Earnings Call Transcript - EHTH Q1 2022

Operator, Operator

Good afternoon, everyone and welcome to eHealth, Inc's Conference Call to discuss the company's First Quarter 2022 financial results. At this time, all participants have been placed in a listen-only mode. The floor will open for your questions following the presentation. It is now my pleasure to turn the floor over to Eli Newbrun-Mintz, Investor Relations Manager. Please go ahead.

Eli Newbrun-Mintz, Investor Relations Manager

Good afternoon and thank you all for joining us today, either by phone or by webcast for a discussion about eHealth, Inc's First Quarter 2022 Financial Results. On the call this afternoon, we have Fran Soistman, eHealth's Chief Executive Officer, and Christine Janofsky, eHealth's Chief Financial Officer. After management completes its remarks, we will open the line for questions. As a reminder, today's conference call is being recorded and webcast from the Investor Relations section of our website. A replay of the call will be available on our website following the call. We will be making forward-looking statements on this call that includes statements regarding future events, beliefs, and expectations, including statements relating to our expectations regarding our Medicare business, including Medicare enrollments, consumer demand, our competitive advantage, and market opportunities. Our expectations regarding trends in the Medicare distribution market, our ability to increase agent productivity and improve customer satisfaction retention, and other quality metrics. Our expectations regarding our online enrollments, member acquisition costs, and demand generation strategy. Our expectations regarding our individual and family business, including growth opportunities and our competitive advantage. Our expectations regarding our financial performance, including the profitability of our business, cash flows, conversion rates, customer retention, seasonality, lifetime values, member estimates, and fixed and operating expenses and our full year 2022 financial guidance. Forward-looking statements on this call represent eHealth's views as of today. You should not rely on these statements as representing our views in the future. We undertake no obligation or duty to update information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in our forward-looking 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 Investor Relations section of our website. We will be presenting certain financial measures on this call that are considered non-GAAP under SEC Regulation G. For reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included on 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. At this point, I will turn the call over to Fran Soistman.

Fran Soistman, CEO

Thank you Eli, and good afternoon, everyone joining us today for our first quarter 2022 earnings call. During my prepared remarks, I will discuss our first quarter financial results, update you on the execution of the strategic plan that we laid out on last quarter's earnings call and describe the early impact we are seeing from our enrollment quality initiatives. Our first quarter 2022 revenue was in line with expectations and adjusted EBITDA was ahead of our expectations. While the enrollment quality initiatives that we introduced in July of last year are still impacting telephonic conversion rates, we've also seen encouraging quality and retention metrics from the most recent Annual Enrollment Period cohort, members that we enrolled during the fourth quarter with the policy effective date of January 1, 2022. The initial traction we're seeing through the early part of 2022 combined with positive carrier feedback reinforces our belief that eHealth can establish itself as a leader in Medicare distribution as this market moves away from volume at all costs towards growth built on a foundation of enrollment quality, enhanced consumer experience, and cash flow generation. One of the key priorities for me and the leadership team is to leverage this trend and enhance member economics and return the company to profitable growth. As an increasing number of Americans become eligible for Medicare every day, we believe we are well-positioned to connect them efficiently and appropriately with the best plans to serve their needs based on our broad plan selection, consumer-centric approach, and data-driven recommendation algorithms. Our omni-channel shopping and enrollment capabilities give eHealth an advantage in attracting a wide range of customers, including younger Medicare eligible individuals and new to Medicare Advantage enrollees. eHealth's online platform is also a differentiator for our Individual family and small business segments, where more than 90% of enrollments are completed online with no agent assistance. In line with our strategic plan, we are slowing down our conventional telephonic enrollment growth while continuing to invest in online business to expand and capture market share. The number of visitors to our online Medicare platform topped 3.2 million in Q1, representing 24% year-over-year growth. First quarter total Medicare Advantage online, unassisted applications grew to more than 11,000 submissions, up 50% compared to Q1 of 2021. In contrast, total Medicare Advantage enrollments, including telephonic and partially assisted applications, declined by 22%. Q1 2022 total revenues of $105 million were down 22% relative to Q1 2021, primarily driven by telephonic conversion rates, which were down on a year-over-year basis. GAAP net loss in the quarter was $33 million. Adjusted EBITDA for the first quarter was a loss of $25 million compared to positive $17 million a year ago. During the quarter, we generated $47 million in operating cash flow. While we're not satisfied with the year-over-year declines in revenue and adjusted EBITDA, we're seeing positive traction in customer satisfaction metrics and retention characteristics from the new enrollments that we added during the 2022 annual enrollment period, relative to the comparable enrollment cohorts from the 2021 and 2020 annual enrollment periods. This is based on preliminary data we have received to the end of April. The data suggests that although we have a comparatively lower telephonic conversion rate in Q1 resulting in lower volume, the enrollments we brought in are of higher quality that will lead to higher customer satisfaction, increased plan longevity, and over time, higher lifetime values. This progress on customer satisfaction metrics and retention for the newest Medicare Advantage cohort has fueled productive conversations with our carrier partners, who increasingly are emphasizing measures of enrollment quality in evaluating their channel partners. We see this as an opportunity to expand our relationships with carriers to adjacent areas given our common goal of improving the experience of beneficiaries through plan enrollment and utilization processes. Our data available through the end of April also indicates that during the Annual Enrollment Period and Open Enrollment Period, we saw lower-than-expected persistency from some of our older Medicare Advantage cohorts. This impacted the overall persistency rates for our book of business and further highlighted the importance of operational changes we've introduced last year as the market environment and consumer behavior continues to evolve. It's important to note that some of the policy churn that we see is reflective of members switching plans, but remaining within eHealth's platform, continuing to generate commission revenue for us. Our 2021 recapture rate was approximately 9%. During the first quarter, we started to execute on the strategic plan I outlined in our previous earnings calls. This concluded the rollout of the cost transformation program towards the end of the quarter. We are on track to generate approximately $60 million in annualized cost savings this year. Given that a large portion of total expected savings comes from our variable acquisition spending, you will see the impact building up throughout the year. As part of the plan, we are taking a more thoughtful approach to every area of our operations. This includes focusing on marketing channels with the best ROI, driving more enrollments through our online fulfillment that is characterized by favorable member economics, and retaining our best performing agents while investing in training and career paths, and shifting our variable acquisition costs to geographic markets that have the highest financial and strategic value for us. Although we are in the very early stages of executing on the strategic plan, we're seeing positive signs, including an increase in our telephonic conversion rates in the first month of Q2 on a quarter-over-quarter basis, as well as against our expectations. This is an encouraging indicator given that conversions typically decline sequentially in Q2, following the completion of the open enrollment period on March 31. Further initiatives are underway in our customer care centers aimed at continuing to lift conversions while preserving the emphasis on quality. This includes increased agent specialization by product and geography, improvements to agent scripts to make them more consumer-friendly, and an outbound call program that allows and incentivizes agents to proactively work their pipeline during downtimes, which can be especially impactful in Q2 and Q3. We also aim to extend agents’ tenure with eHealth, which provides for a higher-quality and more effective sales force. We expect that this year's agent mix will already be more mature compared to a year ago when we aggressively ramped up our internal agent force as we shifted away from the outsourced spending model. We are encouraged by the progress we've made in our telesales, including conversion rates, and we'll continue to build on this as we prepare for the upcoming Annual Enrollment Period. We're also making progress in our efforts to deliver our agents higher-quality leads by improving our marketing strategies and operations. We began 2022 by bringing in new marketing leadership with a mission of greater collaboration between our digital and conventional marketing teams to create synergies between our diversified demand generation channels. This effort is supported by product and technology teams that are launching a series of omni-channel tools that allow seamless transitions of customers between channels. To that end, we have launched online chat capabilities staffed by licensed Medicare agents, and agent co-browsing capabilities with additional omni-channel tools in the pipeline. We are excited about these initiatives that further enhance our technology differentiation and create a stronger connection between the agent-driven and digital organizations. In our view, this omni-channel approach reflects the needs of seniors and consumers in general, who are increasingly proficient online but demand flexibility in how they interact with the platform. This approach is critical to our company's mission of meeting customers on their terms, whether it's through a mobile device or laptop, by speaking to one of our licensed agents over the phone, or online chat, or a combination of touchpoints. We're also de-emphasizing the underperforming demand-generating channels in favor of channels that bring in higher-quality, higher ROI leads. In Q1, this meant scaling back our direct television marketing channel and allocating additional resources to our online advertising and partner marketing channels compared to Q1 a year ago, while we work towards creating the optimal channel mix that will be aligned with our broader strategic goals. While we have currently reduced our reliance on the direct channel, with direct television contributing less than 1% of total applications in Q1, we are reevaluating our longer-term strategy for the entire direct channel, including direct mail, television, and email efforts. Maintaining some exposure to these channels is important given our target demographic, and we are assessing, among other things, the impact of building out differentiated branded programs in these areas to replace generic campaigns, as well as tailoring a message to specific segments of the population to address their unique needs and preferences. We are also evaluating the spillover impact that our investment in the direct channel might have on other channels such as digital and overall consumer awareness of eHealth. Our online platform continues to play an important role in our long-term strategy as the combination of assisted and unassisted online submissions have made up the majority of our submitted Medicare applications for the past two consecutive quarters. We continue to observe favorable unit economics, including a larger proportion of high lifetime value new Medicare Advantage enrollments through our online channels. As unassisted online applications continue to grow as a percentage of total submitted applications, this will also contribute to a greater scalability of our business and mitigate the impact of telephonic conversions on the overall performance of the company. During the second and third quarters, we plan to focus on testing our demand generation initiatives to design the optimal channel mix for the Annual Enrollment Period and build a right-sized agent force that is trained and resourced for success. We also expect to use the upcoming quarters to explore opportunities to supplement our Medicare Advantage revenue by further emphasizing our Medicare Supplement, Individual and Family Plans, and ancillary business lines. I look forward to updating you on those efforts as the year progresses. As a reminder, the following six priorities, as described on last quarter's earnings call, are the foundational principles of our 2022 operating plan. 1. Through transformative changes, reduce our cost structure while focusing on operational efficiency and excellence through re-engineering and reorganizing. 2. Deploy marketing dollars in a way that will drive better economics. This includes optimizing our marketing channel mix to cut the lowest ROI initiatives and focus on channels where we hold strong competitive differentiation. 3. Slow down conventional telephonic enrollment growth, pivot to more overflow telesales carrier arrangements, which require less investment in lead generation and execute a local market-centric telesales model. 4. Continue growing our online business and enhancing our e-commerce platform through a highly disciplined approach to technology investments. 5. Work with carrier partners to find additional ways to create value, including joint quality and retention initiatives. 6. Pursue cost-effective diversification initiatives, including a stronger emphasis on our Individual and Family Plans and ancillary products. As we execute on these initiatives, the improvement in Medicare member margins, characterized by the spread between lifetime values and total acquisition costs, is one of the key goals for myself and the team. Enhancing unit economics combined with fixed-cost rationalization is at the core of our plan for returning to profitable growth and pursuing continued margin expansion thereafter. We're in the process of finalizing our three-year strategic financial plan through 2025 and plan to present it to our Board of Directors in June for their input and approval. Based on this timing, we plan to share our longer-term financial goals with investors in the second half of this year.

Christine Janofsky, CFO

Thank you, Fran. And good afternoon, everybody. We delivered first quarter top-line results that were in line with, and profitability results slightly ahead of our expectations, driven mostly by the positive impact of increased carrier advertising revenue. At the same time, revenue and profitability metrics declined on a year-over-year basis, reflecting primarily lower telephonic conversion rates compared to Q1 of 2021. First quarter 2022, total revenue was $105.3 million, down 22% on a year-over-year basis. GAAP net loss for the first quarter was $32.7 million compared to a net loss of $0.8 million in the first quarter of 2021. Adjusted EBITDA was negative $24.8 million, down from positive $17.3 million in Q1 2021. First quarter Medicare revenue of $95.1 million declined 21% compared to a year ago, driven primarily by a 22% decrease in approved Medicare members. Total Medicare approved applications were 95,800, including 82,400 Medicare Advantage approved applications, which decreased year-over-year by 23%. The enrollment quality initiatives that we implemented in July of last year continued to impact the rate at which our customer care agents convert telephonic leads into submitted Medicare applications. First-quarter telephonic conversions were down approximately 30% compared to Q1 of 2021, our first quarter following an aggressive pivot to an internal agent force and before the enrollment quality initiatives were implemented. In addition to impacting our enrollment volume, lower telephonic conversions also drove up our per member acquisition costs as the year-over-year increased with marketing and call center spending resulting in fewer applications compared to a year ago. We also saw an increase in lead costs in some of our demand generation channels. Our current lifetime value to customer acquisition cost spread is not acceptable to us and improving member profitability is at the core of our strategic plans. We expect to lower our per member acquisition costs in the second half of the year compared to a year ago, through a combination of cutting marketing spend in channels generating enrollments below our margin goals and increasing our conversion rates in the call center. In fact, our conversion rates second quarter-to-date increased sequentially compared to Q1. We are encouraged by this early performance, as typically, we would expect telephonic conversion rates to decline sequentially entering Q2 rather than increase. Our online business continues to generate strong growth at attractive conversions with 50% growth in Medicare Advantage applications submitted online, unassisted, compared to a year ago. Online unassisted submissions in Q1 made up 11.5% of Medicare Advantage applications, up from just 6% in Q1 2021. Q1 Medicare sponsorship revenue was $10.5 million, an 88% increase compared to Q1 2021. This increase in sponsorship revenue was mostly driven by timing relative to the prior year when we received a majority of carrier sponsorship dollars in the second half of the year. It is also a recognition of the significant effort that eHealth has put into enrollment quality in collaboration with our carrier partners. Medicare segment loss was $14.8 million compared to a segment profit of $24.5 million in Q1 of 2021. The difference in segment profit year-over-year was driven primarily by conversion rates in our cost center, as well as a fixed cost run rate associated with the shift to a fully in-house agent model. Acquisition costs per approved Medicare Advantage member were $986, a 56% increase from $631 in the year-ago quarter. We arrive at this number by taking the sum of customer care and enrollment per approved Medicare Advantage member and variable marketing cost per approved Medicare Advantage member. While our acquisition cost per approved member increased compared to Q1 a year ago, our fixed costs for the combination of GAAP technology and content and general and administrative expenses declined by 14% year-over-year. We expect our cost transformation initiatives to generate additional leverage for our fixed costs as we progress through fiscal 2022. Total estimated Medicare Advantage membership increased by 9% on a year-over-year basis to 586,000 total members. Trailing twelve-month cash collections per estimated Medicare Advantage equivalent paying member also increased to $441 from $431 in Q1 of 2021. Trailing twelve-month commissions, cash collections in our Medicare business were over $325.3 million, up 8% year-over-year. As discussed on the Q4 call, these numbers tell an important story about the size, quality, and cash-generating potential of our book of business. Moving to some of the preliminary retention trends we observed during the Annual Enrollment Period and Open Enrollment Period. Approved applications for the cohort with a policy effective date of January 1st 2022 have a retention rate more than 10% better through the first four active months than the comparable 2021 and 2020 cohorts over that same time period. Additionally, customer satisfaction metrics for this new cohort have shown significant year-over-year improvement with select carriers sharing that net scores for this cohort have improved twofold compared to last year. While we still believe there is work to do to keep our newest cohort engaged and retained on their plans, this initial data is encouraging evidence of the efficacy of our new approach to enrollments focused on quality and long-term retention. The improved retention characteristics for our newest cohort of enrollments were offset by an increase in lapses for some of the older cohorts. As we have observed, increased marketing in the industry has led to higher switching behavior among cohorts enrolled prior to our quality enhancement initiative. Our Medicare Advantage recapture rate for 2021 was 9.4%. This metric shows the percentage of eHealth customers who changed plans but remained within the enrollment ecosystem, either telephonically or online. It is an important measure of customer loyalty and value added, from the perspective of the beneficiary. As we transact a larger share of our enrollments online and grow the number of members on our customer center platform, we expect the cost of recapture to trend down, providing for increasingly attractive member-level economics. Medicare Advantage lifetime values of $948 declined 2% year-over-year, reflecting reduced persistency among some of our older cohorts. As a reminder, lifetime values are driven by historical retention data going back three years; we continue to expect flat Medicare Advantage lifetime values for fiscal year 2022. Residual or tail revenue in the Medicare segment was flat year-over-year at around $50,000, in line with our expectations. It was $3.5 million for the company on a consolidated basis, mostly driven by our Small Business segment. Turning to our Individual Family and Small Business segment, first quarter revenue for this segment was $10.2 million, a 23% decrease compared to a year ago. This was primarily driven by a lower positive tail adjustment revenue in the segment, which declined to $3 million from $5.3 million in Q1 2021. The Individual Family and Small Business segment generated segment profit of $5.3 million compared to $8 million in the first quarter of 2021. Now, I would like to review our operating expenses and some of the cost rationalization measures we are taking. First-quarter technology and content expenses declined by 15% while general and administrative expenses declined by 13% compared to a year ago, yielding roughly $6 million in total fixed cost savings. Moving to our variable costs, customer care and enrollment costs grew by 23% and marketing and advertising grew by 15% compared to a year ago. The increase in customer care and enrollment expenses reflects higher agent headcount that we had in Q1 compared to a year ago. As a reminder, last year we pivoted aggressively to an in-house telesales model, cutting the majority of our outsourced agents following the conclusion of the fourth-quarter Annual Enrollment Period. Marketing spend increased through a combination of our investments in leads for our online business, as well as demand generation for our telesales segment to maintain utilization of our agent headcount. As Fran shared earlier, starting in Q2, you will see a gradual reduction in our variable expenses across marketing and customer care and enrollment. We expect a decline of over $50 million in our variable spend in 2022 on a GAAP basis with the overall goal of $60 million in cost savings, including fixed costs compared to the full year of 2021. Our first quarter cash flow from operations was $47.1 million compared to $43 million for the first quarter of 2021. Because of the seasonality of cash collection dynamics in the industry, the first quarter is typically our strongest in terms of cash generation. As of March 31, we had $232 million in cash, cash equivalents, and marketable securities with $70 million of debt following last quarter's financing agreement with Blue Torch. Our balance sheet also reflects a significant commissions receivable balance of approximately $831 million that is comprised of $204 million that we expect to collect over the next 12 months and $627 million in long-term commissions receivable. This compares with total commissions receivable of $742 million as of March 31st, 2021. We are reaffirming our 2022 annual guidance expectations, which are: 2022 total revenue in the range of $448 million to $470 million, GAAP net loss for 2022 in the range of $106 million to $83 million, adjusted EBITDA in the range of negative $64 million to negative $37 million, and total cash flow, excluding the impact of the $70 million term loan and associated costs, is expected to be in the range of negative $140 million to negative $120 million. Given that Q2 is the last quarter when we are comparing against that period last year before the enrollment quality measures were introduced, we are expecting a continued decline in revenue and EBITDA compared to 2021. This is consistent with our financial and operational plan for the year to slow down growth. We expect a year-over-year decline in revenue in excess of the year-over-year decline we saw in Q1 due to our deliberate plan to reduce call center headcount and marketing costs in the second quarter. We continue to expect lower telephonic conversion rates to negatively affect adjusted EBITDA. As Fran mentioned, we are currently in the process of building our three-year plan through 2025, and we will be sharing appropriate components of our longer-term vision with investors later this year. This plan will be built with the explicit goal of returning to profitable growth and reaching cash flow positive, on a trailing twelve-month basis as quickly as possible. With that, I'd like to turn the call back over to the operator for Q&A.

Operator, Operator

Our first question comes from Elizabeth Anderson from Evercore ISI. Please go ahead with your question.

Elizabeth Anderson, Analyst

Hi, guys. Thanks so much for the question. One question I had on the quarter was improving the unassisted online sign-ups. What was the driver in that? How did you push people more towards that or maybe you didn't push them, they went themselves? Can you talk about some of the dynamics that happened in that market or was it purely like a mechanical thing because the assisted sign-ups declined? Thank you.

Fran Soistman, CEO

Hi, Elizabeth. It's Fran. Nice to hear your voice and thanks for the question. Our digital platform continues to be one of the best stories at eHealth, both unassisted and assisted. And I would say that we continue to refine our SEO, SEM, and all of our marketing strategies to support that digital asset. It continues to contribute in a very meaningful way to eHealth's growth in a much more financially viable way. So I wouldn't say there's any single contributor, it's a combination of our marketing optimization strategy with that asset.

Elizabeth Anderson, Analyst

Got it. And one thing I know across the broader healthcare and direct-to-consumer healthcare spaces, there has been a concern about marketing channels and spend in that. Obviously, you pointed to improving marketing efficiencies with better ROI on the marketing channels. Can you help us think through what's an example of one of those channels and how you expect to pivot to those different channels over the course of the year?

Fran Soistman, CEO

Yeah. I'll start. Morelock is here and I'll ask him to share a little more detail. You're right. The cost of acquisition continues to be a challenge, not just for us, but I think everyone in the sector, as well as carriers. I've talked to some carrier partners and they too are experiencing some challenges with respect to lead generation costs. I would say there's no one particular channel that I would say is a darling right now, I think they're all under some degree of pressure, some under more pressure than others. Probably a number of different theories that I could point to in terms of what may be contributing to that. Competition certainly plays into it, and supply/demand is a big component of the competition. I would say that as we have continued to try to meet consumers where they want to be met, even with our digital platform, we are learning that there are some elements in terms of the technology that we bring to bear, whether it's a differentiation between someone who is utilizing a personal computer versus a mobile phone, it produces some different outcomes. And even how we buy the leads for those different pieces of technology can alter the performance, both on the sales side and the retention side. So the more you drill down into the detail, both on the sales and the persistency, you learn more and more about how dynamic this business is. Let me ask Phillip to expand on that.

Philip Morelock, Marketing Executive

That was well said and the only thing I would really add to that is, we have added to our data capabilities pretty robustly over the past two or three years. And so our knowledge of this market and the different marketing channels and the data that we've collected over time allows us to be pretty nimble in response to the signals that Fran was talking about, that we get from consumers from the market. So we can quickly adapt our channel strategy if necessary and optimize our experience for the segments of visitors that we get to our platform.

Elizabeth Anderson, Analyst

Got it. One last one for me. I know you said the churn for the new cohort is about 10 percentage points better than we were previously expecting. It did look like the overall churn went up about 300 basis points year-over-year. Is it just that it's going to take us another year until we have enough new people that have been signed up with us, and the higher quality metrics will overcome some of those maybe older cohorts that have been churning at higher rates? I guess my question is, what timeline do you now expect churn numbers to start improving?

Fran Soistman, CEO

This is Fran again. I'll start and I'll ask Christine to share her perspective as well. Again, as we continue to drill down on the churn, we uncovered something that was truly interesting. In our prepared remarks, we mentioned that we did have some positives regarding the first year and that indicated our quality initiatives are indeed working. Some of the older cohorts did churn at a higher rate than we had seen in the past. But when we drill down further, we identified a particular carrier that historically had been performing well above the average in a favorable manner. Their persistency was greater than the average, but this time, it regressed to the mean and performed consistent with the average. That one carrier really drove largely the change in the persistency for our book of business—this one carrier. So it's not a systemic issue. One large carrier can easily move the needle, good or bad.

Elizabeth Anderson, Analyst

Got it.

Christine Janofsky, CFO

It's also important to note, Elizabeth, the fact that the most recent Enrollment Period cohort is smaller in size compared to some of the historical Enrollment Period cohorts. So as we see more of those members coming in, post-enrollment quality improvements, they'll start impacting overall churn numbers more significantly.

Elizabeth Anderson, Analyst

Got it. That makes sense. Thank you, guys, very much.

Operator, Operator

Thank you. Our next question comes from the line of Jonathan Young from Credit Suisse. Your question, please.

Jonathan Young, Analyst

Thanks for taking my question. I guess, some of the managed care organizations have talked about reducing their dependence on third-party brokers going forward. I guess, has this manifested in your conversations with your carrier partners? And how does this affect your thinking about the go-forward plans for this year and future Annual Enrollment Periods?

Fran Soistman, CEO

Hi, Jonathan, thanks for the question. I would characterize our relationships with our carrier partners as very good. We have regular conversations. I know everyone uses the term partnership loosely, but I really do believe we have a partnership relationship with most, if not nearly all, of our key carriers, those that are described as having significant volume. They're collaborative. We try to solve a common challenge, which is retention. We're very aligned. We follow GAAP accounting. Carriers don't, but they think like GAAP. They're all about lifetime value. We just happen to reflect that, with respect to the way we book revenue. So we're very aligned. And while there may be talk about this and maybe some will follow through, I don't know whether they would do it across the board, but we're having more collaborative conversations about how we work together to improve retention, always focused on improving the beneficiary experience. That's really what's paramount for us and our carrier partners.

Jonathan Young, Analyst

Okay. And then you mentioned cutting marketing and advertising spend in the second half of '22. To what extent is there flexibility within the guidance, that by reducing this advertising spend, there won't be share loss greater than you expect? Or do you expect to effectively offset that by higher persistency, etc.? How are you thinking about the dynamic of cutting that advertising along with membership growth?

Fran Soistman, CEO

Sure. I'm going to let Christine share her thoughts on this as well. We baked that into our plan and we've reflected that in improved conversion rates, which we're working on now and ramping up towards a higher expectation as we get into the fourth quarter, Enrollment Period season. A lot of things will make that happen. It's not just marketing optimization, it's our operating model, the training of our agents to lead changes, improving the quality of our lead generation. I mean, there are a whole host of things that have to occur to improve the conversion rates. So that's all baked into our assumptions. So it's not all the way in a negative way by any means. Christine, do you want to add to that?

Christine Janofsky, CFO

Sure. Thank you, Fran. And thank you, Jonathan, for the question. I would absolutely agree with Fran, and also with what you said. It's a combination of different factors. As we think about those variable costs related to marketing and customer care and enrollment, we'll start to realize some of those optimization savings in Q2, with the majority of that more being realized in the back half of the year, largely concentrated in Q4. As a reminder, when we head into the Annual Enrollment Period in Q4, that's when our largest spend is from a marketing perspective. So it's a combination of factors around the operating model, optimizing marketing, and focusing on those channels that provide the right ROI as we head into the Annual Enrollment Period season. Jonathan, just to quickly mention, we obviously cannot speak on behalf of the entire market, but it seems like our peers will also be moving to a more rational approach to spending. This growth, accelerated growth, came at a marketing cost that probably moving forward, will not be sustainable. So that will mitigate some of the market share impact as well.

Jonathan Young, Analyst

Okay, great. Thanks.

Operator, Operator

Thank you. Our next question comes from the line of George Sutton from Craig-Hallum. Your question, please.

George Sutton, Analyst

Thank you. Fran, you mentioned the positive carrier feedback you've received regarding your new quality initiatives, and I'm curious if you can go into any more detail there. Certainly, some carriers have been somewhat open about their concerns regarding the third-party broker channel. And I sense that you are getting some differing feedback from them given some of these initiatives. Could you walk through that?

Fran Soistman, CEO

Sure, George. Thanks for the question. We're very pleased with the progress we're making, but we keep the champagne on ice. The customer satisfaction metrics—it really does take, I'd say, a joint effort between us and our carrier partners because we have to be in lockstep working together. It's not something that there are certainly many things we can control ourselves, but we get a much better outcome when we are working together with our carrier partners to identify what the real friction points are and how we can resolve or eliminate those friction points. The feedback we're getting from, I would say, all of the major carrier partners during our regular check-ins, this isn't qualitative; this is quantitative as well. There's demonstrated reductions in customer satisfaction metrics on a per thousand basis, not minimal. It's pretty significant and we're getting pats on the back as well. But like I said, you never declare success. You've got to keep working at it every day. So I don't want to call out any one carrier. I think it's fair to say that we work with all of our carrier partners because every beneficiary should have the same experience.

George Sutton, Analyst

Right. By the way, I certainly congratulate you on your reduction in investment in telephonic and increase investment focused on online. I think that's the way to go. I'm curious because under the training side, which affects the telephonic side, it seems the carriers are talking about how they influence some of that training. I'm just curious how much do you feel is in your control versus out of your control as we go into this next season?

Fran Soistman, CEO

I would say we feel very much in control. We own it, we're accountable, even though there is an oversight responsibility to our carrier partners because they have the contractual relationship with CMS. But there is no doubt that we are responsible and accountable, and we work in a very collaborative manner to keep our carrier partners informed and always up to speed with what we're doing, so there's no surprises. I don't know if I'm really answering the question. But I'm kind of surprised that I didn't know there was something going on. I have Bob here—would you say that we have a collaborative process with carriers?

Robert Hurley, Training Manager

It's a very collaborative process with carriers. We definitely incorporate their input into our training programs and best practices as well. So they do offer some good input. We try to incorporate that into our training practices, but we absolutely do control the outcome of that experience in the call center.

Fran Soistman, CEO

All of our calls are recorded. So, Dave, I can audit as needed.

George Sutton, Analyst

Nothing eHealth specific. This is more what carriers have talked about. But last question, if I could, and really off of Kate's point that there is a reduced amount of spend likely to be seen across the board from a lot of different players. It really suggests, again, to those of us watching that there's just too many players. I'm just curious if you've given any thought to consolidation in the space as you see it likely or not.

Fran Soistman, CEO

Well, it remains to be seen what's going to happen in the sector. I think the sector is at an inflection point. We're focused on eHealth. We are working on our cost structure, working on our marketing optimization, working on our carrier partner relationships, and taking care of our beneficiaries every day, and that's plenty to keep us busy. We'll see how things shake out.

Operator, Operator

Thank you. Our next question comes from the line of Daniel Grosslight from Citi. Your question, please.