Conference Call Highlights

Tough economy, eHealth might benefit as a result

• CEO mindful of tougher economy, still looking to grow: CEO Gary Lauer stated that even though margin optimization is not their priority, they are still mindful of their margins, and continue to operate well in a harsh economic climate.

In planning for 2009, management assumed that the economy would be as bad or worse than the 4th quarter of 2008, and they feel that even if that turns out to be the case, they believe their execution and business proposition will allow them to continue to deliver strong revenue growth and maintain non-gaap operating margins at levels comparable to 2008.

The CEO further stated that they plan to continue to generate significant free cash flow in 2009.

In addition, eHealth’s retention rate continues to be at about 2 years, which is a phenomenal rate of retention for such a highly profitable and high margin business model.

My Take: eHealth continues to churn out the cash, acquire customers intelligently, and retain those customers for long periods of time.

It’s clear they are doing not just something right, but many things right.

The value proposition that they offer not to only customers, but the businesses that rely on eHealth for new leads, ensures that they can continue to operate in what is for many other companies a toxic environment of consumer spending, and not just survive, but thrive.

• eHealth expanding relationships: eHealth is continually looking to expand relationships and make deals and special offerings with lots of different companies, including AARP, a recently announced deal which has started in Pennsylvania, and they will look to extend into other states.

In fact, eHealth is continually working with companies and finding ways to leverage their platform and reach. For instance, they are working with a national retail chain to reach out to their recently laid off workforce to offer them affordable health care options.

One of these initiatives involves eHealth’s Chinese subsidiary that is growing rapidly as a similar platform to eHealth but for the Chinese market in which they act as a platform for Chinese health insurance coverage.

While this venture currently isn’t material right now to eHealth’s earnings or revenues, it is promising, and something to follow in the future.

When commenting on eHealth’s recent deals with AARP and JPMorgan Chase, the CEO stated that they are really pleased with these deals and that they usually attract more consumers to eHealth.

For AARP, they like that the brand name is well respected and known, and they are hopeful that they can expand their relationship beyond Pennsylvania. Cigna was also talked about by the CEO as being another great source of consumer awareness and customer submissions.

My Take: eHealth is always looking to expand into new markets and create new partnerships with like-minded and synergistic partners.

In addition to this, eHealth’s platform is now being utilized by more and more health care providers for their own services and offerings, and provides a nice recurring, high-margin technology revenue stream to eHealth for the platform they are providing these companies that allow them to sell their own health insurance products.

In fact, this segment of eHealth’s revenue, called “Sponsorship, licensing and other” accounted for 10.8% of revenue in 2008, vs. 7.7% in 2007.

This is a clear leverage gain for eHealth and costs them literally nothing since the platform and infrastructure is already in place for these companies to piggyback on eHealth’s trusted and well-executed platform.

• CEO talked about slowing application growth/economy: When an analyst asked management why their application growth was “only” 18% when management had been targeting over 20%, the CEO stated that as they entered the 4th quarter and saw the significant slowdown in the economy, they decided to become extremely judicious with their cash, and the amount of money they were willing to spend to acquire new customers.

They felt that they successfully balanced out the spending with the acquisitions in light of all the stuff going on.

The CEO further commented that as the unemployment rate rises, eHealth’s business could very well increase as those out of work look to save costs on health insurance while not losing coverage, but that they didn’t want to assume anything, and thus they are keeping their guidance on a very conservative level as a result.

My Take: Again, management is being very cautious and prudent with their guidance, and rightfully so.

I love the fact that we can see some serious upside to current estimates and projections based on what is going on around us, good or bad.

Again, growth in the high teens when many company’s growth is slowing or reversing, is absolutely stellar!

• CEO talked about the US involvement in health care: The CEO talked about the government’s involvement with health care in the U.S. and how the CEO recently spoke with several congressional leaders and most tell him that change to health care and insurance, likely won’t happen at all this year because there are other more pressing matters facing government.

When talking about COBRA and the latest stimulus plan, the CEO commented that as of today, hot off the presses in fact according to the latest stimulus package, COBRA would only subsidize about 65% of the cost of COBRA and not really help those out of work with those expenses, and once again, help to drive more traffic and business to eHealth for those looking to save money and still retain health insurance.

He broke down in monetary terms how much and individual and a family of 4 would have to pay with and without the subsidized COBRA coverage, and the net result was that those that chose COBRA could in fact save a significant amount of money getting insurance through eHealth while dropping their COBRA entirely!

Other Quick Notes:

• Acquisitions: Talking about acquisitions, the CEO talked about how if they did do something, it would have to be health related, and be accretive to earnings, and have an online bent.

He also commented that more than anything they would be looking to grow the acquired business or for it to be a parallel business that is closely aligned with their current business.

• e-approval: In the quarter eHealth added another provider to its instant e-approval system in which those seeking health insurance can obtain that insurance in real time, and print out an insurance card for immediate use. This is the wave of the future for many archaic legacy carriers that don’t know what the word technology means.
• Marketing spending: marketing spending to be in the range of 35-39% of revenues for the entire 2009 fiscal year.
• Churn: According to the CFO, churn declined slightly this quarter from last quarter.

My Take: As far as the acquisitions are concerned, I would go as far as to recommend that eHealth enlist other types of insurance on its website such as life insurance and other related coverages that would neatly fit within its umbrella, while still leveraging the current business model, and infrastructure.

Whether this is done via an acquisition or whether eHealth rolls out other technology platforms/offerings remains to be seen.

So What’s the Bottom Line…

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