GoHealth Inc (NASDAQ:GOCO) Q1 2023 Earnings Call dated May. 08, 2023.
Corporate Participants:
John Shave — Vice President of Investor Relations
Vijay Kotte — Chief Executive Officer
Jason Schulz — Chief Financial Officer
Analysts:
Michael Cherny — Bank of America — Analyst
Jonathan Young — Credit Suisse — Analyst
Ben Hendrix — RBC Capital Markets — Analyst
Presentation:
Operator
Good morning, and welcome to the GoHealth’s First Quarter 2023 Earnings Conference Call. My name is Michelle and I will be your operator for today’s call. [Operator Instructions] As a reminder, this conference is being recorded.
I’ll now turn the call over to John Shave, Vice President of Investor Relations. John, you may begin.
John Shave — Vice President of Investor Relations
Thank you, and good morning, everyone. Thanks for joining GoHealth’s first quarter 2023 quarterly results call. Joining me today are Vijay Kotte, Chief Executive Officer and Jason Schulz, Chief Financial Officer.
This morning’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.
Before the market opened today, we issued a press release containing our results for the first quarter of 2023. We have posted the release on the GoHealth website under the Investor Relations tab. In the press release, we have listed a number of risk factors that you should consider in conjunction with our statements. We encourage you to consider the other risk factors described in our Form 10-K and Form 10-Q reports filed with the Security and Exchange Commission for additional information.
During this call, we will be discussing certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measures and 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 presentation and exhibits that I encourage you to review.
And with that, I’d like to turn the call over to Vijay.
Vijay Kotte — Chief Executive Officer
Good morning, and thank you all for joining us today. I’m pleased to report a strong quarter and start to the year. We achieved about $183 million in revenue, $29 million in adjusted EBITDA, and $20 million in positive cash flow. Together with our external partners, we helped over 214,000 Medicare beneficiaries assess their current coverage and potential Medicare options and enroll in our plan. Jason will provide more insight into the financial results in his section.
At a high level, our first quarter performance highlights our operational efficiencies and the progress we are making with Encompass and supports our competence in our full year 2023 guidance. The ebroker industry has long believed that growth is directly tied to the acquisition of more agents and thus more leads. However, this traditional approach often leads to diseconomies of scale where the cost of adding more agents and leads drives up customer acquisition costs due to lower quality agents and lower quality leads. We believe technology can drive economies of scale and meaningfully elevate the consumer experience by matching consumers with the right plan for them.
Encompass, our proprietary operational technology and data science platform allows us to streamline the purchase process for consumers, simplifying the cumbersome and confusing experience of healthcare purchasing while allowing our agents to focus on what’s most important, showing empathy and care for our consumers. By leveraging our machine learning platform, we’re able to better serve these consumers and deliver better outcomes for our business. I am incredibly proud of our team and their tireless efforts towards achieving our goals, and I’m excited to share our progress with you.
As we have discussed previously, the increasing propensity for consumers to shop coupled with the seemingly ever increasing number of Medicare Advantage choices for consumers can prove overwhelming. This makes the GoHealth value proposition to both consumers and health plans so timely and relevant. GoHealth’s core value proposition to consumers is providing a trustworthy shopping experience that allows consumers to select the Medicare Advantage plan that meets their unique needs. With the Encompass platform, we offer a personalized, unbiased and no-pressure shopping experience where consumers can feel comfortable and competent throughout the entire process.
Our marketplace model is distinct from traditional brokers in several ways. At GoHealth, we put the consumer at the center of all we do. This has resulted in a passionate belief that we must remain unbiased in the servicing of our consumers. I’d like to take this opportunity to go a bit more in depth to discuss exactly how our people and technology create a differentiated experience and introduce some common language when speaking about our technology.
First, I’ll start with our associates. Our tenured agents and staffing models support the consumer through the end-to-end shopping process and ensure compliance. We have multiple teams of agents. Tier 1 ensures Medicare eligibility and confirmed shopping interests. Tier 2 supports the needs assessment and plan shopping process. And Tier 3 completes enrollment, ensuring the consumers are satisfied with their plan choices, understands their benefits, and know what will happen next. Our quality assurance teams audit the entire process, provide feedback to improve processes along the way, and ensure compliant behavior from our teams.
Our agents are not incentivized to promote specific health plans, and their compensation is not based on the insurance product that consumers ultimately select. This approach ensures that each consumer receives an impartial evaluation and recommendation that is tailored to their specific needs and preferences.
Now moving to technology. Our proprietary consumer-matching technology drives value at the start of the consumer shopping process. We’ve identified many consumer and market-level dynamics that correlate to a particular agent being more effective than another, conserving a consumer’s unique needs. Using machine learning, we identify these matches in real time and route to the best fit agent. We have continued to test different populations for this matching, and our first tests have shown a 30% increase in conversion rate when applying this routing.
Our Plan Fit tool has been built on millions of consumer interactions and leverages that data to create a customized, guided, multi-step purchasing experience that results in a thorough and comprehensive understanding of our consumer’s Medicare insurance needs. Each time we talk to a consumer, Plan Fit analyzes over 180 factors, including plan characteristics, consumer inputs and historical data to sort through 1,000s of Medicare Advantage plans and help us provide the best recommendations to consumers. This allows us to help consumers make informed decisions about their healthcare and select the right plan for their unique needs. The tool continues to evolve as we write more policies, gathers more data and add more features.
Our proprietary unified agent experience creates a simpler, more efficient process for agents to assist consumers, enables faster onboarding and drives compliance. These benefits tie directly to revenue, cash flow and adjusted EBITDA outcomes. The unified agent experience increases automation, creating a simpler and more efficient process. Our sales agents interact with many different applications for everything from determining Medicare eligibility to identifying medications. By integrating these applications directly into our agent platform, we’re able to shorten call time for both the agent and consumer. Shorter handle times increase agent and consumer satisfaction and lead to increase throughput in our model.
Today, new agents receive rigorous training to complete a high quality compliant enrollment. But even with that, it takes repetition for new agents to hone their craft. Our standardized technology accelerates this learning curve and will enable faster onboarding for our new agents, improving overall conversion rates and throughput. Standardization of shopping experience also enables us to drive compliance and adapt to regulatory changes as needed, a critical capability given the current climate. Finally, we created a data profile on each individual, including their health preferences, financial situation, and other relevant factors.
Our evolving Customer 360 platform organizes this information and will enable our agents to provide more efficient personalized service to each consumer that takes their historical relationship with GoHealth into account. This laser focus on the consumer is a win-win and strengthens the value proposition we continue to bring to health plans. We serve the largest health plans in the country while selectively adding new options in our marketplace to ensure we are offering consumers the highest quality options available.
We believe our unbiased marketplace model and superior consumer experience attracts a broader set of consumers than health plans can reach and ultimately expands the number of consumers we can match to health plans. This expands the pie for health plans that participate in our marketplace and enables them to drive their own member growth so long as they have competitive consumer-focused benefits. Additionally, health plans can rely on our standardized and effective sales process to ensure that the consumers enrolled in their plans are informed and satisfied with their plan selection, which minimizes churn, improves retention and reduces complaints.
Finally, our Encompass model specialized agent roles and uniform agent experience technology allows us to drive compliance while also being nimble and responsive to the ever-changing regulatory landscape. Our belief in the Encompass model’s value for health plans is backed by our ability to redefine and reset the foundation of our business through our new contracts. We have secured Encompass contracts with nearly all our health plan partners, assuring them access to our high-powered marketplace and guided shopping process that culminates with an in-house dedicated health plan enrollment team for each health plan to support final enrollment confirmation and initiate onboarding.
As you can see, Encompass is much more than just a new way to contract. It is also a technology-forward operating model designed with purpose, making the consumers’ needs paramount. The efficiency of the model has already begun to flow through our financials with lower cash burn and lower costs. This lower cost per submission driven by significant marketing improvements, lower agent carrying costs during low season and expansion of technology and tools offers variable capacity and access to economies of scale. With every shift of volume to the Encompass model, we deliver greater revenue reliability, supported by a greater percentage of cash collected within the first 12 months.
Our new model has transformed our cash flow profile as the business, and we are now in the unique position in the industry of generating positive, dependable cash flow. This fundamental economic change in our business model recognizes the value of our differentiated approach to delivering elevated consumer experiences and allows us to build an enduring company. As the Encompass model approaches its first full year of launch at scale, we expect that the model will evolve and continue to improve outcomes for consumers, health plans and GoHealth stakeholders.
Jason will speak about how Encompass allows us to reach profitability with the new business we generate on a go-forward basis and decouple the company’s future from the macro headwinds seen throughout the industry from increasing shopping behavior. I want to take a moment to thank our associates, agents and partners. We have been diligently working to improve operational efficiency, which will take time to show fully in results, but we are very encouraged by our progress, which Jason will now discuss.
Jason Schulz — Chief Financial Officer
Thanks, Vijay. We are pleased to announce our Q1 2023 performance. After normalizing for the exit of our non-Encompass BPO services, we generated revenue of $176 million and adjusted EBITDA of $27 million, driven by 214,000 submissions. Our Q1 2023 results are in line with our expectations and keep us on track toward our full year guidance. These results represent a $62 million decrease in revenue and an increase in adjusted EBITDA of $22 million versus Q1 2022. After normalizing for the exit of our non-Encompass BPO services and the $2 million look back recorded in Q1 2022.
As a reminder, the revenue decline was a deliberate strategy to scale down our agent workforce, focus on quality, achieve operational efficiencies and improve our unit economics and profitability. We continue to see good momentum with our cash flow from operations, where this quarter we achieved a positive $20 million, which results in a year-over-year improvement of $303 million on a trailing 12 month basis. We believe trailing 12 months is the most appropriate way to view our performance as it normalizes for seasonality throughout the calendar year.
As detailed in our quarterly results presentation posted on our website, we are focused on driving high quality enrollment and operational efficiencies while reducing our curing cost. This approach has allowed us to streamline our operations and position ourselves for long-term success. We are confident that this decision will continue to have a positive impact on our overall profitability.
For Q1 2023, we have changed our segment reporting to reflect our continued focus on driving high quality Medicare business and our exit from non-Encompass BPO services. Going forward, we will be operating under a single reporting segment, which aligns with how we manage and operate the business and incentivize our associates. As a part of our reporting changes, we are also adjusting how we disaggregate revenue to better align with our operations.
In our 10-Q filing, you will see a line item for our agency revenue, which is defined by GoHealth being the agent of record and represents what we have previously referred to as our traditional model. This included a combination of commissions and partner marketing revenue. We also now have non-agency revenue, which is defined by the revenue which we receive for specific services that support enrollment activities in which GoHealth is not the agent of record. Previously, we have labeled this as Encompass revenue.
As Vijay described, the Encompass model is more than just a contract or source of revenue. It is now our preferred operating platform that puts the consumer in the center of all of our activities, including how we market, support enrollment activities, provide administrative services, utilize proprietary technology and ultimately deliver the highest quality solutions to those we serve. We acknowledge that this change may require our support for you to clearly understand how do they reconcile to prior year. We will provide a clear comparison in our upcoming reports and presentations to ensure that our stakeholders have a comprehensive understanding of our performance and progress.
As I previously mentioned, our Q1 2023 adjusted EBITDA, excluding non-Encompass BPO services is $27 million. We have significantly increased our adjusted EBITDA margin profile from 2% in Q1 2022 to 16% in Q1 2023. This excludes non-Encompass BPO services and a $2 million lift back adjustment recorded in Q1 2022. This improvement reflects our more efficient operating model we established during the annual enrollment period last quarter, which we continue to refine and enhance.
As illustrated in our quarterly results presentation, our Q1 2023 gross margin is $202 per submission, representing a 60% year-over-year increase in profitability. This quarter, we have increased our agency commission constraint, which is the primary driver of the year-over-year sales per submission decline. However, this was more than offset by the efficiencies gained as reflected in the cost per submission improvement of 23%.
Q1 2023 cash flow from operations is $20 million. We continue to see dependable and improving cash flow trends, reflecting our ongoing focus on increasing our non-agency revenue and operating efficiency. As illustrated in our quarterly results presentation, our trailing 12 month cash flow from operations as of Q1 2023 is $27 million, an improvement of $303 million over the same time period measured in Q1 2022.
While $78 million of this improvement can be attributed to non-agency revenue, $219 million of the change is driven by more efficient Encompass operating model. We recognize that revenue, EBITDA and cash flow have always been subject to seasonality. However, because of our progress with the Encompass platform as well as the impacts of our non-agency revenue, the seasonality of our business has changed from the past. The non-agency revenue has shifted our cash collections, lowering the amount of cash collected in Q1 and smoothing collections in the remaining periods with Q3 expected to be the highest collection quarter.
We will continue to see our peak revenue and adjusted EBITDA in Q4 due to the high volumes in the annual enrollment period, followed by Q1 in the open enrollment period and much lower revenues and modest negative adjusted EBITDA in Q2 and Q3 due to the much lower volumes in the special enrollment period. That said, the Encompass operating model has significantly lowered our cost per submission, which will result in a meaningful improvement in this year’s special enrollment period compared to 2022.
Our strong performance in Q1 allows us to reiterate our guidance for the year. We anticipate our revenue to be between $750 million and $850 million, with adjusted EBITDA in the range of $100 million and $140 million. In terms of cash flow from operations, we expect a positive $75 million to $115 million.
In conclusion, during Q1 2023 we achieved significant improvements in adjusted EBITDA, gross margin and cash flow from operations. The strong performance reflects our continued commitment to driving non-agency revenue and executing on our more efficient Encompass model.
With that, we would like to open the call to questions. Operator?
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Mike Cherny with Bank of America. Your line is now open.
Michael Cherny — Bank of America — Analyst
Good morning, and thanks for taking the questions. I have a question about the transition to Encompass from the carrier side, and maybe this is something that we’ll learn more about during AEP. But in terms of the way that you’ve changed your go-to-market strategy, what has been the carrier reaction? And what changes in terms of the interplay that they have with you have you had to make, if any? And have they caused any either stripe or, I guess, better communication either way?
Vijay Kotte — Chief Executive Officer
Mike, thanks for the question. Let me start with, we have been working collaboratively with the carriers and the health plans for some time on this transition to Encompass. The primary focus being driving a better quality experience and better funnel metrics. As you think about that, there are dynamics around driving better effectuation, meaning a submission actually turning into an effective policy and then ultimately moving to a 90-day and then moving to being the retained policy over time. That dynamic, as we left AEP and all those test statistics and kind of running through what we did last Q4, resulted in material improvements on those metrics.
So there’s very strong support from our health plan partners to expand the scope of how we’re delivering that consistent experience with them. They absolutely appreciate that we are aligned in our approach to looking at and protecting the consumer. And the standardized approach and the auditable experience, I mean, the simple fact that we record every element of this, and we need technology to ensure that there’s a standard flow through Tier 1 to Tier 2, and then specifically our Tier 3 which has been really focusing on that subject matter expertise of an agent who learned everything about a given health plan, and then that final element taking the application from the beneficiary and being able to explain to them what specifically happens next to that health plan has been very exciting, right?
We work with them on the script and we’re making sure that aligned experience. And then we follow-up beyond that. So the short story is there’s been a lot of very strong support for the model itself. I would say that as you look at the competitive marketplace elements of it, everybody loves to have an advantage, right? But they do appreciate the fact that when they come into our marketplace, if they have great quality and have a great set of benefits for the beneficiary and align that all together, including things like rapid disenrollment rates and general churn rates, we factor that all in, that they can win on in any given year.
The interesting part of the dynamic is any given health plan if they want to be in or they don’t want to be in that marketplace, it doesn’t affect the number of shoppers that come to us. Our shoppers are really driven by our marketing and they come to us and they say they want to understand what are the best options for that. If a plan chooses not to be in our marketplace, for example, because they don’t think they’ll have a competitive product, well, that doesn’t really affect our volume. Plan participation or not participation in our marketplace is really affects their volume and then it affects some of our mix.
And I will tell you that as we’ve gone through that, our carriers are very interested in getting access to beneficiaries to be part of that shopping experience and continue to grow with us. Is that answering your question, Mike, or too much — too many words and not enough substance for you?
Michael Cherny — Bank of America — Analyst
No, it does, fully understanding that as you lean on Encompass we’re going to see what happens as we go especially into AEP still being such a big component of the year just because of how your market works. So I appreciate that look and I appreciate the transparency you’re giving us on that. And I guess just one last more technical question. I appreciate you breaking out the revenue and EBITDA contribution on the BPO. Any impact on cash flow? Or would it be subsequent or similar to what you’d see from an EBITDA contribution as you wind that business down?
Jason Schulz — Chief Financial Officer
Yes, Mike, this is Jason. I appreciate the question. It’s de minimis in terms of the BPO contribution on cash flow. So I would think of it just pro rata as you kind of stated, so best on it.
Michael Cherny — Bank of America — Analyst
Got it. Thanks so much.
Jason Schulz — Chief Financial Officer
Yes.
Operator
[Operator Instructions] The next question comes from Jonathan Young with Credit Suisse. Your line is now open.
Jonathan Young — Credit Suisse — Analyst
Hey, thanks for taking the question. I just wanted to get your thoughts on the finalized CMS marketing rules given that there is some concern on the 48-hour SLA rule. Just how are you thinking about the impact on your business? And similarly, what have your carrier partners brought up in relation to that rule? Thanks.
Vijay Kotte — Chief Executive Officer
Thanks for the question, Jonathan. I think there’s a lot that we can address that. I think first and foremost, I think it’s fair to say that given all the comments we’ve provided earlier in the prepared comments and how we think strategically, the consumer and protecting the consumer is — and that high quality shopping experience is Paramount. And so, we are fully aligned with what CMS is intending to do and what the regulations are intended to protect.
We do believe that leaving out bad actors and bad actions are really where we all need to focus that we can do the right thing. As you think about year-to-year, right, with CMS, every year there’s some sort of change of regulation around marketing and how you go to market. And all of that is contemplated in how we think about our operating plan and our performance in any given year. As part of that, you’re always working with the different carriers to understand how they’re interpreting things and how that flows through into our operations. And one of the things that is really interesting is that I think we’re all again in the business where we have a full auditing capability for every one of our [Indecipherable].
We know where the lead came from because we do the majority of our own lead generation. We run that through and we have recorded specialized individuals for our Encompass platform that do verification of eligibility and interest to shop all the way through to the enrollment and the onboarding process. So we have a fairly unique platform that can be — that is uniquely positioned to be able to be responsive to any of the changes and interpretations that might have over time in any other regulatory events. But again, this is an annual thing. Every year, there’s something new that comes up. And we assume there will be things like this that will come up.
So in short, we don’t believe there will be any material negative impact based upon some of the different discussions that are going on today. Obviously, more details to come. But we actually believe it could be on the flip side of this, that we think this could be a strategic opportunity for us. As we are standardizing our process as we have more infrastructure and technology built around that standardized process, we’re able to, one, again, leverage the high quality, fully regulated marketing tactics we use to generate leads to manage that funnel process in a number of different environments and be responsive to those moves. They can lead to us grabbing more share. But at this point, we believe our model gives us a strategic advantage that we’re pretty excited about, regardless of where things ultimately fall out.
Jonathan Young — Credit Suisse — Analyst
Great. Thanks.
Operator
[Operator Instructions] Our next question comes from Ben Hendrix with RBC Capital Markets. Your line is now open.
Ben Hendrix — RBC Capital Markets — Analyst
Hey, thank you very much. We’ve heard some commentary from carriers this earning season, suggesting increased shopping behavior in the upcoming AEP as carriers adjust to via new MA risk models. I wanted to get your thoughts on implications for the traditional agency business and measures you’re taking to mitigate any potential increased churn there. Thanks.
Vijay Kotte — Chief Executive Officer
It’s a great question. As we’ve told you and as we’ve anticipated in even in the last call that we did, we described the fact that we are accepting and kind of leaning into the idea that shopping will happen. That has been reflected in all of our estimates not only our guidance but also all of the other estimates that are related to this thing. We think it’s wonderful. As long as the consumer is winning, and they’re getting the best benefit options and they’re being able to actually compare them effectively, that is the concern, right, is that with so much change potential within the different options and so many tweaks that happen around the edges, beneficiaries can’t always understand how does that impact them. They don’t know how to make a relative comparison.
And by actually building our infrastructure the way we have, taking all those benefit plans into account, understanding the beneficiary’s individual needs, we’re able to navigate that shopping experience. So yes, we expect more shopping to happen as we said last quarter. That is what our whole operating plan for the year is based upon. We have some presumptions on what that does to overall behavior around individual policies, and we factor that into our thought process as well.
And as we’ve said last quarter and we have reiterated now, this is a part of our strategy. We’ve leaned into it. It is exactly what we believe should be happening, and that is that they shop. Shopping doesn’t mean you switch. Shopping means you need to comparison shop. Shopping means you need to have an individualized experience. And so our agents, our Tier 2 shoppers, they are high quality trained associates who spend the time to understand the beneficiaries’ needs, to understand all of their benefit alternative and then make sure that even if it’s not — there’s no change necessary, they’re incentivized from the way we compensate them.
And our plans before AEP will be just that, that our agents are being — are able to be rewarded for providing high-value shopping experience even if the conclusion is the beneficiary just stays at their current plan. And they need to have that piece of mind. And so that’s the way we’re thinking about it. From our operational standpoint, that’s exactly what we’re expecting, more shopping. And if it happens in an accelerated pace based on the MA rates and the risk adjusters, that will only lean to more of a positive for us as we think of the shopping dynamic in AEP.
Ben Hendrix — RBC Capital Markets — Analyst
Thank you.
Operator
[Operator Instructions] I show no further questions at this time. I would now like to turn the call back to Vijay for closing remarks.
Vijay Kotte — Chief Executive Officer
Thank you. Thank you again for joining us today. We are really proud of everything that we’ve been able to accomplish thus far this year. Our team has been phenomenal. We have some of the best in the industry who are really focused on doing the right thing and doing it right. And we are absolutely committed to continuing to do that. We hope you leave knowing we remain focused on delivering long-term value for our shareholders while providing high quality experiences to our consumers and health plans. Thank you for your continued support, and we look forward to updating you on our progress during the next quarterly results call and webcast. Thanks.
Operator
[Operator Closing Remarks]