eHealth, Inc. (EHTH) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. welcome to the Q2 2016 eHealth Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will host a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder to our audience, this conference is being recorded for replay purposes. I would now like to hand the program over to Kate Sidorovich, eHealth’s Vice President of Investor Relations. Ma’am, you have he floor.

Thank you. Good afternoon, and thank you all for joining us today either by phone or by webcast for discussion about eHealth Inc.’s second quarter 2016 financial results. On the call this afternoon, we’ll have Scott Flanders, eHealth’s Chief Executive Officer; and Stuart Huizinga, eHealth’s Chief Financial Officer. After management completes its remarks, we will open the lines for questions. As a reminder, today’s conference call is being recorded and webcast from the IR section of our website. A replay of the call will be available on our website following the call. We will be making forward-looking statements on this call that includes statements regarding future events, beliefs, expectations, including statements regarding membership and submitted application estimates, we expect the completion of our strategic review and our plans to communicate is also being reviewed to stakeholders, the anticipated benefits of our agreement with Kaiser Permanente and now value as a distribution partner to carriers, the IFP business contribution to the EBITDA this year, the potential efforts to accelerate growth in Medicare Advantage membership and the Medicare Supplement market, our focus on public policy and plans to raise awareness of the company in Washington DC, our ability to maintain profitability in the IFP business, the impact of the CMS mandated process for enrolling individuals into qualified health plans are now financial results, improved insight into the factors influencing our near-term approach to customer spend and the timing of that insight, and our ability to provide a strategic and financial outlook and guidance, and the timing of such outlook and guidance. 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 now, I will turn the call over to Scott Flanders.

Thank you all for joining us today as we report our second quarter 2016 financial results. This is my first earnings call since becoming CEO of eHealth. And before I dive into our financial and operating results, I wanted to take a moment to say how excited I’m to be leading this company. As many of you know, I’ve been a member of eHealth’s Board of Directors for the past eight years. But now getting to know the company’s operations, our key business partners, and most importantly, eHealth’s team on a much deeper level. I’m very impressed by the team and the assets they have created and see an opportunity for eHealth to becoming much bigger company to aggressive growth in Medicare, including a Medicare Supplement product, stronger emphasis on cross-selling opportunities with our customer base, and exploring adjacent business areas. We are currently the process of a 100-day strategic review, which I initiated shortly after joining eHealth as CEO. I plan to communicate our strategic plan to stakeholders after this process is completed. Now, turning to our second quarter financial results. Revenue was $37.3 million. EBITDA was negative $2.6 million and non-GAAP income per share was $0.09. During the quarter, we generated approximately $2.6 million in operating cash flows, bringing our cash balance as of June 30th of this year to $66.7 million. Several items impacted our second quarter earnings. First of all, during the quarter, we saw strong consumer demand in our Medicare business, and made a decision to spend into this demand resulting in higher submitted application volume and higher Medicare-related marketing costs relative to our expectations. Submitted applications for Medicare Advantage products grew 82% in the quarter compared to Q2 a year ago. A meaningful acceleration from 53% growth year-over-year in Medicare Advantage application that we generated in the first quarter of 2016. Second quarter submitted applications for all Medicare products, which also include Medicare Supplement and prescription drug plans were up 76% year-over-year. Second quarter earnings also reflect approximately $4 million in costs related to management transition and review and analysis of strategic plans. Turning back our Medicare business. Second quarter Medicare commission revenue was $9 million, representing 31% growth compared to the second quarter of 2015. Total Medicare revenue for the quarter was $9.7 million, representing 34% annual growth. While strong, it is worth noting that the 31% growth rate in our second quarter Medicare commission revenue is significantly lower than the 76% rate at which we grew submitted Medicare applications during the quarter. We observed a similar relationship in the second quarter of 2015, as a result of a typical lag between the time when a Medicare application is submitted and when we receive the first commission payment. In addition, this quarter, we increased the reserve rate book against revenue on new sales to reflect our experience in the second quarter of last year. Our estimated Medicare membership was 239,000 at the end of the quarter, up 41% compared to Q2 2015. Medicare Advantage membership was 149,000, representing 38% year-over-year growth. On a sequential basis, our total Medicare membership grew 8%, or 18,700 members compared to the first quarter of 2016. During the quarter, we entered into an agreement with Kaiser Permanente to help people enroll in Kaiser’s individual Medicare Advantage plans across all geographic markets served by Kaiser. We are very excited about this development. Kaiser is one of the largest Medicare carriers and has tremendous brand recognition. We believe their decision to work with us, speak to eHealth value as a distribution partner to carrier. The eHealth make Kaiser Medicare Advantage plans available on eHealth’s platforms beginning July 15, to help consumers enroll for an August 1 effective date. Our second quarter results for the individual and family plan business are reflective of our strategy to operate this business with emphasis on profitability and cash flow generation. Second quarter IFP submitted applications declined 59% compared to the second quarter a year ago. This was slightly better than our expectations, as we have significantly reduced our IFP-related marketing spend this year, especially outside of the open enrollment period that ended on January 31. The cost of acquisition for submitted IFP application was down 35% compared to the same quarter a year ago, also favorable to our expectations. Commission revenue on our individual business, including ancillary products was $24.1 million, representing a 17% decline compared to Q2 2015. Given our IFP membership base, this business remains highly profitable and we expect for it to be a significant EBITDA contributor again this year. Now, I’d like to share some of my preliminary thoughts on the strategic direction of the company. We will continue to focus on our Medicare business. Our Medicare unit economics remains very attractive based on our projected lifetime value of the Medicare member. So one of the questions we are addressing, as part of the strategic review we are undertaking is, whether we should pursue higher growth rates in our Medicare business at the expense of higher acquisition costs. This would include the potential to invest more to try to accelerate growth in our Medicare Advantage membership and also potentially expand our participation in the Medicare Supplement market in a more aggressive way. Should we adopt this strategy? It would mean sacrificing near-term margins to accelerate Medicare membership growth. While our Medicare membership growth has far exceeded the overall market growth, we still account for less than 1% of total enrolled lives. With respect to our individual and family plan business, our current strategy is to continue operating this business for cash flow and profitability. At the same time, we intend to explore playing a larger role under the current administration, as well as the next in enrolling subsidy eligible consumers into qualified health plans. We create a new Government Affairs Committee of the Board and have renewed focus on public policy. Jack Oliver and our new Board Chair, Ellen Tauscher, both members of the committee have extensive government affairs experience. Ellen is a former seven-term Democratic Congresswoman and a former under Secretary of State in the Obama administration. And Jack is a former Deputy Chairman of the Republican National Committee and a former National Finance Chairman for Bush-Cheney campaign in 2004 and Jeb Bush campaign in 2015. Jack and Ellen will lead our efforts to raise awareness in Washington DC, around significant cost savings and higher enrollment that could be realized by the administration through partnering with eHealth and other entities in the private sector. Earlier this year, the center for Medicare and Medicaid services, directed eHealth and other web-based entities to make changes in our process for enrolling individuals to qualified health plans or QHP through the Federal Health Insurance Exchange. This includes using a different pathway then we were using during the last open enrollment period, through which we enroll individuals in these plan. Although we continue to enroll consumers into QHPs, this new pathway is not as effective, which has negatively affected the consumer experience and conversion rates. The financial impact from this is not a significant outside of the main selling season when consumer demand and application volumes are low, but can become more pronounced, once we entered open enrollment period in November. When CMS directed us to stop using this process, we developed to enroll individuals in QHP plan. They indicated they were going to improve the alternative process that they directed us to use. At this point, we have nothing to report in terms of any meaningful improvements from CMS and current indications are that the improvements will not be meaningful. As a result, and as I just mentioned, we are renewing our lobbying efforts with the hope to provide a better, more efficient enrollment process for subsidy eligible individuals in time for the next open enrollment period. If meaningful improvement is not made for the upcoming open enrollment period, we may significantly deemphasize the sale of qualified health plan and only pursue the non-subsidy eligible business. That would have negative implications for IFB and ancillary product commission revenues and membership in 2017. It can also have a marginally negative impact on our 2016 revenues, and a positive impact on 2016 earning due to a reduction in IFP related marketing spend, during open enrollment period. As I mentioned earlier, the individual business continues to be very profitable and we have levers at our disposal that can help us maintain its profitability. These levers include adjusting our variable marketing spends in real-time depending upon our observations with respect, the political and market environment. The areas that will influence our near-term approach to customer acquisitions spend and may significantly impact financial performance of our individual business next year, include the level of broker commissions, carriers participation in individual market and the quality of our connection to the federal health insurance exchange during the upcoming OEP. We will have the better – we will have a better insight into both of these areas over the next few months. Carriers generally are still in the process, deciding on their strategy for their individual and family health insurance businesses, including the extent of their participation and the amount of commissions they’re willing to pay in the market where they participate. Given significant losses that some of the carriers have sustained in the individual market, we may see an overall reduction in our inventory of individual and family plans, and some deterioration and broker commission in this coming open enrollment period compared to the last. Certain large carriers have announced an intention to exit markets, and we only to focus on moving our members onto plans with those carriers in those markets to other plan that we sell. We also expect to see an increase in plan premiums. Finally, we are taking a look at our broader ecosystem to see if there are any adjacent business areas where we can pursue profitable growth in the longer run by leveraging eHealth’s core competencies. Just over six years ago, we conducted a similar review that resulted in eHealth entering the Medicare market, which proved to be a highly strategic move. On the executive management front, I’m pleased to announce that Dave Francis has recently joined the company as our new Chief Financial Officer. Dave brings to eHealth a breadth and depth of financial and healthcare industry experience – expertise with over two decades of work on the capital market side of the business. I look forward to working with Dave to drive for the strategic and operational initiatives critical to growing our business. Importantly, Stuart Huizinga, our longstanding CFO for the last 16 years has agreed to stay on in a transitional and longer-term consulting role with the company to smooth our transition. Stuart has been a great executive and partner and helping to grow eHealth over the years and I am grateful for his service and guidance as we transition the business to new leadership. Given Stuart’s deep knowledge of the numbers and Dave short tenure to the CFO today, Stuart will drive the financial discussion for the quarter, while Dave is available during the Q&A. Importantly, as a result of recent changes in leadership and a comprehensive review of the business that we are undertaking, we believe that it is prudent at this time to suspend our 2016 financial guidance. The executive team is reviewing near-term operating trends in the context of the overall process of examining areas of potential emphasis and investment for the business. And I believe it would be improper to reiterate existing guidance or provide detailed financial guidance on the business with the potential for changes in the near-term. We’ll be carefully examining the financial impact of the strategic and operational decisions we are considering and expect that we will be in a position to provide the investment community with a more tangible strategic and financial outlook, when our strategic review of the business is complete. I understand that this maybe frustrating to some, given the company’s only recent return to the practice of providing guidance. I can assure you that the executive team and I are sensitive to the needs of the financial community and that as soon as we are in a position to provide a set of guidance parameters we will provide you with that outlook. In conclusion, we are pleased with strong growth in our Medicare market during the quarter and our ability to run the individual business for profitability despite the turbulent market environment. At the same time, our installed base in the individual business continues to decline as we pullback on our marketing spent in that area. To me, this demonstrates the importance of considering a more aggressive approach to the Medicare market as well as potentially further diversifying our revenue stream very stronger, emphasis on cross-selling and exploring adjacent business areas. I am hoping to meet many of you in personal over the next few months and look forward to presenting the findings of our strategic review once that process is completed. And now, I turn the call over Stuart to review our financial results in greater detail.

Thanks, Scott and good afternoon everyone. I’d like to review our second quarter financial results in greater detail. Our second quarter 2016 revenue was $37.3 million, a 7% decline compared to $39.9 million in the second quarter of 2015. Commission revenue for the second quarter was $34.6 million also a 7% decline compared to $37.4 million in the second quarter of year ago. Second quarter Medicare commission revenue grew by 31% compared to the second quarter year ago, driven primarily by new member additions. Our estimated Medicare membership at the end of the quarter was 239,000, an increase of 41% compared to the second quarter of last year. Commissions from individual and family plan and ancillary products combined were down 17% compared to the second quarter of 2015 due to a decline in the estimated number of revenue generating ISP and ancillary product members over the same time period. Our estimated individual and family plan membership at the end of the second quarter was 481,300 members, down 15% from the second quarter year ago. The year-over-year decline in estimated ISP membership reflects softness in the market and our decision to manage the individual business for profitability by reducing dedicated customer care and marketing spend in this area. Our estimated second quarter 2016 ancillary product membership was 380,000 represent a 6% annual decline a decline in membership is driven by lower volumes in our individual business given that many of the ancillary products we sell or sold together with major medical policies. We’re also seeing software demand for short-term products compared to last year. Other revenue, which includes sponsorship, e-commerce, on-demand and noncommissioned medical revenue, was $2.6 million in the second quarter, an increase of 5% compared to Q2 2015. This growth was driven primarily by higher Medicare advertising revenue and also by an increase in lead generation revenue in our individual and family plan business. Now, I’ll review our operating expenses for the quarter. Total operating costs increased both in absolute terms and as a percentage of revenues compared to a year ago, driven primarily by our continued investment in the Medicare business, as well as costs related to our management transition and our review and analysis of strategic plan. Second quarter 2016 non-GAAP marketing and advertising expense, which excludes stock-based compensation expense was $12.5 million, or 34% of revenue, compared to $8.8 million, or 22% of revenue in Q2 2015. Underneath that, variable marketing spend in our individual and family plan business declined by over 70%, driven by the lower number of applications submitted during the quarter, as well as the lower cost of acquisition per submitted application. At the same time, Medicare related marketing costs grew in excess of a 100% as we spent into strong consumer demand achieving 82% growth in submitted Medicare Advantage applications, but also seeing a year-over-year increase in cost of acquisition per application. Second quarter 2016 non-GAAP customer care and enrollment expense, which excludes stock-based compensation expense was $10.3 million, or 28% of revenue, compared to $7.5 million, or 19% of revenue in Q2 2015. Customer care and enrollment expense in our individual business remained relatively flat, while Medicare related expenses grew as we continue to increase the number of Medicare enrollments we do outside of the annual enrollment period and have to staff our customer care center accordingly. Second quarter 2016 non-GAAP technology and content expense, which excludes stock-based compensation expense was $7.8 million, a decrease compared to $8.1 million in Q2 2015. Second quarter 2016 non-GAAP general and administrative expense, which excludes stock-based compensation expense was $9.7 million, or 26% of revenue, compared to $6.8 million, or 17% of revenue in Q2 2015. As Scott mentioned earlier in the call, during the second quarter, we booked expenses related to our recent management transition, as well as costs related to a review and analysis of strategic plans totaling approximately $4 million. The majority of that amount are general and administrative costs. Second quarter non-GAAP operating loss excluding stock-based compensation, the amortization of acquired intangibles and restructuring charges was $3.5 million, compared to a non-GAAP operating income of $8 million in the second quarter a year ago. Second quarter EBITDA was negative $2.6 million compared to EBITDA of $9.1 million for the second quarter of 2015. Second quarter 2016 GAAP net loss per share was $0.03, compared to a GAAP net income per share of $0.32 in Q2 of 2015. Second quarter 2016 non-GAAP income per diluted share, which excludes stock-based compensation and the amortization of acquired intangibles was $0.09, compared to non-GAAP earnings per diluted share of $0.44 in the second quarter a year ago. Our cash flow from operations during the second quarter of 2016 was $2.6 million compared to $12.7 million in the second quarter of 2015. Capital expenditures for the second quarter of 2016 were $1.9 million. Our cash balance was approximately $67 million as of June 30, 2016. With respect to our typical seasonal patterns, our third quarter revenue was driven primarily by the new Medicare enrollments, as well as recurring commission revenues on our existing individual and family plan members. During the third quarter, we also start to ramp our Medicare sales agent staffing in preparation for the upcoming annual enrollment period. Therefore, we expect a sequential increase in Medicare related customer care and enrollment costs. Now, I want to make some comments regarding our outlook for the year. As Scott shared earlier in the call, we’re currently in the process of strategic review. The review may result in changes in our strategic direction that could have significant financial implications for eHealth, including a potential impact on our 2016 revenue and earnings. As a result, we decided to suspend our 2016 guidance that we provided before the leadership changes that the company took place. We look forward to sharing the findings of our strategic review after it’s completed. And we’d like to open up the call for questions. Operator?

My pleasure. Thank you. [Operator Instructions] Our first question comes from the line of George Sutton with Craig-Hallum. Your question please.

Hey, guys, good afternoon. This is Jason on the line for George. And Scott, I just wanted to say congratulations and welcome to the call.

Thank you.

I wanted to dig into the changes to the pathway a little bit more. Perhaps you can just give us an idea of the timing on when this was implemented, if there’s anything you can provide looking back at last year, perhaps if you can quantify the size of QHP in the grand scheme of IFP last year? And then furthermore, if you have any trends on what you’ve seen in the cost to enroll and if that’s remained profitable after these changes were put in place?

Yes, I’ll take that, this is Stuart. In terms of the amount of QHPs, it was a little bit more than 50% of our submit in the last open enrollment period. If you look at our total membership as we sit here today, it’s approximately a quarter of our membership just to give you a size of the QHP component there. The changes to the pathway with the government were made after the open enrollment period was over. So that that’s been a – we definitely saw the impacts after the end of the open enrollment period. It has clearly reduced our volumes. It had an impact on our conversion. You can see with the 59% drop in our individual and family application volumes year-over-year. We have been talking with the government for quite a while about improvements that they’re going to make. They’ve made some promises early on that there were going to be improvements. To-date, we really have not seen anything material from them at this stage. I’d say that from a unit economic standpoint, our unit economics in the off-season here are worse than they would be a year ago just given the low volumes that we’re bringing in, and that’s mainly our agent cost per unit are now higher. We have reduced – greatly reduced our cost of acquisition, that piece is well below what it was a year ago. But the agent cost per unit are impacted by the lower number of units. So overall, it is profitable per member on a lifetime basis. If you include all the ancillary products that come along with an individual and family, but the unit economics are definitely down in this off-season, but we’re running pretty low volumes in the off-season. The open enrollment periods are really when the volumes come.

Okay, wonderful. Thank you for all the color on that. And I apologize for jumping around a little bit here. But I wanted to ask on some of the carriers that are exiting different markets on the IFP side, just curious on how easily you can transition some of those subscribers that may be on a carrier that exits a specific market and what are your thoughts on – and I don’t know if you can quantify your ability to transition people. Any color there would be helpful.

Yes, I don’t know if that can be quantified at this point. Carriers are still making their decisions as we speak on this matter. So it’s been a handful of carriers at this point granted that they’re large carriers. The plans for their members vary. And so it really depends market-by-market state-by-state as to what will happen there. We will be very focused on finding homes for those people. We have product in the states the carriers are pulling out as to move people to. We will zero in on those members that are being moved and very, very aggressively looking to place those members.

Okay. Last one for me and I’ll hop back in the queue. But just wondering if there’s any renewed focus on SMB channels. We’ve talked about that in the past and I’m just curious if you’re reevaluating that, if that’s part of the strategic review or if that’s something that’s currently being exercised?

Yes, we absolutely are looking for small business market. Today, we do sell small business product. We have for a long time. It’s not been a huge emphasis historically. Although, we do sell a lot of individual plans to small business owners and to employees of small businesses, so we’re familiar with the market space. It’s absolutely something that we’ll consider and look as a strategic area for us. The – I think it’s becoming more and more attractive to the carriers themselves and we like markets where carriers are excited about selling the product and that’s one of them.

Okay. Thank you.

Thank you. Our next question comes from the line of Tobey Sommer with Suntrust. Your question please.

And a very nice question with regards to your loving efforts to try to maybe get a better pathway, or some other outcome. Like what is a good outcome are you just trying to have the pathway altered, or do you have a higher level objectives that you think could be reasonably achieved. And what is a pretty short time before open enrollment starts?

Right so this is Scott. We would like to have a cooperative and collaborative partnership with the FSM. And we believe that we can significantly enhance their mission, which is to obtain more enrollments in the QHP plans. We would seek for this year just a restoration of the seamless enrollment path that we had in 2015s OEP longer-term we’d like to be more of a strategic partner it’s our thesis that the private sector has competencies in consumer acquisition and activation that the government is not likely to ever possess. And so from our perspective we think we’re good at this. And we would like to play a more significant role with both the state and federal exchanges.

Okay, are you aware of kind of why the change was made in and what they got out of it. So kind of what you, what kind of obstacle or hill you’re trying climb?

Right the concerns that were raised is that our enrollment process might not have been completed now. In terms of providing for every possible scenario of QHP applicant and so we have undertaken a process to address those issues. But as I said in my prepared remarks of the CMS had committed to and making enhancements that we seen no material improvement against as we been in the non-OEP period here and that has impacted conversion rates at a level that causes us to think that the federal objectives are not going to be met in terms of enrollments as they head into this OEP period.

Okay, and how much money indoor time do you think it would take for the pathway to be restored. So you think and that since like how big of an ask is that?

We don’t think it’s a big ask it’s a more of a change of policy that needs to be made at the CMS level.

Questions for me about the healthcare insurance companies exiting some markets and increasing churn. Is – do you also expect in this open enrollment period in addition to that may be some insurance carriers setting rates that are potentially not that attractive. And therefore and not actually pursuing the business even though technically they may be present in the market?

Yes, some carriers may pursue that strategy we all have a point of view that commission reductions are likely to be largely offset by premium increases by its early for us to know what the strategy is for each individual carrier. And Stuart do you want to add anything?

No that will fit.

Okay and then kind of stepping back and just asking a longer-term question if I could from that tactical choices and decisions of this year. The business is in the transition towards the Medicare side broadly speaking I think that’s what you’re still describing here right now by and large. In one of the questions we’ve asked periodically is what is the path to profitability of the Medicare business so that it could stand on its own. And that require the IFP business to supply cash flow. Could you speak to that in how we might think about that over a period of time. Thanks.

So the path to profitability is really getting the membership levels for that business to be above the fixed cost structure. I think a couple calls ago we mentioned that are on a variable cost basis. We are covering a variable cost with the revenue that we’re generating. So at this point it’s really fueling up our membership to a level that will cover the fixed cost as well. We’re focused on continuous improvement in unit economics into the future it’s really – what kind of growth will we experience as we move forward. And we’re going to aggressively go after growth. We’ve also alluded to the fact that we’re more and more focused overtime here on Medicare Supplement market and layering into it we feel that we can lead with Medicare Advantage. And now it’s time for us to pull Medicare Supplement along that given the fact that it’s a major market size wise Medicare Advantage on 19 million people in the market for Medicare Advantage Medicare submit about 12 million so it’s a nice market to penetrate along side of that. Where we to get more aggressive in Medicare Supplement in the short run to see and know the just the timing of when we recognize revenue, and when we recognize their expense, it could string out our path to profitability about a little bit longer. The lifetime revenue of a Medicare Supplement is we believe about equal to a Medicare Advantage so it’s a good lifetime revenue product. But from just from a GAAP perspective we take all the marketing, advertising and agent cost upfront just like we do with Medicare Advantage. And with Medicare Supplement we recognize revenue monthly rather than the first year upfront. And then when it renews another year and then when it renews again another year for Medicare Advantage. So it takes a little longer on the path of profitability or Medicare Supplement.

Probably it’s Dave Francis if I could just add real question. As part of this operational strategic view that we’re undertaking keeping in the contrast that despite the growth that the companies have in the Medicare market we’re still under 1% penetration across the board. Where we’re passively looking the different sub-segments of the market place that we can lever relative to our current technology and customer footprint to identified those areas that might be going little bit more faster than others and do some on a cost of acquisition basis is adventurous to us from a right line perspective. So all of that is on that table with a focus on a Medicare market.

Thank you very much.

Thank you. Our next question comes from the line of Stephen Lynch with Wells Fargo. Your question please.

Hey, yes. Thanks for taking my question. I wanted to start with the Medicare submitted application growth rate just to make sure I heard that correctly did you say that was 76% in Q2?

Yes, 76% for all products combined 82% for Medicare Advantage.

Okay very good. Yet so if it was 76% Q2 that an acceleration from 53% I believe in Q1 for all Medicare products does that stand about right Stuart?

It does. Yes.

Okay can you help maybe walk me through what the difference between that is and then when I look at the growth rates and ending membership where you add growth of 42% in Q1 and then 41% in Q2. Maybe what’s running the difference between?

Yes so the membership it’s really a function of our growth rates for the past 12 months. So that would be op – but even a fourth quarter is combined of our growth in applications over the base. Whereas our current this is just our current application growth rates for these current quarter. So but looking at two quarters whereas for membership you’re looking at a four quarter span.

Sure, yes that make sense just wanted to be sure there was any specific issues going on there. And then Stuart just my other question would be on the tax benefit in the quarter. Can you talk about what’s going there?

Yes so that’s to get our run rate for tax provision for the year to be basically half of what it will be for the full-year, we’re basically in a AMT Alternative Minimum Tax position and a little bit of foreign tax. So it’s essentially kind of a fixed amount of tax provision for this year. And these also book the large expanse when we had a large amount of income Q1 and this essentially this benefit are basically offset for the most part the provision we took in Q1 to get us to a small resulting provision year-to-date at the end of Q2.

Okay. Thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Dave Styblo with Jefferies. Your question please.

Hi there thanks for the question. So I want to come back to the pathway challenge that you guys are facing right now. First want to just make sure I think I heard you say 25% of the total IFP lies right now are qualified?

That’s right as of our membership about 25% are estimated to be QHP members.

Okay so if the path really isn’t historic and not able to do much. Is there any way to capture those folks that that are interested in switching plans, or how does that work or process can they just simply renew and there’s a risk that may be they would, or there is an opportunity for them to stay with eHealth for the next open enrollment even if the path isn’t working that well?

Yes, I think there is a auto enrollment of them that would keep them in those plans such that we would theoretically be able to retain them.

Okay so sort of the worst case scenario 25% of the membership really that risk but there’s certain cohort of that and auto reenrolls?

Right, right.

And there is no other way to sort of capture those folks via any other way?

No the only other way would be for if they’re going to go out and shop, which for us to get in front of them and hopefully they loved our service the first time and we can get them back reenrolled again albeit in a less efficient manner.

Okay, and I guess I still don’t understand exactly what happened I think the comment was made that I guess CMS was concerned about eHealth enrollment process might not be complete enough. What does that exactly mean?

It means that the questions that people were going through in the process about of applying. We were hitting let’s say the 80% rule in terms of the people that are shopping that we had those questions for them to go through and shop based on those questions. And if they were an edge case, which had a more complicated background they would need to go through to the exchange itself to get a complete application to go through those additional questions.

Instead of going through you?

Correct I mean we were streamlining the process for people that the solid 80% of people are shopping. We didn’t have a streamlined process for 100% of the people.

Okay and so is it a detail specific issue then or the other players who have the access to sell these also facing the same challenge?

It’s not an eHealth specific issue it’s across the WV community.

Yes, Dave this is a total web-based entity issue that CMS is kind of take across the board rather being eHealth specific issue. And as Scott said earlier they told us that there were going to be changes to the cost as the year went on. And we’ve just not seen any of that as yet, but this isn’t a company specific issue and we’re making every effort possible to kind of bring the influence to get them to see the benefits of going back to where we were the last year.

Okay got it that’s helpful. And then so this questions for you Scott in terms of thinking about the strategic review. I guess the timing of that would be maybe mid-September or so as it sounds like. But the potential challenges and in the IFP business and the obviously that’s your very profitable segment. If the assessment go through some headwinds and volatility perhaps in the next open enrollment. Does that influence how you are going to think about the strategic plan for the Medicare side in terms of growing faster versus growing less and preserving EBITDA?

I can’t say that it necessarily does. That the two – the two are necessarily correlated, because we would like to have as much profitable IFP business as is possible. And we believe that the web-based exchanges including us is the largest have important role to play there. And that the government the CMS will come around and the bonus of time to seeing the benefit that we bring. And so we believe that we should be in that business. The Medicare business is highly profitable 50% contribution margins average revenues over five years of almost $1,500 frontloaded customer acquisition costs obviously by the way we account and the way the cash flows. But getting in front of that wave where we have 10,000 agents to over 65 every single day crusting at 20,000 per day in a few short years. We feel like we should be growing that business is rapidly as we possibly can. And hopefully that the business gets bigger faster because IFP stabilizes and then grows again. We think that should happen, but whether it does or it doesn’t, the Medicare business standalone as one of the most attractive growth opportunities I’ve seen in my business career. We want to go after it. Stuart made a very important point on the Med Sup business, which we significantly under index in terms of our share in Med Sup. I believe we missed an opportunity in focusing almost solely on Medicare Advantage and selling Med Sup almost as a throw in for those who specifically requested. Those enrollments are very profitable similar lifetime value and we’re looking very hard right now at what we can do to capture as much market share in Med Sup as we do in Med Advantage.

Sure, okay. And then lastly, and I’ll hop back, but you guys had mentioned, talked about accelerated or you decided to spend more to grab membership for the Medicare side in this quarter. How do we think about that going forward because right now it’s just agents, agents for this quarter, next quarter, and then obviously open enrollment happens? But it seems to me like you would either be kind of consistent with the amount of spending that you’d have on Medicare as you go during the non-open enrollment period times or not? So what did you see different as to why you might spend more? And then can you quantify how much more you were spending this quarter versus your baseline?

Stuart, you were involved in those decisions on a weekly basis, so?

Yes, I mean I guess I’d say we saw an opportunity to outgrow Q1 and we were able to step that up from being in the 50% to 80% growth level for MAs, and came in that somewhat higher marginal cost on cost of acquisition – that cost of acquisition grew a little bit more than 100% versus the 82% MA growth. We felt that was still well within where the lifetime revenue is. Great margins on that, didn’t say that in our script or comment here, but with that volume we were able to bring down our cost per unit for our agent costs that we saw more efficiency year-over-year there, which almost offset the cost of acquisition increase. So overall our unit economics were pretty close to what we had in the past. So we – if we see the opportunity continue to drive down our cost for agent and trade that off against higher cost of acquisition and still have a very good return on investment will continue to do that, probably look at it.

Got it. Thanks guys.

Thank you. We have a follow-up question from the line of Tobey Sommer with Suntrust. Your question, please.

Thanks. This isn’t really intended to be a guidance question, it’s more a directional question, but I thought I’d ask it. Based on the growth rates that you’re experiencing in the Medicare business and almost every possible outcome for the IFP, is the Medicare business going to be the majority of the P&L in 2017?

The majority of the P&L in terms of revenue, in terms of expenditure, I mean it definitely would be either.

That would be either, yes.

That that kind of a tough one to answer at this point, I mean I think given the lack of guidance, the lack of – talking about next year, I think, it’s safe to say that Medicare is our primary emphasis. We’re doing all we can to improve the individual and family here. But Medicare is really the primary emphasis. I’m not going to say what percentage, but it’s really where we’re spending our efforts at the moment. Great unit economics, great growth opportunity, it’s really where our focus is along with improving our position in individual family and staying in that game long-term, because we really still really do believe in the long-term potential of individual and family market.

Could you spend a little bit of time expanding on what the Kaiser relationship does for the Medicare business? How does it expend your footprint, or what kind of market position do they have from your perspective, so that we can get a sense for maybe how impactful that relationship could be?

We always love the big brands, and they’re one of the top three brands in Medicare. And a lot of – one of the ways we look at it is, many people are dedicated to Kaiser. They don’t look at anybody else when they got in shop for insurance. So in many ways, we look at it as incremental business to what we’re doing today because of the faithfulness of people to that brand. So even if it doesn’t add an additional market, it could add incremental customer to each consumer that comes through our website. And there are states, where they have significant share, the California would be one as an example.

Well, and the other piece, Tobey, is that most of their plans depending on the state are five star plans. And if we get into the nitty-gritty of when you are able to change or not change, if you’re changing into a five star plan as an existing Medicare Advantage beneficiary, you can do that outside of the AEP, whereas you can’t necessarily do that with non five star plan. So it’s a great brand recognition. It’s a great recognition of how platform and our ability to reach and engage with consumers and gives our folks a little bit more opportunities to buy products in the market.

Thank you. Just so I understand that last point, as a result of the five star plans, that allow a little bit more movement outside of the enrollment period. So these kind off quarter growth number or off enrollment period quarters that you print such as the one today, it could be influential.

I wouldn’t expand way too much into that. But yes, that is a dynamic that’s in place because of that.

Okay. Thanks for your help.

Thank you. Ladies and gentlemen, this is all the time we have for questions today. I would now like to hand the call over to eHealth’s Chief Executive Officer, Scott Flanders for closing comments.

Thank you, everyone, for participating. We are available for conversations with you at your convenience.

Ladies and gentlemen, thank you for your presentation on today’s conference. This does conclude the program, and you may all disconnect. Everybody have a wonderful day.