eHealth Inc (EHTH) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the eHealth Incorporated Q3 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder today's conference is being recorded.

I would like to introduce your host for today's conference call, Ms. Kate Sidorovich, Vice President of Investor Relations. You may begin ma'am.

Thank you. Good afternoon and thank you all for joining us today either by phone or by webcast for a discussion about eHealth, Inc.'s third quarter 2015 financial results.

On the call this morning -- this afternoon, we will have Gary Lauer eHealth's Chief Executive Officer and Stuart Huizinga eHealth's Chief Financial Officer. After the 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 statements on this call that include statements regarding future events, beliefs, and expectations, including our expectations about the Medicare market opportunities, our strategy to scale membership and the recurring revenue base for the Medicare business, our belief the we're well positioned for the Medicare annual enrollment period, strong growth in Medicare applications in this AEP, our ability to offer an extensive selection of Medicare products, the effectiveness of our marketing program, our expectations for the upcoming open enrollment period in individual markets, our ability to carefully monitor market environment and marketing cost, our member acquisition strategy, our strategy going into the fourth quarter, our expectations regarding high government advertising spend in the individual market, managing our individual and family plan business for profitability, our expectation that submitted applications [in the active] business will decline in open enrollment period, the expected timing of open enrollment period, sequential trend for the year and the potential impact on our fourth quarter, expected increase in operating expenses, including marketing and customer care expenses in the fourth quarter, high application volume during the fourth quarter, the expected increase in fourth-quarter revenue driven by the expected increase in Medicare revenue and our expectations that a portion of the Medicare revenue from the annual enrollment period will get pushed out into the first quarter. Also attrition of our individual and family membership base, expected decline in the fourth quarter IFP commission revenue and our expectations about our fourth quarter EBITDA.

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

Forward- looking statement 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 report 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 conciliation 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 About us Section of our corporate website under the heading Investor Relations.

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

Thanks, Kate, and thanks everyone for joining us today. We're pleased with our third quarter 2015 results which demonstrate continued execution just two quarters after implementing a cost rebalancing program. Third quarter revenues and earnings exceeded our expectations. We generated good cash flow and remain debt free.

In Medicare, an important investment area for us, we grew Medicare Advantage applications by 140% compared to the third quarter a year ago and grew our estimated Medicare Advantage membership by 64% compared to the estimated membership we reported for the third quarter of 2014.

During the third quarter in preparation for the Medicare annual enrollment period which started on October 15, we invested in the customer care operations required to handle the application volumes we anticipate and we were still able to deliver solid EBITDA and net income.

In our individual and family plan business, the number of submitted applications and the estimated member base declined as expected outside of the open enrollment period. Our current strategy in the individual business is to focus on profitability and cash flow generation.

Third quarter revenue was $38.2 million, EBITDA was $5.8 million, and GAAP earnings per share were $0.20. During the quarter, we generated approximately $10.9 million in operating cash flow to bring our cash balance as of September 30 to $62 million.

What I'd like to do now is review several highlights of the quarter, starting with Medicare. Growth in submitted Medicare applications continued to accelerate throughout the year. Third quarter 2015 submitted Medicare applications, as I stated earlier, grew 140% compared to the third quarter a year ago. In the first and second quarters of 2015 this year, our submitted Medicare applications -- Medicare Advantage applications that is, grew 79% and 88% respectively compared to the same quarters a year ago.

The unit economics we estimate for Medicare Advantage products are attractive and the Medicare Advantage product is currently at the core of our Medicare strategy. Total Medicare applications which also include Medicare Supplement and prescription drug plan products grew 67% year over year. These strong application growth numbers outside of the annual enrollment period are illustrative of the significant market opportunities we are pursuing in Medicare and are indicative of this becoming a year-round business for us.

We are certainly encouraged by the growth in Medicare applications and membership that we're able to generate over the past three years. At the same time, we are not pursuing growth at our reasonable levels of spending. In fact, per unit Medicare acquisition costs continued to decline on a year-over-year basis with the average cost of acquisition per submitted Medicare member being approximately 40% lower in the third quarter of 2015 compared to the third quarter a year ago.

By the way we calculate the average cost of acquisition per Medicare member by dividing variable Medicare marketing and advertising costs by the number of applications per Medicare Supplement and Medicare Advantage products submitted during the quarter.

Our strategy for the Medicare business is to build a foundation for meaningful future margin expansion by scaling membership and the recurring revenue base. Our total estimated Medicare membership at the end of the quarter was 182,700 members or 51% growth compared to the Medicare membership we estimated at the end of the third quarter of 2014. Third quarter Medicare revenue was $7.7 million comprised of approximately $6.7 million in commission revenue and $1 million of Medicare advertising revenues.

As a reminder, 2015 is the first-year win as a result of a recent new CMS regulation we booked almost all of our Medicare renewal commissions on Medicare Advantage and prescription drug plan products during the first quarter. Historically we had recognized Medicare renewal revenues throughout the year.

The Medicare annual enrollment period, or AEP, started two weeks ago on October 15 and will run through December 7 of this year. During the third quarter we prepared for this critical season by expanding our dedicated Medicare customer care and enrollment team and launched some early marketing campaigns to generate visibility and demand on our platform ahead of the AEP. You can see this reflected in the increase in our third quarter operating expenses. At the same time we were able to deliver good overall profitability.

We believe that eHealth is well positioned for this annual enrollment period with an extensive selection of Medicare products and effective marketing programs including a combination of in-house and partner based initiatives.

Turning to our individual and family plan business, during the third quarter we generated 22,500 individual and family plan submitted applications, down approximately 5% year over year. The annual decline in submitted applications is reflective of our current focus on both unit economics and the overall profitability of our individual business.

In addition to cutting fixed cost as part of our cost reduction program, we also adjusted our variable market spend in this market resulting in a decline in our overall marketing costs in the individual business. We also continue to observe higher average commission dollars on a per estimated member basis across our individual and family plan member base for the third quarter compared to a year ago. As we shared with you on our last earnings call, we believe that some of this can be explained by qualified health plans having higher average premiums than non-qualified health products. We were able to sell qualified health plans in greater volume during this last open enrollment period.

During the third quarter outside of the open enrollment period we continued to successfully enroll subsidy-eligible individuals into the qualified health plans, or QHPs, through the federal exchange with QHPs representing approximately a third of our total submitted individual and family plan applications for the quarter.

Our ability to enroll subsidy-eligible individuals into qualified health plans in future periods will depend in part on CMS regulations and mandates and our ability to have an effective technology connection into healthcare.gov.

Our estimated individual and family plan membership at the end of the third quarter was approximately 518,000, down 9% compared to the estimated membership we reported for the second quarter and 21% compared to the estimated membership reported for the third quarter a year ago, 2014.

It's important to note here that outside of the open enrollment period there is not enough application opportunity for us in the individual market to offset the attrition in this business. And Stuart will provide more details on our individual and family plan business, including third-quarter revenue dynamics later during this call.

The next open enrollment period in the individual market is scheduled to start in just a few days on November 1, and is scheduled to run through January 31, 2016 next year. As the open enrollment period kicks off, we expect to carefully monitor the markets, environment, and opportunities and we'll spend on member acquisition where we think it makes sense.

Going into the fourth quarter, our strategy is to pursue the fast-growing Medicare market with much of our acquisition spend focused on this business. In the individual market where high government advertising spend is expected once again, we will watch our marketing cost closely and plan to continue managing this business for profitability.

As a result, I expect that we'll generate larger Medicare application volumes in this annual enrollment period compared to last years and at the same time expect to see a decline in the individual and family plans submitted applications during the upcoming open enrollment period compared to the prior one.

Once again, we are pleased with our results in this third quarter and highly optimistic about significant growth opportunities in the Medicare business as evidenced by yet another strong Medicare quarter.

And now I'd like to turn the call over to Stuart Huizinga. Stuart?

Thanks, Gary, and good afternoon everyone. I'd like to review our third quarter financial results in greater detail and provide some directional comments for the fourth quarter of 2015.

Our third quarter 2015 revenue was $38.2 million compared to $41.2 million in the third quarter of 2014. Commission revenue for the third quarter was $34.9 million compared to $36.2 million in the third quarter a year ago. Third quarter Medicare commission revenue grew by 10% compared to the third quarter a year ago driven primarily by new member additions. Our estimated Medicare membership at the end of quarter was 182,700, an increase of 51% compared to the third quarter of last year.

I'd like to remind you again that 2015 is the first year when we booked the vast majority of renewal revenues on our Medicare Advantage and Medicare prescription drug plan members during the first quarter as a result of the new CMS regulation.

In 2014, we recognized these renewal revenues throughout the year. So the year-over-year comparisons of our third quarter Medicare commissions are impacted by this change in the timing of revenue recognition.

If you look on a year-to-date basis, our Medicare commission revenues for the first three quarters of 2015 grew 76% compared to the first three quarters of 2014. Commissions from individual and family plan and ancillary products combined declined by 6% compared to the third 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 an increase in average commission revenue per estimated individual and family plan member.

Our estimated individual and family plan membership at the end of the third quarter was 518,000 members, down 21% from the third quarter a year ago. The year-over-year decline in estimated individual and family plan membership was expected and reflective of our decision to manage the individual business for profitability while reducing dedicated customer care and marketing spend in this area. It also reflects our estimates of churn in this business, which we cannot offset through new member additions during a seasonally low application quarter outside of the open enrollment period. At the same time, we estimate that our current individual and family plan members on average generated higher commission dollars per member compared to a year ago. This is one of the reasons why our third quarter individual and family plan commission revenue declined just 6% from third quarter 2014 level compared to a 21% decline in the estimated individual and family plan membership for the same time period.

Other revenue, which includes sponsorship, e-commerce on demand and non-commission Medicare revenue, was $3.3 million in the third quarter compared to $5 million in Q3 2014. The decline was driven primarily by a reduction in Medicare advertising revenue of approximately $1.9 million.

Our estimated third quarter 2015 ancillary product membership was 397,400 representing 4% annual growth. Our total estimated membership at the end of the quarter for all products combined was approximately 1.1 million members, which represents a 5% decline over estimated membership reported at the end of the third quarter of 2014.

Now I will review our operating expenses for the quarter. The total dollar amount of third quarter operating expenses declined compared to the same quarter a year ago. At the same time, third quarter operating expenses grew as a percentage of revenue over the same time period. Underneath that operating expenses in our individual and family plan business declined year over year driven by lower spend in marketing and customer care and enrollment areas.

Our technology and content expense also declined meaningfully compared to Q3 of last year, both on an absolute basis and as a percentage of revenues. These results reflect the successful implementation of our cost reduction program earlier this year. At the same time, we continue to invest in our Medicare business as reflected in an increase in Medicare-related marketing and customer care and enrollment costs compared to the third quarter a year ago. We believe that we are well positioned for this annual enrollment period and invested accordingly to prepare for the Medicare application volume we anticipate.

Third quarter 2015 non-GAAP marketing and advertising expense, which excludes stock-based compensation expense was $8.9 million or 23% of revenue compared to $8.5 million or 21% of revenue in Q3 2014. The impact on overall marketing costs from strong growth in submitted third quarter Medicare applications was largely offset by lower acquisition cost per submitted Medicare member and a decline in individual and family plan related marketing costs compared to a year ago.

Similarly, customer care and enrollment costs were nearly flat on an absolute basis compared to Q3 of last year as lower individual and family plan related customer care costs served to offset our investment in Medicare dedicated customer care resources.

Third quarter 2015 non-GAAP customer care enrollment expense, which excludes stock-based compensation expense, was $9.3 million or 24% of revenue compared to $9.6 million or 23% of revenue in Q3 2014. Third quarter 2015 non-GAAP technology and content expense which excludes stock-based compensation expense was $7.7 million, or 20% of revenue compared to $9.7 million or 24% of revenue in Q3 2014.

Third quarter non-GAAP operating income, excluding stock-based compensation and the amortization of acquired intangibles, was $4.8 million compared to $6.4 million in the third quarter a year ago.

Third quarter EBITDA was $5.8 million compared to EBITDA of $7.5 million in the third quarter of 2014.

Benefit for income taxes for the three months ended September 30 2015 was $700,000 compared to a provision for income taxes of $2.2 million for the three months ended September 30, 2014. This reflects a benefit from a decrease in our liability for unrecognized tax benefit of $800,000 due to the expiration of the related statute of limitations on those previously unrecognized tax benefits.

Third quarter 2015, GAAP earnings per diluted share was $0.20, compared to GAAP earnings per diluted share of $0.08 in Q3 of 2014. Third quarter 2015 non-GAAP earnings per diluted share, which also excludes stock-based compensation and the amortization of acquired intangibles was $0.30 compared to a non-GAAP earnings per diluted share of $0.17 in the third quarter a year ago.

Our cash flow from operations during the third quarter of 2015 was $10.9 million, compared to $11 million in the third quarter of 2014. Capital expenditures for the third quarter of 2015 were $900,000. Our cash balance was approximately $62 million as of September 30, 2015.

Now I'd like to address some of the sequential trends for the year and how they can impact our fourth quarter performance. As you know, both the Medicare annual enrollment period and the first two months of the open enrollment period in individual market take place during the fourth quarter. So the fourth quarter is seasonally highest for us in terms of operating expenses given that our marketing and customer care spend is highly correlated with the volume of applications submitted during the quarter. Accordingly, you should expect to see a significant sequential increase in both of these areas compared to the third quarter of this year.

Regarding revenue, we would expect to see a sequential step up in fourth-quarter revenue compared to the third quarter of this year, driven primarily by the expected increase in our Medicare revenue. Fourth quarter Medicare revenues should benefit from first year commission revenue on new enrollment.

It's important to note, however, that a portion of the revenue that emanates from the annual enrollment period gets pushed out into the first quarter as a result of a combination of CMS regulations, carrier reporting and our own revenue recognition policies.

We expect for individual and family plan commission revenue to decline in the fourth quarter compared to the third quarter of this year as a result of ongoing attrition in our membership base which we do not expect to be fully offset with new individual and family plan member additions during the fourth quarter. New individual and family plan enrollment processed during the open enrollment period are for plans effective January 1 and therefore do not become revenue generating members until the following year.

For the fourth quarter we expect EBITDA to be negative, driven by seasonally high operating expenses, as we're investing in both the Medicare annual enrollment period and the open enrollment period in the individual market.

Just as a reminder, we expense all member acquisition costs upfront, while commission revenues get recognized over the life of a policy. I want to remind you that these comments are based on current indications for our business, which are subject to change at any time. We undertake no obligation to further update these statements.

And now we'd like to open up the call for questions. Operator?

(Operator Instructions) George Sutton, Craig-Hallum.

That was close, it's George. Guys, relative to Medicare, obviously price increases are going to be fairly significant for this new period. Can you talk about how that affects your demand, how that might affect the commission dollars you see and potential customer turnover?

George, this is Gary. In Medicare, as you may know the commissions are actually fixed through CMS. Carriers go to CMS, they get the commission rates approved and those commission rates this year are actually up a bit interestingly. And there have been some price increases on Medicare advantage, although not too significant. So we haven't seen anything that indicates that there is any dampening effect on the marketplace, demand, affordability and so on.

Now relative to your IFP business, you talked last quarter about how many of the states might be forced to transition away from the aggressive marketing that they had last year. Could you give us an update on what you're seeing from a state exchange perspective?

Well, we haven't seen anything yet of course because we're a few days away from the beginning of this. We only know what we read in media which is that some of the states are finding it difficult to be able to fund the marketing, the advertising, some of the other activities because most of the federal government funding is now gone per the legislation.

But we still -- we still expect there's going to be quite a bit of government spending on advertising and marketing. And what's interesting about that is you've probably seen from Health and Human services the projections for enrollment in this coming -- open enrolment period are certainly less than it had been expected a few years ago with the stuff that came from Congressional Budget Office.

So how that all that goes into the mix, none of us know and that's why we've made the comment that we're just going to be monitoring and watching this very, very carefully. And where we find opportunities that make sense in terms of what we'll spend, we'll pursue those, but we're certainly not going to go after this part of the market where it doesn't -- where the economics don't work for us.

And lastly, Stuart, the tax benefit you saw in the quarter it sounds like that was a one-time benefit, correct?

Yes, that's a one-time benefit, yes, statute of limitations ended on certain items that we were previously reserving against basically and we were able to take that reserve off and recognize that.

Tobey Sommer, SunTrust.

Good afternoon, this is Kwan Kim in for Tobey. What proportion of Medicare enrollment has usually occurred within the confines of open enrollment and how much is the shift in coming years? Thank you.

Well, typically during the annual enrollment period at least historically for us over 60% of the application volume, the annual application volume is prudent. So it's obviously a big season. And of course as everyone knows it's the season that once -- it's the time of the year that once you are on Medicare you can switch products you can't during the rest of the year, hence that high volume.

However, with the very strong application volume we've been experiencing, the very strong demand we've been generating outside of the annual enrollment period and you've seen those in the growth rates over the past three quarters now for the second and third quarter of this year, I think you're going to see that in the next few years this is going to skew a bit that it's going to be less than 60% of the annual total volume happening in the annual enrollment period. And more of that's going to be moving out outside of the enrollment period which we like a lot because as I think I commented this is looking more and more like a year-round business and not a business that runs for just several weeks near the end of the calendar year.

Got it. And are you able to sell more seamless in healthcare.gov than last year?

Well, in the first year because of the -- all of the technology challenges that the federal government had we really didn't have any connectivity to be able to enroll subsidy-eligible individuals. Last year we had some better connectivity and we've had good connectivity throughout this year. We would hope that that continues in and through this open enrollment period.

And one more question. How has traffic on your Medicare website changed since the revamp?

Kwan, could you repeat that question?

How has traffic on your Medicare website changed since the revamp?

The only thing that we've revamped is Medicare.com, which is a property that we purchased, gosh, I don't know, year-and-a-half, two years ago. But our traffic, our volumes everything continued to increase. I mean, my gosh, if you look at Medicare advantage applications growth of 140% there is evidence of it right there.

So we're seeing it increase because of our own efforts, both internally as well as through partners, and probably most importantly you've just got organic growth happening in the marketplaces as more and more Americans are turning 65 years of age so the demographics are very favorable there as well.

Steve Rubis, Stifel.

Thanks for taking my questions. I have a few. First, right now the government exchange seems to be experiencing rising premiums and through the other things we've seen in the market UnitedHealth seems to have recommitted to sort of the subsidy-eligible business. So I think it's positives for eHealth or negative?

Well it's a mix. Certainly having United back into the business -- in the first open enrollment period United essentially didn't participate. Then they came into more stakes last year and more this year, that's good. United has got good products. We've always been a big seller of United products, so that's good for us.

Right across the market premiums continue to increase. We see it in the survey, work that we do with our own member base and the applications that we get. We see it in an independent study work that's done outside and that's published. And it's good and it's not good.

I mean you could -- the economics maybe are good for us because what we are paid is a percentage of premiums. As those premiums go up, the absolute dollars we earn are more. But that's very much offset by the fact that if these premiums continue to go up, these products become less and less affordable to people and we don't like that. We want these products to be affordable and attainable for people to be able to get to them and to want them to enroll in them. And there has been a lot written about this recently that even with subsidies this is getting to be very expensive for people. Eye for one hope that the pricing inflation stabilizes.

Great. And then my last question and I'll give my time to everyone else. Can you talk a little bit about the risk exposure for the IFP business as we head into open enrollment, especially around the sort of consumers who received the subsidy last year or this year I guess, but didn't file a tax return. I know that there is -- it seems like a decent number of people, and I am just wondering which end of the spectrum do you serve, if it's the very course end of the subsidy-eligible or are we talking more of a high end or all across board, any color you can give would be great?

Well, it's an interesting question. If fact there was an article about this in the Wall Street Journal yesterday on the -- actual just on the inside of the cover of the second page. I can't say we've had a lot of experience with that at this point. We're certainly very focused on retention with all of the individuals and members that we have on our base. That's one of the things that we're looking at.

Because we didn't have a lot of good connectivity early on, we still don't have a large portion of our member base being subsidy eligible although that portion is certainly growing. But we're going to have to see what it looks like in this open enrollment period with retention and different reasons why people may be switching plans or reaffirming their subsidy eligibility and so on and these are all questions that remain to be addressed and answered.

We think we've got a pretty good handle on all of this, but we'll see once we get into this. So, yes, I think you do raise an interesting point there, which is many people who may have the subsidy eligible but for various reasons can't keep the subsidy.

Great. Thanks for the color on this question.

Stephen Lynch, Wells Fargo.

Thanks for taking my questions. You provided the Medicare advantage application growth numbers for Q1 and Q2 that are comparable to the 140% growth in Q3. Could you also give us a sense for what the growth rates were in Q1 and Q2 for Medicare advantage membership?

Stuart, do you have that handy?

Let's see. I don't have it right at my finger tips. Give me just one sec.

You may just dump this on this one.

There's no problem.

I think it was close to 50% growth in Q2, if I remember correctly, yes.

So is it safe to say that you are seeing a similar like acceleration trend there that's sort of reflective of what you're seeing with the acceleration in growth in application?

Yes, Q1 was about 35% and then it stepped up to about 50% last quarter. So, yes, we have seen some acceleration there.

Okay, that's great. The Medicare business seems to be performing very well. Is there any -- can you help us frame the size of the addressable market for the Medicare advantage business maybe in particular and then give us a sense for where you stand today in terms of penetration? I guess what I'm wondering is, how long can we expect to see you guys experience really high growth rates like this? Thanks.

Well, we think that we're just a blip in the market right now in terms of what's available. You've got about 47 million Medicare beneficiaries across the country today. As to me, that's going to grow to 65 million to 70 million over the next several years as people ageing and life expectancies are longer.

You've got some place around 20% of these beneficiaries are Medicare advantaged, but that number is growing. So we feel really optimistic about what we can do here. We think that the market opportunity is very, very large. We're a small piece of it right now, very small, but growing very fast into it.

We're just 4% or 5% of this market, which we have been in the individual business. This Medicare business is a very, very significant business for us, multi -- hundreds of million dollars of revenue and really good EBITDA at some point if all of that continues and that's what we're focused on.

So it's one of the reasons why we are investing in this -- the way we have been over the last several years. We've seen what the market demographics look like. We've seen -- we see what the retention is on these products, what the unit economics are, it's just very, very compelling to us.

Great. And then maybe my last --

Go ahead please.

Yes, I was just going to say, maybe my last question and then I will hop in the queue, you mentioned that qualified health plans accounted for about a third of the members in the third quarter. Can you give us a sense for what that was, what the mix looked like a year ago third quarter of 2014?

Yes, actually I want to clarify that, about a third of our applications in the third quarter were QHPs and they don't all necessarily matriculate into being members, about a third of the applications. And Stuart -- certainly a year ago it was less, I don't have that handy.

Yes, I mean, if you go back to -- I mean, Q3 a year ago was just a trace. I think it was just a very small percentage. We really didn't step up to these higher percentages until about last OEP.

Yes, we really didn't have connectivity that worked effectively till the end of this last open enrollment period. So when you look back a year, two years ago there wasn't much opportunity to enroll subsidy-eligible individuals unfortunately. We were very vocal about that but here we are today now at least to this moment we are able to.

Thanks guys. Nice quarter.

Dave Styblo, Jefferies.

Thanks for taking the question. Let me just start on the IFP and obviously the challenges that you guys are still facing there. I think you had thought the attrition was in line with your expecting. But I guess it was quite a bit more than what I was thinking. And as we've kind of rolled forward to the managed care earnings and hear what they have had to say about the individual market the challenges there that it's more risk adverse market than they thought. You've heard the Obama comments about only expecting about 1 million new lives. Has that influenced sort of what you are thinking about the strategies? I know you are sort of -- it sounds like you should have taken a little bit of a wait and see and being opportunistic. But over the long run this sounds like it's just becoming a more challenging market and should we start to think of this almost more along the lines of a run-off business where you are really just trying to maximize the retention as long as you can on the profit, or is there something that you would see where things get better and you're able to become more engaged in the market?

You've really asked the $64,000 question which none of us have the answer to. We like the others were surprised to see the projections from the Federal Government being as well as they are for enrollment in this upcoming open enrollment period. What they are projecting is having a year for now about 1 million more lives than that exist today through the government exchanges.

If you would have asked us a year ago, we will be thinking a lot more than that. So sure that influences us. No, this is not a run-down or a run-out business at all. What we've decided to do because of the competitive nature of all the government spending, at least what we've seen, that the economics didn't make a whole lot of sense for us to chase that market the way that we have.

It's a very profitable business for us. We want to do everything we can to maintain that profitability. You've just seen that in this quarter right here. And the final point which this is a really good stable business, but I think it's probably very clear at this point, the growth driver in our Company is we're moving right now is Medicare, and that's a very exciting place for us to be.

The individual business is a great business for us, it's just a much different dynamic in this market today than it was a few years ago before the Affordable Care Act really kicked in the gear. What it looks like a year or two from now, your guess is probably as good as ours. So we're just trying to be very, very careful and thoughtful about how we go about business in that part of the market.

Okay. That's helpful.

And we are all in on Medicare. I mean, we are pushing Medicare as fast and as hard as we can.

I think I'd just add a little color on that. You mentioned churn at the outset. These are always estimates because we're always looking back on a lag on these numbers, but they have been so far this year in line with what we were expecting and we had been expecting basically what we saw a year ago. So we're not seeing acceleration of churn, we're seeing things kind of in line with what we saw a year ago.

Okay. And can you add just maybe a little bit more precision. I think you had mentioned that they IFP apps you expect those to be down in the fourth quarter year over year. Are we talking something -- can you give us any order of magnitude whether you're thinking about half of it or even more than down -- down more than 50% sort of directionally could you help us out there?

No, I think it's hard to predict. As we're talking about here on this call there's a lot of uncertainty about how many shoppers are going to be out into the marketplace in this upcoming season. So, I think it would be tougher for me to tell you exactly what we're thinking.

We certainly scale back our customer care center year over year versus a year ago where we were and so far we've been spending a little less from a budget standpoint. And so we're kind of commenting based on sort of our initial view coming into it in terms of marketing budgets and customer care resources.

But as you know in that business we can scale up very rapidly if the cost of acquisition is favorable. We can -- more than 80% of customers come through the website without assistance and so that's something we can rapidly shift if we need to.

And let me give you a little more insight into how we're looking at this part of the business. We're looking at -- we're really looking at the Company holistically and we're thinking about revenue in total and EBITDA and cash flow generation and so on. And today the Medicare business is not a profitable business because we're investing so heavily and so aggressively on it, and we are really good with that because we've still got a lot of really good profit coming out of the individual business that allows us to do that and we think it still delivers some pretty good financial results as we saw in this quarter.

One of the things that's happening in this individual business and we've noted this is that our estimates of the commissions that we're earning are up and they went up fairly significantly. And so what we look at here is not so much even applications in the member base but the revenue and the profit that falls out of that. So you've got the commissions up fairly significantly. You can afford to have the applications and the membership down and you can absorb a lot of that. And frankly that's what we've been doing and that's what we're looking at in this open enrollment period into the next year as well and that's allowing us to just really go in the way we are at Medicare

And also just to further comment on the churn, as Stuart said, those churn numbers or the attrition are pretty much in line with what we expected.

Remember because we're outside of the open enrollment period, you're going to have natural attrition. It's happening on the government exchanges, it happens with us. And there's really no means to replace them because you can't go out and get the kind of application flow that we used to be able to do historically before you had these open enrollment periods.

Sure, yes, that makes sense. I do want to shift over to Medicare. And the string of growth that you guys have done sequentially has been very stable, very impressive and you helped us out with some color last quarter. I guess if you could maybe just elaborate a little bit more on it sounds like you are stepping a little bit of spending to reach out to these folks and drive applications. Can you give us maybe some more concrete examples of what you're doing, what channels you're in, if the channel partners are helping you, what it is that has really been helping out in terms of generating additional interest and growth in the business?

Yes, absolutely. We're finding that search engine marketing which we pay for is working for us. And when I say working, the economics are favorable. We've a cost of acquisition that's acceptable. We've got a number of partnerships. CVS, the retail pharmacy chain for example and others that generate demand for us and those are a bit more mature than they were previously.

We've got a full slate of products now from all the major brand name carriers. So that makes it a more attractive place for a consumer to come and help through improved conversions.

We're doing some work in broadcast media that's been very interesting for us and we're really enthused about what we're seeing there. There is word of mouth, we know that, because we hear about it anecdotally. Our property Medicare.com is a place that people just -- individuals naturally just key in and come to us. So it's a combination of all of those things. And this is not unlike how we grew our individual business several years ago, except the growth rates we're seeing here are -- frankly are bigger than we had during that individual business.

We know a lot about online marketing to do this and we've got some really good technology assets that help with conversion. I think the other thing we should point out is, one of the reasons that our cost of acquisition continues to be so favorable is that we're converting at a really good rate. So we've done a lot of work there as well. So it's all of those things.

Yes, helpful and agree on the economics. I mean these guys stick around, churn is a lot lower on this, on the IFP. Last one here, just on cash that's starting to build back up. It sounds like there might be a drag in the fourth quarter from spending, but has that kind of normalized that over time. What are your thoughts for how much you'd like to keep on the balance sheet and what are you going to -- what are you planning to do with that?

I'll take a crack at it and Stuart maybe wants to comment as well. Historically we've been, I think, fairly aggressive about returning some of this to shareholders through share repurchase. In fact we've repurchased $250 million worth of our stock over the last several years. We don't have a stock repurchase program in place today but that's one thing that we could do. As we look at the Medicare business, frankly we'd like to be acquisitive at places where it would really make sense where we could generate even more demand and have more conversion and fulfillment. So we think about all of those things.

We like the cash position we're in. Frankly it's a better cash position than we thought we'd be in at this point and we'll be reviewing and thinking about all those things.

Ned Davis, William Smith & Company.

Gary, I want to ask you maybe to elaborate a little bit on the question that was asked before. You spoke about -- I think you said you're just a blip in the marketplace in the Medicare world. As I understand there are a very few independent companies that can market this product. It's mostly just carriers that are marketing it.

And I'm wondering what the gates are for you to pick up a lot of this market share even as rapidly as you have been over the next few years? What are the limitations there? Are there initiatives by other independent companies that are getting licensed to sell this, is that going to be a factor? And are the carriers changing their strategy as they realize how profitable this business can be for them and what a growth business it is?

Hey, Ned, let me qualify -- so thank you for the questions. Let me qualify my blip comment. I should have been more specific. We are a blip in terms of market share right now. I don't think we're a blip in terms of our presence in the market. And I think that our growth rates are telling us that, especially what we're seeing coming to us organically word of mouth. And I like the fact that we're a blip from a market share standpoint because that indicates we have so much runway that we think in front of us right now that is so attractive to us.

And you're right, there aren't a whole lot out there doing what we do. It's highly regulated by CMS. You've got to gain the trust and the confidence of the carriers. There's a lot of compliance all of it should be because it's a very important market and a lot of money is spent on it by government. So we understand all of that. We're very attentive to it. But we think that the limitations for us are probably more execution oriented than anything else. How much can we spend, how can we continue to spend effectively, how can we ensure that we've got the right resources in place to convert the demand as we bring it in and so far so good on that. But you can probably sense we are really excited about this marketplace and what we see here is one of the better-looking market opportunities I have ever seen.

All right. The carriers seem to still be doing a lot of paper-based marketing, just mailing volumes of information out to people. Are you sensing any change? I mean, don't they recognize there is -- this is obviously a growth market, but it's also a market where there is a high return on marketing spend if you do it right. Don't they realize that, aren't they doing something about it in response or are they just sort of basically hearing to the same old strategies of the past (multiple speakers)?

It's hard for me to comment on their marketing strategy and so on. They've always sold directly into the markets, in both the individual market and the Medicare market. I'm sure they will continue to do that. It's not unusual to see some of the brand name carriers with the television commercials and so on and that's all fine. That may work for them. We've got activities and strategies and we think some really good knowledge inside the Company that works really well for us in terms of very efficient marketing that can scale. And this business at this point for us is all about scale, it's about volume and getting as much of leverage on that as we possibly can and we think we've got some pretty efficient ways to go about that.

One last thing. You gave up giving guidance because of all the confusion and uncertainty and strangeness of IFP marketplace. I'm wondering if you think there will be enough stability next year after you get through this enrollment period to start giving guidance again, particularly guidance about the possible growth in the IFP business?

Well, we would hope so. I think we've made that comment in the last earnings call if my memory is right. And again we want to get through this annual enrollment period and the open enrollment period. We need to have some stability, we want to -- we provide guidance it's been always done historically, we've done it the way that we understood the market projections and we would like to think our guidance was pretty accurate and we need to have kind of a basis from which we can do that and that's what we're -- we'll see if we have that after these enrollment periods that we're in.

Thank you very much, appreciate it.

Thank you.

Ladies and gentlemen, that concludes the question-and-answer portion of today's call. I'd like to turn the conference back over to Gary Lauer for closing remarks.

I'd just like to thank everybody for your time and look forward to talking with many of you as well. Thanks again.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.