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

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

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

What follows is a summary of eHealth’s earnings announcement, conference call highlights, and my take on the company’s latest quarter and results, and what you should do if you do or don’t own eHealth’s shares.

New to the eHealth story? 

eHealth, Inc. (NASDAQ: EHTH) offers Internet-based insurance agency services to individuals, families, and small businesses primarily in the United States. The company’s e-commerce platform, which is accessed directly via ehealth.com and ehealthinsurance.com, enable individuals and families to research, analyze, compare, and purchase health insurance products online.

For anyone that is self-employed, runs a small business, or as more and more companies stop paying for employee health insurance, needs to purchase their own health insurance, it is becoming increasingly crucial that individuals find affordable health insurance and eHealth gives them the power of choice.

eHealth offers various health insurance products, including medical health insurance coverage, such as preferred provider organization; health maintenance organization and indemnity plans; short-term medical insurance; student health insurance; health savings account eligible health insurance plans; and ancillary products, such as dental, vision, and life insurance.

Because of the fixed-cost nature of health insurance (there is no discounting online or otherwise in this highly regulated industry), eHealth is probably one of the only ways that most individuals will ever see what different health insurance offerings they could purchase from up to 180 different companies.

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

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I’ll break down this report into 4 parts:

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

Hit Me With Some Numbers

eHealth in line with estimates, acquisition costs decline

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

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

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

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

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

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

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

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

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

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

Other Business Highlights

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

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

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

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

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

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

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

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

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

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

Now let’s take a look at the analyst conference call highlights and management’s discussion of the business.

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