EHTH

eHealth, Inc. 10-Q Summary: Quarter Ended September 30, 2010

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2010. eHealth, Inc. operates as an online health insurance agency for individuals, families, and small businesses in the United States. The company generates revenue primarily through commissions from insurance carriers, as well as sponsorship, technology licensing, and lead generation services. A significant strategic development during this period was the acquisition of PlanPrescriber, Inc. on April 30, 2010, to expand into the Medicare market.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 7% year-over-year for the quarter and 9% for the nine-month period. Commission revenue grew 3% (quarter) and 7% (YTD), while sponsorship and licensing revenue grew 34% (quarter) and 25% (YTD), driven by the PlanPrescriber acquisition.
• Profitability Decline: Despite revenue growth, Net Income decreased 25% for the quarter ($2.60M vs. $3.45M) and 16% for the nine-month period ($8.87M vs. $10.59M). Operating income dropped 25% for the quarter and 13% YTD.
• Expense Increases: Marketing and advertising expenses rose 13% for the quarter and 10% YTD, largely due to incremental costs associated with PlanPrescriber and increased paid search costs. General and administrative expenses increased 15% (quarter) and 24% (YTD) due to acquisition-related costs and professional fees.
• Acquisition Impact: The $28.0 million acquisition of PlanPrescriber resulted in $14.5 million of goodwill and $13.4 million of intangible assets. Amortization of these assets added $0.4 million to expenses for the quarter.

Guidance, Outlook, and Risks

• Stock Repurchase Program: On July 27, 2010, the Board authorized a $30 million stock repurchase program. As of September 30, 2010, the company had repurchased 751,238 shares for $8.7 million.
• Medicare Strategy: Management expects Medicare-related revenue to increase, with a significant portion anticipated in the fourth quarter due to the annual Medicare enrollment period (November 15 – December 31).
• Cost Outlook: The company expects marketing expenses and the average cost of acquiring new members to increase in 2010 compared to 2009.
• Tax Risks: Changes in California tax law limit the utilization of net operating loss carryforwards for 2010 and 2011, resulting in higher cash tax outlays. The effective tax rate for the nine months ended September 30, 2010, was approximately 46.2%.
• Regulatory Risks: The implementation of the Patient Protection and Affordable Care Act (ACA) and medical loss ratio requirements (effective 2011) poses risks to commission rates and carrier relationships. The company anticipates potential reductions in commissions paid by carriers.

Investor Verification Checklist

• Membership Retention: Verify the accuracy of estimated membership figures (778,800 as of Sep 30, 2010), as the company relies on carrier data which may lag or be incomplete regarding cancellations.
• Carrier Concentration: Monitor reliance on top carriers (UnitedHealthcare, Aetna, Wellpoint), which collectively represented approximately 42% of revenue for the quarter.
• Medicare Integration: Assess the success of integrating PlanPrescriber and the ability to generate revenue during the upcoming November/December enrollment window.
• Acquisition Costs: Track the impact of increased marketing spend and amortization of intangible assets on future operating margins.
• Tax Cash Flow: Confirm the impact of California tax law changes on cash tax payments for the remainder of 2010 and 2011.