Health Insurance Innovations, Inc. (NASDAQ:HIIQ) Q4 2018 Results Conference Call March 6, 2019 5:00 PM ET
Mike DeVries – Senior Vice President of Finance
Gavin Southwell – CEO and President
Mike Hershberger – Chief Financial Officer
Conference Call Participants
Richard Close – Canaccord Genuity
Mike Grondahl – Northland Capital Markets
George Sutton – Craig-Hallum
Greg Peters – Raymond James
Steven Halper – Cantor Fitzgerald
Frank Sparacino – First Analysis
Randy Binner – FBR
Greetings, and welcome to the Health Insurance Innovation’s 2018 Earnings Conference Call. At this time, all participants are in a listen-only-mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. Please note this conference is being recorded.
I would now like to turn the conference over to your host, Mike DeVries, Senior Vice President of Finance. Thank you. You may begin.
Thank you, and good afternoon, everyone. We are excited to have you join us today for a discussion about Health Insurance Innovation’s Q4 and 2018 financial results. By now, you should have received a copy of the earnings release. If you do not have a copy, please visit our Web site 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 Investor Relations section of our Web site 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 risks and uncertainties include, among other things, the Company’s ability to maintain relationships and develop new relationships with health insurance carriers and distributors, its ability to retain members, the amount of commissions paid to the company or changes in health insurance plan pricing practices, state regulatory compliance and changes in United States health insurance system and 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 Web site at hiiq.com and on the SEC’s Web site. The Company disclaims any obligation to update any forward-looking statements after this conference call.
And with that, I will turn the call over to our CEO, Gavin Southwell.
Thank you, Mike and hi everybody. I have been looking forward to reporting fourth quarter and full-year results, as well as updating you on our plans for the substantial growth opportunities that we are currently pursuing and others that lie ahead.
We had a strong finish to 2018 and business trends have accelerated in the first two months of 2019 with total months sold our expected duration units increasing 24% year-to-date. During 2018, we shifted our strategic focus towards longer duration products with significantly higher with lifetime value or LTV. In the fourth quarter of 2018, expected duration units from third party distribution partners were up 19% year-over-year reflecting a record open enrollment period despite terminating a large distributor early in the fourth quarter.
After the HHS rule change went into effect in the beginning of the fourth quarter 2018 allowing long-duration short-term medical plans and removing the restriction of three month plans, we focused significantly more resources on ecommerce partners, which increased our own channel agile, as well as other new ecommerce partners. Our decision to deemphasize lower cost lower margin plans to instead focus on long-duration higher lifetime value plans and the ecommerce penetration exceeded our expectations, which rule change also has an impact on submitted policies and diminishes this metric’s importance.
For example, in 2017 and 2018 prior to the rule change, a consumer looking for 12 months of coverage on a STM plan could have bought four three months plan, which would have resulted in four submitted applications being counted for this metric in a calendar year. And from October 2018 onwards, the same consumer would only need to buy one plan for 12 months of coverage, and so submitted applications would show only one sale instead of four. Starting with this quarter, we are providing new sales and operating metrics in our earnings release that we believe will further increase transparency into our business and our CFO will provide more details later in the call.
Despite the decline in agile submitted applications in the fourth quarter, total ecommerce expected duration units grew 68% year-over-year. The successful strategic shift towards higher lifetime value plans and ecommerce will have a positive future financial impact. We believe the stage is now set for a very successful 2019 and beyond. A few financial highlights from 2018 versus 2017, which excludes the impact of ASC 606 in prior year; I’d like to share include, fourth quarter revenue was $131.9 million compared to revenue of $69.5 million in the fourth quarter of 2017; 2018 full-year revenue was $351.1 million compared to revenue of $250.5 million in 2017; the fourth quarter’s adjusted EBITDA was $21.6 million compared to adjusted EBITDA of $10.5 million in the fourth quarter of 2017; and 2018 full-year adjusted EBITDA was $59.4 million compared to adjusted EBITDA of $45.9 million in 2017; and finally, fourth quarter adjusted net income per share was $0.98 compared to adjusted net income per share of $0.37 in the fourth quarter of 2017; and 2018 full-year adjusted net income per share was $2.60 compared to adjusted net income per share of $1.67 in 2017.
Our CFO will provide more detail including some new sales and operating metrics, which we believe will further increase transparency into our business and provide greater clarity to evaluate progress towards our goals. One new metric we will now be disclosing to provide more transparency is expected duration unit of a total number of months sold. In the fourth quarter, expected duration units have submitted IFP sold was 122,400 compared to 957,300 in the fourth quarter of 2017, an increase of 6.8%. Looking forward to 2019; the company expects annual revenue for 2019 to be between $430 million and $440 million, or to grow 22% to 25% year-over-year; adjusted EBITDA to be between $72 million and $77 million, or grow 21% to 30% year-over-year; and adjusted net income per share to be between $3.20 and $3.35, or to grow 23% to 29% year-over-year.
The implementation of ASC 606 has been a complex process, and our ultimate application and assumptions have changed a few times over the last six months, as we spend time with our auditors and independent expert third-party consultants to ensure we got it right. We understand 606 create some noisy comparisons. But ultimately, we are very comfortable with the end result and would note our assumptions have relied on third-party assessment that we believe may prove conservative. With our adoption of new accounting standard, all costs associated with acquiring customers recognized upfront. This effectively creates a mismatch, but pushes approximately 5% of expected high-margin lifetime value of the plan into future period, while a 100% of our third-party commission expense is recognized upfront. As a result of this ASC 606 application, approximately $7 million of what would utilize the adjusted EBITDA in 2018 will now be effectively deferred into 2019. Specific to 2019, we expect high-margin revenue to be deferred into 2020, which make our strong 2019 financial guidance even more impressive.
Also important to note is that as part of ASC 606 and again working with expert third-party consultants, we have made prudent initial assumptions for the lifetime values of longer duration and higher lifetime value plans. As such, we expect to reassess the performance of our longer duration and higher lifetime value plan as we move through 2019, and believe potential exists for greater revenue as the longer duration plans season. 2018 was a strong year and we have gratified the momentum has accelerated into 2019. Reflecting our confidence in the pace of business and HIG strategic opportunities ahead, we bought back $56 million of stock in 2018, including $36 million in the fourth quarter alone. With $35 million remaining at the end of the year on the $100 million authorization announced in December, we have sufficient capacity to continue to acquire our stock and believe it represents a compelling component of our capital allocation strategy. The new $75 million with $25 million credit facility announced today adds flexibility to pursue a range of initiatives to enhance shareholder value.
Throughout 2018, the multi-state review and questions from investors and other stakeholders about this review was an extremely time-consuming endeavor. The process was incredibly detailed and large amounts of management time was spent focusing on the review, which was essential to ensure we can do an acceptable and fair outcome for all parties. We are pleased with the outcome and look forward to returning our attention full-time to serving our growing list of carrier partners, third-party distributors and of course consumers. Simply put, we spent time and invested in resource to ensure that implementing the actions from this review will not have a negative impact to 2019 and the years ahead. This review and the process we went through now all the hard work is behind us is a huge asset for the company. Working with regulators and strengthened by our recent senior hires, we are implementing market-leading controls and raising the standard for our whole industry, something which all stakeholders should applaud. We are not perfect. The individual market is inherently difficult but we work really hard every day to keep raising standards and to keep protecting the consumer.
The advancements we have made as a company under my guidance, particularly in the compliance division helps us to conclude the multi-state examination, paying towards the cost of the review and agreeing to continue to enhance the foundation of compliance of the company’s prioritized since I became as President and CEO. There has been a lot of noise and criticism, some fair but of much of it unfair, over the last two years from stock market participants. And with that said I’d like to take this opportunity to recognize the immense progress we have made and express how proud I am of the HIQ organization. And please note our efforts will not stop to be the single best healthcare distribution platform in the country. For example, due diligence. We’ve always visited and reviewed the agencies for due diligence but in 2019, we are adding a new partner Current Compliance, [ph] a firm with expert insurance industry experience to perform independent third party agency reviews in co-ordination with our in-house team.
Voice verification. We have identified a better way of obtaining verification calls from independent producers, and we’ve held 100% of the verifications since August 2017. Also, IVR for voice verification. Now, we have 100% of the calls we needed to be 100% accurate is in development with SmartAction. We’ve just signed the contract and are looking to have this launched in the second quarter. Background checks. When I started, we were using People Finder, as a way of background. But since 2016, we’ve worked with CenturyLink for FCRA compliant criminal background checks. And we also performed regulatory and legal background checks using a stringent formal process.
Secret shopping. We started an initiative with Verify Health, experts in secret shopping the insurance industry back in 2016, and we’ve ramped the full 100% through 2018 with doubling again the amount of shops this year as we transition to full recording and storage of completed sales calls. License verification. When I began, we have the take and paper licenses. And since 2016, we have linked the electronic feed with Knepper to update license information on a nightly basis. Our agent training center. We developed online training and testing system for product and insurance trainings and launched it throughout 2018. Over 4,000 agents have gone through it so far. We have added modules nearly every month in 2019 on product and insurance laws and we’ll continue to keep adding.
And finally, ActiveProspect. A legal [road block] caused by third parties, a reoccurring and troublesome topic for consumers in our market, caused us to look at how we could help make a positive change. We took the initiative to partner with ActiveProspect, a leading firm managing risk associated with TCPA in the market. With ActiveProspect, we have the tools to require certification needs and reject those that meet the standard. Overall HIIQ has been a fast-growing company with a ecosystem of partners, carrier and distributors. And with fast growth in a broadening ecosystem, infrastructure and processes must keep up. As such in the last few years, we spend a tremendous amount of time, energy and investments to create best-in-class compliance, customer care, distribution and human capital. There has been significant heavy lifting and outstanding results in the non-financial metrics the company monitors and the regulatory settlement agreement to RSA, which found no basis for penalty or fine with the combination of these efforts.
We are grateful of the diligence and opportunity to spend time with our regulators ensuring that they understand what we do and also ensuring we perform and make highest churn as possible. With the RSA now in place, we can confidently focus on our mission of providing great value at affordable prices to consumers in 2019 and beyond.
I now want to talk a little more about our focus on lifetime value. Lifetime value or LTV has been a focus of ours for some time and we continue to execute on our plan of increasing lifetime value. We worked hard in 2018 to focus on great lifetime value products, and we’ve had a successful transition of our business as we move away from lower cost and lower margin products towards products with higher LTV. The results of this work are more clearly shown to investors with the ASC 606 accounting we have now adopted.
Products with higher lifetime value were also often more predictable, and we’ve been quietly increasing our light business throughout 2018. We now have a significant block of over 60 million in premium of life insurance business. By the end of 2019, have a targetable of over 100 million in this segment. I’m very happy to announce that we have developed new and innovative life insurance products, which will be distributed through our existing under 65 health channels, as well as a new life only channel, which is ecommerce focused. And my background actually includes helping to establish a life insurance business, and it’s the space I really enjoy. We believe there is great synergy between life and health, an opportunity that many in the rest of world have executed on but here in the U.S. remains a significant opportunity.
Our technology is very powerful and our next generation technology platform is incredibly well suited to a broader product offering. With a successful launch of MyBenefitsKeeper, our next-generation platform and app amenders adoption has exceeded our expectations. We’ve used our momentum to continue developing and launching new features and functionality to help our members get the most from their policies. We’ve introduced a new chat function and members can now chat with customer service directly through their member portal. We are seeing great feedback and usage with this feature, and it supports data that many customers prefer to use online tools and features instead of calling or finding answers with more traditional methods. MyBenefitsKeeper now offers members the ability to purchase additional policies directly from there member portal without having to contact their insurance agent. This streamlines the purchase experience while providing built-in digital controls that meet their high compliance standards. This feature gives members more freedom in choosing the types of products that fit their demands and needs, and it gives us a simple way of offering these products.
We have launched the brand-new MyBenefitsKeeper app on both iOS and android devices. Not only can members access their benefits and purchase plans from any desktop or mobile browser, they can now also access features in our new mobile app. The mobile app will still provide other features such as push notifications, quick access to ID cards and leveraging internal components of mobile devices for even better consumer experience, such as face ID security and locations services. Customer satisfaction is a top priority here at HIIQ, and demonstrating our unwavering commitment to customer satisfaction. We’ve partnered with one of the leading customer experience engagement companies in the world. Qualtrics, a SAP company, which provides top-tier customer satisfaction software to help their clients create lasting relationships with their customers. With HIIQs continued focus on increasing the customer relationships over longer period, Qualtrics has the tools and experience help us get where we are going. We are really happy with these new customer focused technologies and features, and we are very pleased with how they’ve been received so far. The future of MyBenefitsKeeper in creating an unmatched experience for our members is something we will continue to focus on throughout 2019. And I look forward to keep updating you all on additional features as they become available.
Throughout 2019, we also will focus more time and effort and resource on building at over 65 offering as we continue to broaden out our product offering. We have a lot of over 65 experience here already with many commercial relationships already in place. We simply wait until the business is ready from a technology point of view for a broader offering. The launch of MyBenefitsKeeper has been the trigger for us to now broaden out our product offering. We’ve analyzed this space for long time and understand the competition, the landscape and what we needed to be successful. The health insurance market should be viewed at distinct segments with the individual market being by far the toughest market to be successful in. Our track record of building an individual market business should provide confidence to our investors of our ability to expand our product offering. We look forward to sharing more about our strategies to leverage HIIQ’s existing platform and relationships to drive growth in this adjacent and substantial market.
I now want to get some commentary of what we are seeing in the individual market. I talked in the past about the estimated 30 million Americans who remain uninsured. Premiums have more than doubled since the ACA regulations were implemented, resulting in a significant affordability gap for the average consumer who does not receive a subsidy. I said before that enrollment on unsubsidized individual market plans fell by 20% nationally in 2017 with six dips seen drops of more than 40%. In the 2019 open enrollment period, new enrollments on the federal marketplace were down by more than 15%, while overall enrollment was down by about 4%. Meaning a larger portion of enrollments, which arrive from automatic renewals also huge is that the healthcare.gov Web site declined 17.5% year-over-year. This is important because it signifies a shift in consumers over the past year, and rather a fewer consumers actively shopping in the broader market, partly due to reduced federal advertising and outreach.
In addition to premiums, out of pocket costs have risen at a rapid pace among ACA plans. For plan year 2019, the average deductible available on the federal marketplace for a bronze plan is 6,443 for individual 13,402 for family. Even if a consumer is able to fall in ACA plan free subsidy, eligibility or higher income, the out-of-pocket costs with some of these plans can lead to significant financial hardship when the plan as used to pay for necessary healthcare. Following the HSS rule that allows longer durations for the short-term medical products, we were the first to market with multiple carriers offering a short-term medical coverage for up to 36 months instead but allow this longer duration plans. We also rolled out a variety of ton options and durations to meet the needs of consumers across the nation subject to each state regulations. While many of our competitors have experienced unexpected challenges related to STM in the fourth quarter, we have found success.
Consumer awareness of STM is still growing, and we remain poised to capture additional market share in this growing space, while educating consumers and providing an unmatched customer experience. We believe that longer duration STM plans will provide potential significant upside to our business in 2019 and in future years. The effects of the STM rule are projected to gradually ramp up and grow throughout 2019 and beyond. We remain excited about this expanded market opportunity and we will continue to deliver innovative STM product solutions to consumers across the country.
Turning to association plans. We remain excited about the opportunity that exists in the small group market with respect to the association health plan rule and believe our efficient data driven model is well suited to deliver these new plans. The ASP opportunity continues to be a strategic growth initiative for us and we’ll continue to develop his rules and regulations finalize and the overall market begins to adapt. We are continuing to develop and grow our Spanish-initiative, which will deliver a full end-to-end Spanish language health insurance solution to Spanish speaking consumers. Competitors and other health insurers got neglected to properly address the Spanish speaking community by not delivering complete Spanish-language solutions tailored to the needs of its demographic, which has contributed to consumer confusion and miscommunication.
Data has shown that 40% to 50% of the U.S. Spanish speakers with limited English proficiency are uninsured. This represents about 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. Through the course of our market research, we’ve also followed the development surrounding the growing popularity of the concept of Medicare for all. And we, along with most critical analysts, believe that probability of Medicare becoming the reality in the near future remains very low.
Also on January 1, 2019, the ACA mandate tax penalty was reduced to zero, which we believe is good for consumers and favorably impacts our market by effectively reducing the cost of our products by removing the cost of that penalty. I will make the point again that as a business, we are product agnostic and we will work of approximately 30 insurance carrier and benefit provider partners to design and develop new products depending on what federal and state rules were in place. Along with our core products and our 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 one product or any one carrier, and we also don’t rely on anyone 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.
Of course where there is an opportunity for us to capitalize on the tailwinds, we will do so. But as we have shown since 2016, our offering is built around our ability to be laser focused on the consumer and that is built on the vast amounts of data that we have access to, our technology, our customer experience and our compliance. Right now as an example, we have thousands of different combinations of offerings depending on state rules and consumer’s demands and needs. Often companies in the insurance space are restricted to only working in the small numbers of states, because that platform does not allow them the flexibility to be able to handle so many variations. And for us, that’s simply isn’t an issue. We have a competitive advantage where there is regulatory change. The strength of this business is the data we have access to, our technology, our customers experience and our compliance. And this is reflected in our 100 plus distribution partners, our 30 plus insurance and benefit providers, all of which work with us to ensure our future success.
In summary, HIIQ continues to be uniquely positioned to take advantage of the growing demand for affordable health insurance solutions. We appreciate your time today and we thank you for your interest in our company.
Now, I would like to turn the call over to Michael Hershberger, our Chief Financial Officer, for ending with some final comments.
Thanks, Gavin and good afternoon everyone and thanks for joining us. As Gavin mentioned, we have many promising initiatives underway for 2019. Before I talk about these initiatives and our results for 2018, I’d like to provide some background and color on our adoption of ASC 606 revenue recognition accounting standard. This is the first time that we are reporting our financial results based on ASC 606.
We adopted the standard at the end of 2018 and apply the standard retroactively for all of 2018. We have elected a modified retrospective approach. As such, we will not be restating financial statements prior to 2018. Under ASC 606, we have identified two performance obligations with respect to the individual and family plans, or IFPs and supplemental products utilizing our technology platform. The first performance obligation relates to the sales and marketing services associated with selling a policy to a member. This performance obligation to the customer is deemed complete upon the sale to the member. Once satisfied, revenue recognition for the sales and marketing performance obligation is substantially complete and revenue is recorded based on estimated life time duration of the policy using historical persistency rates. Revenue recorded for this performance obligation is based on products duration, which is constrained to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. We have allocated approximately 95% of the revenue for this performance obligation.
Our second performance obligation relates to the billing, collection and member support component of a continuing policy that I will refer to as member management. This performance obligation is satisfied overtime as the member continues with the policy. 5% of the revenue is allocated to the member management performance obligation. With our adoption of the new accounting standard, all of the costs associated with acquiring customers are recognized upfront. This effectively creates a mismatch that pushes approximately 5% of the expected lifetime value of a plan in the future periods, while 100% of our third-party commission expense is recognized upfront.
I would also like to note that starting with this quarter, we are providing new sales and operating metrics in our earnings release that we believe will further increase transparency into our business, providing greater clarity to evaluate the progress that we are making towards our targets. These metrics include; expected duration units of submitted IFP and supplemental applications sold by channel; the constrained lifetime values of our health insurance products broken out by key categories; revenue by performance obligation and a revised calculation of our adjusted SG&A. We are less focused on our non-GAAP metric of premium equivalents or total collections as our adoption of ASC 606 has diminished this metrics’ important. However, we will continue to focus on improving our margins at the insurance carrier level. Also, while we have historically provided the number of submitted applications by product, the relevance of this metric has also diminished following our adoption of ASC 606 under which the expected duration of units becomes the key economic revenue driver.
We have also added some new balance sheet categories along with our adoption of ASC 606. For assets, we have added contract asset, which can be considered as a proxy for 95% of the expected revenue based on our policies in-force at the end of the period. We also added commissions payable where all the expected commissions payable to the distributors at the end of the period net of some advanced commissions are recorded. Retained earnings and stockholders’ equity were also increased due to the adoption of ASC 606.
Turning to our results, under ASC 606, our 2018 revenue was $351.1 million, consisting of $330.7 million from our sales and enrollment performance obligation and $20.4 million from our member management performance obligation, compared to revenue of $250.5 million, which excludes the impact of ASC 606 in 2017. 2018 reported revenue compares favorably against our revenue calculated excluding the impact of ASC 606, which was $291.1 million. Our newly added metric of expected duration units was slightly greater than a million months, up 7% year-over-year. I would note that in our earnings release tables we have also broken out fulfillment only and outsourced relationship, which represents low-margin products where we outsource all of our sales and marketing obligations and some of our member management services. After excluding these outsourced IFPs, the expected duration units was up 16.6% year-over-year.
Total selling, general and administrative expense or SG&A was $74.3 million in 2018 compared to $64.4 million in 2017. This increase is due to a $5.1 million increase in indemnity and other related legal costs associated with the closing of our market conduct examination. Additionally, SG&A increased $5 million to higher stock-based compensation and related cost and $3.4 million increase in severance, restructuring and other charges. Again, in the vein of simplifying our reporting definitions, we have redefined our adjusted SG&A to include total SG&A less stock compensation and non-recurring costs. In the past, marketing cost of acquisition were deducted from our core SG&A. However, under the new accounting method, marketing costs are now aligned with the lifetime value of revenue from those costs. Adjusted SG&A for 2018 was $50.8 million compared to $54 million in the same period in 2017. The decline in adjusted SG&A in 2018 was driven by efficiencies and leverage from our highly scalable technology platform that integrates carriers and distributor, while allowing consumers to quote their policy, buy their policy, print their insurance card and electronically secure health insurance coverage.
Our third party commission expense as a percentage of revenue was higher with the adoption of the new accounting standard due to the requirement under the guidance to expense the third party commissions upfront, but only bringing forward 95% of the revenue. The net result of this requirement was approximately $7 million unfavorable impact on our 2018 earnings. Also with the adoption of ASC 606, we had $238 million of taxable income allocated to periods prior to 2018. We had about $151 million of accrued commissions that we expensed for GAAP purposes but were unable to expense for tax purposes. These commissions will be deducted as paid and represent future tax deduction. Income tax due is payable over the next four years.
Under ASC 606, EBITDA was $34.5 million for 2018, compared to $47.3 million in 2017, excluding the impact of ASC 606. EBITDA was unfavorably impacted by several one-time items in 2018, including an increase of $5 million for stock-based compensation, a difference in tax receivable agreement liability adjustment of $13.3 million, a reimbursement to the states included in our market conduct examination that concluded last December of $3.4 million, other related legal costs of $1.7 million and the severance payment to our founder and several other former executives of $3.7 million.
Under ASC 606, 2018 full-year GAAP net income per diluted share was $0.97, compared to $1.50, excluding the impact of ASC 606 in 2017. 2018 GAAP net income per diluted share was impacted by several one-time items that were consistent for the items that I talked about during the EBITDA differences.
Turning to our non-GAAP metrics. Adjusted EBITDA and adjusted income per share were both favorably impacted by ASC 606. Adjusted EBITDA for the full year was 28 — for the full year of 2018 was $59.4 million, compared to $45.9 million, excluding the impact of ASC 606 in 2017. Full-year 2018 adjusted net income per share under ASC 606 was $2.60, compared to $1.67, excluding the impact of ASC 606 in 2017.
We believe that our non-GAAP metrics of adjusted EBITDA and adjusted income per share, provide a meaningful measure of our financial performance. We provided a reconciliation of our GAAP metrics to our non-GAAP metrics, and our earnings press release was published earlier today.
We continued to make short-term loans to our distributors based on actual sales that we refer to as advanced commissions. These advanced commissions assist our distributors with our upfront cost of acquisition and provide them with working capital. We recover the advanced commissions from future commissions earned by the distributors on premiums that we collect over the period of which the policies renew. As expected, in the fourth quarter, we experienced a sequential increase of $9 million in advanced commission loans for a total of $51.7 million outstanding at year-end, up from $39.5 million a year ago.
Under ASC 606, a portion of these advanced commission balances were netted against our new liability commissions payable. We also added to our long-term advanced commissions during 2018 for those advances that we make on longer duration products that are expected to be received in periods greater than 12 months.
Our strong cash flow allowed us to complete our initial $50 million stock buyback, of which $36 million was bought in the fourth quarter alone. Our Board recently increased our stock buyback authorization to $100 million.
Based on confidence and our strategic roadmap and belief, our shares represent a compelling value. Share repurchases will remain a priority in our capital allocations plans for 2019, which will be enhanced by the new credit facility announced today. This new credit facility extended our current 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 three years through February 2022.
Cash and short-term investments totaled $9.3 million at the end of the fourth quarter of 2018, down from $40.9 million at the end of 2017. During all of 2018, we purchased approximately 1,550,000 shares of HIIQ stock with a total investment of about $55.9 million. The average purchase price was approximately $36 per share, which we believe represented excellent value. We had $15 million drawn on our line of credit at the end of the year.
Looking forward to 2019. We intend to further our strategic focus on selling longer duration plans, which carry significantly higher lifetime values while providing consumers with the compelling and affordable healthcare solutions. We expect to generate between $430 million and $440 million in revenue for the full year, resulting in an expected growth rate of approximately 22% to 25%, year-over-year.
We expect to generate adjusted EBITDA of between $72 million and $77 million, and adjusted net income per share of $3.20 to $3.35. We believe we can grow EBITDA and earnings in line with revenue, despite the adoption of ASC 606, which differs approximately 5% of high margin revenue in the future periods, while recognizing 100% of the third-party commission costs upfront, creating an even larger deferral in 2019 into 2020. We expect our revenue and earnings to build through the year with Q4 being the high point.
As Gavin mentioned, we have numerous growth initiatives in 2019, such as the over 65 market, Spanish market and expanding our life insurance offerings. Our earnings expectations reflect continued strong operational results and improved scalability, which will allow us to reinvest back into product development.
Thank you for your time today. With that, I’d like to hand the call back to Gavin for some concluding remarks before Q&A.
Thank you, Mike.
We had a strong finish to 2018 and business trends have accelerated in the first two months of 2019 with expected duration units increasing 24% year-to-date. We go into this year with a broader product offering than we have ever had before and we are positioned to be able to take advantage of the ever-changing landscape in 2019 and the years beyond, all built on our new, next-generation technology platform, MyBenefitsKeeper.
HIIQ continues to be uniquely positioned to take advantage of the growing demand for affordable health insurance solutions and we will continue to provide a safety net to consumers and their families who otherwise would be unable to find an affordable solution. We are focused to continue to be a leader in our market and to reach as many consumers as possible. I’m even more excited about our future than I have been in the past and I look forward to explaining the opportunity ahead of us as we travel and meet with investors.
[Operator Instructions] Our first question comes from the line of Richard Close with Canaccord Genuity. Please proceed with your question.
Thank you. Obviously, a lot to digest, and we’ll have to rebuild our model. But, just a quick couple of questions. Mike, on the 2018 report under 606, on December 20th, you guys gave us the $67 million to $72 million adjusted EBITDA guidance. And here, you’re reporting $59.4 million. So, could you just call out the difference between what the guidance was and what you actually reported, that delta?
Sure. We were working — as Gavin mentioned and as I talked about, we’ve had I would say a long session working with our consultants and working with our auditors on this. And we evaluate every aspect of it. And I would say, we took a very prudent approach as we thought about the constrained lifetime value of our products.
Okay. So, that’s not the $7 million that you’re talking about that was called out that gets pushed ‘18 to ’19…
There is two elements. There’s the mismatch between the revenue and the cost — 100% cost and the 95% revenue, which is the $7 million, which is a very easy thing for us to point to, because that kind of gets you to where we would have been. And then, the second part of it is, we use independent third-party expert firms to evaluate how we should value these longer duration plans. And the approach we took has been very prudent, which is we believe a right thing to do. And this is why we’re giving a lot more metrics to people to really understand duration units. And as we go through 2019, we’ll update this and we’ll keep evaluating the approach taken. But, we definitely want to be on the side of future adjustments, we’d like those adjustments to be upside. And so, that’s why we took this prudent approach.
Okay. And just a follow-up. And the policy policies submitted and enforced, understanding these are old metrics, but both of those came in below our estimates. And I know that you deemphasized that low margin, high volume policies throughout the year. I guess, I’m just trying to understand the comments on record growth and momentum, but looking at the old metrics come in the forecast.
Yes. So, we had a 4% increase in submitted apps for non-owned distribution which reflected a period of record sales in that channel. So, the comments we made, we stand by those comments. But, what’s a more meaningful comparison now is the 19% increase in expected duration units from the third-party distribution units. So, it would be 4% increase in applications and 19% increase in expected duration units. Of course, it’s very likely, you have even higher percentage increase of revenue or lifetime value revenue associated with those products. So, for us, one of the big differences in units was at Agile where we went from doing three months only plans and very kind of low cost, low margin to much greater duration and much greater value. So, we get some commentary around how Agile had a large decrease in submitted plans because you’re comparing apples to oranges. So, they actually had a — we’re very pleased in the first part of this year they actually have an increase in those duration units year-to-year, January, February versus prior year. So, a number of different moving parts, and we have got metrics in there. But the comment around record sales period, that will and still is accurate.
Our next question comes from the line of Mike Grondahl with Northland Capital Markets. Please proceed with your question.
In terms of the duration, could you kind of help us understand what the guidance assumes for duration, maybe for a one-year plan and a three-year STM plan, and what do you think that might look like maybe six months or year from now?
Yes. I will take the first part and Mike can add some color. We chose two different external experts at firms, very, very data driven. And with all the other policies, except the 36 month plans, there was vast amount of data we could point to in order to perform the analysis and give — where is the good number to use, bearing in mind that we have this prudent approach with 36 months or plans that are available to that period, there isn’t any that data available. And so, we — you work with the expert — and this is why you have third-party expert firms. And we took a prudent approach against it. And so, as we move through time and we gather more data, there is certainly a great opportunity for us to be able to revalue those plans, and as we say, the typical approach we’ve taken, we expect future changes to be positive. And so, we’re comfortable with the approach taken.
Got it. And then, maybe just following up on that. The 2019 guidance, does that include anything for the over 65 plan or the association plans or even improved carrier splits or a buyback?
It doesn’t include any of those items. We build the guidance from the ground up each year. We take a very prudent approach to that with existing distribution, existing products. We have new products coming on line, each of the items you mentioned, which will all give us a potential upside, if you go through the year. So, we have a pretty good view around what we will do in over 65 and we haven’t included any of that into the guidance. We like to go and execute and see some success before we build that in. So, there is certain opportunity for us; we’ll be talking about that a lot more through ‘19, but you’re quite right. None of those items are in the guidance.
Our next question comes from the line of George Sutton with Craig-Hallum. Please proceed with your question.
So, as we look at January 1st as a start date and December 31st as an end date, can you give us a sense of — because Gavin you mentioned, a growing list of carrier partners and distributors. Can you just give us a sense of how different December 31st might look from January 1st?
Yes. We’ve seen this great shift towards greater ecommerce. We saw that in the fourth quarter; we’ve seen that again through 2019. That’s really pleasing for us. I think we’ll see ecommerce being a greater share of our business and it has been historically. The longer duration plans, this has been a big focus of ours. I think we were very successful in 2018 of getting rid of these lower margin, lower benefit plans, which tended to not last as long as long either. So, I think really, it’s a — we’ll see this nice shift through the year with the greater emphasis on ecommerce, a greater emphasis on life on that ecommerce side. We have new products in that life space, we haven’t had before. We have a specific ecommerce life channel. I think in that over 65 spot, we will see some exciting things in that area. So, it’s a great year. We’re excited to work here and share with people as we best can.
I wanted to give you credit on your bold moves on the buyback side in Q4 in particular. So, also going and getting an increased credit line, I think the message is very clear, having an average purchase price of $36, you view current prices as very attractive and you put a credit line in place, not to have it unused; you put it in place to be active. Is that a fair assumption?
I think that’s very fair. We think that it’s a great use of our capital allocation strategy, it continues to be. And you are right, we’ve put the credit line in place for a reason and the approach will be consistent as it was in the fourth quarter. So, thanks for calling that out. It’s something we are happy to keep supporting up.
Our next question comes from the line of Greg Peters with Raymond James. Please proceed with your question.
Gavin, I look forward to hearing your accent in Spanish when you get upto speed there.
Yes. So, I guess, two questions, and I appreciate the color you provided around guidance both in revenue and adjusted EBITDA and earnings. And I’m just trying to bridge the gap between the new disclosure around expected duration units. Look at the results in 2018 versus 2017, you mentioned on the call that January and February were quite strong. Would it be reasonable for us to assume that the expected duration units is going to grow at a rate commensurate with revenue growth or is there some metric I’m missing in between the two?
Well, there is a link, but thing that we should see is over time as we’ve moved away from sort of lower margin products and we have more benefit rich and higher margin, we should see the durations increasing and then the revenue could increase at a faster rate than the duration units. So, it’s a very useful metric with submitted apps becoming a tougher comparison because moving from multiple three-month plans to longer duration plan and moving from lower margin to higher margin plans. So, the duration units is definitely a more meaningful stat. It’s certainly linked to revenue. But, what we are seeing is revenue growing at a faster rate than the durations are growing. So, I hope that’s helpful.
And Greg, the way that I would describe it is really our expected duration units are submitted policies during that period, multiplied time the expected lifetime value for each of those policies sold. So, my answer to you would be, yes. We continue to increase the persistency of our policies and force through many different components including MyBenefitsKeeper, that’s been a real I would say, a member management enhancement that allows the policies to stand longer.
I will follow-up with you offline. I guess, the other question — and I know you called it out to some degree on the balance sheet, Mike. But, I was looking just simply at your operating cash flow and it is down think around $19 million for the full year versus $42 million the prior. And I know that you mentioned the contract asset issue in the balance sheet. Can you give us some color around what’s going on in free cash? And would it be fair — is this going to be a revert back to some — the growth rate and free cash going to match revenue growth or earnings growth, or give us some sort of perspective on how we should be thinking about that?
Sure. The way that we think about our free cash flow is really more of an adjusted item. So, within our operating cash flow, our advanced commissions that we consider really loans to our distributors is included in there as a used. So, the ways that we think about our cash flow, you can say okay, our cash decreased $31.6 million year-over-year, however, we brought back $56 million worth of stock; we increased advance commissions by $12 million; we paid for some severance and restructuring of our former executive of $3.5 million; and then, we had our multistate examination concluded that including the legal fees was little over $6 million. So, I look at it to say, really our cash flow from operations adjusted for those items is over $30 million, which really is close to 60% of our adjusted EBITDA.
Is that — just a follow-up on that, is that 60% of EBITDA sort of a good benchmark to think about as we think about free cash flow going forward?
I think that that’s a good bench mark. That’s correct.
Our next question comes from the line of Steven Halper with Cantor Fitzgerald. Please proceed with your question.
Hi. So, embedded in the revenue guidance or what — I should say, what is the implied application growth assumption in the revenue guidance? And what’s your confidence level on that, especially since applications were down 2018 due to I guess fewer renewals, right, because you’re doing long-term contracts. I understand that. But, what’s the implied application growth assumption there?
So, we break it down by distribution partner, by product type and we’ve really been focusing people on this for duration units, to a point where our in-house commercial team, the way they have measured historically, would always have been by submitted applications. And now that remuneration, that performance metrics is linked to that duration unit size. So, we do look at both; obviously there is a link between each. But, because we’ve been shifting the product type so significantly for the better we, — there’s plenty of people buying the products, but duration units is really where we’ve been focused.
But when you look at the numbers you reported on the application, down 15% in 2018, obviously was some of it was on purpose, but are you able to break down what percentage or what impact that they were fewer renewals of three months, contracts versus longer term? How much of that impacted the 2018 number?
Yes. So, I mean, the way we kind of broke it out is we looked at our non-owned distribution, and in the fourth quarter the submitted applications were up. We had that nice 4% increase, even though we were moving — we terminated large relationship, we’ve moved away from lower margin products, terminated several relationships but one specifically. The decline in applications was within our agile unit where we really shifted value unit from going with just the cheapest available option online to more benefit-rich products and really much greater duration products. And so, I think the way we are viewing it is our non-owned distribution in terms of units should keep increasing, and I think we’ll see some good comparisons on that as we go through the year. We certainly see that in the beginning of the year. But, really where we’re seeing this great pickup is that 24% year-to-date increase overall of total months sold on expected duration units. And so, there are a number of moving parts. And we know moving to 606 is going to be a little bit noisy. And so, we’ll work with analysts and investors to really give as much insight, as much knowledge as we can because the metrics that we’re using totally are showing those very pleasing shift away from certain products. We’ve seen a little more e-commerce, and we had this really strong start to the year.
Our next question comes from the line of Frank Sparacino with First Analysis. Please proceed with your question.
Hi. Gavin, just one for me. I was hoping you could give a little bit more detail just on the life side of things. I know historically, you have talked too much about that part of the market and maybe what you think is changing in that space and what type of attach rates you are seeing and any other color? Thank you.
Yes. So, historically, our life book has grown — being attached to the health policies, it’s all been through kind of under 65 health channel. And as we’re seeing more and more success with it and we do all this competitive analysis, we identified a shift at consumers for use of technology and to try to really simplify buying processes whilst giving them as much information available using really technology-enabled tools. So, MyBenefitsKeeper is designed and built exactly for that. And then with distribution partners and carrier partners that we acquired through 2018, opportunities developed with life only channel, which a lot of the hard work’s already being done. And so, we have some nice expectations for that through 2019 and onwards because we’re really taking existing relationships and building on to those. So, life is a very predictable, it’s a great product, it fits this business incredibly well. So, we did it before as an addition to our core products and then now is an opportunity for us to make more of an impact in that space. And based on the analysis we’ve done, we think it’s a really great opportunity.
Our next question comes from the line of Randy Binner with FBR.
I just wanted to try the question on the duration again, and I appreciate all the disclosures around the total months sold and this concept of duration units. But, I think just intuitively, especially on 36 months plan, is there a way to say that duration assumption is something like 8 months or 10 months or did I miss that you’ve said that in all of this disclosure, because to me that seems more relatable than the other ways of seeing it?
Yes. So, we didn’t before, I guess to have this helpful as possible, is we had a roomful of accountants and advisors and experts from several different firms, and what happens is you end up with a very prudent approach. So, we had a lot of data on 12-month plans because that’s all what it existed before. And so, it’d be quite likely that you would then look at 36-month plans and say, well, the best data that we have shows us there is some 12 month options. So, we have a good view around where we think 36-month plans will fit. But, the way to apply the rule and the way to get agreements from this third-party expert firms is to go with the data that you have and the data was all based on 12 months plans. So, right now for 36-month plans, it looks very similar to 12-month plans. And that’s a very prudent approach. And as we go through time, once these plans are more than 12 months old, there is a lot of them still exist, we’ve got a great opportunity to then look and revalue those plans as we build the data set. So, I think through this process, we had a good feel it before it was landing. And as we look to the final stages, the way to agreement was to be more prudent and more prudent. And so, that’s where we landed. So, I believe we gave a specific number of months, some of that’s a little commercially sensitive. But, if you look at the approach of how people have been doing it, the data we have is the 12 months. So, it would be logical that 36 months would look very similar to that. And as we move through time, it will adjust.
That’s helpful. I had another follow-up on other question too. So, I believe it was the opening question that talked about how the adjusted EPS came in different than the guide from December 20. I think what I heard you all say is that part of the final review, which appears to be conservative, is that — did you not have the 5% revenue breakout for member performance in the guide back in December 20th, was that one of the main pieces that caused the delta there?
Yes. It is one of the main pieces. It’s a complex process involving our internal team, our external auditors and two different sets of advisors. And as we’ve gone through it — this is reviewing every contract, every agreement, everybody is there, they are going back several years and everybody’s worked pretty hard to try and to try and get it right. And so, some of the assumptions have shifted over time. And every time they shifted, we’ve gotten more prudent. There is two approaches to this. You can come out little aggressive and hope you don’t have to make any adjustments later or you can be prudent and feel pretty confident that any adjustments will be further positive. So, back in December, I think we made some assumptions and some of those assumptions have shifted and became more prudent. So, we try to call of that one specifically because we can point to a number. And then, the other piece would be on the valuations. It’s a good thing for the business that we are selling a lot more of these 3 by 12s, or 36-month plans when we anticipated. But a challenge value to that. So, if you want your advisors and your experts and the room full of accounts locked in a room to agree, then you take a prudent approach. And that’s what we’ve done and will assess this as we go through. And we will keep putting as accurate view on it as possible. We are certainly on that conservative side.
Our final question comes from the line of Mark Argento with Lake Street Capital Markets. Please proceed with your question.
This is John on for Mark. Thanks for taking the question. Just briefly, as you guys kind of shift towards focusing more on the ecommerce business, can you kind of walk trough how the margin and ecommerce of that business is different from a third-party and kind of how you see that trending as a mix going forward?
Yes. I’ll start and then Hersh [ph] can add some color. So, historically, there used to be a bigger difference in margin because the Agile unit was selling a lot of these lower cost, lower margin plans, and that shifted over time. And so, the difference shouldn’t be as great as it was before. We had third-party ecommerce partners, that would be very successful and improve that there is certainly a large demand online to consumers to buy more benefit-rich products. And that’s how shape our strategy, it’s one of the advantageous of having over a 100 distribution partners and many different carriers as we get a large amount of data. And there used to be a bigger difference over time, but we certainly see that narrowing. So, agile is well-positioned to have a successful year. But, because of — we’ve been working with the team, there is a really excellent team, very motivated people. And we feel the position to have a really nice 2019 about business, but we’ve been very prudent in our forecasting and our planning. And we will update that as we go through, but it’s had a strong start to ‘19. And like, we see 68% in the fourth quarter year-over-year, the ecommerce has outperformed our expectations and we see that continuing down the past.
That was a great summary, Gavin. I would even add that prior to the adoption of ASC 606, the Agile, we have that upfront cost of acquisition and then we have the revenue overtime or now we are able to capture that revenue at — most — 95% of that revenue out of point in times. So, there is a much better matching for us for the cost and acquisitions.
Ladies and gentlemen, we have reached the end of our question-and-answer session. I now would like to turn the call back over to Gavin Southwell for closing remarks.
Well, thank you everyone for your interest in the Company. We look forward to answering questions from analysts or investors as we move forward. And we look forward to talking more throughout 2019 about the initiatives we’ve covered and other things that we’re working on. So, thank you all and we will talk soon.
This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation.