eHealth Earnings: A Beacon of Light in a Tumultuous Market

eHealth (NASDAQ: EHTH), the leading provider of Internet-based insurance agency services to individuals, families, and small businesses primarily in the United States, announced solid Q4 and full year 2008 earnings after the market closed tonight.

Everything from customer acquisition costs, to cash flow generation, to forward guidance was solid and only strengthened my investment thesis in the company going forward.

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 180 different companies.

Want More?

• Start: with my initial company write up here.

I’ll break down this report into 4 parts:

• Hit Me With The Numbers: Q4 and 2008 in-line with estimates, margins up
• Other Business Highlights: Strong 2009 guidance despite economy
• Conference Call Highlights: Tough economy, might benefit eHealth
• Bottom Line: eHealth a solid addition to your portfolio

Hit Me With Some Numbers

eHealth in line with estimates, margins increase

Here are some of eHealth’s earnings highlights (growth from previous year’s Q4 or full year 2008/analyst’s estimates where applicable):

• Q4 sales of $29.5 million (up 21.7% from prior year/vs. $29.5 million projected by analysts)
• Q4 operating income of $5.7 million (up 31% from prior year)
• Q4 GAAP net income of $3.6 million, or $.14 per share (down 84% from $22.4 million, or $.86 per share in the prior year (due to a one-time tax gain)/vs. $.12 per share projected by analysts)
• Q4 GAAP operating margin of 19.2% (up from 17.8% from prior year)
• Q4 Submitted applications: 115,600 (up 18% from prior year, down from 117,300 in Q3/2008)
• Q4 Estimated membership: 621,100 (up 20% from prior year)
• Q4 Cash Flow: $7.44 million (down 6% from $7.91 million prior year)
• Q4 Free Cash Flow: $7.2 million (flat from $7.19 million prior year)
• 2008 sales of $111.7 million (up 27% from $87.8 million prior year/vs. $111.7 million projected by analysts)
• 2008 operating income of $21.3 million (up 33% from $16.0 million prior year)
• 2008 GAAP net income of $15.2 million, or $.55 per share (down 84% from $31.6 million, or $1.22 per share in the prior year (due to a one-time tax gain)/vs. $.53 per share projected by analysts)
• 2008 GAAP operating margin of 19.0% (up from 18.2% from prior year)
• 2008 Cash Flow: $30.2 million (up 15.2% from $26.2 million prior year)
• 2008 Free Cash Flow: $27.7 million (up 13.5% from $24.4 million prior year)

My Take: eHealth came through with stellar numbers right on the mark, in fact eerily so.

Previously the company had lowered guidance mid-2008 as things started to deteriorate in their business and the overall economy.

Ever since that time, they have managed their business well, and come in exactly as they had projected.

In fact, the numbers are so dead on, it’s a little disconcerting.

28% growth year over year is phenomenal, and even if we take the Q4 year over year growth of 21.7% from 2007, that’s still amazing considering all that is going on.

In addition, submitted applications and membership growth both grew at 18% or higher in the 4th quarter showing that even in one of the most challenging economic climates we have seen, eHealth was still able to deliver stunning top line growth, GROW their margins, and manage their bottom line to the tune of some serious cash flow and free cash flow.

I’ll talk about guidance in the coming section, but suffice it to say, eHealth is definitely the place to be in a recessionary marketplace.

Other Business Highlights

eHealth gives solid forward guidance, steady outlook

• As of December 31, 2008, eHealth had repurchased approximately 51,000 of their shares at an average price of $12.59 per share for a total cost of $0.6 million.
• For 2009, total revenue is expected to be in the range of $131 million to $136 million, which would represent about a 19.5% growth rate if we take the mid-line. Wall Street was expecting $132.1 million
• GAAP income tax rate expected to be in the range of 43% to 45%
• GAAP net income per diluted share is expected to be in the range of $0.51 to $0.61 per share, $.55 midline vs. analyst’s projections of $.61 per share

My Take: eHealth provided guidance that should sooth Wall Street.

The apparent shortfall in their EPS numbers is a direct result of lower interest income on eHealth’s increasing cash hoard because of lower interest rates and the conservative nature of their investment strategies.

Otherwise, everything looks great, with some upside potential likely as a result of their previously initiated share buyback program (for up to 10% of their shares outstanding) as well as increases in submitted and accepted applications due to further job losses, higher unemployment and those looking to cut costs over current health care coverage plans.

In addition, management stated on the call that they have begun to buy back shares of their stock at the end of December, and they continue to believe that buying back their stock is a good use of their cash.

Conference Call Highlights

Tough economy, eHealth might benefit as a result

• CEO mindful of tougher economy, still looking to grow: CEO Gary Lauer stated that even though margin optimization is not their priority, they are still mindful of their margins, and continue to operate well in a harsh economic climate.

In planning for 2009, management assumed that the economy would be as bad or worse than the 4th quarter of 2008, and they feel that even if that turns out to be the case, they believe their execution and business proposition will allow them to continue to deliver strong revenue growth and maintain non-gaap operating margins at levels comparable to 2008.

The CEO further stated that they plan to continue to generate significant free cash flow in 2009.

In addition, eHealth’s retention rate continues to be at about 2 years, which is a phenomenal rate of retention for such a highly profitable and high margin business model.

My Take: eHealth continues to churn out the cash, acquire customers intelligently, and retain those customers for long periods of time.

It’s clear they are doing not just something right, but many things right.

The value proposition that they offer not to only customers, but the businesses that rely on eHealth for new leads, ensures that they can continue to operate in what is for many other companies a toxic environment of consumer spending, and not just survive, but thrive.

• eHealth expanding relationships: eHealth is continually looking to expand relationships and make deals and special offerings with lots of different companies, including AARP, a recently announced deal which has started in Pennsylvania, and they will look to extend into other states.

In fact, eHealth is continually working with companies and finding ways to leverage their platform and reach. For instance, they are working with a national retail chain to reach out to their recently laid off workforce to offer them affordable health care options.

One of these initiatives involves eHealth’s Chinese subsidiary that is growing rapidly as a similar platform to eHealth but for the Chinese market in which they act as a platform for Chinese health insurance coverage.

While this venture currently isn’t material right now to eHealth’s earnings or revenues, it is promising, and something to follow in the future.

When commenting on eHealth’s recent deals with AARP and JPMorgan Chase, the CEO stated that they are really pleased with these deals and that they usually attract more consumers to eHealth.

For AARP, they like that the brand name is well respected and known, and they are hopeful that they can expand their relationship beyond Pennsylvania. Cigna was also talked about by the CEO as being another great source of consumer awareness and customer submissions.

My Take: eHealth is always looking to expand into new markets and create new partnerships with like-minded and synergistic partners.

In addition to this, eHealth’s platform is now being utilized by more and more health care providers for their own services and offerings, and provides a nice recurring, high-margin technology revenue stream to eHealth for the platform they are providing these companies that allow them to sell their own health insurance products.

In fact, this segment of eHealth’s revenue, called “Sponsorship, licensing and other” accounted for 10.8% of revenue in 2008, vs. 7.7% in 2007.

This is a clear leverage gain for eHealth and costs them literally nothing since the platform and infrastructure is already in place for these companies to piggyback on eHealth’s trusted and well-executed platform.

• CEO talked about slowing application growth/economy: When an analyst asked management why their application growth was “only” 18% when management had been targeting over 20%, the CEO stated that as they entered the 4th quarter and saw the significant slowdown in the economy, they decided to become extremely judicious with their cash, and the amount of money they were willing to spend to acquire new customers.

They felt that they successfully balanced out the spending with the acquisitions in light of all the stuff going on.

The CEO further commented that as the unemployment rate rises, eHealth’s business could very well increase as those out of work look to save costs on health insurance while not losing coverage, but that they didn’t want to assume anything, and thus they are keeping their guidance on a very conservative level as a result.

My Take: Again, management is being very cautious and prudent with their guidance, and rightfully so.

I love the fact that we can see some serious upside to current estimates and projections based on what is going on around us, good or bad.

Again, growth in the high teens when many company’s growth is slowing or reversing, is absolutely stellar!

• CEO talked about the US involvement in health care: The CEO talked about the government’s involvement with health care in the U.S. and how the CEO recently spoke with several congressional leaders and most tell him that change to health care and insurance, likely won’t happen at all this year because there are other more pressing matters facing government.

When talking about COBRA and the latest stimulus plan, the CEO commented that as of today, hot off the presses in fact according to the latest stimulus package, COBRA would only subsidize about 65% of the cost of COBRA and not really help those out of work with those expenses, and once again, help to drive more traffic and business to eHealth for those looking to save money and still retain health insurance.

He broke down in monetary terms how much and individual and a family of 4 would have to pay with and without the subsidized COBRA coverage, and the net result was that those that chose COBRA could in fact save a significant amount of money getting insurance through eHealth while dropping their COBRA entirely!

Other Quick Notes:

• Acquisitions: Talking about acquisitions, the CEO talked about how if they did do something, it would have to be health related, and be accretive to earnings, and have an online bent.

He also commented that more than anything they would be looking to grow the acquired business or for it to be a parallel business that is closely aligned with their current business.

• 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.
• Marketing spending: marketing spending to be in the range of 35-39% of revenues for the entire 2009 fiscal year.
• Churn: According to the CFO, churn declined slightly this quarter from last quarter.

My Take: As far as the acquisitions are concerned, I would go as far as to recommend that eHealth enlist other types of insurance on its website such as life insurance and other related coverages that would neatly fit within its umbrella, while still leveraging the current business model, and infrastructure.

Whether this is done via an acquisition or whether eHealth rolls out other technology platforms/offerings remains to be seen.

Bottom Line

eHealth still a fantastic, long term play

I’ve said it once and say it again: eHealth is a great company, with a great business model, with great leadership and continued execution.

There is nothing in the company’s earnings release, management’s take on what’s going on in Washington or in the economy at large, that do nothing but bolster my faith in their leadership, and direction.

Who would have thought 6 months ago that one of the best performing stocks over that period of time would be a little-known health insurance broker that streamlined the business model, and changed the way people shop for and compare health insurance products.

That the company is cash rich, profitable, continues to grow at 20%+ rates while the rest of the world suffers through one of the worst climates in a long time, speaks volumes about the value proposition and intelligent marketing being done by this company.

There were always concerns, and will be as we move forward, about universal health coverage, about the current administration’s take on health care and what can and should be done, but the reality remains that while we are in our current economic situation, eHealth continues to be a stalwart in the face of decline.

Those looking for new health care coverage go to eHealth to research and learn about their options.

Those with expiring health coverage, or that were laid off from their jobs come to eHealth to save money on new health insurance coverage.

Even the companies themselves that provide eHealth with the commissions that line its cash hoarding pockets, pay eHealth to highlight their offerings over competitor’s products.

And in the coup de grâce, health care providers are now paying eHealth in larger and ever-increasing numbers to use eHealth’s platform in a stark acknowledgment that eHealth has already created a better platform for health care enrollment and administration than they could ever create on their own.

What does all this mean? All signs point to an efficiently run company, with top-flight management, that has continued to excel in a tough environment while only lowering guidance one time and from then on, always meeting or beating that guidance even in the face of a bottom-dropped-out 4th quarter.

I will say that eHealth’s shares are not “cheap” and I would like to wait for a pull back before buying further, but the way these things work, is that high quality, deeply liquid and cash rich companies that show any type of growth in recessionary market always get and deserve a premium valuation.

All we have to do is look at the secondary education companies to see that’s the case right now.

Bottom line: eHealth is a great company with a stock at a fair price.

How you choose to incorporate that into your portfolio is up to you, but if you’ve been paying attention, I would be adding to my position on any weakness.