eHealth Inc (EHTH)’s Preliminary Fourth Quarter and Full Year 2014 Results Conference Call Transcript

Below is the transcript of the eHealth, Inc. (NASDAQ:EHTH)’s  Preliminary Fourth Quarter and Full Year 2014 Results conference call, held on Thursday, January 15th, 2015, at 9:00 am EST.

 

EHTH EHealth Inc logo

The eHealth, Inc. (NASDAQ:EHTH) has enrolled over 4 million people in health insurance coverage and is the leading online marketplace for individually and family health insurance products in the nation. Licensed to market and sell health insurance in all 50 states and the District of Columbia, eHealthInsurance was responsible for the nation’s first Internet-based sale of a health insurance policy, and they have partnerships with more than 180 health insurance companies, and offer more than 10,000 health insurance products online.

 

Company Executives:

Kate Sidorovich, Vice President of Investor Relations, eHealth, Inc.

Gary Lauer, Chief Executive Officer, eHealth, Inc.

Stuart Huizinga, Chief Financial Officer, eHealth, Inc.

 

Operator

Good day ladies and gentlemen. Welcome to eHealth Preliminary Fourth Quarter and Full Year 2014 Results Conference call. My name is Matthew and I’ll be your operator for today. At this time, all participants are on listen-only-mode. If there’s anytime during the call that you require assistance, please press star 0 and an operator will be happy to assist you. As a reminder, this call is being recorded for replay purposes. And now, I will have to turn the  call over to Ms. Kate Sidorovich. eHealth’s Vice President of Investor Relations. Please proceed Ma’am.

 

Kate Sidorovich, Vice President of Investor Relations

Good morning and thank you all for joining us today, either by phone or by webcast for discussion about eHealth Inc Preliminary Fourth Quarter in Fiscal Year 2104 Financial Result. On the call this afternoon, we’ll have Gary Lauer eHealth, Chief Executive Officer and Stuart Huizinga, eHealth Chief Financial Officer.

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 from this call, that includes statements regarding future events, views and expectations including those related to our projected financial results and operating matrix for the fourth quarter and fiscal year ended December 31, 2014, as well as performance and key factors of certain of all businesses. Also our ability to assist up to the eligible consumers during this open enrollment period in the list our family plan application volumes during the weeks leading up to February 15, of 2105.

Potential stronger application volume during the first quarter of 2105. Lifetime values for Medicare supplements and Medicare advantage product. Contributions from Medicare supplement products revenue and membership. Postpone recognition of Medicare revenue until the first quarter of 2015 and our return on investment on Medicare marketing expenses. Forward-looking statements on this call represents eHealth’s views as of today. You should not rely in 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 it’s the result of new information future events or otherwise.

Forward-looking statement are subject to risks and uncertainties that could cause actual results to differ materially from those projected in our forward-looking statements, including the risks associated with delays in our receipt of items acquired to recognize Medicare revenue and estimates that could differ materially from actual reported amount in eHealth Annual Report report on Form 10-K, for the fiscal year ended December 31, 2014.

For the report of other risks factors that may affect our results, please refer to our press release issued yesterday. In our recent SEC filings, in particular the Risk Factor Section of our most recently filed Form 10-Q. We will be presenting certain financial measures on this call that will be considered Non-GAAP under SEC regulation G. For more information relating to Non-GAAP financial measures, 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 forward to Gary Lauer.

Gary Lauer, Chief Executive Officer

Good morning and thanks for joining us as we review our preliminary result from fourth quarter fiscal year 2014. We thought it was important to share this preliminary results with you given that our projected 2014 revenue and earnings are expected to fall short of the guidance ranges we provided previously. Since we haven’t finalized the closing process for the fourth quarter, and don’t have full financial and membership matrix that we typically report, today’s conference call will be limited to our prepared remarks.

What I’d like to do today is update you on our fourth quarter performance in our Medicare business and our individual Family Plan business and discuss key factors that affect our performance relative to our expectations. I’ll then turn the call over to Stuart who review projected ranges for our fourth quarter and 2014 financial results and provides some additional color around this numbers.

In our Medicare business, we completed a successful annual enrollment rate during the fourth quarter, generated submitted application growth above our expectations at attractive acquisition cost per member. We’re especially pleased with submitted application growth rates for our Medicare advantage and Medicare supplement products which are both characterized by high expected lifetime revenues.  Primarily as a result of the strong application growth, we spent considerably more on Medicare marketing during the fourth quarter than we planned, although our per member acquisition cost was lower than it was in the fourth quarter a year ago. I’ll talk more about our Medicare business in a few minutes.

In our Individual and Family Plan business, we are currently in the middle of the 2015 open enrollment period. This is the second open enrollment period under the Affordable Care Act and there are several important differences this going-on open enrollment period and the one one that began on October 13th over a year ago. The first major difference is timing. Given that this enrollment period started on November 15, we have 45 selling days in the fourth quarter of 2014, while on the fourth quarter of 2013, we have a full 90 days. Also during the inaugural open enrollment period, we saw a large number of Individual and Family Plan applications during the last two weeks of December, driven by consumers enrolling in the so called grandmother plans. To remind you late in 2013 the Obama administration allowed carriers to sell non-ACA compliant plans and gave consumers a deadline of December 31, 2013 to enroll in them. More than half of our fourth quarter 2013 individual and family plan applications or for this grandmother plans, this products are not available to be sold in this current open enrollment period that started on November 15th. Importantly during this on-going open enrollment period we are assisting subsidy eligible consumers and submitting applications for qualified health plans, something we did not do on the fourth quarter a year ago to the technology issues with healthcare.gov. We are enthused to be able to offer this capability.

During the fourth quarter of 2014, we sold over 150,000 individuals applied for health insurance on roughly 100,000 individual and family plan submitted applications. Over 25% of these submitted applications were for qualified health plans. The submission volumes were less than we anticipated. I’d like to note that historically we’d seen consumer demands in our markets increased in our application deadlines. During the current open enrollment period, these trend has been even more pronounced. With peak application volumes around the first major enrollment deadline of December 15th, significantly exceeding last years. As a reminder, December 15th was the deadline to apply for the individual family plan policy, with the January 1, 2015 covered effective date.

If this trend holds, combine with our ability to process subsidies this year, we are optimistic about our potential individual family plan application volume during the weeks leading up to the last day of the open enrollment period which is February 15. This could also translate into strong first quarter application volumes considering that the final weeks of the last open enrollment period that ended on March 31, 2014 accounted for a very significant portion of our total individual family plan application volume in the first quarter last year. I’d also like to point out that, unlike Medicare in our family plan business, we did see an increase in the cost of acquisition per member compared to a year ago. To give a little more sight into our Medicare business, submitted applications for Medicare advantage and Medicare supplement products combined were 46 % in the fourth quarter compared to the fourth quarter of 2013 with applications for Medicare Supplement Plans going in excess of 80% and Medicare Advantage Plans going in excess of 40 %.

It’s important to note here that we project Medicare Supplement products that approximately the same lifetime value to us as Medicare Advantage products, and we are starting to see greater contributions for Medicare supplement products to our revenues and to our total Medicare membership. In addition, Medicare Supplement products are not subject to the Medicare annual enrollment period and can be sold throughout the year to anyone who qualifies, which makes this products even more attractive to us.

And now I turn the call over to Stuart to review our guidance ranges and talk about the key revenue and profitability drivers for the fourth quarter.

 

Stuart Huizinga, Chief Financial Officer

Thank you Gary. I will now review our preliminary results for the fourth quarter in fiscal year 2014. Please note that these results are based on our initial review of operations for the quarter ended December 31, 2014 and remain subject to change. We wanted to show a preliminary view on certain of our fourth quarter and 2014 annual financial results and over final results for this recording periods, and our regularly scheduled fourth quarter 2014 earnings conference call.

As detailed in our press release, we expect our 2014 revenues EBITDA and non-GAAP EPS to fall below the annual guidance ranges we provided previously. Specifically, we now expect that our revenue for 2014 will be in the range of $178 million to $ 180 million compared to guidance of $185 million to $194 million. And for the fourth quarter 2014, we expect our revenue to be in the range of $43 million to $45 million. We expect EBITDA for 2014 to be in the range of $1.5 million to $4 million compared to the guidance of $13.5 million to $18.5 million we provided previously.

For the fourth quarter 2014 we expect our EBITDA to be in the range of -$16.3 million to -$13.8 million. We expect non-GAAP net loss per diluted share for the full year 2014 to be in the range of -13 cents to -4 cents compared to guidance of 30 cents to 43 cents earnings per diluted share. And for the fourth quarter 2014, we expect non-GAAP net loss per diluted share be in the range of -56 cents to -47 cents. EBITDA is calculated by adding stock based compensation expense, depreciation and amortization expense, including intangible asset amortization expense, other income expense net and provision for income taxes to GAAP net income. Non-GAAP net income per diluted share is calculated by excluding intangible asset amortization expense, stock based compensation expense and the estimated tax benefit related to these items.

We project our 2014 annual revenues to come in below the guidance range for two primary reasons. First, in the fourth quarter, several million dollars in the Medicare revenues were pushed out into the first quarter driven by regulatory changes that impacted how Medicare carriers compensate their brokered channel. Specifically, for plans that are sold in the annual enrollment period, carriers are no longer allowed to make commission payments before January 1st, which is the standard effective date for these policies. Historically many of the carriers paid brokers following the approval of a policy without waiting for the effective date.

We typically recognized commission revenues based on the receipt of two items, a commission check and a commission statement . One of these two items has to be received during the quarter in which we booked revenues, and the second one shortly thereafter. Given that carriers were not allowed to pay us until Q1 and sales made during the fourth quarter annual enrollment period, we’re planning to booked revenues stemming from these sales based on receipt of commission statements. However, to the extent we did not received statements by quarter end, we had to postpone revenue recognition until the first quarter of 2015.

Lower than expected individual and family plan application also put pressure on our application revenues. While applications generated in the given quarter typically had a limited impact on broker commissions in that same quarter, they do impact other volume based revenues, including sponsorship and advertising and other ancillary revenue. As a reminder, sponsorship and advertising revenues are closely linked to the application volumes for insurance products offered by carriers participating in our sponsorship and advertising programs. Consequently, these individual and family plan related revenue revenues are forecasted to come in below our expectations in the fourth quarter by several million dollars as well.

Turning into our profitability, our fourth quarter EBITDA and earnings per share will be primarily affected by two major factors. One, we spent more than originally planned in Medicare marketing costs based primarily on higher than expected consumer demand and application volumes generated in our Medicare business. As you know our marketing expense of the quarter is closely linked with the submitted application volume and we spent our customer acquisition costs upfront, while commission revenues are recognized over the life of the member. We believe that the return on investment on these Medicare spend is very favorable and as Gary mentioned, our Medicare acquisition cost per member were attractive and below last years fourth quarter. Secondly, our fourth quarter profitability was affected by the revenue shortfall, driven by the timing of Medicare revenue and lower than expected individual family plan revenues that I just discussed.

As we stated earlier, while Medicare unit acquisition costs were lower than last year’s fourth quarter, we saw an increase in cost of acquisition per member in our individual and family plan business driven by a higher paid search cost. So while the overall IFP marketing spend came down in the fourth quarter of 2014 compared to the fourth quarter a year ago, it did not decline to the same extent as the submitted individual and family plan application volume.

We’ll provide greater detail in our fourth quarter revenues and operating expenses during our regularly scheduled Q4 earnings call.

This concludes today’s prepared remarks. We look forward to providing you with full financial results for the fourth quarter and fiscal year 2014 on our earnings call next month. At that point, we also plan to share with you our annual guidance for 2015.

Operator

Thanks for joining us on the call, ladies and gentlemen. This concludes the presentation. You may now disconnect. Good day.