Earnings Call Transcript - GOCO Q1 2024

Operator, Operator

Good morning, and welcome to GoHealth's First Quarter 2021 earnings conference call. My name is Victor, and I'll be your operator for today's call. I will now turn the call over to John Shave, Vice President of Investor Relations.

John Shave, Vice President of Investor Relations

Thank you, and good morning. Welcome to GoHealth's First Quarter 2024 earnings call. Joining me today are Vijay Kotte, Chief Executive Officer; and Jason Schulz, Chief Financial Officer. Today's conference call contains forward-looking statements based on our current expectations. Numerous known and unknown risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict. You should not place any undue reliance on forward-looking statements, and the company undertakes no obligation to update or revise any of these statements, whether due to new information, future events or otherwise. Earlier today, we issued a press release containing our first-quarter results of 2024. We have posted the release on the GoHealth website under the Investor Relations tab. In the press release, we have listed a number of risk factors that you should consider in conjunction with our forward-looking statements. We encourage you to consider the other risk factors described in our annual report on Form 10-K filed with the Securities and Exchange Commission for additional information. During this call, we will be discussing certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measure and the reconciliations are set forth in the press release. You may also refer to the investor presentation posted to the Investor Relations section of our website for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed in this earnings call. I will now turn the call over to GoHealth's CEO, Vijay Kotte.

Vijay Kotte, CEO

Thank you, John, and good morning, everyone. I'm excited to share our first quarter results with you today. Our performance during the Q1 open enrollment period exceeded our expectations in submissions, revenue, and adjusted EBITDA. Notably, our internal captive channel grew submission volume by 20% year-over-year. In response to the challenging market dynamics during the annual enrollment period, we improved our targeted marketing efforts and successfully identified consumers in need of new plan options. I’m proud of our team's resilience and adaptability as they navigated these conditions, resulting in better-than-expected performance while maintaining the integrity of the Encompass workflow and, importantly, doing good. At GoHealth, we provide support and clarity to Medicare consumers in a landscape marked by confusion and uncertainty. Over 65 million people in the United States are eligible for Medicare, and about half of them are on Medicare Advantage plans. One-third of Medicare consumers live in areas with more than 50 plans available, making navigation complex and stressful. Consequently, many consumers are hesitant to shop because they don't know who to trust or where to start. We believe GoHealth is the best resource to empower them in making this essential and personal decision through our proprietary and objective tools, training, and incentive structures. In Q1 2024, our dedicated team helped nearly 600,000 consumers navigate their Medicare options, enhancing decision-making through the PlanFit CheckUp via our proprietary Encompass workflow. In addition to supporting over 215,000 new enrollments in Q1, we also provided peace of mind to over 94,000 consumers by confirming their current plan meets their needs. We are evolving from a traditional Medicare enrollment company to a Medicare engagement company, focusing on building high-quality, long-term relationships with consumers. This transition emphasizes a more integrated and interactive approach to consumer care, solidifying our unique and vital role in the Medicare landscape. In our last earnings call, we noted several market factors that could influence our performance this year. First, we anticipated the final rate notice on commissions for the 2025 plan year. Second, we awaited the 2025 marketing rule from CMS. Third, we considered the extent of health plan product and benefit differentiation between 2024 and 2025. Fourth, we assessed marketing efficiency during this election season. Lastly, we analyzed the competitiveness of health plans and its effect on the planned mix. As we report our first-quarter results, we have updates on the first two of these factors. First, CMS issued the final rate notice, which included a base commission schedule that meets our expectations. The 2025 final rate notice does increase margin pressure on health plans, raising the likelihood of benefit disruptions and market exits, especially for non-special needs plans. Some major health plans have indicated significant upcoming benefit disruptions in their Q1 earnings calls. These disruptions could lead to increased consumer shopping and switching during the 2024 annual enrollment period, positively impacting GoHealth's business model. Despite the margin pressures faced by health plans, many are looking for targeted growth in specific markets and products. Some health plans have expressed a desire to expand within the special needs population, which is an area where GoHealth can effectively attract and serve. These strategies will likely vary by health plan and be geographically distinct. We believe we are well-positioned to assist health plans in achieving targeted growth within specific markets and products. Our Encompass workflow ensures a seamless transition from validating enrollment to onboarding and engaging new plan members. We've demonstrated our marketing attracts consumers likely to shop and those who might benefit from a switch, enabling us to target precision based on geography and product type. We believe we excel in building trust with special needs populations, providing high-quality plan checkups and enrollment at scale. Second, in April, CMS released the final 2025 marketing rules, which include provisions regarding independent agent and broker compensation alongside new marketing guidelines. We are reviewing these guidelines and discussing them with health plans for their interpretations. We are cautiously optimistic that the final rule will have a neutral impact on GoHealth from a direct economic perspective, with some modest effects on contract structure and oversight. Our proprietary Encompass contracts and workflow not only support our robust cash performance but also provide the framework needed to comply with the final rule with minimal changes. We support CMS in their efforts to limit and penalize inappropriate practices by agents and brokers who prioritize compensation over consumer needs. We also endorse the restrictions on third-party lead generators who violate marketing laws. GoHealth has set a new standard by compensating our agents when they reassure consumers that they are on the right plan. As CMS raises industry standards, GoHealth is committed to surpassing these expectations to deliver top-notch service to our consumers and health plan partners. We are actively enhancing our Encompass operating model to improve efficiency and enhance consumer experiences. Last year, we rolled out PlanFit CheckUp, utilizing analytics from nearly 30 million consumer interactions and machine learning to assist our licensed agents in accurately matching consumers with the best Medicare plans for their needs. We believe this tool has enhanced the shopping experience for Medicare Advantage plans and aligns with the final CMS marketing rule. Importantly, GoHealth agents are compensated even if the assessment does not lead to an enrollment. This year, we're focusing on simplifying processes and improving call handle times based on consumer feedback. As part of this initiative, we are launching Encompass Express. Encompass Express is an upgraded consumer-centric model built on our original Encompass workflow. It features streamlined scripting and handoffs, utilizing tech-driven standardization and automation to increase efficiency and ultimately improve consumer experiences while maintaining quality. We expect these changes to positively affect our financial results starting in the second quarter and more significantly this fall during the annual enrollment period. Additionally, we are continuing our investments in technology to enhance consumer experience, agent efficiency, and overall quality. Key investment areas include expanding data and interactive features in Customer 360, our proprietary consumer engagement tool; improving our PlanFit CheckUp to strengthen consumer relationships and enhance service quality; and launching a digital-first shopping experience that allows consumers to initiate the shopping process online. These investments are part of our long-term transformation from a Medicare enrollment company to a Medicare engagement company. While most of the market factors I mentioned are likely to unfold in the latter half of this year, they remain significant, and thus, we continue to expect the following regarding our 2024 performance. First, we anticipate submission volume to grow in line with the overall Medicare market. Second, we expect our revenue to remain flat year-over-year, with incremental operating efficiency leading to modest margin expansion. Finally, we project cash flow from operations to be flat to slightly up as we continue transitioning into the Encompass model and shifting toward non-agency revenue. We are committed to transforming the consumer healthcare journey with continual innovation and strategic foresight. I’d like to thank our team for their commitment to our values and our shareholders for their unwavering support and dedication to delivering long-term value. Now, I will turn it over to Jason to detail our financial results.

Jason Schulz, CFO

Thank you, Vijay. Our 2024 first quarter performance demonstrated the overall improvement and resiliency in our business model. We reported Q1 net revenues of $186 million compared to $183 million in the prior year. Our captive channel, which involves GoHealth's internal sales teams as opposed to relying on external agents or third-party brokers, experienced robust 20% growth due to a combination of enhanced training and technology, increased marketing efforts, and improved consumer retention strategies. We believe our ability to effectively leverage internal resources to optimize sales and enhance consumer relationships not only supports short-term revenue gains but also positions GoHealth well for sustainable long-term growth. Adjusted EBITDA, excluding Non-Encompass BPO Services, was $27 million for the quarter, a slight decrease from the same period of the prior year. We are pleased with our strong unit economic performance for the quarter. Adjusted gross margin per submission increased by 7% year-over-year due to an 8% improvement to sales per submission, partially offset with a higher cost per submission. Q1 2024 cash from operations was $12.5 million compared to $20.5 million in the same quarter last year. This includes a $10.5 million payment to settle a shareholder lawsuit related to the company's 2020 initial public offering. Excluding this one-time item, cash flow from operations for the quarter would have been $23 million. We continue to see dependable cash flow trends, reflecting our ongoing focus on cash management and operating efficiency. As illustrated in our quarterly results presentation, our trailing 12-month cash flow from operations as of March 31, 2024, was $101 million, an improvement of $74 million versus the trailing 12 months ended March 31, 2023. In Q1, we generated a robust $70 million of cash adjusted EBITDA compared to $78 million in the prior year period. We believe that cash adjusted EBITDA is a helpful measure of our business as it neutralizes the impact of the LTV estimates related to the future years. As we noted in our year-end filings, in the first quarter of 2024, we successfully negotiated an amendment to our debt agreement, adjusting the leverage ratio requirements for the duration of the loan facility. We will focus on refinancing our debt over the next few months as we aim to optimize our debt structure. We believe that this amendment provides additional flexibility to support this goal while allowing us to continue investing in the business for future growth. In conjunction with the amendment, we made a $50 million term loan payment in early April. We expect to make an additional $25 million pay down in early Q4 of this year. As we navigate the evolving market landscape, we continue to focus on profitability and value creation.

Vijay Kotte, CEO

Thank you, Jason. We believe our strategic initiatives, particularly the successful implementation of the Encompass workflow, have not only boosted our operational efficiency but also enhanced the service quality provided to Medicare consumers. We are currently in advanced discussions with select health plan partners to roll out the PlanFit Safe Compensation Initiative aiming to align our incentives more closely with consumer needs by ensuring they are enrolled in the most suitable plans rather than prioritizing the financial benefits of new policy enrollment. Our firm belief is that not only do our PlanFit Safe align with the overarching priority communicated by health plans to retain membership, but this approach also prioritizes long-term consumer satisfaction and trust. Looking ahead, we are dedicated to using our insights and technology to further enhance the healthcare journey for consumers, empowering them to make well-informed Medicare decisions. We are now ready to take your questions.

Operator, Operator

Thank you. Our first question will come from the line of Ben Hendrix from RBC Capital Markets.

Benjamin Hendrix, Analyst

Congratulations on the quarter. Just wanted to get some thoughts on the regulatory environment. It seems like there was some language from CMS in the rules, targeting commissions within captive carrier arrangements with brokers. And I wanted to just get more details on kind of how you're seeing the provisions of the rule thus far and kind of what gives you confidence in that alignment with Encompass.

Vijay Kotte, CEO

I really appreciate you joining this morning. As we think about the final rule, and I think there have been a lot of different interpretations out there, the general underlying concept here is that CMS is very focused on inappropriate incentives to independent agents and brokers, whereby an independent agent or broker may be influenced to write one health plan or a policy type over another one based solely on their reimbursement. Uniquely for us, as GoHealth operates, our agents, as you know, are generally hourly wage or salary wage, and they have very minimal variable compensation. And even that variable compensation that they do receive is health plan agnostic. And then on top of that, we go further, as you know, to compensate our agents for not selling or enrolling a consumer in a new policy by just making sure they get peace of mind. So really, the variable tie for us is about providing a service as opposed to delivering a new enrollment. All of that, based upon the way we've interpreted the current rules or the way that was proposed and finalized is consistent with where the health plans have conversed with us on the topic as well is that, that is outside the realm of what CMS was targeting, meaning our model is separate and distinct from where they were trying to focus their efforts. In concert with that, though, our efforts to go beyond the minimum standards established by the CMS regulations are what we're focused on. It's not about meeting the minimum threshold; it's about doing the right thing and being differentially better for consumers and for the health plans that we also partner with in the process. And we're feeling very good about that, and the fact that we really spent a lot of time designing the Encompass structure to be built off a fair market value basis to begin with on how we're reimbursed for the direct services we deliver and then ensuring that our agents are incentivized to do the right thing. So we are cautiously optimistic as to how that's going to play out for us as we continue to advance the model forward to be consumer-centric and focusing on engagement going forward. But as we think about where we go in the relationships with the health plans and how we think about the contracts, there are some elements of waivers that were in there before around marketing and admin dollars that we just need to tweak on the way we adjust the way they're described in our contracts. But again, all of our contracts are built on a fair market value basis and ultimately do not influence what our agents sell or don't sell. It's the appropriateness of the plan for our consumers on a personal basis that influences that. So we're pretty excited about where things landed and we're pretty excited about how we can continue to deliver differential service with our model.

Benjamin Hendrix, Analyst

And if we could move over to kind of positioning for AEP this year. It seems like the carriers in our coverage, United is not backing away from targeting margins to the high end of the range. We have CVS and Humana really in earnest focused on margin recovery being a 2025, even which could include pulling some plans in certain markets and replacing them. It seems like all in all, a big setup for shopping behavior in the fourth quarter. Without all that commentary coming from the carriers, just wanted to get your thoughts on how you're positioning for AEP. What that could mean from both the volume and also an LTV perspective?

Vijay Kotte, CEO

That's a very astute question given all the market dynamics that are out there, Ben. As we look at the market landscape, there are a number of consumers every year who always shop, right? They're always shopping, always see if there's a better deal available. The unique element of what's coming in this upcoming annual enrollment period is you're going to have shoppers who need to shop who haven't previously. They've been able to quote-unquote, set it and forget it. And as we've said in previous calls, we believe more consumers should be shopping every year. What we expect this AEP is that you will have more of those consumers needing to shop because of the disruption that happened to their status quo benefit plan, either an exit of their current benefit plan or a significant degradation to the benefit values for them that will motivate them to shop. And we believe we're the best destination for that shopping to give them the true personalized assessments to see if there are better alternatives for them. And so when you think about shopping, we have been pushing and hoping and advocating for more shopping in general. We expect shopping to increase. More significantly for us, as we've highlighted, we've really put our money where our mouth is on ensuring that we're going to do only what's right for the consumer. So even though shopping has been increasing, the dynamics and the disruption of the benefits determine also the justified volume of switching. And we believe based upon these dynamics that you described with the different health plans, that there will be more of a justified reason for switching, which is a very positive dynamic for GoHealth and our operating model. I think it's also important to note that despite the fact that many health plans are having pain points, as I referred to in my prepared remarks, many of those health plans still want to grow in very targeted areas with different populations, etc. And we also bring that added advantage. Not everybody knows how targeted we can be with our unique marketing capabilities and what Steve Moffat, our Chief Marketing Officer, has been able to do with the team to really get down to those unique demographic areas and geographies to identify those pockets that have the greatest disruption. So where we can anticipate disruption using our predictive modeling and our strong actuarial teams, we're going in, in a laser-focused way with targeted messaging to help really mobilize that shopping and support the necessary switching that will likely be there. So that's generally how we're approaching our preparedness and our planning. The other piece I'll add is in the prepared remarks was our launch of the Encompass Express which has really learned how to be more efficient so we can do more with less and deliver a better experience. And you started to see some of the learnings that we had in the first quarter, where we delivered some strong year-over-year efficiencies on what we're actually doing with our agents.

Operator, Operator

And our next question comes from the line of Pat McCann from NOBLE Capital Markets.

Patrick McCann, Analyst

Really quickly, my first question will just be to piggyback on the last question. You've talked about how in the most recent AEP that we've come out of, there was low plan switching and it wasn't a big period for plan switching. When we look ahead to the next AEP and have an expectation for increased switching, would you characterize that as more relative to this past AEP? Or if you were to go back several years, would you say just objectively, the upcoming AEP you would expect it to be a significant plan switching period? Does that question I guess make sense?

Vijay Kotte, CEO

No, it does, Pat, and it's an interesting way to think about it and ask the question. I appreciate the way you've approached it. Let me kind of replay it for you. I think the question you're asking is, we get that this past AEP in Q4 '23 versus what we are expecting to see in Q4 of '24, that there will likely be higher switching. But how do we think of that on a relative basis compared to the years when there was a lot of benefit investment and there was justified switching? Are we going to be more in line with those years? Are we expecting it to be more? Is that an accurate replay?

Patrick McCann, Analyst

Yes. Thanks for that, Vijay. That's perfect.

Vijay Kotte, CEO

Here's how it stands: we don't have definite answers yet. The final bids from the health plans are still being finalized, and we won’t know the official benefits until October. This creates a shifting landscape that will be hard to predict. However, we believe it's important to emphasize what we've observed in the past. Typically, there are three situations: health plans may enhance benefits to attract market share, which has been common in recent years, or they may remain neutral without investing in benefits, or they may reduce benefits. Enhancements and reductions in benefits lead to high consumer switching. On average, if we consider the same consumers year-over-year, the environment might resemble the recent years of significant switching based on benefit improvements. However, what will be particularly noteworthy is the impact on consumers who historically haven’t shopped for plans annually, especially those who are new to Medicare and haven’t reassessed their plans. Given that some benefits may not only remain stagnant but could decline, this may prompt a new wave of consumers to shop for plans, leading to increased switching. To clarify, I believe the same shopper demographics will likely experience switching tendencies this year, resembling those from previous AEPs, but we will need to analyze further details later this year. The key focus for us is on those who have not previously shopped for plans; they are now searching for reliable guidance due to significant changes they have not encountered before. We aim to support a larger segment of this population.

Patrick McCann, Analyst

And then also, you guys mentioned certain developments in the business enhancements you're making, for example, allowing consumers to begin the shopping experience online. Could you just drill down a little more into that as far as what's driving you to make that enhancement and how that would drive demand? And I guess one of the things that crosses my mind is as we move forward year-by-year, the 65-plus population is going to be more and more technologically literate, if you will as the years progress. So maybe you're just sort of setting up for the long term. But could you just give a little bit more color there?

Vijay Kotte, CEO

Sure, Pat. As we think about the digital direct digital space, that isn't going to go away as an opportunity. To your point, it's going to be increasing over time. And the real question is how do you access those populations and provide them the visibility, the self-driven approach to learning and educating themselves while also providing them the peace of mind of a good experience and the wrap around with somebody to confirm for you that you're doing the right thing for yourself and not doing harm to your benefit needs. As we've been pursuing this, we've spent a lot of time segmenting out the Medicare population, listening to consumers, finding out what could augment or bring those who need to shop, as I referred to before, to shop, right? Enabling them with tools that are not pressurized in a way that give them the opportunity to educate themselves. Ultimately, where we're focusing our efforts is empowering the consumer how they want to be empowered to make a good Medicare decision. Part of that is providing transparency into their options in a very simple, transparent way that can provide them the flexibility to get personalization or just general eligibility of opportunities. We've been continuing to invest in testing those types of tools. We're going to continue to know that digital isn't going to go away; it will likely start to increase over time. So we're trying to be responsive to that, and we're excited about what it could be for those consumers who really want to play in that space.

Patrick McCann, Analyst

If I could ask one more question, you mentioned PlanFit Safe and the discussions you're having with health plans regarding compensation arrangements. Can you provide any details about what those arrangements might look like? Also, do you have any updates on when we might hear more announcements about this?

Vijay Kotte, CEO

No. It's something that we're very excited about as I closed with here today. The PlanFit Safe compensation model is really based upon the fact that we have proven to our health plan partners that we can do the right thing. In these markets where retention and continuous engagement are extremely important to health plans and valuable to consumers, we have, again, this quarter in open enrollment period, did 94,000. So between AEP and OEP, we've done just about 200,000 PlanFit Safes already. As we think about that and the good high-quality conversation we've had with nearly every major health plan, we're expecting to be launching some of these programs to be tested here in Q2 and Q3 and looking to have them substantive in operations as we go into the annual enrollment period. So we're excited about that. I'm not ready to get into the economics of those arrangements, but needless to say, the cost is already born in our model today. Anything coming from those will be additive and incremental in the way we think about them.

Operator, Operator

And our next question will come from the line of James Sidoti from Sidoti.

James Sidoti, Analyst

I'm looking at the revenue breakdown and non-agency revenue looks like it's about 45%, 46% of revenue, up from about 24% last year. Can we assume from this that there's a much lower risk of having any revenue reversals going forward?

Vijay Kotte, CEO

I would say that on the business that we've written under that model, again, you should always think about it for the book that you just wrote, where you would have any kind of look-back potential exposures. As you move away from agency to non-agency, and then it's also a little bit more nuanced. It's how much you've left in agency that is related to high quality stable plans versus others. There's a little bit of a mixed question there as well. But in short, the simple answer is yes, when you write more non-agency, you have less intrinsic market risk for those things about tenure or churn rates, etc., that would impact back book values.

James Sidoti, Analyst

And you generated more free cash in the quarter, I think it's the third quarter in a row with positive free cash flow. You're paying down some debt and you talked about refinancing. Can you talk about what are your options with regards to refinancing? Are you looking at other straight debt? And how do the rates compare to what the existing debt is at now?

Vijay Kotte, CEO

It's a great question. We're obviously very focused on it. Let me just first talk about those cash flow dynamics. I'm very proud of our team. Michael Hargis, our COO; and Jason Schulz, our CFO, are still with us day in and day out to find opportunities to drive efficiency, really invest in both our agent experience as well as the consumer experience in the process. We've been able to be very thoughtful about how we make investments in our technology to support that overall model that is the true driver of the cash dynamics of our business. It is that consistent workflow that's focused on standardization and less unnecessary variation in the pool. As we've delivered that high confidence cash flow, we've consistently shown rigor around our operations. It has enabled us to make those debt pay downs that we've done and opened the door for us to have substantive thoughts around refinancing that debt to get to better interest rates and carrying cost levels for our debt. We're exploring all of those alternatives right now, looking at refinancing, looking at any other market tools that could enhance our debt position so that we can decrease the interest expense that we have and continue to more differentially invest in growing the business. We think we are in a great position to continue to invest under our current state in growth via our technology and the Encompass workflow we put in place. As we look at the refinancing markets and those tools, our cash position and the stability that we've had there and our ability to continuously pay down that debt without tapping into our revolvers in over two years has enabled us to make great progress on what we hope to speak more to you about over the coming months around our refinancing and optimizing our debt structure.

James Sidoti, Analyst

I guess let me put it a different way. Would you be disappointed if after refinancing, you didn't have a better rate than you have today?

Vijay Kotte, CEO

Yes, I would be very disappointed in that. I would expect that to be highly unlikely, but obviously possible. But that is to be very succinct. Yes, I'd be very disappointed by that. Well, thank you so much. I really appreciate Ben, Pat, Jim, your questions; very thoughtful. We are going to close the call here, but I just want to highlight a couple of things. This is one of the most unique years we've seen as we approach this annual enrollment period. We will continuously be experimenting this set for Q2 and the remainder of Q2 and Q3 as we think about all the different ways that we can serve an expanding population of shoppers who need our services more than ever. We have a number of different tactics and tools to continue to build and enhance the trust of being that engagement company as opposed to just an enrollment company. If you think about what we did in AEP versus OEP, we had over 10% of the consumers who've got PlanFit Safe in AEP come back to us in OEP for another PlanFit Safe to reconfirm because there's uncertainty; they are hearing that noise. We are excited about the opportunity to truly deliver on our value proposition of helping consumers doing it the right way and being absolutely opportunistic in being able to deliver high value and rewards for both consumers who seek our services and our stakeholders who are giving us the opportunity to deliver that service to them. Thank you all for your time and attention today, and we look forward to speaking to you again very soon.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program.