eHealth Inc (EHTH) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 eHealth, Incorporated earnings conference call. My name is Jonathan, and I'm your operator for the day. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session after the prepared remarks. (Operator instructions.) And as a reminder, this conference call is being recorded for replay purposes.

And now I would now like to hand the call off to Ms. Kate Sidorovich, Director of Investor Relations. You may proceed, ma'am.

Thank you. Good afternoon and thank you all for joining us today, either by phone or by webcast, for a discussion about eHealth's second-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 IR 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 future submitted application and approved member growth rates; our plans for marketing spend and customer acquisition costs; our retaining an increasing percentage of Medicare leads for direct fulfillment; our Medicare product inventory; enhancements to our online platform; investment in Medicare demand fulfillment; future work for healthcare.gov; our execution of share repurchases; brand and projections for our Medicare business; profitability of Medicare members; and our guidance for revenue, EBITDA, stock-based compensation, and earnings per share.

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 IR section of our website.

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

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

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

Thanks, Kate. And good afternoon, everyone. Thanks for joining us today as we review our second-quarter 2011 financial results.

Revenue for the second quarter was $36.2 million. Earnings per share were $0.12 and cash flow from operations was $7.8 million. We are clearly seeing the benefits of our diversification strategy which, combined with favorable trends in member economics, allow us to mitigate the impact of lowered commission rates.

We ended the quarter with $136 million in cash and cash equivalents. Based on the strength of our balance sheet and our view of the Company's future, our Board of Directors authorized a $30 million stock repurchase program during the quarter. Returning cash to our shareholders is an important priority in our capital allocation strategy. And, as a reminder, this is our third $30 million repurchase program in three years.

Second-quarter individual and family plan submitted application growth declined 13% as compared to the second quarter of 2010. At the same time, the number of individuals per approved individual and family plan application increased, resulting in a lower decline rate in the number of approved IFP members, at 6%.

On that note, I'd like to provide more context on our second-quarter financial results and submitted application volume. We are pleased with our commission revenues for the quarter, which benefited from several favorable trends in member economics. First, we are seeing the impact of premium inflation on our commission revenue per member in the individual market. As we discussed on earlier calls, starting in September of last year, in 2010, we observed increases in premium prices on the IFP products being selected on our platform. And now this premium growth is beginning to flow through to our commission revenues.

Additionally, we are seeing an increased number of members on each submitted application, which results in higher premiums per approved application. This is in part the result, we believe, of certain mandates of the Affordable Care Act, which went into effect last September. Specifically, child-only plans, which are products for children from essentially 0 to 18 years of age, became guaranteed issue, meaning that any application for a child-only plan cannot be denied by the carrier for health reasons. Many carriers have since dropped these products from their offerings. As a result, we see fewer applications for child-only plans and we see more applications with an adult and a child together.

The demand for young adult policies was impacted by yet another reform provision, which allowed 18-to-26 years of age the option of staying on their parents' policies. As you might expect, we are seeing fewer individual applications from the 18-to-26 age group. On the other hand, we are seeing a higher growth rate in applications submitted by older individuals. In fact, the growth rate in applications submitted by all individuals over 40 years of age was positive compared to the second quarter a year ago. And by the way, these individuals typically select plans with higher premiums than children and young adults, which results in a higher commission base from which our commissions are derived. As a reminder, the majority of our carrier partners compensate us with commission payments that are a percentage of premiums on the products that we market and sell.

As you can see, there have been changes occurring within the basic makeup of our submitted application volume. Given all that has occurred in the individual market during the past 9 months, we are satisfied with the 6% decline we experienced in approved IFP members during the second quarter. More importantly, as Stuart will describe, we grew both our IFP membership and our overall membership during the second quarter compared to a year ago. Remember that our business revolves around individual member metrics. And some of the measurements that are important to note is the volume of members that we transact through our system, membership growth, and the commission and revenue per member that we generate.

Decline in submitted application growth rate is expected to continue at the same rate or a higher rate in the third quarter and then improve in the fourth quarter, as compared to the second-quarter levels. Like this past quarter, we believe that during the third quarter, approved members may decline at a lesser rate than submitted applications because of the increasing number of members we are transacting on a per-application basis.

During the second quarter we continued to focus on acquisition costs in the individual business. Our marketing strategy and goals, very simply, are to spend in a way that every new member we acquire is profitable. As such, we are being careful where and how we are spending our marketing dollars and focusing on opportunities that are more profitable and result in better conversions. We are also increasing our acquisition spend in the senior market. And I'd like to review with you briefly our progress in the senior market, which continues to gain traction and scale.

Currently, an important measure of eHealth's Medicare product demand is what we call Medicare lead volume. This metric represents a consumer who has expressed a desire to purchase a Medicare product, generally by visiting one of eHealth's web properties, including PlanPrescriber.com and eHealthMedicare.com, and completing an online lead form or calling us. In most cases, the consumer has also received online quotes and plan comparisons of multiple Medicare products with the ability to enroll online.

During the second quarter our Medicare lead volume grew in excess of 100% year over year. This is the highest growth rate we've experienced since launching our Medicare retail business last year. Consistent with PlanPrescriber's historic business model, we sold a significant number of these Medicare leads to third parties during the second quarter. Most importantly during Q2 we retained a record percentage of these Medicare leads for our own direct fulfillment. We expect the percentage of leads that we retain for direct fulfillment to continue to increase for the remainder of this year.

To support our direct fulfillment we continue to expand our inventory of available Medicare products, including Medicare Advantage, Supplement, and Prescription Drug plans. During the second quarter we actively marketed Humana, Anthem, and Mutual of Omaha Medicare products. Last week we went live with Aetna and we are in the process of adding Coventry's Medicare products nationally during this third quarter. We expect to have a broad inventory of Medicare products going into the 2012 annual enrollment period which starts on October 15 of this year, 2011. From a user experience standpoint, we continue to make enhancements to our online platforms and have many new features planned for this upcoming AEP.

Based on this accelerating Medicare demand, we also made the decision to invest more aggressively in this market, starting in this third quarter. One of the key areas where we plan to invest is demand fulfillment, including our customer care resources. We plan to ramp our retail Medicare business faster by directly fulfilling a larger portion of demand that we generate. Stuart will provide more details about our Medicare unit economics and the leverage of our commission-based model when we fulfill demand directly.

In the government systems area, we continue to have discussions with many states that are considering how to launch exchanges. These discussions are both directly with the states and also through other vendors with significant experience in the government contracting business. And frankly, most states are moving at a slower pace than many had imagined.

Over a year ago we were awarded a contract as a result of an RFP process with the Department of Health and Human Services to be the prime government contractor for a portion of healthcare.gov. Contract responsibility was moved inside of Heath and Human Services to the Centers for Medicare and Medicaid Services, CMS, earlier this year. We were informed by CMS that their preference is to work with a certain schedule of existing government contractors under a preexisting contracting vehicle. Neither eHealth nor Deloitte, our partner, are on this list of contractors. We've recently had our contract with HHS extended and we continue to operate and support this portion of healthcare.gov and expect to do so for the remainder of this calendar year at least. However, CMS has informed us that they will be transferring this work to an approved CMS contractor and we may be transitioning out of healthcare.gov at some point in the future.

Additionally in the government area, the Department of Health and Human Services released a proposed regulation for state-based insurance exchanges on July 11. The draft regulation, as we expected, still leaves many questions unanswered, but appears to give states a range of flexibility in their design and operation of exchanges under the Affordable Care Act. Although the Affordable Care Act is being contested in federal courts and portions of it might be heading to the Supreme Court, we continue to believe that it will be the law of the land in 2014 and we are planning to operate our business as such.

And now I'd like to turn the call to Stuart, who will provide additional details on our second-quarter financial results. Stuart?

Thanks, Gary. Good afternoon, everyone.

Starting on the top line, our revenue for the second quarter was $36.2 million, basically flat as compared to $36.3 million in the second quarter a year ago. However, the revenue composition has changed as a result of our business diversification efforts and the impact of commission rate changes.

Commission revenue was $30 million, a decline of 6% over the second quarter of 2010. Other revenue, which includes sponsorship, e-commerce on demand, government systems, and Medicare lead revenue, increased 39% compared to the second quarter a year ago. Other revenue represented approximately 17% of total revenue for the quarter compared to approximately 12% in the second quarter of 2010.

Our individual and family major medical plan submitted application volume declined 13% compared to the second quarter of 2010, while approved IFP members declined 6% during the same period. Factors that impacted application volume during the quarter were twofold, including the reduction of our online advertising spend, as well as the consequences of healthcare reform implementation which impacted application activity in certain age groups.

The lower rate of decline in our approved IFP members compared to submitted applications was largely driven by a higher average number of individuals per approved application due to a greater percentage of our applications coming from families. The year-over-year increase in average individuals per approved application started in the second quarter of 2010 and has averaged 6% over the last three quarters. This is a favorable trend for us, should it continue, as historically we have earned more than twice the lifetime revenue from family applications than we have from individual applications. In the second quarter the average number of individuals per approved application increased 5% year over year to 1.55 from 1.47 in the second quarter of last year.

Our total estimated membership at the end of the quarter was approximately 804,100 members, which represents 7% growth over estimated membership reported at the end of the second quarter of 2010. The number of revenue-generating individual and family plan members increased 4%, while the number of other members, which includes Medicare members, increased 23%. As Gary stated, our business revolves around member metrics and we're pleased with the growth we are seeing here.

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. And so our second quarter view of retention is based on data from the fourth quarter of 2010. Based on this information, we continued to observe a favorable trend with our estimated member retention rate which improved slightly as compared to the estimated retention rate we discussed in our second-quarter earnings call last year.

As a percentage of revenues, our GAAP marketing and advertising expense was 32% of revenue this quarter, well below 38% in the second quarter of 2010 and also an improvement as compared to 34% in the first quarter of 2011. The year-over-year decline in marketing and advertising, both on an absolute and on a percentage-of-revenue basis, was driven by our efforts to reduce marketing spend in the online advertising channel, which started in December of 2010. The sequential improvement reflects second quarter seasonality, which typically has lower application volume than Q1 and therefore lower variable marketing costs.

Let me give you some perspective on our cost of acquisition trend in the individual market. On a per unit basis, our cost of acquisition, excluding Medicare costs, measured as our total marketing and advertising expense per individual and family plan submitted applications, declined by approximately 15% compared to the second quarter of 2010. Sequentially our cost of acquisition, excluding Medicare, remained in line with the first quarter of 2011.

We are satisfied with our current unit economics in the individual business following the cost reduction efforts we undertook starting late last year. At the current cost of acquisition level, we are profitable across all IFP member acquisition channels based on our projected lifetime value of a member by channel.

Our second-quarter non-GAAP operating expenses, which exclude stock-based compensation and the amortization of acquired intangibles, increased slightly as a percentage of revenue relative to the comparable period a year ago. This year-over-year increase was driven primarily by higher costs of revenues and an increase in customer care and enrollment costs, partially offset by lower marketing and advertising spend. As a reminder, revenue sharing with our subcontractors in the government systems business flows through to cost of revenue, which also reflects other costs related to our government contract work.

In the second quarter of last year, our government systems revenues and related costs were minimal for comparison purposes. The higher customer care costs are 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.

Second quarter non-GAAP operating income, excluding stock-based compensation and the amortization of acquired intangibles, was 20% of revenue, or $7.2 million as compared to 21% of revenue, or $7.6 million, in the second quarter a year ago.

EBITDA for the second quarter 2011 was $7.8 million, a slight decrease compared to EBITDA of $8.2 million for the second quarter of 2010. Second-quarter 2011 GAAP earnings per share were $0.12.

Our cash flow from operations was $7.8 million as compared to $8.2 million in the second quarter of 2010. If you include the entire second-quarter benefit from tax NOLs in operating cash flow, rather than a portion of it being included in cash flow from financing activities, our Q2 2011 operating cash flow would have been $9.3 million. If you similarly adjust our Q2 2010 operating cash flow to reflect the full benefit from NOLs, our Q2 2010 cash flow from operations would have been $10.8 million.

Capital expenditures for the second quarter of 2011 were approximately $700,000, bringing our total CapEx for the first half of the year to $1.2 million.

I would now like to comment on the balance sheet. Our cash and marketable securities balance was approximately $136 million at June 30, 2011. On June 14 we announced our decision to implement a $30 million stock buyback program. Similar to our prior buyback programs, we intend to execute share repurchases in the open market under our 10b5-1 trading program.

As Gary mentioned, during the quarter we made a strategic decision, starting in Q3, to spend even more on our Medicare business based on the demand we're seeing in this market. Currently we fulfill demand that we generate in two ways -- by selling leads or by acting as a broker and fulfilling leads directly. In the first case we get paid on a one-time referral fee, while as a broker we generate recurring commission revenue for the life of the Medicare policy. In the long run, the commission-based business is significantly more attractive to us from a financial standpoint. Assuming a monetizable policy life of 5 to 6 years, the projected lifetime value of a member on a Medicare Advantage policy can range from $1,500 to well over $2,000. This is significantly above what we've been generating in our individual business, even before commission changes earlier this year. And this is also significantly higher than what we earn from selling the Medicare leads to a partner, even if we take into account that as a broker we need to generate several leads in order to sell a single policy.

We decided to accelerate the pace at which we grow our commission-based Medicare business and step up our investment in Medicare in 2011 relative to our original plans. This investment will be allocated to various Medicare-related functions, with a primary goal of stepping up our ability to fulfill Medicare leads as a broker through stronger customer care resources, broader inventory, and better online experience on our sites.

As part of this investment we also plan on further ramping our marketing outreach. We've been building a commissions-based Medicare franchise that is highly profitable on a lifetime value basis. However, we need to achieve critical mass before commission revenues can catch up with upfront customer acquisition costs. This is because, similar to our IFP business, we expense most of our customer acquisition costs in Medicare upfront, while the recurring revenue stream generated by these members is recognized over the life of sold policies.

Transitioning from a lead business to a commissions-based business is in many ways similar to switching from a software license model to a software-as-a-service model where you're creating a backlog of highly profitable revenues, but experience lower profitability at the front end. Our Medicare business has already grown to a point where we could decide to turn it profitable soon. However, the market opportunity is large. And combined with the momentum we are seeing in our business, we are erring on the side of investing rather than leveraging short-term profitability. And I'd like to stress again that each incremental member today is expected to be highly profitable and a source of recurring revenue and cash flow.

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 on our fourth-quarter 2010 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.) Youssef Squali; Jefferies.

This is Sachin again, stepping in for Youssef. Couple of questions -- one, what was the contribution to the commissions line from Medicare enrollment this quarter?

This is Stuart. We don't break out the Medicare commissions at this point. We are just starting to build that business and starting to get membership there. So it's going to be an important contributor over time but we're just starting to build that out. I will say that the commission amount for Medicare was more than 20% of our total Medicare revenue. Combining leads and the commissions together it was more than 20%, just like last quarter.

Okay. And then, in terms of your other revenue, I remember you guys had introduced last quarter products from sort of nonmedical related products that you guys were collecting lead gen revenue on, such as Aflac reinsurance and some other products like that. Was that a significant contributor to the other line this quarter?

Well, those are actually going to be commissionable products. And we would expect that to go through our commission line. That's a growing area and I'd expect to talk about it more in the future as we go.

Okay. And last question -- on your tax provision. I think it was a little bit sort of below where you guys were historically. Is there a benefit that you guys recognized for that this quarter?

No, it's a little bit down from where we were in Q1. Q1 we have some impact that comes from stock options that typically hits the rate in Q1. Q2 is more representative of the underlying rate that we're seeing. We did reduce some of our state taxes year over year. But if you go back to our Q4 comments, we expect to be more in the 43% to 45% rate range for the year.

Okay, got it. Thanks a lot.

Robert Coolbrith; ThinkEquity.

Two quick questions -- first, on the marketing side, are you starting to see any changes in the maybe call it competitive environment on the marketing side, maybe more rational behavior from some of your peers, particularly carriers?

And then, also on the submitted application growth, or actually the decline, is that just a straightforward impact from the lower marketing spend? Or have we seen any changes in conversions, underwriting policy, anything along those lines? Thank you.

On the competitive marketplace, and specifically in online advertising or search, if you will, which is about approximately 30% of where we acquire members, we haven't seen any significant change in behavior from a pricing standpoint. The change we have seen is that there are less competitors there. In the past there had been a fairly large cadre of demand generators and lead aggregators, which aren't exclusive to health insurance, but just the phenomena of search and e-commerce. Many, if not most, of those have exited this health insurance business because of the commission rates. It's more difficult for them to operate in a way that the economics work for them.

So essentially what we see today in online search are the carriers marketing directly, and us. And, frankly, it's still more expensive than we think it should be on a per-unit basis. But we continue to maintain the number one position in most markets. We manage thousands of these key words. And we insure that with those key words that are most relevant and generate the most -- the traffic that converts the best, that we maintain the premier position. And we've done that. We also continue to maintain the number one position on organic or natural search as well. So we've got all of that bracketed.

So it still works for us and it works well. It's profitable because we've adjusted it to be such. But we'd like to see the prices come down more than they have, quite frankly.

And on the submitted applications, that's more a function of the level and volume of consumers coming to the website and not so much the conversion of those numbers.

Well, yes. But it's also, as we noted, the fact that we are seeing more individuals on an application, but less applications from standalone individuals. For example, the child-only plans have pretty much gone away, but we're seeing now more families applying where there's an adult and a child together. That's why you see our member metrics are different than the actual submitted application metrics. And we had commented earlier that really what's underlying the fundamentals or the basics in the submitted application area has changed and certainly changed over the last 9 months. And it's important to note that as you look at all of these metrics. That submitted application number is not the marker it used to be for revenue and for our member economics as well.

Great. And one follow-up on marketing -- I don't know if you can maybe discuss any incremental progress on rationalization of partner marketing costs, if you weren't sort of totally complete on that project as well. Thank you.

Yes. I wouldn't say there's any material change to our marketing partner compensation at this point.

Okay, great. Thank you very much.

Jim Friedland; Cowen and Company.

It's Kevin Kopelman in for Jim. I had a question on the sponsorship and licensing line. Seeing as you're focusing more on commissions, how should we expect that line to look over the next couple quarters and how are you thinking about it?

Well, it largely depends on application trends, in that those are largely transaction driven. And we've seen, in our licensing business, we've seen similar dynamics to what we're describing in our business in terms of the year-over-year changes in application volumes. So that clearly has impacted the revenue from licensing. And same thing on sponsorship -- those are largely driven by transaction volumes. And those are our own transaction volumes, so those have been impacted by that dynamic and should continue to be impacted on a go-forward basis by the same dynamics.

And then a question on IFPs, on IFP growth -- when that first started to slow down a lot of that was sort of uncertainty from the consumers, in part because of all the confusion around healthcare reform. And now obviously you've cut back some on marketing spend. Is there other signs that the consumer is sort of less confused or less uncertain and sort of converting from just a visitor to an applicant?

No. That conversion rate hasn't changed a lot. We know that there's still confusion out there because we hear it in our customer care center interactions and so on. But, no, nothing marked there. And, again, I just want to make this point that it's important, especially with this quarter, to look underneath the submitted application volumes to understand what's happening on the number of members per application, members that are approved, and then the actual growth in membership. Because at the end of the day we don't generate any revenue off submitted applications. We generate the revenue off of members that are paying for these policies on a monthly basis. And we're actually in this very unusual marketplace seeing some growth there.

Let me add -- just point out again that you had several mandates in the Affordable Care Act that have had some impact on this marketplace. One is the child-only plans and there is a significantly less number of those in the inventory today. In fact, in many cases, in many markets there are none because they've become guaranteed issue and many of the carriers have elected not to participate in that guaranteed-issue market. And so you end up with people buying family plans with children, so you've got more individuals on the application, but less applications than we had previously. And in the 18-to-26-year-old -- or 19-to-26-year-old segment, you've got the option now for these young adults to be able to move onto their parents' plan. And we've seen a reduction in the number of applications there.

And I just want to point out again, and this is an interesting trend line and we've seen it strengthen, is that people 40 years of age and older -- we're actually got growth in applications coming from that segment. And that's a very interesting one, because I think as we pointed out, they typically select products that have got a higher premium and in some cases are more robust with things like dental and vision elements as well. And typically the retention of people in this older age segment of these products is longer also.

And what do you think the key drivers there are on that segment?

Well, we think it's a number of things. We know that there are less employers offering health benefits today than there have been in the past. We know that there are more people kind of pre-Medicare who, for various -- pre-Medicare age eligibility, 65 -- who for various reasons have retired earlier than Medicare had anticipated. In fact, we've noted this previously, but for some time our single fastest growing age segment -- this is typically surprising -- is people 59 to 64 years of age. Left place of employment, no longer have employer's health benefit. They're pre-Medicare. They've got to into the market to buy something. They've learned to use the internet at the place of employment. They're comfortable transacting online. It's been a very, very good segment for us. And it's also, we think, a big indicator of what's going to be happening with this Medicare business that we're fast building as well. So you've got a number of things and those are some of them that are contributing there.

Okay, great. Thanks a lot.

Steve Halper; Stifel Nicolaus.

Couple of questions -- when you talk about submitted application being down next quarter, I'm assuming you're talking about it year over year?

Yes, that's correct, Steve.

Okay. And then on the healthcare.gov contract, do you know when the government will tell you what your role will be next year?

No, as a matter of fact. We're assuming we may not have a role next year. But we don't know that for certain. As I said, we've just signed an extension to the current contract that we have. I would say that this whole experience has turned out to be much different than we anticipated. It's a lesser opportunity than I think we had hoped for or thought it would be. The revenues certainly aren't as big. The site isn't as robust. We're not aware of its presence in the marketplace. I think it's just -- it's certainly been different than we had anticipated.

Okay. And then, finally, looking ahead into the fourth quarter do you expect that [bolis] of lead-base revenue related to PlanPrescriber during the open enrollment period?

Yes. We're really gearing up for this annual enrollment period. But I'm glad you asked that. We have actually observed more momentum in this business over the past several months than we had anticipated at this point, than we had planned for. And we're not in an annual enrollment period today, so these for the most part are people who are just turning 65 and coming into the market. But those who've already got Medicare plans can't make changes until they get into the annual enrollment period, which this year's October 15 to December 15. As I think I indicated, just lead growth alone has been in excess of 100% in this past quarter. I mean, these are significant numbers. This is better than anything we even saw in the early days of the individual and family plan business as we were building it. And as Stuart indicated, the revenue value of these products of these products and plans is quite attractive.

So what we want to do is fulfill as much of this as we can directly, so that we can enjoy the commission revenue over the next several years. So we'll be diverting more of that lead revenue into our own -- internally to enroll it both online and through our customer care center. At the same time, we think that there is going to be, from what we're seeing, sufficient lead revenue to certainly have a -- what we think is going to be a very healthy revenue base that's generated from that during this annual enrollment period as well.

And so one thing I should note as well, a lot of the revenue that we could have from leads in the fourth quarter won't be lead gen revenue. Rather, it's going to be commission-based revenue, some of which we'll get this year, but a lot of which we're going to realize over the following years as well. But we believe that now we're seeing the volume such that there's enough that we think we've got the opportunity here to generate some very significant commission-based revenue that we transact in house, as well as a very healthy lead generation revenue contribution also.

Could you sort of, or Stuart, could you frame what the expectation is around Q4 from the lead gen impact?

Well, I think last year we talked about the fact that we grew Medicare significantly and achieved $8 million to $10 million in revenue for the Year. And coming into this year we said that we were looking for 80%-plus type growth rates. And we're still looking to at least do that.

Okay. Thank you.

Sameet Sinha; B. Riley.

Just wanted to kind of [walk] through your guidance. So year-over-year basis, first-half revenue is up about 2%. And the second half is, if you exclude that one-time payment that you got in fourth quarter of 2010, then that drops down [13%.] Can you help us understand how much of that is due to commission cuts, how much because you're transitioning more of the leads to broker revenues?

Well, I can't parse out the percentage, but clearly the commission -- as we walk through over the last couple quarters, the commission changes will continue to impact us. As we go through time a greater percentage of our membership base will have the new rates apply to that. And so a good portion of that will impact the second half of this year and into next year. And so I'd say from -- your question is about the commission change in the second half. I'd say the biggest driver there is the commission rate change.

Fair enough. On the EBITDA side, can you speak to how much of that -- first half you had [20]% margins; second half you're implying 15%. How much of that is due to commission versus increased investments into the Medicare business?

Well, I'd say the biggest portion of the impact on the second half is from the commission impact and, to a lesser extent, the increase in Medicare expenses. But we are looking to step those up. You could back into it through our guidance. You'd see several million dollars of additional spend on the Medicare activities that we talked about.

Okay. You're also [headed] towards increased or reduced declines in submitted application volume in the fourth quarter. Is that because you're seeing less competition in the marketplace? And how should we think about that business in 2012 as it relates to your marketing that business?

Well, I think it's more a function of when we get to Q4 we're starting to compare back to a Q4 last year where these regulatory impacts for healthcare reform started to come into play. We did spend at a higher marketing rate in Q4 last year and only started to cut back that marketing rate at the very tail end of the year. So we do have to compete against that. But those are the biggest influences.

Okay. Thank you very much.

Richard Fetyko; Janney Capital Markets.

Did you say that over 20% of the revenues came from Medicare and government systems in the quarter?

No. What I said was that of our Medicare revenue in total, if you combine lead revenue and commission revenue, that more than 20% of that total came from commissions.

Oh, okay. And can you answer that first question? I think in the past you talked about having certain objectives around Medicare and the government systems as a percentage of total.

Yes. We're not breaking that number out at the moment.

Okay. In terms of the --

I mean, other revenue was 17% of total, up from 12% a year ago. And then on top of that is the Medicare commission piece that I mentioned, which is more than 20% of the total Medicare amount.

Got you. I'll see if I can add that all up. And then, with respect to the second half of this year, the plans to increase the Medicare product coverage, you began to market the Anthem -- I'm sorry -- Aetna plans recently. Could you tell us in what state? And how realistic is it that you will significantly expand this coverage in the next -- between now and November, I'm suppose, how ever many months that is?

Richard, this is Gary. Aetna was on suspension by CMS. In fact, they couldn't even market their products during this last open or annual enrollment period. And they've just come off these sanctions and the suspension. I don't have the list, but I believe that every state that Aetna is operating, which may be nationally, is where we're going to have their product portfolio. So we've got the entire product portfolio, Prescription Drug plans as well as Medicare Advantage plans.

And we'll be actively marketing those and we'll be doing the same thing with Coventry. We're actually going to have a very robust set of product offerings in this annual enrollment period which, frankly, we didn't have last year. We had very few products as we were just starting out. Again, one of the reasons we're investing is that we're going to have a larger product folio or inventory of products to offer coming up than we had thought and we had planned. And so we're also pleased with the progress there and the engagement of some of these very important carriers and plan sponsors in this area.

So the carriers that you have signed thus far you think gives you enough coverage to keep you busy and meet your objectives on the Medicare growth of 80%-plus?

Yes.

Okay. And then, let's see, anyway, you mentioned that the investments related to Medicare acceleration and that opportunity could be in the tune of several million dollars. Would what be the approximate split of this investment between the fixed type of investments in people and facilities and [new type] to support the fulfillment versus the media expenses, the more variable expenses? Just curious if you can quantify the split.

Frankly, it's probably half and half between the fixed portion and the variable portion. It is important to note that we are going to start building the capabilities in the customer care center starting immediately here in the third quarter and get those people on board and trained in advance of October 15. So that will start hitting us here in Q3.

Yes. And you're not splitting out the contribution to customer acquisition cost just for Medicare anymore, do you?

We don't break it out, but we have seen favorable numbers. And that's one of the reasons why we feel very comfortable stepping up the transition of fulfilling it ourselves. We see good solid unit economics underlying all that and expect to generate very good margins off that.

You mentioned the LTV of $1,500 to $2,000 for the Medicare member. Could you give us any other metrics, like what is the average lifetime of the Medicare customer or what is the payback time on your media spend?

Well, those numbers were predicated on a 5-to-6-year life and that's the typical life that we see based on books of business that we've seen from -- in the industry. And in a lot of cases (inaudible) life can be even longer, but our contractual arrangement is to compensate us for the first 5 years or 6 years. So that's the main reason why we're talking about 5-to-6-year lives.

And assuming that, what's your guess on the payback period?

It really depends. The payback period -- given that the annual enrollment period is when people can make their selections and make their -- you know, the bulk of seniors are coming into (inaudible) our selection. We see much better economics in Q4 and the conversions are so much higher. So it's hard to kind of give you an average payback. It kind of depends on the seasonality. But if I look back to Q4 of last year during the annual enrollment period, if you look (inaudible) seeing paybacks that were fairly similar to what we have talked about in the past for individual and family, if not better.

Okay. All right. That's all I had. Thanks.

Scott Fidel; Deutsche Bank.

Had a question on just what types of premium rate increases you were seeing in the individual and family business in the second quarter and whether that has accelerated or decelerated sequentially? And I know that you talked about those picking up late last year and just interested if you're seeing any type of moderation, just given the deceleration in medical cost trends that we've been seeing in the sector so far this year?

Last quarter we talked about it being double-digit, year-over-year increases in premiums. And I would say that this quarter we saw very similar -- they were double digit and very similar to what we saw last quarter on a year-over-year basis.

So you characterize it as pretty much stable in terms of the rate of increase sequentially?

Yes.

Okay. Then had a follow-up question just on what you talked about in terms of the increase of apps from people over aged 40. And just interested if, in terms of what you're seeing around approval rates from the health plans, if you're seeing an increase in the number of apps that they're approving from people aged 40, and if you think there's any effect in terms of health reform and the increased oversight of the individual market affecting the approach to underwriting of those populations?

Well I think in our overall submitted application volumes over time we've seen a little bit lower rate of acceptance of the applications. And I'd say in recent periods we've seen it be similar and it's stabilized.

And there's really no federal oversight at this point, except for the mandates that we talked about that go into effect on the child-only plans and the 19-to-26-year-olds. In fact, interestingly, even if you (inaudible) the Affordable Care Act and read it and see what's going to happen in 2014, there's still not a whole lot of oversight except for the fact that there are minimum benefit levels that have to be met, as you know.

And I think it's going to be interesting, as you have got more robust plans with these minimum benefit levels, to see what that's going to do to premiums. The premise, as everyone recalls, when this bill was being debated and then passed by the supporters of it, was that this was going to decrease the cost of health insurance for people. We haven't seen that yet and I think the question that has to be answered is that when you mandate a minimum level of benefits and they're fairly robust, you take off maximum benefit levels and so on, lifetime payment that is, one would think that premiums may increase more. I don't know. But we only know what we're observing and we've seen double digits over the past several quarters, low double digits by the way.

Okay. And I just had one -- yes?

Oh, I was just going to say -- and then on top of that is just the fact that we're seeing more family applications as a percentage of our total applications. And those family applications have a higher total premium on that application than an individual application. So that helps blend it up as well.

Got it. And just interested in terms of if there's been any discussions in terms of carrier views on commissions heading into 2012 and specifically whether carriers are still looking to maintain the structures primarily on percentage of premium or whether you're hearing increased interest in moving to more of a fixed commission per member structure?

Haven't heard any changes at this point.

There's really no discussions at all about that. In fact, the discussions we're having with carriers typically these days is just about helping them and them helping us with market share and more volume.

Okay. Thank you.

George Sutton; Craig-Hallum.

Just two questions; sorry to belabor the call. But with respect to the total addressable markets for Medicare and traditional IFP, could you discuss that in general terms? Because we're talking a lot about what you might achieve in the short term, but I'm curious longer term what's the real opportunity for this Medicare versus the traditional.

Well, it's a larger market. George, if you take a look at the Census Bureau data, which people regard as the best standard for the size of the individual market, it's estimated to be between 17 million and 18 million policyholders. Hasn't changed a lot over the last 10 years. I just gave a speech on this last week. The Medicare market, you've got about 40 million people today on Medicare products. You've got 76 million baby boomers aging in, people born between 1946 and 1964. You've got over 10,000 a day having their 65th birthday. Baby boomers account for over half of all expenditures in the US right now. The demographics and the data goes on and on that makes it look very compelling. So it's a very, very large market and a market that's growing simply because of the way that many of us, including me, are going to be aging into it. We're just, obviously, very, very intrigued with this marketplace and what we see there.

I think the other point I would make -- I've said this previously, but it's just such a natural application of the technology that we've built over the past several years. It just works so well and it's such a natural extension for us to be moving into this marketplace.

Got you. Gary, I thought you never aged, so I'm glad to hear you say you're getting old.

Keep going, George.

With respect to -- this we've kind of heard from some of the carriers, so I'm curious where this is all going. But will ultimately you potentially move to a model where you have more ownership of a customer, the billing actually goes through you and commissions become less of a future way to get paid?

You're asking -- that's a really interesting question. And the way the market exists today, I would say the answer to that is no. However, in 2014 it gets to be very interesting. Because take somebody who's subsidy eligible for instance. The federal government's going to pay that subsidy and they're going to advance it directly to the carrier. The consumer or the individual who qualifies for it is never going to touch those dollars, nor would we. But presumably many of those individuals, in fact most of them, are going to have to make some kind of a contribution themselves. And so that needs to be collected. That needs to be forwarded to the carrier. There's the opportunity for that.

I think that it's likely you're going to see a number of businesses exit the group health insurance market and turn their employees into the individual market, where many of them will be subsidy eligible and you may have employers making contributions. So it becomes a whole different administrative challenge and opportunity for someone like that. So we're looking at that and thinking about it right now. In fact, I just saw a report today from the National Federation of Independent Businesses, which is already tracking the number of small businesses that are either decreasing benefits that they're providing to employees with health insurance or just eliminating them outright and putting people into this individual market as well.

So I think one of the big opportunities for someone like us over the next several years is to move on from just being the place where you transact or get your health insurance, to also being the place where we help people manage all of their health finances. I mean, I could envision the day where you'd manage all of your health insurance online with us and even make your co-payments or other payments directly through us or through some kind of a technology. So, yes, we're thinking about that right now.

Okay. Thanks for the answers.

Nat Schindler; Bank of America/Merrill Lynch.

Sorry; this might have been -- you might have beaten this a little bit to death. But I wanted to try to understand this a little bit better. On the decline in the submitted applications, specifically the decline on the direct, I understand on the online advertising you're going after those that make sense, so you dial back your spend on what makes sense. But on the direct side you had a 15% decline in the direct submitted applications. Is that all because of the number of people per application? Or is there something else going on and people aren't even just finding you at the beginning?

No, we think the single largest contributor is just the effect of the Affordable Care Act. You've got less young people out there who are either looking for health insurance right now, because they can go under their parents' plans. Or parents are looking for health insurance for kids and there's just, there's no product there, nothing available. And it's really as simple as that.

Because, again, when -- we watch the stuff like hawks. When we look at the older age groups, we've seen just the opposite. We're actually seeing growth there. So there's nothing in the fundamentals of what we're doing that has changed or in our value proposition. Rather, you've got this shift in the marketplace or maybe an imbalance compared to the way it was a year ago. But that -- from everything that we've seen, and we've dug deep into this, the single largest contributor right now is reform. And what's interesting, and frankly I never anticipated this, is that we'd see the application volume fall the way that we have, yet we see the number of people applying for health insurance not be close to that decrease, because we've got more people on an individual application than we had previously and, hence, the member metrics that we've reported today.

Okay. And would it be because the speed at which, or the lack of new subscribers coming on and not a real heavy growth post the pricing change, is that why the drop in the pricing was more moderated than what I would have expected? It was only down about 11% year over year. Or was the commission revenue largely due to increased prices at the carriers? Or was it moderated by the carrier pricing?

Yes. I'd say we're seeing some moderation from these other metrics that we're mentioning, which is that the premiums are higher year over year and we're seeing flow through of that to the commission rate per member. And so that does serve to help moderate the impact on the commission revenue.

Okay, great. Thank you.

And, Nat, we're also seeing -- I think Stuart indicated earlier -- more members with higher premiums than we've had on average in the past. And that relates to the different age segments that we referred to as well.

Ladies and gentlemen, that concludes our Q&A session. And now I'd like to hand the call back to Mr. Gary Lauer, President and CEO, for closing remarks.

I just want to thank everyone for your time today and look forward to talking with many of you individually over the next several days. Thank you.

Ladies and gentlemen, thank you for your participation in today's call. The presentation has ended. You may now disconnect. Have a good day.