Health Insurance Innovations (NASDAQ:HIIQ) Q2 2016 Results Earnings Conference Call August 9, 2016 8:30 AM ET
Cindy Merluzzi - VP of Accounting and Controller
Patrick McNamee - Chief Executive Officer
Michael Hershberger - Chief Financial Officer, Treasurer and Secretary
Michael Baker - Raymond James
Mike Grondahl - Northland Capital Markets
Greetings and welcome to the Health Insurance Innovations Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Cindy Merluzzi, Corporate Controller. Thank you, you may now begin.
Thank you, and good morning, everyone. We’re delighted to have you join us today for a discussion about Health Insurance Innovations 2016 second quarter financial results. By now you should have received a copy of the press release with the financial results. If you don’t have a copy and would like one, please visit our website at investor.hiiquote.com.
On the call this morning with me, we have Pat McNamee, HII's CEO, and Mike Hershberger, HII's Chief Financial Officer. As a reminder, today's conference call is being recorded and a replay of the call will be available on the Investor Relations section of our website following the call.
We will be making forward-looking statements on the call. All statements other than statements of historical facts are forward-looking statements. Such statements may describe future plans, objectives or goals and these statements are generally identified by words such as anticipate, expect, believe, or other similar words.
Forward-looking statements are subject to future risks and uncertainties, including the risks outlined in the company's Form 10-K for the year ended December 31, 2015. These risks and uncertainties include, among other things, the company's ability to maintain relationships and develop new relationships with health insurance carriers and distributors, its ability to retain its members, the amounts of commissions paid to the company or changes in health insurance plan pricing practices and changes and developments in the U.S. health insurance system and laws. 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, 2015, as well as other reports we have 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 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 open for questions, following the presentation.
With that, I'll turn the call over to our CEO, Pat McNamee.
Thanks, Cindy. Good morning, everyone and thank you for joining us today. Our second quarter performance demonstrated continued strong demand for our products with exceptional execution. Revenues grew 96% year-over-year to a record $44.5 million and our adjusted earnings per share for the quarter was $0.27 compared with $0.08 in 2Q of last year.
In the first half of 2016 we generated $87 million in revenue and that resulted in $0.44 of adjusted earnings per share. We had very strong sales of our individual and family finance or our IFPs; that is short term medical and limited medical. We had 258,000 policies in force at the end of Q2 2016 and this represents 128% year-over-year increase.
During the quarter submitted policies increased by 100% to 128,000 year-over-year. Our strong distribution system, which includes our e-commerce division, AgileHealthInsurance.com, continues to drive our sales growth. In Q2 AgileHealthInsurance.com which is powered by our team at HealthPocket delivered the strongest revenue growth of all channels. During the quarter, Agile sold approximately 16,000 short term medical policies and a record 25,000 supplemental dental polices. Agile continues to be our largest distributor and they will continue to add new products this year to assure our future growth.
Our momentum through the first half of the year is due to our disciplined focus and the execution of our key strategic levers; these levers being, product innovations, distributor development, online sales, and operating leverage. Few comments on each; we strive to lead the industry and product innovations with a history of creating quality, affordable and efficiently administered health insurance products that meet the needs of consumers.
And we continue to develop new products. Our focus is to mitigate the effects of any rule that may affect sales of short term medical. Our goal is to both products of similar margin purchase as to short term medical and that meet the critical needs of the insured and uninsured in a $35 billion market.
We continue to help our distributers drive records sales growth in a number of ways. We help them grow via secured loans as well as assuring regulatory compliance by providing a scalable platform that controls all elements of the served classes as well customer support.
We continue to focus on direct-to-consumer business also. Our online business AgileHealthInsurance.com, our Silicon Valley team of developer and marketers continue to demonstrate phenomenal growth, retention and customer satisfaction while increasing their marketing efficiencies.
And finally we continue to focus on scalability and leverage. We have a sophisticated technology driven platform with incredible operating leverage, limited risk, excellent customer service, strong agent support tools and processes to assure compliance and transparency with our regulatory partners.
Now I'd like to provide an update on our proposed regulation impacting the short term medical which I believe everyone on the call is following. To recap, on June 10, 2016 the Internal Revenue Service, the Employee Benefits Security Administration and the U.S. Department of Health and Human Services, collectively HHS proposed rule 2016-13583 that potentially impacts short term medical insurance. The proposed rule limits short term medical duration to three months with no ability for the customer to extend the overall duration of the coverage. The proposed rule has an open common period that coincidentally ends today.
As expected, there has been significant stakeholder pushback against the proposed rule. Many short-term medical consumers have commented with their personal story of how the proposed rule will harm their family and will result in them falling into the ranks of uninsured. As discussing groups have also commented on how the proposed rule harms loanable populations such as loan income communities, or Latino community students as well as real populations. And industry and trade groups have come out very strongly against the proposed rule and importantly at least two states departments of insurance have commented against the proposed rule.
We've added a link to our website at www.hiiquote.com which will allow you to review all the comments that have been made by these stakeholders. We expect HHS to review stakeholder comments and respond within the next 60 to 90 days and if no changes were made to the proposal the rule would go into effect on January 01, 2017.
We believe that HHS was well intentioned in this proposed rule; however, it appears that they have not fully appreciated the negative impact that this rule will have on consumers. The proposed rule sets the stage for considerable consumer harm if implemented without modification.
Without short term medical, many vulnerable consumers potentially fall into the ranks of uninsured rather than in the ACA health plans. There are three potential outcomes to the proposed HHS rule and we are ready for each scenario. The rule could be implemented, a compromised rule might be implemented or the rule is withdrawn and not implemented at all.
We are against the proposed rule as drafted, but we prepared for any outcome. I want to emphasize that we have strategies in place to address each and every one of these three scenarios. HII is a leader in health insurance innovations. We already offer products in the marketplace that are in high demand even if this proposed rule goes into effect. Plus we are launching additional products prior to the proposed implementation date of January 01, to serve our customers.
In short, we have a strategy that we believe will aggressively fill potential loss short term medical sales with other product sales. It is important to note that the core strength of our company is our technology platform. The heart of our operating model is a highly scalable, technology driven quote by print system. It provides 24x7 real-time transaction services. This platform drives our scalability as the virtual administrator. It fulfills the needs of our customers, are agents, our carriers. It is the foundation of our differentiated distribution model and that includes our call centers, our merging broker network and our direct-to-consumer website Agile.
By adding new products to our portfolio and leveraging this prudent technology platform, we will continue to drive profitable growth.
On another topic, I'd like to share with you that over the past the industry has seen increased regulatory scrutiny from many states where we sell our products. These states are enthusiastic to make sure that non-ACA health insurance is properly sold. And in response to this ever changing regulatory environment we've added additional resources to ensure we continue responding to requests regarding our compliance processes. We have always viewed compliance as a critical pillar of our organization. Integrity and consumer satisfaction will always be a key element of our strategy.
I'd also like to share that in order to ensure our company continues to grow through innovation, distribution, with excellent customer service and compliance while maintaining a solid long term strategy, we've augmented our leadership team with a new president. I'm very pleased to announce the addition of to know the addition of Gavin Southwell to our team.
On July 20, we appointed Gavin to the role of President. He is a seasoned insurance executive and brings a significant amount of expertise in sales, operations, state regulatory matters as well as a strong strategic vision. Gavin will be responsible for sales, marketing, distribution and operations.
We also appointed Joseph Denother as our Chief Operating Officer. Joe has been with the company for the past year and has been a driving force in our operational excellence and our scalability. These two leaders working with me, Mike Hershberger, Mike Kosloske and Bruce Telkamp will ensure our company maintains focus and continues to deliver strong performance in all areas.
Based on our strong second quarter, we are increasing our full year guidance. We have now forecast our revenue to be between $155 million and $165 million or approximately 50% to 60% increase year-over-year. And we forecast our non-GAAP earnings per share to be between $0.55 and $0.65 which is approximately 100% to 130% increase year-over-year.
We expect aggregate consumer acquisition cost at Agile, which is an SG&A expense that it will continue to increase during the second half of 2016 and that’s just due to the upfront nature of recognizing these marketing costs.
Our second half 2016 earnings forecast assumes investment in both new product innovations as well as ensuring our distributors remain compliant. The first half of 2016 exceeded our expectations and we're very optimistic about the future. With the proposed HHS rule as well as the regulatory scrutiny our strategy has not changed; new products, strong distribution, direct-to- consumer emphasis while increasing our operating leverage.
We appreciate your time today. Thank you for your interest in our company and I'd like to turn the call over to Mike Hershberger, our Chief Financial Officer.
Thanks Pat and good morning everyone. We continue to be very pleased with our financial momentum and the second quarter was no exception. I'd like to take a few minutes to walk through the results and provide an update on our expectations for the full year.
For the second quarter, Health Insurance Innovations generated revenues of $44.5 million or 96% growth over the second quarter of 2015 and 4.7% sequentially. The strong growth was primarily due to continued consumer demand for our affordable healthcare products outside of the Affordable Care Act open enrollment period and the enhancement of our distribution system including our e-commerce division, AgileHealthInsurance.com.
Our total policies in force were up 128% year-over-year to 258,000. The total was consistent with policies in force at the end of the first quarter. Year-over-year submitted policies were up 100% to 128,000 during the second quarter. As expected, submitted policies were 34% lower sequentially due mainly to the significant sales that we experienced during the Affordable Care Act open enrollment period at the start of 2016 and the normal seasonality that typifies health insurance policy sales.
AgileHealthInsurance.com continues to be our top producing properties distribution channel with approximately 16,000 policies submitted in the second quarter or approximately 25% of our total IFP sales. Adjusted gross margin in the second quarter, which is defined as revenue less third-party commissions and credit card or ACH fees was up both year-over-year and sequentially to $17.7 million. Adjusted gross margin as a percentage of premium equivalents in the second quarter was 22.9% down year-over-year, but favorable sequentially.
The reduced gross margin percentage was driven by a revenue mix shift in the quarter towards non-owned call centers and away from owned call centers due primarily to the restructuring of our two owned call centers in late 2015. We continue to drive scalability in our operations. Our core SGA for the quarter which is the total SGA plus marketing leads and advertising, stock compensation and nonrecurring costs as a percentage of revenue was 19.5% in Q2 2016 compared to 32.7% in Q2 2015. Total SGA expenses in Q2 were $11.7 million up $1.3 million year-over-year.
EBITDA was $5.7 million for the quarter up $5.1 million from Q2 2015 and up $2.2 million from Q1 2016. Second quarter 2016 GAAP earnings per diluted share was $.24 compared to a loss of $0.04 in Q2 2015. Adjusted EBITDA and adjusted EPS increased both year-over-year and sequentially. Adjusted EBITDA for the second quarter was $6.5 million compared to $1.8 million in Q2 2015 and $4.2 million in Q1 2016. Adjusted EBITDA as a percentage of revenue increased to 14.7% for the second quarter of 2016 compared to 7.9% in Q2 2015.
Adjusted EPS for the second quarter was $0.27 compared $0.08 in Q2 2015 and $0.17 in Q1 2016. We believe that our non-GAAP metrics of adjusted EBITDA and adjusted earnings per share provide a meaningful measure of our financial performance. We continue to make short-term loans for our distributors based on actual sales that we refer to as advance commissions.
When compared to the first quarter of this year, we reduced advance commission balances by $3.8 million to $32.8 million at the end of the quarter. Cash and short-term investments increased by $2.4 million for the second to $9.3 million. We also paid down our line of credit by $1 million dollars during the second quarter.
Shifting gears to the remainder of 2016, we now expect to generate between $155 million and $165 million in revenue for the full year, up from our previous guidance of $138 million to $144 million. We are raising our guidance range primarily due to continued strengthen in our IFP sales and the underlying strength in our operations. We now expect to generate adjusted earnings per share of between $0.55 and $0.65 up from $0.38 to $0.42 reflecting continued strong operational results and improved scalability. Offset by accelerated product development and implementation expenses and our upfront cost of acquisition at AgileHealthInsurance.com, especially during the ACA open enrollment periods.
Overall we are very pleased with our continued momentum in the second quarter and are raising our expectations for the balance of 2016, which as Pat mentioned has been a very productive year for the Health Insurance Innovations team. We are optimistic that we will continue to innovate and provide affordable health insurance products that not only meet the consumer's needs, but also generate consistent margins as compared to our short-term major medical products.
We continue to actively manage a robust pipeline of affordable health insurance products and opportunities that would complement our short-term major medical products. We plan on providing 2017 guidance in March after gaining clarity on key details in the upcoming months regarding the proposed HHS rule.
Thank you for your time today and now we would like to open up the call for questions. Operator?
Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Michael Baker with Raymond James. Please proceed with your questions.
Yes, thanks a lot. Pat, you obviously have the benefit of owning HealthPocket and I was wondering based upon the information and data that you're seeing from that whether you're seeing any new emerging trends around consumer selection in the health insurance space that's informing the new product launches that you'll have coming out later this year?
Yes, absolutely. I think what we've learned from the HealthPocket team is that consumers are extremely price sensitive and they are extremely frustrated with the offerings on the Affordable Care Act portfolio. So they are also demonstrating a real interest in supplemental products, especially dental. There is just a strong demand for it. And the other point is the short term med is really important. The fact that we are doing so well in sales outside of the open enrollment period again indicates that HHS isn't on the right track when they think about limiting short term medical.
So those trends are pointing us to stay the course, make sure we continue to diversify our supplemental offering and start to as a contingency move people to the limited med options. We haven’t gathered a lot of data from HealthPocket bonds the value of limited med to consumers, but we know from our distributors there are a number of them that focus solely on hospital indemnity or limited med that there is still strong demand for this product which is very important to us because it's a product that will be on the market here for the next number of years because it has been protected by a couple of court judgments. So it is pointing us to the direction that we will be ready for 2017.
We have a couple of other creative ideas that have surfaced from the data and we're considering and beginning to configure those products. I don’t want to share too much about it because of the competitive nature, but we are really continuing to innovate.
That's helpful. And then on another kind of topic, I was wondering if you could give us a sense of the duration of the short-term policies sold in the second quarter and whether there was any meaningful change from what you saw in the first quarter?
Yep, so good question Mike, Mike Hershberger here. Our duration remained consistent from the first quarter into the second quarter.
That's helpful. Thank you, guys.
Our next question is from the line of Mike Grondahl of Northland Securities. Please proceed with your question.
Hey, thanks guys for taking my questions. First one is just is there any reason the strong trends in 2Q may not continue in 3Q and 4Q?
Well, hi this is Pat. Thanks for the questions. We have worked hard to forecast the second half of the year and we know that in the second half since we have to be prepared for any outcome of the HHS rule, that means we have to have and be prepared to implement over the next few months limited med across the entire portfolio as well as, as I just mentioned the development of a couple of new innovative products as well as supplements. And those products have to be implemented and what that needs is we may have to appoint and license more of our distributor agents on the carriers for these new products. We have a fairly significant technology endeavor with agile in order to put the hospital indemnity plan and some new supplementals and new products onto the website.
So we're going to be very diligent over the next few months and it is frankly a bit of a retooling in a short amount of time. And so we've taken all that into account as we've done our best to forecast how the third and fourth quarter are going to look.
Got it, but on the demand side there is no reason to think consumers would slow down in the second half or anything. I guess, I was getting more at that aspect.
Yes, we don’t have any indication. Hersh, you can weight in. At this point demand has been very, very consistent. I think the industry is quite aware of HHS rule, but I am not sure consumers are changing their behavior because of a potential rule that goes into effect in January.
So to answer your question, we're not seeing any change in demand. It is a $35 billion market. Many of these people are best without an ACA plan, that's a $12 billion market and they are looking and finding products like the ones we offer.
Got it. And then were you guys, the leverage in the model clearly came through in 2Q. Anything one off that assisted that either positively or negatively, any comment on that leverage that we saw?
Yep, I will address that. So, I would say that it’s a combination of many different focuses on our company. So, I will steer you back to June of 2015 when Pat McNamee joined our company that we set out a plan for 2016 at that point to be able to continue to get back to our scalability and improve our scalability. So I would credit that to execution on our plan that we established last year.
Got it, got it, and then may be Pat, if you could talk a little bit about, if we see a worst case scenario in January with short term medical, I guess two questions related to that, can you continued to sell that product in the short term if it ends up in litigation? And then secondly, how prepared are you to sort of run with limited medical and how fast can that kind of ramp up?
We are pretty experienced at knowing how long it takes for a distributor to move from one product to another. And as I mentioned, we are quite confident that we have plenty time between now and January 01 of 2017 to be completely focused on limited med with the addition of some new products that we're designing at the movement.
So, we have very strong confidence that we can be ready to the worst case scenario. If in fact short term medical is still available, which would be a great outcome to consumers, then that’s a better option in fact. Not because we’re going to be better able to sell short term med versus limited med, it’s just that it gives consumers real choice which makes our broader portfolio of products more appealing to those consumers and that is the best outcome.
If in fact based on the precedent that was set in the challenge towards limited med, there is a very good chance that a court will put a stay on the implementation of that rule, at which point it will be easy for us to continue selling short term med just like we are now. It is in fact the rule goes into place and it is under the stay, but is still being challenged, then we will focus on limited medical during that period of time and see how it plays out.
So, we are really trying hard to leverage these next three or four months to be ready for any outcome and there is no reason for us to believe that we can't be.
Great, thank you. I will jump back into queue.
Thank you. At this time, I will turn the floor back to Mr. Patrick McNamee for closing remarks.
End of Q&A
We really appreciate all of you for your interest in our company. As I mentioned, this market is very, very big and it is getting bigger because of the challenges with the Affordable Care Act that aren’t going to be fixed here in the near term. So with our carrier relationships, the innovative mind of our team, our ability to execute, whether it is demonstrating scalability or preparing our distributors or being compliant across the industry, we think we are very, very well positioned and I think the nimbleness of our company will be demonstrated over next few months as we face into more hurdle that we really didn’t expect.
But the good news is, we were ready for it and I really do think the team is well positioned for unbelievable 2016 and a very, very successful 2017. We are working now to determine what 2017 will look like. We are in the budgeting process and strategic cleaning process. As Hersh mentioned, we will have guidance early in the first quarter which will give strong visibility to 2017. But we know we have great products, a great team and unbelievable scalable platform, strong West Coast team that is doing a great job and demonstrating our online capabilities. So we are bullish about the future and appreciate all of your support along the way. So thank you and have a great day.
This concludes today's teleconference. Thank you for your participation. You may now disconnect your lines at this time.
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