EHTH

Business Context and Reporting Period

Company: eHealth, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: eHealth is the leading online source of health insurance for individuals, families, and small businesses in the United States. The company operates a proprietary ecommerce platform that allows consumers to research, compare, and purchase health insurance products from over 180 carriers. Revenue is primarily generated through commissions from insurance carriers, with additional income from sponsorship advertising and technology licensing.

Key Financial Metrics (Year Ended Dec 31, 2008)

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 27% to $111.7 million, driven by a 24% increase in commission revenue ($100.8 million) and a 73% increase in sponsorship/licensing revenue ($10.9 million). Membership grew approximately 20% year-over-year.
• Profitability Decline: Despite higher operating income, Net Income dropped 55% to $14.2 million. This was primarily due to a significant increase in the provision for income taxes ($10.8 million expense in 2008 vs. a $10.3 million benefit in 2007) resulting from the reversal of valuation allowances in the prior year and new California tax laws limiting the use of net operating loss carryforwards.
• Expense Increases: Marketing and advertising expenses rose 43% to $42.2 million (38% of revenue) due to increased online advertising costs and marketing partner fees. General and administrative expenses increased 12% to $18.0 million.
• Interest Income: Interest and other income decreased 30% to $3.7 million due to declining yields on invested cash and marketable securities.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Management expects total revenue to increase in absolute dollars in 2009 due to continued membership growth and expansion of sponsorship and licensing businesses.
• Marketing and advertising expenses are expected to increase in 2009, leading to a higher average cost of acquiring new members.
• Cash outlay for federal and state taxes is expected to rise to 6-7% of pre-tax income in 2009 (up from ~5% in 2008) due to California tax law changes.
• The company authorized a $30 million stock repurchase program in November 2008.

Key Risks & Contingencies:

• Healthcare Reform: Potential federal or state healthcare reforms (e.g., single-payer systems) could reduce demand for private insurance or eliminate the need for agents.
• Carrier Concentration: Revenue is concentrated among a few carriers; UnitedHealthcare (17%), Wellpoint (16%), and Aetna (14%) accounted for 47% of total revenue in 2008. Agreements are terminable on short notice.
• Economic Conditions: Recessionary pressures may lead to increased member cancellations or a shift to lower-premium plans with lower commissions.
• Regulatory Compliance: The company operates in all 50 states and faces complex, varying state regulations regarding insurance sales and advertising.

Investor Verification Checklist

• Membership Retention: Verify actual retention rates given the delay in receiving cancellation data from carriers and the impact of the economic recession.
• Tax Liability: Confirm the impact of the new California tax law on future cash flows and the utilization of net operating loss carryforwards.
• Carrier Relationships: Monitor the stability of relationships with top three carriers (UnitedHealthcare, Wellpoint, Aetna) which represent nearly half of revenue.
• Acquisition Costs: Track the trend in cost per acquired member as marketing expenses rise and competition for online search keywords intensifies.
• Stock Repurchase Execution: Monitor the pace and pricing of the $30 million share repurchase program authorized in late 2008.