eHealth, Inc. (EHTH) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Second Quarter 2019 eHealth, Incorporated Earnings Conference Call. As a reminder, this call is being recorded. [Operator Instructions] I would now like to introduce your host for today's conference, Kate Sidorovich, Vice President of Investor Relations. Please go ahead.

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 2019 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 lines for questions. As a reminder, today's conference call is being recorded and webcast from the IR section of our website. A replay of the call will be available on our website following the call. We will be making forward-looking statements on this call that includes statements regarding future events, beliefs, and expectations, including statements relating to our expectations regarding our Medicare business including expansion opportunity in the Medicare market; our expectations regarding Medicare enrollment growth, our competitive advantage, our market share, growth in online enrollment and telesales capacity, and our investment in the Medicare business; our expectations regarding our individual family and small business segments, including our strategy and opportunity for growth. Our views regarding our long-term growth strategy and performance. The profitability of all Medicare and individual family plans business, seasonal patterns, life and value through retention rate and acquisition cost; our expectations regarding seasonality and investment in agent headcount, sales and marketing and technology. Our outlook for the third quarter of 2019 and our revised 2019 full-year guidance including our assumptions and our ability to deliver on our guidance. Forward-looking statements on this call represents eHealth 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 this forward-looking statements whether as a result of new information, future events, or otherwise. Forward- looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in our forward-looking statements. We describe these and other risks and uncertainties in our Annual Report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, which you may access through the SEC website or from the Investor Relations section of our website. We will be presenting certain financial measures on this call that 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 welcome everyone. We delivered another strong quarter once again exceeding our expectation and building momentum in our Medicare business to continue to grow rapidly, the company by EBITDA margin expansion. Approved Medicare members grew 78% year-over-year, driving a 105% increase in Medicare revenue and the significant increase in Medicare segment profit of $6.1 million, up from negative $1.5 million in Q2 of last year. Total revenue for the second quarter was $65.8 million, a 101% year-over-year increase. Our adjusted EBITDA was $0.8 million despite Q2 being a traditionally slower quarter for us and our GAAP net loss which include expense related to the staff component of the GoMedigap acquisition earn out that is mark-to-market was $5.8 million. eHealth has established a clear leadership position in the consumer health insurance and engagement market. And we continue to demonstrate that leadership with organic growth, revenue growth in excess of 100%. The eHealth formula continues to set us apart from our competitors by offering individual consumers the choice, the simplicity and the easy to access tools that enable them to shop and enroll in the health insurance products that suited for them. Our Medicare enrollment growth was broad-based with all of our key demand generation channels performing strongly as we lean on findings for marketing test performed over the past 12-months and continued to refine our strategies. The portfolio approach to marketing is working exceptionally well, allowing us to opportunistically dial our marketing investment up or down throughout the quarter depending on relative returns on investment, depth of consumer demand and other factors. Online enrollment performance in our Medicare business is a key strategic initiative for the team. The total number of Medicare Advantage and Medicare supplement applications submitted online increased by 113% compared to the second quarter of 2018. We continue to track to our expectation that at least 20% of our 2019 major medical Medicare applications will be submitted online. The fourth quarter historically being the strongest in terms of online enrollment volumes. Because customer demand for the services on our Medicare engagement and enrollment platform is growing so rapidly, we have extended our physical presence to including new Eastern Sales and Technology Center in Indianapolis, and we've expanded our sales centers in Sacramento, Salt Lake City and Austin. To meet our enrollment forecast for the annual enrollment period this year, we are also expanding our outsourced sales capacity to include new relationships with call center companies that have expertise in the insurance business to complement vendors we utilize successfully in the last annual enrollment period. Our individual and family plan major medical business rebounded during the quarter, generating growth in submitted applications for the first time since 2015 albeit off a small base. We are not changing our enrollment outlook for the remainder of the year for this business based on a single quarter, but view this as an encouraging development. Turning to the small business market. The number of submitted applications grew 8% compared to the second quarter of 2018 with commissioned revenue growing 13% over the same time period. We also continue to add new states and carriers into our online applications [Indiscernible] with 14 carriers currently integrated with our platform. The individual family and small business segments remain profitable during the quarter. We continue to see a benefit in providing a diversified product offering in the health insurance market for a variety of strategic and operational reasons, and plan to maintain our presence in the under 65 segment for as long as we can do it cost effectively. Based on the strength of the business, we are again increasing our financial guidance for the full year ending 2019. Our CFO, Derek Yung will provide further specifics but our guidance at the midpoint of our new ranges $375 million in revenue and $67.5 million of adjusted EBITDA are 25% higher and 42% higher than the original guidance we provided in February of this year. These revised expectations for 2019 mean that we are already tracking ahead of both the base case and the tailwind long-term growth scenarios that we presented in our Investor Day in May. We intend to continue pursuing our aggressive growth strategy to expand our market share by delivering exceptional customer experience at every touch point and thus build value for our shareholders. Now I will turn the call over to Derek to speak more specifically about the numbers.

Thanks Scott and good afternoon everyone. We delivered strong second quarter financial results with revenue growth in excess of 100% over the second quarter of last year, driven primarily by the outperformance of our Medicare business. During the quarter, we leveraged our expanded Medicare telesales capacity relative to the second quarter of 2018 by investing more aggressively in demand generation. Similar to the last two quarters we saw strong year-over-year growth in approved members for all Medicare products that we offer, including Medicare Advantage, Medicare supplement and prescription drug plans. In our Medicare business, our second quarter revenue of $52.3 million grew 105% compared to a year ago due primarily to a 78% year-over-year increase in approved Medicare members and growth in non commissioned revenue in particular carrier sponsorship revenue. The Medicare segment generated profit of $6.1 million, a significant increase compared to a loss of $1.5 million in the second quarter of 2018. For the first half of the year, our Medicare segmented profit grew almost 900% to $16.9 million compared to $1.7 million in the first half of 2018. This margin expansion is driven by fixed cost leverage as we continue to scale enrollment volumes and associated revenues at rate that far exceed growth in our G&A and technology expenses. Our estimated number of revenue generating Medicare members was approximately 521,000 at the end of the second quarter, up from approximately 394,000 at the end of the second quarter of 2018 or an increase of 32%. Second quarter 2019 revenue from our individual family and small business segment was $13.5 million and 88% increase compared to a year ago. As Scott mentioned, in Q2 we saw an increase in individual and family major medical plans submitted applications and approved members for the first time in several years, which drove an increase in commission revenues. In addition, we saw the same dynamic as in Q1 where higher than expected retention on some of the older cohort of our ISP members resulted in recognition of significant residual revenues during the quarter. as a reminder, pursuant to the 606 revenue recognition accounting standard, we recognize this residual or tail revenue in the quarter when the cumulative cash collected from these cohorts exceeds the initial revenue that we booked at the time when these members first enrolls through eHealth. In Q2, tail revenue contributed $7.6 million to the commission revenues in our individual family and small business segment. The individual family and small business segment profit was $5.3 million compared to a loss of $0.6 million in the second quarter of 2018. Our estimated individual and family plan membership at the end of the second quarter was approximately 134,000 down 21 % compared to the estimated membership we reported at the end of second quarter a year ago. The estimated number of members on small business products was approximately 46,000, 24% increase compared to a year ago. Our total revenue for the second quarter was $65.8 million, an increase of 101% compared to the second quarter of 2018. Our total estimated membership at the end of the quarter for all products combined was approximately 968,000 members including approximately 267,000 estimated members on ancillary products. Before I move on to our operating expenses, I want to discuss the dynamics that we are seeing with estimated lifetime values or LTVs in our Medicare business. The LTVs for Medicare Advantage plans which account for the majority of our existing Medicare members and new Medicare enrollments have been increasing over the past several quarters on a year-over-year basis, driven by higher commission rate, favorable product mix and improved retention on some of our member cohorts. In Q2, the constrain LTVs for Medicare Advantage plan enrollment grew 15% compared to a second quarter a year ago. While the impact of the higher reimbursement rates this year which typically flows through to broker commission continues to be favorable and we're not seeing any significant changes in terms of retention rates on older cohorts of their members, we have observed higher than average churn on Medicare Advantage members that we enroll during the last annual enrollment period in Q4 of 2018. We believe this is driven by the open enrollment period which took place in Q1 of this year for the first time since 2011, allowing seniors three months to switch their MA plans or the cancel them and return to the original Medicare program. The net impact of the open enrollment period on our Medicare business is still profoundly positive not only in driving higher enrollment volumes in Q1 but also allowing us to keep higher agent headcount throughout the year, which has implications significant favorable implications for Q2 and Q3 volumes, as well as agent productivity during the fourth quarter selling season. Our reported Q2 membership metrics implies slightly increase in churn, thus we expect to see an impact on constrain LTVs for the Medicare Advantage product, which we expect to decline at a mid single-digit percentage rate year-over-year in the fourth quarter of 2019. This reflects our assumption that MA members that we generate during the fourth quarter will have lower retention rates going forward. This dynamic has been incorporated into our revised 2019 guidance. Now I would like to review our offering expenses and profitability metrics. In the second quarter, we made a significantly large investment in Medicare related marketing initiatives and Telesales capacity compared to the second quarter of 2018, resulting in a significant year-over-year Medicare enrollment growth. Growing scale and increased efficiencies in our Medicare business allow us to slightly reduce variable costs per approved Medicare member compared to Q2 of last year. Our second quarter non-GAAP operating cost which excluded stock based compensation, acquisition costs, restructuring charges, change in fair value of earnout liability and amortization of intangible assets grew 51% compared to second quarter of 2018. But declined meaningfully percentage of revenue over the same time period allowing us to swing to a positive EBITDA and what has traditionally been a low volume negative EBITDA quarter. Fixed cost leverage was the key driver EBITDA profitability in the second quarter of 2019. With combined G&A and tech and content expenses growing 34%, compared to the second quarter of 2018. Significantly slower compared to our year-over-year revenue growth of over a 100% reflecting the operating leverage in our business model. Adjusted EBITDA for the second quarter of 2019 was $0.8 million compared to a negative $10.1 million for the second quarter of 2018. We calculate adjusted EBITDA by adding restructuring charges, acquisition costs, stock based compensation, change in fair value of earnout liability, depreciation and amortization, amortization require intangibles, other income and benefit from income taxes to our GAAP net income line. GAAP net loss for the second quarter of 2019 was $5.8 million compared a GAAP net loss of $12 million for a second quarter of 2018. Second quarter GAAP net loss includes a non-cash charge of $7.2 million related to an increase in fair value of earnout liability assuming in connection with eHealth acquisition of GoMedigap. The increase was driven primarily by eHealth share price appreciation. Second quarter GAAP net loss per diluted share was negative-- $0.25 compared to a net loss per share of $0.63 for the second quarter of 2018. Non-GAAP net income per diluted share was $0.10 comparative non-GAAP net loss per share of $0.40 for the second quarter of 2018. Our second quarter cash flow from operations was negative $11.5 million compared to a negative $0.3 million for a second quarter of 2018. This year-over-year increase in cash outflows reflects the strong Medicare enrollment volumes in what historically has been a low volume quarter related investments in marketing and call center operations. Capital expenditures which include capitalized internally developed software costs were approximately $4.2 million for the second quarter. Our cash balance was $117 million as of June 30th and we had no debt outstanding under our line of credit. Our balance sheet also reflects a significant commission's receivable balance of $341 million. We're increasing our annual guidance for the second time this year to reflect our outperformance to date and our increased expectations for second half of 2019. We're now forecasting revenues for 2019 to be in the range of $365 million to $385 million, compared to prior guidance range of $315 million to $335 million. Medicare segment revenues are expected to be in the range of $318 million to $333 million, compared to prior guidance of $281 million to $297 million. Individual family and small business segments revenues are expected to be in the range of $47 million to $52 million compared to the guidance of $34 million to $38 million previously. Assuming the impact of the non-cash charge related to increase in fair value of earnout net liability in connection with eHealth acquisition of GoMedigap remains at $20.5 million, we expect GAAP net income for 2019 to be in a range of $15.5 million to $20.5 million, compared to prior guidance range of $15 million to $20 million. We expect 2019 adjusted EBITDA to be in a range of $65 million to $70 million compared to prior guidance range of $55 million to $60 million. 2019 Medicare segment profit is now expected to be in a range of $96 million to $99 million compared to prior guidance range of $90 million to $94 million. Individual family and small business segments profit is now expected to be in the range of $10 million to $12 million, compared to prior guidance range of breakeven to $1 million. Guidance for the corporate share services expenses excluding stock-based compensation and depreciation amortization is now expected to be approximately $41 million, compared to prior guidance of $35 million. Assuming then impact of a non-cash charge related to an increase in fair value of the earnout liability in connection with GoMedigap acquisition remains at approximately $0.82 per diluted share, GAAP net income per diluted share for 2019 is expected to be in a range of $0.62 to $0.82 compared to a prior guidance range of $0.60 to $0.79. Non-GAAP net income per diluted share for 2019 is expected to be in the range of $1.77 to $1.97per share, compared to prior guidance range of $1.54 to $1.73 per share. Cash used in operations for 2019 is expected to be in the range of $50 million to $55 million, compared to prior guidance range of $20 million to $25 million due to time lag between cash-based member acquisition expenses and commission collections resulting from the enrollments our cash flows from operations decline in periods of high growth. Cash used for capital expenditures is expected to be $15 million to $17 million compared to prior guidance of range of $13 million to $14 million. Finally, I would like to make some comments with respect to the seasonality we expect for the remainder of the year. Based on our successful execution over the past several quarters, access to expanded telesales facilities including a new lease in Eastern US sign in Q2 and continued strength in consumer demand, we are accelerating our investments in agent head account, sales and marketing and our technology platform. As a result, we expect to generate a significantly higher Medicare enrollment growth in 2019, accompanied by stronger revenue growth relative to our early expectations as reflected in our revised guidance. At a midpoint of our annual revenue guidance, we are now expected to grow to close to 50% year-over-year compared to prior expectations of a 29% growth. From a quarterly cadence perspective, we expect a sequential decline in our third quarter revenue. This is primarily due to dynamics in our individual family small business segments. Specifically, the significant positive impact of total revenue in our IP business was likely limit to the second order based on the seasonal timing of IP enrollments and cash collections. Third quarter 2019 Medicare revenue is expected to be roughly flat with second quarter. On the operating expense side, we expect a significant sequential increase in our third quarter costs, driven primarily by our customer care enrollment expense as we start to onboard agents ahead of the fourth quarter annual enrollment period. Given that Q3 seasonally low volume quarter and because it takes several weeks for new agents to be compressive, we anticipate a significant increase in third quarter customer care costs per approved member, and a large sequential drop in EBITDA. The tech and content expenses also expected to increase sequentially and year-over-year as we invest improve our online consumer experience, drive more digital enrollments and make our agents more productive by deploying enhanced technology solutions in our call centers. We expect to see EBITDA loss around 3x the loss we reported in Q3 of 2018. In the fourth quarter, we expect to swing to significant EBITDA profitability with expected EBITDA for the full year 2019 remaining at around 18% at the midpoint of our guidance on a much larger revenue base, resulting in a significant increase in our 2019 EBITDA dollars relative to prior expectations. We currently expect that full year 2019 acquisition cost per approved Medicare member including marketing and call center costs will be flat to slightly up compared to 2018. We continue to expect flat full year LTVs in our Medicare Advantage business relative to 2018 levels, despite a forecast that year-over-year decline in fourth quarter LTV as described earlier. I want to remind you that these comments and our guidance are based on current indications for our business and 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 obligations to update our comments or guidance. Looking forward, our entire team is excited about the growing momentum in our Medicare business as reflected in our financial results to date, and our revised, our annual guidance. We are well positioned to deliver another strong annual enrollment period. And now we will open the call for questions. Operator?

[Operator Instructions] Our first question comes from the line of Jailendra Singh with the Credit Suisse. Your line is now open.

Thanks and congrats on a solid quarter. So my first question actually I want to focus on individual family and small business. You guys did say that they had a benefit of tail revenue of $7.6 million. I want to confirm was that in your origin guidance or not? And also what else is driving the some pretty good trends in that business compared to recent quarters? Any color you can provide in terms of the impact on your business from the court ruling on short term and limited duration insurance plans.

I'll address the forecast question and also the ins and outs of how this play through and then Scott and others can comment on the business dynamics we see in IFP. The tail revenue was not in our original guidance and that's because our estimate at the time when we were enrolling those members we did not expect them to have longer lifetimes as they're seeing, as we're seeing today. So the tail revenues as I commented in the prepared remarks are booked when we see that our originally anticipated churn has been better i.e. the retention is actually better. And therefore we are collecting more and therefore able to book additional revenue.

Jailendra, it's Dave Francis. The dynamics in the IFP business have been significantly better than in years past. Part of that is a new operating focus as we changed out leadership of that group about a year and a half ago. And getting a significant traction there. And the impact of the tail revenues has to do with two things. Number one, improving the mix of business that we're selling within that group to a higher LTV and better tax rate. But it also has to do with the fact that we've been very conservative given the significant changes in the IFP business and making sure that we're not booking revenue at the time of sale that the historical churn rates might indicate lower expected revenue. So we're seeing extended churn and customers liking the products that we are getting them into, staying on those products longer and having that positive impact on the P&L as we extend past the expected churn rate of those folks and booking the tail revenue as a result. But suffice it to say we're a lot more pleased with where the IFP business is today than it has been really in the last two to three years.

Okay and then actually on the same business, I want to understand the pickup in cost were approved member in this business. It seems it's driven by higher customer care and enrollment cost. Any color on the cost associated with this, the new members in this business second quarter.

Yes. So we did invest more in the IFP in small business area in Q2 than we had anticipated largely because of the more positive trends that are now showing at the end of business performance. So, and in particularly invested more in agent and agent training. Whenever we do that we typically see costs spiked up because it does take time to, for people to get trained to be familiar with our tools and so on. So that's what you seen there.

Okay and the last question I had on the, thanks for all the color on quarterly seasonality we should keep in mind. But on Medicare revenue you're saying that Q2 to Q3 should be flat sequentially. I know those are not like I mean fourth quarter is the biggest portion of your revenue. But just generally can you give me some puts and takes, I mean with all the investments you're doing around telesales agents and other agents. I mean should you see -- should see some pick up from Q2 to Q3. And if you can give some color on why flat revenue in Medicare segments in Q3?

Yes, sure, absolutely. So you heard that right. We are expecting Medicare revenues to be flat from second to the third quarter. And the big difference in terms of investment in 2019 versus 2018 is our expanded telesales capacity before the annual enrollment period. And we are maintaining that through Q3 as we're ramping up going the AEP, as we commented in the prepared remark as well, it does take time for agents to be trained and to be productive. And we are taking concerned assumptions as to how quickly we think those agents can come on board prior to AEP and ability to be productive during the selling season.

I mean the other thing I would add Jailendra is that, remember that the cost benefit of concentrating our marketing efforts on driving more business into the platform in Q4 substantially greater than they are in other parts of the year. So we are actively investing and putting on that sales capacity and the telesales organization not expecting them to have any kind of meaningful impact on the revenue side in the third quarter. We are getting them ready so they have a running start once October 15th rolls around and or the AEP period starts in earnest. So everything that we are doing from an investment perspective again to Derek's point is aimed toward Q4 production rather than Q3. We certainly hope that there's going to be some additional pickup from the capacity that we're putting on, but we don't think that it's right to include that in our guidance at this point relative to Q3 production.

Maybe just one other comments from a numbers perspective is we did get a benefit in Q3 where there were approved members that were from application submitted in Q1 because of the lack of approval that flowed into Q2 and we recognize revenue for approved members. So we won't see that because as much in Q3 because we had larger enrollments from Q1 compared to Q2.

Our next question comes from the line of Ross Muken with Evercore. Your line is now open.

Hey, guys. It's Suzy on Ross. Thank you for taking my question and amazing job on the quarter again. I guess I want to touch on given the outperformance in the first half and pretty optimistic expectations for the second half have you guys thought about any changes to the long-term targets that you guys called out at the Analyst Day?

Hey, Suzie. That's a good question. So we commented that we are pacing ahead of both the base case and the tailwind case that were discussed at the Investor Day. Obviously, to point out the obvious, obviously our biggest period is still the annual enrollment period and until we get closer or through that period we have not really been able to assess what is working what's not working. I'll say not settled on what we think in terms of our plans and budgets even for 2020. So I think it's premature to look at that but you're right that we are pacing ahead of what was discussed at the Investor Day.

Got it, that's great. And then maybe another one on the IFP business. To the extent that you could provide some detail, how many consecutive quarters of sort of sustained growth within the IFP business would sort of drive you to go back and sort of re-estimate targets for that business?

So I'll answer it this way. That business is still in flux from a market perspective. The way -- the impact of the ACA and premium spikes and everything else have on that market and the way that it has changed year-over-year over year makes us continue to be cautious but optimistic relative to where we sit and the opportunities for us in that marketplace. It's taken us as you know some time to get the operating model back on track there. So we, I would say that we're pleased with where it sits and on a monthly basis we are looking at where should we be leaning into the opportunities in this marketplace, understanding that it's still a volatile marketplace. So I would say we're pleased with the results. We continue to be cautiously optimistic with the approach that the current leadership team has there. But we continue to be very focused on the Medicare market given the growth and the sustainability of that growth over the long-term relative to where the focus of the business is right now. Very pleased with performance in IFP continue to lean into it, but still very focused on the Medicare business which makes up over 90% of revenues today.

Our next question comes from the line of Frank Morgan with RBC Capital Markets. Your line is now open.

Dave, I'm glad I'm focusing on the Medicare Advantage part of the business and the questions will be directed in that area. With regard to the guidance, I'm curious to get more color around the attribution of this growth. I mean you talked about a lot of things then you said in Indianapolis, the new outsourced sales arrangement. I think that you have set up and I am just curious any other things like is there any change in assumptions around non-commissioned revenue. So just a little bit of color there on where the biggest opportunities that you think they're going to drive that the volume growth that you'll see in the fourth quarter of the year. And then I have another one, ask that one.

Okay. Let me start, so there hasn't been any single thing that we can point to that says that has contributed more to our growth than any other ones. It's been pretty fairly broad base and that includes your things like noncommissioned revenue. Those have grown largely similarly to commission revenue in terms of growth rate year-over-year. The one thing that we have commented on and are doing and continue to do is invest more into our sales capacity outside of AEP period, and we've seen the benefits of that both in Q and Q2. And we are anticipating benefits of that going into AEP because the agents that we're now keeping more year round will be more productive. We continue make good progress in online which are obviously key strategy of ours, and we commented on the growth rates and we're tracking well to our expectation of at least 20% application to be online. And then from a marketing perspective for sure it's been broad-based; all the major channels who participating are growing very well. The online advertising channel is growing fastest from a relative perspective. And that would make sense relative to the fact that also online submissions on application is also growing faster from a channel perspective.

In terms of this new outsourced salesforce that you're talking about, anything we should be thinking about in terms of the economics of that biz and the costs associated with that revenue they generate? Or is it in line with your normal economics?

It's generally in line, Frank. With last year and I take you back to Analyst Day back in May when we talked about the success that we had in truly levering up this outsourced capacity component of our telesales organization in the 2018 AEP selling season. That we learned, we had great success with that but also had a lot of learnings from that such that we believe that we can lever up the sales capacity of the business significantly beyond that which we had in AEP last year. And so if you look at some of the investments that Derek mentioned relative to the EBITDA performance that we expect in Q3 what you're seeing is a lot of investment in the third quarter cash out of pocket to significantly lever in part that outsource capability for the fourth quarter. So that we can get the outside gains that we believe we're capable of getting relative to market share gains and that sort of thing.

And in terms of just the efficiency and productivity of the sales force, obviously, you have a tenured force and a new force. Are there any basic assumptions around the ramp up and that productivity to come with some of those newer salesforce that have been converting overall into more of a permanent basis?

Yes. We've talked about the fact that a tenured sales agent performs meaningfully more productively and more effectively than any new agents as much as 25% to 30% more productivity coming from someone who's been on the platform for at least a year. So what that means as we are growing as rapidly as we are, we do expect that very large component of relatively new sales people, whether they be internal or outsourced are likely to perform a less productive rate than those tenured folks. With that said that the investments that we're making on the technology side many of those are focused not only on the online experience, and ability to drive online enrollments. But it's focused on driving more efficient tool sets into the telesales agent hands, so that they are more effective on the behalf of the consumer and in a position to get more business transacted as they interact with those customers. So we expect that our technology platform which sets us apart from our competitors, and is a key point of leverage for the business will allow those newer agents to perform at a more productive rate than the newer agents might have been a year ago.

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

Thank you. I wanted to ask about your carrier relationships and pricing. Is your rapid growth of a recent quarters and the forecast driving, I don't know, a change in how you're viewed and the propensity to spend not only advertising but is there an opportunity for better pricing given how important the channel could be viewed by carriers?

So, Tobey, remember this on the commission side of things that the commissions are largely in the Medicare Advantage space driven on a regulated basis. So it's not as though we can demand a higher commission rate than some of our competitors by virtue of our growth rate. Now what we do see happening is that we are having much better luck in terms of working directly with the carriers to create marketing programs to synergize their points of emphasis with our knowledge of the marketplace, and be able to access customers more efficiently for all the carriers and a rising tide lifts all boats. But we are in a position given our growth rate to interact with the major carriers, and some of the regional ones in such a way where they are working with us to invest marketing dollars to target certain customer areas and drive more customer flow into our platform, which ultimately accrues to their benefit. So that's kind of the next level of benefit that we get from the growth rates that we've been able to demonstrate over the last couple of years. But in terms of actual commission pricing, we're not picking up any benefit by virtue of the volumes that we're doing.

As you look at the business this year but also out in the future, how would the mix of internal agent capacity versus external change over time in your opinion as you see it now?

That's a great question. It's -- the question really has to do with how much business can we economically do in the first nine months of the year in the SEP period when a much smaller proportion of customers are eligible to transact in the marketplace. At the end of the day as we continue to refine our outsourced programs and the way that we onboard those carriers and then take that capacity back off after the AEP is over, we're learning enough so that we can apply more and more leverage. I would argue that at our current size, given the size of the marketplace there, we could, if we could manage, if we could put on infinite outsource capacity and still be able to satisfy the customer demand out there. It gets down to more of an issue of what can we do from a management and capital allocation perspective rather than is the business there or not. So it's doing the math and planning around how much business can we economically do in the first nine months of the year and how much we can efficiently and from a management perspective put on an outsourced basis at the end of the year. But I will tell you that we are levering up the outsource side of our business from a capacity perspective in this fourth quarter relative to where we were last year.

Are there any early indications as to how the onboarding is going? Because it is a tight job market and it seems like that could be an area of kind of execution risk hitting your targeted goals for Asian growth?

Yes. It's good question. We monitor twice weekly and we are ahead of targets.

And last question for me is how long how far out do you have good visibility into your cost of acquisition and anything that you could offer us in terms of color relative to how you're seeing the competitiveness as carriers as we aim towards the fourth quarter?

Got it. If I understand question is how comfortable are we and our expectations of acquisition cost in AEP. I think is our goal is to keep our total variable cost per approved member for Medicare flat for the year, and that's what's in our guidance. Within that we, as we've commented in other settings as well, there could be a mix between cost going down more on the call center and customer service side and then marketing cost going up. And that's by design so but then in terms of total variable cost were expected flat. And as you've seen in Q1 and Q2, we have not seen diminishing returns as we scale relative to our unique economic. So we continuous anticipating we are tractable to that for your goal of flat, variable cost year-over-year.

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

Hi. Thanks for the questions and congrats on the quarter, guys. On the revenue guidance list of $50 million, it looks like a about half of that is related to Q2 outperformance and then maybe there's some upside to at least how the street was thinking about 3Q maybe another $10 million are there, $10 million or so there and so it looks like that the remaining $15 million or $20 million would be for fourth quarter. Just want to make sure that's how you guys are looking at it as well? And I guess I would have thought given the strong outperformance in 2Q and lifting numbers on 3Q that maybe there would be even a greater benefit in the fourth quarter. Do you want to talk a little bit about maybe some of the assumptions that you have? Are you just sort of being on the conservative? And as you think about things and don't want to get ahead of yourselves for the annual, for the AEP cycle or earnings are there any other offsets that we just need to be mindful of.

Yes. That's a good question. So I guess my first day or my first reaction is when we develop our revised guidance we did not think too much about how the quarterly split was relative to the street expectations they're out there knowing that we were going to give everyone more specific guidance on what Q3 could look like. So from a revenue perspective as we commented in prepared remarks, we are expecting sequential decline revenue with Medicare revenue flat. So that I think works out in the neighborhood of 50% growth or so year-over-year. And obviously if you take that and you can derive what is the expected revenue growth in Q4, which given the range of our revenues could range from 25% to 40%. So and then that's the range we're comfortable in our guidance. To your second part question is there anything that, is there that you should watch out for? The main thing is with the topic that we also discussed in the call as well which is really where LTVs are going. It's important to recognize that we are anticipating LTVs to be down for Medicare Advantage single digits in Q4 because of the increased churn coming out of Q4 of loss AEP.

Okay, that's helpful. That was going to a good segue into the second question. So is that churn specifically just on the MA book, want to confirm that and on those new cohorts. And is that something that it sounds like you're expecting that to happen on a recurring basis going forward. If that's the case what is the new duration on your book look like?

Yes, they are all good questions. So let's see there's three parts of that question I think. So it is related to the AEP enrollments coming out of Q4, 2018. And you may ask well why it is ticking till now to be able to both articulate on also it baked down our guidance. That's because there is a heavy time lag obviously with the OE period or pay period where we have to observe people switching and when they switch we have to wait again to see whether they become paying members. So it wasn't until really in middle of Q2 that we fully, we have visibility around the churn results coming out of that AEP. And it is because of that then we anticipate and churn to increase for the cohort that's coming in disparate way AEP this coming year. And one thing that we don't know and well two other things. The first thing we don't know is whether there is a possibility that since customers were able to have a choice to change their different plan, presumably a better plan because of the open enrollment period that they're less likely going to change again in this annual enrollment period. We haven't looked through this, no one has. So we have to monitor it closely and see what happens. But it is possible that this trend here could revert just because the seasonality relatively wimpy which has changed. Does that answer your question?

That's perfect, yes. The last one real fast is I know you guys talked about, premature to talk about long term and adjusting guidance but sounds like you're trending ahead of even the upside case. Is that more so revenue comment or would you feel comfortable with that in terms of the margins as well? The reason I'm asking that is because if duration is shortening on the MA lives, how does that impact your long-term margin assumptions?

Yes, another good question. So if you were to look at our revised guidance compared to prior guidance, there is a greater increase relative to any role that the EBITDA and that was intended because we, our goal to for margin percentage is really where we are at right now for our guidance. And what we've been looking to do is really scale the business without the [Indiscernible] margins. You may recall last year, we ended up with EBITDA margin of 13.4% and in our current guidance was 18%. And we like to keep it there, but what we also like to do is build scale the business if there are opportunity arises. And obviously they'll give us more EBITDA but most likely the same EBITDA margin percentage. We are tracking ahead of our margin percentage and margin dollars against the long-term base case and tailing case.

Our next question comes from the line of George Sutton with Craig-Hallum. Your line is now open.

Thank you. I wanted to think through your assumptions from this angle when you raise additional capital, you had talked about at the time your estimates did not reflect use of that additional capital. But that provided some upside potential. With these new assumptions, I'm curious, are we fully baking in the availability of capital and investments in marketing and platform and agents et cetera.

That's good question, George. The answer is yes. So given the revised expectations in cash being deployed for investing in Medicare sales and marketing you can see that our cash flow from operations now is a negative $50 million to $55 million. And this is our view of the use of proceeds from the equity offering to drive organic growth by business.

Okay. Just one other question and it really gets to the seasonality of the business. So it's shocking how well you did in Q2 which is a very challenging quarter to market in because you only have people who are aging in. And therefore limiting your audience. Does that suggest that the opportunity is even that much bigger when you have the full purview of potential customers in the open enrollment period?

So, a couple things, George, the population of potential customers goes beyond those aging and though they are a significant component. I mean remember anybody who has a special event in their lives, they get divorce, moving whatever the case may be they too are eligible folks in the Medicare Medicaid dual eligible population which is a meaningful portion of the Medicare population are also eligible to change. What I would tell you is that we believe that our performance to date and we expect us to continue to has to do with the fact that the newly reconstituted marketing organization, and we spent a good deal of time during our Analyst Day focusing on Tim Hanna's organization, the work that he's done to rebuild from essentially scratch an organization that is capable of identifying those customers in these relatively down quarters that have transactionable events to get them into our platform and for us to get them transacted. We're showing the success of rebuilding that marketing organization and getting them aligned with the sales organization from a capacity perspective, so that we are essentially touching virtually every customer that comes into our sales organization, and helping them to the best extent possible. Our Net Promoter scores continue to be up there in that 90 range. So it has everything to do with the new management team coming in. The fact that we've rebuilt all of those capabilities and that we're just doing a very good job of identifying those customers that are capable of transacting in these non AEP course.

And our last question comes from the line of Frank Sparacino. Your line is now open.

Hi, guys. My questions they've been answered. Thank you. End of Q&A

Thank you. And that does conclude today's question-and-answer session. I would now like to turn the call back to Scott Flanders for any further remarks.

Well, thank you everyone for your kind commentary on our results. We're very excited. We realize that more than a half of our business is executed in the fourth quarter. And we're not taking a victory lap from these results. We are tightly focused on execution. And we look forward to updating you on our third quarter earnings call. Thank you.

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