Q2 2019 Earnings Call
Greetings and welcome to the health insurance innovations second quarter 2013 earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Michael Devry Senior Vice President of Finance. Please go ahead Sir.
Thanks, Hector and good afternoon, everyone. We're excited to have you join us today for a discussion about health insurance innovations second quarter 2019 financial results.
By now you should have received a copy of the earnings release, if you do not have a copy. Please visit our web site at H.I.Q. Dot com on the call with me, we have Paul Gevos H.I.Q.'s Chairman of the board Gavin Southwell, H.I.Q., CEO , and President and Mike Hershberger, H.I.Q.'s Chief Financial Officer. As a reminder, today's conference call is being recorded and a replay of the call will be available on the Investor Relations section of our website.
We will be making forward looking statements on the call all statements other than statements of historical facts are forward looking statements such statements may describe future plans objectives or goals.
Forward looking statements are subject to future risks and uncertainties, including the risks outlined in the company's Form 10-K . These risk and uncertainties include among other things the company's ability to maintain relationships and develop new relationships with health insurance carriers and distributors its ability to retain members the amounts of commissions paid to the company or changes in health insurance plan pricing.
State regulatory compliance and changes in the United States Health insurance system. The luxe actual results may differ materially from those projected or expected in these forward looking statements listeners are urged to review and consider the various disclosures made in the company.
In this conference call and the risk factors disclosed in the company's annual report on Form 10-K as well as other reports we have filed with the Securities and Exchange Commission.
Copies of the Companys does he see reports are available on our web site at H.I.Q. Dot com and on the Fccs web site.
The company disclaims any obligation to update any forward looking statements. After this conference call with that I will turn the call over to our chairman of the board Paul gave us.
Thank you, Mike and welcome to all who have joined US for our discussion of H.I. I accuse second quarter results and the significant progress that the company has made towards building out our expanded product platform that adds significant end to end capabilities and assets, while leveraging our core competencies in technology innovation.
I would specifically like to address the Companys recent announcement, but its board of directors working together with its management team and legal and financial advisors has commenced a process to explore review and evaluate a range of potential strategic alternatives focused on maximizing shareholder value.
H.I.Q. is fortunate to have a highly engaged board comprised of members with deep with deep operational and transactional experience in healthcare and in a wide range of regulated and consumer oriented businesses with proven track records of delivering value to shareholders and other stakeholders.
The company's board of directors has not set a timetable for this process nor has it made any decisions related to strategic alternatives at this time.
And there can be no assurance that the board's exploration of strategic alternatives will result in any change of strategy or transaction being entered into or consummated or if a transaction is undertaken as to its terms structure or tiny.
Management will not be discussing the process and their preprint prepared remarks or answering any questions in the queue in a portion of this call with regard to that process.
The company does not expect to make further public comments regarding these matters unless and until the board has approved a specific transaction or alternative or otherwise concludes its review of strategic alternatives.
I will now turn the call over to our Chief Executive Officer Gavin Southwell.
Thank you Paul and good afternoon to everyone who has joined.
On the call today I'm going to provide a couple of highlights from each I Q second quarter.
I'd like to spend a bulk of my time, focusing on our expansion into the Medicare market and what it means to the future they try keep.
Oh second quarter was focused on meaningful developments and our product diversification initiative and lost a definitive shifting our focus to growing in the Medicare over 65 markets.
Over the past two months, we have met several important investments focused on consumer acquisition, our demand generation, including digital assets and traditional media.
Our investments to date total nearly $100 million and with them, we intend to leverage both of our expertise and our technology platform to truly transform our business going forward.
We have also invested in building captive distribution as well as signing major contracts with outsource providers of licensed agent to ensure we have sufficient agents available. So this year's Medicare open enrollment period coming up in the fourth quarter.
I'm very proud to be reporting today, but we have been able to use our financial strength to deploy capital and quickly build a broader fully formed Medicare over 65 product offerings, which will benefit our ptwenty lighting results as well as provide appears to be able to ramp up for future growth into 2020 unbilled.
We are reaffirming our 2019 annual revenue guidance in the range of 450 million to 460 million.
Reaffirming our adjusted EBITDA guidance in the range.
Oh 82 million to 87 million and raising our 28 I'd in adjusted net income per share guidance by 20 cents now in the range of $4 to $4 25 to reflect the lower share count, resulting from repurchases of our common stock.
Revenue for the second quarter came in at 58.4 million, which compares to 73 million a year ago and adjusted EBITDA came in at 13.8 billion compared to 12.5 million. The article on our second quarter results were impacted by a change in estimate that lifetime value associated with policies sold by a terminated third party distributor that impacted revenue in the amount of approximately 11.9 million.
It impacted adjusted EBITDA by approximately 2.4 million.
It is important to note that the estimated total amount refunded associated to these policies was closer to $1 million or approximately $200000 representing the company's portion.
Mike Hershberger will dig deeper into our financials later on the call.
From a bigger picture perspective, we believe having this STC not to and I'll review mirror means our regulated we distractions at becoming a thing of the past.
We have made great strides in the transformation of our business all the while continuing to generate strong financial performance.
We expect our revenue and earnings to build for the second half of the year.
The fourth quarter being the high point, especially during the AC AE and Medicare open enrollment periods.
We're expecting Q3 revenues to range from 90 million to 94 million.
Third quarter adjusted EBITDA to range from five to 7 million. As this estimate includes approximately five to 6 million as expenses necessary to keep ramping up our Medicare offering in advance of the important fourth quarter open enrollment period.
And adjusted earnings per share to range from 30 cents to 35 cents.
While our investments in the Medicare market positions the company to capitalize on these opportunities in the second half of the year. The Q2 results were impacted by our initial re entry into Medicare I do want to note. However that in July and the first few days of August .
Cool I asked the expected duration units grew year over yet and we do expect to see double digit growth in under 65, I F pace going forward.
The highest growth rate, we're allowing for in our model will be in our Medicare business.
[noise] as we look toward our non Medicare that strategic growth initiatives. We have recently made to diversify the business and expand our addressable market by developing an end to end Spanish language health insurance solution and also by expanding our life segment to become a pillar of our product offering.
Oh first Spanish language part of his life and we've already seen sales start to roll in which we expect will begin to gradually ramp up for the fourth quarter and into 2020 .
In Q3, and Q4 will receive a launch a service finished products and additional on salaries to round out. The offering were also engaged in translating the entire member portal and might that if its keep up which we're targeting a third quarter completion date. In addition, we've rolled out Spanish materials to agents and I'm not being translation of our entire quoting engine just as a note. This is a very large scale project, which encompasses every consumer in agent touch point and we believe in addressing this need in the market requires an end to end solution and that's why we committed to delivering that solution in a way that hasn't been done before in our industry. We see this as a significant upside to our business as well as something that could truly help underserved individuals across the U.S.
Looking towards the life segment of our business. We've historically no emphasized life insurance is a major standalone product segment, but rather and celery supplementary offering now we are looking to grow this segment to become a larger portion of our business to help us diversify and to offer a wider range of valuable products to our customers to accomplish that in the near term. We have recently launched a new private label plan with an e-commerce partner and we're in the process of adding additional carriers and products. This growth profile stems, 100% from E Commerce free which we have sold thousands of policies were just a narrow offering to date.
As we continue to focus and invest on growth in e-commerce and expanding our digital offerings, we're very happy to announce but we have launched a new life insurance focused E Commerce site based on the agile platform.
And we have also launched a fully Spanish language E Commerce site focused on health and ancillary products for the Spanish language population.
Also we recently launched our first of many private label enrollment web site, the consumer groups and associations, an area, where we see significant potential for future growth.
I touched on the importance of the second quarter as a real jumping off point for our reentry into and transition of the business focus towards Medicare I'd like to really dig into the details of what that means for remainder of 2019 and for the longer term vision that this company. This move provides an avenue for significant diversification of H. I accused business deemphasizing the role that I FP policies on our financials and reshaping our business is one that has a balance of both Medicare and under 65, continuing to provide affordable health insurance to consumers.
Since the close of the first quarter, we made nearly $100 million in investments for strategic assets in the Medicare is this the first being together health, which we announced in early June .
And we've made great progress on integrating that business since our announcement and we've been pleased with the direction of that demand generation or consumer engagement platform.
The second investment, which we closed recently has a unique asset in the digital space, while not financially material, we intend to utilize this online property to drive significant demand generation going forward.
We also made an investment in captive distribution.
Okay, although not currently material from a financial point of view, we are excited at the organic growth. This investment will drive through the Medicare space and we will continue to invest in growing this important part of our business.
While important to the long term strategic plan for HIV Q.
These investments will also could also potentially play a significant role in our success. During this selling season with respect to the third quarter. We are expecting that our third quarter revenue contribution from our Medicare channel will range from 20% to 25% of our consolidated revenue in the quarter, we expect to make and Sta investment of between five and 6 million during the first quarter to keep building out capacity for a robust fourth quarter open enrollment activity.
Turning to the longer term benefits of this shift to Medicare and in addition to being able to set the large and growing Medicare market. Our product portfolio is going to look meaningfully different in 2020 and beyond.
Regarding our SCS business, we have a great commercial agreements, which will greatly enhance our CFO .
During this year's open enrollment period with these new agreements in place, we will be offering more AC a options than ever before and expect to sell more of these products and we have in past quarters.
Well, let's see this impact mainly in the fourth quarter financials I wanted to emphasize how pleased we were to have the arrangements in place well in advance of the busy selling season.
In terms of our IP business, our platform is product and carrier agnostic and we are not reliant on any one type of product and the steps. We've taken so far this year drastically reduces any potential impact from changes to any single product on our overall performance.
This is especially important in that it reduces risks to us.
From any potential regulatory changes.
Before I turn over the call to Mike Hershberger to go through the numbers I wanted to take a moment to reflect on the past three years since I joined the childcare, we've made great strides in enhancing our technology, including launching the next generation of our technology platform under action, we have diversified our product mix, we have grown our e-commerce offering meaningfully and we have established a strong financial position.
Our reentrance into the Medicare market is yet another significant step forward in the next generation of HIV Q.
We've established a very solid base to stand on for the remainder of 2019 and the moves we've made this quarter will truly transform this company going forward.
I will now handover the call to our CFO Mike.
Thanks, Kevin and good afternoon, everyone.
Second quarter financial results reflect our execution.
In our individual <unk> family plan products.
And significant investments in our product diversification initiative, including our late Q2 acquisition of together health.
Our direct to consumer platform connecting individuals with U.S. insurance carriers through consumer acquisition and engagement.
Primarily serving the Medicare insurance market.
The integration of together health is meeting our expectations and we expect revenue growth and margin expansion from these investments, especially in the fourth quarter.
We continue to execute on several additional strategic initiatives that should drive growth for the second half of 2019 and beyond.
We will continue to invest in what we consider to be attractive growth opportunities throughout the year.
Continuing to focus on product and distribution diversification.
In our process of cooperating with the Federal Trade Commission regarding the policies sold by terminated third party distributor.
The Companys results were impacted by change in the estimated value associated with policies that impacted revenue in the amount of approximately $11.9 million.
And a reduction in associated commission expense of $9.5 million.
This adjustment negatively impacted adjusted EBITDA by approximately $2.4 million net of the associated reduction of commission expense.
The estimated total amount refunded associated with these policies was approximately $1 million.
With approximately $200000 representing the company's portion.
Overall, we expect that 75% of the consumers who purchase these policies will retain the coverage. They currently have in place.
[noise], including unfavorable revenue adjustment of $11.9 million related to the terminated third party distributor.
Our Q2 2019 revenue decreased 18.7% year over year.
To $58.4 million.
Approximately 16.6 of this decrease was attributable to a change in the estimated value associated with a onetime opt out program for policies sold.
By that terminated third party distributor.
Under assay six or six revenue was driven primarily by our expected duration units submitted during the period.
Expected duration units, excluding fulfillment only for the quarter were approximately 516300.
Down less than 1% over the same period in 2018.
As expected submitted I FP applications were down considerably more than expected duration units due to the commencement of sales of short term major medical policies of 12 months in longer beginning in the fourth quarter of 2018.
This results in lower policy churn and in turn.
Fewer submitted applications.
In the quarter, we recognized $26.9 million of third Party Commission expenses.
Compared to $45.7 million in the same period in 2018.
The decrease was driven primarily by the impact of members, who opted out of policies sold by a terminated third party distributor and a favorable change in estimate of amounts owed under certain prepaid Commission agreements.
Looking forward to the third quarter, we're expecting third party commissions as a percentage of revenue to range from 50% to 55% of revenues, reflecting the higher gross margins that we expect from our expansion products as we leverage our captive and BPL distribution sources.
And as a result of our expanded relationships with third party IP distributors that have proven to be highly scalable and have demonstrated an ability to meet our high standards of compliance.
Total selling general and administrative expenses for SGN aim was $21.4 million in Q2, 2019 compared to $19.7 million in Q2 2018.
Adjusted EPS, DNA, which represents total SJ.
Less stock compensation and nonrecurring costs was $16 million for the quarter compared to $12.3 million in Q3 2018.
This increase is primarily due to professional fees legal costs and transaction costs for our together health acquisition.
As well as marketing investment in our ecommerce channel.
But together health operations added an additional $1.1 million to our SGN today for the quarter.
Our GAAP tax expense was higher this quarter as we continue to recognize the impact of assay six or six the higher year over year effective tax rate of 48.5% was due to the adoption of assay six or six creating an opening balance sheet.
Tax liability adjustment the impact of which is spread over four years starting in 2018.
We're working with our tax advisors to evaluate our final tax filing position for 2018.
As we await the publication of final implementation rules from the taxing authorities.
EBITDA was $8.5 million for Q2, 2019 compared to $5 million in Q2 2018.
GAAP diluted net income per share for the second quarter. In 2019 was 20 cents compared to GAAP diluted net income per share of 14 cents in the same period of 2018.
Adjusted EBITDA was $13.8 million in the second quarter of 2019 compared to $12.5 million in the same period of 2018.
Adjusted EBITDA as calculated by taking EBITDA.
And adjusting for items that are not part of regular operating activities, including stock based compensation.
And related costs indemnity and other legal costs severance restructuring and other charges.
Adjusted net income per share for the second quarter, and 2019 was 71 cents compared to adjusted net income per share of 53 cents in the same period of 2018.
We believe that our non-GAAP metrics of adjusted EBITDA and adjusted net income per share provide a meaningful measure of our financial performance.
We provided a reconciliation of our GAAP metrics to our non-GAAP metrics in our earnings press release.
He was published earlier today.
We entered into a $215 million credit facility.
Dated June five 2019, with a syndicate of banks with Bank of America, M&A as administrative agent and B of a securities and Suntrust Robinson Humphrey, Inc. As joint lead Arrangers and joint Bookrunners.
The credit agreement will mature in June 2022, and includes $150 million funded term loan.
And $65 million in available revolving lines.
We used a portion of the net proceeds from the term loan to finance to refinance $65 million of outstanding debt.
Fund that the $50 million cash portion of together health acquisition.
And we repurchased $18.6 million of common stock.
Cash and cash equivalents totaled $14.7 million as of June Thirtyth 2019.
And our $65 million revolver was undrawn.
At the end of the quarter.
As Kevin indicated we are reaffirming our 2019 annual revenue guidance in the range of $450 $450 million to $460 million reaffirming our adjusted EBITDA guidance in the range of $82 million to $87 million and raising our 2019 adjusted net income per share guidance by 20 cents.
Now in the range of $4 to $4.25 to reflect the lower share count, resulting from the repurchase of our common stock.
The company believes that the that this guidance is conservative as we are ahead of our plans for securing critical components of our product diversification initiatives.
Specifically with respect to our newly acquired capabilities in consumer engagement from both traditional media and digital sources.
And the development of in House, VPO, and third party distribution relationships to support sales.
We expect our revenue and earnings to build through the second half of the year.
With Q4 being the high point, especially during the.
And Medicare open enrollment periods.
We're expecting Q3 revenues to range from 90 million to $94 million and Q3, adjusted EBITDA to range from 5 million to $7 million and adjusted EPS to range from 30 cents to 35 cents.
Included in our estimates is an expected SGN AIGH investment of between $5 million and $6 million during Q3 to build out capacity for robust fourth quarter open enrollment activity.
Our seasonal investment includes staffing training and professional fees.
We're expecting that our Q3 revenue contribution from our Medicare channel will range from 20% to 25% of our consolidated revenue for the quarter.
Thank you for your time today with that I'd like to hand, the call back to Gavin for concluding remarks before Cabernet.
Kevin.
Thank you Mike.
During the first half of 2019, we have succeeded in being able to diversify and expand into Medicare and a very positive and accretive manner.
As well as making significant progress on other strategic initiatives accelerating our ability to provide the potential for future growth and fundamentally transforming the company.
We did this while managing to maintain our core business broadly flat from a revenue perspective in Q2 without the impact of one off items.
Now once again in July and August , we seeing growth and expected duration units, which illustrates the strength of the underlying business.
We continue to execute and we will continue to invest in what we consider to be attractive growth opportunities throughout the year continuing to focus on product and distribution diversification.
So with that we will now open the lines for Q.
Operator.
Thank you at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Our first question comes from the line of Randy Binner with FBR. Please proceed with your question.
Hi, good evening. Thank you.
I wanted to maybe start on the Threeq Guide. So you mentioned that 20% to 25% of your revs.
Come from Med Supp.
Would that be a similar percentage.
For the fourth quarter and then in regard to your $5 million to $6 million DNA investment can you can you help us understand what kind of gene a base that would be off of because DNA has been moving up. So it was that five to six suntava like $20 million of DNA.
I have those two questions for the third quarter guide.
Yes, so well to that so thanks for the question good questions well, we'll split them out I'll take the first shot. So so yes, I think thats a good guide of the split we see some Medicare Medicaid and Q3 and it is likely to continue in Q4 as we as we continue to invest.
We'll have further insights and we'll update everybody as we see that which is which is really I think I think impressive considering we had it we had a standing start.
I think it's right as well that we continue to invest as everybody is our peers and if thats what people doing these quarters.
So I'll hand over to host for any of the colobus.
We were trying to give more detail than we have previously around the investments were making so.
Okay Thats good sure absolutely great question, Randy So Mike Hershberger here, so as we think about kind of our revenue and maybe I'll start with the revenue piece and I think it will all tie in so as we think about our revenue guide for Q3 were looking at somewhere between 90 and $94 million as what I said in my prepared remarks with.
Our third party commission expense in that 50% to 55% range.
With our adjusted EBITDA, ranging from $5 million to $7 million. So as we think about it our base for our M&A is going to be right around that $35 million Mark plus the additional investment. So that's I think is appropriate way to think about Q3.
Is that so the third party commission.
There's a pretty significant margin item and it's been moving around here and it looks like it's going to move again in the third quarter is that is it said, if we think about the model longer term under the new accounting.
With the business mix. You're building is is that were third party commission should run generally kind of in the 50% range.
Yes, I think that's a good way to think of it I mean in Q1, a big part of the story is that way commissions were higher we said clearly we went we were looking to control that we've reduced it in Q2, which is a which is exactly how we position that and we successfully executed that and then now it should stay pretty pretty consistent.
As I as we carry on and with the mix of the business changing vis a vis the potential for upside and margin improvements as you grow Medicare that tends to be higher margin. So so so yes, it's kind of a it's moved freely yet, but it's a positive change.
We won't be able to pick up on that we did what we said we would.
But it but yes, I think you're thinking about the right way that kind of 50 55 is a good way to think of it that is correct.
Great stuff. Thanks for the question, yes. Thank you.
Our next question comes from the line of Richard close with Canaccord Genuity. Please proceed with your question.
Yes. Thanks. My first question that you said, the Medicare, 20% to 25% of revenues third quarter and you mentioned that.
So its really implies the rest of the business is flat year over year I am just curious your thoughts.
With respect to the rest of the business why exactly what's going on there that that would be flat year over year. Why are you seeing any growth on that side of the house.
So so weve.
We we really try to change the focus of the business onto under the Medicare side, we see that as being the fastest growing pace.
So its right, but we've taken a more conservative way of modeling out the underlying business.
But as we said in the in the prepared remarks, we have seen solid growth in July and August in terms of expected duration units, but in terms of that.
Im modeling point of view, we have took a conservative view on how we've modeled all under 65 will lie at the business to allow ourselves a strong bias.
Towards the conservative approach, allowing for a potential upside.
Okay.
So I'm I'm curious in terms of being able to.
Reaffirm the guidance for the year I mean, given there's so many moving parts in terms of the product changes here with respect to Medicare.
And you guys don't necessarily have a track record there just curious if you can.
You know I guess.
[noise] provide some additional details or what gives you the confidence that you are getting a.
Be able to hit the targets on Medicare and the second half what gives you that conviction.
Yes, there's a few points that ill try to answer kind of piece piece by piece. So when we made the initial investment and we've made several since we raised high revenue and earnings guidance and then in the second quarter, we had to absorb the impact of this one off item to do as a discontinued operation from November 2018, and so the fact that women tanning the guidance on revenue and earnings is essentially an implied raised by the amount of that impact, which is some 12 11.9 million on revenue and $2.4 million on on on earnings and so I think that.
There isn't an implied raise that and vis vis discussions on the next piece around.
This business has got an expertise in the Medicare space, we used to operate in that market. So weve re entering that market, it's not entirely new to us a lot of our carrier partners and distribution partners have great expertise. The investments we've made in businesses that bring with them a huge amount of expertise in that space, we've done significant and compared to the end market analysis, we understand that that market incredibly well.
And again.
With the investments in demand generation or consumer acquisition, and really gives us incredible visibility over the amount that business available and I think that.
We have been conservative on our guidance.
To give ourselves a high level of confidence and how the business is tracking I mean, weve invested $100 million here in various assets we've clearly.
Got a lot of confidence our ability to execute and as an initial example, we did see a small contribution in Q2 from from that initial investment and we'll see a small contribution in Q3.
It's very predictable.
And.
Yes, that's that's what that's why we feel good about that.
Okay. Thank you.
Thank you great question. Thanks.
Our next question comes from the line of George Sutton with Craig Hallum. Please proceed with your question.
Thank you I just was curious on your captive distribution move.
Are those folks are going to be Medicare capable and.
Will that be an overflow.
Area for you to send customer opportunities or is that going to be a core part of your strategy.
Yes, so I'll try to answer each part of that question. So so.
The captive distribution is important about something that will be growing they'll be coming into it with previous experience of that market. So we essentially have a readymade and salesforce with with a deep experience of of the products.
And similar to a lot of our peer group I will also we also signed agreements with third party.
Providers, it's a tele sales.
Capacity.
And.
I will need to scale very quickly so like a lot of our peer group it will be a combination of captive distribution and on using these fee based third party telesales assets.
Which allows us to have.
Hundreds of agents available.
By the time, we reached 29 things open enrollment period and the case. It was is it being able to have an immediate impact in that consumer acquisition on demand generation.
And now we have the pieces are falling into place as well.
So I think I cover these parts of the question if not let me know.
One other question relative to what happened in Q1 or I'm, sorry, the past quarter for revenues. Obviously, you had certain assumptions. When you had your earnings call then and.
Revenues came out quite a bit less and I'm just curious as we sit here in Q3 with the enthusiasm and comfort you do just can you compare the two quarters and what's different what caused things to be challenged and what what gives you the greater conviction here.
Well, we then the second quarter is traditionally quiet and selling quarter. The it's a perfect time to make investments and build and grow and we said very clearly that diversifying broadening out the product mix was very important for this business and that's what we did in the first half of the year.
As being very successful in terms of really broadening out in diversifying product mix, it's really the perfect time to do that as as a business.
Making several investments and growing out.
Medicare offering does take a lot of time and effort.
And so I think to do that whilst maintaining a pretty flat revenue year over year is impressive I think it's given us the opportunity now we have this fast growing Medicare arm to be more conservative on how we model out.
The I'll call IP business, but we're still showing that as having solid double digit growth.
Free free 2019, so I think a lot of people.
Our industry has refocused from the kind of under 65 to over 65 will from IP to Medicare and they had a huge negative impact on their online business and we've been able to build this out without having.
Such an impact so I think it's an impressive performance.
So to be able to be flat year over year.
Whilst executing on several investments.
Okay. Thanks, guys.
Our next question comes from the line of Mark a gentle with Lake Street Capital markets. Please proceed with your question.
Yes, good afternoon Governor Mike just one quick one in terms of the.
Tcs situation now you guys going to double up.
Absolutely.
Impact you saw it but that revenue give or take a little bit here gross revenue to hit the quarter, where do you stand with the.
Pcs situation here going forward. Thanks.
Thank you.
Yes, we're very pleased to be able to explicitly stays on the impact on that the actual cash impact.
And of course, the accounting impact on the six a six when you when you make an adjustment like this the guidance is that you you take a conservative approach. So you don't have to make future adjustments.
So I think the fact that we're able to do that and easily absorb.
What is a very small.
Impact and it's something that we're very happy happy full.
And we were really pleased to be able to put this and this kind of overhang of what a potential impact would look like.
Behind those and in the rear view mirror.
So so we'll we'll be talking in detail about how the calculation works, but I think the fact that Onea a few hundred thousand dollars was actually paid in refunds is a pretty key takeaway of asbestos actual kind of cash.
The impact of that.
So yeah, we are very happy to have that in the rearview mirror.
Thank you.
Our next question comes from the line of Mike Grondahl with.
North Wind Securities. Please proceed with your question.
Hi, Yes. Thank you Hey, Gavin I think you described the third acquisition the captive distribution.
But could you go into a little bit more detail what you meant on the second one in the digital space kind of an online property to drive demand what is that in layman's terms.
And so.
We've we've acquired on digital assets, so essentially a web sites.
And existing demand generational consumer acquisition assets.
We were currently investing in those assets.
And I will talk about it in a little more detail.
Going forward, but right now we really wanted to make a point that following our acquisition of kind of traditional mass media demand generation. We have also acquired digital assets as well.
We're very excited about it.
I think it's that since we're doing build and grow and we really broadening out will about looks like.
That will will talk about a lot more going forward. So in layman terms landing sites webpages.
And and it really broadens out and rounds out our consumer acquisition pace.
So we're really pleased we spent a lot of time looking a bit a lot of research.
And so to have executed on it it's going to it we think it's going to serve us very well in the future. So yet we'll talk about that more as we go through the third quarter.
Okay and.
When you were describing the 26 million of third Party Commission expense there was a favorable change in I think estimated policies. So there was a benefit there.
Could you go into a little bit more detail there maybe quantify that and just described the change.
Sorry could you could you just repeat the first part of that question again sorry.
Yes, when you talked about third Party Commission expense.
There was an offset to it that you described as sort of a favorable change in estimated policy life and I think that was a contra item to the expense so yes.
How do you say and so a lot of businesses I, we're all dealing with the same.
Revenue recognition standard it's pretty common for people to.
Make it make adjustments.
And so we've made an adjustment it's if it's a favorable adjustment.
And on the impact of that is is that you can look at our peer group.
That frequently making adjustments as well.
And so for US this is an outpost from from.
Following on from Q1.
People picked out commissions, we wave.
Effectively kind of lowered our commissions Sega weve.
And so quite rightly weve made a re estimation.
On the under six so six we'll we'll constantly be reviewing each have a different metrics.
It's a good illustration of where the business is going.
Got it.
And then two more things for for Q.
In the past you've talked about you know that's a potential benefit.
For higher carrier split.
And there's also been this potential benefit for kind of writing off.
Longer duration short term plans, what's kind of your outlook for both of those as we go through the year.
Yes, we will have both of those to be a potential upside to the business.
The fourth quarter is a great opportunity to benefit from from both elements.
And so we haven't included that in our in our model and instead, we've allowed that to be a potential upside.
Which we believe is the is the right thing to do.
But we look forward to getting to the fourth quarter.
Yes.
Okay.
Great. Thanks for the questions.
Our next question comes from the line of Frank.
Spire CNO with first analysis. Please proceed with your question.
Hi, guys I wanted just to come back to commissions for a minute.
And sort of clarify.
The 9.5.
<unk> million reduction in commission expense you talked about.
Is that all related to.
Simple health.
Yes. The 9.5 is yes. So we've tried to in the prepared comments, we tried to explicitly call out.
That impact so 11.9 on revenue at 9.5 on commission expense yes.
So in terms of the favorable change in estimate of amounts owed.
Is that a reflection across the entire book of business.
It is yes.
Okay and.
Is there any way to quantify.
What that impact is and then I guess going forward.
You know how should we think about that.
So I think we should expect it to stay at a consistent level going forward.
There was no your question referencing it.
So I I think you should expect it to be consistent but I think as we move through time.
There is a potential for.
Potential revaluations, we took a conservative approach with a bias for upside.
Okay, maybe just last from me and sticking on the same point is.
It'd be helpful to know if we apply that same.
Assumption today in terms of the commission expense.
A year ago, what the.
Difference would be.
Yes, they had one of the <unk> well one of the good things about it takes those takes it allows you to look at the overall lifetime value and as as we gather more information. It allows you to take it to keep making what you believe your more accurate an accurate estimations.
You know, we we know we'd be making a big effort to control the commission side.
It allows us to.
To to re estimate which is what we've done it's a positive.
So the business is moving in the right direction.
We expect it to be to be consistent with that as we move forward, but like every element of six or six will be will be.
Always looking at that.
Is the ability to make further enhancements.
So we take a constrained approach.
And like we said in our prepared remarks, we believe that our our model and our guidance as a conservative bias with the potential for upside.
Thank you.
Your next question comes from the line of Greg Peters with Raymond James. Please proceed with your question.
Hi, Good afternoon, I just wanted to focus on one area, which is free cash flow.
Hi, if you could talk about the moving pieces in the first half of 19.
It would be helpful, but more importantly, as we look for the full year.
Oh, it's our understanding of the over 65 market that.
There's some cash flow pressure that comes early on when writing that business and.
Just curious what in the context of the revenue guidance you provided for the full year earnings guidance you provided.
What what you are thinking the castle will look like.
I think it's a great question and so we were very fortunate that the business is having this under 65 highest people off which is a big generator.
Positive cash flow.
Allows us to really.
Speed up our growth into the Medicare space, you're you're quite right people to focus mainly or entirely on that space tend to have significant negative cash flow at primrose and the most recent period and you look at kind of the trailing 12 months.
We're looking at about a 50%.
From adjusted earnings to cash flow.
Which which puts us in a very strong position as we as we build out the only 65 at pace.
So so yes. It will be 65 that usually has had has has that impact and so I'd say, it's a great benefit to us to have that under 65, IC business generating significant positive cash flow.
Yes.
Okay. Thanks for your answers.
Our next question comes from the line of Steve Halper with Cantor Fitzgerald. Please proceed with your question.
Hi, so in the release in your prepared comments you talked about the 11.9 million.
In terms of revenue reduction, but then in the commentary you talked about a $16.6 million I'm just trying to figure out what what the 16.6 million represents.
Hey, Steve Mike Hershberger here that was the that was of the 18.7% reduction 16.6% related to that change in the estimated value for that for those opt for that opt out Oh. It was 16.6%, yes, if I said I misspoke I apologize for that.
Okay I guess.
We are not a one off adjustment basically did we say broadly broadly flat year over year of single digit couple of percent.
Right.
And then when you think about just to go back to the cash flow.
No question.
Obviously.
Sort of the business model is in transition because 66, but do you think 2020 sort of.
It is a more normalized.
Free cash flow year or does that happen in 2021.
I think that we have exceeded our target for growing on the Medicare business in 2019. So far we are ahead of schedule.
We we are forecasting it being about 2020, 5% of our business in 2019.
But it could grow at a higher rate.
I think as we go into 2020, we have allowed ourselves this great base for that business to ramp up and and the cash flow will be an output of how quickly the Medicare base grows versus the underlying pool under 65 business.
So I think for us as we as we go through Q3, and we continue to invest in that site as I will give us a really good insight and then as we as we finished the fourth quarter and then we see how everything.
Plays out that'll that'll get us a really really in depth insight.
So I think Directionally I think Thats fair, but I think you know we are betting it investments.
We've done a significant transformation to our business and the continuing to Nick.
Further investments and that we are really excited about that.
So I think we're fortunate in that we have this large individual business that business has been very resilient and is and is still giving us good growth in July and August like we mentioned.
And that's going to that's going to really help generate some significant cash flow for us to help with this as a growth in the Medicare side.
Fair enough. Thank you.
Our next question is a follow up from Richard close with Canaccord Genuity. Please proceed with your question.
Richard close here not only your line is now live.
Richard close are you on the line.
[noise].
Our next question is a follow up from Frank Sparacino with first analysis. Please proceed with your question.
Hi, Kevin just wanted to come back to Medicare for a moment can you talk about a as you launch.
Ah what type of coverage, you're going to have from a product perspective, I assume it's a M.A. and that's up.
Part D as well, but also you know from a.
Carrier perspective, as well just a a sense of how big the footprint is going to be in Q4, and Q3 I guess too.
Thank you I'd say a great question I will reiterate we're very fortunate in that we have a lot of established relationships that across our market. So so we coming into at Medifast best with that with a very broad and and a comprehensive offering a like like he said across all the key major product types and across you know kind of covering the full spectrum that and geographically and by product type and says that benefit that that the large extensive relationships. We've built in that in the individual I at the market. It really gives us just a just a huge.
Hey style and so you know for a lot of businesses from a standing start it would it would take a very long time for us. It just simply simply isn't the case. So so were very Oh, we feel very fortunate in that regard you know and we are grateful to you know apartments is it really helped us establish that.
So quickly.
Our next question is a follow up from Richard close with Canaccord Genuity.
Please proceed with your question.
Great. Thanks, sorry about that I'm not sure what happened.
Just you know given the fact that you're really focusing in on the Medicare.
Thoughts regarding the core business or your historical business are you, making investments. There you know I guess, how should we think about it going forward as we go into 2020 is this you know that existing business or something that you know is expected to decline over time or should it holds steady should there be any growth there going forward.
Yes, I think it's important we the takeaway is our core business is doing just fine. We can continue to seek Wilson to expect it to grow on and that's how we've modeled it on the Medicare market is the fastest growing piece of the market as is seen by the success of our peer group and competitors and incredibly high valuations placed on those businesses because of the attractiveness of that about market segment, but all our core businesses is strong.
And so we we've been more conservative in how we modeled it but we're still expecting solid double digit growth. We just expect Medicare to grow at a at a much faster rate.
Which have which I think is fair and that's what we're seeing across our market.
I'll I'll platform allows us to be.
Products and carrier agnostic, we've we've shifted our focus as several times. This is this is.
A continuation of that strategy, but in terms of investments. The earlier part of your question, we talked in the prepared remarks about the Spanish initiative.
We did a lot of work that amount and that is in the IP under 65 space and we see significant upside there. So I think the fact that we spent that part of the first half of the only the invested.
Hundred million dollars in Medicare.
Wait when we're not meeting away from our core business.
We shifted our focus for a time is the perfect time to make those investments and build and grow.
Weve executed on that and then we started to no attention back to our core business has had an immediate impact in July and assess it as of August .
And as we said.
The Spanish initiative as it is in that segment, but the overall the theme pros is diversifying and broadening out the life initiative.
It's a great success as well and just our growth in E. Commerce in general we've we've launched several new straight to consume a sites and over over the last few weeks.
Across the Spanish language across life.
White labeling for associations, so there's plenty of opportunity out there.
For us yes.
And just one clarification given I think you said, 20% to 25% Medicare revenue for 2019, I know, Mike said that for the third quarter.
Is that correct for the full year, you expect Medicare to be 20% to 25% and was there anything in the second quarter.
There was a there was a small amount in the second quarter. The first acquisition. We did with later on in the quarter and I think 2020, 5% is a good guys the key free and and at Q full.
So it'll probably round out towards the low 20 percents side for the full year, but I think quarter to quarter is what we're trying to help people at multiple too so 20% to 25% about right.
And then we're going to continue to make investments in Q3, and we'll we'll update and we'll get more color.
As.
As we go through the quarter or when we report.
Those post Q3 results.
Yes, yes.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Gavin Southwell for closing remarks.
Thank you.
As we mentioned on the last call 2019 is an important transition year for us as we broaden out our product mix and diversify our offering.
Well, we're investing and building out our business for a much bigger opportunity full built on next generation technology platform.
Currently we are executing on multiple growth initiatives and we look forward to providing further updates as we continue to build and grow we'd like to thank you for your time and your interest in our company.
Have a great night.
Ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.