eHealth, Inc. (EHTH) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Q4 2017 and Full Year 2017 eHealth Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time [Operator Instructions]. As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to hand the conference over to Ms. Kate Sidorovich, Vice President of Investor Relations. Ma'am, you may begin.

Thank you. Good afternoon, and thank you all for joining us today, either by phone or by webcast for a discussion about eHealth Inc's fourth quarter and full year 2017 financial results. On the call this afternoon, we'll have Scott Flanders, eHealth's Chief Executive Officer and Dave Francis, eHealth's Chief Financial and Chief Operations Officer. After management completes its remarks, we’ll open the lines for questions. As a reminder, today's conference call is being recorded and webcast from the IR section of our Website. A replay of the call will be available on our Website following the call. We will be making forward-looking statements on this call that includes statements regarding future events, beliefs, plans and expectations, including statements relating to growth in our Medicare business as application for submitted applications for packages and for Medicare and IFP products, our expectations for partnerships; our planned investments, including with respect to Medicare Supplement and small business, our plans for IFP marketing and expectations as a result of recent and proposed legislation and policies, our plan for cost reallocation, the impact of our office closure, expansion of profit margins and continued investment in growth; the expected impact in our revenues, earnings and balance sheet of our adoption of new revenue recognition guidance, our estimate for average annual commissions for small group members and for the average constrained lifetime value of an improved member for each of our product categories. Our guidance for 2018 including our guidance for total revenue, segment revenue and profit, adjusted EBITDA, corporate shared service expense and non-GAAP net income per share, adjusted EBITDA per share, operating cash flows and cash used for capital expenditures and our estimates for 2017 total and segment revenue and profit under new revenue recognition guidance. Forward-looking statements on this call represent eHealth's views of today. You should not rely on the statements as representing our views in the future. We undertake no obligation or duty to update information contained in this forward-looking statement, 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. These risks and uncertainties I described in our Annual Reports 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. In particular as stated in our earnings release, we're adopting a new revenue recognition standard for 2018. This new standard requires us to make assumptions and judgement that could change over time and impact our revenue and results of operations, we urge investors to review our earnings release and annual report on Form 10-K for 2017 for a more detailed description of the risks and uncertainties associated with our implementation of this revenue recognition standard. Finally, we will be presenting certain financial measures on this call that will be considered non-GAAP under SEC Regulation G. For a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included in our press release and in our SEC filings, which can be found in the About Us section of our corporate Website, under the heading, Investor Relations. And at this point, I will turn the call over to Scott Flanders.

Thank you, Kate and good afternoon, everyone. 2017 marked the first full calendar year of my tenure as CEO at eHealth. It was a busy year for us as we took on the large task of repositioning eHealth for sustainable growth in our core markets on a financially disciplined basis with a goal to deliver strong and predictable results for our shareholders. To reflect briefly, we entered 2017 with several key objectives for the year, to grow our Medicare business on a cost basis that allows for attractive and sustainable margins, to focus specifically on establishing a larger and more aggressive growth profile in the Medicare supplement market, to correct deficiencies within our Medicare tele sales organization, to build a foundation for growth in our small business health insurance business and to reestablish growth in our individual and family health insurance business after several years of regulatory and market headwinds. Our aim was to accomplish each of these objectives while also returning the company to the financial and operating discipline necessary to achieve our financial goals. I can report that we've made strong and tangible progress on four of the five objectives I listed, while also delivering revenue and EBITDA results for 2017 that were in line with our guidance for the year. Our Medicare business resumed double-digit submitted application growth in the second half of the year and is now positioned for further growth acceleration on a cost basis that is substantially more attractive than at any point in the company's history. Our recent acquisition of GoMedigap provides a strong foundation for our expansion in the Medicare supplement segments of the Medicare market. Our in-house tele-sales organization is now converting demand at higher rates than a year ago and we are building on a network of reliable call center partners to handle peak time demand more cost-effectively. Our small group business experienced solid growth in approved members in 2017 and we are well-positioned to build a meaningful presence in this market by leveraging our technology platform. Only the individual and family plan business was a disappointment, given its failures to resume solid growth in a market that continues to be challenging. On the financial front, we performed within the expectations that we set as part of our 2017 annual guidance. For the full year 2017, eHealth generated revenue of $172.4 million, adjusted EBITDA of negative $15.3 million, GAAP net loss of $1.37 and non-GAAP net loss per share of $0.76. Revenue for the fourth quarter was $38.8 million, adjusted EBITDA was negative $19.1 million, GAAP net loss per share was a $1.12 and non-GAAP net loss per share was $0.93. Our yearend cash balance was $40.3 million with no debt. Starting in the first quarter of this year, we are adopting a new ASC 606 revenue recognition accounting standard, which will have a significant impact on our GAAP financial results. Dave will discuss the changes to our recording as a result of ASC 606 adoption and provide our 2018 financial guidance based on the new accounting standard. In our Medicare business, our emphasis last year was on first, implement a major shift in our demand generation strategy towards more profitable channels and second, enhancing the effectiveness of our sales organization and converting demand and building lasting customer relationships. We saw the positive impact of these initiatives during the Medicare annual enrollment period that took place in the fourth quarter. In our Medicare advantage business, fourth quarter variable marketing cost per approved member declined 34% compared to Q4 of 2016, a significant improvement that will allow us to scale this business on a more cost-effective and sustainable foundation. We also saw an improvement in member retention with first-year average churn for Medicare advantage members that we enrolled in 2017 declining 13% compared to the core we enrolled in 2016. We see significant potential to further reduce churn in our Medicare business through a more effective and personalized enrollment process and targeted retention activities post-sale. Our efforts to make our demand generation process more cost efficient resulted in a slowdown in our Medicare enrollment growth in 2017. We pivot away from the expensive paid search and lead aggregator marketing channels and towards strategic partnerships, organic search and in-house management of television advertising and direct mail campaign. We made significant progress in these areas and have signed a number of high-profile Medicare partnerships that we expect to be important growth contributors over the next several years. At the same time, several of our newer partnership scaled slower than we originally expected. As a result, we generated 17% application growth for all Medicare products in the second half of 2017, but we fell short of our target to grow applications at high teens for the full year. As we continue to scale existing relationships and develop a solid pipeline of new partnerships, we expect to grow submitted Medicare applications greater than 25% in 2018, driven primarily through organic growth supplemented by our recent acquisition of GoMedigap a technology enabled provider of Medicare supplement enrollments services. Our acquisition of GoMedigap almost doubled our existing Medicare supplement book of business, put us in a much stronger position with Medicare carriers and strategic partners and positioned us to meaningfully accelerate Medicare supplement plan enrollment growth in 2018 and beyond. We are also very excited to have GoMedigap's Founder and CEO, Richard Cantu and co- CEO, Kevin Walbrick, join our team as senior executives in our Medicare organization. A few words about GoMedigap, GoMedigap operate consumer acquisition and engagement platform focused on the Medicare supplement market with over 24,000 Medicare supplement members as of the close of the acquisition on January 22 and a track record of profitable growth. GoMedigap's expertise in the Medicare supplement market complements our growing Medicare advantage and prescription drug plan business, allowing us to better serve the diverse health insurance needs of our customers. The consumer-centric nature of GoMedigap's business model, which extends from its founders down to customer care agents, is well aligned with our philosophy and mission, driven by superior call-center practices and a focus on consumer engagement and education, GoMedigap achieved remarkably high customer satisfaction scores and member retention rates and has enjoyed significant repeat business. These attributes combined with cost-effective marketing strategies have allowed GoMedigap to be profitable and cash flow positive, an impressive achievement for our fast-growing Medicare business. Our plan is to expand GoMedigap's fulfilment capabilities by aggressively growing our licensed agent headcount and appoint eHealth's advanced call-center and back-office technology. The individual and family plan market remained challenged throughout the year in the absence of the favorable regulatory changes that were broadly expected under the new administration. Consumer space continuing premium inflation, lack of quality products and a shortened enrollment period, news coverage around the potential repeal of the Affordable Care Act, repeal of the mandate and other policy changes contributed to confusion in the market and adversely impacted consumer demand during this last open enrollment period. During the fourth quarter, we saw an increase in submitted applications for qualified health plans from subsidy eligible consumers compared to the fourth quarter of 2016. This was driven by a shorter open enrollment period, which did not extend into the first quarter of 2018 as well as by the new CMS enrollment framework that allowed us to enroll customers into qualified health plans through the federal exchange without the customers having to leave our website. At the same time, we saw a drop-in demand from consumers not eligible for government subsidies as those consumers were hit with the full impact of premium inflation that is being characteristic of the individual and family plan market. As a result, our submitted applications for all individual and family plan products declined 23% in the fourth quarter compared to a year ago. Despite the recent decline in new enrollments, our individual and family plan business, remained profitable and cash flow positive on a standalone basis. In 2017, our individual family and small business segment generated profit of $30.4 million with the IFP product line contributing all of the profit while we invested for growth in the small business market. Our near-term objective is to preserve the cash flow generation potential of the individual business by identifying and pursuing pockets of consumer demand while awaiting much-needed legislation to stabilize the overall individual and family plan market. During this past open enrollment period, we launched our package benefit strategy targeting consumers who had been priced out of the individual market or live in areas impacted by carrier exits. During the fourth quarter, we generated just over 7,000 applications for these packages, which typically include a combination of products such as short-term critical illness, accident, medical indemnity, vision and dental, and our less-expensive, the major medical coverage. Packages are characterized by attractive commission rates that are often well above what we generate on a sale of an individual and family plan product. This year we plan to expand on this strategy, finetune product configuration and pricing with carriers and enhance our demand generation efforts. Starting with 2019, the mandate requiring individuals to maintain ACA compliant health insurance or face tax penalties will be removed and we expect that are packaged products might become even more attractive for consumers from a financial standpoint. We are also pleased with the Trump administration's proposed rule to reverse an Obama-era limit to the duration of short-term insurance plans. This proposal which I expect to become final, should have a positive impact on the sale of these products and provide consumers who might otherwise go uninsured with a valuable measure of protection at an affordable price. Turning to the small business market, the number of our approved groups more than doubled in 2017. Our yearend membership grew 7% with commission revenue for the full-year growing 14% over the same time period. During the year, we achieved significant progress in building out our technology platform resulting in an end to end online enrollment process with one of the largest carriers in the market. We also expanded our marketing initiatives in the small business area with a number of impactful new partnerships and new search campaigns. Moving into 2018, our growth strategy will continue to focus on the Medicare market across all three major commercial products, Medicare Advantage, Medicare Supplement and Prescription Drug Plans. We've proven the value of our strategic partner channel as shown by a significant decline in our acquisition costs in the fourth quarter combined with a 16% growth of submitted Medicare applications. We are seeing interest from other potential partners who recognize the value of our technology platform and fulfilment capabilities. Following the acquisition of GoMedigap, we also can offer a strong Medicare supplement dedicated fulfillment platform to our partners, which puts us in a stronger position competitively. Our goal for the year is to grow submitted Medicare applications above 25% while closely managing acquisition costs like we did in the fourth quarter of 2017. We also plan to continue investing in our small business initiative with a special focus on further enhancing our technology platform. We specifically plan to develop end-to-end online enrollment capabilities with additional carriers. Our ultimate goal is to bring technology into a market that is currently underserved by large benefit consultants and other retail brokers and to migrate the labor-intensive plan selection enrollment process online. We assume that the individual and family plan market environment will not change in any meaningful way this year compared to 2017. During the first three quarters of the year, our marketing initiatives aimed that the ACA compliant market will be limited. We plan to resume targeted marketing to individuals eligible for qualified health plans during the open enrollment period, which is currently expected to take place in the fourth quarter. Because of the most recent open enrollment period ended on December 15 that did not continue into the beginning of this year, 2018 will be the first year where the OEP is confined to a single quarter. Given the continued uncertainty in the market, we currently expect that submitted applications for individual products will decline by approximately 20%, compared to 2017. We also plan to continue to innovate on behalf of our customers by expanding our supply of non-ACA products including benefit packages, short-term insurance and other ancillary products. Our fourth quarter experience show that there is tangible consumer demand for these plans that offer a wider range of benefit levels and price points compared to the available major medical products. We expect to see a significant increase in the number of packages that we sell this year compared to 2018 driven by enhanced product offering and targeted marketing outreach. Finally, the expense side of our operations remains a key area of focus as we work to reallocate cost to better align them with growth opportunities. As result of the new revenue recognition standard with stable review in just a few minutes, our reported revenue and earnings will be driven primarily by new enrollments, revenue commissions on our legacy book of business, emphasizing the need to align the cost structure the same way. The goal is to maximize the sale of products with the highest expected lifetime values at attractive margins. And now I'll turn the call over to Dave Francis

Thanks Scott. Good afternoon, everyone. We have a lot to cover today. I'll begin by reviewing our financial performance for the fourth quarter and fiscal year 2017, excuse me. I will then discuss the new ASC 606 revenue recognition accounting standard, which we are adopting starting in the first quarter of this year and how it will impact our financial statements and metrics going forward. Finally, I will provide our 2018 guidance on the new accounting basis. Our quarterly and annual financial results reflect three key dynamics. First, the continuing expansion of our Medicare membership, second our successful and continuing efforts to rationalize the cost structure in our Medicare business to position it for growth acceleration at sustainable margins and third, a challenging environment in the individual market that resulted in lower new enrollments and the continuation of significant churn in our existing individual and family plan member base during the year. In the Medicare business, our fourth quarter revenues of $22.9 million grew 16% while full-year revenue of $102.6 million grew 28% compared to a year ago. The estimated number of revenue-generating Medicare members was 384,900 at the end of the fourth quarter, up from 304,900 at the end of the fourth quarter of 2016 or an increase of 26%. We were able to drive this growth while at the same time significantly reducing variable marketing cost per approved Medicare member, reversing the trend of cost of acquisition inflation over the past several years. For the full year 2017, the loss from our Medicare segment declined 43% to $18.8 million from a loss of $33.1 million in 2016. For the fourth quarter, the Medicare segment generated a loss of $16.3 million compared to a loss of $22 million in the fourth quarter of last year. Fourth quarter 2017 revenue from our individual family and small business segment was $15.9 million, a decline of 34% compared to a year ago. Full year revenue was $69.8 million or a decline of 35% compared with a year ago. Our estimated individual and family plan membership at the end of the fourth quarter was approximately 224,400 down 38% compared to the estimated membership we reported at the end of the fourth quarter a year ago. The estimated number of members on small business products was approximately 32,000 at the end of the year, a 7% increase compared to a year ago. Our individual family and small business segment remained profitable on a standalone basis, generating segment profit of $30.4 million for the full year and $4.1 million for the fourth quarter of 2017 despite the reductions in revenue. Our earnings release outlines the allocation of costs by segment in greater detail. Total revenue for the fourth quarter was $38.3 million down 11% compared to the fourth quarter of 2016. Revenue for the full year of 2017 was $172.4 million representing an 8% decline compared to the full year of 2016. Our total estimated membership at the end of the quarter for all products combined was approximately 936,900 members including approximately 296,000 members on ancillary products. Now I would like to review our operating expenses, fourth quarter GAAP operating costs were $62.2 million, an increase of $1.7 million. Fourth quarter non-GAAP operating costs, which exclude stock-based compensation acquisition costs and amortization of intangibles, grew by approximately $200,000 compared with the fourth quarter a year ago. Fourth quarter 2017 non-GAAP marketing and advertising expense, which excludes stock-based compensation expense declined by over $5 million year-over-year reflecting primarily the positive impact of our new channel strategy in the Medicare business. Our Medicare variable marketing costs declined 29% in the fourth quarter compared to a year ago while still achieving a 16% increase in submitted Medicare applications over the same time period. Fourth quarter 2017 non-GAAP customer care and enrollment expense, which excludes stock-based compensation expense grew by approximately $3 million year-over-year, driven primarily by an increase in our Medicare agent headcount as well as new agent hires to support our small business initiative. Fourth quarter non-GAAP tech and content cost, which excludes stock-based compensation grew by approximately $900,000 compared to a year ago. Fourth quarter 2017 non-GAAP G&A expense, which excludes stock-based compensation grew by approximately $1.5 million compared I am sorry, driven by additional compensation expense related to new executive hires that we made throughout the year. For the full year 2017, our non-GAAP operating costs, which excludes stock-based compensation, acquisition costs and amortization of intangibles, increased both in absolute terms and as a percentage of revenues compared to a year ago. This increase was driven by similar dynamics to those we observed in the fourth quarter with an increase in customer care and enrollment and general and administrative costs being partially offset by lower marketing and advertising expenses. Adjusted EBITDA for the fourth quarter of 2017 was negative $19.1 million compared to negative $13.9 million for the fourth quarter of 2016. Full-year 2017 adjusted EBITDA was negative $15.3 million compared to positive $5.7 million for the full year 2016. We calculate adjusted EBITDA by adding restructuring charges, acquisition costs, stock-based compensation and depreciation and amortization including the amortization of acquired intangibles to our GAAP operating income. Fourth quarter 2017 GAAP net loss per share was a $1.12 compared to net loss per share of $0.91 for the fourth quarter of 2016. Non-GAAP net loss per share was $0.93 compared to a net loss per share of $0.79 for the fourth quarter of 2016. Full-year 2017 GAAP net loss per share was a $1.37 compared to a net loss per share of $0.27 in 2016. Full-year 2017 non-GAAP net loss per diluted share was $0.76 compared to net income per diluted share of $0.17 in 2016. Our fourth quarter 2017 cash flow from operations was negative $10.1 million compared to a negative $4.7 million for the fourth quarter of 2016. For the full year 2017, cash flow from operations was negative $15.5 million compared to positive $4.1 million in 2016. Capital expenditures, which include capitalized internally developed software costs were approximately $1 million for the fourth quarter of 2017 and approximately $5 million for the full year. Our cash balance was $40.3 million at December 31, 2017. Having engineered major changes in Medicare customer acquisition and sales processes to meaningfully reduce variable marketing costs and increase customer conversion rates, we remain highly focused as an executive team on managing operating costs and positioning the company for sustainable long-term growth. Today we are announcing the closure of our Westford Massachusetts Medicare sales center to align our fixed cost with the new strategy of staffing our sales resource needs with a more optimized mix of permanent and outsourced personnel all according to seasonal demand. We do not expect this closure to have any impact on the growth of our Medicare business. In addition, we are closely managing our investments in technology and development resources to maintain the highest value engagement experience for our customers while focusing on high ROI areas of the business, including targeted investments within the recently acquired GoMedigap Medicare supplement business. Finally, driving further efficiency across all parts of the business, through automation and process improvement, remain key areas of focus for the management team. We are committed to expanding profit margins while continuing to invest in growing the business. And now I'd like to comment on the new ASC 606 revenue recognition accounting standard that we are adopting this year and will have a material impact on our consolidated financial statements. For Medicare, individual and family plan and for ancillary products, we will now recognize commission revenue upfront in the amount of the total estimated lifetime commissions we expect to receive from a member once a carrier approves an application. For small business, health insurance plans, we will recognize commission revenue equal to the estimated commissions we expect to collect from that plan over the following 12 months. At the time the plan is approved by the carrier and then again when the plan renews each year thereafter. Historically, we have recognized commission revenue from all of our products over the life of a member which can span multiple years. At the same time, we have booked up front substantially all variable costs associated with generating new enrolment which in the past has resulted in lower GAAP profitability for rapidly growing businesses such as Medicare. The adoption of ASC 606 will have a nominal impact on our expense recognition and we believe will provide for better alignment between commission revenues and related marketing and sales costs. Under the new accounting standard, our commission revenue in any given quarter will be driven almost exclusively by newly approved enrolments that we generate. Accordingly, the two-key metrics that are essential in understanding and forecasting our revenue going forward, are the number of approved members and the estimated constrained lifetime value or LTV of an approved member. In the past we focused on the number of applications submitted during the quarter and have compensated our aged force based on that metric. However, moving forward, we are shifting our focus both internally and for external reporting purposes to approved members, which is a more relevant metric and also makes agents more attuned to the quality of the applications that they submit. Let me spend some time on the concept of an estimated lifetime value of a member, estimated LTV is driven by multiple factors, including but not limited to, our conversion rates, contracted commission rates, carrier mix and expected policy churn. In addition, LTV’s can vary by month. For example, Medicare Advantage members get approved in January typically have higher LTVs compared to a September cohort given the carriers may pro rate commission payments for the first year. To determine the value of each product LTV in any given time period, we have constructed sophisticated data models using our historical data and we took a conservative approach and estimating each of the key factors impacting LTV. Then to determine the amount of revenue to be recognized for each approved member based on those LTVs we applied a further mathematically derived discount factor called a revenue constraint to account for the external factors that can potentially impact our ability to collect the projected submission amounts. For Medicare policies, we are applying a 5% to 7% constraint factor to the estimated LTVs to determine a recognized revenue base. For ancillary products a 10% constraint is being applied to LTVs. For individual business, we are applying a constraint of 15% to 20% to revenue given the turbulent macro and regulatory environment. I will provide a range of projected 2018 constrained LTVs as part of our annual guidance. From a balance sheet perspective, as we recognize revenue you will see a corresponding increase in accounts receivable, renewal commission payments that we are receiving on our existing book business will no longer flow through our income statement starting this year. Instead, in our balance sheet as of January 1, 2018 we will book a receivable that represents the amount of estimated commissions that we expect to collect from all the policies that we had on our books as of December 31, 2017. As a result, when we report first quarter earnings on the new revenue recognition basis, you should expect to see a significant increase in our accounts receivable balance. As we receive payments from carriers you will see these reflected on our cash flow statement as well as the balance sheet as an increase in cash and an offsetting decrease in accounts receivable. As we adopted new accounting standard, we will also adjust our investor reporting to ensure transparency and to be to better align the metrics that we provide each quarter with ASC 606 revenue recognition. Starting with the first quarter earnings release, we plan to provide the following key metrics in addition to consolidated GAAP financial statements the number of approved members during the quarter the constrained LTV of an approved member in each segment, and the estimated quarter and membership all broken out by key product categories. Also, revenue, profitability and variable marketing cost per approved member by segment. And finally, a breakdown of our quarter end accounts receivable by year of expected collection. To give our 2018 guidance context, I'm going to provide our current view of certain 2017 financial results under the new accounting standard. It is important to note that we along with our auditors are still in the process of evaluating the historical effect of the new accounting standard on the retrospectively restated historical financial statements. As we complete our evaluation we may modify our assumptions and judgments or new information may arise that could cause these restaged historical results to be materially different and the estimated ranges that we are presenting here for comparison purposes. We plan to provide fully retrospectively restated historical financials with our first quarter 2018 earnings release. And now, I will provide our 2018 annual guidance under the new revenue accounting standard. We are forecasting revenues for 2018 to be in the range of $217.5 million to $227.5 million. With Medicare segment revenues in the range of $178.5 million to $183.5 million and individual and family and small business segment revenues of $39 million to $44 million. This compares to an estimated 2017 revenue under ASC 606 of $186 to $191 million for the entire company. $138.5 million to $142.5 million for the Medicare segment and $47.5 million $48.5million for the individual, family and small business segment. We expect 2018 adjusted EBITDA to be in the range of $21.9 million to $26.9 million as compared to estimated 2017 adjusted EBITDA of negative $0.9 million to positive $4.1 million under ASC 606. We also expect 2018 adjusted EBITA per share to be in the range of a $1.13 to a $1.39 as compared to estimated 2017 adjusted EBITDA per share of negative $0.05 to positive $0.22 cents under ASC 606. 2018 Medicare segment profit is expected to be in the range of $45.5 million to $49.5 million. And individual and family and small business segment profit is expected to be in the range of $6 million to $7 million. This compares to estimated 2017 Medicare segment profit under ASC 606 of $18 million to $22 million an estimated 2017 individual, family and small business segment profit under ASC 606 of $8 million to $9 million. Corporate shared services expenses excluding stock-based compensation and depreciation and amortization expense is expected to be approximately $29.5 million. Non-GAAP income per share for 2018 is expected to be in the range of positive $0.92 to positive $1.18 per share. This compares to $0.02 to $0.28 estimated 2017 non-GAAP income per share under ASC 606. Cash used in operations for 2018 is expected to be in the range of negative $8.5 million to negative $9.5 million and cash used for capital expenditures is expected to be less than $10 million in 2018. Our 2018 financial guidance is based on the following assumptions by category for LTVs. In 2018, we expect - 2018, we estimate average fully constrained LTV to be in the range of $810 to $930 for an approved Medicare Advantage member, $970 to $1020 for an approved Medicare supplement member and $250 to $300 for an approved prescription drug plan member. We estimate average fully constrained LTV to be in the range of $90 to $145 for an approved IFP member and we also estimate average annual commissions of $155 to $175 for an approved small business member. Finally, as it relates to guidance for 2018 under ASC 606, it is important to note the seasonal effects of our business on quarterly financial performance. While, we will not be providing guidance on a quarterly basis, do recall that a large number of our new enrolments are generated during annual AEP and OEP selling seasons that occur in the fourth quarter of the year. As a result, revenues and earnings will be concentrated in the fourth quarter of the year under ASC 606 accounting likely resulting in negative earnings in earlier parts of the year, under Generally Accepted Accounting Principles countered by positive earnings in the fourth quarter of the year. I want to remind you that these comments and our guidance are based on current indications for our business and our current estimates, assumptions judgments which may change at any time. Our actual results may differ as a result of changes in our estimates, assumptions and judgments. We undertake no obligation to update our comments or our guidance. And now I'll turn the call back over to Scott for final remarks before taking questions.

Thanks, Dave. I've never been more excited about the growth opportunities for our business. We have a Medicare business poised for 25% growth it's embedded applications on a significantly more attractive and sustainable cost basis. And we are now able to clearly show the substantial profitability of that business under ASC 606. The acquisition of GoMedigap significantly expands our opportunities in the Medicare supplement market and provides us with considerably more balance and broader capabilities across our Medicare product offering. Our individual and family plan and small group businesses are being managed in a disciplined fashion for Fyfe growth opportunities in the future as we work toward delivering market disruptive technology services for our customers. Expanding revenue and profits were providing a unique and valuable suite of technologies and services to our customer base continues to be my focus and that of the entire company. We are well positioned to achieve these objectives. Operator I turn it over to questions.

[Operator Instruction] And our first question will come from a lot of Tobey Sommer with SunTrust. Your line is now open.

Hi, this is Kim on for Tobey. Thank you for taking my questions. First of what is the contribution of GoMedigap embedded in your 2019 guidance in terms of revenue, EBITDA and EPS? Thank you.

Hi Kwan, thanks for the question. We’re not breaking out the contribution. What I will tell you is that, for me a membership growth perspective in our Medicare business, we expect that the contribution from GoMedigap will really only be reflected in about 4% to 5% of that 25% growth that Scott was talking about previously. So strong organic growth and my supplement from the GoMedigap folks, but not a large contributor to top or bottom line.

Got it. And when do you expect the Medicare business to become cash flow positive?

Certainly by 2019 and depending on how we perform this year there is a chance that it goes cash flow positive this year, but certainly expecting it to do so next year.

Okay. And lastly on the commission side, do you assume stable commission rates or compression associated with ASC 606?

We've done a pretty extensive regression analysis on CMPM across all the different parts of the business and what we've found over the last two to three years that outside of the progression of Medicare commissions as we talked about extensively for business it sold mid-year. There hasn't been any kind of meaningful compression and commissions. So, we're expecting everything to remain as it has been for the last couple of years.

That's helpful. Thank you very much.

Thank you. And our next question will come from line of George Sutton with Craig-Hallum. Your line is now open.

Thank you. Scott, I'm wondering as you look at your Medicare partnerships many of which were relatively new this past season, what did you learn that gives you the increased confidence in the 2018 relative to growing with some of those partnerships? And I wonder if you could break some of the opportunities down between folks like hospital groups versus pharmacy partners versus affinity groups?

Okay. So, while, we did learn a lot and as we acknowledged in our script that we - the partnerships developed more slowly than we expected. Our penetration of the total opportunity has been virtually deminimus. And so, we don't have to get a lot better to have substantial orders of magnitude of growth in ‘18 over ‘17. Let me start at the hospitals. We did under 2000 enrolments in that channel, it was a seven-figure net investment to build out the human capital and to onboard the nine systems that we brought on board last year. We expect to double the number of partners this year and we expect much deeper penetration. So, these aren’t massively material numbers, but we expect to approach five figures. Well, I guess we're all ready. We should we should do it in the neighborhood of 10,000 we think. We've budgeted a little more conservatively than that. But that market place we had the opportunity to reach over 400,000 beneficiaries in those systems and we close to 0.5% a percentage point of them. And so, I just give you a sense of what we see as the opportunity. And our strategy of enrolling those patients and Medicare Advantage is very aligned with the hospital systems and so we held a two day off site. It was earlier in February was it was late January and we had every one of our business partners represented there in person with senior executives was very encouraging. And just demonstrate us how excited they are about that marketplace. Than some of the other partnerships like Union Plus plots and others, it just has taken longer for us to fully integrate our brand with their brands. And we still see the opportunity as significant and what we're trying to do is aligned with what they - what their mission is. And so, it's just taken us longer, it's been more individual meetings, and more education, alignment of marketing plans to bring these - to full it - more fully penetrate the opportunity.

And George if I could add, the third channel there is the pharmacy channel it's one that we've been involved in for several years now. We talked about the some of the larger partnerships that we had in that channel this last year. That's when we had a lot of eyes on us in terms of our ability to ramp some of those relationships and perform for them at scale. And while we talked about in our preannouncement, the fact that we were disappointed in one of those relationships in particular, the reality is that we still have more than quintupled the size of business that we have been doing with that partner in previous years. And have shown that, we are fully capable of holding up our end of the bargain relative to executing against these. So, we have a robust channel of existing and new partner negotiations going on as we speak and we're very confident that that channel is going to perform very well for us as we get deeper into 2018.

Dave relatively or fully constrained assumptions. Just so, I'm clear using Medicare advantage as an example. When you say it's 5% to 7% constrained helped me understand that, if that means you're what you're actually seeing is 5% to 7% higher than the 810 to 930 and that's the constraint?

That's right. I think that's a good way to think of it. Think of the constraint in layman's terms taking the accounting speak out of it as an insurance policy of sorts to guard against external events and other things so we believe that we have used very proper and where necessary conservative assumptions in developing the LTV. And then further applied that constrained to those LTVs to get to those numbers that we will use to derive recognized revenue.

Okay lastly Scott you mentioned in your prepared comments there you're going to focus on high ROI parts of the business which obviously make sense. I think, I know where those higher ROI places are and where the low would be. But can you kind of walk through your thoughts on that?

Well as you know our Medicare business we report a blended cost of acquisition but there's wide variability across all of those marketing channels with DR-TV being expensive, search engine marketing being expensive, organic search being very inexpensive. And so, part of that answer is, just managing our marketing channels and the partner channel particularly pharmacy and hospitals where were precluded by the regulatory scheme from paying any sort of Rev share our very low cost of acquisition. And so, it's really about managing that mix. And then we announced when we previewed our five-year strategic plan is an objective to migrate more of our Medicare enrolments online. So, whereas in the individual market we're 90% percent, in the Medicare market where 90 percent agent-enabled by phone. And so, it's been an objective of ours but, it's going to be an even higher priority as Dave is assuming the Chief Operating Officer role is to migrate more of our enrolments to online with our agent assist. Dave what would you add to that?

Yeah, I that's all accurate. And the other thing George is, keeping in mind the long-term values of each of the different customer segments that we laid out here, wherever we can identify areas to reduce operating costs where they're not driving to higher ROI and plough those back into some of the areas that Scott just described as a key area of focus for us. And to talk just a little bit quickly about the individual marketplace. While, we're disappointed in how that business has continued to perform we do see opportunities to turn things around in that marketplace and take full advantage of the fixed infrastructure that we've built over the last 20 years to serve that marketplace. So, while the LTV are lower, if we can acquire customers at scale and drive them through that engine the return on investment for those customers as high as well. So, we continue to have a meaningful focus on getting the problems in that business solve for. So, we can drive more meaningful ROI there as well.

Got you. Thanks guys.

Thank you. And our next question will come from the lot of Dave Styblo with Jefferies. Your line is now open.

Hey there, thanks for the questions. I think I think maybe I have about a dozen but will confine myself to just a couple. Maybe starting out on the Medicare application and your underlying assumptions they are talking about 25% plus growth on the app side. And I think that would be – that’s up in the high teens in the back half of ‘17. So, can you just help it to what the improvement is? I think part of it is the acquisition but is the rest largely due to better operational improvement. Now that you guys straighten some things out, or is that also partially driven by the partnerships of Union Plus and AGIA?

Well, all of that and we're going to be laughing relatively easy conversion rates in our call center and first half of this year which is, you'll make that number more achievable than it might seem at first blush. And then all of these partnerships have the benefit of being in their second year of operation. And so, we're just expecting a lot speed - greater penetration.

Dave the thing that I would add is, keep in mind that in the Medicare business last year we achieved the growth that we did in the second half of the year after essentially completely overhauling our customer acquisition strategy. Recall that we were outsourcing all of our TV advertising to a third party in the first part of the year, we insourced all of that, had a lot of learnings from that as well. The sales machine was broken in the first half of the year we changed our leadership and exited the year significantly improved conversion rates. The partner channels as Scott just described we got good traction with several learning tractions with others and a full year now of experience under our belts to optimize better. So, you throw all that together with the benefits that we will also get in terms of having a much more efficient and better position mid subchannel with the addition of GoMedigap and were we're very confident about where we sit in the growth opportunities ahead for the business.

Okay. And then just understand the modelling the way it works is you're going to application, submit application and then there's for example in Medicare and there is some haircuts to that for a member of becoming an approved member. What's the delta there because right now when I take your submitted apps and grow it and apply the restrained revenue metrics that you've had which is a little bit under a thousand I think on average. I have a hard time getting to your revenue outlook for the year. So maybe I'm just assuming that that quite a few folks fall off from being on an estimate app to prove member, but maybe you could walk us through what you're going assumptions are from when somebody submits an application to when they're approved. What that conversion rate is?

I'm not going to give you the specific numbers on that because it bounces around depending on the time of the year and there are other improvements that we continue to make inside the sales organization. But there is a fall off from a submitted application to an approved application, however and the reason we use approved applications for the determination of revenue recognition is that the falloff from approve to paid is a much smaller kind of Delta and one that is very, very predictable given past history. And again, where we're working to improve the – to submit to approved rate and that's part of why the LTVs are what they are when you look at all the different calculations around that. But the level of approvals that we're looking at support the kind of revenue growth in the Medicare business that we're talking about which is just shy of 30% at the midpoint of the range I believe.

And there is also commission Medicare revenue that goes into that range as well as the sale of some end products which you will not get by just taking approved Medicare members and multiplying by Medicare.

Okay helpful. And on the on the individual side, for the administration's decision to extend the duration of short term insurance plans, obviously that's a positive for that segment of the market that you guys have just started attacking. I'm curious how you think about that as a risk to the rest of your subsidized and individual book. Is it possible that you're going to have some defections going from there, taking a short term plan and how do you think about that terms of the guidance that you've established?

Yeah. Anyone who can afford a major medical plan, buys one is really affordability issue that drives people into short term insurance. So, we don't have cannibalization and we had not very substantial volumes in the on QHP segment. So, from our point of view, we see this as almost entirely upside versus any cannibalization.

Okay. And then lastly just on - understanding the cash flow from here, so you guys have $40 million of cash at the end of the year, I think you're paying $15 million of that for GoMedigap and cash in on the stock there. From there, I think I missed your comments about what the operating cash flow and free cash flow was. Was that a drag of about $10 million?

We gave it as range between $8.5 million and $9.5 million cash burn with several million of that were related to supercharging the growth of our new acquisition GoMedigap.

Okay. So, 40, 35 so that kind of gives you about $25 million of cash - sorry about $15 million of cash is sort of how you think about exiting 2018?

We also have some CapEx in there almost $10 million...

We said, we will end up spending no more than $10 million in CapEx.

No more. Okay. So that gets you closer to maybe $5 million or $10 million of cash exiting the year. Is that the right way to think about it?

That is.

Okay. And so just given the volatility of the IFP book and since you do generate quite a bit of earnings still from that book, if that continues to fall and decline like it has, what sort of your back in case you do need to tap markets one way or the other?

We've been looking at several different options. I mean keep in mind that we've got a balance sheet that's debt free at the moment with what you will see when we report Q1 numbers a very large highly visible receivable on it that in worst case, we could tap that as a as a securitized source of funding. But suffice it to say, we’re not concerned about the liquidity of the business.

Okay. Thanks guys appreciate it.

Thank you. And I'm showing no further questions in queue at this time. So, it’s my pleasure to hand the conference back over Mr. Scott Flanders, Chief Executive Officer for some closing comments and remarks.

Thank you, everyone for your support. We are available for calls and discussion at your convenience.

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