eHealth, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter fiscal year earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your speaker today, Ms. Kate Sidorovich, Vice President of Investor Relations. The floor is yours.

Thank you. Good afternoon, and thank you all for joining us today, either by phone or by webcast, for a discussion about eHealth, Inc.' 's fourth quarter and fiscal year 2020 financial results. On the call this afternoon, we'll have Scott Flanders, eHealth's chief executive officer, and Derek Jung, chief financial officer. After management completes its remarks, we'll open the lines for questions. As a reminder, today's conference call is being recorded and webcast from the IR section of our website. A replay of the call will be available on our website following the call. We will be making forward-looking statements on this call that include statements regarding future events, beliefs, and expectations, including statements relating to our expectations regarding our capabilities and market opportunities, our strategy to drive Medicare enrollment growth, increase quality of enrollments, and achieve high lifetime values. Our expectations regarding our Medicare business, including Medicare enrollment growth and consumer demand. Our investments in technology and retention initiatives and expected returns of these investments. Our ability to grow our internal agent force, increase agent productivity, and improve customer engagement. Our sales and marketing strategy, including our online strategy and strategic partnership channels. Our expectations regarding our financial performance, the profitability of our business, seasonality, churn, lifetime values, plan persistency, member estimates, total acquisition cost per member, and operating expenses. and our outlook for the first quarter of 2021 and our full year 2021 financial guidance. Forward-looking statements on this call represent eHealth's views as of today. You should not rely on these statements as representing our views in the future. We want to take no obligation or duty to update information contained in this forward-looking statement, whether as a result of new information, future events, or otherwise. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in our forward-looking 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 FCC website or from the IR section of our website. Please refer to the information included in our press release and in our SEC filings, which can be found in the About Us section of our corporate website under the heading Investor Relations. And at this point, I will turn the call over to Scott Flanders. Thank you, Kate, and welcome all.

As outlined in our preliminary report three weeks ago, the fourth quarter marked a soft ending to a strategically important year. Although 2020 presented challenges, eHealth made notable progress building out our capabilities, evolving our strategies, and positioning the company to capture significant market opportunities ahead. With that in mind and as we enter a new fiscal year, I want to take a step back and speak to what we have built, where we are going, and why we are confident that the actions we are taking will help address the issues that affected our performance last quarter and springboard eHealth into our next phase of growth and success. eHealth has a strong foundation that is differentiated from others in our industry. We are an organization rooted in technology with a best-in-class consumer-facing eCommerce platform. Over the last four-plus years, we have executed a deliberate plan that has enabled us to drive significant growth. We grew our approved Medicare members at a compound annual growth rate of over 40% between 2017 and 2020, while continuing to rapidly accelerate online penetration. Our Medicare revenue and segment profit have grown at a compound annual growth rate of 54% and 66%, respectively, over the same time period. We ended 2020 with an estimated 876,000 Medicare members and over $790 million in commissions receivable. At this stage of eHealth's evolution, we are enhancing our focus on driving quality of enrollments, customer engagement, and higher lifetime values while we continue to scale and profitably grow our share of the important Medicare market. Part of this strategy, in 2020, we launched two strategic initiatives aimed at strengthening our value proposition. The first was an investment in new technologies to dramatically improve our ability to analyze consumer needs and provide them with superior tools to improve accuracy of plan recommendations. The second is a multifaceted program to improve member retention. Our online strategy is a major element of this program. Online users have persistency that is significantly higher compared to those that engage with us telephonically. As a result, these enrollments have higher LTVs while also requiring lower per-member agent costs, providing for superior member economics. Our Customer Center that was launched in October of last year also plays a key role in improved member retention. The Customer Center leverages our online capabilities and is built around our customers and their data in order to personalize customer experience and deepen our relationships with our members while increasing brand awareness. We expect to start seeing clear returns on these investments in the form of efficiency, customer engagement, and retention as early as the first quarter of this year. We strongly believe our progress can be extended to drive growth and market share expansion through high-quality Medicare enrollments. This belief is further validated by our recent announcement that HIG Capital entered into a binding agreement to make a $225 million investment in e-health. HIG is a blue-chip investor that shares our view that Medicare distribution is rapidly moving toward a comparison shopping model and that our technology-driven platform is uniquely positioned. to leverage this trend and achieve market leadership. This investment is subject to customary closing conditions for this type of transaction. While we have ample liquidity to execute on our strategy in the near term, HIG's investment provides us with flexibility to opportunistically accelerate our growth. We are also excited about the pending addition of HIG's Managing Director, Aaron Tolson, to our Board of Directors. Aaron brings valuable expertise and helping companies leverage technology to disrupt their industry. Turning now to our results for the fourth quarter and full year of 2020. Approved members for our main product, Medicare Advantage, grew 30% in the fourth quarter compared to Q4 of 2019. While we continued to grow our enrollments at rates above the overall Medicare Advantage market, these volumes were below our expectations. I'll get into the challenges from the quarter and the actions we are taking to address those in a moment, but it's important not to lose sight of the progress that we've made. First, we have made significant progress towards improving the quality of our Medicare enrollments, which is critical to long-term profitability and cash flow generation. Our fulfillment mix shifted toward channels historically characterized by better retention and higher LTVs. 43 percent of our fourth quarter applications for Medicare major medical products were submitted online, including unassisted and partially agent-assisted online enrollments, up from 36 percent a year ago. Additionally, 81 percent of our telephonic enrollments in the fourth quarter were fulfilled by our internal agents, compared to 68 percent the year before. In addition to an ongoing shift in fulfillment mix, We have rolled out an enhanced lead segmentation and allocation process, introduced a dedicated customer retention team, and revised compensation structure for our internal agents, all in an effort to better align our sales organization with our broader strategic focus on enrollment quality and member retention. We are already seeing some encouraging early signs out of our retention team based on the number of their interactions with our existing members and relationships preserved, whether by keeping a member on the same policy or switching them to another plan on eHealth's platform. Further, our recently launched customer center has already garnered over 100,000 accounts to date. And as more customers become a part of our customer center, we believe their satisfaction and confidence in their Medicare plan choice will increase, a critical element of retention. We expect that our fourth quarter 2020 Medicare enrollments will prove to be of superior quality from a retention perspective compared to our fourth quarter enrollments a year ago, driven by the initiatives I just described. Under our application of the ASC 606 Revenue Recognition Standard, we expect that these initiatives will drive actual lifetime commissions from fourth quarter enrollments in excess of lifetime values that we have booked as revenue for the fourth quarter. This is because our estimated lifetime values are based in large part on historical observations, which do not take into account the expected impact of these initiatives. That said, based on the enrollment cycle in the Medicare business, we will have more visibility into our retention metrics for this new AEP cohort when we report our first quarter results in April. Our 2021 guidance currently assumes that our Medicare Advantage LTVs for the full year will return to 2019 levels, or roughly a 6.5% year-over-year increase. In our individual and family plan business, we reversed several years of major medical plan enrollment declines with a 4% growth driven by a 15% growth in approved members on qualified subsidy-eligible major medical plans in 2020 compared to 2019. The lifetime values of these qualified plans have also increased by over 20% compared to a year ago, driven by favorable retention observations for these plans last year. We support the Biden administration's decision to extend the enrollment period in the IFP market through the end of the first quarter of 2021 to allow consumers additional opportunity to get coverage in this unprecedented environment. We also encourage expansion of subsidies for more Americans who currently cannot afford an ACA plan. At the same time, our fourth quarter included internal and external setbacks, which we began taking steps to address as soon as they were identified. The main driver of our fourth quarter enrollment shortfall was the underperformance of our outsourced agent model. A large portion of our outsourced agents converted consumer demand at rates well below our expectations. Some of this was due to agent onboarding taking place later in the year compared to prior years. Because of COVID, we were also forced to conduct a remote training and supervision model. We also saw limitations of the outsourced model in terms of access to high-quality agents. This became more obvious as we scaled our telesales operations. As soon as we recognized the issues with our external agents, we took bold action by terminating roughly one-third of our outsourced agent force. It is worth noting that during AEP, our internal agents performed above our expectations, with their fourth quarter conversion rates increasing 12% year-over-year in the aggregate, exceeding our projections of a 10% improvement. On the demand generation side, we observed a significant increase in the combined direct TV spend by carriers and competitors during the annual enrollment period compared to a year ago, leading to higher per-member acquisition costs in this channel relative to our expectations. Combined with lower call conversion rates by our vendor agents, this significantly reduced our return on investments in the DRTV channel. To contain our acquisition costs, we pulled back on our DRTV spend during the quarter, leading to lower than expected volumes from this channel. We also believe that external factors, including the pandemic and, to a lesser extent, the prolonged election cycle, impacted consumer demand on our platform. Going into the 2020 Annual Enrollment Period, we expected a tailwind from more seniors shopping for Medicare online or over the phone instead of meeting face-to-face with a traditional Medicare broker. However, we now believe that there was an offsetting impact on demand from seniors postponing non-urgent health care, which in our view led to reduced Medicare plan switching. Given that a sizable portion of our leads come from the strategic partner channel, including hospitals, provider networks, and pharmacies, we believe the reduced foot traffic and utilization of their services had a negative impact on our enrollment volumes. In conclusion, we believe the factors that impacted our fourth quarter performance were isolated and can be corrected in the near term. We took decisive critical action to fix these issues and cement a strong foundation for our long-term performance and continue to work hard towards this goal, which leads me to 2021 and beyond. As you've just heard me describe, we have an understanding of the issues that impacted our fourth quarter performance. We also have a clearly defined plan in place to address them. We are executing on this plan while continuing to pursue strong Medicare enrollment growth and expansion of our market share. First, we've accelerated the shift in telesales away from third-party vendor agents and toward in-house agents. Historically, our internal agents produced a conversion rates that are on average 30% better compared to vendor agents, and this gap further widened in 2020. Our goal is to have less than 10% external agents in our total telesales headcount for this year's AEP. We plan to grow our internal agent force through a combination of agents at our customer care centers and agents that work remotely. Both groups performed well in the last AEP. Notably, we have taken the lessons we learned from onboarding during this remote work environment and implemented a new onboarding oversight program that we are confident will also help increase agents' productivity and success. Second, we are optimizing our marketing strategy to emphasize channels like our partner and online channels where we can better differentiate our platform from the competition by leveraging our unique e-commerce capabilities and the largest plan selection among broker platforms. The partner and online channels also drive enrollments at higher-forecasted LTVs and in the case of strategic partnerships, lower acquisition costs per member compared to the more traditional channels. Importantly, the initiatives that I have just described are already demonstrating results. First quarter to date, we have seen a 30% increase in agent productivity compared to the same period in 2020. Combined with strong performance in our online marketing channel, this has contributed to over 50% increase in approved Medicare Advantage members quarter-to-date compared to a year ago. The early success of these initiatives gives us confidence to pursue additional, broad-reaching changes to our marketing and sales strategy. We are moving away from transaction-driven marketing to a focus on customer lifecycle, campaigns that span member acquisition and onboarding to retention-focused activities to cross-selling, with a broader range of products. Before I turn it over to Derek, I want to emphasize a few key points. In 2020, we grew our Medicare Advantage approved members 39% and made a major shift towards enrollment quality and customer engagement. We implemented a number of key strategic initiatives and bolstered our sales and marketing organizations. We have aggressively and proactively addressed the factors that impacted our year-end performance. Ultimately, our business is strong and we have the financial firepower to accelerate our growth. As eHealth CEO, a long-term member of the Board of Directors, and one of its largest individual shareholders, I am very excited about the foundation we've built and the investments we're making to scale the company into its next phase of growth and innovation. The initiatives that we have deployed in recent months put us on track to to meaningfully approve performance in 2021. I now turn it over to our CFO, Derek Young.

Thanks, Scott, and good afternoon, everyone. On today's call, I will go over our fourth quarter financial results in greater detail, provide our 2021 annual guidance, and assess the key drivers behind our 2021 projections. We expect the impact of the operational enhancements outlined by Scott will translate into meaningful improvements in our Medicare unit economics this year, allowing us to drive high quality Medicare enrollment growth while increasing our profitability. Throughout today's presentation, I will be making references to our fourth quarter and four year 2020 growth rates relative to 2019. As a reminder, In the fourth quarter of 2019, we worked with an external corporate valuation consultant to increase the accuracy of our Medicare Advantage lifetime value estimates with an emphasis on improving our member retention forecasting by incorporating statistical tools. As a result of the enhancements to our LTV model, in Q4 of 2019, we booked a 42.3 million positive revenue impact from a change in estimate for expected cash commission collections for Medicare Advantage plans since we began selling such products and through the third quarter of 2019. For the purposes of year-over-year comparisons in my remarks today, I will be excluding this $42.3 million in revenue from our 2019 results. Fourth quarter 2020 Medicare segment revenue was $269.9 million. or a 12% year-over-year growth, excluding the $42.3 million in Q4 of 2019 related to the enhancement of our Medicare Advantage Lifetime Value Model. Four-year 2020 Medicare revenue was $516.8 million, an increase of 28% compared to a year ago, excluding the $42.3 million in 2019. Medicare revenue growth was driven primarily by an increase in approved Medicare Advantage members of 30% and 39% for the fourth quarter and four-year 2020, respectively. It also reflects an increase in non-commissioned revenue, in particular, revenue generated from our Medicare plan advertising program. Total non-commissioned revenue grew 99% in the fourth quarter and 89% for the four year 2020 compared to 2019. Strong growth in approved MA members was offset by decline in our constrained lifetime values or LTVs. LTVs in our Medicare Advantage business declined 10% in the fourth quarter and 6% for the four year 2020 compared to a year ago, which is consistent with our expectations and is reflective primarily of increased churn levels that were reported earlier last year. As a reminder, pursuant to ASC 606 Revenue Accounting, we are estimating in-period lifetime values based on historical churn observations. For our 2021 guidance discussion later on the call, I will share our LTV projections for 2021 which will reflect the positive impact expected from the retention activities that we put in place as well as an increase in broker commissions rates this year. The number of approved Medicare supplement and prescription drug plan members declined in the fourth quarter and four year 2020 compared to a year ago. In the Medicare supplement business, this was primarily driven by our decision to shift marketing and call center resources towards the MA product which continues to gain popularity among seniors as the quality, selection, and affordability of these plans have continued to increase. The decline in approved PDP members was driven by lower PDP volumes from our pharmacy partner channel compared to a year ago, combined with a reduced demand for standalone PDP plans compared to medical-advantaged products with built-in prescription drug coverage known as MAPDs. For the fourth quarter of 2020, the Medicare segment generated a profit of $82.6 million. This compares to $107 million in the fourth quarter of 2019, excluding the impact of the $42.3 million in Q4 of 2019 related to the enhancement of our Medicare Advantage LTV model. For the full year of 2020, Medicare segment profit was $102 million compared to $112.9 million in 2019, excluding the $42.3 million. The year-over-year reduction in Medicare segment profit was driven primarily by the underperformance of our vendor agents and softer than expected consumer demand in certain marketing channels during the AEP. I will go into more detail during my review of the fourth quarter operating expenses later on the call. The estimated number of commissions generating Medicare members was approximately 876,000 at the end of 2020, an increase of 23% compared to 2019, reflecting growth that was well ahead of the overall Medicare enrollment growth as reported by CMS. Our estimated Medicare Advantage membership of 533,000 grew 32%, also significantly ahead of the overall Medicare Advantage enrollment growth in the United States. The trailing 12-month churn rate in our Medicare Advantage business that we calculate based on our estimated membership and new paying members was 40%. An improvement compared to the 42% we reported in Q3 and in line with our expectations. Please note that our estimated fourth quarter TTM churn still reflects the elevated churn rates that we observed and previously reported early in 2020. When we report first quarter results in April, we expect to be able to show the initial impact of our retention efforts implemented last year. We expect that MA members that were enrolled during the last AEP in Q4 2020 will churn at lower rates in their first year compared to the AEP cohort from 2019. Year one of enrollment is a critical period from a retention standpoint because it has historically been the highest churn during any annual period in a policy life. While we'll have some data on churn when we report Q1 results, given the time lack of our data about churn, we'll have a more comprehensive view later in the year as we learn more about the impact of the Medicare open enrollment period that takes place during Q1 and offers MA members another opportunity to switch plans. Fourth quarter 2020 revenue from our individual family and small business segments was $23.4 million. a 22% increase compared to a year ago. Full-year 2020 revenue in this segment was $66 million, an 11% increase compared to 2019. Revenue growth was driven primarily by residual or tail revenue from our existing members on individual and family and ancillary plans. We continue to see increased member retention in this business, in particular for subsidy-eligible ACA plans and short-term products. Commission revenue from our small business group products declined 23% in the fourth quarter and 4% for the full year 2020 compared to a year ago, as we continue to focus our investments in the Medicare business. The individual family and small business segment remained profitable on a standalone basis, generating segment profit of $15.9 million for the fourth quarter and $39.4 million for the full year 2020. Our estimated individual and family plan membership at the end of the fourth quarter was approximately 116,200, down 10% compared to the estimated membership reported at the end of fourth quarter a year ago. The estimated number of members on small business products was approximately 45,800 at the end of the year, a 7% increase compared to a year ago. Total revenue for the fourth quarter was $293.3 million, or a 13% year-over-year growth, excluding the $42.3 million in Q4 2019. Revenue for the full year 2020 was $582.8 million, a 26% increase, excluding the impact of the $42.3 million in 2019. Now I will review our operating expenses and profitability metrics. Our plan for 2020 was to build on two consecutive years of improving EBITDA profitability achieved in 2018 and 2019. We targeted EBITDA margin expansion through fixed cost leverage and lower agent costs per approved Medicare member and plan to conduct more of our enrollments online. While we slow down our fixed cost growth in 2020 relative to 2019, and successfully increased the percentage of fully unassisted online enrollments. The positive impact from these factors was offset by underperformance of our vendor agents and overall Medicare enrollment shortfall. During the fourth quarter, our vendor agents converted demand at lower rates relative to our expectations and to 2019 levels. Combined with higher lead costs in the direct TV channel, that we observed this AEP, this resulted in unfavorable per member acquisition costs in our Medicare business. In addition, we made investments ahead of the AEP to prepare for the larger enrollment volumes that we anticipated, including prepaid marketing campaigns and vendor agent capacity expansion, which involved a meaningful upfront investment. Total variable acquisition costs per approved Medicare member grew 23% in the fourth quarter of 2020 compared to Q4 of 2019, with customer care enrollment costs growing 18% and marketing costs growing 26% over the same time period. After we terminated the underperforming vendor agents during a quarter, our overall call center productivity metrics rapidly improved, but not enough to fully mitigate the impact of the vendor agent underperformance on our per-member acquisition costs. On the fixed cost side, our fourth quarter non-GAAP technology and content costs, which exclude stock-based compensation, acquisition costs, restructuring charge, and amortization of intangibles, increased by 14% compared to Q4 2019. Non-GAAP general administrative costs declined by 2% over the same time period. Fourth quarter 2020 adjusted EBITDA was $84.2 million representing a 29% EBITDA margin compared to $100.3 million or 39% EBITDA margin in the fourth quarter of 2019 excluding the $42.3 million. Adjusted EBITDA for the full year 2020 was $83.7 million or 14% margin. This compares to 90.9 million or 20% margin, excluding the impact of the 42.3 million positive revenue impact in 2019. Please refer to our fourth quarter and fiscal year 2020 earnings release for a description of how we calculate adjusted EBITDA. Gap net income was 59.9 million for the fourth quarter of 2020 and 45.5 million for the full year 2020. Our fourth quarter, 2020 cash flow from operations was negative $96.9 million, compared to a negative $56.8 million for the fourth quarter of 2019. For the full year, cash flow from operations was negative $107.9 million. Capital expenditures, which include capitalized internally developed software costs, were approximately $23.8 million for the full year. Our cash, cash equivalents and marketable securities were 93.4 million as of December 31st, 2020 with no debt. We ended the year with a commissioners receivable balance of 792 million. And now I'll provide our 2021 annual guidance. Please note that this guidance excludes potential impact from our transaction with HIG Capital pending its closing. We are forecasting revenue for 2021 to be in the range of $660 to $700 million, with Medicare segment revenue in the range of $621 to $659 million, and individual family and small business segment revenue in the range of $39 to $41 million. We expect GAAP net income for 2021 to be in the range of $42 to $57 million. We expect 2021 adjusted EBITDA to in a range of 100 to 115 million. 2021 Medicare segment profit is expected to be in a range of 138 to 155 million and individual family and small business segment profit is expected to be in a range of 18 to 19 million. Corporate shared service expenses excluding stock-based compensation and depreciation and amortization expense, is expected to be in a range of 56 to 59 million. GAAP net income per diluted share for 2021 is expected to be in a range of $1.53 to $2.08 per share. Non-GAAP net income per diluted share for 2021 is expected to be in a range of $2.77 to $3.26 per share. Cash used in operations is expected to be in the range of $85 to $95 million, and cash used for capital expenditures is expected to be in the range of $24 to $27 million. The midpoint of our 2021 guidance implies 17% total revenue growth with roughly 24% Medicare revenue growth compared to 2020. Medicare enrollment growth is expected to be the main driver of revenue growth this year with approved members for all Medicare products expected to grow in the low 20s and Medicare Advantage enrollments in the high 20s compared to last year. Medicare enrollment growth is expected to be accompanied by expansion of our Medicare Advantage lifetime values, which we forecast to increase approximately 6.5% for the full year 2021 compared to 2020. At the same time, we currently project that our non-commissioned revenue will be roughly flat with 2020 levels after growing close to 90% last year. In addition, we expect to see a decline in our tail of residual revenue in 2021. After booking around $38 million in net tail revenue in the aggregate across our Medicare, IFB, and ancillary products in 2020, we currently forecast to have little to no tail revenue in these areas in 2021. Based on a midpoint of our adjusted EBITDA guidance, we expect to generate a margin of roughly 16% compared to our 2020 adjusted EBITDA margin of 14%. This margin expansion is expected to be a driver primarily by fixed cost leverage and a reduction in per member acquisition costs in our Medicare business as a result of improved productivity of our agent force and to a lesser extent due to changes to our marketing mix with decreased reliance on DRTV and increased contribution from fully unassisted online enrollments to our total Medicare applications. The forecasted reduction in our per-member acquisition costs combined with an increased Medicare Advantage LTVs is expected to deliver a meaningful expansion in our Medicare member economics for the full year 2021 compared to 2020. The positive impact of these factors on our EBITDA margins will be partially offset by year-over-year decline in high-margin revenue items, including non-commissioned revenue and residual revenue. I would also like to make some comments with respect to the seasonality that we expect this year. The fourth quarter will continue to contribute disproportionately to revenue and earnings driven by the timing of the Medicare annual enrollment period, and ACA open enrollment period selling season. In fact, we expect the fourth quarter would drive the vast majority of our revenue and EBITDA growth in 2021 compared to 2020. In terms of quarterly cadence of our Medicare Advantage LTVs, we're currently forecast for LTVs to be down year over year in the first and second quarters of 2021, reflecting the impact of churn in the first half of last year prior to the deployment of our retention program. We project that LTEVs will start increasing in Q3, compared to Q3 2019, with the largest year-over-year increase of 10% or better expected in the fourth quarter, driven primarily by what we believe was a significant increase in quality of MA enrollments in Q4 of 2020. So while we expect to see strong MOA growth in the first quarter, it will be offset by lower LTVs and lower tail revenue, resulting in total revenue growth in a low single digits compared to Q1 2020. We also expect first quarter adjusted EBITDA to be down compared to the first quarter of 2020, also due to lower LTVs and lower tail revenue. Finally, with respect to our online strategy, We expect that online enrollments will represent 43% of our total 2021 Medicare major medical enrollments compared to 37% in 2020. I want to remind you that these comments and our guidance are based on current indications for our business and our current estimates, assumptions, and judgments, which may change at any time. Our actual results may differ as a result of the changes in our estimates, assumptions, and judgments. we entertain no obligation to update our comments or our guidance. And with that, I'll turn the call over back to the operator for Q&A.

As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that is star 1 on your telephone keypad. Your first question comes from the line of George Sutton from Craig Halem. Your line is now open.

Thank you. I wanted to address what you just said about your online goal for 2021 being 43%. You ended Q4 with 43%. I'm curious why that number isn't higher given that is clearly a strategic advantage you have in the market.

Well, we hope it's better. Proves conservative, George. We did end the year with 43% in Q4, but historically that percentage is weighted to the fourth quarter. So we've always started off below our annual target and then made it up in Q4. Got you.

You mentioned your HIG investment will give you well more cash than you need to operate the business, but you did say it would give you opportunities to accelerate your growth or opportunistically accelerate your growth. Can you give us a sense of what that might pertain to? Really, it's...

Not intended to be opaque. It's about our ability to grow faster than the conservative guidance that we're establishing.

Gotcha. Okay. That's it for me. Thanks, guys.

Your next question comes from the line of Toby Sommer from Trust Securities. Your line is now open.

Thank you.

Could you talk about pure online enrollments and whether those are forecasted to grow sort of as a proportion within that 43% figure in guidance this year?

Right, Toby. So last year, we increased our guidance for Q4, our expectation for online assisted and unassisted, to a range between 45% and 50%. And we came in just shy of that at 43%. It was the unassisted that hit our number. But our assisted, which is agent, it's a partially agent and partially e-commerce enrollment, is where we missed. And it's because the agents were newer and did not deploy our tools with the same efficacy as seasoned agents.

Okay. Could you talk about the customer center and maybe catch us up on how you think the rollout went and when this will start to impact the business and how?

Well, it was very encouraging, certainly the bright spot of Q4 for us. We launched it in October. We hope between 20,000 and 25,000 seniors would register. As you know, you've reviewed it. It requires two-factor authentication, at least an hour of data entry on both drugs and doctors, and by coming in, At over 100,000 registrations, we feel very bullish about it. A good number of our enrollments came through customer center. It's early for us to predict what the benefit will be on retention, but I think if you just think about it logically, a senior that's invested that amount of time to enter their information, we believe will be less prone to to responding to a direct mail piece or a DRTV ad and switch when they would have to repeat all of that information over the phone, where now they have it in a secure format, password protected. So we feel that this is going to improve our engagement with the seniors, but also we think the persistency will be very long on seniors that have made the effort to enter all of that information.

Okay, last question from me. Have you strategically, what are your thoughts on the company needing to have some different businesses to keep your internal agents busy, productive, and well-paid during the non-Medicare selling seasons?

Yeah, I'll start, but then I'd like Tim to weigh in on this. We've relied primarily on an inbound model, and we are increasingly deploying outbound efforts and powering all of our agents with a cloud-based telephony system that enables them to toggle back and forth between inbound and outbound, and we're seeing productivity improvements from that. But, Tim, perhaps you could speak to this a bit.

Sure. I mean, you've hit an important point, Scott. We are pushing with our internal agents for them to be productive in more ways and more versatile than they've been in the past. And we piloted having outbound agents switch to inbound, as Scott just mentioned, and saw them be more productive during the AEP than inbound only. We are toggling our agents between retention activities and acquisition activities. But we are also experimenting with other business lines, And as we have success, that will provide additional opportunities for our agents to earn in Q2 and Q3. So the workforce is becoming more versatile, and as it's an internal workforce, we're able to invest in them more aggressively than we could with a vendor workforce.

Thank you.

Your next question comes from the line of Jay Langer Singh from Credit Suisse. Your line is now open.

Hi, thank you. Just a quick clarification on your comment that your target of having 10% external agents in 2021 versus 43% in 2020. And just curious, why not go all internal agents? Are there any contractual obligations with any of these vendor agent groups? Just curious about that 10% figure.

Yeah, I understand the question and it's logical. What we found when we terminated over a third of our external agents, and as we came into the year, the new year, we typically let go a vast majority of the seasonal agents, but we have over 100 that are performing at rates higher than our average internal agents. So when you staff up to that magnitude of external agents, some of them are going to be outstanding. and that's why we think it could be as much as 10% of our capacity might be third-party agents. We don't have anything against it, Jalindra. It's just that that model did not perform for us last year, and so we're going to materially reduce our reliance on the third-party agents.

That's fair. And did you give the figure, like, how many total agents you plan to add this year in 2021? It's a lot, Tim.

Well, we're not giving a specific number, but it will be our ramp is entirely focused on the internal agent side. So we will have flexibility and ongoing relationships with our vendor partners. But the intention is to just keep the high performers and to build our ramp on the internal side. And we're starting earlier this year. Our first class has already been hired. So our ramp is already underway for the AEP. And we'll probably provide more guidance later on in the year.

Okay. And then one last one. Can you flesh out a little bit more about your outlook with respect to non-commissioned business, which you expect to be flat year over year in 2021? Some of your peers have talked about expanding these dedicated partnership with health insurers to drive these non-commissioned business. Just curious about your thoughts there and how do you think about long-term growth prospects in that non-commissioned piece of the business?

Tim, I'll let you take that one.

Well, I think the non-commissioned piece, you know, it really in some ways lags the performance. And so with us having, you know, underperformed in Q4, we have modest expectations of how much we can expand the non-commissioned line. But as we're able to see the benefits of this shift in strategy and outperform expectations, then we think that can expand again in the future.

Okay, thanks.

Your next question comes from the line of Dave Stieblo from Jefferies. Your line is now open.

Hi there. Good afternoon. Thanks for the questions. Scott or Derek, I have a question for you on just the margin outlook over time. It wasn't too long ago last year that you guys talked about growing the business from almost a mid-20% margin in 2020. something that would approach 40% in 2024 and then operating cash flow turning positive in 2022. So can you give us a sense of how you feel about those longer-term targets? Is the business change in a way that it's going to make it much harder to achieve those objectives that you had outlined in such a way that the glide path there will be slower or that those peaks just might not be attainable?

Yeah, I'll start and then pass it to Derek. We are a year behind, so the issues that we dealt with last AP have extended out the period by which we will achieve cash flow positive, for sure. But the issues that we faced, Dave, were really isolated, and they're not industry issues. So we just ran into... the natural end of our ability to make the seasonal agent model work. And so the underlying margins are actually have opportunity to improve. You know, we commented in the formal script that notwithstanding our missing Q4, our internal agents improved productivity by 12% over 2019. We had projected that they would improve productivity by 10%. So we had a 20% overperformance in their productivity compared to what we expected. So we see plenty of margin room. Will we get to the 40s in the out year? Maybe not. But will it be high 30s? I have no doubt that we will achieve those levels. Derek?

Yeah, so Dave, Scott is right that we are roughly a year behind in terms of the cash flow expectations relative to what we have previously stated in terms of when we would break cash flow, break even operating side. On the margin, which ties closely to the unit economics, implied in our guidance is an improvement in unit economics to levels that we saw in 2019. So again, about a year behind on where we've been tracking to that. Now with that said, we did succeed in our unassisted online enrollment targets for 2020, which is an area of biggest cost leverage as we expand online. So that is still an item that will give us favorable traction in terms of ability to leverage online to get more financial leverage.

Okay. Got it. And then on the, The guidance you guys talked about, the MALTVs increasing 6.5%, that's embedded in the outlook. Can you give us a sense of how much of that is rates versus the improved retention? And a follow-up question on the retention area there. I know you guys are encouraged by some of the signs that you're seeing. I guess one concern I would have is in the fourth quarter, can you tell me about the productivity and the quality of the business that those external agents produced? Obviously, you decided to eliminate a third of them, but, you know, is there any risk that those folks there would be just not having duration as long as you'd expect, and how do we just get comfortable that you're going to really capture that retention improvement that you're expecting to? Well, one –

Okay, go ahead. Go ahead, Derek.

Yeah, I was going to take the LTV piece, and I'll pass it back to you, Scott, and Tim as well, on the expectations relative to improvements and retention. So, on the LTV piece, Dave, it is important to keep in mind the seasonality of the LTE improvements, which I commented on in the prepared remarks. So, the important benchmark is the 6.5% that you talked about on a four-year basis, but behind that is the 10% improvement or more in Q4 given that that is the biggest impact that we expect given the retention efforts and also obviously the quarter where AEP happens. And within that 10%, you know, at least, you know, 5.5%, so more than half of that will come through as a rate increase given what CMS has determined in terms of maximum rate increase for this year. If you recall and when we outlined full set of retention and churn initiative turn improvement initiatives Earlier last year the aggregate of the potential improvements of those inertia initiatives plus the rate change would actually Drive us to be better than what we have implied in our guidance So we are actually hoping that that will come through but obviously our guidance is below that level

Right. What I would add to that is we had 68% of our enrollments in 2019 fulfilled by internal agents, which have, of course, higher persistency than the external agents, and this year was 81% of our enrollments. So we had a significant mixed shift toward internal agents, which should, in addition to all of our other initiatives, the retention team, the changes to sales compensation, the lead segmentation being revised from just focused on conversion to focused on total LTV and profitability. All of those factors, Dave, really should contribute to significant LTV upside for us.

Your next question comes from the line of Greg Peters from Raymond James. Your line is now open.

Good afternoon. This is Marcos calling in for Greg. Can you guys hear me okay? Sure. Yeah. Excellent. My first question is on churn. And congratulations on getting that number down in the fourth quarter. And if I heard correctly, Scott, you mentioned that approved Membership here so far in the first quarter is about 50% better than last year. I think that in the fourth quarter of last year, you reported some, no, the first quarter of last year, I apologize, you reported some similar growth rates, and that's when churn spiked. So I guess the question is, as you guys are sitting here, you know, over half of the first quarter being done, how should we be thinking about churn this first quarter as it relates to what happened last year?

Yeah, so we believe that the churn that we experienced last year when we learned that we had elevated churn, that it related to the 100% MA growth that we generated in the 2019 AEP. So the churn was happening in Q1, but it was related to enrollments in Q4. So bottom line is we're expecting to show a a healthy decrease in churn when we report at the end of Q1, but we don't have a read on exactly what that number will be. You know, both Derek and I have tried to point out that there is a lag in reporting on these churn statistics, and so we don't want to go out on a limb today and speculate on what that number is, but all indicators are that churn is continuing to track favorably. It was slightly favorable in Q4, down from 42 percent TTM to 40, but we're expecting a more significant decline after Q1.

David Chambers- Excellent. That's really helpful. My follow-up is on slide nine of your presentation, and I'm looking here at the green line, the commission cash collections. And last year it dipped down, but this year it remained stable in a pretty healthy clip. Is there, you know, something, you know, different there? Can you guys give us some more color on that number? Was there any pull forwards? Anything you could add there would be helpful.

There was not any pull forward impact, you know, operationally. As we've improved our data and analytics around monitoring churn, it does also have a correlated effect on ability to collect cash. So that's not a coincidence since cash collection is an indicator whether someone is still on a policy for us or not. So we've been making improvements from that perspective. There has been some operational improvements also along the lines of reconciling our data to whether we are retaining broker record status with our carriers, which will allow us to continue to collect commissions. That's also reflected in improvements.

Got it. If I can just squeeze one more in. So the outlook does not include the impact with the agreement for the special dividend. Does it include the dividends you'll be paying on the preferred shares, and will that be taken out of operating PS?

Yeah, it's a good question. So you're right, it does not include the impact of the investment, and the impact of the investment will not affect our guidance as it is today on the revenue EBITDA side, also below EBITDA. It's a complicated security, so there could be a range of impact in terms of line items below EBITDA. I expect that we will see the impact on Dividend payout, which will be below net income in terms of what would be between EBITDA and net income. And then I would expect an impact on diluted shares because it is a convertible that has the ability to convert in the common, which will fluctuate depending on the strike price and also stock price, you know, given the current valuations.

Excellent. Thank you for your answer, guys.

Your next question comes from the line of Elizabeth Anderson from Everycore. Your line is now open.

Hi, guys. Thanks for the question. Can you talk about, I know last year in 1Q and 2Q you did have some shift in terms of some of the churn numbers. I just wanted to make sure that we understood those numbers so that when we get to 1Q that we're sort of comparing on an apples to apples basis.

Yeah, Elizabeth, that's a good reminder. We had reported in Q1 last year a TTM churn rate for Medicare Advantage of 38%. And then in subsequent disclosures, we had commented that we had 20,000 additional churn that was observed post-reporting that really happened in Q1. So on an adjusted basis, the Q1 TTM number in 2020 should have been closer to 43%. And that is the right comparison for this year as we get into Q1 2021. Got it.

That's super helpful. And can you just clarify maybe one more thing on the – the sign-ups in terms of the persistency that you were talking about of online versus telephonic. Did the online persistency, was that ahead of both the internal and the external agents in the quarter?

Scott, I'll take that one. Yes, historically, online enrollments have had higher persistency than any telephonic method.

I wasn't sure whether it was just external or internal and external. It just sort of points to the emphasis of the growth there. Perfect. Thank you.

Next question is from Yaron Kinar from Goldman Sachs. Your line is now open.

Thank you and good evening or good afternoon. I guess most of my questions have been answered, but one thing I wanted to ask about was the onboarding pressures that you called out in the external agency. Why wouldn't those pressure points impact the internal agency as well as you were onboarding new agents internally as well? Tim?

So we think the primary reason is that the hands-on management that our subject matter experts deliver is to the vendor agents in season just wasn't able to be done in the same way or with the same effectiveness as it has in previous years. And so we did not expect to see such a divergence because our internal remote agents were actually on par with the rest of our workforce. So it was that we weren't able to be on site with them, coaching them in the same way that we have in years past that we feel like they were less effective.

Okay. So if you were to measure the productivity of first-year internal agents this year compared to prior years, how would you compare the productivity or the measurement of success?

They were higher than previous years because they were a large portion of our overall internal mix or internal workforce, we saw the internal workforce in total be more productive than we expected it to be, and so those first years were ahead of expectations as well.

Got it. Okay, that's helpful. And then maybe I'm thinking about it incorrectly, so any help there would be appreciated. Derek, I think you had mentioned that you expected LTVs to really kind of wrap and start improving in the second half of this year. I guess where I'm confused a little bit is you have churn improving. I think you have the 2018 cohort lapsing or coming off the LTV measurement. Why wouldn't we see the LTV improve earlier than the second half?

Yeah, so the way our prediction model works, which is by looking at actual observations. Until we see the data coming out of AEP 2020, which are people who just had policies that became effective in January 2021, that will not get picked up on the LTV projections. So with expectations that churn for that group will be lower, that will drive LTVs improving in the quarter that those enrollments will come in the following year, which will be Q4 this year.

Right, but don't you have the data around the churn and the observations by the second quarter?

We will, but those data reflects cohorts that are enrolled in Q4. So, the prediction is also on a monthly cohort all the way around. So, when we predict, we say, hey, you know, how do we expect persistence to be different for someone who enrolled, you know, in October for January effective? and base it off of what we've seen historically so you're right we'll have seen historical observations but we have to be against the month that those cohorts are measured against okay thank you next is from jonathan young from barclays your line is now open thanks for taking my question um you mentioned shifting away from directv channels but can you provide any color on

and generally in a more normal year, how much pull-through that channel had on your approved member count, and if your shift to other channels will kind of make up for pulling out of that channel. Tim?

Sure. So that channel used to be a much larger portion of our mix, up to a third in some of our previous AEP seasons. And when we pulled down that TV spend this year due to the challenges we saw, there was demand available in other channels. We just weren't able to convert it because of the poor performance of the vendor agents, the ones that we cut. So as we're into Q1, we're seeing, you know, we've mixed shifted away from DRTV. We're seeing healthy growth rates and strong performance of our agents on these other lead sources. So we feel like there's plenty of available offsets as we take down DRTV and lessen our dependence on it.

Okay. And then I know you're not giving a specific agent count or hiring count for the year, but, I mean, is the goal at least to get back to where you ended the year at, considering you're cutting a fairly significant amount of external agents?

Yeah, I'll take that. I mean, we'll be in the vicinity of where we finish the year, but it will be much more heavily shifted towards internal people who have joined earlier and who are using in more versatile ways.

Okay, thanks.

Next question is from George Hill from Deutsche Bank. Your line is now open.

Hey, good evening, guys, and thanks for taking the question. I guess, Scott or Derek, I'll start off with one on the financing with HIG. I suspect I know the answer to this, but can you talk about how you guys came to the route that that was the right kind of way to go raise capital? 8% seems a pretty expensive cost of capital in this market. So I guess I'd love to ask about that, and then I have a follow-up as well.

Right. From my perspective, George, it was really about getting the right partner. and wanting someone who had an equity stake in eHealth, who was aligned with both our investor-based institutional as well as management. And HIG, this was a competitive process. There were other alternatives. We went with them because they invested in understanding the business. They had a tremendous excitement that they expressed for it that was contagious with us. And they see a very substantial opportunity as we do. And we thought that bringing them on board would accelerate our operating improvements, but also give us the capital to act on those opportunities.

Okay, that's helpful. And then I guess, Derek, I know it sounds like you guys have the capital to meet the growth targets in the near term. But if I look at my model, You probably, if the business grows the way it should, you guys probably might be in a position, again, to need capital in let's call it 18 months, I guess I would ask. Is that how you guys think about the business as well? And does the agreement with HIG kind of give them the right at first refusal on subsequent capital raises?

Yeah, it's a good question, George. So you're right that this year was not the year that we would expect a need for capital to pursue the growth that we had outlined. When we look out another year and a half or two years or so, the capital we raised from HIAG is important to drive growth, but we would, of course, only do that if we make the improvements that we are seeing, that we're expecting right now in terms of both LTV improvements and also unit cost improvements. So, I won't want to get too far ahead of ourselves in terms of just thinking about where growth rates will land until we kind of have more discussions around where we're heading and what we're seeing in terms of LTV to CAC improvement.

Okay, but I guess the question is, do they kind of have the right to buy, to put the next dollar in before public market investors do?

Oh, so good question. No, the answer is no. So there are provisions in the agreement that allow us to raise debt capital you know, without their consent and there's no first right refusal within that provision.

And then my last one I guess would be is that you guys talked about the new enrollments, the new applications that were completed in the fourth quarter should drive LTV increases in the back half of next year and retention should be higher. I guess I would ask, I know that more of them came in online which seems to have a better persistence, but I guess can you talk about what gives you confidence in that assumption. I understand there's kind of the back testing of the model. Are you able to put any more color around kind of what has been the persistence of the online enrollee versus the over-the-phone enrollee? And given that the underlying market tends to be pretty fluid, just would love to hear what gives you the confidence that those numbers are going to go up.

I'll let Tim take it.

Sure. So, you know, there are the sort of mixed factors that you called out that give us confidence. So the fact that more of our enrollments came from internal agents, more online growth, better channel mix, all of those things based on past experience should be helpful to churn. But what's probably even more impactful and exciting is the retention teams and the efforts that they've been going to to connect with our consumers. And there was a clear gap in our customer experience where existing customers would call back and not get the experience they needed, the questions answered that they had. And we're doing a much better job proactively following up with customers on an outbound basis, whether it be by phone or by email, to understand if they still have questions and there's ways that we can help them. So we have a better read of what's going on in our book than we've ever had before. And the early signs from July onwards of things like the compensation plan and some of these teams indicate they should be meaningful movers of churn. And so we're sort of cautiously watching the numbers, but every sign suggests that it should be getting better.

Okay. And then just to that, I'm going to ask you a quick follow-up. Are we differentiating between churn and retention here? Because I know that while we've talked a lot about churn, I at least tend to think of churn as something that happens as a result of the MA market, and retention is something that should be in your control. So I guess if you could differentiate for me targets to reduce churn versus targets to improve retention.

Sure. Yeah, I mean, we use them a little bit interchangeably in our context because it's all done on a policy basis. But you're right that the difference between losing a customer and losing a policy are very different. And that's where, again, the development of our retention team to take inbound calls from existing customers and give them a different experience than someone we've never seen before. The use of things like the customer center to hold on to data and proactively reach out to customers to say, hey, your plan may not be the right plan for you anymore, or the plan you're in looks pretty good, nothing to do for this season, are things that we just started to do this year and will continue to build on as we go through 21 and beyond. So we expect to do better at retaining customers, and we also expect to do better at retaining policies with the changes we've made.

Next question is from Frank Morgan from RBC Capital Markets. Your line is now open.

Good afternoon. One follow-up there in terms of the changes in the agent compensation. Have you seen any fallout as a result of that from losing attrition from more productive sales members?

No. I mean, we're really encouraged by what we're seeing because we built the plan in a way where experienced agents who know how to sell and know how to put people in the right plan have an opportunity to earn more in this system. We score them higher. We route them calls more aggressively. So high-performing agents do better in this system than they would have in the old system.

Gotcha. And there was also some discussion on a competitor call about some changes in commission structures to improve the upfront cash collection or the cash receipts. Just curious if you've had similar thoughts or where are you on that issue?

Yeah, I can take that one. So, Frank, we also are having similar discussions with our top carrier partners. I mean, I don't – I can't say they're exactly the same because it was fairly vague also what I've heard on the other calls. But in terms of moving to a structure that more closely will align with – you know, performance and, you know, payments more upfront to help us with kind of managing cash flow, given how the life cycle works with upfront cash investment, sales and marketing, and then commissions collected later. That is something that we're actively, you know, engaged in with the top carriers.

Okay. Most of that have been answered, but just one is a reiteration. I just wanted to make sure I understood correctly your guidance for 2021. is not predicated on the investment, the HIG investment. And I'll hop off. Thanks.

No, absolutely not.

Okay, thanks.

Your last question comes from the line of Daniel Grossleit from Citi. Your line is now open.

Hi, guys. Thanks for taking the question here. I'd like to focus back on the lead gen strategy. You know, it does sound like there was a bit of an over-reliance here on that direct response TV. So curious if there are any investments on the technology side of the business that you need to make to, you know, better shift among various marketing channels when one channel is underperforming. Sam?

Yeah, you know, I think we've, I think we've made a number of improvements on that side where we have a better understanding of where a good lead comes from and how to generate it. The issue we had in Q4 was really that we had spent a lot and invested a lot up front in TV that even though we could move nimbly to other demand sources, we had already incurred a lot of that expense. And then we didn't have high quality agents to send that additional demand to. So there was opportunity for us to acquire demand in other places. We just didn't have the workforce to send it to.

Gotcha. Okay. And then on the partnership channel, you know, it's really historically been one of the things you've called out in terms of strengths, but it seems like this quarter it was a little bit weaker than expected due to lower foot traffic, particularly on the PDP side. But just curious on what the strategy on the partnership channel is going forward. And, you know, I had thought that most of the benefits you get from partnerships on the provider side is through email addresses and physical addresses. So a reduction in foot traffic wouldn't be that harmful, but it appears that that wasn't the case. Just curious what... what the strategy is there going forward.

Yeah, let me start, and Tim will add in. You know, I remain very bullish on the partnership channel. We signed, you know, new hospital systems, you know, absolute top 10 blue chippers. These are three-year exclusive agreements. And, yeah, we did suffer because of the foot traffic, you know, the lack of signage and brochures that can be handed out physically, we believe, hurt us in terms of our response in that channel. We also, in the pharmacy channel, lost a partnership through an M&A transaction that had been driving a lot of PDP growth for us. I don't think we called it out specifically, but it was one of the headwinds that we faced in Q4 that we won't have to lap in 2021. Tim, speak to your view of the partnership channel.

I would echo your bullish sentiment. I mean, it wasn't, you know, we mentioned that it didn't quite get to our expectations, but it was our fastest growing channel. And our partners are engaging with us every year more and more. Our marketing gets better and more targeted every year. And more and more providers are engaging in conversations on how we can help them. So there's a lot of momentum in that channel. that we'll build on this year and remain very bullish for how it differentiates us in the future.

Thank you, and there are no more questions at this time. Presenters, I'll now turn the call over to Scott Flanders for closing remarks.

Thank you, everyone. I know we ran long, but I appreciate the quality of the questions, and we look forward to having a much more positive update after Q1. See you soon.

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.