eHealth Inc (EHTH) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the eHealth Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to hand the floor over to Kate Sidorovich, Vice Present of Investor Relations. Please begin.

Thank you. Good afternoon, and thank you all for joining us today either by phone or by webcast for a discussion about eHealth, Inc.'s Second Quarter 2017 Financial Results.

On the call this afternoon, we will have Scott Flanders, eHealth's Chief Executive Officer; and Dave Francis, eHealth's Chief Financial and Operations 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 include statements regarding future events, beliefs and expectations, including statements regarding our efforts to return to strong growth and profitability; our progress in executing on our strategic plan; our Medicare demand generation strategy; our partnerships and hospital system -- with hospital systems and pharmacy networks; effectiveness of our Medicare sales organization; our marketing programs; the impact of our direct-to-consumer television marketing efforts; our expectations for low customer acquisition cost; our projected Medicare submitted application growth rate in the second half of 2017; our plan to offer alternatives to major medical IFP product; our expectations for higher commission revenue per member from eHealth-branded insurance and ancillary product bundle; our ability to comply with CMS guidance and enroll subsidy-eligible consumers into qualified health plans through the federal exchange without leaving our website during the upcoming open enrollment period; our expectations regarding (inaudible) business; progress that we made in the small business insurance market; our adoption of new revenue recognition guidance on January 1, 2018, and its expected impact on revenues, earnings and balance sheet and reformation of our guidance for the full year 2017, including revenue, adjusted EBITDA, segment revenue and profitability and earnings per share guidance.

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 statement.

We describe these and other risks and uncertainties in our annual reports on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, which you may access through the SEC website or from the Investor Relations section of our website.

We will be presenting certain financial measures on this call that will be considered non-GAAP under SEC Regulation G. For reconciliation of 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 Scott Flanders.

Thank you, Kate, and welcome, everyone.

It's now been a full year since the board asked me to take over as CEO of eHealth. And I'm pleased to talk with you today about several areas of tangible progress we have made in our efforts to return the business to strong growth and profitability, while enhancing our position in the consumer health engagement market.

We still have significant work ahead, but I'm pleased with our progress and excited by our current trajectory.

2017 is a transition year for eHealth, and our second quarter financial performance reflects this dynamic. Second quarter revenue was $28 million. Our adjusted EBITDA was negative $13.6 million. GAAP net loss per share was $0.93 and non-GAAP net loss per share was $0.78.

Cash flow from operations was negative $1 million, bringing our cash balance as of June 30 to $66.1 million. These results were in line with our expectations for the quarter.

For the first half of the year, consolidated revenues and non-GAAP operating income were $106.9 million and $19.8 million compared with $111.1 million and $22.2 million, respectively, for the first half of 2016.

We're making significant headway in executing on our strategic plan, including early success in developing high-value strategic partnerships in Medicare, enhancing the effectiveness of our Medicare sales organization and achieving strong enrollment growth in the small business and Medicare Supplement segments of the health insurance market.

We are also preparing our Individual & Family Plan business for improved performance in a turbulent market that we believe continues to hold significant opportunity for eHealth.

In Medicare, our focus this year has been on reshaping our demand generation strategy away from higher cost lead aggregator and paid search sources and towards more profitable channels where our differentiated value proposition for Medicare beneficiaries seeking the optimal Medicare covered solution is well recognized by strategic partners.

Last quarter, we announced 2 important Medicare partnerships with Union Plus and USAA. And we are implementing marketing programs with these partners, which we expect to start contributing to our Medicare application volumes later this year.

We continue to build on this momentum by entering into additional partnerships with leading health systems to assist their Medicare patients in enrolling in the Medicare plan that best suits their health and economic needs.

First, we are expanding our existing relationship with Sutter Health. Sutter is a not-for-profit health system in Northern California, serving over 100 communities through a network of 24 hospitals and 5,500 physicians. Sutter Health was our first pilot partner in this area as we tested our value proposition with their Medicare population last year.

We are encouraged that Sutter is working with us to extend our relationship across their large hospital footprint.

We have also signed new partnerships with Community Hospital of the Monterey Peninsula and Salinas Valley Memorial Hospital. These relationships are part of our broader strategy to educate Medicare-eligible individuals regarding their coverage alternatives and provide them with the knowledge and assistance to enroll in the insurance plan that best meets their economic and health care needs.

Working with leading health systems and provider organizations, we create a unique engagement partnership that results in a win for the health system and a win for their patients by aligning their coverage, care and economic needs.

Demand for this program remains high. And we expect to enter into additional relationships such as these prior to this year's annual enrollment period.

Switching to the direct marketing channel in our Medicare business. We're making progress in reestablishing control over our marketing efforts and relying less on third parties to deliver new customers to our platform.

A key area of focus in the first half of the year has been the development of our own direct-to-consumer television advertising expertise. Direct response TV is an important member acquisition channel in Medicare. And we believe that delivering these capabilities in-house will lower our acquisition cost and create greater agent enrollment efficiency from improved coordination between our marketing and sales organizations.

As we engaged in extensive testing of new marketing channels, while enforcing discipline and driving more profitable customer acquisition, we have experienced a temporary, but expected slowdown in our Medicare product submitted application growth in the first half of this year.

Second quarter submitted applications for all Medicare products were down 5% year-over-year. We previously spoke to you about this dynamic as part of our transition plan, and enrollment activity in the first half of the year has been generally as we expected.

While our Medicare application volumes also continue to be negatively impacted by changes in marketing regulations we've previously discussed and they were adopted by CMS last year, it's important to note that our efforts to change leadership and several operating processes around our Medicare sales organization began to yield meaningful increases in sales activity as the second quarter progressed.

Second quarter Medicare commission revenue grew 10%, driven by a 23% increase in new Medicare Supplement enrollments and by renewal revenue on our existing Med Supp book of business.

As we look to the second half of 2017, we anticipate that our Medicare application growth will accelerate meaningfully as a result of the implementation of new partnerships, improved efficiency in our call centers and easier comparisons to the prior year as we anniversary the changes to the CMS marketing guidelines.

For the full year 2017, we are now planning to achieve a Medicare submitted application growth rate in the high teens compared to our earlier projection in the mid-teens that we communicated to you previously.

Switching to our other revenue segment. The Individual & Family plan market remains turbulent and remains a headwind for our near-term growth.

As previously discussed, substantial premium increases, plan cancellations, carrier exits and inventory shortages have limited our new Individual & Family plan enrollment and have contributed to increase churn rates.

In addition, we continue to be constrained in our ability to enroll subsidy-eligible individuals due to the inferior connection to the federal exchange instituted by CMS early last year.

Our estimated quarter in Individual & Family Plan membership was down 49% year-over-year, while second quarter Individual & Family Plan commission revenue declined almost $10 million or 49% to the second quarter of 2016.

To mitigate the decline in our Individual & Family Plan enrollments and reposition the company for growth in this market segment, we are actively working on new, innovative health insurance offerings for consumers who are either priced out of the Individual & Family Plan market or live in areas with limited choices.

First, we have shifted our current focus to offering short-term insurance products, which are often the only option available to consumers outside of the open enrollment period. In addition, we plan to launch a variety of eHealth-branded insurance and ancillary product bundles this quarter that include a short-term plan and ancillary products that our market research indicates are a meaningful value to our customers.

We are designing the eHealth bundles to offer a cost efficient alternative to major medical, individual and family plan products. We anticipate that the bundles, which can be sold throughout the year, will be an attractive solution to our customers and also generate higher commission revenue per member compared to the Individual & Family Plan or a short-term insurance product.

These bundles represent a first step as we reestablish and innovative a footprint in the individual market with product offerings aimed at filling the significant product and coverage gaps created by the Affordable Care Act.

In addition, CMS recently issued new guidance that makes it possible for web brokers like eHealth to implement a process for subsidy-eligible customers to enroll into a qualified health plan through the federal exchange without leaving the web broker's website.

In order to do so, a web broker must meet certain requirements, including asking the same application questions in the same order as the federal exchange and satisfying new privacy and security and other requirements, including a third-party audit demonstrating compliance with the requirements.

This process is currently scheduled to be available for the 2018 annual enrollment period, which will run from November 1, 2017, through December 15, 2017, and could represent a significant improvement to the current double redirect process.

We are currently working to comply with the requirements so that we're able to service subsidy-eligible individuals in a significantly more customer friendly and efficient manner.

Our second quarter financial results were impacted by continuing declines in our Individual and Family membership. The individual market remains broken. And no significant legislative changes have been made so far to stabilize it. At the same time, we've seen some positive developments on the administrative front, including the new subsidy-eligible enrollment process and cuts in this year's funding for healthcare.gov.

We continue to believe that 2017 will be a trough year for our Individual & Family Plan membership and revenues, from which, we plan to start rebuilding this business in 2018, driven by new product offerings, the potential for an improved connection to the federal exchange and expectations for lower funding available to the federal exchange to compete for new enrollments.

Turning to the small business market. The number of approved groups doubled compared to the second quarter of 2016, albeit off a small base. We also accelerated the deployment of an end-to-end online enrollment platform with our partner UnitedHealthcare, which is now scheduled to be released in August. A fully automated process that does not require a live agent support will offer a substantially better experience for a small business employer and also reduce our customer acquisition and service costs.

In addition, we have now -- we now have a streamlined online self-service renewal solution, including proposal e-mails, online renewal, recertification documents and carrier submission. This is expected to increase our retention rates, provide an improved customer experience and lower our agent cost.

We are encouraged by the early progress we are making in the small business market.

I'm also excited to have added 2 important hires who will add significant expertise in key organizational area. Dave Nicklaus joined eHealth last month as Senior Vice President of Sales and Operations with a special focus on enhancing the effectiveness of our Medicare sales staff and operations.

Dave was responsible for building the Medicare telesales organization for UnitedHealthcare, the leading Medicare insurance carrier with over 4,500 teleagents for over a decade.

Tim Hannan joined eHealth as our Chief Marketing Officer just 4 weeks ago and will oversee all marketing efforts across the business, including Individual & Family, Small Business and Medicare products as well as keeping a long-term focus on extending the eHealth brand in the consumer health engagement market.

Prior to joining eHealth, Tim held leading market positions in online travel and at the mobile shopping company, Ibotta.

Before I turn the call over to Dave, I believe it is important to highlight an important upcoming change to our revenue recognition accounting.

Starting with the first quarter of 2018, we are required to adopt the new ASC 606 revenue recognition accounting standard, that in our view will more properly reflect the underlying dynamics of our business by providing for a better alignment between revenues that we generate from a member and costs we spend to acquire and enroll the member.

As you are aware, we have historically expensed the vast majority of member acquisition cost upfront at the time of enrollment, while commission revenues have been recognized over the life of the member. This has resulted in higher accounting losses during years of high membership and application growth and masked the significant lifetime profitability characteristics of an average member.

Under the new standard, we will recognize the entire estimated lifetime commissions from a Medicare, IFP and ancillary product member once the enrollment is complete.

The net effect from accounting perspective will likely be a significant increase in revenue and profitability, particularly, during periods of high membership and application growth.

Dave will describe the guidance and its potential implications in more detail, but this is an important change of which you should be aware.

In conclusion, we are making steady positive progress across all of our strategic and operational objectives and are pleased with the transition thus far as financial performance has come in as expected.

The acceleration of improvements in our Medicare sales organization caused us to expect a significant increase in submitted application volumes during the second half of the year, driving Medicare enrollment growth to a high teens target versus our previous mid-teens expectation.

We see significant interest in eHealth's value proposition from potential partners in the Medicare market and are working on a number of meaningful partnership opportunities, primarily in the hospital and pharmacy verticals.

In the individual market, we intend to pursue customer enrollments in major Medicare products during the upcoming open enrollment period, while being aggressive in offering consumers cost-effective alternatives, including short-term plans and insurance bundles.

Maximizing profitability remains our priority in running the individual business. And we expect for this segment to remain solidly profitable this year.

In the small business market, we are investing in technology, marketing and business development initiatives and expect to continue generating strong double-digit growth in enrollments off of a small base.

And now, I will turn the call over to Dave Francis, who will review our second quarter financial results in greater detail.

Thanks, Scott. Good afternoon, everyone. Our second quarter revenue was $28 million, a decrease of 25% compared to $37.3 million for the second quarter of 2016.

Second quarter commission revenue was $25.8 million, a 26% decline compared to the second quarter a year ago. As Scott described earlier in the call, our financial performance continues to be negatively impacted by the challenging environment in the Individual & Family Plan market.

Second quarter Individual & Family Plan commission revenue was $9.9 million, a decline of 49% compared to the second quarter a year ago.

Second quarter Medicare commission revenue was also $9.9 million, an increase of 10% compared to the second quarter of 2016, driven primarily by new Medicare enrollments during the quarter and renewal commissions on existing Medicare Supplement plan members, which have been increasing and which are booked throughout the year.

Our estimated Individual & Family Plan membership at the end of the second quarter was 244,900 members, down 49% compared to the estimated membership we reported for the second quarter a year ago.

The estimated number of revenue-generating Medicare members was 300,400 at the end of the second quarter, an increase of 26% compared to the second quarter of 2016.

During the first quarter of 2017, strong renewal revenues in our Medicare business more than offset declining Individual & Family Plan commissions, resulting in overall year-over-year revenue growth.

However, our second and third quarters are seasonally and structurally lower in terms of Medicare revenue with no renewal commissions from our existing Medicare Advantage members, all of which are booked in the first quarter and limited commissions on new Medicare enrollments outside of the annual enrollment period that takes place in the fourth quarter.

Our Medicare enrollment growth slowed in the first half of the year, driven primarily by planned changes that we are implementing to our marketing strategy to emphasize lower cost and higher quality customer acquisition. These changes include shifting our focus and marketing dollars to direct marketing initiatives and strategic partnerships as well as working to more closely align our marketing efforts with our sales operations in the Medicare business.

As Scott mentioned earlier, these management, operational and strategic initiatives around marketing and sales resulted in meaning -- excuse me, in meaningful improvements in Medicare sales activity in the last few weeks of the second quarter, and those improvements are sustaining into the third quarter.

Based on steadily improving sales performance and the strength of our partnership and direct marketing activities, we now expect to accelerate Medicare enrollment growth meaningfully in the second half of 2017.

The fourth quarter is, especially, important in driving our Medicare enrollments for the full year and has historically contributed 50% or more of our annual Medicare applications.

As Scott mentioned, we now expect to grow overall Medicare enrollments at a high teens rate for the full year versus a mid-teens rate previously communicated.

The estimated number of members on small business products was approximately 31,200, an 8% increase compared to a year ago.

Our total estimated membership across the enterprise at the end of the quarter for all products combined was approximately 885,800 members.

Now I'd like to review our operating expenses. Second quarter non-GAAP operating costs, which excludes stock-based compensation, amortization of intangibles grew 4% in dollar terms, but increased significantly as a percentage of revenue compared to the second quarter a year ago given the lower revenue base of the business.

Second quarter 2017 non-GAAP marketing and advertising expense, which excludes stock-based compensation expense, grew by approximately $1.5 million year-over-year, reflecting primarily marketing activities to support our direct response television advertising initiatives and new Medicare partnerships and to a smaller extent, an increase in our spend in the small business market.

It's important to note that second quarter marketing expense included over $750,000 of contracted spend against the legacy marketing contract that has underperformed and will not be renewed. A nominal amount of committed spend remains on this contract for the balance of the year.

Second quarter 2017 non-GAAP customer care and enrollment expense grew by approximately $1.4 million year-over-year, driven primarily by an increase in Medicare agent headcount and to a lesser degree by an increase in customer care personnel supporting our small business initiatives.

Second quarter non-GAAP technology and content costs, which excludes stock-based compensation expense and non-GAAP general and administrative expense, which excludes stock-based comp and amortization of intangibles, were down by approximately $0.2 million combined compared to Q2 of 2016.

Adjusted EBITDA for the second quarter of 2017 was negative $13.6 million compared to negative $2.6 million for the second quarter of 2016.

We calculate adjusted EBITDA by adding stock-based compensation, depreciation and amortization, including the amortization of acquired intangibles, restructuring benefits, other income or expense and provision for income taxes to our GAAP net operating income.

Our Individual & Family -- our Individual, Family and Small Business segment remained very profitable on a stand-alone basis, generating segment profit of $8.4 million despite reductions in revenue, while our Medicare segment generated a loss of $15.1 million.

Second quarter corporate shared services expense, which exclude depreciation and amortization expense and stock-based compensation expense were $6.9 million.

Second quarter 2017 GAAP net loss per diluted share was $0.93 for the second quarter of 2017 compared to a net loss per diluted share of $0.03 for the second quarter of 2016.

Non-GAAP net loss per diluted share was $0.78 compared to net income of $0.09 per diluted share for the second quarter of 2016.

Our second quarter 2017 cash flow from operations was negative $1 million, aided by collection of over $9 million in accounts receivable, stemming primarily for Medicare renewal revenues we booked during the first quarter.

Capital expenditures for the second quarter of 2017 were approximately $1.1 million. Our cash balance was $66.1 million as of June 30, 2017.

On the whole, financial performance for the quarter met our expectations as we continue to implement significant operational changes across the business.

With respect to guidance and based on information currently available, we are reaffirming the revenue, adjusted EBITDA, segment revenue and profitability and earnings per share guidance for the full year 2017 that we provided on our first quarter 2017 earnings call.

I want to remind you that these comments are based on current indications for our business, which are subject to change at any time, and we undertake no obligation to further update our guidance.

Finally, I would like to comment on our upcoming adoption of the new ASC 606 revenue recognition accounting standard.

The new standard, which we are required to adopt on January 1 of 2018, will have a material impact on our reported revenues, earnings and balance sheet. We anticipate adopting the new standard on a full retrospective basis whereby we will present all prior periods reported in our filings based on the new accounting convention.

We plan to provide our 2018 annual guidance and comparative data, which will reflect the new standard on our fourth quarter 2017 earnings call.

The main implication of the new standard is that for Medicare, IFP and ancillary products. We will recognize revenue in the amount of the entire estimated lifetime commissions we expect to receive related to the member once the carrier approves an application.

Historically, we have recognized commission revenue for these products over the life of the member.

In addition to changes in our P&L, we expect an adjustment to accounts receivable and retained earnings in the opening balance sheet.

We believe the new standard will provide for better alignment of revenue and related marketing and sales cost and provide improved visibility into the profitability of our 2 operating segments.

And now, we'll open the call for questions. Karen, I will turn it over to you.

(Operator Instructions) Our first question comes from the line of George Sutton with Craig-Hallum.

So relative to the Medicare strength that you started to see in the latter part of the quarter and you mentioned has sustained in Q3, can you just give us a sense of what is driving that? And along with that, I'm curious when Union Plus started to move forward?

George, it's Dave. The sales activity, as you're aware, we made some significant changes in terms of the leadership of that group late in the first quarter. And as we've dug in and look to implement a management transition there under new leadership with Dave Nicklaus taking over in early June, candidly, there were 2 things that happened. One was just identifying some low-hanging fruit relative to taking friction out of the process that had kind of worked its way in under the previous management organization and combining that with a tighter integration of sales with the Medicare marketing team, particularly, as we've been moving into some of these direct TV initiatives that we've been looking to move away from the external third-party source and into a more controlled environment for us, being able to get better alignment between marketing and sales and taking that friction out of the process as the quarter wore on started to show very meaningful results for us as the second quarter got into the back half. And as we said, it's sustained into the -- into and through the month of July. So we're very encouraged by the tangible trends that we've been able to see in that marketplace. And that's what gives us confidence that the growth rate from a Medicare enrollment perspective is going to be higher than we had originally anticipated. Do you want to talk about Union Plus or do you want me to take it?

Yes. Just with respect to Union Plus, it is -- there are 55 unions that comprise that association. And we've hired a director-level leader that is out working with each of these unions to onboard them. And so this is something that we forecast conservatively for the balance of 2017, that we expect to bring meaningful enrollments into '18. But it's not a significant part of our increase in guidance for mid-teens to high teens in terms of Medicare enrollments for the balance of the year.

Okay. Perfect. And you mentioned that you were encouraged by the early progress you're seeing in the Small Business segment. And I'm curious if you made any changes to your spending plans. You had told us before we're going to spend a lot of money trying this. And we're going to report back to you as to what we're thinking, and I thought spending may be some indication?

We are not quite spending at the levels that we built into our plan. So it's -- we were conservative with respect to the budgeting of small business and I'll let Dave comment. We're fully bought. We're encouraged with what we're seeing, but we haven't had to spend as much money as we thought.

Yes, George, the additional color I'd throw out there are 2 things. Number one, we are very encouraged by the development work that our engineering team has accomplished there at the UnitedHealthcare. Digital integration being the most prominent, but there is a lot of additional work with other carriers that's going on to digitize that business that as we talked about is still kind of stuck in 1975 mode for most of the marketplace. And the second piece is that we have been very diligent in managing expenses across the organization. That diligence has gone through into the small business side, on the tech and content side too. So we've been efficient in how we've been bringing some of those new technologies into the marketplace and have done so, as Scott said, on a cost basis that was below what we were looking to spend when we originally budgeted for the first of the year. The last thing I will throw your way is to, again, we're very comfortable with the numbers and reaffirming our guidance from both a topline and bottom line perspective. So all plans are continuing to move forward as we had started the year.

Your 1975 reference forced me to Google what was the top single in 1975 and it was Captain & Tennille's Love Will Keep Us Together. So that's an interesting perspective. So lastly, on the healthcare.gov spending, the fact that they're going to be forced to spend less. Where is that spending going to be less. Is it going to be on the things that are competitive to you relative to advertising?

Well, we found health -- CMS and with healthcare.gov was spending into all channels and search engine marketing as well as print and also TV. So it's a small piece -- the smaller piece of what we think is the upside going into Q4. Reversing the double redirect is more material than CMS moving out of the advertising as is the opportunity for us to sell short term and these custom-tailored eHealth-branded bundles. So we would rank those 2 as more material for Q4 than the CMS dialing back on the healthcare.gov funding.

And our next question comes from the line of Tobey Sommer with SunTrust.

This is actually Kwan Kim on for Tobey. What kind of changes in the market might prompt you to invest more heavily in open enrollment today than it is contemplated today?

So we're launching these bundles later this quarter, and if the takeup rate is high, then we could afford to spend more money in search engine marketing to try to drive more enrollments to the bundles. And these bundles are substantially more profitable than either short term or a standard IFP product. So if we see early success in our launch, which is contemplated for September, we could decide. No plan yet to do so. But to be transparent to your question, we could decide to be more aggressive spending against those bundles.

Yes, the other point that I would make is that we've directed and are constructing the marketing organization to be kind of as nimble and provide as much optionality as possible as we test a number of initiatives in the third quarter, preparing for the fourth quarter OEP and then monitoring the performance of our different product segments throughout OEP on a real-time basis. So as Scott said, if we see an area of the marketplace that is performing exceptionally well, we will be positioned to move in that direction immediately rather than having to step back, regroup and perhaps lose some opportunities. So we're looking forward to this OEP and believe that we're well positioned at the moment to take advantage of it.

(Operator Instructions) And that concludes our question-and-answer session for today. I would like to turn the conference back over to Scott Flanders for any closing comments.

Thank you, everyone. As is our custom, we are available for calls and follow-up at your convenience. Thank you, everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.