eHealth Q1: Continues to Execute Well, Remains Top Pick

Apr.30.09 | About: eHealth, Inc. (EHTH)

eHealth LogoeHealth (NASDAQ: EHTH), the leading provider of Internet-based insurance agency services to individuals, families, and small businesses primarily in the United States, announced solid Q1/09 results after the market closed Tuesday.

As I had previously written about in my eHealth earnings preview, the company did exactly as I wanted, and should appease investors going forward.

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

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 and, 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.

I’ll break down this report into 4 parts:

  • Hit Me With The Numbers: Q1 earnings meet expectations, Acquisition costs decline
  • Other Business Highlights: Strong 2009 guidance despite economy
  • Conference Call Highlights: Health insurance reform gaining traction in Washington
  • Bottom Line: eHealth a solid addition to your portfolio

Hit Me With Some Numbers

eHealth in line with estimates, acquisition costs decline

Here are some of eHealth’s earnings highlights (growth from previous year’s Q1/analyst’s estimates where applicable):

  • Q1 sales of $31.9 million (up 21.3% from prior year/vs. $31.5 million projected by analysts)
  • Q1 operating income of $5.6 million (up 18% from prior year)
  • Q1 GAAP net income of $3.1 million, or $.12 per share (down 6.5% from $3.3 million, or $.13 per share in the prior year/vs. $.12 per share projected by analysts)
  • Q1 GAAP operating margin of 17.5% (down from 18.0% from prior year, and 19.2% in Q4/08)
  • Q1 Submitted applications: 141,200 (up 23% from prior year, up from 117,300 in Q3/08, and 115,000 in Q4/08)
  • Q1 Estimated membership: 680,100 (up 22% from 558,200 prior year, and 621,100 in Q4/08)
  • Q1 Cash Flow: $4.7 million (down 19% from $5.8 million prior year, down from $7.44 million in Q4/08)
  • Q1 Free Cash Flow: $4.48 million (down from $5.51 million prior year, and $7.2 million in Q4/08)

My Take: Once again eHealth came in slightly ahead of expectations in terms of top line growth, and matched for the EPS.

Where eHealth really hit the ball out of the park however, is in their customer acquisition costs, which declined sequentially (more below), as well as having their largest quarter ever for submitted applications.

The slight decline in operating margins was as a result of increased marketing expenses that were within company guidelines. Look for those margins to bump up in coming quarters. Also GAAP margins account for stock based compensation.

In addition, earnings would have been higher except for a higher tax burden this year as a result of a decrease in eHealth’s Net Operating Loss carry-forwards ((NOL’s)), and a decrease in interest income on eHealth’s cash hoard due to lower interest rates.

The rates also affected the cash flow and free cash flow figures accordingly.

In addition, operating and free cash flow continue to clock in higher than net income or EPS figures, which is a very strong indicator of a company’s leverage and one of the reasons why eHealth gets a premium valuation by the market.

If you look at the numbers, there is a symmetry to them: growth continues to clock in at around 20% for all metrics, which is exactly what eHealth’s long term growth model is based on and what management has been guiding investors to expect for years.

It looks like we are entering the sweet steady growth curve in eHealth’s results and execution despite, or quite possibly, as a result of, the current economic and employment situation.

Other Business Highlights

Solid guidance, 1.6% of the company’s shares repurchased

  • For 2009, total revenue is expected to be in the range of $131 million to $136 million (unchanged from last quarter), which would represent about a 19.5% growth rate if we take the mid-line. Wall Street was expecting $132.6 million.
  • GAAP net income per diluted share is expected to be in the range of $0.51 to $0.61 per share(unchanged from last quarter), $.55 midline vs. analyst’s projections of $.57 per share
  • As of March 31st, 2009, eHealth had repurchased approximately 410,000 total shares, with 361,800 having been purchased in Q1/09 at an average price of $12.70 per share for a total cost of $4.6 million this quarter, and $5.1 million in aggregate. This represents about 1.6% of eHealth’s shares outstanding.
  • GAAP income tax rate expected to be in the range of 43% to 45%
  • $150.3 million in cash, $0 debt
  • Total revenue per estimated member: $49.24 Q1/09 vs. $48.82 in Q1/08
  • Cost per acquisition: declined sequentially from Q4/08 to Q1/09: $65.35 in Q4/08, to $62.95 in Q1/09, but higher from Q1/08 ($55.41)
  • Marketing and advertising expense: $13.42 million in Q1/09, vs. $9.65 million in Q1/08
  • Marketing and advertising expenses as a % of revenue: 42% in Q1/09, vs. 37% in Q1/08

My Take: eHealth had the highest number of submitted applications in the company’s history this quarter.

In addition, the company didn’t alter guidance, and kept the same guidance that they gave during their Q4 and 2008 year-end conference call.

I think that is smart and prudent, and makes what they are doing manageable and gives them a certain flexibility to spend more if need be on marketing, as well as account for seasonality and variables in the business, while still continuing stellar growth trajectories.

In addition, over 90% of the company’s commission revenue growth during the quarter was as a result of carriers that have been with eHealth for over 1 year, dutifully termed “same-store-sales” by the CEO.

This means that as the policies that eHealth’s customers purchased in past quarters age, the retention rate is increasing, meaning that people are keeping their policies longer and eHealth is getting a higher percentage of their revenue from old customers vs. new ones.

This gives them greater visibility into the future, and creates a very sustainable and predictable growth curve for the company.

Also on the call, the CEO noted, as well as several analysts, that churn (the rate at which customers defect) declined sequentially, and the CEO indeed mentioned that as a result of what is happening now in the economy, many policy holders are electing to keep their coverage as they consider health insurance a necessity rather than a luxury.

Finally, as far as the marketing expenses being a higher percentage of revenue, that was something that management had already discussed in previous calls letting investors know that they would from time to time, increase their ad spend rate when the seasonality favored doing so, to capitalize on market conditions, but that longer term for 2009, and going forward, their projected marketing and advertising budget would be within the range of 38%-40%, so this is nothing to be alarmed at.

Conference Call Highlights

Health insurance reform gaining traction in Washington

  • New administration mandates could benefit eHealth: Speaking about the current government’s plans to enact better health insurance coverage, or reform the current system, CEO Gary Lauer noted that he expected several bills to be introduced later this year to both the Senate and House concerning health insurance.

Specifically, he noted that the Senate bill is likely to focus on leveraging the existing system of the health insurance industry, while the House bill would likely focus on taking a more government-centric approach.

He further went on to say that many of the committees that are working on these reforms have sought out eHealth for advice on how to proceed and how to reform the system, and eHealth will remain vocal and active in these discussions.

On the state level, he noted that several states are looking at launching health insurance exchanges and eHealth is pursuing those aggressively as an extension of their business.

He also noted that recent pushes by insurance carriers for guaranteed issue as well as mandating that all persons have health insurance is one that eHealth has also been a proponent of for quite some time, along with financial support for those that cannot afford health insurance.

He then noted the president’s 3 main goals for health care reform:

1) Health care coverage for all Americans
2) Improved quality and outcomes of health care
3) Cost reduction

He stated that eHealth supports these initiatives and relayed the fact that eHealth is a solution to all 3.

My Take: eHealth is a proponent of guaranteed issue (meaning everyone will be approved for health insurance no matter what) as well as a mandate that everyone have health insurance because without the mandate, costs would rise exponentially because people would wait till they got sick to get health insurance knowing that they would not be turned down.

With the mandate attached, people would be required to get health insurance, regardless of if they needed it or not, similar to car insurance, and the total pool would be more balanced, and therefore, costs would be lower because there would be more healthy people that didn’t use it vs. people that did as a result of the guaranteed issue.

This is just smart business, and a sustainable business model. The insurance industry works around this framework.

Those that are healthy pay for those that aren’t. But when it’s your turn to tap the system and leverage it for your health care needs, it will be there for you as a result of the large pool of customers maintaining health insurance.

eHealth knows this, and is working with law makers to make sure that any legislation that passes includes some version of both sides to make this work.

As a result, eHealth will garner more business as those forced to get health insurance will be looking for the lowest cost provider, which eHealth will be more than happy to help them find.

  • Revenue mix turning more favorable: Sponsorship and licensing of eHealth’s e-commerce platform continues to grow, contributing 70% revenue growth over the same quarter a year ago. ($3.71 million in Q1/09 vs. $2.16 million in Q1/08) accounting for an increase in percentage of total revenue from 8.2% in Q1/08, to 11.6% in Q1/09.

Essentially, eHealth is leveraging their platform and infrastructure that they have already built and perfected, and licensing that to other companies for a nice recurring high margin revenue stream.

This revenue as a percentage of eHealth’s total has been steadily increasing, which is a nice way for the company to diversify their revenue stream, and maintain margins as time goes on.

My Take: The margins that eHealth generates from this segment are much higher than their commissions, so growth in this segment is great news as it means that more and more companies are using eHealth’s platform to service their customers, and paying eHealth for the privilege of using it.

Since eHealth has already created this platform, the costs are incremental for adding new users to the platform, while collecting healthy recurring revenue.

Think of this as similar to what (NASDAQ: AMZN) does for its 3rd party vendors, or what Ebay (NASDAQ: EBAY) does for its auctioneers: namely, once the infrastructure is in place, it costs the company hosting the solution virtually nothing to add more users to the system, while increasing profits and dropping the incremental revenue gains directly to the bottom line.

  • Health Benefits Direct customer acquisitions: As I wrote about when previewing eHealth’s earnings release, the company made a nice acquisition of customers (not a business) during Q1 when they moved some of Health Benefits Direct’s (HBD) customers to their platform.

You can read more about that transaction here.

When going over the results, the CFO stated that eHealth’s growth in total estimated memberships to 680,000 included 20,000 from their recently announced deal with HBD.

They are still integrating the HBD customers and getting everything settled, so some of their metrics were skewed a little bit in terms of churn (looked lower than it really was), average revenue per user (looked lower than it really was), etc.

My Take: I didn’t realize that servicing these customers was going to be a needle mover for eHealth.

From what I understood on the conference call, management is still processing this transaction, the customer retention and movement, as well as getting everything settled, so it might take the rest of Q2 for everything to show up properly and be accounted for.

Either way, it was a nice little incremental “acquisition” of customers to eHealth’s platform and service.

Other Quick Notes:

  • Direct channel selling: eHealth’s direct channel grew at 33% YoY and contributed 44% of total (Individual, Family Plan) IFP submitted applications, up from 40% in Q4/08, and 38% in Q1/08.
  • Increased media exposure: eHealth was featured in many media publications as well as broadcast television during the quarter. CEO said this was a concerted effort on eHealth’s part to get the word out there concerning what eHealth does, and how they can help those looking for affordable health care coverage.
  • e-approval: e-approval usage rates increased over 150% for Blue Cross Anthem. This is where customers can get approved for health insurance on the fly, without waiting to be approved by an underwriter.
  • Pay per click advertising: Google (NASDAQ: GOOG) remains their #1 growth driver through pay per click ads in their advertiser network channel.
  • Organic search engine rankings: eHealth was the top search result on Google for their COBRA learning center due to their press release discussing COBRA and alternatives. It’s clear that consumers want to learn what their options are, and eHealth is turning into a reliable source of information for those potential customers.
  • Chinese website: Expanded their product offerings on their Chinese website. Their revenue model for this site allows insurance providers to sell their own offerings while eHealth acts as the platform for those transactions to take place. No meaningful revenue yet, but could be a real growth driver in the future.

My Take: More good stuff, and these smaller topics give you an idea of the direction in which eHealth is headed, as well as the continued execution of the management team.

Bottom Line

eHealth still worth owning, despite lofty share price

As I talked about in my earnings preview, eHealth’s shares are not “cheap” by many measures, including using a discounted cash flow model.

Metrics such as P/E ratios, P/S ratios, and P/CF and P/FCF ratios show eHealth trading at a fair price, or slightly above that.

All that being said, I continue to advocate purchasing shares of eHealth on any weakness at all, and now that we know that the company themselves purchased their own stock around $12.70 per share, that should serve as a bottom baseline when looking at the perceived valuation of eHealth relative to its growth prospects in a beaten down market and economy.

If fundamentals were deteriorating (true that eHealth’s growth rate used to be much higher than it is now), then I would be worried.

But remember this: as a company grows, year over year comparisons for growth rates become harder and harder to achieve, so a nice sustainable 20% which was eHealth’s long term goal for a long time, now looks sustainable, and makes for a solid company.

If we look at all the metrics that matter to eHealth, things like customer acquisition costs, submitted applications growth, member growth, revenue per customer growth, earnings growth, revenue growth, etc., we see that not only are things not deteriorating, but they are actually improving when most companies in the market are lucky to be treading water.

Couple that with eHealth’s hefty balance sheet ($150 million in cash, no debt, about $6 per share in cash), and you can see why analyst’s and Wall Street have bestowed upon the company a best in breed status and valuation to boot.

eHealth is a long term growth story with amazing margins, cash flow production, and execution by a competent and talented management team that has not lead investors astray, save for a tumbling economy that caught everyone off guard early last year.

If we also take into account that reform is on its way in the U.S. legislature when it comes to health insurance, you can rest assured that there are many catalysts in the future that might make eHealth look “cheap” in retrospect.

For instance, what if every person in the U.S. were required to obtain health insurance like they were car insurance?

eHealth boasts 680,000 paying members right now…how would that number expand if that came to pass?

Take it a couple of notches lower and say for instance that a state like California, or New York went along and passed bills to require its residents to obtain health insurance.

How would that look?

There are 37 million people in California, and 19.5 million in New York.

What if just 1%, yep, just 1% of Californians made their way online and used eHealth to find the required health insurance coverage?

That would add 370,000 paying members to eHealth’s roster of 680,000 members, or a 46% increase!

What would that do for eHealth’s earnings, revenue, cash flow, etc? Yea, through the roof almost overnight.

Now, I did oversimplify things here because obviously many people already have health insurance, some would never be able to afford their own, etc., but I think the point is clear.

Bottom line: eHealth is a great company that is executing regardless of external governmental forces that could push things to an entirely different level.

Even if you assume nothing changes for the foreseeable future in terms of mandates and universal health coverage for individuals and families, eHealth is still rocking the house with their current growth and execution with the addressable market that is available to them, with tons of runway still left.

The bottom line is this: eHealth is a great company at a fair price. Buy on dips, hold for the long term.

  • Start: with my initial company write-up here.
  • OR: read my latest company analysis and earnings preview here.