Business Context and Reporting Period
Company: eHealth, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: eHealth operates an Internet-based insurance agency platform enabling individuals, families, and small businesses to research, compare, and purchase health insurance. The company is licensed in all 50 states and the District of Columbia. Revenue is primarily derived from commissions paid by insurance carriers, with secondary revenue from sponsorship advertising and technology licensing.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sept 30, 2009 | Nine Months Ended Sept 30, 2009 | Balance Sheet (Sept 30, 2009) |
|---|---|---|---|
| Total Revenue | $35,123 | $100,479 | - |
| Net Income | $3,452 | $10,589 | - |
| Operating Income | $6,491 | $18,950 | - |
| Operating Margin | 18.5% | 18.9% | - |
| Cash & Cash Equivalents | - | - | $100,015 |
| Marketable Securities | - | - | $43,434 |
| Total Current Assets | - | - | $151,856 |
| Total Current Liabilities | - | - | $13,160 |
| Long-Term Debt | - | - | None reported |
| Net Cash from Operating Activities | - | $20,682 | - |
| Net Income Per Share (Diluted) | $0.14 | $0.41 | - |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 23% year-over-year for the quarter ($35.1M vs. $28.5M) and 22% for the nine-month period ($100.5M vs. $82.3M). Commission revenue grew 21% and 20% respectively, driven by membership growth.
- Membership: Estimated total membership rose to approximately 726,600 as of September 30, 2009, from 602,100 in the prior year. This includes approximately 25,000 members transferred from Health Benefits Direct Corporation (HBDC).
- Expense Increases:
- Marketing & Advertising: Increased 24% for the quarter and 33% for the nine months, primarily due to higher paid keyword search advertising costs and increased cost-per-click.
- Cost of Revenue-Sharing: Increased 213% for the quarter and 168% for the nine months, largely due to the new revenue-sharing agreement with HBDC.
- Stock Repurchases: The company completed a $30 million stock repurchase program in September 2009, purchasing approximately 1.83 million shares during the nine-month period.
- Interest Income: Net interest and other income decreased 85% for the quarter and 74% for the nine months due to declining yields on invested cash and marketable securities.
Guidance, Outlook, and Risks
- Outlook: Management expects total revenue to increase in absolute dollars for the full year 2009 compared to 2008. However, they do not expect submitted application growth to accelerate in the fourth quarter compared to the third quarter and noted it may decrease.
- Cost Trends: Marketing and advertising expenses are expected to increase in absolute dollars for 2009. The average cost of acquiring new members is expected to be higher in 2009 than in 2008.
- Tax Impact: New California tax legislation limits the utilization of net operating loss and tax credit carryforwards for 2008 and 2009. While this does not affect the ultimate amount of credits usable, it increases cash tax outlays for 2009.
- Key Risks:
- Healthcare Reform: Uncertainty regarding federal and state healthcare reform legislation could impact demand for private insurance or alter commission structures.
- Carrier Concentration: Three carriers (Aetna, Wellpoint, UnitedHealthcare) represented a significant portion of revenue (14-17% each for the quarter). Relationships are non-exclusive and terminable on short notice.
- Conversion Rates: The company has experienced a decline in the rate at which website visitors convert to members, partly due to economic conditions and stricter carrier underwriting.
- China Operations: Expansion into China involves regulatory risks and unfamiliar legal environments.
Investor Verification Checklist
- Membership Retention: Verify the accuracy of the estimated membership count (726,600) given the company's reliance on carrier reporting and the delay in receiving cancellation data.
- HBDC Integration: Assess the long-term profitability of the HBDC member transfer and revenue-sharing agreement, which significantly increased cost of revenue-sharing.
- Acquisition Costs: Monitor the trend of the cost per acquired member ($74.73 in Q3 2009 vs. $65.34 in Q3 2008) and its impact on operating margins.
- Carrier Concentration: Review the stability of relationships with top carriers (Aetna, Wellpoint, UnitedHealthcare) which collectively account for a large share of revenue.
- Regulatory Environment: Track developments in healthcare reform legislation and California tax law changes that could affect cash tax liabilities and commission structures.