Apr 28, 2009
Executives
Kate Sidorovich - Director of IR Gary Lauer - President and CEO Stuart Huizinga - SVP and CFO
Analysts
Youssef Squali - Jefferies and Company William Morrison - ThinkEquity Justin Post - Merrill Lynch George Sutton - Craig-Hallum Sameet Sinha - JMP Securities Jim Friedland - Cowen and Company George Askew - Stifel Nicolaus Peter Costa - FTN Midwest
Operator
Good day, ladies and gentlemen, and welcome to the Q1 2009 eHealth Incorporated Earnings Conference Call. (Operator Instructions).
I would now like to turn the call over to Kate Sidorovich, the company's Director of Investor Relations. Please proceed.
Kate Sidorovich
Good afternoon and thank you all for joining us today either by phone or by webcast for a discussion about eHealth, Inc. first quarter 2009 financial result.
On the call this afternoon, we will have Gary Lauer, eHealth's President and Chief Executive Officer; and Stuart Huizinga, eHealth's Chief Financial Officer. After management completes its remarks, we will open the line for questions.
As a reminder, today's conference call is being recorded and webcast from the Investor Relations section of our website. A replay of the call will be available from the Investor Relations section of our website following the call.
We will make forward-looking statements on this call. All statements other than statements of historical facts are forward-looking statements.
Forward-looking statements made on this call will include statements regarding the impact of our transaction with Health Benefits Direct on our financial results, including its contribution to revenue and its accretivness, our offering of [Dubong] health insurance products in China, the timing and substance of healthcare reform legislation and its impact on our market opportunity, future spending, our 2009 marketing and advertising expense as a percentage of revenue, fluctuation in our marketing and advertising expenses, our expectation that we'll pay cash taxes at a lower rate than our GAAP income tax rate in our guidance for revenue, stock-based compensation expense, adjusted income tax rate and GAAP diluted earnings per share for the year ending December 31, 2009. Forward-looking statements are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by these statements.
We describe these and other risks and uncertainties in our Annual Report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, which you may access through the SEC website or from the Investor Relations section of our website. Forward-looking statements made on this call represent the company's views as of today.
You should not rely on these statements as representing our views in the future. At this point, I will turn the call over to Gary Lauer, Gary?
Gary Lauer
Thank you and good afternoon, everyone. I'd like to begin by commenting on some of our financial highlights for the first quarter.
Revenue of $31.9 million grew 21% over the first quarter a year ago. Individual and family plan application growth was 23%.
Earnings per share were $0.12 and non-GAAP operating margin, excluding the effect of stock-based compensation, was 20%. We generated $4.7 million in operating cash flow during the quarter which kept our overall cash and marketable securities balance over $150 million as of March 31.
I would like to also note that we repurchased $4.6 million in common stock during the quarter pursuant to our stock repurchase program. We are pleased with the first quarter individual and family plan submitted application growth.
The economic environment during the first quarter continue to be challenging, yet we saw more individuals, families and businesses coming to eHealth to find affordable quality health insurances as illustrated by our record application volume. Of particular note was our direct channel performance that generated 41% of total IFP submitted applications, which was 33% year-over-year application growth in this channel.
The performance marketing partner channel contributed 34% of our individual and family plan submitted applications and the online advertising channel contributed 25%. First quarter application growth was achieved while carefully managing our acquisition cost.
In fact, our acquisition cost per member declined sequentially as compared to the fourth quarter of 2008. In the first quarter, we also saw a sequential improvement in our estimated member retention rate.
Stuart will discuss these metrics in more detail shortly. We believe that our first quarter application volume was influenced by the growing visibility of eHealth driven by many factors, more people searching for their own health insurance, media focus on the plight of newly uninsured, the presidents and congresses attention to healthcare reform and our own aggressive marketing and public relations efforts.
We found in the first quarter that the eHealth value proposition of giving people online access to quality, affordable health insurance continues to grow more relevant. We also continue to see a significant number of unemployed people come to eHealth based on customer care center surveys that we conduct.
Driving high visibility for eHealth was our continued media outreach and public relations objective during the first quarter. Through a combination of newspaper articles, press releases and numerous television and radio appearances, we educated consumers on various health insurance topics, including the highly relevant subject of COBRA and COBRA alternatives.
The new federal COBRA subsidy provided us even more opportunities to proactively educate consumers regarding their alternatives. Our emphasis on consumer education was effective and contributed over 33% growth as I noted earlier in the direct channel as people came to eHealth to get answers and research affordable health insurance options.
During the quarter eHealth was featured on the Today Show, Good Morning America, the CBS Early Show and several times on CNN. We are also featured in many well known print media publications like USA Today, The New York Times, The Wall Street Journal, Kiplinger's Personal Finance, Redbook Magazine, The Chicago Sun-Times, The Los Angeles Times and others.
The broad national exposure for media placements and press releases not only drove direct traffic to our ecommerce platform, but also helped our national search ranking. A press release containing frequently asked questions on the COBRA subsidy contributed to our having the top search result on Google for highly relevant COBRA-related keywords for several days, which generated significant traffic to our COBRA learning center.
In addition to driving near term application growth, we are accomplishing an even more important goal, building long-term brand recognition, which has been and remains one of our top strategic priorities. Our partner channel generated strong application growth in the first quarter, driven primarily by new partnerships added over the past 12 months.
We also continue to work closely with our long-term strategic partners on finding new growth opportunities. During the quarter, we collaborated with our partners in the employment benefit and traditional insurance brokerage areas, such as Willis, Aon and ACS, by reaching out of certain of their large corporate clients with compelling cost effective alternatives to existing employee benefit programs.
We specifically focus on terminated employees, who desire to shop for COBRA alternatives, employees whose COBRA period has expired, early retirees, non-eligible dependents and other relevant groups. eHealth's platform allows our partners to present quality, individual product alternatives to people who are leaving group health insurance.
We also launched co-branded COBRA learning centers with Medica Health Plans, a Minnesota based carrier, and with YouDecide, a destination web site for personal insurance, finance products and other services that augment employer benefit programs. For the YouDecide partnership, we are addressing employees of major corporations to educate them on their health coverage options.
For example, YouDecide reached out on our behalf to outgoing employees of Circuit City, and invited them to research affordable health insurance products available on our site. During the quarter, we maintained our leadership position in paid search, and continue to capture a dominant share of the overall search share of page, for key terms related to health insurance on Google, directly, and through our marketing partner relationships.
Google remains our main partner in page search and the leading contributor to our application growth in the online advertising channel. Overall, we continue to emphasize a diversified and balanced approach to member acquisition and do not rely excessively on any one channel for growth.
In the first quarter, we also announced a business development agreement with Health Benefits Direct. Under the terms of this agreement, HBD agreed to direct transfer a subset of its existing health insurance members to us.
It also transferred a database of health insurance leads and agreed to refer ongoing health insurance prospects to eHealth. This is a performance based arrangement based on commission sharing and the transfer of members is in process.
The transaction will contribute to our revenue this year and the future years, and we also expect it will be accretive to our earnings this year. I'd like to note however that HBD's contribution to our first quarter revenue was not material.
During the quarter, we added new inventory to our offerings. Some of the highlights included, introducing Cigna in Tennessee, as this carrier continued its expansion into the individual and family plan market, a new area for them.
We also added AARP plans that are underwritten by Aetna, and target the 50 to 64 year old segment in California, Florida, Texas and Arizona. I'd also like to note, that over 90% of our commission revenue growth during the quarter came from carriers who have been with us for at least a year, what some people refer to as, same store sales.
We also expanded the selection of products on our Ubao platform in China, by entering into a relationship with [Dubong], an insurance carrier that has a well recognized brand in China. eHealth will be offering [Dubong's] products nationwide in China.
Our revenue model with [Dubong] is similar to the Tai-Kang partnership we announced last year, where eHealth accesses internet technology services provider, allowing carriers to market and sell their insurance products online nationally, under their licensor, on our Ubao site. Our newer business initiatives, including sponsorship and licensing of our e-commerce platform continue to develop and generated over 70% revenue growth over the first quarter, a year ago.
In the EOD business, we added AmeriHealth and Scott & White to the EOD platform, and expanded geographic coverage with IHC. We also benefited from an increase in application volume growth with existing EOD partners, as they continue to ramp their online sales efforts, and increasingly power their broker channel using our platform.
Adding a major carrier, CareFirst to our platform at the end of 2008 also drove solid application volumes during the quarter. I'd like to note again, as I did last quarter, that over 7500 agents and brokers are now using our EOD platform, to market and sell health insurance products online.
Our sponsorship business supported auctions in [15] different states in the District of Columbia, with at least one position sponsored in every state. Several large carriers joined our sponsorship program for the first quarter, including CIGNA, Blue Cross Blue Shield of Louisiana, Blue Cross Blue Shield of Oklahoma, and others.
During the quarter we also observed solid application growth rates for eApproval enabled plans and products. Anthem California applications on our platform grew in excess of 150% in the 12 months following the launch of eApproval, as compared to the same period prior to the launch.
Of course, this growth may have been impacted by other factors, including Anthem's sponsorship programs on our site, Anthem's marketing activities, the recent introduction of new products by Anthem and so on. However, these results are still significant, and Anthem's individual and family plan applications growth in the above mentioned 12-month period, was well above growth rates observed by other California carriers on eHealth.
In the healthcare reform and public policy area, we continue to be very active. We have been meeting regularly with the members of the house and senate, and staff people who are focused on healthcare reform.
Members of the senate and the house are working on respective bills, and based on current timelines they have been talking about, bills are expected to be introduced later this year. In general, we expect that senate build a focus on leveraging the existing structure of the health insurance industry, while the house is likely to take a seemingly more government-centric approach.
The Health Committee of the Senate, the Senate Finance Committee and the Energy and Commerce Committee of the House are all involved in drafting bills and have sought eHealth's input on healthcare reform and the insurance exchange concept as well. Despite the aggressive timeline for introducing the health reform bills by the House and Senate, concerns about timing, breath of change and affordability obviously remain.
On the state level, several states are considering launching health insurance exchanges, and we are pursuing these opportunities aggressively as an extension of our EOD business. In fact, this is an example of new business opportunities that may be created through new healthcare policy.
We also note that the recent support by carriers for guaranteed issue combined with a mandate for individuals to buy health insurance. This is a combination that we frankly have been a proponent of for some time along with financial support for uninsured people who unfortunately cannot afford health insurance.
Looking at the bigger picture, the President has stated three main goals for healthcare reform. One, coverage for all Americans; two, improved quality and outcomes of healthcare; and three, cost reduction, especially through the deployment of technology across the healthcare system.
We support these objectives and believe that eHealth is a unique example today of how to achieve all three. We plan to continue to be very involved in many of the discussions surrounding healthcare reform, lending the experience and knowledge we've gained helping people find quality, affordable health insurance coverage online.
We are optimistic that much of what is developing in the health reform area can increase the market opportunity for eHealth. In conclusion, we are pleased with our first quarter results and we remain very optimistic about our business in the face of an unprecedented economic environment.
We continue to see many new areas of potential growth for eHealth. An additional trend that is very encouraging is the increased visibility of eHealth in the individual market in general.
More people than ever are now aware of the products we offer and are using eHealth as a go-to-resource on various health insurance subjects. We believe this growing visibility is a combination of our internal efforts and the natural fallout of the public policy discussion, specifics of today's economy that bring the attention of many Americans to healthcare issues.
Going forward, we will continue to work on further increasing consumer awareness of eHealth and growing our membership base while maintaining a disciplined approach to spending. Now, I'll turn the call over to Stuart who will take you through our financial results for the quarter in greater detail, Stuart?
Stuart Huizinga
I will now review our financial results for the first quarter of 2009. In the first quarter, we continued generating revenue and membership growth and posted solid operating margins by carefully managing the marketing cost associated with record application volume.
As Gary mentioned, we are particularly pleased with our first quarter application growth. Starting at the top-line, our revenue for the first quarter was $31.9 million, an increase of 21% over the first quarter a year ago.
Commission revenue was $28.2 million, an increase of 17% over Q1 2008. Our year-over-year commission revenue growth was mainly due to growth in our membership base.
Sponsorship, ecommerce on-demand and other revenue was $3.7 million in the first quarter of 2008, a 72% increase over $2.2 million in the first quarter of 2008 and 13% sequential growth as compared to the fourth quarter of 2008. As Gary said, we are very enthused about our ecommerce on-demand business, and I would like to note that it was our fastest growing business area during the quarter.
In the first quarter, we had 157,700 approved members for all products. Out total estimated membership at the end of Q1 2009 was over 680,000 members, which included approximately 20,000 members transferred from Health Benefits Direct in the month of March pursuant to our business development agreement.
During the first quarter, we achieved 23% year-over-year growth in individual and family major medical plan submitted applications, up from 18% recorded in the fourth quarter of 2008. As Gary pointed out, we were especially pleased with our direct channel performance which generated 33% year-over-year application growth and contributed 41% of total individual and family plan submitted applications, up from 40% in the fourth quarter and 38% in the first quarter a year ago.
I'd like to comment on member retention, but before I do, I'd like to remind you that we estimate retention using trailing historical data. Our first quarter view of retention is based on data from the third quarter of 2008.
Based on this information, our estimated member retention remained within our historical range and improved compared to our view of retention at the time of the last earnings call. This is the second consecutive quarter we observed an improvement in member retention.
It is too early to say with certainty what impact this tough economic environment may ultimately have on our retention rates, but we are certainly pleased with what we observed in the first quarter. In the first quarter, our non-GAAP operating expenses as a percentage of revenue, which excludes stock-based compensation, were flat compared to the first quarter a year ago.
The increased marketing and advertising spend during the quarter was offset by significant economies of scale and other operating expense items. Our non-GAAP marketing and advertising expense, which excludes stock-based compensation expense, was 42% of revenue in the first quarter as compared to 36% in the first quarter a year ago.
On a GAAP basis, our first quarter marketing and advertising expense was also 42%. We are pleased with this percentage in light of the record high application volume and we are still targeting the 38% to 40% range on a GAAP basis for the full year.
As we mentioned on our fourth quarter call, our marketing and advertising expense may fluctuate from quarter-to-quarter above or below our target range for the full year based on the seasonality of our application volume. As a reminder, the majority of our marketing and advertising spend is driven by submitted application volumes and its expense upfront has incurred, while our revenue is recognized later over the life of the member.
Therefore, in periods of increased application growth like we had this quarter, marketing and advertising expenses can grow at a faster rate than revenue. This quarter was our all-time highest submitted application volume quarter.
Our cost of acquisition per member on an individual and family plan submitted application was $63 in the first quarter, a sequential improvement as compared to $65 in the fourth quarter of 2008, primarily driven by higher contribution from our direct channel and seasonally strong application volumes. While marketing and advertising expense increased compared to a year ago, we continue to focus on and achieve significant efficiencies in other operating areas.
Non-GAAP technology and content cost, which excludes stock-based compensation expense, improved from 13% of revenue in the first quarter of 2008 to 11% in the first quarter of 2009. General and administrative cost also improved on a non-GAAP basis from 16% of revenue in the first quarter of 2008 to 13% in the first quarter of this year.
Our non-GAAP customer care enrollment costs were 12% in the first quarter of this year as compared to 13% for Q1 '08. We are pleased with our operating margin and operating income results.
Our GAAP operating margin was 18% or $5.6 million as compared to 18% or $4.7 million in the first quarter a year ago. Our non-GAAP operating margin, excluding the effect of stock-based compensation, was 20% or $6.5 million as compared to 20% or $5.4 million in the first quarter a year ago.
First quarter non-GAAP operating income grew 21% as compared to the first quarter of 2008. Our approach to investing and managing our cash remains conservative.
Currently, 89% of our cash and marketable securities consist of cash, US treasury funds, US government agency funds or direct investments in US government agency securities. The remaining investments are in high grade, corporate bonds, commercial paper and CDs that we plan to hold till maturity.
Interest and other income was $0.4 million during the quarter, down year-over-year from $1.2 million in the first quarter of 2008. Interest and other income, almost all of which reflects interests earned on our invested cash, cash equivalents and marketable securities, continue to be impacted by the low interest rate environment.
Our GAAP pre-tax income of $6 million in the first quarter of 2009 was up slightly from $5.9 million in the first quarter of 2008. On a non-GAAP basis, excluding the effect of stock-based compensation in both years, our pre-tax income was $6.9 million or a 5% growth from $6.6 million in Q1 of last year.
The lower year-over-year growth of our pre-tax income as compared to operating income, both on a GAAP and non-GAAP basis, is primarily attributable to a significant year-over-year decline in our interest income. We estimate our 2009 effective tax rate for GAAP purposes in the 43% to 45% range, even though we expect to pay cash taxes at a much lower rate due mainly to significant net operating loss carry-forwards that reduced the cash taxes we pay.
First quarter 2009 GAAP net income was $3.1 million, down from $3.3 million in the first quarter of last year. Non-GAAP net income excluding the effect of stock-based compensation and related tax effect in both years increased from $3.8 million in the first quarter of last year to $4 million in the first quarter of 2009.
Our cash flow from operations was $4.7 million as compared to $5.8 million in the first quarter of 2008. As I mentioned in our Q4 earnings call, the tax benefit that we receive from our NOLs has a different impact on our cash flow statement this year than it did in 2008.
Last year, all of the NOL benefits we received were reflected in operating cash flows, whereas the benefits this year are split between operating and financing activities in our statement of cash flows. This is due to the difference in accounting presentation for NOLs resulting from past operating losses compared to NOLs resulting from past stock option activity.
In the first quarter of 2008, we had a $2.4 million change in deferred taxes all of which benefited operating cash flow. In the first quarter of 2009, our $2.8 million cash flow benefit from taxes was split with $1.7 million benefiting operating activities and the other $1.2 million benefiting financing activities in our cash flow statement.
So, our operating cash flow was approximately $1.2 million lower in Q1 '09 than it would have been if we are applying NOLs purely related to past losses as we did last year. Our Q1 2009 cash flow from operations would have been $5.9 million on that basis or virtually the same as last year's number for Q1.
We also made a cash tax payment of approximately $900,000 in the first quarter of 2009 that was related to 2008 tax obligations and due primarily to recent changes in California state tax laws. Another item of note that impacted cash flow this quarter was a $1.3 million upfront payment that we made in connections with the Health Benefits Direct transaction, which was included in investing activity.
Finally, I would like to point out that our first quarter operating cash flows are typically lower sequentially than the fourth quarter due to the timing of certain cash payments, including annual performance bonuses to employees. Capital expenditures for the first quarter of 2009 were approximately $240,000.
As Gary mentioned earlier, during the quarter we spent $4.6 million in connection with our share repurchase program. This reflects the total repurchase of approximately 360,000 shares in the first quarter for a cumulative total of approximately 410,000 shares acquired under the program.
This amount is reflected in our cash flow from financing activities. Our cash and marketable securities balance essentially remained flat sequentially at $150 million as of March 31, 2009.
Our cash and marketable securities constituted more than 93% of our total assets, excluding deferred tax assets, at the end of Q1. Given this and the fact that we have no debt, we continue to believe we have a very strong balance sheet.
With respect to guidance and based on information currently available, we are reaffirming the revenue, stock-based compensation expense, income tax rate and earnings per share guidance for the full year 2009 that we provided in our last earnings call. I want to remind you that these comments are based on current indications for our business which are subject to change at any time.
We undertake no obligation to further update our guidance.
Operator
(Operator Instructions). Your first question comes from the line of Youssef Squali with Jefferies and Company.
Please proceed with your question.
Youssef Squali - Jefferies and Company
Gary, couple of questions for you, or maybe Stewart. When I look at the IFP application growth of about 23%, just to clarify, does that include the 20,000 that you got from HVD, and is the 20% plus rate of growth kind of sustainable, as we go through the rest of 2009.
Now second half of last year, you have talked publicly about 20% plus rate becoming sustainable, now we are there. So where do you see it kind of going forward?
And then in terms of ARPU, as I look at the average revenue per customer or per applicant, it was actually down about 3%. That's a bit of an acceleration from prior quarters.
I was wondering if you can kind of help us understand why? Is that because of some pressure on premiums, or is that because of the mix of new applicants or new customers that may be coming at a lower rate than others?
Gary Lauer
Regarding the 23% application growth that we experienced in the first quarter, no. There is no Health Benefits Direct business impacting that or affecting that.
That was just pure application growth as we drive applications to the eHealth site. Regarding going forward, we're obviously pleased with the 23%.
As I think, both Stuart and I said, we're optimistic about the year. We stand on the guidance that we provided previously.
It's difficult to forecast. Frankly, it's much more predictable and forecastable.
We look at our revenue, then it is an application growth, given the nature of our business and so on. I can tell you we've got a lot of programs, activities, campaigns in place.
There is a lot of attention being paid to this individual health insurance area right now. In fact, we've been looking at the results of some of the large carriers that they have been reporting over the past several days, and many of them are pointing to growth, an accelerated growth in the individual planned product area, as their employee base membership ranks are in decline for all of the obvious reasons, because of the economy and so on.
So I can't answer your question specifically in terms of what we expect to see in terms of application growth. Rest assured, as in the first quarter, we're doing a lot of things to drive application growth today, and we'll continue to do that throughout the year.
Stuart Huizinga
On ARPU, or what we call your commission per member per month. It is down slightly year-over-year.
It's not down as much as it would appear from our metrics in that. We do have the transferred members from HPD in our membership numbers.
We only brought a small amount of revenue in for one month of the quarter. So that skews your calculation a little bit, but it is down slightly mainly due to mix, not so much related to the types of plans that people are choosing, and the premiums on those, but more the mix of members between what's in their first year, as opposed to second year and beyond.
A little bit more into that second year of mix bucket, where we have lower commissions. Also just a mix of carriers, as to what commission rate we earn from those carriers.
A little bit of, slight change in mix there.
Youssef Squali - Jefferies and Company
And lastly if I may. If I look at your churn at 3.3%, that's kind of bringing those back to a level where you were, couple of years ago, actually Q1 of '07.
Can you just elaborate as to what did you do to actually drive it down, and how sustainable that is?
Stuart Huizinga
Sure. Yes, that's another metric, by adding the roughly 20,000 HPD numbers.
It looks a little bit lower, artificially lower than it really is. We did have a slight improvement in the retention rate this quarter, but it's not as big as it appears to be.
We were happy to see it improve again for the second quarter in row.
Gary Lauer
Our theory on this, we've done some testing of it, is that in a challenging economic environment, which this is and then some. We've tested this.
We believe that there are consumers who intellectually know that health insurance should be discretionary, but they're treat it as such. Yet, there are others that once they have the health insurance product, they don't treat it as discretionary, and they won't let go off it.
We think that may be one of the contributions to the only change we've seen over the last six months, has been in a positive direction.
Operator
Your next question comes from the line of William Morrison with ThinkEquity. Please proceed with your question.
William Morrison - ThinkEquity
Gary, I was wondering if you could talk a little bit more about the regulatory environment, you sounded pretty constructive about the activity on The Hill. I was just curious if you had to place a bet today, which direction you think this would go, and if it goes in the house direction, how would that impact you guys?
And then secondly, I don't know Gary or Stuart, I was wondering if you could talk a little bit more about the details of the Health Benefits Direct deal. You said it should be accretive to revenue and earnings.
Can you give us some kind of a sense of what impact that would be, since you didn't raise your guidance? And a little bit more detail about how the deal works?
Gary Lauer
Let me take the first question on policy because I've been spending a lot of time on this, and as you know, we've got a full time executive, John Desser, who is resident in DC on this as well. The talk about here is more qualitative, because things are constantly changing there as you know.
In fact, one of the changes I noted this morning was that Arlen Specter of Pennsylvania, is a Republican who has just become a Democrat. So depending upon the outcome of the senatorial election in Minnesota, you may have 60 Democrats, which is a filibuster-proof senate.
That could change things for, at least the passage of healthcare reform, energy, education and some of the other things that the administration has on its agenda. It certainly doesn't change our view of where it's going.
We've been expecting for some time that there probably would be legislation that would pass this year. I think that that's the case.
I think it may very well include guaranteed issue, that no one can be denied. I think it may very well include a mandate.
Democrats and Republicans seem to coalesce around those two things. Interestingly, the industry, the insurance carriers, the health underwriters are in support of those two initiatives as well.
We like them a lot and have for years. I believe that there will be some kind of financial support for people who can't afford health insurance.
What form that takes is anyone's guess, whether it's something through the tax code, whether its expansion of Medicaid, things of that nature, is yet to be determined. It may be a combination of all of those.
We are big supporters of those things as well. In the house, Bill, I think you're going to see a description of a public plan, which the President has talked a bit about as well.
It's very controversial. It's strongly opposed by the health insurance carriers, by hospital groups, by physician groups and so on, because of the payment rates and structures that accompany public plans.
I don't want to try to handicap it here, but I think that the public plan getting its way into and through the senate bill is probably not nearly as probable as in the house. The senate bill is coming out of the Senate Finance Committee, Chairman Baucus, who is the Democrat Senator from Montana is the Chairman of that committee.
The Ranking Republican is Senator Grassley, and Baucus has been very vocal about the fact that he liked Grassley to be in an agreement on this, that they like it to be a non-partisan bill. Grassley has been very outspoken about the public plan aspect.
Even, Bill, if there is a public plan, so long as we can distribute it, which discussions we've had with people who like the public plan, they think that that makes a lot of sense. That could end up being actually a very-very good and interesting thing for us.
Probably have a lesser commission rate, but some awfully big volumes to counteract that. And then you've got this idea of an exchange, and the exchange by the way is not very well defined or developed.
In fact, we are spending a lot of times in meetings helping with that right now. Some think the exchange should be a place where risk is essentially organized and monitored and use that to set pricing of different plans as a guideline and so on.
Others think it should be something like eHealth, where people can go to get health insurance. So, where and how that goes, and what that looks like, if it's in both of these bills, is yet to be determined as well.
I should also note that there are several states now that are very interested in launching exchanges, and we see this as a really intriguing EOD opportunity for us as well, we are pursuing those also. So I think in June, July, you are probably going to see a house bill surface and be introduced.
When the senate bill gets to the floor, the senator then is another question. Assuming that both parties can pass bills, they didn't go to something called conference, where they essentially try to come up with legislation that's agreeable to both houses and so on, the senate and the house, and then moves on from there.
So that's what we see. I will tell you that everything that I've seen so far into the discussions we've had and so on I believe are positive, and we've been a very constructive factor and invited into an awful lot of this.
So, we think there is certainly an opportunity here for change to really expand the market opportunity that we face. It's not without risk.
You could get some things happen that I guess that we don't anticipate in terms of public plans and the government underwritten kinds of health insurance and so on, but I think it's possible, but not highly probable today.
Stuart Huizinga
And Bill on Health Benefits Direct, let me give you a little bit of background on the structure and the deal and maybe that will explain a little more, why we are not forecasting the future on that right now. First point to make is that, we didn't buy a business with Health Benefits Direct and we didn't take over the books and records of the company in house here.
Rather, we respected a legacy business piece of it. We are in the midst of transferring members over, and so we've contacted the member base that Health Benefits Direct had, which is, as Gary said, a subset of the total members that they had.
We've contacted those and they're making a broker switch from Health Benefits Direct to us. We're in the midst of that.
To date, we've brought in roughly 20,000 members as I said, but we're not really there yet as far as having them all in house, having commission statements from the carriers, and understanding kind of the full mix of the membership among carriers, where they are in their lifecycle? What kind of commissions are being earned on those, and we still more information in order to get that.
I didn't say the number, but it was less than 1% of our revenue in Q1. So we're really right now just getting on top of the data, and as we move along here, if it becomes a material component, we'd expect to talk about that.
William Morrison - ThinkEquity
So, in terms of modeling, I mean, are you going to continue to break out how many numbers every quarter and some kind of sense of revenue, so we can get kind of organic or apples-to-apples comparison on the all metrics you provide? Because you noted, if you don't know the exact number of members, it puts quite a bit of noise into the metrics.
Stuart Huizinga
Yes. To the extent that it's significant going forward, I would expect that we would add some data for you to help get through the organic numbers as opposed to the Health Benefits Direct numbers.
Operator
Your next question comes from the line of Justin Post with Merrill Lynch. Please proceed with your question.
Justin Post - Merrill Lynch
Did you say you are for guaranteed issue? Because my understanding is, some of the states with guaranteed issue were a little tougher to get any kind of traction?
Gary Lauer
Yes, I want to be clear about that Justin. We are in support of guaranteed issue combined with a mandate.
What doesn't exist in almost in the Northeast states, except for one, Massachusetts that had guaranteed issues, no mandate. So people aren't required to have health insurance, so you get balance in the pools and pricing goes up and it gets to be highly unaffordable for people.
That's why I said that there is agreement by Republicans and Democrats mandated these requiring everyone to have health insurance. So what that says is that everyone will be required to be holding health insurance, and there would be guaranteed issue with that, so no one would be denied for health reason.
Forget about who underwrites this, whether it's public through governments or whether it's private industry, without a mandate you'll have fools who just don't work. That would be so imbalanced because you would need to buy health insurance until you need it when you get sick or have an accident, and then when you need it, you will drop it, why pay for it then?
Obviously, the math there doesn't work. So I fully expect that in all the bills that are introduced, you're going to see a mandate coupled with guaranteed issue.
That makes it work and that's why we're so much in favor of it. We think that that could have a significant impact on volumes for us for all of the obvious reasons.
Justin Post - Merrill Lynch
As I look at the results, I think you said there is a $1.3 million payment in your prepared remarks. Was that in the income statement or where was that?
Stuart Huizinga
You're talking about the $1.3 million for Health Benefits Direct?
Justin Post - Merrill Lynch
Yes.
Stuart Huizinga
Most of that is on the balance sheet and it would be matched with revenue overtime.
Justin Post - Merrill Lynch
What lines does that go into?
Stuart Huizinga
It's in other assets and its split between current and long-term.
Justin Post - Merrill Lynch
What line in the income statement would that go into?
Stuart Huizinga
It would go into cost of revenue sharing.
Justin Post - Merrill Lynch
On the churn, if we normalize for the 20,000 its more kind of in line with history. Are you encouraged that as your membership base is just aging as your company matures that we're seeing a fundamental shift to a lower churn rate or do you think there is any environmental factors causing that?
Gary Lauer
I think we're very encouraged by what we're seeing in retention. Only in that in an economic environment like this, and some people had shared this and we thought about it as well, there could be risk that many people would come to a decision they could no longer afford to hold their health insurance.
We are not seeing that. We think that's a very, very encouraging sign and we are pleased about that.
I think as Stuart said, we got a little bit of a shift here in terms of the age of the member base and so on, but it's certainly not significant.
Justin Post - Merrill Lynch
When you look at the online advertising piece of 25%, but the cost per member went up a little bit year-over-year, is the quick prices online getting more expensive, and so you opted to use last search marketing or what other things are going on within those marketing lines?
Gary Lauer
No, we have not seen anything significant in terms of the cost of search, the keywords and so on and the price changing. It's held fairly constant.
To us, it's more about conversion than it is the price we pay for the keywords. We've always converted very efficiently there.
Frankly, the change was just that we drove so hard on the media outreach side this past quarter that it really impacted direct, which we're pleased about for all the obvious reasons, certainly the increase in the volume, the growth rate, as well as the acquisition cost impact that that has as well. There is nothing really unusual going on, on the marketing line in terms of what we're spending.
You are right, it's up year-over-year, but it's actually down sequentially from the fourth quarter to the first quarter which we're pleased about as well. We've made this comment in the past in this environment.
Frankly, it's just taken a bit more money to go out and get the kind of application growth that we've wanted to have is a bit more challenging just because, again, the economic environment and so on, but nothing extraordinary or unusual in the quarter that affected the unit . Again, I want to point out that it actually went down sequentially from the fourth quarter to the first quarter with a pretty significant increase in the growth rate.
So, we like both of those trend lines quite a bit.
Justin Post - Merrill Lynch
When you look at the new members being added, are you seeing any uptick in the percent that are unemployed versus self employed? Is there any reason for optimism that you could see better times ahead if unemployment numbers or people start running out of their COBRA as you look towards the second half?
Gary Lauer
To be seen, it's all opportunity for us. The COBRA subsidy only lasts for nine months and that's not lost on people.
We know that from people that we've been talking with. I commented earlier that in some surveying we've been doing we continue to see people come to us who are recently unemployed.
Obviously, that's an effect of the economy and so on. We still have got a really good core group of consumers that are opportunity for us that our people who are self employed and others who are just buying their health insurance anyway always have been there and we expect that to continue in a way that supports growth as well.
I don't want to point to any one of these as a difference-maker because I don't think any one is. I think it was really a contribution from all quarters.
Operator
Your next question comes from the line of George Sutton with Craig-Hallum. Please proceed with your question.
George Sutton - Craig-Hallum
First for me, the 20,000 people that came over from Health Benefits Direct there was a suggestion in your commentary that there maybe more to come. Is that a correct statement?
Stuart Huizinga
There are more to come. I just don't want to forecast at this point how many more to come.
George Sutton - Craig-Hallum
Gary, you had mentioned interestingly in your commentary a lot of focus on large corporate clients through your partners and I have never heard you talk about large corporate clients and going after those opportunities. Is that a relatively new focus for you and is that something we should expect you to pursue?
Gary Lauer
It's a very interesting area and I'm glad you brought it up. It's one that emerges an opportunity for us very recently and I do want to point out that it's not us going after large corporations to necessarily insure the current employed population that they have, rather its people coming out of these companies who have been employed, who are losing jobs for various reasons and so on and no longer have group health insurance.
Through a couple of these partners, we've pursued some of these larger businesses that had gotten a lot of media visibility for closing the doors, like Circuit City, but there is a whole lot of others that are just laying people off and are doing whatever they can to help this people, and health insurance is a place where a lot of help is needed. For many people COBRA is not an affordable option and these individual products are good alternatives.
What we think here even more importantly is that there may be a shift underway in this entire marketplace, and I believe that some of the carriers are starting to recognize this as well, that the day of so many people being covered by mid and large size employer health insurance could be over. We're still going to have that, but there may very well be more and more people who are responsible for how to take responsibility on for providing their own health insurance coverage.
Hence, this market opportunity and this individual market is becoming much more viable and much more relevant. One of the reasons why policymakers have got so much focus on it right now on and the carriers as well, there is a lot brewing in this marketplace right now that we find to be very intriguing.
George Sutton - Craig-Hallum
Certainly if we go to guarantee issue, the logic of having your employer necessary in provision of healthcare goes away, correct?
Gary Lauer
I wouldn't say that it goes away. This is one of the things that policymakers are wrestling with right now.
How to keep the employer base of people who are covered the way that they are? The last thing I think that they want to affect is any kind of a mass exodus because that would create real havoc in the marketplace obviously.
I think you should expect to see the continuation of the kinds of tax benefits and deductions and so on that businesses enjoy for providing health benefit to employees. I think it's going to become more of an option for people in many cases, not all but in many cases they're going to the individual markets to secure their health insurance.
George Sutton - Craig-Hallum
Now I assume now you have some data, you can take the Anthem California up 150% numbers to other carriers and generate some additional interest in the eApproval. Is that taking place, can you give us an update on the pipeline there?
Gary Lauer
We've got several carriers in the backlog. As I've commented in the past, the carriers don't move as quickly as we would like, but we know these numbers are so compelling that for carriers who don't move on to this because its opportunity, then they has to do it just offensively because of market share that could be seated to somebody else doing it.
So, yes, this is page one of our sales kit right now. We're talking to carriers about eApproval.
We've got real experience.
George Sutton - Craig-Hallum
Lastly with respect to Ubao, if I were to know, which I don't, where does this show up on the income statement and the balance sheet for you?
Stuart Huizinga
It's not material not at this point to show up anywhere really. The costs are not that significant and the revenue is very small at this point.
George Sutton - Craig-Hallum
In terms of how you have this on the books though, it's shown as an asset in a fairly small amount today?
Stuart Huizinga
There are really no Ubao assets to speak us. From a P&L standpoint, there is an immaterial amount of revenue that would flow through the revenue line, and then minor cost going through marketing and then technology.
Gary Lauer
I'd like to add on Ubao. We're adding these national carriers and that we have a national footprint.
We are seeing some very interesting growth in terms of consumers coming to Ubao and applying for and buying health insurance. We expect to be becoming more of about this in the next several quarters.
Operator
Your next question comes from the line of Sameet Sinha with JMP Securities. Please proceed with your question.
Sameet Sinha - JMP Securities
Submitted application growth was pretty strong during the quarter. Was that in line with internal expectations or did you see an increased growth as the quarter went along?
I'm just trying to get a sense for linearity. Secondly, on the Health Benefits Direct, the $1.3 million in the cash flow of that payment that you made to them, you divide it by 20,000 subscribers you get about $65, which is approximately your cost of member acquisition.
So is that kind of the math that we should think that the payment that you're making them to transfer over per customer? Based on that, your cost of sales, obviously, went up, gross margins were down, and now that you're bringing these guys in and you'll be amortizing the cost, should we expect that cost of sale to continue growing up throughout the year?
Gary Lauer
We've never commented on application growth within the quarter in terms of days, weeks, months and so on, but I will say this, it was a good quarter with strength right across the quarter and we like that a lot. We've never commented about application in terms of our internal plans and so on, but last quarter when we gave guidance, I believe that we did indicate that our guidance was based on application growth rates that were similar to what we have been seeing in the second half of last year.
If you look at that and look at where we were in the first quarter, we're certainly pleased with the growth that we saw and so on. As Stuart said, we reaffirmed our guidance for the year as well.
Stuart Huizinga
On the upfront payment that you mentioned, I'm not sure I would take the math that you did and go with that. They payment we made was more in the nature of a down payment essentially against the member base that we were transferring over.
We structured the deal largely as a revenue share to recognize the fact that we're bringing these members over and we'll see how many of them successfully make it over into our business. We felt comfortable enough with the total opportunity to make an upfront payment against that.
Yes, I would expect the cost of revenue line to increase as we had revenue coming in against that.
Sameet Sinha - JMP Securities
Where do these 20,000 show up? Do they show up in the non-IFP member base?
Is that a fair assumption?
Gary Lauer
The vast majority are in the IFP member base. There is a small amount in the non-IFP.
Sameet Sinha - JMP Securities
You have a new marketing executive. Scott Sanborn came on a couple of quarters back.
Can you talk about what your marketing plans are? Would you be taking up radio and TV, any thoughts from that front?
Gary Lauer
Well, you know a number of things. Scott's been doing a lot since he's been here.
We have done some creative things in the area of search, especially around people who are recently unemployed in COBRA, with some very good results. I will not use this word a lot, but we were delighted with our media and public relations activity in the first quarter.
And we were just referenced and featured time and time again, in many different national media outlets, both print as well as broadcast. And that didn't just happen, that was our PR team and our marketing campaign, the strategies and liked that a lot.
Funny, you ask about radio and TV, we did no radio and very little TV in the first quarter. We're looking at TV again right now, because with all of the attention on healthcare that this is so relevant right now.
You know, we've been doing some things with display advertising for example, online, we hadn't done in the past. So really just a list of things, no one thing that truly is significant that is a difference maker, they all contribute, but I do want to again underscore how important the public relations and media attention has been, and continues to be.
We're really pleased with that.
Sameet Sinha - JMP Securities
If I can squeeze in one more question, I'm sorry. The COBRA subsidy issue, the COBRA administrator is sending out the information on that to the laid off people who do not opt for COBRA as yet.
That's in the process. This must be in the hands of all these unemployed people.
Do you have any thoughts on how this could impact application growth in the second quarter or churn?
Gary Lauer
Well, we've used the COBRA subsidy is an opportunity to generate visibility, and it's the reason that people should come to eHealth, and we think it works, and we think its working. I should note that the rates of people who take COBRA nationally have been less than 10%, the less than 10% of people who have the COBRA option actually take it.
I had the opportunity in December to meet with some of the people who wrote the language for the stimulus bill for the COBRA subsidy, and their hope was that may be that number would double, so may be 20% would take it. Call it 30, triple it, that's still 70% of people who are COBRA eligible, who aren't going to take COBRA.
Now a large portion of those may not take anything, and they join the ranks of the uninsured, but we're talking about millions of people here, and we know a number of them will take. Are doing a lot of purchase health insurance and we did the right job.
We think we can commence on these individual products. Quality products underwritten by really good brand names and it's where they should be, given the right set of circumstances and so on.
You've also got a very large number of people recently unemployed, who are not COBRA eligible. This is a very important point.
These are people who have come out of small businesses, where we have less than 20 employees. You don't have to offer COBRA.
People who are coming out of businesses that are no longer in business, so there is no health insurance offering and no COBRA as well. There is a number of segments that we have frankly been pursuing and messaging and going after quite assertively and we will continue to do that.
We remind people of this a lot, that the COBRA subsidy only lasts for nine months. So once that nine months is expired, you are on your own again.
In many cases, not all, but in many cases, the 35% contribution that someone has to make for COBRA, and many times, is equivalent to, or even more than an individual product may cost as well. All of these things we are making is visible as we can to people was we pursue this as one opportunity area.
Operator
Your next question comes from the line of Jim Friedland with Cowen and Company. Please proceed with your question.
Jim Friedland - Cowen and Company
A quick one on R&D, or technology and content. For the last six quarters, the expense excluding stock based comp has been relatively stable.
Is that something that will need to go up if you are starting work with exchanges and things like that and it just seems like there will be some upward pressure on that number. Can you comment on that line?
Gary Lauer
I wouldn't see it increasing substantially because of some of the public work that we would do with EOD. We already have a team here today for example, that supports EOD, that's in the numbers that you'd see.
Remember, we've have got eHealth China, our subsidiary, where we do an awful lot of our research and development and engineering work. We have some really fantastic people, who frankly are a fraction of the cost of doing it here.
So we've got tremendous amount of leverage there for these kinds of things as well. So, Stuart, I wouldn't expect to see any substantial change.
Stuart Huizinga
No I think that's right. Absolutely.
Gary Lauer
By the way we watch these things very-very carefully.
Operator
Your next question comes from the line of George Askew with Stifel Nicolaus. Please proceed with your question.
George Askew - Stifel Nicolaus
How long do you think it will take for all the Health Benefits Direct members to be observed by eHealth. Is this something, a transfer process you can complete in the second quarter, or is it going to take several quarters?
Stuart Huizinga
It's hard to say. I would hope to be done with that in the second quarter.
But not only do we need to bring him over, but we also need to get to a stage where we can recognize revenue on those, and that actually may be a later point. Not sure yet till we bring those over.
So hope to be there by second quarter, but could be end of third quarter.
George Askew - Stifel Nicolaus
And then the tax rate spiked in the first quarter to 47.5%, yet you've reiterated the 43% to 45% range for the year. What was the cause for the higher rate in the first quarter, and how should we think about that volatility looking out the next three quarters?
Stuart Huizinga
The increase outside of the range you saw in Q1 is really a onetime type of item. It's called a discrete item having to do with stock option exercises and RSU vesting, when people exercise or those RSUs vest at a lower stock price than what we are expensing them at, when we originally granted them.
We get less of the tax benefit from those, and it actually hits our tax expense. So we had about $200,000ish hit to our tax expense this quarter, which went straight to the bottom line essentially, but its non controllable and we had one last year as well.
It happens from time-to-time.
George Askew - Stifel Nicolaus
And then lastly, you've clearly seen a lot of success in the media outreach, PR efforts in the quarter. Is this a permanent shift in your strategy that you would expect to maintain, emphasizing media outreach etcetera going forward in all economic times, when things get better?
Gary Lauer
We've always done media outreach, but because of the environments and all of the public policy focus, there is a real appetite in media right now for all of this. We're doing everything we can take advantage of that and to feed that, because we've got, we think, an awful lot to offer.
We're unbiased and objective in terms of the products that we represent. We've got a tremendous amount of experience from the largest source in the country.
So there seems to be a lot of reasons that we're attracted to media people. We've got a good sized team that's fulltime in-house, that's on this.
And we will continue to push this and lever this as hard as we can, good economic times or not. We always have, but we probably got more wood behind the arrow right now than we've had in the long time here.
Operator
Your next question comes from the line of Peter Costa with FTN. Please proceed with your question.
Peter Costa - FTN Midwest
Couple of things, mostly related to Health Benefits Direct deal. You said, it really didn't impact the numbers on the applications, but is that including the applications, the submitted applications that perhaps came through their website to you, as opposed to the 20,000 members that you converted.
So it didn't drive any traffic to you at all, or did it drive some traffic to you.
Gary Lauer
Peter, it drove so little, it wasn't even spillage, because we just got started with accessing their website in some of the other prospects that they had for us late in the quarter. Very, very little.
Peter Costa - FTN Midwest
Okay. And then the increase in your cost of revenue sharing, you see about 400,000 a quarter thereabouts and now jumped up to 800,000.
Is that incremental $300,000 or $400,000 really the revenue share related to the 20,000 lives that you picked up?
Stuart Huizinga
Good portion of it is, but it's sort of 50-50 between our organic business and Health Benefits Direct. So, additional cash collections and just kind of the mix of cash collections.
Peter Costa - FTN Midwest
So if I look at the 20,000 lives that came over, that would be under a normal number sort of may be $1 million of revenue in a quarter, if you hadn't put the whole quarter, and you had them at the same revenue per member. If you take that, and you apply sort of some may be 150,000 revenue share that you had, do you try and get to some, almost 50% of the revenue share, is that an approximation that sounds good to you?
Stuart Huizinga
I'm not going to give exact numbers, but I'd go a little bit higher than that, slightly higher.
Peter Costa - FTN Midwest
So what dropped down to the bottom-line this time was not even pennies in earnings, is that a fair thing to say?
Stuart Huizinga
Absolutely.
Peter Costa - FTN Midwest
What's the cost that you incurred to bring those members over? Is there any cost involved obviously, some reaching out to the member and to the health plan, but beyond a person perhaps or two doing that, what's the other incremental cost there that we should be understanding?
Stuart Huizinga
There really isn't any. It's just incremental cycles of people's time to go after these things, on top of their normal workload.
Gary Lauer
It doesn't require additional resource here. Its redeployment of what some people do.
That's one of the reasons we structured this the way that we did. We didn't want to buy the business, we didn't want the assets, didn't needn't them.
We didn't take everything that they had in terms of member base. We were able to select what we thought was most relevant for us.
And us for them, and that's what we did.
Peter Costa - FTN Midwest
The last question just on the marketing and advertising spend. That has bounced up, as a percent of revenues, back to where it was back in 2005 I'd say.
Is that something that we're going to see continue at those levels? You said a lot of it was, the incremental cost was the PR spending.
Is that something that's going to keep going through the year or you think you're going to tune down the PR spending going forward?
Stuart Huizinga
I think you could see it back up at that level, and we'd actually hope to see it at that level. That would tell us that we have high growth in our submitted applications.
I'll just remind you that in our cost per unit, the metric that we put out went down sequentially. So we are happy with where that number is right now.
But yes, due to seasonality, you could see it up there again.
Operator
This concludes the question and answer session of today's call. I will now like to turn the call back over to Mr.
Gary Lauer for closing remarks.
Gary Lauer
Well, I'd just like to thank very one for your time and support and look forward to speaking with all of you again soon. Good day.
Operator
Thank you for our participation in today's conference call. This concludes the presentation.
You may now disconnect. Good day.