Q3 2019 Earnings Call
Especially if you want me to press Star one on your telephone please be advised the today's conference is being recorded.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker Kate.
Sidorovich. Please go ahead man.
Thank you.
Good afternoon, and thank you all for joining us today I by phone or by webcast for a discussion about E health Inc. third quarter.
19 financial results.
On the call the tough to know how Scotland, Ehealths, Chief Executive Officer, Erik Young Chief Financial Officer. After management completes his remarks, well open the lines for questions. As a reminder, today's conference call is being recorded in the webcast from the IR section of our website at <unk> Super Cool available on our website following the cool.
Well, we'll be making forward looking statements on this call kept <unk>, which includes the.
Future.
Beliefs and expectations, including statements relating to our expectations regarding on Medicare business, including Medicare enrollment growth comes human demand our competitive advantage on market share girls and online enrollments and outperformance. This annual enrollment period, our investments in the Medicare business, including investment from Telesales capacity.
<unk> online demand generation channel sales and marketing and all technology platform, our expectations regarding the profitability of all business seasonality lifetime. Then this policy durations retention rate conversion rates and cost of acquisition I'll be youth regarding the Medicare market and current political environment and our outlook for the fourth quarter.
And full year, 2019 guidance, including assumptions and our ability to deliver and all the items.
Forward looking statements on this call represent the health views as of today, you should not rely on the statements as you're presenting hobbies and the future went to take no obligation on duty to update information contains forward looking statement. What is the result of new information future events or otherwise forward looking statements are subject to risks and uncertainties <unk>.
Actual results could differ materially from those projected in all forward looking statement, we describe these and other risks and uncertainties and all you know report on form Penske quarterly reports on Form 10-Q filed with the Securities Exchange Commission, which you may access through the assets he website or from the Investor Relations section of our website.
Well, we'll be presenting certain financial measures on this call that that's considered non-GAAP on the S.T. regulation G. for reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure. Please refer to the information can put it at <unk> earnings press release issued today and in <unk> SEC filings, which can be found in there.
<unk> a section all corporate website under the heading Investor Relations and at this point I will turn the call or what the Scott Blenders.
Thank you Kate and welcome everyone.
Strong momentum in our business continued with another quarter of meaningful outperformance against our expectations third quarter revenue of 69.9 million grew 72% year over year grew by 70% increase in approved Medicare members and tail revenue of 11.5 million.
We recognized during the quarter, which represents cash collections on plans beyond what we originally recognized as revenue under our conservative revenue recognition practices.
Our adjusted EBITDA was negative 18.8 million, reflecting significant investments made in our Medicare sales.
Sales capacity as well as marketing investments during the quarter ahead of the annual enrollment period.
GAAP net loss was $11 million Derek will cover our third quarter financial results in greater detail later on the call.
During the quarter, we completed our preparation for the annual enrollment period.
We expect to set another record for the company. This ATP for Medicare enrollment volumes and for Commission revenue.
We successfully expanded our telesales capacity, but total sales agent headcount more than doubling compared to last year's AGP, including a successful watch our new sales center in Indianapolis.
Over the past few months, we tested and deploying new agent pacing technologies that we expect to further enhance our customers experienced an increase Asian conversion rates.
These tools are now available across our agent base, including both our in house and flexible agent force.
Our marketing programs, which are delivered strong results over the past four quarters have been further refined how did the ATP with a greater emphasis on data and analytics designed to supply our agents with high quality leads at attractive cost of acquisition.
Our web site experience for seniors, who choose to enroll online for D.A. mobile device has been enhanced significantly compared to a year ago.
Combined with stronger emphasis on online demand generation channels. We expect these improvements to translate into meaningful growth and online Medicare enrollment volumes compared to a year ago.
The improvements we have made have been implemented against the backdrop I think strong market environment.
Based on CMS forecast Medicare advantage enrollments are expected to grow 10% in 2020.
The highest annual growth rate and more than a decade.
Increased affordability of it may plans broader plan choice and greater plan complexity with new supplemental benefits being introduced by carriers Megi else broad selection of plans and carriers combined with our market, leading online comparison platform more relevant than ever to consumers.
Simply put we have entered this ATP from a position of strength, allowing us to guide up to the high end of our 2019 revenue and EBITDA forecast at a recent Investor Conference on October four.
Our confidence in the trajectory of our business remains high.
Turning to third quarter performance in our Medicare business.
Total revenue grew 75% exhibition revenue grew 78% compared to a year ago.
Sponsorship revenue from carriers grew 83% as insurers have increasingly recognize the advantages of E health customer engagement platform, which is delivered enrollment growth well in excess of the overall Medicare market.
We continue to rely on a diversified portfolio approach to our demand generation strategy.
And our marketing portfolio, we are increasingly emphasizing digital advertising initiatives, which target consumers, who are more likely to enroll online with limited or no call center interaction.
To this end, 21% of our major medical applications in the third quarter were submitted online compared with just 9% and the third quarter a year ago.
Third quarter performance in this regard represented four times increase the number of online applications year over year.
We believe we are living delivering solidly on our strategy to significantly expand the online portion of E health enrollment activity.
Our individual and family plan major medical business, which returned to growth in the second quarter for the first time in several years continued to perform strongly driven by higher new enrollment volumes and increased member retention.
Proved I FP members grew 70%, 76% and I have P. Commission revenue grew 95% compared to the third quarter of 2018.
Turning to the small business market. The number of submitted applications declined 15% fair to the third quarter 2018, as we shifted a portion of our sales resources to Medicare ahead of the Pete.
Small business Group Commission revenue increased 14% over the same time period due to higher renewal revenue.
In conclusion. This year, we have delivered three consecutive quarters of successful execution.
Exceeding our expectations and every single quarter and organically growing our year to date revenue, 76% compared to the same period a year ago [laughter] annual enrollment period began last week on October 15, and we entered this important Medicare selling season from a position of strength and confidence.
During this peak the majority of Medicare recipients have access to a broader selection of plans compare to a year ago had our platform is an optimal destination for seniors to make an informed choice and enroll in a plan that best suits their individual needs.
There's been a lot of activity on the political front ahead of the election year.
We believe that regardless of the outcome of the primary and the presidential election. The Medicare advantage program will remain a cornerstone of administering health insurance to seniors in this country.
Hello marketplace focus technology platform and consumer centric business model is proving to be best solution to help more and more seniors access the best health insurance for their individual needs.
And now I will turn the call over to Derek to speak more specifically about the numbers.
Thank you Scott and good afternoon, everyone.
Our third quarter results reflect strong revenue and enrollment growth in our Medicare and individual and family businesses and a significant investment in our telesales capacity in marketing initiatives ahead of the Medicare annual enrollment period.
In our Medicare business third quarter revenue of 57.2 million grew 75% compared to a year ago due to a 70% year over year increase in approved Medicare members, 64% growth in non commission revenue driven primarily by carrier sponsorship revenue.
3.8 million Intel revenue driven by greater than estimated customer call situation, which I will describe in greater short in greater detail shortly.
The Medicare segment generated a loss of 11 million, reflecting investments as we have prepared for what is expected to be another record fourth quarter selling season in terms of revenue enrollment volumes and profitability.
Year to date, our Medicare segment profit was 5.9 million compared to 2.2 million for the same period last year.
Our estimate a number of revenue generating Medicare members was approximately 551000 at the end of the third quarter up from approximately 410000 at the end of the third quarter of 2018 or an increase of 34%.
Third quarter 2019 revenue from our individual family in small business segment was 12.7 million, a 59 increase compared to a year ago.
Similar to the second quarter, we saw strong increase in a number of approved numbers for major medical IP products, which grew 76% year over year.
In addition, we're seeing a continued trend of longer duration for these products, resulting in higher estimated lifetime values.
Third quarter constraint ltvs for individual and family plan products grew in excess of 40% compared to the third quarter a year ago. As a result of favorable commission rate and policy duration.
Commission revenue in our IP business grew 95% compared to year ago small business Group Commission revenue increased by 14% year over year.
The individual family and small business segment profit was 3.8 million compared to a loss of 0.6 million in the third quarter of 2018.
[laughter].
Our estimated individual and family plan membership at the end of third quarter was approximately 131000.
Down 19% compared to the estimated membership of 161000 were reported at the end of third quarter a year ago.
The estimate at number and members on small business products was approximately 45000, a 17% increase compared to a year ago.
Our total revenue for the third quarter was 69.9 million, an increase of 72% compared to a third quarter 2018.
Our total estimated membership at the end of the quarter for all products combined it was approximately 991000 members, including approximately 264000 estimated members on ancillary products.
Before I move on to discuss operating expenses I want to provide more detail on a dynamics that we're seeing with estimated lifetime values or ltvs in our Medicare business.
Under AOCI six so six accounting, we recognize revenue based on the constrain lifetime value of each enrollment that is approved by our carrier partners.
The base Ltvs are determined the rent estimation of commission payments that we expect to collect over the life of the proof Paul non book of business.
And is based on a detailed historical analysis of several inputs, including our past experience with Paul situations in commission rates per paying member.
These estimates of the base LTV are then reduced by applying a constraint factor effectively discounting to revenue we book compared to what we expect to collect.
This constraint access insurance against overstating revenue for the duration of the policy due to fluctuations in policy duration commission rates or other external factors.
Our revenue recognition approach using constrained ltvs as appropriately conservative and this is demonstrated and how we recognize tell revenue in every quarter of 2019.
We recognize tell revenue when we are cash collections or an excess of the country estimated constrain ltvs for previously sold Medicare policies.
The constrain Ltvs for Medicare advantage plans, which account for majority of our existing Medicare members have grown on a year over year basis for five consecutive quarters, driven by higher commission rates and better than expected policy duration on many of our existing policies.
On our last earnings call in July we noted that several after several quarters of continuous growth in constrain ltvs for Medicare advantage products.
We expect that LTV to decline by mid single digits for proved applications in the fourth quarter up 29 team compared to the fourth quarter of 2018.
This forecast was driven by higher policy turnover that we observed during the first quarter of this year on Medicare advantage members that we enrolled during the last annual enrollment period in the fourth quarter 2018.
We believed that the increased turnover in that specific group of a clue approve applications, what's driven by the open enrollment period, which took place in the first quarter up this year for the first time since 2011.
Since our earnings call in July we observed a reversal of this trend with lower turnover on this Medicare advantage cohort.
As a result, the difference between cumulative turmoil over on the Medicare advantage cohort.
On a year to date basis compared to how prior fourth quarter hold a cohorts turnover by this time has narrowed it.
At this point and in light of these circumstances, we expect that fourth quarter Medicare advantage constrain ltvs will only be down by one to two percentage points compared to the Medicare advantage constrain ltvs for the fourth quarter of 2018.
For the full year 2019, a weighted average Medicare advantage ltvs are expected to be flat to slightly up compared to 2018.
Our commission receivable balance at the end of third quarter was 358 million, an increase of 16 million compared to the ending balance at the end of second quarter and an increase of 92 million compared to about at the end of the third quarter a year ago.
Our commission receivable balance reflects future commissions, we expect to collect on our existing membership discount it by the constraints Dr. died described earlier.
Our commission receivable balances increases each quarter by the amount that we recognize our revenue reported in quarter enrollments, which is based on lifetime value estimates.
This increase is net of the upfront commission payments for in quarter enrollment and recurring commission payments that we received on our existing members enrolled in prior periods.
During the third quarter, we collect at 43.4 million in commission payments.
Now I'd like to review, our operating expenses and profitability metrics.
In the third quarter, we made significant investments in expanding our Medicare telesales capacity, including our new Indianapolis sales center launch as well as hiring training and Onboarding agents ahead of the October 15th start to EPA.
As Scott mentioned earlier, Nicole we girl agent count in excess of 100% compared to the same time a year ago through a combination of in house hiring expanding our outsource agent force.
Our third quarter, non-GAAP customer care, and enrollment expenses, which excludes stock based compensation grew 22.7 million, 433% compared to a third quarter a year ago, reflecting this investment as well as the fact that we are operating with a larger agent count throughout this year haven't kept the majority of.
Our in house agents onboard following the completion of the loss ATP.
The newly hired agents were not fully productive for the most of the third quarter as they were going through licensing and trade.
As a result customer care and enrollment expense per approved member increased significantly both sequentially and on a year over year basis.
Similar to last year, we expect this metric to come down in the fourth quarter, when our expanded telesales resources leverage across a much larger volume of enrollments and thats the agents become more productive.
Our non-GAAP marketing advertising expense, which excludes stock based compensation grew 9.3 million or 60% year over year.
Variable marketing expense in our Medicare business grew 78% compared to a 70% growth in approved Medicare members as we invest it more on the margin in direct online demand generation channels that have higher marketing cost of acquisition, but also tend to have higher unassisted online conversions.
Shifting towards increase online penetration, which should overtime translate into higher operational scalability and lower agent cost per enrollment is at the core of our growth strategy in the Medicare market.
Adjusted EBITDA for the third quarter of 2019 was negative 18.8 million, which was better than our expectations and compared to negative 6.9 billion for the third quarter of 2018.
We calculate adjusted EBITDA, but adding restructuring charges acquisition costs stock based compensation change in fair value of earn out liability depreciation amortization amortization of acquired intangibles other income and benefit from income taxes to our GAAP net loss.
GAAP net loss for the third quarter of 2019 was 11 million compared to GAAP net loss of nine going for the third quarter of 2018.
Our third quarter cash flow from operations was negative 15.9 million compared to negative five going for the third quarter 2018.
Capital expenditures, which include capitalized internal developed software costs were approximately 4 million for third quarter.
Our cash balance was $91.4 million as of September thirtyth than we had no debt outstanding under our line of credits.
Based on information available as of October 24, 2019 E health is reaffirming its guidance for total revenue and adjusted EBITDA for the full year ending December 31, 2019, and also updating its guidance for starting to GAAP and non-GAAP measures 44 year ending December 30, Onest 2019.
Due to the third quarter of 2019 reduction in fair value of the earn out liability assume in connection with our acquisition of go Medigap and a change in income tax rate.
Our 2019 guidance Rangers are included in our third quarter earnings release for your reference.
Based on the quality and scale of our calls on the resources in place the acceleration of online enrollments in the strength of our consumer demand were observing we're confident in our ability to deliver at the high end of the revenue and EBITDA guidance ranges.
This implies a year over year growth in 2019 approved Medicare members of over 60%.
After was has been an investment quarter, we are forecasting a return to meaningful EBITDA profitability in the fourth quarter driven by significant sequential increase in enrollment growth and a related increase in our revenue.
On a year over year basis, we forecast our fourth create quarter EBITDA to grow significantly both on a margin an absolute dollar basis relative to fourth quarter 2018.
The top and about 2019, EBITDA guidance implies fourth quarter 29 to EBITDA growth over 60% compared with Q4 of 2018.
I wanted to remind you that these comments and our guidance are based on current indications of our business and our current estimates assumptions and judgments, which may change at anytime.
Actual results may differ as a result of changes in our estimates assumptions and judgments, we undertake no obligation to update our comments or guidance.
Before we turn the call over to operator, I want to address on membership metrics in context of customer policy retention the topic thats been top of mind for investors and analysts over the past few months.
In order to compute customer policy retention rates, it's important to keep in mind. The following three dynamics.
One of our retention rates or more accurately assessed by using the number of paying members that we add in a given period and not the number inferior approved members.
Our approved Medicare advantage of members have converted into paying members at an average of 92%. In addition, some of the members that are proved in a given quarter don't become paying members until the following quarter spillover effect that the stuff, especially pronounced during high enrollments quarters.
Second policy turnover is higher in the first year post approval and start to decline in the outer years.
Policy Persistency is particularly strong once a policy has been help over a year getting us to our current average policy duration approximately three years for Medicare advantage.
Three and lastly, due to the pronounced seasonality of enrollments. It is more accurate to look at churn and other metrics on trailing 12 month basis.
We summarize these points and also providing example of customer policy retention map as part of our earnings call slides, which are now posted on Investor Relations website.
Our goal has always to be fully transparent to our investors and analysts and over coming quarters, where we'll be revisiting our reported metrics and to evaluate if we can make these make additions or changes for further that goal.
And now we'll open up the call for questions operator.
Thank you.
Next question you want each press star one on your telephone to withdraw your question press the pound.
Our first question comes from July Andreas.
Please your line is now open.
Hi, This is Daniel adversary filling in for lender, saying. Thank you for taking my question do you have any more details on the new call Center in Indianapolis I know last year. There you had approximately a 136000 unanswered calls so have you seen less leakage so far.
And lastly can you talk more about your marketing investments and engagement efforts.
Hi, Thanks for the questions as Dave Francis.
Annapolis call Center as launch.
Really without a hitch and I think we've talked about previously that we were looking to staff as many as 200 salespeople in that office and it's it's gone like I said without a hitch we had full hiring had everybody trained appointed and when the.
Bell opened on October 15th that was our first office opened then taking calls and they've been performing as or better than expected.
As it relates to.
The number of calls that we've talked about last year that we were unable to answer because of constraint capacity.
So far we're early in HBP. So it's way too early to be telling exactly what the fully p. will be but we feel very good about.
Operationally, how all of the call centers are operating in the number of customers that we were able to touch we've got.
Meaningfully less leakage as you put it than we did last year.
As it relates to the marketing side of things everything is working as we expected we've made some significant investments in the.
Across the different marketing channels that we talked at length about from all the way from direct mail up to to search engine marketing and.
I'm very pleased right now with the way he is going with that said, we're less than 20% of the way through a GP.
So it's way too early to see how everything's going to end, but we feel very good about where things stand at the moment and I think thats all we're prepared to say at the moment.
The only thing I'll add to that is in Q3.
Evidence to our ability to serve more calls is that we did have less call selling revenue in Q3, this year that when compared to last year given the productivity in the size of health sales force that we had this year compared to last year in Q3.
Okay, great. Thank you and just one more quick question would you also be able to talk about some of the initiatives you're focused on for your lead sourcing and customer aquas and bringing down your leaves sourcing and customer acquisition costs do you see a big opportunity there.
Yeah, I can start with that so we continue to have success in.
Scaling our direct to consumer marketing and customer acquisition, it's been a multiyear effort and for many years as you have seen we have driven the cost per member down on marketing.
Our focus now is really continue to keep that scale, while growing enrollment.
Just to echo that point, our desire here is not to look for reduction that unit economics of marketing is to maintain that while we scale and energy component to that is continue evolution of our marketing programs to be more analytically, driven which was discussed by Scott and the other highlight here is we will continue to expand.
In an increase our online marketing at a more outsize rate compared to other channel and the reason for it is.
The that the members that we acquired through online marketing channel tend to enroll more online.
Perfect. Thank you very much.
Yes.
Thank you and our next question comes from the line of George Hill with Deutsche Bank. Your line is now open.
Hey, good afternoon, guys and I hopped on the call little bit lay all apologize if you covered as I said I guess, Derek you talked about a 90 I'm trying to read my notes here a approved members becoming paying members 92% of the time I guess can we talk about the other 8% and can you frame this statistic kind of.
Relative to history or is this new.
George that's a good question so ill point people to what accommodate in my prepared remarks, which is more detailed on the slide that we posted in our Investor Relations website. The 90% has been very steady in the history that we've been in this Medicare business and even in the figures that we have disclosed on the slide you can see that.
It averages out Tonight, 2% way look at on a trailing 12 month basis last four quarters.
So what tends to happen as people either don't actually qualified.
Okay, and then I'm not to pay or there and I'm not paying because they are unhappy with the plan and it's not unusual situation not just for E health, but other.
Brokers or other.
Plan providers, where they see a drop of featuring approved to pay.
Okay, and like I said, I apologize I dialed in a little bit late it sounded like you said for Q4 the erosion in Ltvs is now going to be 1% to 2% versus mid single digits.
I guess can you keep there's a couple of factors that drive the LTV component I guess can you talk about which puts and takes have moved versus when we communicated at the end of Q2, My guess is going to be that.
Retention is looking better because you have pretty good visibility to the other components of the LTV calculations. Yeah. That's that's a good inside their jarred. So the three primary and puts an LTV is policy duration commission rates and prove to paid ratio that we had just comments on the latter two of those components are fairly consistent ones obviously.
A cohort has enrolled so really is around the persistency of the policies and as I mentioned in the prepared remarks, which I give more color here. What we saw was coming out of the OE period peanut people, who had enrolled during a EPA in 2018 churning more meaning they switch.
More because of the ability to be able to do that given that OE period.
Since then for people, who did not switch where we've seen is a reversal that trend where they are staying on longer than what we've seen comparative historical patterns.
So when those two things come together on a cumulative basis basis, we're seeing the trend basically narrowing so it's obviously a four year cycle yet so the final chapter of this this deal with the be seen I'm, obviously with HCP.
But at least we you can say, but given the Evans we've seen so far.
We're seeing perhaps a more of a shifting in the seasonality of people switching as opposed to maybe a permanent or permanent increase in switching base on the introduction of or the reintroduction of OE.
All right that's helpful and I don't want to neglect scotton, Dave So what I want to ask about as I want to know how are you guys thinking about the Q1 switching season.
I guess, how do you retain applicants versus people who came on in Q4, you probably can't do anything to prevent switching but I guess, what I care about us from a marketing go to market perspective, do you guys keep kind of the pedal to the metal on marketing spend and the attraction of beneficiaries and enrollees and applicants in Q1. Given this is the second year that we have the switching season and whether it's Pete.
All people aging in or people, who are switching like it's almost you almost like you get a little bit of a second but at the Apple as it relates a little to no. He goes you're thinking about the switch to switching period kind of second time around suit George its Dave I'll go first and let Scott Hi, online, but theres two things as we look at Q1 number one is for lack of a better term playing defense on.
Those customers that we just signed up so to the extent that we can we can limit that that.
Increased turnover and customers that we saw in the first quarter of this last year from the previous Q4.
New buying cohort, we've got some plans in place to to how specific outreach to those folks to make sure that they understand what they bought that they're using it properly.
They have any questions to to help those folks better understand and make sure that their correctly using their products. So that there's there's less impetus for them to to want to turnover. If they do want to turnover then we're right there for them to do that with us so that we keep them in our book and they don't.
End of exiting the book and then secondly, as we've talked about and have demonstrated through our outsize growth rates relative to the market.
And any time of opportunity for broad based customer groups to to change we believe they ought to be doing so using our platform given the tools and the breadth of choice that they have and as we saw last year with significant growth in the first quarter, we fully expect to to be cloud.
Additional marketing resources into the marketplace. So that we can capture as many of those customers as possible. So it's it's an increasing the persistency of all of the customers in our book, including the new ones that we've added in the fourth quarter plus encouraging those folks that are coming back into the market in the first quarter weepy to come to the health platform to.
Do their shopping.
What I would add to that is those members that churned out at from HP and last year's fourth quarter and a new plants in Q1.
Cash.
Low churn.
And so what is probably the case is they got into eight the non optimal plan.
And then got into the right plant in Q1 and I have this had strong persistency since that and so this is why we flagged we flagged the higher churn and Derek might have and lost in an awfully.
Long CFO script, because we covered a lot, but we've been pleased to see that that churn abated dramatically.
And so we had flagged it when we thought it was a potential issue and through from today's call. We're trying to alleviate any ones ongoing concern about churn for us that's flat year over year overall.
Thank you and our next question comes from Tobey Sommer Suntrust. Your line is open.
Thanks. This is Josh for bond for Toby today, you've invested a lot in technology and the online enrollment experience. It appears others are likely to follow how long would you say would take for another platform company. They get to where you are right now.
Oh, it's Dave I I'll answer it this way there's.
We've talked a lot about our platform both from a telephonic and online perspective. The then there are two aspects to the platform that are that are important one is the front end experience for the customer where they engage with us.
And candidly, we've seen a lot of people coming in and creating online quoting and shopping experiences where they're able to show different customers plans and that sort of thing we would call that the nonproprietary side of of the marketplace business.
We continue to invest heavily on the front end of the shop and make sure that our customers have the the best shopping experience.
Available to them the backend of the experience is what we believe is proprietary to the way that we are doing business that we connect across all of our products with over 170 insurance companies across the country large national small regional and otherwise.
And that is the part of the business that is very difficult to replicate given the the inconsistency of technology platforms across all the different payers and creating the the connections and maintaining all the business logic and what have you. That's it's entailed in all of that that's a gross over since.
With occasion of what it takes to build that back in but it's something that would we believe take take not quarters or months, but the years for another potential competitor to replicate.
Yes, the insurers are willing to open up their back ends to that kind of electronic linkage. So.
We see a lot of people coming into our marketplace given the growth that we've had on the front end the customer engagement side.
And we believe the more folks coming in the better.
It opens up more shopping experiences for per customers generally.
But to put the full marketplace end to end experience together in a customer friendly way that we have we believe is extraordinarily difficult expense at a time consuming for potential.
Editor to do.
Thanks, that's very helpful.
Thank you and our next question comes from the line of George Sutton of Craig Hallum. Your line is now open.
Thank you.
Right.
Well.
Okay.
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Good.
Yes.
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Yes.
Yes.
For the quarters correct. So for inorganic then there is in expectations include it around until revenue and that's actually been the case since our first guidance. What is also true is tow revenue have exceeded our expectations.
And.
Yes.
Relative to kind of the earlier questions from George.
Really when we see better than expected results in our cash collections. It is driven mostly because of better persistency people stay on the policies longer. So that's the case so.
Obviously, we have an analytics around a fairly large membership of people the longer they have someone's then on a policy though more.
The less variability there is around churn and yes, we can see if some of the data that we also have included at around the lifecycle of term percentages at least for Medicare advantage in our Investor relations materials. So.
So more to come on that obviously based on how we see Q4 plays out but.
Hopefully that answered questions George.
Wondered if you could explain your growth plans for the P. versus the combination of your increased capacity.
And the assumption of higher online only adds.
George way as there are you talking noted that to be clear or you're assuming a doubling of capacity you're assuming more of what I would define as call center capacity you are assuming higher online only adds but your growth rates are.
Obviously quite a bit different so I just wanted to make sure I understood that dichotomy.
Look at word I would just say that.
Our guidance is conservative.
That was my assumption last question are you seeing.
Let me ask it this way industry folks, including us have looked at Medicare plan finder and found it to be.
Relatively uncomfortable and and unlikely for most people to work through are you finding any impacts thus far in the season from Medicare planned finer.
No.
Thanks, guys.
Thank you and our foreign question comes from the line of Frank Morgan with RBC capital markets. Your line is now open.
Good afternoon, just going back to the ATP I'm just curious do you have any specific.
Numbers, you might be able to share like how its going so far I mean, presumably you're getting real time updates on those numbers and understanding that you're sure early in the process, but anyway, you could kind of quantify or give some kind of benchmark it down how its going so far and in this area.
Hi, Frank you're right, we see the numbers on almost real time basis, I would say that we're very pleased with the way that we planned for and plan for a copy of the way that the numbers are coming in as far Yep Yep record calls and record conversions.
Okay. Thanks, and then just curious.
Lots been mentioned about.
You know the planned binder.
Potential for growing competition, but just curious with.
Seeing strategic buyers in the space does that in any way effect.
Your view of how the competitive landscape plays out and then my last one was that the 21% online number that you had in the third quarter is that a is that a fair number at just you expect to see in the for Q with HCP or is that does that get diluted down somewhat given that the growth in overall volume. Thanks.
So let me answer the second question is on a sequential basis, we have seen historically and we do expect fourth quarter sure online applications to go up.
So we would expect the same thing that happened in 2019 as well.
That competitive side and I'll start and then Dave can Scott Scott can add.
We.
We play in a very large market as you know Frank and we've had a lot of success driving towards the growth strategy that we've been on the last four quarters and as you heard earlier in our prepared remarks and also in Q and a we are very happy with and Im very confident in our preparation execution towards ATP.
So far.
Yes, I'll leave it there I do I do want say Frank again, the fact that we got to over 20% online enrollments in the third quarter as Derek said the trend is for that to accelerate into the fourth quarter historically and thus far this quarter, we've seen just that.
You know we have high expectations for the transition to the online side of the business.
To continue to be a meaningful driver for us.
Both from a PNM perspective in a strategic positioning perspective. So we're we're really pleased with where those numbers are coming in particularly given that we were only looking for 19% to 20% online for the entire year. So we're really pleased with that and.
And competitively we're pleased with what we're seeing in the marketplace relative to our ability to to acquire customers.
Thank you. Our next question comes from David.
Jefferies. Your line is currently.
Hi, good afternoon, thanks for the questions.
Hey, guys the stocks down a few dollars in aftermarket training I think a couple of things that I'm just are raising questions for investors that I thought I asked to see how how you could help maybe at some clarity to it as is first of all on on the variable marketing costs for the approved members and customer care enrollment how.
Those are obviously up seven and 52% as you guys released how do we think about that normalizing how quick does that maybe get back to flattish is that something that can happen in the fourth quarter. Since those agents will be seasoned or does it take a longer period beyond that that would be the first question I had.
Yeah. Good question so.
The third quarter, both those metrics large it came in line or exceed our expectations.
Given the preparation that we were looking to.
Put in place in terms of capacity.
Going to HBP. So you have the way that we look at those metric is really on a back half of year basis.
It will normalize largely because of obviously, the HP period, and although on the sales side really getting agents to be productive, which many of them weren't in third quarter, because they were ramping and then getting training and getting license.
On the marketing side as we commented we're prepared remarks really the pickup there was.
On online marketing spend as a percentage of total marketing spend and because.
People that we acquired through online marketing channels have higher propensity.
Two.
Hi, there is a great ability for us to sign up on marketing.
Ceasing the cost so and as you heard we did exceed our expectations in Q3 for online enrollments. So you see a corresponding.
Positive results from that effort so.
Yeah.
For the year at the midpoint, we had guided to a flattish on a total variable costs.
I think thats still the case.
We will obviously always look for additional investment opportunity to extend that makes sense.
It does make sense it will more likely come from the marketing side.
Through online increase in online marketing investments, but to be very specific save the cc any cost of sales costs are directly related to the fact that we made significant investments to put on significantly more sales capacity in the third quarter. The vast majority of that capacity.
Was unproductive as they were going through Onboarding and training and appointments, we absorb the cost in anticipation of the business coming in in the fourth quarter, having the capacity to help as many customers as possible in the fourth quarter, hence the third quarter blip and is consistent with prior years as well.
Sure that makes sense. Thanks, thanks for the color there.
I think the second element.
That could use in explaining is just on the LTV. So the M.A. LTV was only up 1% in this quarter versus the 8% to 16% and the first half of year I.
I guess I would've thought it would been up again pretty strongly just because you guys have a rate tailwind and sounded like from some of the comments earlier that duration was looking better on that on the new cohorts. So can you help me understand the discrepancy on the M- part and then also on the Med Supp LTV. The declines that are accelerating up to 10 per se.
Sent.
Versus three to Fourx for 36% in the first half sort of fixed can you explain what's what's happening on LTV on that side as well.
Yeah, let me start with that on them. Aside were acquired go medic up about a year and half ago, and then we've really really scale that business.
His where acquire them and we are going through a certain degree of growing pains around kind of the operational aspects as we look to maintain or increase persistency. So you cut that.
On the M&A side, there is a lot going on when you when we look at third quarter Ltvs. One is obviously theres a seasonality aspect of Ltvs. So if you look at on a sequential basis, you will see some fluctuations on a year over year basis.
We look at we use that to your look back to average out the impact of either rate. It both rate increases and also policy duration. So.
That's why earlier in the year in earlier quarters, we had favorable.
Longer duration, there were still flowing until the these that we're starting to get muted because of the enrollments will result in Q4 2018.
Thomas in our progress.
Prepared remarks, we are seeing that churn.
Reversing and normalizing and narrowing compared to what we saw early in the quarter.
But it hasn't been completely reversed yet so thats why you see more of a flattish behavior in Q3.
Okay, and then so thats not just on fourth quarter event, because I thought initially.
The fact that the fourth quarter of 18 was sort of overestimated your correcting for that in the fourth quarter of 19, which Nuvigil guidance was down mid single digits. Now is only down one or two points, yes, I thought that was sort of the catch up that it doesn't really happen in quarters, two or three is but it sounds like it does actually happened throughout the year than it does but it's more a dramatic for the quarter.
Third as it relates to so our estimations on a two year look back but as our seasonalized. So that's the new on so the just to comment more specifically for turned that we were addressing both in the call in Q2 and now it's specific to the age cohort, but in terms of the LTV calculation does build into other quarters us.
But not nearly as much as the quarter that the season, it's related to.
Okay, great. Thanks, guys.
Thank you and are falling question comes from the line of Greg Peters with Raymond James Your line is open.
Good afternoon.
One question enough then a follow up.
You mentioned, a competitive conditions, there seems to be a player or strategic coming into the market almost on a daily basis. So.
One of the things we've been hearing is rising lead costs and I was wondering if you could give us some additional color around your go to market strategy in the process to drive the online enrollment so what 21% in the third quarter.
So I think.
If I understand a question is have we seen additional competitive pressure again, our marketing initiatives and has a how thats shown up in terms of our acquisition cost.
Well I'm sorry, if it wasn't clear we're hearing specifically that the cost of leads is been rising beyond just the 7% that you reported in this third quarter and.
In the context of new players Sandro strategics coming into the market I'm just curious about your go to market strategy, how you're dealing with those pressures.
Gotcha Okay.
In Q3, the increase that we reported is primarily related to increase in online marketing investments and left so of competitive pressure.
Broadly across although channels in our principal channels are the direct channels with direct response, TV direct mail and direct.
Traffic from one side. So that there was nothing in Q3 that we saw at that point to a broader.
Increasing competition.
With that said I you know you are right that there was a lot of interest in this market and for good reasons, because they probably see the same thing.
The around the market opportunity obviously the growing.
Aspect of Medicare advantage, a very very attractive product for consumer self insurance carriers. So we're aware that competition. We do feel like we have advantages in marketing that allow us to able to compete in a manner that allows the continue to scale and most importantly is we do a lot of our lead acquisition.
Principally through direct consumer as opposed to relying on.
The John Partners and then of course, we continue to scale our online capabilities, both from an enrollment perspective, and marketing perspective, Greg It's a competitive marketplace. The we continue to believe that we have the opportunity to grow at multiples of the market rate, while still maintaining a very margin positive impact on all the incremental business.
Great.
By the competition.
Right.
My follow up question, which is in and I understand the dynamics of the near term growth opportunities and sacrificing cash flow or free cash flow that as but.
I was wondering if you could just give us an update.
I think.
In the past you might have suggested that operating cash flow or cash flow from operations might turn neutral or slightly positive at some point.
Year to down the road, maybe you can just give us an updated perspective on that.
Yeah, I at our Investor day back in May.
We had commented that we'd be close to breakeven on a trailing 12 month basis March 2020 based on the guidance at that point.
We have obviously since revise our guidance upward and then we had commented that other settings that we don't expect to be able to be at operating cash flow breakeven.
At that same time period, given our business model, which is heavier investments upfront for customer acquisition.
So it's.
As of now we expect that the cash on the balance sheet, plus or access to a revolving facility to be able to allows for us to pursue our growth strategy.
For both in the five year base scenario and also the tailwind scenario that we had.
Skus at Analyst day.
If there are additional opportunities to pursue more growth.
We will look to leverage more on our 358 million dollar commissioner receivable to give us more access to capital too few that growth.
We will be revisiting our long term growth plan. Obviously after this year. Since we are pacing ahead of both the base and the Tailwinds and are in that five year plan at that point will be more be able to discuss where we see our cash flow dynamics in outer years, Yes, let me just add to that.
That answers to questions. What once that is we do not expect our gross margin per enrollment to be detrimental by any of the market.
Competition.
That would cause us to from more cash is just volumes well in excess of our tailwind case.
Thank you and our next question comes from Michael Newshel with Evercore ISI. Your line is now.
Thanks keep his comment linger on the level of conservatism in the guidance since you decided not to leave the for your revenue guidance unchanged, even though the third quarter came in better plus a Medicare LTV outlook actually improved and stepped up investment capacity. So you just kinda like framed that decision and then also just how you're thinking.
Upside drivers for the enrollment season.
Yes, so we made the decision headed into the queue to.
Earnings call too.
Guide want.
Up and made a decision for a management team and board level than we would not be guiding at Q3. So this is a decision that was made here respective where we came in on Q3's is nothing should be read into that.
Great. Thanks for clarifying that and then just in terms of upside drivers and for the fourth quarter. Since the agent count has doubled is that our productivity the key swing factor.
There is a well like demand for seniors and the quality leads also key factors to.
So this it's the volume of customers coming into the platform and our ability to to do that on a margin positive basis from a marketing investment perspective, and that's the the investments that we made on the technology side to make those agents that we that we've had on board for awhile and those that we've onboarded just recently to be more per.
Productive so to in essence increase their conversion rates.
The fourth quarter, and we build what we believe as a and aggressive but very achievable plan with with.
Areas of potential leveraging up so again to Scott point its.
Imprudent for US this early in the season to be further commenting on guidance beyond that which we have but other than to say that we're very pleased with the way the business has been coming in as Scott said record volumes and record for record conversion so far.
Great. Thank you.
Thank you and our next question comes from the line of Lisa Springer with singular research. Your line is open.
Thank you I just wanted to ask a quick question about the expansion of telesales capacity, how much of that was in house agents Christmas flexible agent and is there a different than conversion rates between those two groups.
Yes is the in house growth was about 50% so call. It 400 up to 600.
Last year, and then the balance of that is going to be external agencies.
There is a conversion rate difference it had the newer the agent the less productive they are on the phone.
Much of the person playing golf or baseball the more slain to the batter club they have the the better they get at using the tools.
Interacting with the customer so.
Yes, we as I mentioned before we make a lot of investments on the technology side too.
Make that sales process easier both for tenured agents and for new agents and we are seeing the benefits of that already this ATP.
But there's no question that a more tenured agent is more productive and more efficient than than annuity.
Thank you and I'm not showing any further questions. At this time I would now like turn the conference back to Scott Anderson for any further remarks.
Thank you everyone and for the.
Caliber of questions. It definitely feels to me that the analyst coverage the house has matured dramatically.
Since a year ago, when we were headed into ATP and just really appreciate the attention being paid to this name.
We could not be more optimistic about how our business is position Forex growth and online. We think is a harbinger of a sea change in our strategies and our competitive differentiation and so as I said earlier, we remain uniquely cost for that and.
And the trajectory of our business and we believe we're going to have a record fourth quarter, we look forward to.
Telling you about it.
When the calendar turns to 2020, thank you everyone for being on the call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.