eHealth Inc (EHTH) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 eHealth, Inc. Earnings Conference Call. My name is Colby, and I will be your operator for today. (Operator Instructions) And, as a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Kate Sidorovich, Vice President of Investor Relations. Please proceed, ma'am.

Good afternoon, and thank you all for joining us today either by phone or webcast for a discussion about eHealth Inc.'s first quarter 2012 financial results. On the call this afternoon we will have Gary Lauer, eHealth's 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 this 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 we will make on this call will include plans and projections for all Medicare business, projected lifetime Medicare member commissions, the size and growth of the Medicare market, submitted application growth, anticipated benefits of our new shopping cart feature, impact of healthcare reform and related rules, our plans and expectations with respect to healthcare reform, our addressable market and growth opportunities, seasonality and timing of all financial results, our investment in Medicare, and our guidance for revenue, EBITDA, non-GAAP diluted earnings per share, and stock-based compensation.

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 report 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 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 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. Good afternoon, and thank you all for joining us today as we review our first quarter 2012 results. Our strategy for the past year and a half has been to maintain leadership in our Individual and Family Plan business, which has undergone much change, to invest for high growth in our new Medicare business, and to maintain operational flexibility in this fluid market environment.

During the first quarter of 2012, we continued to execute against our strategic objectives and build momentum in our business, reflected by our revenues, EBITDA and earnings per share results. Based on our first quarter results and the results we are seeing in our fast growing Medicare business, we are raising our 2012 annual revenue guidance. Stuart will provide our updated guidance later on during this call.

What I plan to do today is summarize our financial results for the first quarter, give you an update on our progress in building the Medicare business, discuss the performance in our Individual and Family Plan business, and make some comments about regulatory developments recently in the health insurance industry and marketplace.

Revenue for the first quarter was $37.1 million, and earnings per share were $0.10. EBITDA was $6.6 million, and cash flow from operations was $5.1 million. During the quarter we completed our third $30 million share repurchase program and remain debt free, with over $116 million in cash and cash equivalents on the balance sheet. I'd like to note that we have reduced our outstanding share count by approximately 22% since late 2008, when the first repurchase program started.

Following a successful annual enrollment period last year, our Medicare business continued to perform strongly during the first quarter of 2012. First quarter Medicare revenue was $6.5 million, a more than 180% increase year-over-year. We are well on our way to delivering the high double-digit growth in Medicare revenue for the full year that we discussed on our last earnings call.

Close to 60% of first quarter Medicare revenue came from broker commissions we earned as compared to approximately 20% in the first quarter of 2011, reflecting our progress in transitioning to a direct fulfillment model.

We keep getting better and more efficient at driving demand to our online Medicare properties and converting this demand into revenue-generating enrollments. During the quarter we generated Medicare lead growth in excess of 100% compared to the first quarter last year, and fulfilled in-house as a broker more than 80% of the demand that we generated. This compares to approximately 30% in the first quarter a year ago and represents a higher percentage than we had originally planned.

We are rapidly moving to fulfilling in-house all of our Medicare demand. As a reminder, direct fulfillment is characterized by significantly higher lifetime revenue values and margin dollars compared to the sale of leads.

The number of Medicare Advantage products sold during the quarter increased in excess of 450% year-over-year as we transact more business outside of the annual enrollment period. This meaningful sales growth was driven by our ability to drive more demand through our diversified online marketing programs and to fulfill more of this demand in-house, and by favorable demographic trends with over 3 million Baby Boomers turning 65 years of age this year.

Medicare Advantage products represented approximately 60% of total new Medicare enrollments during the first quarter, with prescription drug and Medicare supplement plans accounting for the remaining enrollments. We also saw a favorable trend in our cost of acquisition in our Medicare business.

Our Individual and Family Plan business continue to stabilize with submitted applications declining 3% year-over-year compared to a 7% decline we observed in the fourth quarter, and a 20% decline observed in the third quarter of 2011. The year-over-year decline in submitted applications was partially attributable to our redirecting some of our cost of acquisition spending from our Individual and Family Plan business to our Medicare business during the quarter. We still expect to have flat to low single digit growth in our Individual and Family Plan submitted applications for the full year 2012.

Individual and Family Plan approved members declined 1% compared to a 9% decline and a 19% decline observed in the fourth and third quarters of 2011, respectively. We continue to optimize our marketing spend in the individual business. Our cost of acquisition for submitted Individual and Family Plan member posted another meaningful decline year-over-year and is now at its lowest level in four years.

In our Individual and Family Plan business, we continue to innovate with the recent introduction of the shopping cart tool. This new feature launched in select markets recommends to consumers additional insurance products that might provide benefits otherwise not covered by a major medical policy, such as vision, dental and travel insurance. Consumers have an option to add several products to their shopping cart similar to what they would do on amazon.com or other e-commerce sites, and apply for these policies in a streamlined manner. We believe that the shopping cart tool provides additional value to consumers and has the potential for increasing our average transaction size.

We also further expanded our offering by adding new ancillary product inventory. Our goal is to provide a comprehensive online shopping platform for all consumer health insurance and related needs.

Now I'd like to make some comments on public policy. Of specific interest to us, Health and Human Services recently issued a rule or a regulation on state exchanges. As you know, pursuant to the Affordable Care Act, in 2014, individuals with income below 400% of the federal poverty level will qualify for premium tax credits and cost-sharing subsidies to help them pay for their health insurance. This recent regulation addressed an ambiguity in the Affordable Care Act as to the ability of agents and brokers such as eHealth to assist individuals in enrolling into qualified health plans that individuals need to purchase to receive the premium tax credits and cost-sharing subsidies. The regulation makes it clear that states may elect to allow a subsidy-eligible individual to shop for a qualified health plan with an agent or a broker as long as the agent or broker enters into an agreement with the state and meets other certain conditions.

The regulation also allows states to permit individuals to use agents and broker websites, such as eHealth platforms, as long as the website meets certain conditions and the subsidiary eligibility and enrollment application is communicated with the state's health insurance exchange.

While there are additional details to be worked out with Health and Human Services, health insurance companies and the individual states, which are given the authority to implement specific rules for this process, this outcome appears to be consistent with what we had proposed and what we had hoped for.

This is an important development for eHealth, given that a meaningful percentage of currently uninsured Americans who will get coverage as a result of the Affordable Care Act are expected to be subsidy-eligible. Most importantly, we believe that proven entities like eHealth enrolling subsidy-eligible individuals will only help to get more Americans coverage in 2014.

Additionally, we are aware of the recent arguments made before the Supreme Court as to the constitutionality of the Affordable Care Act in certain aspects. While the outcome of the case is not expected to be released until June, we continue to operate and plan presuming that the law will be upheld. At the same time, we feel that our value proposition remains intact if all or part of the law is struck by the Supreme Court.

Our addressable market, including Medicare and Individual and Family Health Insurance products is very large and we believe presents robust growth opportunities to us.

Finally, I'd like to take this opportunity to introduce our new President and Chief Operating Officer, Bill Shaughnessy. We are very excited to have Bill join us. Bill has significant experience in leading execution efforts for large, globally diversified organizations in the Internet and digital media industries. Prior to joining eHealth, Bill served as a senior vice president of product management and product marketing at Yahoo, and before that as global vice president of the sales, marketing and services for the advertiser and publisher group at Microsoft. As eHealth grows and becomes a more complex company, we can truly benefit from his expertise.

Bill will be responsible for the overall management and execution of eHealth's day-to-day operations, including human resources, technology development, product management, and the Individual and Family and Medicare businesses. And this allows me to dedicate more time to strategic planning, our growth initiatives, and public policy. And now I'd like to turn the call to Stuart. Stuart?

Thanks, Gary, and good afternoon, everyone. We are very pleased with our first quarter 2012 financial results, which demonstrate meaningful progress in our new Medicare business and continuing stabilization in our core Individual and Family Plan business. Based on the first quarter performance, we are raising our revenue guidance for the year. We also continue to forecast revenue and earnings per share growth for the full year 2012 as implied by the midpoint of our guidance ranges. I will provide more information on our annual guidance in just a few moments, but first let me review our financial results for the quarter.

Starting at the top line, our first quarter 2012 revenue was $37.1 million, a 1% decline as compared to the first quarter a year ago. Underneath that, commission revenue and our Individual and Family Plan business declined by more than $3 million year-over-year, driven by the impact of commission rate reduction that we experienced beginning in January of 2011, and which has been phasing into our results since that point. As a reminder, this reduction was related to the medical loss ratio requirement of the Affordable Care Act.

At the same time, our Medicare commission revenue grew by $3.5 million compared to Q1, 2011, allowing us to more than offset the impact of lower IFP commission. Our total commission revenue for the quarter was $31.5 million, an increase of 2% compared to the first quarter of 2011. Please note that we expect to see a further decline in IFP commission revenue throughout 2012, and then expect to resume revenue growth in our individual business in 2013. So, starting in 2013, we expect that both our Medicare and IFP businesses will drive revenue growth for the Company.

Other revenue, which includes sponsorship, e-commerce on demand, government systems, and Medicare lead revenue was $5.6 million. This represented a 17% decline compared to the first quarter a year ago. The decline was driven primarily by lower government systems revenue. In the first quarter of 2011, we booked over $2 million in revenues related to our work on the Healthcare.gov project compared to a nominal amount under this contract in Q1 of 2012. Other revenue in the first quarter was also impacted by lower Medicare lead revenue as we transitioned more of our Medicare business to a commission based, direct fulfillment model.

Other revenue combined with Medicare commission revenue contributed approximately 26% of total revenue for the quarter, compared to approximately 19% in Q1 2011, reflecting continued diversification of our business. Our Individual and Family Major Medical Plan submitted application volume declined 3% compared to the first quarter of 2011.

As Gary mentioned, during the quarter we continued to divert some of our marketing spend from the Individual and Family Plan business to our Medicare business, impacting our IFP application activity. For the full year 2012, we continue to expect flat to low single digit growth in IFP-submitted applications compared to 2011. IFP-approved members were down 1% from Q1 2011. However, total approved members for all products were up 7% for the same period.

Our total estimated membership at the end of the quarter was approximately 848,600 members, which represents 6% growth over estimated membership reported at the end of the first quarter of 2011. The number of revenue-generating Individual and Family Plan members declined 1%, while the number of other members increased 50%, our highest growth rate since we started reporting this metric.

The increase in our Medicare customer base over the past 12 months was an important driver behind the strong annual growth in our non-IFP membership.

Now I would like to review our operating expenses for the quarter. Excluding stock-based compensation and the amortization of acquired intangibles, our non-GAAP operating expenses increased as a percentage of revenue relative to the comparable period a year ago, but declined in absolute terms. The increase in our operating expenses as a percentage of revenue was driven by our investment in Medicare as we continue to scale this new business.

Compared to 2011, we are generating and fulfilling more demand for Medicare plans outside of the Medicare annual enrollment period resulting in higher spend in the marketing and advertising and customer care and enrollment areas related to Medicare.

Medicare margins are also being impacted by our decision to transition to a direct fulfillment model faster than originally planned. As Gary mentioned, in Q1 2012, we fulfilled in-house as a broker more than 80% of demand that we generated, up from approximately 30% in the first quarter a year ago.

The lifetime commission revenue and margin dollars that we project to generate by acting as a broker to a Medicare-eligible individual are meaningfully higher than compared to what we earn by referring the individual to one of our partners and generating lead revenue. At the same time, commissions that we earn for enrolling a member are spread over the life of this member, so the margin that we earn in the first year is lower compared to a lead referral model, where we get paid a one-time upfront fee. The direct fulfillment model also requires that we expand the number of customer care representatives on staff.

First quarter 2012 non-GAAP customer care and enrollment expense, which excludes stock-based compensation expense, was 16% of revenue, up from 14% in the first quarter a year ago, due to the increase in our Medicare sales representatives. First quarter 2012 non-GAAP marketing and advertising expense, which excludes stock-based compensation expense, was 34% of revenue, the same percentage as in Q1 2011, and a sequential decline compared to 42% in Q4 2011.

In general, our Medicare-related marketing expense is expected to peak in the fourth quarter each year due to the timing of the Medicare annual enrollment period, when we process the majority of enrollment.

In the Individual business, we continue to reduce our marketing spend both on an aggregate and a per-unit basis relative to 2011. Our cost of acquisition measured as our total marketing and advertising expense, excluding Medicare costs, per individual on IFP-submitted applications declined to its lowest level in four years. This represents a 7% decline from the first quarter a year ago.

I'd like to note that despite an incremental investment in variable marketing and advertising, and customer care and enrollment costs for Medicare of roughly $2.5 million in the first quarter of 2012 compared to Q1 2011, our total non-GAAP operating expenses actually declined year-over-year due to our cost reduction initiatives in the individual and family business.

First quarter non-GAAP operating income excluding stock-based compensation and the amortization of acquired intangibles was 16% of revenue, or $6 million, down from 17% of revenue, or $6.3 million in the first quarter of a year ago.

EBITDA for the first quarter of 2012 was $6.6 million as compared to EBITDA of $6.9 million in the first quarter of 2011. First quarter 2012, GAAP earnings per share were $0.10, up from $0.09 in Q1 of 2011. First quarter non-GAAP EPS, which excludes the impact of the amortization of acquired intangibles, stock-based compensation, and related income tax benefit was $0.17.

During the quarter we continued to generate healthy cash flow. Our cash flow from operations was $5.1 million as compared to $6.8 million in the first quarter of 2011. Capital expenditures for the first quarter were approximately $200,000. As of March 31, 2012, our cash and marketable securities balance was $116.2 million with no debt.

During Q1, we repurchased $8.4 million worth of our stock, completing our latest stock repurchase program totaling $30 million. Our average share price under the program was $13.78.

Now I'd like to comment on our guidance for the full year 2012. Based on information currently available, we are increasing our revenue guidance range and leaving unchanged our guidance for EBITDA, non-GAAP diluted EPS, and stock-based compensation expense as compared to ranges provided on our last earnings call.

Our updated guidance for 2012 is as follows. We are now forecasting revenues for 2012 to be in the range of $152 million to $158 million, up from our prior guidance of $150 million to $156 million. We expect 2012 EBITDA to be in the range of $21 million to $26 million. Non-GAAP diluted EPS for 2012 excluding stock-based compensation, amortization of intangibles and the estimated tax benefit of both is expected to be in the range of $0.56 to $0.66 per share.

Stock-based compensation is expected to be approximately $6.5 million to $8 million. I'd like to note that based on the performance of our Medicare business and solid demand trends that we are observing in this market, we are planning to invest more in our Medicare business than we anticipated at the beginning of the year. Specifically, we want to further accelerate our move towards fulfilling 100% of our Medicare plan demand as a broker, which is an important part of our strategy and helps to maximize our future Medicare revenue stream. This will require an accelerated increase in our customer care resources and related infrastructure starting in the second quarter.

As a result, we are not raising our 2012 EBITDA and EPS guidance ranges. We believe that this investment is prudent given our lifetime value projections for Medicare members. Currently, we expect that we will turn Medicare EBITDA-positive for the fourth quarter of 2012 and the full year 2013.

As discussed on our last earnings call, we expect the second quarter revenue will decline in the mid to high single digit percentage range compared to the second quarter of 2011. We also expect that we will grow revenue in the third and fourth quarters compared to the third and fourth quarters of 2011.

In the second quarter our non-GAAP operating margin is expected to be in the low teens percentage range, below the levels observed in the first quarter of 2012, partially due to an expected increase in customer care and enrollment expenses.

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 George Sutton with Craig-Hallum. Please proceed.

Thank you. Nice numbers, guys. So, I wondered if you could walk through your thought process or what has taken place in the last quarter or so relative to your decision to increase the focus on Medicare, and to an extent reduce some of the expense side on the IFP business?

Hey, George, it's Gary. Yes I'll make some comments on that. The Individual and Family Plan business, which is still an important cash generator for us and is still a really vibrant market, we have just been working hard to continue to reduce the per-unit cost of acquisition to levels that, you know, where we were several years ago, and we have achieved that. We have also, we think, very substantially been able to reduce the reductions that we have had in growth there, and as we indicated, we expect to be flat to actually grow that application volume a bit this year.

On the Medicare side, it is such a compelling opportunity to us. We're seeing so much demand that is coming our way. As we noted, we are fulfilling more of this demand in-house than we had planned at this point, which we're really pleased with. The lifetime revenue value of these Medicare members is substantially greater than the Individual and Family Plan members, and the marketplace itself is -- the growth rate is actually increasing.

So, when we look at all of that, it's really, for us, it's pretty simple, that for every cost of acquisition dollar we have, we want to both economize and maximize on the return. And what we're seeing in the Medicare business certainly allows us to do that. In fact, quite frankly, our objective is to be the largest source of these Medicare products, at least the largest private source, in the marketplace, and we're working hard toward that right now.

Okay, great. I don't know that you addressed it in your prepared comments, but the cash consideration paid to a partner in the book of business transfer, can you explain what that was?

Yes, this is Stuart, George. We make an upfront payment in transferring some Medicare members over to our books, and we earn the renewal commission revenue on that. We make the payment upfront and then we amortize that to expand as we recognize the revenue, as we collect that over a multi-year period.

And this was from a partner who we exclusively provide the leads and the demand to.

I understand, okay. All right, that's very helpful. Lastly, obviously, the MLR rate was changed with the new legislation. Is there any discussion or would you have any anticipation that that might change as a result of anything that might come down from the Supreme Court, or is that just way too early to know?

I think it's too early to know. There is so much speculation and so much written and discussed about the Supreme Court. You know, will they invalidate any of this? Will they invalidate only the mandate? Will they invalidate the mandate and more than that? If they invalidate the mandate, is it such a lynchpin that the rest of the legislation collapses? There are really so many unknowns at this point. But, again, we're managing our business presuming that the law of the land is going to continue to be, and any changes -- you know, we're certainly thinking through different scenarios and how to react to them.

Gotcha, okay. Thank you very much.

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

Good afternoon. Congratulations on the strong results. Just wondering, you delved a little bit into the HHS regulations which were recently introduced clarifying some of the issues around the state healthcare exchanges. Can you maybe provide us a little more detail on what still needs to be clarified? Specifically, reading through the regulations as issued, I didn't get a sense for whether or not there was a clear-cut, some bright line ruling on the commissionability of a subsidy. And I think that's probably top of mind for people who are thinking about this opportunity. Just any more detail on that, in particular. Thank you.

Yes. Well, there is some detail still to be determined. For example, being a Web-based entity, which is how we're regarded, we and others would have to display all the plans that are on a state exchange. We believe that is going to be a public use data file that we'll be able to simply get access to. So, small things like that that we're finding at Health and Human Services, they're very cooperative and seem to be quite eager to participate and to support.

On the commissionability, that's all been left silent purposely, because that continues to be a state-by-state regulated part of the business and will be. We fully expect that these subsidy eligible plans, which are called qualified health plans, QHPs, will be commissionable, and will be commissionable at least at a methodology similar to the products that we sell today. What those commission rates are and so on certainly is still to be determined, but I would think that they wouldn't be markedly different than the other products that are in the marketplace as well.

Great. And I'll ask a follow-up as well. I just wanted to ask for a little more detail on the very strong growth in the Medicare Advantage products. Just anything in particular that you're doing to drive that, or is it just a stronger entry into the market, stronger presence in the market, and how does that play, also, into marketing expense? Is that a shift, where you're now spending more to go after these potentially more valuable members, or any other additional detail or color you could offer on that. Thank you.

Well, I'm glad you asked about that, because we are certainly pleased with the portion of the business that is Medicare Advantage, especially in this past quarter, you know, 60% as we noted. I think it's a number of things. Our presence in the marketplace, the way that we're marketing. I think the offerings that we have online, the way that people are able to interact with them, clearly, people in our call centers and so on. It's been noted by several of the payers that over 25% of seniors now are actually enrolling in Medicare Advantage products, and we are obviously seeing a larger percentage of that. But we just think it's a number of things. It may have something to do with the younger senior that is being attracted to us as well, so it's a combination of those things.

From a cost of acquisition standpoint, it's exactly what we want, because the Medicare Advantage lifetime revenue is the highest of all these Medicare products, so on just a per-dollar basis, obviously what we're investing from a cost of acquisition standpoint has got a much more attractive return when it converts to being a Medicare Advantage product.

Great. And one last follow-up.

I was going to add a comment to that, that we are shifting funds that direction and I'm very pleased to see that our unit cost of acquisition is declining in Medicare at the same time. So, while we're moving the funds there, they're even more effective, especially as our conversions get better.

That's great. One last question. As Medicare Advantage becomes more impactful for the Company, what's your view on going back to ACA? I guess, some of the issues that were raised around Medicare Advantage, I guess they refer to them as overpayments, and just generally the federal government has sort of -- or the current administration's view or orientation toward Medicare Advantage and where you think that might go in the future? Thank you.

Well, we think that there are so many seniors on Medicare Advantage today and more coming on all the time that we think these continue to be really viable products and alternatives for seniors, and they are popular. From a commission standpoint, the only comment we can make is what we see and what we hear from our suppliers, the payers, which is that they are very eager for this Medicare Advantage business. It's really good business for them and they are willing to certainly fund through a commission standpoint a distribution vehicle like us, which is rather unique. So, we feel really good about the future with Medicare Advantage.

Great. Thank you again.

Thank you.

Your next question comes from the line of Corbin Woodhull with Janney. Please proceed.

Hey, congrats on a great quarter, and thanks for taking my questions. Sorry if I missed it earlier, but I'm just wondering the number of Medicare members? I think the last we heard was about 45,000. And then an update on the forecast for growth in the Medicare business. I think you said on the call it's going to be EBITDA profitable by the fourth quarter of 2012 -- or EBITDA positive by the fourth quarter 2012 and a profitable business by 2013.

That's correct. Those are the statements I made about EBITDA. As far as members are concerned, we are a little bit higher now than that number that you just mentioned, the 45,000 enrolled members. Those are members which we've either had revenue recognized in the past or will have future revenues recognized related to some of these members transferred that I mentioned earlier on the call.

We are fairly close to that number at March 31, in that the last time we put out a number it was as of February 15, so it's that number plus what we sold in the last month and a half of the quarter.

And you said Medicare Advantage was up 450%?

Correct, yes. Our sales, approved members in the quarter year-over-year up 450%.

Great. That's all I have. Thank you.

Again, we're seeing very attractive growth rates here, and, again, that's why we're investing in this business.

(Operator Instructions) At this time there are no further questions appearing in queue, so I will now turn over the call to Mr. Gary Lauer, CEO, for closing remarks. Please proceed, sir.

Well, thank you. I'd just like to thank everybody for your time today and we look forward to speaking with many of you individually as well. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.