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Health Insurance Innovations, Inc. (NASDAQ:HIIQ)

Q2 2014 Earnings Conference Call

August 12, 2014 10:00 am ET

Executives

Joan Rodgers - CAO

Michael Kosloske - President & CEO

Michael Hershberger - Interim CFO

Bruce Telkamp - CEO, HealthPocket; & COO, HII

Analysts

Steve Baxter - Bank of America-Merrill Lynch

Steven Schwartz - Raymond James

Brooks O’Neil - Dougherty & Company

Carl McDonald - Citigroup

Glen Santangelo - Credit Suisse Securities

Operator

Good day, ladies and gentlemen, and welcome to your Health Insurance Innovations Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, today’s call is being recorded.

I would now like to turn the conference over to Joan Rodgers, Chief Accounting Officer. Ma’am, you may begin.

Joan Rodgers

Thank you, operator, and good morning, everyone. We are pleased to have you join us today for a discussion about Health Insurance Innovations 2014 second quarter financial results. On the call this morning we will have Michael Kosloske, HII’s Chief Executive Officer; Michael Hershberger, Interim Chief Financial Officer; and Bruce Telkamp , CEO of HealthPocket and HII's Chief Operating 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 be making 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, 2013, 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.

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

Michael Kosloske

Thank you, Joan. Good morning to everybody and thanks for joining us to review HII's second quarter earnings and our ongoing strategic initiatives. Yesterday, we reported results for the second quarter of 2014. I hope that you have had a chance to look at our press release issued after the close of the market.

This is our tenth straight quarter of significant sequential quarterly growth, year-over-year growth and one of our highest individual quarterly growth rates ever. Our quarter was not only successful from a financial standpoint, but also from a strategic standpoint as we are funding investments for sustainable growth.

With these strong results for the first half of the year we are raising our full year 2014 guidance for total collections from customers what our industry refers to as premium equivalents growth to at least 45% compared to 2013. We had previously guided for at least 32% growth. We are also adding revenue guidance of at least 45%. This represents a 40% increase over our original guidance projection.

I'll briefly review our second quarter results. Our submitted policies during the quarter were up 107% as compared to a year ago and our record policies in force total almost 99,000 on June 30, up from approximately 64,000 a year ago. This confirms the demand of HII plans during off enrollment periods as provided by the Affordable Care Act.

Premium equivalents was $37.2 million representing a 53% growth over last year's Q2 total. We also realized record of second quarter revenue of $20.9 million representing growth of 53% versus last year.

Our non-GAAP growth margin of $10.1 million represents 110% growth over the second quarter of 2013. For this second quarter of 2014, the ratio of growth margin to premium equivalents was 27.2% compared to 19.8% for the second quarter of 2013, a 740 basis points increase.

During this past quarter, our growth continued to be equally robust across all age groups signifying that our insurance plans provide affordable value across ages and family members.

We continue to increase our distribution validating our anticipated business model, strength of providing products for licensed agents to sell year round outside of the affordable care act annual open enrollment periods.

At the end of the second quarter, we had 107 licensed agent call centers and over 15,000 licensed broker distributors compared to 79 call centers and approximately 9,000 broker distributors a year ago.

We continue to invest in our 2014 strategic plan to provide best-in-class user experience, removing any friction from purchasers and sellers alike, while building exclusive distribution, improving and broadening our products, and our cloud-based technologies, and our marketing capabilities. These initiatives have been well received by our consumers, brokers, and insurance partners.

Over the last quarter, we are very pleased with the advances we made to position HII for continued strong growth. Over the last several weeks, we've announced two transactions that will accelerate our ability to drive balance and sustainable growth. The first is HealthPocket.com which should contribute meaningfully to our fourth quarter revenue growth primarily as referrals generated from the Medicare and a formal care annual in enrollment period.

From an EPS perspective, we expect a neutral impact from HealthPocket in 2014 due in part to anticipated transaction and integration cost. Beginning in 2015, this transaction is expected to be accretive to earnings per share.

Our recent announced acquisition of America Service Insurance Agency (NASDAQ:ASIA), a Fort Worth based distributor, is in line with our strategy to expand captive distribution channels for sustainable growth. ASIA is a significant distributor of HI plans and they will be a key distribution partner for HealthPocket customer referral which will enhance their future growth and profit. This transaction will produce immediate accreditation and HII will realize the net financial benefit in the near term.

In order to take advantage of our growth opportunities, we also continue to enhance our senior management team. With our acquisitions of HealthPocket and Asia, we enthusiastically welcome Bruce Telkamp as COO, Dr Sheldon Wang as Chief Technology Officer, and Landon Jordan as Director of Call Center Operations. As announced last week, we also look forward to the contribution of Dirk Montgomery as CFO.

Let me now turn the call over to Bruce Telkamp, Co-Founder of HealthPocket and now HII's Chief Operating Officer, who will expand on HealthPocket’s core competencies and synergistic opportunity. Bruce?

Bruce Telkamp

Thank you, Mike. Today, I will provide an overview of HealthPocket, review certain key Health Pocket metrics, outline several collaboration areas we are pursuing since the acquisition and conclude with our readiness for the fourth quarter’s open enrollment period for those Medicare and the affordable care act.

First an overview. As many of you already know, HealthPocket is the leading search and comparison technology for health insurance. Our proprietary technology is still under the technical leadership of my HealthPocket Co-Founder Dr. Sheldon Wang and our outstanding team of engineers and healthcare data experts. Our company is headquartered in the Silicon Valley of California.

HealthPocket has four unique competitive advantages that I'd like you to remember. First, HealthPocket makes it possible for consumers to comparison shop the entire market of health plan and do so in one easy step. HealthPocket maintains comprehensive data for over 30,000 health plans from all 50 states covering 8 separate categories of health insurance. Our website's content far exceeds government exchanges as well as commercial website alternative.

Second, Health Pocket offers consumers advanced comparison shopping, doctor search and health plan ranking, all proprietary of HealthPocket. We work like KAYAK and Yelp, and HealthPocket was the first to apply Internet search and proprietary ratings to health insurance, a space which has historically lacked price and quality transparency for consumers.

Third, HealthPocket business model is unique to healthcare and is very pro-consumer. Because we are not a carrier or a broker and we present every option to consumer we can partner from a fulfillment and revenue standpoint with many health insurance carriers and brokers we sell them highly targeted customer referral typically phone call transfers or click-throughs at the point of purchase. HealthPocket has no settlement operations of any kind. We have a very stable and high margin business model.

Fourth, HealthPocket is not an e-broker. HealthPocket collects its comprehensive health plan data using proprietary search and aggregation technology. E-brokers collect their limited health plan data from carriers under restricted agent agreement. Also, HealthPocket business model is not dependant on the CMS Federal Electronic Data Hub for web-based brokers. The challenges e-brokers are facing now regarding the unavailability of workable federal and state government interfaces required for e-brokers to sell subsidized health plans online do not impact HealthPocket.

Next, I would love to review four key metrics that provide important visibility into HealthPocket’s rapidly growing business. These metrics will be provided on a quarterly basis going forward. Our first key metric is health plan queries. This metric represents all website visitors that receive a health insurance quote on our HealthPocket.com platform. Our two principal categories for this metric are Medicare health plan queries and Obamacare health plan queries. Other important categories of health plan queries we track are short-term, dental and small business.

HealthPocket began tracking health plan queries in the fourth quarter of last year at the beginning of the inaugural open enrollment period for the affordable care act. In the first two quarters of 2014, the six month period, healthpocket.com provided consumers with 597,000 health plan queries.

Our second key metric is client referrals. Client referrals are targeted customer referrals sold by HealthPocket to our insurance fulfillment partners. HealthPocket's fulfillment partners are large in best-in-class health insurance agencies and carriers. A portion of HealthPocket client referrals are referred in house by HealthPocket to one of HII's directly owned call centers. A larger percentage of referrals are sold by HealthPocket to non-HII owned fulfillment partners.

As mentioned in our last conference call, many of HealthPocket's top clients are also distributors of HII's quality short term health plans. These shared relationships represent an important synergy between HealthPocket and HII. In the first two quarters of 2014, HealthPocket generated 97,000 targeted client referrals.

Our third key metric is product mix. HealthPocket separates Medicare referrals from referrals of non-Medicare product categories such as Obamacare, short term and dental. For the first two quarter of 2014 29% of HealthPocket client referrals were Medicare referrals. Importantly, Medicare referrals have a higher monetary value than other product referral categories.

Our fourth key metric is year-over-year growth rates in client referrals. Our industry needs to be compared year-over-year due to substantial seasonality that results from the open enrollment periods for both the Medicare and ACA health insurance markets.

For Medicare the open enrollment period is October 15 through December 7. For the ACA market, this year's open enrollment period is November 15 through February 15. We do not have year-over-year growth metrics for this quarter because we did not have or track client referrals until starting in October of last year. So as a proxy for this number we will provide our current monthly growth rates since the end of AEP and do so for the next two quarters until we have year-over-year comparable.

Our client referral growth rates within the second quarter June, 2014 as compared to April, 2014 was approximately 50% month-over-month growth. Stated another way our June, 2014 client referrals was more than double our April, 2014 client referrals. We feel this inter quarter metric is a fair representation of our current rapid growth rate.

HealthPocket tracks other key metrics but many could review aspects of our competitive advantages or business strategies and those additional metrics will not be broken out separately.

Turning to joint initiatives. Our HealthPocket team could not be more excited about the support that we have received since the acquisition closed on July 14. One example is our planned release of a HealthPocket Spanish language experience in the fourth quarter. Critically, HII will be contributing native Spanish speaking license agents and customer support for this joint initiative. We are very excited to address this underserved segment of the health insurance market.

Another important synergy has been the positive reaction from the agent community. Large HII agent distribution partners have come to us and are now asking how can they become a HealthPocket fulfillment partner. This competition enhances our revenue opportunity and improves our customer experience. HealthPocket always strives to make the best match for our consumers to a best in class fulfillment partner.

I'd like to conclude by making a few observations about the upcoming open enrollment periods which begin in the fourth quarter.

First, HealthPocket expects to see very large year-over-year growth rates and client referrals for the fourth quarter both for Medicare and ACA products. Second, our mix of Medicare client referrals is expected to increase in the fourth quarter. Medicare is expected to represent more than 30% of our client referrals in the fourth quarter. Third, we expect to fulfill a majority of our client referrals through HII directly owned call centers or agencies that are also top distribution partners of HII during the fourth quarter.

Most importantly, we expect that HealthPocket will be the first comparison site to commercially publish the 2015 Medicare plan data for both Medicare advantage plans and Medicare part B drug plans. We will also be releasing important updates for our online tool, so seniors can fully compare their Medicare plan options. Find the plan that will save them the most on their out of pocket health care costs and find a plan that their doctor accepts.

You will also see a step up in our media coverage as HealthPocket leverages its 2015 plan data to report on important industry trend such as pricing, health plan quality and the market's winners and losers. We anticipate a very exciting Medicare and ACA open enrollment season.

Thank you for your interest in HealthPocket and HII. I will now turn the call over to Mike Hershberger, our Senior Vice President of Business Development and acting CFO for a review of our financial results. Mike?

Michael Hershberger

Thanks, Bruce, and good morning everyone. I am pleased to provide an overview of our second quarter financial performance. As Mike Kosloske mentioned earlier our second quarter revenues were $20.9 million increasing by 53.74% over the same quarter of 2014 and by 49.1% for the first half of 2014 compared to the first half of 2013. Premium equivalence or total company collections are key metric used by our management team were $37.2 million for the second quarter of 2014 increasing by 53.7% over the same quarter of 2013 and by 47.2% for the first half of 2014 compared to the first half of 2013.

The second quarter of 2014 mix of revenues by policy type were as follows. 58% short term major medical, 15% hospital indemnity and 27% ancillary products compared to 61% short term major medical, 17% hospital indemnity and 22% ancillary products last quarter. We are consistently executed on our strategy to provide consumer friendly ancillary products to our members such as general insurance and term life insurance. Our total policies in force increased by approximately 55% year-over-year to almost 99,000 policies.

Our call base technology allows us to leverage that growth to our proprietary virtually administered quote by print platform. Policies were sold, funds were collected and commissions are paid with no human intervention.

Non GAAP gross margin, which is calculated by taking our revenues less third-party commissions, credit card costs and ACH fees, that comprise our variable cost of sales increased to $10.1 million this quarter, a 110% year-over-year increase compared to the second quarter of 2013.

Non-GAAP gross margin percentage of premium equivalents was 27.2% for the second quarter of 2014 as compared to 19.8% in the same period in 2013. This 740 basis point increase was due in part to the acquisition of the Company's largest distributor in July, 2013, an increase in the proportion of higher-margin ancillary policies in force and our company's scalability.

Net income per diluted share for the second quarter of 2014 was $0.05 compared to a loss of $0.08 in the second quarter of 2013. Non-GAAP net income per share, which is calculated beginning with adjusted EBITDA, was $0.09 for the second quarter of 2014 compared to $0.08 for the second quarter of 2013.

A reconciliation of adjusted EBITDA to non-GAAP net income per share is included in the back of our press release that went out yesterday.

During the second quarter of 2014, the company had pre-tax income of $1.1 million in comparison to a pre-tax loss of approximately $700,000 in the second quarter of 2013.

EBITDA that is earnings before interest, taxes, depreciation, and amortization was $1.6 million for the second quarter of 2014 compared to a negative $500,000 for the same period in 2013. Adjusted EBITDA was $2.1 million for the second quarter of 2014 compared to $1.6 million for the same period in 2013, reflecting core earnings growth of over 31% year-over-year for the quarter.

Adjusted EBITDA is calculated starting with EBITDA and then further adjusted for items that are not part of regular operating activities including acquisition cost, contract termination cost and other non-cash items such as stock based compensation. During the second quarter of 2014, total selling general and administrative expenses was $8.6 million. The SGA expenses included the cost to operate our call center subsidiaries. As we look forward to the second half of 2014 we expect our SGA expenses to exceed a run rate in the second quarter primarily due to the acquisition of HealthPocket and American Service Insurance Agency.

Cash generated in the operations during the second quarter of 2014 was $2.3 million compared to cash used in the operations of $700,000 in the same period of 2013.

In summary, we've had an active second quarter executing strategies and transactions to build momentum that should position the company for continued strong growth.

I will now turn the call back to our CEO, Mike Kosloske.

Michael Kosloske

Thank you, Mike. As we look forward to the second half of 2014, we expect to continue momentum as we integrate operationally with our newly acquired organizations and build on the many opportunities they provide. One of our first major initiatives will be converting HealthPocket customer referrals to brokerage commission utilizing HII's vast call center network. This will positively impact HII's revenues.

We will now open up the call for questions. Operator, please begin the Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Kevin Fischbeck of Bank of America. Your line is open. Please go ahead.

Steve Baxter - Bank of America-Merrill Lynch

Hi, this is Steve Baxter on for Kevin. I appreciate all the color on the recent deals you guys have been quite active on that front. Do you think deals are going to continue to be a big part of the growth story going forward or do you feel you largely have the capabilities that you needed and now you just kind of need to focus on execution going forward?

Michael Kosloske

Yes, we need to focus on execution going forward; we feel we have the pieces in place.

Steve Baxter - Bank of America-Merrill Lynch

And then any as deals kind of do come up though just I guess any color on your ability to just fund those given your current capital position?

Michael Kosloske

Yes, we are very fortunate that we are able to do acquisitions like HealthPocket which are disruptive and first movers for $1.3 trillion of the market place, we are able to do that with our own capital because we have such great profits coming off our core business. So for example, last quarter we had $2.3 million of cash. We have plenty of cash to handle this acquisition and we are able to do that and fund our own growth.

Steve Baxter - Bank of America-Merrill Lynch

Okay thanks. And then I guess one follow up. Just days on the growth rate for a short term and for ancillary, it seems like your having either greater success or greater attention bundling ancillary products. Is there any change that you would want to kind of call out to your strategy in that regard or any specific product you would want to highlight as driving the strength in that number?

Michael Kosloske

Well it's also a large barrier of entry for us. A single carrier cannot compete against a bundle because the carrier may be great in one or two products but they are not going to be great as all of the ancillary products. We sell three and half ancillary products per core medical. I've never heard that in the insurance industry before. We are able to do that through our technology where to the consumer in nano second they can pick which products they want, have one enrollment process and have one bill. So to the consumers its like one product. And our technology we really have this perfected and we see no end in sight for this bundling capability and additional ancillary sales coming in. And as we mentioned, we're up 300% year-over-year in our ancillary sales. Those are higher margin sales as well.

Steve Baxter - Bank of America-Merrill Lynch

Okay, thanks. I guess people shop in now between enrollment periods. Have you seen a meaningful change in retention rates for short term medical? And I guess thought the headlines about potential rate shock going forward, how do you think that impacts your ability to kind of market yourself?

Michael Kosloske

We've seen no change. Our product is so valuable to the consumer because it is less than half the cost and they can choose their own doctor and hospital. So we are very sticky and hasn’t changed and we have seen off, open enrollment period, we work four seasons unlike lot of our competitors that are now one quarter a year companies we work four seasons because we are the only games in town during the off enrollment period. And we see no end in sight as consumers start to figure out the value of this product.

Operator

Thank you. Our next question comes from Steven Schwartz from Raymond James. Your line is open. Please go ahead.

Steven Schwartz - Raymond James

Hey good morning everybody. A few here. Mike Hershberger, can you discuss the relationship of SG&A to revenues or premium equivalent in light the fact that your sales were so high? If you remember the first quarter there was this question of margin and the cost because so much was done through owned distribution as opposed to their party.

Michael Hershberger

Sure. And our own distribution is continuing to sell a significant amount of business and so we're continuing to see that push into the second quarter. As the quarter continues to go on we are anticipating SG$A to be a reduced percentage of revenues.

Steven Schwartz - Raymond James

Okay, that would be just exclusive of HealthPocket, excuse me?

Michael Hershberger

That is correct.

Steven Schwartz - Raymond James

Okay, and then a couple of others, hospital indemnity still 15% of sales, I think HSS is looking to restrict that. Any strategy with regard to that product going forward?

Michael Hershberger

Yes, and that is it will have no effect on HII because as the law takes effect in 2015, we can convert those folks to short term medical, not a significant amount of our new business going forward. It will not affect the in-forced block of hospital indemnity. There is still some question out there of whether that product will be available as a core sale. It certainly will be a viable and a great product for supplemental business, for example, as a supplement to Obamacare. So again no effect on HII.

Steven Schwartz - Raymond James

Okay, and just on HealthPocket going forward. Well first, I guess the first question will be when fourth quarter comes around will a substantial amount of the fourth quarter referrals go to HIIQ fulfillment?

Michael Hershberger

Well, one interesting fact is that Bruce has done a wonderful job with his company in a short period of time. They have their first revenue event fourth quarter of 2013. And Bruce may be you can comment on this, but you have pretty much your leads spoken for, why don’t you jump in on this one, Bruce?

Bruce Telkamp

Sure, sure, yes, definitely a majority, we anticipate that majority of our fourth quarter leads will be either fulfilled in-house by an HII-owned call center or by one of HII's largest distribution partners.

Steven Schwartz - Raymond James

Okay and --

Michael Hershberger

Steven, let me just follow up on that. I think this is a great point, but there are so many synergies of our companies with this unique big data that no one else has, the completeness in $1.3 trillion at the marketplace. It’s to have the chance to be the KAYAK of our healthcare is just a wonderful opportunity. One of the first things we are going to focus on is getting -- right now HealthPocket has that customer referral, they get a one-time fee, we can 8x that with a lifetime brokerage, for example, in Medicare. So, by us then fulfilling through either independent call centers or captive call centers or our own call centers by us fulfilling that customer referral, we now get a lifetime brokerage fee as opposed to one-time lead sale. And that’s a major event and that’s one of the first synergies that we are focusing on.

Steven Schwartz - Raymond James

Mike, what was that number before the x?

Michael Hershberger

8x for Medicare, that’s a sample of Medicare. So the brokerages commission is very lucrative. It’s a great business, there is 10,000 baby boomers a day. The Medicare marketplace is $525 billion and we are very excited to be a thought leader and disruptive in that space.

Steven Schwartz - Raymond James

Okay, thanks guys, good job.

Michael Hershberger

Let me, Steven, one other sample I like to give. And we had this with investors as we announced the deal and we personally did this with my family, but here is the power of HealthPocket in very simple terms. So my mother she is of Medicare age. She goes on for the site. She has five prescription drugs that she has taking. She puts in those dosages. But the first time it filters of every single Medicare plan available. It looks in order based on those drugs are the best plan for her, price, benefit; also there is another button she click on this to see okay what will be the insurance cover, what will be my out-of-pocket expense be, okay. For my parents they’re spending over $500 a month in prescription drugs. This is a huge burden and she was able to go on to the site and of every single plan gets the one that was the best value with her where she is saving literally fact thousands of dollars.

She then additionally put in her doctors that she likes and she additionally put in any health conditions she had. Every time she did that of every single plan available, it showed you know the best plan for her, and she was then able to go back and compare to the plan she had. And what Americans are going to see is, there is hundreds and thousands of dollars per consumer to be saved because for the first time they have unbiased transparent information of everything available to get the best plan for them.

Another comment as she should do that every year because these Medicare companies change their formularies, right, its one of the secrets of the industry. They change those formularies. So what works for her this year may not work next year. So she should do that every single year. I think now not only does that work for Medicare, its works for Part D, it works for Medicare Advantage, it works for a small group, it works for ACA, it works for individual, it works for short term (inaudible) Medical. Think KAYAK, its derivatives, its big data, it’s going to pop up the shortest duration and the lowest price. Americans have never had this opportunity before. They were always subject to a broker right and brokers are by definition are biased, not unbiased.

Operator

Thank you. Our next question comes from Brooks O’Neil from Dougherty & Company. Your line is open, please go ahead.

Brooks O’Neil - Dougherty & Company

Good morning, guys. I have a couple questions too. I was hoping you could just help us understand a little bit better how the different distributor arrangements you have affect your results as you sell policies. So specifically, can you just talk a little bit about how the owned distribution will drive revenue for you, how the exclusive arrangements work for you, and then how the licensed independent agent relationship works from the perspective of driving revenue and profit to HII? Thanks a lot.

Michael Hershberger

Okay. So there is in 80% of our sales, we have over a hundred licensed agent call centers, I believe in numbers something like 14,000 or 15,000 agents in those call centers, by far the largest network in the U.S. So, when we had owned, all of those brokerage commissions come to us and we do have the expense of running those call centers but that’s very high-margined business for us.

We then love the model of where we have best-in-class owned call centers what we call to kind of McDonaldize the customer experience, we want a very good unbiased transparent customer experience. We use those best-in-class call centers and to train our exclusive call centers. Those are call centers that we don’t own, we don’t have the SG&A expense for or liability but they have to do it our way because we have exclusive agreements with them making sure that customers get the best experience. We have a little -- we have great margins in that business but a little less than we do with our owned call centers.

And then third and final is independent distribution where we can negotiate one-time lead as HealthPocket does today or even ongoing revenue shares on the brokerage commission and that will be a little less margin but incredibly great margined business. So all three are winners. And we have such a large amount of further growth, I mean, 50% month-over-month and that’s earned growth does not -- that’s the majority of that business is earned, it’s not pay-per-click, it’s because the customers gain such a great experience but there is plenty of leads, it’s a big tent to go to all of our distributors. And the final thing is those distributors were all get, that call center referral you think about it’s not a lead, right, they made it like my mother she made it all the way to a certain Medicare product and she is trying to onboard, okay. So we are striving towards onboarding that consumer to what they are asking for; it has a very high close rate. And regardless of which distributor own exclusive or independent gets that lead, they're the only ones that are going to get it and they're the only ones going to be onboarding that consumer and they are going to have incredible result.

One last comment. As we started, why did we acquire them? We started using those customer referrals first quarter and second quarter of this year and you can see our result up 107% that was a big part of it, is the success we have with those customer referrals.

Brooks O’Neil - Dougherty & Company

Great. I guess that so sort of leads to a natural another question for me is clearly historically the majority of your revenue as we discussed a little earlier is coming from short term medical and ancillary and hospital indemnity. I think with the HealthPockets and some of the other changes you’ve made you have high hopes of Medicare Advantage and ACA related products, obviously, during open enrollment period. Can you just talk about how those sales should relate from revenue and profit perspective to your historic per policy rates, etc?

Michael Kosloske

Yes, so if you look at the pie, Brooks, you have you know individual is $35 billion of $1.3 trillion, Medicare $525 billion, right, so that’s a very large number. So that's how we expect the pie eventually break down, small business $220 billion, okay. So those are the biggest chunks as Bruce mentioned. We have within the individual $35 billion, you have ACA, you have on-exchange, off-exchange, and you have short term. And so over time we’re going to resemble Americans and that’s going to be our pie as we move forward.

Bruce Telkamp

This is Bruce, I would like a comment, Mike.

Michael Kosloske

Sure.

Bruce Telkamp

So I just add that our acquisition last week of American Service Insurance Agency was done in large part to help us accelerate our capacity, our capability with HII to directly fulfill these new product categories, Medicare and as well as ACA products. So, we’re aggressively moving into those areas. As Mike said they’re very big and incremental growth categories for us.

Brooks O’Neil - Dougherty & Company

Great. Go ahead.

Michael Kosloske

As we said, Brooks, we welcome Landon Jordon who will be running those call centers but in addition to his call center we got a dozen captive exclusive call centers to go along with that. So that's a very large ability to fulfill the HealthPocket customer referrals.

Brooks O’Neil - Dougherty & Company

Sure. That's great. Just a quick technical question, I was curious if Hersh could help us understand how the calculation for the non-controlling interest is done, whether that's likely to become short of a consistent calculation or will it move around going forward?

Michael Hershberger

We anticipating that to be a consistent calculation.

Brooks O’Neil - Dougherty & Company

All right. And roughly is it like 70% or 75% or something like that? How should we figure that up?

Michael Hershberger

Yes, there will be a weight average over time.

Brooks O’Neil - Dougherty & Company

Okay. Cool. Last question, I am just curious obviously been to the HealthPocket's website and I would love to hear a little bit about the plans to drive customer traffic to the site. I obviously know the market is exploding around us but what specifically are you guys going to do to try to drive incremental traffic to the HealthPocket site this year in going forward? Thanks a lot.

Bruce Telkamp

Sure, great question. I'll take that. So most of the traffic existing today comes to us from natural search, word of mouth, consumers telling consumers and the work at the media that we do. If you Google News HealthPocket you would see we are regularly our data and HealthPocket itself is regularly mentioned and accredited in the media to the day that we publish and our thought leadership is building and very well established.

All of those categories I would collect into a (inaudible) bucket and we are going to continue to invest in our direct product category but we are also adding on to that two new very important product categories and they've been key initiatives for us for the last two quarters and that's building out a more a fast growing online advertising channel which includes paid search marketing and that performs online advertising in a very strong pay for performance marketing channel through partners. And we have several very large partners now that send us incremental business and also leverage the healthpocket.com platform for their customers, and we are investing in accelerating those marketing efforts as well.

So looking out a year from now, we are going to see three very strong and I expect three very healthy and rapidly growing channels, a direct channel, an online advertising channel and a performance partner channel.

Operator

(Operator Instructions) Your next question comes from Carl McDonald from Citigroup. Your line is open. Please go ahead.

Carl McDonald - Citigroup

So, in terms of majority of the client referrals going through the HII call centers or agencies is it right to think the majority of the Medicare leads will be sold externally and the majority of the non-Medicare leads will be done internally?

Michael Kosloske

I think for the near term, Carl, that's a reasonable thought but certainly we are through integrations striving to get a good chunk of those leads also, but again there is always going to be plenty of leads for everyone because of the volume of the opportunity that's out there.

Carl McDonald - Citigroup

I know there is a wide range of what the leads going to be sold for, but can you give us a sense of what if you sell a Medicare Advantage referral what the going rate on that is?

Michael Kosloske

I think I can do that but we are very, very concerned; we don't want our competitors to know what we are selling leads for, we certainly don't want our customers to know what we sell leads for because that's confidential information, but it's not the Internet leads the sell for a dollar, these are customer referrals, they're very valuable and, however, that's a one-time fee. The brokerage commission again for Medicare can be 8x. And then as we move forward with our models or manufacturing some of these products there is additional margin there. So but again that's a very question that we are not going to be sharing, we don't want to disrupt our existing distribution.

Bruce Telkamp

Yes, I would just add to that that over the last six months we continue to get more competition, more fulfillment partners, large agencies that want access to the HealthPocket client referrals, which again are very different than traditional leads, because they are so targeted and the consumer can be very far down the shopping funnel. That competition is resulting in our ability to negotiate higher lead prices and we think that's a very favorable trend and we will continue.

Carl McDonald - Citigroup

So maybe without giving any specific numbers or ranges, could you just talk about how the sale price of a Medicare lead may have changed over the last few years? I'm just try to get a sense of do you see wide variations from year-to-year, is it fairly consistent? And then maybe separately look at what does a Medicare lead sell for versus what a individual lead as an example sells for?

Bruce Telkamp

A little background, so we first started selling client referrals in the fourth quarter of last year. So we don't have years of experience, we have three quarters of experienced selling leads. I think as you would image, Carl, the Medicare leads are more valuable than the under 65 leads and the value of those leads increased during the annual enrollment period which is October 15 to December 7.

Really though and one of the things that we do and this is where the competition is so important to our business model and our strategy as well as really making it HealthPocket customer experience the best is the lead is actually most valuable if we can correctly match the consumer to the right fulfillment partner. And that's just an area what we are investing in and need to continue to invest and accelerate our investment. And the closer we get a perfect match, the closer that client referral conversion percentage will equate to a completed sale. And I think how high the broker commissions or the value of an unenrolled member is to a carrier. We can get closer and closer with those higher numbers as we do better matching, and we also know that that improves the customer experience. So that's really where we are invested in. I think for us there really is no cap to a lead price for us because we can keep improving on and accelerating on as we better our customer experience and better our (inaudible).

Carl McDonald - Citigroup

And then a separate question if you could just talk about the top prices behind the recent CFO change?

Michael Kosloske

Sure, we thank Jim Dietz, he did a great job. Really enjoyed his time here at HII. With Dirk Montgomery, he has been a very successful public CFO, multi-billion dollar companies in the direct consumer space. Also, if you will know, when he the CFO of a large retail company he also had the title of technology. So he fits exactly what we are looking for, what we are – you can imagine with an opportunity this large especially with the HealthPocket acquisition, we are really needing that direct consumer and that technology expertise to get us get to the size that we want to be. So again, we appreciate everything that Jim did and we're excited about welcoming Dirk.

Operator

Thank you. Our next question comes from Glen Santangelo of Credit-Suisse. Your line is open. Please go ahead.

Glen Santangelo - Credit Suisse Securities

Yes, thanks. Bruce, I just want to follow up on some of the comments you made earlier. I think when you are describing HealthPocket, you described yourself as not an e-broker, you are not a health plan and you prided yourself on sort of the unbiased information and so I am kind of wondering if you could give us a sense how your business model may change now that you are basically owned by a fulfillment partner? And as you think about that could you give us a sense for may be what percentage of the leads you were telling to HII because it kind of sells like now that the majority of the leads are going to be sold to HII. So, if you could walk through that transition a little bit more would be helpful.

Bruce Telkamp

Sure. Thanks for the question. Our business model will not change. The key tenets to our business model is replete with easy to use the powerful tools and run biased. HealthPocket is not a broker today and we will not become a broker or an e-broker or otherwise.

So you need to think that HealthPocket as a – well, it's a separate company within the HII family. The partners or the direct fulfillment that we are talking about with HII will be other HII directly owned call centers which are set up as separate companies not under HealthPocket, just like today we said leads and referrals to HII's call centers, one of the three now HII call centers, those call centers are not organizationally under HealthPocket. So we will maintain that separation, we think that's very important for us.

We will continue to work to, as I was describing for, always best match the consumer with the fulfillment partner who can sell that consumer the plan that fulfillment partner is looking for and that will not change either and we see that as really critical to the HealthPocket model, very critical for the consumer and offering the best customer experience and what makes us the most unique.

Obviously, because we have the data and the information, we can help get HII and its call centers there more quickly, and that's the area of investment. And one of the examples of those investments is bring on that the recent call center acquisition last week. So the goal is to expand HII's call center capabilities for its direct supplement of HealthPocket's client referrals.

Glen Santangelo - Credit Suisse Securities

Okay. But did I hear you correctly saying that the bulk of the leads are going to be sold to HII going forward?

Bruce Telkamp

No, what I said before was -- and this is currently the case. We have seen this since last couple of quarters, actually through the acquisition. The majority of HealthPocket's leads the last few quarters have either been sold to HII or now used in-house or to one of HII's top distribution partners. One of the reasons that I felt, that I personally felt this was such a good fit bringing these two companies together was that HII has a very deep and long term relationship with a large number of call centers. I think Mike referenced over 107 call center agencies that distribute HII's products. That is a wonderful synergy and asset for us HealthPocket to tap to further that vision that I was describing before of making sure that that consumer can buy the plan that they're looking for.

So we have the ability to develop more and more of our own direct fulfillment within HII. But we can always look beyond that to those top distribution patterns of HII. Now, 107 growing every quarter. The -- and frankly, a really important benefit for them and perhaps another important benefit to sell more of HII's products is now to get access to the HealthPocket leaflet. And that benefits us from revenue standpoint and customer experience standpoint. So everybody wins. Most importantly, the consumer.

Glen Santangelo - Credit Suisse Securities

Mike, may be -- go ahead Mike.

Michael Kosloske

I just want to add every -- whether you are a Medicare call center, an ACA call center, a short-term call center, an off-exchange call center everyone needs short-term medical because it's one of the only gains in town off season. So these 100 call centers have a wonderful mix of all types of focus that can meet the needs of those HealthPocket customer referrals.

Glen Santangelo - Credit Suisse Securities

Maybe that's a good segue into my follow-up question. I do want to talk to you about the seasonality of your business, Mike, because it is clear on the first quarter you obviously benefited from all the media hype around the enrollment period and that kind of made sense. But what do we expect to that post, the end of the enrollment period that you would saw at least some seasonality tick down in the business but you didn't see that. And so, may be you can talk about how the business differs during the enrollment period versus off the enrollment period and how should we think about that? With respect to the seasonality in the back half, based on your guidance, should we assume that 4Q will be much stronger than 3Q?

Michael Kosloske

Right. And I'm sure the question -- many of your competitors have their sales way down. We are selling ACA now and you go to their website it says closed for business. So we saw this opportunity coming a while ago. We innovate products that would be available four seasons. And so, we are continuing our strong rapid growth. We are having a lane grab, over 50 agents a day coming to us to distribute. So we are strong for four seasons. However, we are going to be even stronger during open enrollment. So we will him some seasonality with more sales, but we are open for three quarters of the year as well.

Operator

Thank you. Steven Schwartz from Raymond James. Your line is open. Please go ahead.

Steven Schwartz - Raymond James

Hey. Thanks for the follow-up. Just really quickly, Bruce, you talked about I think it was from the first half of the year 597,000 quarries, 97,000 of those became target referrals, the 500,000 difference. Is any money made off of those?

Bruce Telkamp

Not today. But we do see that as an opportunity for us to introduce more I'd say advertising. On our platform we actually have some tests running in that regard right now. The early data looks pretty good.

Operator

Thank you. I'm showing no further questions at this time. I'd like to hand the conference back over for closing remarks.

Michael Kosloske

Yes. This is Mike Kosloske. I'd like to thank you everyone for their time today in this exciting opportunity. We have a -- we are a first mover. We are disruptive. What an opportunity to be the KAYAK for $1.3 trillion of healthcare. What's most exciting is, when companies have an opportunity this big, a lot of times they will, they have capital needs. We have such great profits coming in from our core business that we would have fund these transactions with our own capital and still add to our money, add to our profit margin on a quarterly basis. So I want to thank everyone for their time today and we appreciate, thanks.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program. You may all disconnect and have a wonderful day.

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Source: Health Insurance Innovations' (HIIQ) CEO Michael Kosloske on Q2 2014 Results - Earnings Call Transcript

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