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eHealth, Inc. (NASDAQ:EHTH)

Q4 2008 Earnings Call Transcript

February 12, 2009 at 5:00 pm ET

Executives

Gary Lauer - Chairman, President and Chief Executive Officer

Stuart Huizinga - Senior Vice President and Chief Financial Officer

Kate Sidorovich - Director, Investor Relations

Analysts

Youssef Squali - Jefferies & Co.

George Sutton - Craig-Hallum Capital

Neil Gagnon - Gagnon Securities

Richard Fetyko - Merriman Curhan Ford & Co.

Jim Friedland - Cowen & Company

William Morrison - ThinkEquity, LLC

Justin Post - Merrill Lynch

Carl McDonald - Oppenheimer & Co.

Peter Costa - FTN Equity Capital Markets

Randy Katz - JMP Securities

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter and fiscal year 2008 eHealth earnings conference call. My name is Kamisha and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions) I would now like to turn the call over to your host for today's call, Ms. Kate Sidorovich, Company's Director of Investor Relations. Please proceed, ma'am.

Kate Sidorovich

Good afternoon, and thank you all for joining us today either by phone or by webcast for a discussion about eHealth Inc.’s fourth quarter and fiscal year 2008 financial results. On the call this afternoon, we will have Gary Lauer, eHealth’s President and Chief Executive Officer, and Stuart Huizinga, eHealth’s Chief Financial Officer. After management completes its remarks, we will open the line for questions.

As a reminder, today’s conference call is being recorded and webcast from the Investor Relations section of our website. A replay of the call will be available from the Investor Relations section of our website following the call. We will make forward-looking statements on this call. All statements other than statements of historical facts are forward-looking statements.

Forward-looking statements made on this call will include statements regarding future growth, the introduction of particular products in traditional market, the addition of more carrier partners to Ubao, the significance of our business opportunity, future healthcare reform, healthcare reform increasing the market's redress, the stimulus bill creating additional interest in COBRA options, future revenue growth, future non-GAAP operating margins, generation of operating cash, our future investment of cash and marketable securities, product's retention, future interest income, expected GAAP and cash tax rates, use of net operating losses and realization of cash flow benefit from net operating losses, guidance for 2009 revenues and revenue growth, stock-based compensation and earnings per share, 2009 marketing and advertising expense as the percentage of revenue, future benefits of skill and operating expenses, 2009 target operating margins and the impact of expected 2009 interest income and stock-based compensation expense on 2009 GAAP earnings per share.

Forward-looking statements are based on assumptions and assessments made by the Company’s management, based on factors they believe to be appropriate. Forward-looking statements are subject to risks and uncertainties that could cause actual results, developments, and business decisions to differ materially from those contemplated by these 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.

Forward-looking statements made on this call represent the Company’s views as of today. You should not rely on these statements as representing our views in the future. We undertake no duty to update or revise any forward-looking statements made during this call, whether as a result of new information, future events, or otherwise.

We will be presenting certain financial measures on this call that will be 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 corporate website under the heading Investor Relations.

And at this point I will turn the call over to Gary Lauer. Gary?

Gary Lauer

Good afternoon and thank you for joining us today. I would like to begin by commenting on some of our financial results for the fourth quarter. Revenue of $29.5 million grew 22% over the fourth quarter a year ago. Individual and family plan application growth was 18%, marketing and advertising expense as a percentage of revenue improved to 39% compared to 40% in the third quarter of 2008. Earnings per share were $0.14 and non-GAAP operating margin, excluding the effects of stock-based compensation, was 22% up from 23% a year ago. We generated $7.4 million on operating cash flow during the quarter and over $30 million for the entire year bringing our overall cash and marketable securities balance to $150 million with no debt on our balance sheet as of the end of the year. As our financial results illustrate, we continue to execute on our operating plans and grow our business in the midst of an extraordinary macroeconomic environment.

As we all know, the economy continue to deteriorate in the fourth quarter of 2008 with unemployment reaching 7.2% in December, up from 6% in the third quarter, consumer confidence dropping to an all time low and December retail sales declining almost 11% year-over-year. Initial estimates indicate that fourth quarter ecommerce sales were down year-over-over for the first time since the US Department of Commerce started to track the sector in 2000 and we are unfortunately seeing many businesses and industries in various states have declined. Against this backdrop, we are very focused on operating efficiency and aggressive marketing to keep growing eHealth at high rates relative to many other companies, and most importantly to help people find quality health insurance options. We would like to grow even faster and think we can in the long run. Like everyone else, however, we are operating in a very challenging economy.

The fourth quarter results are reflective of our disciplined approach to spending in order to grow our membership base profitably. Even though margin optimization is not our highest priority, we maintain a close focus on operating efficiencies and watch carefully where and how we spend in this environment. In the past quarter, we deliberately brought our marketing and advertising expense down within our range for 2008 of 35% to 39% of revenues. We also exercised discipline in other operating expense areas resulting in year-over-year improvement in our non-GAAP operating margins for the fourth quarter and for the full year. Additionally, we saw improvement in our member retention rates as Stuart will describe more fully.

In the fourth quarter, we maintained a diversified approach to member acquisition and delivered year-over-year growth at each of the member acquisition channels. Our direct channel generated 40% of total IFP submitted applications representing 26% year-over-year application growth. The performance marketing partner channel contributed 32% of IFP applications and the online advertising channel contributed 28%. We like the balance of contribution we continue to maintain from these channels and the economics of our channels.

During the fourth quarter, we brought on board a new senior marketing executive, Scott Sanborn, who is managing all major marketing and demand generation functions for eHealth. Scott has extensive experience in online and traditional consumer marketing having previously been senior vice president of marketing at Home Shopping Network. Scott's addition add strength to our senior executive team and enables Bruce Telkamp, who had been very effectively managing our marketing activities to focus more of his attention on our corporate and business development areas which are critically important for us.

In the fourth quarter, we continue to pursue high relevance marketing campaigns tailored to the current environment. We aggressively pursued people coming out of the group market as a result of recent layoffs and corporate bankruptcies as well as continued to reach employees of companies that cannot afford to support health benefits in the current economy. We believe eHealth can help these individuals by providing timely information on their health coverage options and an efficient platform to research and buy affordable products. We proactively reached out and got a positive response from companies that recently announced large scale layoffs. For example, we are working with a national retail chain to offer our services to their terminated employees. The state of Ohio's Workforce Investment Board and the Foundation for Health Coverage Education added eHealth to their online resource centers dedicated to assisting employees and companies going through layoffs.

We also continued to enhance our COBRA learning center and start to move up significantly through the natural search rankings per COBRA related terms during the quarter. As we enter 2009, eHealth's value proposition in the COBRA alternative markets is highly relevant and in fact, we believe we are now seeing a growing number of people coming to eHealth who are recently unemployed. Our PR team was successful increasing our coverage in leading online and print publications during the quarter and as unemployment levels continue to decline, many national and local TV and radio stations tap into our expertise to offer advice on affordable healthcare options. Our message is resonating with people as evidenced by the contribution from our direct member acquisition channel.

We are also pleased with our search results in the fourth quarter as we maintained our leadership position, both in paid and natural organic search. In the marketing partner channel, we continue to add high profile marketing partners. We are now featured on the homepage of U.S. News and World Report online health channel. Waterfront Media, a major destination for health and wellness content is marketing our services on its leading websites including EverydayHealth.com. We also launched the new reciprocal partnership with J.P. Morgan Chase to which we offer J.P. Morgan Chase HSA bank accounts on our platform and J.P. Morgan Chase markets our individual and family plans to their customers.

In January, we announced a revenue sharing partnership with Hays Insurance Services, one of the fastest growing privately held insurance brokers in the country. The agreement enables Hays to sell individual health insurance products online in a co-branded environment using eHealth's ecommerce platform. In addition, our new partnership with Citigroup, which we announced last quarter, is gaining momentum. We already reached millions of their cardholders and other customer segments and have recently expanded our relationship to include their student loan subsidiary. The ecommerce on demand or EOD business of licensing our ecommerce platform to insurance carriers continues to develop. We have two new carriers to the EOD platform in the quarter and expanded geographic coverage with several existing EOD clients. We now have carriers utilizing our EOD solution in 43 states in the District of Columbia.

eHealth also expanded our EOD partnership arrangement with CareFirst by launching a Medicare supplement EOD platform for this major carrier. As you may recall, we originally announced bringing on CareFirst as an EOD partner during the last earnings call. This is eHealth's initial full rate into the Medicare EOD business. I would also like to note that in many of these EOD relationships, carriers are extending our technology to the desktops and laptops of their agents and brokers. In fact, in excess of 7500 brokers and agents today now use eHealth's platform.

In another development in the carrier relations area, we rolled out eApproval to LifeWise in the state of Washington to support instant approval of applications for their individual and family major medical policies. LifeWise Health Plans of Washington is a member of a family of companies headquartered in Washington State with operations in Washington, Oregon, Alaska and Arizona. LifeWise and its affiliates provide healthcare coverage and related services to over 1.5 million subscribers and their families. We are pleased with this most recent addition and with the application growth we are observing on our eApproval platform with WellPoint in California and IHC.

In our sponsorship business, 40 carriers participated during the fourth quarter by paying us to sponsor or highlight a specific plan or their brand in a specific geography. This represents a 29% increase over the third quarter of 2008 when 31 carriers participated in our sponsorship program. We also added new inventory to our offerings, a particular note, Cigna pushed ahead with its expansion plan to the IFP market and used our platform as part of its rollout strategy. During the fourth quarter, we introduced Cigna's IFP products in Texas and Colorado and expect to launch into additional markets with this major brand in 2009. We also added Coventry Health in Texas and Florida, Assurance in the state of Washington and UnitedHealth Dental in four states.

Finally, we are pleased to announce a new partnership with AARP to market their essential premier health insurance plans underwritten by Aetna to the 50 to 64 year old segment online. Their brand is well recognized for their endorsement of high quality products for seniors. This program is underway in Pennsylvania and we hope to add additional states in the coming months. In China, we extended our relationship with Taicang, one of the largest life insurance companies in China. On the 24th of January, we expanded Ubao.com across the entire mainland of China with Taicang's medical and accident insurance products. It is important to note that the Taicang model is one where eHealth access an internet technology provider allowing Taicang to market and sell their insurance products online nationally under their licensure. We are enthused to now be operating Ubao across all of China after piloting Ubao.com in Xiamen and Shanghai.

Ubao.com, by the way, is our online health insurance platform in China, developed and managed under eHealth China Inc, our wholly owned subsidiary. We hope to be adding more carrier partners to Ubao this year. As before, our business in China is new and developing and the market is not yet defined so we are not currently projecting any material revenue contribution from China in 2009. In the public policy area, we continue to be very active and involved. As you may know, we have a full time executive, John Desser who resides in Washington DC and manages our public policy and government relations activities.

I was in DC with John very recently and we had meetings with several members of the house in Senate, mostly democrats to discuss healthcare reform. There is clearly a desire among many legislators to address healthcare and be then insured. However, there appears to be growing concern about timing, breadth of change and affordability. Several democratic congressional members have very recently commented that any substantive change is unlikely in 2009 and clearly the country's economic situation and stimulus spending are taking precedence over everything else. It is likely that effective reform efforts will include a combination of private health insurance and public programs. The focus is in how to expand access to insurance coverage for all Americans. Combinations of ideas being discussed like mandates, guaranteed issue, tax reforms and so on can significantly increase the market opportunity we address and provide individuals and businesses more access to affordable products and the president's focus on healthcare IT is a way to reduce cost and increase efficiency is precisely what our business is all about.

The most recent version of the stimulus bill includes the COBRA subsidy for people who have recently lost jobs. As currently written, this is just very recent in the last half hour, the subsidy is 65% for nine months administered through a businesses payroll taxes. Unfortunately, this may not be enough to help many people but we believe can create additional interest for COBRA options, our sweet spot. We see a growing number of people coming to us everyday looking for affordable COBRA options as well as many people recently unemployed who have no COBRA offering. We plan to continue to be very involved in many of the discussions surrounding healthcare reform letting the experience and knowledge we have gained over the past several years helping people find quality, affordable health insurance coverage.

Before I turn the call to Stuart, I would like to share some thoughts on this year's outlook. We are very optimistic about our Company and the market opportunity. The current environment maybe unprecedented but does not affect eHealth's value proposition. The business opportunity is very significant and our unique online approach is more relevant than ever. Our growth, profitability and strong cash position allow us to invest aggressively in technology and content, the cornerstones of our business. In planning for all of 2009, we assumed that the economy would not be any better than the fourth quarter of 2008 and could deteriorate even more.

Even so, we believe our execution and business proposition will allow us to continue to deliver strong revenue growth this year and maintain non-GAAP operating margins at levels at least equivalent to 2008. We planned to once again generate significant operating cash in 2009 and will remain conservative in our investment philosophy for our cash and marketable securities. Most importantly, we continue to develop and refine our approach to the market which is allowing us to grow in the current environment and we believe positions eHealth strongly for growth when the economy begins to impove.

Stuart will provide you with our detailed guidance for the year. Our strong belief in the fundamental value of our Company and its growth prospects is reflected in the decision to implement a stock buyback program which was announced in November. As we stated at the time, our Board authorized to repurchase for up to $30 million or 10% of our outstanding shares of common stock which ever is less. We put in place a 10b5-1 trading program in the late December to begin buying back shares. We believe that buying our shares at attractive market prices is a good use of our cash.

And now, I would turn the call over to Stuart who will take you through our financial results in some detail. Stuart?

Stuart Huizinga

Thanks, Gary and good afternoon, everyone. I will now review our financial results for the fourth quarter and full year of 2008. As Gary mentioned, we generated solid fourth quarter performance in a challenging environment and grew revenues at a healthy pace. We also increased our operating margins, both sequentially and year-over-year.

Starting at the top line, our revenue for the fourth quarter was $29.5 million, an increase of 22% over the fourth quarter a year ago. For the full year, our revenue was $111.7 million, a 27% increase over 2007. Commission revenue for the fourth quarter was $26.2 million, an increase of 19% over Q4 2007. Our year-over-year commission revenue growth came mainly from growth in our membership base. Sponsorship, EOD and other revenue was $3.3 million or 11% of total revenues in the fourth quarter of 2008, a 48% increase over $2.2 million in the fourth quarter of 2007.

The year-over-year growth in our individual and family major medical plan submitted applications was 18% in the fourth quarter. For the quarter, we had 131,200 new approved members. Our total estimated membership at the end of the year was over 621,000 members, which represents 20% growth over estimated membership reported at the end of the fourth quarter of 2007.

I would like to comment on number retention, but before I do, I would like to remind you that when we estimate retention using trailing historical data. And so our fourth quarter view of retention is based on data from the second quarter of 2008. Based on this information, our estimated member retention rate remained within our historical range, and improved as compared to the estimated retention rate we discussed on our last earnings call. We see this as a positive result given that the economy started to deteriorate sharply during the second quarter of 2008. It is too early to say with certainty what impact this tough economic environment may have on the retention rates but we continue to estimate our revenue weighted average product retention to be an excess of two years.

Turning to operating expenses, our non-GAAP operating expenses, excluding stock-based compensation improved as a percentage of revenue both for the fourth quarter and the full year 2008 as compared to the comparable period a year ago. This was achieved despite the deliberate increase in marketing and advertising spend this year and demonstrates our management rigor and the operating leverage of our model.

I will now review our operating expenses line by line. Non-GAAP marketing and advertising expense, which excludes stock-based compensation expense, was 39% of revenue in the fourth quarter as compared to 35% in the fourth quarter a year ago. On a GAAP basis, our marketing and advertising expense was 39% within our target range for 2008 of 35% to 39% and down from 40% in the third quarter of 2008. As Gary mentioned earlier, we are very judicious about our marketing spend and pleased that we brought it down sequentially since the third quarter as a percentage of revenue. Non-GAAP technology and content costs, which excludes stock-based compensation expense, declined from 13% of revenue in the fourth quarter of 2007 to an 11.5% for the comparable period this year.

General and administrative costs also declined on a non-GAAP basis from 17% of revenue in the fourth quarter of 2007 to 14% in the fourth quarter of this year. Our non-GAAP customer care and enrollment costs declined from 13% in the fourth quarter of 2007 to 12% in the fourth quarter of 2008. The economy's scale and discipline in these areas allowed us to increase our sales and marketing spend in 2008 while improving our overall operating margins.

Our fourth quarter non-GAAP operating margin, excluding the effect of stock-based compensation, was 22% or $6.5 million as compared to 20% or $4.9 million in the fourth quarter a year ago. Fourth quarter non-GAAP operating income grew 35% as compared to the fourth quarter of 2007. We saw similar dynamics for the full year with non-GAAP operating margin increasing to 22% in 2008 as compared to 20% in 2007. This is 41% growth in 2008 non-GAAP operating income.

Interest and other income was $0.6 million during the quarter, down year-over-year from $1.4 million in the fourth quarter of 2007. For the full year 2008, our interest and other income was $3.7 million, down from $5.3 million in 2007. Our approach to investing and managing our cash remains conservative. Currently, over 85% of our cash and marketable securities consist of cash, US treasury funds, US government agency funds or direct investments in US government agency securities. The remaining investments are in high grade corporate bonds, commercial paper and CDs that we plan to hold the maturity.

As I shared with you on the last earnings call, we believe this is a prudent approach to investment and cash management given the prevailing economic environment. At the same time, our approach yields minimal returns on our investments. Our interest income will continue to be impacted by declines in interest rates and is expected to decline further in 2009 from the $2.5 million annual run rate implied by interest income earned in the fourth quarter of 2008.

Our GAAP pretax income of $6.3 million in the fourth quarter of 2008 grew 9% over the $5.7 million generated in the fourth quarter of 2007. On a non-GAAP basis, excluding the effect of stock-based compensation in both years, our pretax income was $7.2 million or 14% growth from $6.3 million in Q4 of last year. The key factor behind our non-GAAP pretax income growing significantly slower than year-over-year than our non-GAAP operating incomes is lower interest income in Q4 2008 as compared to the fourth quarter of 2007 levels. Our 2008 effective tax rate for GAAP purposes was approximately 43% while our cash tax rate was 5% for the year.

For 2009, we expect our GAAP tax rate to be in the range of 43% to 45% while we expect to pay cash taxes at the rate of 6% to 7%. The difference between our GAAP tax rate and our cash tax rate is mainly due to significant net operating loss carry-forwards that reduced the cash tax as we pay. Going into 2009, our federal NOLs are approximately $78 million. This includes NOLs related to stock option deductions that are available to offset future corporate income taxes, but are not considered an asset for accounting purposes. The NOLs resulting from such stock option activity, which totaled approximately $66 million for federal purposes coming into 2009, will not reduce our future GAAP income tax expense, but to the extent we can realize these deductions, we will obtain a cash flow benefit from them.

Of note, in 2009 we expect to use the majority of the remaining tax benefits related to our past federal operating losses. The impact of this tax benefit is reflected each quarter in our operating cash flow. In 2009, we also expected begin using the federal NOLs related to our past stock option activity. Based on GAAP guidelines, the impact of these NOLs will be reflected in the financing portion of the cash flow statement. This will obviously have no impact on total cash flows but will shirt the benefit to a different category of our cash flow statement. We also have a significant amount of California State NOLs that remained available to us. However, due to the severe budget issues in California, the legislator recently suspended the use of NOLs related to past operating losses to offset corporate state taxes due in 2008 and 2009. At the same time, we continue to use state NOLs related to our past stock option activity.

These changes did not affect the amount of NOLs that we expect to ultimately use to offset future taxes but it did result in higher than expected cash taxes in 2008 and will have a similar impact in 2009. Fourth quarter 2008 GAAP net income was $3.6 million compared to $22.4 million in the fourth quarter of 2007. 2007 fourth quarter GAAP net income included a tax benefit of $18.9 million from the reversal of valuation reserves against our deferred tax assets primarily related to past NOLs. Non-GAAP net income for the fourth quarter 2008 was $4.2 million compared to $3.7 million in the fourth quarter of 2007. Non-GAAP net income for the fourth quarter 2008 excludes $0.5 million of stock-based compensation and related tax effects while non-GAAP net income for the fourth quarter of 2007 excludes the tax benefit of $18.9 million and $0.3 million of stock-based compensation and related tax effects.

Non-GAAP net income for the full year increased 19% to $16.5 million in 2008 compared to $13.8 million in 2007. Non-GAAP net income for 2008 excludes $2.4 million of stock-based compensation and related tax effects while non-GAAP net income for 2007 excludes the previously mentioned tax benefit of $18.9 million and $1.2 million of stock-based compensation and related tax effects.

Our cash flow from operations in the fourth quarter was $7.4 million, down from $7.9 million in the fourth quarter of 2007 primarily due to timing of several working capital items. For the full year, we generated $30.2 million in operating cash flow, reflecting 15% growth over 2007. Capital expenditures for the fourth quarter of 2008 were approximately $240,000 and were approximately $2.5 million for the full year. As a reminder for a company of our size, we are not a capital intensive business.

Moving on to the balance sheet, primarily driven by our cash flow from operations, our cash and marketable securities balances increased to approximately $151 million at December 31, 2008. Our cash and marketable securities constituted more than 94% of our total assets, excluding deferred tax assets, at the end of Q4. Given this and the fact that we have no debt, we continue to believe we have a very strong balance sheet.

Finally, I would like to comment on our expectations for 2009 but before I do that, I want to remind you that these comments are based on current indications for our business which may change at any time. We undertake no obligation to update these comments. We are forecasting revenues for 2009 to be in the range of approximately $131 million to approximately $136 million representing an annual growth rate of 17% to 22%. For the full year 2009, stock-based compensation expense is expected to be approximately $5 million to $6 million and GAAP diluted earnings per share is expected to be in the range of approximately $0.51 to $0.61 per share.

I also want to provide a little more color on our margin guidance. Going into 2009, we are targeting our marketing and advertising expense as a percentage of revenue to be in the 38% to 40% range for the full year. However, we expect this number to fluctuate above or below this range from quarter to quarter based on the seasonality of our application volume. We should continue to see benefits to scale and operating expenses excluding marketing and advertising this year. As a result, we are targeting our non-GAAP operating margins for the full year 2009 to be at least equal to what we reported in the full year of 2008. Also please note that the impact on our 2009 GAAP EPS of the expected decline in our 2009 interest income from its 2008 levels is approximately $0.04 per diluted share and the expected impact of the increase in 2009 estimated stock-based compensation expense as compared to its 2008 levels is approximately $0.03 to $0.05 per diluted share.

And now we would like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Youssef Squali - Jefferies & Co.

Youssef Squali - Jefferies & Co.

Couple of questions; first, Gary, if I look at the applications growth of 18% that is still somewhat shy of your goal of the 20%+ that you have been talking about off late. Yet if we look at the acquisition cost of roughly $64 that was relatively flat sequentially, obviously albeit a big jump from year ago. So, the question is, did you decide not to pursue or not to push for applications really this quarter for whatever reason to protect the margins or what happened because certainly the assumption out of your last call was that maybe you will going to continue to let your acquisition cost go up a little more in order to drive further growth? And the other question, Stuart, maybe can you comment in the close ratio? This is the second quarter in a row where we are seeing a sequential decline. I think it touched the 59%, Q3 I think it was around 57%. It is 55% right now.

Gary Lauer

Youssef, it is Gary. I will start. Yes, on the application growth, frankly as we get into the fourth quarter, we saw the economy and the environment continue to deteriorate fast and as we look at that and we saw that frankly, we just decided to get judicious, I guess is one word a way to describe it about how we were spending money where we spending it. At the same time, we saw our direct content starting to frankly strengthen which we were pleased about and so, yes. We made a conscious decision that we want to keep the spending in check. We certainly could not spend quite a bit more but last quarter at 40% is I think you remember, we commented or I commented, were at the higher end of where we want to be or outside the range of guidance that we have given for the year as well although when we gave that guidance, no one anticipated an economic environment like it is today or like it was in the fourth quarter.

But we thought that at that spend level, getting that kind of application growth that that was a roughly good balance and frankly, relative to everything else that we are learning now about how other companies have faired in this environment, what we seeing in terms of ecommerce momentum and growth and so on, carriers in this market place and on and on, we feel good about the decisions we made and we feel really good about the growth. It is a relative world and that world out there right now is really tough and the fact that we are able to grow 18% and spent what we did, we are very satisfied with that.

Stuart Huizinga

And then on the close rate area, you are right that it has come down a little bit from where it was last quarter. We do continue to see a tight underwriting cycle that we have been talking about over the past several quarters. It is not down as much as that would appear when you take our metrics and try to back into that. As I have talked about in the past, there is some lag effect to when we get a submitted application and when that gets reported to us. So our internal numbers based on partial data for Q4, it is not fully lagged yet, we would feel a small decline in the conversion rate there.

One other comment that I would make is that we are starting to see a little bit more in recent periods of family policies as a mix of our business and those seem to close at a little bit lower rate than individual policies. So, it is a little bit of mix as well.

Youssef Squali - Jefferies & Co.

Okay, that is helpful but just kind of a follow up to your answer, Gary. What is baked into your guidance in terms of application growth? Do you think or does your guidance in that would return back to the 20%+ type of range or are you still going to be pretty frugal with, or how would you guys be frugal with the marketing spent?

Gary Lauer

Yes, Youssef, we really based our guidance on what we experienced in the second half of the year and certainly the fourth quarter of the year as well. So, if you assume within that guidance range that we are working kind of off growth rates in metrics similar to what you saw in the third and the fourth quarter, you could probably have an assumption area that is around where we are looking at. We think that there is as unemployment is fast and increasing, it is interesting, two or three quarters ago as the economy was continuing to deteriorate, we were not seeing accompanying unemployment increases at kind of the rates that people thought the economy was declining, but now we are seeing that and we are seeing it very significantly and unfortunately for a lot of people out of work, that may have some positive impact on our business which certainly could change some of the assumptions or at least added the assumptions that we had going into this but let me point out again that we have come into this year assuming that the economy at best case is equivalent to the later half of what we saw last year. The deteriorates, we think we got a lot of programs and things in place but that keep referring at the kind of rates we have been running at. If it gets better or if we get some pick up from unemployment and so on then obviously that has a countering effect there.

Operator

Your next question comes from the line of George Sutton - Craig-Hallum Capital.

George Sutton - Craig-Hallum Capital

With respect to the COBRA element that you mentioned from stimulus plan, how did you factor that into your guidance given that it was fairly late in the process?

Gary Lauer

George, this is Gary. Only in that we think, I will make several comments on the stimulus plan. First of all, I think it is unfortunate that the subsidy is only for people who were looking at COBRA because there are a tremendous number of people losing jobs and they do not have COBRA as an option. For example, most people do not know this but federal precludes businesses with 20 employees or less for example. Businesses that go bankrupt no longer have the health insurance offering or COBRA as well plus the vast number of businesses that had no health insurance to begin with and then you add to that the fact that even at the 65% subsidy and the subsidy is in some place between 60% and 65%, I do not know at this moment where it has landed.

But in either case, for many people, it is still pretty heavily expensive and many, many of the products that we market are less expensive even in the 40% or 35% contribution you have to make out of pocket. So, we actually think that there maybe some uplift from all of that. We assumed coming into this that, because we saw this that there would be some, it could be some COBRA helping working the stimulus package. So that is certainly reflected in our guidance and in fact, I really do believe that the stimulus package and what is in there with COBRA probably brings more visibility to this market place that forces people to go look at options and helps our business.

George Sutton - Craig-Hallum Capital

There were two deals that you mentioned that I wanted to just make sure we get a little more detail about big brand names; J.P. Morgan, the referral deal sounds interesting if you could just give a little bit more clarity there and then also AARP, what would you hope to accomplish with these two programs?

Gary Lauer

Well, with J.P. Morgan Chase, it is just a great name and being able to introduce them into the HSA world with their banking, with the chase banking, is really good. Every time we bring a brand name into our market place, it seems to attract consumers whether it is Aetna or Cigna or J.P. Morgan Chase, we believe. So we think that is going to be good and they have got a very, very large customer base as you know and they are marketing us into that customer base as well. So, it is really up that we are enthused about that.

The American Association of Retired People, AARP, we are very enthused about. I mean that is a well known, well-respected brand name. We have launched the first product with them only in Pennsylvania but our hope and plans are to expand that and once again having a name like that in our market place, we think just is further legitimizes what we do and brings more people too. Additionally, they are focused on people 50 years of age and older which is a fast growing internet centric as well. There are more baby boomers aging into that so there are a lot of demographics that we think having our peer with us, help us to get to and expose us too as well. So, AARP, I am particularly excited about.

The third brand name you did not mentioned that I would like to emphasize as well is Cigna. Cigna is well respected, well known name in the insurance world and the health insurance world as well. They historically have only been supporting large employers. We have now got them in three states, growing from one just a few short months ago and the plan and the hope is to go to more and if there is experiences anything like Aetna, once again, consumers will grab a take toward that brand name and we think that is good as well.

George Sutton - Craig-Hallum Capital

Okay lastly, with respect to the share repurchase. It sounds like you began that late in December. Can you just give us a sense within the constraints of the 10b5-1 plan and what your plans would be there given the low rate of interest you are getting on your cash?

Gary Lauer

Yes, we got a 10b5-1 in place and it is as you know as 10b5-1s are constructed, typically they got different bonds and so on at different price points and different bonds. We are buying back shares and we have been active in the market.

Operator

Your next question comes from the line of Neil Gagnon - Gagnon Securities.

Neil Gagnon - Gagnon Securities

Really I have two questions for Stuart. On the interest, on the discussions ago, it looks to me like that is about, what, $0.04 or $0.05 lower in 2009 than 2008, is that correct?

Stuart Huizinga

That is correct, about $0.04.

Neil Gagnon - Gagnon Securities

Okay. On the amount of money that goes to share options, I think you said $5 million to $6 million. So, after tax, that is roughly $3 million plus so that is $0.10 or $0.11?

Stuart Huizinga

No, it is $0.03 to $0.05 after taxes are applied.

Neil Gagnon - Gagnon Securities

No, I am sorry. Let us do that again, $5 million to $6 million that is your pretax option to the P&L, correct?

Stuart Huizinga

Correct.

Neil Gagnon - Gagnon Securities

Okay, if you tax it then 60% of it after tax would be $3 million or more. I do not understand why that is not $0.11. I do not get the $0.04.

Stuart Huizinga

The $0.04 is the delta between what we had last year and what it is this year.

Neil Gagnon - Gagnon Securities

Okay. That I understand there, but the absolute expense if we go from your, according to estimate you gave as GAAP, we have to add roughly $0.11 to that.

Stuart Huizinga

No, what I am strictly looking at is the delta between what we have last

Neil Gagnon - Gagnon Securities

I understand it, yes. Stuart, I understand it but please just stay with me. You have to add your $0.51 to $0.61 or whatever that number is roughly $0.11 to get to non-GAAP earnings per share.

Stuart Huizinga

I am sorry, I am blanking on this. I do not follow that.

Neil Gagnon - Gagnon Securities

Okay, I will repeat one more time. Your stock option in expense is $5 million to $6 million, I think it is $5.5 million. I taxed it 40% so that is $3.3 million or $3.2 million. That is $0.11 a share. That is what has to be added back to your GAAP earnings per share number if I want to get to a non-GAAP number.

Stuart Huizinga

Yes.

Neil Gagnon - Gagnon Securities

Good.

Stuart Huizinga

That is correct.

Neil Gagnon - Gagnon Securities

That is just what I want to understand. Thanks.

Stuart Huizinga

Oh, I am sorry.

Gary Lauer

Operator, next question?

Operator

Your next question comes from the line of Richard Fetyko - Merriman Curhan Ford & Co.

Richard Fetyko - Merriman Curhan Ford & Co.

Just a quick question, with respect to seeing the impact from unemployment on your applications growth, is it fair to say that if we look at your direct traffic channel and direct channel for applications' acquisitions, which was up or actually accelerated in terms of a year-over-year growth rate, is that perhaps an indication of that increased interest?

Gary Lauer

Well, Richard, this is Gary. It maybe, we did quite a bit of public relations work in the quarter almost all focused on the unemployed, the state of the economy and apply it to people with no health insurance. As I noted, our search ranking for what we do in COBRA and our COBRA outreach and so on, the COBRA Learning Center increased significantly as well. So, we definitely saw some strong pick up and I noted our year-over-year direct was 26% growth. So although I cannot tell you specifically that every single person that came to us direct, what their origin is because we do not know by definition, I think it is fair to assume that there is some influence there from the people recently unemployed and from the unemployment ranks growing.

If you look at that fourth quarter unemployment just on that quarter alone, it went from 6% in the third quarter to 7.2% in the fourth, so we are kind of operating on the assumption that there is definitely some content there of people unemployed looking for options to COBRA or simply looking for health insurance because they do not have a COBRA option.

Richard Fetyko - Merriman Curhan Ford & Co.

And then follow up, you mentioned Cigna and we have heard Cigna talked about how they went on to be more aggressive in individual market to offset their sort of membership losses. On the corporate accounts, that have kind of picked up that kind of tone from the others but are you seeing the other insurance carriers follow through with also product launches and new region launches as well or is it more of a just kind of talk and discussion as oppose to actual actions and seeing some new product launches from these carriers?

Gary Lauer

Oh, no. We are definitely seeing a lot of activity. We saw more sponsorship in the fourth quarter for example as they are actually spending more in this market. We are certainly seeing more plan designs in this market. We are seeing more carriers come to the market. Cigna is the most notable right now. We are seeing other carriers looking to expand to the other market so there is a lot of activity and we have been noted as well that in several of the large health insurance carriers earnings reviews recently, there have been comments about the individual market and growth there as well, as well as comments about healthcare reform probably having some positive platform in this market place also.

Richard Fetyko - Merriman Curhan Ford & Co.

Okay, thanks and then if I may one more, with respect to your cash, is there a sort of active look or search for acquisitions as well as part of the strategy and I mean, how far along are you at reviewing some ideas out there?

Gary Lauer

Well, we continue to be interested in ways to grow our business other that just organic growth. I have said this before, if we did anything we would like it to be strategic and accretive. It has got to be health related. Most likely it is going to have a strong online part or element to it. Bruce Telkamp, who is really focused on and this is part of his responsibility, he is spending a fair amount of time there as well. As you might imagine in this environment, we are seeing more and more private companies looking for capital because they cannot get it from the sources they used to which makes them more affordable, not necessarily more attractive but more affordable but we are looking at all kinds of things but I can assure you that anything we do would be really thoughtful and careful about and as you know to this point, we have not done anything very significant on the acquisition or merger side of our business but we certainly got the ability to do that, somewhat with our stock currency and certainly with our cash as well.

But we would really want something that would help us to either grow the business as we continue to move in and around the market place or be a parallel business that is very closely aligned with our core business today.

Kate Sidorovich

Next question, please.

Operator

Your next question comes from the line of Jim Friedland - Cowen & Company.

Jim Friedland - Cowen & Company

First just a quick one on guidance, is the buyback or is any portion of the buyback assumed in terms of making the EPS guidance and second on marketing, in terms of the range you are giving this year, it is really tighter and a little higher than it was in the past, at what point do you say, "Okay, well, we have been growing the marketing faster than revenues for a while," and you stop increasing that as the percentage of total because obviously there will be a lot of leverage when that does occur or is it just, as long as we are in this current difficult environment that you are likely to push marketing a little bit more aggressively?

Stuart Huizinga

Jim, this is Stuart. On that question on the guidance, we did not assume a material amount from the stock buyback. As you can see, we did not do much last year and that program went into effect right at the end of the year so we come into the year with very little adding to the or taking away from our weighted shares. And then the stock price has increased fairly significantly since the time that we put that in place and so it is hard to say where the price goes from here but we have assumed at least for guidance purposes very little in the way of stock buyback.

Gary Lauer

And on the marketing and advertising at 38% to 40%, we just took a look at where we have operated over the past six months as we said, I think and Youssef's comment where do we predicate a lot of this on, we predicated on off a lot of our guidance after what we have experienced in the fourth quarter and what we expect to see going forward even with a more challenging environment and we think 38% to 40% is a good area to operate and we think we can grow at a very nice rate. In fact, we think we can grow faster than almost any other company we are aware of in this really tough environment. But there is a point at which we will stop spending and you can see it is probably around that upper limit but as Stuart said, there maybe some quarters we spend more than others. So you might find a bit of fluctuation this year but we know with these numbers we could highly profitable and we also feel optimistic that we can grow it a very good rate as well.

Jim Friedland - Cowen & Company

And one quick follow up on the sponsorship and the EOD, the other line item. That is growing in a much faster rate in the commission business and you are signing up a lot of partners. How well penetrated are you as a percentage of the total and on the sponsorship side and the EOD side, do you think you are 25%, 50%? So, just trying to get a sense of how that could grow going forward?

Gary Lauer

Well in sponsorship, we are probably more penetrated, in fact probably we are more penetrated than we are at the EOD business simply because we only led out so much real estate that will sell in the different markets that we are in and we are in the majority of states right now with sponsorship although as time goes on, we will start to break it down in the metropolitan areas and zip code by zip code. So, there is certainly opportunity for us to market more sponsorship there and that is more to us than anything else as we continue to expand that business and how we want to expand it.

On the EOD business, I feel like we are just scratching the surface. We are in as I said 43 states and I think we have 31 carriers currently today. As you know there is over 180 carriers that market and sell on the eHealth platform today. They are all certainly potential partners for us here plus those that we are doing business with today. We got to expand into other markets that they maybe in and yet there is the whole broker/agent community which we had just really started to focus on and started to talk about as well. The strategy here quite frankly is that every time there is a health insurance transaction that occurs online, it is on the eHealth platform whether it is directly through us or with the hands of an agent or the computer of an agent or a broker or directly through a carrier as well but we have the opportunity to monetize it no matter where it happens and I can tell you, I am personally very enthused about this EOD business specially the momentum we have been gaining and where we see this going.

Operator

Your next question comes from the line of William Morrison - ThinkEquity, LLC.

William Morrison - ThinkEquity, LLC

I jumped on the call in the Q&A so I apologize if you already talked about this Gary but I am just wondering if you could talk just kind of broadly about the regulatory environment, what the departure of Daschle from the nomination to EHTH mean in your view and what your government relation folks are hearing from the hill. And then secondly, I was just wondering if you could comment on any impact or not from the SCHIP legislation passing.

Gary Lauer

Yes, Bill this is Gary. Yes, I made some comments in my script and a few others after but I was actually in DC a week ago with John Desser, he was our government relations executive and we have many meetings with members of the senate and the House as well, individual meetings. There is certainly desire on the part of the, by the way, we met almost exclusive with democrats, there is certainly desire among all of them to do some things in terms of healthcare reform. There is not a lot of specificity I might add. I think that the clearly the stimulus, it seems clear to us. So we are hearing this from the hill as well that the difficulty in getting the stimulus package through and agreed to has certainly may portend things for other legislative activities.

There is the question of affordability which everyone that we met with a week ago acknowledged and talked about and then I think Daschle now not being, no longer being the nominee for health and human services does not speed things up. It slows things down. He had a real passion for this. We have a relationship with him and think a lot of him and I thin he was taking that position because he really cared about getting healthcare reform done and in place. That leadership is gone from the administration and from the cabinet. I do not know who is going to take that position but that certainly slows things down as well. We had heard Max Baucus last week who is the chairman of the Senate Finance Committee who has been talking a lot about health that say it is probably not going to happen this year. We have heard that from Steny Hoyer in the House and others as well.

So, your guess maybe is as good as mine but although I think that there was probably more anticipation several weeks ago. My gut is that people are getting to be a bit more pragmatic about this and it is slowing down. I have heard some people say that if it does not happen this year, it probably does not happen at all in this administration. I am the last person to know whether that is the case or not, but it certainly does not feel that it is moving at a speed that it was previously and it is expensive. The other concern I heard last week is that more money maybe required for stimulus than in whatever bill gets passed and that would probably take precedence over healthcare or anything else.

William Morrison - ThinkEquity, LLC

And SCHIP?

Gary Lauer

Oh, sorry Bill. Yes, I wrote that down. SCHIP, yes, the present sign to SCHIP legislation last week which extends SCHIP which is by the way for everyone is the State Children's Health Insurance Program. It is federal funding for children to get health insurance. It is administered through the states, not by the federal government. A child who is a member of a family that is at 300% of the national poverty level or below and that is about $66,000, I am not sure, about $64,000 of family income would qualify. It is estimated that there is about 11 million people today who are ultimately free their Medicaid or SCHIP are not enrolled in the ranks of the uninsured. Look, we felt the last president should have signed this legislation. We just think it is the right thing to do and it is good stuff. It has probably, it has no negative impact on our business that we can see except that maybe it reduces the ranks of the insured a bit but kind of by definition, these are group of people who will not going to be coming to us anyway and in some ways could help the business because it brings more visibility to health insurance and may get their parents thinking about it, and who knows, there maybe some families out there that once the children are covered, it is more affordable for the parents now to buy themselves some health insurance because the government is paying for the children. But we do not see any material impact to our business one way or another right now from SCHIP.

Operator

Your next question comes from the line of Justin Post - Merrill Lynch.

Justin Post - Merrill Lynch

Gary, you talked about the economy affecting the buy rate and some of the activity for you as well as everyone else. Why do you think that is? Are people just generally going without insurance right now? Do you think that is just what people are forced to do in the environment?

Gary Lauer

Yes, here is what I think Justin, I think every time you turn on the television, you hear about how bad the economy is and people are economizing and so on. I think that influences consumer behavior and in my one personal opinion in mind, I know it is influencing my house and my family members. I think there are people who looked at health insurance as something they wanted to buy but did not have it and they have decided to put it off longer for various reasons. I think there are others who are just feeling that although it maybe not to discretionary they are trading. It is being discretionary.

As you know this economic situation seems to be impacting everything everywhere and unfortunately health insurance is part of that. Intellectually, it seems like health insurance should be a nondiscretionary item for everyone but we would have so many people uninsured who have incomes in excess of $75,000 for example who we think could afford it but do not if everyone did believe it is discretionary. So there is no doubt in my mind that there has been for several quarters for us some downward pressure from this economic environment. But I want to add that we may see some counter, we could see some counterbalance to that as the ranks of the unemployed appear to be continuing to increase.

Justin Post - Merrill Lynch

Okay and in our numbers, we do calculate a conversion rate and I think the assumption maybe 12 months ago was that some of the electronic processing would help kind of drive that up but it looks like it was down a little bit and I think you mentioned that in your prepared remarks. What are some of the maybe one or two big initiatives this year that either help stabilize that or can you get that to start go in the right direction again?

Stuart Huizinga

Well, we are constantly working in our customer care center on ways to improve that ratio and underneath that all, we have been able to move the needle in a positive direction. In that regard, in this past year we have added call center software to make it more efficient, make everyone's effort more efficient and we believe that that will help boost things going forward. We are just in a cycle that we have seen before, it is longer that it has been in the past but there is a piece of it that we cannot do anything about and that is with the carrier's control.

Justin Post - Merrill Lynch

Okay and any timeframe on when you think this could kind of little easier and make it loosen the standards, any thoughts on timing on that?

Stuart Huizinga

It seems to have somewhat coincided with the economic downturn and so I think the hope would be that when the economy turns around, maybe we will see something change there.

Justin Post - Merrill Lynch

Okay and then the last thing, any changes in the quality or type of person applying for health insurance? Is it waiting more towards people in the small businesses or more towards unemployed and any changes in the demographics of your membership base, anything you can report there?

Gary Lauer

Justin, there is nothing to report at the moment. As Stuart commented, we are seeing more families applying. Whether you conclude from that that is because of the rising unemployment, I do not know. We have not been able to tie that yet. We are doing a lot of survey work right now for people who come to us. We do not have anything of substance there yet but we are drilling some interesting trends that I do not want to comment on until I feel more confident that they are accurate. As you heard in our prepared remarks, I think we said several times everyday, we feel that we are seeing more people coming to us who are recently unemployed so it should not be a surprise to see that trend specially given what is happening with unemployment and so on.

But we do not see anything from a product mix standpoint as well as the demographic of the customer standpoint that stands out right now that says if there is any kind of an important shift one way or another.

Operator

Your next question comes from the line of Carl McDonald - Oppenheimer & Co.

Carl McDonald - Oppenheimer & Co.

I am just wondering if you could give any studies or have any internal projections on what you saw on the take up rate of COBRA would be with the subsidy as oppose to where it was before.

Gary Lauer

Yes, Carl. This is Gary. It is a really good question. I met with some policy people in DC a week ago and we had that discussion. They are thinking at some place in kind of the 20% to 30% range. I will tell you what the concern with that is and it is a very real one. In fact, this recently came from a compensation firm, [Buck Consulting] who look at these things and their concern is that what you are going to have with this subsidy is people who have got preexisting conditions or have got health issues today who are not healthy are going to be those who are going to take advantage of this and what that is going to do is it is going to imbalance the pools that businesses have and over time increase the premium cost quite significantly.

Those who are healthy either are not going to take the COBRA or going to go into the individual market. That is the prediction. There is nothing to substantiate that from a historical standpoint so we will see but it is an interesting one and it does make some sense. But we think, Carl that if you have a take rate of 25% or 30% of people who are unemployed, who did not take COBRA which is by the way, is much higher than the take rate today. I am talking about with the subsidy. We think that that has got really good impact for us because that is going to get a lot of these people thinking about options and so on before they go to spend that 35% or 40% of whatever the premium value is out of their pocket. We did an interesting study here on our Company by the way. We offer a good quality health insurance to our employees. It is not a catalogue version but we think it is very good and for some who are in their mid 30s who elects COBRA with us, it is a little bit less than $500 a month, in fact $493.62 to be exact, 35% of that if the government paid 65% from that, it means I have to pay $172 out of my pocket.

If I have a family, I would pay $1,530.24 a month that is to extend the eHealth insurance benefit today through COBRA. If I had to pay 35% that, the government paid 65%, I would pay $535 out of my pocket. That is quite a bit of money when you do not have a paycheck coming in and that is going to get people to think. If you take a look at our cost and benefit survey across the country, the average of health insurance for a family of four is $366 per month and that is what benefit similar to what we offer so I just putting this up as an example of how this is still I think could be very challenging for a lot of people, yet it may give people pause to think and to come to us to take a look at options.

Carl McDonald - Oppenheimer & Co.

Second question would just be on the growth assumption that you touched on in terms of the guidance. When you look at the growth rate over the last couple of years, I mean it has been a pretty consistent downward trend throughout 2007 and then to 2008. So when you say the assumptions you have made in 2009 are similar to the second half of 2008, does that mean you are assuming a similar kind of decline or you are assuming that you see some stability in that growth rate similar to what you had in the third and fourth quarter?

Gary Lauer

Well, as you probably would note, the economy has been a decline in all of 2007 and 2008 as well and if you look at the growth rates that we have, they are pretty much in line with the kinds of things that we have seen over the past several quarters.

Stuart Huizinga

Yes and I think if you would also look at our overall top line growth rate of 17% to 22%, fairly strong growth rate there, all things in equal.

Carl McDonald - Oppenheimer & Co.

Okay and final question just on the licensing, the $3.3 million in the fourth quarter, is that a good run rate or is there anything in there that we are not going to see recur in 2009?

Stuart Huizinga

That is recurring revenue.

Operator

Your next question comes from the line of Peter Costa - FTN Equity Capital Markets.

Peter Costa - FTN Equity Capital Markets

Is there anything in your guidance for pressure on commissions going forward or if you assumed very similar commissions to what you had the past year?

Stuart Huizinga

Yes, there is not anything in there in terms of commission rates changing in any way. It is all based on our current structure and it is really constructive more around application volumes and the potential of retention rates changing. But we have not seen anything that would cause us to want to change the commission rate assumption.

Operator

Your next question comes from the line of Randy Katz - JMP Securities.

Randy Katz - JMP Securities

Just one question for you. Considering the deteriorating environment, it was nice to see churn come down in the quarter. Is there anything that you can point to that drive down to these levels? And as it relates to guidance for 2009, churns bounce around quite a bit from the first quarter through the fourth quarter so, how do you think about churn going in 2009 and how does that play in the guidance?

Stuart Huizinga

Yes, I think about churn in terms of what we have seen over the last several quarters. It is somewhat seasonal. It is typically a little bit better in the fourth quarter. So we looked over several quarters and I have always said in the past, never take a single quarter and draw a straight line off of that and so I just really need to look at kind of a rolling kind of outlook on that.

Operator

And there are no more questions in queue. I would now like to turn the call over to Mr. Gary Lauer for closing remark.

Gary Lauer

Okay. I just like to thank everybody for your participation this afternoon and we look forward to speaking with you in the near future. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect and have a wonderful day.

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Source: eHealth, Inc. Q4 2008 Earnings Call Transcript
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