eHealth: Still Solid Despite the Economy

eHealth (NASDAQ: EHTH), the leading provider of Internet-based insurance agency services to individuals, families, and small businesses primarily in the United States, recently announced their Q3/2008 earnings on October 30th.

While it appears eHealth is seeing some of the same headwinds that are affecting other businesses, they are weathering the storm much better, and in fact continue to grow and pursue growth aggressively, in an environment in which individuals and families are losing their jobs and health insurance and are in need of the services that eHealth provides.

eHealth continues to be profitable, generate huge amounts of free cash flow, and is aggressively marketing their products while times are tough, and actually increasing their market share and health care coverage to individuals.

I have been, and continue to be, impressed by eHealth’s value proposition, wide moat, and tenured management team, and this quarter’s earnings and outlook did nothing to dampen that confidence.

What follows is a summary of eHealth’s earnings announcement, conference call highlights, and my take on the company’s latest quarter and results, and what you should do if you do or don’t own eHealth’s shares.

New to the eHealth story? 

eHealth, Inc. (NASDAQ: EHTH) offers Internet-based insurance agency services to individuals, families, and small businesses primarily in the United States. The company’s e-commerce platform, which is accessed directly via ehealth.com and ehealthinsurance.com, enable individuals and families to research, analyze, compare, and purchase health insurance products online.

For anyone that is self-employed, runs a small business, or as more and more companies stop paying for employee health insurance, needs to purchase their own health insurance, it is becoming increasingly crucial that individuals find affordable health insurance and eHealth gives them the power of choice.

eHealth offers various health insurance products, including medical health insurance coverage, such as preferred provider organization; health maintenance organization and indemnity plans; short-term medical insurance; student health insurance; health savings account eligible health insurance plans; and ancillary products, such as dental, vision, and life insurance.

Because of the fixed-cost nature of health insurance (there is no discounting online or otherwise in this highly regulated industry), eHealth is probably one of the only ways that most individuals will ever see what different health insurance offerings they could purchase from up to 175 different companies.

Hit Me With Some Numbers

eHealth in line with estimates, maintains guidance, margins decline

Here are some of eHealth’s earnings highlights (growth from previous year’s Q3/analyst’s estimates where applicable):

• Quarterly sales of $28.5 million (up 24% from prior year/vs. $28.76 million projected by analysts)
• Quarterly operating income of $4.5 million (down 7% from prior year)
• GAAP quarterly net income of $3.0 million, or $.12 per share (down 19% from $3.73 million, or $.14 per share in the prior year/vs. $.12 per share projected by analysts)
• Non-GAAP quarterly income of $3.67 million, or $0.14 per share (down from $4.06 million, or $.15 per share in the prior year)
• Operating margin of 15.7% (down from 21.0% from prior year)
• Submitted applications: 117,300 (up 19.8% from prior year)
• Cash Flow: $8.26 million (up 7% from $7.71 million prior year)
• Free Cash Flow: $7.32 million (down 1% from $7.41 million prior year)

My Take: eHealth had previously lowered their guidance due to the slowing economy, and because the company new that they would be spending more money to aggressively pursue those that were without jobs, and looking to save money and cut costs, without compromising health insurance coverage.

As this quarter’s results show, eHealth kept to their lowered guidance, and had rational and reliable explanations as to why margins decreased, etc.

Any way you slice it, 24% growth is fantastic in this environment, and if it weren’t for higher advertising expenses, the bottom line would have followed as well.

There has been a trend of lower submitted applications over the course of the last year or so, but eHealth is now entering a more sustained period of growth as opposed to the hyper growth days when it was a start up and nascent company.

Management has spoken of long term growth rates in the 15-20% range, and that would be fine with me, and Wall Street as well, especially in light of eHealth’s cash generating capabilities.

Other Business Highlights

Maintains Guidance, Everything Still On Track

• Q4/2008 revenue expected to be about $30.24 million vs. analyst’s estimates of $29.55 million.
• Q4/2008 non-GAAP income per share to range between $0.10 and $0.17 ($.14 midpoint) vs. analyst’s estimates of $.13 per share.
• For the entire fiscal year of 2008, eHealth is projecting sales from $111.5 million to $113.5 million ($112.5 million midpoint), vs. analyst’s estimates of $112.1 million.
• For the entire fiscal year of 2008, GAAP earnings per share are expected to be in the range of $.50 - $.57 ($.54 midpoint), vs. analyst’s estimates of $.54.
• Ended Q3/2008 with approximately $143 million in cash and investments vs. $136 million in Q2, and no debt.
• Capital Expenditures (CAPEX) were $.93 million in Q3.

My Take: eHealth had previously lowered their full year guidance after their Q2 earnings release, and I’m sure it was a relief for Wall Street to not have to deal with any more revisions.

In fact, management pegged their shortfall so well, that they are actually running on pace to beat the lowered guidance by a wide margin in Q4, but we won’t count those chickens until they are hatched, especially in the environment we are in now.

On another positive note, eHealth ended the quarter with $143 million in cash and equivalents, which is a huge cash hoard that represents about $5.70 per share in cash on the books.

Conference Call Highlights

Pretty “boring” conference call, which is fine by me

• CEO reiterates eHealth’s aggressive marketing push: CEO Gary Lauer stated that during the 3rd quarter, both inside and outside the company, he constantly reiterated that they were not going to stand pat and wait for the economy to improve, but rather implement several marketing initiatives to stress the affordability of health insurance for all individuals.

Within this was a push for more marketing and advertising, as well as increased awareness via co-branding deals, free informational offerings such as the potential savings by those looking into COBRA health care plans and how eHealth offered a viable alternative that was actually CHEAPER than those thinking about these COBRA health care plans if they were laid off from their jobs, and other initiatives.

Further, in the quarter eHealth closed on several marketing partners such as with Citigroup (NYSE: C), in which they will promote eHealth and their health insurance offerings on their consumer and affinity channels, and specifically, Sears (NASDAQ: SHLD) launched banner ads announcing the benefits of eHealth insurance to their members, as did American Airlines (NYSE: AMR) to their Advantage customers.

My Take: eHealth was indeed aggressive in acquiring new customers as we saw in the form of eHealth’s higher marketing expenses and concurrent lower margins, and their awareness metrics in terms of increased applications, revenue, etc., which lead me to believe that eHealth’s aggressive approach is prudent and warranted.

eHealth’s aggressive stance and actions will create a solid revenue stream, and continue to widen their large moat at times when other companies cannot afford these expenses and marketing initiatives.

• Obama or McCain victory shouldn’t change health care landscape too much in the short term: According to the CEO’s statements, he felt that it is likely that whoever wins the election (Obama is now the president elect), there likely won’t be a large impact on eHealth and the overall health insurance system due to the large budget deficit and bailout plan as well as other more pressing issues.

The CEO went on to say that they were in Washington last week talking to some Democrats about the health care issues and how they would affect eHealth.

He also stated that if there was guaranteed issue (meaning guaranteed health coverage), they feel that regardless, they would be getting more and more attention as a result of either candidate winning and more focus on healthcare, and individual’s paying for their own health care, etc.

My Take: This remains to be seen, but I do agree with the CEO that even in the various forms proposed by Obama, there will still be a huge subset of Americans that do not have adequate health insurance, with or without government mandates and will be forced to fend for themselves.

In addition, if states such as California require everyone to obtain health insurance, similar to car insurance, that would actually BENEFIT eHealth because it would be a prime resource where individuals would go to search and seek out cheap health care from up to 175 different providers.

As things stand right now, we’ll have to wait and see how this all shakes out, but for the foreseeable future, things will remain status quo, and eHealth will serve its niche as it has for years without interruption.

Other Quick Notes:

• e-approval: In the quarter eHealth added another provider to its instant e-approval system in which those seeking health insurance can obtain that insurance in real time, and print out an insurance card for immediate use. This is the wave of the future for many archaic legacy carriers that don’t know what the word technology means.
• Churn: According to the CFO, churn declined slightly this quarter from last quarter.
• Break Even: Also according to the CFO, it takes about 6.5 months to break even on new acquisitions, with a 24 month average length of contract, meaning that eHealth can justify its high customer acquisition costs because on average, each of those customers proves to be highly profitable.
• Share repurchase program: CEO stated that they are currently “evaluating” a potential share repurchase program.

My Take: All good stuff, especially the further penetration of the e-approval system.

In fact, on the call the CEO talked at length about how eHealth’s offerings were actually being used by insurance carriers to sell their own insurance to customers. In other words, they are using eHealth’s own computer systems and infrastructure, or back end, to run their own health insurance websites and applications submissions programs, and then paying eHealth a fee for the use of their technology.

I think its obvious to many of the old dogs of health insurance that they are ill equipped to provide the systems and back-end necessary to cope with the changing times, and eHealth is offering one more way for them to differentiate themselves, and thus create a win-win situation for all involved.

Bottom Line

eHealth still a solid, long term play

I started eHealth with an initial buy recommendation right around these levels and have yet to regret my research and diligence to this point.

In fact, management, led by CEO Gary Lauer instilled me with instant confidence when I saw him at a recent conference and I could see he was a solid leader with a large stake in the company that new his stuff inside and out.

He is often peppered with questions both at these investor conferences, as well as on the quarterly earnings calls, and he never misses a beat. It doesn’t matter the question asked, its vagueness, or implications, he is ready for anything that is thrown his way, and his deft handling of all the possible negatives with eHealth’s business leave me very satisfied going forward, deteriorating market and economic conditions notwithstanding.

On top of the leadership which I rank as an A+, there’s the entire business model on which eHealth sits where there are little to no competitors, and the wide moat which continues to grow.

Finally we have the fantastic balance sheet and fundamentals of the company both in terms of continued revenue growth and intelligent ad spending, as well as profit and free cash flow that make eHealth hard to beat in any economic conditions, let alone in the one we are facing now, where cash is king.

I believe that eHealth, while not a bargain at these levels (Wall Street isn’t that stupid either), still represents a fantastic risk/reward proposition, and should be purchased, at least a small position, right here, and again on any weakness.

I’ll be posting a more in depth look at the eHealth story, as well as looking further into their quarterly numbers in the coming weeks.

In the mean time, do yourself a favor in this volatile market and start a position in eHealth immediately.

New to the eHealth story? 

• Start: with my initial company overview here.