eHealth, Inc. (EHTH) Earnings Call Transcript & Summary

All right. Good morning, and welcome to the final day of the Barclays Healthcare conference. I'm Jonathan Yong, and I will be hosting today's session with eHealth. With us today is CEO, Scott Flanders; CFO, Derek Yung; and from Investor Relations, Kate Sidorovich. Thanks for joining us. So obviously, you came to an agreement with one of your shareholders today, and you're adding a new member to the Board with another expected in the next 1.5 months or so. So let's start there on your conversations there and focus points us to the extent that you can.

Okay. What do you want to talk about?

So what have the conversations been with that large shareholder that you came to agreement today? What were some of the terms? And how are you guys thinking about that?

Right. So we don't discuss the specific conversations that we have with individual shareholders, but we did reach a cooperation agreement with Hudson. They currently are 5.8% shareholder. So they're, for sure, Page 1 shareholder. We've had constructive dialogue with them, really starting in the fall and all the way through reaching this agreement. It's a customary settlement agreement of this type in terms of limiting their shareholdings to 9.9%. The settlement agreement has a duration through the balance of this year. And we agreed to appoint John Hass to our Board and another director that will be appointed sometime over the next 45 days.

Yes. So I mean, kind of thinking about the discussions that you have been having and just from your current view. Is there any view from your perspective that there's a change in the company's approach to the market in terms of those conversations? Or is it still status quo from how you're going to approach the market?

Yes. No, I don't want to speak for Hudson or frankly, for any other shareholder. But I guess I would broadly say that they saw eHealth as undervalued when they stepped into the stock, obviously, the motivation of most shareholders and see a lot of appreciation potential, and we are aligned to agree with them. As all shareholders, they'd like to see execution happen more crisply on an accelerated basis, and that is exactly our focus. John Hass, who we're bringing on to the Board. Very excited about him. He was selected through a normal nomination and governance process. Introduced to us by Hudson, but was one of a number of candidates. We were attracted to John because of his strong track record as an operator. He was CEO of Rosetta Stone for 4 years, and the company performed exceptionally well under his tenure. Stock went up 4x. But more importantly, he transformed that business from a CD based business to an online subscription business and had extremely well positioned for a world that's moving increasingly online. And just to add to it, while a different industry with e-health being a distributor of health insurance products the very similar migration is aligned with our strategy. We believe this market is increasingly going to move to online shopping to a marketplace based winning strategy that we have that's consumer-centric. And all of those philosophies and strategic orientations John brought to Rosetta Stone. He just joined the Board officially yesterday, but in the conversations leading up to his appointment, I was personally excited about our sympatico around where the market's moving and eHealth's differentiated strategy.

Great. And so kind of if we think about the continued -- those conversations, obviously, not speaking to any specific shareholder. But when you think about the margin profile of the company, the cash generation of the company and then the top line growth, how do you think about balancing all of that out kind of in the short-term and then the medium term?

Yes. And this is not specific to Hudson or to John Hass, who we've not gotten into that level of strategic positioning. But it's clear that our sector has shifted from what was 1.5 years or 2 years ago, more of a revenue multiple valuation to one that's more centered on EBITDA so between those 2 and reflected in our guidance for this year, is a much greater focus on profitability. We're absolutely centered on reaching cash flow positive in 2023. And that's a very important metric for us. We haven't talked about the HIG investment, which is expected to close in the coming months, and that will bring in $225 million for us, which we're confident will be adequate capital to get the company to breakeven. But to be -- put a sharper point on it, with Jonathan, we are zeroed in on improving our LTV to customer acquisition cost ratios. The unit economic improvement in this business is the path to greater profitability, and that is our #1 priority.

Kind of going to that comment you made that you still are committed to the committed to the 2023 target for cash flow breakeven. I mean, kind of given some of the changes you're doing, the accelerated hiring, some of the investments. I mean, how certain are you that you're going to be able to achieve that? Will you have to slow down components of your growth in order to achieve that? Or how are you thinking about balancing that?

Yes. So our growth is projected to slow down this year. But we are accelerating the hiring and growth of our internal sales agent force. And that is super strategic to us. I mean, we've seen -- and the speed bump we had in Q4 was entirely related to the shortfalls and performance from our vendor agents. And so by the accelerated hiring of internal agents this year, we'll be positioned to deliver much higher profitability in Q4 and during the annual enrollment period this year versus last year.

Okay. Great. And then kind of on that internal agent hiring, how do you think about the phasing of hiring throughout the year? Obviously, you are hiring earlier, but is it still a larger bolus in 1Q, 2Q? How are you thinking about that?

We are absolutely full speed ahead on that hiring. In fact, 3 weeks ago today, we released our earnings for Q1, therefore Q4 rather. And we gave an update that we were up in enrollments more than 50% against what was a strong Q1 print last year with a 30% higher agent productivity. And in fact, those trends have actually slightly accelerated even from there. We're being told by our carrier Relations team that we're #1 or #2 with the top 6 carriers year-to-date. That's after underperforming in Q4. But we're back on that growth track and very happy about it. In fact, we have no issues with demand. We have no issues with customer acquisition costs. We're actually agent constrained right now that could be growing even faster. So we're hiring agents right now just as fast as we can, and we will be continuing to do that through Q2 and Q3. What we see is that agents have much higher productivity when they've taken about 100 live senior calls. And so getting the agents hired earlier in the year so that they are fully ramped up by the time of AEP is a critical productivity issue for us.

Okay. Kind of going to that 50% commentary on the approved MA applications. I mean, I tend to -- obviously, higher volume is good, higher productivity is great, but it is OEP right now. And so that is indicative that there is more switching going on right now. So how are you looking at that in terms of the balance where you're just making sure that there's not churn and you're actually perhaps taking share from your competitors because your competitors have also talked about, they're also seeing elevated volumes. So how are you thinking about that? And what are you seeing?

Yes. Now I'm certainly not suggesting that we're an outlier here in our strong performance. The market is robust. I would say that Q4 we experienced lower switching. Seniors were not engaging with their health care systems as much as in prior years due to COVID. There was also anecdotally reports from our sales team that there was resistance to switching because of concerns around gaps and coverage that might emerge. And so it would stand to reason that Q1 would result in greater switching. But we had significant switching last year in Q1 because eHealth is a true marketplace. We have more than 80 Medicare Advantage carriers on our platform, multiples more than our other public company comps, we are the preferred destination for smart shoppers that are looking for the absolute best plan in their counties. And so we do over index. So we are a beneficiary of heavy switching. We when we're under 2% of the market as each of us independently are. If you look at our competitors as well as us, probably 10% market share for the whole broker category. We aren't yet eating our own. And so most of this growth is incremental and not just switching from broker to broker.

Okay. You mentioned that you are a little bit agent-constrained right now. Are you seeing any wage inflation pressure poaching or limitation on the quality of the agents that you're hiring, considering that your peers are also doing the same?

No. That's a really insightful question because that was an issue for us in Q4. On the vendor agents, our strategy of trying to hire seasonal agents during COVID, where we were recruiting remotely, training remotely, coaching them up remotely, getting licenses, getting the licensing tests taken remotely. That was an issue. And we did see a lower overall quality of applicant for that seasonal agent. Different from that now is we are hiring career-minded agents. Our targeted first year comp is in the 70,000 range. We have multiple deciles of agents that earn 6 figures as do our competitors. And so these are really attractive jobs and much more attractive than most inside sales roles that don't require in-person selling. And so this is just an attractive career path and again, I don't differentiate eHealth. We have our differentiated model, but this is an attractive opportunity for the -- for anyone that is capable of inside sales.

Okay. Great. Turning to that external agent commentary. You are expecting to have about 10% or less external agents come AEP. I kind of think about that. You did mention that some of them actually performed in line or better than your average internal agents. And so what prevents you from hiring those agents to bring internal?

Yes. I know it's a bit of an anomaly. When you hire as many external vendor agents as we did, it shouldn't be surprising that 100 of them ended up being very good. But still, if you take a full accounting of the cost of recruiting the number of external agents to end up with only 100 that were outstanding. That math doesn't work. And it was exacerbated by COVID. And certainly, if we were to have continued our vendor agent model into 2021, we would have had much higher productivity this year than last year. And it's important to note that, that strategy did work well for us in 2018, and then it improved productivity in 2019. We doubled Medicare Advantage enrollments in 2019 over 2018, very effectively and efficiently using this vendor model. However, when we experienced elevated churn, after Q1 and Q2 of last year, we unpacked the root causes of that churn. And we realized that longer term, the optimal strategy for us is highly trained and experienced seasoned agents that have enrolled thousands of seniors into the right Medicare Advantage plans, they do -- these agents get better and better, more and more accurate. They know the right questions to answer. So even though we provide more technology support than any of our competitors in our industry. The reality is that agents get better and better every single call they take. And so we realize coming into AEP last year that we needed to migrate to a dominantly internal career agent model. And so that's what we're doing.

Okay. Fair enough. Just on the increased agent hiring, obviously, there are slower periods throughout the year where you're outside of AEP OEP what do you plan to do with those agents? Will they be selling ancillary products? Are you going to expand into other product lines? Give us a little bit more flavor around that?

Yes, that's another good question. We are experimenting with additional product lines, ancillary sales. We also -- and this will sound rather pedestrian, but we have been on a Cisco legacy telephony system for the last decade, and we're moving to Nice which is a competitor, Five9, a public company that many know. And so we will have an entirely cloud-based telephony system. In fact, we're already piloting it now. It'll be fully operationally by the end of Q3, which enables toggling between inbound and outbound calls. Right now, it's very challenging, particularly on a work from home basis to power our agents to be able to toggle back and forth from inbound to outbound. So during Q2 and Q3, when we're not in an open enrollment period or in the annual enrollment period, being able to place outbound calls to existing members to check on their plans. To offer them ancillary services and products is a real capability that we have not had before. So we are optimistic that we can make these agents productive year round. But even if they weren't, the math works, even if the agents were entirely sedentary, didn't take a single call during those periods, the increased productivity in Q4 of an internal career minded agent is such that we would still prefer that model versus relying upon the vendor model and the seasonality of it.

Okay. Great. So one of the drivers of your EBITDA was the shift to online enrollment and ideally do-it-yourself customer mindset. Kind of given some of the challenges you've seen with churn and some of the what you've seen over the past year, do you think that this is still the do-it-yourself customer marketplace? Or do you really need to have a pretty large agent force to help support those customers that may not necessarily know their plan inside and now to really sign up online completely?

Well, I would say both. They only deal with the telesales first. I mean, look, seniors, particularly more elderly seniors, are not going to shift to being comfortable making a Medicare Advantage decision entirely online in large numbers. I mean, we did see COVID causing seniors to engage in more e-commerce with subscribing to streaming services to using food delivery services, even online banking has started to surge among seniors. But when we talk about seniors, it's not a monolithic demographic. An aging 65 year old is very different than an 80-year old. And so the majority of enrollments, even for eHealth, was by far the e-commerce leader, are going to remain telephonic into the future. I believe that increasingly, aging and seniors are going to be shopping and perhaps completing most, if not all, of their enrollments increasingly online. And that's growing very rapidly for us. Right? And so it was about 10% of our business, the online-only last year. It's the fastest-growing segment of our business. And very importantly, it by far has the largest persistency. So we have almost a 40% longer life from an online-only enrollment than we do from an entirely telephonic enrollment. So these are the youngest, the healthiest and the most savvy seniors, the most desirable for the carriers as well because they're the lowest utilizers of health care services. So this is an important demographic for us. But we also recognize that there's another 90% of the business that is telephonic. Of that, we did about 27% were online-assisted. And what that means is that there was agent interaction with the senior, but ultimately, the senior enrolled by hitting enter on their iPad or their iPhone or their computer. And those seniors also have much stronger persistency, not quite as strong as the online only, but much better persistency than a purely telephonic. So those -- that ratio went from 27% in '19 to 37% last year, and where -- our guidance contemplates 43% between online-only and online-assisted for 2021. And so that's going to decrease our churn, increase our persistency, which ultimately translates into much stronger LTVs in the future.

Great. So turning to some of your retention activity there. Is there any statistics you can provide on kind of how you saw retention and switching in the 4Q period? And you've traditionally talked about a 10% recapture rate. How did that trend versus kind of what you were expecting? Did it get better? Or did it basically stay the same from your view?

Yes. We're making some progress on that recapture rate. The -- our churn levels did modestly decrease trailing 12 months [ 12 31 ] went from 42% to 40%, and we expect that to continue to trend down in Q1 and then trend down again from that level in Q2. So we do believe we're on the right track in terms of reduced churn, which, again, is a leading indicator of future higher LTVs. But the biggest success we had in Q4 on the retention side was the formation of a retention team. And that team took over 150,000 calls. We believe that they saved 15,000 seniors from leaving our system. About 10,000 were retained in their existing plan through the assistance of the retention team. And about another 5,000 we actually switched to another plan that would be better for them. And to imagine that given the number of Medicare Advantage enrollments in the low 200,000s to get 150,000 calls, that went to the retention team tells you how important it is to have that capability. In 2019 in the past years, those calls came in, but they went to licensed agents who we were compensating and incentivizing to switch them to another plan. And because we were paying 100% commission on approved applications, those agents could be switching somebody 2x, sometimes even 3x in AP and get paid 100% commission in each instance. We changed the compensation to defer 1/3 of that commission to the 100-day point. So only members that stayed on the books for 100 days between fully paid members received full commission. But in addition, and more significantly, the calls don't even go to a licensed commissioned agent. They're going into the retention team. So this was the most important move we may in 2020. And we have early positive indicators that, that's reducing churn, but we truly won't know the magnitude until our first quarter print.

Okay. Great. I just want to turn to your pullback from direct response TV. You said, just -- I believe on the call you said spending there and leads generated will be about 13% or so. Kind of given the DRTV is a bit of a higher term channel, does it make sense to even have that amount of money there in the first, please? Should you reduce it more? And kind of we've heard from your competitors that they have said that they didn't run into this type of issue. So I guess what's different that you conduct there versus them from your perspective?

Well, yes. And I think the key is that our churn is highest in DRTV of all of our channels, but it's still profitable. And there are significant opportunities to reduce that churn through the retention team. One thing I didn't mention is we placed 40,000 outbound calls, and those were primarily to members that had enrolled through DRTV because our data science team identifies those members as having the highest propensity to churn. These outbound calls going to those members answering questions that they have, removing doubts that they might have in questions whether they got into the right plan, we believe can increase that -- the persistency of those DRTV ads. Just because a senior enrolls in a plant doesn't mean that sale is, in fact, completed, right? They have to become also confident that they're in the right plan, and they don't really become confident until the beginning of the new year when they utilize the plant, go visit their doctors, specialists, order medications, and to ensure that all of those are in network. And so what happens in Q4 is they talk to a friend that has a different plan. They talk to their children. They see another ad on TV. And they're tempted to reconsider. And so the affirmative outreach with those 40,000 calls to many of the DRTV enrollees, we believe can bring down that churn to levels approaching our average. So I'm not toxic on DRTV. We needed to minimize it because we did not have those retention practices in place, and that's what we're now implementing.

Great. Okay. Well, it looks like we've gone into over time. So we'll -- we have to call it there. I would love to talk more, but I'm running out of time here. So thank you, Scott, Derek and Kate, for joining us. And for the rest of you, enjoy the rest of the conference. Thank you.

Thanks, Jonathan.

Thanks.