eHealth Inc (EHTH) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to eHealth's conference call to discuss the Company's fourth-quarter and full-year 2015 financial results.

(Operator Instructions)

As a reminder, this conference call is being recorded.

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

Ma'am, you may begin.

Thank you.

Good afternoon and thank you all for joining us today either by phone or by webcast for a discussion of eHealth, Inc.'s fourth-quarter and full-year 2015 financial results.

On the call this afternoon, we will have Gary Lauer, eHealth's Chief Executive Officer, and Stuart Huizinga, eHealth's Chief Financial Officer. After management completes its remarks, we will open the line for questions.

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

We will be making forward-looking statements on this call that include statements regarding future events, beliefs and expectations, including our estimated IFP, Medicare Advantage and Medicare products membership and our expectations about changes to membership, our belief that the Medicare market is becoming a year-round business, our belief that we can reduce the cost of acquiring new Medicare members, the Medicare market opportunities including future growth with the market, our expectations about the growth and profitability of the IFP and Medicare businesses, the impact of new regulations and member conversion rates, our expectations for commission team is in the next open enrollment period and the impact of 2016 results, our strategy going into the first quarter of 2016 and our intention to pursue the fast-growing Medicare market and to manage our individual and family business for profitability, our belief this revenue from the Medicare business will exceed revenue from the IFP business in 2016, our increased focus on an investment in the Medicare business, our estimates related to commissions earned from IFP and Medicare members, our estimates related to revenue, EBITDA, EPS and stock-based comp expense for 2016, our expectations regarding sequential transfer 2016, the impact of cost reduction measures on profitably in the first quarter of 2016 and expected increase in first quarter Medicare renewal revenue and finally expectations about our first-quarter EBITDA.

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

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in our forward-looking statements. We describe these and other risks and uncertainties in our annual 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 the about us section of our corporate website under the heading investor relations.

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

Thanks, Kate. And thanks, everyone, for joining us today as we report our fourth-quarter and full-year 2015 financial results.

For the full year 2015, eHealth generated revenue $189.5 million, and non-GAAP diluted earnings-per-share of $0.43, with adjusted EBITDA of $11.1 million, an increase of 129% compared to our 2014 adjusted EBITDA.

Revenue for the fourth quarter was $50.1 million. Non-GAAP loss per share for the fourth quarter was $0.56 and adjusted EBITDA was negative $9.5 million. Revenue and earnings for the fourth quarter and the full year were better than we had anticipated. Our year-end cash balance was $62.7 million with no debt. Our strategy throughout 2015 was to expand our Medicare business at a fast pace, which we did.

Total estimated Medicare membership at the end of the year grew 60% compared to the end of 2014. Medicare commission revenue for the full-year 2015 grew over 60% compared to 2014. I would also like to point out that as we grew Medicare membership and revenue significantly, we were also able to improve our cost of acquisition per submitted Medicare application year-over-year.

Our cost of acquisition improvements illustrate how we are gaining efficiencies in this rapidly growing business. Most importantly, our total commission revenue for all products across the Company grew 8% in 2015, compared to 2014, reflecting once again the importance of leverage of our Medicare business.

During 2015, we made strategic and operational changes in our individual and family plan business, which reflect our view of this turbulent market. In March of 2015, we implemented a significant cost reduction program to better align our cost structure with the Affordable Care Act market environment. As a result, our individual business continued to be highly profitable in 2015, and we were able to deployment much of this profit into growing our Medicare business while at the same time increasing our 2015 adjusted EBITDA over the previous year.

At this point, I would like to make some comments on several fourth-quarter highlights. I will start with our Medicare business. Medicare is at the core of eHealth's growth strategy and our 2015 results speak to our successful execution in this fast-growing market.

During the fourth quarter, as well as throughout all of 2015, we saw strong consumer demand on our Medicare platform. Fourth-quarter 2015 submitted Medicare Advantage applications grew 23%, compared to the fourth quarter a year ago. Total Medicare applications, which also include Medicare supplement and prescription drug plan products grew 15% year-over-year.

The strong application activity and favorable number retention that we observed throughout the year allowed us to grow our estimated year-end Medicare advantage membership by 73% and our total Medicare membership by 60%, compared to 2014. An important part of our Medicare strategy is to make it a year-round business. In 2015, for the first time since we entered the Medicare market, Medicare Advantage applications that we submitted outside -- or that were submitted outside of the annual enrollment period contributed more than half of total Medicare Advantage submitted applications for the year.

For the full-year 2015, we grew submitted Medicare Advantage applications by 49% compared to 2014. We believe that the seasonality that we have typically experienced in our Medicare business is beginning to change. In this current first quarter, we are once again seeing significant Medicare application growth year-over-year.

For the full-year 2015, total Medicare revenues grew 42%, while Medicare commission revenues grew 63% over the prior-year. In the fourth quarter of 2015, total Medicare revenues grew 38% year-over-year, while Q4 Medicare commissions grew 32%.

As a reminder, our total Medicare revenue is comprised of Medicare commissions and Medicare advertising revenue. Our average cost of acquisition per Medicare application declined approximately 14% in 2015 compared to a year ago. By the way, we calculate the average cost of acquisition per submitted application by dividing variable Medicare marketing and advertising costs by the number of applications for Medicare supplement and Medicare advantage products submitted during the year.

The 14% cost of acquisition improvement is significant. And as we continue to expand and diversify our customer generation sources and become more effective at converting Medicare demand, we hope to continue making progress with cost of acquisition over time.

I think everyone knows how compelling the Medicare market demographics are. It's estimated that on average, 10,000 individuals in the United States will be having their 65th birthday each year for the next 15 years. So this market is poised for strong organic growth. We plan to continue significant investment for growth in our Medicare business throughout 2016.

To provide a bit more insight as to why we are so focused on Medicare, I would like to comment on our unit economics as well as profitability expectations for this business. We estimate that on average, a Medicare Advantage member will generate approximately $1,450, that's 1-4-5-0 in lifetime commission revenues, including all variable costs associated with acquiring a Medicare Advantage member. Including marketing and call center variable expenses, the average lifetime contribution margin we project for an MA number is above 50%. And note that approximately 85% of our Medicare commission revenues come from Medicare Advantage members.

We also have efforts underway to generate more of these members online without any call-center support, which over time can result in even a better margin profile. Based on our current expectations, we believe our Medicare business will turn profitable over the next several years when you take into account all costs, including variable expenses and allocation of corporate overhead.

Looking at it on a variable cost basis, we are already close to being profitable. As a reminder, we recognize all of our acquisition cost on Medicare as we incur them, while commission revenue gets recognized over the life of a member. And by the way, if we achieve growth rates even higher than have been experiencing, it may take longer to get to profitability in this business, but we will have an even higher member and revenue base.

In our individual and family plan business, our 2015 strategy was simple: keep it as a profitable business and only pursue opportunities that we view to be cost-effective. Fourth-quarter individual and family plan submitted applications grew 14%, compared to the fourth quarter a year ago, to 114,600 applications.

However, we saw less demand in January, the last month of the open enrollment period, reflective of the overall market trend based on the enrollment data for government exchanges released by the centers for Medicaid and Medicare services earlier this month. The number of total individual and family plan submitted applications that we generated over the entire open enrollment period was down 22% from last year's OEP, to 172,181 submitted applications.

At the beginning of the year, 2015, as we saw softness in the individual market, we decided not to pursue application growth to the expense of higher acquisition costs, in line with our strategy for the individual business. As such, we reduced our cost of acquisition per submitted IFP member during this open enrollment period compared to the prior one.

During the year, we were able to enroll subsidy-eligible individuals into qualified health plans as a web-based entity. The center for Medicare and Medicaid services has recently directed us and other WBEs, web-based entities, to make changes to the process for enrolling individuals into qualified health plans through the Federal Health Insurance Exchange. This change requires that we use a different pathway for which individuals are enrolled in these QHPs. These changes have been implemented and may adversely affect our conversion rates during the next open enrollment period.

In addition, several health insurance carriers have recently reduced or eliminated broker commissions on individual products they have for sale during the current SEP. By the way, the SEP stands for special enrollment period, which allows enrollment outside of the open enrollment period under very specific circumstances.

Carriers have informed us that they will resume more standard commission payments in time for enrollments occurring during the next open enrollment period. Because individual and family plan application volumes are very low during the SEP, we think this will have minimal impact on commission revenue in 2016 and is reflected in the guidance we will be providing to you today, but it could impact future periods.

Now I'd like to make some comments on our outlook for 2016. As you have seen, we are pursuing an exciting and very fast-growing Medicare business and our strategy is to capitalize on this, while at the same time operating the individual and family plan business for profit and cash flow maximization. Stuart will be giving specifics on our guidance for 2016, but it's important to note that we plan to grow revenue and EBITDA, which indicates the importance and impact of our Medicare business.

Medicare commission revenues are expected to be greater than individual and family plan commission revenue in 2016 for the first time. We're very pleased with our execution in 2015 and given the turbulence and uncertainty in the ACA market, we are fast becoming more and more of a Medicare marketplace.

Now, I will turn the call over to Stuart.

Thanks, Gary, and good afternoon, everyone.

Today, I plan to review our financial performance for the fourth quarter and FY15, and provide our 2016 annual guidance. Our 2015 financial results reflects successful execution of the Company's growth strategy in the Medicare market and our decision to manage the individual and family plan business for profitability and cash flow generation.

Our fourth-quarter 2015 revenue was $50.1 million, an 11% increase compared to the fourth quarter of 2014. Revenue for the full-year 2015 was $189.5 million representing a 5% increase compared to the full-year 2014. Fourth-quarter Medicare commission revenue was up 32% compared to the fourth quarter of 2014 driven primarily by the new Medicare enrollments that we generated during the quarter.

Full-year 2015 Medicare commission revenue grew 63% over 2014. Fourth-quarter individual and family plan ancillary and small business commission revenue was down 3%, compared to the fourth quarter of 2014, with an increase in average commission revenue per individual and family plan member offsetting some of the decline in the estimated number of revenue generating individual and family plan members.

. For the full-year 2015, individual and family plan, ancillary and small business commission revenue declined 8% compared to 2014. Strong growth in Medicare commission revenue allowed us to grow our total commission revenue on a year-over-year basis both in the fourth quarter and full-year 2015. Our total commission revenue for the fourth quarter 2015 was $41.1 million, a 7% year-over-year increase.

Total commission revenue for 2015 of $171.3 million grew 8% compared to 2014. Other revenue which includes sponsorship, e-commerce on demand and non-commission Medicare revenue was $9 million in the fourth quarter, a 37% increase compared to Q4 of 2014. This growth was driven primarily by higher Medicare advertising revenue and also by an increase in lead generation revenue in our individual and family plan business.

Turning to membership metrics, the estimated number of revenue generating Medicare members was 228,900 at the end of the fourth-quarter, up from 143,500 at the end of the fourth quarter of 2014, or an increase of 60%. Our fourth-quarter 2015 individual and family plan submitted applications volume grew 14% compared to the fourth quarter of 2014. For the full-year 2015, our IFP submitted application volume declined 5.5% compared to a year ago.

Our estimated individual and family plan membership at the end of the fourth quarter was approximately 503,300, down 3% compared to the estimated membership we reported for the third quarter of 2015 and down 11% compared to the estimated membership we reported for the fourth quarter a year ago. These estimated membership metrics are within our range of expectations and reflective of our strategy to manage this business for profitability while investing in Medicare growth.

As a reminder, the vast majority of applications submitted during the fourth quarter were for products with effective dates of January 1, 2016, or later and the resulting members from these applications would not become paying members until 2016. The contribution from individual and family plan members approved during the fourth quarter to our individual and family plan membership will depend on the rate at which these members convert into revenue generating members.

The estimated number of members on ancillary and small business products was over 412,000 at the end of the year, or slightly higher compared to a year ago. Our total estimated membership at the end of the quarter for all products combined was approximately 1.14 million members, which represents a 2% increase over estimated membership reported at the end of fourth-quarter of 2014.

Now, I would like to review our operating expenses. Total operating cost for the fourth-quarter and full-year 2015 declined as a percentage of revenues compared to a year ago driven primarily by growth in revenue and by cost reductions implemented in March of 2015. Full-year 2015 operating costs also benefited from lower acquisition costs per Medicare member as we continued to drive efficiencies in this business.

Let me provide more detail around our operating expenses for the quarter. Fourth-quarter 2015 non-GAAP marketing and advertising expense, which excludes stock-based compensation expense, was $31 million, or 62% of revenue, compared to $28.1 million, or 62% in the fourth quarter of last year. Our marketing costs are largely variable and are directly tied to the application volume each quarter.

During the fourth quarter, we grew submitted applications in our Medicare and individual and family plan businesses, while maintaining a disciplined approach to acquisition costs per application. Fourth-quarter 2015 non-GAAP tech and content expense, which excludes stock-based compensation expense, was $8.5 million, or 17% of revenue, down from $10 million, or 22% of revenue in Q4 of 2014, reflecting the impact of the cost reduction program implemented in March of 2015.

Fourth quarter 2015 non-GAAP customer care and enrollment expense, which excludes stock-based compensation expense, was $13.4 million, or 27% of revenue, compared to $14.3 million, or 32% of revenue in Q4 2014. This reflects a significant decrease in customer care resources in our individual and family plan business pursuant to the cost reduction program, partially offset by our investment in Medicare-dedicated customer care staff during the annual enrollment period.

Adjusted EBITDA for the fourth quarter of 2015 was negative $9.5 million, an improvement from negative $12.9 million for the fourth quarter of 2014. Full-year 2015 adjusted EBITDA was $11.1 million, compared to $4.8 million for the full-year 2014. Fourth-quarter and full-year 2015 adjusted EBITDA were better than we had anticipated. We calculated adjusted EBITDA by adding restructuring charges, stock-based compensation and depreciation and amortization, including the amortization of acquired intangibles to our GAAP operating income.

Fourth-quarter 2015 non-GAAP net loss per share was $0.56, compared to net loss of $0.44 for the fourth quarter of 2014. Non-GAAP net loss for the fourth quarter of 2014 included a tax benefit of $0.35 compared to a tax benefit of $0.01 in the fourth quarter of 2015. Full-year 2015 non-GAAP net income per diluted share was $0.43, compared to non-GAAP net loss per share of a penny for the full-year 2014.

Gap net loss per share was $0.67 for the fourth quarter of 2015, compared to a loss of $1.08 for the fourth quarter of 2014. GAAP net loss per diluted share was $0.26 for the full year of 2015, compared to a loss of $0.88 for the full-year 2014. Our fourth-quarter 2015 cash flow from operations was $1.2 million, compared to negative $4.1 million for the fourth quarter of 2014.

For the full-year 2015, we generated $13.7 million in cash flow from operations compared to $1.8 million in 2014. Capital expenditures for the fourth-quarter of 2015 were approximately $660,000 and were approximately $3 million for the full year. Our cash balance was $62.7 million at December 31, 2015, up more than $11 million from the $51.4 million at the beginning of the year.

And now I'd like to comment on our expectations for 2016. We are forecasting revenues for 2016 to be in the range of $195 million to $203 million. We expect 2016 EBITDA to be in the range of $11.5 million to $17 million.

Non-GAAP diluted earnings-per-share for 2016 is expected to be in the range of $0.38 to $0.68 per share. For the full-year 2016, stock-based compensation expense is expected to be in the range of $6.5 million to $8 million.

Now, I'd like to address some of the sequential trends for the year. We expect that the first quarter of 2016 will be seasonally highest in terms of revenues and earnings. Similar to last year, we expect to recognize the vast majority of our Medicare renewal revenues during the first quarter.

Given that renewal commissions are paid on our existing Medicare book of business and do not have marketing expense associated with them, they contribute greatly to the bottom line. In addition, first quarter profitability will benefit from cost reductions that we put in place in March of last year and our decision to run the individual business for profit maximization.

As a result, we project a significant increase in our first-quarter 2016 EBITDA compared to the first quarter a year ago. We also expect the first quarter to be our highest EBITDA quarter of 2016. I want to remind you that these comments and our guidance are based on current indications for our business, which may change at any time.

We undertake no obligation to update these comments or our guidance. And now, we would like to open up the call to questions. Operator?

(Operator Instructions)

Tobey Sommer, SunTrust.

This is Kwan Kim on for Tobey. Thanks for taking my question. Got a question on the increase in net cash. Could eHealth repurchase shares now that you are past open enrollment is something on the table? Thank you.

Yes, so the answer is that we are always thinking about that and thinking about how to return value to shareholders and we've bought back $250 million worth of stock in the history of our Company and it's certainly something that we will be considering. We will be looking at the many ways to return value to shareholders but the answer is yes. We will be giving that consideration.

Last year, was a very turbulent year for us because there was so much uncertainty around the Affordable Care Act. We restructured the company and we thought it was most prudent to watch the cash balance that we had. We frankly had a better year than we had anticipated.

We're very optimistic about this year and this is not the first time I have heard this question or the suggestion as well. So, thank you, yes.

Okay. And could you talk about how much subsidy eligibility enrollment contributed to growth?

Well, we saw an increase this year in subsidy eligibles as a percentage of our total submitted applications. This open enrollment period, it was roughly 55% of our applications and this time a year ago, in OEP, was around 41% so that is definitely contributing.

Okay. And regarding the Medicare business, the path to profitability, how significant are the changes to your projections, if there were any? Are your expectations and line to where they were in the past?

You are asking about Medicare?

Yes.

Well, hopefully it's becoming clear and obvious that we are really going through a pivot and a transition here. Our business mix is changing significantly and changing quickly and that's really deliberate. We're pushing very, very hard into this Medicare business for all the obvious reasons.

As I indicated, if you take a look at our variable marketing and advertising and customer care expenses, we're very close to being profitable there right now. We're spending a significant amount of money on acquisition to grow this member base and the revenue base and that's what really pushes out the point of profitability. As I think as I commented, if we actually see increasing growth rates, which we did last year, that could push it out even a bit further.

We are able to fund this and we are able to manage to do this as we're going through this transition in the business mix, through the individual business, which is highly profitable and given current trends and what we know currently, we expect to continue to be for some time. We're very fortunate to have that and to be able to capitalize on that as well as add to it wherever we see appropriate.

Okay, thank you.

Dave Styblo, Jefferies.

Good afternoon, congrats on the progress, guys. On the 2016 guidance, you talked about Medicare revenue being greater than IFP revenue. I guess if, I know you didn't give the underlying details there but, if we assume that IFP continues to sort of erode down, would that be a fair assumption?

And if so, it looks like Medicare revenue would need to be up about 35% next year to create that crossover. Am I in the right ballpark there?

I think you have the dynamics right. We do expect a decline in the individual and family commissions next year. And then, a healthy, strong, a upward growth in Medicare, as well.

In our comment about the Medicare commissions crossing over the level of individual and family, that does not include the ancillary commissions. That's a separate line item so this is just strictly the Medicare being larger than individual by itself.

Right, okay. Of that growth in Medicare, call it whatever, 35%, 40% plus, something in that range, how much visibility do you have and what are your assumptions that you are baking into there? Clearly, you had a nice tick up in sequential membership in the fourth quarter.

It sounds like a lot of that revenue will actually get booked in the first quarter because they signed up pretty late and could you just walk us through how much competence or visibility you have on that growth rate baked into guidance?

You know, if I look at last year, more than 40% of what we recorded as revenue came from renewals. So, a good chunk of what we book each year as revenue comes from the renewal-base which is ever-expanding, obviously at a much faster pace now that we actually had a higher growth rate for Medicare Advantage this year in 2015 than we had in 2014.

That's going to help very much with renewals. You are right, we do get some spill over revenue from our fourth-quarter sales that spills into Q1. So we have visibility on that.

And then, we obviously have some visibility, given just what we're seeing here in the first quarter so far, in terms of what growth rates we are experiencing with new sales which will drive the rest of it. We are organizing ourselves around healthy -- another very healthy growth year in Medicare, looking to hire additional sales agents to staff up to that, to spend more marketing funds against it. And I think we have quite a bit of visibility on a good chunk of this.

Yes, we really like what we see there. As Stuart said, we feel like we have had good visibility because, I had commented, and Stuart may have added to that as well, more than half of our Medicare Advantage applications came outside of the annual enrollment period, which is really quite unusual and in some ways bucks the experience of a lot of others, at least historically, in this business and what we expected.

We push really hard for that and as I said, we are seeing significant growth again already in this first quarter which is outside the annual enrollment period. So I think the combination of all those things certainly gives us confidence about what we're forecasting and what we hope to see in this business.

Okay and then just one more. Just to stay here on Medicare, so clearly it seems like your investments and resources deploying towards diversifying into different leads such as TV. I think you guys were doing that and refining the conversions that were maybe missed in prior years or months at least. Maybe the expansion of Med Sup.

Can you just give a little bit more color and peel back the onion more about these items that your pushing on? And what is seeming to impact the business the most?

It's really a combination of things. We had quite a bit of success last year with TV, which we are really pleased about. That's somewhat unusual in this online world and we are continuing that. We are actually transacting more online.

During this last annual enrollment period, we saw a much larger percentage of transactions of both Medicare Advantage and prescription drug plans online. When I say online, I mean no human interaction at all, no call center. That's really important to us because it obviously, gives us a real leverage when it comes to acquisition cost, conversion and on and on.

We've got a fast-growing partner channel. We do really well in terms of sourcing through some of the major retail pharmacies across the country. In fact, we believe that we've got about 65% of the retail pharmacy outlets across the country that we're partnered with.

The inventory of products has expanded. We've got all of the major names now. All of this has just been so good for us in the Medicare Advantage business and I might add that we've got projects underway inside the company to move more and more of this online, without being call center reliant.

Just to give you a flavor for that, in our under-65 individual business, historically about 80% of what we transacted was done online. The other 20% needed customer care or call center support. That business today, the individual business, the vast, vast majority of what we do is online.

We just have a handful of agents that support that business. We think Medicare is always going to be a bit different because it's a more complex product set. But we are convinced from what we've seen, we can get more and more of this online which gives us, we think, some really interesting leverage.

It's a combination of a lot of things here. We are running at this business very, very hard from a lot of different places. You asked about Medicare supplement.

We're not doing as much there yet as we would like but we think an awful lot of what we're doing the Medicare Advantage business is going to transfer into the Med Sup business and that will probably become more and more of a contributor as we continue to evolve and develop this really exciting Medicare part of the business.

Thanks, I will hop back.

Steve Halper, FBR.

Two quick questions. Gary or Stuart, what are the key variables in the guidance range? Seems pretty wide, understanding that it's early. There are some variables but what are those key variables that you have to consider?

I would say the key variables are for both product lines, the cost of acquisition that we experience throughout the year is a key variable. It will impact not only what we spend but also how much we can generate to support revenue.

Medicare growth rate for Medicare Advantage is a key driver and then just ACA market demand for ACA products will impact us this year, as well as just the metrics around that. Conversions of those and then just retention rates from the ACA business, I would say is another driver.

And then specifically, Gary, you mentioned the new pathway for QHP submission. What is the timeline to get that developed and do we have any confidence that the interaction with www.healthcare.gov, it's going to be smoother than it was the last time you went through this process? And I'm not even going to ask why they changed the pathway.

The pathway that we are using today, it's working. We're enrolling QHPs right now in the SEP. It's far from ideal. And we've got some work to do on it and with CMS, to be very frank, but that's where we sit with it.

It's just another example of why we are in this transition and this pivot toward the Medicare business. There are just so many factors in this under-65 business right now as a result of Obamacare that make it very difficult to predict. So, it's working and we are enrolling people in qualified health plans.

It's not working as well as we would like, to be very, very frank. And we hope working with CMS we can improve this pathway or find another pathway that works even better for us. But having said all that, we've been through this with these people at CMS before when it comes to Obamacare and here we sit again. This goes back to I think Stuart's comments as well, to your question about the -- a bit of the range in our guidance.

Some of it comes from this because of the unpredictability of what's going on there. You may have caught the comment that some of the carriers are reducing or eliminating commissions during this SEP. I can't speak for any of them but you know many, several of them, have indicated that the business for them, at least currently, is not profitable. And what they are stipulating to us and other distribution points is, they don't want us selling those products right now.

It's as simple as that. So you've got all those variables but I just want to come back to Medicare. It's becoming such an important, substantial part of our business.

That's really the story about eHealth. Frankly, we couldn't be more pleased about where we are right now with that business. It is developing faster than the individual business ever did for us as we built this company before Obamacare.

That's a good point. So, we shouldn't hold our breath that this new pathway and the transition to it is going to be any smoother than the last time. That's sort of my take away based on your comment. Would you disagree with that?

I would not disagree with that.

Okay, thanks.

Ned Davis, Williams & Smith.

Gary, there was an article in the New York Times a week or so ago, very bullish on the Medicare Supplemented Advantage and carriers were all raving about their profitability. I'm wondering, are the marketing dynamics likely to change because this is becoming a more important component of their business?

And do you have any idea what your market share is or was, say last year as a percentage of the total enrollments -- in the industry?

Ned, I'm aware of the New York Times article and others like that as well. This is an exciting part of the business right now for a whole lot of reasons, not the least of which is this population that is ever-increasing of eligibility for Medicare and people living longer. We all know the demographics here. And so, one of the things that we've been -- this isn't new for us.

We've been running at this business for five years plus and really been laying down a lot of track to be able to go after it. You are now starting to see the result of that. So we've got these really great partnerships with the retail pharmacies. As I said earlier, the TV is working and on.

We're getting better about doing this online. By the way, I should mention as well, we bought a property two years ago called Medicare.com. We on that property, that URL, that address online. And we think the value in that is incredibly high.

We are doing a lot of work around that right now from a branding standpoint and it's yet another place for consumers to come online for Medicare products. So, again, we're doing everything we can to leverage this business. In terms of market share, we're still really, really small and that's the beauty in all of this. When it comes to Medicare Advantage, we're certainly less than 1% of that market right now.

We have done some internal work here. If we could just achieve what we achieved in the individual market several -- a few years ago actually, where we had 4% to 5% of the market share. If we can just do that alone with Medicare Advantage and nothing else, this is a very substantial business and probably a much different business than we have ever seen in the history of this Company and that's our objective.

We're going after as much market as we can get but we're doing it in a way that's efficient. And the thing that is probably most pleasing to us and in some ways must surprising is that with the kinds of growth rates we had last year, which were very substantial, we brought our case cost of acquisition down significantly and that's because we converted better, we got smarter about all of this. We're doing some of these products, more of them online.

I think you can tell we have a lot enthusiasm here. This is where our focus is.

That's great. The other 99%, any idea how much of that is generated by the carriers through their own direct marketing? As opposed to any kind of third-party pharmacies or others outside of the carriers themselves?

Yes, you know you've got several places where all of this happens. Of course, the federal government has an exchange called Medicare.gov. It's been there for several years and there are some Medicare Advantage and some prescription drug plans that get transacted there. But not a substantial number.

We've seen a fair amount of market data on some of the carriers and the carriers spent a lot of money marketing directly, which is, you know, when we get it, it's fine. It actually helps us. What their share is, I can't tell you carrier by carrier or as a percentage of the market.

You've also got a lot of regional brokers and brokerages that are focused specifically on Medicare, many of which are captive so there may be one that just sells Humana. There may be another that just focuses on Aetna products and on and on. There's a fair amount out there but there is nothing, there's no one dominant player. Maybe that's another way to come at this.

And that's what we like about it as well. We think that the window's opening quickly here and it's very significant in terms of what someone, maybe us, is going to be able to do here.

And so the carriers, based on this article in The Times, are making such good margins, or expect to, they have a big incentive to keep you as a commissionable marketer. Is that a good statement?

I would certainly hope so. We're told by some that our cost of acquisition for them is really favorable. What we bring to them is highly accurate.

There is very little rework and you've probably seen recently that there is a fair amount of bullishness right now on the Medicare market. In fact, CMS just in the last few days, they proposed a rate hike for the Medicare Advantage plans which means the reimbursements for the carriers. I think that there's more and more recognition that these products for people who are 65 years of age and over are becoming more and more popular and really an important part of Medicare coverage.

Okay, terrific. Thank you very much.

Thanks, Ned.

Jon McCullough, Glacier Peak Capital.

I'm sorry, you sort of just touched on it but, just the CMS upping the reimbursement rates. Just want to understand how it exactly kind of affects your business and flows to you.

Well of course, our revenue source is the commission that we're paid by the carriers to market and sell these products. As reimbursement rates go up, one would think that, that's good from a commissionable standpoint. Stuart, last year our effective commissions were up what? About 1%?

Maybe 1% or 2%. We saw a little bit of an increase last year for similar reasons.

By the way, these are substantial commissions that are paid on these products because it's a complex sale and, as I indicated earlier, on Medicare Advantage we see about $1,450 in terms of lifetime revenue. We estimate that life to be around five years, it may end even being longer than that. So, the reimbursement rates on the proposed rates and proposed rate hikes from CMS, yes, we think that's a positive development in the market for us.

Okay. Secondly, you've shown the cost of acquisition has drifted down as you guys become more efficient. Is there kind of a floor where it hits where, you know, like you said it was down I believe it was like 14% year over year. Can you project out how further it can go lower or just sort of your thinking?

Well, we have driven it down the past couple years. I can tell you in this business, going down 14% is substantial.

Yes, it's gone down double digit percentages the last two years so that's been very good with the efficiencies we have brought in. It's kind of hard to say, one thing that really helped when we were growing the individual and family business is, as we got more and more word-of-mouth and recognition in the marketplace and more direct traffic. That helped and I think as we have described, we're still considering ourselves early days in the Medicare business, so over time I think that would help us, doing more and more online as we go, would help as well. So there is some drivers that -- in front of us I think that can continue to help us there.

Even as it's early days, as we built this individual business several years ago before Obamacare, we are seeing, I would say we're seeing growth rates, we're seeing take in the market that is more substantial than we have probably ever seen in the history of the Company and we're certainly seeing from a dollar standpoint much, much higher potential margins coming out of these products, just the absolute dollars alone. As we said earlier, just where we are today, we've got about a 50% unit margin and we think we can do some things to make that actually a higher unit margin.

Do you think that kind of the know-how that you've learned or the process that you've learned can be applicable to the supplement business or is that just, it's totally different than you guys have to kind of learn that to then drive down the same sort of acquisition costs?

I think there is a lot of similarities. We certainly would use the same platform we think Medicare.com is a great place to land consumers for Medicare supplement products. We're beginning to do that. The advertising and some of that approach may be a bit different but we know a lot about that and we really know how to do it online.

Frankly, that's the next area we're going to start moving into. Just think about it, if we can continue to experience some of these healthy growth rates with Medicare Advantage and then start to bring Medicare Sup into a range like that, this becomes really interesting quickly.

Right, right. Lastly, this is more coming from a generalist investor standpoint, but your guidance, there is some puts and takes on the IFP versus the Medicare, but the guidance doesn't necessarily say you're not having any kinds of assumptions about, hey this is what GDP is going to do or this is what the macro economy is going to do. This is really court of, it can be driven maybe by some rule changes or CMS or some different changes but generally macro. There's nothing that really affects the business at this point?

I think what has macro affected the business has been Obamacare.

Okay.

And we get that. We have taken our lumps over the past three years for that. We've got a whole different approach with that business.

As I said, we are pivoting quickly and significantly toward Medicare. From a macro-standpoint, the trends that -- the macro influences we know of right now are positive. All these baby boomers aging in, so many of them being very comfortable transacting online, searching online, learning online, life expectancy is increasing, the carriers wanting to go after this business. As Ned had pointed out, it's profitable for them.

We see those macro trends and those are really good trends. Those for the most part are going to be independent of GDP, the economy and everything else. Remember, the real customer with Medicare is not the person who is 65 or 66 years of age or my mom who is 90 years old who buys the product, the customer is the federal government because they are paying for this.

This has been in place since 1965 and that's not changing anytime soon that we see. By the way, if Bernie Sanders is elected president, there might be a lot more Medicare for us to go after because his solution to health care is Medicare for all.

Thank you, I'm not showing any further questions so I will now turn the call back over to Gary Lauer for closing remarks.

I just want to thank everybody for taking the time this afternoon and I certainly look forward to speaking with many of you one-on-one as well. Thank you.

Ladies and gentlemen this does conclude the program. You may all disconnect. Everyone have a great day.