eHealth Inc (EHTH) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 eHealth, Incorporated earnings conference call. My name is Alicia, 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 call is being recorded for replay purposes.

I would now like to turn the call over to your host, Kate Sidorovich, Director of Investor Relations for eHealth. Please proceed.

Good afternoon and thank you all for joining us today, either by phone or by webcast, for a discussion of eHealth Inc's first quarter 2011 financial results. On the call this afternoon, we will have Gary Lauer, eHealth's President and Chief Executive Officer, and Stuart Huizinga, eHealth's Chief Financial Officer. After management completes its remarks, we will open the line for questions.

As a reminder, today's conference call is being recorded and webcast from the Investor Relations section of our website. A replay of the call will be available from the Investor Relations section of our website following the call.

We will be making 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 acquisition costs in the individual and family plan business, plans and projects for our Medicare business, our Medicare product inventory and geographic coverage for the 2011 annual enrollment period, our goal with respect to Medicare revenues, our ability to compete in our strategy of the state exchange contracts, increases in average premium for IST products and the impact of such increases, the pursuit of our new business areas of Medicare and government systems, our focus on enrollment cash generation, impact of commission rate changes, and our guidance for revenue, EBITDA, stock-based compensation, and earnings per share for 2011.

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 of our corporate website under the heading Investor Relations.

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

Thanks, Kate and thanks for joining us today as we review our results from the first quarter. Throughout the first quarter at eHealth, we were focused on several important objectives, to integrate the new commission structures as a result of the January 1 medical loss ratio requirements into our business, to achieve an overall cost of acquisition, which allows us to acquire new members profitably, to grow our revenues, to further expand our business base through our ecommerce on-demand, government systems and Medicare initiatives, and to continue to generate and grow cash flow from our operations. We are very satisfied with our performance during the quarter in all of these areas.

Revenue for the first quarter of 2011 was $37.6 million, growing 4% over the first quarter of 2010, even as we began to integrate the commission rate reductions into our individual and family plan business, which as a reminder were in excess of 30%. Stuart will provide more information on how these commission reductions will flow through our membership base. Our revenues reflect higher than anticipated commission override payments paid to us by carriers for volume we delivered and higher contribution from our government systems business during the first quarter.

Revenues from our ecommerce on demand government systems, sponsorship, and Medicare business initiatives were approximately 20% of our total revenue, reflecting the progress and growing importance of these business areas. Earnings per share were $0.09 and as Stuart will discuss shortly, we reduced our individual and family plan cost of acquisition to levels, which allow all of our member acquisition channels to be profitable based on the current lifetime member value projections.

Our marketing and advertising expense, as a percentage of revenues, also declined as compared to the first quarter in 2010. Our year-over-year application decline in the individual and family plan business was 12%, right where we had planned. Cash generated from operations was $6.8 million.

We are also working to increase the lifetime value of individual members by introducing ancillary products and emphasizing the shopping cart concept in our online marketplace. Our goal is to become a one-stop destination for all health related insurance products, including vision, dental, travel, and catastrophic insurance, and to take full advantage of the cross-selling opportunities on our platform. During the quarter, we introduced a brand new online store for accident insurance where we offer AFLAC branded products.

We are prioritizing profitable member acquisition and margins in our core individual and family plan business over growth, until acquisition costs in this market normalize to reflect the new commission structures. At the same time, we are emphasizing growth in our new business areas, Medicare and government systems. Our Medicare business continues to gain traction.

During the quarter, we saw more evidence of significant synergies from our acquisition of PlanPrescriber, which combined PlanPrescriber's unique technology and content in the Medicare market with eHealth's online marketing capabilities to create a powerful platform for lead generation and fulfillment. First quarter lead volume on the PlanPrescriber platform grew significantly as compared to the first quarter of 2010 when PlanPrescriber operated as a stand-alone entity. This growth was primarily driven by significant progress achieved in building out our online advertising channel in the Medicare space. PlanPrescriber's average position in paid search on Google for high relevance Medicare keywords improved meaningfully in the past 12 months and we'll continue to work on maximizing the value of this important channel.

It's important to note that even though much of the Medicare business is transacted during the annual enrollment period, otherwise known as AEP, we are growing new revenue throughout the year as people age in the Medicare eligibility. We're also starting to apply to Medicare our public relations and media strategy, which has yielded great results in driving high quality, direct traffic in our core individual and family plan business over the years. In the marketing partner channel, we are now in the early stages of building out our performance partner network, which should provide another substantial growth opportunity for the Medicare business.

In our commissions-based Medicare business, we are on track to have broader product inventory and geographic coverage available for the upcoming annual enrollment period, which starts this year on October 15, and we're also working on deepening our integration with the carriers. We are also in the process of enhancing our call center experience and tailoring it to the unique requirements of Medicare eligible people. Our goal remains to expand our commission-based revenue to contribute roughly a quarter of the total 2011 Medicare revenues. In our government systems business, we are spending significant effort educating states on exchange implementation.

As you may know, in February of this year the so-called early innovator states received approximately $240 million from Health and Human Services to design and implement health insurance exchanges ahead of the January 1, 2014 deadline. This group includes Kansas, Maryland, New York, Oklahoma, Oregon, Wisconsin, and a consortium of New England states. We have had discussions with all of these early innovator states to share eHealth's extensive expertise in connecting millions of American to quality healthcare through an online marketplace.

Based on the strength of our technology, we continue to believe that we are well positioned to compete for state exchange contracts. Depending on a state, we might pursue these mandates in partnership with other providers, either as a prime contractor or a subcontractor.

On the last earnings call, we made a comment regarding recent increases in average premiums in the individual and family plan health insurance market. As with the fourth quarter, the premiums on the IFP products being selected on our platform in the first quarter of 2011 grew compared to the first quarter of 2010 at a greater rate than they have historically. These premium increases were partially driven by lower sales of child only plans that tend to have lower premiums. However, after removing these plans from the analysis, premium increases still visibly increased following the introduction of minimum benefit requirements on September 23rd of 2010. If this trend were to continue, it could serve to mitigate the impact of lower broker commission rates in the individual market.

In conclusion, we are pleased with eHealth's performance in this changing environment. Based on our current lifetime member value projections, we are profitable across all member acquisition channels in the individual business where our focus is currently on profitable member --customer and member acquisition, and we continue to aggressively pursue our new business areas of Medicare and government systems where our focus is on growth. And as always, we continue to stress cash flow generation for the business as a whole. Given all the changes in the business environment where we operate, we feel that the results we just reported indicated that we're off to a good start this year.

I would like to turn the call to Stuart who will review our financial results in greater detail. Stuart?

Thanks, Gary and good afternoon, everyone. As Gary mentioned, our first quarter financial results reflect commission rate changes that went into effect on January 1, 2011, mainly affecting our compensation on policies sold after that date. This means that most members of the eHealth base that were sold before these changes went into effect will continue to generate commissions at previous rates. Therefore, the impact on eHealth's first quarter revenue does not reflect the full estimated change in our average base commission rate of over 30%, which will phase into our financial results over time.

Given the impact of commission rate changes, we are pleased with our first quarter performance and especially the contribution to revenues from our Medicare and government systems businesses. Our first quarter revenue was $37.6 million, a 4% increase compared to the first quarter a year ago. Commission revenue for the first quarter was $30.8 million, a 3% decline compared to the first quarter of 2010. Other revenue was $6.8 million, a 61% increase over $4.2 million in the first quarter of last year. Growth in other revenue was driven primarily by our Medicare business and revenue from our new government systems business. For the quarter, other revenue represented approximately 18% of total revenue compared to approximately 11.5% of revenue in Q1 2010.

Our individual and family major medical plan submitted application volume declined 12% compared to Q1 2010. The application volume decline was most pronounced in our online advertising channel where we took aggressive steps to reduce costs. Given the highly variable nature of our marketing spend in online advertising, where bids can be adjusted dynamically, and the fact that this channel has the highest cost of acquisition per member, it represented an obvious target for us as we work to bring our cost structure in line with the new lifetime value of members.

As a percentage of revenue, our GAAP marketing and advertising expense was 34% of revenue third quarter, in line with the fourth quarter of 2010 and an improvement as compared to 41% in the first quarter of 2010. Excluding Medicare costs, our cost of acquisition measured as our total marketing and advertising expense per individual on an individual and family plan submitted application declined by more than 10% as compared to the fourth quarter of 2010. Our

Medicare related marketing spend declined sequentially, driven by the seasonality of the Medicare business, but increased year-over-year as compared to the first quarter of 2010, which was prior to our acquisition of PlanPrescriber, when we were not spending our marketing targeted at Medicare customers.

For the quarter, we had approximately 101,800 total new improved individual and family plan members. Our total estimated membership at the end of the quarter was approximately 801,200 members, which represents 6% growth over estimated membership reported at the end of the first quarter of 2010. The number of revenue generating individual and family plan members increased 5% while the number of other members, which includes Medicare members, increased 14%.

I would like to comment on member retention, but before I do I'd like to remind you that we estimate retention using trailing historical data. And so our first quarter review of retention is based on data from the third quarter of 2010. Based on this information, we continued to observe a favorable trend with our estimated member retention rates, which improved slightly as compared to the estimated retention rate we discussed in our first quarter earnings call last year.

Our first quarter 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 relative to the comparable period a year ago. This year-over-year increase is driven primarily by an increase in customer care and enrollment costs associated with the opening of our Medicare dedicated customer care center in October of 2010, and the seasonality of our Medicare business, which leads to the fixed portion of Medicare related costs being aligned with lower revenues outside of the annual enrollment period. These factors were partially offset by our successful efforts to control marketing and advertising spend as I described earlier.

First quarter non-GAAP operating income was 17% of revenue, or $6.3 million as compared to 21% of revenue, or $7.6 million in the first quarter a year ago. EBITDA for the first quarter of 2011 was $6.9 million, a 14% decrease compared to EBITDA of $8.1 million for the first quarter of 2010. First quarter 2011 GAAP EPS were $0.09. Our cash flow from operations was $6.8 million as compared to $3.1 million in the first quarter of 2010. Our first quarter cash flow benefited from the collection of receivables from Medicare leads generated during the fourth quarter of last year. For these leads, we recognized the marketing expense in Q4 2010, but did not collect the majority of the receivables until Q1 2011.

During the first quarters of 2011 and 2010, we utilized $1.1 million and $2.6 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 and a decrease in cash flow from operating 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 $7.9 million as compared to $5.7 million in Q2 2010. Capital expenditures for the first quarter of 2010 were approximately $500,000.

I would now like to comment on the balance sheet. Our cash and marketable securities balance was approximately $130 million at March 31, 2011 reflecting $3.8 million of stock repurchased during the first quarter when we completed our second $30 million stock repurchase program. With respect to guidance and based on information currently available, we are reaffirming the revenue, EBITDA, stock-based compensation expense, and earnings per share guidance for the full year 2011 that we provided in our last earnings call.

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

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

(Operator Instructions) Your first question comes from the line of Richard Fetyko from Merriman Capital. Please proceed.

Good evening, guys. A couple of things on your progress here with the customer acquisition costs. Did you mention what they actually were specifically the numbers, with and without the Medicare contribution as you did in the past? And then secondly, on the government systems progress there and discussions with the state exchanges, just curious what your sense of timing of some of these announcements at least and/or implementations of these earlier pioneering states or whatever they were called. Just wondering if we could hear something by the end of this year with some implementation in the beginning of 2012.

Yes, Richard, on the cost of acquisition I didn't quote a specific number. On our last call, I indicated that the old metrics had become obsolete basically at this point with all of the individual Medicare spend and government systems marketing and advertising that was coming into the mix. And so I didn't quote a specific number, but I did indicate that we decrease the individual and family plan portion, the unit cost by more than 10% from the fourth quarter.

Hey, Richard. This is Gary. On the exchanges, the seven states, or six states, the group of New England states that got funding from HHS are called early innovator states. None of them have RFPs yet that have been let out, but we think we may see an RFP from two, maybe three of them in the next several months. It's conceivable that there could even be an award before the end of the year and work could begin. Oregon -- and we're talking to all of these states in the New England, the group as well. Oregon is a state that is moving along quite rapidly here as an example. So as soon as we start to see that and know more, we'll certainly disclose that.

Okay, thanks. That's all I had.

Your next question comes from the line of Sachin Jain from Jefferies. Please proceed.

Hi, guys. This is Sachin stepping in for Youssef. A couple questions. The first on Medicare. I know it's still early in the season, but can you kind of talk about what the split was between lead-gen for Medicare versus enrollment? And then the second was, what -- where does the legislation stand or the broker commissions on MLRs?

On the lead-gen versus enrollment, we had a good quarter, good solid quarter in Medicare and we were pleased to see that more than 20% of our revenue from Medicare this quarter came from commission.

Okay.

Yes, so on Medicare we're really pleased with the progress into the -- with the commission contribution. On the broker commissions, I think you may be referring to a bill that was introduced in the House that would exclude or preclude broker commissions from the medical loss ratio calculation. I'm just going to give you one person's opinion. I'm pretty close to it. I just can't imagine in my wildest dreams at least in the next year and a half in this political environment that that would ever see the day of light. The Republicans in the House, frankly, from the best that we can tell and I spent a lot of time there with many of them, don't want to do anything right now that improves or makes the legislation any better. The medical loss ratio was one of those issues that got a lot of attention and I can't imagine the Democratic Senate, if the bill ever even got there, voting to pass it as well.

So I wouldn't expect to see anything soon legislatively on commissions changing. I think we should just all assume, as we are here, that the commission structures we have in place are what we're going to be moving forward with.

Okay. Great. Thanks.

Your next question comes from Sameet Sinha from B. Riley and Company. Please proceed.

Yes, hi. Thank you. When you talk about customer acquisition, on which of these channels was unprofitable for you in the past and how dynamically do you change it? I mean are you changing it on a weekly basis or a monthly basis? If you can talk to that. The second thing, in terms of members per application that seems to have dropped to a fairly low level, but approval rates are going up. Can you comment on that?

Yes, on the cost of acquisition, we've always run our programs such that they were incrementally contributing margin in each channel. My comments were more that with the change in commissions that we've seen going into the current year, we've adjusted the cost of acquisitions in each of the channels such that incremental members from each channel will continue to provide incremental margin in each channel. So it's mainly a shift in our paid search channel this quarter in getting to that. Our members per application, year-over-year we've actually seen an increase in that year-over-year. We saw the same dynamic last quarter. So we've actually seen an increase on our side.

thank you.

Your next question comes from the line of George Sutton from Craig-Hallum Capital.

Hey, guys. This is actually Jason filling in for George. I had a question here around the impact from I guess what I'll call the confusion factor for customers relative to what we saw late in the year last year and just, I guess I'm wondering if there's a better appreciation for the reality and the timing of the implementation of the Obama Care.

Well, you know, it's an interesting question. I just saw a Kaiser Family Foundation survey that was just let out within the last week that indicated in a recent survey they did that the confusion level is still about where it was six months ago. And I don't have it in front of me, but my recollection is about half of the respondents, about 50% still don't understand the legislation and what it means. So I think there's still quite a bit of confusion in the marketplace and we experienced that at least anecdotally in our customer care center with people that we interface with.

Okay, and then one follow-up if I could. I know Google made some changes to their search algorithms earlier in the quarter. I'm wondering if that has any impact on your search rankings or any of your marketing and advertising spend throughout the quarter.

No, our search rankings maintained the high level that they always have. We typically are number one in organic natural search and at many key words, we maintain a one or two position with paid key words and paid search as well. No, no impact there. In fact, on that I should note, however, we are spending less on paid search both in the important keyword areas that we are and some of the secondary and tertiary keywords as well as we're bringing the cost of acquisition down. And the decline in applications, frankly, was right in the center of what we had planned and what we expected. So we actually feel we're tracking nicely right out in this area in terms of getting cost of acquisition in balance with what the revenue is from new members at the new commission rates.

And so now, of course, the objective is to start to continue to maintain these cost of acquisition levels and now start to generate more application volume at these levels. And that is our plan, and hopefully you'll see that over the next several quarters.

Okay. So no changes in the marketing and advertising spend expected? Everything is going the way you would expect it and it will continue to do so?

Yes, well, we have made changes. We have reduced the spend. But it's tracking just as we had hoped and frankly just as we had planned. I think for us that's the real good news here.

Okay, great. Thank you very much.

Thank you.

Your next question comes from the line of Caroline LeCates from Stifel Nicolaus. Please proceed.

Hi, yes, just wondering if you could provide some additional insight on average premium increases. I think you mentioned that the minimum benefit requirement could mitigate some of the effects of the rate cuts. I'm just wondering how we should be thinking about this over the course of the year.

Yes, it's a good question. The premium increases were significant enough. That's why we noted it here. In fact, we're seeing last quarter on average premium increases that are low double digits. Quite significant over a very, very short period of time and clearly because most of our commissions continued to be a percentage of premium that has an upward or a positive effect or impact on the dollars that we would earn.

I'm not so sure I would do any modeling from this yet. I think we need a little bit more time to see how all of this is going to behave and where these premiums go, but it seems pretty clear that when you add benefits or features to these products as they were mandated to do September 23, as -- the Affordable Care Act, it's not unlike going to shop for a new car. If you want the upgraded better sound system it costs more and that's what happens with these products as well, and we're clearly seeing that right now.

Remember, also, in the Affordable Care Act there's no mechanism in there to control premium pricing with the carriers or the plan sponsors. That's still all left to the states and that's business as usual. So when you've got the MLR now at 80%, one of the ways that the plan sponsors have or the carriers have, obviously, to accommodate that is top end pricing. I'm not suggesting that's what's fueling that, but the point I want to make here is that there's nothing there in the Affordable Care Act that changes any of the pricing approaches that the carriers have. They simply do it through the states and the insurance commissioners. So I'm not forecasting we're going to see more premium increases, but I would also say it wouldn't surprise me as well.

Okay. Great. Thank you.

At this time, you have no further questions. This concludes the question and answer portion of the call. I will now turn the call over to Gary Lauer for closing remarks. Please proceed.

I just want to thank everybody for your time and look forward to speaking with many of you individually. Thanks again.

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