eHealth Inc (EHTH) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the eHealth Incorporated fourth-quarter and full-year 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to turn the conference over to Kate Sidorovich, Vice President of Investor Relations. You may begin.

Thank you. Good morning, and thank you all for joining us today either by phone or by webcast for a discussion about eHealth Inc.'s fourth quarter and full-year 2016 financial results. On the call this morning we have Scott Flanders, eHealth's Chief Executive Officer, and Dave Francis, eHealth's Chief Financial Officer. After management completes its remarks, we will open the lines for questions. As a reminder, today's conference call is being recorded and webcast from the IR section of our website. A replay of the call will be available on our website following the call.

We will be making forward-looking statements on this call that includes statements regarding future events, beliefs and expectations including statements regarding our Medicare, small business, and individual and family health insurance market strategies; our expectations that the new administration's policies will emphasize private sector participation and have potential positive implications for our business; our expectations regarding the individual and family health insurance markets; our five-year revenue and adjusted EBITDA growth targets; our belief regarding our ability to achieve those targets, the profitability and growth of our individual and family plan business with respect to future periods, changes to our Medicare sales and marketing efforts designed to generate demand, improve conversion, and lower the cost of acquisition.

Our plans to leverage strategic relationships and grow the contribution from our direct marketing channel; lifetime member economics, and expected churn of Medicare supplement plans; aggressive expansion in the Medicare supplement market; projections regarding our 2017 Medicare submitted application growth and profitability involving new Medicare enrollments in 2017; the profitability and target segment profits as a percent of segment revenues for the Medicare business segment with respect to future periods; investments in the small business health insurance market and it's projected impact on our 2017 suggested EBITDA loss; growth potential of the small business health insurance market, and expectations regarding revenue and increase in small business membership for the next four years.

Investment in our technology platform and sales and enrollment processes; impact of our efforts in Medicare conversion rates; our ability to enroll subsidy-eligible consumers during the fourth quarter of 2017 and its impact on revenue and expenses; status of our strategic alternatives process; our guidance for 2017 total revenue; revenue from the Medicare segment; revenue from the individual family and small business segment; adjusted EBITDA, Medicare segment loss, individual family and small business segment profit, corporate shared service expenses and non-GAAP net loss per share. Finally, our long-term financial goals including margins on an adjusted EBITDA basis for a five-year period.

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 to the SEC website or from the investor relations section of our website.

We will be presenting certain financial measures on this call that would be considered non-GAAP under the SEC Regulation G. For reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included in our press release and in our SEC filings which can be found in the about us section of our corporate website under the heading investor relations. At this point, I'll turn the call over to Scott Flanders.

Thank you for joining us today as we report our fourth-quarter and full-year 2016 financial results. For the full year 2016, eHealth generated revenue of $187 million, non-GAAP diluted net income per share of $0.17, and adjusted EBITDA of $5.7 million. Revenue for the fourth quarter was $43.8 million, non-GAAP net loss per share for the fourth quarter was $0.79, and adjusted EBITDA was negative $13.9 million. Our year-end cash balance was $61.8 million with no debt.

2016 was a dynamic year for the company. eHealth has undergone a broad change in the leadership team and extensive strategic review of the business, including a thorough assessment of the company's target and adjacent markets. The result is a newly focused strategy with a core emphasis on growth and execution, diversification of revenue streams, and enhancement of member profitability.

During the fourth quarter, we began to execute on eHealth's new strategy. As we shared with you on our third-quarter earnings call, our current strategic priorities include, one, continuing growth in the Medicare market including an increased focus on the Medicare supplement market. Two, aggressively pursuing growth in the small business health insurance market. And, three, managing our individual and family health insurance business core profitability while preparing to resume growth in this market based on our expectation that the new administration policies will make it more attractive to the private sector.

The financial forecast underlying our strategic plan targets a five-year compounded annual growth rate of revenue in excess of 20%, and adjusted EBITDA target margins in the mid 20% range by the end of the five-year forecast period. We believe we can deliver these targets through strong execution across our key business areas.

I would like to note that starting with this quarter, we began reporting our financial results and providing annual guidance on a business segment basis. This in an effort to provide additional transparency into the financial dynamics of our two key business segments. One, the individual family and small business segment, and two, the Medicare business segment. Our earnings release details the allocation of revenues and costs by business segment and outlines the methodology we used for such allocations as well as the methodology we use to calculate segment profit and loss. This approach is in line with our new operating structure which emphasizes direct measurement and accountability of group executives for revenue growth and profitability of their business segments.

Turning to our individual and family plan business, in 2016 we saw a further deterioration of the individual market as a result of the ACA as carriers withdrew further from the market and substantially curtailed their marketing activities for individual products. This dynamic was further exacerbated starting in February 2016 as CMS forced us to utilize the inefficient, double redirect process for enrolling subsidy-eligible consumers. As this process negatively impacts our ability to enroll subsidy-eligible customers and reduces our conversion rates, we made significant cuts during the fourth quarter to our IFP-related marketing spend and saw a 60% decline in our submitted IFP applications compared to the fourth quarter of 2015. Given that Q4 is the largest enrollment period of the year for individual plans, this downturn will have a significant impact on our revenues and profitability in 2017 which Dave will describe in more detail.

So why are we pursuing this market? Simply put, I believe that the individual and family health insurance market is at bottom. While we have not yet seen a detailed plan from President Trump for replacing provisions of the ACA, we do believe his plan will emphasize private sector participation, especially with respect to health insurance distribution and potentially reduce the role and financing of government changes.

We are very involved in public policy as a relates to the Affordable Care Act. Following the election, we changed to our government affairs strategy and engaged new consultants and outside counsel with specific expertise in healthcare and access at the highest levels of the new administration. I have personally spent a lot of time in DC since the election, and have met with multiple lawmakers. I am very encouraged by what I am hearing.

It is worth noting that we don't currently expect immediate fixes to the IFP market. In fact, during this special enrollment period, we are seeing further reductions to broker commissions and fewer plans to our customers including many states and ZIP Codes where we are currently not able to offer any IFP plans at all.

Despite the headwinds in this market, our estimated membership economics in the individual business remain very attractive. When combined with reductions in IFP-related spend we implemented over the past year and a half, the IFP business remains very profitable on a stand-alone basis. In 2016, our individual family and small business segment generated profit of more than $67 million with the IFP product line contributing the vast majority of this profit. Dave will discuss our segment performance in greater detail later on the call.

Our 2017 projections assume that during the next open enrollment period, we have the same connection to the federal exchange we used in 2015 before we were forced to use the cumbersome double redirect process last year. Should the new administration take an effective action to stabilize the IFP market, it could have further positive implications for our long-term financial plan. Finally, in our five-year plan, we project that our individual, family, and small business segment will remain solidly profitable on a standalone basis in each year.

Turning to Medicare, this market remains an important area of growth for eHealth. 2016 was another year of double-digit growth in our estimated Medicare membership that was up 33% compared to 2015 year end. However, we also saw a deceleration of growth in submitted Medicare applications in the second half of the year, combined with a meaningful year-over-year increase in cost of acquisition per member. I am disappointed with these results and believe that we can do much better.

One of the main factors behind the recent slowdown in application growth rates is the lingering impact of changes we made in our sales and marketing processes in response to compliance requirements issued by CMS. We continue to work with our carrier partners on making the sales and enrollment process more effective within the confines of the compliance guidelines. As importantly, I am not satisfied with the profitability of our Medicare business and the quality of demand that we have been generating. Since the inception of our Medicare business, we have relied heavily on the lead generation partner channel that used to be productive but is becoming more expensive as we scale.

While variable acquisition costs including marketing and customer care and enrollment costs required to generate an incremental Medicare member continue to represent less than 50% of the member's estimated lifetime value, I believe there is a lot of upside to member profitability that we are beginning to actively pursue. Going forward, we plan to leverage strategic key participants including providers, pharmacies, and other entities to drive their customers to eHealth in exchange for access to our industry leading consumer engagement, content, and decision support technologies, as well as our customer care and enrollment support. We also plan to grow the contribution from our direct channel by enhancing eHealth's brand and providing proprietary tools to assist seniors in their plan, research, and selection. These efforts are already underway, and we expect that demand generated through these channels will come at a more attractive cost of acquisition and will convert better.

Our performance in the Medicare supplement market was solid in 2016, reflecting our new emphasis on marketing Medicare supplement products. Medicare supplement plans are less regulated compared to Medicare advantage plans and offer better lifetime member economics with lower expected churn based on our historic membership data. For the full year 2016, Medicare supplement applications grew 56% year-over-year compared to a 10% decline in 2015. I believe that a more balanced and complete marketing focus on both Medicare advantage and Medicare supplement plans significantly broadens the addressable market of our Medicare business and can better serve the diverse health insurance needs of our customers. Going forward, we plan to continue to emphasize aggressive expansion in the Medicare supplement market including the expansion of a dedicated customer care and enrollment team.

We see 2017 as a transition year for our Medicare business. While growth is still our primary goal for the Medicare market, in order to get back to application growth rates of 20% to 30% on a more profitable basis, we are adjusting the methods by which we are generating demand. This is a priority for the Medicare business for 2017.

As we transition to diversify customer engagement in acquisition channels in the Medicare market, we project that our 2017 submitted Medicare applications will grow in mid-to high teens, still solid growth but a lower annual growth rate compared to what we generated in the past few years. At the same time, we expect the average projected profitability of our new Medicare enrollments to increase in 2017 compared to last year. As we look beyond 2017, our target segment profit as a percentage of segment revenues for the Medicare business segment, we plan to achieve by the end of the five-year period is in the mid 20%.

Turning to the small business market, we see significant growth potential for eHealth in this business. Over the past few years, we maintained a stable and profitable member base of around 300,000 small business members with no dedicated marketing and just a handful of agents to support the enrollments and customer service. Our research indicates that businesses with fewer than 20 employees are clearly underserved, and a large share of small business owners are dissatisfied with the service they receive from traditional brokers. We believe that by leveraging our demand generating expertise into this segment of the insurance market and by using technology to improve a very manual and efficient sales and enrollment process across the market, eHealth can build a differentiated offering and take market share.

This is a large and underserved market with over 20 million individuals employed by businesses with fewer than 20 employees. An estimated 50% of these businesses offer health insurance to their employees. During the fourth quarter, we doubled the number of dedicated sales and enrollment agents to support the marketing initiatives that are already underway in the small business group market for 2017. We are also investing in our technology platform to make the enrollment process easier for small businesses and their employees while differentiating our market facing footprint.

The investment we are making in our small business initiative is large relative to our current revenue run rate in this area. In fact, two-thirds of our total projected EBITDA loss for 2017 is driven by our small business investment. We expect to generate significant revenue and membership growth as a result of this investment with a current forecast for a 50% increase in our small business membership each year for the next four years. We plan to report on our execution progress on a regular basis and are fully prepared to make the necessary adjustments to our small business strategy if we are not delivering on projected growth.

As we look forward to 2017, will clearly be a year of transition for eHealth. Our investments are aimed at driving meaningful expansion in Medicare and small group membership to build a strong foundation of recurring commission revenues. We are also investing to make our sales and enrollment processes in these areas more efficient, which over time, should further enhance lifetime profitability of our members.

We do expect to report a significant EBITDA loss this year as reflected in our 2017 guidance. However, the $62 million in cash on our balance sheet provides ability to make these investments and position the company to return to profitable growth.

As I mentioned earlier, we currently targeting five-year revenue compounded annual growth rate of 20% along with an adjusted EBITDA target margin percentage in mid-20%s or better by the end of the five-year forecast period. More specifically, we are targeting to get to break even in 2018, generate low double digit margins in 2019, and 20%-plus margins in 2020 and thereafter, all on an adjusted EBITDA basis. These numbers represent our long-term financial goals and should not be viewed as guidance. We undertake no duty to update them.

Before I turn the call over to Dave, I wanted to give you an update on the strategic alternatives process that we announced on the third quarter call. We are currently wrapping up the process and plan to have it completed in time for our analyst day which will take place on March 23 in New York City. And now I'll turn the call over to Dave.

Thanks, Scott, and good morning everyone. Today I plan to review our financial performance for the fourth-quarter and FY16 and provide our 2017 annual guidance. During the fourth quarter of 2016, we began evaluating our business performance and managing our operations as two distinct reporting segments, Medicare and individual, family and small business, and we are now reporting revenue and profit by segment.

We discussed methodology behind the allocation of revenues and costs by business segment in our earnings release. The earnings release also describes how we calculate segment profit and loss. Our intention is to provide the investment community with greater transparency and a better understanding of the revenue and profit dynamics of our two major business areas.

Our fourth-quarter results reflected a decline in our individual and family plan membership and revenue driven largely by the negative impact of the Affordable Care Act on the IFP market and increased CMS restrictions on web-based entities that made it more difficult for us to enroll subsidy-eligible individuals. While we continue to generate growth in Medicare membership and revenue, it was not enough to offset the decline in IFP revenue resulting in overall fourth-quarter revenue of $43.8 million down 13% compared to the fourth quarter of 2015. Revenue for the full year 2016 was $187 million, representing a 1% decline compared to the previous year.

Fourth quarter individual family and small business revenue was $24 million down 24% compared to the fourth quarter of 2015. For the full year 2016, IFP and small business revenue of $106.7 million declined 16% compared to 2015. Our fourth-quarter 2016 individual and family plan submitted application volume declined 61% compared to the fourth quarter of 2015. At the same time, our IFP-related variable marketing expense declined at an even higher rate of 76% over the same time period as we continue to manage this business for profitability given the current CMS headwinds.

Our estimated IFP membership at the end of the fourth quarter was approximately 361,000, down 28% compared to the estimated membership we reported for the fourth quarter a year ago. The estimated number of members on small business products was approximately 30,000 at the end of the year, an 8% increase compared to a year ago.

Switching over to Medicare, fourth quarter Medicare revenue was $19.7 million, an increase of 6% compared to the fourth quarter of 2015 driven primarily by new Medicare enrollments that we generated during the quarter and continued growth of our membership. Full-year 2016 Medicare revenue of $80.3 million grew 27% over 2015, again reflecting expansion of our member base. The estimated number of revenue generating Medicare members was 304,900 at the end of the fourth quarter, up from 228,900 at the end of the fourth quarter 2015 or an increase of 33%.

As a reminder, our Medicare commission revenues for the fourth quarter and the full year were negatively impacted by a change in how we were paid on many of our new Medicare enrollments that occurred outside of the annual enrollment period. As a reminder, CMS now allows carriers to either prorate the commission payment from the time of enrollment and through year end or pay a broker a full year commissions up front. As we discussed our third quarter call, a number of our large carrier partners switched this year to prorating their payments which had a total annual revenue impact of just under $5 million.

For the full year 2016, submitted Medicare application volume grew 31% compared to the 26% growth generated in 2015. While our submitted application volumes were strong in the first half of the year, we experienced a slowdown in growth rates during the third and fourth quarters. Our fourth-quarter 2016 submitted Medicare applications grew by only 15%. One of the main factors behind the slow down in submitted application growth was a decline in sales conversion rates compared to the fourth quarter a year ago. Some of that decline was driven by changes to the sales process we introduced mid-year in response to new CMS marketing guidelines as we indicated on our last earnings call.

Over the past several months, we have worked with our Medicare carriers to mitigate the impact of these changes and have developed a number of tactics to enhance the effectiveness of our sales process within the confines of the regulations. As a result, the year-over-year decline in conversion rate moderated in Q4 compared to what we observed during the third-quarter of 2016, though we remain dissatisfied with the level of sales conversions and believe that there is room for improvement.

We are also expecting to see over time a favorable impact on conversion rates from our efforts to change our marketing channel mix. Our efforts are aimed at increasing the contribution from strategic partnerships and from direct marketing channels. Historically, customers we have generated through these channels have converted at better rates than we have received through paid search and other generators. Again, we are not satisfied with our current level of Medicare membership growth or customer conversion and are focused on these operational efforts as a top priority. Our total estimated membership at the end of the quarter for all products was approximately 1 million members including about 320,000 members on ancillary products.

Now I would like to review our operating expenses. Fourth quarter non-GAAP operating costs, which excludes stock-based compensation and amortization of intangibles, grew as a percentage of revenue and were flat in dollar terms compared with the fourth quarter a year ago. Fourth quarter 2016 non-GAAP marketing and advertising expense which excludes stock-based comp was down by approximately $3 million year over year, reflecting a significant decline in IFP-related spend that outpaced the decline in submitted IFP applications. At the same time, we saw an increase in Medicare marketing cost reflecting a 15% growth in submitted Medicare applications and also a higher cost per submitted Medicare application, a cost trend that we are focused heavily to correct.

Fourth quarter 2016 non-GAAP customer care and enrollment expense grew by approximately $2.5 million year over year, driven primarily by increases in Medicare agent headcount. We also hired additional customer care personnel to support our small business initiatives. Fourth quarter non-GAAP tech and content costs which excludes stock-based comp, were down $1.4 million compared to a year ago while non-GAAP G&A expense was essentially flat.

For the full-year 2016, our non-GAAP operating cost excluding stock-based comp, amortization of intangibles, and restructuring charges increased both in absolute terms and as a percentage of revenues compared to a year ago. This increase was driven primarily by higher G&A costs which include approximately $4.8 million in expenses related to management transition and our strategic review and higher customer care and enrollment costs as we ramp our Medicare agent headcount. This was partially offset by over $6 million in savings in marketing and tech and content expenses, primarily reflecting a year-over-year reduction in IFP-related expense in these areas.

Adjusted EBITDA for the fourth quarter of 2016 was negative $13.9 million compared to a negative $9.5 million number for the fourth quarter of 2015. Full year 2016 adjusted EBITDA was $5.7 million compared to $11.1 million for the full year of 2015. We calculate adjusted EBITDA by adding restructuring charges, stock-based comp, and depreciation and amortization including the amortization of acquired intangibles to our GAAP operating income.

Our individual, family and small business segment remain highly profitable on a stand-alone basis, generating segment profit of $67.9 million for the full year and $14.2 million for the fourth quarter of 2016 despite the reductions in revenues that we discussed previously. Our Medicare segment generated a loss of $33.1 million for the year and $22 million for the fourth quarter. Please note that segment profit or loss for our two business segments excludes the depreciation and amortization expense, stock-based compensation, restructuring charges, and amortization of intangible assets in addition to the shared general and administrative expenses, which under our new segment reporting structure, are reflected under the corporate category.

Corporate shared services expenses which excludes depreciation and amortization expense, stock-based comp, and restructuring charges were $29.1 million for the full year and $6.1 million for the fourth quarter of 2016. I will refer you again to our earnings release which outlines the allocation of cost by segment in greater detail.

Fourth quarter 2016 non-GAAP net loss per share was $0.79 compared to a net loss of $0.56 for the fourth quarter of 2015. GAAP net loss per share was $0.91 for the fourth quarter of 2016 compared to a loss of $0.67 for the fourth quarter of 2015. Full-year 2016 non-GAAP net income per diluted share was $0.17 compared to $0.43 in 2015. Full-year 2016 GAAP net loss per share was $0.27 compared to a loss of $0.26 in 2015.

Our fourth-quarter 2016 cash flow from operations was negative $4.7 million compared to positive $1.2 million for the fourth quarter last year. For the full year 2016, we generated $4.3 million in cash flow from operations compared to $13.7 million in 2015. Capital expenditures for the fourth quarter of 2016 were approximately $760,000 and were approximately $3.9 million for the whole year. As Scott mentioned earlier, our cash balance for the end of the year was $61.8 million with no debt.

Now I would like to comment on our expectations for 2017. As Scott shared earlier on the call, 2017 will be a transition year for the company as we lay the foundation for future profitable growth in the Medicare and small business markets. In addition, our 2017 revenue and profitability will be impacted by low IFP enrollment volumes generated during the most recent open enrollment period that just ended on January 31. At the same time, our guidance assumes that the under the new administration, we will be able to enroll subsidy-eligible consumers more effectively and drive higher IFP enrollment volumes during the next OEP which starts in the fourth quarter of 2017. This would not have a significant impact on revenues until 2018 but will result in higher IFP-related marketing spend in the fourth quarter of 2017 compared to the fourth quarter of 2016.

Finally, this year plan to focus on significantly enhancing the quality of the Medicare customer demand that we generate, which is expected to have a positive impact on our profitability but will slow down the pace of expected Medicare membership commission revenue growth in the current year. Turning specifically to guidance, we are forecasting consolidated revenues for 2017 to be in the range of $165 million to $175 million, with Medicare segment revenues in the range of $91.5 million to $96.5 million, and individual, family and small business segment revenues of $73.5 million to $78.5 million.

We expect consolidated 2017 adjusted EBITDA to be in the range of negative $14.1 million to negative $16.1 million. 2017 Medicare segment loss is expected to be in the range of $16.9 to $17.9 million. Individual and family and small business segment profit is expected to be in the range of $29 million to $30 million. Corporate shared services expense excluding stock-based comp and depreciation and amortization expense is expected to be approximately $27.2 million. Non-GAAP loss per share for 2017 is expected to be in a range of negative $1.49 to negative $1.59 per share.

As Scott shared in his prepared remarks, our five-year financial targets are to grow revenues at a compounded annual growth rate in excess of 20% and achieve adjusted EBITDA target margins in the 20% range at the end of the forecast period. We expect for the individual, family and small business segment to remain profitable this year and as we return to growth in 2018 and beyond. We also expect that the Medicare segment will be highly profitable with segment profit as a percent of revenue well in excess of 20% by the end of the five-year forecast period.

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 for questions. Nicole?

(Operator Instructions)

Dave Styblo, Jefferies, LLC.

Good morning, and thanks for the questions. Maybe I'll just start on a longer-term guidance to get a better understanding of the assumptions that are in there, especially by segment. I know with Medicare, you guys were talking about getting to 20% in the out your plus from a loss; and at the same time, it sounds like you are certainly changing some go-to-market strategies for attracting applications.

How do we get comfortable that you have the visibility already to see a path towards that profitability over the next few years here when we are pretty early on in the process of moving forward to that? In on the IFP side in those longer-term assumptions, what do you guys assume that market looks like in a few years when broker commission cuts continue to happen or many brokers are not paying? Can that business remain profitable over the next few years under this environment that we are in right now? So if you could Start with that, that would be great.

Thanks David. I will hit the Medicare and I think the IFP discussion probably requires a little bit broader strokes, so I will let Scott talk little bit more about what we have been doing in Washington on that front and how that impacts the nuts and bolts that business. The Medicare side, as we've had an opportunity to dig into the business both through the strategic planning process and the strategic alternatives process that we have been going through, we have been able to identify a number of areas where we believe we are not operating at an optimal level and have considerable upside relative to both how we are going to market to source customers as well as how we are operating from a sales process perspective.

What I will tell you is that we believe that we have a suite of content and decision support services, as Scott had mentioned earlier on the call, that from a new-business perspective will enable us to get into some market segments from a customer acquisition perspective that are significantly higher quality customers that we can acquire at a lower cost basis. And our early moves to get into those markets have been greeted very favorably by the partners that we are working with.

We see a lot of runway relative to early traction in some of those strategic efforts. Some of those we'll talk a little more in depth about at our March 23 meeting, but we are already beginning to see the benefits of that change in go-to-market strategy relative to some of those strategic partners. From a sales process perspective, we do believe that we have identified several areas where we can take those lower cost customers, hitting our platform, and convert them at a higher rate. And candidly, the marketing cost of acquisition formula, it's very arithmetic, and the more people you convert to sales, the further down that cost of acquisition goes.

So as we are able to execute on the sales conversion process with some new processes that we are putting in place, we believe we can drive higher revenue and at lower costs. And we're already starting to see some of that traction as we mentioned earlier.

I will only add that we are seeing an improvement in our conversion rates. Q3 was a very tough quarter. We had a deterioration conversion rate of 10% year over year in Q3. That was mitigated down to an only 2% degradation in conversion in Q4. So we would say that we do see the early signs of making progress in terms of improving Medicare profitability.

There was a lot of words in our two prepared statements, but the bottom line is that both of us expressed that we are unhappy and in the regard of operationally unsatisfactory the profitability of Medicare. That is not a view of the underlying business economics that are afforded by Medicare, but rather by our poor execution. And so what we are committing to today are targets that would only bring us to best practices. And so we are stating those because we see others referenceable companies that are performing at those rates, and we are confident that we can get eHealth performing similarly.

And then on the IFP side?

Okay. Could you just re-ask it, because I was so absorbed with Medicare?

Sure. Just the Outlook right now is very tenuous. We, through our channel checks, continue to hear about broker commission cuts, many of the plans not providing any commissions whatsoever. It sounds like you guys are thinking you might be able to possibly enroll some new folks in the open enrollment period for 18. So I am just curious what does your long-term targets assume happens in the IFP business for either enrollments or revenue? How are you guys looking about that business when obviously we still don't even have a plan from Trump yet. But what are you thinking about how that looks like?

So, Dave, again, I'll let Scott talk about the bigger picture stuff. As it relates to how we are looking at modeling the business right now, you're absolutely right. What you described in terms of what the market looks like currently from an IFP perspective is spot on. The -- particularly, in the SEC period, the brokers that have continued to stay in the market are aggressively stepping away from the market. And as a result, commissions are hard to come by and new business is hard to come by for us.

What we have built into our expectations from a modeling perspective is that given our contacts with what is going on in Washington that we expect the double redirect to be removed from our enrollment process by the time we get into OEP and in late 17 for the 18 enrollment year. And that we are able to transact business back in a marketplace which is still not in great shape as an individual market, but significantly better than what we had to deal with in 2016, something that begins to look more like what we were able to transact in 2015.

It's important to note that during OEP, those carriers that are in the market do step up with commissions. We have not seen a degradation in commission rates, though it's too early to tell what the rates will be going into the next OEP. But if the handcuffs that were put on us back in February of 2016 are taken off, again, we conservatively expect that will be able to transact business much as we did back in 2015, which was significantly below peak levels for us as well.

So from a modeling perspective, we believe we've addressed it conservatively relative to what is going on in the marketplace, but I will let Scott talk a little bit more about what we are seeing towards the regulatory outlook.

Right. So just to put a finer point on it, we have very conservative enrollment projections for the 2017 open enrollment period because we see the same things your market checks are indicating in terms of further carrier exiting of the market. And there are some carriers that rather than exit are paying no commissions because they really don't want this business because, in a word, it is unprofitable for that.

Dave and I are taking this call actually from Washington DC in our government affairs offices. We are here both this week, having senior-level meetings both with the administration and with Congress, and making our case heard as to what is necessary to repair the individual market which has collapsed and is collapsing at an accelerating rate.

So if no action were to be taken in this market, there won't be one for the 2018 enrollment year. So the view that we have is that everything that can be done from a regulatory front pursuant to President Trump's executive order that he signed on his first or second day is going to be done with the HHS and CMS administration. And then further that health care remains the number one priority to repeal and replace in part as part of the budget reconciliation in March and April before taking on tax reform in August.

That was reaffirmed in Mike Pence's speech last night at the CPAC Convention, and it is consistent with everything we are being told by senior administration officials. So we believe that our IFP submitted app forecast will end up proving to be conservative. We very carefully indicated here that we are only assuming a restoration of the electronic pathway for enrollment. We are not assuming that the market gets more robust, but we also aren't assuming that it deteriorates further.

Okay and my other question is on the small growth initiative here. You guys are making a fairly large bet, I think you said about 2/3 of the EBITDA loss, something like $10 million, or 5% of the company's market cap is going towards these investments. I think I triangulated all that right. How can you help investors, and this is one question I get from many of them, about what you are doing her with the opportunities? Why it looks good from an economic perspective?

Certainly, I can appreciate that there is a lot of mom and pops out there that keep it going against the streamlining from a technological standpoint, a lot of the enrollment process, but also it seems to be a situation where that might be costly to do and tough to scale. Can you help us get a bit more perspective on what you see is so attractive about that business and that can drive attractive unit economics?

Well, first, I would like to agree with you that it is material and it is in that range of spending. And to put a finer point on it, it's 16% of our cash. And I look at it as even three times more material than the 5% of our market cap that you indicated, because I husband the cash very carefully and hold very high ROI expectations for it if we are going to use it for anything other than return to shareholders. Let me make that firm note and commitment to you.

But with respect to small business, this was a key insight from our 100 day strategic plan. And when we understood that we had these 300,000 members who are highly sticky -- I'm sorry, what did I say? 30,000 members that are highly sticky that we were generating with virtually no customer acquisition cost because they were coming across the transom with our search engine optimization keywords that were one or two in every single insurance term. And we were processing them at a highly manual way, and then the customer care and engagement post-enrollment was also highly manual. The integration, interface with the carrier, again, highly manual.

Given that we've done -- automated every estimated aspect of that customer purchasing journey as well as integration on the B2B side with the carrier and the IFP business and you just heard how enormously profitable the IFP business is even in a down year. It made $68 million for us last year. So even with all of this, and the small business was profitable. Obviously at a small level because it was only a $6 million business for us. So we have those internal assessments.

The external assessment is the feedback from these mom and pop businesses. Ideal target sizes is 4 to 5. We're saying under 20, but the ideal size is 4 to 5. These businesses need health insurance, and they don't need a sophisticated HRIS system. They are probably using QuickBooks or even their check book to cut payroll, but they need to offer payroll for retention and for recruiting, and there is no competitor that has omni channel support for this growth. It is not cost effective for physical agents to call on, sell, and service. They don't make money for groups of this size.

Contra wise, the only all online services require more hand-holding by the small business than what they receive. So we believe that we can provide, because of our expertise in this market, a customized enrollment and customer engagement where they can enroll new people, they can change plans, they can interface if they want on the phone or online with us. We truly believe this is a unique offering.

What committed to is that we will monitor this very closely, and that means quarterly, and report back to our investors quarterly as to how we are proceeding. And if at any point in time our market Outlook shifts -- and we know we can execute internally because this is just what we do. But the imponderable here, the bet for us, is that we are right that this segment is robust.

If it is not, we will curtail that investment immediately and consider other uses of that cash. Dave, what would you add?

The only thing I would add, Dave, is that there is a significant opportunity as we have looked at the market to tap into what we've identified as at least an $8 million market opportunity, the micro end of the marketplace with a significantly differentiated go-to-market strategy and technologized platform that is completely unique in the marketplace and provides a level of access and service to this segment of the marketplace that just does not have any today.

And because of the significant investment that we made on the IFP side and the fact that a majority of that technology investment translates very clearly over to this segment of the marketplace, we believe that we are not just stepping up to the plate and swinging the bat. We are kind of starting from second base here, and the opportunity with a meaningful investment, but one that is manageable on our end to tap into a significant market opportunity is substantial.

Just to give you some of the metrics on this to whet your appetite -- it certainly does mine -- we estimate $3,300 LTV per group, and this is with groups with five members on average. That's because of high commissions and very low churn. It stands to reason once a small business has set this up, as long as it is functioning for them, they are just inclined to churn unlike the individual market which has very high churn rates.

So we think that there is very attractive unit economics in this business. We are not incurring a large fixed cost to go after it. And so again, we will continue to monitor it, and we're committing on this call to report on it on a quarterly basis.

Thanks for the interest. I will step back, brothers.

Tobey Sommer, Suntrust Robinson Humphrey.

Thanks. Could you update us on the expressions of interest that you received from external parties in 2016?

What I would say is there were more than one, and we were in multiple conversations throughout this period. And we continue to have narrowed down those conversations, but we have not yet concluded the process and are indicating on today's call that we will conclude the process by March 23.

Okay. In terms of your margin goals that are long-term that you have articulated, if you could bifurcate them in what contributes to them on two fronts, maybe this will just be helpful for me. How much of it is just pure scale versus incremental profit improvement initiatives.

That is a fair question. I don't know that I could necessarily break them down in that regard. I will answer it this way, the IFP business absolutely benefits from scale. We have done a very good job, I believe, of managing both the technology investment from an ongoing perspective as well as the marketing investment relative to what is going on in the marketplace to ensure that what is a strong cash flow generating business remains such.

At the same time, the Medicare business is one that because it is a more labor intensive business from a sales perspective -- there are benefits of scale to that. But the near-term margin opportunities within the Medicare business, candidly, come much more from a process improvement perspective rather than scale. Again, we are talking about 2017 being a transition year and that we are looking for still solid, but lower than we've been putting up growth in the Medicare business from a submitted application, from a revenue perspective.

Our revenue growth is in the mid to high teens projected for 17, as Scott had mentioned. But the scale opportunities there will come over time, the benefits in the near term from a profitability perspective being much more process driven, however.

One other comment I would make is we are assuming our corporate G&A expenses remain flat through this period, which would mean, given inflation, that we are gaining modest deficiencies along the way. So we are showing -- we believe that we have all of the staff functions that we need for the business to more than double in revenue.

And along those lines, the last point that I would make is that on a tech and content investment perspective as well, there are meaningful investments being made obviously in the small business side but also in the Medicare side this year and into the early part of next year to further differentiate our go-to-market capabilities. As you get deeper into 18 and further into 19 and beyond, the opportunities, like with G&A, to leverage those investments will are pretty significant also.

Thank you. Just two other questions from me. I wanted to dovetail back on the conversations you were having relative to strategic alternatives. Did the pace or tenor of those change post-election with a different outlook for ACA?

We entered into the conversations before, and I would say there was some greater interest expressed post-ACA.

Okay. And then in 2017 and 18, what is the cash burn assumption assuming negative EBITDA that is fairly substantial in 17 and then breakeven in 18.

The cash burn largely aligns with our adjusted EBITDA targets, and we -- as Scott mentioned earlier, we are targeting breakeven performance on a corporate basis for 2018. So again we are not going to get into cash projections, but you can --

The cash would roughly attract the EBITDA?

That is a fair assumption, yes.

Thank you very much.

(Operator Instructions)

George Sutton, Craig-Hallum.

Thank you. Scott, you mentioned that you are very encouraged by what you are hearing from folks in Congress. I wondered if you could just give us a sense of what you are hearing from them relative to your business opportunity, and very specifically, what are you hearing relative to a potential shutdown or dismantling or muting of the healthcare.gov site? Thanks.

Yes. I have heard from two most senior officials in the administration that it is there ambition to shut down healthcare.gov. There is growing sentiment that should be an ambition. I think the more likely scenario is that healthcare.gov becomes an information site rather than an enrollment site and an e-commerce site that is inefficiently supported by the government.

I think that this would have been evitable even without our streamless efforts to call attention to the $1.9 billion being spent per year on healthcare.gov. The administration is highly oriented to eliminating waste and government interference with the private sector.

So I couldn't be more optimistic on that front. There is a possibility that there will be a more robust, addressable individual market coming out of this; but right now without having seen the president's plan, we were hesitant to build any upside into these five-year projections.

Hypothetically, if we were to see even an information site, but certainly not a transactional site scenario for healthcare.gov, we have been under the belief that would be a relative homerun scenario competitively. Would you agree with that?

I do, and I think that it will even be seen by you more so now that we have broken out segment profitability and to see just how profitable that IFP business is.

Okay. One other thing relative to the strategic review process. I know you are sensitive to the question, so I will ask it this simply. You are suggesting that it will be concluded by the time you have an analyst day March 23 in New York. Should I buy refundable or non-refundable tickets?

We look forward to updating you when we are able to do so fully.

Okay. Thanks, guys.

Thanks for the questions, George.

I am showing no further questions at this time. I will turn the call over to Scott Flanders for any closing remarks.

Thank you, everyone. I look forward to catching up with any of you that would like more detailed discussion around our results in our five-year forecast. And if we don't have any further questions, Dave and I will get back to work. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. At this point, you may all disconnect. Have a great day.