GoHealth, Inc. (NASDAQ:GOCO) Q3 2023 Earnings Call Transcript

GoHealth, Inc. (NASDAQ:GOCO) Q3 2023 Earnings Call Transcript November 9, 2023

GoHealth, Inc. beats earnings expectations. Reported EPS is $-2.61, expectations were $-2.9.

Operator: Good morning, and welcome to the GoHealth Third Quarter 2023 Earnings Conference Call. My name is Michelle, and I’ll be your operator for today’s call. At this time all participants are in a listen-only mode. Following the prepared remarks, we will conduct a question-and-answer session. 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. Welcome to GoHealth’s third quarter 2023 quarterly results 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 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.

A smiling customer with a health insurance plan, a customer that was successfully acquired thanks to the company’s efforts.

Earlier today, we issued a press release containing our results for the third 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 forward-looking statements. We encourage you to consider the other risk factors described in our Form 10-K and Form 10-Q reports 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 Relations presentation posted to the Investor Relations section of our website for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call.

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

Vijay Kotte: Thank you, John, and thank you all for joining us today. I’m pleased to report another strong quarter for GoHealth, revenue and adjusted EBITDA in line with guidance. Our quarterly results showcase a 12% year-over-year revenue growth, excluding Lookback Adjustments and Non-Encompass BPO Services, while our full-year guidance points at a substantial improvement in cash flow from operations and a rapid increase towards profitability as compared to last year. During the third quarter, together with our external agency partners, we helped over 161,000 Medicare consumers assess their current coverage, review potential Medicare options, and enroll in a plan. GoHealth’s core value proposition to consumers is providing a trustworthy shopping experience that allows them to select the Medicare Advantage plan that meets their unique needs.

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. We accomplish this with our Encompass platform, offering a personalized, no-pressure shopping experience where consumers can feel comfortable and confident throughout the entire process. The e-broker 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 them with the right plan for their needs. Encompass, our proprietary operating, technology, and data science platform, allows us to streamline shopping, 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 Medicare consumers. By leveraging our machine-learning platform, we can better serve these consumers and deliver better outcomes for our business. Even with personalization, Encompass provides a standardized workflow that facilitates a uniform consumer experience, both enhancing quality and improving cost efficiency.

Business flowing through the Encompass workflow, most significantly reflected in the non-agency revenue line, is generally pre-funded and de-risked from policy lifetime values, and therefore, should be considered as cash revenue. Non-agency revenue has increased by over 161% year-over-year from $12.9 million in Q3 2022 to $33.5 million in Q3 2023. The Encompass model generates more predictable in-period cash revenue and cash EBITDA. Consistent with our expectations, we have seen increased consumer shopping behavior amongst the Medicare consumers seeking our services. Benefit and health plan changes, such as increasing or decreasing co-pays, moving drugs on and off formularies, regional shifts in provider networks, and expansion or contraction of service areas, result in shopping.

In addition, material shifts in the Centers for Medicare and Medicaid Services, Medicare Advantage star rating, good or bad, generate more shopping. CMS recently announced 2024 Medicare Advantage star rating, and amongst the top 15 health plans by enrollment, about half improved or had stable ratings year-over-year, while the other half saw their ratings decline. When environmental factors align with the ever-changing personal circumstances of the Medicare consumer, it’s no surprise that there is increased shopping. We believe GoHealth has been ahead of the curve in terms of identifying shopping behavior and building tools to support it. Our investment in technology is an important differentiation for GoHealth and our consumers. Our proprietary Plan Fit tool utilizes a machine-learning algorithm built on data from approximately 28 million consumer interactions over multiple years, plus star ratings, and GoHealth independently observed retention characteristics.

Our Plan Fit tool helps our agents quickly select a recommended plan based on the consumers’ individual needs to drive a more likely match for both immediate and short-term consumer priorities. Last quarter, we spoke about our new Plan Fit checkup offering, designed to create a personalized, pressure-free, high-quality shopping experience. We assess consumer needs via the Plan Fit checkup, regardless of whether they have been a GoHealth caller for years or a first-time caller. We’ve seen three consumer outcomes for a Plan Fit checkup. In the first outcome, we recommend a new plan to help them save money, increase benefits, or better cover their new needs, and we enroll them. In the second outcome, we make the recommendation, but the consumer chooses to stay in their current plan.

In the third outcome, we find that the consumer is in the best plan for their current needs and we assure them no new enrollment takes place. GoHealth agents who complete the Plan Fit checkup are compensated, regardless of whether the assessment results in an enrollment. So, if after a Plan Fit checkup, our agent informs the consumer, they are already on the right plan to suit their personalized needs, and no new enrollment takes place, we compensate our agents for investing their time to build trust with the Medicare consumer. In Q3, during our controlled launch, we completed almost 5,000 Plan Fit checkups and are proud to be doing what is needed in the industry, building trusted, long-term relationships with consumers. We expect the number of completed Plan Fit checkups to increase over time as the program is now deployed across our entire GoHealth agent base.

Our agents are responding positively to Plan Fit checkups as we further align agent interests with consumers and continue to build long-term trusted relationships with consumers by putting them at the center of all we do. Our standardized and encompassed model directs our focus to the lifetime value of a consumer and their relationship with GoHealth as opposed to the lifetime value of a transactional policy at a given point in time. In addition, we are excited to share that we have made significant progress in both our unified agent experience and Customer 360 technology initiatives, and we’ll share more over the coming quarters. Both are aimed at driving improved efficiency for our agents while also preparing us to succeed in a future where consumers are empowered to enroll in and manage their Medicare on their own terms, whether telephonically, digitally, or some combination of the two.

Building off the foundation of our robust data set within Customer 360, we have invested a significant amount of time into understanding and testing our learnings of the Medicare consumer. Based on the work we have been doing in earnest over the last year, we have found there are very specific segments of the population that find value in the way we have historically gone to market and the value proposition we have provided. We have also learned there are larger segments of the market that are looking for personalization, not only in the benefit and plan matching process, but also in how they interact with us and our proprietary technology. Based on this insight, we’ve begun efforts to adapt our engagement model to meet more consumers wherever they’re most comfortable, to ultimately deliver them peace of mind in their Medicare coverage decision.

Our unique end-to-end solution is strategically designed to prioritize plan satisfaction and long-term retention, ensuring the most favorable outcomes for Medicare consumers, while aligning with the objectives of our health plan partners who share our vision and value. To that end, the U.S. Senate Finance Committee, along with other consortiums of legislators, have met and commented on Medicare Advantage marketing practices and enrollment tactics, and we are pleased that they are focused on the same core topic we are, protecting Medicare consumers and ensuring an unbiased personalized shopping experience. In addition, earlier this week, CMS issued the calendar year 2025 proposed rule for Medicare Advantage and Part D. Those early and additional clarification and definition will be necessary to draw any conclusions on the implications, it is important to highlight key facts on GoHealth’s operating model.

First, in our model centered on the Encompass workflow, our licensed agents are compensated for a quality Plan Fit checkup, regardless of whether a new enrollment takes place. Second, information on our commercial arrangements with health plans are not shared with our licensed frontline agents. Third, our licensed agents do not get compensated differently based on which health plan or product they recommend for the consumer. Finally, as part of the Encompass workflow, after our unbiased Tier 2 shopping agent recommends a plan, our Tier 3 agent reviews the recommendation again with the consumer, discusses the tradeoff and reconfirms it is the right choice for them before they ultimately complete the application. We are confident with this process.

We can ensure through our technology, training, compensation model and real-time quality insurance that our focus is doing what’s right for the consumer. As we embark on the next phase of our growth journey, I take great pride in the fact that GoHealth is serving a large and important group of consumers by helping them navigate a challenging healthcare decision, harnessing the potential of our advanced technology tools for a better experience and delivering strong financial. I’ll now turn it over to Jason to discuss our financials in more detail.

Jason Schulz: Thanks, Vijay. I’m pleased to discuss our Q3 2023 financial results. Our Q3 performance met our expectations with revenue growth and improved profitability compared to Q3 of last year. As a reminder, we fully exited the Non-Encompass BPO Services business in Q2 of this year. Beginning this quarter, all revenue is related to our core business. Our third quarter revenue was $132 million, demonstrating growth compared to $118.3 million when excluding Lookback Adjustments and Non-Encompass BPO Services in the third quarter of last year. We are pleased with this growth, which was driven by over 161,000 submissions, representing a 31% increase year-over-year. Third quarter adjusted EBITDA improved nearly 20% year-over-year with negative $11.5 million as compared to negative $14.3 million in Q3 2022.

In Q3, we generated $6.5 million in cash flow from operations with approximately $72 million received in October shortly after the quarter ended, as a few of our health plan partners were slower processing invoices, which were expected in Q3. Adjusting for this timing, our Q3 cash flow from operations would have been approximately $79 million for the quarter. We remain on track for our full year’s expected cash flow from operations of $75 million to $115 million. As illustrated in our quarterly results presentation, our trailing 12-month cash flow from operations as of Q3 2023 is a negative $3.2 million. However, adjusted for the $72 million payment timing, our trailing 12 months would have been approximately $69 million. Consistent with our performance in the first half of the year, we continue to see strong momentum with our unit economics.

Our unwavering commitment to driving high-quality enrollment and leveraging our proprietary tools and technology has yielded a remarkable operational efficiency. As discussed in prior quarters, beginning in Q1 of 2023, we have been booking a higher constraint on our agency revenue as compared to 2022. This is primarily due to our expectation that shopping will continue to increase. This changing constraint is a significant contributor to the year-over-year decline of 15% in sales per submission. We are pleased by the efficiency improvements gained through our Encompass model. In Q3, our cost per submission improved 14% year-over-year. This rate of improvement is lower than previous quarters as Q3 2022 already includes some of the efficiencies gained by the actions we took to restructure the business.

It’s also important to remember that Q3 is the least efficient quarter of the year with lower volumes and investments made in advance of AEP. These investments include testing marketing strategies, introducing technology enhancements, and the ramping up of new agents. Given our in-line third quarter results, we are maintaining our full year guidance. We expect total net revenue excluding Non-Encompass BPO Services between $800 million and $850 million. Our expected adjusted EBITDA range, excluding Non-Encompass BPO Services, is $120 million to $140 million. And as I previously mentioned, we expect cash flow from operations of $75 million to $150 million for the year. Our reaffirmation of guidance is a testament to our extensive preparation, strong performance, and confidence in the future.

Our expectations for total revenue, adjusted EBITDA, and cash flow from operations reflect our dedication to sustained growth and the delivery of value to our shareholders. The shift to our Encompass model, increasing non-agency revenue, and driving further operational efficiencies fuels our enthusiasm for quarters ahead. And we eagerly anticipate building on this momentum. I’ll now turn it over to Vijay for closing remarks.

Vijay Kotte: Thank you, Jason. As we wrap up this quarterly results call, I want to underscore some key takeaways. We are harnessing technology to empower our agents and offer our consumers a pressure-free shopping experience through our personalized Plan Fit checkups. As we navigate the current annual enrollment period, our investments in technology, commitment to efficiency, and focus on long-term retention all set us on a promising path. Finally, I want to thank our dedicated team for their hard work during this transformative time, our shareholders for the continued trust and support, and our consumers for the opportunity to serve and provide peace of mind in their healthcare decisions. We look forward to the exciting journey ahead and opportunities it brings to enhance the lives of Medicare consumers while driving value and growth for GoHealth. Operator, we’re now ready to open the floor for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] One moment while we compile the Q&A roster. Thank you. Our first question comes from Sandeep Soorya with Delaware Street Capital. Your line is open.

Sandeep Soorya: Hi, Vijay and Jason. Can you guys hear me okay? Can you guys hear me okay?

Operator: Yes, we can hear you.

Sandeep Soorya: Okay, great. My first question is just can you guys discuss your debt maturities and your strategy around managing debt over the next one to three years? And then I have a couple other follow-ups.

Operator: Sir, please stand by. Your call will resume momentarily.

Vijay Kotte: Sorry about that. Our line got cut off there and we just came back. So if you wouldn’t mind repeating the question, I’d appreciate it.

Sandeep Soorya: Sure. Can you guys hear me now?

Vijay Kotte: Yes, we can. Thank you.

Sandeep Soorya: Okay, great, great. So I have a couple questions. The first is can you discuss your debt maturities and your strategy around managing debt over the next one to three years?

Jason Schulz: Yes. This is Jason. Happy to and thanks for the question. So yes, our term debt comes due in September of 2025 and our revolver in September of 2024. Our plan is in early 2024 to go ahead and refinance both of those and part of that improve our overall interest rate as well.

Sandeep Soorya: Okay, great. And then I tried to keep my questions in some reasonable order, but they’re a little all over the place, so sorry. But okay, when I think about general revenue, we basically have two buckets and I appreciate your comments on the call. You have the agency or commission revenue where some percentage is collected upfront and some over time. And then you have the non-agency, call it non-commission revenue, which is collected closer to proximity of recognition. Is that the right way to think about that? Or am I missing something?

Jason Schulz: No, I think you’re thinking about that correctly.

Sandeep Soorya: And the partner marketing and other services, does that – which bucket does that fall into?

Jason Schulz: That would more similarly resemble the non-agency from a cash collection standpoint.

Sandeep Soorya: Okay. Got it. And then within that context, how do I think about both of those buckets kind of growing over time? And I know the business has been transitioning to kind of Encompass and then some non-commission revenue as well. So I’m trying to think – and maybe the answer is like, longer term, maybe the business stabilizes in these revenue buckets for the next – over the next 12 to 18 months. But longer term, how should we think about growth of each of one of those revenue line items?

Vijay Kotte: Yes, I think let’s talk about kind of – sorry, Sandeep, it’s Vijay. As you think about it, what I would say is you are going to see more of a shift on a percentage basis towards the non-agency. As you see non-agency shift over, you’ll see those marketing dollars and that line strength as a percentage of the total distribution, because that’s more linked to our agency line, though as Jason said, it has the same cash dynamics of non-agency but it’s linked to agencies. So if you see agency go down as a percentage of total sales, right, or volume, you will see that shift take place. But as we said earlier this year, and we continue to operate with, we are going to have more and more of our total operating workflow moved through the Encompass platform and you’ll have more of a shift towards that non-agency line over time.

Sandeep Soorya: Got it. Okay, thanks. And then, so just so I understand it, when I think about third quarter cash flow, there was 120 – over $120 million improvement on a trailing 12-month basis. Is that the right takeaway?

Jason Schulz: Yes, that’s correct.

Sandeep Soorya: And then when you adjust for the health plan partner payments, the improvement was closer to $200 million. Is that the right way to think about it?

Jason Schulz: That’s right. So, on a reported basis, you got exactly right. And then what we had was $72 million that came in, in October that was expected in September. And so yes, you’re thinking about it exactly right. You would make that additive to the $120 million.

Sandeep Soorya: Got it. And first of all, congratulations, that’s not an easy swing in improving cash flow over a 12-month period. That’s very impressive especially given your revenue base. So, congratulations for that. I don’t want that to go unnoticed. When you guys think about guidance, though, property cash flow, $75 million to $115 million, how do we think about the sustainability of that cash over the next few years? And then can you also tie that – the second part of the question is how do we think about CapEx over the next few years as well?

Vijay Kotte: Yes. I think what we are seeing is that barring any really interesting investments that you would see in the – within any given year you’re going to see some consistently stabilization and growth of that operating cash flow. We are pretty confident about that as we think about our growth rate if you even kind of just look at the overall market growth of kind of 5% to 8%. That’s if everything just grew in line, and we only grew in line with the marketplace. As we had in our prepared comments, I described the fact that we’ve done a lot of work in our segmentation to identify there are a whole bunch of populations out there whose needs aren’t being met, of how to shop and shop effectively [indiscernible] unbiased resource.

And so we are investing in building tools to address that marketplace and bring additional opportunities for growth on top of what the market is doing in total. And so as you think about that and you think about my previous comments about more shift towards non-agency versus agency, you can see that we expect this to be stable and growing as time goes on. .

Sandeep Soorya: And then CapEx?

Vijay Kotte: Oh, sorry. On the CapEx side, as we alluded to in our prepared comments, and we have spoken about it over the course of the last year, we are making more and more investments in technology as time goes on. As it relates to segmentation work, we have found there’s a lot about our technology and tools that we want to enhance to reach those different populations in a unique way. So, I wouldn’t be surprised if you saw some step function adjustments in how we think about CapEx over time, but they’ll always be very pointed at driving near-term growth. .

Sandeep Soorya: Got it. So should I think about it as a percentage of revenue? Or should I think about the current – at the end of this year, the CapEx level should grow in line with market growth or revenue growth?

Jason Schulz: Yes. I think you look at what we spent this year and then put some incremental growth on that versus tying it directly to a revenue number.

Sandeep Soorya: Okay, great, thanks. I will get back in queue. Sorry about that. Thank you.

Jason Schulz: Great. Thank you.