Good day, ladies and gentlemen, and welcome to the Q1 2018 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 first quarter 2018 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 Operating 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 Web-site. A replay of the call will be available on our Web-site following the call. We will be making forward-looking statements on this call that includes statements regarding future events, beliefs, and expectations, including statements relating to execution against our growth targets, the performance of our Medicare and Individual and Family Plan business, expected contributions from our strategic partner channel, expectations regarding the consumer demand for non-ACA compliant products, expected expiration of the ACA individual mandate penalty, our marketing efforts including our new digital marketing initiative, our integration efforts with respect to the GoMedigap acquisition, our expectation for significant approved applications, profitability of and growth in our Medicare business, the profitability of our Individual and Family Plan business, and the potential for cash flow generation, our plan [indiscernible] eligible consumers, the priorities of our small group business, our expectations regarding approved members of Prescription Drug Plans, enhancement in our consumer-facing and technology platform, the [indiscernible] of new sales and operating metrics in affecting the performance of our business, our longer-term financial outlook through 2021 including growth in Medicare and total Company revenue, and EBITDA margins, our expectations regarding cash flow from operations and commissions receivable balance, the sequential quarterly trend of our revenue and earnings, our expected tax rate for 2018, and our guidance for 2018 including our guidance for total…

Thank you, Kate, and welcome everyone. We had a great start to our year at eHealth with double-digit enrollment growth and 21% revenue growth in the Medicare segment. Growth rate is well above the overall Medicare market. This growth generated significant segment profit as we meaningfully reduced variable marketing cost per approved member compared to a year ago and continued to improve customer conversion rate throughout the quarter. We expanded and strengthened our approach to the Medicare Supplement market with the acquisition of GoMedigap, whose early performance and integration are on target. Our small business group also performed well with the number of approved members increasing by more than 50% year-over-year. Only the individual and family plan business remained challenged for us though we expect that recent changes in leadership and our go-to-market approach will allow us to gain better traction in the individual market later in the year. The Company is singularly focused on executing against the growth targets we established on our year-end earnings call and I view our first quarter performance as generating strong momentum towards achieving those objectives. This is the first quarter in which we are reporting results according to the new ASC 606 revenue recognition standard. First quarter revenue was $43.1 million. Our adjusted EBITDA was negative $1.2 million. GAAP net loss per share was $0.26 and non-GAAP net loss per share was $0.07. Cash flow from operations was $10.7 million, bringing our cash balance as of March 31 to $34.7 million. Of note, our balance sheet as of March 31, 2018 shows a commission receivable balance of over $272 million that represents the constrained amount of estimated commissions that we expect to collect over time from all of our existing policies. This is the first time that this commissions receivable value has been…

Thanks Scot. Good afternoon everyone. This is the first time that we are reporting our financial results based on the ASC 606 revenue recognition accounting standard. Our earnings release includes historical financial statements presented on this new basis to facilitate period comparisons. When I refer to prior-year financial results in my remarks today to address growth rates and other year-over-year trends, I will be using historical financial results as adjusted to reflect the new accounting treatment. I would also like to note that starting with this quarter we are providing new sales and operating metrics as part of our earnings release with the goal to increase transparency into our business and make it easier for investors to evaluate the progress that the Company is making against its growth targets. These metrics include, the number of approved members during the quarter, the constrained lifetime value of an approved member both broken out by key product categories, a more granular view of the estimated quarter end membership and commission revenue. We are also providing variable marketing costs and customer care and enrollment cost per approved Medicare equivalent and individual and family plan equivalent member respectively. We believe that this level of information taken together provides a clearer sense of the performance of our business and aligns with the key metrics that we as a management team are now using to manage the Company. Also, while we have historically provided the number of submitted applications by product, the relevance of this metric has diminished following our adoption of ASC 606, under which the number of approved members becomes a key revenue driver. We will continue to provide the number of submitted applications by product for another year for continuity purposes and phase that metric out starting in 2019. First quarter revenue was $43.1…

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

Nice quarter, guys. So, I wanted to walk through the commission receivables. So, if I look at the combination of your short and your long-term receivables even relative to your enterprise value, it's basically equivalent. So, effectively that represents receivables that you will be ultimately you will be receiving cash for under that constrained assumption. Are there any other real costs associated against that?

No, the costs attached to each of the receivable balances have essentially been absorbed as we generate the revenue in any particular quarter. So, as the cash comes in, there's no additional cost attached to that. And the reason that those receivables are there is because there is no meaningful service component attached to them either. So, according to our contracts with the carriers, these are all cash collection expectations that we have both in the short-term and the long-term.

Interesting. Great. And then relative to the new partnerships that you have already signed year to date, I believe those were Medicare partnerships, can you just give us a sense of some of the opportunity that you see from those new partnerships? And then also, as we look at the Q1 results, how significant were some of these larger partnerships you signed in 2017 that you were somewhat behind your expectations there? It looks like you actually performed ahead in Q1. Just curious how that shifted.

I'll answer it this way, and if I need to do more, tell me. We're really pleased with where we sit right now from the partner perspective. We talked about a specific partner last year that did under-achieve relative to our contracted expectations there, but conversations with that partner for this coming year are going very, very well. We are encouraged by where we sit with those folks. Our performance against our partner business last year has also set us up for significant sales activity in the first part of this year to be able to set up the volume expectations for the back half of the year as well. It's our expectation to be in more of a portfolio-driven approach relative to partners this year, particularly in the fourth quarter, rather than relying on just a single partner for the lion's share of business. But either way, we are encouraged by where things stand at the moment, and as Scott mentioned, we have had a couple of partners sign contracts ahead of our expectations relative to what we're going to be doing in the fourth quarter. Did that answer what you were asking?

Again, if I looked at who you signed year-to-date, can you just give us a relative level of significance in your view? Are these just kind of down the middle, normal type of partnerships?

So, the partnerships that we had in place last year continue into this year. As Scott mentioned on his prepared comments, the partner activity typically ramps up in the fourth quarter as you go into the AEP selling season for Medicare. That's where just the largest volume of activity is. We do have as part of these partnerships agent activity and other programs that we do outside of the AEP period, but the reality is that, and I think we talked about this late last year, the first half of this year is working on getting these partnerships either expanded for those that are existing or signed for those that are new, determining the scope of how we are going to work with those folks and then implementing those in the second half of the year. So, it's our expectation that we'll be talking a lot more about, if we can't say who, certainly more the nature of some of those partnerships as we get into the Q2 and the Q3 reporting period, but right now it's just way too early to give a lot more information relative to what those are going to mean relative to the fourth quarter other than to say we are very encouraged by the activity at the moment.

Okay. A simple last question if I could, in your other, on the ancillary side of your business there was an 'other' line that grew 213%. I'm curious what is that?

That's primarily dental but other products that we are selling in that area. The construct of the products being sold in the IFP business right now are continuing to change as we continue to work to find the right mix of product and engagement strategies to, as Scott said, turnaround what we would characterize as disappointing results in the individual business, and we are working on finding that right mix of product and benefit at the right price for the right customers that we are engaging with.

Okay. Thank you.

Our next question will come from the line of Dave Styblo with Jefferies. Your line is now open.

Want to just get a better sense of all these efforts that you're doing to move things in-house from a referral basis to lead generation side and get a sense of the cost of acquisition and steps on improving conversion rate, how far are you into that process at this point? I felt like we've been hearing about it for a good 18 months and change, but are we kind of in the third inning, the sixth inning, just how much further do we have to go in terms of improvement there?

I would say a highlight of Q1 was the 29% cost of acquisition improvement year-over-year in Medicare. So, we feel very good about that efficiency. Where we've had improvement is in the direct response TV and direct mail. We've been able to be less reliant on third-party lead aggregators and we've been less reliant upon the most expensive lead source which is paid search. So, I'd say we would pick the easy fruit from that, Dave. But having said that, those trends should continue through the second quarter where I see huge opportunity for us both to improve efficiency but also capture market share as we continue to improve our digital marketing efforts. And so, the contributions from that team, which I noted literally, they just, human capital just joined us in January, we are just beginning to experience the improved digital marketing from their talent. So we are really bullish on how we can improve the profitability per member but also outgrow the market substantially by strong digital marketing. Dave?

That's absolutely right. The two areas that I would pile on there is to reemphasize that investment in marketing talent, particularly on the digital side, as Dave, you know, we brought onboard a very talented new Chief Marketing Officer in June of last year, and it's, as all things that you rebuild, it's taken some time for him to build the bench strength and the capabilities there and this digital marketing piece is a very important part. We had been doing it badly as a company for quite some time, causing us to dial back the spending there. As we reenergize those muscles and do that better, we will be investing more aggressively there. The other is to keep in mind that last year we essentially took our Medicare acquisition channel strategy and turned it on its head, in-sourcing a lot more work and then looking to this partner channel. That had very good early results and you're seeing some of those results still coming through in the first quarter here. And I would say that the year is really broken into two areas, that it's the first three quarters of the year where we have to go out and market much more aggressively on a paid basis to generate the new customer acquisition volume. And in the fourth quarter where all of this partner volume comes in, getting those partnerships in place and then implementing and executing against them, we believe that there are opportunities for us to continue to grow the business while reducing the incremental cost of acquisition in each of those periods, but candidly the more pronounced impact is going to be in the fourth quarter when more of the volume comes in generally and more of those lower-cost partner relationships kick in and implement at scale. So, if you want an inning, I'd say we are in the fourth or fifth right now, but this one could go into a day and night doubleheader too. So, we are excited about where we sit.

Right, okay. So that actually [indiscernible] questions about growth and how you guys see the low-hanging fruit from application growth from here, and so it sounds like, [indiscernible] that's more internal and perhaps more paid search still with the fourth quarter leaning on those channels. I guess since the fourth quarter is so seasonal and now important to you guys hitting your numbers, what are you doing with the partners right now to prepare for that or kind of what does the strategy look like when you go into a Union Plus or AGIA, are you having to go into multiple different agencies within there to talk about what you guys want to do and what the demands and needs of your clients are? Sort of just walk us through how that workflow goes as you build up to get ready to market to those folks.

Great. Just a bit of a retrospective on the last year's AEP, we have developed strength in business development that outpaced our operational competencies. And so, we were not well-positioned to process all the partnerships that we signed. And so, our recently last year recruited SVP of Sales Operations actually has reorganized and is now structured in a way where we are in much better position to support these partnerships, each of which are unique. What we were good at doing was high-volume lead segmentation and prioritization and conversion of large volumes of inbound calls, driven by direct response TV and third-party lead aggregators. So, as we created more complexity and made us less reliant on those high-cost channels, we were ahead of ourselves in terms of building the tools, the systems, and the processes in our sales ops. Dave may answer that directly but that's my perspective.

I think that's all correct and we also are working hard to engage at different levels, Dave, kind of to your point, and Scott mentioned it, each of these partnerships is different, and better understanding with a year under our belt for some of those existing partnerships that we expect more performance out of, understanding both how they work and how they interface and engage with their customers, and being able to lever that engagement point more effectively to drive more traffic that has an intention to transact with us, is what we are working on with those folks right now. Again, for agent campaigns we are able to get some of that volume going right now. We are working there to both take advantage of that volume but also use that volume as testing to be able to optimize when we get into the fourth quarter, but a lot of engagement and work with each of those partners to make sure that we are taking advantage of the unique needs and touch points that they bring to what we are trying to achieve with them.

Okay, that's helpful. And then just the last one, I know you guys aren't pleased with the IFP business and just the challenges in the market. Obviously a lot of the ACA complexities are a challenge with that one. I guess every time we kind of step forward, it seems like there was a strategy and it's just a tough market to work, and I guess that's reflected in the numbers where sequentially growth has been down [for like 11 out of] [ph] past 12 quarters and it's down another 19% in the first quarter here. That's still your biggest profitable business and I'm just curious what else can you do to stem the losses and just help stabilize that business, and maybe helping us understand how much of that 183,000 lives is ACA compliant business versus non-ACA compliant?

We only signed up in terms of subsidy-eligible ACA plan, 17,500 enrollments in the open enrollment period in 2017. And so, we underperformed our expectation, even though we had the double redirect constraint eliminated and direct proxy enrollment enabled. The reality is that the far bigger market opportunity for us is in the non-ACA compliant, and that's what I was signalling in my prepared remarks, Dave, that we are more singularly focused and you can go to our Web-site now and see that we are directing our flow to short-term insurance. It converts at a higher rate, it's much more affordable to a much broader audience. And so, we do believe we can stabilize the membership through these moves that we've made. But we are too early to give you assurance of that. Dave?

Yes, the other thing, Dave, I would add is, we as a company have been too focused on the ACA compliant side of the business and realizing the bifurcation of that marketplace and that more and more people are finding themselves in an economic position where an ACA compliant plan because of the lack of subsidy just doesn't match for them, combined with the fact that the regulatory environment is creating more opportunities to sell more attractive wide price point non-ACA compliant products and that includes the expected extension of short-term to a 364 day maximum. We believe that our engine remains very well-positioned to help a large portion of that market out, and that we have essentially cleared the cultural hurdle and are getting out of the way of the ACA side of things, doing that where we can and have the ability to do it, and we'll take all that business we can, but we are focused on meeting the needs of the market with the right set of benefits at the right price point and engaging patients or customers where they want to meet.

And is that really what you are seeing, if those members go [indiscernible], many of them are going to those shorter-term plans, is your assumption there?

Yes, there is still a lot of confusion among consumers in the marketplace. So we are helping to get them educated as to what's best for them. Some of them have been buying packages from us, which include short-term. Some of them have been putting together their own portfolio of products, but as Scott said, where we see the opportunity right now is taking advantage of where the short-term market exist today and where we think it's going in the middle part of this year with extended lifetimes of those products and be positioned when all of the volume starts to hit again in the fourth quarter to be much better prepared to capture significantly more volume than we have in each of the last two years.

Sure. Thanks guys.

Our next question will come from the line of Steve Halper with Cantor Fitzgerald. Your line is now open.

Just a housekeeping item, Dave, I know you talked about the non-cash tax rate of 27.5%, I'm assuming that's for the full year. What should we assume as a benefit in the second and third quarter, assuming that you are going to be in a loss position?

From a reporting perspective, Steve, the GAAP net income line is going to be hit with that 27.5% effective rate.

Even though you will be in a loss position?

Correct.

Okay. So, it won't be a benefit, it will be an expense.

No, it will be a benefit, it will report as a benefit.

Okay, got it. Okay, that's fine. Thank you.

Our next question will come from the line of Tobey Sommer with SunTrust. Your line is now open.

Could you speak to the improvements you've seen in the variable marketing cost? Is there any way that you could quantify those for us and talk about the path to profitability, seeing how the Medicare business is where you are getting the growth and it seems to be the principal driver of the long-term prospect for the Company?

Sure. I'll see how I can do and then we'll go wherever you want to, Tobey. So, as Scott described earlier, the fact that we have re-taken control essentially of our direct marketing channels, you see is the term where when we came into the business, we had essentially outsourced all of our marketing to third parties for whom we were simply paying a bounty for customers that we were able to enroll and therefore not getting any kind of leverage out of our enrollment engine, taking that all back in-house and improving our sales conversion rates inside of the sales center has resulted in that overall decline in variable marketing cost in this non-AEP, non-selling season part of the year. When you look at the opportunities in the fourth quarter, in the fourth quarter because of both the volume of business being done over the fixed infrastructure and the fact that we can bring down, if we execute appropriately, the variable marketing expense on a blended basis for every new customer because of the mix of business coming from the lower-cost partner channel, the opportunity to significantly impact, have a positive impact on profitability in the fourth quarter relative to the first three is, it becomes very apparent. So, I would tell you, as we said earlier, the opportunities as we continue to refine our direct retail marketing efforts in the first three quarters of the year to continue to reduce costs at the margin on an incremental basis is still there and has meaningful upside for us. But the real profits come in the fourth quarter when the volume comes and the volume comes with a significantly more attractive mix of business relative to channels.

Okay. With respect to the IFP business, how much of your future strategy hinges on changes to the ACA or government action as opposed to forecast in new processes and selling that are internally controlled in assumed kind of the current operating environment?

So we provided updated guidance on our 2021 long-range plan where we indicated that Medicare will continue to grow at a 20% rate but that our overall revenues would be in the 15% range. And the reason for that is we are taking a very conservative perspective on the IFP business, very little growth at all in that segment. So we are discounting any legislative fix to expand assessibility of ACA insurance. Now, I personally believe that there will be a legislative fix. So that's one of the reasons I love to completely exit the sale of [indiscernible] as we do believe in the plan period it will come back. But for purposes of our guidance and the commitments we are making, we are taking a cautious outlook.

Okay. How would you characterize pricing, both from the selling season and enrollment as you headed into this year as well as any kind of conversations you're having headed into the end of this year?

When you say pricing, do you mean commission rates?

I do.

So, in the Medicare business, no meaningful change, there were some at the margin beneficial rules coming out of CMS relative to what carriers were enabled to pay relative to administrative fees and other commissions. And as you know, the Medicare Advantage space is regulated to a large degree. The Med Supp market, the CMPM rates have continued to be attractive for us and you see that in the LTVs that we published as well. We are not seeing any meaningful change to those trends, positive or negative. We are encouraged by where things stand on the Medicare side of things. In the IFP business, it's very difficult to get paid any commissions on subsidy-eligible business, ACA business right now, and we are working with the carriers with whom we work in the non-ACA space to get us as strong a commission trend as possible. We expect that those trends will continue to go up, again particularly on the short-term products as you get higher-priced products based on a longer-term lifetime value of the short-term products as they come into the market in the back half of the year. We expect to see improvements there. But generally speaking, commission trends are not a concern for us right now. Things are stable to improving at the margin.

Thanks. One last question for me, what is the cash flow or burn associated with this year's CAGR?

So, we mentioned that one the Q4 call that we expect to have operating cash flow in the negative 8.5 million to negative 9.5 million range. Do you have the exact, I think we said we were just under 10 from a CapEx perspective.

And the first quarter was a little better than we anticipated from a cash standpoint.

Okay. Thank you.

Thank you and I am showing no further questions in the queue. So, now at this time I'd like to hand the conference back over to Mr. Scott Flanders, Chief Executive Officer, for some closing comments or remarks.

Thank you everyone for participating and we are available for follow-up calls to schedule through K. Thank you.

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.