eHealth, Inc. (EHTH) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the eHealth, Inc., Q2 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I’d now like to introduce your host for today’s conference, Kate Sidorovich, VP of Investor Relations. Ma’am, please begin.

Thank you. Good afternoon and thank you all for joining us today, either by phone or by webcast for a discussion about eHealth Inc.’s second quarter 2015 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. After management completes its remarks, we’ll open the lines for questions. As a reminder, today’s conference call is being recorded and webcast from the IR Section of our website. A replay of the call will be available on our website following the call. We will be making forward-looking statements on this call that includes statements regarding future events, beliefs and expectations, including our expectations of qualified health plans or QHPs may represent a larger share of our total individual book of business, our continued abilities to enroll consumers in QHPs during and outside of the Open Enrollment Period. The ability for state health insurance exchanges to be self-sustaining growth in our Medicare business including our ability to generate growth in Medicare applications and membership outside of the annual enrollment period expected increase in third-quarter operating expenses, expected increase in Medicare customer care capacities and other Medicare related operating expenses in preparation for the annual enrollment period, the individual and family plan business being an important contributor to our revenue and profit, the ability of our carrier partners to handle large application volume, the expected timing of open enrollment period, the huge implications of the recent Supreme Court decision, attrition of our individual membership base, low application volume outside of the open enrollment period and our expectations for third quarter 2015 revenue and earnings. 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. We describe these and other risks and uncertainties in our annual report on Form 10-K and quarterly report on Form 10-Q filed with the Securities and Exchange Commission, which you may access through the SEC website or from the Investor Relations section of our website. We will be presenting certain financial measures on this call that will be considered non-GAAP under SEC Regulation G. For reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included in our press release and in our SEC filings, which can be found in the About Us section of our corporate website, under the heading, Investor Relations. And at this point, I’ll turn the call over to Gary Lauer.

Thank you, Kate and thanks everyone for joining us today as we report our second quarter 2015 results. During this quarter, we continue to execute on our growth strategy in the Medicare business, driving a 65% increase with number of submitted applications for major Medicare products compared to the second quarter last year. We also grew commission revenues sequentially in our individual and family plan business for the second quarter in a row. Second quarter revenue was $39.9 million, adjusted EBITDA was $9.1 million and GAAP earnings per share were $0.32. Cash flow from operations was $12.7 million. We ended the quarter with no debt and $51.8 million in cash on our balance sheet, up from $39.4 million that we had at the end of the first quarter of this year. What I'd like to do now is review the highlights of the second quarter starting with Medicare. On our first quarter 2015 earnings call, we commented that demand for Medicare products on our platform remains strong outside of the annual enrollment period. The strength persisted into the second quarter as we grew submitted applications for major Medicare products, which include Medicare Advantage and Medicare Supplement plans by 65% year-over-year. Demand for Medicare Advantage products was especially robust with submitted applications growing 88% compared to the second quarter a year-ago. These results exceeded our expectations and represented an acceleration from 59% growth in applications for major Medicare products and 79% growth in applications for Medicare Advantage products generated in the first quarter of 2015 comparing that quarter to first quarter of 2014. I would like to note that we were able to drive strong growth in submitted Medicare applications at favorable per unit acquisition cost. The average cost of acquisition per Medicare member calculated by dividing variable Medicare marketing and advertising cost by the number of applications for Medicare supplement and Medicare Advantage products submitted during the quarter was approximately 30% lower in the second quarter of 2015, compared to the same quarter a year-ago. This improvement reflects our continued focus on the Medicare business and finding ways to generate more efficiencies. Total Medicare revenue was $7.2 million comprised of approximately $6.9 million in commission revenue and $300,000 of Medicare advertising revenues. 2015 is the first year when as a result of the new CMS regulation, we booked almost all of Medicare renewal commissions on Medicare Advantage and prescription drug plans during the first quarter. As a reminder, historically we had recognized Medicare renewal revenues throughout the year. We are very pleased that despite virtually no contribution from renewal commissions on Medicare Advantage and prescription drug plan members, we grew second quarter Medicare commission revenue 18% year-over-year, driven almost entirely by new product sales. Our total estimated Medicare membership at the end of the quarter was 169,100 members or 49% growth compared to the Medicare membership, we estimated at the end of the second quarter of 2014. Turning to our individual and family plan business, our individual and family plan business commission revenue for the quarter grew 10% sequentially, compared to the first quarter of 2015 and exceeded our expectations. This is the second consecutive quarter of sequential commission revenue growth in our individual business. As a reminder, during the first quarter of 2015 individual and family plan commission revenue grew 4% sequentially compared to the fourth quarter of 2014 and also tracked favorably compared to our expectations. Our estimated individual and family plan membership at the end of the second quarter was approximately 568,000, down 3% sequentially and 24% compared to our estimates for the second quarter of 2014. Similar to commission revenues, our estimated second quarter individual and family plan membership was above our expectations. I’d like to highlight several important and positive factors that are impacting our individual family plan revenues this year. First of all, compared to a year ago, we are experiencing higher average commissions on a per member basis across our individual and family plan member base. We believe that at least some of this can be explained by higher average premiums and qualified health plans that we are able to sell in greater volume during the most recent open enrollment period and by overall premium inflation across the individual market. And by the way, we are selling qualified health plans presently during the special enrollment period, and expect that they may represent an increasingly larger share of our individual member base over time. Second, we are benefiting from an increase in the rate at which our submitted applications converted into revenue generating members compared to last year. This was driven by or getting paid on a larger percentage of approved members following the most recent open enrollment period compared to the open enrollment period a year ago. It is also driven by the guaranteed issue provision of the Affordable Care Act. It’s not all of the individual and family plan health insurance applications submitted during the open enrollment period a year ago were for guaranteed issue products. And finally during the first half of 2015, our individual and family plan commission revenue benefited from carriers paying us earlier on policies approved during this open enrollment period compared to a year ago. We believe that our carrier partners were better prepared to handle larger application volumes during this last open enrollment period. And we also look took steps to work with our carrier partners to make sure that their processes resulted in more timely commission payments. Clearly, the individual market has changed since the implementation of major provisions of the Affordable Care Act some 18 months ago. Our attrition rates are higher, premiums have increased substantially, and our average commissions per new member have improved compared to three Affordable Care Act levels. We’re pleased with the recent revenue and profit contribution from our individual and family plan business, given all of the uncertainty and upheaval that we’ve seen in the marketplace over the past year and a half. Recently, as you know, the Supreme Court ruled in favor of the administration in the king versus Burwell case. This judgment provides for the continued access to health insurance subsidies for millions of Americans residing in 30 plus states, which have not built exchanges. As a result, we expect to continue enrolling consumers and qualified health plans in these states now and during the upcoming open enrollment period. In addition, the Affordable Care Act requires that state-run government exchanges become self-sustaining beginning in January of this year. This means that state exchanges are expected to sustain their operations through revenues or other funding that they generate. This represents a change compared to the first two open enrollment periods under the Affordable Care Act, where many states had access to federal funds to finance their marketing outreach and other operational activities. And it’s no secret that these government exchanges had spent a significant amount of money to enroll individuals in health insurance during the last open enrollment period. So to conclude, during the second quarter, we once again generated significant growth in our Medicare applications and membership outside of the annual enrollment period. We like what we see in this emerging business a lot and believe it is becoming a more of a year around business for us. We are now starting to ramp our Medicare customer care capacity in preparation for the next annual enrollment period scheduled to begin on October 15 of this year. And you will see this reflected in associated third quarter operating expenses. We’re also thinking about the upcoming open enrollment period in the individual market, which is scheduled to run from November 1st of this year through January 31st of 2016 and how we are going to spend in this market. The individual and family plan business continues to be an integral part of our overall strategy and an important contributor to our revenue and profit. Again, given all of the turbulence we've seen in the market over the past 18 months, we are pleased with the revenue dynamics in our individual and family plan business in the first half of this year. And I would like to turn the call over to Stuart.

Thanks, Gary and good afternoon everyone. Our second quarter results reflect strong growth in new sales of Medicare products, $2 million in sequential individual and family commission revenue growth, and effective expense management including the beneficial impact of our cost reduction program. Our second quarter 2015 revenue was $39.9 million, compared to $42.6 million in the second quarter of 2014. Commission revenue for the second quarter was $37.4 million, compared to $38.5 million in the second quarter a year ago. Second quarter Medicare commission revenue grew by 18% compared to the second quarter a year ago driven primarily by new member additions. The estimated number of Medicare members that we had at the end of the quarter of $169,100, grew 49% compared to the second quarter of last year. The difference between Medicare commission revenue growth and our estimated Medicare membership growth is due primarily to the fact that 2015 is the first year when we booked the vast majority of renewal revenues on a Medicare advantage and Medicare prescription drug plan members during the first quarter, as a result of the new CMS regulation. Commissions from individual and family plan and ancillary products combined, declined by 7% compared to the second quarter of 2014. Due to a decline in the estimated number of revenue generating individual and family plan numbers over the same time period, partially offset by an increase in average commission revenue per individual and family plan member. Other revenue which includes sponsorship, e-commerce on demand and non-commission Medicare revenue was $2.5 million in the second quarter, compared to $4.1 million in Q2 2014. The decline was driven primarily by a reduction in Medicare advertising revenue of approximately $1.5 million. During the second quarter, we generated 23,900 individual and family plan submitted applications, down approximately 4% year-over-year. As a reminder, individual market-submitted application volumes in the second and third quarters are seasonally low outside of the open enrollment period. Our estimated individual and family plan membership at the end of the second quarter was 568,400 members, down 24% from the second quarter a year ago. As Gary mentioned, compared to the prior open enrollment period, we have seen an increase in the rate at which approved individual and family plan numbers, who submitted applications during the most recent open enrollment period have converted into revenue-generating members. In addition, we also experienced faster processing of the initial commission payments on approved policies by our carrier partners than we witnessed a year ago. As a result, we have incorporated this information into the approved to pay conversion rates we used in estimating individual and family membership at the end of the second quarter. In prior quarters, we have used the actual conversion rates for the six month period a year ago. Because we have better information this quarter, we substituted Q1 2014 rates in our calculation with rates that we observed in the first quarter of this year. Our estimated second quarter 2015 ancillary product membership was 404,900 representing 5% annual growth. Our total estimated membership at the end of the quarter for all products combined was approximately 1.14 million members, which represented a 9% decline of our estimated membership reported at the end of the second quarter 2014. Now I will review our operating expenses for the quarter. Second quarter operating expenses benefited from the impact of our cost reduction program, which we announced in early March of 2015 and have successfully implemented. It also benefited from a significant improvement in our member – our per member acquisition cost compared to the second quarter of last year in both the individual and family plan and Medicare businesses, as calculated by dividing variable marketing and advertising costs in each of the businesses by the number of members who submitted applications during the quarter. Second quarter 2015, non-GAAP marketing and advertising expense, which excludes stock based compensation expense was $8.8 million or 22% of revenue compared to $9 million or 21% of revenue in Q2 2014. Marketing costs in our individual business declined year-over-year driven by fixed cost reduction, lower acquisition cost per submitted individual and family plan member as well as the year-over-year decrease in the number of submitted individual and family plan applications. Marketing and advertising expenses in our Medicare business grew compared to the second a year-ago, but at a significantly lower pace relative to annual growth and submitted Medicare applications. This was a direct results of an approximately 30% annual decline in the average cost of acquisitions per submitted Medicare member, which Gary described in his remarks. Second quarter 2015, non-GAAP customer care and enrollment expense, which excludes stock-based compensation expenses was $7.5 million, or 19% of revenue, compared to $8.9 million, or 21% of revenue in Q2 2014. Second quarter customer care expense in our individual business declined by approximately 50%, compared to the second quarter of 2014, driven primarily by our cost reduction program. Second quarter 2015 non-GAAP technology and content expense, which excludes stock-based compensation expense, was $8.1 million, or 20% of revenue, compared to $9.1 million, or 21% of revenue, in Q2 2014. Second quarter non-GAAP operating income excluding restructuring charges, stock-based compensation and the amortization of acquired intangibles, was $8 million compared to $8.6 million in the second quarter a year ago. Second quarter adjusted EBITDA was $9.1 million compared to adjusted EBITDA of $9.6 million from the second quarter of 2014. Second quarter 2015 non-GAAP earnings per diluted share which also excludes restructuring charges, stock-based compensation and the amortization of acquired intangibles was $0.44 compared to non-GAAP earnings per diluted share of $0.22 in the second quarter a year ago. Second quarter 2015 GAAP earnings per diluted share was $0.32 compared to GAAP earnings per diluted share of $0.15 in Q2 of 2014. Our cash flow from operations during the second quarter of 2015 was $12.7 million, compared to $300,000 in the second quarter of 2014. Cash flow from operations reflect over $400 million in cash generated during the quarter from collections from accounts receivable. As of June 30, we had just over $10 million in accounts receivable remaining on our balance sheet, reflecting primarily Medicare commissions payable to us. As a reminder for Medicare Advantage and prescription drug brand products, we now recognize annual renewal revenues during the first quarter and then collect commission payments from carriers on a monthly basis throughout the year. Capital expenditures for the second quarter of 2015 were $1 million. Our cash balance was approximately $51.8 million as of June 30, 2015. Now I would like to address some of the sequential trends for the year and how they can impact our third quarter performance. Regarding revenue, we would expect to see a sequential decline in third quarter revenue, compared to the second quarter of this year. One of the factors that is expected to drive the decline is ongoing attrition in our individual member base, which we do not expect to fully offset with new individual and family plan member additions, during the seasonally slow third-quarter. In addition, pursuant to a new CMS regulation, commissions for new Medicare Advantage and prescription drug plan members that we enroll during the year are prorated from the policy effective date to year-end. So a new member that enrolls during the third quarter would contribute less to that year’s revenue, compared to a new enrollee in Q1 or Q2. Turning to operating expenses, during the third quarter, we will start preparing for the annual enrollment period in the Medicare market. As a result, we should see a sequential increase in Medicare related operating expenses in the third quarter. A combination of the sequential decline in third quarter revenue, combined with a sequential increase in operating cost, is expected to result in third quarter earnings being materially lower, compared to what we reported for the second quarter of 2015. 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 these statements. And now, we would like to open up the call for questions. Operator?

[Operator Instructions]. Our first question comes from the line of Steve Halper of FBR. Your line is open.

Hi, can you hear me?

Yes.

Yes, hi how are you? So just on the cash flow, we noticed a big benefit from accounts receivable, does that have to do with some of those catch-up payments that you were mentioning earlier in the call?

Yes, this is Stuart. That is due to collections of receivable essentially which will occur across the year. In Q1 we recognized the renewal revenues on our Medicare Advantage and on our PDP plans. For the first time, that's all in Q1 year. And then we collected cash monthly throughout the year, and so we set up a receivable in Q1 for the map that we’ll collect in Q2, Q3, and Q4.

Right, so that explain the cash flow weakness in Q1, and now you picked it up for the rest of the year.

Yes.

So Gary, as we sit here today great growth in Medicare and that should continue. Can you tell us a little bit about the strategy going into the next open enrollment season for the IFP business?

Yes, sure and Steve and on Medicare, yes, we continue to see good growth and I just want to point out that this is becoming more of year around business for us, not just an annual enrollment period business. We’re obviously pleased with that. And having said that we’re certainly geared up for growth and we think some really good application volume in the fourth quarter for the annual enrollment period. Now for the open enrollment period the individual business, we’re still assessing that. The last couple of years has been a lot of government money that’s been spent on acquisition of consumers and individuals to enroll in products through the government exchanges. The states no longer have access to a lot of those federal funds. The question will be how much is a federal government spend this year? What does that mean in terms of acquisition cost, what does that mean in terms of what the market looks like? So we’re certainly going to be very active in that market, and we’re still assessing how we would go about this and what we would look for. Today, we are enrolling qualified people – consumers in qualified health plans. And we are really pleased about that. We are looking to be efficient and have better economics in this business. It needs to be – continue to be a profitable business. So we are assessing all of those things. I couldn't tell you today, how much we’re going to spend as we go into this business, because we haven’t determine all of that yet. And frankly the market opportunity is in many ways still kind of defining itself.

Great, have you sort of assessed the competitive landscape among Web broker entities? Because in theory, you are going to be competing with all these companies that are out there.

Yes, as we did in this last open enrollment period, it’s just going to be charge-off that has to be really effective and really competitive and really good of this. Remember we do almost all of this online, many others are very much call center centric, which is a model that works. It’s – frankly, for us – I’m not speaking for them, but for us, it’s a more expensive way to go about it. So we are really all about finding that consumer who is online and wants to transact online, and get this done quickly and efficiently. And that’s a much more economic way for us to go about this as well. In our Medicare business is just the opposite. We are very dependent on the call center. It’s a more expensive transaction, but also a much higher revenue-yielding transaction for us also.

So more call-based model within those Web broker entities, is it really sustainable longer-term?

Yes. I don’t – it’s once again, it’s all about the economics, and can you find a balance here between the cost to acquire a consumer then the cost to transact and get them enrolled? Again, I can only speak for us. What’s been really sustainable for us, and it’s what’s serving us right now, I think, as we are enrolling individuals, is that we do this online. And it’s just a much more efficient way to go about it. We are moving a lot of this into mobile technologies, for example, and mobile capabilities. We had a good number of people in this last open enrollment period that came to us on handheld phones, smartphones. We would expect to see even more of that coming up. And that’s not going to be a call-center centric kind of transaction for us.

Right. And my final question. I guess it’s difficult to look at the IFP open enrollment period, because it’s going to straddle both the fourth quarter and the first quarter. But, as you get further along into the year, we appreciate the third quarter sort of look; but might you be in a position to provide an annual look or guidance for 2016 at some point?

I would hope that we get to 2016, because a lot of this turbulence is behind us that will be providing guidance. I think we are learning more about the new environment as a result of the Affordable Care Act in the individual business. Some of those – some of these new emerging trends that have impacted our revenue in this past quarter, actually these past two quarters, are favorable. We like that. We hope that these become more sustainable kinds of trends that there are things that we can predict from. So, yes, we would certainly hope that we could provide guidance for 2016 based on what we see and what we know today.

Great. Thank you.

Thanks, Steve.

Thank you. And our next question comes from the line of George Sutton of Craig-Hallum. Your line is open.

Thank you. Gary, I wondered if you could dissect the strength in Medicare in the context of the products that you have to sell and the distribution that you have. Is there a way you can dissect for us that strength.

Well, I think and I’ll let – maybe Stuart make some comments on this as well, in terms of the product make up but first of all from a carrier standpoint, we feel like we’ve got a really well rounded inventory products to choose from, United, Anthem, Aetna, Humana, and many others including a number of regional plans, the popular and different parts of the U.S. So we’ve got – we think we’ve got a really good breadth of choice, in terms of product mix, we’re much more focus frankly on Medicare advantage and Medicare supplement plans, that’s where most of our call center workers done prescription drug plans, we try to help consumers enrolling those online. The lifetime revenue value is much less than the Medicare advantage and Medicare supplement. The majority of our member based today is Medicare advantage and Medicare supplement members. And so – and I think you saw that kind of growth we had in Medicare advantage, and all of the Medicare supplement – Medicare advantage products combined in this past quarter. So we feel like the product mix is good from the carriers the inventory products and we really like the mix in terms of how we’re enrolling the consumers.

Yes, I think the only thing I’d add is that the fastest-growing of those products is the Medicare Advantage product for us right now. But that – just given the setup that we have in those products, and our emphasis within the company, Medicare advantage is growing the fastest.

Okay, great. And relative to the state exchanges and the requirement to be self-sustaining, what do you envision will happen? Are you expecting to see some more state exchanges push off to the federal exchange? Are you seeing opportunities that will exist for you to help some of those states?

Well, the way we would like to help the states is simply by enrolling more residents in those states through our platform. I’m not sure that we want to be in the software providing business to the states, that’s a whole different business that you recall we did that years ago with healthcare.gov, and we’ve done it with few states. What’s really interesting, George, is that – and we’ve seen comments made by the exchange people in California, and some of the other states running their own exchanges, that they are certainly challenged, or feel they like are going to be challenged, in terms of the financial – how to support them and how to sustain themselves from a financial standpoint. And the amount of money that has been spent to acquire a consumer or a resident to enroll, at least for us, is not sustainable – not the money we spend, but the money these state exchanges spend. When you spend over $1,100 to sign somebody up for a health insurance product, that’s just – the math just doesn’t work. So we think that many of these state exchanges should have done this a while ago. They're going to need to and should turn to WBEs like us to help them with enrollment. All it's going to do is provide more enrollment and generate more revenue for these state exchanges. And I think we're going to start to see more and more of them do that. I should also comment we've got a really good relationship with CMS. We've got a really good entry point through what's called the Broker Portal into healthcare.gov. And we are enrolling people in qualified health plans today through that, and expect to be in the open enrollment period. It's a great example for some of the states how someone like us can help the state.

Okay, perfect lastly for me, you obviously have had a lot of consolidation of the carriers that you work with. Can you give us a sense of what you would expect that to mean for you obviously not right away, but over the next couple of years that occurs?

Yes, it's interesting, isn't it, when you see what's going on with Humana and Aetna and CIGNA and on and on. We may very well end up with three or four major brand names in the marketplace. And that is going to be very much like the Medicare business – where the brand names that most consumers seem to tend toward are United, Anthem through Blue Cross, Aetna, Humana and some CIGNA as well. So, if it's anything like the Medicare business and the individual business, these large brand names become ferociously competitive with one another for market share. And that's what we see in the Medicare business and with a need of what they want is distribution. So they can generate volume to what we do. So our early on thinking is very early as this kind of consolidation could be very well be good for us.

Okay, thanks guys.

Thanks George.

Thank you and our next question comes from the line of David Styblo of Jefferies. Your line is open.

Hi, thanks for the questions. Let me just start out on the IFP first and talk about the sequential decline, I guess. Had you guys talked about guidance in that segment before? Because I was thinking – and modeling growth there, thinking that the backlog of the 186,000 approved members in the first quarter, some of those happened late and that they would translate into paying members in this quarter. So, that was the thought process there. Curious if you could help me reconcile the thoughts there as to how that came above your expectation?

Yes. Well, we didn’t give guidance on what membership would be and if you look at last year, we saw sequential decline between Q1 and Q2. And so, I think this is kind of the seasonality affect of we are now outside of the open enrollment period yet, we did pick up many new paying members offer our applications from Q1. And that contributed to the membership in Q2, but we are simply outside the enrollment period and not adding as many new members at the top of the pipe as we would have attrition outside of the open enrollment period.

Okay. In terms of visibility in that book, so one of the latest HHS reports that we had, signaled that there's really only about 10 million paying lives now versus sort of the headline was closer to 12 million who had signed up but ultimately didn't pay. There's a – that's a pretty wide disconnect. I'm just curious, given what happened last year, and some members suddenly just didn't convert over, how confident you are that the membership that you have in the books is fully converted and ready and really there?

Well, Stuart will weigh in on in this, but I just want to make a comment that our membership numbers are estimated. Remember that the member pays the carrier. The carrier then pays us. So based on payments we receive, and there is a time lag we estimate what the membership is, I think all that I would say about this – and I’ll let Stuart make some comments – is that compared to a year ago, we’ve – carriers have approved more apps. They are paying us earlier than they paid us a year-ago on a higher rate of applications. As we said, the commission per-member is – on a per-member basis has increased. And our estimated membership, at least – and I’ll, once again, underscore estimated – membership for our Q2, higher than we anticipated coming into all of this. And you see that in the revenues. The revenues, frankly, are higher than anticipated both on a per basis and an aggregate.

So when it's estimated, though, how much visibility or certainty do you have about that membership? I mean, what percent do you have confidence that that's actually there?

I won’t give you a confidence percentage but in our estimate, we are still using attrition from a year ago. And as Gary is suggesting, our plan for this year assumes similar attrition to a year-ago, and assumes similar approve-to-pay conversions, submit to approved conversions, all those conversions – very similar to a year-ago. And with all of that said, we are coming out ahead of – our estimate is coming out ahead, and our revenue is telling us as well, it’s coming out ahead of our models as well. And so, at least the revenue side of the equation is giving us confidence with respect to how things are trending versus our models, which are based on last year.

And as Stuart commented in his prepared remarks we actually made a change to one of the factors through that’s part of our formula and our modeling, which is the rate at which we are being paid for these applications. We call it the approve-to-pay rate. We haven’t changed any of the other factors. We are still using the factors in our estimates that we experienced a year-ago. Perhaps we’re going to find over the next several months that one or two of those factors have changed as well as the approve to pay has.

Okay, that's helpful. Thanks for peeling that back. Moving over to the Medicare business, obviously, the sequential growth, 9%, another solid update there. That seems to be just getting a little bit more consistent and less volatile. What do you attribute that to? Because even last year, it bounced around a little bit. I mean, I know you are really going after the folks who are aging in, but it seems like the strategy is starting to take root. Are there certain marketing avenues or ways that you are going to market that's helping to produce this result? And is that something that you'd expect to carry forward into the third quarter? Or is there anything that you would spike out this quarter that was unusual?

Well, this is much like the way we grew this individual business several years ago. And what’s interesting about it is that as you have more presence in the marketplace, there’s a number of things that help to impact growth. One, anecdotally, is just word-of-mouth – one consumer telling another about an experience that they had. Secondly, as I said earlier, is just the breadth of products. I mean, we’ve got, we think a really robust inventory of products today. Thirdly, we are a bit better at marketing to this specific consumer demographic than we were a year ago or two years ago. We are better at transacting than we were a year ago or two years ago, both online as well as with our customer care. You see that – in fact, some of the evidence of that is in the cost of acquisition. As we indicated, our cost of acquisition on a per-member basis is dropped in the 30% range year-over-year. I can tell you, in the Internet e-commerce business that’s a very significant number. So, it’s all of those things. And we talked about this many times, but you’ve got millions of Americans who are baby boomers who are aging in, 10,000 to 11,000 a day, 76 million people over the next 15 years. Life expectancy is longer. There is frankly more marketing done by the carriers for Medicare Advantage products. We get some of the spillage from that. So it’s not one thing. It’s all of those things. And we are very much into this Medicare business. We like this business so much. And what we really like is that we are finding ways to grow it outside of the annual enrollment period, which with the common knowledge, that’s when all of this should transact. So as we said earlier, it’s becoming more of a 12 month business for us. It’s all of those things. And we are very focused on this. We’ve got a property called Medicare.com that we acquired a year ago. We are going to be more of that from an acquisition standpoint. So, we certainly are planning and moving toward all of this kind of growth and what we are seeing in the Medicare revenue contribution continuing. And the other thing – the last thing to note is that percentage of revenue that Medicare makes up for us as a percentage of our total revenue keeps growing as well. So this is becoming a very important part of our company.

Super. And then, lastly, could you just talk a little bit more about the EBITDA profile? I know you don't technically break these out, but you've commented before that it's – I think it's – on a fully loaded basis, it's still negative this year. I'm curious at what level that might reach break-even? How much revenue do you need? And then sort of in the longer-term outlook, how – what sort of margin potential can this business be? And what revenue does it need to be at to reach that – whatever it might be, 15% or 20% level – several years from now?

You know, we still, from a long-term standpoint, believe that it can be a 20%-plus EBITDA business. Now today, as I sit here, I don’t what to say when we would get there or even what revenue level we’d achieve that at, but the various ways we’d model it, we clearly see that we can get there

And we continue spend to grow the base. And that’s part of what we carry on the expense load here. And we could certainly bring the acquisition total expense down, bring the growth down and start to see an earlier contribution to EBITDA and earnings and so on. But everything that we model up, especially when we look at the unit economics, tells us that we wanted to do as much as we can to grow this member base [indiscernible] to get to the kind of EBITDA margins that Stuart just described.

Right, okay, Gary. Thanks, guys, for the questions.

Thank you.

Thanks.

Thank you. And our next question comes from the line of Stephen Lynch of Wells Fargo. Your line is open.

Hey, guys, thanks for taking my questions. It looks like there was a bit of a decline in the other estimated membership lines sequentially. Could you maybe give us a sense for what's going on there?

Well, there is some connection with the individual and family business. You know, as we are coming off of the open enrollment period, you’ve seen a decline year-over-year with individual and family, and some of those dynamics impact the ancillary products that are cross-sold with them. And then also, I don’t – I’d say in short term, it’s part of the equation there we have seen lower sales to short term year-over-year than we saw this time last year. And so our emphasis has been on the major medical individual and family product. And so I’d say it’s a combination of those two factors.

Yes, I think a year ago we were selling more short-term products as a bridge. Now that we’ve got QHP capability, and now that I think that frankly do a better job of helping people understand whether they really qualify or don’t qualify in the special enrollment period. That is probably have a little bit of dampening effect on short-term products, but certainly hasn’t on the sale of qualified health plans now, which we weren’t even selling a year-ago.

Okay, thanks. Given the regulatory change that did pull Medicare renewal revenue forward into Q1, is there any sort of commentary you can provide to us to help us where modeling Medicare commissions for the rest of the year, maybe should we expect the progression to look similar to what it was last year in Q3 and Q4? Or is it going to be fundamentally different?

Well, it will be somewhat different in that there will still be this effect of not having renewals. So that piece for Q3 would make you somewhat flat with Q2. But as I described in my remarks, there should be a step-down related to new sales, just because of the new proration rules from CMS. And so, a new sale of a Medicare Advantage product this year in Q3 will just get a prorated amount from the date of effective date to the end of the year; whereas we used to get a full year of compensation upfront, and take the full revenue. And so in Q2, that proration gives us more revenue for the year than a Q3 sale will. So, if we sold the same number of members in Q3 as we sold in Q2, you’d see a step-down, just because of the proration.

Got you. That makes sense. Maybe this one for Gary. I wanted to see if we could get some big picture thoughts from you guys on where you see the Medicare Advantage market going? Advantage, I think it accounts for about 30% of Medicare lives today. Where do you think that penetration could be three years, five years from now? And what catalysts do you see that could move the needle there?

Well, it’s something we think about a lot. It’s a great question. First of all, it’s a business, as you know, that the carriers really like a lot. So we think they will continue to configure these products in a way that is very appealing to consumers. Secondly, as reimbursement rates will continue to narrow for just base level Medicare and so on, it makes these supplemental products – which in many ways, Medicare Advantage is – a more attractive product. Thirdly, the baby boomer demographic is aging in. Many of them are affluent enough that they are willing to spend, and want to spend, for more services, which is Medicare Advantage. So almost everything that we see points to this being continue to be a growing factor and a larger percentage of Medicare beneficiaries. And we certainly hear that from our carrier partners as well.

Thank you. And our next question comes from the line of Tobey Sommer of Suntrust. Your line is open.

Thanks. Gary, you changed one of the factors in your kind of routine to estimate things. Does it feel in that some of these factors are improving, and maybe contrasting that to last year when the – most of the variance was sort of deteriorating versus historical trend? Thanks.

Well, Stuart talk about this as well. It certainly seems a lot more stable than it did a year-ago. We’ve seen this – what we call this approve-to-pay metric is better we believe that a year-ago. As I said earlier, the commissions that we earn on a per-member basis are higher than they were a year-ago. And you know what we’ve seen – what we believe there is some really good revenue that’s come out of this individual business here for the second quarter in a row. I don’t think we’ve seen enough yet that would indicate us that we want to change anything else in our assumptions and in our formulas. But certainly, it appears to be more stable.

Yes. And I’d say we are gratified to see an improvement in that approve-to-pay. It was an area of concerning year-ago. We spend a lot of time working with our carrier partners to work with them on their side of the process. And they came through this time around with much better, faster and higher levels of pay. So we are very gratified to see it.

Thanks. And kind of looking at the next enrollment, open enrollment period, are there changes relative to the last enrollment period that you think may contribute to more ongoing stability or predictability? Or the opposite or a little less? Thanks.

Well, I think the only thing that we would point to right now that we feel very optimistic about coming to this next individual open enrollment period, is our capability and capacity to enroll qualified health plans – subsidy-eligible individuals. We’ve really got it working much better in this last open enrollment period. It’s working very nicely for us now. Barring any significant changes made to the technology in healthcare.gov by the government or barring that system not working – which is what we experienced two years ago – that is one factor that we feel really good about, coming into this open enrollment period.

And I think we’ve also commented it will be interesting just to see how the government exchanges will market this next upcoming year as well, just given the economics – the different economics that they will be under this time around.

Thanks. And kind of wanted to ask a broad question about the IFP business and Medicare business residing side-by-side. In the IFP business, it’s an online enrollment. Medicare – sometimes people need a little bit more personalized systems to achieve their objectives. How do you square those two long-term – kind of different – potentially different approaches, over a period of time?

Well, several ways. First of all, for us being call center-dependent or centric in the individual business has never worked really well for us from an economic standpoint. And fortunately, we figured out ways years ago to get most of that to transact online as it does today, so that’s all good. In the Medicare business, yes, the consumer there typically need some personal interaction. But what we are doing is we’re taking a lot of what we’ve learned, and a lot of the technology assets that we built in the individual business and applying those to the Medicare business, which helps our call center people to be much more efficient, helps them to get through the transaction a lot quicker. And frankly, you can provide tools to the consumer as well, to look at things and consider things online. And I should also indicate that one of our objectives is to do more and more of the Medicare business online with no human interaction at all. And we have made progress on this also. So we actually think these things can really complement one another. And we are – thankfully, we’ve got a really good technology base instead of assets that we can transfer over to this Medicare business, which is one of the things that attracted us to the business in the beginning.

My last question is, any – if you could give us an update on the opportunity for you to sign up some strategic partnerships that may facilitate sales growth and kind of provide low-cost distribution channels for you. Thanks.

Always – we are always at that. We’ve got what we think is a really good partner team in our company, a business development team. CVS is one of our partners in the Medicare business will be looking for some really nice, hopefully, contribution through them. We do work in Costco. We’ve got a number of partners in the individual business. So we are constantly looking to these partners and trying to work with them to find ways to leverage the access they have the consumer. So yes, it’s a big part of the strategy.

Thank you. And our next question comes from the line of Nat Schindler of Bank of America Merrill Lynch. Your line is open.

Yes. Hi, guys and I know this IFP conversation has been done to that. But I just want to see if I can get at it a different way. Two things, one should we be looking at this year as kind of the bottom of your IFP member number? Are you going to go see more churn in Q3, a little bit more in Q4, as you enter open enrollment with a pop in Q1, and which we will now be at a permanently higher level again than you were – than you are now? Is that going to – and throughout this year, is this the – are you functionally seeing the bottom? Secondly, if this is the retention rates that we are seeing, do you think even as open enrollment period change their length. Are they – do you think they will be relatively similar as you go through a year. I mean higher, highest in Q1 and low in Q2 and Q3, – sorry, churn rate, not retention rate, so highest churn in Q1, low in Q2 and Q3 and then pop in back in Q4?

Yes, I would say looking back at least that a year-ago and the pattern we saw. I would expect the churn to be highest in Q1 and then to be lower outside of the open enrollment period. We wait to see how that transpires this year, but that’s what we saw year-ago. As for where the membership settles out, I mean, I think, given the seasonal patterns, it's – we are always going to have obviously a big slug in the open enrollment period, and then it will – the membership should decline in Q2, Q3, into Q4 before we reload again. Because it’s really a question of how much of a reload do we get of new members in the next open enrollment period? And then what does the churn profile look like as we move forward? Does that normalize? And I think that’s what we need to wait and see how that is the equation come together.

But now I think the kind of the way you framed this, is what we would hope to see and the only comment I can make on that is, we've – again it seems some good trend lines emerging here over the past really the past six months.

Okay. How much do you think marketing by the state and federal exchanges affect this? So, the marketing levels.

A lot. Very significantly. You know, we do the arithmetic on this but it's written by lots of people. The cost that government has spent to acquire a member in the private sector is not even close to being something you'd ever consider. It's a minimum of $1,100 per individual. The lifetime revenue value of one of these members is $250, $275, as an example, kind of in the average. These exchanges are collecting 3%, 4% of the premium each month as an exchange fee. The math just doesn’t work at all. And so over time, the states are either going to have to find ways to supplement this with other funding sources, or the federal government is going to have to, but that’s not part of the Affordable Care Act. So I think a lot of these states are going to be challenged. And we are here to help them because we are happy to enroll individuals, even to run them through their exchange through some kind of a portal or whatever. They can take the credit, we don’t care about that and they will get their 3% or 4%. And so it generates revenue and it actually increases membership. I think the bigger question is going to be, how is the federal government is going to come out this year? What kind of money will they be spending? But there is no question in our minds at least that these tremendous amounts of advertising and money, that has been spent on marketing, has had a real impact on our business and others as well.

Great, thank you.

Thank you. And our next question comes from the line of Steve Rubis of Stifel. Your line is open.

Thanks for taking my question. Last year, you were hit by commission conversion issues, and in the past OEP, you were hit by the attrition of grandfathered health plans. Are there any looming issues of a similar magnitude that preclude you from giving FY15 guidance?

I won’t – there is no looming issues that I can point to sitting out there. And so, no, it’s not really looming issues, per se. I’d say that, as we look at the rest of the year, as we are suggesting, we are looking at some of these positive factors like the approved-to-pay conversions, the higher commissions per member, coming off of this last OEP. And it has us assessing what level of investment we are going to want to make in the fourth quarter, and into Q1, around the OEP. We certainly want to look at retention over the next quarter so, as part of that as well. And think about what is the ramp going to be from a competitive standpoint in terms of what government spending looks like, what competitors in the private sector may be doing, and assessing all those factors. I mean, that's probably the biggest thing I'd say, between now and the end of the year for this year is determining what the spending level into individual and family business.

Great. Now you often talk about eHealth’s ability around customer demand generation. Can you all comment on any trends you are seeing in terms of demand from, say, non-traditional entities such as a company like Oscar, Accountable Care Organizations, or even Health Systems, in terms of trying to attract clients? Do you think there’s an opportunity for you guys to serve those entities at some point in the future?

Yes, there’s no question about it. I mean some of these new entities are going to have to be able to get some traction and have some products that are somewhat appealing to consumers. If they have and if they get traction, we are delighted to work with them and use them as a – or have them here as an option or a choice for consumers. We are all about choice. I mean, the more choice that we have for consumers, we think the better this is for them and the more attractive. So, for sure. And we’ve had some discussions with some of those.

Got it. Now another characteristic you guys talk about, and you’ve mentioned a lot on this call was the breadth and depth of plan products as one of your core strengths. Can you talk about physician access in these plans on eHealth and how they compare to, say, physician access on healthcare.gov? Has that been an issue for you guys or for your consumers?

What do you mean by physician access? I don’t quite…

Well, Avalere Health did a little study, I think, a week or two ago that showed that, on average, consumers who use plans on the federal exchanges have a 34% smaller physician pool to work from, in terms of being able to obtain a physician they are looking for, that just that total pie of doctors is 34% less than what you would get through, say, a health plan that you get from your employer.

Yes, okay. Thank you. Well, I’d answer this several ways. First of all, what you find on the government exchanges are qualified health plans. These are subsidized plans. And there’s been a lot written about them and a lot of analysis that shows exactly what you just described, that the networks are narrower than both non-QHP plans and certainly employer plans, and have continued to narrow. So there is not as much access to physician or caregivers and so on. Now on that point, I just want to throw this in, one of the things that we figured out several years ago is that consumers, in most cases, care much more about the relationship that they have with their physician than they do the name at the top of the health insurance product. We built a database of essentially every physician in the country that takes health insurance. So if you come with us, you’ve already got a physician for yourself, your spouse, your children, indicate to the physician is, we’ll show you all the products that support that physician. To my knowledge, that’s not being done very effectively on government exchanges currently. But you are right. The networks themselves, and not just physician networks, but hospital networks as well, are certainly narrower.

Yes, thank you very much.

Thank you.

Thank you. And at this time, I’m showing no further questions in queue. I would like to turn the call back over to Gary Lauer for closing remarks.

Thanks everybody, and look forward to talking with any of you further.