Smallcap eHealth, Inc. Has Significant Room To Grow

Our August recommendation is online health insurer eHealth (EHTH). The company provides health insurance coverage through 160 carriers nationwide via its website eHealth.com. Fol- lowing the company’s IPO in October of 2006 eHealth has grown revenue at a 45% clip having reached profitability in Q405. We believe eHealth has significant room to grow as it adds new carrier states and launches new membership platforms and technology. We recommend purchase of eHealth at current prices for aggressive growth investors.

OPPORTUNITY
eHealth is taking advantage of a large market opportunity as a provider of affordable health insurance solutions to an estimated 47 million uninsured Americans. The company has partnered with major health insurance car- riers such as Aetna, Cigna, BCBS and Humana to offer a wide range of products online. eHealth witnessed a strong start to 2007 boasting 383,400 individual and family product members, up 44% from last year. In addition, the company launched in 29 new carrier states in Q2 including four new Blue Cross and three new Humana states.

eHealth also reported that it will launch Blue Cross-Blue Shield of Arizona in the third quarter, the state’s market share leader. eHealth continues to invest in new platforms and technology that we expect will drive growth over the next three to five years. The company is rolling out a third generation electronic process interchange technology with partners including Aetna, United Healthcare, Wellpoint and Coventry that will provide instant electronic underwriting. In addition, members will have the ability to print ID cards and membership materials following approval directly from the eHealth website.

The company is also planning a major platform introduction in Q3 with Health Savings Accounts for businesses that can’t afford insurance coverage for their employees or have a large amount of part-time or contract labor. With 27 million uninsured working Americans, eHealth’s HSA platform allows employers to contribute a defined amount to employee healthcare expenses. The company plans a Q3 rollout in a limited number of states with a full launch planned in 2008. Key to the company’s growth is increased membership and enrollment counts. The company employs an ex- tensive online sales and marketing strategy that makes use of relevancy models through paid search to drive sales and traffic to its site. Management reported in its conference call that the new Yahoo Panama platform has been an effective sales driver.

Based on eHealth’s large end- market opportunity, brand recognition and technology leadership, new plat- form introductions, and broad carrier relationships we believe the company is well positioned to grow revenue over the next three to five years at a 25%+ rate. We believe the recent pullback in share price post-IPO provides an attractive entry point in eHealth for aggressive growth investors.

SECOND QUARTER RESULTS
Second quarter revenue grew 48% to $21.1 million on growth in new enrollments and a broadened range of products offered. Q2 EPS climbed 100% to $0.14. Total membership grew to 463,600, up 41% from last year. The company continues to generate positive cash with second quarter cash flow from operations of $7.2 million, up from $3.2 million last year.

GUIDANCE & EXPECTATIONS
The company lifted its 2007 revenue guidance to $85-87 million from $81-84 million previously. Net income for 2007 is expected to be in the range of $12-13.5 million with corresponding Non-GAAP EPS of $0.47-0.52. The company’s guidance for cash flow is $21-23 million, up $2 million from 2007 guidance provided last quarter.

BUSINESS
eHealth is the parent company for eHealthInsurance founded in 1997. The company boasts that its technology was responsible for the nation's first Inter- net-based sale of a health insurance policy. The company, through its website ehealth.com, is the leading online source of health insurance for individuals, families and small businesses. eHealth is licensed to market and sell health insurance in all 50 states and currently has partnerships with more than 160 health insurance companies. Through its partners eHealth offers more than 7,000 health insurance products.

EHTH 1-yr chart: