SHORT THESIS SUMMARY
- 4Q13 IFP application metrics are mostly churn
- Attrition risk not being considered
- 2014 to disappoint, 2015 setup is worse
IF GUIDANCE BEATS, EXPECT A CUT LATER
We continue to expect 2014 guidance will disappoint on the release. There are too many headwinds facing the company, and consensus has gotten ahead of themselves in terms of 2014 growth expectations. We can send you our prior notes and our blackbook if you would like more detail.
At a meeting with another sell-side firm in January, EHTH management suggested that guidance will include caveats, which we suspect means it will be issued in a wide range, with the top end potentially beating consensus estimates. If that is the case, it could perpetuate the ACA growth narrative, and push the stock higher in the near term. However, if management chooses to guide high on the 4Q13 release, we believe it will have to cut on the 1Q14 release.
EHTH MISSES THE NEXT WAVE?
Management suggested that it is expecting another wave of applications before the March 31st Open Enrollment deadline, which is why we suspect EHTH could guide higher than it should. While possible, we have yet to see any surge in demand three weeks into February. Health Insurance search traffic has steadily waned ever since Open Enrollment began on 10/1/13, and is now at its lowest point since Open Enrollment began
Even if demand picks up into the final Open Enrollment deadline, it doesn't mean EHTH will see a proportionate share of applications. EHTH is gradually losing whatever competitive edge it had over the public exchanges. Three things to consider
- EHTH can't sell subsidized plans in the 15 states running their own exchange
- EHTH hasn't been able to sell subsidized plans in the states where it is allowed to do so, due to technical issues with the federal site according to an interview with EHTH's CEO on 2/11/14 (link).
- Functionality on the government exchanges has steadily improved; making them a more formidable competitor and the only option for subsidized plans
In summary, if guidance surprises to the upside, we suspect it would be more wishful thinking than anything else. We believe management would be setting themselves up for disappointment later. We remain short into the 4Q13 earnings release this Thursday (2/20/13).
Hesham Shaaban, CFA