GoHealth, Inc. (NASDAQ:GOCO) Q1 2024 Earnings Call Transcript

GoHealth, Inc. (NASDAQ:GOCO) Q1 2024 Earnings Call Transcript May 9, 2024

GoHealth, Inc. misses on earnings expectations. Reported EPS is $-2.19722 EPS, expectations were $-0.84. GOCO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to GoHealth’s First Quarter 2024 Earnings Conference Call. My name is Victor and I will be operator for today’s call. [Operator Instructions] Following the prepare remarks we will conduct a question-and-answer session. As a reminder, this conference is being recorded. I will turn the call over to John Shave, Vice President of Investor Relations. John, you may begin.

John Shave: 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 in 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 this earnings call.

I will now turn the call over to GoHealth’s CEO, Vijay Kotte.

Vijay Kotte: Thank you, John and good morning everyone. I am excited to share our first quarter results with you today. Our performance during Q1’s open enrollment period exceeded our expectations for submission, revenue and adjusted EBITDA. Notably, our internal captive channel grew submission volume by 20% year-over-year. In response to the challenging market dynamics observed during the annual enrollment period, we enhanced our targeted marketing efforts and successfully identified consumers in need of new plan option. I am 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 more importantly being great at doing good.

We at GoHealth 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 in Medicare Advantage plans. One-third of Medicare consumers live in a county with more than 50 plans available to choose from. Navigating these options can be confusing and stressful. As a result, not enough consumers are shopping as they don’t know who to trust or where to begin. We believe GoHealth is the best resource to empower them to make this important and personal decision via our proprietary and objective tools, training and incentive structures. In the first quarter of 2024, our dedicated team empowered nearly 600,000 consumers to navigate their Medicare options, enhancing the consumer decision-making process utilizing the PlanFit Checkup via our proprietary Encompass workflow.

Along with supporting over 215,000 new enrollments in Q1, we also provide a peace of mind to over 94,000 consumers confirming their current plan is best for their needs. We continue our evolution from a traditional Medicare enrollment company to a Medicare engagement company, focused on building high-quality, long-term relationships with our consumers. This shift emphasizes a more integrated and interactive approach to consumer care cementing our unique and vital role in the Medicare landscape. In our last earnings call, we highlighted a handful of market factors that could influence our performance in the year. As a reminder, first is the final rate notice on commissions for the 2025 plan year. Second is the final 2025 marketing rule from CMS.

Third is the degree to which there is health plan product and benefit differentiation between 2024 and 2025. Fourth is marketing efficiency within this election season. And finally, there is the relative health plan competitiveness and the effect on plan 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 aligned with our expectations. The 2025 final rate notice does increase margin pressure for health plans, which increases the likelihood of benefit disruptions and market exits, especially for non-special needs plans. Some major health plans have confirmed 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, which is a positive dynamic for GoHealth’s business model. Though health plans are facing margin pressure, many are seeking targeted growth in specific markets and products. Some health plans have indicated a desire to grow in the special needs population, an audience that GoHealth is differentially able to attract and serve. These strategies and priorities will likely vary by health plan and be very geographically diverse. We believe we are ideally positioned to help health plans achieve targeted growth in specific markets and products. Our Encompass workflow facilitates a seamless transition from validating enrollment to onboarding and engaging new plan members.

We have proven our marketing attracts consumers who should likely shop and who might benefit from a switch and we can precisely target based on geographies and product types. We believe we are the best in the industry at building trust with special needs populations delivering high-quality PlanFit Checkups and enrollment at scale. Second, in April, CMS published the final 2025 marketing rules, including addressing independent agent and broker compensation along with new marketing guidelines. We continue to review these guidelines and discuss them with health plans for their interpretations. We remain cautiously optimistic that the final rule has a neutral impact to GoHealth on a direct economic basis, with some modest impact to contract structure and oversight.

Our proprietary Encompass contracts and workflow not only differentially support our strong cash performance, but we also believe they provide the appropriate construct to support full compliance with the final rule with minimal modifications. We support CMS for their efforts to restrict and enforce against inappropriate practices amongst agents and brokers who place compensation above consumer needs. We also support the restrictions on third-party lead generators that blatantly violate marketing laws. We believe GoHealth has already set a new standard by compensating our agents when reassuring a consumer they are on the right plan. As CMS set higher industry standards, GoHealth is committed to exceeding these standards to deliver best-in-class service to our consumers and health plan partners.

We continue to improve our Encompass operating model to enhance efficiency and the consumer experience. Last year, we introduced PlanFit Checkup, using analytics from nearly 30 million consumer touchpoints and machine learning to help our licensed agents accurately match consumers with the best Medicare plans for their needs. We believe this tool has improved 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 result in an enrollment. Fifth year, we are focusing on streamlining processes and improving call handle times based on consumer feedback. As part of this effort, we are launching Encompass Express. Encompass Express is an enhanced consumer-centric model built on the chassis of our original Encompass workflow.

It includes streamlined scripting and handoffs using tech driven standardization and automation to deliver efficiency and ultimately a better consumer experience while maintaining quality. These changes are anticipated to positively impact our financial results beginning in the second quarter and more substantively this fall during the annual enrollment period. Additionally, we are continuing to invest in technology to improve consumer experience, agent efficiency and overall quality. Key areas of investment include expanding data and interactive capabilities in Customer 360, our proprietary consumer engagement tool, improving our PlanFit Checkups to deepen consumer relationships and enhance service quality, and finally launching and testing a digital first consumer shopping experience, enabling consumers to start the shopping process online.

These investments are part of our long-term shift from a Medicare enrollment company to a Medicare engagement company. While most of the other market factors I mentioned are more likely to play out in the second half of this year, they are still significant and thus we continue to expect the following in terms of our performance in 2024. First, we expect submission volume to grow in line with the overall Medicare market. Second, we expect our revenue to be flat year-over-year with incremental operating efficiency resulting in modest margin expansion. Finally, cash flow from operations is expected to be flat to slightly up as we continue our transition into the Encompass model and shift to non-agency revenue. We are driven by our commitment to transforming the consumer healthcare journey with continuous innovation and strategic foresight.

I’d like to thank our team for their commitment to our values and our shareholders for their ongoing support and dedication to delivering long-term value. With that, I will turn it over to Jason to detail our financial results.

Jason Schulz: 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 wealth for sustainable long-term growth.

Adjusted EBITDA, excluding non-encompassed 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 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 flow 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 a reminder, cash adjusted EBITDA is simply taking our reported adjusted EBITDA plus the year-over-year change in our net contract asset. If the net contract asset has decreased, this is a result of higher cash collections from the back book and the inverse is true if the net contract asset has increased year-over-year.

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. I will now turn the call back to Vijay for closing remarks.

Vijay Kotte: 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 plan, rather than prioritizing the financial benefits of new policy enrollment. Our firm believes 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: Thank you. [Operator Instructions] Our first question will come from line of Ben Hendrix from RBC Capital Markets. Your line is open.

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Q&A Session

Ben Hendrix: Thanks, guys and congratulations on the quarter. Just wanted to get some thoughts on the regulatory environment, it seems like there was some language from CMS and the rules targeting commissions within captive carrier arrangements with brokers. 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? Thanks.

Vijay Kotte: Good morning, Ben. Great question. Really appreciate your joining this morning. As we think about the final rule, and I think there have been a lot of different interpretations out there, but 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 policy type over another one based solely on their reimbursement. And uniquely for us as GoHealth operates, our agents, as you know, are generally hourly wage or salary wage, and they have a 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 the way the health plans have conversed with us on the topic as well. 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, what we will say is our efforts to go beyond the minimum standards established by the CMS regs 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 spend a lot of time in 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 contract, 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.

Ben Hendrix: Thank you. I appreciate that. 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 high into their 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. I just wanted to kind of without all of that commentary coming from the carriers just wanted to get your thoughts on how you are positioning for AEP, what that could mean from both the volume and also an LTV perspective? Thanks.

Vijay Kotte: No, that’s a very astute question given all the market dynamics that are out there, Ben. As we look at the market landscape, we have – there are a number of consumers every year who always shop, right. They are always shopping, always seeing if there is a better deal available. The unique element of what’s coming this upcoming annual enrollment period is you are going to have shoppers who need to shop who haven’t previously. They have been able to “set it and forget it”. And as we have said in previous calls, we believe more consumers should be shopping every year. And 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 significant degradation to the benefit values for them that will motivate them to shop.

And we believe we are the best destination for that shopping to give them that true personalized assessment as to are there 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 have highlighted. We are proving – we have really put our money where our mouth is on ensuring that we are going to do only what’s right for the consumer. So, even though shopping has been increasing, the dynamics and the disruption the benefit determines also the justified volume of switching. And so 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, and as I referred in my prepared remarks, many of those health plans still want to grow in very targeted areas with different populations, etcetera. 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 be able to identify those pockets who have the greatest disruption. So, where we can anticipate disruption using our predictive modeling and our strong actuarial teams, we are 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 are approaching our preparedness and our planning. And the other piece I will add was in the prepared remarks was our launch of 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 are actually doing with our agents.