eHealth, Inc. (EHTH) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2012 eHealth, Inc. Earnings Conference Call. My name is Blue, and I will be your operator today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Ms. Kate Sidorovich, Vice President of Investor Relations. Please proceed, ma'am.

Good afternoon, and thank you, all, for joining us today, either by phone or by webcast, for a discussion about eHealth, Inc.'s third quarter 2012 financial results. On the call this afternoon, we will have Gary Lauer, eHealth Chief Executive Officer; and Stuart Huizinga, eHealth Chief Financial Officer. After management concludes its remarks, we will open the lines for questions. As a reminder, today's conference call is being recorded and webcast from the Investor Relations section of our website. A replay of the call will be available from the IR section of our website following the call. We will make forward-looking statements on this call. All statements other than statements of historical fact are forward-looking statements. The forward-looking statements made on this call include statements regarding submitted application growth for 2012, our historical commission rates reductions, future growth and commission revenue and the reasons for annual growth, projected performance during the Medicare Annual Enrollment Period, and our guidance for revenue, EBITDA, stock based composition expense and EPS for the full year 2012. Forward-looking statements are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by these statements. These risks included the ongoing risks associated with the implementation of the Affordable Care Act, our ability to maintain relationships with health insurance carriers and our success in marketing and selling Medicare-related health insurance plans and other risks and uncertainties included 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 IR section of our website. Forward-looking statements made on this call represent the company's views as of today. You should not rely on these statements as representing our views in the future. We undertake no duty to update or revise any forward-looking statements made during this call, whether as a result of new information, future events or otherwise. We will be presenting certain financial measures on this call that will be considered non-GAAP under SEC Regulation G. For a 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 headings, Investor Relations. And at this point, I will turn the call over to Gary Lauer.

Thanks, Kate, and good afternoon, everyone, and thanks for joining us as we review our third quarter 2012 results. During the quarter, we saw a further improvement in our Individual & Family plan business, highlighted by both membership and submitted application growth. We continue to generate strong growth in Medicare product sales, and, importantly, we invested in and prepared for the Medicare Annual Enrollment Period, which kicked off last week. Third quarter revenue was $37.6 million and GAAP earnings per share were $0.01, reflecting the Medicare-related investments we made during the quarter. EBITDA was $3.4 million and cash flow from operations was $6.9 million. At the end of the quarter, we had $131 million in cash on the balance sheet and no debt. During the quarter, we announced a $30 million stock repurchase program. As a reminder, we have completed 3 stock repurchase programs over the past 4 years, spending $90 million to reduce our outstanding share count by over 20% since late 2008, when the first repurchase program was implemented. We continue to believe that at the current share price levels, repurchasing our shares is a prudent use of our cash. At this point, I'd like to make some comments about our Individual & Family plan business, an area in which we once again saw positive performance after 2 challenging years. Our third quarter Individual & Family plan submitted applications grew 5% year-over-year, accelerating from the 2% growth rate we generated in the second quarter of 2012. There was also a dramatic improvement -- this was, sorry, was a dramatic improvement compared to a 20% year-over-year decline in submitted applications in the third quarter of 2011. In the third quarter, we resumed growth in revenue-generating Individual & Family plan members at a 2% year-over-year growth rate. It's important to note that we return the application and membership growth in the IFP business in a disciplined way, while continuing to improve our cost of acquisition per submitted Individual & Family plan member and ensuring that each acquisition channel remains profitable based on our current lifetime member value projections. In fact, our acquisition cost per Individual & Family plan member has declined on a year-over-year basis every quarter since the second quarter of 2010. Based on the trends we are seeing in our Individual & Family plan business, we continue to expect positive submitted application growth for the full year 2012. We also believe that by early 2013, we will absorb the majority of the impact of last year's commission rate reductions, and given current course and speed, we expect to grow Individual & Family plan commission revenues in 2013. Growth in next year's non-Medicare commission revenue is expected to be primarily driven by growth in our Individual & Family plan membership base, and also helped by our successful ancillary product strategy, including dental, vision, accident and other insurance products. Finally, with respect to our Individual business, I'd like to note once again that if the Affordable Care Act is implemented, it's not without risk to eHealth. A lot remains to be done to prepare for the meaningful changes in the individual market anticipated in 2014. In our Medicare business, we continue to see significant consumer demand outside of the Annual Enrollment Period. Third quarter Medicare revenue was $6.3 million, representing a 93% year-over-year growth rate. The number of total Medicare products sold during the quarter grew in excess of 110%, and the number of Medicare Advantage products sold grew in excess of 180% compared to the third quarter of 2011. In this past third quarter, we signed a number of important partnership agreements that are expected to contribute to Medicare product sales during the Annual Enrollment Period, and have done a lot of work on search engine optimization on eHealth core competency to enhance natural ratings of our Medicare sites. During the third quarter, we fulfilled in-house, as a broker, nearly 100% of Medicare demand that we generated compared to 53% in the third quarter of 2011. As a reminder, in-house fulfillment is characterized by significantly higher lifetime revenue values and margin dollars compared to the sale of Medicare leads. We were also more effective at converting demand into enrollments compared to the third quarter of 2011. The Annual Enrollment Period for Medicare started last week on October 15, and will run through December 7. As a reminder, the majority of Medicare sales for the year occurred during this period. We believe that we are well-positioned for this year's Annual Enrollment Period. Our inventory of Medicare products is broader this year compared to 2011. In addition to Medicare Advantage and Prescription Drug Plan products from Humana, Aetna, Anthem, and WellCare, we now offer products from CIGNA, CVS Caremark, Blue Cross Blue Shield of Michigan and Medica. We are also growing our presence in the Medicare Supplement market with products from Mutual of Omaha, Humana, Anthem and Primera, that are now available online. As expected, in preparation for the Annual Enrollment Period, we meaningfully ramped our investment in our Medicare dedicated customer care resources, reflecting our successful transition to the in-house fulfillment model for Medicare demand. This is reflected in our operating expenses for the quarter, and Stuart will provide more color on this later during the call. In conclusion, the last 2 years have certainly been challenging with many of the uncertainties of the Affordable Care Act relating to the Individual & Family plan business. At the same time, we've been investing aggressively to build our new Medicare business. I am pleased with our progress to date in both areas and believe that our financial results speak to this progress. We have returned to growth in the Individual & Family plan submitted applications area and Individual & Family plan membership. We delivered strong growth in Medicare revenues and continue to generate meaningful cash flows from operations. We will be providing guidance for the full year 2013 on our fourth quarter earnings call, which typically takes place in mid-February. At this point, I'd like to turn the call over to Stuart for more remarks on our financial progress. Stuart?

Thanks, Gary, and good afternoon, everyone. Our third quarter 2012 revenue was $37.6 million, an 8% increase as compared to the third quarter a year ago. This is our strongest quarter in terms of total revenue growth since the fourth quarter of 2010. Our operating margin improved relative to the third quarter of 2011, resulting in 21% non-GAAP operating income growth. Cash flow from operations also grew 28% in the third quarter compared to Q3 2011. Commission revenue for the quarter was $31.3 million, representing 11% annual growth, a meaningful acceleration from 2% annual growth we generated in the second quarter of 2012 and also our best performance since 2010. Commission revenue growth was driven primarily by our Medicare business. However, we also saw a positive trend in our Individual & Family plan business. IFP commissions declined by $400,000 in the third quarter on a year-over-year basis, a significant improvement compared to the approximately $2.7 million year-over-year decline we saw in the second quarter of 2012. Other revenue, which includes sponsorship, eCommerce On-Demand, Government Systems and noncommissioned Medicare revenue, was $6.3 million. This represented a 4% decline compared to the third quarter a year ago. The decline was driven primarily by lower revenues from the sale of Medicare leads as we transitioned to a commission-based direct fulfillment model in Medicare. In Q3, we fulfilled in-house, as a broker, close to 100% of the Medicare demand that we generated. As a result, our third quarter Medicare lead revenue is nominal. We also had nominal Government Systems revenues during the quarter compared to $1.4 million that we recognized in the third quarter of last year, primarily related to our contract with HHS. Our Individual & Family major medical plan submitted application volume grew 5% compared to the third quarter of 2011. Approved Individual & Family plan members increased 4% compared to Q3 2011. Both metrics accelerated relative to the second quarter of this year when we generated 2% growth in IFP submitted applications and were flat on approved IFP members. Total approved members for all products were up 24%, driven by activity in Medicare and ancillary products. Our total estimated membership at the end of the quarter was approximately 926,600 members, which represents 14% growth over estimated membership reported at the end of the third quarter of 2011. The number of revenue-generating Individual & Family plan members was up 2%, while the number of other members increased 80%. The increase in our Medicare base over the past 12 months was an important driver behind the strong annual growth in our non-IFP membership. Now I'd like to review our operating expenses for the quarter. Excluding stock-based compensation and the amortization of inquired -- acquired intangibles, our non-GAAP operating expenses increased in absolute terms, but declined as a percentage of revenue relative to the comparable period a year ago. The increase in the total amount of our operating expenses was driven primarily by our planned investment in customer care and enrollment in the Medicare business. Third quarter 2012 non-GAAP customer care and enrollment expense, which excludes stock-based compensation expense, was $8.7 million or 23% of revenue, up meaningfully from $6.2 million or 18% in the third quarter a year ago. This year-over-year increase of roughly $2.5 million was driven entirely by our Medicare business, while customer care and enrollment costs in the Individual & Family plan area were flat. Similar to last year, Q3 is the quarter where we significantly ramp up our sales infrastructure to prepare for the Medicare Annual Enrollment Period in Q4. Therefore, in Q3, our increased Medicare expenses align with seasonally lower Medicare revenues outside of the Annual Enrollment Period, a situation that will change in the fourth quarter when we expect sequential and year-over-year growth in Medicare revenues, which will allow us to better absorb the increased level of expenses. Third quarter 2012 non-GAAP marketing and advertising expense, which excludes stock-based compensation expense, was 36% of revenue, down from 39% in Q3 of 2011. Our cost of acquisition in the Individual & Family plan business measured as our total marketing and advertising expense, excluding Medicare costs, per individual on an IFP-submitted application, declined by 5% compared to the third quarter of 2011. This is our ninth quarter in a row of annual improvement in this cost of acquisition metric. Another expense area where we saw a year-over-year decline was our cost of revenue. Our third quarter 2012 cost of revenue was 3% of revenue compared to 5% in the third quarter a year ago. This decline was primarily driven by phasing out of the government project with HHS. Third quarter non-GAAP operating income, excluding stock-based compensation and the amortization of acquired intangibles, was 7.4% of revenue or $2.8 million. This represents 21% growth from $2.3 million or 6.6% in the third quarter a year ago. EBITDA for the third quarter of 2012 was $3.4 million as compared to EBITDA of $2.8 million for the third quarter of 2011, or a growth of 20% year-over-year. Moving down the income statement, I'd like to point out that our tax expense, relative to our pretax income, was unusual this quarter. Our tax provision of $0.9 million represented approximately 81% of our third quarter pretax GAAP net income. This unusually high effective tax rate was due primarily to a tax shortfall related to stock-based compensation. This special tax item had an adverse impact of $0.03 on our GAAP EPS. For comparison purposes, we also had a special tax expense item in the third quarter of 2011, which negatively impacted GAAP EPS by $0.01. The prior year item primarily related to an increase in our estimated effective tax rate for fiscal 2011, resulting from an increase in estimated nondeductible lobbying expenses for the year and a tax shortfall related to stock-based compensation. Third quarter 2012 GAAP earnings per share were $0.01 compared to negative $0.01 in Q3 of 2011. Third quarter non-GAAP EPS, which excludes the impact of the amortization of acquired intangibles, stock-based compensation and related income tax benefit was $0.09. During the quarter, we generated strong cash flows. Our cash flow from operations was $6.9 million compared to $5.4 million in the third quarter of 2011, or a 28% annual growth. This brings our 2012 year-to-date cash flow from operations to $19.7 million. Capital expenditures for the third quarter were approximately $1 million, bringing the year-to-date total to $3.1 million. As of September 30, 2012, our cash from marketable securities balance was $131 million, up from $122 million at the end of the second quarter of 2012. With respect to guidance and based on information currently available, we are reaffirming the revenue, EBITDA, stock-based compensation expense and earnings per share guidance for the full year 2012 that we provided on our first quarter 2012 earnings call. I want to remind you that these comments, as well as our annual guidance, are based on current indications for our business, which are subject to change at anytime. We undertake no obligation to further update our guidance. And now, we'd like to open up the call for questions. Operator?

[Operator Instructions] The first question comes from line of Richard Fetyko from Janney Capital.

One week into the Medicare A, B, curious what you're seeing, how happy you are with the volume of activity in the conversion rates. And then also, related to that, you've stepped up in the customer care area. I'm curious, could you give us the percentage increase in the staff versus the last year or give us the numbers? I'm just curious how many more staff members do you have now versus the last year.

Hey, Richard, it's Gary. Yes, the AEP started a week ago, as noted. We're pleased with the start. We're certainly in a much different position this year than we were last and the year before that. More product inventory, more geography, more resources, more demand generation capability, and we think all of those work in our favor. The Annual Enrollment Period industry-wide is interesting. It's a bit of a hockey stick, as you might imagine, where the majority of the volume happens in the last several weeks. But we're certainly pleased with where we are and what we're seeing so far. And I think that our Medicare results over the first 3 quarters of this year outside of the Annual Enrollment Period would indicate the kind of foundation that we've been building in preparation for the AEP. In terms of resourcing, we've done a number of things. We've got more websites that we're using for demand generation. We've certainly got more product inventory, as indicated earlier. We've got -- we've more than doubled personnel in our customer care centers. And again, we feel that we're well-resourced to address the demand that we're generating and we hope to generate very significant demand at this Annual Enrollment Period.

The next question comes from the line of George Sutton.

Gary, I wondered if you could talk about the IFP submitted app growth. Obviously, that has been a consistently better and better result for you over the last few quarters, and I'm wondering what's driving that. Is it just the easy comparisons? Is it better marketing? Is it some change in the industry dynamic that I'm not aware of? I'm just curious what's driving that.

Hey, George, I think it's a number of things. Clearly, we're comping off of some lower volumes a year ago due to a lot of the Affordable Care Act implications and the beginning of the implementation of mandates and so on. We -- I'd like to note that we're -- our cost of acquisition is the lowest it's been in quite some time, as what I think Stuart and I both commented in our formal comments. We feel that we're doing a very good job with search engine optimization, especially organic and natural search, which really talks to the relevancy of eHealth on the Internet through the Google algorithms and the same thing at Yahoo! and Microsoft through Bing. And we also, at least, are hearing anecdotally that there's probably less independent agent and broker participation in this market because of the commission rate reductions a while back. It's just always been a labor-intensive business for them and it just doesn't have the kind of margin potential it had previously. I also think that we're finding that more and more consumers are getting comfortable with some of the changes in the marketplace. Certainly, the Affordable Care Act, all of the election, health care discussion, frankly, is good for us because it just makes consumers more aware of health insurance and the need to be covered and where to help thems, so, George, it's not any one thing, I think it's all of those things. And again, I want to point out that we've been very judicious on how we've been spending in this area. So I'm not only pleased with the 5% growth, I'm actually particularly pleased with the cost of acquisition.

That's a very helpful answer. So relative to your Medicare business, you obviously are giving revenues and you're giving growth rate, but you're also fulfilling the vast majority in-house. And what that results in is a longer-term customer revenue opportunity, but likely a lower revenue opportunity upfront. And I'm curious if you can talk more so to the number of leads that are coming in relative to the growth rates that you're talking about.

Well, in terms of the demand, when you say leads, we think of it as demand. That is increased substantially. In fact, when I gave you some of the growth rates in the Medicare products and Medicare Advantage, you can assume that demand on kind of the -- on a -- with the linear comparison is very much like those as well. Although I should note that our conversions are getting better also, which is the real key in an Internet business.

So linear relationship in other words? Okay. Interesting.

Yes. I mean we're seeing demand that's more than doubling. There's no question about that.

Okay. And last question for me, since I'm asked virtually every time I talk about eHealth with a client, they -- we always end the conversation with, what happens if Obama is not in office and the health care act is no longer, what does that mean for eHealth? Since I'm asked that so commonly, I figured I would ask that of you.

Thanks, George, and I've been asked that question before, quite often. Well, it's very interesting. First and foremost, we think that no matter where the election goes and what the outcome is, it's clear that there's a lot of reform that's needed in the world of health care just because of the sheer expense. And it's very clear to us that what it's crying out for is better economics and much better efficiency, i.e. technology, which, if I'm a broken record, it's been about that, this is exactly what we do. If the Affordable Care Act is implemented, we are very, very optimistic and anxious to help enroll the millions of people out there who are uninsured right now and others who've got to meet the mandate. And we think we're going to be a highly viable choice for them to be able to do that. If President Obama is not reelected and the implementation of the Affordable Care Act is halted or stalled or modified or what have you, we still think it's really good for us because the Republican approach to this is much more of a private sector rather than a government approach to health care. And again, what's going to be needed is efficiency and better economics, and frankly, much better access to these products for people. And we're thinking not just about access, but how to help consumers better spend their health care dollars as well. So we really like where we're positioned. You combine all that with what's going on in the Medicare business for us, I think Medicare with a lot of these baby boomers who are aging in is just, once again, a real good illustration of the application of technology in this complex environment where people have to make choices.

So kind of what we've been saying, heads, we win, tails, we win bigger.

Well, I'm very optimistic in either scenario. You flip a coin and tell me who's going to win, and I can give you one scenario, I can give you another scenario for the other presidential candidate prevailing. But yes, we really like -- we like where we're positioned, we like what's really going on in the marketplace and there's certainly a lot more awareness these days of having to have coverage. And because of the expense, there are less and less businesses providing employer-sponsored cover to people, so this individual market as a solution set continues to expand.

And the next question is from the line of Andrew Maroc [ph] from Cowen & Company.

This is Andrew on for Kevin. I just had 2 quick questions. Can you provide us any updates on the progress with the negotiations with your state exchanges? And also, on a modeling perspective, how much are your seasonal expenses that are related to the Annual Enrollment Period can you reduce going into Q1 '13?

You take the second one first.

Sure, I'll take the second one. Seasonal expenses, if you look at last year, the main item that's seasonal is the Medicare enrollment agents that come onboard. A portion of the agents are seasonal in nature. We dialed that up this Q3. If you look back to last year, we had quite a sequential increase in Q3. And then after the Annual Enrollment Period was over, you see it stepped down from customer care enrollment from about $6.6 million in the fourth quarter to about $6 million in Q1. So I would expect probably a similar step down this year percentage-wise.

And, Andrew, on the state exchanges, we continue to talk with and work with various states in a number of different ways. I should add, we're not a software company, we're a consumer-facing company in a marketplace that's becoming more and more consumer-centric. And first and foremost, we're interested in being the destination, the resource or the source that people come directly. And should the Affordable Care Act be implemented, we're going to be front and center in all of these states, with eHealth as, again, a highly viable option and choice for people to use. But at the same time, I would -- makes sense to the states to deploy and use our technology as we've done it with the Massachusetts Connector, for example, with the Physician Finder. We'll certainly evaluate that and look at that. But we think the real leverage and opportunity for us in 2014 with the Affordable Care Act is direct-to-consumer, which is what we've always been and what we think we do best, that we know we do best.

The next question comes from Ned Davis of Wm Smith & Co.

I'd like to get a little more refinement on now, we're getting closer to the likely, let's say, implementation of the ObamaCare Act, when would you expect to actually start to see a ramp of new application volume from people who have either just postponed or not been able to afford health care coverage, but will start looking at the incentives built in to the legislation and the subsidies? Is this going to be just like January 1 of 2014, is this going to rocket or is it something that you think you'll see a lot of impact from in 2013?

Well, we think several things. First of all, let me indicate that the minimum benefit standards that these products need to meet have not been released yet by Health and Human Services. We expect to see those before the end of the year, so no one knows yet what the product configuration is going to be specifically. Clearly, in the second half of next year, the payers, consumers, state governments, federal government, will be, I think, in prep mode for the actual mandates that come into effect, or many of the mandates that come into effect on January 1 of 2014. The question is going to be when do subsidies start flowing and so on. The way that CBO has scored it, not until January 1 of 2014, we'll watch all of that. But I think there's certainly a chance and an opportunity that once people understand what they need to have and that they're mandated to have it, that they may be very well taking action next year. But all that's really yet to be determined. But we're looking at that, thinking a lot about it and going through a number of different planning scenarios for that. And the other thing that's interesting about that is that many states, at least in our observation and what we're hearing, are not very far along in their exchange development. In fact, many of the Republican states have been very reluctant to develop exchanges, which we think is going to present a really unique opportunity for us late next year and into 2014 in these states where there's not very good exchange implementation.

Good. If I could just follow on and a little bit more about this, the -- all those numbers were bandied about when the legislation was being passed about the uninsured population, I know you studied this up and down. Do you have kind of an updated sense for what the realistic addressable market is for eHealth? If this just goes through, it's implemented, the incentives are all there, the policies, let's say, the policies are -- that are mandated by the guidelines are similar to the profile of your existing policies, is the average premium going to be significantly lower or higher than your current profile with your legacy business? And do you think that the life of the policies is going to be longer or shorter than the relatively short timeframe that you have in the IFC business currently? Any kind of more color on all this stuff? I know it's a very complex thing to be looking at, but you must be looking at it because you got to address it.

Oh, yes, we've -- we look at it in great detail and we give it a lot of consideration. And it is complex and there's a lot of unknowns. For example, you're going to have millions of people who, at least in theory, are going to be coming to the market for coverage that are currently uninsured. And the carriers are going to have to look at this pool to determine what that risk looks like for them and how to price to that. There are some schools of thought that say because of this, you'll have so many people coming in who haven't had very good care up to this point, that they may be a higher risk. Therefore, you're going to have premium inflation that could be quite substantial, that even with subsidies, makes these products prohibitively expensive for people, for consumers because of the differential between the subsidy and the actual premium. There's another school of thought that says when you've got, and this is what the President and the administration were marketing a couple of years ago, that when you've got everyone in the system, costs are going to come down. We're watching all of this, I think it's going to be really interesting. It's also going to be fascinating to see how many of the payers actually participate in the lower income part of the market, that is the subsidy, the subsidized part of the market, because there's nothing in the Affordable Care Act that forces them to do that. And it may be that there's a dearth of product for these -- for lower-income people because the carriers have got a better siding on the risk of higher income people, which they're a bit more accustomed to. So there's all of that. But there's certainly, the opportunity for the market that we face to double. To do that, we've got to be able to get the states to certify us as a web-based entity to be able to host subsidy-eligible consumers. We've got a good -- we continue to do a good job of marketing ourselves to others as well. But the Congressional Budget Office estimates that there's 30 million uninsured people that are going to come into the ranks of the insured. Now some of those are Medicaid eligible, but if you conservatively assume that 15 million of those people are going to be outright buying products, you almost double the market that we face right now. And then you've got the small business ranks who may, may decide that individual coverage is more affordable and more viable than group coverage. And then, of course, you've got all the conversation and discussion about the employer mandate, which doesn't get much attention, but that there may be an exodus of -- or there may be a number of employers who no longer offer group coverage to their employees and move them into the individual market. And there's a big private exchange opportunity for someone like us there as well. So it is complex, but we're doing a lot of scenario planning, and it's an interesting-looking map, I can tell you that, and it's filled with a lot of opportunities, we believe.

You do expect to be able to address the subsidized marketplace once these guidelines are clarified?

Well, we do. We're planning on that, but it's state-by-state. A state can certify us, for lack of a better word, as a web-based entity, that operates in parallel to the state exchange to host individuals who are subsidy eligible. It's conceivable that a state could decide not to do that. We don't think that makes much sense. In fact, we think that's discriminatory because why shouldn't lower income people have the same choices that wealthier people have? But yes, we have a regulation that allows us to do that and we're enthused about it, and as we've had discussions out and about, there seems to be a lot of enthusiasm about us helping as well.

And the next question is from the line of Caroline LeCates from eHealth (sic) [Lazard Capital Markets].

Caroline LeCates with Lazard Capital Markets. Just two questions, the first on revenue recognition. As you've transitioned into this in-house Medicare model, just wondering, based on the open enrollment period that began earlier this month, when you would recognize that commission revenue? Is that -- would we see a step-up in the first quarter of next year and then the run rate going forward or is that something that we would see earlier?

Yes, we recognize revenue in our Medicare sales in the retail side of the business as those commissions are reported to us on an annual basis. So in the first year of the sale, we would recognize the first year's revenue when that's reported to us by the carrier and paid to us with a reserve against anticipated churn over that first year. And then for our renewal revenues, we recognize those when we are reported -- when the carrier reports to us at renewal, and we get a payment for that renewal. We recognize that full year of renewal, again, with a reserve for expected churn.

Okay.

So we should get, for the sales in the fourth quarter, to the extent that the carriers report those to us during the quarter, we would recognize that first year revenue upon that reporting to us and cash payment. But we could have some sales at the latter part of the quarter that could fall into the first quarter if the reporting from the carriers happens that way, if we get that in the first quarter, reported to us with cash.

Okay. And are they by and large reporting these monthly to you or are -- is it a mixture of annual and monthly?

It's actually a mixture of weekly and monthly.

Weekly and monthly. Okay. And then my second question is a general question on reform and that state certification process. Just wondering if you could provide a little more color around there and perhaps, how states are thinking about the potential for adverse selection with 2 separate exchanges. And then also, if you do get certified, what kind of marketing would be involved in that process to raise awareness for eHealth's separate site?

Well, that's a good question. But first of all, assuming that we're certified, we don't believe there'll be any adverse selection because everyone goes into one pool. In fact, we would argue just the opposite, that we help to provide a larger more diverse pool, which is better in terms of the risk mitigation and the risk analysis and all the actuarial work that's done. And another reason that we believe strongly that a state would want to work with us is that we do so much outreach through so many different creative ways, through partnerships, through what we do online, on and on. This is not easy to get to people, and it's not easy to enroll them. And anyone who thinks that just building a state exchange or a website that the world -- everyone in the state is going to flock to it is mistaken. Most people are unaware of all of this. They're not aware of the choices, they won't be -- or may not be aware of the subsidies, so we'll certainly be doing some marketing. But we think that if the Affordable Care Act is implemented, to achieve the president's objective of ensuring over 30 million uninsured people, you've got to have eHealth, who's been the most successful at this, right in there, getting these people enrolled. And again, it just adds to the overall pool. Think of it as one pool, not 2 pools of people. We're just another ladder or a doorway into the pool.

I will now hand back to Mr. Gary Lauer for closing remarks.

Well, thanks, everyone, for your time and interest today, and I look forward to talking with many of you individually over the next several weeks as well.

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Enjoy the rest of your day. Thank you.