eHealth Inc (EHTH) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter and fiscal year 2013 eHealth, Incorporated earnings conference call. My name is Estefan, and I will be your operator for today. (Operator Instructions)

I would now like to turn the conference over to your host for today, Kate Sidorovich, Company's Vice President of Investor Relations. Please proceed.

Good afternoon. And thank you all for joining us today, either by phone or by webcast, for a discussion about eHealth, Inc.'s fourth-quarter and full-year 2013 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 line for questions.

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

We will be making forward-looking statements on this call that include statements regarding future events, beliefs and expectations, including those related to estimated membership, seasonality, future margins, 2014 margin expansion, an increase in net income and EBITDA margins, 2014 growth in margins on membership in each of our product areas, 2014 investment in membership growth, technology and content and in our private exchange initiatives; 2014 components of our Medicare business, 2014 marketing and advertising expense, demand in the first quarter of this year, new members offsetting churn, our ability to enroll individuals in (inaudible) plans, our ability to enroll and the opportunity for enrollments outside of the open-enrollment period, the end of the open-enrollment period transition of the health insurance industry to consumer-centric model, and adoption of the Internet as a health insurance distribution channel, our estimates and projections relating to commission rates, membership extension and commission revenue growth across key areas of our business, migration to private exchanges, and our expectations and guidance for revenues, EBITDA, non-GAAP earnings per share, stock-based comp, and amortization of intangibles for the year ending December 31st, 2014.

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

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in our forward-looking statements. We describe these and other risks and uncertainties in our annual reports 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. We will be presenting certain financial measures on this call that will be considered non-GAAP under SEC Regulation G. For reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included in our press release and in our SEC filings, which can be found in the About Us section of our corporate website, under the heading Investor Relations.

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

Thanks, Kate. And thanks, everyone, for joining us today as we report our fourth-quarter and full-year 2013 results.

Our quarterly and annual performance reflect strong membership and revenue growth across all of our key product areas, including individual and family, Medicare and ancillary products, as well as increased spend related to the Affordable Care Act implementation and other growth opportunities.

What I plan to do today is summarize our financial results for the fourth quarter and the year and provide additional context on our performance during the first three months of the open-enrollment period in the individual market. I'll also make some comments about our Medicare business and conclude with our outlook for 2014.

As many of you know, on January 9th, eHealth provided preliminary financial results for the fourth quarter and the full year 2013. Our financial results were within the preliminary ranges that we disclosed. Specifically, revenue for the fourth quarter was $54.2 million. Non-GAAP loss per diluted share was $0.01, and EBITDA was $1.1 billion.

For the full year 2013, eHealth generated revenue of $179.2 million and non-GAAP diluted earnings per share of $0.37, with EBITDA of $16.2 million. Our year-end cash balance was $107 million. Stuart will discuss our financial results in much more detail a little bit later during this call.

2013 was truly an unprecedented year for the health insurance industry, with significant market changes underway as a result of the Affordable Care Act implementation. The impact of the ACA provisions were especially pronounced in the individual market, a very important area for eHealth.

Our individual business performed strongly throughout the year, driving revenue outperformance relative to our original guidance provided a year ago in February. Growth in new individual and family plan members and estimated revenue-generating individual and family plan members accelerated significantly in 2013 compared with the levels in 2012. The number of new individual and family plan members approved in 2013 grew 19% year-over-year. And this compares to 3% growth achieved in 2012.

Estimated individual and family plan revenue-generating members that we had at the end of 2013 grew 12% from December 31st of 2012. And this compares to a 5% in estimated IFP membership achieved in 2012.

The fourth quarter of 2013 was the strongest quarter of the year in terms of submitted individual and family plan application growth, new IFP member adds, and growth in estimated individual and family plan membership. The first-ever open-enrollment period under the Affordable Care Act launched on October 1st of 2013, driving significant demand for health insurance products that we offer on our platform.

As federal and state exchanges experienced significant technical difficulties, eHealth was open for business from day one of the open-enrollment period and was able to handle significant online visitor traffic and application volume without technical difficulties. We received significant media attention as a viable and valuable alternative to government exchanges.

As part of our preliminary fourth-quarter announcement, we disclosed that our individual and family plan submitted applications grew approximately 50% during the fourth quarter, compared to the fourth quarter of 2012. We now have more data to share with you with respect to individuals who were applying on our platform during the fourth quarter.

First of all, we were very pleased with the age distribution of applicants in the fourth quarter of 2013 at eHealth. Over 40% of these individuals were between 18 and 34 years of age, a highly sought-after demographic. This compares to 24% of individuals in the same age group who selected plans through Healthcare.gov based on the information reported by government.

Second, we estimate that existing eHealth members applying for new plans contributed less than 10% of total submitted applications, suggesting that the increase in demand during the fourth quarter came from sources outside of our current membership.

Third, we saw significant increase in conversion rates from submitted to approved applications for those individuals who applied for plans effective 2014.

As a reminder, starting this year, carriers can no longer deny coverage based on the applicant's health history. At the same time, applications for plans with effective dates in 2013, which represent over 50% of total application volume during the quarter, were still subject to carrier underwriting.

Finally, during the fourth quarter, we were unable to enroll subsidy-eligible individuals online due to continuing technical difficulties with Healthcare.gov and slow movement with many of the state exchanges. Consequently, the vast majority of our fourth-quarter individual and family plan applications came from consumers paying 100% of their premiums out-of-pocket.

We continue to work with the federal exchange on creating a functioning and user-friendly online experience for consumers who are looking for subsidized products. However, given that there is little less than one month left in the open-enrollment period, it's unlikely we'll be able to support a significant volume of online enrollments of consumers in subsidized plans during this open-enrollment period.

This is due to the continuing low functionality of Healthcare.gov technology. We do expect to have this functionality available in time for the next open enrollment period, which is now proposed to run from November 15th, 2014 through January 15th, 2015.

I'd like to note that consumers will be able to enroll in Affordable Care Act-compliant plans, including subsidy-eligible plans outside of the open-enrollment period to the extent that they experience what is deemed to be a qualifying event, like losing employer-based coverage, moving to another state, or becoming subsidy-eligible or -ineligible.

Now, I'd like to make some comments regarding retention trends within our existing book of business. We have not seen any unusual changes in our fourth-quarter retention or churn rates compared to historical levels. Given that we were unable to enroll individuals into subsidy-eligible plans, it is likely that we lost some of our subsidy-eligible members in the first quarter, when the Affordable Care Act-compliant plans became effective.

It is also possible that in the first quarter we might've lost some members due to plan cancelations and significant premium increases. The impact of this churn on our first- quarter 2014 net membership growth is still too early to estimate. Our view of member retention is based on commission checks that we receive from carriers. And we will not be getting payments for January policies until later this month and into March.

I'd like to note at this point that we expect to see solid growth in our individual membership base in 2014, with new member inflow offsetting the impact of churn. Our guidance range incorporates a range of outcomes for member retention this year.

Turning to our Medicare business -- in 2013, we saw strong growth in Medicare demand on our platform, with submitted applications for all Medicare products growing approximately 68% in the fourth quarter compared to the fourth quarter of 2012. Submitted applications for Medicare Advantage products were 37%, while applications for Medicare supplement grew 221%, although that's off of a smaller base for the same period.

Our Medicare revenue growth came in near the high end of the preliminary ranges that we shared on January 9th of this year. Specifically, for the full year 2013, total Medicare revenues grew 24%, while Medicare commission revenues grew 48% compared to the prior year.

In the fourth quarter of 2013, total Medicare revenues grew 18% year-over-year, while fourth-quarter Medicare commission revenue grew 29%. We are pleased with these results and expect another good year for our Medicare business in 2014.

Now, I'd like to make some comments on our outlook for 2014. You will note that the midpoint of our guidance range implies 2014 revenue growth of approximately 17%, which is driven by double-digit revenue growth in each of our product areas, including individual and family products, Medicare and ancillary products.

The midpoint of this year's guidance range also implies margin expansion with EBITDA and non-GAAP earnings growing well in excess of 20%. At the same time, we plan to continue investing in Medicare and individual and family plan membership growth and in technology and content, with a special focus on our private exchange technology.

In 2013, we entered in this market through partnerships with Aon and Empyrean, and now seeing more potential partner interest. We believe this area of the health insurance market will continue gaining significant traction over the next several years.

The rate of our membership growth and related marketing and advertising spend in 2014 will be heavily driven by demand in the individual market. It's an unprecedented time for the industry, and the trajectory of consumer demand is difficult to predict. It remains to be seen how consumers transact in the second half of the open-enrollment period, which is currently scheduled to run through March 31st.

The fourth quarter, and especially December of 2013, was extremely strong. And thus far, we're not seeing the same levels of IFP application volume on our site. However, deadlines remain in this open-enrollment period, and consumer demand has tended to rally into such deadlines. We'd see it every year with the Medicare annual enrollment period, and we had certainly observed it in the fourth quarter of 2013 in the individual market.

We also have limited visibility into how much of the individual business will get transacted during the year outside of the open-enrollment period. As I mentioned earlier, there is a potential for significant individual and family plan enrollments throughout the year based on income fluctuations and other changes in consumer life situations. The percentage of total annual enrollment that occurs outside of the open-enrollment period will not be known for at least another year.

Looking forward, we are enthused about significant growth opportunities for eHealth in our existing markets, as well as new ways of leveraging our technology platform. We see an ongoing transition of the health insurance industry to a more consumer-centric model, as well as growing adoption of the Internet as a key distribution channel by managed-care organizations.

The implementation of the Affordable Care Act and significant media attention around online exchanges is expected to further accelerate consumer use of the Internet for researching and buying health insurance. These trends play very well into eHealth's value proposition as a leading private online exchange for health insurance and related products.

Now, I'd like to turn the call over to Stuart Huizinga, who will give you some more detailed insight into our financial results. Stuart?

Thanks, Gary. And good afternoon, everyone.

Today, I plan to review our financial performance for the fourth quarter and fiscal year 2013 and provide our 2014 annual guidance.

Our revenue growth accelerated meaningfully in 2013 relative to growth rates achieved in 2012. Our 2013 annual revenue was $179.2 million, or a 15% year-over-year increase. For comparison purposes, in 2012, our total revenue grew 3% on a year-over-year basis.

Our fourth-quarter 2013 revenue was $54.2 million, a 20% increase compared to the fourth quarter of 2012. Commission revenue for the fourth quarter was $44.2 million, representing 18.5% year-over-year growth.

We are pleased with our fourth-quarter commission revenue growth, which was supported by meaningful membership expansion across all product lines. Our Q4 individual and family plan commission revenue grew by 14% compared to Q4 2012. Our Q4 Medicare commission revenue grew by 29% year-over-year, while commission revenue from ancillary products increased over 45% on the same basis.

Other revenue, which includes sponsorship, ecommerce on demand, and non-commission Medicare revenue, was $10 million in the fourth quarter, an increase of 25% compared to Q4 2012. The increase was driven primarily by growth in individual and family plan licensing and sponsorship revenues.

Before I discuss our membership metrics for the quarter, I wanted to make some comments regarding our estimated broker commission rates in the individual and family plan business. The last time we provided an update on the subject was on our third-quarter 2013 earnings call, which took place in October. At that point, we had received rate schedules applicable to plans for 2014 coverage from approximately 60% of our carrier partners based on commission revenue volumes.

We now have rate schedules for more than 97% of our IFP carriers. Based on this information, we can reiterate the statements that we made last October -- that we project a new commission rate to imply flat to slightly higher commission dollars per average policy, regardless of whether such policies are subsidy-eligible or not.

As a reminder, this projection represents the impact assuming average policy premiums remain constant. We arrived at this estimated impact by applying the changes in both the first year and renewal-year commissions to a subset of our individual and family plan members, and comparing commission revenues that were actually generated by these members to what these commission revenues would've been under the new rates.

We used a subset of our members approved after the medical loss ratio requirements went into effect in 2011 and that were on our books long enough to generate first-year and renewal commissions. In our Medicare business, carriers with which we had a relationship in 2013 have kept their rates relatively unchanged for policies effective this year.

Turning to membership metrics -- our individual and family major medical plan submitted application volumes grew 50% compared to the fourth quarter of 2012, and the estimated number of revenue-generating individual and family plan members was up 12%. As Gary mentioned, in the fourth quarter, we saw significant increase in approval rates for policies effective in 2014, reflecting the impact of the guaranteed issue provision of the Affordable Care Act.

As a reminder, there is a lag between the time an individual applies and is approved for a policy and when eHealth receives its first commission check. Therefore, a significant percentage of individuals who applied in the fourth quarter will become paying members in 2014 and have not been reflected in the reported membership number as of December 31st, 2013.

We believe that given the expected increase in conversion rates from submitted to approved applications on our platform starting in 2014, the number of approved members will become a more important leading indicator than submitted applications for our membership and commission revenue growth volumes.

Our total estimated membership at the end of the quarter for all products combined was approximately $1.2 million members, which represents 27% growth over estimated membership reported at the end of the fourth quarter of 2012. The estimated number of revenue-generating Medicare members was 118,000, up from 70,600 at the end of the fourth quarter of 2012, or an increase of 67%. The estimated number of members on ancillary and small business products was over 330,000 at the end of the year compared to 202,600 at the end of 2012, reflecting 63% annual growth.

As Gary mentioned in his prepared remarks, we will continue investing in membership growth in 2014.

Now, I'd 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 both in absolute terms and as a percentage of revenues relative to the comparable period a year ago.

The increase in operating expenses as a percentage of revenues is driven primarily by marketing and advertising and technology and content costs, reflecting a significant increase in demand for individual and family plan products that we sell, and our planned investment in eHealth's technology platform.

Fourth-quarter 2013 non-GAAP marketing and advertising expense, which excludes stock-based compensation expense, was 51% of revenue; compared to 41% in the fourth quarter of last year. As you know, our marketing costs are largely variable and are directly tied to the application volume each quarter. A 50% growth in submitted individual and family plan applications that we generated in the fourth quarter of 2013 resulted in marketing and advertising expense which was substantially higher than what we'd expected to spend when we established our original guidance plans for the year.

Our estimated lifetime economics on these new IFP members is attractive. However, we expense our customer-acquisition costs up front, while revenues are recognized over the life of a member. So fourth quarter estimated applications growth had little impact on Q4 revenues while driving costs.

In addition to strong year-over-year growth in the number of submitted applications, we saw low-teen percentage increase in the cost of acquisition per submitted IFP member. However, we saw no change in the cost of acquisition per approved IFP member. The increase in cost per submitted IFP member was driven primarily by higher contributions from a marketing partner channel relative to the fourth quarter a year ago.

Our partner channel contributed 42% of total submitted IFP applications for the quarter, compared to 33% in the fourth quarter of 2012. Consequently, the contribution from our direct channel, which is characterized by the lowest cost of acquisition per submit, was down to 41% of total applications generated during the quarter, compared to 49% in the fourth quarter of 2012. The more favorable trend on a per-approved basis was due to higher application approval rates in our individual and family plan business, as described earlier.

Fourth quarter 2013 non-GAAP tech and content expense, which excludes stock-based compensation expense, were 16% of revenue, up from 11% of revenue in Q4 of 2012. As we shared on our prior earnings calls, this increase in technology expense was part of a planned investment in our platform related to the Affordable Care Act implementation, including an investment in Web-based entity functionality to allow eHealth to connect to government insurance exchanges and assist subsidy-eligible individuals in enrolling in qualified health plans.

Fourth-quarter non-GAAP operating income, excluding stock-based compensation and the amortization of acquired intangibles, was 0.3% of revenue, or $0.2 million; down from 14% of revenue, or $6.4 million in the fourth quarter a year ago. Full-year 2013 non-GAAP operating was 7% of revenue, or $12.9 million.

EBITDA for the fourth quarter of 2013 was $1.1 million, compared to EBITDA of $6.6 million for the fourth quarter of 2012. Full-year 2013 EBITDA was $16.2 million.

Fourth-quarter 2013 non-GAAP loss per diluted share was $0.01, and full-year 2013 non-GAAP EPS was $0.37. Fourth-quarter 2013 GAAP loss per diluted share was $0.11, and full-year GAAP EPS was $0.09.

Our cash flow from operations was $6.2 million, up from $5.2 million in the fourth quarter of 2012. For the year, our cash flow was $20.9 million, compared to $24.9 million in 2012.

Capital expenditures for the fourth quarter of 2013 were approximately $600,000 and were approximately $7.3 million for the full year. Our cash balance was approximately $107 million at December 31st, 2013.

And now, I'd like to comment on our expectations for 2014. We're forecasting revenues for 2014 to be in the range of $206 million to $213 million. We expect 2014 EBITDA to be in the range of $18 million to $22.5 million.

We calculate EBITDA by adding stock-based compensation and depreciation and amortization, including the amortization of acquired intangibles, to our GAAP operating income. Non-GAAP diluted EPS for 2014 is expected to be in the range of $0.43 to $0.51 per share.

For the full year 2014, stock-based compensation expense is expected to be in the range of $8.5 million to $10.5 million. The amortization of intangibles is expected to remain relatively flat compared to 2013 amortization of intangibles of $1.4 million. We expect that similar to 2013, our revenue growth this year will be broad-based and supported by solid membership expansion and corresponding commission revenue growth across key areas of our business.

While we expect to start seeing leverage in the area of marketing and advertising, we will continue to invest in technology and content. One of the key engineering initiatives for 2014 involves enhancing our platform to offer a competitive solution to the private exchange market. This is an important investment for eHealth, as we believe that over the next few years, a significant number of individuals holding employer-sponsored plans could migrate to private exchanges. Finally, we expect to see an increase in 2014 net income and EBITDA margins, which is implied by the midpoint of our guidance.

I'd also like to reiterate what Gary said earlier on the call. This is an unprecedented time for our industry. And therefore, consumer demand patterns in the individual market are difficult to predict. Our typically seasonality, with first and third quarters being the strongest in terms of individual and family plan submitted applications, will no longer apply and will take at least a year, if not more, to understand what percentage of applications will be submitted during the open-enrollment period versus the rest of the year.

One thing to keep in mind is that our largest area of spend, marketing and advertising, is driven by the application growth in a given quarter. Therefore, quarters with higher levels of submitted applications, such as the fourth quarter of 2013, will be characterized by higher marketing spend and lower margins, all other things being equal.

I want to remind you that these comments, as well as our annual guidance, are based on current indications to 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) Dave Styblo, Jefferies.

Thanks for taking my questions.

First question is just on the conversion rates. I know you had signaled that those had moved up a little bit in the fourth quarter. And I had continued to assume that the applications per member were still around -- excuse me -- members were application were still around 1 1/2. In order to kind of get to the historical level, the 60% conversion rate, I would have to have my members per app drop to 1.2. So I'm wondering if I'm just missing something, or if those members don't show up actually until the first quarter.

I guess my question here is -- are you seeing a decline in the number of members per application?

No, we're not seeing a significant change in the members per application. I think what you're seeing in your numbers is the effect of a lag that occurs. Many of the applications from the fourth quarter actually get approved in Q1, or get reported to us in Q1 by the carriers. So there's going to be a lag effect to the approved members. You're going to see some of that growth spilling over into Q1.

Okay.

Second question is on your retention and churn levels. You had mentioned that those remained, I think, relatively steady in the fourth quarter, and that you're still -- it sounds like you're still getting data from the insurers. I'm wondering if you can give us a sense of -- how much of your current book, do you know, is staying in place? Is it still too early to tell how many will fade away? Or are you feeling pretty confident that the vast majority of your book is going to stay in place and hasn't migrated to Medicaid or Healthcare.gov?

I think it's too early to tell right now, to quantify any numbers for you. When we look at Q4 transitioning into Q1, we would expect, even if people were moving over to get into a subsidized product, or had a cancelation and had to move from one product to another, that they would still hold their policies through the end of last year, if they were on a current policy through December 31st; and then move to the new, effective coverage 1/1.

So I think a good piece of the churn would happen on 1/1. And we'll find out about that churn on a lag basis. We determine that through looking at commission statements subsequent to that time period. And we don't have membership reported to us by the carriers, or cancelations reported to us; we have to wait and look at the commission statements in order to determine whether someone's left the network at this point.

So in terms of our estimates and guidance and so forth, what we've relied on is our work directly with each of our carrier partners. Those partners have been working really hand-in-hand with us throughout this whole period in transitioning people to new plans if that's required to do, and move very close to them on that.

Right. Let me ask it different way, though. How do you have any confidence that a large part of your book still hasn't migrated? It seems like you would've received -- my understanding is it takes four to five or six weeks to receive that data. Have you received the vast majority of the runs from the insurers telling you who has paid and not? Are you at half, or are you well below half? Can you give us any sense of just how many -- what percentage of that book you've received an update on?

We've not received -- we still have a lot of data to receive. Let me say that. We need to see who pays in January, and then who also pays in February, in order to really solidify things from a data standpoint. But at the same time, we have been working with the carriers closely to understand, at least from their perspective, what they're seeing. And at least at that level, we feel good about what we're hearing from our carrier partners.

I think we should also add -- we commented -- we saw nothing unusual in the fourth quarter regarding retention.

To Stuart's point, certainly a lot of those December applications -- we're not going to see the effect of those until this time period going forward. But we generated a lot of volume in the October-November timeframe. And it's likely that we would've seen some of that reflected in some of the data we've gotten since then. And we'll just make the comment again that we saw nothing unusual from a retention standpoint in the fourth quarter.

Okay. Let me ask one more, and then I'll hop back.

The technology and content spend that you called out -- that's revolving around your private exchange strategy. Can you flush out what that spend is for, what the long-term goal -- sounds to me like that might be addressing the group side of the private exchange market. Obviously, you've historically been focused on the individual side.

So what are your plans there? And how should we think about that going forward, both in terms of the drag this year on financials, and then perhaps when you might start seeing some revenue come in the door from that strategy?

Yes, we don't expect to see any significant revenue this year from that, so it's really an investment year. And the reason we're going about it is quite simple. We really believe, based on what we know about the Affordable Care Act, what we're hearing from businesses that we do business with currently in the small group side -- and more importantly from larger partners who've got mid- to large-size groups -- is that there is likely to be a migration out of group plans into some other form of insurance, with some kind of health insurance, with likely some kind of a contribution made by the employer, and a platform, an online platform, that a employee uses to go look at the menu of choices that may be available.

We think this could be very significant both in the individual business and, interestingly, in the Medicare business as well. We've got, we think, a really great set of technology assets. We're doing some work to actually expand those, so that we've got configurable kinds of solutions for both mid- and large-size employers, as well as the many different kinds of administrators and carriers that serve them. We think it's a very exciting opportunity.

Thanks, Gary.

Tobey Sommer, [Intrust].

This is Frank, in for Tobey.

Wanted to ask you quickly -- how are things going with the partnerships in terms of Intuit and CVS, and some of the large partnerships? Are you seeing good progress there?

Yes, we're seeing very good progress. CVS was an important partner for us during the annual enrollment period of Medicare; we think they will be again this year.

We're very enthused about Intuit, and working with and through Intuit. The dependency that we've got for Intuit and several others is the connection to the federal data hub in some of the states to be able to host subsidy-eligible individuals. And that's going to be important. Because a number of the people using the Intuit platform as well as others may very well be subsidy-eligible.

And that brings up an equally important topic, which is where we are in that right now. We're working very diligently with Healthcare.gov and several of the states as well. The technology is just not stable enough and not moving fast enough to get to where we want to be. But we're getting -- it's certainly not for lack of support from the federal government and so on. They've just got their hands full at this point.

We are beginning to process in this quarter some subsidy-eligible consumers, but we're pretty much doing it manually, which is the way that everyone else is going to have to be doing it as well, until we've got a better technical solution coming out of Healthcare.gov. But I just bring that up because I think that's an important point, and it does relate to some of these partnerships as well.

But partners have always been a very important part of our customer acquisition approach and strategy. And you could see in the fourth quarter how important they were to us, and we expect that to continue.

That makes a lot of sense. Thanks for the color there.

In terms of your guidance in the revenue side -- what assumptions are you making in terms of the sources of applications by channel? Any particular changes you expect to occur over the year?

I think we're largely working at the mix that we just saw in the first open-enrollment period as the guide to 2014. We saw a fairly significant jump in the partner channel in particular. And as Gary was just describing, I think a lot of these new partners will contribute as well.

And so I think I would look at Q4 as probably the best proxy for the type of mix we'd see in 2014.

And it's going to be interesting as well. Because as Stuart indicated, we've got seasonality changes. Previously, our first and third quarters were the strongest in terms of application volume. Obviously now, because of this open-enrollment approach that's been legislated into the marketplace, it's all going to happen in the fourth quarter. So I think there's going to be a tremendous amount of anticipation and preparation on behalf of our partners and all the work that we do directly as well, getting into that fourth quarter, when we would expect once again to see very, very significant volumes. We think, as Stuart said, we're going to have a mix that's similar to what we've seen in the past.

And two quick numbers questions -- what do you see in terms of tax rate and share count in your guidance?

I would expect the tax rate to be a little lower than what you saw this year. I would say more into the mid-40s, probably the high 40s.

And, I'm sorry, the share count? Share count probably north of 20 million, little north of 20 million.

Great. Thanks very much.

Nat Schindler, Bank of America Merrill Lynch.

Can you just give me a little bit more detail about the marketing cost per Medicare member versus IFP members? I know that the lifetime is expected to be quite a bit longer. So I would imagine it costs you a bit more to get those in.

Yes. If you look at the acquisition costs on a per-approved member basis, they're quite a bit higher than individual and family. And that's mainly because the revenue opportunity is so much bigger in Medicare than individual and family, because of the fact of [six-year life] that those members have. We are seeing about the first year of revenue equal to the cost of acquisition in Medicare right now. So several hundred dollars per approved member.

Okay.

And can you walk us through the typical economics in your private marketplace deals?

Typical economics in the private marketplace? (Multiple speakers) like partners?

Yes. How would the money flow in a deal? Not necessarily the Aon deal, but a deal like that? And what would be your -- how would margins differ in getting a subscriber income, that type of deal, than simply from your regular IFP market?

Okay, yes, got it.

These would be commission-based kinds of arrangements, like our other partnerships. We would take the gross commission likely. There'd be some kind of a commission share, with an Aon or with someone else. The cost of acquisition on a per-unit basis should be much more favorable than what we do in the consumer-facing individual business, because we get the leverage of essentially one on many. Aon may bring us thousands of potential consumers in an enterprise.

So really, our acquisition cost there is what it costs to just process them in. There's really no marketing or advertising involved. Maybe a little bit offset by the fact that the commission share is going to be higher than we might have in a normal partner arrangement and so on. But we think from a larger standpoint, it all ends up being favorable. Sure.

Yes. And the other thing I'd add to that is not necessarily a unit economic answer here. But just from a GAAP perspective, we you've heard us talk a lot of times, we take the hit for our marketing cost up front when we pay for members with partners and so forth. In most of our traditional deals, with the rev share, we'd be matching the revenue with expense across the life of the member.

Great.

And a [further] question -- I think they kind of got into this earlier, but I don't know if I fully understood it -- how have the mass numbers of cancelations in the IFP market, coming into the launch of the Affordable Care Act, affected your members?

Well, that gets back to the retention question, and we're still working that through. It's had some impact. But as we indicated, in the fourth quarter, of all those new applications, approximately only 10% came from existing members, which could lead you to believe that a large number of those coming to us on a first-time basis were coming for various reasons, including cancelations outside of us and where we've operated previously.

But we're still collecting all of this.

I also want to mention that just because they didn't come back through our platform and submit an application doesn't mean we would've lost some of those members. Some members that get canceled -- the carriers were actually moving them from one plan to a new plan and mapping them to new plans.

Those members won't churn out of our book. And they won't fill out an application, and it won't go into our submitted application metrics. However, we would still keep those members in our revenue-generating member book. You're just not going to see them flow through all of our metrics in doing so.

That is a crucial point. Thank you.

You're welcome.

George Sutton, Craig-Hallum.

Gary, I know you've been very frustrated with the subsidy-eligible piece of the equation. If we were to look at you having had access, in your opinion, to the subsidy-eligible pool both in Q4 and in Q1, how might that have changed your outlook for the full year '14 in terms of revenues? Is there a way to try to quantify that at all?

Well, we obviously, George, do a lot of modeling and look at this. And let me answer it this way -- in anticipation of being able to enroll subsidy-eligible consumers through Healthcare.gov and those 36 states, we have something on our site that we call a rain check. You come in, we say -- look, we can't process you yet with a subsidy; we hope to soon. Give us your name and information, we'll get back to you. It's a rain check, like the ones in the store.

We've had a large volume of rain check consumers, and we've still got a lot of them sitting there right now. We hope to be able to accommodate some of these on a manual basis. But yes, it's clear that we've missed what we think is some really important opportunity by not being able to host these subsidy-eligible consumers.

On the other hand, we were pleased, to say the least, of all of those non-subsidy-eligibles that have come to us. And at some point here soon, I really hope we'll be adding the subsidy-eligible to that as well. It could be a very significant number.

And your guidance --

And could've had impact on -- sure -- could've impacted our guidance.

And just to be clear, in terms of what your guidance assumes for subsidy-eligible -- are you assuming you'll be to some form of normalcy by midyear?

Yes, I'd say that's accurate. Clearly by the next open-enrollment period. But we have assumed that somewhere midyear, we should be up and running. But as Gary mentioned, the midyear volumes are expected to be much lower during Q2 and Q3. So the really important quarter at this point is really the fourth quarter.

Our frustration, George -- and I'm very frustrated -- is that no matter what you hear from people about Healthcare.gov, our experience is that the technology is still not stable. Our experience is also that they're working really hard just to try to stabilize it and get working what they've got. And so, our ability to process subsidies and get some of the technology done there is not the highest thing on their priority list.

We're doing a lot to work through that and around that. We've got good support from people there. But they've -- it's no secret that they've had a lot of problems and continue to. And that very much frustrates us. Because from our standpoint, this should be a fairly simple thing to do. And at the end of the day, the loser in this is a whole bunch of consumers who want to do business through us and with us. And I'm not so sure a lot of them are necessarily migrating to government exchanges.

And I'd like to make another point on this that I think is really important. And every chance I get in the media, I talk about this. But we attract an uncanny number of young people. In fact, as we indicated in the fourth quarter, over 40% of our applications came from people between 18 and 34 years of age. That is the sweet spot for the Affordable Care Act. If you don't get a lot of these young people enrolled, and get a lot of older people enrolled like me, who are higher utilizers, this just isn't going to work very well.

And it's just another reason why I want a lot of these states and the federal government to get there as fast as they can. Because we can help with the balance in these insurance pools.

We always have attracted a lot of younger people and will continue to. Younger people aren't going to pick up the phone. They're not going to do paper applications, like they have to do today in Oregon and in Maryland and several other states as well. Young people want to do it on -- they want to do it on Samsung Galaxys, on iPhones, on tablets. And that's how we get to them.

(Multiple speakers) So, sorry, a little bit of soapbox [there, George].

I'm glad to give you the forum.

The Medicare side -- we obviously had a struggle in 2012, given a lot of volume of folks coming to the site but not very good conversion. Can you just give us an update -- after making the technology investments and people investments in 2013, were you happy with how you were able to convert the volume that was coming into the site? Did you get the volume you were hoping to get?

We could've taken a lot more volume. We're very happy with what we've got. As we indicated in our remarks, it was smooth. We didn't have technical breakdowns, we didn't have outages. We got everyone through the system, and we could've taken a lot more.

Okay.

So yes, we're (multiple speakers) -- yes, we're pleased with where we invested and how we invested, and really proud of our technical team here and what they were able to do.

Is there a way to quantify the investment in this private exchange technology for the entirety of sort of building that up?

Yes, I guess the best I could say is millions of dollars. We did indicate we're going to increase our -- it's going to increase as a percentage of revenue. And a good chunk of that increase would be the private exchange spend.

Okay. Thanks, guys.

Thank you.

Kevin Kopelman, Cowen and Company.

This is Andrew Merrick on, for Kevin.

Was wondering if you could give us a little more color around CVS partnership's impact on the open-enrollment period. And to the extent that you can, if you could comment on what you're seeing in Q1 to date for IFP member and application growth. Thank you.

Well, with CVS, it was pretty much Medicare focused and was an important contributor; helped us a lot with our prescription drug plan, the volumes. As we noted previously, prescription drug plan as well as Medicare supplement grew very, very nicely. And CVS was a good contributor to that. And we expect them to be again this year.

In terms of application volumes in this quarter -- I did make a comment in my prepared remarks that it's slower than we saw in the beginning of the last quarter. But we've seen this before. We would fully expect it. We're hearing this from others in the marketplace as well, including carriers. A pretty strong hockey stick through the [market at large].

Our actual demand, if you look at it in terms of visitors and what we call, quote, obsessions, is really quite healthy. Consumer behavior is really interesting. We've seen this for years and years. But for reasons, some of which are explainable and some are not, consumer behavior is such that people -- consumers do wait toward the end of these periods before they choose to apply and then enroll. And we would expect to see a similar thing here.

In terms of conversion rates, I guess the only comment we would make is that these 2014 Affordable Care Act-compliant plans should have very attractive conversion rates. Because by law, no one's going to be denied for medical reasons.

Yes. That's right. We're expecting north of 70% conversion rates, where historically we've been more in the 50s, mid- to high 50% conversions.

That's very helpful (multiple speakers).

Yes. And we like that. Because obviously, the return on investment from our cost-of-acquisition standpoint gets to be more attractive. Because the cost of acquisition hasn't changed a lot, but the conversion is going up, really, just overnight.

And that's why, as Stuart indicated in his script, going forward, you're going to probably hear a lot more focus from us on what we call approved members, or new revenue-generating members, coming into the system. Because these conversion rates are higher. And we're going to see more than we've seen historically. And that results in more revenue, obviously.

That's great. Thank you.

That concludes our question-and-answer period. I will now hand the call back to Gary Lauer for closing remarks.

As always, thanks, everyone, for the time and the interest and the support. And we'll look forward to seeing and talking with many of you soon.

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