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Health Insurance Innovations (NASDAQ:HIIQ)

Q4 2013 Earnings Conference Call

March 18, 2014 10:00 AM ET

Executives

Joan Rodgers - CAO

Michael Kosloske - CEO

Jim Dietz - CFO

Analysts

Carl McDonald - Citigroup

Steve Baxter- Bank of America/Merrill Lynch

Operator

Good day, ladies and gentlemen. And welcome to the Health Insurance Innovations, Incorporated Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions).

I would now like to hand the conference over to Joan Rodgers, Chief Accounting Officer, ma’am please go ahead.

Joan Rodgers

Thank you, operator, and good morning, everyone. We are delighted to have you join us today for a discussion about Health Insurance Innovations' 2013 fourth-quarter and year-end financial results. On the call this morning we will have Michael Kosloske, HII’s Chief Executive Officer; and Jim Dietz, our Chief Financial Officer.

As a reminder, today's conference call is being recorded and webcast from the Investor Relations section of our website and replay of the call will be available from the Investor Relations section of our website following the call.

I caution listeners that we will make forward-looking statements on this call. All statements other than statements of historical facts are forward-looking statements. Actual results could differ materially from those projected or expected in these forward-looking statements. Listeners are urged to carefully review and consider the various disclosures made by the company in this conference call and the risk factors disclosed in the company’s annual report on Form 10-K for the year ended December 31, 2012, as well as other reports filed with the Securities and Exchange Commission. Copies of the company’s SEC reports are available on our website at www.hiiquote.com and on the SEC’s website. The company disclaims any obligation to update any forward-looking statements after this conference call.

At this time all participants have been placed in a listen-only mode. The forum will be opened for questions following the presentation.

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With that, I would now like to turn the call over to our CEO, Mike Kosloske.

Michael Kosloske

Thank you Joan. Good morning to everyone and thanks for joining us today. 2013 represents another great year for our company, filled with many accomplishments on our distribution, sales and infrastructure initiatives. We’re pleased with our strong finish. This is particularly gratifying during a year of significant transitions for consumers, the health insurance industry, and for health insurance innovations with the newly implemented Affordable Care Act.

Prior to going public, last February, 2013; HII forecasted much of the unprecedented opportunity the Affordable Care Act would create. Now that the ACA initiatives are advancing, our efforts and vision to date have uniquely prepared us to provide significant value to our distributors, shareholders and most importantly, our consumers.

We completed our transition to operating as a public company and investing of strategic expansion of distribution and sales networks. We proactively responded to developments in the industry and drove annual revenue growth of 35.1%. As a result, we are the leading product innovator and virtual administrator of affordable cloud-based individual health insurance and ancillary products that meet the post Affordable Care Act consumer needs. As I take you through the highlights from 2013, detailed in our earnings release distributed last night, you’ll see why we are well-positioned for a continued growth in 2014.

First, let me offer you key highlights from our fourth-quarter 2013. Record quarterly revenue of $15.8 million representing 33.9% growth from 11.8 million in the fourth quarter of 2012. Record quarterly premium equivalents, up 27.7 million representing 30% growth from the fourth quarter of 2012. Non-GAAP gross margin of 7.7 million representing 102.6% growth from 3.8 million in the fourth quarter of 2012.

For the fourth quarter of 2013 the ratio of non-GAAP gross margin to premium equivalent was 27.8% growth compared to 17.8% for the fourth quarter of 2012, 1,000 basis point increase. Overall, 2013 was a strong year for us. Here are some highlights from our full-year 2013.

Record annual revenue of 56.6 million representing a 35.1% increase from 2012. Record premium equivalent of 100 million representing a 31.8% increase from 2012. Non-GAAP gross margin of 23.2 million representing 77.1% growth from 13.1 million in 2012. For the full-year the ratio of non-GAAP gross margin to premium equivalent was 23.2% in 2013 compared to 17.3% [technical difficulty] quarter 2013.

New policy sales were strong and we believe this is a trend. The growth in policy account was driven by accelerating demand for Affordable Healthcare in the fourth quarter associated with the Affordable Care Act open enrolment period and the growth of our Company’s distribution network. Our Q4 strategic commitment to expanding distribution resulted in adding 10 additional call centres and over 900 licensed insurance brokers to our distribution. HII now has 93 licensed agent call centres, 10,700 licensed agent distributors, additionally the majority of our sales now come from captive or exclusive distribution, increase in our margin, product diversification and scalability. And just setting the increased demand for Affordable Care Act, our record sales in fourth quarter indicate a growing consumer acceptance of the unique affordable health insurance products we offer and our preparations to meet that demand.

Additionally, we launched in February the insurance cost estimator to our entire distribution network. This innovative web-based tool provides licensed insurance distributors of HII, the ability to help consumers compare the relative cost, benefits and other provisions of short-term major medical policies offered versus the ObamaCare government exchange programs. We recently introduced initiatives for small businesses, providing a tailored private exchange for their transition away from employer-sponsored group plans to individual health plan.

We are also making notable progress on several key initiatives to be launched this spring for individuals and group brokers as well as direct to consumer marketing initiatives. I’m sure you all are interested in our fourth quarter and annual 2013 financial performance.

For that, I’ll now turn the call over to Jim Dietz to give our annual 2013 financial performance.

Jim Dietz

Thank you, Mike, and good morning everyone. I'd like to provide an overview of our fourth quarter financial performance and reflect back on certain 2013 trends as we move into 2014. I'll start by defining our non-GAAP top-line, we call premium equivalents. As a managing general underwriter, all receipts and payments flow through our accounts. Premium equivalents include earned premiums from all policy types together with discount output charges and membership enrolment fees. The fourth quarter of 2013 produced premium equivalents of 27.7 million representing about 30% growth from the fourth quarter 2012 and a 6.5% sequential growth over Q3 2013.

For all of 2013, premium equivalents were just over 100 million growing 31.8% over 2012. GAAP revenue is defined as premium equivalents or total collections less risk premium payments to our insurance carriers and payments to our discount benefit vendors. Q4 2013 produced revenues of 15.8 million, representing 33.9% growth from Q4 2012 and 7.5% sequential quarterly growth over Q3 2013.

Full year 2013 revenue 56.6 million represents 35.1% growth over 2012. Both premium equivalents and revenue growth was primarily driven by the 26.8% year-over-year increase in the total number of policies enforced. By category, short-term medical policies grew from 23,700 at the end of 2012 to 28,700 at the end of 2013. Hospital indemnity policies increased from 8,100 at the end of 2012 to 8,400 at the end of 2013.

We continue to expand our technology driven bundling strategy which has resulted in strong growth and ancillary policies enforced. Total ancillary policies enforced grew about 40% during 2013 and ended the year at 36,600. As we have discussed in prior quarters, much of our cost structures comprised of variable cost which creates a high degree of operating leverage in our business model. Payments to carriers and discount medical plan providers is the first of three variable cost categories that represented 43.3% of premium equivalents in Q4.

Secondly, payments of third-party commissions totalled 28.1% of premium equivalents in Q4.

Finally, payments to ACH and credit card processors accounted for 1.1% of our premium equivalents in the quarter.

It is notable that third party commission expense declined throughout 2013. In Q4 2013, this variable expense was 28.1% of premium equivalents compared to 36.6% in Q4 2012. Primarily, this trend reflects the increasing portion of insurance policies produced by captive call centres including secured health and life and the insurance category. We analyse our business using a metric that we refer to our gross margin and relate to the calculated dollar amounts to premium equivalents, gross margin is defined by HII as premium equivalents less the three variable cost categories I just mentioned.

Non-GAAP gross margin percentage has increased each quarter this year due to a greater portion of higher margin ancillary product sales, including bundled policy sales and due to lower third party commission expense. This margin percentage for all of 2013 was 23.2% compared to 17.3% for 2012, a 590 basis point improvement over the entire year. More importantly, for Q4 this non-GAAP metric totaled 7.7 million or 27.8% of premium equivalence compared to $3.8 million or 17.8% for Q4 of 2012.

After those significant variable costs are absorbed and arriving at gross margin, the cost of operating our business is relatively fixed. Our virtual administration infrastructure is fully in place and we have very little capital expenditures. As our premium equivalence grow, we expect operating margins to expand.

Total Selling, General & Administrative expense of 7.9 million in Q4 2013 represented a 5.1% increase compared to Q4 2012. In 2013 SG&A included 2.0 million of non-cash stock compensation charges which are expensed on accelerated basis. This was the first year of such compensation. We expect non-cash stock compensation to decrease very significantly in 2014.

Additionally the overall increase in selling, general and administrative expense includes $1.8 million of secured health and life operating cost in Q4 2013 which was offset by higher HII gross margins. These operating costs will continue but we expect a purchase of secured to produce attractive and growing additions to company gross margins in 2014.

Part of HII’s higher ongoing cost structure reflects public company administrative overheads that began with our 2013 IPO including higher legal, auditing, SOX 404 and other administrative costs. In the latter part of 2013, we also added a handful of senior personnel including our Chief Marketing Officer and our heads of broker sales and small employer sales. With these new hires, HII expects to pursue new initiatives and incur related costs associated with exploiting sales opportunities, new consumer marketing and other organic growth initiatives. These investments will be made selectively and are planned to increase in 2014.

On balance, while some costs like stock based compensation are expected to be lower in 2014, other costs such as those focused on new business initiatives will increase. The average level of selling, general and administrative expense in the second half of 2013 can be considered a useful indication of a level of selling, general and administrative expense that we expect in 2014.

Cash used in operations in 2013 totaled 1.2 million compared to cash provided by operations of 5.3 million in 2012. The 2013 cash flow total is net of a 5.5 million paid in the TSG agency transaction and 2.2 million of commission advances to independent insurance agencies. Both transactions have helped HII increase profitability. Absent these two cash flow items, the core business would have produced 6.5 million of cash flow from operations, net of significant IPO expenses that did impact the first half of the year. For Q4 cash provided by operations totaled 2.2 million after reduction by 1.1 million for commission advances made during the quarter that are designed to help our independent distributors expand their operations. As of December 31, 2013 our balance sheet reflects total near cash assets of 39 million and HII has no long-term debt.

Michael Kosloske

Thanks, Jim. Our strong balance sheet and cash position together with expected cash flow from 2014 will allow us to continue to invest to broaden our capabilities and product offerings. Internal investment will focus in our distribution network and marketing programs to raise awareness of our innovative products which meet the affordable health insurance needs for our post affordable care consumers.

External investments will be reserved for selective acquisitions that enhance our competitive position. We intend to build on this momentum and expect that growth in premium equivalence in 2014 will outpace the record growth the company achieved in 2013. We see tremendous future opportunity led by the following four business model strengths.

Number one; price of insurance policies. As we predicted prior to going public individual and family premiums for private insurance have significantly increased in some states doubling in 2014 over 2013 rates. This makes premiums for our products among the most affordable coverage available to qualify individuals and families and our programs allow our consumers to choose any doctor or hospitals given the flexibility they need.

Number two; products available for year round sales, Obama Administration Officials announced last week that March 31, 2014 open enrolment deadline for consumers who want to get coverage on health insurance exchanges will not be extended. On and off enrolment in all individual major medical plans will be limited to the open enrolment periods with the next open enrolment period starting November 15th. The over 300,000 license agents insurance brokers across the country will see significant limitation in their product offerings that are both affordable to consumers and profitable for them to sell. Short term medical will remain one of the few exceptions. This will be a positive influence on sales trajectory for HII.

Number three; product line innovation. The Affordable Care Act has introduced substantial changes to the health insurance industry for consumers, carriers and distributors. Our unique position as a product manufacturer will allow us to remain agile, to rapidly evolve and reinvest our pipeline with innovative profitable products, relative to the changes in the post affordable care marketplace.

Number four; finally digital focus. The increased dependence on digital technologies to deliver every aspect of our lives, including health insurance purchases as we have seen during this open enrolment period. HII’s advantage is consumer friendly reliable technology. We've sold approximately 370,000 policies in the past five years on our private exchange that is unique and also includes virtual administration. We offer a Quote-Buy-Print platform for our consumers or in a few minute process, they can check a product to their budget and benefit.

We continue our commitment to optimizing our scalable customer focus technology as the foundation of our business building processes that deliver satisfying consumer experiences, customer loyalty and maximize revenue. Entering into 2014, health insurance innovations both a fully integrated business model, a cloud based delivery platform and private exchange combine with leading product and functional expertise focus on creating wins for our distributors, customers and our shareholders.

Operator let’s start the Q&A session now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Carl McDonald from Citigroup.

Carl McDonald - Citigroup

First question was just, if you have any metrics around the quality of the applications that you’re receiving either in the fourth quarter, even into January and February. Just in terms of how many of those applications are actually turning into sales?

Michael Kosloske

Yes, we have seen the exact same trends that we’ve had where the submitted applications are turning 95% of our submitted applications, the people purchase our program. We have not seen a significant change in those numbers.

Carl McDonald - Citigroup

And then the second question was just around, any seasonality to the G&A spending, you said the second half SG&A percentage is a good -- figure is a good run rate for 2014. Do you think that will be even throughout the year? Do you anticipate some of the investment spending hitting in the first half or second half?

Jim Dietz

Yes, Carl good question, Jim Dietz here. I would say that there’ll be some additional -- some increase over the year, but it will be fairly minor. We’ve got the key people in place for beginning you make the investments, of course those direct cost will somewhat increase, we’re taking a step by step process as we do that though, we expect to achieve perhaps growth beyond what we’ve expected, what we’ve communicated thus far. So yes, G&A should increase slightly as we go throughout the year, but again further comments that I have made we have an expectation that our G&A for the full year will be consistent with the quarterly rate, the average quarterly rate in the second half of 2013. So you’ll see a little bit more as the quarters go on but not significant.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Kevin Fishbeck from Bank of America/Merrill Lynch.

Steve Baxter- Bank of America/Merrill Lynch

Hey this is Steve Baxter on for Kevin. You used the term accelerating demand a few times in your press release related to the fourth quarter. But it looks like that growth rate was actually slightly below your annual total. Would you describe demand I guess then as accelerating through the quarter as some of the hiccups with the exchanges were kind of resolved and you are able to get people truly doing comparison shopping with your product versus exchange products?

Michael Kosloske

Yes, we saw a significant increase of sales overall our already a high-sales trajectory in fourth quarter and those sales we get paid monthly and so it’s an annuity to us. So, the sales we had in fourth quarter then take a time for the revenue to show up because consumers pay monthly. And we'll continue to receive payments on a monthly basis, so it’s just, so that’s one of the reasons we are so excited about ‘14 as we already see strong trends that those sales are up.

Steve Baxter- Bank of America/Merrill Lynch

Thanks. And then just from hearing you guys talk about the growth opportunity outside of open enrolment. So, I guess would you be expecting some more seasonality then in your revenue growth and earnings going forward, so do you think I guess Q2 and Q3 should be significantly above levels in Q1 and in Q4?

Michael Kosloske

This is the first time in the history of U.S. healthcare where we'll have very little competition. So we've never seen this before. All signs point to this being a unique opportunity for us and very, very positive but until we experience and go through it, we will just continue and assume it’s our normal high growth.

Steve Baxter- Bank of America/Merrill Lynch

Okay. Thanks.

Operator

Thank you. (Operator Instructions). And I have no further questions from the phone lines.

Michael Kosloske

Great. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.

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