eHealth Inc (EHTH) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter and fiscal year 2010 eHealth Incorporated earnings conference call. My name is Tahesha, and I will be your operator for today. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session. (Operator Instructions)As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Miss Kate Sidorovich, Director of Investor Relations. Please proceed.

Good afternoon, and thank you all for joining us today either by phone or webcast for discussion about eHealth Inc.'s fourth quarter and fiscal year 2010 financial results. On the call this afternoon we will have Gary Lauer, eHealth's President and Chief Executive Officer, and Stuart Huizinga, eHealth's Chief Financial Officer. After management completes its remarks, we will open the lines for questions. As a reminder, today's conference call is being recorded and webcast from the investor relations section of our website. A replay of the call will be available from the investor relations section of our website following the call.

We will make forward-looking statements on this call. All statements other than statements of historical fact are forward-looking statements. The forward-looking statements made on this call will include statements regarding our expectations and projections relating to our commission rates, our future online advertising costs, plans for our Medicare business, growth in the Medicare market, projected results and performance of our Medicare and Government Systems business, the role of state health insurance exchanges, our future revenue growth, profitability and cash flows, the revenue contribution of our businesses other than our individual and family planned business, 2011 GAAP tax rate and cash taxes, the impact of commission rate changes, and medical loss ratio regulations, our guidance for revenue, EBITDA, stock based compensation expense, and GAAP diluted earnings per share for the full year 2011, and our target range for 2011, GAAP marketing and advertising as a percentage of 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 SEC, which you may access through the SEC website or from the investor relations section of our website. Forward-looking statements made on this call represent the Company's views as of today. You should not rely on the statements as representing our views in the future. We undertake no duty to update or revise any forward-looking statements made during this call, whether as a result of new information, future events or otherwise.

We will be presenting certain financial measures on this call that will be considered non-GAAP under SEC regulation G. For reconciliation of each non-GAAP financial measure 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. At this point I will turn the call over to Gary Lauer. Gary?

Thank you, and thanks everyone for joining us today as we review our fourth quarter year 2010 results. 2010 was certainly an extraordinary year for businesses involved in healthcare, and today we have much to report about eHealth. Specifically what I plan to do today is to summarize our fourth-quarter results, walk you through healthcare reform-related commission rate changes in our individual and family plan business, give you insights into our experience and success in the new Medicare business, discuss our fast emerging Government Systems business opportunities and conclude by making comments about our 2011 guidance. I think that you will see that the eHealth business is fast changing, both as a result of healthcare reform and our own efforts as we continue to leverage our strong technology assets.

I will begin today by making some comments about the fourth quarter. We grew our revenues 30% over the fourth quarter a year ago. We expanded operating margins, and most importantly, we saw significant contributions made by our two new businesses, Medicare and Government Systems. For the full year 2010, eHealth generated revenue of $160.4 million and earnings per share of $0.73. Our fourth quarter and full year 2010 results include a one-time revenue item of approximately $6 million, or $0.15 on and earnings per share basis, reflecting a commission prepayment we received in the fourth quarter from one our carrier partners on a number of existing policies and members. Excluding the impact of this revenue item, we were well within both our revenue and EPS guidance range for the year. And, by the way, the 30% fourth-quarter revenue growth I referenced earlier does not include this one-time revenue item.

As you also may recall, we authorized a $30 million share buyback program during 2010, and I'm pleased to report today the repurchase of these shares has been completed. Our year end cash balance was $128 million, we have no debt and our shares outstanding as of January 31, were 21.3 million as compared to 23.5 million shares as of June 30, 2010, before we started the share repurchase. As those of you listening today know well, one important element of healthcare reform legislation is that health insurance carriers in the individual and family business are required as of January 1, 2011, to maintain a medical loss ratio of 80%. There has been tremendous speculation and uncertainty about what this means for commission rates, and specifically commissions that eHealth will earn going forward on individual and family plan major medical products.

I want to take this opportunity to set the record straight. As a reminder, eHealth supports over 180 high quality brand name carriers across the 50 states and the District of Columbia. Through the history of our business, we have been paid commissions directly by the carriers to market and sell their individual and family major medical products. Commission rates have typically varied from carrier to carrier, state to state, and in many cases, by type of product sold. We previously commented during our third quarter earnings call, that the Department of Health and Human Services had not yet finalized regulations defining the calculation of medical loss ratios.

It did so during the fourth quarter, and we had subsequent discussions with many of our carrier partners as you might imagine. Most of these carriers have had to adjust their operating cost structure as a result of the medical loss ratio regulations that, again, became effective January 1 of this year. This cost structure, of course, includes distribution expenses. We have been working closely with many of our carrier partners as commission rates on many individual and family plan products have been reset reflecting the new regulations.

As expected, individual and family plan commission rates have been reduced across most markets where we operate. But the magnitude of these changes varies from carrier to carrier, depending upon several things including many carriers pre-existing medical loss ratio levels. Prior to the commission rate changes, the average base commission rate that we earned across eHealth's individual and family health insurance membership was just above 10%, reflecting a blend of first and follow-on year commission rates. The commission rates that we earned specifically with carriers, by the way, are proprietary and confidential and will remain so. However, in order to give you a sense of the impact of commission rate changes that have resulted, our new blended base commission rate across all individual and family plan products is now expected to be just below 7%, as compared to just above 10% prior to the changes. Stuart will provide you with more information on the methodology used in calculating these average rates.

I'd like to make two additional and important points regarding our commissions. First, although you may hear or read about published commission rates by carriers, our commissions in many cases may be different. And second, the majority of our commissions historically have been paid to us as a percentage of premiums on the products that we sell. This has not changed.

Most importantly, we believe that we can run our business profitably at these new commission levels. We have always placed high value on our relationships with carriers, and believe the outcomes of our commission rates discussions reflect that. As a potential offset to these commission changes, it has been predicted by some that average premiums in the individual and family health insurance market will increase, due to expanded benefits resulting from healthcare reform legislation and the increasing cost of health care delivery. Related to this, we recently observed significant rate increase filings by several major carriers with departments of insurance, and this is an area, as you might imagine, that we are going to watch very closely.

As a result of the new economics in the individual and family health insurance part of our business, we are making adjustments to our cost structure. For example, our marketing and advertising spend is mostly variable and is a function of our submitted application volume. Approximately 30% of our submitted applications have typically come from the online advertising channel, and this channel generally accounts for in excess of 50% of our total variable marketing and advertising spend. Starting in November of 2010, last year, we began to gradually adjust our bidding strategy in this channel to reduce our acquisition costs.

Fourth quarter individual and family plan submitted application volume declined 9%, compared to the fourth quarter of 2009, due in part to these deliberate effort aimed at reducing member acquisition costs. We believe that over time, the cost of doing business in the online advertising channel and the individual health insurance space, specifically, will decrease, reflecting the lower lifetime value of a member, to many bidders. We are also adjusting costs in other areas of business that support individual and family plan transactions.

By the way, application volumes during the fourth quarter were also impacted by the implementation of new regulatory requirements, pursuant to the affordable care act that came into effect on September 23. As a result, many of our carrier partners were making changes to their products during the fourth quarter, which affected and decreased available plan inventory on our platform.

Notably, during the fourth quarter we added several new product offerings to our platform, and in particular I'd like to highlight the addition of Blue Cross Blue Shield of Florida, which has approximately 30% market share in the Florida individual market. So, I talked about our successful fourth quarter, and the significant commission changes in the individual and family plan business as a result of the healthcare reform legislation.

Now it like to move into and describe to you our new Medicare business. We are very pleased with our results in the Medicare market. 2010 Medicare revenues were well within our expected range of $8 million to $10 million and up from a very small base in 2009. The majority of this in 2010 was lead-based revenue, although our commission-based business was also off to a very strong start. As a result of the demand that we generated during 2010, we had 10,000 individuals as of December 31, 2010, enrolled in various Medicare products through our direct efforts, and through business development arrangements.

Approximately 60% of these enrollments were health plan members on Medicare Advantage and supplement products, and the remainder were on prescription drug plans. This is meaningful, given that we essentially had no Medicare members at the end of the third quarter in 2010. As a reminder, the Medicare business was new to us last year, although the majority of our 2010 Medicare revenues came from lead generation, our plan is to transition this into what we expect to be a significant commission-based business over the next several years. We've entered the Medicare market and are investing in it for several really important reasons.

First, there's a large number of people aging into Medicare eligibility. In fact, the first baby boomers turned 65 years of age this past January 1, and it's estimated that on average 10,000 baby boomers will turn 65 years of age every day, over the next decade. We have found is to be an affluent demographic, with many people who are comfortable transacting online. Secondly, marketing and selling Medicare products online is a natural extension of the powerful technology platform we've been developing over the years. And third, our carrier partners are also aggressively pursuing the senior market, and we've gotten excellent support from some of the largest plan sponsors in the business.

As part of our Medicare strategy, we acquired Plan Prescriber in May of 2010. We've been working with Plan Prescriber to make significant improvements to its technology platform and its demand generation channels including direct online advertising, the pharmacy channel and other performance partnerships. Among our goals for 2011 is to further scale our demand generation activities, with particular focus on the direct and partner channels in this Medicare area. In addition to Plan Prescriber, we also operate eHealth Medicare.com, which, during the 2010th annual open enrollment period facilitated online enrollment in several states. We plan to continue to add carrier states to our Medicare platforms throughout the year.

Our Medicare product marketing capabilities are complemented by a dedicated Medicare customer care center that we opened and launched October 1, 2010. Based on our Medicare success and experience in 2010, we expect to see strong growth in the Medicare market in 2011. Our plan is to continue to transition from a lead based business to a commission based business, and we are targeting Medicare commission revenue at 20% to 30% of the total 2011 Medicare revenues. Similar to 2010, this year's Medicare revenue and earnings will be weighted more towards the fourth quarter, driven by the timing of the annual open enrollment period for Medicare participants. We are continuing to invest in this area, and expect Medicare to be a very significant and profitable part of eHealth's future business.

The Government Systems business is also a new area of rapid growth for us. This new business opportunity has evolved as a direct result of healthcare reform legislation, which, among other things, required Health and Human Services to launch and maintain a national information platform, and that all 50 states launch and maintain health insurance exchanges for consumers. We believe that our experience as a leader in the online health insurance market has us well positioned to take advantage of these many opportunities, and most importantly, to help government agencies provide reliable and robust health insurance exchanges.

During 2010, we were awarded the Health and Human Services health plan data collection and software services contract as the prime contractor, and our technology has been implemented and running for HHS for several months. Additionally, Health and Human Services expanded this contract last month beyond its original scope. As we previously reported, we also participated in a winning exchange RFP in Florida.

More recently, we were awarded a contract through another RFP process, to provide certain decision-support technologies to the Massachusetts connector. The Massachusetts connector is relatively small from a revenue perspective, but nevertheless, an important win that serves as yet another example of the strength and appeal of our technology offerings to government entities. A number of states are now beginning to consider and plan for exchanges required under healthcare reform, and we are actively engaged in the exchange related discussions in many of these states. We believe that our Government Systems business can be an important revenue and earnings contributor for us. In fact, just based on the relationships we already have in place, in excess of 5% of our 2011 revenue is projected to come from this area. And remember that a year ago, this business didn't even exist for us. Additionally, we expect our government business operating margins to be in excess of 20% in 2011.

There's been a lot of discussion recently as to what the individual and family plan market will look like in 2014, when most of the elements of healthcare reform legislation will come into play, including 50 state exchanges presumably up and running. Our strongly held view and experience is that state exchanges will simply be one of several sources which consumers can choose products. In fact, United Healthcare said it best in one of their recent presentations, characterizing state exchanges as a market, not the market for individual and small-business products.

We plan to participate in the state exchange opportunity, and at the same time will continue to grow our direct commission based business. Our Company's mission statement for 11 years, has been to be the online distribution standard through which people find the right health insurance products. Let me say it another way. What we want to do here is monetize the health insurance enrollment transaction no matter where it occurs. So as you can see, our business at eHealth is changing and expanding, as a result of healthcare reform legislation, and new business opportunities we are developing. Please remember, first and foremost eHealth is a technology company, and we take great care to ensure that all of our business initiatives directly leverage the power of our Company's core technology, and that all of these businesses will be important and profitable contributors to eHealth.

Because our business is changing so rapidly, I'd like to conclude my formal remarks with some comments about our 2011 guidance. Although we believe our commission reductions in the individual and family plan business are not as deep as some may have expected, they are still significant, and will clearly impact our expected revenues and earnings for 2011. On the other hand, we have a fast-growing Medicare business and a new Government Systems business, both of which are off to really successful starts. We are a company today that is in the midst of a transition period, and because of the power of our technology and the ability to scale, we believe that we can mitigate much of the impact of commission changes, as we build new businesses while generating good profitability and most importantly, strong cash flows. Reflecting all of this, our revenues for 2011 will be slightly down compared to 2010.

The EPS impact will be more pronounced, given that some of the revenue from our new businesses will initially produce lower margins than our core IFP business, as we invest in their growth. We are planning for revenues outside of our core individual and family plan business to contribute over 25% of the total revenues in 2011. And we expect EBITDA to stay strong and given our changing landscape, this is something I am frankly most pleased about. So Stuart will provide you with more details, but I wanted to let you know what our high level thinking has been on guidance. Let me again emphasize that we continue to be a solidly profitable business. We also expect to resume revenue growth off of this new base I just described to you in 2012. And so now I will turn the call to Stuart, and he will take you through a lot of this in more detail. Stuart?

Thanks Gary, and good afternoon everyone. I will start by reviewing our financial results for the fourth quarter and calendar year 2010. Our fourth quarter revenue was $44.7 million, excluding the one-time item Gary described. This represented a 30% revenue increase compared to the fourth quarter a year ago. On that basis, our annual revenue was $154.4 million, representing 14.5% annual growth, and within our annual guidance range of $152 million to $157 million. Excluding the one-time item, commission revenue for the fourth quarter was $33.7 million, an increase of 12% over Q4 2009. Other revenue was $11 million, a 152% increase over $4.4 million in the fourth quarter of 2009. Growth in other revenue was driven primarily by strong results in our Medicare business, which was well within our expected revenue range.

As a reminder, our current Medicare business is weighted heavily towards the fourth quarter, driven by the Medicare annual open enrollment period which in 2010 occurred between November 15 and December 31. In the fourth quarter we also recognized approximately $1.6 million in revenue from our contract with the Department of Health and Human Services, which was another factor contributing to strong revenue growth compared to Q4 2009, when we had no government contract in place. For the year, our total other revenue represented over 16% of total revenue, excluding the one-time commission item, compared to approximately 11.5% of revenue in 2009.

Our individual and family major medical plan submitted applications declined year-over-year by 9% in the fourth quarter. This decline was partially due to our decision to reduce our online marketing spend in the individual and family market, starting in November of 2010, and shift some of that budget into Medicare. Our cost of acquisition measured as our total marketing and advertising expense on individual and family plan submitted applications, was $88.79 for the quarter. This metric now includes our Medicare spend in the numerator, as well as marketing spend on other new initiatives. Much of the spend does not drive membership, such as spending on our Medicare lead business and Government Systems.

In contrast, the denominator includes exclusively individual and family plan members. As a result, this measure is much less relevant than it has been in the past and this will be the last quarter for which we report the cost of acquisition in this manner. For comparison purposes, our Medicare marketing spend added over $4 to our cost per individual and family plan submitted member in the third quarter, and $17 in the fourth quarter of this year. Excluding Medicare costs, we saw a year-over-year improvement in the cost of member acquisition, as compared to the fourth quarter of 2009.

For the quarter we had approximately 94,200 total new approved individual and family plan members. The average number of individuals per approved application increased, compared to the fourth quarter of 2009, which mitigated some of the impact of the lower submitted application volume. Our total estimated membership at the end of the year was approximately 778,000 members which represents 7% growth, over estimated membership reported at the end of the fourth quarter of 2009.

I would like to comment on member retention, but before I do, I would like to remind you that we estimate retention using trailing historical data. And so our fourth quarter view of retention is based on data from the second quarter of 2010. Based on this information, we continue to observe a favorable trend with our estimated member retention rate, which improved as compared to the estimated retention rate we discussed on our fourth quarter earnings call last year.

I would now like review operating expenses. To facilitate the year-over-year comparison, all margin related comments will exclude the impact of the one-time revenue item recorded in Q4. On that basis, excluding the expense related to the one-time revenue item, stock based compensation, and the amortization of acquired intangibles, our non-GAAP operating expenses improved as a percentage of revenue, relative to the comparable period a year ago, as well as sequentially. This improvement was driven by the favorable margin contribution from our Medicare lead business, our efforts to control the acquisition cost per submitted member as described by Gary, and lower application volume during the quarter.

I will now review our operating expenses line by line. Our non-GAAP marketing and advertising expense which excludes stock based compensation expense, was 34% of revenue this quarter, an improvement as compared to 38% in Q4 '09. For the full year 2010, our GAAP marketing and advertising expense as a percentage of revenue was 39%, excluding the one-time item, which is below the target range of 40% to 42% that we set at the beginning of the year.

Non-GAAP technology and content costs, which excludes stock based compensation expense, declined from 11% of revenue in the fourth quarter of 2009, to 10% for the comparable period this year. Non-GAAP general and administrative costs, which excludes stock based compensation, also declined from 13.5% of revenue in the fourth quarter of 2009, to 11% in the fourth quarter this year. Our non-GAAP customer care and enrollment costs, which excludes stock based compensation, increased from 10% in the fourth quarter of 2009 to 12% in the fourth quarter of 2010, reflecting the launch of our Medicare dedicated customer care center in Utah in October of 2010.

Our fourth quarter non-GAAP operating margin, excluding the one-time revenue item, and associated cost of revenue, the effect of stock based compensation, and the amortization of acquired intangibles, was 27% or $12.2 million as compared to 24% or $8.3 million in the fourth quarter a year ago. Fourth quarter non-GAAP operating income grew 47%, as compared to the fourth quarter of 2009. For the full year non-GAAP operating margin was 22% in 2010 as compared to 23% in 2009. We continue to benefit from past net operating loss carry-forwards, which reduced the cash taxes we pay, relative to what we recorded as expense in our GAAP income statement.

For 2011, we expect our GAAP tax rate be in the range of 43% to 45%, while we expect to pay cash taxes at a rate of 10% to 12%. Going into 2011, our federal NOLs are approximately $18 million, the largest portion of which are NOLs we obtained in the Plan Prescriber acquisition. The remainder relates to stock option deductions that are available to offset future corporate income taxes. Notably, we are also carrying over $70 million of state NOLs, many of which are in the state of California, and therefore cannot currently be utilized.

Fourth quarter 2010 GAAP earnings per share were $0.38 or $0.22 excluding the impact of the one-time revenue item, and the related tax impact. Full year 2010 GAAP EPS was $0.73 or $0.58 excluding the impact of the one-time item, and the related tax impact. Our cash flow from operations was $3.6 million, as compared to $9.4 million in the fourth quarter 2009. Fourth quarter 2010 operating cash flow was impacted by a $7.6 million increase in accounts receivable, related primarily to the seasonality of our new Medicare business.

Given the annual enrollment period for Medicare that took place in the fourth quarter, our Medicare related marketing expenditures rose significantly, however we did not collect a majority of the revenue associated with these expenditures in the fourth quarter. A portion of the increase in accounts receivable was also related to our contract with the Department of Health and Human Services. As of today, we've collected over $4 million of these Medicare and Government Systems related receivables.

During the fourth quarters of 2010 and 2009, we utilized $5.5 million and $1 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 $9.1 million, as compared to $10.4 million in Q4 2009.

If you similarly adjust our annual operating cash flow to reflect the full benefit from deferred income taxes, our full year 2010 cash flow from operations would have been $33.4 million as compared to $35.1 million generated in 2009. Capital expenditures for the fourth quarter of 2010 were approximately $500,000, and were approximately $2.9 million for the full year. As a reminder, we are not a capital intensive business.

I would now like to comment on the balance sheet. Our cash and marketable securities balance was approximately $128 million at December 31, 2010, reflecting $26.2 million of stock repurchase during 2010 under our stock repurchase program. Gary described to you the changes underway in our business, including new emerging businesses and the commission changes. Given all of that, I'd like to tell you what it means for our expectations for 2011.

As Gary mentioned, our estimate of the amount by which our average individual and family plan base commission rate has changed, as it has declined from just over 10% of premium as of the third quarter 2010, the most recent period for which we have fully lagged data set for the calculation, to just below 7%. We arrived at this estimated change in the average rate by applying the changes in the first and renewal year commission to our book of business, as of the third quarter of 2010. The changes are revenue weighted, so that a rate reduction implemented by a carrier with a larger eHealth member base had a stronger impact on the resulting average rate than a change by a carrier with a smaller eHealth member base.

The new average rate includes estimated changes for a minority of our carriers which have not completed the rate review process.Most of the commission rates changes are perspective, meaning that most members of the eHealth base that were sold before these changes went into effect, will continue to generate commissions at previous rates. The actual impact of 2011 revenue is not as deep as the change in commission rates themselves, and we believe that as other businesses develop, it will help us mitigate the commission reductions.

Also, the future commissions that we earn will depend on a mix of our future sales, as well as their premium values. We also expect in addition to the base commission rate changes, other programs that carriers have supported like bonuses and sponsorship, may be reduced as carriers work to comply with MLR regulations. Also, please note that the one-time payment of $6 million we received in the fourth quarter, was an acceleration of an estimated $2.6 million of 2011 revenue or $0.07 of 2011 EPS into 2010. This movement from 2011 to 2010 is reflected in our guidance.

Our guidance for 2011 is as follows. We are forecasting revenues for 2011 to be in the range of approximately $141 million to approximately $149 million. In 2011, we expect to continue to generate strong EBITDA and associated cash flow. We expect 2011 EBITDA to be in the range of $23 million to $28 million. We calculate EBITDA by adding stock based compensation and depreciation and amortization, including the amortization of acquired intangibles, to our GAAP operating income. For the full year 2011, stock-based compensation is expected to be approximately $7 million to $8 million. GAAP diluted EPS for 2011 is expected to be in the range of approximately $0.31 to $0.40 per share, again reflecting the acceleration of $0.07 out of 2011 into 2010.

In addition to guidance, I want to make a couple of other comments regarding our outlook for 2011. As we continue to diversify our revenue, we expect that over 25% of our 2011 revenues will come from business initiatives other than our individual and family retail business. We expect our Medicare business to continue generating strong growth this year. It is not unreasonable to expect 80% plus year-over-year growth in this business. Similar to 2010, it will continue to be weighted towards the fourth quarter, with the annual open enrollment period for 2012 coverage starting on October 15. We also expect good growth from our Government Systems business.

Finally, our target range for GAAP marketing and advertising as a percentage of revenue for the full year of 2011 is 37% to 39%. I want to remind you these comments in our guidance are based on current indications for our business, which may change at any time. We undertake no obligation to update these comments or our guidance. And now we'd like to open up the call for questions.

Thank you.

(Operator Instructions)

Your first question comes from the line of George Sutton from Craig Hallum.

Hello everyone. So Gary, you mentioned that, and I was intrigued by this comment, given all of the complexities of 2011, you mentioned that you expected the business to grow in 2012. If we looked at it from a very high level, are you assuming that your core business grows in 2012 or is that predominately from the new initiatives becoming a larger portion of the total?

Hello George. As we've looked at 2012 and even into 2013, we see the core business as pretty much being stable where it is right now. We obviously see it really accelerating in 2014 when you've got the mandate and subsidies and so on. But we do see growth in 2012 and 2013 coming from these new businesses that are expanding our footprint. Certainly the Medicare business and the Government Systems business.

Okay. You mentioned a change in your marketing strategy near the end of the year, and obviously reflecting some of the changes you are seeing. I wanted to make sure I was clear what exactly you were changing, is this largely the buying of search words?

We are changing a number of things. Because the revenue value of these products has decreased, we've got to get obviously, the customer acquisition expenses more in line with the revenue value. So, in search, yes. We manage all of this in-house, and we actually manage thousands of keywords on a 24 hour a day basis. The number of keywords we look at and how to optimize those, overall spend. We are really the leading spender in this area and we think over time that we should be able lead this spend down into an area that is more in line. So that, and we've got other costs associated with the support and the sale of these products as well. Other marketing and associated expenses, the G&A expenses related to those. We're not just looking at all of those, but we are taking action with all of those as well to get them more in line.

Okay. Finally for Stuart, what are you assuming happens with retention rates into 2011?

I'm assuming they are fairly stable with what we've seen. As you seen over the past year, they have actually been improving year over year slightly, and I'm assuming they stay pretty much stable with what you just saw in 2010.

Got you. Perfect. Thank you.

The next question comes from Richard Fetyko from Merriman Capital. Please proceed.

Good evening. With respect to the Medicare business, what is your sense of margins in 2011 on that business, and maybe on a longer term basis, as obviously you are investing a little bit with the call center and so on? And then is your sense that in 2014, when the state exchanges are in place that Medicare plans will be available on those as well?

Richard, first of all, on the margins, the margins in aggregate won't be as good in 2011 as we think they will be in following years, just because we are investing. The margins on just a per unit basis are really attractive, more so than we've seen in our core business, for example. It's one of the things that attracts us here. On the exchanges, today no, there has been no discussion or what I would expect to see the Medicare products there. The Medicare products are already on a government exchange, Medicare.gov. Which is run by the centers for Medicare and Medicaid services, CMS.

It is estimated that 20% to 25% of all Medicare enrollments, most of the prescription drug plans, I might add, occur on that site. Everything happens outside of that.So, I would not expect to see Medicare products on the state exchanges. I would on the state exchanges, however, not be surprised in some states to see them want to do a combination of the individual products and Medicaid state children's health insurance program products and so on.

Thanks for that. And if I may follow up on the Medicare topic, you mentioned increased focus and you've mentioned in the past, that you would like to transition that PlanPrescriber business to a recurring fee as opposed to lead-gen fee. What impact will that have on the 2011 numbers, or is it more on a going forward basis more the revenue will be on a recurring basis, rather than a lead-gen basis? Just a little more color on that.

Ultimately over time, what we would like to have is a business here that is predominantly, and I mean that the vast majority of the business comes from commission revenues, that the source of the base. We are in a transition to that right now.In 2010, we actually had more commission revenue that we generated, and more members that will be generating commissions, close to 10,000, I indicated, than frankly we had expected or planned, and to us that was awfully good validation of the approach, in people wanting to buy these products, especially online. As I also indicated in 2011 in expectations alone, we think 20% to 30% of this Medicare revenue will be commissioned based or recurring if you will, and will keep expanding from there.

And I think one thing --this is Stuart --just to remind you the model on the retail business, just like in our individual and family business, as we build up the recurring revenue, we expense all of our marketing expenses up front and customer care costs up front and then we recognize the revenue over the course of the life, which in Medicare is a much longer life than in individual and family.And so as we build up that member base in the early stages, it does have lower margins that will in the future, because of the fact we are front ending all of the cost acquisitions.

Are the cost of acquisitions going to be higher on the Medicare side since their lifetime value are also higher?

We don't have a lot of data on that but so far it looks very favorable. Relative to -- it looks like it's right there with individual and family and maybe a little more, but very favorable toward lifetime value.

Okay. Thank you.

Richard, just on that point, there's this window opening in the Medicare market with all of these people who are aging into it, that really impacts the demand curve significantly. We saw that in this past annual enrollment period, an awful lot of demand, that we were able to generate, and in fact frankly, we were somewhat challenged with ways to fulfill all of that demand and that directly relates to cost of acquisition. This is not something that we are concerned about, in fact it may be in the up being more favorable than what we had been planning as well because of what we are seeing here.

Thanks.

Your next question comes from Robert Coolbrith with ThinkEquity. Please proceed.

Good afternoon. Just a couple of things. I was just wondering, first of all, if you could talk a little bit more about the marketing environment, it sounds like you were ahead of the curve to account for a lower TOB on your members. Are you seeing the search market begin to adjust, and also did your partner and marketing agreement adjust for the reduction in commission values? And I have a couple follow-ups.

I would simply say in the cost of acquisition whether it's in search and with partners as well, it's a work that is in progress, we're early into it. We are beginning to see some things adjust in the market and so on, but it's going to take a bit of time.

On the commission structure, I don't know if it's possible to generalize at this point, but will you be getting commissions on increases in premiums over time or is it just on the initial premium or is it a mixed depending on the carrier?

I would characterize it as a mix. There have been some changes to lock it in as the initial premium, compared to how they were structured before. But one thing we also commented on is, we expect that premiums themselves will continue to inflate overtime, and the starting point will likely be higher than it has been in the past.

Then I'll ask one quick one, might jump back in queue. Can you tell us a number of members the commission prepayment relates to and also was that driven by the carrier or is that something you might happen with other carriers? And how do you come up with the assumptions for the pre-pay?I assume this represents the net present value of the entire future stream of revenue for those numbers? All right thanks a lot.

You next question comes from the line of--

Hold on a second--

We didn't get a chance to respond there. Due to confidentiality on that arrangement, we are not at liberty to talk about the structure or the membership numbers or anything like that. But it does relate to future commissions that we were expecting to get over the course of the years.

Think of it as an accommodation. It worked well for us but it's several years worth of payment and a lot of margin.

My apologies on that. We do have a question from the line of Nat Schindler of Bank of America Merrill Lynch.

Yes, hello.

Nat.

Can you just tell me a little bit on -- when you mentioned rising premiums as an offsets from the lower cost of the lower commission rates, historically however, premiums seem to almost always rise and it hasn't really benefited you in the past. Will this time and why? Then I have some follow-ups.

Actually I think in the past we have gotten benefit from it. We've seen the commissions that we have earned over the years historically, if you go up a few percentage points every year, part of that from a premium inflation. Clearly going forward, we think it has positive impact, how much, we can't forecast. I will tell you this what we told you about today in terms of commission range is just a bit over 10% and a bit below 7% is more than we have ever, ever disclosed about this before and I thought it was important to really get everyone calibrated on where we are as to the size of these changes and so on.

Remember that these changes for the most part are perspective changes on business going forward, and we are observing across the country a premium increase. Nat, you know here in California for example there's been a lot of media attention on Blue Shield of California. Over 59% increases in the individual business. Aetna wants to increase in California, Anthem has, and we are seeing it in East Coast states as well. We have not factored that into any of our comments today, we really haven't factored it into any of our guidance but we think there may be some uplift as a result of that. Certainly at least compared to what we planned for, and what we told you today, in terms of what we know about the business.

Okay and then, I would assume if that's from the prospective business only, as those people churn off, and new people are included, that a little under 7% has to go down again in '12 and possibly '13 as well, right?

Think of the just below 7% is the mix across the entire book, so that is the first year commissions mixed in with the second year commissions and weighted against who pays those to us and the members they have in their base and so on. There is some complexity to calculating all of this but it's something that we know well. So sure, anybody we sell a product to today, theoretically, is at the new commission rate in the first year, which will be higher than it is in the second year and so on. But even given all that, through everything that we know and what we see, we do expect we will see a moderate increase in our revenue growth, or our revenue in 2012 compared to 2011.

Okay. Then looking at what happened on submitted applications, you mentioned dialing back your spend and if you take up to $17 from Medicare, it is clear that you did and that would make sense on the online advertising and partner front, but then you had the 7% decline from the direct side of the business. Or at least I calculate that, even as the year over year comparison got easier. You mentioned that came a little bit from the carriers making changes to their plans starting in September. When will that impact end and would you expect that line to grow from here, and see real growth in new applications on the direct side, which would be non-advertising related?

It's good observation. So direct is always run approximately 40% of what we have sourced for consumers and members and as you know it our single largest channel. It's impacted by a lot of things. We know some of it is word-of-mouth anecdotally and certainly media attention that helps and it's impacted by natural search, and it is also impacted by what we call spillage.

For example, someone will click through on Google and we will pay for that. They will come and they'll look at quotes and they'll move around and then we will leave and they might bookmark us and come back later directly and not go through Google and depending on how the time has elapsed, and so on, it depends on whether we categorize that as online advertising or drop it into direct. You will have some of that impact and effect there as well. We did frankly, have a smaller inventory of products for sale in this last quarter. There were a number of changes being made because of mandates that went into place for benefits September 23.

One example was child only plans for people 19 and younger. In many states, many of the payors simply just withdrew from that market and offered no child plans at all. Some of the states have responded, like California where we are today, by putting in open enrollment period in place. In fact there is only two more weeks of that here, it's a 60 day open enrollment period, January and February.

The reason for that, and this gets back to health care reform and all of the different pillars in all of this, is that when you have guaranteed issue, which is what these child only products are and no mandate, it doesn't take long for someone to figure out that it's more -- the economics for them personally are better to not buy the product until they need it and then to drop it when they don't need it.

The problem with that for the underwriter, on whether it is a private company or even governments underwriting it, is that you just don't have a balance in terms of revenue inflow to offset what you are spending for utilization. That's why the carriers dropped out. We didn't have product there to sell, and we get a good number of people that simply ensure their children and not themselves, just as an example for you.I think also a good example of the complexity in the market as a result of healthcare reform.

Okay, sorry, his line actually dropped. We will move on. The next question comes from the line of Steve Halper of Stifel Nicolaus.

Yes, hello. Two questions. Gary, what percentage of the carriers are you done with renegotiating commission rates?

This is Stuart, we estimate about 90% on a revenue basis.

Okay.

We're complete with.

I guess you mentioned that there were some smaller plans that represent less of a percentage of total revenue that you're not done yet?

That's correct. There are some carriers waiting to make their decisions that in fact, that we forecast a number for those, we put in a placeholder in coming up with our calculation of the estimated change.

Okay, that's fair. If you look at the lead generation from PlanPrescriber, just the lead generation business, did that meet your expectations?

Yes, it did and then some.

Great, thanks.

We are very pleased with PlanPrescriber and the acquisition, what it did and what it's doing right now and where we think it's going to take us.

Great, thanks.

Thanks, Steve.

The next question comes from Jim Friedland from Cowen and Company. Please proceed.

Thanks. I just want to get some number questions in. First of all with CapEx, should we expect that to pick up with some of the new investments this year or should it be relatively stable? Second question is looking at the IFP business, I was curious on the associated businesses, EOD and the sponsorship for advertising business, are those still intact and should they relatively grow or remain sort of flattish in line with the core IFP business? And then the last question is now that you've taken this hit on the marketing expense and IFP submitted apps are down about 9% year over year and accu of a two basis, should we expect normal seasonality?

On the CapEx question, I would expect it to be relatively similar to what you saw in 2010. We did $2.9 million. It should be in and around that amount for 2011. EOD and sponsorship, those have flattened out some over the course of this past year. EOD is driven largely by the volume of transactions going through the carrier platforms, and they've seen a slowing of the business similar to what we've seen and so has slowed down. And then same with sponsorship, we've seen a little bit lower participation in sponsorship recently, so that has flattened out some.

And on the seasonality of the IFP business, should it be normal, kind of Q over Q seasonality at this point, now that you have pulled back on the ad spending? I'm just talking in terms of submitted apps.

I think that the seasonality patterns should remain in tact. I would expect Q1 as a step up seasonally, and then typically a little bit lower in Q2 followed by a step up again in Q3.

Okay and then the last question is related to the commission changes, what percentage if any of your partnerships have commissions come down with existing members or are all the changes 100% just on incremental new members?

Minority of the carriers had some changes to previously sold business. By far the most of that related to sales during the second half of 2010, at various dates within the second half of 2010 that they applied those to. None of it applied to amounts that we earned in 2010. They applied that prospectively starting January 1, with respect to some members sold prior to January 1.

Okay good, got it. Thanks.

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

Hello, actually this isn't Youssef, this is Sachin stepping in for him. A couple questions, the first is on the 80% that you were forecasting for Medicare revenue in 2011, the 80% growth, how much of that is going to be coming from enrollment versus lead-gen at the end of the full year? The second is related to the accounts receivable, I think you said this was related to sort of a government payment, a longer term payment structure, do you think it's going to continue going forward in your Government Systems business?

Yes, I will take the first question on the Medicare growth. As I indicated in my prepared remarks, the revenue that we plan to see generated by the Medicare business this year, 20% to 30% of it will be commission based but don't assume that 20% to 30% of what we do in terms of everything will simply be enrollment. The enrollments were probably be more than that but that's the commission revenue, that we'll yield from that. The other 70% to 80% depending on where that falls out will be lead based but that's a substantial change from what we experienced in this annual enrollment period we just finished, and we really like where that is going, and this is part of our strategy to move it there, frankly as quickly as we can.

Okay.

And on the Government Systems receivable, this was kind of a one-time item. I don't expect to see a delay like this. This is more a function, we just got started on the contract, and the early builds, getting those through the system. Now we are starting to see regular payments, starting here in the first quarter.

Okay and one more question, finally, on the deferred revenue item, it seems like you have an unusually large, about $2 million in deferred revenue, is that related to the prepayment from the carrier accelerated into 2010?

No. No, that's related to the Government Systems. We are recognizing our revenue pro rata over the course of the arrangement. And so as we straight line that, there are certain amounts that go into deferred revenue relative to what we bill.

Okay, got it, thanks.

You have a question from Scott Fidel with Deutsche Bank.

Thanks. The question is what percentage of your members do you expect will be on the new commission structures in 2011 and then do you have an estimate of what that will be in 2012 as the book rolls over to the new commission structures?

I don't have a percentage offhand but I think we've talked at length before about the average lifetime of a member being in a little bit in excess of two years. So I think if you use that in your modeling, you should get a rough estimate of the impact as it prospectively moves its way into the system.

So then maybe thinking about one, one, thirteen as being one pretty much all the new commission schedules are embedded?

Pretty close.

Majority.

Yes.

Okay. Just a second question, just on the carriers deciding to primarily just change to reduce the commissions but stick on a percentage of premium, did any of your carriers decide to move to a fixed commission per member, and are you having any discussions about them considering potentially doing that in 2012?

No, we haven't. We've always had a few that were on a fixed payment basis and those didn't change. But the vast majority of what we've earned historically has been a percentage methodology, that didn't change, especially with the largest payers we pay with. We've got signed agreements in place with them.

I don't expect any changes or renegotiation or what have you of these things. We should also point out given all of this, we have had some carriers that have increased commissions as well. It's interesting given all the focus on commission reductions and so on. But no, nothing, no change there. Pretty much the profile looks as it did a year ago in terms of the methodologies for these payments.

Okay then, just one last question on the Medicare member generation and the 10,000 members that you cited they are, any color you have on how that was derived across the carriers? You talked about signing on United and Humana, and WellPoint, did you see a broad-based or was there any particular carrier driving that membership?

More focused on one, than any of the others, only because of the time that's required and the regulations you had to do with CMS to become certified to do these things, and so on. I think I mentioned earlier, we frankly have more demand in that open enrollment period then we were able to satisfy. Somebody said it's a high-class problem but it's one we spent a lot of time studying, and we just didn't have enough inventory of product, because it takes time to get products approved and up and going.

This is a highly, highly regulated business by CMS, much more so than the individual business. Frankly it's one of those things that is appealing about it because it's hard to get in to do it but once you are there, we think it's a fantastic business. We've got a team of people working full-time on this right now, we continue to add product and we continue to work through the approval cycles and so on, that are required in this annual open enrollment period which by the way, starts earlier this year, it starts on October 15. We expect to have and plan to have much more choice and much more product inventory available, in more markets than we were in as well.

Okay. Thank you.

We have no more questions. I would now like to turn it over to Mr. Gary Lauer for any closing remarks.

I want to thank everybody for your time. I hope this was helpful. We tried to give you as much insight as possible on the commission changes and also again, give you insights into both our experience and what we are finding in the new business as we are expanding the footprint of our company. Thanks, and I'm sure we will be talking to many of you over the next several days one on one as well, and appreciate your time.

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