eHealth, Inc.
Q2 2008 Earnings Call Transcript

Published: 1 Aug 2008

[Operator:]

Welcome to the eHealth Inc. conference call to discuss the company’s results for the second quarter of 2008. (Operator Instructions) I would now like to turn the call over to your host for today’s call, Kate Sidorovich, the company’s Director of Investor Relations.

[Kate Sidorovich:]

Thank you all for joining us today either by phone or web cast for a discussion about eHealth Inc.’s second 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 line for questions. As a reminder, today’s conference call is being recorded and web cast from the investor relations section of our web site. A replay of the call will be available from the investor relations 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 the impact of the economy; of search category leadership position secondary [ph] to competition; the future strength of our business model; favorable industry trends and their drivers; eApprovals potential for driving increased conversion rates; unemployment stimulating demand in the ISP market; brand visibility driving growth and expansion; our pursuit of radio and television opportunities; the role of private health insurance in health insurance reform; the presidential elections impact on our opportunities; a data center expansion project; 2008 capital expenditures; future marketing and advertising expenses; future interest income; our effective tax rate for 2008; and our projected rate for payment of cash taxes. Guidance for total revenue stock based compensation expense, GAAP net earnings per diluted share, cash flow from operations and GAAP income tax rate for the year ending December 31, 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 these statements. We will 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 SEC 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 the 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 a consideration 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 web site under the heading Investor Relations. At this point I will turn the call over to Gary Lauer.

[Gary Lauer:]

Let me first go over the highlights of our second quarter results. Our revenue $27.5 million, grew 31% year-over-year and operating income grew 53% to $6.4 million resulting in record operating margins. Additionally we generated record operating cash flow of $8.6 million, representing 21% year-over-year growth. These results continue to demonstrate eHealth’s strength and sound business fundamentals. Our individual and family plans submitted application growth was 18% year-over-year, less than the 23% growth we achieved in the second quarter of 2007. By channel, direct continued to be the largest source of submitted applications at 40% up from 38% in the first quarter of 2008 and unchanged from the second quarter a year ago. The marketing partner channel contributed 32% and online advertising 28% of total submitted applications. Although we expected to generate higher application growth during the quarter, we are pleased with our channel mix, especially our direct and marketing partner channel contributions. Based on our second quarter application growth, we believe that while our underlying business model is sound and there are favorable loan term trends in our market, we have been somewhat impacted by the US economic environment. In the first quarter we saw the potential for some economic factors that could drive demand for our services. For example, an increase in unemployment rates could cause previously ensured employees and their dependents to lose employer based coverage, face expensive COBRA options and as a result consider the individual market, increasing our total market opportunity. Another example is the attractiveness of our solution for those who currently have coverage but are looking to save money by replacing it with a more affordable policy. At the same time, in a challenging economic environment consumer spending for any new product or service may slow. To the extent that consumers have postponed making health insurance purchase decision, it can affect our application growth. At the same time, as Stuart will describe, we have not seen a significant change in our retention rates. We believe that in the second quarter the negative influences of the current economic environment on our application growth rates may have prevailed. Search activity in the health insurance category, within the major online search engines, was indicative of more cautious online shopping patterns by consumers. This was most evident in our online advertising channel. During the quarter we observed slower year-over-year growth for click throughs, or consumers that come to us through search. I would like to stress that we did experience growth in the online advertising channel, but at rates slower than we’ve seen in previous quarters. It is also important to emphasize that our search category leadership position continues to be strong. For example, on high traffic search key words on Google, like health insurance and health insurance quotes, we either directly or through many of our marketing partners, receive traffic from sources that comprise approximately 50% of first page organic listings and first page paid listings. In addition, our click through share on Google as compared to other major players in our category is holding steady and even increasing year-over-year. Our overall leadership within search remains a very important priority for us and a continuing barrier to potential future competitors. Not withstanding the current economic environment, we believe our business model is strong. We continue to observe favorable industry trends, including increased carrier focus on the individual and family plan market, which is emerging as an area of growth in the managed care space. As we previously discussed, this is driven by the erosion of employer-based coverage, a slow down in carriers’ commercial group enrollment, and a growing emphasis on consumer directed health care among other factors. Our competitive positioning also remains strong with no other comparable commercial platform available in the market. Our operating model continues to be highly scalable as demonstrated by this quarter’s record operating margin. We continue to generate significant amounts of cash flow from operations and have a balance sheet with no debt and $136 million in cash and investments. We remain focused on profitable growth and continue to be disciplined in our sales and marketing spend, especially in this challenging business environment. During the quarter our marketing spend represented 34% of revenues, down from 37% in the first quarter of 2008 and below our target range of 2008 35% to 39% of revenues. Our cost of acquisition per member, if measured using the acquisition cost metric we provide, remained attractive providing for a substantial amount of incremental profit margin on our member ads. Stuart will discuss our sales and marketing and membership metrics in greater detail later on this call. Our conversion rates appear to have improved during the second quarter. We believe that the tightening of the underwriting criteria that we started to observe during the second half of 2007 persisted; however it was more than offset by our channel mix and improved efficiency in converting submitted applications into paid members. We also believe that the penetration of our e-approval technology can over time drive our conversion rates to even higher levels. Let me now highlight some of our key marketing initiatives. As you know it has been our strategy for years to have diversified marketing programs not overly dependent on any single channel or partner. We are very pleased to have a 40% contribution from our direct channel this quarter which, as you know, has a much lower cost of acquisition than our online advertising or marketing partner channels. Our marketing partner channel generated healthy year-over-year application growth. We also had strong new deal flow during the second quarter, which we hope will assist in driving future application growth. For example, we have brought on board a number of high profile partners in the financial services vertical including Severing Bank, Lending Tree and Key Bank. We are also please to announce Humana as a new carrier-marketing partner for us. This relationship is similar to existing relationships with Aetna and United Health Care who offer our services to their website visitors residing in states outside of their own product offerings. We also signed and are in the process of launching a pilot program with MetLife, targeted primarily to customers of MetLife that are early retirees. During the second quarter we also launched our first partner program for the business HSA platform with the National Federation of Independent Businesses. NFIB is the nations leading small business association with over 475,000 business members nationwide. Our business HSA product now allied in 35 states and the District of Columbia, allows small business employers to co fund and administer their contributions to employee, individual health savings accounts and provides an easy to navigate accounts center for the employees. EHelp generates revenues from commissions on the HAS eligible health insurance purchased by the employees through our platform. We continue to evolve and develop the HSA platform. Looking forward we continue to believe that increases in unemployment can stimulate demand in the individual and family plan market and are expanding our efforts to assist those who have recently lost their employer sponsored health coverage. During the quarter we developed a content rich COBRA learning center, an educational collateral to teach consumers about COBRA and the affordable alternatives that may be available to them in the individual market. We are marketing this COBRA alternative program through new and existing partners. We are also doing outreach to educate people on COBRA alternatives through media, both broadcast and print. In addition to our focus on driving near term application growth, we are now increasingly focused on brand building initiatives. Our goal is to increase the number of consumers that are aware of the internet as a venue to research and purchase affordable health insurance and are familiar with eHealth and our platform. We believe that building the visibility of our company with consumers is an important driver of long-term growth and direct channel expansion. As we have shared with you on previous calls, we’ve been reviewing the opportunities in the television and radio media areas and introduce pilot programs in limited markets. In June we began running television commercials on national cable networks. We also started a regional radio campaign in several major cities near the end of the second quarter. We are encouraged with the results of our initial testing and plan to continue to pursue this area as an important element of our expanding marketing programs and company branding. We are working to increase our awareness through public relations activities as well. The US media is focused on unemployment, inflation, and healthcare on a daily basis. We are reaching out to national, regional, and local media to educate consumers and small businesses on how they can find affordable health insurance plans that match their needs through eHealth. Our partnerships with over 180 of the leading health insurance carriers are one of eHealth’s significant competitive advantages and an important barrier to entry into our space. In the second quarter we continued to expand the selection of healthcare plans on our website and launched new products with Empire, BlueCross, BlueShield in New York, Companion Life in Ohio, the Scott and White Health Plan in Texas, Golden Rule United in several states including North Carolina, PHP&I which is a new regional plan in Fort Wayne, Indiana and Clear Choice in Montana. We also added dental plans from Delta Dental and Ameritas. As part of our efforts toward enhancing the consumer experience on our site and achieving deeper integration with our carrier partners’ eHealth introduced the instant approval technology, eApproval which went live with Anthem BlueCross of California in late March of this year. We now have over three months of data available from our launch of eApproval. In the 95 days between its launch and the end of the second quarter the application growth for eApproval enabled Anthem plans exceeded 30% as compared to the 95-day period prior to this launch. While we excluded Anthem’s sponsored plans from this data, it is important to recognize that factors other than eApproval technology itself could impact eApproval volumes, such as the prominent marketing of eApproval plans with this feature on our site, carrier marketing activities and some other circumstances. Our high margin technology licensing and sponsorship business continues to grow. During the second quarter 28 carriers participated in our sponsorship program by paying us to sponsor or highlight a specific plan or their brand in a specific geography. This represents a 22% increase over the first quarter of 2008 when 23 carriers participated in our sponsorship program. Based on favorable feedback and improved sales conversions from a pilot program, we started to transition our individual and family plan sponsorship program from plan level to brand level sponsorship. With brand level sponsorship a consumer can click on the placement and see all of the plans available from the sponsored carrier. This approach provides more value to carriers while creating better clarity for consumers of sponsored versus non-sponsored results. The number of carriers licensing our eCommerce technology also continues to grow. During the second quarter we launched our technology with five carriers in ten states. In addition, we entered into agreements with two new carriers near the end of the quarter putting the number of total carriers live on our licensing platform at 27 and more than 69 carrier states. Out of the 27 carriers on eHealth’s licensing platform currently a growing number are using our technology to enable their broker channel further expanding eHealth’s reach. To date recognizable brand names like Kaiser, Mid Atlantic, Celtic, GHI New York, several LifeWise, Coventry, and BlueCross BlueShield carriers are using our technology platform. Now I’d like to make some comments on the current political landscape. We receive a lot of investor inquirers on this topic. The campaigns of both major party presidential candidates have emphasized the need to extend health insurance coverage to the nations uninsured population. While key differences exist in their various approaches, both leading candidates have indicated support for utilizing private health insurance as a basis for reform as opposed to a nationalized healthcare system. We believe in the coming years there is a viable opportunity for the new president to work with congress to develop a solution for the uninsured. If successful we believe that such a solution is likely to rely on the continued use of private health insurance; further more there are several scenarios which could produce a new focus on the use of individual health insurance where eHealth is well positioned. Consequently we believe the increased national focus and attention on health insurance resulting from this year’s election does not pose any serious risks to our countries private health insurance system and in fact may produce significant opportunities for eHealth. I would like to wrap up my prepared by reiterating that the fundamentals of our business are strong. Obviously in the second quarter we believe we felt some economic impact as evidenced by our application growth. As a result, we are adjusting our 2008 guidance. We are, however, being very aggressive in the marketplace because we believe there are significant opportunities before us. We remain excited about eHealth’s future and growth opportunities. EHealth has become the leading online store where consumers can easily find, compare, and buy health insurance from over 180 brand name companies. Well over one million Americans have bought their health insurance through us and we believe that our value proposition is more relevant than ever. We continue to make good progress influencing online adoption and raising the visibility of eHealth through our strategic marketing partners, traditional media and other programs. I believe that increased consumer awareness will be crucial in driving the long-term growth of our company. Now I’d like to turn the call to Stewart who will go over our financial results for the second quarter.

[Stuart Huizinga:]

I will now discuss our financial results for the second quarter of 2008. As Gary mentioned, we believe the economy had some impact on our application growth during Q2. At the same time, we continued to generate solid year-over-year growth in revenue, income and cash flows. Our operating model remained highly scalable, allowing us to further enhance our operating margin both sequentially and as compared to the second quarter of 2007. Starting at the top line, our revenue for the second quarter was $27.5 million, an increase of 31% over the second quarter a year ago. Commissioned revenue was $24.8 million, an increase of 25% over Q2 2007. Our year-over-year commissioned revenue growth was mainly due to continued growth in our membership base. Our sponsorship, licensing, and other revenue was $2.7 million in the second quarter of 2008, a 116% increase over $1.3 million in the second quarter of 2007. The $2.7 million of sponsorship, licensing, and other revenue this quarter included approximately $470,000.00 in revenue relating to a 1x item. In the second quarter we had 132,600 new approved members. Our total estimated membership at the end of Q2 2008 was over 579,000 members, which represents 25% growth over estimated membership we reported at the end of the second quarter of 2007. Our individual and family major medical plan estimated membership, which generates the majority of our commissioned revenue, grew 27% compared to estimated membership we reported for the second quarter of 2007. I’d like to comment on number retention, but before I do I’d like to remind you that when we look at maturing we estimate our membership based on trailing historical data and so our view of retention is based on estimates that are backward looking. So currently we are looking back at the fourth quarter of 2007 when estimating our Q2 membership. We have seen a small up tick insuring for our individual and family major medical plans based on this data; however the numbers that we’re observing are within our historical range. We are not seeing anything significant here and we will be watching this metric carefully. We continue to estimate our revenue weighted average product retention to be in excess of two years. In the second quarter we achieved 18% year-over-year growth in individual and family major medical plans submitted applications down from 23% year-over-year growth in the second quarter of 2007. Our GAAP marketing and advertising expenses as a percentage of revenue increased modestly to 34% as compared to 32% in the second quarter of 2007, but declined relative to 37% in the first quarter of 2008. As Gary mentioned earlier on the call, we have been and plan to remain disciplined in our marketing spend. We intend to invest opportunistically with a goal of keeping marketing and advertising expense on a GAAP basis in the 35% to 39% range as a percentage of revenues for the remainder of 2008. 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 we aggregate costs of acquiring new members. This metric continued to be very favorable for us. Based on Q2 2008 commissioned revenues earned per estimated member per month, it would take approximately six months to recover the cost of acquiring the new members we estimate that we added in the second quarter. Assuming a revenue weighted average estimated product retention in excess of two years, this leaves us with a substantial amount of incremental profit margin on our member ads. In Q2 our total expenses as a percentage of revenue continued to decline on a year-over-year basis resulting in a record operating margin and demonstrating the scalability of our operating model. When compared to Q2 of last year, our non-GAAP operating expenses, excluding stock based compensation increased by 21% compared to a 31% revenue growth over the same period. Our non-GAAP operating margin excluding the effective stock-based compensation in both years increased from 21% in Q2 of last year, to 27% in Q2 this year, an all time record. We saw improvements in several areas in Q2. Our non-GAAP customer carry and enrollment costs, which excludes stock based compensation expense, declined as a percentage of revenue from 14% of revenue in the second quarter a year ago, to 11% of revenue this quarter. Non-GAAP technology and content costs which also exclude stock based compensation expense declined from 13% of revenue to 12% for the comparable period. We also continued to realize the benefits of scale in the general and administrative area which declined on a non-GAAP basis, from 18% of revenue, in the second quarter of 2007 to 14% in the second quarter of this year. As a result of the above, our Q2 operating income increased by 53% on a GAAP basis and 64% on a non-GAAP basis, excluding stock based compensation expense, compared to the second quarter of 2007. It’s important to note that these growth rates are much higher than our comparable GAAP and non-GAAP net income growth rate for 30% and 37% respectively as our 2008 non-operating income is being impacted by declining interest income and higher tax rates compared to 2007. Interest and other income was approximately $900,000 during the quarter down year-over-year from $1.3 million in the second 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 off set by increase in cash and investments on our balance sheet. We expect our interest income to continue to decline slightly on a quarterly basis for the remainder of the year relative to this quarter. Our approach to investments remains conservative. Our marketable securities primarily consist of money market funds, and highly liquid investment grade corporate and US government sponsored enterprise bonds, commercial paper and certificates of deposit. GAAP pre-tax income increased from $5.5 million in the second quarter of 2007 to $7.3 million in the second quarter of 2008, a 35% increase. On a non-GAAP basis, excluding the effect of stock based compensation in both years, pre-tax income increased by 44% from $5.8 million last Q2 to $8.3 million this year. It is important to note that we estimate that our 2008 effective tax rate for GAAP purposes will be 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 carry forwards that reduced the cash taxes we pay. Our fatal NOLs coming into 2008 were approximately $100 million. These included NOLs related to stock option deductions, but 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 will obtain a cash flow benefit from them. GAAP net income increased from $3.2 million in the second quarter of last year to $4.2 million in the second quarter of 2008, a 30% increase. Non-GAAP net income excluding the effect of stock based compensation in both years increased 37% from $3.5 million in the second quarter of last year to $4.9 million in the second 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 cash flow from operations grew 21% to a record $8.6 million from $7.2 million in the second quarter of 2007 primarily driven by our income growth for the quarter. Year-to-date our operating cash flow was $14.5 million reflecting 37% growth over the first half of 2007. Capital expenditures for the second quarter of 2008 were $1 million, a significant component of which was the purchase of call center software to enhance the efficiency of our customer care professionals. Primarily driven by our cash flow from operations, our cash and marketable securities balances increased to $136 million at June 30, 2008. Our cash and marketable securities constituted more than 94% of our total assets, excluding deferred tax assets, at the end of Q2. Given this and the fact that we have no debt, we continue to have a very strong balance sheet. Driven by the factors addressed by Gary earlier on the call, we are adjusting our guidance for the full year ending December 31, 2008 based on information currently available. Total revenue is expected to be in the range of $111.5 to $113.5 million compared to previous guidance of $114 to $117 million. Stock based compensation expense is expected to be in the range of $3.8 to $4.3 million compared to previous guidance of $4 to $4.5 million. GAAP net earnings per diluted share are expected to be in the range of $0.50 to $0.57 per share compared to previous guidance of $0.58 to $0.63 per share. Cash flow from operations is expected to be in the range of $30 to $32.5 million compared to previous guidance of $33.5 to $36 million. Our GAAP income tax rate is expected to range from 43% to 44.5% for the full year ending December 31, 2008 compared to previous guidance of 43% to 45%. 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. In addition I’d like to mention that we anticipate a 1x project in the second half of 2008 that will impact our CapEx this year. This project is aimed at expanding our data center operations. Currently we expect our full year CapEx to be in the $3 to $4 million range.

[Operator:]

(Operator Instructions) Your first question comes from Steven Halper -Thomas Weisel Partners

[Steven Halper -Thomas Weisel Partners:]

Gary, how do you know with certainty that it’s the economy which resulted in the slower application growth as opposed to some other factor, be it competitive or health plan activity, things like that?

[Gary Lauer:]

We have looked at a lot of things, as you might imagine. We’ve looked at what we believe to be the momentum that the carriers are having in the marketplace. We’ve investigated a search and this search channel in the category of health insurance specifically, with our other channels as well, working with partners and so on. The conclusion we come to is that there seems to be some, the best conclusion we come to today is that there seems to be some impact from the economy. We have certainly done a very thorough examination of all of our internal metrics and so on and as you have heard us say, our conversions are either equivalent to or better than they’ve been in the past, so we don’t think there’s an execution issue from that standpoint. From a competitive standpoint we have not seen nor are we aware of any new significant competitor in the marketplace.

[Steven Halper -Thomas Weisel Partners:]

So have you factored in just a lower growth expectation for the remainder of the year for submitted application?

[Stuart Huizinga:]

Yes. When it comes to our guidance we’ve looked at what we just did in the second quarter and used that as essentially a baseline, roughly, for our expectations for the second half of the year, plus or minus from that point. But in setting the range we also looked at the possibility that there may be further deterioration in the economy from here which could impact us potentially not only on the submitted application side, but we also factored in some potential should churns pick up from where we are right now.

[Steven Halper -Thomas Weisel Partners:]

So you have assumed some further deterioration.

[Stuart Huizinga:]

We have within our range. In setting the low end of our range we certainly have.

[Steven Halper -Thomas Weisel Partners:]

You are sitting there with well over $5.00 per share in cash, Gary, has the board or will the board consider a share repurchase at these levels?

[Gary Lauer:]

Yes, Steve we have taken a look at that, as you might expect at this level. What we’ve found is that at these levels doing a share repurchase is somewhat accretive. Not significantly so. We have also taken a look at what the impact would be two, three and four years out as well. We continue to look at that. We’ve had some board discussion and we’ll have some more of it.

[Operator:]

Your next question comes from George Sutton of Craig-Hallum Capital.

[George Sutton:]

I know you manage your numbers very closely and I’m curious when you were seeing the quarter evolving and you saw that the 18% growth in applications was lower than you expected, I’m curious that you stayed at that 34% marketing rate. Can you just help us with the logic there?

[Gary Lauer:]

Well you could argue that we spent less than we would have liked to have spent. Remember our range is 35% to 39%.

[George Sutton:]

That’s my point.

[Gary Lauer:]

Yes, we looked at a number of different of venues, we certainly could have spent more money to bring in more applications, but they’d be outside of our boundaries in terms of what’s profitable and what’s acceptable and so on and we feel really strongly, especially in what could be a very challenging economic environment that we really adhere do the discipline and the processes that we’ve had in the company for some time and that’s exactly what we did. Now having said that, it’s important to note that we are doing television advertising right now as I am speaking and radio as well and if that continues to produce some of the results that we’ve seen you should expect that we’ll continue to do that as well and that’s new. That has a different kind of return for us than some of the more established channels as you might know. It’s harder to track and so on. At least on an isolated basis has a higher cost of acquisition, but one area that we’re looking at and I actually feel very, very strongly about right now. I should also probably make the point and we’ve never commented about our application growth or anything else on a monthly basis but as we look back and really examine the second quarter both as it was developing, but also after the second quarter finished, what we saw and what we experienced was out of the three months May was the softest month, interestingly.

[George Sutton:]

Second question on the HAS platform, you began to market that with NFIB. I know you had some presentations with them. Can you just give us a sense of how, what kind of a reaction you were seeing from potential customers?

[Gary Lauer:]

Yes, NFIB is very enthused about it, from the CO of NFIB through the rest of the organization that’s involved with it. We’ve had very good response to it. We’re not ready yet to start disclosing volumes and so on. I would note that we’re still evolving it, we’re still adding software, we’re still developing it and so on, but we remain very enthused and optimistic about what this can do in the marketplace and we’re getting very good feedback from other partners that we approach with this HAS platform proposition as well.

[George Sutton:]

Lastly if I could just ask you a quick question on the COBRA side, as you begin to try to pursue that type of an opportunity what sort of expectations were you factoring into your guidance with respect to that market?

[Stuart Huizinga:]

Not a lot frankly. As you look at the unemployment changes so far this year, we haven’t really seen anything, you know major, shifting to date, so we really haven’t factored in a lot from that.

[Operator:]

Your next question comes from Jim Cleveland.

[Kevin Copeland:]

Thanks, Kevin Copeland in for Jim. I had a couple of questions on conversion rate. Could you give us a little more color just on, was there anything in particular driving that improvement and then on eApproval do you have an idea how many carriers you expect to be using that by the end of the year and then looking out what kind of impact can that have on conversion rates?

[Gary Lauer:]

Let me take the second part of that, on eApproval, first. As we have said in the past we fully expect to be implementing eApproval with other carriers in new and additional markets. We are very pleased with the growth that we saw in the first 90 some odd days of the approval with Anthem in California and we think that in man ways this is kind of an important lighthouse for many other carriers who are taking a look at this and considering it. Whether it was the technology specifically, the marketing we did around it, or the combination of those things, we certainly saw a marked increase in the application growth volume there and we’re pleased about that and we think other carriers can experience similar thing with eApproval and we also believe that it’s a very compelling reason for consumers to come online and to buy from us.

[Stuart Huizinga:]

On the closed ratio side, as we mentioned we did see a little bit more continuous stringency on the part of the carriers in terms of what they were converting for us, but the positive factors that we can point to are two-fold, one is that our customer center reps have been much more aggressive out in the marketplace following up with consumers to convert and have seen some good results there. Another factor is our mix of our submitted applications that you saw. Our direct proportion was about 40% this quarter, it was about 38% previously and those converts a little bit better than the other channels.

[Operator:]

Your next question comes from Sameet Sinha of JMP Securities.

[Sameet Sinha:]

From the mid-point of revenue guidance you took that down by about 2.5%, EPS by about 12%, can you talk to that? Are you expecting all metrics [inaudible] application conversion rate, churn customer acquisition, could you elaborate on that?

[Stuart Huizinga:]

No at the midpoint, as I mentioned, we were really looking at the levels that we saw in applications in the second quarter and kind of building the midpoint around that, so clearly not to duration there and as I mentioned it is our down side case that really included potential increases in churn.

[Gary Lauer:]

I think Stuart made a good comment earlier that in the range of guidance we have given you we made some assumptions about some deterioration that if there is some it’s included in this guidance. We’re not planning on that at all. I want to make that point really clear. If it does occur, if the economy continues to deteriorate and it has further impact on our application volumes and/or on churn, which we don’t think we’re observing yet, we built that in. But, right now with what we see and what we’ve experienced, we think our challenge at the moment is simply on consumers who may be deferring the decision once more to purchase health insurance and we’ve got to be even more aggressive and smarter about our marketing to convince people how important this is, that in an economic environment like this that they have health insurance.

[Stuart Huizinga:]

I think another comment on the EPS side is, one of the things that we’ve been facing is there are several issues on the non-operating side of the business. Interest income, as I suggested has been a lot lower than when we came into the year. We were already seeing headwinds there that have continued even further here in the second quarter and the other is our tax rate as well is higher than we had originally anticipated, so something we faced. We certainly saw it in the first quarter already, but thought we were going to be able to navigate around that as we went along, but those are definitely things that have impacted us.

[Sameet Sinha:]

Second question, Gary you spoke about TV and radio being new channels that you’re excited about, but you also mentioned that these have a higher cost of acquisition, so is that high cost of acquisition offset by getting larger volumes or applications a large number of members? Is that your initial experience?

[Gary Lauer:]

Yes, if you isolate television, for example, just stand-alone, it’s got a higher cost of acquisition than our other channels. But if you assume that there is, what we look at as really spillage from television, that is it will influence people who go to search, influence people who recognize us on partner sites, certainly influence word of mouth and so on. The real objective here is to get all boats to rise. We did some TV advertising in the second quarter, our direct increased to 40%. I can’t tell you definitively that that is the only reason, but we think it’s had some influence there and we like that. Right now the message is so relevant about affordable health insurance and that we’re the store where you can buy it and so on and we really want to start to push that message very hard and that’s exactly what we’re doing.

[Operator:]

Your next question comes from Willis Taylor.

[Willis Taylor:]

Are you seeing health plans change their plans to roll out new IFP products or to market existing IFP plans?

[Stuart Huizinga:]

To my knowledge I don’t think we’ve seen at this point a major change of plans, swapping in and out and so on, you know we’ve got a number of new carriers that have joined us. Anthem, WellPoint has certainly gotten somewhat more aggressive in all the marketplaces and so on. I know they’ve taken some pricing steps; that’s not unusual. We see carriers ebb and flow in the market competitively, but nothing in terms of any major change, but more and more interest in the individual market by these plans, there is no question about that. In fact if you look at the comments of several of them in their most recent financial results earnings calls, many of them have pointed at the individual market and made comments about it and a year ago they didn’t talk about the individual market.

[Willis Taylor:]

You talked about getting smarter in how you market to that consumer who is hesitating to buy insurance. Could you talk about how you’re adapting your marketing message there?

[Gary Lauer:]

Yes we think it’s very, very important that people understand that health insurance is much more affordable than they may perceive it to be. I’ve always contended that people think that for the most part health insurance is only available by businesses that purchase it for their employees, but that you and I could never buy it for ourselves, or afford it for ourselves, or our family members; when in fact for many, many people the opposite is true. We’re looking at a lot of our messaging right now. We’re going to be focusing much more on the fact that you can buy directly from eHealth, that plans are surprisingly affordable, that many plans are much more robust than people think; we’re going to be getting that message out in our TV advertising, some of the radio messaging we’re doing and a lot of other messaging that we’re working through right now as well, in addition to a lot of our PR work.

[Willis Taylor:]

It sounded like you had a very strong licensing quarter again. Do you think in the current environment that health plans might change their desire to buy your licensed software?

[Gary Lauer:]

It’s a good question. The other thing I point out in addition is that we had a good sponsorship quarter in the second quarter and what we think we may be observing is that as it’s a more competitive environment or the market perhaps is a little bit smaller because of the economy, the plans are looking for more ways to be able to market and sell their products and sponsorship on our side is one of them and licensing of the technology to be able to sell their products efficiently, directly is another. I can’t tell you for certain that that is why sponsorship is up and licensing is up, but anecdotally we hear that from the plans and we believe that’s probably one of the influences. The other thing I’d point out that’s important to note is that we’ve got a growing number of these licensees now who are rolling out our technology to the desktops and the laptops of their agents and brokers to get them online as well, which really extends our reach. I also wanted to point out that as I said in the script, we now have 27 carriers who are licensing our technology and I think in the past we told everybody the number, but it’s getting to be what we think is a significant number of carriers.

[Operator:]

Your next question comes from Peter Costa of Finn Midwest Securities Corp.

[Peter Costa:]

Stuart can you tell us the effect of the average lower share price in the quarter on your APS? Then Gary, can you talk about the growing conversations about health connectors or medical marketplaces or what ever you want to call them exchanges under the various versions of reform, in particular the Light Bennett [ph] bill?

[Gary Lauer:]

Yes let me talk about the connectors. As everyone may know in Massachusetts there was legislation passed that’s commonly referred to as the common law fact that requires, that mandates that every resident in Massachusetts have health insurance. There was really no individual market to speak of there, it’s what’s called a guaranteed issue community rated sate, which is the reason why many carriers wouldn’t participate. Part of the approach here is to have something called a connector which was essentially a technology or internet way for people to be able to find plans and so on. There’s a connector in Massachusetts. In our view the view of the Boston Globe and some of the carriers, it’s moderately effective at best. There are a few other states who have taken a look at it. We’ve had some discussions with them. I think the one to note is the idea that Baroque O'bama has talked about nationally of having some kind of a national connector or umbrella. It doesn’t seem to be any further detailed or thought through then kind of what I’ve just described to you in terms of how it would work but we see that if we ever got to something like that on a national scale, we see that as a potential huge opportunity for our company, because it is exactly what we do today and maybe in some of the other states as well. At the end of all of this, whether there are mandates or whatever kind of focus there is on getting more people covered, more and more it appears that both democrats and of course republicans feel that the private sector in these individual products need to be a very important part of that solution set and we think that’s good for us. \

[Stuart Huizinga:]

Peter on your first question, the impact of the lower share price on our EPS, it’s immaterial to us. We had a small step up in the number of weighted shares this quarter, a little bit smaller than last quarter but really immaterial.

[Operator:]

Your next question comes from William Morrison of Thinkpanmure LLC.

[William Morrison:]

Stuart your sales and enrollment costs were down from last quarter but kind of consistent with the fourth quarter. I was just wondering if there was something one time last quarter or this quarter that brought that number down?

[Stuart Huizinga:]

Yes, the main reason it was down this quarter was our production in terms of new approved members was lower than we had as our goals and so some of the compensation at our customer care center is linked to performance incentive plans; most of that comes from lower incentive payments this quarter.

[William Morrison:]

Gary I heard you talk a little bit about continuous underwriting and kind of a case study of one of the original share companies to sign up with and doing some continuous underwriting. Last quarter I believe you said you had about a half dozen or a dozen additional companies looking or in the pipeline. I am curious how many or any that you added this quarter.

[Stuart Huizinga:]

Yes we indicated last quarter we had several in the pipeline; that’s the case today. Although we didn’t add any more in the second quarter, as we add them we’ll be announcing them. One of the reasons we won’t announce them before we add them is that we want to keep the carriers who are participating feeling that they’re advantaged and we don’t want to upset the marketplace until we actually get there with the products.

[Gary Lauer:]

I don’t know if you heard it Bill, what I did say was that the way we measured the growth of applications for Anthem in California over the 95-day period that we’ve had those plans in place was in excess of 30% and we’re very pleased with that.

[William Morrison:]

If I just looked at, if I kind of grow a sense the non-sales and marketing expenses a little bit consistent with your history, to get to your guidance, even the high end of your EPS guidance, it looks like I’m going to have to bring sales and marketing as a percent of revenue up towards the high end of that range that you’ve talked about in the past, the 30 products in the 39%, is that generally accurate or where else would the costs be coming to get to your guidance in the back half?

[Stuart Huizinga:]

That is more towards the higher end of the range that we put out. There are a few reasons for that. One is that the second half is actually seasonally higher than the first half of the year. We have higher volumes and the marketing expenses rise with that and so that’s pretty natural. We’ve built in an assumption of the overall cost of acquisition per member being a little bit higher than the average that we saw in the first half. Then as Gary mentioned earlier, we are looking to continue to spend on TV and radio and some other offline venues at a little bit higher pace in the second half then we did in the first half.

[Operator:]

Your next question comes from Justin Post of Merrill Lynch.

[Matt Schindler:]

Yes hi, this is Matt Schindler for Justin Post. Actually my question was answered a few questions ago.

[Operator:]

Your last question is a follow up question from Steven Halper.

[Steven Halper -Thomas Weisel Partners:]

Gary when did you say that you started to see some deterioration in the submitted ap trends?

[Gary Lauer:]

Well the month that surprised us was May. May was the weak month for us. We have tried to find a lot of ways to connect that. It’s certainly the month when there seemed to be an awful lot of media visibility about gas prices going over $4.00 per gallon nationally. Over Memorial Day weekend there as a tremendous amount of focus about that. Did that have some impact, maybe, probably. CNN at that time did a segment on what it costs to buy gas and food and it was about a fellow who decided to drop his health insurance, but keep his family covered, coincidentally; so there were those kinds of things, but it was certainly in that May time frame.

[Steven Halper -Thomas Weisel Partners:]

So did June pick up?

[Gary Lauer:]

Well the only comment I’m going to make about that is that May was the softest of the three months.

[Steven Halper -Thomas Weisel Partners:]

Okay and do you want to say something about July?

[Gary Lauer:]

Yes, but I won’t. I do want to make one other comment that’s somewhat related to this. We have seen some analysis that’s been done by some of these outside research firms that look at visitors to websites and things of that nature and we’ve actually seen some data that’s been published that shows that our visitor counts have gone negative year-over-year in the first and second quarter for example and I just want to make this comment one time. The accuracy of what’s been reported there and what people have picked up is far, far from the reality. In fact the growth that we’ve experienced in visitors in the first and second quarter year-over-year is orders of magnitude larger and different than what’s been reported by some of these research groups.

[Steven Halper -Thomas Weisel Partners:]

So where do you think their methodology is flawed?

[Gary Lauer:]

Steve I don’t know. I really haven’t studied their methodology or how they’re going about it, but we’ve seen this in the past, but it was really pronounced in this last quarter. I actually had some people ask me about it and it just became apparent to me that this was becoming something that was probably important enough for me to address. I should also tell you that visitors are important to us, but it’s not what we drive our business with. What we drive our business with is working to find potential consumers who need and want health insurance and they’ve got a need that we can satisfy and that’s why we are so hawkish about how we spend money and where we spend money and so on. I will add that our visitor counts have grown and they’ve grown quite nicely.

[Gary Lauer:]

I just want to thank everyone for your time and look forward to talking with many of you over this next quarter at different major conferences and so on and thanks again.