GoHealth, Inc. (NASDAQ:GOCO) Q4 2023 Earnings Call Transcript

GoHealth, Inc. (NASDAQ:GOCO) Q4 2023 Earnings Call Transcript March 14, 2024

GoHealth, Inc. misses on earnings expectations. Reported EPS is $-0.12795 EPS, expectations were $2.73. 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. Welcome to GoHealth’s Fourth Quarter and Full Year 2023 Earnings 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. Following the prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I would like now to turn the conference over to John Shave, Vice President of Investor Relations. Please go ahead.

John Shave: Thank you, and good morning. Welcome to GoHealth’s fourth quarter and full year 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 any 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.

Earlier today, we issued a press release containing our results for the fourth quarter and full year 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 measures and 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 during 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’m pleased to share with you today our 2023 results, which reflects significant year-over-year improvement in revenue, adjusted EBITDA, and operating cash flow. The shift to the non-agency operating model continues to drive cash generation. Our consumer centric focus enables our evolution from enrollment to engagement with trust as the foundation. We provide guidance and insight 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 plan. One-third of Medicare beneficiaries live in accounting with more than 50 plans available to choose from.

Navigating these options can be confusing and stressful. We are proud that our team helped over 2 million consumers assess their benefit options in 2023, leveraging our proprietary Encompass workflow, including our PlanFit tool and PlanFit Checkup. Backed by analytics from nearly 30 million consumer touch points and machine learning technology, our proprietary PlanFit tool helps GoHealth’s licensed agents match consumers to the best plan for them based on their profile and priorities. During the fourth quarter 2023, we announced the launch of PlanFit Checkup. PlanFit Checkup removes the stress and enhances the experience for consumers shopping for a Medicare Advantage plan. As we previously shared, there are three consumer outcomes for a PlanFit Checkup.

One, we enroll a consumer in a new plan because it’s the best thing for their needs. Two, we tell the consumer about a better plan and they choose not to switch. Or three, we reassure the consumer that they are in the best plan for their needs and no enrollment takes place. Importantly, GoHealth agents who complete a PlanFit Checkup are compensated regardless of whether the assessment results in an enrollment. In the Q4, we performed over 300,000 PlanFit Checkup’s. We enrolled over 200,000 of these consumers into a better plan option for their needs. Over 100,000 additional consumers were told they were on the best plan already and we did not enroll them in a new plan. We provided this peace of mind to the consumer whether we already had a relationship with them and more importantly, when we did not have an existing relationship with them, thus building and reinforcing trust in each and every instance.

During 2023’s annual enrollment period, we faced the best test of the integrity of the PlanFit Checkup experience. Our marketing initiatives worked as planned. Our agents showed up, worked hard, and took more opportunities per day than ever before. However, from a health plan product offering standpoint, this AEP was different than we have previously seen. An analysis from Milliman revealed that for the first time in recent years, benefits for Medicare Advantage plans stayed relatively flat year-over-year. This led to a market environment with minimal product differentiation, providing few incentives for consumers to switch plans. The traditional enrollment centric broker model might have still switched consumers to new plans with similar benefits or even subpar benefits to get a commission, but we chose to honor the integrity of our PlanFit Checkup process and the investment in trusted relationships with consumers and only recommended a change when there was a justified reason to do so.

With our high integrity process, in 2023 we expanded our market leadership and continue to be a leading producer of Medicare Advantage policies for our primary health plan partners. We believe our Encompass transformation is working. As a reminder, we launched the Encompass workflow in 2022. We are now operating at scale with all key partners. With over 75% of our employed agent submissions in Q4 flowing through the Encompass workflow, we have observed a market increase in submission quality as seen by lower complaints and CTM rates. Our strategic shift has significantly impacted revenue composition. Over 50% of revenue is now generated from the non-agency line, surpassing our traditional agency line or lifetime value revenue. Leveraging the Encompass workflow and adjustments to our LTV revenue recognition process has led to a stabilized back-book asset valued just under $900 million net of our constraint reserves.

This stability is evidenced by the absence of a Lookback Adjustment for the first time in several years. While we observed positive retention trends in late 2023, we have opted not to adjust LTV positively at this time. Underlying that approach is our expectation that there will be benefit disruptions for the 2025 benefit year, potentially leading to more switching. We’re investing in long term trusted relationships and not just trying to maximize the short term return of an enrollment. We believe this is not only the right thing to do, but also the right thing for the business and the right thing for health plans. It is in the best interest of the consumer and 100% in line with what CMS is looking for from brokers. We are excited about the brand and proof points we are establishing and the proprietary tools, tactics, and incentives we have built.

We recognize that health plans are facing regulatory changes for Medicare Advantage that may impact benefit investments. There is no question that Medicare Advantage continues to have a strong value proposition for Medicare eligible consumers. We expect to see more shopping and likely more switching as uncertainty on benefit stability appears probable in the upcoming AEP. More than ever, consumers will need to find a trusted advisor to help them navigate the volume of options and the impact of benefit changes, and we believe GoHealth is that trusted advisor. Instead of providing specific 2024 guidance, we will share our general expectations for several key areas of our financial performance. 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. There are a handful of market factors that could influence our performance in the year. First is the final rate notice on commissions impacting 2024 AEP. Second is the final 2025 marketing rule from CMS impacting 2024 AEP. Third is the degree to which there is health plan product and benefit differentiation between 2024 and 2025, which will indicate the amount of switching we should expect. Fourth is marketing efficiency within this election season. And finally, there is a relative health plan competitiveness and the effect on planned mix.

Any of these factors alone or combined could significantly affect our performance for the full year 2024. We expect these key variables to become clear throughout the year with some of the most material remaining unknown until the early part of Q4, right before and during AEP. Our strategic and long term outlook remain resolute, driven by a commitment to transforming the consumer healthcare journey. I am extremely proud of our team as they navigated through an important and transformative year punctuated by a unique AEP. They rose to the occasion, embraced plan fit, and delivered peace of mind through our compelling consumer value proposition. With that, I will turn it over to Jason to detail our financial results.

Jason Schulz: Thank you, Vijay. As we review our performance for 2023, I’m pleased to share that GoHealth has demonstrated financial and operational strength. One of our primary goals in 2023 was to continue to improve our operating cash flow. We delivered on this objective with $109 million of cash flow from operations, a nearly 80% improvement from the $61 million in 2022. We ended the year with $90 million of cash on hand. In addition to our strong cash flow, we generated significant improvement in revenue and adjusted EBITDA. Our journey through the year has been marked by substantial improvements across key financial metrics, underlying the effectiveness of our strategic initiatives and the resilience of our business model.

We reported revenues for 2023 of $735 million, an increase of $104 million as compared to $631 million in 2022, a 16% improvement. As a reminder, 2022 revenue included a $276 million Lookback Adjustment that reduced revenue as a result of an actuarial review of our back-book. As Vijay noted, we did not record a Lookback Adjustment for 2023, the first time since 2020. The work we have done with our Encompass model to derisk the business from our agency revenue has resulted in higher quality revenue and a strong balance sheet. Our adjusted EBITDA, excluding non-Encompass BPO, was $73 million for the year, a 78% improvement from $42 million before the Lookback Adjustment in 2022. This increase underscores our operational improvement and our focus on sustainable profitability.

Another way to look at our results is on a cash adjusted EBITDA basis. In 2023, we generated $142 million of cash adjusted EBITDA, which is up from $98 million in 2022 and a negative $301 million in 2021. Cash adjusted EBITDA is simply taking our reported adjusted EBITDA plus the year-over-year change and our net contract asset. If the net contract asset has gone down, this is a result of higher cash collections from our back-book and the inverse is true if the net contract asset has increased year-over-year. We believe that cash adjusted EBITDA is a helpful measure of our business as it neutralizes the impact of the LTV estimates related to future years. As I mentioned, 2023 saw us achieving a robust cash flow from operations of $109 million, up from $61 million in 2022.

This $48 million increase is a testament to our disciplined cash management and our successful execution of our operational strategies. In the first quarter of 2024, we successfully negotiated an amendment to our debt agreement, adjusting the leverage ratio of 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 this amendment provides additional flexibility to support this goal, while continuing to invest in the business for future growth. In addition, we have committed to a $50 million term loan paydown in early Q2 and an additional $25 million paydown in early Q4 of this year, which we plan to fund from our strong balance sheet and liquidity.

More information will be available in our 10-K filing. I will now turn the call back to Vijay for closing remarks.

Vijay Kotte: Our confidence in our business and operational model continues to remain resolute. We firmly believe that prioritizing consumer needs and aligning with CMS, regulators, and health plan standards is a sound long-term strategy for our shareholders. Our focused business transformation efforts bolster our positive outlook. We are well positioned to overcome unique market dynamics and seize opportunities to further enhance the shareholder value. With that, we’ll now take your questions.

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Q&A Session

Operator: Thank you. [Operator Instruction] Our first question comes from Ben Hendrix with RBC Capital Markets. Your line is open.

Ben Hendrix: Hey, thanks guys. Just a quick question on — I appreciate the commentary about submission volume kind of in line with Medicare growth, but wanted to kind of just get your thoughts, kind of commentary on the overall Encompass platform. Has there been anything fundamentally changing about your ability to capture the growth opportunity in Medicare going forward? Anything in your Encompass strategy that’s changed that we should be aware of? And kind of, how do you see that kind of on a competitive footing with your peers who may be still kind of pursuing the ASC 606 strategy, over the longer term? And basically, how should we think about the competitive differential between the two platforms, kind of given what we’ve seen this past AEP? Thanks.

Vijay Kotte: Yes, thanks for the question, Ben. Just that I’ve got the question right, effectively just thinking about are there any material changes to the way we are operating or thinking about our Encompass model and pre-funding specifically relative to the 606 versus 605 more like LTV versus the more Encompass pre-funded model. We — just operationally, we are still very confident that the Encompass workflow that we put in place is the right thing for consumers and we are committed to that model. We want to make sure that we are continuously putting the consumer at the center of everything we do. And as part of that we think there are costs to running that business model that we are contemplating and appropriately investing in in the way that we get reimbursed by our health plans for that model.

As you think about the overall market landscape, as we indicated, there is a lot of benefit instability that may be coming up in the upcoming AEP season and in future. And when you think about the market landscape in general. When you look two years ago versus this last AEP versus what we’re anticipating in the future, consumers should likely shop more, which is what we’ve said all year. We want them to shop, we expected them to shop, they are shopping. But when it comes to the appropriate time to make switches, it is either because they’ve got incrementally much better benefits, or, in contrary, when they have a lot of change in their benefit structure. And what we saw in this last AEP, it was one of the unique AEPs where there was some negative, but really not a lot of changes, and so less and less of a reason for people to make changes.

And when you have a high-integrity process like the Encompass workflow we have, you’re going to deliver a result where you’re just providing peace of mind as opposed to new enrollment. So just in short, we are staying committed and we believe there’s a lot of future viability and excitement about the differentiation of the Encompass workflow. The quality is better and we’re delivering a better experience that plays the long run with that relationship with the consumer. And as it relates to the market dynamics, we would expect that, as we said, in what we didn’t do on LTVs, we saw some positivity on LTVs, or retention in the latter part of 2023, but in anticipation of some of the disruptions we expect going forward for the portion of the business that we still haven’t on the LTV basis or 606 basis as you referred to.

We were trying to maintain some conservatism on that as we continue to see the market dynamics play out.

Ben Hendrix: Thank you very much.

Operator: One moment for the next question. The next question comes from Pat McCann with Noble Capital Market. Your line is open.

Patrick McCann: Hey, guys. Thanks for taking my question. I was wondering, given that the number of Medicare Advantage plan options has been growing pretty rapidly, I’m wondering if — number one, if you’re seeing that trend continue? When you look at the carriers, are there more and more options hitting the market? And then, I guess, sort of a basic question would be, could you talk a little bit about how Encompass gives customers access to the largest number of plans possible even as those policy options are rapidly evolving?

Vijay Kotte: Yes. Thanks, Pat, for the question. Just to restate. One is, how do we think about the plan options increasing, following the trend that we’ve seen in previous years? And then follow-up was how do we make sure that the consumers have access to being able to decipher between all of those plans. Is that the right way to re-state your question?

Patrick McCann: Yes.

Vijay Kotte: So on the first one, it’s an interesting question and it’s really a health plan by health plan question as to who’s going to be introducing or contracting the number of plans available. As I said in the previous response, there’s offensive and defensive reasons why a consumer may want to make a change, right? And offensively, if their benefits in the market that they’re in have significant improvement, right, then they might want to shop and potentially make a switch. If there’s disruption in the marketplace of health plans leaving or degradation to benefits, it also triggers a moment where they should shop and likely make some change to the benefit choice. And so, we’re anticipating more of the latter as we kind of heard some of the things from the health plans.

Not to say that some might still not — might still make some investments in benefits, but you’re seeing the general landscape of what’s hitting the challenges of the Medicare Advantage health plans profitability, such that there’s likely going to be more tweaks and adjustments that require the nuance of our PlanFit technology and the trusted structure or the foundation upon which we operate the Encompass workflow. So we don’t know per se if there’s going to be a lot more. I would say my gut is probably not a lot of growth in brand new plans, but what we do know is, we’ve heard that plans are indicating they will likely be exiting certain geographies, causing some of that disruption, but still more to come, as we alluded to. And that the market dynamics won’t really be known until much later in the year as to what’s really going to happen on that.