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spk01: Good day, and thank you for standing by. Welcome to the GoHealth third quarter 2022 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 11 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference call is recorded. I would now like to turn the call over to Brian Farley.
spk02: Thank you, and good afternoon, everyone.
spk03: Thanks for joining GoHealth's third quarter 2022 earnings call. Joining me today are Vijay Kote, Chief Executive Officer, and Jason Schultz, our Chief Financial Officer. This afternoon's conference call contains forward-looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict. You should not place undue reliance on any forward-looking statements, and the company undertakes no obligation to update or revise any of these statements, whether due to new information, future events, or otherwise. After the market closed today, we issued a press release containing our results for the third quarter of 2022. We have posted the release on the GoHealth website under the Investor Relations tab. In the press release, we have listed a number of risk factors that you should consider in conjunction with our forward-looking statements. We encourage you to consider the other risk factors described on our Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission for additional information. During this call, we will be discussing certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measure, and the reconciliations are set for press release. Please refer to today's press release for the reconciliation of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call. And with that, I'd like to turn the call over to Vijay.
spk00: Thank you all for joining us this afternoon to discuss our third quarter 2022 results. As promised on our last quarterly call, we're going to spend some time addressing the key elements of our go-forward strategy with a more fulsome look to come after AET. We continue to put beneficiaries at the center of what we do, transforming ourselves from a transactional e-broker to a trusted consumer marketplace. In the past quarter, our internal agents fielded over 630,000 calls, completed nearly 56,000 retention conversations, and started Medicare evaluations with over 251,000 Medicare beneficiaries. Together with our external partners, we completed over 130,000 enrollments. Before I get into our main topics for today's call, I want to note that we have posted a presentation on our IR website that provides a more comprehensive overview of Encompass than we've shared before. We'll be referencing these slides when we dive deeper into Encompass later in the call. I'll kick things off with a high-level overview of the third quarter numbers and let Jason go into more detail on financials in just a bit. Our cash flow from operations has improved meaningfully from a loss of $40 million in last year's third quarter to a positive $96 million this quarter. The $136 million delta in cash flow is a direct result of ramping up our Encompass solution and getting back to basics with the strategic cost initiatives we implemented during the quarter. This has fundamentally changed the dynamics of cash flow for our business, and we're confident these positive trends will continue as we lean further into our Encompass solution. As anticipated, revenue of $133 million is down year over year as we have focused our efforts on higher quality revenue with a more experienced, albeit smaller, sales force. As a testament to our renewed focus on quality, adjusted EBITDA was roughly flat compared to a year ago despite generating $79 million less in revenue. I'll now turn to our strategic initiatives. Last quarter, we made the calculated decision to emphasize quality and invest in Encompass. Our shift to focusing on more experienced, high-quality sales agents rather than volume of agents is already proving beneficial. Last year at this time, just under 13% of our agents had been in GoHealth for at least one AEP. This year, just over 94% of agents have been here for at least one AEP, and they're delivering the improved quality we were targeting. While it's still early in AEP, our conversion rate is ahead of expectations. With our seasoned agents and new model, October conversion has improved 70% year over year. This increased efficiency and higher rate of conversion, in turn, makes our marketing spend go even further by making the most of each and every lead. We expect just under a 20% year-over-year improvement in operating efficiency for all of AEP. We are working hard to prove that with the right operating rigor and commitment to transparency, we can market in a highly compliant manner and deliver the experience beneficiaries, health plans, and regulators are seeking. While conversion rate is an important operating efficiency indicator, we view the enrollment experience as the first step in establishing a trusted relationship with the beneficiary. Next, late in September, we announced that we received a $50 million strategic investment from two of our significant partners. This additional funding will empower us to deliver higher quality customer service and enhance the differentiated value we bring to the market. We look forward to strengthening our multi-payer marketplace and further improving our ability to help millions of Medicare beneficiaries understand an ever-growing range of coverage alternatives. As we shift the business from being primarily transactional to being rooted in trusted relationships, Encompass is a critical component. We anticipate Encompass will be a game changer for the customer, for health plans, and for the financial profile of our business. Turning to the slides, if you turn to slide three, we believe Go Health is well positioned to redefine the Medicare journey by doing the right thing for the consumer and better aligning expectations with experience. We can deliver trusted relationships with beneficiaries because one, we have excellent marketing and consumer insights based on over 100 million marketing interactions with beneficiaries over the past decade. Two, we have proven high quality Medicare agents. Three, we have a history of over 10 million Medicare evaluations, allowing us to truly understand beneficiary needs. Four, our proprietary technology platform, including our PlanFit tool, Enables our experienced agents to effectively qualify and match individuals with the best plan available matching their individual needs and preferences and Five we have a trust-based agile operating model with our health plan partners Moving to slide four to remind you of the challenge at hand The industry has problems for consumers health plans and brokers and no one is truly putting the consumer at the center Many consumers face an abrasive, disjointed Medicare landscape. They're bombarded with confusing information. There are many plans with similar options that are hard to navigate, and there can be an overall lack of trust in the process. Once beneficiaries are enrolled in plans, they're confused about how to get the most out of the benefits. In this environment, health plans face churn, high complaints, and lower customer satisfaction with plans, all of which lead to lower star rates. From a broker standpoint, the industry has been historically more enrollment-focused than engagement-focused, valuing total number of enrollments as measured on a policy basis as opposed to number of trusted relationships with beneficiaries. In this environment, brokers are sometimes penalized for moving a beneficiary to a new plan based on the beneficiary's needs, even when it's the right thing to do given the varying and rich benefits among health plans year over year. The economics of the state don't always fully support doing the right thing for the beneficiary. Next, if you turn to slide five, you will see that as we discussed in our October 18 press release, our expanded end-to-end encompass solution supports enrollment and engagement across the Medicare beneficiary journey, helping to solve a critical need in the marketplace, drive positive outcomes at scale, and increase member satisfaction. we're already seeing the benefits with a 20% demonstrated improvement in retention and a 10% reduction in complaints to Medicare this year. Please refer to our press release for more details. Now, on to slide six to discuss the financial profile of the shift from the LTV model to Encompass Connect. Encompass Connect enables us to put the consumer at the center of what we do and benefits our financial model as well. The economics of this model are predictable and favorable from a margin and cash perspective. Adoption of Encompass Connect reduces our exposure to the volatility of the LTB model, which is subject to several factors, including but not limited to the quality of health plan benefits, changes in beneficiary behavior, marketing dynamics, the time of year, and many other factors outside of our control. We still like the opportunity within the traditional LTB model, given our ability to build and support long-term relationships. but believe it is prudent to significantly diversify from the model to drive more predictable unit economics. Encompass Connect offers a more service-based model that directly compensates for the specific work and milestones we deliver and achieve in the short run, as opposed to the uncertainty and dependencies of the traditional LTV model. One of the major advantages of the shift is that a majority of our Encompass Connect work is pre-funded based on an agreed upon forecast of volume we and our health plan partners anticipate Go Health producing in the subsequent quarter. That means we receive some cash even before we engage in certain Encompass Connect activities with the recognition of revenue and cash reconciliation against that agreed forecast happening upon the completion of the respective period. Put simply, we will recognize revenue in the quarter we perform the work. And if we over deliver against the agreed upon forecast, we'll bill for the difference. If we under deliver against the agreed upon forecast, will reconcile in future quarters. As a result, you will see the significant change in cash dynamics of the respective models, moving from a negative $350 year one cash flow to positive $260 year one cash flow on a unit basis, or a $600 improvement in year one cash on a unit basis. For simplicity, we kept the cost consistent across both models, so there are different requirements for each with their own opportunities for additional operational efficiency. From these transformational shifts in the way we use our talented teams and proprietary technology to partner with health plans and deliver value to beneficiaries, we expect our cash and margin dynamics to be more stable and less subject to material adjustment as our sales force is deployed to focus on this more predictable high-value model. The results we reported are consistent with our view from last quarter, but as we mentioned, we are not providing full-year 2022 guidance. While I acknowledge that it takes time to change the trajectory of a company, we believe that GoHealth can achieve its full potential in the next two to three years. In addition, following last month's shareholder approval, we currently intend to effectuate a reverse stock split on or around November 17th at a 1 for 15 ratio. We believe completing the reverse stock split at this time will benefit all stakeholders. Finally, I want to reiterate how excited I am about the progress we have made on our strategic initiatives. as evidenced by the early success we are seeing in AEP. I look forward to giving a more fulsome update in the new year. I'll now turn the call over to Jason for a more detailed look at the numbers. Jason?
spk04: Thanks, Vijay, and thank you all for joining us today. I'm going to start off with discussing the Encompass platform and the positive impacts it will have to the financial performance of our business. Then I'll review the third quarter results, and I'll wrap up with a couple highlights from our balance sheet. As Vijay mentioned, Encompass leverages our proprietary technology that supports enrollment and engagement across the Medicare beneficiary journey. We believe that this offering is unmatched in the market and a service that our carrier partners regard very highly. As we evolve from a transaction-oriented business to a trusted partner role, our financial makeup will evolve as well. We expect Encompass to have a dramatic impact to our cash flow, to diversify against our traditional LTV business, and to improve our overall margin profile. As Vijay mentioned, the improved cash flow profile with Encompass is a very significant impact. This is already evident in our Q3 results with cash flow from operations improving by $136 million year-over-year, of which $114 million was driven by the Encompass Connect deferred revenue. Encompass Connect diversifies our exposure to the more sensitive LTV commissions business. This is due to several factors. the revenue is much more predictable as the service requirements and the pricing are clearly laid out in our carrier agreements. Second, cash flow is significantly improved as we collect cash in a much more timely basis than the traditional LTV model. Lastly, by the nature of the service requirements of the Encompass Connect Agreements, revenue is less likely to be subject to material adjustments. From a margin profile perspective, we are improving our revenue economics as a result of Encompass's broader scope of services. We believe that this will drive margin improvement over time as more of our revenue flows to the Encompass model. We currently anticipate that approximately 30% of our business will flow to the Encompass Connect as AEP. Going forward, we expect the percentages to increase as we intend to deploy some of our Salesforce to drive business to this more predictable model. Now turning to our third quarter results. In the quarter, we generated $133 million in revenue compared to $212 million a year ago. This is in line with our internal expectations. Consistent with the first two quarters of the year, we maintained the 7% blended constraint reserve methodology for the new policy sold in the quarter. Our commission revenue of $87 million was down 50% from prior year, which is a direct result of our strategic decision earlier this quarter to reduce the number of agents to focus on quality, tenure, and improved customer acquisition costs. Our enterprise revenue was $46 million for the quarter, an increase of 25% year over year. This is driven by our encompass business generating $9 million in revenue in the quarter as it began to gain traction in the market. We had an adjusted EBITDA loss of $14.3 million. which is flat as compared to third quarter of last year. This is despite the $79 million decline in revenue. The decrease in revenue was primarily driven by lower submissions as a result of reduced agent headcount. As previously discussed, the decline in revenue was expected as we made aggressive expense management changes to increase the efficiency of our operations and our marketing channels. We are pleased to see the early actions we made beginning to bear fruit and we expect continued momentum as we move into Q4. In the quarter, we generated $96 million in cash flow from operations. Normalizing cash flow for the encompassed deferred revenue, we had a cash flow from operations loss of $19 million, which compares favorably to a $40 million loss a year ago. The $21 million year-over-year improvement of cash flow from operations is a good indication that the actions taken earlier in the quarter are having the desired effect in improving the core business. I'll now wrap up with a couple of important updates on our balance sheet. We ended the quarter with $215 million in cash, up meaningfully from year end at $84 million. The increase was driven by encompassed cash collections and the $50 million pipe we announced earlier in the quarter. We ended the quarter with $666 million of total debt. However, subsequent to quarter end, we paid down $110 million of debt from our revolver. We plan to continue to strategically use our revolver from time to time moving forward. Overall, while these are still early days, I'm pleased with the results that we are seeing. I believe our incumbent solution has positioned us well for success in AAP and into 2023. In closing, Based on our third quarter results and early indications for the fourth quarter, we have increased conviction in our ability to achieve cash flow breakeven on a trailing 12-month basis in early 2023. With that, let's open the call to questions. Operator?
spk01: Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. One moment while we compile the Q&A roster. The first question that I have is coming from Michael Journey of Bank of America. Your line is open.
spk05: Good afternoon, and thank you for taking the questions. I want to make sure I got this right on the deferred revenue dynamics. Obviously, a big jump. I appreciate you calling that out. Is that a one-time change that's now a permanent baseline to be expected on the balance sheet? Or is this something we should expect to grow? Is it something that will just reverse next quarter as you had the encompass adjustment? Especially given your commentary around getting a cash flow break even, obviously you're going to have a 4Q use of cash, but just curious how you should think about that line.
spk00: Thanks, Michael. This is Vijay. Just to respond to your question, this is directly related to how we have entered into the encompass arrangement. and therefore we have pre-funding associated with it. And as you see the volume through the year, you will see this pre-funding dynamic continue. And so you'll have the largest amount of deferred revenue happening prior to Q4. And then you'll see that settle out as we get through to the lower production years, the quarters throughout the year. So we'll obviously give you more updates, but you should see it go up and down with the associated volume distribution of how the business operates.
spk05: Got it. That's certainly helpful. And then when you think about AEP and you think about your go-forward strategy, I get the components of Encompass. Will seniors feel it? What will be some of the different ways, if we go a little deeper, that they'll be interacting with you as you focus on your own internal operations and pushing forward on these cash flow and profitability targets that you're going after?
spk00: It's a great question. It is a different experience. So let me start with the way we have entered into the program as a number of key drivers of success. One was you kind of had to have the right relationship with the health plans and the carriers to be able to begin. So we had to have quality that we could deliver with really high, you know, strong and experienced agents. And you can see we did that to make sure we had the most experienced agents that we've ever had. Then you needed to compound that with the best technology tools to ensure that we're supporting a thorough process. We've had a plan fit tool in previous years. This year, we went to 100% adoption of that plan fit tool. So every time a beneficiary comes in, there's a standard set of questions to ensure that they're getting the key parameters entered into the tool to get them matched with the right plan for them. That's a multi-plan selection process. And then what's very different in the process is typically that would happen with our captive agent. They would then submit an application, and that would go directly to the carrier. In the Encompass model, we have a model where there's an interim step where those beneficiaries would actually transition to a carrier-designated agent with a seamless transition of that data that was already provided to do the final application submission reconfirmation of all the parameters that would identify this plan as being best for them so that they're more satisfied, one, with the experience, that they feel as though they've been matched to the right plan, and therefore that translates into lower cancellation rates for them because they understand it better and now understand what is to come with that next level of follow-up, So it is a very different experience versus the traditional as we move to diversify away from the traditional model into more of the encompassed model.
spk05: Understood. Thanks. Appreciate the time. Thank you, Michael.
spk01: Thank you for your question. As a reminder, if you would like to ask a question, please press star 11 on your telephone. One moment while we wait for more questions. At this time, there are no more questions in the queue, and I would like to turn the call back over to Vijay Kote. Please go ahead for closing remarks.
spk00: Thank you, Lisa. I really appreciate everybody's attention today, participating in the call, and your interest in our organization. We look forward to updating you as our progress continues and really refocus as an organization on the beneficiary being at the center of everything we do. So thanks again, and we look forward to hearing and speaking with you all soon.
spk01: This concludes today's conference call. Everyone may disconnect. You all enjoy the rest of your evening.
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