eHealth, Inc. (EHTH) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 and Full Year 2018 eHealth Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, 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 2018 financial results. On the call this afternoon, we'll have Scott Flanders, eHealth's Chief Executive Officer; and Derek Yung, Chief Financial Officer. After management completes its remarks, we'll open the line 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 include statements regarding future events, beliefs and expectations, including statements relating to our expectations regarding special opportunity in the Medicare market; Medicare enrollment growth; plan applications growth; our share of total Medicare enrollments; growth in online enrollments; and our investment in the Medicare business; our expectations regarding our individual and family plan business, including our ability to leverage our technology platform and brand; the profitability of our Medicare and individual and family plan business; seasonal patterns conversion rates and acquisition costs; and finally our 2019 full year guidance and our ability to deliver on our guidance. Forward-looking statements on this call represent 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 describe 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 website or from the Investor Relations section of our website. 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 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. 2018 was a defining year for eHealth in validating our vision and growth strategy for the Medicare market. We delivered the strongest Medicare annual enrollment period in the Company's history, achieved a number of important executional milestones and reported financial results, which significantly exceeded our expectations. I am proud of these accomplishments. One of my strategic priorities after becoming the CEO, 2.5 years ago was to position eHealth for strong and sustainable growth in the Medicare market on a foundation that provided for scalability and margin expansion. Over the past two years, we've worked toward this goal and made significant changes across the Company's operations including an overhaul of our marketing organization and enhanced scale and effectiveness of our sales organization. The 2018 Medicare annual enrollment period in the fourth quarter of 2018 was an important test of our vision and strength of execution. Our 2018 target was to grow submitted Medicare applications by 25% for the full year applying an ambitious goal of approximately 40% growth for the fourth quarter. I am pleased to report that we significantly surpassed these targets growing 39% for the full year and 64% in the fourth quarter. Importantly, we were able to achieve these results while also expanding our operating margins resulting in 175% growth in our Medicare segment profit for the full year 2018, compared to a year ago, a significant upside to our expectations. Despite these accomplishments, I believe that we are still in the very early stages of capturing a significant expansion opportunity in the Medicare market. Our overall addressable market is growing driven by favorable demographic trends and an increasingly popularity of private Medicare plans. Most importantly, we see eHealth as uniquely positioned to take advantage of an ongoing shift towards the Internet as a preferred channel for seniors to research and enroll into Medicare plans. This represents an attractive opportunity for us given our strong technology capabilities and limited direct online competition. eHealth currently represents just 1% of total Medicare enrollments based on the number of our estimated Medicare members as of the end of 2018, a share that we plan to expand as we execute on our growth plan. For the full year of 2018, eHealth generated revenue of $251.4 million or 32% annual growth and adjusted EBITDA of $33.7 million, 610% annual growth. Net income was $0.2 million. Revenue for the fourth quarter was $134.9 million, adjusted EBITDA was $51.9 million and net income was $26.1 million. We are off to a strong start in 2019 and expect to maintain this momentum as reflected in our 2019 annual guidance. In the fourth quarter, our Medicare business performed strongly with broad-based enrollment growth across all product categories and multiple customer acquisition channels. Fourth quarter Medicare Advantage applications grew 51%, Medicare supplement applications grew 122% and prescription drug plan applications 75% compared to the fourth quarter a year ago. Fourth quarter Medicare revenue grew 74% year-over-year driven by strong enrollments as well as an increase in non-commission revenues. Our Medicare segment represented 90% of our total fourth quarter revenue reflecting our successful pivot towards this important market. Driving online enrollment is a critical element of our Medicare growth strategy. In the fourth quarter, 22% of our Medicare Advantage and Medicare Supplement plan applications were submitted online, a 69% increase compared to the fourth quarter a year ago. In absolute terms, the number of Medicare Advantage and Medicare Supplement plan applications submitted online grew 170% over the same time period. Our back-office integrations with leading Medicare carriers and ability to offer consumers a start-to-finish online enrollment experience provides for meaningful competitive differentiation. Driving more enrollments online also allows us to significantly reduce our total acquisition costs per member an important point that Derek will elaborate on later in the call. Finally, online enrollment makes our business model much more scalable allowing us to grow enrollments without a linear increase in agent headcount. Over the past 12 months we have also made significant progress in developing our direct-to-consumer marketing capabilities bringing the majority of our customer acquisition programs in-house and reducing reliance on agencies, lead aggregators and other third-party sources. The percentage of our submitted applications for Medicare Advantage and Medicare Supplement plans generated from direct channels such as; direct-response television, paid search, organic search and direct mail has increased from 32% in the fourth quarter of 2016 to 71% in the fourth quarter of 2018. As a result during the annual enrollment period, we were one, more flexible in testing and fine-tuning our customer acquisition strategies to maximize their effectiveness. Two, had more control over member acquisition costs, while aggressively driving demand to our platform. And three, achieved a greater degree of coordination between our demand generation and our call center and fulfillment activities. Finally, the flexible call center model that we deployed at scale for the first time at the last annual enrollment period performed well. The Medicare market is highly seasonal with a large share of annual enrollments condensed into the eight weeks of the annual enrollment period and further characterized by uneven demand levels with large spikes occurring periodically. Our flexible call center model combined with a higher degree of coordination between our marketing and customer care organizations increased our effectiveness in fulfilling peak demand enhanced customer experience by reducing wait times and was an important contributor to our strong enrollment growth in the quarter. While Medicare is at the center of our growth strategy and its contribution to our total enrollments revenue and profitability continues to increase, we see a benefit in maintaining a diversified portfolio of products. In addition to group plans targeting the small business market and major medical individual and family plans, we offer a variety of ancillary products including dental, vision, accident insurance and short-term plans. This allows us to provide a broad range of coverage to our customers, leverage our technology platform and brand and have access to new areas of growth and expansion in the continuously evolving competitive and regulatory environment. Fourth quarter revenue in our individual and family and small business segment was up 1% relative to the same quarter a year ago representing a continuing decline in new individual and family plan enrollments and related sales of ancillary products offset by growth in our small business and non-commission revenue. This segment continued to be profitable in the fourth quarter and the full year 2018. We believe the small group market and especially the micro group segment is vastly underserved by traditional brokers. The enrollment process industrywide is paper-based and labor-intensive and there is a significant opportunity to leverage eHealth's advanced technology in carrier integrations to disrupt this market. In 2018 we grew the number of approved small group members 28% and delivered another significant improvement in demand conversion rates. We also successfully pursued additional carrier integrations and ended 2018 with four major carriers supported through our online application process, a capability that provides us with meaningful competitive differentiation. The sale of major medical individual and family plan products is our legacy business. eHealth's plan comparison platform was originally launched in the individual market, revolutionizing the way consumers shopped for health insurance. Despite the negative impact of the Affordable Care Act implementation in recent years and related decline in our individual and family plan enrollments, this business remains profitable with multiple operating levers at our disposal to maintain profitability even if enrollment declines persist in the near term. We maintain our individual and family plan business as an option on a potential rebound in the individual market whether as a result of constructive regulatory changes or greater proliferation of non-ACA coverage alternatives. We have had a strong start to 2019 in terms of Medicare enrollment growth and expect to maintain this momentum throughout the year. At the midpoint, our 2019 annual guidance calls for 25% Medicare revenue growth and 19% total revenue growth accompanied by further EBITDA margin expansion. Derek will go over some of the key assumptions behind our guidance in his prepared remarks, but I'd like to stress that our growth expectations in Medicare are broad-based, driven by a combination of an aggressive marketing push across multiple customer acquisition channels and enhanced scalability from completing more enrollments online. In addition to execution-driven factors, the overall Medicare market environment remains highly favorable with 10,000 seniors on average becoming Medicare-eligible every day for the next 11 years and who are increasingly turning to the Internet to explore their Medicare options. Carriers continue to pursue Medicare enrollment growth and with eHealth growing ahead of the overall Medicare market, we represent an attractive channel partner for them. Before I turn the call over to Derek, I'd like to emphasize that despite our strong 2018 performance and a strong outlook for 2019, we believe that multiple opportunities remain to scale our Medicare business and grow our share of this important market. We now have the right executive team in place to execute on our growth strategy and with the successful completion of a secondary offering last month, also have access to significant financial resources to power our growth plans.

Thanks Scott and good afternoon everyone. Last month, we provided our preliminary financial results and selected operating metrics for the fourth quarter and the full year 2018. Our Medicare business performed strongly during the annual enrollment period exceeding our expectations and pushing our 2018 revenue and adjusted EBITDA above guidance ranges. Today, we'll be providing our full results for Q4 and fiscal year 2018 and on this call I will discuss some of the key drivers behind these numbers. I will also discuss our 2019 annual guidance which includes our outlook by segment and provide some color on the expected seasonality and quarterly patterns this year. The fourth quarter capped a year of significant operational improvements and extensive testing and refinement of our marketing and sales programs as we prepared for the Medicare annual enrollment period. Our financial strategy was to significantly ramp-up our investments in marketing and sales capacity in the fourth quarter compared to the relatively moderate investments that we maintained early in the year. During the annual enrollment period, Medicare marketing investments yield significantly more enrollments per dollar spent as our channel partners deploy their marketing budgets to drive demand to our platform and customers conversions are substantially better resulting in more attractive acquisition costs. This strategy was effective, allowing us to grow our full year 2018 Medicare submitted applications by 39%, while also reducing our total acquisition costs per approved Medicare member compared to a year ago. In the Medicare business, our fourth quarter revenue of $121.6 million grew 74% and full year revenue of $210.6 million grew 48% compared to a year ago. This strong growth was driven by a combination of growth in approved Medicare members and an increase in non-commission revenues, in particular revenues generated from carrier sponsorships and sale of Medicare Elite. In the fourth quarter, we also saw an increase in member lifetime values or LTVs of our Medicare Advantage and Medicare Supplement members of 10% and 3% respectively compared to a year ago. As a reminder, under ASC 606 accounting standard, member LTVs have a direct impact on commissioned revenues that we recognize during the quarter. For the full year 2018, the Medicare segment profit increased 175% to $60.8 million. For the fourth quarter, the Medicare segment generated a profit of $58.7 million, an increase of 90% compared to the fourth quarter of 2017. The estimated number of revenue-generating Medicare members was approximately 487,000 at the end of the fourth quarter, up from the 385,000 at the end of the fourth quarter of 2017 for an increase of 26%. Fourth quarter 2018 revenue from our individual family small business segment was $13.3 million, a 1% increase compared to a year ago. Full year revenue in this segment was within our guidance range at $40.8 million or a decline of 15% compared to full year 2017. Revenue was impacted by a continuing decline in the number of approved members on ACA-compliant individual and family prime products and related declines in ancillary product enrollments. The impact of these declines was partially offset by an increase in enrollment in our small group products and higher non-commission revenue, especially as it relates to the sale of individual and family plan leads. The individual family and small business segment remained profitable on a stand-alone basis, generating segment profit of $5.8 million for the full year and $3.5 million for the fourth quarter of 2018. Our estimated individual and family plan membership at the end of the fourth quarter was approximately 152,000, down 32% compared to the estimated membership reported at the end of the fourth quarter a year ago. The estimated number of members on the small business product was approximately 39,000 at the end of the year, a 23% increase compared to a year ago. Total revenue for the fourth quarter was $134.9 million, an increase of 62% compared to the fourth quarter of 2017. Revenue for the full year 2018 was $251.4 million, representing a 32% increase compared to the full year 2017. Our total estimated membership at the end of the quarter for all products combined was approximately 953,000 members, including approximately 275,000 estimated members on ancillary products. Now I would like to review our operating expenses and profitability metrics. In 2018, we achieved significant efficiencies across all areas of our operations with every major operating expense including marketing, customer care and enrollment, tech and content and G&A declining as a percentage of revenue compared with 2017. This was achieved due to leverage that we are seeing in our fixed costs as we grow our revenue base as well as a decline in total variable costs per approved member in our Medicare and ISP businesses. In the Medicare business, which accounts for a vast majority of our revenue and operating expenses, total variable costs per approved member declined 8% in 2018 compared to 2017. This was despite a significant investment in Medicare-related marketing initiatives and call center capacity. The total variable costs per approved member has two components: One, marketing and advertising; and two, customer care and enrollment or call center costs. As we drive more Medicare enrollments online we expect that the customer care and enrollment costs per approved member will continue to decline. We currently plan to reinvest most of the resulting savings into our digital marketing initiatives. You saw this dynamic in the fourth quarter of 2018 when Medicare marketing costs per member increased year-over-year, while customer care and enrollment expense declined resulting in roughly flat, total acquisition costs per approved Medicare member compared to a year ago. Driving significantly more enrollments online compared to the fourth quarter of 2017 was instrumental in keeping total costs per member flat, while generating 64% growth in Medicare submitted applications. As we continue to focus on aggressive market share expansion on enrollment growth in Medicare, our near term target is to maintain our overall Medicare variable costs of acquisition per member flat with 2018 levels. 2018 non-GAAP operating costs which exclude stock-based compensation, acquisition costs, restructuring charge, change in fair value of earn-out liability and amortization of intangibles were $220 million or 88% of revenue compared to $188.8 million or 99% of revenue for the full year 2017. Fourth quarter non-GAAP operating costs were $83.7 million or 62% of revenue compared to $58.7 million or 71% of revenue in the fourth quarter a year ago. The year-over-year increase in our operating expenses in absolute terms was driven primarily by our investments in Medicare related marketing and sales capacity. Adjusted EBITDA for the fourth quarter of 2018 was $51.9 million compared to $25.1 million for the fourth quarter of 2017. Full year 2018 adjusted EBITDA was $33.7 million compared to $4.7 million for the full year 2017. We calculate adjusted EBITDA by adding restructuring charges, acquisition costs, stock-based compensation, change in fair value of earn-out liability, depreciation and amortization, including amortization of acquired intangibles, other income, and provision for income taxes to our GAAP net income. Fourth quarter 2018 GAAP net income per diluted share was $1.25 compared to net income per share of $1.47 for the fourth quarter 2017. Non-GAAP net income per diluted share was $1.61 compared to net income per share of $1.57 for the fourth quarter of 2017. Full year 2018 GAAP net income per diluted share was $0.01 compared to net income per share of $1.33 in 2017. Full year 2018 non-GAAP net income per diluted share was $1.11 compared to net income per share of $1.69 in 2017. 2018 GAAP net income includes a non-cash charge of $12.3 million related to an increase in the fair value of the earn-out liability assumed in connection with eHealth's acquisition of GoMedigap, including $6 million recognized in the fourth quarter. The increase was driven primarily by eHealth's share price appreciation since the transaction closed in January of 2018. The share price appreciation has increased the value of the equity based portion of the earn-out consideration owed to the former holders of the GoMedigap equity interests. Our fourth quarter 2018 cash flow from operations was negative $8.7 million, compared to a negative $10.1 million for the fourth quarter of 2017. For the full year 2018, cash flow from operations was negative $3.2 million. In the fourth quarter, we saw Medicare commission payments related to our annual enrollment period enrollments come in earlier than we expected for this smaller percentage of payments being pushed out into the first quarter, compared to historical patterns. This development had a beneficial impact in 2018 both negatively and will negatively impact our cash flow from operations in 2019, which is reflected in our guidance. Capital expenditures, which include capitalized internally developed software cost were approximately $10.8 million for the full year. Our cash balance was $13.1 million and we had a $5 million balance outstanding against our line of credit as of December 31, 2018. Our current cash balance reflecting a successful completion of a public equity offering last month is approximately $148.3 million and there is no debt currently outstanding under the line of credit. And now, I will provide our 2019 annual guidance. Today we are reaffirming the guidance that we provided as part of the January pre-release of total revenue Medicare segment revenue, adjusted EBITDA and non-GAAP income per share. We are also providing additional guidance on a segment level as well as cash flow and GAAP net income guidance. We are forecasting revenues for 2019 to be in the range of $290 million to $310 million with Medicare segment revenues in the range of $256 million to $272 million and individual family and small business segment revenues of $34 million to $38 million. We expect GAAP income for 2019 to be in the range of $16.3 million to $21.3 million. We expect 2019 adjusted EBITDA to be in the range of $45 million to $50 million. 2019 Medicare segment profit is expected to be in the range of $80 million to $84 million and individual family and small business segment profit is expected to be breakeven to $1 million. Corporate share services expenses excluding stock-based compensation and depreciation and amortization expenses is expected to be approximately $35 million. GAAP income per diluted share for 2019 is expected to be in the range of $0.60 to $0.79. Non-GAAP income per diluted share for 2019 is expected to be in the range of $1.22 to $1.33 per share. Cash used in operations is expected to be in the range of negative $17 million to negative $20 million and cash used for capital expenditures is expected to be $13 million to $14 million. I would like to point out that our Medicare revenue growth implied by our 2019 guidance is driven first and foremost by the expected increase in new enrollments we are projecting and assumes no improvements in LTVs. The adjusted EBITDA margin expansion implied by our guidance is driven primarily by continuing leverage that we expect to see in our fixed costs as we grow enrollments and expand our revenue base. Finally, I would like to make some comments with respect to the seasonality that we expect this year. We are currently expecting a similar pattern in terms of each core's percentage contribution to total annual revenue. The fourth quarter will continue to contribute disproportionately to revenue and earnings driven by the timing of the annual enrollment period and open enrollment period selling seasons. This will result in negative earnings and adjusted EBITDA in the first three quarters of the year with the third quarter being the largest investment quarter as we start preparing for the Medicare annual enrollment period. I want to remind you that these comments and our guidance are based on current indications for our business, our current estimates, assumptions and 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. In summary, 2018 was a successful year as reflected in our strong financial performance. We are excited about the expansion opportunities that we see in the Medicare market and plan to continue to scale up our Medicare investments and enrollments in 2019 with an emphasis on driving more enrollments online. And now we will open the call up for questions. Operator?

[Operator Instructions] Our first question comes from Ross Muken with Evercore ISI. Your line is now open.

Good afternoon guys and congrats.

Thanks Ross.

So I guess as we just think about in the basement the care business sort of what you will do differently or what you learned upon from this year's enrollment period sort of build upon the penetration success and maybe get to sort of brand recognition in the market more commiserate with sort of what would be viewed as sort of a leading business, I guess what are some of the things and the guideposts we should look for over the balance of the year and then what are some of the tools you're going to sort of pump up or emphasize on the marketing side to kind of continue the momentum you saw here obviously during this good selling season?

Hey Ross its Dave Francis. Great question. I would tell you that from the learnings that we got this last year a lot of what we are planning for 2019 quite frankly is rinse and repeat, but on a greater scale than what we did in 2018. As we've talked about over the last several weeks there was a lot of new initiative that was brought to bear in this most recent selling season as we've had the new management team that we brought in about a year and a half ago has had the ability to get entrenched and kind of bring their different tool sets to bear in the business. And as you look at what we are looking to do for 2019 over 2018, it really is to continue to ramp up the telesales activity, invest even further into some of the marketing initiatives that worked well for us this year. You will see us testing quite a bit in the first nine months of this year to make sure that we are once again optimizing for the fourth quarter. And then the last piece I would touch on is the online piece. We believe that we got some good critical mass traction last year relative to moving more of the business online and a lot of the investments that we are making this year on the technology side to create an easier and more intuitive user experience that will convert more efficiently and then plowing more marketing resources into that channel that is something that we would definitely point to in terms of how to measure our success this year as we go through the year. Again, a lot of that is not going to show up in earnest until the fourth quarter, but we'll be talking about the preparations that we're making for the fourth quarter throughout the year.

That's helpful. And maybe just on sort of the point you made on LTVs. I think you guys called it out in terms of being flat. I guess it seems like that's a metric that still over time could theoretically be upward-biased. I guess how should we think about the levers you have eventually there to maybe continue to drive that more favorably or is it really going to be a function now still just of mix?

It's a good question, Ross. So for sure there are drivers that we can influence to increase our LTV and we've had a variety of initiatives focus on both the operational side and the consumer side and we've seen some impact on the operational side, which is the ability to collect – or commission sooner which will impact our LTVs. We'll be able to close the gap on people who are enrolled but – and are paying. There's a smaller drop-off on that. We've had initiatives that impact it and that's reflected in the increase in LTVs. And of course LTVs also reflect what we see in the market relative to increasing rates as well. On the side that we are still testing and we're hoping that we will have initiatives that will start to make an impact, but we haven't seen it yet, is really on the customer retention side. And we've had some successful tests. It's too early to talk about, since we're still evaluating those, but surely those will add to our ability to increase the lifetime and therefore the LTVs.

Great. And maybe just one quick last one. I mean, obviously, with the huge outperformance here and what you've done on the enrollment side. I guess, what's the conversation like with the payer universe? Because clearly your channel is now allowing for growth well above sort of industry averages, particularly in MA and that's obviously a pretty fierce market. So I'm guessing that catches increasingly the attention of payers. So what – how does that sort of outperformance feed those conversations? And obviously we saw in the other line they're clearly using you more as a sort of agent. But just help us understand how that dynamic evolves your relationships, given you've always been obviously so independent.

So the timing of your question is good. As a normal course of our business, Ross, we engage with each of our major carrier partners in a kind of rehash of what went well in the most recent selling season and then our plans relative to 2019, how does that jive with your plans carrier X. And begin to strategize with each of them kind of how we can maximize their impact in the marketplace within the context of our unique value proposition that we bring to each of them. There's no question that each of the major carriers that we work with is more than pleased with what we've been able to show from a results perspective and helping them to grow their customer bases. And what they've realized more of late is kind of calling it out again, that the uniqueness of our value proposition relative to customers. The fact that we grew at, pick your market growth rate, but anywhere from 5 to 7 times what the market was growing at in the Medicare base, particularly the Medicare Advantage market, this most recently selling season, calls out the fact that we clearly have a unique way to deliver value to each of these Medicare customers. And now that we are doing it at a scale and having the kind of impact on the carriers' book of business that we have, the recognition of that and their willingness to partner with us in more tangible ways is becoming more meaningful for us as well. So again more to come as we continue those conversations throughout the first part of the year, but we're encouraged by where we stand relative to each of those relationships.

Thanks, guys.

Thank you. And our next question comes from Tobey Sommer with SunTrust. Your line is now open.

Hey, this is Joseph on the line for Tobey this evening. What is the – my first question is what is the relationship between the percentage of Medicare applicants that submit online versus approved online? So I know you called out that 22% number for the quarter that were submitted online. Is this the same for the number that were approved online? Thank you.

Hi, Joseph. The ratio of sent to approved for online should be very similar to all those channels. I don't think we've seen a significant deviation of that dynamic. So I don't know if there was a deeper question there but in terms of timing and ratios, we haven't seen a difference for online versus otherwise.

Got it. And then sort of as a follow-up to that what is the – what do you see as the long-term run rate for this percentage that are submitted online? Do you have a specific goal over the next couple of years or do you see like a natural feeling at some point? Just any additional color on that would be great? Thanks.

We expect it to grow and we're investing heavily into it. I think for myself and others who have come from other industries – I came from work and travel, we think the sky is the limit. We have of course as a company experience in our IFP business where that number is north of 90%. So we're still working through ultimately given the success we saw in Q4 where this will land, but we have large ambition and certainly are investing in both the product and technology improvements that enhances the user experiences and also on digital marketing which the applications that are generated there typically have a high propensity for online applications as you can imagine.

And just to add on, I think, we've stated publicly that we expect over the next five years that about a third of our enrollments from a mix perspective in the Medicare business that we expect that to be a reasonable target. I will tell you that we certainly have higher aspirations inside the building but given the trajectory of the business, we don't think that a third of the business being done online by the time we get to 2023 is out of the question by any means.

Got it. Thank you. And then one quick numbers question. You mentioned that average Medicare Advantage and Medicare Supplement lives increased by 10% and 3%. Off what base were those going off of? I might have missed it earlier but I just quickly wanted some clarification on that.

Yes, compared to the same period prior year.

Got it. Thank you.

Fourth quarter 2017, yes.

Thank you.

Thank you. And our next question comes from Frank Morgan with RBC Capital Markets. Your line is now open.

Good afternoon. I was curious if you could talk a little bit about the impact of this special enrollment period that's coming up in the first quarter what impact that may have had on your business so far? That'll be my first question.

Yes, I'll just start off with that Frank. As I said in my prepared remarks, we are off to a strong start. We anticipated that however because we were well aware of the change of the extended OEP through the first quarter so this was anticipated into our guidance and we're on track with that guidance.

Got you. Thank you. And then in terms of a lot of talk over the last few weeks in managed care and in the Part D business just any thoughts about the impact of all the proposed government changes on Medicare rules around rebates and the impact that might have in terms of your relationship with some of these health and drug plans?

We think it's needed. Pharma is too expensive and is increasing the costs of these plans and reimbursements at a rate well in excess of GDP. So we applaud the overall focus regulatorily on prescription drug costs. We don't see that having impact on us. We are focused on the consumer side of this and we're hopeful that the cost to the consumer goes down as a result of these regulations.

Frank what I would add to that too is, we have to wait and see what the final rules ultimately look like and the impact that that'll have but to the extent that, that creates an environment in which Part D premiums actually go up. At the end of the day that's good for our business simply because any kind of disruption in the marketplace that drives the consumer to need to go back and revisit what their benefit plans look like relative to cost is good for us. We've got the best tool set in town and to the extent that there is an external event driving more consumers to reshop that almost always plays to our benefit. So again we'll have to see what the final rules say, but if it does create any kind of meaningful disruption for customers, we expect to benefit from that.

Frank let me just add onto that. We think that RBC – your research piece did a nice job of pointing out that increasing complexity is a benefit to EL. To augment on Dave's point, it just increases the value of our comparison shopping algorithms.

I know you touched on this and some of the strategies around that you've implemented for increasing those online enrollment numbers, but anything more specific on these individual initiatives that you could share with us about what's driving that? Obviously I know what your bogie is now on reaching that one-third of online apps, but any more color just on the specific initiatives? Then I'll hop off. Thanks.

Yes I can name a few. One is we believe there is a bigger opportunity given what the user experience is right now with our site for Medicare Supplement and with our acquisition of GoMedigap last year, they don't have any online experience. So adding that business with an online capability would also be additive so that's one. The second one is around our mobile experience. Like many companies who conduct e-commerce a larger and increasing portion of people coming to those sites are via mobile devices, mobile electronic devices like tablets and we will have a higher focus relative to improving those experiences to allow people to navigate our site more easily on those devices. And then lastly I would say that we did a number of test-and-learn initiatives last year that helped our ability to go to convert someone once they land on our site and we expect to accelerate the velocity of those test-and-learns, so we can have more opportunities to improve on the overall conversion when someone comes to our site as well.

Okay. Thank you very much.

Thank you. And our next question comes from Dave Styblo with Jefferies. Your line is now open.

Hi, there good afternoon and thanks for the questions. First one was just coming back to the free cash flow comment. I guess looking at some of your components there it looks like you guys are looking for a free cash flow loss of a little over $30 million in 2019 which is steeper than the loss in 2018. I think there was a mention of some sort of item that might have gotten pushed one way or the other, if I could get clarity on that. And I guess more broadly given all the improvements in variable costs and the initiatives that you guys are doing pushing more to online, I guess I would have thought that free cash flow would have been turning positive this year. So maybe you can give us a sense of when can we start to expect to free cash flow to markedly turn up and reach break-even and then turn profitable in the next couple of years?

Yeah. That's a good question. So let me start with the answer for your last question which is we expect to be operating cash flow positive in 2020. And on the timing piece well a couple of things on what is expected in 2019, is we still had a cash component around the earnout for the GoMedigap acquisition. So that was $10 million. And then as I said in the prepared remarks, we had really a fortunate timing both our collections and our payments in 2018 that really created more of a favorability than it appeared relative to 2018 by pushing to 2019. That timing adds up to be almost $8 million. So if you normalize for that you can see that actually the trends from 2018 and 2019 are pretty consistent relative to operating cash flow loss. And really the story here is around the fact that given the timing of AEP, we do invest heavily both in terms of sales and marketing in that period and our fiscal year being what it is, we don't really begin collecting on commissions and certainly given the lifetime of the new enrollees being much greater than a year, more positive cash flow on a per-enrollment basis comes later on. But as we build our membership base we will get to the point where we will become operating cash flow positive which is what we're targeting for 2020.

Okay. That's helpful. Thanks. And then I don't think you guys formally break out churn rates or report those, but when I look back and try to do the math on that and look at your 4Q churn rates back in 2016 and 2017 it looks like it was about 6% in the fourth quarter in both of those years. When I do that same math for the fourth quarter of 2018, it spiked up to 17% and as a result your Medicare enrollment was at least 5% below what I was looking for. So I'm just trying to understand, if you would agree with that math and what caused the spike in churn?

We may have to follow-up on your math because that's not how we see it. Our lifetime of Medicare Advantage enrollees is roughly about three to 3.5 years and for Med Supp and Part B it's about five years, so we've typically put a 3.25 base on the range of products. Of course you can do the overall average of that across the product space and the mix of our enrollments. In general, we've actually seen some uptick and therefore uptick in LTVs since we've been on 606 so we actually have not seen an increase in churn. We've actually seen a decrease in churn on average.

So Dave, we'll circle back and walk through the math with you because I'm not sure what you're looking at either, but our persistency rates have improved with the margin rather than turned south.

Okay. We can do that. Yeah. All right. And the last one was, are you guys in a position to where maybe you'd like to talk about the long-term financial goals before under the previous accounting standards? You guys had talked about some longer-term financial goals over the next five years and a 20% revenue CAGR and 25% EBITDA margin, I think by 2022. So I'm curious if you have an update to that. I'd imagine under ASC 606 the margin on that would need to inflate just from the mechanics behind it, but do you guys have an updated view of those long-term goals at this point or might we hear about that later on in the year?

We don't have an update on that today. Well to comment on what you just quoted those guidance were based on 606, if I remember correctly, so there isn't a change in guidance relative to the change in accounting. But relative to your question, we are still really assessing the full impact of what we should expect given the success we had in Q4. That's one. And the second is, it was only about a month ago, when we completed our equity offering and armed with more resources. We are now assessing the degree of investment the acceleration that we should expect in the business and be able to articulate that better in a revised long-term outlook, but we won't be doing that today.

Got it. All right. Thanks.

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

Hey, thanks for taking my questions. Jason on for George. I want to pick up where you left off there. Obviously, better capitalized after the raise that you did last month. Just wondering if you can kind of give some examples of programs that you may consider investing in as you go forward for utilizing that capital?

Broadly there are two. And some of these discussions happened as we were discussing the use of proceeds for the equity offering. One is more investment in our technology capabilities to drive more online enrollments. That's more in the engineering product development side. In our guidance, we actually have an increase, an outsized increase of investments already baked in, but it's possible that we would look to do more depending on the return that we get on those investments. And the second one, which is probably the bigger one and more impact on the likely 2019 performance is really an increase in driving more enrollments during the annual enrollment period, the higher level of investments in marketing and sales capacity.

Okay. Got it. And just to kind of touch on the online enrollment, so if you go back to the OVP period last fall, I know you implemented this flexible contact center, you increased the number of reps that you had there, but at the same time you saw this progress for actually having more enrollments completed online. So can you maybe just walk through like the puts and takes? And how you're thinking about that going forward versus what you need to have in-house? What kind of flexibility you're implementing versus trying to push more of those to be completed online?

It's great observation. I'll answer it this way. We see a lot of opportunity to grow the business continue to grow the business at a higher rate than the market and the unique nature of our online capabilities and the equally unique nature of the value proposition and how that is playing with consumers in the marketplace means that we have opportunities on both sides of the plate. The online piece is absolutely a core if not the primary focus for us this year in terms of getting more leverage out of that channel. As we talked about, that gives us the opportunity to scale the business exponentially rather than arithmetically. But at the same time both because of the demographic and because of the relative inertia in the marketplace of people moving online there's still a tremendous opportunity for us to grow the business telephonically as well and we see opportunities both on the technology side both digitally and telephonically and on the marketing side to drive significant growth on both sides of the platform. So I can't tell you that there are any specific targets that we're looking at because the targets are pretty bake that we're looking at and we're getting after both of them while we have this opportunity in the market.

Got it. I'll try to sneak in one last one here. You talked about the different customer acquisition channels. Obviously you saw success from new acquisition channels in Q4. Do you have any data that supports how successful some of those channels are during the OEP and AEP season versus what you expect to see basically over the first nine months of the year?

Well, yes, is the short answer, though I'm not sure it's something that we necessarily share with the rest of the world. We talked about the fact that we've essentially rebuilt the marketing group from scratch over the last 18 months. Our new Chief Marketing Officer, Tim Hannan joined in June of 2017 and has done a terrific job of upgrading both the talent and behind that talent the technical capabilities and ability to access the data that you're talking about to be a lot more intelligent about how we go to market. As you know a lot of the go-to-market strategies that we have are decidedly low-tech in nature, direct mail being one, direct response TV being another, but we do get a lot of data even from those channels and are able to much more precisely target our investments relative to what's working, what's not working, what products are working, what products are not working, geo-targeting and that thing and be able to across the board whether it be high-tech or low-tech, make sure that we are constantly improving the way that we are engaging with our customers and driving them in to the platform. So again what we saw in the fourth quarter of this last year, a lot of learnings from the biggest learning being that there's a lot more opportunity for us to get after and we're using data in the way that you talk about to make sure that we are being more and more effective as we plow more resources into those channels.

Great. Thank you.

Thank you. And our next question will come from Steve Halper with Cantor Fitzgerald. Your line is now open.

Embedded in the adjusted earnings guidance for 2019, what is the tax rate assumption both annual and quarterly, recognizing the first three quarters you're going to be in a loss situation?

Yeah. On an annual basis – Steve just on an annual basis, it's 27% to 30%. There's a range and you can back into that based on the GAAP net income EBIDTA reconciliation that's part of the guidance. And from a core perspective because of our seasonality, you will see a fluctuation in terms of whether we're at a loss position and a profit position, but you essentially can apply that tax rate across the board. As long as it works out at the end is really what matters in terms of effective tax rate.

Right. So for the full year 27% to 30%.

Correct.

Great. Thank you.

Thank you. I would now like to turn the call back over to Scott Flanders for any closing remarks.

Well, thank you, everyone for your support throughout 2018 and your continued interest in our exciting prospects for 2019. We look forward to speaking to you soon those of you who have scheduled calls either today or tomorrow and then again at the conclusion of Q1 when we report in April. Thank you.

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