eHealth Inc (EHTH) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 eHealth, Incorporated, earnings conference call. My name is Caitlin, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Ms. Joann Horn, Market Street Partners. Please proceed.

Good afternoon and thank you for joining us today, either by phone or by webcast, for a discussion of eHealth, Incorporated's second quarter 2010 financial results. I'm filling in for Kate Sidorovich, eHealth's Director of Investor Relations, who is on maternity leave.

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 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 to repurchase shares of our common stock and impact on our cash reserves, NOL regulation timing, our focus on profitable growth, cash flow generation and controlling marketing spend, opportunities related to healthcare reform and its impact on the addressable market, our participation in growth opportunities presented by healthcare reform, pursuit of state health insurance exchange opportunities, growth in the Medicare market, PlanPrescriber financial performance, broadening our relationship with Medicare partners, timing of a nationwide retail experience for Medicare products, our development of a call center dedicated to Medicare products, expansion of our Medicare footprint, accretiveness of PlanPrescriber to earnings, estimated GAAP tax rate and cash taxes, future prospects, our 2010 guidance for revenue, stock-based compensation expense, income tax rate and earnings per share, timing and amount of projected Medicare-related revenue and expense, and expectation for revenue and earnings per share in future periods.

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 the call, whether as a result of new information, future events, or otherwise.

We will be presenting certain financial measures on this call which 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 on our corporate website under the heading Investor Relations.

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

Thanks, Joann, good afternoon, and thanks for joining us today as we review our second quarter of 2010 financial results. Our second quarter revenue increased 8% to $36.3 million compared to the second quarter of 2009. Clearly, we are now seeing the effect of the past several quarters' application volumes on our individual and family plan revenue.

During the quarter, we generated $5.8 million in operating profit. Our non-GAAP operating margin, excluding the effect of stock-based compensation and the amortization of acquired intangibles, was 21%, and we generated $8.2 million in cash from operations, bringing our overall cash balance to $141 million. Individual and family plan submitted applications declined 3% compared to a year ago.

Much of the second quarter was marked by continued consumer uncertainty and confusion in the individual and family health insurance market as a result of the recently enacted healthcare legislation. However, June was the first application growth month we have experienced this year, and we have recently observed positive trends in our application growth during July as well. I will comment further on our application volumes in a few minutes.

I'm delighted today to report that just yesterday we were notified by Health and Human Services--HHS--that eHealth had been awarded, as a result of a formal federal government RFP process, a contract to provide our software platform and services for the upcoming October launch of the HHS Health Plan Data Collection and Software Services Web portal. More details will be provided on this important strategic development over the next several days.

Today we announced a new program to repurchase our stock. We plan to repurchase up to $30 million of our shares in the open market. I believe that this is a good use of our cash, reflects a very strong belief in the value and the future for eHealth, and it will still allow us to maintain significant cash reserves.

Recently there has been much speculation and attention paid to the medical loss ratio requirements of healthcare reform legislation and specifically what the implications are for commissions paid to us by the health insurance carriers. At this point we know nothing definitive. It is important to note that regulations pertaining to MLR forms and calculations have not yet been provided by regulators, although I expect we should begin to get some clarity during this third quarter.

I also want to remind everyone that the health insurance products we market are complex, daunting decision and buying processes for many people. These products don't sell themselves. An effective Internet distribution, efficient and lower cost is precisely what the new healthcare environment requires.

During the second quarter, paid search was once again our strongest member acquisition channel based on individual and family plan application growth, generating 12% year-over-year growth, or 28% of the total of submitted applications. Our direct channel remains the largest contributor to individual and family plan submitted applications at 44%.

Finally, our partner channels show improved performance, declining 16% year over year versus a decline of 25% year over year in the first quarter. While we expect continued challenges in the partner channel, we are pleased with the progress we are making in this channel, as we added a number of new partners in the quarter and made enhancements to programs with our existing partners. Notably, we have observed positive growth in our partner channel during July.

During the second quarter, we operated in a macro environment similar to what we observed through the first quarter of 2010. As I noted, much uncertainty remains in the marketplace around the implications of healthcare reform, and we believe this uncertainty continued to impact customer decisions with respect to the purchase of health insurance.

Given this environment, we are focused on profitable growth and cash flow generation, with an emphasis on controlling marketing spending. GAAP marketing and advertising expenses as a percentage of revenue was 38%, below our target of 40% to 42% for the year.

The second quarter spend included the addition of Medicare marketing costs as part of our PlanPrescriber operation, which we have not had previously. The cost of member acquisition for the second quarter increased modestly on a sequential basis if you remove the costs related to Medicare to make it a fair comparison. Stuart will provide greater detail on the second quarter operating costs and margin performance later during the call.

However, given the uncertain environment we were operating in last quarter, I am pleased with how we were able to manage our overall marketing and advertising spend.

While healthcare legislation is not a law of the land, many specific regulations in the framework for implementing the key reform provisions have yet to be established. Healthcare reform provides significant opportunities for eHealth, yet at the same time presents uncertainties, challenges, and risks. Regulations mandating most Americans to have health insurance, while providing subsidies to millions of people to purchase health plans, should ultimately expand the size of the addressable market. We believe that with our scalable platform and leading online presence, we may be well positioned to participate in this growth opportunity in several ways.

We see a growing opportunity for our ecommerce on demand business driven by the requirement for states to support health insurance exchanges for individuals and small businesses. We plan to pursue these opportunities to support state exchanges with our industry-leading technology, much like we do today in the private sector through our EOD business. And we are off to a great start in this area with our Health and Human Services relationship.

We continued our aggressive public relations campaign during the second quarter. We ran multiple simultaneous campaigns focused on several areas, including consumer confusion following healthcare reform, health insurance options for recent college graduates, and alternatives to COBRA for many of the subsidy's first recipients, who began receiving the subsidy in March 2009 and who officially exhausted their 15 months of assistance in June.

We delivered helpful information on health insurance options for consumers, including a very well attended Webinar on alternatives to the COBRA subsidy, educational vehicles, consumer tips and FAQs, all with extensive media outreach. Our aggressive PR efforts around consumer education delivered another quarter of outstanding coverage in top-tier media outlets, including USA Today, Fox News, the LA Times, Kiplinger's, Forbes, the Chicago Sun-Times, and other leading broadcast, print, and media outlets.

It's important to note that the eligibility period for the federal government COBRA subsidy expired on June 1, and that the unemployment benefits package passed by Congress and signed by the President last week, did not include a renewal of the COBRA subsidy.

Additionally, as I mentioned earlier, COBRA assistance for many of the subsidy's first recipients officially expired in June. Coincidentally, we began to observe positive application growth in early June, and that momentum has continued into July. We believe that many of our marketing efforts, coupled with the COBRA subsidy expiration, are contributing to renewed application growth.

I want to note at this point that we have never made comments about application growth trends during the current quarter as I just did for July. But given the uncertain environment we have been operating in, I thought it was important to share with you what we have been observing over the past several weeks with application growth. We will not be making further comments about application growth as we progress through the quarter, consistent with our normal practice. And it's important to note that July is just the first of three months that make up the quarter.

Competitively, we did not observe any significant changes to the online landscape during the second quarter, and we maintained our number-one natural search ranking for the term "health insurance." We continued to maintain our number-one position in paid search on Google for relevant terms like "health insurance," "medical insurance," "individual health insurance," and "health insurance quotes."

In the second quarter, we continued to add leading carriers to our under-65 retail offering. Highlights including expanding our relationship with Aetna and AARP by adding their individual and family plan products in Tennessee, Nevada, Maryland, South Carolina, Washington, DC, Mississippi, Delaware, and Arkansas.

We also expanded our offering of Coventry's IFP plans by adding supply in Virginia and West Virginia. Additionally, we expanded our dental plan offering by adding nationwide plans in Florida, Rhode Island, and Virginia; United Concordia plans in California, Texas, Pennsylvania, West Virginia, Florida, and Arizona; and additional plans from Humana and Golden Rule.

Now I'd like to turn my comments to our developing Medicare business. We are very enthused and committed to the senior market, which is characterized by very attractive market trends and economics. Over the next 20 years, the fastest-growing age segment of the US population will be people 65 years of age and over. There are approximately 42 million Baby Boomers, many of whom are now reaching their 65th birthday.

It is estimated that the Medicare market will grow by 7.1 million enrollments from this year, 2010, to 2015, which is an average of almost 4,000 new members every day. And many of these new seniors are Internet users, as illustrated by the growing number of seniors coming online to eHealth looking for Medicare solutions.

In addition to this very positive market growth, the estimated commission lifetime value of a member for Medicare Supplement and Medicare Advantage products is much higher than the average lifetime value of our individual and family plan members, assuming an average retention rate of five to six years, which compares to just over two years for our traditional IFP products.

Last quarter, we announced the acquisition of PlanPrescriber, a leading technology company in the online Medicare space and an important addition to the development of our retail Medicare initiative. The integration has been going as planned. PlanPrescriber has been well received by our carriers and other partners and is a valuable asset and customer acquisition source as we continue to build our online Medicare platform.

As we discussed during the last call, PlanPrescriber's relationships with certain leading national pharmacies are unique and an important part of how PlanPrescriber sources its Medicare customers. We are working closely with these partners to get ready for the Medicare annual enrollment period, or AEP, which starts November 15 and continues through December 31. It is during this 45-day season of each year where PlanPrescriber receives the majority of its annual senior consumer traffic from its pharmacy partners, and we are laying the groundwork to make this year's AEP particularly significant.

For example, we expect to broaden our relationships with key partners such as Wal-Mart this year to include activities such as enhanced website and in-store promotion, direct mail and email marketing to the pharmacies' 65-plus clientele, as well as public relations activities. And all of these marketing activities are driven by our pharmacy partners.

We also announced last quarter that we had signed an agreement with Humana as part of our initial entry into the Medicare market and hoped to announce another major carrier by year end. We are very pleased today to have now signed two additional field marketing organization level agreements--one with United Healthcare, featuring their industry-leading AARP products, and another with Anthem Health Plans in the last few weeks.

We have secured commitments from each of these three key national Medicare carriers to distribute their Medicare Supplement, Medicare Advantage, and Part D products in all their available markets. We are working closely right now with each of these three leading national Medicare carriers to integrate their Medicare products into both the PlanPrescriber and eHealth Medicare platforms, fully enabled with online comparison shopping and enrollment capabilities.

We are on track for having a national retail experience--in fact, a nationwide retail experience--for Medicare products in time for the Medicare annual enrollment season, which begins this coming November. We also expect to support our Medicare enrollments during this AEP season with a new call center dedicated to our Medicare business and located in the Salt Lake City area. We are also in discussions with leading Medicare regional carriers, and we expect to make more announcements later this year on the future expansion of our Medicare footprint.

To conclude, we may start to see some details and decisions around the specific provisions of the healthcare reform legislation over the coming months, which should provide some degree of clarity for the industry. At the same time, we will pursue new opportunities created by the healthcare legislation, as evident by our new contract with Health and Human Services. We are making significant progress with our Medicare initiatives, and we are pleased to be experiencing recent application growth in our traditional individual and family plan business.

Now I'd like to turn the call to Stuart, who will review our financial results in greater detail. Stuart?

Thanks, Gary. Good afternoon, everyone. Starting at the top line, our revenue for the second quarter was $36.3 million, an increase of 8% over the second quarter a year ago. Commission revenue was $31.9 million, an increase of 6% over Q2 2009. Our year-over-year commission revenue growth was mainly due to growth in our membership base. Sponsorship, technology licensing, and other revenue, which includes contributions from PlanPrescriber, for the month of May and June was $4.4 million in the second quarter of 2010, reflecting 25% annual growth.

During the second quarter, we had approximately 117,000 individual and family major medical plan submitted applications. This represents a 3% decline as compared to the second quarter of 2009, which was a slight improvement from the 4% year-over-year decline we had in Q1 2010.

We believe that the macro factors that we have been discussing over the past year, including the significant uncertainties resulting from healthcare reform legislation, the continuation of federal COBRA subsidies to the unemployed, resulting in a higher percentage of these individuals staying in the group market, and the financial stresses on consumers in this economic environment continued to affect our business in the second quarter, resulting in the year-over-year application volume decline.

Our total estimated membership at the end of Q2 2010 was approximately 755,000 members, which represents 7% growth over estimated membership reported at the end of the second quarter of 2009. In the second quarter, we had over 93,000 approved members for individual and family products, reflecting a 10% decline as compared to the second quarter of 2009. This was driven by the year-over-year decline in submitted applications we have experienced over the past two quarters, coupled with a decline in the rate at which applications have been approved by the carriers.

This approval rate, sometimes referred to as our "close rate," is a lagged estimate of the percentage of submitted individual and family plan applications that become approved by our carrier partners. While the numbers are not fully lagged yet for Q2, it is clear that this carrier approval rate has declined, both on a year-over-year and a sequential basis.

I'd like to comment on member retention, but before I do, I'd like to remind you that we estimate retention using trailing historical data. Our second quarter review of retention is based on data from the fourth 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 slightly as compared to our estimated retention rate we discussed on our second 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 starting in the first quarter of 2009 pursuant to our business development agreement with them.

In the second quarter, our non-GAAP operating expenses, which excludes stock-based compensation and the amortization of acquired intangibles from the PlanPrescriber acquisition, increased as a percentage of revenue as compared to the second quarter a year ago. The increase was driven primarily by increased Medicare costs and closing costs related to the acquisition of PlanPrescriber incurred in the second quarter.

As we discussed last quarter, we expect PlanPrescriber to be accretive to earnings for the full year. However, given the significant seasonality of the Medicare business, the impact on our margins and bottom line was negative for Q2, as expected, and is expected to be negative for Q3 before a projected offsetting positive effect in the fourth quarter. The impact of this, when combined with the transaction costs of the acquisition incurred in Q2, reduced our non-GAAP margins by a little over 200 basis points.

Our non-GAAP marketing and advertising expense, which excludes stock-based compensation expense, was 37.7% of revenue in the second quarter, similar to the 38% we reported in Q2 '09. Our GAAP marketing and advertising spend was 38.3% of revenue, below the 40% to 42% range that we are targeting for the full year 2010. As Gary noted, we were very careful about our marketing and advertising spend during the second quarter.

Our cost of acquisition, measured as our marketing and advertising expense per individual on individual and family plan submitted applications, was $79.51 for the quarter. As I mentioned in our call last quarter, given the addition of PlanPrescriber in Q2, this measure now includes Medicare marketing spend in the numerator, while the denominator includes exclusively individual and family plan members and no Medicare members.

As a reminder, PlanPrescriber's current model is a referral model with a one-time referral fee. Therefore, there were no members added to our membership base related to the Medicare marketing spend this quarter. As a result, this measure is less comparable than it has been in the past and will likely become less relevant as we continue to diversify our business.

For comparison purposes, our Medicare marketing spend added more than $2.00 per individual and family plan submitted member this quarter. We also incurred business development costs this quarter related to the Health and Human Services proposal that Gary discussed earlier, which added more than $0.50 to this metric as well.

Non-GAAP technology and content costs, which excludes stock-based compensation expense, were 13% of revenue in the second quarter of 2010, up from 11% in the second quarter of 2009. General and administrative costs were 16% of revenue on a non-GAAP basis compared to 13% in Q2 of last year. Our non-GAAP customer care and enrollment costs were 11% of revenue for the second quarter of this year, flat with 11% for Q2 '09.

The majority of the increase in G&A expenses as a percentage of revenue comes from the combination of increased consulting expenses, most of which will not be recurring, and the transaction costs associated with the PlanPrescriber acquisition. While we did not use investment bankers on the PlanPrescriber deal, we did engage a consulting firm to help us better understand growth opportunities and synergies in adjacent markets.

The increase in technology and content expenses mainly relates to Medicare spending, including the engineers who came over from PlanPrescriber, and some increased spending related to our ecommerce-on-demand efforts.

Our GAAP operating margin was 15.9%, or $5.8 million, as compared to 20.5%, or $6.9 million, in the second quarter a year ago. Our non-GAAP operating margin, excluding effective stock-based compensation and the amortization of acquired intangibles, was 21.1%, or $7.6 million, as compared to 24.1%, or $8.1 million, in the second quarter a year ago. Second quarter non-GAAP operating income declined 5% as compared to the second quarter of 2009.

Our GAAP pre-tax income of $5.7 million in the second quarter of 2010 was down 19% from $7.1 million in the second quarter of 2009. On a non-GAAP basis, excluding the effect of stock-based compensation in both years and amortization of acquired intangibles in 2010, our pre-tax income was $7.6 million as compared to $8.3 million in the second quarter last year, reflecting an 8% decrease.

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 significant net operating loss carry-forwards and excess tax benefits related to share-based payments that reduced the cash taxes we pay.

Second quarter 2010 GAAP net income was $3 million, or $0.13 per diluted share, compared to $4 million, or $0.16 per diluted share, in the second quarter of last year. Non-GAAP net income, excluding the effect of stock-based compensation and related tax effects in both years, and amortization of acquired intangibles in 2010, was $4.2 million as compared to $4.8 million in the second quarter of 2009.

Our cash flow from operations was $8.2 million as compared to $8.3 million in the second quarter of 2009. During the second quarters of 2010 and 2009, we utilized $2.6 million and $1.5 million, respectively, of previously unrecognized excess tax benefits related to share-based payments to reduce our federal and state income taxes payable.

These excess tax benefits are shown in the cash flow statement as an increase in cash flow from financing activities. If you adjust operating cash flow in both periods to reflect the full benefit from deferred income taxes, including the portion that is reported in cash flows from financing activities, this quarter's cash flow from operations would have been $10.8 million as compared to $9.8 million in Q2 '09.

Capital expenditures for the second quarter of 2010 were approximately $900,000. This brings our total capital expenditures for the first half to approximately $1.3 million, which is in line with our expectations. Our cash and marketable securities balance was $141.3 million as of June 30, 2010, after our cash acquisition of PlanPrescriber.

Our strong belief in the fundamental value of our Company and its future prospects is reflected in the decision to implement a stock buyback program, which we announced today. Our Board of Directors has authorized a repurchase program of up to $30 million, and we believe that buying our shares at attractive market prices is a good use of cash.

With respect to guidance and based on information currently available, we are reaffirming the revenue, stock-based compensation expense, income tax rate, and earnings per share guidance for the full year 2010 that we provided in our last earnings call. I will add, however, that with respect to our guidance ranges for revenue and earnings per share, we are currently trending towards the lower end of both ranges.

As a reminder, the seasonality of the Medicare business is driven by industry regulations that provide for an annual enrollment period, a 1.5-month period during the fourth quarter of each year when Medicare enrollees may make new choices about their coverage.

Due to the significant seasonality of the Medicare annual enrollment season, we expect the vast majority of our projected Medicare revenue this year will be in the fourth quarter. As a result, when we look at the second half of the year, we expect our third quarter revenue to slightly increase sequentially over the second quarter revenue, with a significant sequential increase in the fourth quarter.

We expect to increase our Medicare spending in the third quarter, as planned in our budget for the year, to prepare our operations for the fourth quarter Medicare annual enrollment season. In addition, consistent with our historical seasonality, we typically experience a significant sequential increase in our marketing spend in our individual and family business as sequential application volumes increase.

Given the sequential increase in Medicare investment, the normal sequential increase in marketing spend in our individual and family business, and our expectation of a minimal increase in sequential revenue for Q3, we expect our Q3 2010 EPS to be lower than our Q2 2010 EPS.

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

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

(OPERATOR INSTRUCTIONS.) Your first question comes from the line of George Sutton of Craig-Hallum. Please proceed.

Hi, guys. A couple questions. First, Gary, you thankfully were discussing the trend that you're starting to see in the quarter and also what you saw in June. How much of that improvement would you believe relates to the COBRA expiry, and how much might be from other factors?

George, we wish we knew specifically. We watch that closely. That's why I purposely made the comment that, coincidentally with the expiration of the COBRA subsidy in June, we begin to see a return to growth in our application volumes, and it's continued up to this point in July.

Certainly, that's had some influence and some impact, and let me note again that the extension of the COBRA subsidy was not part of the unemployment package that was passed last week in the Senate and the House and signed by the President for political reasons regarding the cost and deficit spending and so on. So I think it's highly unlikely we're going to see that again, politically. And that's the first time I've felt that way.

We've also been doing an awful lot of outreach. It may be, George, and I don't know the answer to this, but it may be that some of the uncertainty around healthcare reform is beginning to abate a bit, although I'm not sure. I think it's a combination of all of these things. But the reason I wanted to note it today is that we've seen it now for, going on two months straight here.

Now, with respect to this HHS award, are you able to give us more detail yet in terms of what kind of a revenue event this might be and what sorts of other programs they may have been looking at as part of this effort?

This is part of the information exchange that they're required to launch as part of the healthcare legislation. It's, we noticed, not an enrollment exchange, so people will come to this and look at various products and so on, but actually can't purchase them there. It's to get information and perhaps be vectored to different places.

It's very important and very significant. I don't have much more information to disclose today. Otherwise, I would have. But over the next few days, I think you'll be hearing a lot more about it. It was a formal RFP process. We competed for it, as I believe others did as well. And it was something that we felt was strategically very, very important, because in may ways it becomes the cornerstone for, and I think lays the groundwork, for the work that's going to be done in the states with exchanges as well.

And now that we're the basis for the federal national exchange, and I'm delighted and flattered that HHS selected us, right now our mission is to help them put something up in October that is something that is very, very high quality and something that everybody's going to be very, very proud of. And we want this thing to really shine and to work well, because I believe it could be the template for where the states go as well, and the beginning of what I think can be a very significant business.

And I think it's an example of being able to take healthcare reform and find ways to capitalize on it and create a brand-new business here with government as a customer, which is what we've done. So we were very, very pleased to have gotten this news yesterday. And a lot of work went into this, I'll add, as well.

Nice to hear. Congratulations. I'll turn the call over to others.

Thank you.

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

Thanks. A question on the Medicare products and not the PlanPrescriber part of the products, but the actual eHealth business that you're ramping up. So you had Humana, and now you've signed up United Healthcare and Anthem.

Where do you think you'll be in terms of percentage of total penetration, or however you want to address it, when you hit that Q4 sign-up period this year? Is it enough of an array of plans to be fully up and running, or will 2011 really be the first year where you have a broad enough offering where you have a critical mass of business and we can see the needle move with the eHealth-related side of Medicare sign-ups?

Yes, Jim, that's a good question, and as this year progresses, we'll know more and more about it. Our plan had been, earlier on, to have one to two nationwide carriers up. In fact, we were really thinking more about one. Today we've got three in-house that are contracted. And they're three, frankly, of the bigger, more recognized names in this business, including the AARP plans.

And it's our intention, as I said, to have these up and available for online enrollment in the annual enrollment period starting November 15 at PlanPrescriber and eHealthMedicare.com. In fact, let me note there that we're really going to be running two businesses here--the PlanPrescriber business and the eHealth Medicare business--and that's got a lot of positive implications from a marketing standpoint for us.

But we fully intend to have these products up and available for enrollment online. I also noted that we're building a separate, specific customer care or call center for these Medicare products to support them exclusively. We're going to be doing that in the Salt Lake City, Utah, area.

We are very busy there right now in terms of building out the facility, recruiting people, hiring, getting them trained and ready to go as well. So we're really going to have, in some ways, three prongs here from an enrollment standpoint--PlanPrescriber.com online, eHealthMedicare.com online, and our customer care center, where we can do both assisted online and do offline enrollment as well. So it's our plan to be able to have some impact from a business standpoint in this enrollment period.

Then, of course, as we bring more carriers on and continue to build this out, there's yet more business that we can generate going into 2011 as well. And the annual enrollment period in 2011, certainly, that's a long way away, almost 18 months, but it's something we're aiming for to be able to be in a very, very significant position.

But let me also note that between now and then, every day you've got approximately 4,000 new seniors becoming 65 years of age who are looking to enroll in products, and we're going to be aggressively marketing to and pursuing them as well.

And a follow-up on the carrier approval trends in the core eHealth business. That seems to be, has been getting more challenging. And what do you think is driving that, and is there any sign that that may stabilize?

It's hard to point to anything particular. The carriers are really in control of the close ratio, to a large extent. And I think healthcare reform is undoubtedly having an impact on them in those decisions. And as I said, we saw a little bit of a tickdown this quarter from where it was even before, and we think reform is really the main culprit there.

And what specifically about reform? Is it just the increasing costs that are being put on the insurance companies to make them less willing to approve certain customers that might be higher risk, which they're not going to be able to get away with longer term? And what's the driver there?

It's speculative right now on our part, but you do have some regulations coming into force this year, like preventive care, things of that nature. And we suspect that the carriers are just being a bit more selective about who they're going to have on the rolls and so on if they have to do this.

But as you point out, in 2014, with this legislation as it exists today, they will essentially be enrolling everyone, because it will a guaranteed issue environment. But I think--we think, we think, again, it's just speculative on our part--but what we think and what we know is that the carriers are choosing to be more selective between now and then as they're looking at these enrollment rolls that they have.

Okay, great. Thank you.

Your next question comes from the line of Matt Schimler of Bank of America Merrill Lynch. Please proceed.

Yes, hi. Just a couple of quick questions. One, going in a little bit more detail on that last question. Could you speculate why would they be looking to be more selective coming into a mandate that they have to be open? Wouldn't they be looking to build a profitable model around more approvals than going in the opposite direction before a cutoff date where they'll have to swing all the way back the other direction?

Again, I want to be careful. I can't speak for them, and I don't want to. But a guaranteed issue environment, in theory, you take everyone into the pool. So you've got all these people who are unhealthy who get selected out today balanced by everyone who is healthy who's in the pool.

And that doesn't exist today, yet what you've got is some regulations that are coming into play that require the carriers to have to do--frankly, to provide more than they provide today, in some cases, with their products. So in this period, we speculate that they may choose to be a bit more selective about all of this compared to when they get to the point where--again, in theory--they're going to have a larger pool, but that's much more balanced because everyone that's healthy is required to be in the pool, including everyone who's not healthy who will get taken into the pool. And I say "in theory," because that assumes that everyone that's healthy is going to participate.

Okay. And on a separate note, what is the--if they're being more selective, and imagine they're taking healthier people--would that cause a lowering in average price of a plan? Or what have plan prices trended amongst your newer, new subscribers that you guys have provided?

We've seen it be largely flat to potentially up. We have not seen prices coming down at this point.

Okay, and would the small decline you have seen in commission revenue versus subscriber be because you have more aging subscribers and they pay on a declining scale?

That's correct. You've seen that trend over the last year or plus now, where a greater percentage of our members are in their second year or thereafter, and that causes the commission, the average commission per member, to decline.

Oh, it makes sense. Okay. And then finally, on the--well, just to go back on that further, with these year-over-year declines in submitted apps in the last two quarters, should that mean that we would expect that to flow through even more so in the next few quarters?

Yes, modestly. You've seen the decline year over year increase just a little bit over the last year. And if submitted applications continue at these levels, EPS, you would see that commission per member decline a little bit more.

Right, makes perfect sense. And then very quickly on the last question on the HHS deal, what are the economics of that deal? Not necessarily the numbers, but how are you paid?

We haven't released any information about it yet. Again, we just got the contract yesterday. And the reason I didn't choose to disclose it today is that it will soon be posted on something that's called the Federal Registry, so it's going to be public information. And we will--hopefully, over the next several days--be providing more information and disclosure about this, perhaps a press release and so on. It's a large deal. There are other contractors involved with us, all of whom may want to participate in the announcement as well. And at that point, we'll talk about this.

You would think about this as a software-as-a-service kind of a model, fundamentally.

Okay, and then it would go into your license and other revenue line, if there is, however it is accounted for?

That's correct, yes.

Okay.

Software-as-a-service, similar to our EOD, and revenue would be over time.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Steve Halper of Stifel Nicolaus. Please proceed.

Yes, hi. So you're obviously spending a lot of money and time looking at the, building out your Medicare, your platform. In the long-term model when it's fully baked, is that going to be more profitable, less profitable, or the same compared to your commercial book of business? And let's include PlanPrescriber in that as well.

In the long run, we expect it to be more profitable--at least as profitable, if not more profitable. And we're looking at the lifetime value of these members as being quite a bit higher than in our traditional business. It's going to come down largely to the cost of acquisition. Interestingly, today the paid search terms are actually lower cost than in individual and family space. So it will really come down to how well this converts in a retail environment and what those costs are as a percentage of revenue.

Steve, I think that over time, and what we're working toward, is that given what we know today, that the Medicare business could be as substantial as the traditional businesses that we have at the moment. But I say, "given what we know today," because I think it's still uncertain as to what the impact's going to be as you get toward 2014 of all of these new enrollees, at least in theory, coming into the traditional individual market as well.

But we view this as a business that we're investing in, and it's going to have very, very nice returns, and we think be quite profitable. And in fact, it will be profitable for us, if everything goes according to plan, beginning this year.

So if you look at the agreements with Aetna and United Health, are you able to discern any sort of trend on commission rates on the traditional business?

No, we have not had any--and I will be very clear on it--we have not had any conversations with any carriers about specific commission rates at this point. Certainly, we've had some discussions with carriers about what may happen as a result of MLRs, that commission rates may change. But the carriers don't know, really, any more than we know right now, because the regulations are still in development and yet to be delivered. And again, I hope that we see it all sooner rather than later so that we've all got some clarity on this and can move on.

So it's safe to say, as some of your agreements come up for renewal, just your regular renewals, commission rates really have remained unchanged?

To this point, commission rates have remained unchanged. Stuart, I can't think of one that we had to change.

That's correct.

Yes, and as you might imagine, we watch these very closely and very carefully.

Great. Thanks.

Thanks, Steve.

Your next question comes from the line of Youssef Squali of Jefferies. Please proceed.

Thank you very much. A couple of questions. Stuart, trying to back into your guidance, and to hit the low end of it, by at least my math, you need to start showing double-digit growth in submitted applications growth, with some stabilization, or even there may be a slight increase in pricing, which seems to contradict somewhat your commentary just now, answering a couple of questions earlier. Can you maybe address that?

Yes. You may not be factoring in enough Medicare contribution. Last quarter we talked about an $8 million to $10 million range for Medicare. And as I said, it's very back-end loaded to Q4. Our model does not show double-digit application growth in the second half--it doesn't assume that. And so I think Medicare is probably the missing piece of your model.

Okay, that makes sense. And what's your, assuming your model is what you've already been seeing in June and so far in July? Is that fair?

It's a whole range between lower, that and potentially even higher. There's a wide range there. But truthfully, that doesn't drive a lot of revenue this year. It takes time to build. And so the application growth, percentage growth, is not a major driver for the second half. It's really about Medicare and about EOD contribution and sponsorship. Those are bigger short-term revenue drivers.

On Medicare, what gives you confidence that those revenues are going to come in in Q4?

We know what the historical pattern is. We have seen what PlanPrescriber was able to do a year ago in Q4. We have seen their growth rate so far this year. We know some of the things that they have in the works heading into the annual enrollment period for Q4. So that's in our thinking.

And then there's our organic growth that we're seeing internally this year over what we did in Q4 a year ago. So there's a lot of factors there.

And the enrollment capabilities that we'll be adding with the three major carriers that we've signed and the call center that we're going to be building as well.

All right, okay. And, Gary, I think in your prepared remarks, you talked about the positive, or seeing positive growth in the partner channel in July. Is there anything that you've done on your end to cause that to happen, or how do you explain that?

Yes, Youssef, I did say that, that we actually had moved to positive growth in July in the partner channel. We've been doing a lot of things, as you might imagine. We've been reviewing the programs we have with existing partners, in some cases revamping them. We've brought some new partners on.

It could be that the expiration of the COBRA subsidy and some of the media work that we've been doing has been impacting them as well. So I believe it's a combination of those things.

But I can tell you that there's just a lot of very focused management attention on that partner channel right now by the people who do that, and I'm really pleased with what we've been able to do and what they're doing there.

All right, and the last question. Does your second half guidance bake in the revenues from the HHS contract?

No, we really haven't ascribed revenue to that in any material way. It's not due to launch until October 1, and as I said, we're going to take it over time, and so it's not that significant this year.

Okay, great. Thank you very much.

Your next question comes from the line of Jason Helfstein of Oppenheimer. Please proceed.

Thanks. Just a follow-up. On the revenue guidance, are you assuming anything from United Healthcare and Anthem, or is that, again, more into next year, depending on when that actually launches? And then on the marketing side, obviously, the focus is on marketing spend per application for approval. But some of that is in a rear, so just maybe talk about your view towards marketing toward the back half of the year, and if your revenue does not, comes in toward the lower end of your expectations, what kind of flexibility did you bake into marketing spending plan? Thanks.

We always look at our revenue trends with respect to what we spend in marketing. And most of our marketing is discretionary, so we always balance that. In fact, one of the ranges that we've talked about consistently is a 40% to 42% target range for marketing and advertising as a percent of revenue. So we'll continue to watch that range and target that as a range over the second half.

And on United and Anthem, Humana, obviously, in the Medicare revenue that Stuart's talked about, we've had some assumptions in there. But frankly, this is probably more carrier concentration and participation than we have modeled up and talked about previously. So we'll see what that results in.

Thank you.

Your next question comes from the line of Richard Fetyko of Merriman and Company. Please proceed.

Thanks, guys. With respect to marketing costs on the Medicare product, it sounds like you'll begin to commit some marketing dollars to that product in the second quarter. I was wondering if you could tell us what you expect from those levels, in the second half of this year, to increase or remain the same?

Yes. The Medicare spend you saw was driven by spending at PlanPrescriber. It's the normal level of spend for them. It's a referral business that drives the revenue in their business. And I would expect that to increase some in the third quarter and then significantly increase in the fourth quarter with the annual enrollment period.

Got you. But do you think you'll be able to remain in that targeted marketing spend range as a percentage of revenues?

Yes.

Okay.

That continues to be our target. And as Gary said, in the fourth quarter, a lot of the contribution from the pharmacies kicks in, and those members come in virtually free to us.

Okay. And what was the contribution in terms of revenues from PlanPrescriber in the second quarter? I think you may have just mentioned in terms of what it is as a percentage, or in terms of your guidance, but I feel like I missed it. So I was just wondering how much of the PlanPrescriber revenues are in your guidance as well.

We don't break it out. We didn't break that out for this quarter. We did talk about $8 million to $10 million of Medicare revenue as a projection for this year as a whole, and the majority of that is from PlanPrescriber.

Got it. And lastly, the past growth in June and July that you saw, I just want to make sure you're talking about it on a year-over-year basis, not month-to-month, correct?

That's correct. Year over year.

Okay, great. Thanks, guys.

Your next question comes from the line of Robert Coolbrith of ThinkEquity. Please proceed.

First a couple of quick questions on Medicare, your description of the total lifetime value of a Medicare customer being in excess of an TLV of a IFP customer. Do you mean the TLV to the carrier or the TLV to eHealth or PlanPrescriber/eHealth? Then also, another quick question on Medicare. I'll ask one more question after that, if that's all right. Just wondering on the level of investment in the Salt Lake City call center and whether or not you'll be able to tally those revenues seasonally to the big Q4 push, and how seasonal trends and enrollment spending might change otherwise. Thank you.

Yes. So when we went into this year, we said that our planned spend in the Medicare space was in excess of $3 million, a good portion of that related to building out this customer care center. Those costs look to be on track with our expectations. There is a seasonal increase as we build that up into the fourth quarter. We would expect it to be higher in the fourth quarter than the third. But yes, there is a seasonal component to the costs there.

And on your total lifetime value question, the five to six years, that's the average cost to the industry that someone would retain one of these products. So you could assume that there's revenue impact over that period of time to the carrier as well through his commission impact to the broker or the agent or someone like us.

Great. And then also, I just wanted to ask a question about the potential direction of commissions in 2011 and beyond in the IFP market. Do you envision, or has it been contemplated, that there could be a change to the commission structure away from a percentage of premiums model to a flat fee or referral model? And a related question on marketing. Would it be fair to say that if commissions are reduced by X percentage, that marketing expense could be reduced by X percentage as well? Thank you.

Yes, so just on the commission structure, again, we'll all just be speculating on what it could or could not or may or may not look like, whether it's a percentage or a flat fee, whether there's more in the first 12 months than there are months in 13 and later and so on. And we honestly don't know that, and I can assure you that some of the discussions we've had with carriers, they don't, we're not having much conversation about structures and so on. It's, frankly, just preliminary. So anybody's guess is almost as good as mine at that point on that.

Yes, I think on the marketing costs, a significant part of our marketing costs is in the paid search channel. And if the lifetime value were to decline, we would expect, just from a rational, on-paper standpoint, you would expect the marketing costs to come down to reflect a lower lifetime value.

Great. Thanks a lot.

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

Yes, thank you. A couple of questions. First, can you speak about the HHS opportunity? Maybe I just didn't understand it. It seemed like it was an information exchange, and the way you would get paid is probably more of an EOD model, and if you could spend some time there, to the extent that you can. And my second question is, and you made your first acquisition, PlanPrescriber, last quarter. This quarter you announced a buyback. Is that an indication that you don't see too many other acquisition opportunities in the industry? And the third thing would be, in terms of PlanPrescriber, can you talk about the range of cost per lead that you'd generate from that business?

Yes, let me start on--so just to make sure that we're all on the same page here, so healthcare reform was passed and signed this year by the President. And part of the legislation--there's so many aspects to this--but one of the things that is required is that Health and Human Services launch a national exchange that people can go to, to look at all of the different individual products that are available across the country.

And Health and Human Services, as most government procurements do, put a Request for Proposal on the street, an RFP, which we responded to. I think others may have as well. We spent a lot of time and energy on this because we thought it was very important, and we thought we had a really good solution set to be able to help host this for Health and Human Services.

We learned yesterday we were fortunate enough to be selected. It's really an information exchange. I use that word because people don't transact on this exchange, per the legislation. That will happen in the state exchanges in 2014, at least as the legislation is written today.

The economics here, as I said earlier, you should expect this to be some kind of a software-as-a-services kind of a model, but one that we think will be a really good one for us. We think this will be great for Health and Human Services as well, because we're really committed to helping them build and deliver something here that's very, very high quality.

And strategically--this is the most important thing, and I really want to emphasize this--this really sets the table or lays the groundwork to go into this government exchange business. And I think that being able to help host or host the federal government exchange is just a great way to start. So we're delighted--and we underscore the word "delighted"--to be participating in this, and to, frankly, have won this business.

On cash, you asked about that, we continue to generate really good cash, and that's always been the fundamental in our business model. We enjoy a really good cash reserve today. We have no debt.

PlanPrescriber, we thought, was a really key strategic acquisition for us, and it was the right price, and we did it. If we saw others like that, we would do them as well. We, I think, maintain a pretty unique position in the industry and so on, in the technology world, and we haven't seen a lot out there, obviously, that makes a lot of sense from an acquisition standpoint.

We feel that we're trading at a stock range right now that is one that really makes us think about the value of the Company and what's reflected in the stock price. And given the cash, we think it makes sense to buy shares at this price range. We think it's a heck of a buy, and hence the stock repurchase program.

And this concludes the question-and-answer section of the call. I would now like to turn the call back over to Mr. Gary Lauer for closing remarks.

I just want to thank everyone this afternoon, and look forward to speaking with many of you individually. Thanks again.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.