eHealth Inc (EHTH) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q1 2010 eHealth, Incorporated, earnings conference call. (Operator Instructions) Later, we will conduct a question-and-answer session. As a reminder, this call is being recorded for replay purposes. And I would now like to turn the call over to your host for today, Ms. Kate Sidorvic, 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 first quarter 2010 financial results. On the call this afternoon we will have Gary Lauer, eHealth President and Chief Executive Officer, and Stuart Huizinga, 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 plans and strategies with respect to Medicare and the seniors market. Timing of the launch of a nation wide retail Medicare experience, impact of the PlanPrescriber acquisition on our Medicare plans, accretiveness of the PlanPrescriber acquisition and impact on our financial outlook. Performance of our marketing channel, opportunities presented by healthcare reform laws and our ability to address them. The impact of healthcare reform on the health insurance market, future characteristics of the Medicare market, future contribution of Medicare and e-commerce on demand. Future operating expenses, near term submitted application growth rates, expected 2010 effective GAAP tax rate and cash taxes, our 2010 guidance for revenue, GAAP diluted earnings per share, and stock-based compensation expense. And finally, 2010 expected Medicare based revenue.

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 a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included in our press release and in our SEC filings which can be found in the "about us" section of our corporate website under the heading Investor Relations. And at this point, I will turn the call over to Gary Lauer. Gary.

Good afternoon and thank you all for joining us today. Before I review our first quarter performance, I would like to comment on a recent announcement that we are very enthused about. EHealth's acquisition of PlanPrescriber Incorporated, formerly known as Experion Systems Incorporated, a leading technology company in the on-line Medicare space. As you know, eHealth has grown organically since inception, yet we have always been interested in acquisition possibilities which can contribute to our growth strategies and also match M&A objectives. PlanPrescriber acquisition meets each of them.

It is highly strategic, expected to be financially accretive in this year, and is technology centric. Importantly, this transaction accelerates eHealth's entry into the senior market and provides us unique Internet and customer acquisition capabilities in that area. Stuart and I will provide more details on the PlanPrescriber acquisition and its impact on our financials later during this call. At this point I would like to review the highlights of our first quarter performance.

Revenue of $36 million grew 13% over the first quarter a year ago. Earnings per share were $0.13. Our non-GAAP operating margin, excluding the effect of stock-based compensation was 21%, up from 20% in the first quarter of 2009. Our cash and marketable securities increased by $5.1 million to $158.6 million as of March 31st with no debt on our balance sheet.

Individual and family plan submitted applications were down 4% year-over-year on a challenging comparison with the first quarter of '09 when we reported record submitted application volume and before we believe healthcare legislation discussions, COBRA subsidies, and the economy started to impact submissions later during 2009. Sequentially, individual and family plan submitted applications grew 11% as compared to the fourth quarter of 2009. I would like to point out that we processed 135,600 individual and family plan applications during the first quarter. The second highest application volume ever achieved in the company's history.

Paid search was our strongest member acquisition channel based on individual and family plan application growth, generating 15% year-over-year growth, 30% of total submitted applications. During the quarter we saw annual application growth with Google and Yahoo as well as secondary search providers. Our direct channel remained the largest contributor to family plan submitted applications at 43% and grew 2% year-over-year. Finally, our partner channel had disappointing performance declining 25% as compared to the first quarter of '09. We do expect to see continuing challenges in the partner channel, and we are working to address them. At the same time we are optimistic about contribution from our direct and paid search channels.

During the first quarter we operated in a macro environment similar to what we observed through the second half of 2009. Much uncertainty remained in the marketplace as the fate of healthcare reform was being decided in Washington. We believe this uncertainty continued to impact consumer decisions with respect to the purchase of health insurance. In this environment, we're focused on profitable growth and cash flow generation with an emphasis on controlling marketing spend. First quarter cost of member acquisition remained relatively flat with levels in the second half of 2009 at $73.68. GAAP marketing and advertising expense, as a percentage of revenue, was 41.2% within our guidance range for the year of 40% to 42% in the face of the first quarter being seasonally high application volume quarter. Stuart will provide more details on the first quarter operating costs and margin performance later during the call.

Passage during the first quarter of the patient protection and affordable care act was the single most important development in the health insurance industry in years. To remind you, this new legislation is based on the Senate bill that was passed in December of 2009. We see significant opportunities related to this legislation and believe eHealth is uniquely positioned to address them. Mandating most Americans to have health insurance and providing subsidies to millions of people to purchase health plans, most would agree will expand the size of the health insurance market. We believe this is an environment that favors scalable technologies that can process high application volumes in an effective low-cost manner requiring minimal human interaction. States will also need to lay groundwork for launching health insurance exchanges and providing effective venues for administering subsidies to elder individuals and small businesses.

We welcome the opportunity to provide government and the private sector with the benefit of our advanced technology platform and years of experience connecting millions of Americans to quality health insurance. It's important to note that while healthcare legislation is passed, specific regulations and framework for implementing the key reform provisions provisions have not yet been established. This is sweeping legislation, and for eHealth it presents challenges, risks, and opportunities. We will closely monitor developments on the public policy front in the coming months. We are also actively involved in educating consumers regarding reform implications for their coverage and clarifying some common misperception about this legislation.

As you recall, last December, we engaged opinion research corporation to conduct a survey that confirmed our belief that lack of clear understanding of key reform provisions resulted in hesitancy to transact in our market on the part of some consumers. We revisited this study in April of this year. The results indicated remaining uncertainty with consumers despite healthcare reform passage. Findings of our survey are supported by a recent Kaiser family foundation study that concludes 56% of Americans don't have enough information to understand how reform will affect them. As before, this impact was seen primarily with individuals who were uninsured at the time of the survey. Our goal is to address this uncertainty and expedite the consume decision making process through a cohesive marketing strategy involving multiple consumer touch points.

First of all, we launched an aggressive public relations campaign. Through a combination of educational press releases, media appearances, and have off-line advertising. The emphasis is on time line and availability of key reform programs and the impact of the new legislation on out of pocket costs of health insurance for individuals. To address eHealth site visitors our technology team is work on incorporating precise and effective messages on our landing pages to create urgency with individuals who remained uninsured in anticipation of reform passage.

We are also using our customer care center resources to educate consumers through a combination of inbound and outbound efforts. We have also launched an educational campaign targeting the first wave of COBRA subsidy recipients. A sizable group of people who lost their jobs between September 2008 and March of 2009, a time period characterized by widespread layoffs. These initial recipients will be coming off the subsidy at the end of May, and we believe should start researching affordable COBRA alternative products.

On the carry relations side we continue to expand our website inventory and deepen our relationships with existing carrier partners by increasing the scope of services we provide to them such as our EOD and sponsorship offerings. During the quarter we signed a new e-commerce on demand contract with Blue Cross Blue Shield of Arkansas. We also entered into a pilot agreement with one of our largest carrier partners, Well Point, for the deployment of our platform in New York and Georgia. This is an important project and gives eHealth the opportunity to prove the relevancy. We believe we can add a lot of value to that's businesses and make the direct to consumer efforts more cost effective and efficient while at the same time monetizing this portion of the business through a high-margin transaction-based model.

During the quarter, we did not observe any significant changes in the on-line competitive landscape. EHealth remained the leader in its category as we maintained our number one national ranking for health insurance while improving for secondary health insurance related items. We also maintained our number one position in paid search on Google for such high relevance key words as health insurance, individual health insurance, and health insurance quotes. Now I would like to comment on our progress in the senior market.

We are very enthused about the Medicare market which is characterized by attractive member economics including an estimated five to six-year average retention for Medicare Advantage, Medicare Supplement, and Part D products. Well above the average retention for our individual and family plan products which is just over two years. The estimated commissions lifetime value of a member on Medicare Supplement and Medicare Advantage also compares very favorably to the average lifetime value of our individual and family plan members. More importantly, the Medicare market is projected to grow by 7.1 million enrollments from 2010 to 2015, which is an average of almost 4,000 new members per day.

As I have commented in the past, pre-Medicare 60 to 64-year-old individuals are the fastest growing demographic segment of our individual family plan membership. In many cases these individuals retire early and come to us on-line to look for health insurance solutions. We have also observed that despite no marketing spend in this area, a growing number of senior Americans are coming to eHealth looking for products that supplement Medicare. So, the combination of more seniors on-line, growing organic traffic, and projected Medicare enrollment growth, makes the senior market a natural extension of eHealth's core individual and family plan business. We are currently engaged in building out our retail Medicare initiative and believe we are on track for having a nationwide retail Medicare experience for products that supplement Medicare in time for the Medicare annual enrollment season which begins this coming November.

As I mentioned in my opening remarks our acquisition plan for of PlanPrescriber Incorporated accelerates our margin into the large and expanding senior market. PlanPrescriber is a company we have known for some time. Similar to eHealth, it's profitable fast-growth technology company that has developed a unique and data-intensive research and comparison shopping capability for Medicare-eligible individuals, including a comprehensive catalog of plan data for every Medicare advantage and prescription drug plan in the nation. PlanPrescriber's primary website, PlanPrescriber. com, helps seniors evaluate expected costs among available Medicare plans for the specific medications they take and provides an invaluable access point to this fast growing demographic group. According to a 2009 report by the CDC, close to 90% of all individuals ages 65 and older had taken at least one prescription drug in the month leading up to the survey, and over 60% had taken three or more prescribed drugs.

Notably, PlanPrescriber's technology and decision support tools are licensed and used by a number of leading pharmacy retailers including Wal-Mart, CVS and Rite Aide, both on their websites and at their pharmacy counters. The ability to interface directly with seniors using this internet technology and help them analyze make important cost-savings decisions on their medication and health insurance options is very valuable and unique. PlanPrescriber's revenue model monetizes through referral partners the high volume of Medicare traffic that PlanPrescriber generates. A model that we plan to compliment over time with commissions based business using eHealth ears carriers relationships.

The acquisition adds essential building blocks to our Medicare strategy including critical website functionality and content as well as expertise in effective customer acquisition for Medicare related insurance products. Overall, we believe it's an excellent compliment to our technology and on-line marketing capabilities in the individual and small business products area. We've now developed a close relationship with a PlanPrescriber team and expect a smooth and fast integration process.

As we integrate PlanPrescriber, we will work on expanding its presence and providing an even more streamlined and seamless experience for seniors. PlanPrescriber's Cofounder and Chief Executive Officer Ross Blair, will manage PlanPrescriber as a subsidiary of eHealth. We are very pleased to have Ross and his team on board to help us achieve our goal of becoming the nation's technology distribution standard for Medicare related products. Our acquisition checklist includes the objectives of being strategic, accretive, and technology based. As I said earlier, PlanPrescriber meets all of these objectives. And, as Stuart will describe, we expect this transaction to be accretive to eHealth's revenue and GAAP earnings starting this year. Stuart will provide updated guidance for the full-year 2010 later during the call.

Very recently we also executed a national marketing and distribution agreement with Humana to become a field marketing organization for the distribution of their Medicare supplement, Medicare advantage and Part D products nationwide. Our ability to offer a complete on-line customer experience for all three Medicare product categories is a critical step, and we are very pleased to have entered into this relationship with Humana, one of the largest national carriers specializing in Medicare. Our strategy is to first offer Humana product in a small number of mark and later to expand our distribution of these product nationally.

We are also in discussions with other national brand-name Medicare carriers. It's important to note that as we pursue the opportunities in our emerging growth businesses, Medicare and e-commerce on demand, we will also continue to emphasize our individual and family plan commissions business, which remains the core of our company. But we expect that the contributions from e-commerce on demand and Medicare will continue to increase. We also plan to remain extremely careful about our spending both in the existing and new businesses.

In conclusion, we are certainly operating in a dynamic environment that presents a unique set of opportunities and challenges for our core non group retail business. Over the next few quarters, we will devote significant effort towards solidifying our position in the post-reform world as regulations are written and the new environment becomes better defined. This will include communicating our value proposition to state governments and also working closely with carriers to help them leverage our technology and adapting successfully to the new regulatory realities. Now I would like to turn the call to Stuart.

Thanks, Gary. Good afternoon, everyone. As Gary mentioned, during the quarter we continued to grow our business organically and also worked on completing the first acquisition in the Company's history, which closed last Friday. Based on projected financial contributions from the PlanPrescriber transaction, we are increasing our 2010 annual revenue guidance, which I will provide at the end of this call, but first I would like to review our financial results for the first quarter 2010.

Starting at the top line, our revenue for the first quarter was $36 million, an increase of 13% over the first quarter a year ago. Commission revenue was $31.8 million, an increase of 13% over Q1 2009. Our year-over-year commission revenue growth was mainly due to growth in our membership base. Sponsorship technology licensing and other revenue was $4.2 million in the first quarter of 2010 reflecting 14% annual growth. During the first quarter we had approximately 136,000 individual and family major medical plans submitted applications, the second highest application volume in the company's history, yet reflecting 4% decline as compared to the first quarter of 2009. As Gary pointed out, this quarter we had a difficult year over year comparison with Q1 2009, which was our record application volume quarter.

The second quarter of 2009 is when we believe our application growth was negatively impacted by the economy, by the introduction of COBRA subsidies to the recently unemployed, resulting in a higher percentage of these individuals staying in the group market, and bine the uncertainty on the public policy front. We believe these macro factors continue to affect our business in the first quarter of this year, resulting in a year-over-year application volume decline. Conversions of our website traffic into submitted applications showed slight sequential improvement as compared to the fourth quarter of 2009. Our recent conversion enhancement initiatives had the most pronounced impact on our direct channel, where conversions were also up year-over-year in addition to sequential improvement. Our partner channel continued to lag on this metric and we are focused on a number of initiatives tailored to this channel.

Our total estimated membership at the end of Q1 2010 was over 755,000 members, which represents 11% growth over estimated membership reported at the end of the first quarter of 2009. In the first quarter, we had over 114,000 approved members for individual and family products, reflecting a 6% decline as compared to the first quarter of 2009. This was driven by the lower submitted application growth rates we experienced over the past two quarters, and a lower average number of individuals per approved application which was flat sequentially but declined as compared to Q1 2009.

Additionally, our close rate, a lagged estimate of the percent of submitted individual and family plan applications that become approved by our carrier partners, declined year-over-year, also contributing to the lower number of approved members during the quarter. It's important to note, however, that we did grow our individual and family plan membership by approximately 25,000 members compared to last quarter. 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. Our first quarter view of retention is based on data from the third quarter of 2009.

Excluding health benefits direct members from the number of total revenue generating members, our estimated member retention rate remains within our historical range and improved as compared to our estimated retention rate we discussed on our first quarter 2009 earnings call last year. As a reminder, health benefits direct members refer to members that were transferred to eHealth from health benefits direct in 2009 pursuant to our business development agreement with them.

In the first quarter our non-GAAP operating expenses, which exclude stock-based compensation, declined as a percentage of revenue as compared to the first quarter a year ago. We achieved this result while at the same time investing in our emerging Medicare business including approximately $250,000 in transaction costs during the quarter, related to our acquisition of PlanPrescriber. As Gary mentioned we are focused on managing our spend and maximizing margins in our core business in this environment. Our non-GAAP marketing and advertising expense, which excludes stock-based compensation expense, was 40.6% of revenue this quarter, down as compared to 41.6% reported in Q1 2009. Our GAAP marketing and advertising spend was 41.2% of revenue within the 40% to 42% range that we are targeting for the full year 2010.

Our cost of acquisition measured as our marking and advertising expense per individual on individual and family plan submitted applications was $73.68 for the quarter. This represents a less than 1% sequential increase as compared to $73.38 in the fourth quarter of 2009, and a 17% increase as compared to $62.95 in the first quarter of 2009. The year over year increase was primarily driven by lower conversions for our website traffic, a lower average number of individuals for submitted application that I mentioned earlier, and costs related to off-line media spend. The impact of these factors was mitigated by higher contribution from our direct channel, where the cost of acquisitions is significantly lower than our paid search and marking partner channels.

Non-GAAP technology and content costs, which exclude stock-based compensation expense, were 11% of revenue in the first quarter of 2010, which was flat with first quarter of 2009. General and administrative costs were also flat on a non-GAAP basis at 13% of revenue. Our non-GAAP customer care and enrollment costs were 11% of revenue for the first quarter of this year down from 12% for Q1 2009. Our GAAP operating margin was 16.4%, or $5.9 million, as compared to 17.5%, or $5.6 million, in the first quarter a year ago. The year-over-year GAAP operating margin decline was driven primarily by an increase in stock-based compensation. Our non-GAAP operating margin, excluding the effects of stock-based compensation, was 21%, or $7.6 million, as compared to 20% or $6.5 million in the first quarter a year ago. First quarter non-GAAP operating income grew 16% as compared to the first quarter of 2009.

Our approach to investing in managing our cash remains conservative. Currently, approximately 99% of our cash and marketable securities consist of cash, U.S. treasury funds, U.S. Government agency funds, or direct investments in U.S. Government agency securities. The remaining investments are in high-grade corporate bonds and commercial fair that we plan to hold to maturity. Our GAAP pretax income of $5.9 million in the first quarter of 2010 was down 1% from $6 million in the first quarter of 2009. On a non-GAAP basis, excluding the effect of stock-based compensation in both years, our pretax income was $7.6 million as compared to $6.9 million in the first quarter last year, reflecting a 9% increase.

We estimate our 2010 effective tax rate for GAAP purposes in the 43% to 45% range even though we expect to pay cash taxes at a much lower rate due mainly to operating loss carry forwards and excess benefits related to share base payments that reduce the cash taxes we pay. First quarter 2010 GAAP net income was $3.2 million, or $0.13 per diluted share, up from $3.1 million, or $0.12 per diluted share in the first quarter last year. Non-GAAP net income, excluding the effects of stock-based compensation and related tax effect in both years, was $4.4 million as compared to $4 million in the first quarter of 2009.

Our cash flow from operations was $3.1 million as compared to $4.7 million in the first quarter of 2009. During the first quarters of 2010 and 2009, we utilized $2.6 million and $1.2 million respectively of previously unrecognized excess tax benefits related to share-based payments to reduce our federal and state income taxes payable. These excess taxes benefits are shown in the cash flow statement as an increase in cash flow from financing activities. If you address operating cash flow in both periods to reflect the full benefit from deferred income taxes, including the portion that is recorded in cash flows from financing activities, this quarter's cash flow from operations would have been $5.7 million as compared to $5.9 million in Q1 2009. Our operating cash flow in Q1 was substantially lower than in the fourth quarter of 2009, which is normal for us historically due to the timing of certain cash payments, including annual performance bonuses to employees.

Capital expenditures for the first quarter of 2010 were approximately $500,000. Our cash and marketing a securities balance was over $158.6 million as of March 31st, 2010, before our acquisition of PlanPrescriber. Our cash and marketable securities constituted approximately 95% of our total assets excluding deferred tax asset at the end of Q1. Given this and the fact that we have no debt we continue to believe we have a very strong balance sheet.

Now turning to our 2010 guidance, as Gary mentioned the acquisition of PlanPrescriber accelerates our entry into the Medicare space and has a favorable impact on our financial outlook for the year. As a result we are increasing our 2010 revenue range to reflect the contribution from PlanPrescriber. Please note that given the seasonal nature of the Medicare business, we expect that the largest impact of this transaction, including more than 50% of the revenue contribution this year, will be seen in the fourth quarter. To remind you, the seasonality of the Medicare business is driven by industry regulations that provide for an annual enrollment season, a one and one-half month period during the fourth quarter each year when Medicare enrollees make new choices about their coverage. First quarter typically represents a material step-down from Q4 in terms of enrollment volumes that might still be seasonally higher than Q2 and Q3 due to the open enrollment period for Medicare advantage when seniors are allowed to make limited changes to their Medicare Advantage plans. During the rest of the year only the newly eligible individuals and other select groups of seniors are allowed to enroll in Medicare plans.

PlanPrescriber is a profitable company with solid operating margins. However, the accretive nature of this transaction in respect to eHealth 2010 GAAP earnings will be largely offset by the impact of purchase accounting including non-cash charges related to the amortization of transaction related intangibles and approximately $600,000 of cash transaction costs. Therefore, we are leaving our GAAP EPS expected range unchanged. You should expect to see the accretive impact of PlanPrescriber on our GAAP earnings starting in the fourth quarter of 2010, again driven by the seasonality of this business. Going forward, we will show the impact of purchase accounting when presenting our non-GAAP statement of income and reconciliation of GAAP to non-GAAP financial metrics.

I would also like to note that the cost of acquisition metric we published, which uses our total marketing and advertising expense in the numerator, and individual and family plan submitted members as the denominator will change somewhat as we had a Medicare marketing spend to our total marketing spend. Our updated 2010 annual guidance which reflects a higher than expected revenue range and leaves all other guidance unchanged is as follows. We now expect 2010 revenue to be in the range of $152 to $157 million, compared to previous guidance of $148 to 155 million. 2010 GAAP diluted EPS expected to be in the range of $0.55 to $0.65. 2010 effective GAAP tax rate is expected to be in the 43% to 45% range. For the full year 2010, stock-based compensation expense is expected to be approximately $6 million to $7.5 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.

In conclusion, the non group market is clearly going through a transitional period driven by changes in the legislative lapped scape and in our core business we continue to operate in an uncertain marketplace. So, at this point, we expect our individual and family near-term application growth rate to remain similar to the past two quarters. Adjacent to our core business we see a very attractive market, Medicare. We believe that over the next few years there will be significant business momentum generated.

In this year alone we expect to have approximately $8 to $10 million in Medicare-based revenues including our existing lead business and contribution from PlanPrescriber. And that's just starting to scratch the surface. As Gary mentioned, we intend to over time, transition to a combination of referral and commission based revenue which will make this business even more compelling financially. And now we would like to open up the call for questions. Operator.

(Operator Instructions) And your first question comes from the line of George Sutton from Craig-Hallum. Please proceed.but is there any way you've found to try and quantify this?

Hi guys. I'm wondering if there is a way to quantify any sort of pent up demand that might have been created? You may have answered my question, Stuart, through your suggestion that the growth rates will remain the same and thus you haven't seen a pent up demand yet. But is there any way that you've found to try to quantify this?

No, there really isn't. As I have said, we're going through a transition period. There has been a lot of uncertainty in the marketplace, especially with respect to reform, and at least at this stage we haven't seen anything that would tell me we see what I would call pent up demand.

Okay.

But we did allude to the fact there may be some COBRA subsidy, people under the COBRA subsidy that will be coming off at the end of May. So we'll see how that transpires. Gary, you mentioned, in terms of the new healthcare bill, the opportunity side, I think relates to state based exchange opportunities.

Are you able to give us any updates as to what you are seeing on that side?

Yes, George, with everything right now at healthcare legislation, regulations haven't been written yet. Very little guidance has been provided on exchanges and so on. In fact, in the bill, the Federal Government is required to put an exchange up by July 1st, which is an interim information exchange. I'm not even so sure they're going to be able to make that date. I just don't know. Time is ticking. We've had some discussions with them, as you might imagine. We've had some very preliminary discussions with a few of the states, but they're not anyplace on this yet.

Again, guidance hasn't been provided, templates haven't been provided, regulations haven't been written. So, all of this with the legislation so far is still -- in many cases, yet to be determined. But the opportunities we see are clearly the exchange opportunity, moving out toward 2014, a much larger market, people being subsidized and so on to supply the products.

And, one other question, if I could, related to the partner channel issue you mentioned. Can you just give us a sense of what some of the issues are and what some of the corrections you're attempting are?

Yes, it's really a volume challenge that we have there that with some of the larger demand generators and aggregators that we've worked with in the past, in addition to many of the other partners we have, some of these larger ones, they just have not been producing the kind of volume that they had previously. And everything that we know and conversations we have them indicate once again they're also probably more much more than we have, seeing this malaise that has fallen over the marketplace.

Thanks, guys.

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

Thanks. We missed some of the opening remarks. Sorry if I'm repeating things. First, on marketing dollars, you guys, in the tough environment, it seems like it's flattish Q over Q. If you exclude any of the impact of Medicare, do you expect it to continue to be kind of that $72, $73, looking forward for the year? And then in terms of the commission impact on the core business heading into next year, what have your key carriers told you to date? Any color there would be great, thanks.

Jim this is Gary. On the marketing spend, we operate well within the range of guidance that we had provided. I think that for the remainder of the year we plan to manage within that range. In terms of commissions, I don't have any more comments about that, than we have in the past. This is another case where we don't know, the carriers don't know, regulators don't know, because, again, the MLR regulations have not been written or developed. In fact, recently Health and Human Services asked for some input on this, and I know it's being provided by a number of different places, including insurance commissioners in the states and so on.

But discussions we've had are just like the discussion we're kind of having right now, with the carriers, that it's very much unknown. I can tell you, the carriers, those who have reported publicly recently, several have made comments about the fact that the broker channel is important, they expect it to be a vital part of what they do going forward. You certainly can't qualify that in terms of commission percentages in dollars and so on. The only other comment I would make is that these are complex products, and through this legislative work, they haven't gotten less complex. They've in some ways even gotten more. So these products don't sell themselves. We think entities like us are going to become even more important to the distribution and sourcing of these products. Like I cannot tell you at the moment what that means in terms of commission rates and so on, nor can the carriers.

Okay. Maybe just asking it this way, at what point will the carriers actually have to make a decision like, when will you get clarity based on the MLR actually kicking in, in January? Will this have to be settled in September, or it could spill over into next year? We know the MLR's supposed to kick in.

At this point I'm guessing. And my educated guess, Jim is that we would see something sometime this year. I don't think they'll let it fall into next year. There is a provision in the legislation that allows the Secretary of Health and Human Services to change the MLR requirement if it's disruptive to any of the localities or any of the local business, i.e. the states and so on. What that means, I can't begin to tell you and how that would affect January 1, 2011. But certainly we would expect later on this year that, commission changes are going to be made, that we and others would learn of those. But I can't tell you whether it's September 1st, December 1st, October or November. None of us know.

Okay, yes. Fair enough, thank you.

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

First, on PlanPrescriber, the comments around fourth quarter seasonality were helpful, but can you sort of just describe how that company gets paid?

Yes, in our comments, we mentioned that it's a referral business, and so it's a one-time transaction referral fee, is the primary source of their revenue currently.

And the transaction fee is paid by the payer, correct? I'm just trying to get an idea what the transaction fee is.

Transaction fee is paid by a referral -- a partner of theirs that places an applicant into a product and earns the broker commission.

Okay. So it is more commission based?

They're not earning -- PlanPrescriber doesn't earn the commission. Their partner earns the commission. PlanPrescriber earns a referral fee.

Okay.

For sending it to that agent.

Steve this is Gary. Today it's somewhat akin to a -- kind of a lead referral or a lead generation business, although they've begun -- PlanPrescriber had begun to do some fulfillment, and what we plan to do, working with the PlanPrescriber team is move toward directly fulfilling more and more of that -- of those seniors that they sourced through these different pharmacy and search work that they do.

So is that going to be put into your other revenue line or the commission revenue line?

That would be in the other line, yes.

And just to touch base on the commission question, Gary, we know it's extremely early, but have any of your carriers kind of said, okay, this is what it's going to look like in the future?

No. They haven't. The discussions we've had have been very cursory, because, as I said before, they don't know yet how to calculate the MLR. Some of the obvious things they know, but they don't have a specific regulation to work from today. So, given that, it's essentially impossible to know what that's going to look like. So, no, I mean, one of the things, in the question, Steve, if changes are made, are they prospective changes going forward. We suspect that that's more likely the case. But again, and this is all conjecture, and we're just all kind of guessing right now, it's not an area I've spent a whole lot of time thinking about, because we just don't know.

Great, thanks.

And your next question comes from the line of Youssef Squali from Jefferies & Company. Please proceed, sir.

Thank you very much. Couple of questions. Starting with you Stuart, I'm trying to reconcile a couple of things. First, I think in your prepared remarks, or towards the tail end of it, you said that you would expect $8 million to $10 million in Medicare-based revenues this year. Yet when I look at the increase in guidance in the midpoint it's only around $3 million. I take it that's for nine months for the year. But so is that $8 million to $10 million. So, I guess, if I just use my, call it $3 to $4 million, which is the implied change at the midpoint of your guidance, it would reflect a, I don't know, six to seven times multiple that you're paying for this acquisition. So, how do you kind of reconcile the two, and if my number is correct, is that a reflection of conservatism on your part or maybe a bit of more weakness in the core business relative to what you had guided on the last earnings call? And then I have a follow-up for you, Gary.

Yes, actually, the $8 to $10 million number is for the full year, so that does include some of the referral business that we do internally. So, that's a full year number, first of all. Yes, I mean, as you can see from the first quarter results, the core business, individual and family has been weaker than we had hoped that it would be, but, on the other hand the Medicare business, making more traction than I think we were expecting at this stage. And so on balance, looking at the range for the year, we kind of put those two together and were able to raise it to what we brought it to.

Okay, so I guess simple math would imply that maybe the core business maybe mid single-digit millions light versus what you had originally anticipated on the last earnings call, right?

Yes, our best estimates right now would probably put you more towards the lower end of the range, of the original range. Got it.

Okay. That's very helpful. Gary, is it possible that carriers may actually opt to increase the premiums in the next two or three years to build up reserves before the costly changes such as guaranteed issue hit their P&L?

Youssef, it's certainly possible. You've got an interesting issue in Massachusetts where you've had the commonwealth act in place for over three years. Many have talked about it as similar to what's being done federally. The carriers and the governor are kind of at a stand-off because the carriers say they need to increase premium rates, fairly substantially, and the governor won't allow them to do it. You may see some similar things nationally. Part of this legislation requires minimum benefit levels and features in these products that don't exist right across the boards. And like with any product, whether it's health insurance or anything else, when you had a more features and benefits, you had a corresponding price.

There's been some speculation that says because the actual penalty, the tax penalty to enforce the mandate isn't substantial enough to make people want to buy health insurance that you still may have the issue of a lot of high utilisers because it's guaranteed issue coming in, not offset by healthy people who don't utilize a lot. That would cause premiums to go up. Could the carriers increase premium prices in any way in anticipation of all this? Yes, we may see that as well. I don't want to speak for them, and I can't predict what's going to happen, but wouldn't surprise me to see premium increases in the future.

Okay. That's great. Thanks a lot.

And your next question comes from the line of George Askew, Stifel Nicolaus. Please proceed.

Thank you very much. Question on the PlanPrescriber acquisition. As you move that business toward doing -- as the company moves toward doing more fulfillment of those products, will you be able to use your existing insurance licenses, existing call center and whatnot, or sense it's in a separate subsidiary are you going to have to build that from scratch that infrastructure from scratch?

George, that's good question. We've got a fairly good size customer care center today with well over 200 employees, many of whom are licensed licensure is very similar and essentially the same so that's not an issue. But certainly the skill set and the knowledge level and so on is somewhat different. These Medicare products, the requirements and the regulations are fairly complex. In fact, over the weekend I was looking at a CMS document on this and I understand all this well. It confused me. So, I can imagine what it's like for many seniors trying to make decisions. So, traditionally these products are sold through agents and brokers and call centers. Very much hands-on.

We would expect as we're building out on-line fulfillment to also in tandem be building out a customer care support organization as well. Whether we do that in-house with what we have today, or whether we did it in some other fashion is yet to be determined. But I would expect as this Medicare business grows, and we think it's got the opportunity to grow very quickly, that you'll hear from that you say we're adding a customer care center or call center capability. Again, whether that's directly with what we have or we do it some other way, that's still to be determined, but it's going to be an important part of the strategy and what we plan to do.

Right, okay, thank you.

George this is Stuart. In our last call, when I talked about the $0.08 per share investment that we were making in Medicare this year, a good chunk of that was building out call center capability, or the beginning of building that out.

Got you, okay. And then, forgive me if you've already answered this, but sponsorship licensing and other revenue growth was a lot slower than we expected. Was there a decline in the number of partners or advertising revenue or something else going on there?

No, those are performance based -- most of the revenue there is performance based, and so as an example, sponsorship, that's very closely tied in with the decline our application volumes that you saw, the 4% year-over-year application volume, that same number is a primary driver of the sponsorship revenue, that's an example. Seeing the same thing with EOD partners. Our carriers are seeing similar challenges in terms of volume in this environment so it's hitting those performance-based fees.

Okay. And then lastly, you just completed your first acquisition what is your appetite for another deal in the next couple quarters, or is this enough to digest for the next year or so?

Well, this is, first of all, we're delighted with this acquisition. We've been talking with the team here for some time. It's very, very adjacent and very close to what we do as a technology centric company. It's, we think, a very unique and really, really powerful acquisition capability.

By the way, I should just describe for everybody what PlanPrescriber does. Most seniors are on medication. And prescribed medication is expensive. And different Medicare products help them, help seniors to pay for their medication in different ways. But what PlanPrescriber does is it allows a senior to simply input what their -- the medication is that they're on, and PlanPrescriber comes back and shows them all the Medicare advantage and Part D possibilities for helping them to more affordably buy that prescription drug. They do it on line, either at PlanPrescriber. com, they can do it on-line at CVS. com, or more importantly, the pharmacist at the point of sale will do it right then and there at the cash register where all this technology is installed as well. What's very interesting is that for those people who are on a Medicare advantage or Part D plan and then switch, because of what PlanPrescriber helps them with on average, they save $600 a year on their prescription expense. For those who are new to Medicare advantage or Part D, they save about $900.

We have also found that for the pharmacy itself, there's about a 50% increase in the medication or prescribed drug up-take in terms of what they buy. So you quickly start to get a feeling for why this is so appealing for us, and the power of this technology. Frankly, how it just helps seniors to save money, and they do that by enrolling in a new plan, which is exactly what we do. So this is very, very in concert and parallel to our business and where we want to take it. And we think that when we start to get the companies closely integrated and so on, we're going to see an awful lot of efficiency and leverage in this.

So we're really -- company strategy really consists of three things today. The -- essentially the existing business, as you know it today, individual and family plan business and small business health insurance, the technology business, which we call e-commerce on demand, and the this very, very rapidly growing Medicare business for us. Where we think we can be first to market and be the on-line distribution standard.

So you know, other acquisition possibilities like PlanPrescriber that present themselves to us, we're going to think about long and hard to either augment what we're doing in the technology side, which becomes very interesting through the legislative environment today, and or the Medicare space as well. So the answer is yes, we would do PlanPrescriber kinds of acquisitions -- I shouldn't say this -- all day long, but we'd love to find another like acquisition. It met every single requirement objective that we have.

Okay, great. Thank you.

As a reminder, ladies and gentlemen, we do ask that you just have one question and one follow-up. And your next question comes from the line of Richard Fetyko with Merriman & Company. Please proceed.

First of all, congrats on the acquisition, looks great. Curious if that business was completely on the fulfillment revenue model and business model as you plan to migrate what would the revenue impact would be? Would that sort of reduce the first revenue -- first year's revenue but introduce a recurring revenue model to it? Is that what essentially would happen?

That's right, that's how it would work. Essentially, it would be a bigger revenue opportunity. As we migrate towards commission-based revenue, as we've said in the pat, the revenue profile, lifetime revenue, can be four to five times what we earn in the IFP business. So, it's a very attractive lifetime revenue. So, over time, that's at the goal of ours.

Richard, to do that, we're going to strike a balance. If we took all the PlanPrescriber revenue and turned it to direct fulfillment, you probably have less of -- would you decrease the revenue this year but the lifetime revenue would grow to be quite substantial. We expect to be doing on-line fulfillment this year. We plan to. We're working toward investing in that now, but I think you'll see from us a balance of the transaction business as it exists today, moving towards more and more on-line fulfillment, and we think overtime we can find a really nice balance between these two. Obviously, what we're all about is on-line fulfillment. As Stuart said, one of the things that's attractive is the life time revenue value of each and one of these members is substantial.

Secondly, I know this has been asked many different ways, but on the core side of the commission, seems like at least one or two carriers have kind of hinted that it's going to have to be a "shared responsibility", quote unquote, which means that the carriers and I assume the brokers will all have to make some concessions on how they're getting paid. I mean, it wouldn't be safe to assume that therefore everyone involved to assume that the commissions will have to come down, it's just a matter of what level, by how much, or do you think that would still be sort of a presumptuous conclusion?

Well, Richard, again, I don't know, but I want to be clear with everybody, I don't want to be communicate saying that think or maintain that commissions aren't going to change. I think that there's a high probability there are going to be commission changes. What those commission changes are none of us -- when I say none of us, I include regulators, health insurance carriers, us here at eHealth, we don't know. All I know is we're the largest sales point for these product in the industry, for over 50 of these carriers we're their single largest source of sales.

We know the cost of sale through us is less. There's a whole lot of reasons for that, starting with the fact that is all done electronically with no paper. We know there's tremendous value. Commission changes may change the distribution model. It may make it less interesting to ago and brokers who do this one at a time. I don't know. You can guess at that as well. But we -- we're essentially the most viable source of these products in the marketplace today. I certainly don't see that changing.

You know, one of the things that's been suggested, which I think is interesting, is that if commission rates come down, you may find cost of acquisition coming down as well. It may not be worth as much on search as it is today. It may not be worth as much it is in other places because it may be, it just may be, that the lifetime revenue value is less. I don't know. Then the other question here is that if you have an across the board or an average commission decrease and you get some changes in the distribution of that's products, what does that mean for volume? At some point does volume offset the commission difference? I don't know that as well but we think about all those things. We're not sitting around here blindly waiting to see if something is going to happen or not happen. We think about a lot of this.

We've been looking and planning and working on Medicare, I should add, for the last 18 months. This is not a new thing. Coincidentally, the timing for us we think is really nice. Because, as we are quickly revving up this Medicare business, which is already highly, highly regulated, I might add, we're going through this transition in the individual family plan for a lot of our business.

Okay. Those are good points. I guess there could be a shift in terms of the distribution between the off-line and on-line brokers. Okay, thanks.

I personally think that what this legislation is going to do is require that these product be much more efficiently and much more economically distributed and sourced. And that's what our company has been about for the last 10 years. You could argue that this really plays to our strengths, which is online distribution. It may make the EOD business even more interesting to the carriers, and may make us a lot more interesting as well in terms of (inaudible). Operator?

And your next question comes from the line of Sameet Sinha, JMP Securities. Please proceed.

Hi, this is Randy Katz in for Sameet. Just a couple quick questions on PlanPrescriber. First of all, over time will you obviously do more fulfillment but in its current state can you discuss what the margins for the PlanPrescriber business look like? And then also, in previous calls, you discussed $3 million that you would be investing into the Medicare business. And I'm wondering, with this acquisition, if that negates some of the investments you would have to make or if we should still be looking for that $3 million investment number.

I'm not going to throw out exact margin numbers, but it's an attractive margin business. At least equal to if not better than our margin to date. I did mention, though, that as you throw on the purchase accounting amortization so far, it brings those margins down. But the core margins are very strong.

On the $3 million, no, this isn't negated at all. In fact, it makes us want to, in some ways, invest that as quickly as we can so that we can further and sooner optimize what we're doing with PlanPrescriber. But we feel very much on track with our Medicare progress and plans right now.

Okay, great. Just one additional question. I guess the one thing we look at in non submitted application growth that looked great was the increase, at least on the paid search side. I think you discussed several of the initiatives, whether it was buying secondary terms or so more traffic through secondary engines. I was wondering if could you discuss first which of those you thought may have a larger impact on the growth there, and also if you saw any material difference in the cost of customer acquisition with the additional channels or the longer tail terms. Thank you.

It's interesting, because, yes, we have some challenges in search in the last year as the market has been challenged. We've been working really hard to optimize our position and our conversion from search. We are pleased with what we saw in the past quarter. We've made some really good progress with Google, Yahoo, MSN, and a number of other engines as well. We hope and expect that to continue. We also feel good about the direct side of continues. That's been contributing nicely for us as well. What's interesting is that one part of the business that in some ways we just -- we don't after direct hand on or in is the partner business, and that's the place right now that we're getting a lot of focus. But, yes, we like everything about search that we've seen rebel has been really, really good, and in many ways reassuring of would we're able to do from a technology standpoint.

Thanks, guys.

Thank you.

And your last question comes from the line of Robert Coolbrith with ThinkEquity. Please proceed.

Good afternoon. First a couple of questions on the acquisition. How would you describe their standing in the Medicare space compared to where you guys are in the IFB space, specifically with respect to organic search? Also, on fulfillment, or the transition from a referral molds to a commission/fulfillment model, do you need more carrier cooperation to sort of make that transition, and where do you think you stand with respect to that right now? Finally, you just talked a little bit about how potentially higher MLR and lower commissions might be offset in the future by higher volume or share shift to online. Can you give us an update on what the situation in Massachusetts is right now where you're competing with connector as well as off line brokers and so on and so forth? Thank you very much.

Yes, on search, PlanPrescriber does work in search, and it's been an important channel for the company. We have always felt that management of search is kind of a core competency in eHealth. We do it all in house, as you know. I can tell you just in the first day the two companies have been together there's already been some work done on search. So we think that's going to be a really neat and good compliment to what PlanPrescriber and has been doing.

On the fulfillment side of things, you know, it's really a case of getting the major carriers up and on-line. And those major Medicare carriers nationally are Humana, check that one off, you saw the announcement we made about Humana. Well Point. We have a very close working relationship with Anthem Well Point. Aetna, where we have a very close working relationship, and United where, we have a very close working relationship. I think I comment earlier, we're in discussions with the -- with major name-brand carriers. So from that list you can imagine what we're talking to. We want to have a lot of really great choice for seniors when the annual enrollment period comes around starting this November to fulfill online. So, that's part of what we're invested in what we're working on and toward right now. And there was a third part of that question, which.

How are you doing in Massachusetts? As we think about reform.

We're doing fine in Massachusetts. We do more business in Massachusetts now than we've ever done previously. You can actually go to the Massachusetts connector site and take a look at what the usage is on the connector. And the vast majority of what's transacted on the connector are state subsidized product. The vast majority that's not subsidized is sold outside the connector, agents, brokers, carriers directly, us.

The -- in fact, the last I saw, and don't take this verbatim something, between 80% and 85% of all the individual products that are transacted on the connector in Massachusetts are subsidized product. So, the vast majority of the stuff is not subsidized as I said, it's done outside the connector. If Massachusetts is an example of how this is going to work, and I'm not saying that it is, but if it's an example of how the federal legislation is going to work, there's a lot of room for somebody like this. The federal legislation also has language about states having the ability to let other entities work with subsides as well, which could be us. But that's three and half years away, let me remind everybody of that. All of that doesn't start until 2014, so that's a ways out.

The issue in Massachusetts, by the way is an interesting one. As I said earlier, cat portend what we're going to scene other states or nationally, which is that the carriers all indicate that they need substantial rate increases to be able to continue to be able to support the business, and regulators in the state don't want to allow those increases. It's beginning to be a bit of a stand-off. It's very interesting to watch.

And at this time there are no more questions in queue, and I would like to turn the conference back over to Gary Lauer for closing remarks.

I'd just like to thank everybody for your time today. I'm sure we will be talking to many of you over the next several weeks. Thanks again.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. Have a wonderful day.