eHealth, Inc.
Q1 2008 Earnings Call Transcript

Published: 16 May 2008

[Operator:]

Good day, ladies and gentlemen, and welcome to the first quarter 2008 eHealth Inc. Earnings Call. My name is Amanda and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Kate Sidorovich, Director of Investor Relations. Please proceed.

[Kate Sidorovich:]

Good afternoon and thank you all for joining us today either by phone or by webcast for a discussion about eHealth Inc.'s first quarter 2008 financial results. On the call this afternoon we will have Gary Lauer, eHealth's President and Chief Executive Officer and Stuart Huizinga, eHealth's Chief Financial Officer. After management completes its remarks we will open the lines for questions. As a reminder, today's conference call is being recorded and webcast from the investor relations section of our website. A replay of the call will be available from the investor relation section of our website following the call. We will make forward-looking statements on this call; all statements other than statements of historical fact are forward-looking statements. Forward-looking statements made on this call will include statements regarding estimated membership; a larger scale rollout of eApproval capability; the impact of eApproval on our business volume; market opportunity in China; the timing of the launch of our HSA platform; revenue potential for sponsorship advertising; Kaiser's implementation of our ecommerce platform with brokers and agents; passage and impact of future legislation; industry trends and their impact on our growth opportunity; the amount of time to recover cost of acquiring members and related profit margin; general and administrative expenses declining as a percentage of revenue; expected rate for cash taxes; and guidance for total revenue stock-based compensation expense; GAAP income tax rate; GAAP net earnings per diluted share and cash flow from operations for the year ending December 31st, 2008. Forward-looking statements are based on assumptions and assessments made by the company's management based on factors they believe to be appropriate. Forward-looking statements are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by the statements. We describe these and other risks and uncertainties in our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission which you may access through the Securities and Exchange Commission's website or from the investor relations section of our website. Forward-looking statements made on this call represent the company's views as of today. You should not rely on these statements as representing our views in the future. We undertake no duty to update or revise any forward-looking statements made during this call whether as a result of new information, future events or otherwise. We will be presenting certain financial measures on this call that will be considered non-GAAP under SEC Regulation G. For reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure please refer to the information included in our press release and in our SEC filings which can be found on our corporate website under the heading Investor Relations. And at this point I will turn the call over to Gary Lauer. Gary?

[Gary Lauer:]

Good afternoon and thanks everyone for joining us today. Our first quarter results again demonstrate positive growth and increasing operating leverage [Technical Difficulty] growth of 25% during what is historically a big volume quarter. Comparatively our submitted application growth was 23% in the first quarter of 2007. The 25% growth was achieved with our marketing and advertising spend being 37% of revenue, well within our target band of 35% to 39% of revenue that we indicated previously. These results reflect our focus on profitable growth and our disciplined approach to member acquisition. As many of you know, we source applications from three major channel categories, direct, marketing partners and online advertising. The percentage contribution from each of these channels was unchanged from the fourth quarter of 2007 and notably, we saw very strong year-over-year growth in our partner channel. We continue to add new partners and expand our relationships and marketing programs with existing partners, giving us more diversity in the way we grow our business. For example, during the first quarter we launched an important partnership with Progressive, one of the largest auto insurance companies in the US. This partnership is an extension of our footprint with large financial institutions that endorse eHealth and our online platform. Historically we have had very good traction with partners in the auto insurance vertical and we are pleased to now be working with Progressive. Across all channels we are being proactive in pursuing opportunities arising from the macroeconomic and industry trends that we observe. For example, in response to the softening economic environment and an increase in unemployment rates we are seeking to assist those who have recently lost their jobs by offering cost-effective health insurance options. We are actively approaching COBRA administrators, human resources organizations and large employers that are going through significant layoffs. We are educating these constituents regarding individual policy options as an alternative to COBRA and providing them information about eHealth offerings that companies can then share with their employees. According to data provided by a Kaiser Foundation survey, we estimate that an individual on average will pay $380 per month for a COBRA plan. By comparison, an individual health insurance policy can be purchased through eHealth for an average of $148 per month based on a joint study that we did with the Forrester Research. Because our services offer an important solution to large numbers of Americans being impacted by the declining economy, we are accelerating our media outreach in this area. We are also developing online COBRA resource centers and driving traffic to these micro sites through partners, direct marketing and targeted keyword programs. During the first quarter, we prepared for the live launch of our eApproval capability, which was known previously as EPI III, and this launch occurred in early April, ahead of our original schedule. This first rollout is in California with one of our largest carrier partners, Anthem Blue Cross of California. As a reminder, eApproval is proprietary technology that allows consumers to complete a health insurance application online, submit signature and payment electronically and receive an underwriting response from the carrier. If approved, a consumer can then print the membership materials immediately and begin to utilize coverage. We are very excited about this launch which we believe is just the beginning of a larger scale rollout with other carriers. We see eApproval as a very important milestone and a very compelling reason for consumers to come online and purchase health insurance from eHealth. We believe that over time eApproval can increase our business volume. Notably, during the first few weeks of eApproval being live on our site, which I want to comment is limited experience; we have seen a significant upward trend in the submitted application volume for plans with this feature enabled. During the quarter we also made progress with our Ubao.com platform, expanding its research outside of, its reach outside of Xiamen, where eHealth China is headquartered to include the Shanghai area. With an urban population in excess of 18 million people, Shanghai represents an intriguing market opportunity for eHealth. We are now offering 27 insurance plans from several major carriers to Shanghai consumers through a partnership with a Shanghai insurance brokerage. As we mentioned on previous calls, our China business is still in its very early stages and we don't expect any material revenue from China for 2008. Longer term, however we believe that China can be a very interesting business opportunity for eHealth. We are also making good progress with the development of the eHealth business HSA platform. As a reminder, the HSA platform is designed to allow businesses the ability to easily fund or co-fund health savings accounts for their employees. The platform integrates eHealth's insurance offerings with robust HSA expense management tools, allowing its users to manage their HSA healthcare expenditures online. We are on target to launch the platform through key strategic partners within the next few months. During the first quarter we continued to increase our inventory of products available online. Carrier partners such as at Aetna, Golden Rule, Kaiser, PreferredOne, Geisinger, Independence Blue Cross and Mercy Health Plan all launched products through eHealth. We also launched dental products with Everest Dental and Blue Cross Blue Shield of Oklahoma and added short-term health insurance products in two new states with Golden Rule United. Our technology, licensing and sponsorship business continues to grow. During the first quarter 23 carriers participated in our sponsorship program by paying us to sponsor or highlight a specific plan in a specific geography. This represents a 35% increase over the fourth quarter of 2007 when 17 carriers participated in our sponsorship program. Additionally, at the end of the first quarter we started testing a new type of sponsorship called brand level sponsorship. This new advertising model allows carriers to sponsor all of their available plans in a specific geography instead of sponsoring only a single plan. We are very enthused about the revenue potential for this new form of paid placement on our platform. The number of carriers licensing our ecommerce technology also continues to grow. During the first quarter, we launched our technology with GHI in New York. We also extended the use of our platform through Kaiser and Coventry for their off-line agents and brokers. Coventry is deploying our platform to provide broker support for its Vista Healthplan, which is now part of Coventry in Florida. And, similar to our launch of Celtic in the fourth quarter, Kaiser will be leveraging our ecommerce platform to enable their agents and brokers across multiple geographies, including the states of Maryland, Virginia and the District of Columbia, to submit and process applications online. This relatively new use of our technology is strategically important for us because it allows us to participate in and monetize traditional off-line business. On the public policy front, we continue to monitor events at both the state and national level. While there continue to be various ideas put forth, we believe that no significant legislation will be passed this year or in the foreseeable future, which would directly affect our business. The discussion during the run-up to the presidential election is interesting. We believe the discussion is good and that it calls attention to the importance of making health insurance more accessible and affordable. And some of the proposals related to the tax treatment of individual insurance, if passed, could be advantageous to consumers in the individual markets and to our business. In conclusion, we are optimistic about our business and about our start to 2008. We continue to observe a combination of trends that point to expanding growth opportunities for eHealth in our core individual and family product market. The key drivers include, more carriers continuing to enter the individual and family plan market in more states; a growing inventory of affordable quality plans on our site; continued erosion of employer based coverage causing more consumers to enter the individual market; added emphasis on consumer directed healthcare and increasing use of the Internet by consumers to research and purchase health insurance. And we are working to take advantage of these and other opportunities as well. And now I'll turn the call over to Stuart, who will take you through our financial results in greater detail. Stuart?

[Stuart Huizinga:]

Thanks, Gary, and good afternoon, everyone. I'll now discuss our financial results for the first quarter of 2008. These quarterly results reflect strong year-over-year growth across key financial metrics including revenue, income and cash flows. Our operating model remained highly scalable and allowed us to improve our first quarter operating margin year-over-year, while at the same time generating solid member growth. Starting at the top line, our revenue for the first quarter was $26.3 million, an increase of 35% over the first quarter a year ago. Commission revenue was $24.1 million, an increase of 31% over Q1 2007. Our sponsorship, licensing and other revenue was $2.2 million in the first quarter of 2008, a 94% increase over $1.1 million in the first quarter of 2007. Our year-over-year revenue growth was mainly due to continued growth in our membership base. In the first quarter we had over 143,000 new approved members, a record. Our total estimated membership at the end of Q1 2008 was over 558,000 members, which represents 26% growth over the estimated membership we reported at the end of the first quarter of 2007. Importantly, our individual and family major medical plan estimated membership, which generates the majority of our commission revenue, grew 30% compared to the estimated membership we reported for the first quarter of 2007. As Gary mentioned, we are pleased with the results of our marketing programs in the first quarter. We achieved 25% year-over-year growth in the individual and family major medical plan submitted applications in the first quarter of 2008, compared to 23% year-over-year growth in the first quarter of 2007. At the same time, our non-GAAP marketing and advertising expenses, excluding stock-based compensation as a percentage of revenue, increased modestly to 36.2% as compared to 35.4% in the first quarter of 2007. It is important to remember that the vast majority of marketing and advertising costs to acquire members are expensed when they're incurred, while the revenue stream resulting from that spend comes in over future periods. This is important because the first quarter has typically been a higher application volume quarter than the fourth quarter, resulting in seasonally higher marketing and advertising expenses. Therefore, in general, the most relevant way to assess our margins and application volumes is on a year-over-year basis. One of the metrics that we use internally to measure the return on our investment in member acquisition efforts is the length of time we estimate it will take to recover the upfront marketing and advertising costs per new member. We use our marketing and advertising expenses for the quarter from our P&L as the aggregate cost of acquiring new members. This metric continued to be very favorable for us in Q1. Based on Q1 2008 commission revenues earned per estimated member per month, it would take less than six months to recover the cost of acquiring the new members we estimate that we added in the first quarter. Assuming an average estimated retention in excess of two years, this leaves us with a substantial amount of incremental profit margin on our member adds. In Q1, our total expenses as a percentage of revenue continued to decline on a year-over-year basis, demonstrating the scalability of our operating model. When compared to Q1 of last year, our non-GAAP operating expenses, excluding stock-based compensation, increased by 26% compared to our 35% revenue growth over the same period. Our non-GAAP operating margin, excluding the effect of stock-based compensation in both years, increased from 15% in Q1 of last year to 20% in Q1 of this year. This was achieved at the same time as we achieved a significant year-over-year increase in application volume. We saw improvements in several areas in Q1. Our non-GAAP customer care and enrollment costs, which exclude stock-based compensation expense, declined as a percentage of revenue from 15% of non-GAAP revenue in the first quarter, a year ago, to 13% of revenue this quarter. Non-GAAP technology and content costs, which also exclude stock-based compensation expense, declined from 15% of non-GAAP revenue to 13% for the comparable period. We also started to see the benefits of scale in the general and administrative area, which declined from 17.3% of non-GAAP revenue in the first quarter of 2007 to 15.6% in the first quarter of this year. As we mentioned in our prior earnings calls, our general and administrative costs increased significantly in 2007, given that it was our first full year as a public company following our IPO in late 2006. This quarter is the first apples-to-apples comparison of our G&A costs to the same quarter in the prior year since both periods now include public company costs. Although you might not see a sequential improvement every quarter, our general and administrative expenses are expected to decline further as a percentage of revenue between now and the end of the year. Interest and other income was $1.2 million during the quarter, flat year-over-year and down sequentially from $1.4 million in the fourth quarter of 2007. Interest and other income, almost all of which reflects interest earned on our invested cash, cash equivalents and marketable securities, was negatively impacted by declining interest rates, somewhat offset by increasing cash and investments on our balance sheet. We expect our interest income to gradually decline sequentially throughout the year from where it was in Q1 of this year. Our approach to investments remains very conservative. Our marketable securities primarily consist of money market funds and highly liquid investment-grade corporate and U.S. government-sponsored enterprise bonds, commercial paper and certificates of deposit. GAAP pre-tax income increased from $3.9 million in the first quarter of 2007 to $5.9 million in the first quarter of 2008, a 54% increase. On a non-GAAP basis, excluding the effect of stock-based compensation in both years, pre-tax income increased by 60% from $4.1 million last Q1 to $6.6 million this year. GAAP net income increased from $2.3 million in the first quarter of last year to $3.3 million in the first quarter of 2008, a 45% increase. It is important to note that our effective tax rate for GAAP purposes is estimated at over 40%, even though we expect to pay cash taxes of 3% or less for the year. This is mainly due to significant net operating loss carryforwards that reduce the cash taxes we pay. Our federal NOLs coming into 2008 were approximately $100 million. This includes NOLs related to stock option deductions that are available to offset future corporate income taxes but are not considered an asset for accounting purposes. The NOLs resulting from such stock option activity, which totaled more than $58 million for federal purposes coming into this year, will not reduce our future GAAP income tax expense, but to the extent we can realize these deductions we'll obtain a cash flow benefit from them. Non-GAAP net income, excluding the effect of stock-based compensation in both years increased 50% from $2.5 million in the first quarter of last year to $3.8 million in the first quarter of 2008. This increase once again illustrates the impact of the significant growth in our revenue and the scale that we're achieving through the efficiency of our operations. Our operating cash flow in the first quarter was very strong. Our cash flow from operations grew 72% to $5.8 million from $3.4 million in the first quarter of 2007, primarily driven by our significant income growth for the quarter. Our operating cash flow for Q1 was sequentially lower than the fourth quarter which is normal for us historically due to the timing of certain cash payments including annual performance bonuses to employees. Capital expenditures for the first quarter of 2008 were again very modest at $334,000. As a result, in the first quarter we generated in excess of $5.5 million in free cash flow. Primarily driven by our positive free cash flow, our cash and marketable securities balances increased to $127.9 million at March 31st, 2008. Our cash and marketable securities constituted more than 93% of our total assets, excluding deferred tax assets at the end of Q1. Given this and the fact that we have no debt we continue to have a very strong balance sheet. With the uncertainty that exists in the market we feel it is important to make a comment this quarter about our annual guidance for 2008. We are reiterating the following guidance for the full year ending December 31st, 2008 based on information currently available. Total revenue is expected to be in the range of $114 million to $117 million. Stock-based compensation expense is expected to be in the range of $4 million to $5.5 million. GAAP net earnings per share diluted share is expected to be in the range of $0.58 to $0.63 per share. Cash flow from operations is expected to be in the range of $33.5 million to $36 million. This guidance is unchanged from what we provided on our last call in February of this year. Based on information currently available we expect our GAAP income tax rate to range from approximately 43% to 45% for the full year ending December 31st, 2008 which is higher than the previously estimated GAAP tax rate of 42%. I want to remind you that these comments are based on current indications for our business which are subject to change at any time. We undertake no obligation to further update our guidance. And now we'd like to open up the call for questions. Operator?

[Operator:]

(Operator Instructions). Your first question comes from the line of Youssef Squali with Jefferies & Company. Please proceed.

[Youssef Squali:]

Yes, hi good afternoon, Gary and Stuart. A few questions. First, on the EPI III, I was wondering if you could just help us quantify maybe some of the effect and I know it's only been a few weeks, but any quantification that you can help us in trying to gauge the potential impact here. And in terms of the rollout, what is the scheduled rollout into other states with that same provider and then with any other providers? And then I have a follow up.

[Gary Lauer:]

Yeah hi, Youssef, it's Gary. As I mentioned in my comments, we've seen some what we're terming significant increases in volume over the past several weeks for these eApproval products. But again I just want to note that it's early. We've got three weeks and a few days experience there so far, but we're certainly pleased, very pleased with what we're seeing. And we think this early on result that if it continues, very much proves up the hypothesis here which was that giving consumers this ability will be a very, very attractive thing and can have some very positive impact on volume. I should note that it's interesting, as we looked at this, one of these plans is actually in a sponsored status that the carrier is paying for and we've excluded that from what we're terming the significant growth of the other plans because we want to make sure that what we're looking at is very clean and not impacted by anything else. The one plan that sponsored that also has eApproval is way up in terms of its volume as well. It's hard for us to separate the effect there of sponsorship and eApproval, but certainly the combination of them both is a good one. But those plans that just simply have eApproval we're seeing very, very nice growth so far.

[Youssef Squali:]

And in terms of rollout?

[Gary Lauer:]

Yeah in terms of rollout, we've made this comment, there are other WellPoint owned plans that we are working on right now with WellPoint to rollout and we'd like to do those sooner rather than later. I would note again that we've got the Anthem Blue Cross plans in California live earlier than had been planned and we're pleased about that. In fact, the beta test period that we had with WellPoint went surprisingly well and very quick. And we've got several other carriers yet to be named that we're working with as well to roll this out. And we're hoping that our early on experience here, as is noted by other carriers further influences them to frankly accelerate their work and their endorsement and participation in this project. We think it's very, very important.

[Youssef Squali:]

Okay. And on a different topic here, a number of the managed care providers have preannounced some pretty dismal numbers recently. Why wouldn't there -- and I understand it's a cost issue for them, not necessarily the revenue issue, but if those cost issues persist why wouldn't that push them to effectively spend less over time on sales and marketing and negatively impacting your business?

[Gary Lauer:]

Well, I think you may see just the opposite effect with these individual products. We've looked at the results of companies like WellPoint and United and Humana and Health Net recently and they've all got their challenges for various reasons. There seems to be a couple of common threads, one is Medicare, the other is the amount of money that they're spending on their managed loss ratios and so on. I don't want to get too technical with all of this, but it's noted by several of them that their consumer directed plans and their other individual plans and products are doing nicely and are growing. What we are seeing from some of them is actually added emphasis in this area because it's a growth area and a leverage area for them. So we area actually -- although we'd like to see some of these companies doing better than they've done, we're certainly enthused about the part of the market that we're in and think what we're witnessing here an awful lot of market trends and forces that again make the market that we face even more interesting to us.

[Youssef Squali:]

Great, thank you very much.

[Operator:]

Your next question comes from the line of Steven Halper with Thomas Weisel Partners. Please proceed.

[Steven Halper:]

Yeah, hi. Are you seeing any material change in the churn?

[Stuart Huizinga:]

Hi, this is Stuart. We're not at this point seeing a significant change in the churn, it's -- in its normal range for us. In saying that, I should comment though that when we look at churn we estimate our membership based on trailing historical data and so our churn is based on estimates that are backward looking. And we're looking back six months or more due to the fact that we get delayed information from the carriers in that area to do those estimates. So I just want to make that statement that it's kind of a backward looking area for us.

[Steven Halper:]

So when a member discontinues a policy, does the company try to figure out why?

[Stuart Huizinga:]

Yeah we do. We do try to figure out why. In some cases we may find out about that on a delayed basis though. And so it is a challenge for us in some cases to get to those numbers.

[Steven Halper:]

So has there been any perceptible change as to why members discontinued or is it kind of a standard reason?

[Stuart Huizinga:]

Standard reasons, we're not seeing anything materially different at this stage.

[Steven Halper:]

Great, thanks.

[Operator:]

Your next question comes from the line of George Sutton with Craig-Hallum. Please proceed.

[George Sutton:]

Gary, you briefly mentioned the HSA platform and that we would be hearing something in the next few months. Can you just give us a sense of what kind of progress you've made from a beta test perspective there?

[Gary Lauer:]

George, sure. We’ve actually are beta testing it in additional states now. We're finding that it's attracting more businesses that are coming to it and beginning to utilize it and that's all good. We've got some further software enhancement that we're going to be adding over the next several weeks. One of the things here that has got to be very usable by people and very intuitive and that's what we're testing and working toward right now. We've got something that works today, but we want this thing to work really, really, really well and really easily for businesses and employees. And our plan and expectation is that over the next several months as I indicated with some of our larger partners, in conjunction with them, we'll be doing some rollouts with the business HSA into their small business constituencies and so on. And if all goes well, this can be I think, a very important influence on our individual product sales over the next several years.

[George Sutton:]

On the platform licensing side, I know you've had some examples where you've been able to put your platform in the hands of the actual sales people out in the field. Can you just talk about what sort of impact that might have to volumes from your side?

[Gary Lauer:]

Well, over time it should have some financial impact for us because almost all of these deals are performance-based; transaction performance-based. So, every time a transaction occurs, we essentially earn a payment. And that's one of the things that's appealing to the carriers is that, there's not a standard software licensing arrangement here, there's very little upfront investment and they simply pay as they go. We like that because there's no ceiling, and if we go about this the right way it can be very significant in terms of the volume. So we're certainly enthused about that. Now having agents and brokers; if you think about an agent or broker who typically is localized and sells automotive insurance and life insurance and homeowners and health as well, they've got a lot to deal with, and this is a very paper intensive transaction. If you envision somebody coming to your home some evening and opening a briefcase and laying all this paper out on the kitchen table, that's really how these products have been marketed traditionally. And now it's simply done with a laptop and the agent or broker who simply direct you over the phone to get on line and go to his or her site and go through the application process. So it's obviously more efficient, more can be sold. The carriers like it; there is less rework, it's quicker, I mean, all of those attributes. So strategically, we like being able to extend this into the hands of agents and brokers and being able to monetize those transactions. And yes, I think over time, as we get more and more of them to adopt and it works, and we've seen it work quite well with several carriers already. There's the potential here for this to be a very good contributor for us.

[George Sutton:]

Okay. And lastly, if I could with respect to Progressive, that sounds like a nice announcement, certainly a big traffic site. Can you just talk about the relative importance of that as a new relationship?

[Gary Lauer:]

Well, it's a great name. They advertise extensively as you know, especially on television. And like many other partners like this, we think it has the potential to be important and significant for us. We think, once again strategically, it's another indication of the power of our platform that someone like Progressive would embrace this and partner with us to be the individual health insurance solution. And we need a little bit of time. We're just starting out here, but we're hopeful that this could be quite additive for us.

[George Sutton:]

Okay, thank you.

[Gary Lauer:]

Thank you, George.

[Operator:]

Your next question comes from the line of William Morrison with ThinkEquity. Please Proceed.

[William Morrison:]

Hi. Thank you. Good afternoon. A couple questions. First, I noticed the IFP conversions looks like it ticked down a little bit to 55% from 56%. I'm just curious if you could comment a little bit around that, why the conversions continue to come down? Is it tighter underwriting standards or something else there? And then you mentioned that EPI III eApproval initially has shown really driving nice volume. I was curious if you've seen any kind of impact on conversion rates as people obviously are approved instantaneously and don't have to wait, and maybe choose something else during the waiting period? Thanks.

[Stuart Huizinga:]

This is Stuart; I'll take the first question. We don't really see a material change in our close ratio; we call it the close ratio, from submitted application to approved application. We have had a couple factors there that are very similar to what we talked about last quarter, one of those being the underwriting cycle. The carriers have been a little bit more strict over the last few quarters. We saw them just very slightly stricter, I'd say this quarter than they have been the last couple quarters but very, very slightly and more stringent on their underwriting of our applications. And the other factor that we talked about last quarter was the mix of our business. Some of our marketing partners tend to have a lower close ratio than our direct business as an example. And so, as we get a little bit more of that mix some of that has impact on the close ratio.

[Gary Lauer:]

Hi, Bill. It's Gary. On eApproval, yes, we would expect to see a favorable influence on conversion rates, it's simply too early and there is not enough there yet. Remember, it's only one set of plans in one state. But, let me add to that we have had consumers come to the site, choose the Anthem Blue Cross of California plans, go through the application process, be approved, print their membership material and be covered. And that has been the promise of all this and it works and it's attractive and working well there. So, one would think over time that that is going to influence conversion rates.

[William Morrison:]

And just one quick follow-up there. So can you give us a sense of -- you said you're in talks with several other carriers, you know a sense of maybe timing on when you expect to see a significant number of additional carriers using eApproval? And then the second I guess a derivative question is how many carriers do you think you need to have a material impact on the business? Do you need a quarter of your 200 plus carriers or half or more?

[Gary Lauer:]

Hi, Bill. Thanks for that question. First, we're more than just discussions with carriers; we have several other carriers we're working with right now to actually roll them out. So they're in house and we're working through the -- the technology is ready to go up, working through the underwriting rules, and things of that nature. And again, we want to do those sooner rather than later. We talked about having eApproval going in the first half of this year. We actually got it going at the end of the first quarter or beginning of the second quarter. And you should expect to see some others come on. I would hope perhaps at the end of this quarter and more probably in the third quarter as well. And we're working as fast as we can to get them up and to get them going. In terms of what we need; we really haven't looked at it in terms of needing 25% or 50% of the carriers and so on. All I can point to is our experience with the first implementation of the electronic process interchange, EPI, which, we started with one carrier and then went to two and three, and now almost all of our business is conducted that way and almost all of our carriers participate in it. And I would hope that if this early success and result with eApproval is an indicator that you'll see that with eApproval as well. And we can achieve that within the next couple of years, if not sooner.

[William Morrison:]

One last question then. Gary, could you maybe give us some -- I know you said you don't expect any material impact from Shanghai or China this year, but 18 million urban residents is a big number. Are all of those addressable by your service over there? I'll claim ignorance on the insurance market over in China. Maybe you could talk a little bit about the market. How is it different than here? How will the business model be different than in the U.S., price points, etcetera? And then I guess just curious, how many of those 18 million -- what's the real addressable market?

[Gary Lauer:]

The addressable market today is less than those 18 million. It's clearly people who have got access to the Internet, and it was noted recently that there are more people now online in China than there are in the U.S. The number is growing fast; many of these people are young, as you might imagine. The health insurance market isn't even nascent yet, it's very, very early days. There really hasn't been a market up to this point. So, we're clearly blazing a new trail here. That's part of the attractiveness and the fun of this as well, quite honestly, and the stakes can be very high, as you've pointed out. We're actually sitting here, I don't know how many of those 18 million people in Shanghai are prospected consumers; several million are for sure, but I couldn't quantify it beyond that. We're all trying to ascertain that right now, off the carriers and others participating in this. So we just wait and watch as that continues to unfold. We are selling products there, I mean it's working and people are using it and embracing it. And I'm sorry, Bill, the second part of your question was, on China?

[William Morrison:]

Just the business model, how it's developed?

[Gary Lauer:]

Thank you. Yes. The business model is similar to the model in the U.S.; some of these can be recurring revenues, others can be one-time transaction fees. The actual dollar leverage is different. The currency exchange and the currency difference is pretty dramatic. For example, an employee in China fully burdened can cost 1/6th or 1/8th or 1/10th of what a person in the US costs and that's the case with a lot of other things as well including health insurance. So in some ways you've got to think in US dollars, you've got to have eight times as much volume if that's the exchange difference to achieve the same kind of dollars here. So it's a little bit different from that standpoint. But the construct of the products isn't that much different. It seems early on that the need and the demand and so on is somewhat similar to here as well. But again let me emphasize it's all brand, brand new to all of us including all the consumers in China, and this is all just beginning to unfold and we're learning as we go.

[William Morrison:]

Thanks.

[Operator:]

Your next question comes from the line of Sameet Sinha with JMP Securities. Proceed.

[Randy Katz:]

This is actually Randy Katz in for Sameet. Two questions for you. I believe on the fourth quarter call you had outlined some outreach programs to partners, going after college grads with student loan companies, SMBs through credit cards. I was wondering if you can give us some updates on any traction that you're seeing there?

[Gary Lauer:]

Yeah, those are good ongoing programs for us. We are seeing some good traction. We use e-mails for some of these partners among other ways to get to these constituencies and so on. And these have worked effectively for us in the past and are today. So they've been quite good.

[Randy Katz:]

Okay. Going in through the rest of the year, what kind of expectations do you have in terms of member generated revenue? I mean, should we still be expecting this to increase as new members come on? And really at what point do we see a critical mass of customers coming into their second year of the contract where we may actually see the member generated revenue start to decline?

[Stuart Huizinga:]

I'm not sure what to say on the revenue question except our guidance remains the same as what we stated for the year in our last call. As far as members getting into their second year, I don't think you'd see at any point a massive shift; that would tend to happen slowly over time as our -- the industry called book of business ages out a little bit, that would happen gradually.

[Randy Katz:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Carl McDonald with Oppenheimer. Please proceed.

[Carl McDonald:]

Thank you. I'd be interested in your comments on the regulatory environment in California. Things have gotten a little bit more difficult for the plans in the individual business over the last couple of weeks in Health Net as an example has said they're going to emphasize the individual product in California precisely for that reason. Just would love your perspective on that.

[Gary Lauer:]

Well Carl, as you know, Health Net had a legal court judgment to go against them. It was a woman who bought an individual plan and then regarded rescission and so on. By the way, this was not a customer of ours, not sold or marketed through us. And one would think that that's made Healthnet a little -- could make Healthnet little more reticent in this marketplace from an underwriting standpoint. I can't speak for them, so I don't know that that's the case. Some of the other carriers are certainly cognizant of that. It hasn't changed anything in the regulatory environment, none of the regulations or the laws, none of those things have changed at all. And we view California as a really vibrant market with new products coming into it. WellPoint we see is starting to get aggressive again in this market as well, Aetna doing well. So I really can't comment beyond that because we don't see anything beyond that today.

[Carl McDonald:]

Just as a follow-up to that, do you think it will have any impact on the plan's willingness to do instant underwriting? Regulations may not necessarily have changed, but the way the plans are doing business certainly has as a result of this. And I think the changes have got much less opportunity to rescind policies after the fact. So just sort of your sense of plan willingness to do the instant underwriting with the inability to cancel policies after the fact?

[Gary Lauer:]

We certainly aren't seeing any reluctance among those carrier partners that we're talking with and working with on rolling out eApproval or, as you call it, instant underwriting. So we see no impact there at all. I think the impact that we would anticipate seeing is that as the plans are more cognizant of this whole environment from a rescission standpoint, I think they're going to be more inspective from an underwriting standpoint of applications and probably be thinking about what they're asking and what they need and want consumers to disclose. So I think we may see it on that side of the business, but we certainly haven't seen anything to my knowledge at this point that has any effect at all with eApproval. In fact, our partner WellPoint in light of all this came into this very aggressively with us. And again, I can't speak for them, but we're all very pleased with what we see so far.

[Carl McDonald:]

Great, thank you.

[Gary Lauer:]

Thanks.

[Operator:]

Your next question comes as a follow-up from line of Youssef Squali with Jefferies & Co. Please proceed.

[Youssef Squali:]

Thank you. Just a quick follow-up to Stuart maybe. If my numbers are correct and if I look at the acquisition cost per member, it dropped to somewhere around 5450 for the first time in a while. Is that a reversal of a trend? Because I think three months ago or so you came out saying how you are planning on increasing that number, so I'm a little surprised by this. Or should we basically expect this to start accelerating again as you start spending more on media outreach for the COBRA type of clients that Gary talked about?

[Stuart Huizinga:]

Yeah, you are correct, it did go down sequentially from what it had been in Q4. We're, as always looking to be more and more efficient with what we do and more thoughtful about what we do, always looking at the ROI of everything in our marketing programs. Certainly one impact in Q1 relative to Q4 is the fact that it's a larger volume quarter for us in terms of submitted applications and so we get some scale there and scale effect. Because some of the marketing advertising expenses are fixed in nature and so we do get some improvement there. I don't really give guidance as far as where we think those numbers will go. But I will say that similar to a comment that we made in our last call, we look at marketing and advertising as a percentage of revenue and look to stay in a 35% to 39% range for 2008. And again, just a reminder, there is seasonality to the business, so that would typically be higher in Q1 and Q3 in that scale and lower relatively speaking in Q2 and Q4.

[Gary Lauer:]

Hey Youssef, it's Gary. It’s just another comment. We are pleased with our sales, our advertising and marketing costs or expenses in total for the first quarter, especially given the fact it's such a big quarter and we are able to increase our growth compared to a year ago as well. And you are right, it did come down sequentially. And really what that does is provides us yet even more headroom to go do some other things as well as we look to fuel the growth.

[Youssef Squali:]

Yeah I know, it makes sense. And lastly on the non-IFP business, if I look at the growth in estimated membership I guess, it was single digits. Any kind of comment on that?

[Stuart Huizinga:]

Yes. That's similar -- it is a little bit slower growth than the prior quarter. I think this question came up last quarter as well. In that category short-term products are included which is a high turnover product, and we've seen actually a little bit lower membership in that product year-over-year. We've done a little bit less cross selling of that. We used to cross sell that during the time that people were awaiting their underwriting results on our individual and family products and given the shortening of that cycle that we've had we're doing less cross selling of that product.

[Gary Lauer:]

Although as we start to ramp up our COBRA outreach the short-term products are a very, very viable alternative for people on COBRA. And so that may have some impact on volumes as we move ahead here in the next few quarters with that.

[Youssef Squali:]

Got it. Thanks a lot.

[Operator:]

Your next question comes from the line of Peter Costa with FTN Midwest Securities. Please proceed.

[Peter Costa:]

Hi guys. Can you tell me, sort to go through the math on the Progressive arrangement? Can you lay that out a little bit for us in terms of what that could be and exactly how you get paid there and what you pay there? And then also on the acceleration that you talked about for carriers on eApproval or plans on eApproval, can you say -- is that an acceleration for your business or just a shift to those health plans getting the acceleration so it comes out of sales that might have otherwise gone down another path?

[Gary Lauer:]

Yeah, Peter, first on Progressive, we've got hundreds of partnerships like Progressive and we don't ever disclose the specific arrangements for the obvious reasons that they're not all the same. But the Progressive one is; it's a performance-based arrangement like most of the others, so you'd assume that we won't be paying anything until there's a transaction or until we're deep into a transaction. So it's very advantageous from an economic standpoint for us. That's been the construct of these partnerships really right from the beginning as we've built this channel out. And there's nothing noteworthy about Progressive that makes it much different than any of the others in terms of how we go about paying or what we're going to pay and so on. And if it works like the others it will be a very profitable source for us as well. And if we're able to take advantage of a lot of the effective marketing and advertising they do, one would think that it could be a very good consumer application generation source for us. So we're looking at that.

[Peter Costa:]

Is there any co-marketing arrangement going on with them at this point, it's structured in there so that you could perhaps piggyback on some of the marketing that they do?

[Gary Lauer:]

I think by design there will be co-marketing because if they're out advertising and they're bringing people to their sites and so on, they're going to come to us as well.

[Peter Costa:]

But you're not paying for that in any way?

[Gary Lauer:]

No. Nothing technically emphatic about that, no. No, we typically don't with our partners. We typically are able to participate in the marketing advertising spend that they have in place without us adding to it or contributing in some form or fashion. On eApproval, we believe from what we've seen in the first few weeks here that some of this should be additive, and some of it may be taking from some other carriers as well, which makes it even more interesting because, first of all, the additive part is good. Part of the idea here has been eApproval is a compelling reason to come online to eHealth to evaluate and purchase health insurance. If that holds true, that will bring more consumers to us. But also, you've got the other side of that which is that when you come onto the site and you see these plans, you see the eApproval plans and you see the plans that don't have eApproval and you're going to buy a plan, if you move to the eApproval plan, arguably that's a consumer who may have gone to a different name plan but didn't because of the attraction of eApproval. And I like that because that argues strongly that those carriers who aren't participating in eApproval are going to be left behind or are competitively disadvantaged and need to embrace eApproval. So for some carriers who don't see this as an opportunity, and many do, probably some others just from a defensive standpoint are going to want or need to do this as well. But we think it's a big opportunity for all of them. But to answer your question specifically, we think there's a combination here. We think there's some new additive business and we think that there's some business that's moving from other carriers to eApproval because of its attractiveness.

[Peter Costa:]

That's great. Thank you very much.

[Operator:]

Your next question comes from the line of Justin Post with Merrill Lynch. Please proceed.

[Justin Post:]

Gary, when you think about accelerating either application growth or member growth, what do you really think is your opportunities here? Or are you just kind of hoping, your know kind of 25% going forward is the normalized growth rate for the company? What are your thoughts there?

[Gary Lauer:]

The 25% growth rate and kind of the big volume core in the first quarter for us is a very good growth rate, really good. We're very pleased with that and we're especially pleased at what it cost us to get that because we actually operated more efficiently than frankly I think we had anticipated and that's all good. Going forward, we're certainly in a good growth range; it could be more depending upon some of the opportunities that present themselves, and then how we pursue them as well. If this growth were a bit less, we're still in really good stead and feel very, very good about the kind of guidance we've provided and so on as well. Remember that there's not a linear or direct relationship between the application growth and revenue growth or even necessarily the member growth as well as you've seen. But at a 25% growth rate, given just the shear volume of the applications that we brought in, just with the kind of conversions that we have today; it's a significant revenue generator for us.

[Justin Post:]

Okay. Moving on to the license and other revenue. I don't know, Stuart, if you want to address this, but, it was down a little bit sequentially. How are the trends there, and do you think you're going to start seeing a reacceleration of sequential growth there?

[Stuart Huizinga:]

That area, it's a relatively new area for the company, and so, you need to keep that in mind in terms of looking at each quarter and how that compares to the prior quarter. 94% growth year-over-year, we feel very good about the growth we had in the quarter; can't promise it's always going to be in triple digits like we had last quarter. As we launch new license deals as an example, it takes some time for those to get traction. And so, you see us announcing different deals, but it does take time to work with those partners and get those flowing. And so this business is going to ebb and flow from time to time.

[Justin Post:]

Okay. The tax rate at 44%; is that kind of the long-term or do you see that coming down over the next few years? I know it's just a book rate, of course.

[Stuart Huizinga:]

Yes, it's hard for me to see into the coming years beyond this year. It is a little bit higher than we anticipated when we originally did our guidance. The underlying rate is exactly what we were expecting, but what we do find is that there's an item, they're called discrete items that may or may not pop up from quarter to quarter which we had in Q1, and it relates to stock option transactions. And we'll probably have that in the future from time to time, but it's hard for me to predict next year for that.

[Justin Post:]

Okay. And then the stock comp, I guess it's a little bit back-end loaded based on your full-year guidance. Do you see that putting any kind of margin pressure on your GAAP numbers for the next few quarters or how do you see that playing out into your estimates?

[Stuart Huizinga:]

The range that we gave is the same range that we had originally. So, I don't see any change in the margin pressure, but you are right, it is back-end loaded here. I should say that -- you see it's a pretty wide range for the year; it's hard to project out for an annual period. But what I'd like to say is that for Q2 we expect that to step up about a penny after taxes.

[Justin Post:]

Okay. And Gary, when you get into the HSA accounts, it looks like, I guess you're hoping some start happening over the summer. Would you think that would really be a marketing expense savings or really a growth accelerant? How do you see that affecting your financials over maybe a two or three-year period?

[Gary Lauer:]

I think it's a growth accelerator. It's, we think another very innovative way to bring a lot more business opportunity right to the face of these individual products. Remember what we've got going on in the environment right now is an erosion of membership people who get health benefits through their employers. There are just less employers providing health benefits directly to employees or dependents of employees. And by the way, many of these businesses are small businesses that don't want to not offer this to employees, they simply can't. It's prohibitively expensive. We're providing them here we think is a much more cost-effective option to be able to provide to employees a way to access good healthcare that's a lot less expensive than group health insurance. Group health insurance especially for small businesses, in many, many cases is prohibitively expensive just by the design of the products alone. And so, given that, what we're able to do here Justin, is we're able to access the business environment with individual products or bring the business environment to this individual product market through eHealth. So, very much, it can be an accelerator to our business over the next several years.

[Justin Post:]

Thank you.

[Operator:]

Your next question comes from the line of Christine Arnold with Morgan Stanley. Please proceed.

[Christine Arnold:]

Hi there. With respect to eApproval, do you charge a higher commission for that capability because you're arguably doing more, you're interfacing with their underwriting logic, you're going to have to constantly update that and you're providing an incremental service?

[Gary Lauer:]

Hi Christine, it's Gary. No, no change at all in the economics. We're not being paid more, and we're not charging more. It's just business as usual, and purposely. Everything we do is done in an objective and unbiased fashion in terms of the presentation of products to consumers. We want the carriers to feel the same way. Frankly, I think that hopefully that that's yet another attraction or attractive characteristic of the eApproval model for carriers as well.

[Christine Arnold:]

Okay. And then how do I think about what you get paid for, say a broker who's using your technology and submits an application versus what you'd get if it happened on your site?

[Gary Lauer:]

Yeah in almost all cases it's a single transaction based on an application being submitted, much like we do with the carriers. And it's certainly the sheer size of the dollars that are transacted there to us are going to be less than the recurring revenue. But the margin is as good or in some cases even better. In some cases it's almost a pure margin. So again the amount of dollars is less. The margin contribution is as good if not better.

[Christine Arnold:]

Margin being percent margin or dollars?

[Stuart Huizinga:]

Percent margin. Percent margin is much better on the licensing side, just a lower absolute dollar amount of margin.

[Christine Arnold:]

And then how I think about the sponsorship here? You've increased the number of carriers paying you to sponsor, you're coming out with a new sponsorship tool or whatever. But at some point -- everyone can't be preferred in terms of placement on the site in every market. So how do we think about where we are in tapping that potential?

[Gary Lauer:]

You raised a good point. This is one where there is clearly in terms of the model, the way it's designed today where there's a ceiling because there are only so many carriers that can take up sponsorship and there's only so much real estate available on the site for those carriers to take. Now having said that, as sponsorship becomes more effective for these carriers, presumably we can charge more as well. So there's certainly the leverage from that standpoint. But we've still got many, many markets yet that we can take sponsorship to that we haven't. We haven't broken it down ZIP code by ZIP code yet, we may be able to do that, we may want to do that. So there's a number of ways to go here. And I have to be honest with you, I haven't sized it. I couldn't tell you today, Christine, that we're at 50% of capacity or 30% or whatever. I frankly don't know. One of the reasons is that there are so many iterations of this that we could implement that it changes in a lot of ways. But clearly with the model as it exists today we've got a number of really good carriers participating in it. And when a carrier is participating in a state it kind of locks out all the other carriers so you can kind of assume that we're almost at full capacity there for whatever that period of time is. But there are a lot of ways we can go with this. This new thing we just rolled out where we let the carriers essentially brand themselves, they're really kind of putting the brand first and foremost and in front of the consumer rather than a specific product, is just another example of some ways to take sponsorship.

[Christine Arnold:]

Got it. Okay, thank you.

[Operator:]

(Operator Instructions). Your next question comes from the line of Sandy Braun with Gilder. Please proceed.

[Sandy Braun:]

Hi I'm sorry, I missed the early part of the call, so I hope you didn't already cover this. But could you just briefly go over what the differences are when the carrier considers approving a subscriber when it's done offline versus what may be done online through EPI III? Is it just an administrative turnaround or did they actually do some form of due diligence?

[Gary Lauer:]

It's Gary. So essentially the way that works is that the carrier working with us determines what their underwriting rules are, it's done in a very binary fashion so there's nothing subjective here. Think of it as a decision tree. And we simply take the application and the answers on the different questions of the applications and take it down the decision tree. If you get to the bottom of that and you pass through the underwriting rules you've approved, if not you move into just the normal underwriting process.

[Sandy Braun:]

Is it based on a person's medical history and is it far different -- is the decision process far different for the online approval than it would be for the approval that's handled offline?

[Gary Lauer:]

Yes, so the first part of the question is they're evaluating a number of things including, of course the health profile of the applicant. And it is somewhat different in that, as I said, it's binary so there's nothing subjective there. So you're either going to pass through whatever set of rules they've defined or not. And if not then you go into the normal underwriting process through which then someone can take a look at it, an underwriter and make some judgments and decisions then that obviously are going to be different. So if you haven't passed through I guess you could argue, if you go into the normal underwriting, that it's a little bit more difficult to go through the electronic instant underwriting, but if you passed it's not. And really what we're doing here is two things. We're attracting people to these products to apply it for them with the hope that they can be approved instantly and have coverage right then and there; if not they go into the underwriting cycle. And for many of these people who have got a health profile that passes through it's a really efficient way to buy the product.

[Sandy Braun:]

So would you say -- I don't want to characterize it one way or the other, but is the fear of being either too permissive in bringing subscribers into the plan through EPI III, would that be the biggest hesitation? And maybe they think people will be gaining the system somehow even though they have a defined set of rules online? Are carriers more hesitant to do that because there's such a big fear that they'd be letting in too many people who would not otherwise be coming in if they were approving them offline?

[Gary Lauer:]

Certainly haven't heard that. The carriers are obviously trying to be careful in their underwriting and so on and that would be represented in the rules. What we don't want to do is we don't want to have the approval set up so that one out of 100 applicants gets approved, that doesn't work.

[Sandy Braun:]

Sure.

[Gary Lauer:]

It would be great if 100 of 100 got approved, but that's probably not going to work over time as well. So some place between those two points is where it needs to land, that's one of the things that we're working through and working with the carriers on. In terms of what's represented on the application, it's important for me to add whether it's eApproval or anything else, in all 50 states it's fraud to misrepresent or not disclose and so on. We're very careful about that. We do things I think in a positive way to help people disclose everything that needs to be disclosed and that the carrier wants. Our experience with people not doing this correctly is surprisingly low, and we attribute that to the fact that I think we provide an environment here for people where they understand what they need to do and how to go about this and how it works. So I don't think that eApproval presents the opportunity for people to gain the system.

[Sandy Braun:]

Okay, thank you very much.

[Gary Lauer:]

Thank you.

[Operator:]

Ladies and gentlemen, that concludes the question-and-answer session of today's conference. I'd now like to turn it back to Mr. Gary Lauer, eHealth President and Chief Executive Officer, for closing remarks.

[Gary Lauer:]

Well great. Thank you. I just want to thank everyone for your participation, interest and support today and look forward to talking with many of you soon.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.