance range that we provided on the third quarter earnings call.

As a reminder, we provided an initial 2009 guidance range at the beginning of last year. In October, we narrowed the 2009 revenue guidance range by moving the bottom end of the range upward. Commission revenue for the fourth quarter was $30 million, an increase of 15% over Q4 2008. Sponsorship EOD and other revenue was $4.4 million, or 13% of total revenues in the fourth quarter of 2009, a 34% increase over $3.3 million in the fourth quarter of 2008.

The year-over-year growth in our Individual and Family major medical plan submitted applications was 6% in the fourth quarter. By channel, Direct had its highest percentage contribution this year at 44% of total fourth quarter Individual and Family Plan submitted applications.

Our Marketing Partner and Online Advertising channels contributed 29% and 27% of Individual and Family Plan application volumes, respectively.

Conversions of our website traffic into submitted applications which had been declining stabilized during the quarter and actually started to improve relative to the third quarter at the end of Q4, following the release of our new home and quoting pages.

For the quarter we had 124,400 total new approved members. Our total estimated membership at the end of the year was approximately 728,000 members, which represents 17% growth over estimated membership reported at the end of the fourth quarter of 2008.

It is important to note that we did observe a decline in the percentage of applications that were processed and approved by carriers during the quarter, after seeing improvement in Q3. Based on that, the lower submitted applications growth rate we experienced in the third and fourth quarters, and the lower average number of individuals per approved application compared to the fourth quarter of 2008, we observed a 2% decline in approved Individual and Family Plan members as compared to the fourth quarter 2008.

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 our fourth quarter view of retention is based on data from the second quarter of 2009. Based on this information and excluding HBD members from the number of total revenue generating members in both Q3 and Q4 of 2009, our estimated member retention rate remains within our historical range and improved as compared to the estimated retention rate we discussed in our fourth quarter earnings call last year. As a reminder, HBD members refer to members that have been transferred to eHealth from Health Benefits Direct in 2009, pursuant to our business development agreement with them.

We are encouraged by the consistency in our member retention that we have observed during this difficult economic environment.

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 2009, as compared to the comparable period a year ago. This is driven by continuing economies of scale as well as strong operational discipline that we maintained in this environment.

I will now review our operating expenses line by line. Our non-GAAP marketing and advertising expense which excludes stock-based compensation expense was 38% of revenue this quarter, an improvement compared to 39% in Q4 '08. For the full year 2009, our GAAP marketing and advertising expense as a percentage of revenue was 40%, and within the target range of 38% to 40% that we set at the beginning of the year.

And, as Gary mentioned, we were pleased with the 2% sequential decline in our cost of acquisition per member. This is measured as our marketing and advertising expense per individual on Individual and Family Plans submitted applications for the quarter.

On a year-over-year basis, cost of acquisition measured on this basis increased 12%, driven mainly by a lower conversion rate for our website traffic and a lower average number of individuals per submitted application as compared to Q4 '08. Non-GAAP technology and content costs which exclude stock-based compensation expense, declined from 12% of revenue in the fourth quarter of 2008 to 11% for the comparable period this year.

General and administrative costs also declined on a non-GAAP basis from 14% of revenue in the fourth quarter of 2008 to 13% in the fourth quarter of this year. Our non-GAAP customer care and enrollment costs declined from 12% in the fourth quarter of 2008 to 10% in the fourth quarter of 2009.

Our fourth quarter non-GAAP operating margin excluding the effective stock-based compensation was 24%, or $8.3 million as compared to 22%, or $6.5 million in the fourth quarter a year ago. Fourth quarter non-GAAP operating income grew 27% as compared to the fourth quarter of 2008.

For the full year, non-GAAP operating margin was up slightly at 22.7% in 2009, as compared to 22.2% in 2008. This resulted in 24% growth in 2009 non-GAAP operating income for the full year.

Interest and other income was $0.1 million during the quarter, down year-over-year from $0.6 million in the fourth quarter of 2008. For the full year 2009, our interest and other income was $0.9 million, down from $3.7 million in 2008.

Our approach to investing and managing our cash remains conservative. Currently over 97% of our cash and marketable securities consist of cash, US Treasury funds, US Government Agency funds, or direct investments in the US Government Agency securities. The remaining investments are in high-grade corporate bonds that we plan to hold to maturity.

Our GAAP pre-tax income of $7 million in the fourth quarter of 2009 grew 12% over the $6.3 million generated in the fourth quarter of 2008. On a non-GAAP basis excluding the effective stock-based compensation in both years, our pre-tax income was $8.4 million, or 18% growth from $7.2 million in Q4 last year. The largest factor behind our non-GAAP pre-tax income growing slower year-over-year has been our non-GAAP operating income is lower interest income in Q4 2009 as compared to the Q4 2008 level.

We continue to benefit from past net operating loss carry forwards which reduce the cash taxes we pay relative to what we report as expense in our GAAP P&L statement. For 2010 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 3% to 5%.

Going into 2010, our federal NOLs are approximately $46 million, all related to stock option deductions that are available to offset future corporate income taxes that are not considered an asset for accounting purposes.

The NOLs resulting from such stock option activity 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. Also, based on GAAP guidelines, the impact of NOLs related to past stock option activity is reflected in the financing portion of our cash flow statement; whereas, NOLs related to past operating losses are reflected in the operating cash flow.

Fourth quarter 2009 GAAP net income was $4.8 million compared to $3.6 million in the fourth quarter of 2008. Fourth quarter GAAP net income includes an income tax benefit of $585,000 related to an increase in deferred income tax assets, which resulted from a reduction in estimated limitations on both federal and California net operating loss carry-forwards.

Non-GAAP net income for the fourth quarter 2009, which excludes stock-based compensation expense and related income tax benefits, and also the income tax benefit that I just mentioned from the reduction in estimated limitations on our NOLs, was $5.1 million compared to $4.2 million in the fourth quarter of 2008, a 22% increase.

Non-GAAP net income for the full year increased 10% to $18.2 million in 2009 compared to $16.5 million in 2008. Our cash flow from operations in the fourth quarter was $9.4 million, up from $7.4 million in the fourth quarter of 2008. For the full year we generated $30.1 million in operating cash flow compared to $30.2 million generated in 2008.

For the full fiscal year we had a $9.4 million net cash flow benefit from deferred taxes. For purposes of our 2009 cash flow statement, that $9.4 million net cash flow benefit was split with $4.4 million benefiting operating activities and the other $5 million benefiting financing activities.

In 2008, the majority of a $9.2 million net cash flow benefit from taxes was reflected in cash flow from operating activities with just $300,000 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 2009 cash flow from operations would have been $35.1 million as compared to $30.5 million in 2008.

Capital expenditures for the fourth quarter of 2009 were approximately $300,000, and were approximately $1.4 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 security balances increased to approximately $153.5 million at December 31, 2009, up from $150.6 million at the end of 2008, even after the completion of our $30 million stock repurchase program.

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.

And now I would like to comment on our expectations for 2010, but before I do that, I want to remind you that these comments are based on current indications for our business which may change at any time. We undertake no obligation to update these comments.

We are forecasting revenues for 2010 to be in the range of approximately $148 million to approximately $155 million, representing an annual growth rate of 10% to 15%. For the full year 2010, stock-based compensation is expected to be approximately $6 million to $7.5 million. GAAP diluted EPS for 2010 is expected to be in the range of approximately $0.55 to $0.65 per share.

I also want to provide a little more color on the impact of our new Medicare retail initiative on our 2010 outlook. As Gary mentioned, we are excited about this market and plan to invest in dedicated Medicare resources this year. Starting at the top line, our revenue guidance does not reflect a meaningful contribution from Medicare retail commissions in 2010.

On the operating expense side, we expect to invest just over $3 million in people, technology and marketing to support the Medicare initiative in 2010. This represents an EPS impact of approximately $0.08 this year. At the same time I'd like to point out that a lot of the heavy lifting with respect to technology has already been done and we are leveraging significant financial resources and years of hard work by our engineering team that have been invested in our platform since the Company's inception.

Regarding our margin outlook in 2010, similar to 2009, we will continue to focus on profitable growth and maintenance of attractive margins. We are targeting our GAAP marketing and advertising expense as a percentage of revenue to be in the 40% to 42% range for the full year. This number will likely fluctuate above or below this range from quarter to quarter based on the seasonality of our application volume. We also expect to see continuing leverage in other areas of operation outside of marketing in our core business.

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

(Operator Instructions) First question will come from of Youssef Squali, Jefferies & Company. Please proceed.

Hi, good afternoon. This is Sandeep [Swadier] in for Youssef. Thanks for taking my questions. Just two quick questions. The first one probably better to just break it into two parts. So, you talked about application growth rate would be challenging in the first quarter. But I am just curious in terms of what growth assumptions are you making into your guidance for 2010, especially in terms of the first half or the second half. Are you thinking about any recovery in the second half, or could it even get worse than where it is now? And similar color for sort of some trend in marketing expense as well. And then I have a follow-up.

Yes, this is Stuart. In our guidance for 2010, we obviously -- you can see our 10% to 15% revenue growth rate, so that obviously includes an increase in the submitted application growth compared to where we are in the fourth quarter of this year. Gary mentioned Q1 is a particular challenge, but after we get past Q1, as you recall looking back at 2009, the headwinds picked up fairly substantially in Q2 and continued to get more severe as the year progressed. And so our year-over-year growth we would expect for that to pick up on a year-over-year basis in the second half relative to the first half.

Yes, and this is Gary. What I would add to that is we were really pleased with the application growth we had a year ago. It was an interesting quarter in that the economy was continuing to deteriorate, more people were losing employment, unfortunately. There is no COBRA subsidy and people were recently employed and at least presumably had some money in their pockets.

Interestingly, we think now in retrospect that once the COBRA subsidy became affected, which was at the end of that quarter, probably had some more impact on the individual market than any of us, I think, both here and with many of the carriers suspected. In fact, we have been monitoring recent carrier earnings calls and it is interesting to see the COBRA uptake that they have been experiencing.

I saw a study recently from, I believe it was Hewitt. We have also seen one from Ceridian that shows COBRA uptake between 15 and 20 total percentage points more than in a typical market environment. So, we had this big quarter last quarter, then we are dealing with that and some other things as well.

Now, what is interesting is that in future quarters in this year, Q2, Q3, Q4, as you know, we had (inaudible) growth rate that weren't as large as we did in the first quarter, and so we're comping against something that is a little bit different as well. But clearly there is still some very strong influences in what we regard as this macro environment that we are dealing with.

Okay. And then you talked about bringing in some high profile partners and we just noted that the cost rev share was down 30% sequentially. Just curious what was going on there to have something to do with HBD or did you renegotiate some partner agreement? How should we think about it for 2010?

Well our cost of acquisition went down this quarter. We were looking closely at all channels in terms of monitoring that, keeping that at or below what we saw in Q3. We are pleased to see it below what we had in Q3. We did spend a little less in the Direct channel than we had previously, and that was one component of that. In terms of us focusing as much as could on the highest ROI aspects of our constituencies that were coming to us.

For next year, 40% to 42% is our range that we have set as a target as a percentage of revenue for marketing and advertising, and it does allow for the cost to be a little bit more than what we saw in Q4. But (inaudible) going to 2010, which is -- we're not looking to chase higher cost of acquisition up in this tough macro environment. And so if we start to see that improving, we may spend more on the marketing side, if we see improvement happening.

And we actually have a lot of questions in the queue, so we have to limit, unfortunately, to one to two questions per caller. So, can we take the next caller, please?

The next question will come from the line of Jim Friedland of Cowen & Company. Please proceed.

Thanks. Question on the Medicare investment this year, that incremental $3 million that you are going to spend. Do you view that as one time and then on an absolute basis it could tick down next year, or next year might it at least you see a lot of leverage off that line? And then I just want to confirm that you said, it sounds like the signups are not going to kick in until Q4 of this year, so I guess we probably will only see a very little piece of the revenues in 2010, and then it is really a 2011 story? Thanks.

Yes. Most of the spend that is going into Medicare this year is recurring. It is engineering, it is customer care and enrollment, some G&A and some marketing that will be on an ongoing basis. We do have some one-time costs that go into there to start it up, so there will be some startup marketing costs, for instance. There is regulatory work to do, legal, professional services, some other things that are associated with one-time kind of starting it up. But I would say the bulk is going to be building out what we need to support that business going forward.

I will say as we move beyond 2010, I would expect the cost to increase at a closer rate, especially in areas like technology, where we would be slowly adding to that core team probably largely in China, as an example. And then as volumes pick up, depending on how volumes work from there, we would add additional Customer Care Center resources.

And in terms of how the revenues kick in for Medicare?

Yes. So, as Gary stated, it is a recurring revenue stream and, you are right, we look for it to be -- we are targeting the fourth quarter to begin sales in the retail channel in any significant volume. And so we may pick up a little bit in the fourth quarter, but I would expect most of that to benefit the next year.

Okay, great. Thank you.

The next question will come from the line of George Sutton, Craig-Hallum. Please proceed.

Hi, guys. Gary, you referenced an interesting study that I wanted to go into a little bit more, and that is that 44% of people were choosing to wait to buy healthcare insurance given the potential for healthcare bill, and 21% of those people insured would wait if they lost their job. So, what that tells me is between 21% and 44% of potential customers that would have come to you were not coming to you. Is it that simple? Is that analysis relevant in looking at what growth rates could have been in absence of the healthcare bill?

Well, George, it's interesting. I don't know that you could add it back. We saw enough unusual things happening in terms of consumer behavior that we went to Opinion Research, who is a very well respected group, and brought them on to work with us on this, independent of us. We wanted to make sure we were getting some things that seemed pretty clean. And what we found was that in December, 24% of people seeking coverage said that they would wait, 44% -- I'm sorry, 24% of people in total said they would wait, 21% of them were insured and 44% uninsured.

We just commissioned it again. We ran the same study in January and found some trends that weren't unlike that as well. So, clearly, all of this media attention, all the hoopla and so on over healthcare reform has got people, not just legislators confused, but more importantly from our standpoint, consumers confused about all of this. And people thinking they are going to wait. What do they think, they're going to get a free health insurance or they're going to get a check from the government, it's less expensive? It kind of runs the gambit.

Now, as a follow-up to that, your messaging has really moved towards explaining to people that it isn't likely you're going to get healthcare insurance, it isn't likely that we are necessarily going to have a healthcare bill any time soon. What has been the response you have seen thus far from that new messaging, which appears to be about a month old?

Yes. We've just begun that messaging and I believe it is starting to resonate with people. But, you know, you still -- you know, healthcare hasn't gone away. The president has announced this bipartisan summit that is going to be televised on February 25. Nancy Pelosi still says we are going to get a bill done. You've still go a lot of people rattling their sabers about this right now. And until that dies down, I think we're still going to have this confusion factor to continue to deal with. And, frankly, it's a challenge for us from a marketing standpoint to battle it, but we are starting to get very aggressive now about educating people on what this is and what it's not.

Gotcha. Thank you.

Thanks, George.

We have a question from the line of Gregg Genova, Deutsche Bank. Please proceed.

Hi, thanks. Can you comment on the application growth. You said it was going to be tough in the beginning of the year, but then you are going to see a rebound in the back. Do you think that rebound could be enough to get you back to that mid-teen level, or do you think that is kind of on hold for now?

You know, Gregg, I don't want to comment at this point on what I think it could be in terms of an absolute number, because, frankly, we don't know. We clearly see a little bit more -- we clearly see some smoother air in front of us because what we are dealing with now. I would think, I think that healthcare reform one way or another starts to get itself resolved over the next several months. I think, I may not be certain, although I also thought a month ago that it would passed and a bill would be signed by right now. So, I think we are all surprised by that.

It doesn't look like the economy is getting a whole lot better, so we've got all these things to deal with. And the COBRA subsidy, although it has been extended through February 28, the jobs bill they're talking about right now in the Senate, as well as the president's proposed budget, have got some pretty significant increases -- I'm sorry, extensions to that as well. So, we are watching and monitoring all of those things.

But having said that, it is our job to just go market and position ourselves every way that we can so that people understand what they are dealing with here, and that is precisely what we are doing. But, yes, we think we are in a challenging environment right now. We were last quarter and that continues a bit.

Great. And then how about -- you talked about the consumers' attitudes with health reform. How about health plan behavior? Have you seen a change maybe in broker commissions or any thoughts on health plan behavior as health reform has kind of taken a 180 over the last few weeks?

Yes, we've seen absolutely nothing on the commission side. Our commission rates haven't changed in years, so there has been nothing there. I think you are all aware of the announcement by Anthem Blue Cross to increase, at least in California and perhaps other markets as well, pretty substantially the premiums that their members have today, up to as much as 39%. That actually, believe it or not, is a really good marketing opportunity for us, although it is certainly -- it has certainly kind of refortified some of the Democrats and others about the need for the bill to pass right now in the House and the Senate.

But, the other comment I would make about the carriers is that several of them have made comments as well about pressure in the marketplace and so on, and what they see in their individual businesses, and we hear it from a number of others as well.

I think the comment I would add is you heard me talk about the close ratio declining in Q4 and the carrier underwriting was a part of that close ratio decline. We saw it improve in Q3, but then to turn back down in Q4. And so that may be stemming from some of the things that are going on in the marketplace with the carriers.

We have a question from the line of Nat Schindler, Bank of America Merrill Lynch. Please proceed.

This is actually Justin Post. I wanted to ask you about market share and I'm just trying to frame it in the function of whether consumers aren't buying anything because of the economy and the healthcare legislation, or is there a market share trend that you know about? I s there any kind of data about new policies being sold and how you are comparing kind of to an industry average? And then I have a follow-up.

Yes, Justin, this is Gary. We look at that very, very closely. There is no data source for that. Fortunately or unfortunately, nobody tracks that very accurately or very well. So, we try to do it ourselves. We do it through talking to the carriers and so on and try to understand what is going on with their books of business. There is nothing there that indicates to us that there is a market share change. Frankly, with our e-commerce on demand sites, we watch those very carefully because we can see what the carriers are processing in terms of the quantity of applications and so on.

And interestingly, over the past six months, the second half of 2009, we saw a similar growth decline there as well. That is one of the first things that I would look at in this environment is, is there something here from an execution standpoint that is causing us a loss of market share? And I can report to you at this point, I don't see anything that indicates that right now.

Okay. And then any update or progress on your healthcare platform for businesses, maybe for the part-time employees that might not be getting full healthcare benefits? And any kind of opportunity to drive some revenues from kind of new platforms in that area?

Well, you know we've got our health savings account platform that we built for small businesses that we are still very enthused about with all the healthcare reform activity and so on. And, frankly, what was going to happen to health savings accounts in both of those bills, that suddenly wasn't so relevant. The platform is a really good platform and there are a lot of ways that we can use it and will look to use it.

We frankly, the interesting thing in the small business environment kind of to this point is that we are seeing more and more people come to us who are employed in small businesses but not getting any kind of health coverage through the business, so they are purchasing it on their own. So, we are watching all those things as well. There have been some legislative proposals that could make this small business platform a very, very interesting one, also.

But in this current environment, one of the parts of business that is most hampered in this economy is small business, as you know, and that relates to health insurance and everything else for small businesses.

All right. And last thing, when you look out across all the states and all the carriers, where do you think you are as far as penetration of carriers on your website? And is there any opportunity to increase that penetration and maybe increase conversion rate? Thank you.

Yes. Well, our penetration is high. In most states we are in our market -- on our online marketplace we are representing the major quality carriers, and I emphasize "major" and "quality," because we have a high standard by which we bring them on. We are seeing some expansion with CIGNA, as they are moving into this non-group market the way that Aetna did over the last couple of years. And we are looking at regional plans and more localized kinds of plans that are dominant in the smaller markets that they're in.

We have a question from the line of Willis Taylor, Gagnon Securities. Please proceed.

You mentioned 44% of consumers are sort of waiting for the healthcare reform uncertainty to pass before buying insurance. Do you have a sense for what that amounts to in numbers of people on the sidelines?

You know, Willis, no. Yes and no. I just want to be careful with this. It looks like there may have been now close to 50 million people who are uninsured. Of those that Opinion Research surveyed for us, 44% of those uninsured said that they would wait. And it is 24% in total when you include people that are insured as well. So, it is certainly a significant number.

Now, would all those people, if healthcare reform weren't hanging out there, would they all come to our site and transact? No. But is there a meaningful number there that are not right now? We think that there may very well be.

And does your educational message, do you plan on evolving it if the uncertainty lasts longer than you think?

Oh, absolutely. We are starting to get aggressive about it. We just did a release this week on many, many people who are not eligible for the COBRA subsidy and what that means for them. And we are watching this very, very closely in DC. We have people in DC, as you know. And I think it is going to be interesting to see what happens on February 25, with the president's televised meeting, whether it's political theater or if anything meaningful comes out of that.

But one thing seems to be somewhat certain or probable, which is that the further you go into this year the midyear elections really start to ramp up. That is all the seats in the House and 36 seats in the Senate, and passing legislation like this probably becomes less and less interesting to many of them. So, does this bill just kind of flitter away or do they try to get something else passed? I don't know the answer to that at the moment.

And we have a question from the line of George Askew, Stifel Nicolaus. Please proceed.

In the new products, the life insurance and Medicare products, what is the revenue model? Is eHealth the agent of record, collecting recurring commissions, or is there a revenue share with, for example, eFinancial in the life insurance space, or some other structure?

Yes, George, at the moment what we are doing with life, it is really more of a bounty or kind of a lead payment, if you will. But as I think I commented, we are also considering direct fulfillment there. We are really trying to understand what that market is about and how it reacts.

In Medicare today, this is really important for me to emphasize, we are generating revenue in Medicare. We are simply, simply placing people who come to us with carriers for the most part, and a few others, and a few Medicare call centers that are fulfilling this business. They are the broker of record. They are earning the commissions and so on. We are really getting paid a referral fee. But it is enough that it has really got our interest, because we do nothing to market this right now. We don't do anything to attract seniors to our site, yet they are coming to us anyway.

But our plan is with Medicare to get into the retail business with a business that is going to look very familiar to you. It is going to look very much like our Individual and Family Plan business. We are interested in it because the lifetime value of these products is far greater than the individual and family products today. The commission rates are higher, the retention rates are much longer. There is no national strong online presence today which still surprises me. We think it's a wonderful opportunity for us to move right into. It is very fast growing. As I said earlier, there are over 7 million people aging into Medicare eligibility over the next five years.

And another interesting thing. One of the fastest growing age segments for us of people buying individual and family products are people who are 59 to 64 years of age. They are retiring early, they no longer have their employer's health benefit, they are not Medicare-eligible yet, and they have learned to use the Internet presumably at their place of employment, and they are comfortable transacting online. But we just see so many things moving in this direction. We just feel it is a very, very intriguing, if not compelling business opportunity for us. And we've got a very strong and unique technology asset that we think lays into this very, very well.

Right. Thank you for that. And then the second question, what is the possibility of another share repurchase authorization?

Well, it's possible. We certainly have the cash wherewithal and we continue to generate cash at a very, very nice rate, we believe. And we are monitoring that and monitoring the price of our stock in the marketplace and so on, and it is something that we continue to look at and evaluate with our board.

We have a question from the line of Sameet Sinha. JM Securities. Please proceed.

Yes, thank you very much. During the analyst day that you had last year, you spoke about eventual acquisitions. Can you talk about where -- which segments you could be making acquisitions? Would they be revenue acquisitions, basically technology? Secondly, are you in your assumptions about sales and marketing costs 42% of revenues, do you think customer acquisition costs or member acquisition costs reasonably would be up in the 5% range? And the third question is cost of revenues was down sequentially, and there were some accounting related issues with things that you did with HBD. Can you talk about that and how that is going to [influence] 2011 as well?

I missed the first question.

Sameet, we are just conferring. We got the second and third question, not the first question.

Okay.

Acquisitions, okay, I got it. Thank you. I wrote down your second and third and didn't write down the first. Let me address the first and Stuart can make comments on the second and third questions. On acquisitions, I'll just say what I've said in the past, is that we are acquisition-minded, but we are going to be very thoughtful about this. The history of acquisitions in the world of technology is not a good one. More fail than succeed. If we do something we want to be very adjacent to where we are. If there was an eHealth 2 out there, we probably would have acquired them by now to consolidate the marketplace. There is not. We are very unique in where we stand in this marketplace. Maybe even more unique than ever as we continue to expand our footprint and so on.

Clearly, there may be some opportunities in some of these expansion areas, like Medicare, for example. We may be able to do some things there from a technology standpoint or otherwise that could help to accelerate our entrance into this business. And it is something that we consider and we are looking at.

And on your other two questions, on the cost of revenue, the decline there is almost entirely from health benefits direct to revenue declining between Q3 and Q4. Many of those members hit their second year, lower commission percentages during the fourth quarter, and so those revenues declined and the cost or revenue declined with that.

On cost of acquisition, we have a 40% to 42% range. As I mentioned, we are really looking to keep the same philosophy going forward that you saw in Q3 and Q4, and keep our cost of acquisition on a per-unit basis as close to where we are today as we can. But our guidance does allow for that to go up modestly.

I should add to that, there is another option here always for us, which is to spend our way into growth, and from time to time people suggest that. And it is just not something that we are willing to do as a company. We think we built an awful lot of discipline into our channels, into our business over the years, the way that we manage it and so on. Profitability and margins are very important to us, as is growth, and right now we are in an interesting environment. It is very challenging and we are trying to keep all these things in balance.

And management has time for one more question and it will come from the line of Steve Halper with Thomas Weisel Partners. Please proceed.

Gary, could you just update us on how you feel the online search performance has been?

Yes, Steve. Actually pleased with our progress there. We have seen some good progress in what I regard as the secondary engine, Bing at Microsoft and some at Yahoo, although Yahoo continues for everyone in the e-commerce world to be a bit of a challenge. Google is very much stabilized for us. We saw some good on a relative basis paid search growth.

Probably most importantly on a natural search in the middle of the fourth quarter we regained our number one ranking. I haven't looked today, but I think if you key in health insurance, you may very well find us as the number one natural organic position. So, we are bracketed now, number one natural, number one in paid, which is where we like to be and it's an unusual place to be. So, yes, we feel like we have made some good progress there, Steve.

Great. Thanks.

And this concludes the question-and-answer session of today's conference. I would like to turn the call back to Gary Lauer for closing remarks.

I would just like to thank everyone for your time and look forward to speaking with many of you over the next several weeks or so as we meet. Thanks again.

And, ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect and have a great day.