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Takeaway: Quick update on our short thesis below. If you have any questions, or would like to see supporting notes and analysis, let us know.

SHORT THESIS UPDATE

  1. IFP Application growth likely peaked: Management suggested that 1Q14 applications are lagging that of 4Q13. Management expects another surge into the March 31st deadline. With a little more than a month remaining, our tracker suggests this isn't happening.  We'll continue to monitor, and provide updates.
  2. Attrition risks yet to emerge: Members that left EHTH because of cancellations and/or migration to the gov't exchanges are still included in EHTH's 4Q13 IFP membership metrics. EHTH won't know the status of existing member attrition until commissions are reported to them by their MCOs in 1Q14.
  3. Net-net, IFP membership growth may be worse than we thought: 4Q13 applications, which are likely the NTM peak, provide some insight into gross IFP membership growth.  But the full brunt of cancellations/attrition remains unknown to EHTH until 1Q14.  Given that less than 10% of EHTH’s 4Q13 IFP applications were from existing clients (churn), the probability of cancellations leading to attrition is now considerably higher. 
  4. Consensus still doesn't get it: 2014 guidance was below consensus expectations, with revenues of $206M-$213M vs. consensus of $219M.  Consensus estimates have declined to $215, above the guided range; suggesting the street is not taking the cancellation risk seriously, or is too bullish on application growth into the March deadline.  We're expecting 2014 revenues in the $200-$205M range, and expect management to reduce the top end of guidance (at a minimum) on the 1Q14 release. 
  5. 2015 setup is worse: Consensus is assuming another 20% revenue growth in 2015.  The cancellation risk increases in 2015 as a larger percentage of existing IFP members are facing cancellations.  Further, EHTH cannot sell subsidized plans in every state and functionality on the government exchanges continues to improve; making EHTH more vulnerable to attrition.  We doubt any uptake on the private exchanges can compensate in 2015.

If you have any questions, or would like to see supporting notes and analysis, let us know.

Hesham Shaaban, CFA

@HedgeyeInternet