Description

SUMMARY THESIS

• Asymmetric Risk / Reward with Upside Potential of 100%+ Over the Next 12 Months and 300%-500% in 2-3 Years  - HIIQ is the most compelling long opportunity I have ever come across. My conservative base case is for the stock to double over the next year (including 30%-50% upside potential into year-end) with multi-bagger potential thereafter (unless the Company gets acquired first). The stock is currently trading well below what my work suggests the stock is worth even in unrealistic downside scenarios, making the opportunity about as asymmetric as they come. The crux of the long thesis is refreshingly simple, predicated on a currently massive ~50% relative valuation discount even on laughable Street numbers that HIIQ will continue to beat by 30%+. With both numbers and valuation so unsustainably low, the stock should continue an  impressive upward trajectory on significant near/longer-term earnings outperformance along with the simple growing awareness of the story
  
  

BUSINESS OVERVIEW

• Innovative Healthcare Technology Company that Develops and Distributes Short-Term Health Insurance Plans Across the United States  - This is done on behalf of the insurance carriers so HIIQ is taking no actual underwriting risk. HIIQ acts as a claims administrator of sorts on both the front and back end, allowing the Company to become firmly entrenched in customer workflows. Their insurance products d products are a far better alternative than Obamacare and far cheaper than COBRA, ultimately designed for the self-employed and anyone else who is temporarily uninsured (e.g. divorce, early retirement, military discharge, graduation, part time or seasonal employment, unemployment, etc.)
  
  

• Highly Profitable Operating Model with a Multi-Year 20%+ Top-Line Growth Outlook - HIIQ grew the top-line 76% in 2016 and 40% in its most recent quarter and is poised to sustain 20%+ growth well beyond 2018. The Company’s turn-key operating model is highly profitable and scalable with distribution thru both its powerful technology platform, AgileHealthInsurance.com, and call centers. HIIQ is net cash, eclipsed 20% EBITDA margins in its most recent quarter despite a still modest annualized revenue base of just a couple of hundred million, and converts an incredibly high percentage of EBITDA to FCF (90%+ in the first half of this year) with minimal SBC. Margins / FCF are poised to only improve from here given a continued mix shift towards Agile (only ~10% of policies are submitted thru Agile today)
  
  

KEY ELEMENTS OF THE LONG THESIS

• Significant Upside to Street  2H17  Forecasts  - HIIQ will beat Street 2H17 revenue / EBITDA forecasts  by at least 15%+ and 30%+, respectively. Should this outperformance (which would be entirely in-line with the it’s recently quarterly  track record of success) prove correct, it’s not out of the realm of the possibility that HIIQ finishes 2017 with a P&L approximating  where the Street is for 2018!  There are two primary factors driving this dynamic, including:
  
  

• An Already Highly Conservative Management Team Took an Incredibly  Cautious Approach to Guidance  -  There are three primary reasons initial 2017 guidance was set conservatively:
  
  

(1) It was unclear how, if at all, the 4/1/17 implementation of a new HHS policy mandate limiting the duration of its Short-Term Medical (STM) products would impact its growth trajectory, so management decided to approach FY 2017 guidance with extreme caution and essentially assume a doomsday scenario. Now two full quarters into the year, the policy change has proven to be a complete non-issue and growth has even accelerated since April 1

(2) A new CEO (Gavin Southwell) that came aboard late in 2016 intent on making sure he didn’t repeat the errors of an old CEO that had completely botched the positioning of the Company and how to play the “expectations game” a few years prior

(3) This is a management team with backgrounds grounded in Accounting and there’s an existing conservative bias that stems from that (their words, not mine)

• The Street is Still Fairly New to the Story - While still not particularly robust, Street coverage of HIIQ was practically non-existent up until a few months ago when Canaccord, Craig Hallum, and Cantor Fitzgerald, all launched on the name. Before they launched, “coverage” consisted of Raymond James (a complete buffoon I’ll touch on below), Lake Street Capital Markets, Northland Securities, and First Analysis. So, coupled with already conservative management guidance, the new covering Analysts grounded their quarterly numbers to the “existing Street” numbers which were, and continue to be complete nonsense. For example, current Street Q317 EBITDA expectations of $9.2 million are virtually identical to where Q3 forecasts stood before Q1 even though in the subsequent two quarters HIIQ has beat EBITDA by an average of 30%+ while operating momentum has continued to accelerate at an increasing rate. FY 2017 Street numbers have only come up by the (impressive) magnitude of the Q1 and Q2 beats and thus remain entirely dismissive of the extreme conservatism underlying management’s approach to guidance and in stark contradiction to the multi-quarter visibility of the business model, historical seasonality, and the Company’s robust current operating trajectory. Some additional obvious illustrations of this dynamic include:
  
  

• With respect to Q317 revenues, the Street is modeling NEGATIVE 11% sequential growth, even though Q3 revenues have sequentially  grown an average of  9%+ over the last five years (and never less than 4%)
  
  

• With respect to 2H17 FCF, the Street is assuming $7.5 mm of FCF in Q3 and Q4 COMBINED vs. the $20mm+ that was generated in the first half of the year and the $19mm of FCF generated in the 2H16 (note the only difference between 2H17 and the 2H16 is that EBITDA will be much higher). Cut another way, even on the Street’s understated 2H17 EBITDA forecasts, their current FCF assumptions imply sub 40% conversion vs the ~90% conversion the business has been averaging over the last five quarters
  
  

• Significant Upside to Current Street 2018 Forecasts  - The Street has 2018 revenues growing just 15% off their significantly understated 2017 forecasts and just 6% if using my more realistic 2017 numbers. This s a far cry from what HIIQ’s current operating trajectory would suggest as well as the 25% sustainable  growth expectation management suggested on its Q316 call (excerpts below). Besides the fact that growth continues to dwarf this 25% bogey, perhaps most interesting is that the below quote was said on November 3rd, 2016 amidst a relative perfect storm of events that included an impending presidential election (where HIIQ was fully prepared for a Democrat victory) and, a few days prior in October, HHS had just issued its final ruling on the STM policy change with the implementation date five months away. If HIIQ thought it could sustainably grow 25% even with these potential headwinds while also assuming its STM business vanishes overnight (represents 25%-30% of total policies in force), the fact that these headwinds have since  turned to tailwinds would suggest a more realistic 2018+ growth outlook is now significantly greater than 25%. Off my 2017 numbers, conservatively sticking with 25% top-line /  30% EBITDA growth in 2018 would still imply ~$63mm of EBITDA, nearly 30% above the Street
  
  

Q3 2016 Earnings Call

Michael D. Hershberger. Chief Financial Officer, Secretary & Treasurer, Health Insurance Innovations, Inc.

“We feel that the carriers are going to probably reduce premium on a three month policy, because there's just less risk of customer getting some new illness. And so, we think premiums are going to go down. Broadly, before I get too specific on the Short-Term Med  three month opportunity, we're walking into 2017 assuming that Short -Term Med is not a viable product. We're building the plan that says, we can grow at 25% top line and 30% bottom line without any form of Short-Term Med. But we're also looking at a bunch of different products. And one of the products we're looking at is the question you just asked. Can three month Short-Term Medical be viable? And it might be. But we haven't yet understood yet and the carriers are still trying to sort out, what are they going to charge for, how would we sell it, how do we deal with the fact that people may want to renew it. And it's fair to say that HHS made it clear in the ruling that we could sell three month and then another three month as long as it's a different carrier. So we have to study all that, understand that, we're putting just as much effort into that as we are other products, such as what we're calling a Gap product, which is a configured Limited Med product that makes it even more fit very specifically with the Bronze plan, as I mentioned earlier, because it could be a good supplement to the Bronze. So we're looking at that question, Mark. We're not counting on it working, but we're going to try to find out. And if so, we're going to sell it.”

Patrick R. McNamee

Chief Executive Officer & Director, Health Insurance Innovations, Inc. A

I just – I can't imagine, don't want to imagine, do often think about our risk that 2018 can't be a year similar to 2017. I mentioned earlier, our goal is to go 25% top line and 30% bottom line. That's why I'm here, that's why I believe in this company. That's why I joined, that's not guidance, but there's nothing in my vision that says 2018 can't be exactly like 2017.

• Asymmetric Risk / Reward with 100% Upside Potential in the Next 12 Months: Stock is Unquestionably Cheap on an Absolute and Relative Basis  - Despite significantly higher top and bottom-line growth and a robust FCF profile. On Street numbers that are still far too low, HIIQ is trading at  silly discounts to both high growth healthcare technology businesses as well as tech-enabled service businesses outside of Healthcare with at least quasi similar financial profiles and growth trajectories
  
  High Growth Healthcare Technology Peers

High Growth, Technology-Enabled Service Peers (Ex. Healthcare)

Simply put, asset light businesses with net cash positions that are growing the top-line at 35%+, EBITDA at 75%+ and print cash do not trade at low double digit EBITDA multiples at and high single digit FCF yields. We’re not talking about a 5%-10% relative valuation disconnect here - more like 50%. Realistically, in a status quo market backdrop the only direction this multiple goes is up (just as its been trending)  as long as HIIQ continues to hit numbers. I spent a fair amount of time above detailing why HIIQ not only will hit numbers, they will smash them. That’s said, for the sake of argument let’s assume I’m dead wrong and HIIQ grows closer to Street forecasts in the near and longer/term and the multiple gets no lift off current levels. Even in this scenario there is a credible argument to be made for 30%+ upside to the stock from here

To get to 25% potential downside from current levels, one would effectively have to suddenly ascribe HIIQ ehealth's revenue multiple, which is completely nonsensical for reasons the below simple side by side should clearly illustrate (with HIIQ numbers assuming current Street expectations)

Multiples and comps aside, HIIQ’s aforementioned cash flow profile provides strong intrinsic value and  compelling downside support. To run out a DCF that gets you to today’s price one would have to make the below unrealistic assumptions

• My expectation for massive 2H17 / 2018 outperformance proves incorrect and HIIQ ends up growing in-line with the Street over the next six quarters
  
  

• Top-line growth falls off a cliff from the ~40% the business is growing at today to barely above GDP growth in just a couple of years
  
  

• EBITDA margins come to a complete standstill from the Street’s current 18.4% 2018 margin assumption even though (a) HIIQ put up a 20%+ margin in its most recent Q2 and (b) The continued mix shift towards Agile will only be margin accretive
  
  

• A reasonably punitive 10% WACC
  
  

Said slightly differently, it’s far easier to run a credible DCF implying 100% upside than it does to today’s stock price

• Stock Poised for a Continued Squeeze as a Stale Short Thesis Increasingly Gets Washed Out  -  HIIQ still carries double digit short interest and anyone hunting for the bear thesis on this name will likely come across a one-page Raymond James downgrade from June titled “Downgrade to Market Perform Due to Valuation”.  On valuation, the only rationale he provides is the below (couldn’t even make something like that up if I tried)
  
  

“Valuation: HIIQ currently trades at 10.4x our 2017 EV/EBITDA estimate, compared with the peer group average of 15.5x.”

Outside of this thoughtful valuation critique, he then highlights the below:

“Multi-state examination of HCC’s products: In April of last year, the company received a notice that the

Indiana Department of Insurance was leading a multi-state examination of HCC Life Insurance Company’s short-term medical plans (which HIIQ distributed), regarding ACA compliance, marketing, and rate and form filings. As of March 2017, 42 states have joined the examination.”

While he is indeed correct that there is an ongoing multi-state examination involving HCC (an insurance carrier that represented 22% of HIIQ revenues in 2016), he egregiously fails  to mention that HIIQ dropped HCC as a customer after 2016 and thus HCC will represent 0.0% of HIIQ’s 2017 revenues  Even so, for the sake of thorough  diligence I spent considerable time walking thru this with management and the short answer is that at most HIIQ may pay a fine in the $1 million range just to make it go away but nothing beyond that. Besides the HCC multi-state inquiry, the Raymond James Analyst also flags “additional state investigations”, which as of today only consist of:

• Massachusetts - Similar to HCC, this inquiry relates to the questioning of the insurance carrier, UnitedLife, which settled for $2.8mm in late April 2017, clearly implying any fine for HIIQ would be peanuts (management does not seem to be expecting one at all)
  
  

https://www.bostonglobe.com/business/2017/04/04/insurance-company-accused-deceptive-practices-pay-mass-settlement/okeTqTWUDXiBk6O5LxX48H/story.html

• Texas - This relates to licensing rules and marketing inquiries that are completely  commonplace in the industry. My conversations with management would indicate that they believe this is a complete non-issue, which certainly foots with the typically miniscule precedent fines from the TDI (Texas Department of Insurance) that frequently don’t even crack four figures
  
  

https://wwwapps.tdi.state.tx.us/inter/asproot/commish/da/clips2016.asp?page=4

Raymond James aside, our prime mentioned to us that much of the current short base is quants,  which is likely supportive of a continued squeeze and would reconcile with my conversations with multiple Sellside Analysts that have unanimously told me there are never any inbounds from shorts absent an email here and there asking about the RJ downgrade

PRIMARY RISKS / MITIGANTS

• With both Street numbers and HIIQ’s multiple as unsustainably low as they are, realistically the biggest risk to the thesis is some wacky, unforeseen regulatory change that temporarily hurts investor sentiment just as the old CEO alluded on HIIQ”s Q316 call:
  
  

The “beauty” of this risk (or lack thereof) is twofold:

1. We are years away before this could ever become a realistic possibility (next presidential election at the earliest) and until the time, any policy change will likely only be supportive of the HIIQ”s operating model. The quote referenced above was made on November 3rd, 2016 amidst a relative perfect storm of events that included:
   
   

1. An impending presidential election where HIIQ was fully prepared for a Democrat victory
   
   

2. A few days prior, HHS had just issued its final ruling on the 4/1/17 STM policy change. For background, the whole reason the policy change came about in the first place was because Obamacare was starting to melt down and the administration was going after anything it viewed as a potential competitor, using HHS  as its proverbial henchman. This risk has is now in the rearview with the regime change in Washington. Tom Price, the new Trump appointed Head of the HHS, is incredibly supportive of HIIQ (HIIQ management has even had a few calls with him since he took over) and is openly opposed to the government operated distribution channel (Healthcare.gov) and doesn’t believe short-term medical policies should be capped at anything less than one year. In fact, there is even a chance that the new regime reverses the STM restrictions, which would only be a neutral to positive catalyst
   
   

http://www.flexiblebenefit.com/blog/lengthening-short-term-medical

http://www.washingtonexaminer.com/gop-senators-urge-change-to-short-term-insurance/article/2625403

2. Even if there is some new regulatory development down the line, who cares? It wouldn’t happen until investors have made already multiples on their capital and the Company will probably manage around it anyway just like they did with the STM policy change - a dynamic not all dissimilar to how the major health insurers were able to navigate (not to mention massively outperform) around health reform, which many initially believed would spell doom for the insurance industry

Catalyst

(1) Continued Earnings Beats

(2) Growing Investor Awareness

(3) Favorable Policy Changes from New HHS Regime

(4) HCC Multi-State Resolution