U.S. Markets closed

Edited Transcript of HIIQ earnings conference call or presentation 6-May-19 9:00pm GMT

Q1 2019 Health Insurance Innovations Inc Earnings Call

Tampa May 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Health Insurance Innovations Inc earnings conference call or presentation Monday, May 6, 2019 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Gavin D. Southwell

Health Insurance Innovations, Inc. - President, CEO & Director

* Michael DeVries

Health Insurance Innovations, Inc. - SVP of Finance

* Michael D. Hershberger

Health Insurance Innovations, Inc. - CFO, Treasurer & Secretary

================================================================================

Conference Call Participants

================================================================================

* Charles Gregory Peters

Raymond James & Associates, Inc., Research Division - Equity Analyst

* Frank Sparacino

First Analysis Securities Corporation, Research Division - SVP

* George Frederick Sutton

Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst

* Mark Nicholas Argento

Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst

* Michael John Grondahl

Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst

* Randolph Binner

B. Riley FBR, Inc., Research Division - Analyst

* Richard Collamer Close

Canaccord Genuity Limited, Research Division - MD & Senior Analyst

* Steven Paul Halper

Cantor Fitzgerald & Co., Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings. Welcome to Health Insurance Innovations' First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to your host, Mike DeVries, Senior Vice President of Finance. Mr. DeVries, you may begin.

--------------------------------------------------------------------------------

Michael DeVries, Health Insurance Innovations, Inc. - SVP of Finance [2]

--------------------------------------------------------------------------------

Thank you, Jeremy, and good afternoon, everyone. We're excited to have you join us today for a discussion about Health Insurance Innovations' first quarter 2019 financial results. By now, you should have received a copy of the earnings release. If you do not have a copy, please visit our website at hiiq.com. On the call with me, we have Gavin Southwell, HIIQ's CEO and President; as well as Mike Hershberger, HIIQ's Chief Financial Officer.

As a reminder, today's conference call is being recorded and a replay of the call will be available on the Investors Relation section of our website following the call. We will be making forward-looking statements on the call. All statements other than statements of historical facts are forward-looking statements. Such statements may describe future plans, objectives or goals. Forward-looking statements are subject to future risks and uncertainties including the risks outlined in the company's Form 10-K. These results and uncertainties include, among other things, the company's ability to maintain relationships and develop new relationships with health insurance carriers and distributors, the ability to retain its members, the amount of commissions paid to the company or changes in health insurance plan pricing practices, state regulatory compliance, and changes in the United States health insurance systems of laws. Actual results could differ materially from those projected or expected in these forward-looking statements. Listeners are urged to review and consider the various disclosures made by the company in this conference call and the risk factors disclosed in the company's annual report on Form 10-K as well as other reports we have filed with the Securities and Exchange Commission. Copies of the company's SEC reports are available on our website at hiiq.com and the SEC's website. The company disclaims any obligation to update any forward-looking statements after this call.

And with that, I'll turn the call over to our CEO and President, Gavin Southwell.

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Mike, and good afternoon, everyone. I've been looking forward to reporting our first quarter results as well as updating you on our plans for the substantial growth opportunities that we are currently pursuing and others that lie ahead. On the call this afternoon, I'm going to review a few highlights from the quarter. I'll then dive into an update on our strategic areas of focus and the progress we've made on those areas this quarter. For the first quarter of 2019, we report revenue of $87.3 million, an increase of 15% year-over-year; adjusted EBITDA of $9.3 million and adjusted in earnings per share of $0.43.

We met our internal expectations for the quarter and continued to execute on several key initiatives, including enhancements to our industry-leading regulatory compliance protocols, preparing to expand and diversify our product portfolio and driving higher policy sales across our e-commerce channels. As you will recall, we have shifted our strategic focus toward products associated with longer durations leading to significantly higher lifetime value or LTV. Our move away from lower-cost lower margin products towards these products with higher lifetime value have shown early signs of success, producing year-over-year growth and expected duration units excluding our fulfillment only products of 20% compared to the first quarter of 2018.

Our continued focus on growing our e-commerce channel, which includes our owned channel agilehealthinsurance.com, as well as of a new third-party e-commerce partner, also showed solid results and expected duration this quarter of 42% versus the first quarter last year. Now, the change to ASC 606 for revenue recognition, which we moved to in the final quarter of 2018 does provide a better insight into our business over a longer period of time but it does not reflect the progress we have made in Q1 where we will see significant upside later in the year. For example, while we have agreed to a mechanism of some insurers for a positive uplift in the second half of the year, and although successful execution of this as being a major project in the first quarter, the first quarter could not benefit from any of these future upsides. This is now in place and it positions us really well for the second half the year. And so what we have learned is that we would benefit from providing next quarter guidance going forward as well as giving more detail around the initiatives we are working on.

We expect our revenue and earnings to build through the year, with the fourth quarter being the high point. We're expecting Q2 to represent about 18% of revenues for the year at about 12% of our adjusted earnings, with our expectations reflecting the heightened impact of ASC 606 when applied to the seasonal nature of sales. 2019 is an important transition year for us as we broaden out our product mix and diversify our offerings. We're building out our business for a much bigger opportunity, all built on our next-generation technology platform, MyBenefitsKeeper. Since the launch of this platform, we are now able to diversify our product mix and we are excited about the opportunity this creates for us as we build on the second half of 2019 and the years to come. One example of this is our re-entry into the over 65 space. We expect our over 65 business to be significant by the end of 2019 and we also expect our direct to consumer life block to continue growing at a fast pace, meaning by the end of the year short-term medical will be deemphasized from 23% of business in 2018 to an even smaller percentage in 2019.

By the end of 2020 our expectation is that our over 65 business will rival the size of our total existing business including all products in the under 65 business. And in addition, we expect our life block to at least double the size that it was at the end of 2018. This potential upside is not currently included in our guidance but I want to give investors color around our direction in the first half of the year. We're spending a lot of time trying not to be distracted by the noise in the investor community from short-sellers and instead focus on our important work to broaden out our product mix. In the first quarter of the year, we have launched new carriers and we are in the process of adding new distribution which is likely to come live around the middle of the year and that has the potential to significantly change the shape of our business and provide an upside to our guidance.

At this time, I'm looking ahead to the rest of 2019. We are raising our [2019] adjusted net income per share guidance to a range of $3.50 to $3.75 and we are reaffirming our annual revenue guidance of a range of $430 million to $440 million and adjusted EBITDA guidance in the range of $72 million to $77 million. Towards the end of May or early June we will provide a further business update and more detail around the initiatives we are working on to support the growth of the company.

Looking at our current valuation, and the current situation with our stock, we are trading at approximately 6 times earnings and part of the challenge has always been a perception of regulatory overhang in large part due to the multistate review, which is ongoing for 2.5 years and closed in December 2018. This review, which covered 2010 to 2016 and the regulatory settlement agreement, or RSA, was ratified in January 2019 and by March, 40 states signed on to the RSA. This review and the process we went through to get to today has made us better, creating a huge asset for the company. Working with regulators and strengthened by our recent senior hires and additions to our in-house regulatory counsel and compliance leadership, we're continuously implementing market-leading controls and raising the standard for our whole industry. We continue to work towards enhanced standards for independent third-party agency review, voice verification including recording of all sales calls, background checks, secret shoppers, license verification and TCPA compliance, just to name a few.

We are not perfect. The individual market is inherently difficult but we work hard every day to keep raising standards and to prioritizing the protection of our consumers. We are frankly grateful for the diligence and opportunity to spend time with our regulators and sharing that they understand what we do and ensuring we perform at the highest possible levels. With the RSA finalized with no findings or penalties, we can confidently focus on our mission of providing great value at affordable prices to consumers in 2019 and beyond.

Meanwhile, in the business world, a call center focused on health insurance called Transact recently sold for $1.2 billion, which was 4x revenue or 60x earnings, that's 6-0. They were private equity owned since 2016 and was just sold to one of the largest and most respected businesses in the world called Willis Towers Watson. Just as an aside, I used to work at Willis in the internal audit team and it's a great business. This is a really important point and something all investors should understand as a large part of investor apprehension of HIIQ was always around the use of third-party call centers. The short thesis is fundamentally based on the fact that call centers are bad and that there is no value to business conducted using call centers. And I guess for us, we've always found this really odd, as most health insurance including over 65 and, indeed, most types of insurance including the ACA are sold over the phone. The reality is, we work with many large call centers and brokers and we actually also do a lot more e-commerce than we used to. We have a lot more e-commerce and competitors that we're often compared against. The point being in our industry, there's never been the same type of concern around call centers and this recent deal should provide some much needed context for investors. Our industry and key players in the industry are large investors in these types of businesses absolutely see the value in the use of well-run call centers. And with a major market player paying 4x revenue or 60x earnings, this shows the scarcity value pretty clearly.

Now, with that context, back to what is happening here with HIIQ. I think it's only right that we address some important points to clear this up once and for all. It is certain people's full-time job to try to attack this business with never-ending, false and misleading information whilst it is our day job to keep building a successful growth company with incredible cash flow. We will today clarify some important points and we will talk about our market in general and where this business fits into the ecosystem as there are many people who are new to our story and we want to help investors and all of the stakeholders cut through the noise and understand what we do and the value we add. So let's confront some of this head on and today we'll show clearly 2 things. Firstly, our business fundamentals will ultimately shine through. We continue to have win after win and we are more excited than ever about the years to come and the opportunity in front of us. And secondly, the underlying short thesis is fundamentally wrong. And today, we'll just take 1 of 2 components and provide more details.

In previous earnings calls, we talked about the state of the insurance market for individuals and the challenges they face with price increases, meaning products cost double what they did in 2014 and the average American being unable to afford an ACA Silver plan anywhere in America. And so the 2 main issues being unaffordable and high pricing and focused on the satisfaction, a business like ours, which is focused on helping to provide affordable solutions and with huge resources focused on improving the customer experience is incredibly important and valuable to the individual market.

A fundamental reason why people would take a short position against the company is the mistaken thesis that any non-ACA product must be worthless. Now I'd like to take the opportunity to say that, that is false. What we do here (inaudible) although we offer ACA plans, we also offer many other types of non-ACA plans and in the last few weeks, I've been made aware of examples of success stories. People who have had to face the worst of life and their health insurance that they were able to access through our platform has been able to provide a safety net and allowed them to get the treatment, which almost certainly saved their life. The 51-year-old with a brain tumor and the insurance carrier covered all costs. The 21-year-old with leukemia where they have received many treatments and still have a policy that has paid over $400,000. Another cancer patient where the policy has so far paid over $310,000 unbilled charges. And the 40-year-old who suffered a stroke and even though the policy expired while in the hospital's care, the insurer approved an extension of benefits until the man was released, saving him tens of thousands of dollars in charges he otherwise would have had to pay. Now these are just a few of the examples we see every week. We are not perfect. The health system here has major issues which are well publicized and we work hard to keep improving so we have less complaints and less issues than anyone else that we are aware of. I think the context we should take a moment and look at some of the other businesses in the ACA health insurance space and the type of issues that are being publicized by the press. To be clear, these are all ACA examples. Firstly, there's a broad topic to understand which is that it was reported that ACA plans denied about 1 in 5 in-network claims overall in 2017. Research from KFF reported the ACA marketplace plans denied 19% of in-network claims with huge denial rate variations between payers ranging from single digits to as high as 45%. There were vast differences within states, too. This might be a surprise, as often the assumption is that if you have an ACA plan, all claims are covered. And non-ACA means you are more likely to be denied a claim. Out of the almost 43 million denied claims, only about 200,000 were appealed, which is approximately 0.5%. And out of that 43 million of denied claims, the appeals process reversed denied claims in about 30,000 cases, which is a tiny number. Another negative impact of such a high amount of claim denials is our members wind up with surprise medical bills with lead to large out-of-pocket costs for patients and we'll look at some specific examples in a moment. It's important for everyone to understand that denied claims and surprise billing go well beyond the ACA marketplace. The Kaiser Family Foundation, or KFF, also recently reported that about 40% of Americans said they have received a surprise medical bill and a further study by Change Healthcare found about 9% of claims were initially denied in the previous year. In this research, KFF reviewed almost 230 million claims submitted by 130 insurance company payers. And at this point, it's impossible for researchers to pinpoint exactly why an insurance company denied the claim. Now, there is some good news, which is by earlier this year, the Federal Agency CMS said it will require ACA plans to report denial reasons, including out-of-network referral or prior authorization. CMS will also require payers to provide claims data by the plan level and not the insurer level, which will allow for more analysis. This will allow us and other researchers to get a better understand on why payers are denying claims.

States are also getting more teeth to prevent this type of poor consumer outcome. Recently, a fine of $91 million was upheld in a court case where the ACA insurer was found guilty of 900,000 violations relating to patient claims. The cases has gone through various appeals and is a good example of the type of challenges consumers face in today's landscape. Also it's useful to take some specific examples of where this impacts consumers. I want to provide some extracts of a research that we have been doing. An example of an ACA carrier who was fined $3.6 million for chronic billing and enrollment errors including overbilling and double billing, which led to about 3,500 complaints in a year. A different carrier whose been subjected to numerous investigations, complaints and class actions resulting in a $1.5 million fine and a cease and desist (inaudible) Insurance plus a high level of complaint. We've found an example of an ACA insurer who was fined $500,000 in Florida for allegedly discriminatory pricing practices and also $162,000 for misleading policyholders in Missouri. There was an example of an ACA carrier who was fined $5 million for repeatedly failing to address consumer complaints. Another was fined $16 million for mishandling thousands of claims. There was an example of one health insurer wrongfully denying claims for emergency department visits in New York. And another example where an insurance company denied 12,200 emergency room claims in 2017 alone, reflecting their policy of denying claims for emergency services as the company believed the emergency services were unnecessary. There was a well-publicized case only last week of several health insurance businesses who allegedly paid bribes to Baltimore Mayor Catherine Pugh and then were rewarded a $48 million contract with the city. We've seen many examples of consumers of individual policies who say they've been subject to certain erroneous cancellations, forced them to go without heart medicines, get vaccinations for their children and pay large out-of-pocket expenses for medical care. There have been accusations that an ACA health insurer engaged in deceptive marketing during the open enrollment period to falsely attract consumers into plans that did not include the advertised providers. Another ACA insurer was charging hidden fees to consumers. The lawsuit provided an example of the alleged scheme. A plaintiff said the insurer, which would require the pay in the example given, a hospital $6,000 reported larger charge, $6,810 and the insurer kept the additional $810 as a hidden administrative fee.

There's examples of insurance companies refusing to help autistic children by denying coverage for applied behavioral analysis therapy. As a result, the families had to go to court and eventually, they won the case. An Oklahoma jury told the insurer to pay $25 million damages to a deceased's estate after the insurer denied a (inaudible) cancer treatment that could have saved her life. The jury said the insurer recklessly disregarded its duty to act fairly and in good faith when it denied her treatment. We actually found a theme of insurers refusing to pay for certain treatments even after multiple specialists claimed that the therapy was effective. One insurer refused to pay a (inaudible) after multiple appeals, saying there was not enough medical evidence to show that it was effective and the parents of the child ended up paying $95,000 out-of-pocket for the treatment. The same insurer was involved in another lawsuit again for refusing to cover certain treatments and the judge presiding over the case who later recused himself stated only last week that the insurer was immoral and barbaric for denying the patient for that treatment. There were allegations an insurer in Massachusetts had been systemically denying payments that claims that inpatient treatment for mental health disorders and violation of its insurance policy. An insurance agent in North Carolina who was investigated by state officials for illegally signing up over 600 individuals in North and South Carolina for insurance when they did not properly qualify. An example where an ACA insurer denied brain surgery request to a patient because they deemed the procedure to be experimental even though it is FDA approved and is proven to be effective. This was frustrating, given that the patient's parents had paid $24,000 in premiums to that insurer and now they will most likely will be left with a $300,000 left to pay it. And then finally, in North Carolina, where Department of Insurance received around 850 complaints about insurers do to overbilling, [failure] to verify effective coverage and system errors. But of course, many, many more of these examples and what we all know or at least what we should all know is that the healthcare system here is not working as well as it should be. And there are far too many cases of consumers who had bad consequences. That makes us motivated here at HIIQ to be a positive force in the industry, and that is what we are. We review complaints made against insurers we work with. And if we see something we don't like, we take action. Here is HIIQ after relentless regulatory scrutiny including from a multi-state review lasting 2.5 years, which resolved only recently at the end of 2018 and we didn't pay a final penalty and no issue or concerns were raised in the report. Instead, the result of that review is we were continuing to strengthen our controls and we are happy to do it. We want to lead our market in ensuring the consumer has as good an experience as possible. We have done more to prevent the types of issues I just highlighted happening that anyone were aware of and we aligned with regulators and other stakeholders who want us to do whatever we can to help consumers. Again, we are not perfect and we work hard every day to improve. We're adding new senior staff right now and we will announce how we continue to strengthen our team shortly.

Of course, on the other side of this, there are many examples of success stories and great outcomes to people with ACA coverage and with our technology framework, we will help ensure the consumer has the best possible experience with whatever product they choose, by working hard to make sure the product meets their demands and needs. The ACA plans do generally offer a higher level of benefits and broader coverages. And for many consumers, this is the right product for them if they can afford it. But it's important to understand the complaints of these products are significant as it's an indicator of a broader issue within the marketplace and the health system in general.

It's important for all investors to understand that the here at HIIQ, we are product agnostic and we work with approximately 35 insurance carriers and benefit provider parters to help design and develop new products depending on specific federal and state rules. Along with our core products are now individual and family plans. We also sell significant amounts of life, critical illness, accidental death as well as dental, vision and a range of other supplemental plans. We do not rely on any 1 product or any 1 carrier and we also don't rely on any 1 state either. We're deliberately and strategically positioned to be able to offer a broad and full product offering, utilizing our proprietary technology, access to vast data and our product expertise. I now want to talk a little bit about consumer satisfaction and complaints as context is important. When we have previously talked about our complaints and consumer satisfaction, we have been very clear and transparent that we are comparing ourselves to others in the market that we are using the only measure possible, which is Department of Insurance complaints. We have access to these complaints for ourselves at HIIQ and everyone we work with in the market and actually, every other health insurance company data, including our competition. And that allows us to compare ourselves to them and that allows a proper comparison. Simply put, each company does not generally disclose its own internal measures and every company has the ability to categorize however it likes. One company might call something an apple and another company might call the same thing an orange, and another company might not even bother to record this information at all. The only measure we can use to provide context is Department of Insurance complaints. We record all customer service data because we are trying to identify areas where we can improve behavior at either the third-party call centers or our third-party insurance company partners. Let's make sure going forward we are ultra clear about this point. To provide the best insight we can, let's also take a moment and look at our Department of Insurance data and also that of all of our third-party distribution and all of our insurance company and benefit provider partners as well. We track our third-party distributor and our third-party insurance carrier to Department of Insurance complaints as a majority of complaints happen at the business where the issue occurred. So if the issue was during the sale of the complaint, it would logically make sense the complaint would be with the company who sold the policy. In this case, the third-party distributor. And if the issue was at the point of the claim then logically, the issue would be raised with the insurance carrier. If you add all of these together, our approximately 100-plus distributors and approximately 35 insurance carriers then you get a total of Department of Insurance complaints back in 2016 of 489 in 2016, reducing to 375 in 2018, even whilst the policy counter is significant to a little under 400,000 policies and 1 million consumers. Another publicly available measure which we could use, which is also available would be the BBB where the reduction in complaints from 2016 to 2018 was even greater. 390 complaints in 2016 falling to 133 in 2018, a reduction of 66% even again during a period where policies in force grew significantly. Looking at just HIIQ only in the first quarter of 2019, we had a total of 1 Department of Insurance complaint in 2019 versus 6 in 2018.

When talking about issues, the type of context is very important. Recently, we were asked by a stakeholder about issues they saw on 100-or-so policies. We have approximately 400,000 policies in place with over 1 million people covered. We're in a market where many major market participants have had well-publicized challenges and we have been held to task based on a simple math of 1 potential issue in every 4,000. Now of course, every time we see an example of where a third-party distributor hasn't done a good job during the sale and the consumer feels they were mis-sold or when we see an example where an insurer doesn't pay a claim where we would like, it's heartbreaking, of course it is. But what we do at HIIQ means these examples, which happen everywhere in our market, happen a lot less if the consumer is fortunate enough to find a trading partner of ours, someone who has to work within our rigorous compliance framework. I think the analogy of a car manufacturer helps to illustrate this. We could make the safest cars available in the world and have better safety and less crashes than anyone else. But of course, there will sadly be cases where there is a crash. Simply pointing to that one incident and ignoring all the other car manufacturers and all the other crashes and all the data and simply saying you had 1 crash, therefore, your cars aren't safe would clearly make no sense. If every other type of car has multiples more crashes and many more bad outcomes, they should provide important context and apologies for the analogy. I think now we have the context, it's important to look at some of the key aspects of the short thesis that has resulted in our stock hitting such low levels as the same misleading allegations are repeated again and again and again. The areas I would like the opportunity to probably just talk about are 1, robocalls and 2, the FTC investigation into 1 of our former third-party distributors. Firstly, robo-dialing. Let's be clear, HIIQ does not use robocalls for sales and marketing purposes and prohibits any distributors on the HIIQ platform from performing sales and marketing robocalls to sell products available to them on the HIIQ platform. HIIQ also prohibits distribution on the HIIQ platform from using lead vendors that use sales and marketing robocalls to generate leads. We are a cloud-based technology platform that provides agents with the tools they need to sell affordable health insurance products to their consumers, and we take robocalling seriously. Although not required, we work with ActiveProspect's trusted form technology to help agents ensure that their leads only come from consumers who have given express written consent to be contacted. The way that ActiveProspect's software works is it will reject leads that are not certified with the consumer's consent and it also scrubs leads against the National Do Not Call Registry. HIIQ provides this service to the independent third-party insurance agents who use this platform free of charge. In addition, HIIQ communicates with the independent agents regarding requirement of often a certification that a person requested to be contacted as well as keeping agents informed about TCPA rules. Now back in December 2018 at our Analyst and Investor Day in New York, we talked extensively about robocalling and what we do within our business to prevent this. However, because robodialing has still bizarrely remained a key part and, in fact, a pretty fundamental part of the short thesis against this business, I think it's just worth spending a minute or so to cover this in a little detail because accusing this business of robocalling is about the equivalent of accusing me of mistreating my zebra and I do not have a zebra.

Also, to help investors and all of the stakeholders, we have added some information to our frequently asked questions today, which you can also refer to. It includes a diagram to help with understanding. Secondly, the FTC. Now please remember, HIIQ is not an insurance carrier and is not a party to the contract between the policyholder and the insurance carrier. So HIIQ does not have the right to cancel any policyholder's insurance policy. The policyholder can cancel at any time and the insurance carrier can only cancel it in limited circumstances, for example, nonpayment of premium. If the FTC instructs HIIQ to provide notifications and refunds, we will be glad to comply as applicable. We are in discussions with the FTC and the relevant insurance carriers to provide policyholders [some] simple information concerning the policies that they purchased.

Now, I would like to talk about our technology. We are, after all, a technology business with a powerful proprietary platform. And with the successful launch of our next generation consumer portal, MyBenefitsKeeper, our next generation platform for members and its new features, we're very pleased with how it's improving the overall experience for members. We're really happy that members are finding value in the available features and are purchasing additional policies within the portal. We actually had hundreds of sales without even notifying consumers that the functionality was available. These interactions support our focus on providing the best experience to consumers that we can. Back in March, we talked about MyBenefitsKeeper giving members the ability to purchase additional policies directly from the member portal without having to contact their insurance agents. Due to the successful launch of the desktop feature, we've now extended this capability to the mobile application where members get a streamlined purchase experience while providing digital, trackable controls that meet our high compliance standards and are what we expect from all sales channels. This feature expands members' freedom in choosing the types of products that fit their needs and gives us an even more simplified way of offering these products. I also want to talk about our Spanish initiative. We've been working on an end to end solution for the underserved and often under-insured Spanish-speaking population and are happy to announce that our Spanish straight-to-consumer website went live with the ability for native Spanish speakers to purchase insurance policies directly online without the help of an agent. So similar to Agile but made specifically Spanish speakers. Data has shown that 40% to 50% of the U.S. Spanish speakers with limited English proficiency are uninsured. This represents a little over 10 million people. A lack of health insurance products designed to meet the needs of Spanish speakers combined with the affordability issues in individual market and a general lack of language services in the U.S. have contributed to the growing uninsured Spanish-speaking population. With this initiative has come new products, applications, documentation and experiences in the Spanish-speaking population. Licensed third-party agents now have access to Spanish products directly from our platform. Our next phase of it is developing a completely end to end version of MyBenefitsKeeper and the mobile app in order to keep building out the Spanish experience. Our team and external partners have worked very hard to create this end to end experience and we're excited for the Spanish-speaking population to gain access to important insurance products that were previously inaccessible. In addition to these exciting advances, we've also created a plug-and-play quoting engine that third-party independent agents can add to their website for their online consumers to run their own quotes. This is a great step forward in serving a growing online insurance consumer population. It's also a great added value for third-party agents as they often do not have the capabilities to build large coding engines or to serve their customers completely online. We're thrilled with these technological advances and we'll continue to create new opportunities through our state of the art cloud-based suite of software products. We also strive to be easy to work with. Our customer service team picks up the phone in under 5 seconds and we are leveraging our technology to further improve our consumer's experience.

Finally, I'd like to talk to our scalability. We strive to deliver strong shareholder value including increased scalability and leverage and plan to deliver on this initiative through increased reliance on technology. Our technology touches every aspect of our company, not only saving money but also improving our control environment and driving compliance. We have a lot of play right now to ensure a bright future for the company and I'm very excited about all of our progress up to this point. What we've accomplished and put in place so far gives us confidence in our ability to achieve our initial revenue and adjusted EBITDA outlook for full year 2019. We continued our share repurchase program in the first part of the year as we believe that our shares continue to be great value. For the remainder of 2019, we will continue to focus on our key strategic initiatives to further diversify and broaden out our product mix and I look forward to updating you on our progress. Today, I have spent a little time talking about the short thesis and this is because we want investors and other stakeholders to be able to cut through the noise around our business and focus on the fundamentals and all of the facts and all of the data. We felt it was important to spend a little time talking about this out loud and allow investors the opportunity to establish the reality and then make decisions based on the actual real world and instead of other stuff. Once again, the first quarter for us has been about how we have successfully been able to launch new products and add new distribution and we've also took giant steps in broadening out our product offering. It's been the quarter where we have realized that we can do more to help investors understand the fundamentals of our business. And so between enhancing our investor relations and the business update we will provide in a few weeks' time, we look forward to doing a better job of helping our investors cut through the noise and focus on our technology, our best-in-class products, our outstanding consumer satisfaction and our ability to keep building a business despite the distractions put in front of us.

Now, I would like to turn the call over to Mike Hershberger, our Chief Financial Officer, and before ending with some final comments.

--------------------------------------------------------------------------------

Michael D. Hershberger, Health Insurance Innovations, Inc. - CFO, Treasurer & Secretary [4]

--------------------------------------------------------------------------------

Thanks, Gavin, and good afternoon, everyone. We're pleased with our results for the first quarter of 2019, which met our expectations for the quarter. We continued to execute on several strategic initiatives that should contribute to sustained growth for 2019 and beyond. And we'll continue to invest in what we consider to be attractive growth opportunities throughout the year.

Turning to our results. Our Q1 2019 revenue grew 15% year-over-year. Q1 2019 revenue was $87.3 million, consisting of $82.3 million from our sales and enrollment performance obligation and $5 million from our member management performance obligation, compared to revenue of $75.9 million in Q1 of 2018. Under ASC 606, revenue was driven primarily by our expected duration units submitted during the period. Expected duration units for the quarter were 680,000, up 20% over the same period in 2018. I would note that in our earnings release tables that were published earlier today, we've also broken out fulfillment only, a deemphasized outsource relationship where we outsource all of our sales and marketing obligations and some of our member management services.

In the quarter, we recognized $60.7 million of third-party commission expenses. And as a reminder, under ASC 606, we recognize the expected lifetime expense of the third-party commissions upfront but only bring forward about 95% of the revenue. Our third-party commission expense as a percentage of revenue was higher in Q1 2019 compared to Q1 2018. Third-party commission expense represented 69.5% of revenue in Q1 2019 compared to 59.9% of revenue in Q1 of 2018. The increases of third-party commissions were primarily due to the sales mix shift to products sold with longer policy durations and a shift to higher cost distributors with greater potential to drive market share gains across multiple product lines within our portfolio.

Total selling, general and administrative expenses or SG&A was $18.7 million in Q1 2019 compared to $16.2 million in Q1 of 2018. This increase is primarily due to an increase in digital marketing investment at our e-commerce channels. Adjusted SG&A which represents total SG&A less stock compensation and non-reoccurring costs was $15.8 million for the quarter compared to $13.2 million in Q1 of 2018. Our GAAP tax expense was higher this quarter as we continue to recognize the impact of ASC 606. The effective tax rate or ETR of 56.2% was due to the adoption of ASC 606 creating an opening balance sheet tax liability adjustment. The impact of this opening balance sheet tax liability adjustment in the first quarter of 2019 increased the tax provision by an additional $1.4 million, resulting in a total tax expense of $2.8 million, thus increasing our ETR from 28% to 56.2%. This adjustment will continue to inflate the ETR for the remainder of 2019. As a reminder, third-party commissions are accelerated and expense for GAAP purposes but are deducted as paid for tax purposes and represent a future tax deduction. We continue to work closely with our tax advisers to mitigate our tax expenses.

EBITDA was $6.5 million for Q1 2019 compared to $12.8 million in Q1 of 2018. Q1 2019 GAAP net income per diluted share was $0.11 compared to $0.36 in Q1 of 2018 driven primarily by a higher ETR as I previously mentioned.

Turning now to our non-GAAP metrics. Adjusted EBITDA for Q1 2019 was $9.3 million compared to $15.8 million in Q1 of 2018. Q1 2019 adjusted net income per share was $0.43 compared to $0.70 in Q1 of 2018. We believe that our non-GAAP metrics of adjusted EBITDA and adjusted net income per share provide a meaningful measure of our financial performance.

We provided a reconciliation of our GAAP metrics to our non-GAAP metrics in our earnings press release that was published earlier today.

Cash and cash equivalents totaled $6.5 million as of March 31, 2019, a decrease of $2.8 million from December 31, 2018. The decrease in cash included the $3.4 million payment for closing a market conduct examination and $3.1 million increase that we spent on advance commissions. The company repurchased 1,351,241 shares of our common stock during the first quarter of 2019 for $45.3 million as part of our previously announced share repurchase program. The company has $94 million remaining under its $200 million share repurchase authorization. In Q1 2019, we also expanded our credit facility to $75 million with the ability to increase the revolving commitment to $100 million with our lender's consent. The term of the credit facility was extended out 3 years through February 2022. The company borrowed an additional $50 million on our bank line of credit in the first quarter for a total of $65 million borrowed on a revolving loan facility.

The company is investigating its options with respect to further expanding its credit facility to fund along with our significant free cash flow generation, additional investments in key strategic initiatives and share repurchases. Looking forward to the remaining 2019, we intend to further our strategic focus of selling longer duration plans, which carry significantly higher LTVs while providing customers with a compelling and affordable health care solution.

We will execute on our product diversification initiative including 65 plus and term life insurance and continue our program of raising consumer awareness of our individual and family plans. We are raising our 2019 adjusted net income per share guidance to a range of $3.50 to $3.75, and we are reaffirming our annual revenue guidance in the range of $430 million to $440 million and adjusted EBITDA guidance in the range of $72 million to $77 million. The increase in the projected 2019 net income per share is due to a lower diluted average share count resulting from repurchases of the company's common stock during the first quarter.

As Gavin mentioned, we expect our revenue and earnings to build through the year with Q4 being the high point. We're expecting Q2 to represent about 18% of revenues for the year and about 12% of our adjusted EBITDA.

Thank you for your time today. With that, I'd like to hand the call back to Gavin for concluding remarks before Q&A. Gavin?

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thank you, Mike. Once again, the first quarter for us has been about how we have successfully been able to launch new products and add new distribution as well as taking giant steps in broadening out our product offering. We've also put mechanisms in place to allow us to increase at a faster rate revenue and earnings in the second half of the year due to enhanced agreements made with carriers.

At this time, I'd like to hand over for questions. Thanks.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Mike Grondahl from Northland Securities.

--------------------------------------------------------------------------------

Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [2]

--------------------------------------------------------------------------------

The first question is just post the 42 state investigation, that settlement, there was kind of supposed to be some pent-up demand from new distributors, new carriers. It sounds like you made a little bit of progress with new products. But are you kind of continuing to see the distributors and carriers come through?

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

We are and it's a great question. I mean this industry plans everything around the seasonality, and so kind of once you miss that fourth quarter opportunity, everybody kind of goes back to building again for that opportunity. And so for us, the first quarter of the year and indeed, the second quarter is really about building for that second half. So we have those relationships had we been able to close review quicker in '18, and that would have been a big benefit. And it took longer than we'd anticipated. And so now we're helping everyone strategically plan and build for that second half. And we actually had some good success adding in new partners who didn't have to go through any of that kind of process or noise as well. So as we kind of look toward that middle part of the year onwards, we're certainly excited around the distribution partners we have in place.

--------------------------------------------------------------------------------

Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [4]

--------------------------------------------------------------------------------

Okay. And new association plans, over 65 plans, life insurance, which 1 of those 3 are you most excited about for 2019?

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Well, for each of these, it's a logical progression for us. We have existing trading partners who are already in the life space. We already had a significant block of that about $63 million last year. So to do more of that, it's really kind of low-hanging fruit for us. The over 65 space, this business we used to be in, we're reentering that market. It's a very exciting market for people in our industry. And again, a lot of our distribution partners are already in that space. All of our carriers are already in that space. It makes logical sense. For us, building that build and grow is interesting. We've seen some very exciting opportunities in both sides of that. So it's hard to choose a favorite, and that's part of the reason why we're so motivated here because whichever direction we look at there's a good opportunity for us to go off and execute on.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from the line of Richard Close from Canaccord Genuity.

--------------------------------------------------------------------------------

Richard Collamer Close, Canaccord Genuity Limited, Research Division - MD & Senior Analyst [7]

--------------------------------------------------------------------------------

Gavin, I appreciate the comments on simple health and FTC and that you can -- are prohibited from contacting the policyholders. Just to be clear, what do you think HIIQ's financial or legal exposure, if any, is to any negative judgment against Dorfman or his operating companies?

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [8]

--------------------------------------------------------------------------------

So we're not named in the FTC investigation, so we don't see ourselves having an exposure into an investigation we're not named in. It's a very sad situation for everyone involved. We're doing everything we can to help the FTC, and we want to be very sensitive. We want to let them get on with their job and want to support them as much as we can, so we try to really minimize any public comments. It didn't feel right, but there have been so much misinformation. We just wanted to clarify that if we're not able to take an action, to be accused of it in such a situation, isn't right. So we just wanted to clarify we don't have the ability to cancel these policies. We eagerly await instructions and will help in any way we can.

--------------------------------------------------------------------------------

Richard Collamer Close, Canaccord Genuity Limited, Research Division - MD & Senior Analyst [9]

--------------------------------------------------------------------------------

Okay. Great. And then just with respect to thoughts on submitted policies, when you exclude the fulfillment, I guess submitted policies was down about 4% year-over-year, but obviously, the duration units were up 20%. How should we think about submitted policies in maybe second quarter, third quarter? Are those going to be negative year-over-year but obviously, the duration units higher like in the first quarter?

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [10]

--------------------------------------------------------------------------------

It's a harder measure because of all the moving parts. We're really going to try to point everybody towards a distribution units. It's the first time we've given kind of next quarter guidance, and I think we've really learned the lesson that we'll really expand on that. Because of our business update we're going to be giving towards the end of May, early June, that's as much information that we want to give at this time. But distribution units being up 20% is a much better metric because of all the different pieces. And then the percentages we get for Q2 are about as good as we can provide at this time. The big shift towards much longer duration policies has such a big impact. I mean over half of our policies sold are -- is very long duration policies now. And that's a good thing for the business. And so comparing that to submitted apps kind of shows unintentionally an artificial movement where what everyone's interested is the creation of value, and creation of value is having these longer value -- much higher lifetime value plans. So we're going to point people to the distribution unit. And as we grow through the year, and we get more insight into the much, much higher lifetime value products, we might have the ability to have another look at how they're valued with the potential upside there as well.

--------------------------------------------------------------------------------

Richard Collamer Close, Canaccord Genuity Limited, Research Division - MD & Senior Analyst [11]

--------------------------------------------------------------------------------

So just to be clear, you don't look -- view submitted policies being down 4% year-over-year excluding the fulfillment as a negative indicator at all.

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [12]

--------------------------------------------------------------------------------

No, we -- our sales team are remunerated. They judged their bonus based on distribution units. They argued successfully. They were right. It's hard to compare based on the change in the mix. So distribution units is where we look. I mean, it's -- yes, that's just where we look. I hope that's helpful. That's what we use internally. That's our internal measure, yes.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Our next question comes from the line of Randy Binner from FBR.

--------------------------------------------------------------------------------

Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [14]

--------------------------------------------------------------------------------

So I wanted to first ask about elevated SG&A. You noted that it was the result of what I think were controllable initiatives around digital marketing and other advertising. This seemed to be largest divergence in our model -- or in your results versus our model. So I'd like to understand how controllable that was and if we can expect SG&A to be a more prominent part of the expense margin going forward.

--------------------------------------------------------------------------------

Michael D. Hershberger, Health Insurance Innovations, Inc. - CFO, Treasurer & Secretary [15]

--------------------------------------------------------------------------------

Thanks, Randy. Thanks for the question. So you're absolutely right. That is a controllable component of our SG&A. And we continually refine our metrics around the digital marketing component. We believe that, as Gavin mentioned, that e-commerce is a tremendous opportunity especially as we continue to grow our business. So we will continually monitor that going forward, but I would expect that to be a consistent SG&A component going forward.

--------------------------------------------------------------------------------

Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [16]

--------------------------------------------------------------------------------

Okay. So if I raise that up higher going forward in the model, and the share count reduction from buyback is pretty straightforward, it doesn't seem like I can get to the guide unless other things are changing, so is there an assumption in your guide of better duration, better implied duration as these products stay on? Or is there another piece of the puzzle to help support the higher EPS guide?

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [17]

--------------------------------------------------------------------------------

I think as we go through the year, we'll get more insight into that. We have to gather the data as does everybody else. I'd have to go through various consultants and external audits and review. But as we go through the year, there's certainly a potential upside that's there, and it wouldn't be unusual for that to happen. Anything else...

--------------------------------------------------------------------------------

Michael D. Hershberger, Health Insurance Innovations, Inc. - CFO, Treasurer & Secretary [18]

--------------------------------------------------------------------------------

Yes, I would say that our -- once again, as we continue to build for Q4, that's really our expectation. So Q1 is really just kind of a building quarter as we think about the year going forward.

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [19]

--------------------------------------------------------------------------------

A building quarter where we had 20% increase in duration units. I did misspeak earlier at duration units, not distribution units. Apologies for that. But so a building quarter where we had that nice increase.

--------------------------------------------------------------------------------

Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [20]

--------------------------------------------------------------------------------

Should we think of the range of $3.50 to $3.75 as being kind of how the duration piece could range up?

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [21]

--------------------------------------------------------------------------------

It'll have an impact. It might not be an exact correlation, but certainly, that increasing would have a positive impact. So I think that could be part of it. But I think with the initiatives we have underway here and the potential for different parts of the business to grow, we expect to give further updates to our view to the year and our growth to the year pretty shortly. We're planning on doing another update towards the end of this month or early June, which will provide more color.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Our next question comes from the line of Mark Argento from Lake Street Capital Markets.

--------------------------------------------------------------------------------

Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst [23]

--------------------------------------------------------------------------------

Just quickly, Gavin, you had mentioned in your prepared remarks about some new agreements with some carriers and how that's going to positively impact the second half of the year. Could you peel the onion a little bit on that for us?

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [24]

--------------------------------------------------------------------------------

Yes. We've put a mechanism in place where we are able to work with our carriers so that if we ensure the blocks develop the way that they have in previous years, we'll be able to take a greater share of commissions based on the successful growth of a block. So logically, that's the sort of step you do later in the year. And based on the accounting, that's where we need to account for it. It's not something that you can kind of take in Q1 or Q2. Maybe a little in Q3 but it's really a Q4 exercise. So we have some insurance company partners where we grew some really nice blocks of business and we'll get the benefits of that later in the year. We only have a small number of these agreements. We have others to do. One of the advantages of having the massive amount of data available and our ability to surface that data from our data warehouse is to be able to be a real value add to our insurance carrier partners. And the more we can add value, the more they're happy to pay those higher amounts to do that.

--------------------------------------------------------------------------------

Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst [25]

--------------------------------------------------------------------------------

And obviously, 606 is having a negative impact in terms of the accounting around the third-party commissions given that you can't recognize the full dollar amount but you have to -- of revenue but you have to recognize the full commission. Question there, is that -- that obviously needs to reverse itself at some point or at least true-up. How much of the impact is that having on the gross margins right now? Just trying to like (inaudible) asking questions, trying to better understand how -- got to see some gross margin improvement here in the second half to kind of justify the guidance.

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [26]

--------------------------------------------------------------------------------

Yes, so look, it's a 5% mismatch. 100% of cost and 95% of revenue, that's where we landed when we did the initial implementation. And same with the duration of the products where we took a conservative constrained revenue approach. It's something that we'll keep under review. And as we move through the year, these are the things we'll be discussing with all of our advisers and our auditors. But then in terms of margin improvement, the bigger the distribution partner that you add on the e-commerce side, there's an element of how having to make sure to be able to remunerate people the right way. Getting the fair share from insurance company partners and being able to use that both for ourselves and our distribution partners is important. We can make those agreements now but we don't see the benefit until later. So we took really big steps, but the way that 606 works is the period in time. So over a longer period of time, it'll provide a much clearer insight, but quarter to quarter, it does result in some illustrations that aren't perhaps as insightful as it could be. But as we move through the year, it'll provide a lot more help. Just a quarter into this, there are some things to come out in the wash.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Our next question comes from the line of George Sutton from Craig-Hallum.

--------------------------------------------------------------------------------

George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [28]

--------------------------------------------------------------------------------

Gavin, you made an interesting comment that you thought the over 65 business could rival your current size in relatively short period of time and that would be from a standing start. So can you give us a sense of where that enthusiasm comes from and how would you see that being structured?

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [29]

--------------------------------------------------------------------------------

Yes. Well, we know our market very well. We spent the last 2 years doing industry analysis, market analysis, competitor analysis. We've got incredible insight sitting where we sit. We work with a lot of the major market participants even on other products over some kind of cross-sell there. A lot of our distribution partners are already in the market. A lot of our insurers are already in the market. So we're coming into this armed with a huge amount of assets on our side. I mean the individual market is a very -- it's a very tough market, and we've been able to outcompete all of our competition. We've been able to provide this outstanding consumer satisfaction. So we've done a lot of the hard work already, and so we go into over 65 with some confidence in our ability to be able to scale and grow at the same time as where we did in the individual space. I don't think we're going to get the wrong impression. The individual market is a focus of ours, but this platform was built for a much broader play. The technology is so powerful. We don't want to just waste it on a narrow product offering. So we're going to do more ACA. We're going to do more life. We're going to do more over 65s. There's -- and it's just to come. It just makes sense and this is what the platform is for. So yes, we want to give the color of our expectations, and we've got a pretty good track record of execution, so we don't say.

--------------------------------------------------------------------------------

George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [30]

--------------------------------------------------------------------------------

Could you just give us a sense of the importance of the Florida bill approval today relative to short term?

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [31]

--------------------------------------------------------------------------------

Yes, thanks for noticing that. I mean, look, at a state level, a number of states have put in place state legislation to protect and put into law the availability of 36 months short-term medical. We were aware of that bill, and we think it's very well written. And we think it's helpful for people who are having difficulty with the affordability of options available. We gave some examples today of where products like that can make a real impact. So it's a good thing and a number of states have done this. A few weeks ago, there was an announcement about a regulator inquiry and on the same day, Arizona put a similar bill into law. So Florida is a very big state but a lot of people in that state. For a business like ours, we -- things like this can be helpful.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Our next question comes from the line of Steve Halper from Cantor Fitzgerald.

--------------------------------------------------------------------------------

Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [33]

--------------------------------------------------------------------------------

Just 2 questions. What's the interest rate assumption on the credit facility that we should be using?

--------------------------------------------------------------------------------

Michael D. Hershberger, Health Insurance Innovations, Inc. - CFO, Treasurer & Secretary [34]

--------------------------------------------------------------------------------

Right in that 5% range.

--------------------------------------------------------------------------------

Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [35]

--------------------------------------------------------------------------------

5%. Okay. And I noticed in the disclosure the risk premium as a percentage of premium equivalents went up. Why was that?

--------------------------------------------------------------------------------

Michael D. Hershberger, Health Insurance Innovations, Inc. - CFO, Treasurer & Secretary [36]

--------------------------------------------------------------------------------

Yes. So that was a function of our product mix. So within the -- within Q1, we had a higher percentage of our revenue with short-term major medical that a higher percentage of those policies are paid to the carriers for risk premium. The 1 point with ASC 606 is it does accentuate the impact of sales that were made in that period. So I think that as we think about our business, we look at it as a global component. So with respect to that, it is a -- I would say that, that just accentuated the percentage of business sold in that quarter.

--------------------------------------------------------------------------------

Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [37]

--------------------------------------------------------------------------------

And should that number stay stable at this level now?

--------------------------------------------------------------------------------

Michael D. Hershberger, Health Insurance Innovations, Inc. - CFO, Treasurer & Secretary [38]

--------------------------------------------------------------------------------

I think that Q1 is a pretty a good proxy certainly for the next 2 quarters.

--------------------------------------------------------------------------------

Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [39]

--------------------------------------------------------------------------------

And how does the fourth quarter change because of the bolus of policies?

--------------------------------------------------------------------------------

Michael D. Hershberger, Health Insurance Innovations, Inc. - CFO, Treasurer & Secretary [40]

--------------------------------------------------------------------------------

Yes. So as we think about the fourth quarter, once again, it depends on the types of products sold. So we're going to -- we're focusing on this individual marketplace, so we're going to continue to sell life insurance plans and short-term major medical plans. So I would say maybe a slight variation in the fourth quarter but on the same trend lines.

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [41]

--------------------------------------------------------------------------------

Yes. To be clear, what will happen through the year is we make agreements with insurance companies during the first part of the year planning for the fourth quarter. And a lot of that is based around the performance of the business and expectations of good performance. And so for us, we see key metrics, things like SG&A and other measures, having the ability to improve as we move towards that strategically important fourth quarter because we don't see the benefits of agreements that we've made at this time until later in the year. So we do a lot of the hard work, but we see the benefits later on.

Now it's hard to model for because the agreements we have are in the NDAs and they're commercially sensitive and things like that. But 606 will be able to show this sort of thing pretty clearly. So putting the mechanisms in place is very important, and that's the hard work we've already completed. But the benefit of this will show as we move to that second part and really into the fourth quarter. So I hope that helps. I'm trying to give a color. And as we talk to analysts and investors as well as kind of that next quarter percentage, we'll try to give some more insight into the moving parts as well. So I hope that's helpful.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Our next question comes from the line of Frank Sparacino from First Analysis.

--------------------------------------------------------------------------------

Frank Sparacino, First Analysis Securities Corporation, Research Division - SVP [43]

--------------------------------------------------------------------------------

Just one question for me as it relates to the over 65 market, maybe Gavin. In terms of scaling that business, yes, if you do it organically, do you think you can get to the type of numbers you're hoping for by 2020? And if the route is M&A, what's the most important attribute right now for you guys in terms of getting into that market and growing as fast as you can?

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [44]

--------------------------------------------------------------------------------

Thanks. So appreciate the question. So for us, we've had a good look at competitor analysis and market analysis, and so we've identified key players and what their offerings are. Obviously, we consider things like M&A. But then also, we look at our own internal technology platform, the way that we're set up here, and there's a balance between if you can build it yourself or if you can speed up your growth by making strategic investments. And I think that's something that we always have to consider. For a business like ours, we generate a lot of cash. We have the ability to do a lot of things. We have access to large amounts of available cash if we need it. So either works. It's that age old question, so it depends on the opportunity and what's there. But certainly, we can build this ourselves with our existing partnerships. There's a lot of low hanging fruit. We can immediately turn on large sections of this. We don't have to do anything particularly difficult. But clearly, if we wanted to speed this up and we wanted to ensure our success, then there's always that M&A option. And I think right now we're at a point where we give about as much detail as we can and we'll give a further update as we move through. So I hope that's helpful.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

Our next question comes from the line of Mike Grondahl from Northland Securities.

--------------------------------------------------------------------------------

Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [46]

--------------------------------------------------------------------------------

Just 2 questions on short-term medical policy. In the back of your press release, in the March quarter, you wrote almost 30,000 short-term medical policies greater than 12 months. And it's really only down from about 35,000 in the fourth quarter when you benefited from open enrollment. How are those longer policies selling? Were you surprised that you did 30,000 down from about 35,000?

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [47]

--------------------------------------------------------------------------------

Ever since these longer duration policies came about, we've been repeatedly pleasantly surprised at consumer interest and take-up. We continue to sell more of these policies than we would have anticipated because that's what the consumers' demands and needs are. We also saw a very healthy increase in sales of e-commerce, a lot of which were these longer duration policies. And so we kind of sat on this very valuable block but right now is valued based on the only data we had available at the time. These products only existed since October. And so there's a chance that at a future point we may be able to see some further value from these products. But overall, we continue to be pleasantly surprised at the take-up of the products. Especially on an e-commerce level, our initial assumption is that not as many people would take this up on e-commerce, but actually, it's been a huge success since the get go.

--------------------------------------------------------------------------------

Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [48]

--------------------------------------------------------------------------------

Got it. And then lastly, on STM or any of the new products you're talking about, would you ever take the underwriting risk for that margin?

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [49]

--------------------------------------------------------------------------------

It's an interesting question. I mean there's lots of different mechanisms you can use. We have that kind of option available, but reality would be if we were to do something like that, that we would take an element of premium. We would fully reinsure it back out the other way. One mechanism you can use to get increased payments from carriers is to have captives in place and stuff like that. We've got the ability to use that kind of mechanism. But whatever the mechanism is, the outcome for it will be the same in that, towards the end of the year, we expect higher payments from our carriers for the same business that we're doing today. And whether or not that involves taking premium, we'd always kind of fully reinsure that out the other side just because it simplifies our story.

But a lot of the blocks that we have, if you take things like dental, vision and other products, they're extremely predictable. And this is very in demand business, so we sit here where we've created a 2-sided market and we're able -- we've got a position of leverage over carriers. So where we use that mechanism or others, is fine either way, but we do have that option. And it's a very valuable option to have, but it would be an option where we see premium. We fully reinsure it out. So I don't want to overcomplicate it on the call here, but the short version would be we'd ultimately always ensure we didn't end up holding any risk.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

Our next question comes from the line of Richard Close from Canaccord Genuity.

--------------------------------------------------------------------------------

Richard Collamer Close, Canaccord Genuity Limited, Research Division - MD & Senior Analyst [51]

--------------------------------------------------------------------------------

Just real quick. Mike, I was wondering if you could comment on the stock comp in the quarter and your thoughts on how we should be thinking about stock comp in the second quarter and the remainder of the year.

--------------------------------------------------------------------------------

Michael D. Hershberger, Health Insurance Innovations, Inc. - CFO, Treasurer & Secretary [52]

--------------------------------------------------------------------------------

Yes. So our stock compensation for Q1 was about -- approximately $1.9 million. We anticipate that to go up slightly for the remaining part of the year due to an award that was granted in the first part of 2019. But I would say slightly greater than Q1 of 2019.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

Our next question comes from the line of Greg Peters from Raymond James.

--------------------------------------------------------------------------------

Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [54]

--------------------------------------------------------------------------------

Just a couple of final questions here. First of all, I know you commented about it in your prepared remarks. But can you just circle back to the cash flow results of the first quarter 2019? Because it was down and even free cash flow was negative. And so just walk us through the moving pieces there.

--------------------------------------------------------------------------------

Michael D. Hershberger, Health Insurance Innovations, Inc. - CFO, Treasurer & Secretary [55]

--------------------------------------------------------------------------------

Sure. With free cash flow, we had a couple adjustments as you think about this quarter. So the first one would be the payment of our multistate exam for the examination component of that of $3.4 million. We also had an increase of our advanced commissions of approximately $3.2 million in -- right in that range. So as you think about it, those -- both of those items impact our free cash flow.

--------------------------------------------------------------------------------

Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [56]

--------------------------------------------------------------------------------

And Mike, can you go back? And as you do this product mix shift, are advanced commissions going to be as prevalent? Or is that something that's going to gradually diminish?

--------------------------------------------------------------------------------

Michael D. Hershberger, Health Insurance Innovations, Inc. - CFO, Treasurer & Secretary [57]

--------------------------------------------------------------------------------

Yes. So that really depends on our distributor base. So some distributors prefer advanced commissions. Some do not. I would say that it's generally on a distributor-by-distributor basis. Generally, the larger distributors do not want the advanced commissions, although some do. So there's generally a cost associated with that. So I would say that, that is definitely not an indication of our revenue. It doesn't follow our -- it doesn't track with our revenue. It depends on the distributor.

--------------------------------------------------------------------------------

Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [58]

--------------------------------------------------------------------------------

Is -- just turning to your intended shift towards the plus 65 market. I'm just curios, it seems like as you do the shift and it seems like strategically a smart thing to do, it seems like the Better Business Bureau rating becomes even more important. And so can you update us on your efforts to get an improvement in that rating and if there's been any discussions or sort of how that might play out over the next year? Or maybe I'm wrong. Maybe it doesn't matter, but I think it does.

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [59]

--------------------------------------------------------------------------------

Well, we -- I gave some highlights in the reduction in complaints. The 66% reduction in complaints from in 2016 to 2018 and the fact that the ratings stayed the same doesn't seem to make any sense. So we've had long discussions with them around why that rating is there and a lot of it is based on historical items that they considered not closed or not resolved. And the simple fact is if the complaint was made about a different company, then we are physically unable to resolve that complaint. And so there's a period of time where these complaints get removed, and we are waiting that will happen. And then our rating should jump back up. So this time, it feels like we've gone as far as we can. There is a team continuing to work with the BBB. But it doesn't feel like the issue is on our side. There's a miscategorization of historic items. We've shown the logic and -- but the good news is that there's a point where these old claims just fall off. So that'll be a help, and it'll happen sometime in '19.

--------------------------------------------------------------------------------

Operator [60]

--------------------------------------------------------------------------------

We've reached the end of the question-and-answer session, and I will now turn the call over to management for closing remarks.

--------------------------------------------------------------------------------

Gavin D. Southwell, Health Insurance Innovations, Inc. - President, CEO & Director [61]

--------------------------------------------------------------------------------

Well, thanks, everybody, joining the call today. We're going to be giving more insight into movements through the year and the ramp-up and the moving parts. The ASC 606 has presented a lot of additional work and dynamics, and we look forward to helping everyone understand the movements in the model as best we can. So thanks for your interest, and we look forward to traveling and talking with you all soon. Have a good evening. Thanks.

--------------------------------------------------------------------------------

Operator [62]

--------------------------------------------------------------------------------

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.