Edited Transcript of EHTH earnings conference call or presentation 23-Apr-20 9:00pm GMT

Forward-looking statements on this call represent eHealth’s views as of today. You should not rely on these statements as representing our views in the future. We undertake no obligation or duty to update information contained in these 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 on our Investor Relations website. And at this point, I will turn the call over to Scott Flanders.

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Scott N. Flanders, eHealth, Inc. – CEO & Director [3]

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Thank you, Kate, and welcome, everyone. We finished the first quarter in an unprecedented environment, shaped by significant disruptions to the global economy and our daily lives as a result of the coronavirus. In this environment, our mission to connect every person with the highest quality, most affordable health insurance for their life circumstances is more relevant and important than ever. Being enrolled in the right plan is especially important to our main customer segment, seniors, as they are being disproportionately impacted by this pandemic.

Our omnichannel consumer engagement platform allows seniors to research and enroll in Medicare plans in a safe environment, online or by speaking to a licensed insurance agent on the phone, without having to leave their house and allowing them to avoid the face-to-face interactions that traditional agents depend on to sell plans.

In addition to delivering outstanding service to our customers, the safety of our employees is a top priority in this challenging environment. In March, we shifted our entire U.S. workforce to a remote model, including all of our customer care agents. This was a major undertaking accomplished in a matter of days and seamlessly, with the transition having no impact on our operations.

In fact, the average productivity of our agents in the first quarter increased compared to a year ago despite this major change to their work environment and routine. I want to acknowledge our team’s resilience and tenacity over the past several weeks and express my gratitude for their unrelenting focus on our mission.

Turning to our performance for the quarter, the fundamentals of our business are strong, and we are continuing to drive meaningful Medicare revenue and enrollment growth. Building on our momentum of the past 2 years, especially our record performance in 2019, we are pleased to deliver another quarter of outperformance.

First quarter approved Medicare members grew 46% compared to a year ago, with Medicare Advantage approved members growing 59%. First quarter Medicare revenue grew 75% year-over-year, driven by strong enrollment volumes and a favorable trend in the estimated lifetime values of our Medicare members, which Derek will describe in greater detail.

We continue to drive rapidly growing customer acquisition success through our diversified portfolio approach to our demand generation strategy. Our direct-to-consumer channels provide balanced customer traffic through digital advertising, direct response TV, direct mail, e-mail and organic search initiatives, while our strategic partnerships with large retail pharmacies, hospitals and other affinity groups remain a substantial and unique driver of new business.

In the first quarter, we achieved another meaningful year-over-year increase in the number of Medicare applications submitted online, including unassisted and partially assisted agent online enrollments. 24% of our first quarter applications for Medicare major medical products were submitted online compared to just 12% 1 year ago.

On an absolute basis, the total number of applications for Medicare major medical products submitted online more than tripled compared to the first quarter of 2019. As a reminder, our target is to reach 34% online penetration for the full year 2020, and we are well on track to achieve it. Despite the broader economic challenges and disruption to major parts of the health care market, the Medicare market remains very strong with a large selection of high-quality and affordable plans available to seniors. Our enrollment growth continues to significantly outpace the overall market, driven by our omnichannel engagement model that emphasizes customer choice and provides individualized comparison tools that are unique to eHealth. In the wake of social distancing and lingering health concerns related to COVID-19, we believe seniors will find our platform to be an even more important and valuable resource.

Turning to our first quarter financial results. Total revenue for the first quarter of $106.4 million grew 55% year-over-year. Our adjusted EBITDA was $11.1 million, a 30% year-over-year increase. GAAP net income was $3.5 million, and cash flow from operations in the first quarter was positive $8.9 million.

During the quarter, we raised approximately $227 million through an equity offering to support continued strong organic growth in our core Medicare market. Despite the significant growth achieved in each of the last 2 years, which was well ahead of overall market growth rates, our Medicare membership still represents just 1% of the total Medicare population in the country. We see tremendous opportunity to build additional scale and capture market share. As of March 31, we had $246 million in cash, cash equivalents and marketable securities and no debt on our balance sheet.

We plan to deploy this capital in our Medicare business, including to finance marketing initiatives, fund further expansion of our telesales capacity and underwrite continued enhancements to our technology platform, such as projects aimed at increasing customer retention, and boosting online engagement and conversion rates.

We are in the process of developing our operational strategy for this year’s annual enrollment period, which takes into account the growth capital now available to us post offering as well as some of the important learnings from the last AEP. One of the interesting implications of successfully shifting our customer care agents to a remote model is the flexibility this model can potentially offer us in staffing for the high-volume fourth quarter.

Deploying home-based agents opens up new geographies for our talent acquisition, reduces office space as a constraint on the growth of our employed agent population and could, over time, boost our overall agent productivity by decreasing our reliance on outsourced call center agents. While we have had recent success in increasing productivity of our employed agents and outsourced call center agents, our internal employed agents continue to convert demand into applications at consistently higher rates.

Optimization of our sales and marketing efforts remains a central focus of our long-term growth strategy. Our Individual & Family Plan approved members declined 19% compared to the first quarter of 2019. We saw an uptick in IFP enrollments in March, which has carried through to the second quarter and was likely driven by consumers losing employer coverage and turning to the individual market. However, this did not sufficiently offset slower activity in the first 2 months of the quarter. We continue observing increased retention of existing IFP plans resulting in higher estimated LTVs in this business.

Approved members for small business group products declined 15% compared to the same quarter a year ago.

We entered this year with great momentum, and have, once again, started the year strong, generating significant Medicare enrollment growth and exceeding our expectations for the quarter. eHealth is proving to be an increasingly important destination for consumers in this challenging environment, a testament to a significant value that we provide to consumers by bringing choice, transparency and convenience to the selection of health insurance.

We are updating our 2020 annual guidance to reflect our first quarter outperformance. And I want to specifically note that our revised guidance does not reflect the deployment of cash raised in the equity financing. Similar to last year, we’re working to lock down our operational plan for the annual enrollment period by the end of June and intend to share our revised projections with you at the time we report second quarter earnings. We continue to see significant growth potential that can be captured by further expansion of our telesales capacity, combined with driving an increased percentage of Medicare enrollments through our online platform.

Meaningfully, the new work-from-home model for our agents provides an additional avenue for revenue and profit leverage during AEP that has not been available to the business in prior year. In short, I remain excited and confident about our growth opportunities for 2020 as the eHealth model continues to perform well and we demonstrate the company’s differentiated value proposition in the market.

And now I’ll turn the call over to Derek Yung, who will review our first quarter financial results in greater detail and provide our revised guidance ranges.

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Derek N. Yung, eHealth, Inc. – Senior VP & CFO [4]

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Thanks, Scott, and good afternoon, everyone. Our first quarter financial results reflect underlying strength of our platform and continued strong execution in our Medicare business despite the challenging public safety and related macroeconomic environment.

We entered the year on a strong note, with the first quarter Medicare revenue of $96.2 million, growing 75% compared to a year ago, driven by a 46% increase in approved Medicare members, 86% growth in non-commission revenue as well as an increase in residual or tail revenue recognized during the quarter.

The Medicare segment generated a profit of $22 million, an increase of 103% compared to the first quarter of 2019. The open enrollment period was a particularly important contributor to our first quarter Medicare enrollments this year, with Medicare Advantage approved members growing 59% compared to the first quarter a year ago. Medicare Advantage enrollments attributable to the open enrollment period represented a larger percentage of our total approved Medicare members compared to the first quarter of 2019. Our estimated number of revenue-generating Medicare members was approximately 726,000 at the end of the first quarter, or an increase of 44% compared to a year ago.

Similar to a year ago, we saw an increase in Medicare Advantage member churn to above-average levels during the first quarter. It was driven primarily by higher-than-average attrition rates in the cohort that we enrolled during the last AEP in Q4 of 2019. As you recall, we observed a similar increase in Q1 of last year, which was followed by a decline in member churn in subsequent quarters.

We believe that this new seasonal pattern of consumer behavior is due to their introduction of the open enrollment period in 2019 and that seniors who optimize their plans during the first quarter are less likely to churn later in the year. The trend is likely to be even more pronounced this year as more seniors took advantage of the open enrollment period on our platform compared to a year ago.

We currently expect for churn to decline later in the year, as was the case in 2019, and continue to forecast 2020 Medicare Advantage lifetime values to be roughly flat with last year’s. It is also important to note that churn in our member base is highest in year 1 and declined significantly in subsequent years. For example, our average first churn — first year churn for our Medicare Advantage member is in the mid-30s. This declined to just under 20% in year 2 and then again to 11% in year 3. In year 4 and beyond, churn rates have dropped to single digits.

As a result, in periods of high growth, when new members represent a larger percentage of our total member base, we see higher total implied churn. We have provided our historical average churn rates by year as part of our first quarter 2020 earnings slides posted on our Investor Relations website.

First quarter constrained lifetime values of our Medicare Advantage product grew 5% year-over-year, due primarily to an increase in average commission payments per member. As a reminder, our constrained LTVs are derived by applying a constraint factor to our statistical estimates of expected lifetime commission receipts. We’re effectively discounting the revenue we booked compared to what we expect to collect.

Since the adoption of ASC 606 for revenue recognition, our cash collections from Medicare Advantage plans have generally exceeded initial estimates, reflecting the appropriate conservatism of our approach. This dynamic has contributed to the recognition of residual or tail revenue from Medicare Advantage members in every quarter in 2019 and, again, in Q1 of 2020.

I’d like to note that beginning with this quarter, Q1 of 2020, we will be reporting the number of new paying members added during the quarter with the goal of providing additional transparency into our membership dynamics. The delta between approved members and new paying members exists because not all approved applications result in an active policy for various reasons. For a given period, this conversion rate also is impacted by the lag between the time an application gets approved by a carrier and we receive the commission payment for that policy as we count an applicant as a new paying member when we receive the commission payments. For example, in the first quarter of 2020, we had 85,000 approved Medicare members and added 161,500 new paying members, reflecting a significant spillover of enrollments from Q4 of 2019. The difference between the 2 metrics tend to be especially pronounced in the first and fourth quarters, given the large number of enrollments approved during the annual enrollment period in the fourth quarter do not start generating commissions until the first quarter when these plans become effective.

Turning to our Individual, Family and Small Business segment. First quarter revenue from this segment was $10.3 million, a 26% decline compared to a year ago. This was driven by lower IFP enrollments and tail revenue compared to a year ago, partially offset by an increase in short-term and small business group commissions. The Individual, Family, Small Business segment remained a profitable stand-alone business for the first quarter, generating segment profit of $2.6 million compared to $6 million in the first quarter of 2019.

Our estimated Individual & Family Plan membership at the end of the first quarter was approximately 113,000, down 13% compared to the estimated membership we reported at the end of first quarter a year ago. The estimated number of members on Small Business products was approximately 44,000, a 3% increase compared to a year ago.

Our total revenue for the first quarter was $106.4 million, an increase of 55% compared to the first quarter of 2019. Our total estimated membership at the end of the quarter for all products combined was approximately 1,137,000 members.

Now I would like to review our operating expenses and profitability metrics. First quarter operating expenses reflect a higher run rate in fixed costs as we scale our business in the second half of 2019 in preparation for our annual open enrollment period. We anticipate year-over-year growth rates in G&A and technology and content spend to start normalizing in the third quarter. For the full year 2020, we expect to see fixed cost leverage resulting in margin expansion relative to 2019. The overall variable cost — acquisition cost per approved Medicare member, which includes marketing and customer care-related spend, increased by 5% year-over-year. Underneath that, variable call center costs per approved Medicare member grew 6% year-over-year as we retained a larger number of agents following the annual enrollment period compared to last year. This increase also reflects costs associated with moving our call center to a remote model in March in light of the coronavirus crisis.

Marketing costs per approved member grew 5%, primarily reflecting a shift in channel mix with the continuing increase in enrollment volumes coming from our digital advertising channel and the decline in contribution from some of our partners that pulled back on marketing initiatives in this environment.

For the full year 2020, we continue to expect that total variable acquisition costs per approved Medicare member will come down from 2019 levels, driven primarily by further gains in agent productivity.

GAAP net income for the first quarter of 2020 was $3.5 million compared to GAAP net loss of $5.2 million for the first quarter of 2019. Adjusted EBITDA for the first quarter of 2020 was $11.1 million compared to $8.6 million for the first quarter of 2019. We calculate adjusted EBITDA by adding stock-based compensation, change in fair value of earnout liability, depreciation and amortization, amortization of intangible assets, other income and benefit for income taxes to our GAAP net income.

Our first quarter cash flow from operations was $8.9 million compared to $12.7 million for the first quarter of 2019. Capital expenditures, which include capitalized internally developed software costs, were approximately $6.1 million for the first quarter. As of March 31, we had $246 million in cash, cash equivalents and marketable securities, and we had no debt outstanding under our line of credit.

Our balance sheet also reflects a significant commissions receivable balance of approximately $560 million that is comprised of $125 million that we expect to collect over the next 12 months and $435 million in long-term commissions receivable.

We are updating our 2020 annual guidance to reflect our outperformance to date and an increase in our diluted share count following the equity offering that we completed in March. As Scott mentioned, this guidance does not reflect our full investment plan for the upcoming AEP as a result of the increased working capital provided by the offering.

We’re now forecasting revenues for 2020 to be in the range of $600 million to $640 million compared to the prior guidance range of $580 million to $620 million. Medicare segment revenues are now expected to be in the range of $553 million to $589 million compared to prior guidance of $533 million to $569 million. individual, Family and Small Business segment’s revenue is expected to be in the range of $47 million to $51 million, which is unchanged compared to prior guidance.

We expect GAAP net income for 2020 to be in the range of $70 million to $85 million compared to prior guidance range of $68 million to $83 million. We expect 2020 adjusted EBITDA to be in the range of $125 million to $140 million compared to the prior guidance range of $120 million to $135 million.

2020 Medicare segment profit is now expected to be in the range of $157 million to $174 million compared to our prior guidance range of $152 million to $169 million. Individual, Family and Small Business segment profit is expected to be in the range of $17 million to $18 million, which is unchanged compared to prior guidance.

Guidance for corporate share services expenses, excluding stock-based compensation and depreciation and amortization expenses, remains unchanged at approximately $49 million to $52 million. GAAP net income per diluted share for 2020 is expected to be in the range of $2.55 to $3.10 compared to prior guidance of $2.64 to $3.23 per share. Non-GAAP net income per diluted share for 2020 is expected to be in the range of $3.41 to $3.90 compared to prior guidance range of $3.56 to $4.90 per share.

Cash used in operations for 2020 is now expected to be in the range of $61 million to $64 million compared to prior guidance range of $52 million to $55 million.

Cash used for capital expenditures is expected to be in $18 million to $29 million, which is unchanged from prior guidance.

Finally, I would like to comment on sequential trends. Consistent with previous seasonality trends, the second and third quarter Medicare enrollment volumes are at the lowest points compared to other times of the year. Last year, our year-over-year growth in the second quarter was aided by a particularly weak comparison period in 2018 that included the closure of our Westford, Massachusetts, sales center in May of 2018.

While we expect year-over-year growth in the second quarter to remain strong, the rate of increase will not benefit to the same degree due to this weaker comparison period in Q2 of last year. Second quarter tail revenue is also expected to decline sequentially.

Similar to last year, we’ll be retaining the majority of our in-house agents post OEP, which is expected to result in a further increase in agent productivity during the critical selling season in Q4, but is adding to our cost base during the lower-volume, second and third quarters. As a result, we currently expect the second quarter revenue growth to be approximately 20% on a year-over-year basis, and we expect our adjusted EBITDA loss in the mid-single-digit millions of dollars for the quarter.

We continue to refine our sales and marketing investment plans for the fourth quarter and expect to finalize those plans over the rest of this quarter. We plan to provide further update guidance for 2020 that includes the anticipated results of those investments as well as an updated 5-year outlook at the time of our second quarter earnings report.

I want to remind you that these comments in 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 estimates, assumptions and judgments. We undertake no obligation to update our comments or our guidance.

I would now like to turn it back to Scott, who will make some short closing remarks, and we’ll then open up the call for questions. Scott?

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Scott N. Flanders, eHealth, Inc. – CEO & Director [5]

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Thanks, Derek. Before we get into Q&A, I’d like to wrap up our prepared remarks today by emphasizing that in the face of the disruption to the global economy and our daily lives resulting from the coronavirus, our team is more committed than ever to our mission of connecting every person with the highest-quality, most affordable health insurance for their life circumstances. The most important things you should note coming out of this call are the fundamentals of our business continue to improve, and we are achieving strong operating metrics across the business by executing on a clear strategy and making targeted investments to drive growth. Anyway you cut it, our financial results reflect the significant progress we are making.

Our omnichannel customer engagement platform is ideally positioned to serve seniors safely and more effectively, both now and in the future. The addition of work-from-home capabilities for our agents adds to the significant revenue and margin leverage opportunities we have in 2020 and beyond. Our updated 2020 annual guidance reflects our outperformance to date, but not the additional investments we are contemplating and planning for this year’s annual enrollment period. These will be provided in conjunction with our second quarter results.

So I’m proud of the efforts of our team to deliver in this challenging environment and believe that we are well positioned to continue driving growth, margin expansion and shareholder value as we execute on our growth strategies.

With that, Derek and I look forward to answering your questions. Operator, please open the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Jailendra Singh of Credit Suisse.

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Jailendra P. Singh, Crédit Suisse AG, Research Division – Research Analyst [2]

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So thanks for clarifying your comments in the press release that the guidance does not include investment, but it looks like it does not include the benefit from those investments as well. I guess, that was creating some confusion. I want to follow up on the comments you made around the increased churn in the first quarter for your 4Q ’19 MA cohort in particular. Can you provide any color on your recapture rate? Did that improve? What you saw last year? And the point I’m trying to get to is that, if there is an increased churn among seniors, it may not be a bad outcome from your perspective as long as those seniors stay on your platform. So just help us get a flavor about the recapture rate. What you’re seeing on your book?

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Scott N. Flanders, eHealth, Inc. – CEO & Director [3]

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Right. And just to clarify on your first point, Jailendra, you are correct that we very intentionally increased our guidance for the full year by only the amount of our beat to consensus in Q1. As — and we did the same thing in Q1 of 2019. And then we increased by well over 2x that amount after our Q2 earnings call, when we had our full agent staffing and marketing mix plans in place. The same process is going to be undertaken this year. And just to remind everyone, we increased our guidance last year to $375 million after Q2. And without tail revenue adjustment, we came in at $464 million, a $90 million beat to that upgraded guidance.

So we are counting on the same [triangular] process this year. We were not in the position at the end of Q1 to be able to quantify exactly what the level of increase in the investment and revenues would be.

To your other question on the churn. Churn is an aspect of our model, and we are the marketplace where seniors come to shop to compare plans. And we saw an elevated churn in Q1 of 2019 off of the heavy enrollment in Q4 of 2018, and that was because CMS opened up the first quarter for enrollment for switching. The same experience happened this year. The recapture rate this year was 10% against a recapture rate of 9%, so only very modestly up. This is an area where we see opportunity for improvement. But baked into all of our LTVs and all of our financial accruals is the assumptions of the actual churn rates. Tim, can I let you elaborate somewhat on this?

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Timothy C. Hannan, eHealth, Inc. – Chief Revenue Officer [4]

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Sure. This is Tim Hannan. Yes. I think what we saw was the same behavior we saw last year. As Scott said, our recapture rate was slightly better. What we’re excited by is with this extra year of understanding and data, we’ll be able to go and improve on these metrics, we think, over time, because we’ll be able to understand how to make better recommendations during the annual enrollment period and then in the OEP, which of our members we can target or should target as potentially needing to adjust their plan. So it’s now a part of annual life here, and we think, with our scale and the breadth of choice we have, we can learn at a faster rate and improve on these metrics.

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Jailendra P. Singh, Crédit Suisse AG, Research Division – Research Analyst [5]

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Okay. And then I want to ask about the customer acquisition costs with all the advertisement costs. Number of advertisers being down. Just at a high level, curious on your thoughts around customer acquisition costs getting easier in a recessionary environment as various other companies are cutting down on ad spending. Any thoughts on that? If you see that could be some benefit for you guys?

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Scott N. Flanders, eHealth, Inc. – CEO & Director [6]

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Yes. So Tim Hannan is our Chief Revenue Officer, who runs all of sales and all of marketing for us. Tim, I’ll let you elaborate.

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Timothy C. Hannan, eHealth, Inc. – Chief Revenue Officer [7]

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Sure. So I think on the disruption from COVID-19 and what it could mean to different channel, I think it will differ by channel. So in some places, it may open up inventory opportunities for us to advertise in places that maybe we had been priced out of before or hadn’t experimented with. But in other places, as Derek noted in his comments, it’s disruptive to certain partners, who now can’t market on our behalf. So generally speaking, it does make more advertising inventory available to us, but it will vary channel by channel, and we’ll be watching to see how to adjust our investments based on what we observe.

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Jailendra P. Singh, Crédit Suisse AG, Research Division – Research Analyst [8]

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Okay. And my last question. With respect to your online enrollment percentage of 24%, by any chance do you have a breakdown on how much was the online enrollment percentage in the last 2 weeks of March? Was it higher than 24%? Just curious if there was any different way seniors are behaving in the last 2 weeks of March.

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Scott N. Flanders, eHealth, Inc. – CEO & Director [9]

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Tim, did you notice anything?

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Timothy C. Hannan, eHealth, Inc. – Chief Revenue Officer [10]

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We do see a surge in the last — the very end of the quarter when our agents are more occupied. It’s not as pronounced as what we see during the annual enrollment period, but it does exist.

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Operator [11]

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Our next question comes from George Sutton of Craig-Hallum.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division – Partner, Co-Director of Research & Senior Research Analyst [12]

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I was wondering if you could give us just generically more perspective on the types of things you are contemplating to further grow the business with this additional capital. And I’m referring to more agents or internally built technology, third-party technology, anything you’re thinking of from an M&A perspective. That’s kind of the angle of the question.

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Scott N. Flanders, eHealth, Inc. – CEO & Director [13]

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Thanks, George. So we’re not contemplating any M&A. I very pointedly commented in my script that we raised $227 million because of our organic growth opportunities that we see over the next 2 years and have fully budgeted for all the tech and content spending we need to get to 34% online enrollment this year and targeting quickly as possible getting to 50% threshold. We also have brought in all the G&A that we need. And you’ll see in the second half of the year quite a bit more operating leverage on our revenue growth. What we’ve had in the first half is just run rate from the last half of 2019. So the investment is going to go into additional agent capacity, and it’s going to go into additional customer acquisition, with the objective of us maintaining our overall unit economics.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division – Partner, Co-Director of Research & Senior Research Analyst [14]

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Perfect. This may be a question for Tim. Relative to Medicare Plan Finder, which was obviously, a significant issue in Q4, got a lot of seniors into the wrong plans and was expected to provide some — a fair amount of turnover in Q1. I’m curious if you felt the benefit of that in terms of those consumers coming to you. And do you have any perspective on the medicare.gov outcomes in Q1?

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Timothy C. Hannan, eHealth, Inc. – Chief Revenue Officer [15]

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Good question. So what I would say there is our feedback would be highly — probably, anecdotal would be the best way to describe it. We did see increased shopping in Q1, as we described, during the open enrollment period. And part of that, undoubtedly, has to come from seniors not being in the right plan. So we think we benefited from that in some way, but hard for us to quantify exactly how much.

And on Medicare Plan Finder, generally, I mean, I think we haven’t seen any significant changes that would change our — sort of our bullishness on our platform, the value that we provide in the market. And so it has not disrupted our plans in any way.

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Operator [16]

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Our next question comes from Frank Morgan of RBC Capital Markets.

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Frank George Morgan, RBC Capital Markets, Research Division – MD of Healthcare Services Equity Research & Analyst [17]

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I guess, first question, more of a shopping list question, how much — can you call out a number on how much this migration to work-from-home impacted costs in the quarter?

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Scott N. Flanders, eHealth, Inc. – CEO & Director [18]

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Derek?

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Derek N. Yung, eHealth, Inc. – Senior VP & CFO [19]

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Yes, I can take that. It’s really not material, Frank. What — because we, as Scott commented earlier, have seen an increase in productivity year-over-year in the work from — workforce, and we continue to see it even as they move from the physical location call center into work-from-home. So the costs related to moving them home is really more on the technology side and moving costs into logistics. So they’re really immaterial.

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Frank George Morgan, RBC Capital Markets, Research Division – MD of Healthcare Services Equity Research & Analyst [20]

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Got you. Okay. And I guess, when I think about — across all the channels, whether it’s digital advertising or direct television or mail or email, have you seen, over the past several years, sort of any change in the mix of the different channels? And have you noticed any difference in the retention variance amongst those groups? And what are you seeing from that perspective?

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Scott N. Flanders, eHealth, Inc. – CEO & Director [21]

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Yes. Tim, I’ll let you handle that.

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Timothy C. Hannan, eHealth, Inc. – Chief Revenue Officer [22]

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Sure. Yes. So our investments, I’d say, ebb and flow based on the performance that we’re seeing. And it’s why we have the portfolio approach that we do. And so there are times that we’ll lean more aggressively into something like direct mail. We’ll see particular creative stop being quite as effective, but at that point, we’ll roll out a new direct response TV creative, and that will take on more volume. So we are continuously experimenting in our channels. Well, we never want to become too dependent on any one channel. And we do monitor the downstream quality of the enrollment and make adjustments. But there aren’t very significant changes or variants channel to channel. In general, we’ve been enhancing the quality of our enrollments across the board.

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Frank George Morgan, RBC Capital Markets, Research Division – MD of Healthcare Services Equity Research & Analyst [23]

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Got you. One more and I’ll hop. I just noticed, obviously, you haven’t included anything in your guidance for the capital. But I did notice your assumptions and guidance around cash flow from ops seemed a little bit more negative. So just any color there, and I’ll hop off.

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Derek N. Yung, eHealth, Inc. – Senior VP & CFO [24]

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Yes. Frank, so that’s actually completely tied to the additional investments we made in Q1 to drive more growth.

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Frank George Morgan, RBC Capital Markets, Research Division – MD of Healthcare Services Equity Research & Analyst [25]

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Got you. Okay. So it’s sort of the operational investment, if you will, that flows through cash flow from — okay.

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Derek N. Yung, eHealth, Inc. – Senior VP & CFO [26]

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Correct, that’s right.

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Operator [27]

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Our next question comes from Toby Sommer of SunTrust.

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Tobey O’Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division – MD [28]

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I was wondering if you could give us some additional color, maybe some examples of revenue and profit opportunities that the kind of revelation that you can work from home with home agents has revealed to you.

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Scott N. Flanders, eHealth, Inc. – CEO & Director [29]

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Yes. And I’ll turn that to Tim. But before I do, I would just say, we — I commented that it was done within a week and done seamlessly. It was not without stress and strain. And I would — any of the eHealth executives that are listening, I wouldn’t want to diminish, you don’t want to, what a herculean effort it was and the fact that we’ve gained productivity, probably nothing at my tenure at eHealth has impressed or pleased me more. But Tim, I’ll let you speak specifically to some of the possibilities that work-for-home flexibility might afford us.

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Timothy C. Hannan, eHealth, Inc. – Chief Revenue Officer [30]

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Sure. Thanks, Scott. Yes. So I think the #1 flexibility that it affords us is we’ve been constrained by the real estate in our call centers for our internal agent counts. And so we went through the significant effort of opening up a new headquarters in Indianapolis last year, recruiting into it, training up those agents, and we saw outstanding performance from that effort. But we had to make sizable upfront investments in order to create that space. With a work-from-home capability, we can recruit from a much broader geographical base than where we’ve been able to recruit from to this point. And a lot of our agents have been asking for work-from-home capabilities. So we think this gives us a way to retain higher-performing agents over the long haul by giving them the flexibility to not need to come into the office.

So we’re looking at how we’ll train, how we’ll license and appoint our agents on a remote basis. And as we explore that opportunity, we’ll have a better sense for just how far we can expand our internal agent base this year. But given that those agents are higher-performing than our partner agents have been, increasing their share of our agent mix will make all of our investments return better because we’ll see higher conversion rates.

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Tobey O’Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division – MD [31]

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And as a follow-up, does this change the competitive landscape as, perhaps, others discovered their models were not quite as flexible?

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Scott N. Flanders, eHealth, Inc. – CEO & Director [32]

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Yes, I don’t have a lot of information competitively. I will tell you, and we did comment on this, that though we’ve made strides in improving productivity and conversion in our outsourced agents, our internal agents are still dramatically more productive. And so to the extent that we’re not space limited, to the extent that we can use a hub-and-spoke strategy and expand more virtually without space increases, this enables us to increase our mix of captive agents versus outsourced agents. And that does enable us to scale more, to scale with higher quality and with higher productivity. So it is a — it was an unexpected outcome of what was an otherwise quite unwelcome crisis.

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Tobey O’Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division – MD [33]

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Last question from me. Has your online experience informed and skewed your view for what the long-term opportunities for online enrollment is?

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Scott N. Flanders, eHealth, Inc. – CEO & Director [34]

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Well, I’ll answer that in my — from my perspective and ask Tim to weigh in as well. No, our view is that online is even more important and the mix shift to both online and telephonic is likely to accelerate because of fears of being in close proximity to strangers. We think seniors are going to be particularly sensitive coming into AEP here. We — if anything, we really think our online enrollment experience and shopping experience is more important, not less. Tim, what would you say to it?

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Timothy C. Hannan, eHealth, Inc. – Chief Revenue Officer [35]

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No, I would echo those comments entirely. I think we’re not sure exactly all the ramifications of the coronavirus and the effects will have on shopping behavior and preferences of seniors. But the 2 models that I would want to have are telephonic and online, and so we think, with the improvements we’ll make through the year, both to the agent workforce we just described, to the technology that our agents use in the call centers, but also to our online experience, that we’re well positioned in both environments to do well.

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Operator [36]

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Our next question comes from Dave Styblo of Jefferies.

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David Anthony Styblo, Jefferies LLC, Research Division – Equity Analyst [37]

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I wanted to appreciate the comments on the proceeds and what you could be using those for, towards agent count marketing. I was wondering if you talk a bit more about the agent count activity there. Do you guys foresee the spike in unemployment, 20 million plus being unemployed in the last 5 weeks, as there’s an opportunity to maybe hire folks earlier than you normally would, I’m not sure when you would typically make those hires, but is there an opportunity to, perhaps, grab some of those folks earlier than you’d expect? And then, while we’re talking about agent count, with the folks that are now working from home, once things sort of normalize with corona, do you expect some of those folks to go back into the office setting? Or are you finding that this model is just more efficient, and you’re really just not going to need the real estate anymore and the new model really is to have the vast majority of the agents work from home?

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Scott N. Flanders, eHealth, Inc. – CEO & Director [38]

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Well, you must have been listening in on some of our internal calls of late. So some of this is real-time, Dave. But I think 2 things: one, yes, I do think we will get a higher caliber of agent this summer than we did last summer because of unemployment. We’re not reducing our base compensation, in fact, we’re looking, in some places, at increasing it. We’re not looking to decrease any of our agent compensation. And as you can imagine, as more of our agents are using the assisted online efforts, they’re able to process more calls, which results in more enrollments and more commissions for them. So the second piece of this that you didn’t ask, but it’s a corollary sort of implied in your question, we’re also expecting lower turnover. That’s an unwelcome aspect of our model is to lose seasoned agents because the seasoned agents, with more than a year of tenure, have a 30% higher conversion rate than agents in their first season. And so we think it’ll be — we’ll be able to recruit more and higher caliber agents as determined by the rate at which they pass the licensing exams. And we believe, and this is complete speculation, I wish to qualify this, but all instincts that we have are that our turnover will go down, which will reduce our recruiting, training expense and give us more seasoned agents going into the fall. So this is part of the reason that we were so definitive that we are going to be increasing our guidance after Q2, and we just don’t know by what exact amount yet because we’re so early into all of these factors.

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David Anthony Styblo, Jefferies LLC, Research Division – Equity Analyst [39]

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Okay. Got it. And then on the marketing spend, are you guys finding any new channels that you really haven’t been able to pursue? I know you commented a little bit about some costs coming down, but is it likely that — you got the slide wheel spending, you know what’s working really well. Is it more about spending more money in those existing channels to generate more submitted apps? Or is there some element where, “Hey, there’s some new emerging opportunities that we haven’t been able to pursue in the past just because of capacity limitations, and we’re going to look at those?”

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Scott N. Flanders, eHealth, Inc. – CEO & Director [40]

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Well, I’d like Tim to be on the hook to you for that answer, so I’ll defer to him.

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Timothy C. Hannan, eHealth, Inc. – Chief Revenue Officer [41]

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Thanks, Scott. So I would say in terms of performance in Q1, we definitely — the first 2 months were not affected by coronavirus in a significant way, and we did lean into what was working there. I think what we’ve seen change in the last 6 weeks is other advertisers pull back and make inventory cheaper in some channels. So particular examples for us would be Facebook, YouTube, even some TV placements. We’re looking at making investments in these places to learn whether they would be viable for us on a go-forward basis and at what price. So it is a combination of us leaning into what we know, but broadening our horizons to see what we can learn during this unique moment to expand our portfolio.

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David Anthony Styblo, Jefferies LLC, Research Division – Equity Analyst [42]

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Got it. And then just the last one for Derek on the LTVs for Medicare Advantage. I think guidance there, you mentioned, is still flat for the year, despite 1Q, I think, was up 5%, and I know the commission rates for brokers are up, I think, mid-single digits. So I’m just wondering, is that more of a conservative posture on your end? Or is there something — some other element that comes in that would cause the — that to not increase by, call it, mid-single digits?

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Derek N. Yung, eHealth, Inc. – Senior VP & CFO [43]

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Yes. So you’re right that our Q1 LTV for MA were — increase year-over-year was largely driven by the rate increase. It’s actually been pretty much right in line. And really what — the reason why we are forecasting flat LTVs is because of the increase of number of seniors we’re seeing taking advantage of the open enrollment period that we see causing that higher churn in the AEP cohort. We are expecting that, similar to last year, that to normalize. And when that happens, this will be then kind of the new seasonal trend that we will see from here on out in terms of when we think a senior to churn, which is when they can switch, and when they won’t after that, which is they’re in the plan that they want. So that’s what we’re anticipating, and that’s why we’re forecasting flat LTV.

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Operator [44]

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Our next questions come from George Hill of Deutsche Bank.

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George Robert Hill, Deutsche Bank AG, Research Division – MD & Equity Research Analyst [45]

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I guess, Derek, just a housekeeping question to start. Was there any meaningful impact on LTVs in Q1 from the new model that we started using in Q4?

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Derek N. Yung, eHealth, Inc. – Senior VP & CFO [46]

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Yes. George, so the — not for Medicare Advantage because the enhanced model that we have rolled out for Medicare Advantage adjustments were part of that $42.3 million change in estimates that was reported in Q4. We did roll out enhanced models for the rest of our Medicare products and also our IFP major medical products. And those enhancements did not produce a significant increase or decrease in LTVs that had to be reported and adjusted. But in terms of the ongoing work to enhance our estimates for LTVs and to ensure that we are appropriately conservative, we continued to do that in Q1 and were successful.

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George Robert Hill, Deutsche Bank AG, Research Division – MD & Equity Research Analyst [47]

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Okay. And Scott, kind of early. I don’t know how real-time you have the data, but maybe a little bit of a speculative question for you because I recognize that Q1 ended before the COVID crisis really hit across the country. But I guess, are you guys able to talk about whether you saw anything meaningful, I’d call it, between the end of that third week of March and kind of up to the moment on online enrollment dates given the COVID crisis? I’m just thinking that this has to be something that’s kind of meaningfully impacting the on-the-ground broker. And that kind of rolls into the question of, as you look at what’s happening now, like, which changes in the business in the way customers engage kind of become permanent.

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Scott N. Flanders, eHealth, Inc. – CEO & Director [48]

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Yes. To the latter question, I would say I’m way too early to be speculating as to what will be permanent. I am very optimistic that we’re going to have a record enrollment year this year because of the factors we talked about with respect to field agents. We’re hearing anecdotally that they are struggling to book appointments with seniors. It just stands to reason, and we think that will continue. God forbid, that there’s a second wave in the fall, which would shut down, further isolate seniors. We think all of that plays in well for our model, online and telephonic. We finished strongly with high productivity in those few weeks that we worked from home at the end of March. And that momentum has continued here for the first 3 weeks of April. Tim, would you comment further?

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Timothy C. Hannan, eHealth, Inc. – Chief Revenue Officer [49]

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Yes. I mean, I mentioned before, we did see a surge in online enrollment at the end of the quarter, but I wouldn’t say it was more than we were expecting. So we typically see that at the — or we saw that last year, and we expected to see it again this year. We will continue to work on broadening our outreach in online channels. And if some of those channels, I mentioned before, become affordable, and with the improvements we’re making to our online experience, we need be able to accelerate some of that shift to online. But in terms of — as Scott said, in terms of consumer behavior and how it’s changed in a sort of durable way, we are not sure yet, but we feel like we are prepared for a number of outcomes.

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George Robert Hill, Deutsche Bank AG, Research Division – MD & Equity Research Analyst [50]

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Okay. And Scott, I don’t know, just a quick follow-up. I know you guys aren’t ready to talk about the numbers yet, but are you ready to talk at all about what changes might be considered for the upcoming AEP from a strategic perspective?

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Scott N. Flanders, eHealth, Inc. – CEO & Director [51]

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Yes. I think the most significant one is, last year, we tripled our external agents and just barely not quite doubled our internal agents. And we were only able to do that because we stood up Indianapolis after our capital raise in ’19. This year, I believe we’ll end up — when the numbers all sort themselves out, George, that we’ll end up adding more internal agents than we do external agents in an absolute number, which would mean, percentage-wise, a quite significant increase in internal agents versus external agents.

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Operator [52]

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Our next question comes from Greg Peters of Raymond James.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division – Equity Analyst [53]

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A number of my questions have been asked. I was curious, you were just talking about outsourced versus captive, I’m wondering if you see a different level of churn businesses produce from your outsourced agents versus the captives.

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Scott N. Flanders, eHealth, Inc. – CEO & Director [54]

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I don’t know the answer to that. Tim, do you have any data?

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Timothy C. Hannan, eHealth, Inc. – Chief Revenue Officer [55]

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We don’t have any specific data on that. We are always looking for ways that we can improve the quality of our mix. And so enrollment method, agent type, marketing channel, we’re always looking at ways that we can make adjustments to improve that, but nothing significant enough that I would call it out here.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division – Equity Analyst [56]

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Okay. I thought I’d just ask. So last year, when we were tracking your customer care enrollment costs per approved member, it inched up, inched up is probably too soft to a term, it went up pretty noticeably in the second and third quarter before dropping in the fourth quarter. Do you anticipate that, that’s going to be the same sort of flow that we see this year? And I think you said, Derek, — maybe in the beginning of your comments, you said that you expect your customer care enrollment costs and variable marketing costs to be down this year versus last year. Can you just refresh me on that, please?

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Derek N. Yung, eHealth, Inc. – Senior VP & CFO [57]

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Yes, Greg. So I did. So in our guidance and also in our original — revised guidance and original guidance, we anticipate and have planned initiatives to have our total variable costs per group — Medicare member to be down compared to last year. And between the marketing component and the customer care enrollment component, we do see the customer care component to be the driver of that reduction as marketing will be probably roughly flat because we will look to invest more in marketing to capture more market share and enrollments. And if you may remember that, last year, we leaned heavily into staffing early in order to ensure that we had adequate agent capacity to handle the demand in AEP. The AEP, the year before last, so in 2018, and in 2017, we had inadequate agent capacity, which meant that we left money on the table, and we did not want to do that last year.

Now in the process of doing that, we’ve learned a lot. And part of what we learned is, we were too safe on bringing people early and really incur more costs, especially on the vendor side — vendor agents external side than we would have liked. And those are the adjustments that we are planning to make this year in addition to additional investments in technology that would allow us to be able to drive more agent productivity.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division – Equity Analyst [58]

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But we should still see the customer care enrollment costs per approved member peak in the third quarter, though, based on what you’ve done historically, correct?

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Derek N. Yung, eHealth, Inc. – Senior VP & CFO [59]

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Yes. Yes. So yes, I apologize, I didn’t catch that part. From a seasonal basis, absolutely, because we start bringing in new agents for training and for licensing appointment prior to AEP. And when they do that, they spend many weeks to prepare, and they’re not productive on the sales force. So yes, we would see, from a seasonality perspective, that number to spike, again, similar to prior years.

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Operator [60]

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Our next question comes from Mike Newshel of Evercore.

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Michael Anthony Newshel, Evercore ISI Institutional Equities, Research Division – Associate [61]

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Scott, it’s so logical, as you said, there’ll be some behavioral change favoring Internet and telesales due to COVID and when we avoid face-to-face. But are you going to have like a marketing messages, specifically highlighting that safety as an aspect?

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Scott N. Flanders, eHealth, Inc. – CEO & Director [62]

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Yes. We — I actually had a conversation with one of our competitors asking whether we were bold enough to take that approach. And my inclination is no.

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Michael Anthony Newshel, Evercore ISI Institutional Equities, Research Division – Associate [63]

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It will be a natural behavior change that I think that people know about you.

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Scott N. Flanders, eHealth, Inc. – CEO & Director [64]

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Yes. Yes. I think we have enough tailwinds and word of mouth and just this is not — this mix shift to telephonic and, secondarily, online is something that’s been happening apace in any case. We just think these conditions will accelerate it in this year naturally.

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Michael Anthony Newshel, Evercore ISI Institutional Equities, Research Division – Associate [65]

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Can you talk just a little bit more about how COVID is affecting the recruitment and training of agents? I mean, it sounds like you have a larger pool to draw from now that you have work at home and I would think due to higher employment as well. But just how are like the logistics affected? Can you get people trained completely remotely and get licensing and exams? Or is there some disruption there?

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Scott N. Flanders, eHealth, Inc. – CEO & Director [66]

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Yes. Tim, I’ll let you answer.

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Timothy C. Hannan, eHealth, Inc. – Chief Revenue Officer [67]

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Yes. I’ll take that one. So we — I’d say it’s still a little bit early because we haven’t begun our full-on ramp towards the fourth quarter. I’d say the early indications are that we feel like it will allow us to recruit high-caliber agents into our workforce. We have been able to move our training regimen to remote. So we have agents, right now, on a remote training regimen to get up to speed and be some of the first ones deployed this year. The licensing and appointments will vary by state, and we’re evaluating that, but we feel confident that we’ll have solutions that we need or alternatives in terms of recruiting license — already licensed agents. So we’re still evaluating all the ins and outs. But overall, to be able to attract more internal, high-caliber, quality agents, we think is going to be a net positive for us.

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Michael Anthony Newshel, Evercore ISI Institutional Equities, Research Division – Associate [68]

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And I know you just mentioned it, but my last question was just going to be, like, do you think there’s more like already — it’ll be easier to recruit traditional brokers that are already licensed because they’ll be worried about — they won’t be worried about whether they can do face-to-face sales?

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Scott N. Flanders, eHealth, Inc. – CEO & Director [69]

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Yes.

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Timothy C. Hannan, eHealth, Inc. – Chief Revenue Officer [70]

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We definitely think that is a potential outcome. So we’re — we’ll be watching as we recruit to see if that’s what we see.

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Operator [71]

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Our next question comes from [John Huyang] of Barclays.

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Unidentified Analyst, [72]

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Kind of going back to the churn that you’re experiencing with OEP, as you kind of think about AEP coming up later this year, is there anything that you’re — any steps you’re taking where you could try to help improve the retention rate so that a member kind of goes into the right plan without churning in 1Q? Just any thoughts there?

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Scott N. Flanders, eHealth, Inc. – CEO & Director [73]

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Yes. So that’s absolutely another example. You must be listening into some of our internal discussions. We have been making an increasing investment in agent tools. And we’ve deployed some of those, but we remain in the early days of deploying technology to actually making our agents, not just more efficient where we’ve concentrated in the past, but also give them better recommendation support tools and decision support tools to get the seniors into the right plan. Tim, I’ll let you elaborate.

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Timothy C. Hannan, eHealth, Inc. – Chief Revenue Officer [74]

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Yes, I think that’s right. As I said earlier, we will go through the data of what we observed in terms of plan change from AEP to OEP from this year, and less so from last year, but we now have 2 years of experience to understand how could we improve our recommendation, how do we get more people into the right plan the first time around because it’s a complex decision-making process. It’s their doctors, their drugs, the plans that have changed or new plans introduced into their area. So this is not a simple recommendation. And as we get better and better with our breadth of choice, we know that, that will — that we can win more often than we have been going forward. And I think beyond that, we’ll also know who in our book, who didn’t change during the AEP, might be wise to look at choices, and we’ll move them to a better suited policy in the OEP.

So we think we can do better on both of those fronts, and we’ll use the data just acquired from the OEP to help us do so.

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Operator [75]

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Our last question comes from Lisa Springer of Singular Research.

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Lisa Springer, Singular Research, LLC – Research Analyst [76]

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My question is, is the main driver of the higher technology cost for the quarter was that setting up people to work from home. And are those costs pretty much all taken care of now? Or are we going to see more costs for that in the second quarter?

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Timothy C. Hannan, eHealth, Inc. – Chief Revenue Officer [77]

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Go ahead, Derek.

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Derek N. Yung, eHealth, Inc. – Senior VP & CFO [78]

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Yes, the increase was not related — was not driven by the move to work from home for the technology area. We did incur additional technology costs, but they were not material relative to that. It’s really the run rate in our investments in ’19 coming into this year, and we do expect it to normalize in the back half of the year. In our revised guidance, our corporate shared services expenses remains unchanged, and we still expect to get fixed cost leverage and margin expansion as implied in our revised guidance.

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Operator [79]

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I’m showing no further questions. I’d like to turn the call back over to management for any closing remarks.

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Scott N. Flanders, eHealth, Inc. – CEO & Director [80]

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Thank you, everyone, for all the attention you pay to eHealth, and we appreciate the very insightful questions today. And we are excited about the second quarter and look forward to updating you at the Q2 earnings call in late July. Thank you, everyone.

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Operator [81]

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Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.