eHealth, Inc. 10-Q Summary: Period Ended June 30, 2009
Business Context and Reporting Period
This is a Quarterly Report on Form 10-Q for eHealth, Inc., an Internet-based insurance agency for individuals, families, and small businesses in the United States. The report covers the three and six months ended June 30, 2009. The company is licensed to market and sell health insurance in all 50 states and the District of Columbia. As of June 30, 2009, the company had approximately 707,100 estimated members.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenue | $65,356 | $53,781 |
| Net Income | $7,137 | $7,498 |
| Operating Cash Flow | $13,033 | $14,493 |
| Cash and Cash Equivalents | $101,621 | $85,201 |
| Marketable Securities | $58,176 | $56,499 |
| Total Assets | $176,407 | $168,755 |
| Stockholders' Equity | $162,589 | $154,979 |
Margins and Ratios: Net income margin for the six months ended June 30, 2009, was approximately 11% (down from 14% in the prior year). The effective tax rate was approximately 46% for the six-month period. The company reported no long-term debt.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 22% year-over-year to $65.4 million. Commission revenue grew 19% to $58.1 million, driven by membership growth. Sponsorship, licensing, and other revenue grew 47% to $7.2 million.
- Profitability: Net income decreased 5% to $7.1 million, despite revenue growth. This was primarily due to a significant increase in operating expenses.
- Expense Increases:
- Marketing and Advertising: Increased 38% to $26.4 million (40% of revenue vs. 36% prior year). The cost to acquire a new member rose 22% to $73.45 from $60.39, driven by higher paid search costs and lower conversion rates.
- Cost of Revenue-Sharing: Increased 144% to $2.1 million, largely due to a new agreement with Health Benefits Direct Corporation (HBDC) involving member transfers and revenue sharing.
- Interest Income: Interest and other income, net, decreased 69% to $0.7 million due to declining yields on invested cash and marketable securities.
- Stock Repurchases: The company repurchased 361,841 shares for $4.6 million during the six-month period under its $30 million authorization program.
Guidance, Outlook, and Risks
Management Commentary: Management expects total revenue to increase in 2009 compared to 2008 due to continued membership growth and expansion in sponsorship and licensing. However, they anticipate marketing and advertising expenses will increase in absolute dollars, leading to a higher average cost of acquiring new members for the full year.
Tax Outlook: New California tax legislation limits the company's ability to utilize net operating loss and tax credit carryforwards in 2009. While this does not affect the ultimate amount of credits usable, it is expected to increase cash tax outlays for the year.
Risks and Contingencies:
- Healthcare Reform: Ongoing federal and state debates regarding healthcare reform create uncertainty that could impact the private insurance market and the company's business model.
- Carrier Concentration: Three carriers (Aetna, Wellpoint, UnitedHealthcare) represented a significant portion of revenue (16%, 15%, and 14% respectively for the six months ended June 30, 2009). Loss of relationships with these carriers could materially harm the business.
- Membership Retention: The company experiences a delay in learning about policy cancellations from carriers, making it difficult to assess the immediate impact of economic conditions on retention rates.
- China Operations: The company has operations in China, exposing it to regulatory, legal, and operational risks in a foreign jurisdiction.
Key Facts for Investor Verification
- Member Growth vs. Acquisition Cost: Verify if the 22% increase in customer acquisition cost ($73.45) is sustainable and how it impacts long-term profitability given the recurring revenue model.
- HBDC Agreement Impact: Assess the long-term profitability of the Health Benefits Direct Corporation (HBDC) member transfer, which drove a 144% spike in revenue-sharing costs.
- Carrier Concentration: Monitor the stability of relationships with Aetna, Wellpoint, and UnitedHealthcare, which collectively accounted for 45% of revenue in the first half of 2009.
- Tax Cash Flow: Confirm the impact of the new California tax law on 2009 cash tax payments, as the company expects a higher cash outlay despite no change in the effective tax rate.
- Interest Rate Sensitivity: Note the 69% decline in interest income; verify the company's investment strategy given the low-yield environment.