eHealth Inc (EHTH) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the eHealth Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Kate Sidorovich, Vice President of Investor Relations. Ma'am, you may begin.

Thank you. Good afternoon, and thank you all for joining us today, either by phone or by webcast, for a discussion about eHealth, Inc.'s second quarter 2018 financial results. On the call this afternoon, we'll have Scott Flanders, eHealth's Chief Executive Officer; Dave Francis, eHealth's Chief Operating Officer; and Derek Yung, Chief Financial Officer. After management completes its remarks, we'll open the line for questions. As a reminder, today's conference call is being recorded and webcast from the IR section of our website. A replay of the call will be available on our website following the call.

We will be making forward-looking statements on this call that include statements regarding future events, beliefs and expectations, including statements relating to our strategy for growth in the upcoming Medicare annual enrollment period; contributions from our strategic partner channel; our marketing efforts, including our direct-to-consumer marketing initiatives; our expectations regarding online enrollments, customer volumes, cost of acquisitions and conversion rates; our expectations for submitted and approved applications; the performance of our Medicare and Individual businesses; expected demand for short-term and non-ACA products; the priorities and growth in our Small Group Business; our expectations for sales force expansion; our customer retention initiatives; lifetime value of our short-term products; and expected legislation relating to the duration of short-term plans; our plans relating to debt financing; our revenue and earnings expectations for the third quarter and our guidance for 2018, including our guidance for total revenue, segment revenue and profit, adjusted EBITDA, corporate shared service expense, GAAP net income, GAAP net income per share, non-GAAP net income per share and adjusted EBITDA per share.

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 described 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 are 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. During the second quarter, we've made significant progress in preparing our Medicare business for what we believe will be the strongest selling season in eHealth's history. Our portfolio of strategic partners is now broader and more diversified compared to a year ago, which should allow us to drive higher customer volumes and reduce execution risk. We also tested a range of direct-to-consumer marketing initiatives across direct response television, direct mail and digital channels, and believe these efforts will allow us to better optimize Medicare customer volume at an attractive cost of acquisition, adding to expected growth in the partner channel.

Our second quarter accomplishments also include further improvements in the effectiveness of our sales organization, another meaningful year-over-year reduction in marketing cost per approved Medicare member and a higher contribution from online enrollment, which we believe represents the future of the Medicare market and for which eHealth is uniquely positioned to become the market leader.

In the under-65 market, we generated year-over-year growth in approved numbers for the first time in over 2 years, reflecting a new focus on short-term plans designed to meet the needs of Americans who continue to face rising premiums and a limited selection of major medical insurance products. We plan to continue to emphasize short-term and other non-ACA products in the absence of a much-needed legislative fix for the individual major medical insurance market.

Finally, our Small Group business had another great quarter with the number of approved groups increasing 25% year-over-year, while acquisition cost per application declined, reflecting better conversion rates.

Second quarter revenue was $32.7 million. Our adjusted EBITDA was negative $10.1 million. GAAP net loss per share was $0.63, and non-GAAP net loss per share was $0.40. Cash flow from operations was negative $300,000, bringing our cash balance as of June 30 to $30.8 million. Our total commission receivable balance was $267 million as of quarter-end. Dave Francis will go over our second quarter financial results in greater detail later on in the call.

In our Medicare business, submitted applications grew 8% and revenue grew 5%, while variable marketing costs per approved member declined 19% compared to the second quarter of last year. During this seasonally slower quarter in the Medicare market, we focused on our marketing and sales strategies to optimize the quality of demand that we generate and enhance conversions as we prepare for the critical Annual Enrollment Period in the fourth quarter.

I am pleased to report that we have made significant progress in this area. Conversion rates within our sales organization were up by 25% compared to a year ago. In the second quarter, our customer care professionals answered 100,000 fewer calls compared to a year ago, while at the same time increasing the number of applications they submitted, a great achievement reflecting higher lead quality and improved call center efficiencies.

In addition, we increased the number of online applications submitted. In the second quarter, over 9% of Medicare Advantage applications were submitted online, a 59% increase compared to the second quarter of last year.

For all Medicare products, including Prescription Drug Plan, 15 were submitted online, a 28% increase compared to a year ago. This is a positive dynamic given that these enrollments are usually generated with a lower, or in some cases, no agent cost, leading to a higher return on our marketing spend and increased scalability of the business. Most importantly, it signals to us that seniors are increasingly comfortable researching Medicare plans and enrolling online if they have the right platform and tools. eHealth is well positioned to take advantage of what we believe will be a major shift of Medicare customers to migrate online over the next several years.

As we have shared with you in the past, our strategic partner channel is expected to be a significant contributor of our projected enrollment growth during the upcoming Medicare Annual Enrollment Period that starts on October 15. We have a great roster of partners in the hospital, pharmacy and insurance carrier segments of the market, including 4 out of the 5 largest retail pharmacies in the country ranked by the number of pharmacists. Our business development team is working closely with existing partners to ensure that we are well aligned for successful Annual Enrollment Period execution.

We also continue to add new partners. Just in the past few months, we signed partnership agreements with a number of major hospital and provider networks, including Cedars-Sinai, Advocate Health System, Steward Health System, Privia Health and Orlando Health System. In addition to the provider and pharmacy channel, we continue to build out our affiliate partner network, adding Gallagher Affinity as an important new relationship for eHealth. Gallagher is an industry leader in program administration and affinity marketing. They market and manage insurance and other member benefits for over 250 affinity groups across the U.S., including some of the largest and most iconic organizations in the country, such as the (inaudible) Association and the National Small Business Association. eHealth will have access to market and sell Medicare Supplement, Individual Medicare Advantage and Prescription Drug Plans to those members of Gallagher Affinity groups that turn 65 every year.

During the quarter, we tested new marketing strategies in the direct and paid search channels ahead of the Annual Enrollment Period. The direct channel represented 50% of our second quarter Medicare enrollment, up from 29% a year ago, reflecting our strategic shift away from the costly and lower-quality lead aggregator channel. During the quarter, we continued to invest in our in-house direct response TV initiatives and test out new creative concepts and network options. We also started to scale our direct mail initiative, which is generating high-quality customer volume on an increasingly attractive cost basis.

In the search engine marketing channel, we continue to increase investments as our new digital marketing team demonstrates its ability to drive high quality customer engagement at a low cost. Importantly, our paid search efforts attract customers whose tendency is to enroll more frequently over the Internet rather than the telephone.

Finally, we'd like to remind you that the contribution from our strategic partner channel is typically moderate in the first half of the year when growth is driven primarily by direct-to-consumer strategies. Strategic partners typically deploy their marketing budgets around the main selling season that takes place in the fourth quarter. We continue to expect an acceleration in submitted Medicare application growth in the second half of the year as our partner channel contribution increases, with the fourth quarter being the strongest quarter in terms of Medicare product application volumes and growth rates.

The individual market remains challenged, as premiums for Obamacare plans continue to increase with another 15% average rate hike expected for next year. At the same time, we are seeing growing demand for non-ACA products, which tend to be more affordable for an increasing number of consumers impacted by the premium inflation. We have recently refocused our marketing efforts on this part of the under-65 market as discussed in our first quarter earnings call.

In the second quarter, approved members on short-term plans grew 41% year-over-year. This performance allowed us to post annual growth in total approved numbers in the under-65 market, including major medical and short-term products for the first time in over 2 years. We are very pleased with this return to growth in the under-65 business. More importantly, we are excited to better serve our company mission through a broader offering of a viable health insurance solution to consumers who cannot afford major medical coverage.

While the coverage offered by non-ACA products is typically not as comprehensive compared to Obamacare plans, these products do provide the benefits our customers tell us they want the most, office visits and emergency room coverage, reasonable co-pays and deductibles, and limited prescription drug coverage. We're also experiencing significant attach rates for dental, vision and GAP coverage.

The second quarter approved members on major medical products declined 67% compared to a year ago. In addition to a challenging market environment, the year-over-year decline in major medical enrollment also reflects our decision to shift our marketing spend towards non-ACA products. Total approved members in the individual market, consisting of IFP and short-term plans, grew 9% compared to the second quarter of 2017. Going forward, we believe the demand for non-ACA health insurance will further increase within the next 12 months due to the elimination of the financial penalty associated with the Affordable Care Act individual mandate and the Trump administration's expected reversal of a regulation that limited the duration of short-term health insurance to 3 months.

Our team is working on adding more quality, reasonably priced products to our short-term plan inventory and fine tuning our marketing approach to more fully capitalize on this trend. We also remain committed to the subsidy-eligible market, and we'll be marketing major medical products during the open enrollment period in the fourth quarter.

Turning to the small business market. We continue to see robust growth in demand and approved application growth accompanied by meaningful progress across important operating metrics. The number of approved groups grew 25% compared to the second quarter of 2017. Commission revenue increased 16% over the same period last year. Our small group team has achieved a 19% year-over-year improvement in conversion rates and experienced a solid uptick in retention rates, driven by strong performance of our sales center. The acquisition cost per small group application declined 48% year-over-year. In addition, we're selling more ancillary products to our small group customers with new small group ancillary product enrollments growing over 90% in the second quarter. Finally, we continue to make progress in building out a digital small business platform to enable customers to shop and enroll their employees online, bringing significant innovation to the market. We continue to be very excited about the progress and potential for growth in the small business market.

In conclusion, our focus as a company in the seasonally slower second and third quarters of the year is to prepare and optimize the business for the critical selling seasons in the fourth quarter. This year's Annual Enrollment Period will be critical in proving out our new Medicare marketing strategy and our ability to deliver strong Medicare enrollment growth at acquisition costs that represent a meaningful improvement to historical levels.

In the first half of 2018, we made significant progress in lining up 5-key ingredients for making this AEP a success: Number one, we expanded our marketing partner network with several important relationships that are expected to launch prior to the fourth quarter; two, we have tested a range of direct-to-consumer marketing initiatives to ensure that we deploy our marketing budget in an effective and cost-efficient way during the selling season; three, to drive higher sales volumes, we are putting in place a larger sales force with a more flexible model comprised of our core customer care team, supported by 2 high-quality outsourced call centers that will be on-hand to convert demand during peak enrollment times; four, our efforts to drive more customers to our improved online enrollment tool is expected to provide greater scale and customer benefit; and finally, we have launched a number of customer retention initiatives to mitigate customer leakage, immediately following a new sale, and to create greater long-term customer engagement to cement our relationship with our customers.

On this last point, higher retention rates are an important driver of our revenue and profit margin potential as they positively impact the expected lifetime value of a new enrollment. We are excited about the potential of each of these initiatives for both our fourth quarter and long-term financial performance. We are also optimistic about the potential for our non-ACA sales activity in the second half of the year based on what we observed in the second quarter and so far in July. Our expectations for the individual market overall remain very conservative, but the recent traction we are seeing with the non-ACA opportunity is encouraging. Overall, we are pleased with our recent execution and remain committed to the annual guidance that we provided on the last earnings call.

Finally, I am pleased to introduce our new CFO, Derek Yung, who joined eHealth last month. Prior to joining eHealth, Derek served as CFO of Hotwire, a subsidiary of Expedia. He brings significant experience in leading finance, strategy and analytics functions at a leading company in online travel, an industry that has similar dynamics to ours. And we are very excited to have him on board. Dave Francis remains in the role of Chief Operating Officer, and with Derek's arrival, he will be able to focus on the revenue and operational imperatives of the business. Dave, who is working closely with Derek during this transition, will go over our second quarter financial results today.

And with that, I will turn the call over to Dave.

Thanks, Scott, and good afternoon, everyone. I'd like to add my words of welcome to Derek Yung, and note the strong impact that he has already made on the business in the short time since his arrival. He's a great addition to our executive leadership team.

Our second quarter financial results reflect the significant work being done to prepare eHealth for the upcoming Annual Enrollment Period, or AEP. We remain in a strong position to achieve our Medicare enrollment goals and overall financial guidance for the year. We also successfully captured growth opportunities in the small group market, and the non-ACA segment of the individual market, with our approved members on IFP and short-term products combined increasing for the first time in over 2 years.

Before I cover the financials in detail, I want to make a general comment on our second quarter results. As we discussed in our last earnings call, we expected a sequential decline in our second quarter revenue, reflecting the seasonality of our business. The actual decline was slightly more pronounced compared to our expectations driven by 2 key factors: First, we undertook activities to streamline and optimize our Medicare telesales organization, including the closure of our Westford, Massachusetts sales center; and aggressive investments to expand the sales organization at the recently acquired GoMedigap Medicare Supplement business, which impacted Medicare sales and enrollment activity in the second quarter.

In addition, we made a conscious decision in the quarter to conduct extensive testing of our marketing strategies, especially in the area of direct-to-consumer marketing, to optimize enrollment volume, product mix, channel mix and acquisition costs in preparation for the fourth quarter selling season. The impact of these marketing tests was to marginally reduce Medicare enrollments in the quarter. Both of these factors resulted from purposeful operational decisions we made in the first half of the year to put us in a stronger position for the upcoming AEP, and their overall impact on the annual enrollments and COAs is expected to be positive this year, despite their negative impact on second quarter results.

As we complete preparations for the Q4 selling season, we will be investing to add significant additional internal sales staff in the third quarter as well as ramping up our outsourced sales partners to prepare for the October 15 start of AEP. As a result, we will have a significantly larger and more flexible sales force during the AEP to drive greater conversion of the anticipated sales and enrollment volumes that our marketing strategies and extensive partner relationships are expected to generate.

Turning out to our financial results. Keep in mind that all current and prior period results are based on the new ASC 606 accounting standard adopted on January 1 of this year. Second quarter revenue was $32.7 million, a decline of 6% compared to the second quarter of 2017. Second quarter commission revenue was $30.6 million, also a 6% decline compared to the second quarter a year ago.

In the Medicare segment, our second quarter revenue of $25.5 million grew 5% compared to the second quarter of 2017, driven primarily by growth in approved Medicare members and an increase in non-commission revenue. During the quarter, we grew our submitted Medicare applications by 8% compared to the second quarter a year ago, while approved members grew slower at a 1% rate, driven largely by a shift in mix of Medicare Advantage customers. Our estimated number of Medicare members was 393,937 at the end of the second quarter, an increase of 31% compared to the estimated Medicare membership at the end of the second quarter 2017. Second quarter loss from our Medicare segment was $1.5 million compared to a loss of $2 million for the second quarter 2017, reflecting the aforementioned marketing tests and increased investment in sales resources at GoMedigap. In the first half of the year, our Medicare segment profit was $1.7 million compared to a loss of $2.9 million in the first half of 2017.

Second quarter 2018 revenue from our Individual, Family and Small Business segment was $7.2 million, a decline of 31% compared to a year ago, driven by a 67% decline in approved members on major medical individual and family plans, which was partially offset by growth in commission revenue from sales of our short-term products. Including these products, our total approved member growth in the individual market was 9%. Short-term products, which represent the majority of our non-ACA enrollments, have a lower projected lifetime value compared to major medical products, driven primarily by their expected duration. As a result, growth across all approved individual products during the quarter was not sufficient to offset the revenue impact from the product mix shift towards non-ACA products. Going forward, we plan to continue to increase our non-ACA enrollment volumes and could also see an increase in short-term product lifetime value starting in 2019, as current restrictions that limit short-term plan duration to 3 months are expected to be lifted. We believe this would result in a more meaningful revenue impact from our non-ACA initiatives in the individual market starting in 2019.

Commission revenue generated by our small business group grew 16% year-over-year. The second quarter loss from our Individual, Family and Small Business segment was $0.6 million compared to a segment profit of $2.1 million in second quarter of last year. While the IFP segment, on the whole, was unprofitable in the quarter, the IFP business on a stand-alone basis remained profitable.

Our estimated Individual & Family Plan membership at the end of the second quarter was 168,278, down 31% compared to the estimated membership we reported at the end of the second quarter a year ago. We also had approximately 17,000 members on short-term plans at the end of the second quarter. The estimated number of members on small business products was approximately 37,000 at the end of the quarter, a 19% increase compared to the second quarter a year ago.

Second quarter non-GAAP operating cost of $43.4 million, which excludes stock-based compensation, change in fair value of an earn-out liability of $2.5 million, restructuring charges, acquisition costs and amortization of intangibles, grew 3% or roughly $1.2 million, an increase to the percentage of revenue compared to the second quarter a year ago.

Second quarter 2018 non-GAAP marketing and advertising expense, which excludes stock-based compensation expense, was roughly flat year-over-year, reflecting a decline in Medicare-related variable marketing costs and an offsetting increase in our marketing spend related to growth opportunities in the small group and short-term markets.

In the Medicare business, our acquisition cost per approved application declined 19% compared to a year ago. In the individual business, we increased our marketing spend around non-ACA-compliant plans, including short-term products and packaged benefits, to capture what we see as meaningful and growing consumer demand for more affordable alternatives to major medical plans.

Second quarter 2018 non-GAAP customer care and enrollment expense, which excludes stock-based compensation, increased by approximately $1.1 million, and increased as a percentage of revenue compared to the second quarter 2017. This increase was driven primarily by the increased sales investments at GoMedigap mentioned previously.

Second quarter non-GAAP tech and content costs, which excludes stock-based compensation and non-GAAP general and administrative expense, which excludes stock-based compensation and amortization of intangibles, were each roughly flat compared to the second quarter of 2017. Adjusted EBITDA for the second quarter of 2018 was negative $10.1 million, compared to negative $6.9 million for the second quarter of 2017. We calculate adjusted EBITDA by adding back stock-based compensation, change in fair value of earn-out liability, depreciation and amortization, including the amortization of acquired intangibles, acquisition costs, restructuring charges, other income or expense and income tax benefit to our GAAP net operating income.

Second quarter 2018 GAAP net loss per diluted share was $0.63 compared to a net loss per diluted share of $0.08 for the second quarter of 2017. Non-GAAP net loss per diluted share was $0.40 compared to net income of $0.01 per diluted share for the second quarter of 2017. Our second quarter 2018 cash flow from operations was negative $300,000. Capital expenditures for the second quarter of 2018 were approximately $2.7 million. Our quarter-end cash balance was $30.8 million, and our commission receivable balance was $267 million.

As we have previously discussed, we are working to augment our balance sheet by adding a line of credit to provide us with additional operational flexibility as we continue to grow the business. As an update, we are currently in the process of negotiating a $40 million secured revolving credit facility with a third party and hope to complete this process in the next several weeks. Since these negotiations are ongoing, and may not -- may or may not result in closing, there can be no assurances that we will successfully put this credit facility in place.

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 2018 that we provided on our first quarter 2018 earnings call.

With respect to sequential quarterly trends, the third quarter is also a traditionally slower quarter across all 3 of our business segments. Nonetheless, we expect for our Medicare approved member and commission revenue growth to begin to reaccelerate in the third quarter as we conclude our marketing test and start ramping our agent headcount in preparation for the AEP. Despite the expected sequential increase in third quarter revenues, our EBITDA is expected to remain roughly flat compared to Q2, reflecting new agent hires.

During the fourth quarter, when the selling season in the Medicare and individual markets takes place, we expect to see the highest revenue and enrollment growth of the year as well as significant profitability, both on an EBITDA and a GAAP EPS basis. 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 our guidance.

And now, we'll open the call for questions. Operator?

(Operator Instructions) Our first question comes from Dave Styblo with Jefferies.

Just want to talk a little bit about the 2Q results to start with, and so the revenue shortfall and I guess, EBITDA at least relative to what we on the Street were looking for, it sounds like it was more of a self-imposed optimization process ahead of Medicare open enrollment. Can you discuss -- I know you touched upon a few of those items, but can you talk a little bit more about what you guys were doing, what you learned through that testing and how quickly you can put into action those things that you learned?

Go ahead.

David, this is Derek Yung. As it was mentioned in the prepared remarks, there were a number of optimization efforts that comes into play in terms of our Q2 execution and really, there were 2 focus areas, as Scott and both Dave described. One around marketing and one around our sales call center. On marketing, we've been embarking on a shift in marketing strategy to move away from costly lead aggregators to direct consumer marketing and also partner channels. And in the quarter, we did a number of tests to optimize our marketing in terms of volumes, product mix and channel mix, and that impacted our volumes. In particular, we set very aggressive goals for the quarter in order to push the boundaries of what we expect out of those channels in preparation for AEP. The second point is around our sales and call center efficiency and operations. We, as mentioned, had closed our Westford, Massachusetts call center and also invested heavily into our call center sales agents as part of our GoMedigap acquisition integration, and those efforts drove our cost and also efficiency in the quarter to -- that also impacted our enrollment. So both those things are things that we consciously were pursuing in terms of preparation for the quarter, and we expect those to actually bear fruit as we enter into the Annual Enrollment Period.

Okay. And as you go through and you're concluding what you've -- those tests that you've done, is it creating a shift in strategy in how the channels that you're going to go to market into or other aspects (inaudible) help improve the demand and conversions?

So I answer it this way, Dave. On the marketing side, we wanted to push the envelope on a couple of new channels on that DTC side. So specifically, on the direct marketing and the digital side of things where we were trying to find the perfect balance of driving the right volume at a very aggressively lower COA. That had the impact of constraining to a certain degree the volume of customers that came into the sales organization. At the same time, as we were looking to trim some of the fat and specifically our least well performing of our 3 Medicare sales centers and exited that Westford facility, we ended up kind of cutting it a little bit too close to the bone relative to production in the quarter. All of that is being -- from a production perspective, is being right sized right now relative to both insourced and outsourced production capabilities and taking the learnings from those marketing tests to make sure that we are in good shape going into the October selling season. So we're able to flip the learnings that we've taken here into what we believe will be much better optimization as we get deeper into the second half of the year and certainly, by the time the bell rings on October 15.

Okay. That's helpful. And then in advance of that open enrollment, can you talk more about the partnerships? You guys have landed quite a few and, at one point, we knew a couple of the numbers. I think, for Union Plus, there is a captive audience of 25,000 seniors aging into Medicare a month, and Union Plus with -- sorry, in AGIA, I think, was 15,000. So how big is your audience that you have an ability to directly market to at this point? And what have you been able to do to get things in order so the you can maximize those partner channels?

So the -- I mean, the number of customers that we ultimately can outreach to is well over 1 million through all of these different marketing partnerships. Now the question is how do you turn those potential customers into true leads and ultimately get them to convert. And that's where, again, some of the work that we were doing on the marketing side was working to optimize some of these partner relationships as well. We expect the Union Plus side to perform better for us this year. We believe this new Gallagher relationship is going to be a good first step for us. But if you look at the breadth of the partnership channel for us this year relative to where we were last year, I think the important point to make is the portfolio nature that we have been able to create this year relative to meaningful reliance on 1 or 2 partners last year. So we think that we have significantly improved both the risk profile and our ability to execute relative to the broader partner channel and take advantage of both the quality of customer and the attractive cost of acquisition of each of those customers through the partner channel than we were in a position to last year.

Okay, great. And my last one is just on the IFP business. So continue to see attrition there, which I guess wasn't surprising but it was -- I think it was down, membership was down 8% sequentially. It was a little bit worse than we were thinking it would be. Again, is there -- I think this business is free cash flow positive for you still and probably still subsidizing the Medicare business. Wanted to know if that's still true. And secondly, is there anything else that you can do to sort of stem the attrition here? Obviously, you're trying to work on the short-term plans, which sounds like you made some good progress there. But what else can be done on this side of the business to sustain the cash flows that are [thrown] off from this business?

We really see the model evolving where the mix shift is away from the ACA-compliant plans because of the high premium and 95-plus percent of the customers who reach out to us outside of OEP cannot afford an ACA-compliant plan unless they have a full subsidy. And so we've been slow to react to that marketplace reality, that's why we were very encouraged by the success in Q2. We think that that's only going to accelerate as the duration is extended as expected to 364 days by the Trump administration. And with the mandate penalty going away January 1, we are ramping up our marketing. We want to be a lot more effective and efficient closing the organic search that we generate with the short-term plans, because we were pushing almost -- we were pushing every inbound or organic search customer down the path of trying to sell them major medical and we were just having exceptionally low conversion rates because of the affordability issue. So we're seeing a mix shift here. We don't have a long life to these numbers. It's about 2.5 months today, because the duration of short-term is only 90 days. So we think that can easily double once we have the 364-day duration restored, which we're expecting news of that any day. These are cash flow positive very quickly. The return on investment is not like Medicare with the 2-year payback period, it's much shorter. So it's favorable from a cash flow and from an earnings standpoint.

And the only thing I would add, Dave, is that we're very pleased with the turn that we've seen in terms of enrollment activity with our new focus on short-term and we think that, that provides us a lot of lever points to be adding additional products there as we refine our -- both our digital marketing and our overall sales strategy in that business. We're pleased with how that's performed so far this quarter as well. And again, this was -- this is a meaningful turning point for us relative to the downward trajectory that we've seen in that business. And we think that we're setting up for a lot more success than we've had in the past in that business going forward.

Our next question comes from Tobey Sommer with SunTrust.

Can you start by maybe giving us a little bit more color on what I think you described as kind of the variance in the growth rates between Medicare applications and approvals? Can you explain kind of the factors that drove that?

Yes, Tobey. The key one there was a higher mix of what are called D-SNP or Dual Eligible Medicare Advantage customers. These are lower income -- called dual eligible because they can apply for both Medicare and Medicaid. And in getting those folks into the right Medicare Advantage product has a meaningful impact on those customers from both a cost and a care management perspective. They are also a little bit more involved from an enrollment perspective because you have to get both the Medicare and the Medicaid information to the carrier, the carrier has to process it correctly on the back end. And the result of the increased mix of that slightly more challenging to enroll customer resulted in a marginally lower move for us to move from submitted application to approved application in the quarter. A couple of things that we are focused on the back end of our process is to minimize that fallout on a go-forward basis because this is a key market segment for us within the Medicare market and we're working with several carriers on specific plans to go out and help them convert more of those customers. But as it related to this specific quarter and the relatively low volumes in the second quarter to begin with, the impact of that marginal mix shift was more pronounced in the quarter, and hence, the disconnect that you saw there between submitted and approved applications.

I mean, one more thing I'd add is we actually like these [checks] because they are sold throughout the year and the market for dual eligibles is quite large around $10 million. And then from a -- how we get compensated perceptive is similar to an MA plan, a regular standard MA plan, so there's no differences in unit economics.

Great. Could you describe the new retention tools you're putting in place? I'm curious if any of them are financial and [chance] you have ongoing profitability of renewing customers?

No, great question. I would put those -- put the retention efforts generally into 2 categories. One for making sure that the near-term retention in terms of sales that we've made, that we keep them in the boat past what's called a rapid dis-enrollment or early cancellation period, so the first 90 days post sale. And there are -- that is primarily an operational thing on our end to make sure that both our systems and our communication back and forth with the carriers is put together in as frictionless and complete a process as possible. That is an area that, quite frankly, the company has not focused on historically. And the opportunities for us to significantly improve retention rates in that 90-day period post-sale are both substantial and reflect a lot of near-term opportunity that we are very much focused on at the moment. No incremental costs associated with that kind of opportunity and to the extent that we're successful in meaningfully changing that amount of churn, that will ultimately reflect in meaningfully higher LTVs for Medicare customers in the relatively near future. The second piece of the retention pie that we're going after is that post-90 day, so more of a relational aspect with customers. Here again, an area that the company has historically not placed much of any focus on in terms of proving out the value proposition that we as a company have and continuing to help that customer manage their Medicare insurance purchase and to basically make sure that they are in the right plan at whatever point they are in their life or economic cycle, and to keep them as eHealth customers throughout the process rather than going elsewhere to buy another plan when things change for them. Here again, a very small investment, well under $1 million, for us to put some of the technology and other high-value engagement tools in place to help these folks recognize that eHealth is a valuable part of their insurance purchasing and management process and keeping them in the boat. That's one that will take a little bit longer for us to get the payback on simply because it will take longer to prove out, and we show that people stay in our book for a longer period of time. But one where, again, we think there is a very significant return on investment opportunity for us is any kind of extension in persistency in our book is new revenue and revenue that flows virtually all to the bottom line.

Great. Just 2 more for me and I'll get back in the queue. When do you expect the company to be cash flow positive on a calendar basis? And then I understand in the IFP market, there are some prospective changes, so you kind of (inaudible) works. But given that we maybe kind of described the market in those terms, in recent years just for the changes not to manifest themselves in a positive way, I'm curious how you're coming to a conclusion to plan for doing -- materializing when recent history says they don't?

You're breaking up a little bit on the second part, so I think I've pieced the question together, I'll answer that one first. We continue to believe that the IFP marketplace is one that has by virtue simply of the fact that there are still -- I mean, multiple 8 figures of customers in that marketplace, even though it is turbulent, even though it is transient, a significant number, well over 15 million customers, that are in need of non-ACA products to help them meet their health insurance needs in the marketplace and that we have simply, over the last couple of years, not done as good a job as we can and are now beginning to get some traction on serving those customers with the right products at the right price point and engaging with them in the best manner to help them. We have some additional things that we are working on to further improve that part of the business for us, but the numbers tell us that there is still significant opportunity for us in that marketplace, levering the tools and the technology infrastructure that we have established in the marketplace as well as our brand name there. So we -- yes, we're pleased with the turn in enrollments here and are still firmly committed to that marketplace and it remains profitable for us. On the cash flow question, we've not provide guidance for next year, I do believe that we have commented previously though that we expect to be operating cash flow positive next year. We haven't set budgets for 2019 yet so I can't tell you much more than that, but to tell you that we -- we're pleased with our operating trajectory relative to use of cash.

Our next question comes from George Sutton with Craig-Hallum.

You referred a couple of times to a more flexible model relative to a larger sales force. I wondered if you could explain what you mean by that exactly?

Right. So as we went into AEP last year, we had access to 425 agents that were trained, licensed and appointed. And this year, between our 3 call centers in Gold River near Sacramento and Salt Lake City and in Austin, coupled with 2 outsourced operations, we will have 975 agents. And so we will not be -- the last year we were significantly peak load limited and this year, we anticipate being able to serve the vast majority of the customers calling us even in the busiest times.

George, and I would add that from a flexibility perspective, the outsourced folks there not only allow us to put on sales agents that we don't have to carry throughout the year and what have you, but the way that our head of sales who has got over 12 years of having managed models like this at UnitedHealthcare, the way he set this up is that the flexibility comes in is that during those peak times that -- of the day that Scott mentioned, we're able to bring people on, on a part-time basis fully licensed and available to sell so that we're not carrying all of those 900-plus agents throughout the entire day, throughout the entire selling season, but really turning them on and turning them off as we need them, as the model show us, we will need to be able to handle that volume. So we expect to be able to serve a peak number close to an optimal number of customers that we expect to drive into our platform throughout the selling season.

Got you. Simple math suggests given the Q1 was a short -- or I'm sorry, Q2 was a shortfall, but you are reiterating guidance for the year, that you're frankly even a little more optimistic about particularly Q4. Is that a reasonable conclusion?

I'd say, yes. We were a bit over our plan in Q1 and we're a little bit below our plan in Q2, and largely on track -- a bit light in revenue and a bit ahead in adjusted EBITDA. And so we -- the first half is not that critical from an overall performance standpoint. What's encouraging is where we're seeing COAs come in, we're seeing the agent hiring and training on track, the outsourced partners coming up and will be online. And so we have a high degree of confidence than we're -- that our guidance is fully in place.

And the volume side of this, I mean, we talk a lot about the work in the partner channel in particular being that the first quarter of the year is heavy on selling those partners, the second quarter of the year is heavy on closing those partners and along with a marketing test that we undertook in the second quarter, getting the whole volume side of the equation set up and aligned correctly relative to the production side that Scott just mentioned, all of that came in as expected if not better, so we're comfortable with the guidance as it stands right now.

That's helpful. Lastly Scott, you mentioned that you are expecting any day that we could move to 364 days for short-term. Obviously, you and I have both thought the same thing for a few months. So I'm curious, has anything changed from your perspective? Or is there an easy explanation as to why it's taken a little longer?

Look, our speculation is there could have been consideration in the administration for an implementation of mandatory renewability, which would have increased the cost of short-term by potentially 2x. We believe, because it's been -- because the rule has been submitted to the congressional budget office, that, that has been resolved and so that we really are in the final days before release. But one question that there's a lot of bid and ask around the table is whether the effective date for the...

Implementation [date].

No. So implementation date is not known, of course, but we still expect it any time. But one open question is whether it will be effective for this OEP or take effect on January 1. And there are -- there's an evenly divided split in the company as to the handicapping of what happens there.

Thank you and I'm currently showing no other questions at this time. I'd like to turn the call back over to Scott Flanders for closing remarks.

Thank, everyone. We look forward to catching up with you individually as your schedules permit.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.