eHealth, Inc. (EHTH) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the eHealth Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later there will be a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to 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 second quarter 2018 financial results. On the call this afternoon, we'll have Scott Flanders, eHealth's Chief Executive Officer; Dave Francis, eHealth's Chief Operating Officer; and Derek Yung, Chief Financial Officer. After management completes its remarks, we'll open the lines for questions. As a reminder, today's conference call is being recorded and webcast from the IR section of our 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 our strategy for growth in the upcoming Medicare Annual Enrollment Period, contributions from our strategic partner channel, our marketing efforts including our direct to consumer marketing initiatives, our expectations regarding online enrollment, customer volumes, cost of acquisitions and conversion rates, our expectation for submitted and approved applications, performance of our Medicare and individual businesses, excepted demand for short-term and non-ACA products, the priorities and growth in our small growth business, our expectation for sales force extension, our customer retention initiative, lifetime value for our short-term products and expected legislation, leading to the duration of short-term plans, all plans relating to debt financing, our revenue and earnings expectations for the third quarter and our guidance for 2018, including our guidance for total revenue, segment revenue and profit, adjusted EBITDA, corporate share service expensive, GAAP net income, GAAP net income per share, non-GAAP net income per share and adjusted EBITDA per share. Forward looking statements on this call represents eHealth's views as 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 the 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 described these and other risks and uncertainties 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 Web site or from the Investor Relations section of our Web site. We will be presenting certain financial measures on this call that are considered non-GAAP under SEC Regulation G. For reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included in our press release and in our SEC filings, which can be found in the About Us section of our corporate Web site, under the heading, Investor Relations. And at this point, I will turn the call over to Scott Flanders.

Thank you, Kate and welcome everyone. During the second quarter, we made significant progress in preparing our Medicare business for what we believe will be the strongest selling season in eHealth’s history. Our portfolio of strategic partner is now broader and more diversify compared to a year-ago, which should allow us to drive higher customer volumes and reduce execution risk. We also tested a range of direct to consumer marketing initiatives across direct response television, direct mail and digital channels. And believe these efforts will allow us to better optimize Medicare customer volume at an attractive cost of acquisition, adding to expected growth in the partner channel. Our second quarter accomplishments also include further improvements and the effectiveness of our sales organization; another meaningful year-over-year reduction in marketing cost per approved Medicare member; and a higher contribution from online enrollment, which we believe represents the future of the Medicare market and for which eHealth is uniquely positioned to become the market leader. In the under 65 market, we generated year-over-year growth in approved members for the first time in over two years, reflecting a new focus on short term plans designed to meet the needs of Americans who continue to face rising premiums and a limited selection of major medical insurance products. We plan to continue to emphasize short-term and other non-ACA products in the absence of a much needed legislative fix for the individual and major medical insurance market. Finally, our small group business had another great quarter with a number of approved groups increasing 25% year-over-year, while acquisition cost per application declined, reflecting better conversion rates. Second quarter revenue was $32.7 million. Our adjusted EBITDA was negative $10.1 million. GAAP net loss per share was $0.63. And non-GAAP net loss per share was $0.40. Cash flow from operations was negative $300,000, bringing our cash balance as of June 30th to $30.8 million. Our total commission receivable balance was $267 million as of quarter end. Dave Francis will go over our second quarter financial results in greater detail later on the call. In our Medicare business, submitted applications grew 8% and revenue grew 5%, while variable marketing costs per approved member declined 19% compared to the second quarter of last year. During this seasonally slower quarter in the Medicare market, we focus on our marketing and sales strategies to optimize the quality of demand that we generate and enhance conversions as we prepare for the critical annual enrollment period in the fourth quarter. I am pleased to report that we have made significant progress in this area. Conversion rates within our sales organization were up by 25% compared to a year ago. In the second quarter, our customer care professionals answered 100,000 fewer calls compared to a year ago, while at the same time, increasing the number of applications they've submitted. A great achievement reflecting higher league quality and improved call center efficiencies. In addition, we increased the number of online applications submitted. In the second quarter, over 9% of Medicare Advantage applications were submitted online, a 59% increase compared to the second quarter of last year. For all Medicare products, including prescription drug plan, 15 were submitted online, a 28% increase compared to a year ago. This is a positive dynamic given that these enrollments are usually generated with a lower, or in some cases, no agent costs, leading to higher return on our marketing spend and increased scalability of the business. Most importantly, it signals to us that seniors are increasingly comfortable researching Medicare plans and enrolling online if they have the right platform and tools. eHealth is well positioned to take advantage of what we believe will be a major shift of Medicare customers to migrate online over the next several years. As we have shared with you in the past, our strategic partner channel is expected to be a significant contributor of our projected enrollment growth during the upcoming Medicare Annual Enrollment Period that starts on October 15th. We have a great roster of partners in the hospital, pharmacy and insurance carrier segments of the market, including four out of the five largest retail pharmacies in the country ranked by the number of pharmacists. Our business development team is working closely with existing partners to ensure that we are well aligned for successful Annual Enrollment Period execution. We also continue to add new partners. Just in the past few months, we signed partnership agreements with a number of major hospital and provider networks, including Cedars-Sinai, Advocate Health System, Steward Health System, Privia Health, and Orlando Health System. In addition to the provider and pharmacy channel, we continue to build out our affiliate partner network, adding Gallagher Affinity as an important new relationship for eHealth. Gallagher is an industry leader in program administration and Affinity Marketing. They market and manage insurance and other member benefits for over 250 affinity groups across the U.S., including some of the largest and most iconic organizations in the country, such as the ALS Association and the National Small Business Association. eHealth will have access to market and sell Medicare Supplement, individual Medicare Advantage and prescription drug plans to those members of Gallagher Affinity groups that turn 65 every year. During the quarter, we tested new marketing strategies in the direct and paid search channels ahead of the Annual Enrollment Period. The direct channel represented 50% of our second quarter Medicare enrollments, up from 29% a year ago, reflecting our strategic shift away from the costly and lower quality lead aggregator channels. During the quarter, we continued to invest in our in-house direct response TV initiatives and test out new creative concepts and network options. We also started to scale our direct mail initiative, which is generating high quality customer volume on an increasingly attractive cost basis. In the search engine marketing channel, we continue to increase investments as our new digital marketing team demonstrates its ability to drive high quality customer engagement at a low cost. Importantly, our paid search efforts to attract customers whose tendency is to enroll more frequently over the Internet rather than the telephone. Finally, I'd like to remind you that the contribution from our strategic partner channel is typically moderate in the first half of the year when growth is driven primarily by direct to consumer strategy. Strategic partners typically deploy their marketing budgets around their main selling season that takes place in the fourth quarter. We continue to expect an acceleration and submitted Medicare application growth in the second half of the year as our partner channel contribution increases, with the fourth quarter being the strongest quarter in terms of Medicare product application volumes and growth rates. The individual market remains challenged as premiums for Obama Care plans continue to increase with another 15% average rate height expected for next year. At the same time, we are seeing growing demand for non-ACA products, which tend to be more affordable for an increasing number of consumers impacted by the premium inflation. We have refocused our marketing efforts on this part of the under 65 market as discussed in our first quarter earnings call. In the second quarter, approved members on short term plans grew 41% year-over-year. This performance allowed us to post annual growth in total approved members in the under 65 market, including major medical and short term products for the first time in over two years. We are very pleased with this return to growth in the under 65 business. More importantly, we are excited to better serve our company mission through a broader offering of viable health insurance solutions to consumers who cannot afford major medical coverage. While the coverage offered by non-ACA products is typically not as comprehensive compared to Obama Care plans, these products do provide the benefits our customers tell us they want the most. Office visits and emergency room coverage, reasonable co-pays and deductibles and limited prescription drug coverage. We're also experiencing significant attach rates for dental, vision and gap coverage. The second quarter approved members on major medical products declined 57% compared to a year ago. In addition to a challenging market environment, the year-over-year decline in major medical enrollments also reflects our decision to shift our marketing spend towards non-ACA products. Total approved members in the individual market, consisting of IFP and short term plans grew 9% compared to the second quarter of 2017. Going forward, we believe the demand for non-ACA health insurance will further increase within the next 12 months due to the elimination of the financial penalty associated with the Affordable Care Act, individual mandate, and the Trump administrations’ expected reversal of a regulation that limited the duration of short term health insurance to three months. Our team is working on adding more quality, reasonably priced products to our short term plan inventory and fine tuning our marketing approach to more fully capitalize on this trend. We also remain committed to the subsidy eligible market, and we'll be marketing major medical products during the open enrollment period in the fourth quarter. Turning to the small business market, we continue to see robust growth and demand and improved application growth, accompanied by meaningful progress across important operating metrics. The number of approved groups grew 25% compared to the second quarter of 2017. Commission revenue increased 16% over the same period last year. Our small group team has achieved 19% year over year improvement in conversion rates, and experienced a solid uptick in retention rates driven by strong performance of our sales center. The acquisition costs for small group application declined 48% year-over-year. In addition, we're selling more ancillary products to our small group customers with new small group ancillary product enrollments growing over 90% in the second quarter. Finally, we continue to make progress in building out a digital business platform to enable customers to shop and enroll their employee online bringing significant innovation to the market. We continue to be very excited about the progress and potential for growth in the small business market. In conclusion, our focus as a company in the seasonally slower second and third quarters of the year is to prepare and optimize the business for the critical selling seasons in the fourth quarter. This year’s annual enrollment period will be critical and proving out our new Medicare marketing strategy and our ability to deliver strong Medicare enrollment growth at acquisition costs that represent a meaningful improvement to historical levels. In the first half of 2018, we made significant progress in lining up five key ingredients for making this AEP a success. Number one, we expanded our marketing partner network with several important relationships that are expected to launch prior to the fourth quarter. Two, we have tested a range of direct-to-consumer marketing initiatives to ensure that we deploy our marketing budget in an effective and cost efficient way during the selling season. Three, to drive higher sales volumes, we are putting in place a larger sales force, but a more flexible model comprised of our core customer care team supported by two high quality outsourced call centers that will be on hand to convert demand during peak enrollment times. Four, our efforts to drive more customers who are improved online enrollment tool is expected to provide greater scale and customer benefit. And finally, we have launched a number of customer retention initiatives to mitigate customer leakage immediately following a new sale and to create greater long-term customer engagement to cement our relationship with our customers. On this last point, higher retention rates are important driver of our revenue and profit margin potential as they positively impact the expected lifetime value of the new enrollment. We are excited about the potential of each of these initiatives for both our fourth quarter and long-term financial performance. We are also optimistic about the potential for our non-ACA sales activity in the second half of the year, based on what we observed in the second quarter and so far in July. Our expectations for the individual market overall remain very conservative. But the reason traction we are seeing with the non-ACA opportunity is encouraging. Overall, we are pleased with our recent execution and remain committed to the annual guidance that we provided on the last earnings call. Finally, I am pleased to introduce our new CFO, Derek Yung, who joined eHealth last month. Prior to joining eHealth, Derek served as CFO of Hotwire, a subsidiary of Expedia. He brings significant experience in leading finance, strategy and analytics functions at a leading company in online travel, an industry that has similar dynamics to ours and we are very excited to have him on-board. Dave Francis remains in the role of Chief Operating Officer. And with Derek’s arrival, we’ll be able to focus on the revenue and operational imperatives of the business. Dave who is working closely with Derek during this transition will go over our second quarter financial results today. And with that, I will turn the call over to Dave.

Thanks Scott and good afternoon, everyone. I’d like to add my words of welcome to Derek Yung, and note the strong impact that he has already made on the business in the short time since his arrival, he’s a great addition to our executive leadership team. Our second quarter financial results reflect the significant work being done to prepare eHealth for the upcoming Annual Enrollment Period, or AEP. We remain in a strong position to achieve our Medicare enrollment goals and overall financial guidance for the year. We also successfully captured growth opportunities in the small group market and the non-ACA segment of the individual market with our approved members on IFP and short-term products combined, increasing for the first time in over two years. Before I cover the financials in detail, I want to make a general comment on our second quarter results. As we discussed on our last earnings call, we expected a sequential decline in our second quarter revenue, reflecting the seasonality of our business. The actual decline was slightly more pronounced compared to our expectations, driven by two key factors. First, we undertook activities to streamline and optimize our Medicare telesales organization, including the closure of our Westford, Massachusetts sales center and aggressive investments to expand the sales organization of the recently acquired GoMedigap Medicare Supplement business, which impacted Medicare sales and enrollment activity in the second quarter. In addition, we made a conscious decision in the quarter to conduct extensive testing of our marketing strategies, especially in the area of direct to consumer marketing to optimize enrollment volume, product mix, channel mix, and acquisition costs in preparation for the fourth quarter selling season. The impact of these marketing tests was to marginally reduce Medicare enrollments in the quarter. Both of these factors resulted from purposeful operational decisions we made in the first half of the year to put us in a stronger position for the upcoming AEP and their overall impact on annual enrollments and COAs is expected to be positive this year despite their negative impact on second quarter results. As we complete preparations for the Q4 selling season, we will be investing to add significant additional internal sales staff in the third quarter, as well as ramping up our outsourced sales partners to prepare for the October 15th start of AEP. As a result, we will have a significantly larger and more flexible sales force during the AEP to drive greater conversion of the anticipated sales and enrollment volumes that our marketing strategies and extensive partner relationships are expected to generate. Turning now to our financial results, keep in mind that all current and prior period results are based on the new ASC 606 accounting standard adopted on January 1st of this year. Second quarter revenue was $32.7 million, a decline of 6% compared to the second quarter of 2017. Second quarter commission revenue was $30.6 million, also a 6% decline compared to the second quarter a year ago. In the Medicare segment, our second quarter revenue of $25.5 million grew 5% compared to the second quarter of 2017, driven primarily by growth in approved Medicare members and an increase in non- commission revenue. During the quarter, we grew our submitted Medicare applications by 8% compared to the second quarter a year ago, while approved members grew slower at 1% rate, driven largely by a shift in mix of Medicare Advantage customers. Our estimated number of Medicare members was 393,937 at the end of the second quarter, an increase of 31% compared to the estimated Medicare membership at the end of the second quarter 2017. Second quarter loss from our Medicare segment was $1.5 million compared to loss of $2 million for the second quarter of 2017, reflecting the aforementioned marketing tests and increased investment and sales resources at GoMedigap. In the first half of the year, our Medicare segment profit was $1.7 million compared to a loss of $2.9 million in the first half of 2017. Second quarter 2018 revenue from our individual family and small business segment was $7.2 million, a decline of 31% compared to a year ago, driven by a 67% decline in approved members on major medical individual and family plans, which was partially offset by growth and commission revenue from sales of our short-term products. Including these products, our total approved member growth in the individual market was 9%. Short-term products, which represent the majority of our non-ACA enrollments, have a lower projected lifetime value compared to major medical products driven primarily by their expected duration. As a result, growth across all approved individual products during the quarter was not sufficient to offset the revenue impact from the product mix shift toward non-ACA products. Going forward, we plan to continue to increase our non-ACA enrollment volumes and could also see an increase in short term product lifetime value starting in 2019 as current restrictions that limit short term plan duration to three months are expected to be lifted. We believe this would result in a more meaningful revenue impact from our non-ACA initiative in the individual market, starting in 2019. Commission revenue generated by our small business group grew 16% year-over-year. The second quarter loss from our individual family and small business segment was $0.6 million compared to a segment profit of $2.1 million in the second quarter of last year. While the IFP segment on the whole was unprofitable in the quarter, the IFP business on a standalone basis remained profitable. Our estimated individual and family plan membership at the end of the second quarter was 168,278, down 31% compared to the estimated membership we reported at the end of the second quarter a year ago. We also had approximately 17,000 members on short term plans at the end of the second quarter. The estimated number of members on small business products is approximately 37,000 at the end of the quarter, a 19% increase compared to the second quarter a year ago. Second quarter non-GAAP operating costs of $43.4 million, which exclude stock-based compensation, change in fair value of an earn-out liability of $2.5 million, restructuring charges, acquisition costs and amortization of intangibles, grew 3% or roughly $1.2 million, an increase as a percentage of revenue compared to the second quarter a year ago. Second quarter 2018 non-GAAP marketing and advertising expense, which excludes stock based compensation expense, was roughly flat year-over-year, reflecting a decline in Medicare related variable marketing costs and an offsetting increase in our marketing spend related to growth opportunities in the small group and short term markets. In the Medicare business, our acquisition costs per approved application declined 19% compared to a year ago. In the individual business, we increased our marketing spend around non-ACA compliant plans, including short term products and package benefits to capture what we see as meaningful and growing consumer demand for more affordable alternatives to major medical plans. Second quarter 2018 non-GAAP customer care enrollment expense, which excludes stock based compensation, increased by approximately $1.1 million and increased as a percentage of revenue compared to the second quarter of 2017. This increase was driven primarily by the increased sales investments at GoMedigap mentioned previously. Second quarter non-GAAP tech and content costs, which excludes stock based compensation and non-GAAP general and administrative expense, which excludes stock based compensation and amortization of intangibles, were each roughly flat compared to the second quarter of 2017. Adjusted EBITDA for the second quarter of 2018 was negative $10.1 million compared to negative $6.9 million for the second quarter of 2017. We calculate adjusted EBITDA by adding back stock-based compensation, change in fair value of earn-out liability, depreciation and amortization, including the amortization of acquired intangibles, acquisition costs, restructuring charges, other income or expense and income tax benefit to our GAAP net operating income. Second quarter 2018 GAAP net loss per diluted share was $0.63 compared to a net loss per diluted share of $0.08 for the second quarter of 2017. Non-GAAP net loss per diluted share was $0.40 compared to net income of $0.01 per diluted share for the second quarter of 2017. Our second quarter 2018 cash flow from operations was negative $300,000. Capital expenditures for the second quarter of 2018 were approximately $2.7 million. Our quarter end cash balance was $30.8 million and our commission receivable balance was $267 million. As we have previously discussed, we are working to augment our balance sheet by adding a line of credit to provide us with additional operational flexibility as we continue to grow the business. As an update, we are currently in the process of negotiating $40 million secure revolving credit facility with a third-party, and hope to complete this process in the next several weeks. Since these negotiations are ongoing and may or may not resolve in the closing, there can be no assurances that we will successfully put this credit facility in place. With respect to guidance and based on information currently available, we are reaffirming the revenue, adjusted EBITDA, segment revenue and profitability and earnings per share guidance for the full year 2018 that we provided on our first quarter 2018 earnings call. With respect to sequential quarterly trends, the third quarter is also a traditionally slower quarter across all three of our business segments. Nonetheless, we expect for our Medicare approved member and commission revenue growth to begin to reaccelerate in the third quarter as we conclude our marketing tests and start ramping our agent headcount in preparation for the AEP. Despite the expected sequential increase in third quarter revenues, our EBITDA is expected to remain roughly flat compared to Q2, reflecting new Asian hires. During the fourth quarter, when the selling season in the Medicare and individual markets takes place, we expect to see the highest revenue and enrollment growth of the year, as well as significant profitability, both on an EBITDA and a GAAP EPS basis. I want to remind you that these comments are based on current indications for our business, which are subject to change at any time. We undertake no obligation to further update our guidance. And now we’ll open the call for questions. Operator?

Thank you [Operator Instructions]. Our first question comes from Dave Styblo with Jefferies. Your line is open.

Just want to talk a little bit about the 2Q results to start with. And so the revenue shortfall and I guess EBITDA and what the industry we’re looking for, sound like it was more of a self-imposed optimization process ahead of Medicare open enrollment. Can you discus, I know you touched upon a few of those items. But can you talk a little bit more about what you guys were doing, what you learned through that testing and how quickly you can put into action those things that you learned?

As I mentioned in prepared remarks, there were a number of optimization efforts that comes into play in terms of our Q2 execution. And really what two focus areas, as Scott and both Dave described, one around marketing and one around our sales call center. On marketing, we’ve been embarking on a shift in marketing strategy to move away from costly lead aggregators to direct consumer marketing and also partner channels. And in a quarter we did a number of tests to optimize our marketing in terms of volumes, product mix and channel mix and that impacted our volumes. In particular, we set very aggressive goals for the quarter in order to push the boundaries of what we expect out of those channels in preparation for AEP. The second point is around our sales and call center efficiency and operations. We as mentioned, had closed our Westford, Massachusetts call center and also invested heavily into our call center sales agents as part of our GoMedigap acquisition and integration. And those efforts drove our costs and also efficiency in the quarter to -- that also impacted our enrollments. So both those things are things that we consciously pursue in terms of preparation for the quarter, and we expect those to actually bear fruit as we enter into Annual Enrollment period.

And as you go through and you’re concluding what you've -- those tests that you've done. Is it creating a shift in strategy and how the channels that you're going to go to market into, or other aspects that just could help improve the demand and conversions?

So I’ll answer it this way, Dave. On the marketing side, we wanted to push the envelope on a couple of new channels on that DTC side, so specifically on the direct marketing the digital side of things where we were trying to find the perfect balance of driving the right volume at a very aggressively lower COA, that have the impact of constraining to a certain degree, the volume of customers that came into the sales organization. At the same time, as we were looking to trim some of the fat and specifically our least well performing of our three Medicare sale centers and exited that Westford facility, we ended up -- cutting it a little bit too close to the bone relative to production in the quarter. All of that is being from a production perspective is being right-sized right now relative to both in sourced and outsource production capabilities, and taking the learnings from those marketing tests to make sure that we are in good shape going into the October selling season. So we're able to flip the learnings that we've taken here into what we believe will be much better optimization as we get deeper into the second half of the year. And certainly, by the time the bell rings on October 15th.

Okay, that's helpful. And then in advance of that open enrollment. Can you talk a little bit more about the partnerships you guys have landed quite a few? And at one point, we knew a couple of the numbers, I think, for Union Plus, there's a captive audience was 25,000 seniors aging into Medicare a month and Union Plus -- an AGI I think was 15,000. So how big is your audience that you have an ability to directly market to at this point? And what have you been able to do to get things in order so that you can maximize those partner channels?

The number of customers that we ultimately can outreach to is well over a million through all of these different marketing partnerships. Now, the question is how do you turn those potential customers into true leads and ultimately get them to convert. And that's where some of the work that we were doing on the marketing side was working to optimize some of these partner relationships as well. We expect the Union Plus side to perform better for us this year. We believe this new Gallagher relationship is going to be a good first step for us. But if you if you look at the breadth of the partnership channel for us, this year relative to where we were last year, I think the important point to make is the portfolio nature that we have been able to create this year relative to meaningful reliance on one or two partners last year. So we think that we've significantly improved both the risk profile and our ability to execute relative to the broader partner channel and take advantage of both the quality of customer and the attractive cost of acquisition of each of those customers through the partner channel than we were in a position to last year.

And my last one is just on the IFP business, so continue to see attrition there, which I guess isn't surprising but it was -- I think it was down, membership was down 8% sequentially. There's a little bit worse than we were thinking would be. Again, is there -- I think this business is free cash flow positive for you still and probably still subsidizing the Medicare business. Wanted to know if that's still true? And secondly, is there anything else that you can do to stem the attrition here? Obviously, you're trying to work on the short term plans but sounds like you’re making some good progress there. But what else can be done on this side of the business to sustain the cash flows that are thrown off from this business?

We really see the model evolving where the mix shift is away from the ACA compliant plans, because of the high premium at 95 plus percent of the customers who reach out to us outside of OEP cannot afford an ACA compliant plan unless they have a full subsidy. And so we've been slow to react to that marketplace reality, that's why we were very encouraged by the success in Q2. We think that that's only going to accelerate as the duration is extended as expected to 364 days by the Trump administration. And with the mandate humbly going away January 1, we are ramping up our marketing. We want to be a lot more effective and efficient closing the organic search that we generate with the short term plans, because we were pushing every inbound organic search customer down the path of trying to sell their major medical. And we were just having exceptionally low conversion rates, because of the affordability issue. So we're seeing a mix shift here. We don't have a long life to these members it's about 2.5 months today, because the duration or short term is only 90 days. So we think that can easily double once we have the 364 days duration restored, which we're expecting a news of that any day. These are cash flow positive very quickly. The return on investment is not like Medicare with a two year payback period, it’s much shorter. So it's favorable from a cash flow and from an earning standpoint.

And the only thing I would add, Dave, is that we were very pleased with the turn that we've seen in terms of enrollment activity with our new focus on short term. And we think that that provides us a lot of lever points to be adding additional products there as we refine our -- both our digital marketing and our overall sales strategy and that business, we're pleased with how that's performed so far this quarter as well. And again, this is a meaningful turning point for us relative to the downward trajectory that we've seen in that business. And we think that we're setting up for a lot more success than we've had in the past in that business, going forward.

Thank you. Our next question comes from Tobey Sommer with SunTrust. Your line is open.

Can you start off by maybe giving us a little bit more color on what I think you described as the variance in the growth rates between Medicare applications and approvals? If same -- the factors that…

The key one there was a higher mix of what called D-SNP, or dual eligible Medicare advantage customers. These are lower income -- called dual eligible because they can apply for both Medicare and Medicaid. And getting those folks into the right Medicare advantage product has a meaningful impact on those customers from both a cost and a care management perspective. They are also a little bit more involved from enrollment perspective, because you have to get both the Medicare and the Medicaid information to the carrier, the carrier has to process it correctly on the backend. And the result of the increased mix of that slightly more challenging to enroll customer, resulted in a marginally lower move for us to move from submitted application to approved application in the quarter. A couple of things that we are focused on the backend of our process is to minimize that fallout on a go forward basis, because this is a key market segment for us within the Medicare market. And we’re working with several carriers on specific plans to go out and help them convert more of those customers. But as related to this specific quarter and the relatively low volumes in the second quarter to begin with, the impact of that marginal mix shift was more pronounced in the quarter and hence the disconnect as you saw there between submitted and approved applications.

One more thing to add is, we actually like these, because they are sold throughout the year. And the market for dual eligible is quite large around 10 million. And then from -- how we get compensated perspective, is similar to M&A plan, regular standard M&A plan so there’s no differences in unit economics.

Could you describe the new retention tools you’re putting in place? I’m curious if these are more financial and change that on your profitability of renewing customers?

I would put the retention efforts generally into two categories. One for making sure that near-term retention, in terms of sales that we’ve made that we keep them in the boat past what is called a rapid disenrollment or early cancellation period, so it’s first 90 days post sale. And there are -- that is primarily an operational thing on our end to make sure that both our systems and our communication back and forth with the carriers is put together in as frictionless and complete a process as possible. That is an area that quite frankly the company has not focused on historically. And the opportunity for us to significantly improve retention rates in that 90-day period post sale are both substantial and reflects a lot of near-term opportunity that we are very much focused on at the moment. No incremental cost associated with that opportunity. And to the extent that we’re successful in meaningfully changing that amount of churn, that will ultimately reflect in meaningfully higher LTVs for Medicare customers in the relatively near future. The second piece of the retention pie that we’re going after is that post 90 days, so more of a relational aspect with customers. Here again, an area that the company has historically not placed much of any focus on in terms of proving out the value proposition that we as a company have and continuing to help that customer manage their Medicare insurance purchase and to basically make sure that they are in the right plan at whatever point they are in their life or economic cycle, and to keep them as eHealth customers throughout that process, rather than going elsewhere to buy another plan when things change for them. Here again, a very small investment, well under a million dollars, for us to put some of the technology and other high value engagement tools in place to help these folks recognize that eHealth is a valuable part of their insurance purchasing and management process and keeping them in the boat. That's one that will take a little bit longer for us to get the payback on, simply because it will take longer to prove out and we show that people stay in our book for a longer period of time. But one where, again, we think there's a very significant return on investment opportunity for us is any extension and persistency in our book is new revenue and revenue that flows virtually all through the bottom line.

Just two more from me and I’ll get back in the queue. When do you expect the company to be cash flow positive on a shareholder basis? And then I understand that the IFP markets, there are some perspective changes in the works. But given that we maybe describe the market in those terms in recent years just for the changes not to manifest themselves in a positive way. I'm curious how you come to a conclusion to plan for doing -- materializing when history says they don't?

You're breaking up a little bit on the second part. So I think I piece the question together, I'll answer that one first. We continue to believe that the IFP marketplace is one that has; by virtue simply the fact that there's still multiple eight figures of customers in that marketplace; even though it is turbulent; even though it is transient; a significant number, well over 15 million customers that are in need of non-ACA products to help them meet their health insurance needs in the marketplace; and that we have simply, over the last couple of years, not done as good a job as we can; and are now beginning to get some traction on serving those customers with the right products, at the right price point and engaging with them in the best manner to help them. We have some additional things that we are working on to further improve that part of the business for us. But the numbers tell us that there is still significant opportunity for us in that marketplace, leveraging the tools and the technology infrastructure that we have established in the marketplace, as well as our brand name there. So we're pleased with the turn and enrollment here and are still firmly committed to that marketplace, and it remains profitable for us. On the cash flow question, we've not provided guidance for next year. I do believe that we have commented previously though that we expect to be operating cash flow positive next year. We haven't set budgets for 2019 yet. So I can't tell you much more than that. But to tell you that we’re pleased with our operating trajectory relative to use of cash.

Thank you. Our next question comes from George Sutton with Craig Hallum. Your line is open.

You referred couple of times to a more flexible model relative to a larger sales force. I wondered if you could explain what you mean by that exactly.

So as we went into AEP last year, we had access to 425 agents that were trained, licensed and appointed. And this year, between our three call centers and Gold River near Sacramento, and Salt Lake City and in Austin, coupled with the two outsourced operations, we will have 975 agents. And so we will not be -- the last year, we were significantly peak load limited. This year we anticipate being able to serve the vast majority of the customers calling us even in the busiest times.

And I would add that, from a flexibility perspective, the outsource folks there not only allow us to put on sale agents that we don't have to carry throughout the year and what have you, but the way that our head of sales who's got over a dozen years of having managed models like this at healthcare, the way he set this up is that the flexibility comes in during those peak times of the day that Scott mentioned, we're able to bring people on a part time basis, fully licensed and available to sell. So that we're not carrying all of those 900 plus agents throughout the entire day, throughout the entire selling fees but really turning them on and turning them off as we need them. As the model show us, we will need to be able to handle that volume. So we expect to be able to serve a peak number close to an optimal number of customers that we expect to drive into our platform throughout the selling season. Q – George Sutton: Simple math suggests, given the Q2 was a shortfall, but you are reiterating guidance for the year that you're frankly even a little more optimistic about particularly Q4. Is that a reasonable conclusion?

I’d say, yes. We were a bit over our plan in Q1 and we are little bit below our plan in Q2, largely on track, a bit light in revenue and a bit ahead in adjusted EBITDA; and so the first half is not that critical from an overall performance standpoint. What's encouraging is where we're seeing COAs come in. We're seeing the agent hiring and training on track, and the outsource partners coming up and we'll be online. And so we have a high degree of confidence that our guidance is fully in place.

And the volume side of this, we talk a lot about the work in the partner channel, in particular being the first quarter of the year is heavy on selling those partners. The second quarter of the year is heavy on closing those partners and along with the marketing tests that we undertook in the second quarter, getting the whole volume side of the equation set up and align correctly relative to the production side that Scott just mentioned. All of that came in as expected, if not better. So we're comfortable with the guidance as it stands right now.

Lastly, Scott, you mentioned -- you are expecting any day that we could move to 364 days for short term. Obviously, you and I have both thought the same thing for a few months. So I'm curious, is anything changed from your perspective or is there an easy explanation as to why it’s taken a little longer?

Our speculation is there could have been consideration in the administration for an implementation of mandatory renewability, which would have increased the cost of short-term by potentially 2x. We believe, because the rule has been submitted to the Congressional Budget Office that that has been resolved, and so that we really are in the final day. It won’t be before release but one question that there’s a lot of bid and ask around the table is whether the effective date for the…

Implementation…

So the implementation date is unknown of course, but we still expect it anytime. But the one opening question is whether it will be effective for this OEP or take effect on January 1st. And there’s an evenly divided split in the company as to the handicapping of what happens there.

Thank you. And I’m currently showing no other questions at this time. I’d like to turn the call back over Scott Flanders for closing remarks.

Thank you, everyone. We look forward to catching up with you individually as your schedules permit.