GoHealth, Inc. (NASDAQ:GOCO) Q4 2022 Earnings Call Transcript
GoHealth, Inc. (NASDAQ:GOCO) Q4 2022 Earnings Call Transcript March 16, 2023
Operator: Good afternoon, and welcome to the GoHealth Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Lisa, and I will be your operator for today's call. As a reminder, this conference is being recorded. I would now like to turn the call over to John Shave, Vice President of Investor Relations. John, you may begin.
John Shave: Thank you, and good afternoon, everyone. Thanks for joining GoHealth's Fourth Quarter and Full Year 2022 Earnings Call. Joining me today are Vijay Kotte, Chief Executive Officer; and Jason Schulz, Chief Financial Officer. This afternoon's conference call contains forward-looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict. You should not place undue reliance on any forward-looking statements, and the company undertakes no obligation to update or revise any of these statements, whether due to new information, future events or otherwise.
After the market closed today, we issued a press release containing our results for the fourth quarter and full year of 2022. We have posted the release on the GoHealth website under the Investor Relations tab. In the press release, we have listed a number of risk factors that you should consider in conjunction with our forward-looking statements. We encourage you to consider the other risk factors described in our Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission for additional information. In addition, the results discussed here and contained in our press release were prepared by management and are unaudited as our independent registered public accounting firm has not completed its audit. During this call, we will be discussing certain non-GAAP financial measures.
These measures are reconciled to the most directly comparable GAAP financial measure and the reconciliations are set forth in the press release. Please refer to today's press release for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call. For reference, in the Investor Relations section of the GoHealth website, we have provided a supporting slide deck and exhibits that I encourage you to review. And with that, I'd like to turn the call over to Vijay.
Vijay Kotte: Thank you, John. Good afternoon, and thank you for joining us for our fourth quarter and full year 2022 earnings call. I want to start off by saying how proud I am of our team. Our internal agents fielded over 1 million calls in the fourth quarter. Together with our external partners, we helped over 320,000 Medicare beneficiaries, assessed their current coverage and potential Medicare options, and enrolled in a plan. GoHealth has been and continues to be a leading health insurance marketplace and Medicare-focused digital health company. Our unique combination of cutting-edge technology, data science and deep industry expertise allows us to build trusted relationships with consumers and match them with the health policy and health plan that is right for them.
On today's call, I'll provide a brief recap of our annual enrollment period, or AEP results and how we approached this season differently from the past. I'll also discuss why we are positioned for success in 2023, and beyond and our 2023 guidance. Jason will then review our operating and financial results for 2022. As many of you know, we have been executing a transformation of GoHealth since Jason and I joined the company mid-last year. In advance of the 2022 AEP, we made several strategic and operational changes and executed against three clearly defined goals during the second half of 2022. First, improve cash flow from operations; second, maximize efficiency in our model; and third, prioritize more experienced, high-quality sales agents over volume of agents.
I'm pleased to share that we delivered on these key focus areas. For full year 2022, we achieved cash flow from operations of a positive $61 million ahead of our target to achieve cash flow breakeven in the first half of 2023. This cash flow improvement was driven by not only the better-than-expected shift towards our Encompass solution, which delivered on revenue, margin and cash, but also our improved operating efficiency. Jason will describe our Encompass economics in more detail. We showed year-over-year improvement on key performance measures, including effectuation conversion, cost per effectuated policy, and margin profile, due to our disciplined marketing approach, the high-quality performance of our tenured agents and our proprietary planned-fit technology improvements.
Based on these actions, we delivered more than 20% improvement in AEP operating efficiency year-over-year. The plan we laid out for you in advance of AEP delivered the strong operational results we anticipated. Now I'd like to share some thoughts on the current state of our market, how it's changed and how we expect it to evolve. Our diversification into the Encompass solution is an intentional strategic and financial move for us as seen through the lens of the broader market landscape. This diversification is critical to our ability to win because our industry is evolving. In an increasingly complex Medicare market, beneficiaries have challenges figure out what health plan option works best for them as their needs change over time. They are bombarded by marketing messages from numerous parties as soon as they become eligible for Medicare and, then again, during every AEP thereafter.
More beneficiaries are switching from original Medicare to Medicare Advantage every year with nearly 5% net beneficiaries switching from original Medicare to Medicare Advantage annually. There are over 5,000 Medicare Advantage plan options available across the country, and the average beneficiary has access to over 43 Medicare Advantage plans, up from 20 in 2018. Plan benefits are improving year-over-year. Differences between plans are nuanced on traditional benefits and hard to compare on supplemental benefits. Switching costs are low given that clinicians and highly utilized prescription drugs are now covered by most plans. Historically, a beneficiary shopped two to three times and made one to two plan changes over their Medicare eligibility spend.
Those changes are happening more often. There is a nearly 50-50 split between beneficiaries who shop minimally and beneficiaries who shop annually. We believe beneficiaries now switch as many as three to five times over the course of their eligibility as their needs change. It's important to define how we look at shopping and switching in the context of Medicare. We believe shopping is a beneficiary reviewing their current plans covered services or costs relative to their current needs to see whether they are in the optimal plan or if they might need to consider a new option. Switching means moving from one plan to another. While we do believe that on average, plan stability is important for a beneficiary improvement of overall health, we also believe that any individual beneficiary's needs are so dynamic it's critical to reassess their needs at least annually to ensure they are in the best available plan.
We believe more beneficiaries should be shopping to make sure they're in the most appropriate plan, and they need a trusted resource to help them. We believe policy switching is unavoidable as shopping increases. As beneficiaries continue to shop more, LTVs based on the length of a policy have gone down even if the number of policies written overall is increasing. We, however, are prime to turn shopping into a strategic advantage as we increase our focus on building beneficiary relationships for the long term. If beneficiaries are going to shop, we want them to shop with us, regardless of whether we originally enrolled them in their plan. More beneficiaries will shop with us as we build a trusted relationship by delivering an unbiased, high-quality consumer shopping experience, leveraging an agnostic consumer marketplace with multiple plan options and developing credibility with beneficiaries.
We want to be the destination that provides beneficiaries with the needs-based plan assessment every year where the results of such an assessment might mean the beneficiary stays in their current plan if it's the best plan for their needs. If it is not the best plan, we make it easy to enroll in the better one. Furthermore, we help support the onboarding process to ensure they are able to activate the benefits that motivated the change. We are reinforcing the focus on a thorough and unbiased customer experience this year by compensating our agents not only on new enrollments and plan changes, but also on high-quality personalized assessments that may not result in a sale. Our new standard operating model and customer experience, inclusive of Encompass, is built on the concept that neither plans nor beneficiary needs are static.
Available benefits change every year as to the health and financial needs of each beneficiary. We use our proprietary technology, uniform best practices and highly skilled agent workforce to assess each beneficiary's unique individual priorities to match them with the right plan. Our agents are compensated to ensure that a beneficiary is in the most appropriate plan for their needs, regardless of whether we enrolled them in the traditional LTV policy previously or not. A key piece of the model is that there are no cookie-cutter ratings in comparisons. Two beneficiaries living next door to each other with the same basic demographics on paper, may prioritize different benefit options and thus end up with different plan matches. More importantly, even the same beneficiary calling in two consecutive years may have changes in their health and preferences and thus have a different recommended plan option.
We have demonstrated that our model brings customers back year-over-year. Our data shows that nearly 25% of our calls in each AEP are from beneficiaries we had served and/or enrolled in the previous year. To enhance the experience we provide, we look forward to broadening the plan options we compare for beneficiaries as opposed to limiting plan options like others in the industry. We enable a more direct and transparent competitive marketplace where health plans compete on an even playing field and where winning is tied to the best benefits, quality and experience for beneficiaries. Encompass is the new standard customer experience at GoHealth with our internal captive agents, and we intend to begin transitioning some of our external channel downline partners to the Encompass solution as well.
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A uniform and consistent experience for the beneficiary regardless of where they live, what their needs are, what plan they choose and which agents they speak to, is a critical piece of building a long-lasting trusted relationship. This will be a key area of focus for us in 2023. We have made a strategic decision to focus on the Medicare shopping experience. To ensure success, remove distractions to our team and streamline our operations, we have decided to exit our non-Encompass BPO enterprise services business or dedicated health plan and agency arrangements. This move allows us to redirect our most precious assets, our experienced and high-quality agents, towards our most highly valued services. Jason will address the financial implications of this change in more detail.
Looking ahead to 2023 and beyond, we are positioned to win. We believe we will win because of our deep understanding of the new market reality and our strategic initiatives underway. People will continue to shop. And while others in the industry are reducing the plan options they offer, focusing on who pays more as opposed to who offers the best benefit and quality options, we are positioning GoHealth to be the chosen, trusted partner that consumers shop with. We're doing so by expanding our Encompass solution, adding more diverse high-quality choices for beneficiaries in our marketplace, continuing to invest in our agents and by developing our proprietary technology to complete assessments and build for the future. We are diversifying our operating model and marketing approach to expand our universe of beneficiaries; while at the same time, diversifying our business model and our financials away from the current LTV model, where LTV is measured on a policy basis.
Finally, I'm pleased to share that we are reinstating guidance. Our 2023 guidance builds on our efficient exit run rate from 2022 and incorporates our strategic initiatives. We expect 2023 revenue to be between $750 million and $850 million. We anticipate adjusted EBITDA in the range of $100 million and $140 million. And we expect cash flow from operations of a positive $75 million to a positive $115 million. I'll now turn the call over to Jason to provide more details on the financials. Jason?
Jason Schulz - CFO: Thank you, Vijay, and thank you all for your continued interest in the GoHealth story. There are many moving parts this quarter, but the key takeaway is that the proactive steps we took in the second half of last year to create a much more efficient operating model and drive increased adoption of our Encompass solution resulted in a materially better business profile, which directly improved cash flow from operations and our unit economics. On today's call, I will be referencing a supporting slide deck, which is available on the GoHealth Investor Relations website. Today, I will be discussing five primary topics. First, I'll spend a couple of minutes walking you through the adjustments to Q4 and full year 2022 to normalize our results.
This includes our lookback adjustments and discussing the decision to exit our non-Encompass BPO Services business. Second, I will explain in more detail our lookback adjustment each of fiscal quarter. Third, I want to discuss the improved economic and cash flow profile of our Encompass solution versus our traditional LTV model. Fourth, I'm going to illustrate the margin expansion we saw in Q4 2022 versus Q4 2021 of our internal Medicare business by leveraging the Encompass solution on the more efficient operating model we built in the second half of 2022. And in closing, I'll give an update on our cash flow performance and deposition. Let me now walk you through the adjustments I just referenced, which are illustrated on Slides 10 and 11 of the investor deck located on the GoHealth Investor Relations website.
These adjustments are made with the intent of providing transparency into our operating performance in Q4 2022 and full year as well to provide you with the right jump-off point when discussing our 2023 outlook. Included in our Q4 2022 reported financial statements is a lookback adjustment related to business sold in 2021 and prior with $266 million reduction to revenue and $187 million reduction to adjusted EBITDA, which can be seen on Slide 10. Excluding the impact of the LTV lookback adjustment made this quarter, our net revenue would have been $336 million, and our adjusted EBITDA would have been $92 million. Including smaller negative lookback adjustments in Q1 through Q3 of 2022, the total full year lookback adjustment for 2022 is $276 million reduction in revenue and a $193 million reduction to adjusted EBITDA.
This is illustrated on Slide 11. On a full year basis, excluding the Q1 to Q4 look back adjustments, our net revenue would have been $907 million and our adjusted EBITDA would have been $63 million. As Vijay mentioned, we have made the strategic decision to exit our non-Encompass BPO services business. In Q4 2022, non-Encompass BPO Services represented $34 million of revenue and $7 million of gross margin, which is illustrated on Slide 10. Slide 11 provides the full year 2022 non-Encompass BPO Services revenue of $111 million and $20 million of gross margin. Excluding the impact of the LTV look back adjustment made this quarter and normalizing for the exit of our non-Encompass BPO Services, our Q4 2022 revenue would have been $302 million, and our adjusted EBITDA would have been $85 million, which is depicted in the last comps on their respective graphs on Slide 10.
On a full year 2022 basis, excluding the Q1 through Q4 lookback adjustments, and normalizing for the exit of our non-Encompass BPO Services, our revenue would have been $797 million, and our adjusted EO would have been $42 million, which is illustrated on Slide 11. We think providing you with full transparency to these adjustments to our full year 2022 results is important as this is what you should compare our '23 guidance to. One additional item of note. Historically, we were using carrier approved submissions, which reflects policies sold from our traditional LTV model. As we continue to transition to the Encompass solution model, carrier improved submissions is not an accurate definition of the services we provide under the Encompass solutions model.
Given that both the traditional LTV model and the new Encompass solutions model will both exist, we believe it's more informative to define the combined activity as submissions, which you will see in our financials going forward. Next, I'd like to provide you with some additional detail related to our lookback adjustment. To preempt some natural questions, I want to address why we were making a lookback adjustment this quarter when others in the industry are making opposite claims regarding LTVs and future potential adjustments. Simply put, we are making this adjustment for policies sold in 2021 and prior years because: one, we believe the market dynamics around the beneficiaries we serve have changed, especially around the annual beneficiary shopping patterns; and two, given the meaningful volume of policies sold over the last several years, we now have observed more data than ever before, allowing us to conduct a better informed and detailed actuarial analysis.
Importantly, note that the $266 million lookback adjustment also includes a constraint we placed on our back-book commission receivable. Ultimately, we believe the actions we are taking will reduce our future exposure to LTV risk, the size of the adjustment and the constraint on the back-book works in the current market dynamics and anticipate continued future pressure on LTVs. It is important to remember our Encompass solutions model diversifies a material amount of our go forward revenue away from the traditional LTV model, further reducing our future risk. And finally, we are broadening our ways to pursue new demographics of the beneficiary population that make sure less switching behavior by testing book benefit and experience oriented marketing messages.
Given the importance of the diversification into the Encompass solutions model, I want to do a quick refresher on the economic profile and how it compares favorably to our traditional LTV model. Please view Slid 12 of our earnings presentation. On this slide year we have illustrated the annual unit economics and cash flow differences between our traditional LTV model and our Encompass solutions model. As you can see, we have a high variability in our traditional LTV model, preferably related to revenue. This is driven by product and health plan mix as well as the less predictable LTV revenue estimates due to switching. In comparison, our Encompass solutions model is much more predictable as it is based upon services rendered during the sales process which is predicting the life time value of a policy.
The evident point of difference between the two models is around year one cash flow. On the right side of Slide 12, you can see that the cash flow profile in year one of the traditional LTV policy sold is negative by approximately $280 for each policy sold. In comparison, we have a meaningfully positive year one cash flow profile of $275 for each of the sale completed under the Encompass solutions model, representing a change of $555 in cash per policy on a year-long basis. Ultimately, under either model, our goal is to drive better beneficiary choice, experience and satisfaction, resulting in a high trusted relationship. Regardless of the exact payment model we have with our health plan partners, intend to have the same operational model in our marketplace for all health plan partners for this upcoming AEP.
This will not only drive continued improved quality and experience for the beneficiaries we serve, but it will also help further drive a more efficient operating model. Q4 2022 results demonstrate the combined impact of the more efficient operating model, leveraging the Encompass solution. On Slide 13, we are comparing our internal Medicare unit economic performance for Q4 2021 versus Q4 2022, adjusting for the impurity impacts of the previously discussed LTV lookback adjustments and their respective impacts to both 2021 and 2022. As you can see, our Q4 2022 sales per submission is $971, an increase of 27% year-over-year. This increase was driven by our more tenured agents performing high-quality sales, which is realized through improved effectuation rates.
In addition, we saw more predictable revenue through the Encompass solutions platform, with nearly 50% of our sales in Q4 being completed through this platform. The more efficient model that was built in the second half of 2022 had a significant impact on our cost per acquisition, resulting in a 22% year-over-year improvement. This improvement was driven by favorable marketing costs and beneficiary conversion rates achieved through our more tenured agents. As a result, in Q4, our internal Medicare business achieved 49% gross margins or $479 per submission, which is a significant improvement compared to Q4 2021, where we saw 18% gross margin or $136 per submission. The combination of having a more efficient operating model, increased penetration of our Encompass solutions, and disciplined expense management, has produced a meaningfully positive result on our cash flow from operations.
On Slide 14, you can see that we achieved a positive $61 million of cash flow from operations for the full year 2022, which is a $360 million improvement compared to the full year 2021. This improvement was one of the primary objectives of management, and we are thrilled with the result that the collective team has delivered. By retaining our best agents to drive high-quality enrollment activities, exceeding our Encompass penetration goal, focusing on highly efficient operating model and tightly managing our expenses, we have materially strengthened our liquidity position from just a future months ago. Because of our strong cash flow position and increased liquidity, in the fourth quarter, we paid down $155 million of debt plus principal payments, bringing our total debt down from $670 million in Q4 of 2021 to $510 million in Q4 2022.
This is illustrated for you on Slide 14. It's also important to note that we have an untapped $200 million revolver for same-day access to liquidity if ever needed. Due to our strong operational results and much improved liquidity position, we are in full compliance of our debt covenants for Q4 2022. As you might recall, we have had to amend our covenants for each of the last four quarters. We are pleased with the relationship we have with our lender partners and don't anticipate a need for further covenant amendments in the future. This includes achieving 12-month leverage ratio for Q4 of 2023 as defined in our debt agreements. Based on the successes from our 2022 exit run rate performance, a more efficient operating model, enhanced commercial relationships, followed results from our Encompass solution and our planned 2023 strategic initiatives, we expect to be able to achieve our guidance ranges that Vijay mentioned earlier.
We made meaningful strides in 2022 and set the foundation for profitable growth, improve the margin and cash flow profile and are on our way to greater predictability of our financial results through our well-positioned business. I'll now turn the call back to Vijay to provide closing comments. Vijay?
Vijay Kotte: Thank you, Jason. Our fourth quarter results exceeded our expectations, but there's still significant work to be done. We're excited about the journey ahead. When Jason and I joined GoHealth in June 2022, we had some very specific goals. First, we needed to improve the cash flow characteristics of our model. Second, maximizing efficiencies was essential. Third, we needed to prioritize more experienced, high-quality sales agents over volume of agents. We achieved those goals and expect to continue to execute against the financial guidance provided. As the Medicare Advantage industry evolves, GoHealth will also evolve. We will continue to develop and deploy our proprietary technology and tools to increase choices for beneficiaries while continuously evolving contracts with our health plan partners to establish the Encompass Platform.
Our strategic initiatives are underway, and we are positioned to win. Thank you for your interest and for your attention this afternoon. We will now open the call for your questions.
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