(EHTH) eHealth Q3/2008 Earnings: Still Solid Despite Economic Outlook

November 6th, 2008

eHealth Logo eHealth (NASDAQ: EHTH), the leading provider of Internet-based insurance agency services to individuals, families, and small businesses primarily in the United States, recently announced their Q3/2008 earnings on October 30th.

While it appears eHealth is seeing some of the same headwinds that are affecting other businesses, they are weathering the storm much better, and in fact continue to grow and pursue growth aggressively, in an environment in which individuals and families are losing their jobs and health insurance and are in need of the services that eHealth provides.

eHealth continues to be profitable, generate huge amounts of free cash flow, and is aggressively marketing their products while times are tough, and actually increasing their market share and health care coverage to individuals.

I have been, and continue to be, impressed by eHealth’s value proposition, wide moat, and tenured management team, and this quarter’s earnings and outlook did nothing to dampen that confidence.

What follows is a summary of eHealth’s earnings announcement, conference call highlights, and my take on the company’s latest quarter and results, and what you should do if you do or don’t own eHealth’s shares.

New to the eHealth story?

eHealth, Inc. (NASDAQ: EHTH) offers Internet-based insurance agency services to individuals, families, and small businesses primarily in the United States. The company’s e-commerce platform, which is accessed directly via ehealth.com and ehealthinsurance.com, enable individuals and families to research, analyze, compare, and purchase health insurance products online.

For anyone that is self-employed, runs a small business, or as more and more companies stop paying for employee health insurance, needs to purchase their own health insurance, it is becoming increasingly crucial that individuals find affordable health insurance and eHealth gives them the power of choice.

eHealth offers various health insurance products, including medical health insurance coverage, such as preferred provider organization; health maintenance organization and indemnity plans; short-term medical insurance; student health insurance; health savings account eligible health insurance plans; and ancillary products, such as dental, vision, and life insurance.

Because of the fixed-cost nature of health insurance (there is no discounting online or otherwise in this highly regulated industry), eHealth is probably one of the only ways that most individuals will ever see what different health insurance offerings they could purchase from up to 175 different companies.

Want More?

Start: with my initial company write up here.

I’ll break down this report into 4 parts:

Hit Me With The Numbers: Q3 in-line with estimates, margins down
Other Business Highlights: Maintains Q4 guidance, strong cash flow
Conference Call Highlights: Nice and boring
Bottom Line: eHealth still a solid addition to your portfolio

Hit Me With Some Numbers

eHealth in line with estimates, maintains guidance, margins decline

Here are some of eHealth’s earnings highlights (growth from previous year’s Q3/analyst’s estimates where applicable):

Quarterly sales of $28.5 million (up 24% from prior year/vs. $28.76 million projected by analysts)
Quarterly operating income of $4.5 million (down 7% from prior year)
GAAP quarterly net income of $3.0 million, or $.12 per share (down 19% from $3.73 million, or $.14 per share in the prior year/vs. $.12 per share projected by analysts)
Non-GAAP quarterly income of $3.67 million, or $0.14 per share (down from $4.06 million, or $.15 per share in the prior year)
Operating margin of 15.7% (down from 21.0% from prior year)
Submitted applications: 117,300 (up 19.8% from prior year)
Cash Flow: $8.26 million (up 7% from $7.71 million prior year)
Free Cash Flow: $7.32 million (down 1% from $7.41 million prior year)

My Take: eHealth had previously lowered their guidance due to the slowing economy, and because the company new that they would be spending more money to aggressively pursue those that were without jobs, and looking to save money and cut costs, without compromising health insurance coverage.

As this quarter’s results show, eHealth kept to their lowered guidance, and had rational and reliable explanations as to why margins decreased, etc.

Any way you slice it, 24% growth is fantastic in this environment, and if it weren’t for higher advertising expenses, the bottom line would have followed as well.

There has been a trend of lower submitted applications over the course of the last year or so, but eHealth is now entering a more sustained period of growth as opposed to the hyper growth days when it was a start up and nascent company.

Management has spoken of long term growth rates in the 15-20% range, and that would be fine with me, and Wall Street as well, especially in light of eHealth’s cash generating capabilities.

Other Business Highlights

Maintains Guidance, Everything Still On Track

Q4/2008 revenue expected to be about $30.24 million vs. analyst’s estimates of $29.55 million.
Q4/2008 non-GAAP income per share to range between $0.10 and $0.17 ($.14 midpoint) vs. analyst’s estimates of $.13 per share.
For the entire fiscal year of 2008, eHealth is projecting sales from $111.5 million to $113.5 million ($112.5 million midpoint), vs. analyst’s estimates of $112.1 million.
For the entire fiscal year of 2008, GAAP earnings per share are expected to be in the range of $.50 – $.57 ($.54 midpoint), vs. analyst’s estimates of $.54.
Ended Q3/2008 with approximately $143 million in cash and investments vs. $136 million in Q2, and no debt.
Capital Expenditures (CAPEX) were $.93 million in Q3.

My Take: eHealth had previously lowered their full year guidance after their Q2 earnings release, and I’m sure it was a relief for Wall Street to not have to deal with any more revisions.

In fact, management pegged their shortfall so well, that they are actually running on pace to beat the lowered guidance by a wide margin in Q4, but we won’t count those chickens until they are hatched, especially in the environment we are in now.

On another positive note, eHealth ended the quarter with $143 million in cash and equivalents, which is a huge cash hoard that represents about $5.70 per share in cash on the books.

Now let’s take a look at the analyst conference call highlights and management’s discussion of the business.

View original at: PeakStocks.com