eHealth Inc (EHTH) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Q1 2016 eHealth Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and the instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Kate Sidorovich, Vice President of Investor Relations. Please go ahead.

Good afternoon and thank you all for joining us today, either by phone or by webcast for a discussion about the eHealth, Inc.'s first quarter 2016 financial result.

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'll 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 includes statements regarding future events, beliefs, plans and expectations, including those relating to our plans and objectives with respect to our Medicare business, our expectations regarding our strategy for the IFP business, our expectations regarding the financial performance of our IFP business this year, momentum in our Medicare business and our ability to generate and convert consumer demand, our expectations regarding our previously released guidance and financial results for the full year 2016, including revenue, EBITDA, stock-based compensation expense and non-GAAP earnings per share, trends in our business and operating results that we expect to see this year, especially as they relate to the second quarter of this year.

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

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in our forward-looking statements. We describe these and other risks and uncertainties in our Annual Report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, which you may access through the SEC website or from the Investor Relations section of our website.

We will be presenting certain financial measures on this call that will be considered non-GAAP under SEC regulation G. For a 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 to all of you for joining us today as we report our first quarter 2016 financial results. Our revenue of $73.8 million grew 20% and adjusted EBITDA of $26.8 million grew in excess of 300% compared to the first quarter a year ago. Our first quarter non-GAAP diluted earnings per share was $1.10. During the quarter, we generated $4.7 million in cash flow from operations resulting in a quarter cash-in balance of $66.7 million and no debt. We're obviously very pleased with these financial results.

Our Medicare business continues to gain momentum with strong double-digit growth across the key metrics that we track, which are submitted applications, estimated membership and revenues. Our individual and family business exceeded our expectations despite continuing turmoil in the market with first quarter submitted applications and revenues coming in higher and operating expenses lower than we anticipated. Last year, we made a strategic decision to manage the individual business for profitability and this is proving to be the right decision.

Now I'd like to review the highlights of the quarter starting with Medicare. Submitted applications for Medicare Advantage products were up 53% in the quarter compared to the first quarter a year ago. Our Medicare supplement business is also gaining some nice traction with first quarter application growth of 47%. Medicare Supplement is an attractive and growing market with over 11 million covered lives. Our focus to-date with Medicare has been primarily on Medicare Advantage products, but we are now starting to address the Medicare Supplement market in a more aggressive way.

First quarter submitted applications for all Medicare products, which also include prescription drug plans, were up 53% year-over-year. We are pleased with the level of Medicare consumer demand that we generated and converted during the first quarter outside of the Annual Enrollment Period. And I'd like to note that so far the Medicare submitted application growth that we're seeing in this second quarter exceeded the growth rates that we just reported for the first quarter.

First quarter Medicare commission revenue was $42.7 million representing 46% growth compared to the first quarter of 2015. As a reminder, during the first quarter, in addition to commission revenues from new Medicare enrollments, we recognized substantially all of our renewal commissions on our existing Medicare Advantage and Prescription Drug Plan members. These renewal revenues were approximately $29 million in the first quarter of 2016 representing 52% annual growth. Given that the vast majority of Medicare renewal revenues fall in the bottom line, our first quarter is seasonally the strongest both in terms of revenue and profitability. Total Medicare revenue for the quarter was $43.5 million, representing 47% annual growth. Our estimated Medicare membership was 2,20,300 at the end of the quarter, up 42% compared to the first quarter of 2015. Medicare Advantage membership was 1,33,700 representing 44% year-over-year growth. Medicare membership declined slightly on a sequential basis compared to the fourth quarter of 2015, which is simply a reflection of typical seasonality in our Medicare business, where a large number of new members have been added during the fourth quarter annual enrollment period. In contrast, much of the member attrition associated with the annual enrollment period occurs during the first quarter. I'd like to note that member retention on our Medicare business continues to track to our expectations.

In our Medicare business, we've always been highly focused on maintaining attractive unit economics with a favorable ratio of expected lifetime revenues to acquisition cost per member. And the objective with Medicare is to build a large business with a significant revenue base. Our individual business performed better than we anticipated, both on a revenue and submitted application basis. First quarter operating expenses in this business also tracked favorably against our expectations. The combination of last year's cost reduction program, targeting fixed cost, and our prudent approach to variable marketing spend allowed us to generate significant earnings and cash flows in the individual business.

First quarter individual and family plan submitted applications of 74,000 were down 47% year-over-year, reflective of the softening in the individual market that we observed in the beginning of the year, and our strategy to not pursue application growth at the expense of higher acquisition cost. As Stuart will describe later on the call, our total marketing and customer care costs in the individual business came down in the first quarter compared to Q1 a year ago. Our estimated individual and family plan membership at the end of the first quarter was approximately 523,000, up 4% sequentially compared to the estimated membership we reported for the fourth quarter of 2015, and down 11% compared to the estimated membership we reported for the first quarter a year ago.

In conclusion, we're off to a strong start to 2016, and we are pleased with the significant growth that we're generating in the Medicare business. We have multiple initiatives underway aimed at supporting the momentum in our Medicare business and making eHealth even more efficient at generating and converting consumer demand. Our individual business continues to be profitable and we plan to maintain our strategy of focusing on cash flow generation and profitability in this market. We are reaffirming our 2016 annual guidance. We are very pleased with our results in the first quarter and we're optimistic about our financial results for the full year.

And now I'll turn the call to Stuart.

Thanks, Gary, and good afternoon, everyone. During the first quarter of 2016, we grew our revenues 20%, while at the same time reducing our operating expenses, both in absolute terms and as a percentage of revenue, which allowed us to materially improve our profitability compared to the first quarter a year ago. These strong results reflect rapid expansion of our Medicare business combined with our prudent approach to expense management across the entire Company and especially in our individual and family plan business, which we are operating for profit.

Our first quarter 2016 revenue was $73.8 million compared to $61.3 million in the first quarter of 2015. Commission revenue for the first quarter was $69.4 million, an increase of 20% compared to $57.8 million in the first quarter a year ago. First quarter Medicare commission revenue grew by $13.5 million, a 46% increase compared to the first quarter a year ago. This increase was primarily driven by significant growth in the number of Medicare members renewing in Q1 and also by an increase in the number of new members that we enrolled during the quarter compared to Q1 a year ago.

As Gary mentioned, during the first quarter, we recognized the vast majority of renewal revenues on our existing Medicare Advantage and Prescription Drug Plans, making it the largest Medicare revenue quarter of the year. We had a very successful Medicare renewal season this year.

Commissions from individual and family plan and ancillary products combined were down 7% or $1.9 million compared to the first quarter of 2015 due to a decline in the estimated number of revenue generating individual and family plan and the ancillary members over the same time period. Other revenue, which include sponsorship, eCommerce on-Demand and non-commission Medicare revenue was $4.5 million in the first quarter, an increase of 28% compared to $3.5 million in Q1, 2015. This growth was driven primarily by an increase in lead generation revenue in our individual and family plan business and also by higher Medicare advertising revenue.

Turning to membership metrics. The estimated number of revenue generating Medicare members was 2,20,300 at the end of the first quarter, up from 1,55,600 at the end of the first quarter of 2015 or an increase of 42%. Our estimated individual and family plan membership at the end of the first quarter was 5,23,000 members, down 11% from the first quarter a year ago. The year-over-year decline in estimated IFP membership was in line with our expectations and reflective of softness in the market, and our decision to manage the individual business and profitability by reducing dedicated customer care and marketing spend in this area. As a result of this strategic cost reduction program that we implemented in the first quarter of 2015 and ongoing control over variable expenses, we expect the individual business to be highly profitable again this year. Our total estimated membership at the end of the quarter for all products combined was approximately 1.15 million members, which represents a 1% decline compared to estimated membership reported at the end of the first quarter of 2015.

Now I'll review our operating expenses for the quarter. Total operating cost declined both in absolute terms and as a percentage of revenues compared to year ago. Underneath that, both our marketing and our customer care and enrollment expenses in the individual business declined by close to 50% year-over-year. Our technology and content expense also declined meaningfully compared to Q1 of last year, both on an absolute basis and as a percentage of revenues, primarily as a result of last year's cost reduction program. At the same time, we continue to invest in our Medicare business as reflected in an increase in Medicare related marketing and in customer care and enrollment costs, compared to the first quarter a year ago.

First quarter of 2016 non-GAAP marketing and advertising expense, which excludes stock-based compensation expense, was $20.3 million or 28% of revenue compared to $24.9 million or 41% of revenue in Q1 2015. First quarter 2016 non-GAAP customer care and enrollment expense, which excludes stock-based compensation expense, was $10.1 million or 14% of revenue compared to $11.7 million or 19% of revenue in Q1 2015. First quarter 2016 non-GAAP technology and content expense, which excludes stock-based compensation expense, was $8.1 million or 11% of revenue compared to $10.3 million or 17% of revenue in Q1 2015.

First quarter non-GAAP operating income, excluding stock-based compensation and the amortization of acquired intangibles, was $25.8 million compared to $4.7 million in the first quarter a year ago, which also excluded restructuring charges associated with last year's restructuring program. First quarter EBITDA was $26.8 million, an increase of 362% compared to EBITDA of $5.8 million in the first quarter of 2015. First quarter 2016 GAAP earnings per diluted share was $0.99 compared to a GAAP loss per share of $0.12 in Q1 of 2015. First quarter 2016 non-GAAP earnings per diluted share, which also excludes stock-based compensation and the amortization of acquired intangibles, was $1.10 compared to non-GAAP earnings per diluted share of $0.26 in the first quarter a year ago, which also excluded restructuring charges. Our cash flow from operations during the first quarter of 2016 was $4.7 million compared to an outflow of $11.2 million in the first quarter of 2015. Capital expenditures for the first quarter of 2016 were $4,00,000. Our cash balance was approximately $67 million as of March 31, 2016. We are very pleased with our first quarter financial results and believe that they provide a solid foundation for our execution in 2016.

With respect to guidance and based on information currently available, we are reaffirming the revenue, EBITDA, stock-based compensation expense, and non-GAAP earnings per share guidance for the full year 2016 that we provided on our fourth quarter 2015 earnings call.

I also wanted to make a few comments on certain sequential trends we expect to see this year, especially as they relate to our expectations for the second quarter. As we described earlier on the call, Q1 is our largest quarter in terms of Medicare revenues, driven primarily by annual renewals paid on our existing Medicare Advantage and Prescription Drug Plan members. In Q2, we have little to no renewal revenue in our Medicare Advantage and Prescription Drug Plan business, so you should not expect to see the same level of Medicare revenues in the second quarter as we had in the first quarter.

Also, second quarter EBITDA is expected to be seasonally lower than the first quarter's, given that the vast majority of Medicare renewal revenues that we booked in Q1 fell to the bottom line, and therefore contributed more to EBITDA than as expected for Q2. 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 I'd like to open up the call for questions. Operator?

(Operator Instructions) George Sutton, Craig-Hallum.

Thank you. Guys, I have a few questions. First, relative to reaffirmation of the guidance. I just wanted to think about that up against what were better than expected IFP results in Q1. Could you just give us a sense of what for the rest of the year might be different or is this just too early in the year to be too aggressive?

Well, I think it's too early in the year. We've reaffirmed our guidance for the year as you saw and we're very thoughtful about that when we look at it and our performance against that, especially early in the year. I think there's clearly some timing impact this quarter and as we've mentioned throughout our comments, this is a big quarter for renewals for Medicare and that's a big driver from a timing standpoint and the seasonality of our business. We did see a better renewal year than we had anticipated when it comes to Medicare and as we commented, the individual business came in a little bit better than we had anticipated as well. So it's a combination of those two things. And so I'd say we're optimistic about 2016 and feel good about what we did in Q1 and that's kind of where we sit right now.

Okay. It was interesting that other revenues were up as large as they were and you mentioned that a bit of that was related to lead generation in the IFP area. Are you doing something different with leads in IFP than you would have otherwise in the past?

The answer is yes, although we started doing that last year, the latter part of last year and it's generally in non-SSM states, states that are not covered by the SSM where we need more telephonic support, and with those leads, we will from time to time sell those leads to others, just to sell. After we have reduced our individual and family customer care staff, we started selling some of those leads off in some states. So that's generally -- you're going to see the bigger amounts for that during the open enrollment period, so fourth quarter and first quarter and not so much outside of that.

Okay. And then two other quick things. The pathway for web-based entities, you were concerned about that last quarter, I'm curious if there's an update there? And then you also had talked about likely re-engaging your stock buyback program, I'm just curious if that was active during the quarter?

George, it's Gary. On the pathway with CMS, no change, we're using the pathway that they had asked us to change to, we're enrolling subsidy eligibles through it. I've made the comment last quarter, we think it's still going to require some work, we've been -- it's been communicated to us by CMS, they're going to be doing that work to make that a better pathway, but it's working for us today. It's not ideal as I think I commented last quarter, but we hope that CMS will do the things that they've committed to do there, but it is working, and it's working for us today. Regarding stock repurchase, I guess I'd just make a couple of comments. One is, as you know, we've repurchased in the past. In fact, we've spent $200 million of cash in the past several years, and actually we're looking at this earlier through that a reduced what would've been our outstanding today by more than 35%, and I can just tell you that management and the Board are continually evaluating our options regarding -- as they relate to cash. And we're certainly pleased with the fact that we're generating cash the way that we are.

Dave Styblo, Jefferies.

Thanks for taking the questions. I do appreciate sort of being this early on in the year, but did the first quarter seasonality come in quite a bit better than you expected for the earnings, it just seems like we've got to have quite a bit of drag in the latter half, so is there some sort of additional expenses or again are you guys just biased to not moving things until you get a little bit more line of sight of the full year here?

I'll say that it came in somewhat better than we had anticipated and we're very pleased with that. I think as we think about expenses going forward throughout the year and the bottom line, one thing that we do consider is having a little bit better performance in Q1 that does provide us some flexibility as we move forward in the year to spend that on Medicare growth. So I think one thing to keep in mind is just we wouldn't necessarily pocket an over performance in EBITDA for the year, we would look to plow that back into Medicare potentially.

Yes, I'd just add to that. We made the decision a year ago to manage the individual business for profitability and to be very disciplined about our acquisition spend and I think you've seen us do that. At the same time, I think as Stuart has indicated, we're aggressively pursuing the Medicare business and this is obviously working. So the combination there and the strategies allowed us to grow our revenues 20% in the first quarter, and the same time, we actually reduced our overall operating expenses across the Company as Stuart described. So I think the only thing we would say right now is our strategy and our approach to individual Medicare markets is working well for us to-date.

And so I think you guys said, I may have missed the exact context, but that you're going to become a little bit more aggressive I think on the Medicare sup side, is that right?

Yes, we did make that comment. We've been quite effective with Medicare Advantage. The Medicare supplement market, as you may know, it's not part of the Centers for Medicaid and Medicare Services, the way Medicare Advantages, it's a state by state business. The United (inaudible) products, you may see advertise, an example of the Medicare Supplement market. The lifetime revenue values are approximately equivalent to Medicare Advantage. Our cost of acquisition is not dissimilar. So it's got a lot of attributes and it's very attractive and we are now beginning to pursue that market and we're starting to see -- we're seeing some very attractive growth rates there, we're enthused about that.

Gary, could you elaborate on that? So what specifically are you doing, is there some areas that you don't have a product in certain geographies or what is it that you're doing to become more aggressive and maybe it's more so just a lead-gen?

Well, we've certainly have some more targeted marketing in that area for one. Two, we've added more product inventory over the past year, which has helped us. So what's interesting about it is that the bulk of Medicare Advantage and the Medicare Supplement markets are somewhat geographically dependent. There are some geographies where Medicare Advantage is really strong and that's the product that a consumer is more likely to want to enroll in. There are other geographies, many of them are rural where Medicare Advantage frankly doesn't offer the kind of participation from providers and others that a consumer may what with the Medicare Supplement business does or will. So there's that as well and we're beginning to do some of the geographic targeting as we look at that also.

And then lastly, just on the IFP side of things, can you maybe park that a little bit more, where the growth came from, was this exchange related, was it non-exchange related?

It's hard to point at specifically the one area there. I can't say we did have a higher mix of exchange related subsidy eligible business with the last OEP. So that is part of it and that does help our premium -- inflation of our premiums and also our commissions a little bit with this QHP. And also, you'll note in our metrics that we had a 47% decline in individual and family applications in Q1, but if you'll recall, we actually had an increase year-over-year in the fourth quarter, the early part of OEP. And so we're starting to see possibly a better environment for us in Q4 versus Q1 portion of OEP. So when you look back at this last OEP, we saw a decline in applications for individual and family of 22% across OEP despite the fact that you saw the tail end down about 47%. That's pretty consistent with what some of the data points that are out there published by the exchanges as well. So we're looking at the whole OEP as a driver towards the revenue for this year, it's not just kind of tail end here.

Sure. And have you guys (inaudible) on that when -- as you're getting this higher mix of exchange subsidy, certainly as we follow the other managed-care stocks, the churn is one of the issues that they're talking about, and it's upwards of 50%, if not more, perhaps. I'm curious, given how you guys are paid on the business, I think it's breakeven after about a year? Are you making money on that business from what you've been able to see or already sort of get it, and just turned down so it's sort of breakeven, what sort of economics are you seeing on that part of business right now?

We haven't seen anything abnormal with that. We've just gone through our first meaningful renewal cycle with those, this time a year ago -- the first -- this last OEP was the first full meaningful cycle of renewals. So I don't have a full view of that yet, but I can say that it does appear just kind of initial review of the data would suggest that our -- there's nothing unusual in terms of the churn relative to the non-QHPs at this point that I can see and the revenue itself came out better than we had in our planning, and our planning was based on churn from a year ago. So I'm not seeing anything unusual going on there.

You know just on that, and as Stuart noted this in his script, our individual family plan and ancillary revenues down on about $2 million year-over-year. And at the same time, our Medicare revenue is up $13.5 million year-over-year. So I think that reflects somewhat on the individual business of what we're experiencing there, and our strategy and also what we're doing in Medicare, and what the growth engine looks like.

Steven Lynch, Wells Fargo.

Hey guys, thanks for taking the questions. I guess to start out, I wanted to talk to you about the marketing and advertising spending. It came in a lot lower than expected. I was hoping maybe you could just talk us through some of the dynamics that you're seeing there. I know you talked last quarter about average acquisition costs for Medicare is, I believe you said it was down 14% in 2015. So maybe can you give us some color on what's driving the lower spending there this quarter? Is this sort of a permanent -- is this a fundamental difference in the businesses that we're going to -- we should expect to see lower customer acquisition cost for Medicare going forward or is some of the benefit in the quarter driven by higher fee as well?

Yes, some of the benefit is driven by IFP as well. We did spend more in Medicare this quarter than we did this time a year ago, but that was more than offset by the reduced spend in IFP. So those areas like high level, the big drivers. In Medicare, from a cost acquisition standpoint, we did spend a little bit higher on the unit basis than we had this time last year, but great unit economics on that, at the same time, just we felt comfortable doing that. We've been seeing good improvements in our cost per agent in our customer care side of the business and giving us a little room to push a little bit harder on the unit cost from a marketing standpoint for Medicare to keep generating significant growth.

Got it. And then, Gary, maybe this question is for you. Given that Medicare business is set to become the largest source of revenue this year and it's definitely the primary focus going forward, can you just give us your big picture overview of what the competitive landscape looks like selling Medicare plans? How many other firms are out there in the market you're competing with? How fragmented the market is and who -- maybe who are some of the other larger competitors that you come up against?

Yes, it's a really great question. We haven't seen a lot of change in terms of the landscape. The large in fact, the 50 state online exchange, you can go there's medicare.gov, it's estimated that about 5% of Medicare Advantage transacts there in about 20% of Prescription Drug Plans, the rest outside. We definitely compete directly with the suppliers, the carriers. They've got a very large marketing budget, you'll see them advertise on TV, print media and other places as well, selling their products directly, the same products that we sell.

There are large regional brokerages that more often than not are dedicated to one brand name, so it maybe Humana, maybe Aetna and as I said, they're regional. So it may be a state or part of a state or a couple states depending upon where they are. We're one of the few that we're aware of that has got the national footprint that we have is doing it online, the way that we're doing it. I think the way that we're acquiring consumers or reaching them is rather unusual, we're doing it online, we're doing it offline, with television advertising, obviously online we're using search. We're doing a little bit of print media, believe it or not, we even do a little bit of direct mail, we found that that sometimes is effective. So we've got a really interesting mix here that has served us well so far.

But from a competitive standpoint, we haven't seen anything in the marketplace that indicates any real change. And frankly, what we're seeing I think is, is even more traffic and more interest online and you know the demographics like we do, over 70 million baby boomers aging in over the next 15 years and we're seeing more and more of that as well. But nothing to report from a competitive standpoint that's unusual or that's changed much.

Thanks, Gary, that's great color. And if I could just two really quick housekeeping questions. The first is on the $29 million of revenue that you got from renewals this quarter, can you give us what the comparable number was from Q1 last year? And then the second thing is, whether or not we should expect a meaningful tax provision for the rest of this year?

Yes, I don't have -- oh, I do. $19 million was the comparable number to that $29 million, so it's a 52% increase in our renewal revenue. And I'm sorry, the second question was on the tax rate?

Yes, that's right, whether or not we should expect meaningful taxes the rest of the year.

Yes. So the rate that we use, roughly 24% for Q1 represents what we would estimate our rate to be for the full year. So I would use that rate for the full year.

Steve Halper, FBR.

If you could just do me a favor and talk about the cash on the balance sheet and plan is for deployment until your share repurchases, I don't think the Company's been too active in the share repurchase area of late?

Yes, Steve, it's Gary. As I'm sure you've heard me say earlier, we've repurchased $200 million, we're pleased with our cash position, we've been generating cash at a really nice pace. And we are continually looking at options related to the disposition of cash. I really don't have any more to comment and report on that at the moment.

Tobey Sommer, SunTrust.

Hi, it's [Ray Long] filling in for Tobey. You talked about attractive unit cost economics for Medicare. Can you just -- when you decide to turn around and operate it for profit, what is the potential scale that you can achieve in this business?

Well, the unit economics today are really good. I think we would continue to try to go for growth and keep pushing at those levels. As we move forward, we are looking to bring the unit cost down just through ongoing efficiencies and marketing programs, including efficiencies in our customer care enrollment. I don't have a specific target margin to (inaudible) in front of you today because I really think we're in a multi-year growth mode here. And so I think it's kind of early for me to talk about kind of a normalized kind of when we stop going for strong growth and try to settle into kind of a normalized position. I mean, it's kind of too early to do that.

And as you see, we're definitely investing for growth right now. I mean, our objective is to grow the revenue base as large as we can reasonably. When I say reasonably, I mean, profitably and with the unit economics, as Stuart described that is very, very favorable. And because of the way we've been managing our individual business and our overall expense profile, we're able to do that. We're seeing these what we think are really attractive growth rates in Medicare and the profitability as a Company as a whole.

Okay, thanks for the color. And not to beat a dead horse, but given the recent weakness in the share price, could you just talk about what the options are that you're weighing against share purchases?

Well, I can't talk about anything specifically. But as I said earlier, we've repurchased in the past, in fact many times in the past we've been quite aggressive about it. And we're just thinking about a number of different options that would optimize the use of our cash, both from a Company standpoint and a shareholder return point of view as well.

And just one last one on the marketing strategy, you previously mentioned new customer generation sources that you're exploring. Are there just anything you could point to that's particularly exciting or I think that you see kind of (inaudible) increased conversion?

Well, interestingly, in the Medicare business, we've had some really good experience with television. And one wouldn't think that when you think about a technology in an ecommerce company, see a lot of TV advertising, you don't see Amazon, Google, eBay and a number of others doing a lot of TV. We've actually found that direct response TV has been quite effective for us in this marketplace. We've found that the cost of acquisition is good, we found that we could -- that we can scale a lot of consumers who actually convert for us. So that's one area that we've been creatively developing over the last year, year and a half, and it's worked well for us. And we do it both through partners, as well as our own direct advertising. We continue to do working around search. I mentioned earlier that we've been doing some direct mail, that's, believe it or not, been effective for us as well, the response on that has been good and the economics work for us. So we continue to look at a number of different things to do there. And the other thing I would tell you is that we found this in our individual business that, as we build the Medicare business because of the consumer experience we like to think we provide, word of mouth becomes an important driver for consumers coming to us as well, and at least anecdotally we're finding there's more and more of that as well and we're pleased about that.

Ned Davis, William Smith & Co.

Real quickly, on the -- it was a rather large disparity between the trend in net cash flow and the EBITDA, and I noticed that your receivables went up by about $10 million and your payables didn't go up proportionately. Should we expect, Stuart that you'll kind of revert back to a more traditional ratios, which would mean that whatever EBITDA you have in the final nine months will have a proportionally larger net cash flow generation to free cash on the balance sheet?

Yes, so that the receivable tends to increase fairly significantly in the first quarter when we recognize our renewals for Medicare Advantage. And then we collect those monthly throughout the year and that receivable comes down across the year. So we will definitely benefit from that in future quarters across the year and help our cash flow for the year. I would expect our operating cash flow this year to be fairly similar to what you're -- what you would see for EBITDA. So if you look at our EBITDA range, that just put you in the zip code of where our operating cash flow should be for the year.

That would be a big relative shift in free cash flow versus EBITDA for the rest of the year then, huge, right?

Yes, well, as I said we will be collecting that cash across the year. And Q1 is also a quarter in which we pay off our marketing costs, coming off of the open enrollment period. And then you can also see just accrued incentive pay and other payroll related pay that's fairly high in Q1. And then this -- that doesn't recur in future quarters.

Secondly, back in March, you came out with an announcement of a repetition of your compensation program for key executives. It looked to me like it's mostly tied to hitting revenue targets and EBITDA targets for all the top executives. You don't disclose those targets, are they, I only ask a rhetorical question, which probably (inaudible) like the midpoint of these guidance ranges, or are they high end or low end?

You know, Ned, I can't comment on what they are specifically, but they're certainly within the guidance range of where those targets would be, yes.

Okay. And then one final thing just a little refinement, you mentioned that basically, I'll sort of [translate], you didn't raise your guidance because you want the flexibility to spend more, particularly on the Medicare market development and coming off a very low share of the total market, I can see why you would do that. And you've talked about TV, direct mail, etc., I take it what your implying is that the rates of return on this type of spending, if you hope to spend more to grow even faster, but these are very high rates of return, and I take it that's the way you're kind of looking at it, am I on track there with that kind of thinking?

Yes, you're totally on track. We're very focused in both individual and family and Medicare on return on investments on every unit that we bring in, we're everyday like hawks watching that. So I would definitely agree with that comment.

And you don't see any new gates to the growth rate, you already talked about competition, seeing anything radically different there and the carriers still love you, right, I guess, or anything?

Well, I don't know about love, but I think they like us. We generate some good volume for them. We think we do it in a quality way, the cost of acquisition they tell us through us is good for them. We help them to gain market share, so I think all of that's good. We've always approached our carrier partners with the idea that we want the relationship with each and every carrier to be as good as the best relationship we have with the best member. And so we take a lot of care in that area. Medicare is a very exciting market and I think you should not really start -- we've been talking about it for several years, but I think when you see the kind of results and the growth rates we've had over the past several quarters, again they illustrate why we're so excited about this.

And so what you were suggesting earlier on the Supplement side is the inventory available to you on a state by state basis is increasing in a meaningful way. Did I interpret that correctly?

Yes, we actually have increased it over the last year. That's correct. And now we'll begin to pay more and more attention to this market as well. We're building a very nice business with Medicare Advantage and now we're beginning to look at doing the same thing in parallel with the Medicare Supplement business.

I am showing no further questions at this time. I would now like to turn the conference back to Gary Lauer for closing remarks.

Well, we just appreciate your time this afternoon and look forward to speaking to many of you over the next several months. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.