eHealth, Inc. (EHTH) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 eHealth, Inc. Earnings Conference Call. My name is Jeff, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Kate Sidorovich, eHealth's Vice President of Investor Relations. And you have the floor, ma'am.

Thank you. Good afternoon, and thank you for joining us today either by phone or by webcast for a discussion about eHealth, Inc.'s second quarter 2012 financial results. On the call this afternoon, we'll have Gary Lauer, eHealth Chief Executive Officer; and Stuart Huizinga, eHealth Chief Financial Officer. After management concludes its remarks, we'll open the lines for questions. As a reminder, today's conference call is being recorded and webcast from the IR section of our website, and a replay of the call will be available on site following the call. We will make forward-looking statements on this call. All statements other than statements of historical fact are forward-looking statements. The forward-looking statements made on this call include statements regarding the impact of healthcare reform and our plans and expectations in light of healthcare reform; future growth in IFP submitted applications, membership and revenue; the impact of medical loss ratio requirements and commission rate changes; plans and projections for our Medicare business; projected lifetime Medicare member commissions and return on investments and our guidance for revenue, EBITDA, non-GAAP diluted earnings per share and stock-based compensation; and seasonality and timing of our financial results. Forward-looking statements are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by these statements. We describe these and other risks and uncertainties in our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, which you may access through the SEC website or from the IR section of our website. Forward-looking statements made on this call represent the company's views as of today. You should not rely on these statements as representing our views in the future. We want take no duty to update or advise any forward-looking statements made during this call, whether the result of new information, future events, or otherwise. We will be presenting certain financial measures on this call that will be considered non-GAAP under SEC Regulation G. For a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included in our press release and in our SEC filings, which can be found in the About Us section of our corporate website under the heading, Investor Relations. And at this point, I will turn the call over to Gary Lauer.

Good afternoon, everyone, and thanks for joining us today as we review our second quarter 2012 results. We are pleased with eHealth's second quarter performance across the key areas of our business. In the individual and family plan business, we returned a submitted application growth, and we're on track to generate application growth for the full year of 2012. In the emerging Medicare business, we continue to significantly invest with strong results. The number of Medicare applications we sent to carriers and Medicare products we sold, grew at rates in excess of 100% in the second quarter of 2012 compared to the same quarter 1 year ago. We also generated significant Medicare demand and increased our capacity to transact a much higher portion of this demand in-house. At this point, I'd like to summarize our financial results for the quarter. Second quarter revenue was $35.5 million and earnings per share were $0.11. EBITDA was $6.5 million and cash flow from operations was $7.6 million. At the end of the quarter, we had $122 million in cash on the balance sheet, and no debt. Before I provide further detail on our quarterly performance, I'd like to comment on the Supreme Court's Affordable Care Act ruling last month. As you know, the Supreme Court ruled to uphold the Affordable Care Act, which will allow the states and the health insurance industry, to continue moving forward with implementing the law. The implementation of the Affordable Care Act is estimated to reduce the number of uninsured by approximately 30 million people. A meaningful portion of these previously uninsured are projected to be covered through individual health insurance plans and be subsidy-eligible. We, as a company, have always been supportive of the Affordable Care Act, and we look forward to helping consumers newly entering the individual market access coverage. We believe that eHealth's industry expertise and proven technology makes us a valuable resource for these consumers and a convenient platform for researching and buying quality, affordable plans that best suit their needs. Of course, a lot remains to be done in order for us to operate successfully in this new post-ACA environment. First and foremost, we need to work with individual states and with health insurance carriers to ensure that we are allowed to facilitate enrollment of subsidy-eligible individuals through our platform. We also need to make sure that our platform remains competitive and provides an attractive differentiated offering to compete with state exchanges. At this point, I'd like to review the performance of our individual and family plan business. We continue to see improvement in this important area of eHealth's business, and we are pleased to return to individual and family plan submitted application growth after 2 challenging years. Individual and family plan submitted applications grew 2% compared to the second quarter 1 year ago. We were able to resume growth at a favorable level of acquisition cost per submitted individual and family plan member. In fact, our acquisition cost per member declined again in the second quarter on a year-over-year basis. We think that the Supreme Court's decision regarding the constitutionality of the Affordable Care Act provided much needed clarity to the health insurance market, and it's removing some of the uncertainty that we observed over the past 2 years. We currently expect to generate IFP application growth for the full year 2012 at least in the low single-digit range and to build on this momentum going into 2013. 2014 could be a very interesting year for us when the major provisions of the Affordable Care Act, such as guaranteed issue, federal subsidies and the individual mandate, are implemented. As you might imagine, we are preparing for these meaningful changes in the individual market and our business. Relating to revenue in the individual business, we are in the final stages of absorbing the impact of reductions to our commission rates, which became effective on January 1, 2011 as a result of the Affordable Care Act's medical loss ratio requirement. We expect the impact of these reductions to be fully reflected in our average commission revenue per member in late 2012 and early 2013. We also expect that our individual and family plan membership will expand in 2013, driving growth in total IFP commission revenue for the year compared to 2012. The progress in our Medicare business is very positive. Second quarter Medicare revenues were $5 million, representing 130% annual growth. During the quarter, we generated significant demand for Medicare products. The number of total Medicare products sold grew more than 300%, and the number of Medicare Advantage products sold grew more than 500% year-over-year as we retained more of this demand for in-house fulfillment. During the second quarter, we supported in-house, as a broker, 93% of demand that we generated compared to just over 30% in the second quarter a year ago. And the majority of our Medicare revenue now, is not sourced from the sale of leads. Notably, 60% of Medicare products that we sold during the quarter were Medicare Advantage products. What we are finding with these results is that there is a robust market for Medicare products outside of the Annual Enrollment Period. We believe that much of this market and our success here is a reflection of younger Medicare-eligible people aging in and using the Internet to research and enroll in Medicare products. During this year's upcoming annual enrollment period, we hope to generate significant Medicare demand and process the majority of this demand in-house, getting closer to our goal of transitioning to a 100% broker-based model. We are generating strong growth in Medicare demand and sold products at what we believe are attractive member acquisition costs. An average Medicare member is expected to generate a multiyear stream of commission revenues far in excess of upfront acquisition cost. Based on the highly favorable projected lifetime return on investment for Medicare members, we will continue to invest heavily in this business in preparation for the Annual Enrollment Period this year. A specific investment area is the expansion of eHealth's Medicare dated -- dedicated customer care resources. As planned, we are accelerating hiring in this area in the third quarter as we near the Annual Enrollment Period. And you should expect to see a corresponding impact on our third quarter operating expenses. 2012 is an investment year for our Medicare business, but we still expect to become EBITDA positive during the fourth quarter of 2012 in our Medicare business and then for the full year 2013, as our recurring Medicare revenue base continues to build. During this past quarter, we added inventory to our site across all major product categories, including the individual and family plan business, the Medicare business and our ancillary product line. In Medicare, we are diversifying our offering by adding more Medicare supplement plans to complement the selection of Medicare Advantage and Prescription Drug Plan products we offer. Non-individual and family plan products, including Medicare and ancillary products, performed strongly during the second quarter, as reflected by 66% growth in our non-individual and family plan membership during the quarter. We are pleased with how we are executing against our strategic objectives as a company. The Medicare business is growing very rapidly, and we will continue with the significant investment in this area. We see strong growth in Medicare demand, Medicare products sold in-house, and, as I mentioned, we expect to turn EBITDA positive in the Medicare business during the fourth quarter. We are working hard to position ourselves for another successful Medicare Annual Enrollment Period this year. Our individual and family plan business has clearly stabilized, and we expect it to return to revenue growth in 2013. It is a highly profitable business and is generating strong cash flows for our company. We also think that recent legal developments, namely the Supreme Court decision, can be very favorable for the individual market and for eHealth. And as I said earlier, much remains to be done for us to operate successfully in this new, post-Affordable Care Act environment. And as a concluding point, I want to comment on state exchange activity. Another result of the recent Supreme Court decision is that many states are more earnestly working to build out state exchanges as required by the Affordable Care Act. As I've mentioned before, state exchanges are potential new competitors for us in the post-2014 world, but they also represent a business opportunity as we work with states and systems integrators to provide portions of our technology to power state exchanges. But we can't expect to be providing technology to every state exchange. And I want to note again, that our fundamental business, mission and focus is to be the best consumer facing Internet resource in the marketplace. And with that, I'd like to call -- turn the call over to Stuart. Stuart?

Thanks, Gary, and good afternoon, everyone. Our second quarter 2012 financial results reflected continuing improvement in the individual and family plan business and strong revenue growth in the emerging Medicare business. During the second quarter, we continued to invest in Medicare and will further increase Medicare-related spend in the third quarter as we prepare for this year's Annual Enrollment Period. Let me now review our quarterly results, starting at the top line. Our second quarter 2012 revenue was $35.5 million, a 2% decline as compared to the second quarter a year ago. Commission revenue in our individual and family plan business declined by approximately $2.7 million year-over-year, a moderation compared to an annual decline of over $3 million in the first quarter of 2012. As a reminder, this decline in individual and family plan commission revenues was driven by the impact of commission rate reductions as a result of the medical loss ratio requirement of the Affordable Care Act that we experienced beginning in January of 2011 and then -- that has been phasing into our results since that point. Our second quarter Medicare commission revenue grew meaningfully compared to Q2 2011, allowing us to offset the impact of lower individual and family plan commissions. We also saw attractive year-over-year growth in commission revenues from ancillary products, such as dental and accident insurance, which is part of our strategy to more fully monetize our members. As a result, our total commission revenue for the quarter was $30.6 million, an increase of 2% compared to the second quarter of 2011. As Gary mentioned, we expect to resume annual growth in individual and family plan commission revenues starting in 2013. This means that starting next year both our Medicare and individual and family plan businesses are expected to drive revenue growth for the company. Other revenue, which includes sponsorship, eCommerce on-demand, government systems and Medicare lead revenue, was $4.9 million. This represented a 20% decline compared to the second quarter a year ago. The decline was driven primarily by lower government systems revenues. In the second quarter of 2011, we booked just under $2 million in revenues related to our work on the healthcare.gov project. In the second quarter of 2012, we did not have any revenues from this project. Other revenue in the second quarter was also impacted by lower Medicare lead revenues as we transition more of our Medicare business to a commission-based direct fulfillment model. Our individual and family major medical plans submitted application volume grew 2% compared to the second quarter of 2011. This is the first quarter of positive application growth since the third quarter of 2010. We now expect growth in individual and family plan submitted applications at least in the low single-digit range for the full year 2012 compared to 2011. This is an improvement over our prior expectations of flat to low single-digit growth for the year. Individual and family plan approved members were flat compared to Q2 2011, also reversing a negative trend of year-over-year approved member declines for the past 5 quarters. Total approved members for all products were up 19%, a very strong metric driven by activity in Medicare and ancillary products. Our total estimated membership at the end of the quarter was approximately 876,900 members, which represents 9% growth over estimated membership reported at the end of the second quarter of 2011. This was the highest growth rate achieved since the first quarter of 2010. The number of revenue-generating individual and family plan members was virtually flat, while the number of other members increased 66%. The increase in our Medicare customer base over the past 12 months was an important driver behind the strong annual growth in our non-individual and family plan membership. Now, I'd like to review our operating expenses for the quarter. Excluding stock-based compensation and the amortization of acquired intangibles, our non-GAAP operating expenses increased in absolute terms and as a percentage of revenue, relative to the comparable period 1 year ago. This increase in our operating expenses as a percentage of revenue was driven by our investment in Medicare as we continue to scale this new business. Our incremental investment in variable marketing and advertising and customer care enrollment costs for Medicare was roughly $2.7 million in the second quarter of 2012 compared to the second quarter of 2011. As Gary mentioned, customer care enrollment is a key area of our Medicare-related investment as we increase the percentage of demand that eHealth processes in-house as a broker. In the second quarter, over 90% of demand we generated, we supported in-house. We expect that during Q4, which is a high-volume quarter for Medicare business, we will support in-house the majority of the demand that we generate. This requires that our call center is adequately staffed with trained Medicare sales representatives. As a result, second quarter 2012 non-GAAP customer care and enrollment expense, which excludes stock-based compensation expense, was $6.3 million or 18% of revenue, up meaningfully from $4.5 million or 13% in the second quarter a year ago. In absolute numbers, our customer care and enrollment expense is expected to again increase sequentially in the third quarter and then peak in the fourth quarter during the Medicare Annual Enrollment Period. Second quarter 2012 non-GAAP marketing and advertising expense, which excludes stock-based compensation expense was 33% of revenue, up from 31% in the second quarter of 2011 and down sequentially compared to 34% in the first quarter of 2012. Underneath that, our Medicare-related marketing and advertising expense increased year-over-year, while in the individual business, we continued to reduce our marketing spend, both on an aggregate and a per unit basis relative to 2011. Our cost of acquisition in the individual and family plan business, measured as our total marketing and advertising expense excluding Medicare costs per individual on IFP submitted applications, declined by 2% compared to the second quarter of 2011. In light of our 2% application growth, we are very pleased with this cost of acquisition result. We also saw a year-over-year improvement in our per unit cost of acquisition in Medicare. Second quarter non-GAAP operating income, excluding stock-based compensation and the amortization of acquired intangibles, was 17% of revenue or $6 million, down from 20% of revenue or $7.2 million in the second quarter a year ago. EBITDA for the second quarter of 2012 was $6.5 million, as compared to EBITDA of $7.8 million in the second quarter of 2011. Second quarter 2012 GAAP earnings per share were $0.11, down from $0.12 in Q2 of 2011. Second quarter non-GAAP EPS, which excludes the impact of the amortization of acquired intangibles, stock-based compensation and related income tax benefit, was $0.17. During the quarter, we generated healthy cash flow. Our cash flow from operations was $7.6 million compared to $7.8 million in the second quarter of 2011. Capital expenditures for the second quarter were approximately $1.9 million, bringing the first half total to $2.1 million. As of June 30, 2012, our cash and marketable securities balance was $122 million, with no debt. EBITDA, stock-based compensation expense and earnings per share guidance for the full year 2012 that we provided on our first quarter 2012 earnings call. Now, let me make some comments regarding the second half of the year. First of all, we expect that we will grow revenue in the third and fourth quarters compared to the third and fourth quarters of 2011. Second, as I mentioned earlier, in Q3 2012, we're expecting to further ramp our investment in the Medicare business as we prepare for this year's Annual Enrollment Period, taking place between October 15 and December 7. This investment layers on top of the historical seasonality of operating expenses in our individual business. As you know, we typically generate our highest individual and family plan application volumes in Q1 and Q3, which means that our marketing and advertising expense in these quarters is higher, resulting in lower operating margins. So you should expect third quarter GAAP earnings per share this year to be flat to a few pennies negative before seeing a meaningful rebound in the fourth quarter. We anticipate that fourth quarter 2012 will have the highest operating and net margin compared to the other quarters of the year. I want to remind you that these comments, as well as our annual guidance, are based on current indications for our business, which are subject to change at any time. We undertake no obligation to further update our guidance. And now we'd like to open up the call for questions. Operator?

[Operator Instructions] Our first question comes from the line of George Sutton with Craig-Hallum.

So, Gary, just to take a big picture step-back, now that the Affordable Care Act looks like it's moving forward, can you just firm up the market size as you see it for 2014, and ultimately, is there a way to try to determine what component will be handled by the exchanges versus your platform?

George, yes. It's -- this is all very rough, obviously, but the Congressional Budget Office now estimates that 30 million Americans who are currently uninsured will be getting coverage post-2014. Many of those will go into Medicaid, but many of them will be buying individual plans. We think conservatively, at least half of those will be coming into the individual markets. So you could, at least, conservatively look at increase in the individual market by 15 million there. And the Census Bureau, by the way, currently estimates that the individual market is a little bit more than 17 million people currently. So you've got a rough, a little bit less than doubling there. And then you've got another interesting dynamic, which is employer-sponsored health insurance. We're seeing more and more speculation that there will be some employers who no longer offer group coverage to employees, but rather help them to buy plans in the individual market. In fact, Deloitte just released a survey earlier this week where -- their survey shows that about 10% of employers that they surveyed would be taking employees into the individual market for either subsidy-eligible or other kinds of plans. So we see some very meaningful growth there, which we're, obviously, very enthused about. Now, at the same time, you're going to have state exchanges essentially coming to this business as the new competitor. I think that's the way to look at it and to look at them. And the question becomes, how effective will they be at marketing in this new world? How effective are they at converting online? How many of these states are really going to aggressively approach this? Many of the Republican-governed states are indicating reluctance to be involved in implementing the Affordable Care Act. So we think we've got a lot of variation there. We think some states may be effective, others won't. But the real key for us, actually there's a couple of keys: one is that there's a regulation now that would allow us to host someone who's subsidy-eligible to enroll in a subsidy-eligible plan at eHealth, as long as the state agrees to support that; and secondly, and I think most importantly, we are the largest and the oldest consumer facing online marketplace or exchange, if you will, that exists. And what we need to be in 2014 is the best, which means we need to be even more consumer-centric, offer more tools to help people to get them information and knowledge. And we're really thinking a lot about the post-enrollment part of the process. All of the exchanges are focused today on enrollment, the transaction, which we think we've kind of made a science out of. But we're thinking an awful lot now about post-transaction. What can we do to support that individual so that they can really utilize that health insurance in a way that makes a lot of sense? How can we help them best to manage their healthcare cost and their finances because all of us are now spending more money out-of-pocket for healthcare. And we think all of this represents big, big opportunity for someone like us. But I wish I could give you specifics on exactly how big the market's going to be, how much will go to exchanges, how much will come to us. But we're certainly optimistic that we can get our fair share. We think our fair share of this new environment is quite significant.

Nice. I think that was very helpful. And relative to your platform, you mentioned in your prepared comments that you need to make sure your platform remains competitive through this period. Am I hearing through that, that there will be potentially increased R&D at some point or -- my sense has certainly been looking at Massachusetts as an example that your platform is more than competitive?

Well, we think we're very competitive today, and we want to be a few years from now. No, I don't think you should take from my comments that you'll see an increase on R&D necessarily because of that. But certainly, we have a lot of focus in the company today just on the whole consumer interaction, the consumer experience, both pre- and post-sale. And it's something that we'll continue to really emphasize. We just think that it's so, so important because in 2014 in many states, you'll have the choice of going to a state exchange, us, or perhaps some other entity. And the real question I think is going to be, where is the most value represented, where are you going to get the most for your dollar? And that's exactly -- we want the answer to be us. And although we'll be selling the same products at the same prices, because that's legally how all of this -- how this marketplace looks today and will be then. We can offer a lot of value in terms of what we are able to provide to consumers after they purchase this product.

Last question, if I could. The -- relative to the commission rate cut that we saw, obviously beginning in 2011, we're starting to hear a little bit from carriers willing to bend on some of the rates or provide more sponsorship dollars. Is that a factor that you're able to discuss?

Well, I wouldn't say that it's a material factor for us today. We certainly haven't seen any deterioration in any of our commission rates or anything that we're paid since those changes were made in 2011. And we see a number of carriers who, I think, are feeling much more optimistic about this marketplace and are looking for market share. And as we've seen in the past, in many cases, they're willing to invest in securing that market share. We think that's going to be a good thing for us. We think that could be a really good thing in 2014 because if there's less differentiation in 2014 in these actual products, if they're more homogeneous, the carriers are going to be even, I think, more eager, more interested in finding ways to gain market share to compete with one another. And we think we can be a real differentiator for many of them in terms of just sheer volume and market share in the markets that they operate in.

Our next question comes from the line of Robert Coolbrith with ThinkEquity.

I just wanted to return again to the issue of the post-2014 environment. I know you've mentioned the recent HHS or relatively recent HHS ruling on whether or not third-party platforms or marketplace could handle subsidies. Have you had any additional discussion or any indication from any of the regulators on the commissionability of subsidies and exactly how that would work? And also, does that decision as well, is that to be made on a state-by-state basis? And I have a few follow-ups as well.

Sure, yes. Robert, thanks for asking that. This today, is a state-by-state business and in 2014 and the Affordable Care Act environment is a state-by-state business as well. These products for the most part, are regulated by the state insurance commissions. Pricing, commission rates, things of that nature for the most part, are all regulated there as well. There's nothing definitive across all 50 states regarding the commissionability of these products, but we fully expect that these subsidy-eligible products, which by the way are called QHP, qualified health plans. We fully expect that these QHPs are eligible for subsidies, will be commissionable as are other products as well. And we've seen in some states, and California is one, where there has been some discussion of this and some announcement that this is really up to the carriers and their distribution partners and so on. And we expect that, that will be the case in most other states as well. So said another way, with what we see and what we know today, we expect that these will be commissionable products, very much like all the other products that are in the marketplace.

Okay. Then another follow-up on ACA, just -- it seems as though a lot of the states, maybe the red states, if you want to call them that, had may dragged their feet on exchange development or implementation and anticipation of a different legal position from the Supreme Court. Are you finding a lot of those trying to catch up now? Are you getting sort of more inquiries as a consequence of people that maybe have dragged their feet and are now behind, looking for your expertise sort of consequence?

Well, I'd make several comments. One of 50 states today, 29 are governed by Republican governors, and many of these Republican states, as you noted, aren't highly enthused about implementing the Affordable Care Act. A few of them have actually been defiant about this, saying they won't put an exchange in place. If they don't, it's very clear in the Affordable Care Act, the Federal Government will come into the state and operate an exchange. And so, at this point, it's -- you have to wonder how much of this is just -- is politicking and how much is real. It's rather hard to believe that a state that doesn't like the Affordable Care Act and what the Federal Government has done would want the Federal Government to come in to have a hand in the marketplace there. So we think that, assuming that this law exists in 2014 and most of the states are going to have exchanges up. And yes, some of those that aren't real, again, enthused about this will probably put an exchange up that meets the minimum of the Federal Government ACA requirements. And in some cases, there's certainly an opportunity for us to participate and help them, yes. And we've had some discussions with some states that way.

Okay. And then one last question just on sort of the environment in IFP right now. Obviously, you're seeing improvement in both member acquisition costs and the return to growth. Is that -- I mean, so in terms -- the multiple factors there, consumer certainty over what's going on from a regulatory perspective, what's the competitive environment like in setting [ph] up your individual or broker competitors gone out of business or are they just being less aggressive in terms of their marketing spend? Also, what's the environment like for carrier direct member acquisition?

Well, I guess -- there are several parts there, I like Stuart to make some comments on the financial side of it, but there certainly are not more competitors today than there were a few years ago. There may be less. We hear anecdotally from some of the carriers that the traditional agents and brokers are less interested in this business because of the commission change in these products from 1.5 years ago. We -- many of the carriers continue to market and try to sell their products directly. They were a real presence in the world of paid search 1 year ago, they're still there, but we've seen costs come down, which we kind of expected but it took longer. It's important to note that not only did we grow in this past quarter, but our cost of acquisition, we've -- we're really pleased with what we were able to do in terms of what we've spent on a per unit basis here.

Yes, I guess what I would add -- this is Stuart -- is, the percentage coming direct is -- has been increasing for us, and that's a very key part of bringing the cost of acquisition down. We're just very pleased to see the performance in the direct channel. And that comes virtually with 0 cost to us. And it's an area of focus for us. It's been improving for us, and that really helps on the cost side.

And your anticipation of higher levels of growth in the remainder of 2012, or into 2013, what's your level of confidence there, and what sort of plays out for that scenario to play out where you do see higher growth than what you're seeing right now or have seen in the recent past?

Well, we think that there's more stability in the marketplace. We think there's some more certainty because more people understand that it's highly likely the Affordable Care Act is going to be implemented. Unless there's a change in the White House, and anyone's guess is as good as mine at this point about that. But that's certainly an impact, a good one. But also note, as we talk about seeing growth through the second half of the year, we still think it's going to be in single digits. And we were all -- we want growth more than that. Previous to all the Affordable Care Act and the economy changing, we used to grow these applications in double-digit kinds of rates. We're seeing that growth and a lot more in the Medicare business. But we think that the next 6 months in the individual business for us are going to be good. And we're really positive about 2013 in that business. In fact, and I'll give you a reason why, many of these state exchanges want to start implementing themselves in the second half of 2013, getting ready for January 1, 2014. We think that visibility alone and some of the things that we'll be doing to generate interest and demand are going to have some -- provide some real uplift for us from a volume and a growth standpoint there.

Our next question comes from the line of Steve Halper with Lazard Capital Markets.

So 2 questions around the Medicare business. Number one, from a lead generation -- from the lead business, are you still going to see that sequential pickup in the fourth quarter or has it really become -- or do you think it's going to be pretty small in the fourth quarter?

Steve, it's Gary. We think that lead generation in the fourth quarter is going to be strong. We think demand will be very strong compared to a year ago. And we think sequentially from the third to fourth quarter, demand will be strong as well. Remember that's when the Annual Enrollment Period is, and just by the regulated environment and the nature of this business, you've got a lot of people coming into the marketplace.

Right. Even though you're sourcing more of the products in-house?

Well, the difference between demand and what we actually sell, remember demand is what we generate, it's the interest that's out there; and our mission today is to take most of that and then convert it in-house or, as you said, source it in-house. So yes, we think we're going to see -- we think we'll experience strong revenue growth, very strong growth in demand. And certainly, just because of what we converted a year ago in-house compared to what we'll be able to convert this year, there'll be a lot of growth there as well. But we think in absolute numbers, just the number of individuals we're able to enroll will grow also.

Right. And then, in terms of your members, do the Medicare members show up in that total approved members line?

They do. They're certainly approved members and in the revenue-generating members.

So of the 148,500 that includes the -- your Medicare business?

Correct.

Okay. Would you ever -- at what point will you start breaking out your Medicare submitted applications like you do for IFP?

It's a big question. I think you'll probably see some more visibility on membership in next year, at least on a revenue generating standpoint. And still -- I think, still thinking through on a quarterly basis, what you might see on the approveds being broken out.

Yes, Steve, you asked about applications. We've got 3 categories of applications: Medicare Advantage applications, Prescription Drug Plan applications and Medicare supplement applications. Each product category being different. Not so sure we'd be breaking those out, but I think at some point, just because of the sheer volume we're generating, we'll be taking a look at the Medicare membership itself and how we want to characterize that.

[Operator Instructions] Our next question comes from the line of Ned Davis with Wm Smith and Company.

My question really has to do with drilling down on the other services you were suggesting that you were looking at. And first of all, specific question, does your typical contract with a carrier allow you to market other products subsequent to the actual commissionable transaction on the insurance to the individuals based on the data you obtain in connection with making that sale?

Ned, Gary. Yes, for the most part, yes, within reason. We're actually legally what's known as the broker of record, so we have a distribution broker relationship with the insurer. And we do, for example, as Stuart indicated, our non-major medical health insurance products, what we call our ancillary products, things like dental, vision, accident insurance, have been growing at really nice rates because we've been either at point of sale or afterwards going to members and helping them when they've got needs for these things, and we can certainly do that. We've always been very careful though, we want this to be a very safe, secure environment for people to do business in because of the highly personal nature of this transaction. So you don't see us out marketing unrelated products, and we've always been very, very careful about that. We don't sell any of this membership information to anyone else, we don't let anyone else market to them. We're very protective of our members here, but the answer is yes. For related products, we certainly have the ability to do that and we do -- but we only try to deal with products that we think are very high-quality and can make a difference for someone.

Okay. Switching back to the individual policy and then also to this employer marketplace that you're addressing. There was a statistic release I think by the Congressional Budget Office this week estimating that the number of Medicaid enrollees will actually be lower than their forecast at the time that the Federal legislation passed by I think it was over 3 million, maybe in the 6 million households or individuals, I forget which. And I'm wondering as you address this marketplace, first of all, not having exchanges in the red states would seem to be wonderful because the poorer people, if you will, the younger, poorer people or the uninsured or recently unemployed in those states are going to be your potential customers. But my specific question is, if you get more of a subsidized component to the need to get insurance group in 2014, is this net good for eHealth, neutral or bad for eHealth in terms of your potential to capture even more market share?

We think it's really good because as we're seeing more subsidized insurance, we're also seeing more people out there having to buy nonsubsidized insurance. They go hand-in-hand because of the mandate. And in the states, and hopefully it will be all 50, that we can assist or support someone who's subsidy-eligible, not Medicaid but subsidy-eligible, we think that can be very interesting, is one way to describe it, to say the least, for us. And we're very enthused about this.

Okay, one last thing. What -- can you describe with some color what the -- kind of the gates are or the limitations are to your growth in Medicare? I mean, it seems like a very compelling ROI, even with a higher, upfront customer service response. And if you say that, that's beginning to level off or drop on a per unit sale basis, what's limiting you from just spending a lot more and growing that even faster?

Really, our own infrastructure. Product inventory which we continue to add. The ability to be able to transact or enroll these people, that's one of the areas that we're investing in. Continuing to build our demand generation capability, i.e., generating visibility and awareness of eHealth. Securing more partnerships. We've got a great partnership with Wal-mart. We're very enthused about that and where we think that's going to go, but more of those kinds of things as well. So we're in the very early stages of building this business out and it's -- I'm more enthused today than I've ever been about it. One, because of just the results that we're seeing and secondly, the way they -- just the market itself is growing with the number of people who are aging in. In fact, the -- interestingly over the next several years, the number of people aging in, these baby boomers, continues to increase. So as the Medicare population grows, where it's growing is that as the younger or the really, the bottom end of the age group here, people who are 64, aging in to being 65, up to 70 years of age. So there's nothing in the marketplace that's limiting. We're being thoughtful about how we're investing and where we're going as well with all of this. And at the same time, want to make money.

Ladies and gentlemen, since there are no further questions in the queue, I'd now like to turn the presentation over to Mr. Lauer for closing remarks.

Well, I'd just like to thank everyone for your time today. And with many of you, we look forward to talking with you one-on-one and seeing you over the next several months. Thanks again for your interest and support in the company. It's very much appreciated.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.