eHealth Inc (EHTH) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the eHealth, Inc. first-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I'd now like to turn the conference over to your host, Kate Sidorovich, Vice President of Investor Relations. Ma'am, you may begin.

Thank you. Good morning and thank you for joining us today either by phone or by webcast for a discussion about eHealth, Inc.'s first-quarter 2015 financial results. On the call this morning we will have Gary Lauer, eHealth Chief Executive Officer, and Stuart Huizinga, eHealth Chief Financial Officer. After Management completes its remarks, we'll open the lines for questions.

As a reminder, today's conference call is being recorded in a 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 our expectations regarding Medicare commissioned revenue growth, continued expansion of our ancillary product business, expansion of our Medicare membership fees, saleable retention rates for our Medicare members, growing contribution from high margin Medicare renewal commissions, the beneficial impact of investments in our Medicare business, the importance of our individual and family planned business or IFP, a source of significant annual revenue, cash flow and earnings and the profitability of our IFP business.

The recent cost-reduction program and the expected cost savings and impact on profitability on cash flow, member retention rates and [churn in our] IFP business, projected commissions from member in our IFP business, our ability to take advantage of emerging opportunities in the IFP market, the timing of the recognition of Medicare revenue, all operating expense, cash flow and non-GAAP financial information and our expectations regarding revenue during the second quarter.

Forward-looking statements on this call present eHealth's views 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 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 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 reconciliation of which 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.

Thank you and thanks all for joining us today as we report our first-quarter 2015 results. We completed a strong quarter driven by acceleration in Medicare commissioned revenue growth, better than expected individual and family plan commission revenue and a continued expansion of our ancillary product business.

First-quarter revenue was $61.3 million, representing a 20% growth rate compared with the first quarter a year ago. First-quarter EBITDA adjusted for restructuring charges was $5.8 million. During the first quarter we reported $4.5 million in restructuring charges related to our cost reduction program. Including these charges, EBITDA was $1.3 million and the GAAP net loss per share was $0.12.

We ended the quarter with no debt and $39 million in cash. Our cash balance reflects seasonality inherent in our business model as well as the restructuring charges that I just referenced.

I'd like to start this morning by commenting on our performance of the Medicare business, one of the highlights of the quarter. Total first quarter Medicare revenue was $29.6 million, or 108% annual growth, with a decline in Medicare advertising offsetting some of the growth in commission revenues. As we previously noted, Medicare advertising reflects discretionary spend by the carriers and tends to be more variable than commissions.

First-quarter Medicare commission revenue was $29.3 million, an increase of 135% compared to the first quarter a year ago. This strong performance was driven by growth in renewal revenue on our existing book of business, an increase in the new number of Medicare members added during the quarter as well as changes in timing of Medicare revenue recognition due to the impact of new CMS regulations.

So let me elaborate. During 2014, we grew our submitted applications for major Medicare products, including Medicare Advantage and Medicare Supplement plans by 51%. This momentum continued into the first quarter of 2015 with applications for major Medicare products growing 59% year over year. As a result of strong application growth in 2014 and the first quarter of 2015, we had 62% more approved Medicare members in the first quarter compared to a year ago, which helped to deliver meaningful growth in first-year commission revenue.

In addition, we saw retention rates with our existing Medicare members that resulted in strong renewal commission revenue. Our first-quarter Medicare renewal revenue did benefit from certain changes in timing of revenue recognition pursuant to a new CMS regulation. Adjusting for these changes, our first-quarter 2015 renewal revenue grew 56% compared to renewal revenue for the entire year of 2014. As we continue to expand our total Medicare membership base, we expect to see a growing contribution from renewal commission revenue which, by the way, has little incremental expense associated with it.

Finally, as a result of new CMS regulations and as a result of our not receiving commission information from certain carriers in the fourth quarter of last year, both the first-quarter Medicare renewal revenue and the revenue on new Medicare sales benefited from revenue which historically had been recognized in other periods. This includes an estimated push out of just over $3 million in new sales commission revenue from the fourth quarter of 2014 into the first quarter of 2015, and the fact that 2015 is the first year when we are recognizing all of Medicare renewal revenues during the first quarter.

Historically the first quarter has been the largest renewal revenue quarter for Medicare, but we also recognize some renewal revenues in Q2, Q3 and Q4. This is why in my earlier statement I compared our first quarter 2015 renewal revenue to the renewal revenue for the entire year of 2014 to reflect the impact of this timing.

Our total estimated Medicare membership at the end of the quarter was 155,600 members, or 39% growth, compared to the Medicare membership we estimated at the end of first quarter 2014. The estimated number of members holding major Medicare products, including Medicare Advantage and Medicare Supplement plans, grew 51% during the same period.

The investment that we've made in our Medicare business is working, and our first-quarter financial results demonstrate the beneficial impact that this business can have on our top and bottom line. I'd like to point out, again, that as our Medicare membership expands, we stand to benefit from the larger potential contribution of high-margin renewal revenues. This is especially important given the favorable retention rates we are experiencing with our Medicare members. Our strategy is to continue growing our Medicare business and to focus on new and innovative ways to expand our presence in this very important market.

We also continue to expand our inventory of quality Medicare plans from leading insurers. In the last six months, for example, we added 11 additional states for our Medicare Supplement plans, and a product -- which is a product underwritten, by the way, by United Healthcare, and we also added Express Scripts prescription drug plans nationwide.

Turning to our individual and family plan business, first-quarter submitted individual and family health insurance applications were down 17% year over year. As a reminder, this year's open enrollment period ended on February 15, while the prior open enrollment period ran through the end of March of 2014. In addition, the number of new enrollees in the individual market was meaningfully lower during the second enrollment period compared to the first one.

Our estimated individual and family plan membership at the end of the first quarter was up 3% sequentially and down 27% compared to the first quarter of 2014. First-quarter individual and family plan commission revenue, including commissions from ancillary and small business products, grew 4% sequentially compared to the fourth quarter of 2014, and was down 14% on a year-over-year basis. I want to emphasize that although we've seen lower individual and family plan application volume over the past several quarters than we had expected, the individual business remains a very important part of eHealth as it generates significant annual revenues.

In 2014, for example, the individual and family plan business contributed approximately $108 million, or 60% of total Company revenue. The contribution was even higher at 72% if you include commission revenues from ancillary products, the majority of which are cross sold into our individual and family plan member base. By the way, we saw continued growth in our ancillary product business with first-quarter 2015 revenues up 25% compared to the same quarter a year ago.

Our individual business can also serve as an important source of cash flow and earnings, some of which we plan to invest or reinvest in our Medicare business. I'd like to point out that our individual business was profitable in 2014 despite all of the challenges surrounding the Affordable Care Act and its implementation during the year.

As you may know during the first quarter of 2015, we announced the start of implementing a cost reduction program aimed at aligning our cost structure with our revenue. The majority of expense cuts came from employee costs and our customer care and enrollment and technology and content groups, with an overall reduction in our total Company work force of 15%. It's important to note that our first-quarter results reflect minimal cost savings associated with the cost reduction program given that we started to implement it during the last month of the quarter.

Commission rates in our individual business remained stable and we actually observed higher commissions on new sales for many of the plans for which we received payments from the carriers during the first quarter of 2015 compared to previous quarters. Contributing to these commissions were qualified health plans which represented roughly 47% of total individual and family plan applications submitted through our platform during the first quarter of 2015.

At this point we continue to assess the post-open enrollment period data in our individual business to get more clarity into our membership retention rates. As a reminder, members typically do not pay us directly or report their intent to cancel a policy. Rather, carriers collect premium payments and in turn make commission payments to their broker channel. These payments provide us with an insight into active membership on our books for a given period, but this process can take several months.

We like what we've seen so far this year in terms of commission payments, and we expect to get even more clarity into payment rates in churn over the next several months. As you know, retention rates are important driver of our membership numbers and therefore of the individual and family plan commission revenue that we earn.

Given all that we've experienced over the past several quarters, we are pleased with our first-quarter results. As I stated earlier, the momentum and contribution we are seeing from our Medicare business is a direct result, I believe, of the focused investment we've made in this exciting opportunity over the past several years.

While we were disappointed with the application activity during the open enrollment period in our individual and family plan business, we did see better individual and family plan commission revenue than we expected during the first quarter. Remember that the individual business is a significant part of our revenue and profitability and we believe we can take advantage of emerging opportunities in this market.

And most importantly, we generated positive EBITDA in the first quarter, even in light of the restructuring costs that we've incurred. Now I'd like to turn the call over to Stuart.

Thanks, Gary, and good morning, everyone. During the first quarter, we generated strong revenue growth and made an important step towards the Company's return to profitability by implementing an aggressive cost reduction program.

Our first-quarter 2015 revenue was $61.3 million, a 20% increase compared to the first quarter of 2014. Commission revenue for the first quarter was $57.8 million, representing 27% year-over-year growth. Commissions from individual and family plan and ancillary products combined declined by 14% compared to the first quarter of 2014 due to a decline in the estimated number of revenue-generating individual and family plan members over the same time period, partially offset by continuing growth in our ancillary product membership.

First-quarter Medicare commission revenue grew by 135% year over year, driven primarily by strong renewal revenue on our existing book of business as well as growth in new member additions. Other revenue, which includes sponsorship, eCommerce on demand and non-commissioned Medicare revenue, was $3.5 million in the first quarter, a decline of 35% compared to Q1 2014, driven primarily by a reduction of approximately $1.5 million in our Medicare advertising revenue.

I now would like to address our commission revenue dynamics in greater detail, starting with the individual and family plan business. The annual decline in the first quarter individual and family plan commission revenue, excluding ancillary and small business products, was approximately 20% which is less than the 27% year-over-year decline in our estimated individual and family plan membership. We believe that some of the difference is attributable to favorable commission mix.

In addition, the commissions reported to us in Q1 imply that we may be benefiting from higher quarter-end estimated membership than we reported, which can be driven by either more favorable retention rates or payment rates on approved members, compared to our assumptions which are based on prior-year metrics for retention rates and for payment rates. Given the normal lags that we experience in receiving all of the data necessary to fully quantify these metrics, it will be several months before we can understand them more definitively.

Turning to Medicare, as Gary discussed earlier on the call, our first-quarter Medicare commission growth was driven by a combination of stronger first-year commission revenue as well as favorable renewal revenue on our existing book of business which continues to expand. In addition, first-quarter 2015 revenue benefited from a shift in timing of revenue recognition.

As we stated in our fourth-quarter earnings call, commission revenues were pushed out into the first quarter of 2015 from Q4 of 2014 as a result of a new regulation that requires commissions on Medicare Advantage and PDP products sold during the annual enrollment period not to be paid to brokers until January 1, which is the effective date of these policies, as a result of us not receiving commission information from certain carriers in the fourth quarter. The estimated benefit to our first-quarter revenue was just over $3 million.

In addition, another new CMS regulation dictates that all renewals for Medicare Advantage and PDP products now occur on January 1 rather than the historical practice of renewing on the anniversary of the policy's effective date. As a result, we now recognize all of the annual renewal revenue on Medicare Advantage and PDP products in the first quarter.

Historically, in the first quarter we recognized renewal revenues on the existing policies that were previously sold during the annual enrollment periods which made it the biggest renewal revenue quarter of the year given that the vast majority of Medicare Advantage and PDP plans are sold during the annual enrollment period. However, we also used to recognize some of the renewal revenues in Q2, Q3 and even Q4 for members who aged into Medicare during the year and enrolled into these products outside of the annual enrollment period.

2015 is the first year when these renewal revenues were instead booked in Q1. If we take into account these changes in timing of revenue recognition and compare first quarter 2015 renewal revenue to renewal revenue for the entire year of 2014, we grew revenue -- renewal revenues by 56% on that basis.

Our ancillary products also continued to perform strongly during the quarter with total commission revenues growing 25% compared to Q1 of last year. Our total estimated membership at the end of the quarter for all products combined was approximately 1.16 million members which represents a 10% decline over estimated membership reported at the end of the first quarter of 2014. First quarter 2015 estimated individual and family plan membership was approximately 584,900 members, and estimated Medicare membership was approximately 155,600.

Now I'll review our operating expenses for the quarter. It's important to note that first-quarter operating expenses reflect minimal cost reductions pursuant to the restructuring program that we announced in early March of 2015. We will start seeing the impact of the program in the second quarter, net of the investment we are making in our Medicare business.

The cost reductions primarily impact customer care and enrollment resources in our individual and family plan business and technology and content resources across the Company. At the same time, customer care and marketing expenses related specifically to Medicare are expected to increase in 2015 compared to last year as we invest in growth opportunities that we see in front of us in this important market.

Our first-quarter operating expenses declined as a percentage of revenues from the first quarter of last year. Strong top line growth, including significant contribution from Medicare revenues drove this decline. In absolute terms, non-GAAP operating expense, excluding restructuring charges, stock-based compensation and the amortization of acquired intangibles, increased 10% year over year, driven primarily by an decrease in marketing and advertising and customer care expenses while tech and content and G&A remained relatively flat.

During the first quarter we recorded $4.5 million in restructuring charges, including $2.6 million paid out during the first quarter related to the cost reduction program that we announced on March 11 of 2015. First quarter non-GAAP operating income, excluding restructuring charges, stock-based compensation and the amortization of acquired intangibles, was $4.7 million compared to a non-GAAP operating loss of $0.3 million in the first quarter a year ago.

First quarter EBITDA adjusted for restructuring charges was $5.8 million compared to EBITDA of $0.7 million for the first quarter of 2014. First-quarter 2015 non-GAAP earnings per diluted share, which also excludes the restructuring charges, stock-based compensation and the amortization of acquired intangibles, was $0.26 compared to non-GAAP earnings per diluted share of $0.01 in the first quarter a year ago. First quarter 2015 GAAP net loss per diluted share, which reflects the restructuring charges, was $0.12 compared to GAAP net loss per diluted share of $0.08 in Q1 of 2014.

Our cash flow from operations during the first quarter of 2015 was negative $11.2 million compared to negative $5.4 million in the first quarter of 2014. The negative cash flow was partially driven by seasonal patterns in our business, specifically we incurred increased marketing expenses during the Medicare annual enrollment period and the open enrollment period in the fourth and first quarters. A large portion of the fourth-quarter marketing expenses are paid out to our marketing partners in the first quarter.

Additionally, the open enrollment period ended on February 15 this year as opposed to March 31 in 2014, resulting in a greater portion of first-quarter marketing expense being paid during the first quarter compared to last year. As a result, in Q1 we reduced our accrued marketing expenses by over $7 million.

Also for Medicare Advantage products, we recognize a full year of renewal revenues up front during the first quarter and then collect commission payments from carriers on a monthly basis throughout the year. During the first quarter of 2015, our accounts receivable increased by over $6 million driven primarily by this dynamic.

Capital expenditures for the first quarter of 2015 were $0.4 million. Our cash balance was approximately $39.4 million as of March 31, 2015.

Now I'd like to address some of the sequential trends for the year and how they can impact our second-quarter performance. Starting with the top line, we expect that Q1 will be the strongest quarter this year in terms of total revenues. As I discussed earlier, during the first quarter, we recognized all of the renewal Medicare commissioned revenues that we expect to have this year on Medicare Advantage and PDP products or approximately $19 million.

During the second through fourth quarters this year, we will have no Medicare renewal revenues on those products for the first time as a result of the new CMS regulation. In addition, Q1 is characterized by strong first-year Medicare commissioned revenues. This is because during the first quarter we booked commissions not only associated with the new members who we enrolled during Q1, but also some of the new enrollments that occurred during the tail end of the annual enrollment period in the fourth quarter.

As previously discussed, starting in 2015 an even larger portion of commissions stemming from the annual enrollment period enrollments were recognized in the first quarter as a result of the impact from CMS regulations. By comparison, first-year Medicare commissions that we received in Q2 and Q3 will be seasonally lower as they are driven by new enrollments outside of the annual enrollment period.

Based on these factors, we expect a material sequential decline in revenue in the second quarter compared to the first quarter of this year. I want to remind you that these comments are based on current indications for our business which are subject to change at any time. We under take no obligation to further update these statements. And now we'd like to open up the call for questions. Operator?

(Operator Instructions)

Our first question comes from the line of Steve Halper of FBR.

So to confirm the shift in the revenue recognition on the renewal to January 1, that accounted for $19 million and subsequently that $19 million won't be recognized in subsequent periods in the year, correct?

No, the $19 million is the total amount of renewal that we recognized in Q1. And Q1 is typically our largest renewal quarter anyway because it does represent all of the accumulated sales we've made during the annual enrollment period over the history of the Company that are still paying at this point in time and also the Q1 renewals from Q1 sales. So it's always been our largest quarter.

So the majority of that $19 million is in the first quarter as it always has been. So that's just the total amount that I'm stating there at $19 million. But you are correct, as we move forward into Q2, Q3 and Q4, we won't have any renewals related to MA or PDP plans.

Right, can you size that impact out of the $19 million?

I don't have a number for you here today. I'll just say that the majority is Q1 as it always has been.

So it would have been in there anyway given the strong renewal trends that you saw?

That's correct. And that's why we gave the figure that -- the Q1 renewal amount compared to all of last year was up 56%. So we had strong renewal revenue growth and we're comparing basically year to year at this point.

Right.

Steve, the other point that we would make is that over the past several years as we've been building this business, there's been a lot of discussion about Medicare, especially Medicare Advantage retention rates, and what we're seeing especially in this past quarter is that the Medicare retention is developing as we had always hoped.

Thanks. And then the other comment -- the other question I have is as the visibility improves both on the IFP trends as well as Medicare and as you think about the restructuring effort, when are you -- when will the Company be in a position to provide more formal guidance for this year?

I don't think we're in a position to answer that as to a specific time at this point. I think we're going to need to see how things develop at this point and make a decision as we go.

But clearly the most important thing, as we said previously, is retention or attrition or churn in the individual book of business. And because of the lag that both Stuart and I described, it takes several months till we can see what really occurred near the end of this open enrollment period. I think important to note, again, that we did -- we think we're seeing higher commission rates, we may be seeing earlier commission payments, and we actually may have better retention than we'd estimated, but we don't know that yet.

And then I'm sure it's hard to answer the question is one of the different scenarios that you're looking at in case the Supreme Court strikes down subsidies at www.healthcare.gov. I know you can spend an hour talking about that.

Yes, yes, obviously we think a lot about it and who the heck knows which way this is going to go. It may take -- if the Supreme Court rules in favor of King, the plaintiff, it may take some legislation to fix this. Obviously we're talking to a number of legislators about that. So, yes, we're thinking a lot about it and we think about different scenarios here.

Thanks.

Our next question comes from the line of Toby Sommer of SunTrust.

I wanted to get into that retention in the IFP, if you will. Over the -- could you describe the process in the length of period of time that it will take for you to have a firmer grip on whether that retention is a little bit better? Thanks.

Well, that would typically take us somewhere between three to five months probably from now to have a full view going back to Q1 of how that retention fully developed.

So we're probably talking about a 2Q call in August and having a firm grip or even beyond that?

Could be at that point or a little bit after that.

Okay. I'm curious, what is left to develop on the Medicare side that you would require it to actually give us a dollar figure for the impact of the accounting change? Thanks.

Can you say that again? What would happen --

Yes. What do you have to learn in order to understand numerically in dollars what the change is to recording all the Medicare renewal revenue in 1Q versus spreading it out for the year. Because we've been given lots of numbers and percentages, but not just the net effect of that equation. Thanks.

Yes, there's really not much more to develop on that number. It's just we've given a lot of percentages, as you stated, and I think the pertinent number is the 56% year-over-year growth in retention revenue. And so that's the focus there.

Okay. I guess is it possible to express that in dollars?

It is, it's possible to express, yes.

Could you do it on the call?

I'm not giving that number today. I don't have it handy here.

Okay. I am curious, shifting gears a little bit, outside of the Medicare enrollment period, what sort of opportunity do you think there is to enroll people in this off-cycle enrollment, and how should we generally think about the spending required to do that? Thanks.

Well we're really enthused about the opportunity outside of the annual enrollment period. For example in this first quarter that we just completed, we grew applications for Medicare Advantage and Medicare Supplement, and primarily Medicare Advantage, I should add, by 59%. That's very significant. We've got a lot of agents that are occurring, we've got more product inventory, we've got more visibility in the market place, so we're enthused about that.

And there's an important -- couple of important things here. It obviously increases our member base, but it also generates revenue in Q2 and Q3 and Q4 as we're paid for these new members as they come on. We do spend some money here. We spend money on marketing to acquire these. We've got a partner channel that works closely with us, we do work in search.

So there's all of that, and we've actually are upping our investment around that because of the opportunity that we're seeing to go get it. But I just say it again, we're really pleased with what we're seeing so far outside of the annual enrollment period.

Okay. And my last question is do you have an expectation for or any kind of even broad expectation, it doesn't have to be specific, for cash flow or cash burn at this point because Q1 was pretty significant and I know there were some puts and takes that you described amply in the call?

No specific numbers on it, but I do expect to see positive cash flow from operations in total for the remainder of the year. From this point forward to the end of the year, I would expect us to generate positive cash flow.

Okay. Thank you very much.

Our next question comes from the line of Dave Francis of RBC Capital Market.

I guess I want to try and ask the question a little differently on how the revenue flows and water falls from here going forward. As you can gather, we're having a hard time getting our hands around the cadence of revenue flows relative to the accounting changes and just the changes in your business plan and business model relative to the ACA.

Can you give us a little bit better sense as to how you guys look at the business today given all of the changes that have come in and understanding that Q1 is clearly going to be a -- the big revenue quarter for you guys, how does it flow from here? I mean, can you give us a better sense as we try and get our hands around the business model as I imagine you guys are doing the same?

Sure, yes. So a couple numbers I gave were intended to help with that. One is that the total renewal revenue for Q1 was $19 million, and so that's a number for Q1 that you can reduce and get to more --

Stuart, I mean, we got the numbers and we can play with the numbers any which way. But I guess, again, trying to get your sense as to how you guys are looking at the business, you got a better sense of it than we do. It's -- clearly from where the revenues came in this quarter versus where not just us, but I think a lot of my peers were, it's pretty clear that the cadence of how the revenues come in is changing pretty considerably. And what can you tell us to help us get a better handle around the mechanics around that so that we can have a better handle on putting numbers together on our end?

Well clearly this is a more seasonal business. The majority of the application flow in the individual business happens in a short period of time, the same in the Medicare business. But -- and so you're going to see a -- you saw a larger Q1, you're probably going to see the same thing next year in the first quarter.

But let me add to that, this isn't just all about timing, this is about momentum and it's about a lot of volume that we've generated. The growth rates that we've got in this Medicare business we think are quite substantial. We continue to be disappointed in the entire market place in the individual business as we look out at it. But as we indicated, we don't yet have a good handle -- we don't feel confident that we know enough about churn, but we like what we've seen with the commission rates, it may be better retention than we thought.

So you put all that into the mix and at some point we'd like to be able to provide guidance, but we don't want to do it until we're confident that we've got a good handle on all of this. But, sure, the first quarter is a bigger quarter, as Stuart said, sequentially the second quarter is going to be less. But he also said we're going to be -- he expects to be positive cash flow from operations for the year. So we're looking at all of this right now.

All I can tell you at this point, absent giving guidance is that we're really pleased not just with what we've seen in the quarter, but more importantly the momentum behind that supports all of this.

So let me ask you an operational question along those lines, and again, trying to get a handle on -- I understand you guys are trying to get a handle on the churn rates and what have you. Is there something that you guys can be doing differently from an engagement perspective, either engagement with your customers or an engagement level with your insurance company partners to be getting better data such that you're not necessarily managing the numbers from a rear-view mirror perspective, but more in real time to understand what's going on in real time with the business rather than waiting for data to come in from your partners what sounds like six to nine months down the road?

Well we've worked with them over time to improve that, but it's really a function of the fact that they collect the cash and pass it on to us and we're always going to be rear-view mirror somewhat to the extent that we're not collecting the cash, so that's one.

I'd say another piece of this, though, is that not all of the consumers pay monthly. Some pay quarterly, some pay every six months. And so even if we had a tighter flow from the carriers, we're still not going to fully be able to understand who's churning every three months if they're paying every three months or who's churning every six months if they're paying every six months. That piece of it is a little bit of a hurdle for us.

It's a hard one and we've tried to get more insight and visibility and get the data sooner. One of the large carriers recently commented that they have the same issue. In fact, the comment, and I'm paraphrasing was something the lines that we just wish that these members would call us up and thank us for the health insurance and tell us that they're going to terminate, but they don't. We don't find out for a few months when they stop paying and that's how the carriers deal with it, then we get it in those arrears as well.

So it's a difficult one. It's one we've not been able to solve and it's a carrier issue as well as it is for us. So we're somewhat down the tail on all of this. And it's frustrating for us.

Thank you.

But it's a characteristic of this part of the business.

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

I wondered if we could talk about the IFP revenues per member which were much better than expected? And in your prepared comments you suggested part of that was mix and then part of that was your estimation, the numbers which may have been conservative. I'm just trying to see if we can get a breakdown of how much might have been in each of those buckets, in particular can you talk more about the mix that you saw?

Yes. So that was what I commented on that it's still going to take us a few months of getting the commissions off of Q1 before we can parse out how much of this is related to churn versus how much of it's related to the rate of payment on members. We're still collecting cash off of Q4 even now. Q4, not Q1, but back to Q4, we're still collecting cash from that. And so I'd say in a couple months we'll be able to break out those different buckets.

No I understand you're still collecting off Q4, but you therefore are getting a sense of what that mix looks like, and I think the suggestion you're making is that that mix has improved and I'm trying to understand how significant that mix change has been. Or commission rates or however you want to define the -- what you're learning.

Yes. Well we are seeing improved commission rates. I think it's a little bit -- it still is a little bit early on this, but we could be seeing in excess of 5%, possibly even 10% improvement in commission rates. And we'll have to see how that further develops, but that may give you at least a general sense of what we may be seeing there.

We also may be seeing earlier payments of commissions from a timing standpoint, that they may be coming faster. There are some indications that that's happening. But we'll see if that continues.

And then finally it may be better retention and that's the one that takes a lot longer for us to understand, and that's what makes me reluctant to really break out a pie chart, basically of how much is coming from what place because it may be that the churn is better than we estimated.

Understand. Okay and Gary, on the ancillary products side, can you just give us a general sense of where you're seeing success there and where your marketing focus has been?

Yes, George, we've just had to -- we continue to have really good attach rates to the major medical products that we sell, dental, vision, accident as well. And of course, we've always done well with short term. But these dental and vision in particular are just attaching in a nice way. We've done some work over the past year or so to improve the consumer flow so it's easier to do that and to see those.

And as we've commented previously, we've already spent the acquisition costs on getting the major medical product here and sold. So in many ways these ancillary products almost flow as pure margin on top of that because there's no direct acquisition costs associated. So just a combination of things. The products are better, we've got a better line up of those products, I think we're probably doing a better job presenting them. They're not expensive, and as a result of all that we continue to see really good attach rates.

Appreciate it. Thanks, guys.

Our next question comes from the line of Stephen Lynch of Wells Fargo.

Hay, guys, thanks for taking my questions. Most of mine have been addressed at this point, but maybe if you could give us a little bit of an update on what you're seeing in terms of competition for key words in the paid search advertising space for the IFP business? And then maybe also how your client acquisition costs are trending in the Medicare business, that'd be great.

Yes, I'd say on the individual and family side we continue to see strong competition in Q1. We mentioned it in Q4 that we saw strong competition there, and I'd say that the heaviest competition is from the carriers at this point, and they continue to drive that in Q1.

From a Medicare standpoint, we're seeing good improvement in our cost of acquisition year over year. We saw improvement in Q4 and we saw improvement again in Q1. And that's one of the reasons we're able to generate the growth in Medicare that these rates that we're talking about with new applications, we're seeing good cost of acquisition that allows us to spend into that.

Is the improvement in the client acquisition costs there in the Medicare business, is that being driven primarily by a shift toward direct leaves or is it marketing partners or can you give us a sense for what's driving that?

Yes, it's a combination of things. Our paid search has been going well, we've been expanding our partners and I'd say more of a shift probably from the paid search channel to the marketing partner channel as we grow that out.

And we're also seeing an interesting dynamic there as well which we observed in our individual business several years ago. And this is more anecdotal, but there's more and more word of mouth, and that impacts the acquisition costs because it's essentially nominal or free. So it's a combination of all of those things.

And we've also got more product supply, and with more product supply there's more choices and a consumer is more likely to choose something. And so what's really key -- in fact, what the most important element in cost of acquisition is conversion.

Got you. And then finally maybe more of a housekeeping question, and I may have missed it, but are you guys expecting to incur any amount of material restructuring costs in Q2 or is pretty much all that behind us?

I'd say pretty much all that's behind us. There may be a little bit trickling in from what we've already done in Q1. But it's nominal at this point.

Okay. Thanks, guys.

Our next question comes from the line of Steve Rubis of Stifel.

Hey, guys, I actually tried to take myself out of the queue, I don't have any questions at this time. Thanks.

Our next question comes from the line of Jason Mitchell of Bank of America.

Hi, guys, this is Jason here for Nat Schindler. I wondered if you could talk about churn on the IFP plans during the quarter. Did you have any sense of some of that churn was people switching from subsidy plans to non-subsidy plans or vice-versa that were maybe already members?

And then overall churn was a new high this quarter. How do you see the IFP business moving forward? It sounds like you're emphasizing more of the Medicare and refocusing your spending there, so can you talk about how you think about the IFP plan business, maybe some of the takeaways you got from this enrollment season? Thank you.

Well I'll let Stuart handle part of that, but just on the individual business, I want to emphasize this is a key business for us, it's core to the Company. We're invested in it. We've certainly rebalanced our -- the expense structure around that business as we needed to do. But we continue to push on that business. When there are opportunities that present themselves, we'll evaluate them and go after them.

And I'll give you an example of that. Right now as we speak, we are marketing and selling qualified health plans to subsidy-eligible individuals. We were hardly able to do that at all during the open enrollment period a year ago. And outside the open enrollment period a year ago, we didn't do any of it, now we are. And that's a really unique opportunity that we're very, very enthused about.

The Medicare business, I think the numbers speak for themselves. We have invested in that, it's worked. We're going to invest more because we think we have the opportunity to grow at these rates or even higher rates. It's a huge market place, it's incredibly exciting to us.

Yes and I'd just say on the churn, I will point out that, again, it is an estimate. We -- our process is to use the historical numbers from a year ago to make those estimates. And so we're looking back to last Q1 and OEP, and when we look back at Q1 a year ago, we actually saw higher churn than we originally estimated and reported for Q1. As we went into Q2 and Q3, we've found that there was higher churn that related back to Q1, and so we're using that updated number to inform this year's calculation.

So -- and this gets back to my comment that the commissions that are being reported to us in Q1 would indicate that we may be understating our membership number which would increase the churn that you're seeing.

But we won't know that for several months.

Okay, great. Thanks, guys.

Our next question comes from the line of Scott Fidel of Deutsche Bank.

So going to the higher commissions in the IFP business and then thinking about the potential impact of mix on that, how do your average commission rates or on a dollar basis compare in the QHPs, and the qualified health plans, as compared to non-QHP products?

The QHPs appear to be giving us higher commissions than the off-exchange plans. The premiums appear to be higher that consumers are selecting with those QHPs. I'll likely give more data on this when we fully develop more numbers across OEP, probably next quarter. But directionally, that's what we're seeing.

And do you think the variance between the two is significant enough that that could explain the higher commission rates? I'm just interested if you're actually seeing -- when you think about 5% to 10% higher commissions, is the base rates actually going up or could it just be that now you have almost half of the IFP business and QHPs that that really just drove that -- those increased revenue yields?

That could be a factor. There is a deferential there that could be a good part of that.

Okay. And then had a follow-up question on the Medicare side with the application growth that you saw in the first quarter, did you see that pretty well balanced across numerous carrier partners or did it seem like there were one or two carriers out there that seems to be driving an inordinate amount of the growth in the first quarter of this year?

We saw good growth across the spectrum of our carrier partners.

Okay. Thanks.

(Operator Instructions)

Our next question comes from the line of Toby Sommer of SunTrust.

Had a question to see if you have any plans and opportunity you think to sign up any new partnerships that could drive more traffic and help out the profitability side? We haven't really talked about that kind of thing awhile on one of these calls, and I just wanted to get an update. Thank you.

Yes. Well we've got a very active business development and partnering group. That's one of the things -- one of the areas that's contributing to our Medicare momentum. We think about that in the individual business. We got a number of partners there that have been good ones, we expect them to continue to be and we're always looking for new ones.

So, yes, very active. And I'd maybe -- and probably in this next quarter we'll provide an update on a few of those new partners that we've brought on.

Thank you.

Our next question comes from the line of Steve Halper of FBR.

So we understand the -- you have the costs coming out based on the cost reduction program and a certain percentage of that is going to go to building the Medicare business as you stated previously. But as we think about the rest of the year, do you -- what sort of magnitude of decline in marketing and advertising expense do you expect? Last year you had a steep drop off, but then the enrollment periods changed for individuals, so if you could just give us some flavor of that. And we assume a big -- and should we assume another big pick up around fourth quarter?

Yes, I would expect a fairly significant drop off in that, particularly in off season for individual and family. Last year you saw much lower volumes for individual and family and you could use a range around the numbers from a year ago to estimate the spending in that it's very closely linked to those volumes. But I guess I would just look at those kind of volumes.

And then on Medicare, I would likely see that dial up from a year ago, but with our cost of acquisition coming down, that'll mitigate it some.

Right. And then the spike up again in the fourth quarter given Medicare and IFP open enrollment.

Right, definitely a spike up in the fourth quarter.

Right. Got it, thank you.

Thank you. And that does include our Q&A session. I'd like to turn the conference back over to Mr. Gary Lauer for any closing remarks.

Well thanks, everyone, for taking the time this morning and we look forward to speaking with many of you individually as well. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.