eHealth Inc (EHTH) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the First Quarter 2014 eHealth, Incorporated Earnings Conference Call. My name is Denise and I'll be the operator for today. At this time all participants in a listen-only mode. Later we will conduct a question and answer session. If at any time you require operator assistance, please press star zero. As a reminder, this conference is being recorded for replay purposes. I will now turn the conference over to Kate Sidorovich, Vice President 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 first quarter 2014 financial results. On the call this afternoon we will have Gary Lauer, eHealth Chief Executive Officer and Stuart Huizinga, eHealth 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 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 statement on this call that include statements regarding future events, beliefs and expectations including those related to the lifetime economics and profitability estimates for our members, opportunities that we see in our core Medicare and IFP markets, our opportunity to scale our subsidy-eligible business, our expectations regarding the approval rates and applications submitted during the quarter, our growth expectations and forecasts for individual membership base, projected demographic trends and their impact on demand for Medicare products, eHealth's value proposition for younger seniors, the estimated lifetime value of our Medicare supplement products, the intended benefits of our relationship with Aetna, our plans to work with strategic partners, the future financial impact of member applications submitted in the first quarter of 2014, our estimate of the number of revenue generating IFP members, our beliefs regarding the impact of the Affordable Care Act and our churn rate and current churn estimates for the first quarter of 2014, our expectations regarding submitted applications, marketing and advertising expense and revenue growth rates, our estimates of various components of our membership and our 2014 guidance with respect to revenue, it's (inaudible) based compensation expense and earnings per share. Forward-looking statements on this call represent eHealth's view of today. You should not rely on these statements as representing our views in the future. We undertake no obligation or duty to update information contained in this forward-looking statement 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 report on form 10-K and quarterly reports on form 10-Q filed with the Securities and Exchange Commission, which you may access through the SEC website or from the investor relations section of our website. 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 thanks to everyone for joining us today as we record our first quarter 2014 results. The first quarter was another dynamic quarter for our individual and family plan business with consumer demand on our eHealth platform fast escalating as we approach the end of the open enrollment period. As a reminder, the first open enrollment period under the Affordable Care Act concluded on March 31st of this year with the limited exception of limited state and care specific deadline extensions. Similar to the fourth quarter of 2013 the volume of individual and family plan applications submitted in the first quarter of this year exceeded our expectations. We also observed strong demand for our Medicare products offered on our platform, which we believe was driven by favorable demographic trends and our successful execution in this important business area. Our first quarter margins reflect a meaningful year-over-year increase in marketing and advertising spend as a result of high submitted application volumes in both the individual family plan and Medicare businesses. As we did in the fourth quarter last year, we made the decision to spend in the strong consumer demand and pursue membership growth at the expense of quarterly earnings based on the favorable lifetime economics we estimate for these members.

What I'd like to do today is summarize our financial results for the first quarter, discuss our performance of the second half of the open enrollment period and provide some pertinent metrics for our individual and family plan business. I'll also make some comments about our Medicare business and what we are seeing outside of the main Medicare selling season.

First quarter revenues were $50.0 million, an 18% increase as compared to the first quarter of 2013. GAAP loss per share was $0.08. EBITDA was $700,000 and cash flow from operations was negative $5.4 million. Our balance sheet remains strong with $98 million in cash and no debt as of March 31, 2014.

During March our board of directors authorized a $50 million share repurchase based on the opportunity that we see in our core Medicare and individual family plan markets as well as in the adjacent business areas including private exchanges. Once our program is put into place we can begin repurchasing our shares in the open market.

Now I'd like to discuss our individual family plan business. First quarter individual family plan submitted applications grew 34% compared to the first quarter of 2013. Consistent with the first half of the open enrollment period less than 10% of submitted applications came from existing eHealth members applying for new plans. Importantly during the quarter we processed 10,000 applications from subsidy-eligible individuals as we worked through government exchanges. While these applications represented just 5% of total submitted application volume for the quarter we see this as meaningful progress in our ability to assist subsidy-eligible consumers. I'd like to note that the majority of the individuals enrolling into subsidy-eligible qualified health plans which are the plans they enroll through with the subsidy on our platform during the first quarter required telephonic support. We continue to push hard with healthcare.gov and [SAFES] to create a more streamlined online enrollment process for web-based entities like us and consumers, which would allow us to scale our subsidy-eligible business.

Younger Americans once again represented a meaningful share of eHealth applicants. During the first quarter consumers between the ages of 18 and 34 accounted for 45% of individuals selecting non-subsidized plans through eHealth. I'd also like to note that the approval rates on applications submitted during the quarter will be meaningful higher than our historical rates given that the first quarter was the first quarter during which all of our individual and family plan applications were for guaranteed issue products. Interestingly, first quarter demand was even more back end loaded than we originally expected with 50% of total applications coming in the last two weeks of the quarter. Due to a lag between the time an individual applies and is approved for a policy and when eHealth receives its first commission payment, the majority of first quarter applications did not contribute to first quarter revenues or the estimated number of individual and family plan paying members as of March 31st.

I would like to make some comments regarding retention within our existing book of business. Based on the most recent data, including commission payments that we've received from our carrier partners so far, our current estimate of churn for the first quarter of 2014 falls well within the range that we assumed in our 2014 annual guidance, which we provided on our last earnings call. So we continue to forecast growth in our individual membership base in 2014 with new member inflow more than offsetting the estimated impact of churn. I think it's important to note, however, that because consumer buying behavior maps to the open enrollment dates and because the next open enrollment period starts on November 15th and ends on February 15th of 2015 we expect to see strong membership growth from the open enrollment period that just completed to the end of the next open enrollment period.

We're pleased with the strong demand for the individual products on our platform during the quarter. Given that we expense virtually all of our customer acquisition costs up front, the exceptionally strong demand generated during the quarter resulted in a meaningful year-over-year uptick in our reported first quarter marketing and advertising costs and Stuart will provide more insight into our customer acquisition expenses later during this call.

Now turning to our Medicare business, in the first quarter submitted applications for Medicare Advantage products on our platform grew in excess of 80% compared to the first quarter of 2013 and applications for all Medicare products grew in excess of 100% for the same period. As you know, consumers are allowed to buy Medicare Advantage and prescription drug plans when they turn 65 even if their birthday occurs outside of the annual enrollment period and it's projected that over three million Americans will turn 65 years of age this year, which could potentially drive significant demand for Medicare products outside of the fourth quarter annual enrollment period. We believe that eHealth has an exceptional value proposition for these younger seniors with a broad offering of well recognized Medicare brands, consumer friendly online interfaces and highly trained customer care professionals ready to assist in finding the products that best meet the individual's needs. We also saw very good traction with our Medicare supplement products, which have an estimated lifetime value similar to Medicare Advantage and can be sold year round. First quarter submitted applications for Medicare supplement products grew over 130% compared to the first quarter of 2013. First quarter 2014 total Medicare revenue was $14.3 million a 41% increase compared to the first quarter a year ago. First quarter Medicare commission revenues grew 49% as compared to the prior year.

Finally, during the quarter we continued to make progress in expanding our presence in the private employer-facing exchange market. In March we announced another high profile business relationship in this area. eHealth is partnering with Aetna to provide health insurance solutions for employers transitioning their retirees from a group to individual coverage, which is currently the largest segment of the private exchange market. The relationship is well aligned with our go-to-market strategy and will give eHealth potential access to certain of Aetna's corporate customers.

In conclusion, we are pleased with our execution across our key business initiatives during the quarter. We continue to pursue Medicare and individual family plan membership growth and our first quarter year over year membership growth across all product lines speaks to our success in these areas. The expected lifetime profitability of the new members we are generating is very attractive as we are laying down the foundation for future earnings growth and margin expansion. I'd like to note that had we achieved the integration with healthcare.gov we were seeking during the open enrollment period and have been able to do volume enrollments of subsidy-eligible individuals online, the individual and family plan application growth might have been meaningfully higher in the first quarter than we've already experienced. While we've processed over 10,000 applications for subsidy eligible consumers, we were not able to address a significant amount of demand we had for subsidized qualified health plan business. That's why creating an efficient consumer friendly experience for subsidy-eligible consumers is a top priority for us this year. In our private exchange business we plan to work with our strategic partners on winning corporate accounts and starting initial technology deployments. I'm enthused about the opportunities that we see for eHealth in this growing market. And at this point, I'd like to turn the call over to Stuart.

Thanks Gary and good afternoon everyone. Our first quarter results reflect strong demand on the eHealth platform across all major product areas including Medicare, individual and family plan and ancillary products as well as meaningful growth in operating expenses required to capture and convert this demand. Our first quarter 2014 revenue was $50.9 million, an 18% increase compared to the first quarter of 2013. Commission revenue for the first quarter was $45.6 million representing 19% year-over-year growth. Commissions from individual and family plan and ancillary products grew by 11% compared to Q1 2013 while our first quarter Medicare commission revenue grew by 49% year over year. Other revenue, which includes sponsorship, ecommerce on demand and non-commission Medicare revenue was $5.4 million in the first quarter, an increase of 8% compared to Q1 2013. The increase was driven primarily by growth in technology licensing revenue.

Turning to membership metrics, our individual and family major medical plan submitted application volume grew 34% compared to the first quarter of 2013. As Gary mentioned at the beginning of the call, this growth was very back end loaded and came in above our earlier expectations. Based on our initial observation, we are seeing a significant increase in approval rates for individual and family plan applications submitted during the quarter compared to historical level reflecting the impact of the guaranteed issue provision of the Affordable Care Act. For example, approval rates for applications submitted in January were close to 80% compared to the high 50s to low 60s percentage rates historically. At the same time, due to the back end loaded nature of the first quarter application volume, many of the applications submitted during the quarter have not flowed through the approved member and paying member metrics that we reported for Q1 and are instead are expected to positively impact our Q2 membership once we have received the initial commission payments.

Our estimate of the number of our revenue generating individual and family plan members was 800,000 as March 31, 2014, up 8% year over year, reflecting an increase as we expected in estimated individual and family plan churn during the first quarter relative to our historical rates and the offsetting impact of new member inflow driven primarily by significant demand that we generated during the fourth quarter of 2013. As a reminder, our estimates of member churn are based on commission payments that we receive from insurance carriers since carriers don't specifically report membership or cancellations to us. Typically, our view of churn is based on a six months look back period, however, given the significant changes that have occurred in our industry as a result of the Affordable Care Act we have taken additional steps to make our first quarter churn estimates more current. Specifically we incorporated more recent data than we normally would, particularly around the transition from December 31, 2013 to January 1, 2014, the first date on which new plans became effective for members making a transition off pre-Affordable Care Act plan.

Based on commissions we've collected year to date in 2014, we looked at the percentage of members for whom we had a commission payment in December but no payment in January and compared that to our historical sequential membership change between these two lines. As expected, we saw an incremental amount of churn above historical levels between those dates and reflected that increment in our membership estimate as of the end of Q1. Based on our analysis, our current estimate of the first quarter churn is well within our target range and we are pleased with the results of the member retention efforts we've undertaken throughout the open enrollment period. We believe that the impact of the Affordable Care Act on churn in our individual member base is most pronounced in the first quarter given the unique transition point from pre-ACA to ACA compliant plans that Q1 represented. At the same time, we are not going to have a full view of churn that occurred during the open enrollment period which ended on March 31st until later in the year.

Our total estimated membership at the end of the quarter for all products combined was approximately 1.29 million members, which represents 22% growth over estimated membership reported at the end of the first quarter of 2013. The estimated number of revenue generating Medicare members was 111,700 up from 75,300 at the end of the first quarter of 2013 or an increase of 48%. The estimated number of numbers in ancillary and small business products rose over 374,000 at the end of the quarter reflecting 56% annual growth.

Now I'd like to review our operating expense for the quarter. During the first quarter we continued to pursue membership growth initiatives which drove our marketing and advertising and customer care and enrollment costs. We also carried on with our planned investment in enhancing the enrollment experience for subsidy-eligible individuals the development of eHealth's private exchange capabilities as reflected in our technology and content expense.

First quarter 2014 non-GAAP marketing and advertising expense, which excludes stock based compensation expense was 44% of revenue compared to 33% in the first quarter last year. Our marketing costs are largely variable and are directly tied to application volumes each quarter. As I described earlier, during the quarter we generated very strong submitted application growth in our individual and family plan and Medicare businesses, resulting in a meaningful year-over-year increase in marketing spend. The lifetime economics for our new members are very attractive. At the same time, commission revenues from these members are recognized for the lifetime of each member while the acquisition costs are expensed up front as incurred. This creates margin pressure during high application quarters all other things being equal.

First quarter 2014 non-GAAP tech and content expense which excludes stock-based compensation expense was 19% of revenue up from 15% of revenue in Q1 2013. During the quarter we continued to invest in website enhancements, improvement of the online enrollment process for subsidy-eligible consumers and have also begun to step up our private exchange spending.

First quarter 2014 non-GAAP customer occurring enrollment expense, which excludes stock-based compensation expense was 19% of revenue, up from 16% of revenue in Q1 2013. The year-over-year increase reflects our decision to retain a larger number of our customer care professionals following the conclusion of the Medicare annual enrollment period which ended December 7th of last year. This decision was driven by higher demand for Medicare products than we expected to see outside of the annual enrollment period and also by our initiative to provide a solution for subsidy-eligible consumers shopping for non-Medicare individual and family health insurance products on our platform. Because we are not well integrated with the government exchanges yet these individuals required significant telephonic support from our customer care representatives. Higher spend in these areas was slightly offset by the decline in cost of revenue and G&A as a percentage of revenues compared to the first quarter a year ago.

First quarter non-GAAP operating loss excluding stock-based compensation and the amortization of acquired intangibles was $300,000 compared to non-GAAP operating income of $5.9 million in the first quarter a year ago. EBITDA for the first quarter of 2014 was $700,000 compared to EBITDA of $6.6 million for the first quarter of 2013.

First quarter of 2014 non-GAAP earnings per dilute share was $0.01 compared to non-GAAP earnings per diluted of $0.17 in the first quarter a year ago. First quarter 2014 GAAP loss per diluted share was $0.08 compared to GAAP earnings per diluted share of $0.11 in Q1` of 2013. Our cash flow from operations was negative $5.4 million compared to negative $500,000 in the first quarter of 2013. Capital expenditures for the first quarter of 2014 were $1.1 million. In addition, during the quarter we paid approximately $4.5 million in cash to purchase an important domain name, medicare.com. Our cash balance was approximately $98 million at March 31, 2014

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 2014 that we provided on our fourth quarter 2013 earnings call.

I also want to make a few comments on certain sequential strengths we expect to see this year. In our individual business we expect that submitted application volume will decline in the second quarter and third quarter both on a year-over-year basis and relative to the first quarter of this year. Only certain consumers will be allowed to buy individual and family major medical insurance products outside of the open enrollment period. In order to do so they must have experienced qualifying trigger events, which includes income fluctuations that impact subsidy eligibility, birth of a child and certain other changes in their life situations. However, the majority of consumers in the individual market will have to wait until the next open enrollment period which is expected to start on November 15, 2014 before enrolling into a new policy for the following year. Consequently, we expect a significant sequential step up in demand for individual products in the fourth quarter compared to the second and third quarters.

In the Medicare business we expect to see strong annual growth in submitted applications for the rest of the year driven by continued favorable demographic trends of seniors aging into Medicare and our growing presence in this important market. Of course the volume of applications in non-annual enrollment period quarters will continue to be meaningful below expected fourth quarter level when the annual enrollment takes place. Based on these expectations for quarterly demand fluctuations we believe that our marketing and advertising expense will hit its highest level during the fourth quarter followed by the Q1 and will decline meaningfully in the second and third quarters relative to the first quarter levels. Given the recurring nature of our commission revenues, we expect to see relatively similar annual revenue growth rates in all quarters of 2014.

I'll remind you that these comments as well as our annual guidance 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 I'd like to open up the call for questions. Operator?

Ladies and gentlemen, if you have a question please press star one. Our first question comes from [Steve Styblo] with Jefferies. Please proceed.

Hi, thanks for taking the questions guys. First one just housekeeping is when can you begin your share repurchase program?

We do it under the auspices of a 10B51 program which is going into place currently and there's typically a cooling off period. So you're 30 to 60 days out.

From today?

Correct, from this time period.

Then more at the heart of the matter here, in terms of IFP and all the moving parts going on, I guess I would have, I understand there's going to be a strong spill over into the second quarter. Should we expect, is there any sort of guidance you can provide us on where membership should actually fall out?

Well, I think the only guidance I can give there is just I'd look to our annual guidance for revenue. We've kept that consistent to what I gave last quarter which is at the midpoint 17% growth to our total revenue for the year and IFP makes up more than 70% of our revenue so I think that would give you just a general sense of membership growth for the year. But also know that we expect to see our commission from member end sales to increase as well. That is also bolstering that growth.

Okay.

I think it's also important to notice, as we said, is that over 50% of these individual and family plan applications transacted in the last two weeks of the quarter and as you know there's a lag between the application time to when we actually have a member. So that would impact membership you saw in the first quarter and new quarters after that.

Okay. So to think about those, that surge, those folks would be generally under the guaranteed issue. We'd expect a higher conversion rate of something upwards of 80% on that base?

That's right. Yes, that's what we saw in January, the first kind of full month of conversion that we have in house.

Okay. And then kind of stepping back, rolling forward from the fourth quarter to the first quarter, I guess I would have thought that maybe all of the submitted apps that happened in December and late in the year would have benefitted you perhaps a little bit more since your churn was more within your expectations. Can you help us reconcile this surge that happened at the end and perhaps why we didn't see as much of that flow through to membership on this first quarter?

Sure. Yes, the Q4 applications were not as back end loaded as we saw in Q1. We saw a surge in applicants at the beginning of the open enrollment period, October 15th and then another peak in December, but it was more even throughout the quarter and so Q4 benefitted to a greater extent from a timing standpoint than what we just saw in Q1. It was much more severe back end loading in Q1. So in other words, I guess we got more of a benefit during Q4 to our membership and less of a spillover effect than we expect to see here in Q1 into Q2.

Okay. And then lastly, I hope I didn't miss this, but did you get into why membership in Medicare declined sequentially?

I didn't make a specific statement, but if that's a function of the annual enrollment for Medicare, most of the volume happens in the annual enrollment period and members sign up for an annual policy and so people that we lose from that pool of consumers that are in the renewal phase at the annual enrollment period, we'll lose them, to the extent we do lose a member it's going to be January 1st that we lose those. So Q1 is the biggest quarter of the year for churn.

Okay. So that was not a surprise. That's what you expected.

No. Yes.

Okay. I'll hop back.

Our next question comes from Tobey Sommer with Suntrust. Please proceed.

Thank you. Curious how is eHealth ranking in search or Medicare now or what would you expect the purchase of medicare.com to do so that you can take advantage of those three million Medicare people becoming Medicare eligible? Thanks.

Well, I'm not looking currently, but we're typically ranking well during the annual enrollment period. Medicare.com is a really important property which we were frankly delighted to be able to acquire. Obviously the government exchange is medicare.gov. In fact if you go to medicare.com you'll see that it's operated by us and in fact we've been running it now for several weeks. Although we weren't running it even with those strong application growth volumes in the first quarter most of that was without medicare.com. That's a very recent acquisition and something we just started. So we think that's going to have some really positive impact on this Medicare business throughout the year as well as during the annual enrollment period. And I can't tell you at the moment where we're ranking in Medicare, but we certainly source a growing volume of our applications from search and medicare.com is going to help us significantly there as well.

Thank you. That's helpful. Just a housekeeping detail, you mentioned the purchase price but I didn't quite catch it. Could you repeat that?

It's $4.5 million in cash and $300,000 of forgiven receivable from them.

Okay. Thanks. And then from a lifetime perspective of your customers have you noticed any changes in the duration of how long the customer life is? I know that's an integral part to the business model and economics. Thanks.

I don't think -- it's too early to report anything on the lifetime. You said the lifetime of the member?

Yes, correct.

I think it's too early to see that. I think that we're expecting to see somewhat of a slowdown in the initial churn that we normally would see in the early months just given the open enrollment periods that people would more readily hold their products from open enrollment period to open enrollment period. But then there would be larger churn after year one when you hit that open enrollment period, so much more like Medicare. That's our expectation.

Okay. And then would the open enrollment dates for next year, are we going to see a shift in your seasonality where the higher marketing expense and application volume is likely to be in the January February period? I know it's a little bit far away and it's a change, but just wondering what your updated thoughts might be on the change to seasonality as a result of those dates.

Yes, we think it's probably going to be in both quarters. We think we'll see a surge of people in fourth quarter who are looking for calendar year, no gap in coverage. We want to make sure they have a January 1st coverage date. But then also we could see a surge in the first quarter as more people come in to meet the mandate. Some of the penalties get larger next year and we may see more people coming in for that.

So what we saw in this past open enrollment period was interesting that really the first wave of enrollees in the first 90 days which was October 1 to December 31 were people who really had pent up demand to get in, had chronic conditions, couldn't previously because of guaranteed issue, were typically older and in many cases were just anxious to enroll. Then what we saw in the first calendar quarter, which was the second half of the annual enrollment period of January 1st to March 31st was consumer behavior that we frankly thought was even more pronounced than we were expecting it to be but thought it could be which was that consumers procrastinating and waiting right toward the end. So if you move that into this coming open enrollment period, what we think we're going to see in the beginning of it which would be November 15th to pick a date. It's either December 31st or January 15th, maybe people who have got products but are anxious to get out of them and move to something else. Their physician is no longer with the product. They've just discovered a product that does cover their physician. They didn't have it and on and on. Then as Stuart just pointed out, you're going to have probably the second wave which is those who just near the end need to comply and want to buy. So we're probably going to be dealing with two hockey sticks not unlike what we just experienced here.

And then my last question, I'll get back in the queue, is kind of a broader one. You've had two quarters now with significant growth opportunities and you spent to take advantage of that growth. The market is dynamic and you could be confronted with several more quarters in that regard. Are you comfortable that you're going to be able to respond to the changes in growth opportunities and still kind of preserve the EBITDA that you've conveyed to us here today?

Well yes, I mean, that's why we made some of the comments about the seasonality we expect in between open enrollment periods. We would expect our marketing to decline fairly significantly in Q2 and Q3 relative to Q1 and Q4. And so we still need to see these seasonal patterns play their way out, but our best estimates right now obviously trend towards the EBITDA numbers we put out there.

Thank you very much.

Our next question comes from George Sutton from Craig-Hallum. Please proceed.

I've become French. I wondered if you could talk about your conversion rates during the quarter relative to your expectations. It would appear that the traffic was very good and that you didn't bring all those folks in and I'm assuming part of that is or a large part of that was the subsidy-eligible portion.

Yes George, look we're pleased with the conversion that we saw, especially with subsidy-eligibles. We've been disappointed right from the beginning in healthcare.gov's ability to allow us to connect in an online fashion. Frankly, we jerry-rigged some things and got creative which allowed us to enroll over 10,000 subsidy eligibles, but we did most of that in a pseudo-phone online way. We are working with and pushing hard right now to connect so that we can have an online experience for subsidy-eligible consumers that's like what non subsidy-eligible people get. I think I've made the comment that had we had that capability we think we could have seen a much higher conversion rate and on a per-unit basis, a much more favorable cost of acquisition. We had a very large volume of subsidy-eligible consumers come to us and sadly we couldn't address their needs and I say sadly for a couple of reasons. One, they just want to get coverage and we can do it expeditiously and secondly every time we do it it doesn't cost taxpayers money. Every time it's done a government site it costs taxpayer money and among other things we just don't think that's the best way for government to be spending money. We can be helping here and we're working on it and we're hearing the right things but they are still very challenged from a technology standpoint. So on the conversions to summarize it, we very much like what we saw with the non-subsidy eligible population, especially the age demographic. 45% of these people are 18 to 34 years of age. What we're seeing from government is someplace around 25% and this is the most sought after demographic. This is the real sweet spot of what keeps everything in balance. And we could have made a very significant contribution to that, we think, with subsidy eligibles as well. But we like what we're converting and we think there's a lot of headroom to have much better conversion here as well.

I'm curious how you're going to be running the ancillary part of the business during these off seasonal periods. It would seem like that may get more of a focus in those periods, but I'm curious how that might change the way you run that part of the business.

Well, it's a good question because the ancillary products; dental, vision, accident do not come under the auspices of the Affordable Care Act interestingly, so you can buy them at any time. And we're certainly -- that's become a very important business for us. It's a really good margin generator. It's one that we're being very aggressive about and have been, like the Medicare business as well. So there's a lot of business activity for us outside of the individual open enrollment period and that's these ancillary products and the Medicare products.

I think I should also add that short term products seem to be attractive to people in the off season. Short term products also fall outside of the ACA and I think some people have probably woken and found out that they should have done something, didn't do something when they could have during OEP and I think for many people that's a solution, at least kind of a stop gap solution. Typically, we've seen people hold on to those plans only three to four months but in the new environment they may hold onto it out through the open enrollment period for a longer lifetime than usual.

That makes sense. Lastly for me, you mentioned that you were working with partners on the SMB opportunity or that exchange. Can you give us the types of partners you're working with and how broad you're working with them?

Well we think the private exchange business as we commented previously is going to be a really, I think, interesting new business category in this industry in this marketplace. Through Aetna and another partner we're going after the transition of retirees. We're doing it for a few others. We're working with Aon right now on part timers and contract employees. We've got several other smaller partners where we're going to be going to the small business environment which I think is going to be a really interesting one. The employer mandate for the Affordable Care Act which goes into effect January 1st of 2015 does not apply to businesses with less than 50 employees. We think many of these businesses may just choose to fund their employees to buy individual products. We like the idea a lot of being able to provide them an exchange to make this really efficient and quite simple for them. So I think we've got a multiple of initiatives underway in this area and there's a lot interest in it and not just in part of partners but potential business, consumers and customers as well.

Thanks guys.

Thank you.

Ladies and gentlemen, please limit your questions to only two. Our next question comes from Steve Halper with FBR. Please proceed.

Yes, hi. So I just want to clarify the statement around the second quarter and third quarter. You said that individual IFP applications, the growth would be negative year over and year and sequentially. Is that accurate?

That's correct.

Okay. And then so if you look at Q2 it will be down year over year versus Q2 a year ago?

That's correct.

And then Q3 will be down versus Q3 a year ago?

Correct.

Okay. And both of those, Q2, Q3 will be lower than the Q1 submitted application number?

That's right.

Yes, and Steve, the reason for that is that you essentially, not essentially, you cannot buy an Affordable Care compliant plan outside of the open enrollment period.

But, but, but what --

Changes the seasonality of the business here.

Right, but does that apply to non-subsidized individuals?

Yes.

And is that really the result of health plans pulling out of the market basically during that plan because of the risk pool? Is that the way to think about it?

No, it's the law. What the Affordable Care Act requires very simply is that you can purchase these products whether you're subsidy eligible or not, the compliant products during the open enrollment period. Outside the open enrollment period it's called the special enrollment period, SEP, and to qualify there you've got to have a life changing event; divorce, birth of a child, moving from one state to another, so just a few exceptions. That's why the vast majority of this business and the spend that we've been talking about is going to occur during these open enrollment periods.

Right. So just driving down, so your spend on the marketing side will be lower in the two quarters, right, which is going to drive the bottom line and you'll get that pick up in applications and beginning November 15th it will drive and obviously your marketing expense will be higher. So even though you don't get the full benefit of the revenue in Q4 and earnings, right, will to just sort of put the pieces together, right, the fourth quarter earnings number should be lower than the second and third because of the high acquisition costs. And then you get the benefit, right, of the higher membership in 2015. Am I thinking about that all right?

You are thinking about that right.

Okay.

Yes.

Fair enough. Thank you.

Thanks.

Our next question comes from Kevin Kopelman with Cowen and Company. Please proceed.

Hi. Thank you. I was just wondering if you could give us any more color on trends in commission revenue per member and what you're expecting going forward there and if you could help us think about that in terms of Medicare members and also IFP and other kind of separately? Thanks.

Yes, so we're expecting, I mean, it's still early but we are seeing a fairly significant increase in premiums as I think everyone expected year over year. We benefit from that to a certain extent. A little bit over 50% of our carriers pay us a flat fee and a little less than 50% pay us on a percentage of premium. So as those premiums go up we do benefit from a portion of that. So we do expect our commission per member on new members we're selling to increase this year.

Okay, and on Medicare?

On Medicare at this point I expect things to be fairly just stable with what we've seen in the past.

Got it. And if you had to translate the new individual kind of how you expect that to play out as a percentage, what do you think your kind of effective commission rate would be?

Yes, I'd say flat to up over the year is what we're projecting. We're talking about per approved and paying member. I also want to just for others' sake, just mention that this close ratio is definitely making each submitted application more valuable to us than it's been in the past. As we move from what I described from mid-50s to 60 % close ratios up to 80%, although we've seen roughly a 30% to 35% increase in the value of a submit just based on that close ratio change, and then we're tacking a little bit of a premium increase as well, so.

Yes, we had commented in the last earnings call, I think Stuart had said that we had seen a close ratio or expected something around 70%. We're actually, as you said in January, seeing close to 80%. And so when you think about effectively what we're spending on a per unit basis for cost of acquisition we're getting a much more attractive conversion rate there and an improved cost of acquisition, which frankly we had anticipated because of the guaranteed issue provision that's in the Affordable Care Act.

Yes, and when you say January, that's mostly reflective of the people who are submitting at the end of December and then?

No. Actually when I say that I'm lagging things back to January submits. So I'm talking about January submits and what percentage of the January submits we've seen close.

Yes.

Yes.

We like 80%. That's a very healthy close ratio.

Yes.

And then just a question on expenses, on G&A I'm not sure if you mentioned it but it kind of went up a little bit quarter over quarter and I think last year there were some one time things in there. Was there anything one time in there this year?

No, I can't think of anything one time. Q1 is a little bit elevated because that's when the annual audit is done and that's a fairly significant chunk of G&A, but that's just year over year that doesn't really change things a whole lot, but sequentially it definitely does.

Okay. Thanks a lot.

Yes.

Our next question comes from Nat Schindler with Bank of America Merrill Lynch. Please proceed.

Hi, this is Jason Mitchell here for Nat Schindler. I was just curious as the Affordable Care website kind of improved over the course of the last three months did you see any change in your flow of traffic or applications coming to the website? And then from the applications you got the last three months, were a lot of those current customers switching to Affordable Healthcare or ACA compliant plans or mostly new customers?

Well, just with healthcare.gov all I can tell you is we saw record volumes coming to us during the last three months compared to any other period like that in terms of consumers visiting the site, what we call quoted sessions when someone actually looks at a product, applications, I mean, all the way through. And I think most interestingly is that we saw a very large volume of subsidy-eligible people coming to us there as well. The only place they could really get the subsidy was on healthcare.gov although as I indicated we engineered some ways to be able to help people and got over 10,000 of them enrolled or at least submitted with their applications and presumably enrolled. So there's clearly, and I've been saying this for several years there's a new competitor in the marketplace and that's government with government exchanges. We certainly haven't seen anything that's been in any way upsetting to our business, just the opposite. We think we're a beneficiary of the Affordable Care Act and that's borne out in the volumes that we see here. And we just keep working every day to make the consumer experience and interface better.

And on your second question, the submitted applications, less than 10% of our submitted applications were from current members.

Okay. That's helpful. And then just on the private exchanges, how do the economics work out for those exactly? Is it still the same where you're getting a commission fee for the plans that go through those private exchanges?

Yes, I would characterize the partnerships we have today as commission based, with yes the commission rates that we enjoy with the products that we just sold them one on one. Typically the arrangement is that we'll do some kind of a commission share with the partner but we'll take the gross commission as revenue and then there's a cost of revenue which is the commission share. And I wouldn't say from that that everything that we do in the future is going to be situated that way but that's how they are currently and that's most of the discussions that we're having.

Our next question comes from Adam Klauber with William Blair. Please proceed.

Thanks. Couple questions, I'm not sure if you said this but was there any traction on the Turbo Tax relationship and how much was that hindered by execution issues with the federal hub?

Yes, well we had some traction with Intuit and as you might imagine we've been working very closely with them right up to April 15th and after as well. A number of the Intuit consumers that we would be introduced to like other partners may be subsidy eligible. So the impact there is on the subsidy-eligible portion of that segment and how we can help them. And we focused a lot of our efforts on those partner subsidy-eligible people that are part of those 10,000 that we enrolled. But I just want to be clear that we have got to get a better connection with these government exchanges. It's not on us. It's on the government exchanges that the technology just isn't what it needs to be for us to be able to connect. We are hopeful and optimistic with many of them including healthcare.gov that we're going to have a connection before this next open enrollment period so we can do this the way people want to do it when they come to us which is online and that would certainly pertain to Intuit.

Great. And just a follow up on that, from what I've heard the deadline for Accenture to be up and running is more like mid-summer. How are they doing on the intermediate deadlines? Are they doing better than the last contractor?

I'm just not qualified to talk about that. I don't know. We've got our own focus which is just to connect into them with the right plumbing so that this will all work, but I just can't speak to where they are with any of this. I don't know any more than what anybody else knows from what they read and so on.

Okay. And then also, as you mentioned that churn was elevated but within the range of what you expected for the first quarter. With the first quarter being so busy can we expect an elevated level of churn in the second quarter also?

I expect that churn would likely slow down in the second quarter on an ongoing basis until the next OEP. We could see a little bit of churn off of just the straggling of completion of Q1, but all in all I would expect it to slow down.

There's an important point, I think, to be made here about churn and the way that we calculate it. What we talk about here and what we look at internally is product churn and product retention, not necessarily member churn or member retention. So let me give you an example; somebody may churn off of a product and we'll actually look at that and we'll essentially report that in some of our metrics but they may churn off a product and buy another one underneath us. So the product churns but we don't lose the member. In theory and let me emphasize in theory, in theory over the next six months there shouldn't be as much of that because you can't churn off a product and then go buy another one because the Affordable Care Act won't allow you to do that until the open enrollment period. So in theory we should have less churn in that category of retention and in theory we should have more demand coming November 15th for those who do want to churn out of the product they're holding into a new one but don't want to lose coverage. If you churn off a product today, if you've got a compliant product, you stop making payments, you terminate it you're going to go uninsured. You can't go get another product unless you've qualify for one of the special enrollment exemptions if you will, which is divorce, birth of child or moving from one state to another. So we think theoretically, that that's going to have a positive impact on the kind of churn we've seen traditionally.

Our next question comes from Hesham Shaaban with Hedgeye. Please proceed.

Hesham Shaaban with Hedgeye. Thanks for taking the questions. So I know it's a little early in the year to be asking this but the NCOs are expected to start submitting rates for 2015 and I'm wondering if you've had any conversations with them regarding rates for next year?

Are you talking about the actual premium prices?

Yes, not the NCOs are going to submitting their premium prices, but I'm wondering if you've had any conversations with them regarding rates, commission rates for 2015 on the IFP product?

We, historically, commission rates have not changed on an annual basis. The only significant change we've ever experienced was a result of the mandate in the Affordable Care Act in 2011 when the medical loss ratio was required to be 85% on these products and we had roughly a 35% commission reduction as a result of that. There was some expectation that we may see commission rates change coming into this first open enrollment period and as we commented on our last earnings call I think Stuart reaffirmed it today our commissions are flat to up compared to a year ago. We have no indication of any commission rate changes coming up. We think this is already built in and assumed in the medical loss ratio that the carriers operate with. We have contracts with most of them. Many of them are month to month, some of them are longer term, but we certainly don't anticipate any significant changes and I can tell you that we're not in discussions currently about any kind of changes on commission rates at all.

Okay. Great. Thank you.

We have no further questions. I would now turn the call back over to Gary Lauer, CEO, for closing remarks. Please proceed.

Well sure, I'd just like to thank everyone for the time today and look forward to talking with many of you the next coming days and weeks.

This concludes today's conference. You may now disconnect. Have a great day.