GoHealth, Inc. (NASDAQ:GOCO) Q1 2023 Earnings Call Transcript

GoHealth, Inc. (NASDAQ:GOCO) Q1 2023 Earnings Call Transcript May 8, 2023

GoHealth, Inc. beats earnings expectations. Reported EPS is $-1.12, expectations were $-1.96.

Operator: Good morning, and welcome to the GoHealth First Quarter 2023 Earnings Conference Call. My name is Michelle, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Followed by the prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I’ll now turn the call over to John Shave, Vice President of Investor Relations. John, you may begin.

John Shave: Thank you, and good morning, everyone. Thanks for joining GoHealth’s First Quarter 2023 Quarterly Results Call. Joining me today are Vijay Kotte, Chief Executive Officer and Jason Schulz, Chief Financial Officer. This morning’s conference call contains forward-looking statements based on our current expectations. Numerous 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 undue reliance on any 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.

Before the market opened today, we issued a press release containing our results for the first quarter of 2023. 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 statements. We encourage you to consider the other risk factors described in our Form 10-K and Form 10-Q reports filed with the Security 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 measures, and the reconciliations are set forth in the press release. Please refer to today’s press release for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call.

For reference in the Investor Relations section of the GoHealth website, we have provided a supporting slide presentation and exhibits that I encourage you to review. And with that, I’d like to turn the call over to Vijay.

Vijay Kotte: Good morning, and thank you all for joining us today. I’m pleased to report a strong quarter and start to the year. We achieved about $183 million in revenue $29 million in adjusted EBITDA and $20 million in positive cash flow. Together with our external partners, we helped over 214,000 Medicare beneficiaries assess their current coverage and potential Medicare options and enroll in our plan. Jason will provide more insight into the financial results in his section. At a high level, our first quarter performance highlights our operational efficiencies and the progress we are making with Encompass and supports our competence in our full year 2023 guidance. The ebroker industry has long believed that growth is directly tied to the acquisition of more agents and thus more leads.

However, this traditional approach often leads to diseconomies of scale, where the cost of adding more agents and leads drives up customer acquisition costs, due to lower quality agents and lower quality leads. We believe technology can drive economies of scale and meaningfully elevate the consumer experience by matching consumers with the right plan for them. Encompass our proprietary operational technology and data science platform allows us to streamline the purchase process for consumers simplifying the cumbersome and confusing experience of healthcare purchasing, while allowing our agents to focus on what’s most important showing empathy and care for our consumers. By leveraging our machine learning platform, we’re able to better-serve these consumers and deliver better outcomes for our business.

I am incredibly proud of our team and their tireless efforts towards achieving our goals and I’m excited to share our progress with you. As we have discussed previously the increasing propensity for consumers to shop coupled with the seemingly ever increasing number of Medicare Advantage choices for consumers can prove overwhelming. This makes the GoHealth value proposition to both consumers and health plans so timely and relevant. GoHealth’s core value proposition to consumers is providing a trustworthy shopping experience that allows consumers to select the Medicare Advantage plan that meets their unique needs. With the Encompass platform, we offer a personalized, unbiased and no-pressure shopping experience where consumers can feel comfortable and competent throughout the entire process.

Our marketplace model is distinct from traditional brokers in several ways. At GoHealth, we put the consumer at the center of all we do. This has resulted in a passionate belief that we must remain unbiased in the servicing of our consumers. I’d like to take this opportunity to go a bit more in depth to discuss exactly how our people and technology create a differentiated experience and introduce some common language when speaking about our technology. First, I’ll start with our associates. Our tenured agents and staffing models support the consumer through the end-to-end shopping process and ensure compliance. We have multiple teams of agents; Tier 1, ensures Medicare eligibility and confirmed shopping interests; Tier 2, supports the needs assessment and plan shopping process; and Tier 3, completes enrollment ensuring the consumers are satisfied with their plan choices understands their benefits and know what will happen next.

Our quality assurance teams audit the entire process provide feedback to improve processes along the way and ensure compliant behavior from our teams. Our agents are not incentivized to promote specific health plans and their compensation is not based on the insurance product that consumers ultimately select. This approach ensures that each consumer receives an impartial evaluation and recommendation that is tailored to their specific needs and preferences. Now moving to technology. Our proprietary consumer-matching technology drives value at the start of the consumer shopping process. We’ve identified many consumer and market-level dynamics that correlate to a particular agent being more effective than another conserving a consumer’s unique needs.

Using machine learning we identify these matches in real time and route to the best-fit agent. We have continued to test different populations for this matching and our first tests have shown a 30% increase in conversion rate when applying this routing. Our Plan Fit tool has been built on millions of consumer interactions and leverages that data to create a customized guided multi-step purchasing experience that results in a thorough and comprehensive understanding of our consumer’s Medicare insurance needs. Each time, we talk to a consumer Plan Fit analyzes over 180 factors; including plan characteristics, consumer inputs and historical data to sort through thousands of Medicare Advantage plans and help us provide the best recommendations to consumers.

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This allows us to help consumers make informed decisions about their healthcare and select the right plan for their unique needs. The tool continues to evolve as we write more policies, gathers more data and add more features. Our proprietary unified agent experience creates a simpler more efficient process for agents to assist consumers, enables faster onboarding and drives compliance. These benefits tie directly to revenue, cash flow and adjusted EBITDA outcomes. The unified agent experience increases automation, creating a simpler and more efficient process. Our sales agents interact with many different applications for everything from determining Medicare eligibility to identifying medications. By integrating these applications directly into our agent platform, we’re able to shorten call time for both the agent and consumer.

Shorter handle times increase agent and consumer satisfaction and lead to increase throughput in our model. Today, new agents receive rigorous training to complete a high quality compliant enrollment. But even with that it takes repetition for new agents to hone their craft. Our standardized technology accelerates this learning curve and will enable faster onboarding for our new agents improving overall conversion rates and throughput. Standardization of shopping experience also enables us to drive compliance and adapt to regulatory changes as needed, a critical capability given the current climate. Finally, we created a data profile on each individual including their health preferences, financial situation and other relevant factors. Our evolving Customer 360 platform organizes this information and will enable our agents to provide more efficient personalized service to each consumer that takes their historical relationship with GoHealth into account.

This laser focus on the consumer is a win-win and strengthens the value proposition we continue to bring to health plans. We serve the largest health plans in the country while selectively adding new options in our marketplace to ensure we are offering consumers the highest quality options available. We believe our unbiased marketplace model and superior consumer experience attracts a broader set of consumers than health plans can reach and ultimately expands the number of consumers we can match to health plans. This expands the pie for health plans that participate in our marketplace and enables them to drive their own member growth so long as they have competitive consumer-focused benefits. Additionally, health plans can rely on our standardized and effective sales process to ensure that the consumers enrolled in their plans are informed and satisfied with their plan selection, which minimizes churn, improves retention and reduces complaints.

Finally, our Encompass model specialized agent roles and uniform agent experience technology, allows us to drive compliance while also being nimble and responsive to the ever-changing regulatory landscape. Our belief in the Encompass model’s value for health plans is backed by our ability to redefine and reset the foundation of our business through our new contracts. We have secured Encompass contracts with nearly all our health plan partners, assuring them access to our high-powered marketplace and guided shopping process that culminates with an in-house dedicated health plan enrollment team for each health plan to support final enrollment confirmation and initiate onboarding. As you can see, Encompass is much more than just a new way to contract.

It is also a technology-forward operating model designed with purpose, making the consumers’ needs paramount. The efficiency of the model has already begun to flow through our financials with lower cash burn and lower costs. This lower cost per submission driven by significant marketing improvements, lower agent carrying costs during low season and expansion of technology and tools offers variable capacity and access to economies of scale. With every shift of volume to the Encompass model, we deliver greater revenue reliability supported by a greater percentage of cash collected within the first 12 months. Our new model has transformed our cash flow profile as the business, and we are now in the unique position in the industry of generating positive, dependable cash flow.

This fundamental economic change in our business model recognizes the value of our differentiated approach to delivering elevated, consumer experiences and allows us to build an enduring company. As the Encompass model approaches its first full year of launch at scale, we expect that the model will evolve and continue to improve outcomes for consumers, health plans and GoHealth stakeholders. Jason will speak about how Encompass allows us to reach profitability with the new business we generate on a go-forward basis and decouple the company’s future from the macro headwinds seen throughout the industry from increasing shopping behavior. I want to take a moment to thank our associates, agents and partners. We have been diligently working to improve operational efficiency, which will take time to show fully in results, but we are very encouraged by our progress, which Jason will now discuss.

Jason Schulz: Thanks, Vijay. We are pleased to announce our Q1 2023 performance. After normalizing for the exit of our non-Encompass BPO services, we generated revenue of $176 million and adjusted EBITDA of $27 million, driven by 214,000 submissions. Our Q1, 2023 results are in line with our expectations, and keep us on track toward our full year guidance. These results represent a $62 million decrease in revenue and an increase in adjusted EBITDA of $22 million versus Q1 2022. After normalizing for the exit of our non-Encompass BPO services and the $2 million look back recorded in Q1 2022. As a reminder, the revenue decline was a deliberate strategy, to scale down our agent workforce, focus on quality, achieve operational efficiencies and improve our unit economics and profitability.

We continue to see good momentum with our cash flow from operations, where this quarter we achieved a positive $20 million, which results in a year-over-year improvement of $303 million on a trailing 12-month basis. We believe trailing 12 months is the most appropriate way to view our performance, as it normalizes for seasonality throughout the calendar year. As detailed in our quarterly results presentation posted on our website, we are focused on driving high-quality enrollment and operational efficiencies, while reducing our curing cost. This approach has allowed us to streamline our operations and position ourselves for long-term success. We are confident that this decision will continue to have a positive impact on our overall profitability.

For Q1 2023, we have changed our segment reporting to reflect our continued focus on driving high-quality Medicare business and our exit from non-Encompass BPO services. Going forward, we will be operating under a single reporting segment, which aligns with how we manage and operate the business and incentivize our associates. As a part of our reporting changes, we are also adjusting how we disaggregate revenue to better align with our operations. In our 10-Q filing, you will see a line item for our agency revenue, which is defined by GoHealth being the agent of record and represents what we have previously referred to as our traditional model. This included a combination of commissions and partner marketing revenue. We also now have non-agency revenue, which is defined by the revenue which we receive for specific services that support enrollment activities in which GoHealth is not the agent of record.

Previously we have labeled this as Encompass revenue. As Vijay described, the Encompass model is more than just a contract or source of revenue. It is now our preferred operating platform that puts the consumer in the center of all of our activities, including how we market, support enrollment activities, provide administrative services, utilize proprietary technology and ultimately deliver the highest quality solutions to those we serve. We acknowledge, that this change may require our support for you to clearly understand, how do they reconcile to prior year. We will provide a clear comparison in our upcoming reports and presentations to ensure that our stakeholders have a comprehensive understanding, of our performance and progress. As I previously mentioned, our Q1 2023 adjusted EBITDA excluding non-Encompass BPO Services is $27 million.

We have significantly increased our adjusted EBITDA margin profile, from 2% in Q1 2022 to 16% in Q1 2023. This excludes non-Encompass BPO Services and a $2 million Lookback Adjustments, recorded in Q1 2022. This improvement reflects our more efficient operating model we established during the annual enrollment period last quarter, which we continue to refine and enhance. As illustrated in our quarterly results presentation, our Q1 2023 gross margin is $202 per submission, representing a 60% year-over-year increase in profitability. This quarter, we have increased our agency commission constraint, which is the primary driver of the year-over-year sales per submission decline. However, this was more than offset by the efficiencies gained as reflected in the Cost per Submission improvement of 23%.

Q1 2023 cash flow from operations is $20 million. We continue to see dependable and improving cash flow trends, reflecting our ongoing focus on increasing our Non-Agency revenue and operating efficiency. As illustrated in our quarterly results presentation, our trailing 12-month cash flow from operations as of Q1 2023 is $27 million, an improvement of $303 million over the same time period measured in Q1 2022. While $78 million of this improvement can be attributed to Non-Agency revenue $219 million of the change is driven by more efficient Encompass operating model. We recognize that revenue, EBITDA and cash flow have always been subject to seasonality. However, because of our progress with the Encompass platform as well as the impacts of our Non-Agency revenue the seasonality of our business has changed from the past.

The Non-Agency revenue has shifted our cash collections, lowering the amount of cash collected in Q1 and smoothing collections in the remaining periods with Q3 expected to be the highest collection quarter. We will continue to see our peak revenue and adjusted EBITDA in Q4, due to the high-volumes in the Annual Enrollment Period, followed by Q1 in the Open Enrollment Period and much lower revenues and modest negative adjusted EBITDA in Q2 and Q3 due to the much lower volumes in the Special Enrollment Period. That said, the Encompass operating model has significantly lowered our cost per submission which will result in a meaningful improvement in this year’s special enrollment period compared to 2022. Our strong performance in Q1 allows us to reiterate our guidance for the year.

We anticipate our revenue to be between $750 million and $850 million with adjusted EBITDA in the range of $100 million and $140 million. In terms of cash flow from operations, we expect a positive $75 million to $115 million. In conclusion, during Q1 2023, we achieved significant improvements in adjusted EBITDA, gross margin and cash flow from operations. The strong performance reflects our continued commitment to driving Non-Agency revenue and executing on our more efficient Encompass model. With that, we would like to open the call to questions, Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Mike Cherny with Bank of America. Your line is now open.

Operator: [Operator Instructions] The next question comes from Jonathan Yong with Credit Suisse. Your line is open.

Operator: Please stand by for our next question. Our next question comes from Ben Hendrix with RBC Capital Markets. Your line is open.

Operator: [Operator Instructions] I show no further questions at this time. I would now like to turn the call back to Vijay for closing remarks.

End of Q&A:

Vijay Kotte: Thank you. Thank you, again for joining us today. We are really proud of everything that we’ve been able to accomplish thus far this year. Our team has been phenomenal. We have some of the best in the industry, who are really focused on doing the right thing and doing it right. And we are absolutely committed to continuing to do that. We hope you leave knowing we remain focused on delivering long-term value for our shareholders, while providing high-quality experiences to our consumers and health plans. Thank you for your continued support, and we look forward to updating you on our progress during the next quarterly results call and webcast. Thank you.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.