eHealth, Inc. (EHTH) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the eHealth Inc. Q3 2016 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 be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your first speaker for today, Vice President of Investor Relations, Ms. Kate Sidorovich. Please go ahead.

Thank you. Good afternoon and thank you all for joining us today either by phone or by webcast for discussion about eHealth Inc.'s third quarter 2016 financial results. On the call this afternoon, we will have Scott Flanders, eHealth's Chief Executive Officer and Dave Francis, 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, plans and expectations, including expectations regarding our strategy and impact to operating results, our plans to drive substantial growth in the Medicare advantage, Medicare supplement and small business insurance market, our plans to drive high substantial growth in the Medicare Advantage and Medicare Supplement and small business insurance markets, our plans to drive higher sales volumes in adjacent market and expand our sales activities, expected performance of our Medicare business, our member estimates and believed reasons such as historical churn rates, the benefits of Medicare customer acquisition channels, our near-term investments in our technology based solutions, expansion of our sales organization and the reach of our brand, our plans to utilize strategic partnerships to maximize the distribution of our products and services and extend our product reach, our expected return on our investments, anticipated increase in demand, compliance with CMS regulations, expectations regarding our Medicare and individual and family plan businesses during the fourth quarter of 2016 and related marketing efforts, the potential for substantial growth of our business and significant increase in shareholder value over the next three to four years, expectations that following the election the government will approach the [indiscernible] market differently and our engagement of investment bankers to pursue strategic alternative. The 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 Reports on Form 10-Q, filed with the Securities and Exchange Commission, which you may access through the SEC website or from the Investor Relations section of our website. We will be presenting certain financial measures on this call that 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 the corporate website under the heading, Investor Relations. And now, I will turn the call over to Scott Flanders.

Thank you Kate and welcome everyone. We have a lot to cover today. I will provide a high-level overview of the third quarter and have Dave cover the results in more detail. Then I will come back to update you on our recently concluded strategic business review, share insights on the opportunities we see to move eHealth forward on an aggressive and sustainable growth trajectory and expand on our decision to engage with investment bankers to explore strategic alternatives at this time. We plan to leave plenty of time for questions. So with that, let's dive right in. Our third quarter revenue was $32.1 million, EBITDA was a negative $4.6 million and non-GAAP loss per share was $0.23. Cash flow from operations was positive $2 million bringing our cash balance as of September 30 to $67.3 million. We are disappointed with these financial results. We saw lower than anticipated commission revenue on our Medicare business, which was flat compared to the third quarter of last year. Two key factors impacted our third quarter Medicare commission revenue, a regulatory change that created what I would characterize as a speed bump in our Medicare marketing and sales process as well as a change in how we have been paid recently by carriers on many of our new Medicare enrollments during the quarter. We are not satisfied with the year-over-year growth rates in our third quarter submitted Medicare applications. While remaining in double digits, growth rate is low compared to the first half of this year. I will ask Dave to provide the specifics, but I do want to note that while this was a disappointing quarter, we believe the time will prove this to have been an isolated pause in our Medicare growth trajectory. We have finished implement a number of initiatives in time for the critical annual enrollment period and we expect to see a return to better performance in the fourth quarter. Third quarter results notwithstanding, we believe that eHealth has significant future growth potential. I will share more about the review and our investment strategies after Dave's discussion of the Q3 numbers. But to summarize, we have developed a three-point plan to drive substantial growth in our business. First, accelerate growth in our Medicare Advantage membership and significantly increase our market share in the Medicare Supplement market. Two, significantly expand our market share in the small business insurance market. And three, drive higher sales volume in adjacent markets while expanding our sales activities with existing and new members. These initiatives create a path to significant value creation potential for the company looking out several years. Attacking these opportunities will require meaningful near-term investments that we expect to create attractive long-term returns. Four critical areas of investment, each of which we expect will derive meaningful value for shareholders include rapid expansion of our technology base, customer engagement and transaction solutions for Medicare consistent with our approach to the IFP market, expansion of our sales organization to support the expected growth from our technology and marketing efforts, optimizing and expanding the reach of the eHealth brand and expanding strategic partnerships to maximize the distribution of our products and services. To position the company to achieve our near-term and long-term growth objectives, we are undertaking a reorganization of the management structure to increase focus and accountability in achieving our growth objectives. I will expand on this as part of our strategic direction discussion later. I will stop there for the moment and turn the call over to Dave.

Thanks Scott and good afternoon everyone. I would like review our third quarter financial results in greater detail. Also to echo Scott's comments, we are not satisfied with the financial performance of the business in the third quarter. Our third quarter 2016 revenue was $32.1 million, a 16% decline compared to $38.2 million in the third quarter of 2015. Commission revenue for the third quarter was $29.9 million, a 14% decline compared to $34.9 million in the third quarter a year ago. Third quarter Medicare commission revenue of $6.6 million was flat compared with the third quarter a year ago while our estimated Medicare membership at the end of the quarter was 242,500, an increase of 33% compared to the third quarter of last year. I would like to put a little bit more color around these dynamics which Scott highlighted briefly. Flat Medicare commissions primarily reflect the change in how we were paid on many of our new Medicare enrollments during the quarter. For certain enrollments that occur outside of the annual enrollment period, CMS allows carriers to either prorate the commission payment from the time of enrollment through year-end or pay the broker full-year commissions upfront. A number of our carrier partners switched to prorating their payments this year which impacted of the year-over-year comparisons by offsetting new member growth with prorated rather than full-year commissions thus impacting revenue growth. Turning to our individual and family plan and ancillary products business. Combined commissions were down 18% compared to the third quarter of 2015 due to a decline in the estimated number of revenue generating IFP and ancillary product members over the same time period. Our estimated IFP membership at the end of the third quarter was 390,400 members, down 25% from the third quarter a year ago. We expected the year-over-year decline in estimated IFP membership due to continuing softness in the market and our decision to manage the individual business for profitability by reducing dedicated marketing spend in this area. In addition, our third quarter membership estimates reflect higher churn rates in our IFP business relative to our prior expectations. As we have explained previously, our individual and family plan membership estimates are based on historical churn rates as we do not learn of membership cancellations for a period of time after they occur. We are now seeing that our actual churn rate in the first half of the year was greater than the historical churn rates using our membership estimates and we have reflected this increased churn rate in our current membership estimate. We believe that the increased churn is largely related to premium inflation in the individual and family plan market. Our estimated third quarter 2016 other product membership was 255,600 members, representing an 11% decline compared to the third quarter of 2015. The decline in other product membership was driven by lower volumes in our individual business given that many of the ancillary products that we sell are sold together with major medical policies. Other revenue which includes sponsorship, e-commerce on-demand and noncommission Medicare revenue was $2.1 million in the quarter, a 35% decline compared to $3.3 million in Q3 of 2015. This decline was driven primarily by lower sponsorship in technology licensing revenue in our IFP business in the quarter. I would now like to turn back to our Medicare business where application growth was clearly disappointing. Third quarter submitted applications for Medicare advantage products grew 16% compared to Q3 a year ago. Submitted applications for all Medicare products, which include Medicare Supplement and Prescription Drug Plans were up 26% year-over-year. These results represent a deceleration compared to strong growth rates that we have been posting in our Medicare business in the first half of this year and were driven in large part by a change in sales and marketing guidelines issued by CMS, causing us to change our Medicare product sales and marketing processes. These changes were implemented on relatively short notice and impacted the effectiveness of our sales center agents in converting leads into submitted applications during the quarter. While these issues impacted our Q3 performance, they do not dampen our enthusiasm about the Medicare growth opportunity ahead for eHealth. In fact, we are taking a number of steps to strengthen our Medicare business and drive material performance improvement beginning in the fourth quarter which is the seasonally highest new business volume quarter for the year. Key initiatives include new outsourcing deals with two major carriers that will send us their Medicare Advantage leads, the addition of new carriers to our platform since the last AEP including Kaiser Permanente and Highmark Medicare Advantage plans and incremental Medicare advertising deals which should help us reaccelerate MA sales. We also have a number of initiatives underway to further automate our enrollment process and have implemented new customer retention programs that are designed to improve sales yields. Turning to our IFP business. Third quarter submitted applications were down 60% year-over-year. I also want to provide you with an update on our discussions with CMS regarding our connection to the federal health insurance exchange or the FFM. As we shared with you on our last earnings call, CMS had represented that they would seek improvements to the required pathway to FFM for web-based entities such as eHealth to provide a better enrollment experience into qualified health plans for subsidy eligible customers. We did not seen any improvement from CMS in time for the open enrollment period, which is starting in just a few days on November 1. Furthermore, the direct lobbying efforts with CMS and HealthCare.gov that Scott described in our second quarter call, proved fruitless in the near-term as CMS recently advised us that they would not allow us to use the process that we use to enroll subsidy eligible individuals through the FFM during the last open enrollment period. As a result, we have decided for the current OEP season to significantly reduce our marketing efforts in the individual business. In addition to an inferior connection to the FFM which impacts our subsidy eligible business, the IFP market remains in a considerable state of turmoil. As you know, many health insurance carriers including many national carriers with which we have relationships made a decision to exit the exchange business starting with this open enrollment period. As a result of these and other exits, our inventory of IFP plans has declined significantly compared to last year's including several states and zip codes where no IFP plans are available at all. This not only limits our ability to offer the choice of quality products to potential customers, but will also lead to a displacement of some of our existing members to the extent that carriers discontinue certain plans. We have a transition team in place to help these members find replacement plans but as with any transition, we expect to lose some of them. Many of the carriers that are staying in the market are reducing broker commissions on the individual plans that they sell. We expect to see a meaningful reduction in our average commission rates during this open enrollment period compared to the last OEP. The exact impact of these rate changes on our CMPMs will depend on the mix of products that we sell during the open enrollment period. We do expect to see premium inflation offsetting some of the negative impact of lower commission rates given that some of the carriers pay us on a percentage of premium basis. Now I will 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 an increase in general and administrative costs which reflect approximately $1.2 million in expenses related to management transition and our strategic review and by an increase in customer care and enrollment cost as we ramped up our Medicare agent headcount in anticipation of growth in the annual enrollment period. Third quarter non-GAAP operating loss, excluding stock-based comp, the amortization of acquired intangibles and restructuring charges was $5.4 million compared to a non-GAAP operating income of $4.8 million in the third quarter a year ago. Third quarter EBITDA was negative $4.6 million compared to positive EBITDA of $5.8 million for the third quarter of 2015. Third quarter 2016 GAAP net loss per share was $0.31 compared to GAAP net income per share of $0.20 in Q3 of 2015. Third quarter 2016 non-GAAP net loss per diluted share, which excludes stock-based comp and the amortization of acquired intangibles, was $0.23 compared to non-GAAP earnings per diluted share of $0.30 in the third quarter a year ago. Cash flow from operations during the third quarter of 2016 was positive $2 million compared to $11 million in the third quarter of 2015. Capital expenditures for the third quarter of 2016 was $0.8 million. Our cash balance was approximately $67.3 million as of September 30, 2016. And with that, I will turn it back over to Scott.

Thanks Dave. Any of you who have followed us for a period of time know that our business landscape has changed dramatically over the last several years. On the IFP side, we confronted three major challenges to the business from the implementation of the Affordable Care Act. First, its impact on the competitive landscape, second, the substantial decrease in plan availability as well as the lower commission rates as Dave just described. More recently, CMS has made it more challenging for web-based brokers to do what we do best which is driving younger healthier participants into the system that are critical to making it work as designed. As a result, the IFP business is effectively stalled for us for the current period and we are managing it for profitability now growth for this foreseeable future. The Medicare story is much brighter. Our biggest opportunity is right front of us. Everyone is well aware of the compelling demographics in Medicare, so I won't recap them here. Suffice it to say, we are focused on a market that is growing rapidly over a multiple year horizon. Research shows that the Internet has become the dominant Medicare shopping channel among customers turning 65 and aging into Medicare eligibility. These trends are reflected in the growth we have seen to-date in this part of our business. Now, since I joined eHealth as CEO earlier this year, I have focused on taking a fresh and holistic view of the company with a focus on driving superior value creation. The new executive team has been charged with aggressively growing the business, not necessarily to protect legacy businesses if they are not positioned to thrive. The starting point in this effort was a 100-day strategic review led by an independent consultant that worked closely with management and the Board. The review was comprehensive and rigorous, including evaluation of market dynamics, the competitive landscape, political environment and on the eHealth side, our assets, relationships and core competencies. At the center of the findings of our review is the fact that eHealth has built strong, defensible assets that are not being fully leveraged in the changing landscape in which we operate. Those differentiated and defensible assets include a robust technology platform, market-leading customer engagement and technology capabilities, deep proprietary content, strong carrier relationships, broad marketing reach and acumen and established sales enrollment capabilities. These assets offer tremendous opportunity to diversify our focus and refocus our revenue streams into higher growth opportunities. One important insight from this process is that we don't need to undertake a major pivot or overhaul of the company. Instead, we are migrating our core toward the most exciting and achievable set of growth opportunities. So to restate it, our three-point plan to drive substantial growth in our business is to accelerate growth in our Medicare Advantage membership and significantly increase our market share in the Medicare Supplement market, significantly expand our market share in the small business insurance market and third, to drive higher sales volume in adjacent markets while expanding our sales activities with existing and new members. By taking a path that is close to our core expertise, we believe we can accelerate the company's growth, further diversify our revenue streams and market exposure and drive significant increase in shareholder value over the next three or four years, all while mitigating execution risk. Now on the Medicare side, we have identified new high impact customer acquisition channels which can generate meaningful incremental demand for us at a more favorable acquisition cost per member than what we are currently experiencing. In addition to increasing the top of the funnel, a number of opportunities were identified to enhance customer experience and make the plan selection process more intuitive and interactive potentially resulting in higher conversion rates for our Medicare leads. Based on our research, eHealth reaches a substantial number of potential Medicare customers. So even a small increase in our conversion rates can be very impactful. We will also be moving to capitalize on the opportunity to cross sell additional insurance products to our Medicare customers. The attach rates in our Medicare business are significantly below what we were able to achieve in IFP and represent a great opportunity to increase the lifetime revenue of a Medicare member. We also see an attractive opportunity in the Medicare Supplement market. Historically, our investment in this market has been minimal as we focused on driving Medicare Advantage growth. Despite this, we have seen nice growth in Medicare Supplement plan membership and submitted applications off a very small base. We plan to substantially increase our presence in the Medicare Supplement market over time by enhancing our technology and content offerings for consumers, tailoring our online marketing efforts to target this space and increase our dedicated agent headcount to satisfy anticipated demand. Moving on to the small business market. We are already a player in this market today with an estimated 30,000 profitable members despite little to no current marketing outreach in this area. Our research indicates the small business employers are looking for a partner that meet multiple insurance needs of their businesses. They also want a simplified electronic enrollment process for their company and employees while having access to expert advice as needed. We believe that through a combination of our technology platform, our sales capabilities and our strong reputation with insurance carriers, we have the necessary building blocks for becoming the go-to platform for small business owners to research, purchase and manage their insurance needs. Now however, in order to fully meet their needs, we plan to invest in further automating the sales enrollment process, develop a more comprehensive suite of insurance and related products by leveraging strategic partnerships and add dedicated sales professionals to address increased demand. We already have a new and exciting partnership with a leading HR and benefits platform in the SMB market, which is already generating group enrollments for us. As we implement our strategic plan, investment is required over the next several years to enable us to capitalize on the opportunities. Accordingly, we expect to see a negative EBITDA impact both this year and in 2017. Offsets to this impact will be determined by the pace of Medicare growth and our efforts in maintaining profitable operations on the IFP side. We fully understand that the transition in our business will not be easy near-term but the payoff is clear, attainable and in our view far exceeds the near-term performance impact. We are also reorganizing our leadership structure to focus on maximizing revenue growth opportunities for optimizing operations to support and sustain expected growth. So effective immediately, I have asked Bob Hurly our EVP of Sales and Operations to assume the role of President, Medicare Products. In addition, Tom Tsao, our EVP and Chief Technology Officer will move into the role of President, Small Business Individual and Family Products. It is my belief that placing direct responsibility for revenue growth in the hands of these accomplished executives will position the company to more effectively execute against the opportunities that our strategic review has identified and create the focus necessary for the business to excel. In conjunction with these moves, we are also expanding the role that Dave Francis will play. in addition to his current responsibilities as our Chief Financial Officer, Dave will take over as Chief Operations Officer, heading key operational aspects of the business including telesales, product and technology development. Dave's deep knowledge of the market and financial expertise have been a strong addition to the executive team at eHealth and has added focus on key operational aspects of the business that's designed to facilitate the revenue growth and profitability performance we expect to deliver for all of our stakeholders. Before wrapping up the business discussion, I would like to spend a moment on the current status of the IFP business. So IFP was not included in the strategic review. Clearly the individual and family market is broken as reflected in significant premium inflation, multi-billion dollar losses reported by major insurance carriers and significant reduction in the number of IFP plans that will be available to consumers in the upcoming OEP. Today, we continue to manage the business for profitability and have made the decision not to exit this market in the near-term. We have an election in a couple of weeks and our focus is on positioning for a likely change in the way that government is approaching this marketplace. We continue to believe that constructive dialogue could drive positive change for all under the right administration priorities and as a result, we are already increasing activity on the Washington front. That said, I am not handicapping an IFP outcome today. Until the political and operating picture clears, we are running this business to provide value for members and shareholders and that's the benchmark against which we will measure future strategies. As I just described, we see significant opportunities ahead for eHealth. At the same time, we recognize execution risk and substantial investments that are required to achieve the goals that we set off of the company. In order to ensure that we are maximizing shareholder value, we made a decision to engage investment bankers and explore strategic alternatives as a parallel process while at the same time working on implementing our strategic plan. This decision comes as a result of expressions of interest from third parties regarding potential business combinations and we will be working closely with our financial advisors to evaluate these and other strategic alternatives. This action is not meant in any way to discount the opportunities that we see in ahead but as rather what we believe to be a prudent process to see if there's a transaction that could accelerate growth and value creation for the business. Wrapping up, eHealth is moving forward with strategic clarity and tremendous opportunity, but we have a great deal of work ahead. We have a roadmap for growth and value creation that best leverages our existing assets and that is fully achievable with the right investments and strong execution. On behalf of Dave and our entire team, we greatly appreciate the support of our investors and all eHealth stakeholders as we move forward. Let's now open the call for questions.

[Operator Instructions]. Our first question or comment comes from the line of George Sutton with Craig-Hallum. Your line is now open.

Thank you. I think I could ask 400,000 questions. I will limit myself to three. But on the Medicare demand change that you saw this quarter, you mentioned it as a speed bump and you mentioned that the fix would be relatively quick and I wondered if you could just be more granular about what the fix is and have we begun to see that already given that we are already in the fourth quarter?

Hi George. It's Dave. Great question. I would say, yes, we have already started to see the sales organization adjust to the changes that we had to make in our processes and while AEP is relatively still early in the in the process, our numbers are definitely more encouraging than we saw in the third quarter. So we continue to be very optimistic about just how well the sales organization has adjusted quickly to some of these changes. Essentially, when you throw a sales organization a very quick change in terms of how they need to operate or how they are required to operate, the cadence of their process, as Scott described, hit the speed bump and that is largely what we saw in terms of our ability to convert new business in the quarter. So we have seen those sales guys adjust considerably to those challenges and we are already seeing some strong performance early in the selling season so far.

So just to be clear on that, the inbound leads haven't changed significantly. It's really the conversion rate that had the primary impact?

It was a combination of both. The changes that we are required to make were both on the sales side in terms of the way the sales guys operate on the phone with their Medicare customers, as well as some of the advertising messaging that we were required to change into the marketplace, again on a fairly short-term basis. And what we saw was that the initial changes made to some of those advertising messages created a diminution of the number of leads that were coming into the business over a short period of time. Again, we have been able to work with our advertising group and adjust the messaging there such that we are more satisfied at the moment with our lead generation and that that has recovered to a more satisfactory level and that the sales yields, while never where I would like them to be, have bounced back from where they were in the in the third quarter as well.

Okay. On the small business side, this is something that have been contemplated for years and chosen not to, the management team had chosen not to pursue. I am curious what has changed about the small business market that has made it more palatable to now focus on?

So one factor is that the adverse selection that resulted in some group formation at the micro level has been mitigated by the ACA and so carriers find this market more attractive and as you well know, George, most business formation happens in micro sized companies. So our target market is employee groups of four to 20. That's not being aggressively pursued by Genisys and others.

Got you. Okay. Now I will be asked this question, so I will try to ask you the way I think I will be asked. You are pursuing strategic alternatives. One could look at the results that you posted and the need for capital to execute on the new plan as weakness. You could also look at the third-party interests in the business as strength and I am curious as we look at these strategic alternatives logic, are we looking at a combination of the two? What caused this to move to a strategic alternatives process?

Well, we have fiduciary duty to evaluate any inbound interest in the company always and we are going to do that transparently and that's good governance. It's the right thing to do. But what we are at an inflection point in the company. We believe we have adequate capital on our balance sheet, $55 million of cash to fund the investments that we have spoken about. We have run five-year projections and are confident that we can be self funding. So the two are not connected.

Yes. And George, if I could clarify two points. Number one, this isn't a capital issue. We have got a healthy balance sheet and the investments that we need to make in the business we are fully confident we are capable of making from the liquidity on hand and this hasn't moved, per se, to a strategic alternatives process that we are aggressively moving down that road as well as the strategic growth process that Scott outlined as well. So there is a significant sense of urgency for us to get after these growth opportunities in the marketplace and as a result we, again as Scott said, from a full transparency perspective, the Board has instructed us to move aggressively down the growth track while also chasing down these strategic alternatives that have recently hit the table.

Okay. That's helpful. Thanks guys.

And our next question or comment comes from the line of David Styblo with Jefferies. Your line is now open.

Hi there. Thanks. I will try to also keep it to three questions. Let me start out with the IFP business because that is the free cash flow engine of the company and I just want to get my arms a little bit more around how much further attrition could be at risk here? I think during the last call you guys had suggested about 25% of the book was on exchange. Can you give us an updated figure for that? Or where you see that number going? Because it sounds like there's going to no way to really reenroll those folks into a subsidy program. So it seems like attrition in back half of the year or into early next year could be still pretty severe in the IFP book. Is that the right way to be thinking about it?

Yes. David, it's Dave. I think that's the right way to be thinking about it candidly. The fact that we are still restricted to the double redirect process from an enrollment perspective just significantly handicaps our ability to transact business for subsidy eligible consumers. So we will still do business with folks that are willing to go through that process but we are obviously not marketing into that side of the business and restricting the investment because there is just not going to be a big payoff for it while that pathway is restricted for us. Well, I don't want to get into specific numbers in terms of how much of the book at the moment is subsidy versus non-subsidy eligible, we continue to focus on the non-subsidy side of the business and are signing up as much business as we can there. But long story short, yes, you are looking at it the right way in terms of that business being hobbled on the subsidy eligible side of the equation.

Okay. And maybe you don't want to be specific but can you give maybe just a rough range of what percent of that book is still there? Is it still roughly around 25%? Or is that a big part of the book that fell off this quarter?

You know what, let me get back to on specific numbers there.

Okay. And so I guess just thinking from a higher level, if this is the part of the business that's generating much cash for you guys or really is the only part that's cash flow positive, this isn't significant decline. I know you have talked about EBITDA of negative for this year, EBITDA of negative for next year, how deep into that cash are we going to be eating, do you think, by the time we are at the end of 2017? And I think you suggested that you don't think you would need to act with capital markets. Does that mean including debt? Or were you just talking specifically about equity?

Let me answer it this way. We don't expect to be in a position where we need to raise capital in 2017 in any way, shape or form quite frankly. Candidly if we are accessing capital, it means that we are selling a tremendous amount of new business on the Medicare side and it would be a high-class problem. But the cash balances on the balance sheet at the moment is more than sufficient to finance the business certainly throughout all of next year. And again we will be in a position to provide more financial information and guidance when we present our Q4 numbers and are in a position to get back into the guidance business at that point.

Okay. Great. And then just on the Medicare side and kind of coming back to the previous question. I guess, I just didn't fully understand what the issue there was. It sounded like CMS changed some rules on advertising and some other guidelines. Can you be more specific about what they changed, when did those changes take effect in your book and obviously you are starting to see some improvement but just to help us get more confidence that you are going to be able to cap a strong sales period as we go into this next open enrollment here?

No. All fair questions. So as everyone's aware, the Medicare Advantage business in particular is highly regulated by CMS and that there is always a constant flow of new tweaking and rules around how one is able to market in that business, how one is able to sell in that business and there were several areas where we were forced to change, what's called our scope of appointment or the latitude that our salesmen have in terms of talking about different product opportunities for some of the customers in the marketplace and where relatively new restrictions on them in being able to do that. As again, I think Scott has mentioned of it being a speed bump is an appropriate way to talk about it, which is the sales guys had to change their cadence and the way that they work with their customers in such a way that they became less efficient in a short period of time in being able to close new business. And again they along with our sales management team have adjusted significantly to that speed bump and we have seen yields. As I said, I am not satisfied with where yields are the moment, but they are certainly up from where they have been throughout much of the third quarter and it was largely the third quarter where we began to see this all start to impact the business.

Okay. I will step back for others.

Thanks David.

[Operator Instructions]. Our next question or comment comes from the line of Tobey Sommer with SunTrust. Your line is now open.

Hi. This is Kwan Kim, on for Tobey. On the IFP side, you mentioned you lost a large portion of your inventory. When did you realize that the IFP business was facing severe difficulties and what percentage of your addressable market did you lose due to carriers exiting exchanges or pulling from eHealth's IFP offerings. And then you mentioned there were entire geographies that lost the IFP coverage. So can you give some color there?

There's several questions there. So let me take a quick step back. And everyone's aware that the IFP business has been has been suffering significant turbulence for quite some time. The process by which we get data from our carriers is one that is imperfect, to put it very kindly. There is a significant lag between the time that the carrier actually learns that an individual member may have churned out of their membership. And then there is, depending on the carrier, a sometime short, oftentimes very long lag between the time that that carrier communicates that churn back down to us, which means that there often is as long as six or longer months of time between the individual actually leaves the membership rolls of that carrier and that information makes its way down to us for us to adjust our numbers accordingly. The result of that is that within the third quarter is when we start to get a lot more of the hard data relative to where our estimates have been previously and that's where it became very apparent that our historical estimations or our historical experience relative to churn and how we play that into our estimates show that our estimates for churn were not high enough in this current period given the difficulties in the marketplace. So again, what we are reflecting to you now is as accurate a data as we have got at the moment on that. If you look at the different geographies out there, because we are taking away a significant amount of effort in the IFP business because of our difficulties in transacting business given the need to go to the double redirect, the fact that there are a lot of geographies out there that have a small or non-coverage level relative to carriers in the marketplace that has some impact on our business, but by far the key reason for our IFP business at the moment being at a performance level is just not where it has been historically or where we would like it to be is because of the way the government is causing us to not be able to interact with the FFM and get the data that we need to, to transact for these subsidy eligible individuals. So if you really want to get into who has got coverage where and that sort of thing, we can do that off-line, but the key point here for our business, it has much more to do with our ability to use our technology engine vis-à-vis the handcuffs that the government is putting on us at the moment.

Okay. And do you have like a threshold before reconsidering to exit the IFP business? Is that at the level or commissions or membership in there?

Our reasons for remaining in that business is we believe that the new administration will address the issues with ACA and that the individual and family markets will come back. Secondly, we believe that carriers will begin paying commissions again once that market sorts itself out and they can project profitability from enrollment fees. So we think it's a mistake to exit it. And then lastly, we are going to build off the capabilities of the IFP business and use that platform and infrastructure to accelerate the growth of our small business initiative.

Okay. I will get back in the queue.

Okay. Thanks.

Thank you.

Our next question or comment comes from the line of John Mccallon with Glazer Capital. Your line is now open.

Thanks for taking my question. I guess you refer that you guys used as a consultant to look over everything as you guys did the strategic review. I guess can you share with us what they found about your competitive positioning within the Medicare business and sort of how many other firms are doing this and how you guys ranking in some?

We did have them do a deep dive into the competitive landscape and we have all manner of PowerPoints and pie charts on market share and who are competitors and what is the soft underbelly of those in terms of where we have an opportunity to capture share. But one major finding that they had, which is relatively self-evident is our under-indexing in the Med Sup market. So that's up approximately 40% of the total non-fee-for-service market and we under-index at the 10% level for Med Sup. And so we have obtained some Med Sup derivatively from our MA lead gen, but we have never done any targeted Med Sup at scale. And so the number one finding for us was, we needed dedicated effort in terms of lead gen, marketing positioning and trained sales agents in order to close and capture our share of Med Sup which is an some is an enormous and rapid market and is projected to gain share against the MA over the next three years.

Is the Med Sup, economics of the sub any different or dramatically different than a Medicare Advantage sub?

The overall cash flow dynamics candidly are not. From an accounting income statement perspective, however they are. Because the dynamics of a Med Sup member who can change more frequently than a Medicare Advantage member means that from a revenue recognition perspective, one recognizes revenue on Med Sup premiums on a monthly basis, whereas renewals in a Medicare Advantage space are recognized on an annual basis even though the cash comes in typically on a monthly ratable basis. The renewals on the Advantage business are recognized at the front end of every year. And again the Sup businesses is monthly for the lifetime of that membership.

Got it. And then lastly, reading between the lines and maybe I am reading too far into it, you guys are announcing the strategic review or announcing your work with investment banks, is that because you got inbound calls? Or is that because the Board wants you to just explore this? I just wanted to clarify.

We received inbound calls.

Okay.

And the Board directed us to engage advisors to evaluate those inbound proposals.

Okay. Thank you. And I guess, Scott, from your standpoint, I know after the last quarter, you bought a bunch of stock and the whole nine-yards. Has your thoughts of the business changed since you done, finished this strategic review in terms of the attractiveness, the whole nine-yards? I mean you have been through couple of these types of businesses before with customer acquisitions, I am sure, during the business. But I would just like to hear your thoughts, has your enthusiasm for the business changed at all?

I will address that but first I have to share one of my favorite aphorisms with you, which is that idealism is inversely proportional to your distance to the problem.

Got it.

And I am now much closer and feel like I have my arms around all of the challenges this business faces. That doesn't mean there won't be additional challenges in the future, but I feel fully confident and calibrated on what those challenges are and if there was an open window and we weren't going through this process, I would be buying more shares today, really regardless of where our stock settles out here because the opportunity set that activate our consulting firm identified are much greater than I ever thought when I was a Board member. I did not realize the growth potential and how low our actual share was in Medicare Advantage and that we had fractional share in Medicare Sup. I also didn't appreciate the changes in the small medium-sized business market and how well positioned eHealth is. One thing that we didn't mention that I do not know when we were last on the call and I should've known as a Board member, is the deep expertise that eHealth has in search engine optimization and SEO is where you land in organic algorithmic searches on Google and we possess the number one or number two search terms for all health insurance term and where we are not number one, it's because the government is number one. And so that positioning for us took 16 years to build through millions of millions of dollars of content against those search words that have been generated. That is an unassailable position that eHealth had. And so when we talk about the strong foundation that we have, yes, it requires investment, not investment that's going to require us access the capital markets but investment that will have us go cash flow negative over the next period of time, that only means that the payoff is going to be bigger. So long-winded answer but I am very optimistic and excited about the future of this opportunity.

Got it. And not to say how you guys lean politically but just a general sense, we don't know exactly what their plans are with ACA and Medicare and expanding or not expanding. But I would think a Democrat in the White House and may be a Democrat majority in the Senate is probably better for you guys than not?

That's hard to handicap because we feel like we have visibility on what a Clinton administration will do and we don't have visibility on what a Trump administration would do.

Not many people do.

Although the rhetoric is, repeal ACA. We believe that's an attractive political soundbite when you are dealing with legislation that needs revised and an improved and enhanced across a number of different dimensions to make it profitable for carriers and make it affordable to consumers, neither of which it is today and the administration has not acknowledged that reality as candidly, in my view, as they should have. I am confident that a Clinton administration will fix it. And I don't believe it's realistic for repeal even in the unlikely event of a Trump administration. I believe that there will be a pragmatic solution with a Republican House, Democratic Senate, Democratic administration that will go about reducing the drama that reeled and rhetoric around this and actually fix it again for the private sector to make it profitable and for the consumer to make it affordable.

Got it. Thank you very much. I appreciate it.

And at this time, I am showing no further questions or comments. So with that said, I would like to turn the conference back over to CEO, Mr. Scott Flanders for closing remarks.

Thank you everyone. I appreciate your support and I am available for conversations at your convenience.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.