eHealth, Inc. (EHTH) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 eHealth, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advice that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker, Kate Sidorovich. Please go ahead, ma'am.

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 third quarter of '19 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 which includes statements regarding future events, beliefs, and expectations, including statements relating to our expectations regarding our Medicare business including Medicare enrollment growth, consumer demand, our competitive advantage, our market share, growth in online enrollment and our performance to stay on enrollment period. Our investment in the Medicare business including investments and telesales capacity, online demand generation channels, sales and marketing and our technology platform. The patients regarding the profitability of all business, seasonality, lifetime values, policy durations, retention rates, conversion rates and cost of acquisitions. Our views regarding their Medicare market and current political environment and also for the fourth quarter and full year 2019 guidance, including our assumptions and our ability to deliver on all guidance. Forward-looking statements from this call represent 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 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 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 earnings press release issued today 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. Welcome everyone. Strong momentum in our business continued with another quarter of meaningful outperformance against our expectations. Third quarter revenue of 69.9 million grew 72% year-over-year driven by 70% increase in approved Medicare members and tail revenue of 11.5 million, that we recognized during the quarter, which represents cash collections on plans beyond what we originally recognized as revenue under our conservative revenue recognition practices. Our adjusted EBITDA negative 18.8 million, reflecting significant investment made in our Medicare sales telesales capacity as well as marketing investments during the quarter ahead of the annual enrollment period. GAAP net loss was $11 million. Derik will cover our third quarter financial results in greater detail later on the call. During the quarter, we completed our preparation for the annual enrollment period. We expect to set another record for the Company this AEP for Medicare enrollment volumes and for commission revenue. We successfully expanded our telesales capacity with a total sale agent headcount more than doubling compared to last year's AEP including a successful sales center in Indianapolis. Over the past few months, we tested and deployed new agent-facing technology that we expect to further enhance our customers experience and increase agent conversion rates. These tools are now available across our agent base including both our in-house and flexible agent force. Our marketing programs deliver strong results over the past four quarters have been further refined ahead of the AEP with a greater emphasis on data and analytics, designed to supply our agents with high quality leads at attractive cost of acquisition. Our website experience for seniors who choose to enroll online for VA, a mobile device, has been enhanced significantly compared to a year ago. Combined with stronger emphasis on online demand generation channels, we expect these improvements to translate into meaningful growth in online Medicare enrollment volumes compared to a year ago. The improvements we've made have been implemented against the backdrop of a strong market environment. Based on CMS forecast, Medicare Advantage enrollments are expected to grow 10% in 2020, the highest annual growth rate in more than a decade. Increased affordability of MA plans, broader plan choice and greater plan complexity with new supplemental benefits been introduced by carriers make eHealth's broad selection of plans and carriers combined with our market-leading online comparison platform more relevant than ever to consumers. Simply put, we entered AEP from a position of strength, allowing us to guide up to the high end of our 2019 revenue and EBITDA forecast at our recent investor conference on October 4. Our confidence in the trajectory of our business remains high. Turning to third quarter performance in our Medicare business, total revenue were 75% and commissioned revenue grew 78% compared to a year ago. Sponsorship revenue from carriers grew 83%, as insurers have increasingly recognized the advantages of eHealth customer engagement platform, which is delivered enrollment growth well an excess of the overall Medicare market. We continue to relay on a diversify portfolio approach to our demand generation strategies, and within our market portfolio, we are increasingly emphasizing digital advertising initiatives, which target consumers are more likely to enroll online with limited or no call center interaction. To this end, 21% of our major medical applications in the third quarter were submitted online, compared with just 9% in the third quarter a year ago. Third quarter performance in this regard represented four times increase in a number of online applications year-over-year. We believe we are delivering solidly on our strategy to significantly expand the online portion of eHealth's enrollment activity. Our Individual and Family plan major medical business, which returned to growth in the second quarter for the first time in several years, continued to perform strongly driven by higher new enrollment volumes and increased member retention. Approved IFP members grew 76% and IFP commission revenue grew 95% compared to the third quarter of 2018. Turning to the small business market, the number of submitted applications defined 15% compared to the third quarter 2018, as we shifted a portion of our sales resources to Medicare ahead of the AEP. Small business for commissioned revenue increased 14% over the same time periods due to higher renewal revenue. In conclusion, this year, we have delivered three consecutive quarters of successful execution, exceeding our expectations and every single quarter and organically growing our year-to-date revenue 76%, compared to the same period a year ago. Annual enrollment period began last week on October 15th and we entered this important Medicare selling season from a position of strength and confidence. During this AEP, the majority of Medicare recipients have access to a broader selection of plans compared to a year ago. And our platform is an optimal destination for seniors to make an informed choice and enroll and a plan that best suits their individual needs. There's been a lot of activity on the political front ahead of the election year. So, we believe that regardless of the outcome of the primaries and the presidential election. The Medicare Advantage program will remain a cornerstone of administering health insurance to seniors in this country. eHealth's marketplace focus technology platform and consumer centric business model is proving to be the best solution to help more and more seniors access the best health insurance for their individual needs. And now, I will turn the call over to Derek to speak more specifically about the numbers.

Thank you, Scott, and good afternoon, everyone. Our third quarter results reflect strong revenue and enrollment growth in our Medicare and Individual and Family businesses and a significant investment in our telesales capacity and marketing initiatives ahead of the Medicare annual enrollment period. In our Medicare business third quarter revenue of 57.2 million grew 75%, compared to a year ago, due to a 70% year-over-year increase in approved Medicare members, 64% growth in non-commissioned revenue driven primarily by carriers sponsorship revenue, and 3.8 million in tele revenue, driven by greater than estimated customer policy fruition, which I will describe in greater detail shortly. The Medicare segments generated a lot of 11 million, reflecting investments as we have prepared for what is expected to be another record fourth quarter selling season in terms of revenue, enrollment volumes and profitability. Year-to-date, our Medicare segments profit was 5.9 million compared to 2.2 million for the same period last year. Our estimated number of revenue generating Medicare members was approximately $551,000 at the end of the third quarter, up from approximately 410,000 at the end of the third quarter of 2018 or an increase of 34%. Third quarter 2019 revenue from our individual family and small business segments was12.7 million, a 59 increase compared to a year ago. Similar to second quarter, we saw a strong increase in the number of approved members for major medical ISP products, which grew at 76% year-over-year. In addition, we are seeing a continue trend of longer durations of these products, resulting in higher estimated lifetime value. Third quarter constrained LTVs for Individual and Family plan products grew an excess of 40% compared to the third quarter year ago as a result of favorable commission rate and policy duration. Commissioned revenue in our IP business grew 95% compared to a year ago, small business group commission revenue increased by 14% year-over-year. The individual family and small business segment profit was 3.8 million compared to a loss of 0.6 million in the third quarter of 2018. Our estimated Individual and Family plan membership at the end of third quarter was approximately 131,000 down 19% compared to the estimated membership of 161,000 we reported at the end of third quarter a year ago. The estimated number of members on small business projects with approximately 45,000 a 17% increase compared to a year ago. Our total revenue for the third quarter was 69.9 million, an increase of 72% compared to third quarter of 2018. Our total estimated membership at the end of the quarter for all products combined was approximately 991,000 members including approximately $264 estimated members on ancillary product. Before I move on to discuss the operating expenses, I will provide more detail on the dynamics that we're seeing with estimated lifetime values or LTVs in our Medicare business. Under ASC 606 accounting, we recognized revenue based on the constrained lifetime value of each moment that is approved by our carrier partners. The base LTV are determined for an estimation of commission payments that we expect to collect over the life of approved business and it's based on a detailed historical analysis of several input including our past experience with policy duration in commission rate per paying member. These estimates of debate LTV are then reduced by applying constraints factor effectively discounting the revenue we book compared to what we expect to collect. Just constraints active insurance against overstaying revenue for the duration of the policy due to fluctuations in policy duration, commissioned rates or other external factors. Our revenue recognition approach using constraint LTVs is appropriately conservative and this is demonstrated and how we recognize tail revenue in every quarter of 2019. We recognized tele revenue when we're cash collections are in excess of the estimated constraint LTVs for previously sold Medicare policy. The constrained LTVs for Medicare Advantage plan, which complement majority of our existing Medicare members have grown on a year-over-year basis for five consecutive quarters, driven by higher commission rates and better than expected policy duration on many of our existing policies. On our last earnings call in July, we noted that several, after several quarters of continuous growth and constrained LTVs for Medicare Advantage products, we expected that the LTV to decline by mid-single digit for pre application in the fourth quarter of 2019 compared to the fourth quarter of 2018. This forecast was driven by higher-policy turnover that we observe during the first quarter this year on Medicare Advantage members that we enrolled during the last annual enrollment period in the fourth quarter of 2018. We believe that the increased turnover in that specific group of approved application was driven by the open enrollment period which took place in the first quarter of this year for the first time since 2011. Since our earnings call in July, we have observed a reversal of the trend with lower turnover under the Medicare Advantage cohort. As a result, the difference between cumulative turn over on this Medicare Advantage cohort on a year to date basis compared to how prior cohorts turnover by this time has narrowed. At this point in the light of these circumstances we expect that fourth quarter Medicare Advantage constrained LTVs will only be down by one to two percentage points compared to the Medicare Advantage constrain LTV for the fourth quarter of 2018. For the full year 2019 our weighted average Medicare Advantage LTVs are expected to be flat to slightly up compared to 2018. Our commission receivable balance at the end of third quarter was 358 million, an increase of 16 million compared to the ending balance at the end of the second quarter and an increase of 92 million compared to the balance at the end of the third quarter a year ago. Our commission receivable balance reflects future commissions we expect to collect on our existing membership discounted by the constraint factor that I described earlier. Our commission receivable balances increased as each quarter by the amount that we recognized our revenue for in quarter enrollment, which is based on lifetime value estimates. This increase is net of the upfront commission payments for any quarter enrollment and reoccurring commission payment that were received on our existing members enrolled in prior periods. During the third quarter, we collected 43.4 million in commission payments. Now, I would like to review operating expenses and profitability metrics. In the third quarter, we made significant investments in expanding on Medicare telesales capacity including our new Indianapolis sales and their launch as well as hiring, training, and on-boarding agents ahead of the October 15th start to AEP. As Scott mentioned earlier on the call, we grew our agent count in excess of 100% compared to the same time a year ago through a combination of in house hiring expanding our outsourced agent force. Our third quarter non-GAAP customer care enrollment expenses which exclude stock-based compensation grew 22.7 million or 133% compared to a third quarter a year ago. Reflecting this investment as well as the fact that we are operating with a larger agent count throughout this year haven't kept the majority of our in-house agents on-board following the completion of the last AEP. The nearly hired agents were not fully productive for most of the third quarter as they were going through licensing and training. As a result, customer care enrollment expense per approved member increased significantly both sequentially and on a year-over-year basis. Similar to last year, we expect this metric to come down in the fourth quarter when our expanded telesales resources are averaged across a much larger volume of enrollments and that the agents become more productive. Our non-GAAP marketing and advertising expense which excludes stock-based compensation grew 9.3 million or 60% year-over-year. Variable marketing expense in our Medicare business grew 78% comparison to 70% growth in approved Medicare members, as we invested more on the margin in direct online demand generation channels that have higher marketing costs of acquisition, but also tend to have higher on the online conversions. Shifting towards increased online penetration which should overtime translate into your higher operations scalability and lower agent cost per enrollment is at the core of our growth strategy in the Medicare market. Adjusted EBITDA for the third quarter of 2019 was negative 18.8 million, which was better than our expectations in compared to negative 6.9 million for the third quarter of 2018. We calculate an adjusted EBITDA by adding restructuring charges, acquisition costs, stock-based compensation, change in fair value of earn out liability, depreciation and amortization, amortization of requiring tangible, other income and benefit from income taxes to our GAAP net loss. GAAP net loss for the third quarter of 2019 was 11 million, compared to GAAP net loss of 9 million for the third quarter of 2018. Our third quarter cash flow from operations was negative 15.9 million, compared to a negative 5 million for the third quarter 2018. Capital expenditures, which include capitalized internal developed software costs were approximately 4 million for the third quarter. Our cash balance was 91.4 million as of September 30th. And we had no debt outstanding under our line of credit. Based on information available as of October 24, 2019, eHealth is reaffirming his guidance for total revenue and adjusted EBITDA for the full year ending December 31, 2019. And also updating this guidance for certain GAAP and non-GAAP measures for the full year ending December 31, 2019, due to the third quarter of 2019 reduction in fair value of the earner liability assuming connection with our acquisition of GoMedigap and a change in income tax rate. Our 2019 guidance ranges are included in our third quarter earnings release for your reference Based on the quality and scalable call center resources in place to acceleration of online enrollments and the strength of our consumer demand were observing. We are confident and our ability to deliver at the high end of the revenue and EBITDA guidance ranges. This implies a year-over-year growth in 2019 approved Medicare members of over 60%. Afterwards has been investment quarter we are forecasting a return to meaningful EBITDA profitability in the fourth quarter, driven by significant sequential increase in enrollment growth and a related increase in our revenue. On a year-over-year basis, we forecast our fourth quarterly results to grow significantly those on a margin and absolute dollar basis relative to fourth quarter of 2018. The top end of our 2019 EBITDA guidance implies fourth quarter 2019 EBITDA growth of 50% compared to Q4 of 2018. I want to remind you that these comments and our guidance are based on current indications of 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 estimate assumptions and judgments. We undertake no obligation to update our comments or our guidance. Before we turn the call over to the operator I want to address our membership metrics in context of customer retention, a topic that's been top of investors and analysts over the past few months. In order to compute customer calls retention rate it's important to keep in mind the following dynamic. One, our retention rates are more accurately assessed by using the number of paying members that we add in a given period, and not the number in period approved members. Our approved Medicare Advantage members have converted into paying at an average of 92%. In addition, some of the members that are proved any given quarter don't become paying members until the following quarter, a spillover effect especially pronounced during high enrollment quarters. Second, policy turnover is higher in the first year post approval and start to decline in and out of years. Policy persistency is particularly strong; one policy has been help year-over-year getting us to our current average policy duration of approximately three years for Medicare Advantage. Three and lastly, due to pronounced seasonality of our enrollments it is more accurate to look at churn and other metrics on trailing 12 month basis. We summarize these points and also provide an example of customer policy retention map as part of operating call slides, which are now posted on investor relations website. Our goal has always to be fully transparent to our investors and analysts and over coming quarters we will be revisiting our report metrics and to evaluate, if we can make additions or changes to further that goal. And now, we'll open up the call for questions. Operator?

Thank you. [Operator instructions] The first question comes from Jailendra Singh with Credit Suisse. Your line is now open.

This is Daniel Aversano filling in for Jailendra Singh. Thank you for taking my question. Do you have any more details on the new call center in Indianapolis? I know last year there you had approximately a 136,000 unanswered calls. So, have you seen less leakage so far? And lastly, can you talk more about your marketing investment and engagement efforts?

Thanks for the question. This is Dave Francis. The Indianapolis call center has launched really without a hitch. I think we've talked about previously that we were looking to staff as many as 200 sales people in that office, and it's gone like I say, without a hit we had full hiring, had everybody trained, appointed; and when the AEP valve opened on October 15, that was our first office opened and taking call, and they been performing as a better-than-expected. As it relates to the number of calls that we talked about last year that we were unable to answer because of constrained capacity. So far early in AEPs, so it's way through earlier telling exactly what the full AEP will be, but we feel very good about our operationally how all the call centers are operating and the number of customers that we are able to touch. We got meaningfully less leakage as we put than we did last year. As it relates to the market side of things, everything is working as we expected. We've made some significant investments across the different marketing channels that we talked at length about from all the way from direct mail up to search engine marketing, and very pleased right now with the way AEP is going. With that said, we're less than 20% of the way through AEP, so it's way too early to see how everything's going to end, but we feel very good about where things stand at the moment. And I think that's all we're prepared to say at the moment.

The only thing I'd add to that is. In Q3, as into our ability to serve more calls that we did have less call selling revenue in Q3, this year than compared to last year given the productivity and the size of telesales force that we have this year compared to last year in Q3.

Okay, great thank you, and just one more, quick question. Would you also be able to talk about some of the initiatives you're focused on for your lead resourcing and customer -- and bringing down your lead resourcing and customer acquisition cost? Do you see a big opportunity there?

Yes, I can start with that. So, we continue to have success in scaling our direct to consumer marketing and customer acquisition. It's been a multiyear effort, and for many years, you have seen we have driven the cost per member down on marketing. Our focus now is really continue to keep that scale while growing enrollment. So just to kind of echo that point, our desire here is not to look for reduction and economics of marketing is to maintain it while we scale. And the key component to that is continued evolution of our marketing program to be more analytically driven which was discussed by Scott, and the other highlight here is we will continue to expand and increase our online marketing at a more outsize rate compared to other channel and the reason for it is the members that we acquire through online marketing channels tend to enroll more online.

Thank you, and our next question comes from the line of George Hill with Deutsche Bank. Your line is now open.

Hey, good afternoon guys, and I hopped on the call a little bit late, I'll apologize if you covered this. I guess Derek, you talked about 90, I'm trying to read minutes here, approved members becoming paying members, 92% of the time, I guess can we talk about the other 8% and can you frame this statistic kind of relative to history or is this new?

George, that's a good question and I'll point people to what I commented in my prepared remarks, which has more details on the slide that we posted in our investor relations website. So, 92% has been very steady in the history that we've been in this Medicare business and even in the figures that we have disclosed on the slide. You can see that averaged out to 92% when you look at on 12 to 12 months the last four quarters. So what tends to happen is, if people either don’t actually qualify and then I am not paying because they are unhappy with the plan. And this is not a unusual situation not just for eHealth but other brokers or other plan providers where they see a drop off between approved to pay.

Okay, and like I said I apologize I dialed in a little bit late. It sounded like you said for Q4 the erosion LTVs is now going to be one to two percent versus mid single digits. I guess can you, there's a couple of factors that drive the LTV component, I guess can you talk about which puts and takes have moved versus when we communicated at the end of Q2, my guess is going to be that retention is looking better cause you have pretty good visibility for the other components of the LTV calculations.

Yes, that's good insight there George. So there're primary inputs in LTV is policy duration, commission rate and approved to paid ration that we had just commented on. The ladder two of those components are fairly consistent ones obviously a cohort has enrolled. So really it is around the persistency of the policies. And as I mentioned, the prepared remarks which I give more color here, what we saw was, coming out of the OEP period. People who had enrolled in during AEP in 2018, turning more, meaning they switch more because of the ability to be able to do that given that OEP period. Since then, for people who did not switch, what we see is a reversal of that trend where they're staying on longer than what we've seen compared historical patterns. So, when those two things come together on a cumulative basis, we're seeing the trend basically narrowing. So, it's not obviously the four year cycle yet. So, the final chapter of this is still to be seen, obviously with AEP. But at least we can say, for given the heavens we've seen so far, we are seeing perhaps a more of a shifting in the seasonality of people switching as opposed to maybe a permanent increase in switching based on the introduction or the reintroduction of OEP.

And I don't want to neglect to Scott and Dave. So, what I want to ask about is I want to know, how are you guys thinking about the Q1 switching season? I guess how you've retained applicants versus people who came on in Q4? You probably can’t do anything to prevent switching, but I guess what I care about is from a marketing, go-to-market perspective. Do you guys keep kind of the pedal to the metal and marketing spend, and the attraction of beneficiaries, enrollees and applicants in Q1? Given this is the second year that we have the switching season, and whether it's people, people aging in or people who are switching like it's almost like you get a little bit of a second bite of the apple as it relates to AEP. I'd love to know, how you guys are thinking about the switching period kind of second time around.

So George, this is Dave. I'll go first and I have Scott follow on, but there's two things as we look at Q1. Number one is, for lack of a better term playing defense on those customers that we've just signed up. So, to the extent that we can limit that increased turnover and customers that we saw in the first quarter of this last year for the previous Q4, new buying cohort. We've got some plans in place to have specific outreach to those folks to make sure that they understand what they bought, that they're using it properly. If they have any questions to help those folks better understand and make sure that they're correctly using their products so that there's a less impedes for them to want to turnover. If they do want to turnover then we're right there for them to do that with us, so that we keep them in our book and they don't end up exiting the book. And then secondly, as we talked about and have demonstrated through our outsized growth rates relative to the market. Anytime of opportunity for broad based customer groups to change, we believe they ought to be doing so, using our platform given the tools and the breadth of choice that they have. And as we saw last year with significant growth in the first quarter, we fully expect to be plowing additional marketing resources into the marketplace so that we can capture as many of those customers as possible. So it's an increasing the persistency of all of the customers in our book, including the new ones that we've added in the fourth quarter plus encouraging those folks that are coming back into the market in the first quarter OEP to come to the eHealth platform to do their shopping.

What I would add to that is, those members that churned out and from AEP in last year's fourth quarter and a new plan in Q1 have shown low churn. And so, what is probably the case is they got into the non-optimal plan and then got into the right plan in Q1 and have strong consistency since then. So, this is why we flag -- we flag the higher churn. And Derek might have lost in an awfully long a CFO script because we covered a lot, but we'd been pleased to see that churn abated dramatically. So, we implied it when we thought it was substantial issue. And from today's call, we're trying to alleviating once ongoing concern about churn for us. It's flat year-over-year overall.

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

This is for Joshua [indiscernible] for Tobey today. You've invested a lot in the technology in the harmon enrollment experience. It appears, there is likely to follow, how long would you say would take for another platform company to get to where you are right now?

It's Dave. I will answer this way. There is we talk a lot about our platform both from a telephonic and an online perspective. There are few aspects to the platform that are important. One is the frontend experience for the customers where they engage with us and we've seen a lot of people coming and creating online, quoting and shopping experiences where they are able to show different customers plans and that sort of thing. We would call that the non-proprietary side of the markets of its business. We continue to invest heavily on the frontend of the shop and make sure that our customers have the best shopping experience available to them. The backend of the experience is what we believe is proprietary to the way that we're doing business that we connect across all of our products with over 170 insurance companies across the country, large national small regional and another one. And that is the part of the business that is very difficult to replicate given the inconsistencies of technology platforms across all the different payers, and creating the connections and maintaining all the business logic and what have you is entailed in all of that. That's a growth oversimplification of what it takes to build that back, in but it's something that we believe take, not quarters or months, but year for another potential competitor to replicate if the insurers are willing to open up your end to that kind of electronic linkage. So, we see a lot of people coming into our market place given the growth that we have on the front end, the customers engagement side and we believe the more folks coming in, the better it will conduct more shopping experience for customers generally. But to put the full market place end to end experience together in a customer's friendly way that we have we believe is extraordinarily difficult to expend that a time consuming for potential competitor to do.

Thank you. And our next question comes from the line of George Sutton with Craig-Hallum. You're line is now open.

You mentioned the tail revenues in the quarter were $11.5 million and have increased five quarters in a row. Curious, does your Q4 assumption include any tail revenues?

There are two questions. Just to be clear, we've seen tail revenue five quarters in a row. I don’t think we can specific comment that increased five quarters in a row, but 11 million for the quarter is correct. So, for -- in our guidance, there is expectation included around tail revenue and that's actually been the case since our first guidance. What is also true is tail revenue have exceeded our expectation. And relative to kind of the earlier questions from George, really when we see better than expected results in our cash collection, it is driven mostly because of better persistency, people saying, the policies longer so that's the case. So, and obviously, we have the analytics around a fairly large membership of people. The longer that they have it's almost been on a policy more, the less variability there is around churn, and yes, we can see some of this data that we all have included around the life cycle of churn percentages at least for Medicare Advantage in our Investor Relations materials. So, more to come on that obviously based on how we see Q4 plays out, but hope that answer your question George.

Wondered, if you could explain your growth plans for the AEP versus the combination of your increased capacity and the assumption of higher online only ads?

Historically, are you talking about that?

To be clear, you're assuming a doubling of capacity, you're assuming more of what I would define as call center capacity. You are assuming higher online only ads, but your growth rates are obviously quite a bit different. So, I just wanted to make sure I understood that dichotomy.

I would just say that our guidance is conservative.

That was my assumption. Last question, are you seeing, let me ask it this way. Industry folks including us have looked at Medicare Plan Finder and found to be relatively uncomfortable and unlikely for most people to work through. Are you finding any impacts thus far in this season from Medicare Plan Finder?

No.

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

Good afternoon, just going back to the AEP. I'm just curious, do you have any specific numbers you might be able to share about how it's going so far, I mean, presumably you're getting real-time updates on those numbers and understanding that you're still early in the process, but anyway you could kind of quantify or give some kind of benchmark about how it's going so far in this AEP?

Frank, you're right, we see the numbers on almost real time basis. I would say that we are very pleased with the way that we plan for and plan for AEP in the way that the numbers are coming in thus far.

Record calls and record convergence.

And then just curious, a lot has been mentioned about you know the plan finder, potential for growing competition, but just curious with you know seeing strategic buyers in the space. Does that in any way affect your view of how the competitive landscape plays out? And then my last one was that the 21% online number that you had in the third quarter. Is that a fair number, just you would expect to see in the 4Q of AEP? Or does that get diluted somewhat given the growth in overall volume?

So, let me answer the second question is. On a sequential basis, we have historically and we do expect fourth quarter share online applications to go out. So, we would expect the same thing that happened in 2019 as well. On a competitive side, and I'll start and then Dave and Scott can add. We play in a very large market, as you know, Frank. And we've had a lot of success driving towards the growth strategy that we've been on the last four quarters. And as you heard earlier in our prepared remarks and also in Q&A, we are very happy with and then very confident in our preparation and execution for the AEP so far.

Yes, I do want to say Frank. Again, the fact that we've got to over 20%, online enrollments in the third quarter, and zero so the trend is for that to accelerate into the fourth quarter historically and thus far this quarter we've seen just that. We have high expectations for the transition for the online side of the business to continue to be a meaningful driver for us, both from a P&L perspective and a strategic positioning perspective. So, we're really pleased with where those numbers are coming in particularly given that we were only looking for 19% to 20% online for the entire year. So we're really pleased with that. And, again, competitively we're pleased with what we're seeing in the marketplace relative to our ability to acquire customers.

Our next question comes from David Styblo with Jefferies. Your line is currently open.

The stocks down a few dollars and aftermarket trading, I think a couple things that just are raising questions from investors that I thought I'd ask to see how you can help maybe add some clarity to it is. It's first of all on the variable marketing costs for the approved members and customer care enrollment. How those are obviously up 70 to 52% as you guys released? How do we think about that normalizing? How quick does that need to get back to flattish? Is that something that can happen in the fourth quarter since those agents will be seasoned? Or does it take a longer period beyond that? That would be the first question I have.

So, third quarter both of those metrics large in came in line or exceed our expectations, given the preparation that we were looking to put in place in terms of capacity going AEP. So the way that we look at those metrics is really on the back half of year basis. And it will normalize largely because of obviously the AEP period and also on the sales side really getting agents to be productive, which many of them were in the third quarter, because they were ranging in and gain training, getting licensed. On the marketing side as we comment in our prepared remarks, really the pick-up there was an online marketing spend as a percentage of total marketing spend; and because people that we're acquired through online marketing channels have higher propensity to online [indiscernible]. So, and as you heard, we did to and see our expectations in Q3 for online enrollment. So, you see a corresponding positive result from that effort. So for the year at the midpoint, we had guided to a flattish on a total variable stock. I think that's still the case. They always look for additional investment opportunities to the extent that make sense and it does make sense it will more likely come from the marketing side through online, increase in online market investment.

To be here at specific, the CTE cost, the standard cost are directly related to the fact that we made significant investment to put on significantly more benefit in the third quarter vast majority of that capacity was unproductive as they were going through on boarding training and appointment. So, we absorb the cost in anticipation of the business coming into the fourth quarter having the capacity to help as many customers a possible in the fourth and the third quarter blips in consistent for prior year.

Thanks for the color there. I think the second element that you can explain is just on the LTV. So the MA LTV was only up 1% this quarter versus 8% to 16% in the first half of the year. I guess I would have thought would have been up, again pretty strongly just because you guys have a tailwind and sounded like some of the comments earlier that duration was looking better on that and the new cohort. So can you help me understand just got to see on the MA part and then also on the net stuff LTV, the declines accelerating up to 10% versus 3% to 6% in the first half sort of can you explain what's happen on the LTV on that side as well?

Let me start with that, on MA side, we required GoMedigap about a year and half ago. And then we really, really scale that business just to require them and we are going through a certain degree of growing pains around kind of the operation aspect as we look to maintain our increase persistency so you caught that. On the MA side, there is a lot going on when we look at third quarter LTVs. One is seasonality aspect of LTV so if you look at on a sequential basis, you will see some fluctuation. On a year-over-year basis, we look at -- we use a two year look back to average out the impact of either rate increases and also policy duration, so that’s why early in the year and early quarters we have favorable longer durations that were still flowing LTVs that we're starting to get new because of the enrollments we saw in Q4 2018. And as we comment in our prepared remark, we are seeing that churn reversing and normalizing and narrowing comparable ROI in the quarter, but it hasn’t been concluded so that’s why you see more flattish behavior in Q3.

Okay. And then, so that’s not just a fourth quarter event. I thought initially the back of the fourth quarter of 18 was sort of overestimated. You're correcting for them in the fourth quarter of 19, which usual guidance was down the single digit, naturally downward 2 points. I thought that was sort of the cash up that it doesn’t really happen in quarter two or three, but it sounds like it does actually happen throughout the year event.

Yes, it does pay more a dramatic one of the quarter that it relates to. So, our estimations are to you look back, but it is on seasonal. So that’s the new one, so just to comment more specifically the churn that we were addressing both in call in Q2 and now is specific to the ADP cohort. But in terms of LTV population build into other quarters and not nearly as much as the quarter that the season is related to.

And our following question comes from the line of Greg Peters with Raymond James. Your line is now open.

I have one question and then a follow-up. You mentioned competitive conditions. There seems to be a new player or strategic coming into the market almost on a daily basis. So, one of the things we've been hearing is rising lead costs, and I was wondering if you could give us some additional color around your go to market strategy and your process to drive the online enrollment ever since the 21% in the third quarter?

So, if I understand your question is, have we seen additional competitive pressure against our marketing initiative and how that's shown up in terms of our acquisition cost.

I'm sorry if it wasn't clear. We're hearing specifically that the cost of leads has been rising beyond just the 7% that you reported in your third quarter. And you know in the context of new players and/or strategic coming into the market, I'm just curious about your go to market strategy, how you're dealing with those pressures?

In Q3, the increase that we reported primarily related to increase in online market investments and less so compared to pressure broadly across other channels. And our principle channels are the direct channels with direct response TV, direct mail and direct traffic on both sides. So, there was nothing in Q3 that we saw that point to a broader increase in competition. With that said, you are right that there is a lot of interest in the market, and for good reasons because they probably see the same thing obviously that we see around the market opportunity and obviously the growing aspect of Medicare Advantage as a very-very attractive [indiscernible] carriers. So, we're aware of that competition. We do feel like we have advantages in marketing that allow us to go to compete in a manner that allows we continue to scale. And most importantly is we do a lot of our lead acquisition intensively through direct to consumer as opposed to relying on lead gen partners. And of course, we continue to scale our online capabilities both from an enrollment perspective and marketing perspective.

Greg, it's a competitive market place that we continue to believe that we have the opportunity to grow at multiples of the market rate while still maintaining very margin cost of impact on all the incremental business that we're bringing in despite the competition.

My follow up question which is and I understand the dynamics of the near-term growth opportunities in sacrificing cash flow or free cash flow that is. But I was wondering if you could just give us an update, I think in the past, you might have suggested that operating cash flow or cash flow from operations might turn neutral or slightly positive at some point a year or two down the road. Maybe you can just give us an updated perspective on that?

Yes, at our Investor Day back in May, we had commented that we would be close to breakeven on the trailing 12 month basis March 2020 based on the guidance at this point. We have obviously since revised our guidance upwards and then we had commented in other settings that we don't expect to be able to be at operating cash flow break even at that same time period given our business model which is heavier investment upfront for customer acquisition. So as of now we expect that the cash on our balance sheet plus our access to a revolving facility to be able to allow for us to pursue our growth strategy for both in the five year pay scenario and also the tail wind scenario that we had discussed at analyst day. If there are additional opportunities to pursue more growth, we will look to leverage more on our $358 million commission receivable to give us more access to capital to view that growth. We will be revisiting our long-term growth plan obviously after this year since we are pacing ahead of both debates and the talents in that five year plan and that one will be more available to discuss where we see our cash flow dynamics in our years.

Yes, let me just add to that, that answers two questions with one sentence is. We do not expect our gross margin for enrollment to the decremented by any of the market competition what would cause us to firm defer more cash is just volumes well in excess of our tailwind case.

And our next question comes from Michael Newshel with Evercore ISI. Your line is now open.

Can you just comment on your, on the level of conservatism the guidance since you decided not to leave the full year revenue guidance unchanged even though the third quarter came in better plus the Medicare LTV outlook actually improved and set up investment capacity. So, can you just kind of like frame that decision and then also just how you're thinking about upside drivers for the enrollment season?

Yes. So, we make the decision headed into the Q2 earnings call to guide once up and made a decision remain the team and board level that we would not be guiding at Q3. So, this is a decision that was made irrespective of where we came in Q3. So, it's nothing should be read into that.

And then in terms of upside drivers and for the fourth quarter since the agent count has doubled. Is there a productivity to key some factor? Or is a force like demand for seniors and the quality of leads also key factors too?

It's Scott. It's the volume of customer coming into the platform and our ability to do that on a margin positive basis from a marketing investment perspective. And then it's the investment that we've made on the technology side to make those agents that we've had on board for a while and those that we've on board just recently, to be more productive. So in essence, increase their conversion rates throughout the fourth quarter. We build what we believe is an aggressive, but very achievable plan with potential leverage. So, again, to Scott points, it's improvement for us this early in AEP season to be further commenting on guidance beyond that which we have. But other than to say that we are very pleased with the way that the business has been coming in. And Scott said, record volumes and record conversion so far.

And our next question comes from the line of Lisa Springer with Singular Research. Your line is open.

I just wanted to ask a quick question about the expansion of telesales capacity. How much of that was in house agents versus flexible agents? And is there a difference in conversion rates between those two groups?

The in-house growth was about 50%. So, call it 400 up to 600 last year, and then the balance of that is going to be external agent. There is a conversion rate difference. It has the newer agents, the less productive they are on the firm. Much as a person playing golf or baseball the more swings the batter club they have, the better they get at using the tools and interacting with the customer. So, as I mentioned before, we make a lot of investment on the technology side to make that sales process easier goes for tenured agents and for new agents. And we're seeing the benefits of that already to take AEP, but there is no question that a tenured agent is more productive than more efficient than a new agent.

Thank you. And I’m not showing any further questions at this time. I would now like to conference back to Scott Flanders for any further remarks.

Thank you everyone for the caliber of question, it definitely feels to me that the analyst coverage of eHealth has matured dramatically since a year ago when we were headed into AEP and it just really appreciated the attention being paid to this May. We could not be more optimistic about how our business is positioned. The 4x growth at online, we think is a [indiscernible] change in our strategy and our competitive differentiation. So, as I said earlier, we remain uniquely confident and in the trajectory of our business and we believe we’re going to have a record fourth quarter. We look forward telling you about it when the calendar turns to 2020. Thank you everyone being on the call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.