eHealth, Inc. (EHTH) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to eHealth's preliminary Fourth Quarter and Full Year 2014 Results Conference Call. My name is Matthew, and I’ll be your operator for day. At this time, all participants are in listen-only mode (Operator Instructions). As a reminder, this call is being recorded for replay purposes. And now, I'd like to turn the call over to Ms. Kate Sidorovich, eHealth's Vice President of Investor Relations. Please proceed, Ma'am.

Good morning, and thank you all for joining us today, either by phone or by webcast, for a discussion about eHealth Inc.'s preliminary fourth quarter and fiscal year 2014 financial results. On the call this afternoon, we'll have Gary Lauer, eHealth's Chief Executive Officer; and Stuart Huizinga, eHealth's Chief Financial Officer. As a reminder, today's conference call is being recorded and webcast from the IR section of our Web site. A replay of the call will be available on our Web site following the call. We will be making forward-looking statements on this call, that include statements regarding future events, beliefs and expectations, including those related to our projected financial results and operating metrics for the fourth quarter and fiscal year ended December 31, 2014, as well as performance and key factors of certain of our businesses, also our ability to assist subsidy-eligible consumers during this open enrollment period, Individual & Family Plan application volumes during the weeks leading up to February 15th of 2015, potential stronger application volumes during the first quarter of 2015, lifetime values for Medicare Supplements and Medicare Advantage products, contributions from Medicare Supplement products saw revenue and number shift, postponed recognition of Medicare revenue until the first quarter of 2015, and our return on investment on Medicare marketing expenses. Forward-looking statements on this call represent eHealth's views as of today. You should not rely on these 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, including the risks associated with delays in our receipt of items required to recognize Medicare revenue and estimates that could differ materially from actual reported amounts in eHealth’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014. For a discussion of other risks factors that may affect our results, please refer to our press release issued yesterday, and our recent SEC filings, in particular, the risk factors section of our most recently filed Form 10-Q. We will be presenting certain financial measures on this call that will be considered non-GAAP under SEC Regulation G. For more information relating to non-GAAP financial measures, 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 Web site under the heading Investor Relations. And at this point, I will turn the call over to Gary Lauer.

Good morning and thanks for joining us as we review our quarterly results for the fourth quarter and fiscal year 2014. We thought it was important to share these preliminary results with you, given that our projected 2014 revenue and earnings are expected to fall short of the guidance ranges we provided previously. Since we haven’t finalized the closing process for the fourth quarter and don’t have the full financial and membership metrics that we typically report, today’s conference call will be limited to our prepared remarks. What I’d like to do today is update you on our fourth quarter performance in our Medicare business and our Individual & Family Plan business, and discuss key factors that affected our performance relative to our expectations. I’ll then turn the call over to Stuart, who will review projected ranges for our fourth quarter and 2014 financial results and provide some additional color around these numbers. In our Medicare business, we completed a successful Annual Enrollment Period during the fourth quarter, generating submitted application growth above our expectations at attractive acquisition cost per member. We’re especially pleased with submitted application growth rates for our Medicare Advantage and Medicare Supplement products, which are both characterized by high expected lifetime revenues. Primarily as a result of the strong application growth, we spent considerably more on Medicare marketing during the fourth quarter than we’ve planned. Although our per member acquisition cost was lower than it was in the fourth quarter a year ago. I’ll talk more about our Medicare business in a few minutes. In our Individual & Family Plan business, we are currently in the middle of the 2015 Open Enrollment Period. This is the second Open Enrollment Period under the Affordable Care Act, and there are several important differences this going on Open Enrollment Period and the one that began on October 13th over a year ago. The first major difference is timing. Given that this enrollment period started on November 15th, we have 45 selling days in the fourth quarter of 2014 while on the fourth quarter of 2013 we had full 90 days. Also during the inaugural Open Enrollment Period, we saw large number of Individual & Family Plan applications during the last two weeks of December, driven by consumers enrolling into so called grandmother plans. To remind you, late in 2013, the Obama administration allowed carriers to sell non-ACA compliant plans and gave consumers a deadline of December 31, 2013 to enroll in them. More than half of our fourth quarter 2013 individual and family plan applications were for these grandmother plans. These products are not available to be sold in this current open enrollment period that started on November 15th. Importantly, during this ongoing Open Enrollment Period, we are assisting subsidy eligible consumers in submitting applications for qualified health plans, something we did not do on the fourth quarter a year ago due to technology issues with Healthcare.gov. We are enthused to be able to offer this capability. During the fourth quarter of 2014, we saw over 150,000 individuals applying for health insurance on roughly 100,000 Individual & Family Plan submitted applications. Over 25% of these submitted applications were for qualified health plans. These submission volumes were less than we anticipated. I’d like to note that historically we’ve seen consumer demand in our market increase around application deadlines. During the current Open Enrollment Period, this trend has been even more pronounced with peak application volumes around the first major enrollment deadline of December 15th, significantly exceeding last year’s. As a reminder, December 15th was the deadline to apply for an individual family plan policy, with the January 1, 2015 covered effective date. If this trend holds, combined with our ability to process subsidies this year, we are optimistic about our potential Individual & Family Plan application volume during the weeks leading up to the last day of the Open Enrollment Period, which is February 15th. This could also translate into strong first quarter application volumes considering that the final weeks of the last Open Enrollment Period, that ended on March 31, 2014, accounted for a very significant portion of our total Individual & Family Plan application volume in the first quarter last year. I’d also like to point out that, unlike Medicare in our Individual & Family Plan business, we did see an increase in the cost of acquisition per member compared to a year ago. To give you a little more sight into our Medicare business, submitted applications for Medicare Advantage and Medicare Supplement products combined, were 46 % in the fourth quarter compared to the fourth quarter of 2013 with applications for Medicare Supplement Plans growing in excess of 80% and Medicare Advantage Plans growing in excess of 40%. It’s important to note here that we project Medicare Supplement products that approximately the same lifetime value to us as Medicare Advantage products. And we are starting to see greater contributions for Medicare Supplement products to our revenues and to our total Medicare membership. In addition, Medicare Supplement products are not subject to the Medicare annual enrollment period and can be sold throughout the year to anyone who qualifies, which makes these products even more attractive to us. And now I’ll turn the call over to Stuart who will review our guidance ranges and talk about the key revenue and profitability drivers for the fourth quarter.

Thank you, Gary. I will now review our preliminary results for the fourth quarter and fiscal year 2014. Please note that these results are based on our initial review of operations for the quarter ended December 31, 2014 and remain subject to change. We wanted to share our preliminary view on certain of our fourth quarter and 2014 annual financial results and we’ll report final results for these recording periods on our regularly scheduled fourth quarter 2014 earnings conference call. As detailed in our press release, we expect our 2014 revenues, EBITDA and non-GAAP EPS, to fall below the annual guidance ranges we’ve provided previously. Specifically, we now expect that our revenue for 2014 will be in the range of $178 million to $180 million compared to guidance of $185 million to $194 million. And for the fourth quarter of 2014, we expect our revenue to be in the range of $43 million to $45 million. We expect EBITDA for 2014 to be in the range of $1.5 million to $4 million compared to the guidance of $13.5 million to $18.5 million we’ve provided previously. For the fourth quarter 2014, we expect our EBITDA to be in the range of negative $16.3 million to negative $13.8 million. We expect non-GAAP net loss per diluted share for the full year 2014 to be in the range of negative $0.13 to negative $0.04 compared to guidance of $0.30 to $0.43 earnings per diluted share. And for the fourth quarter 2014, we expect non-GAAP net loss per diluted share to be in the range of negative $0.56 to negative $0.47. EBITDA is calculated by adding stock based compensation expense, depreciation and amortization expense, including intangible asset amortization expense, other income expense net and provision for income taxes, to GAAP net income. Non-GAAP net income per diluted share is calculated by excluding intangible asset amortization expense, stock-based compensation expense and the estimated tax benefit related to these items. We project our 2014 annual revenues to come in below the guidance range for two primary reasons. First, in the fourth quarter, several million dollars in Medicare revenues were pushed out into the first quarter driven by regulatory changes that impacted how Medicare carriers compensate their brokerage channel. Specifically, for plans that are sold during the Annual Enrollment Period, carriers are no longer allowed to make commission payments before January 1st, which is the standard effective date for these policies. Historically, many of the carriers paid brokers following the approval of a policy without waiting for the effective date. We typically recognized commission revenues based on the receipt of two items, a commission check and a commission statement. One of these two items has to be received during the quarter in which we booked revenues, and the second one shortly thereafter. Given that carriers were not allowed to pay us until Q1 on sales made during the fourth quarter Annual Enrollment Period, we’re planning to book revenues stemming from these sales based on receipt of commission statements. However, to the extent we did not received statements by quarter end, we had to postpone revenue recognition until the first quarter of 2015. Lower than expected Individual & Family Plan applications also put pressure on our fourth quarter revenues. While applications generated in a given quarter typically have limited impact on broker commissions in that same quarter, they do impact other volume based revenues, including sponsorship and advertising and other ancillary revenue. As a reminder, sponsorship and advertising revenues are closely linked to the application volumes for insurance products offered by carriers participating in our sponsorship and advertising programs. Consequently, these Individual & Family Plan related revenues, are forecasted to come in below our expectations in the fourth quarter by several million dollars as well. Turning to our profitability, our fourth quarter EBITDA and earnings per share were primarily affected by two major factors. One, we spent more than originally planned in Medicare marketing costs, based primarily on higher than expected consumer demand and application volumes generated in our Medicare business. As you know, our marketing expense of the quarter is closely linked with the submitted application volume and we expense our customer acquisition costs upfront, while commission revenues are recognized over the life of the member. We believe that the return on investment on this Medicare spend is very favorable, and as Gary mentioned, our Medicare acquisition cost per member were attractive and below last year’s fourth quarter. Secondly, our fourth quarter profitability was affected by the revenue shortfall, driven by the timing of Medicare revenue and lower than expected Individual & Family Plan revenues that I just discussed. As we stated earlier, while Medicare unit acquisition costs were lower than last year’s fourth quarter, we saw an increase in cost of acquisition per member in our Individual & Family Plan business, driven by higher paid search costs. So while the overall IFP marketing spend came down in the fourth quarter of 2014 compared to the fourth quarter a year ago, it did not decline to the same extent as the submitted Individual & Family Plan application volume. We’ll provide greater detail on our fourth quarter revenues and operating expenses during our regularly scheduled Q4 earnings call. This concludes today’s prepared remarks. We look forward to providing you with full financial results for the fourth quarter and fiscal year 2014 on our earnings call next month. At that point, we also plan to share with you our annual guidance for 2015.

Thanks for joining today’s conference call, ladies and gentlemen. This concludes the presentation. You may now disconnect. Good-day. End of Q&A: