iSelect said it will take a one-off hit to its full-year profit of up to $14 million because it overstated the commissions it will receive from people who have switched health funds using its comparison website.
In an embarrassing admission, which comes one year after the newly listed online company missed revenue forecasts from its share sale prospectus, iSelect said it will receive $16 million to $20 million less in commissions than it had previously expected.
The revaluation of its “trail book”, which relates to receivable future commissions, will impact its after-tax profit in the 2014 full year by $11 million to $14 million. Analysts had expected the company to announce net profit of about $19 million when it reports on August 28, according to Bloomberg.
The practice of booking future commissions as current earnings had been raised as a concern by many fund managers. When a customer uses the iSelect comparison service to change providers, the insurer that benefits from the switch pays the website a finder’s fee.
For a handful of health insurance providers, iSelect also earns a commission for as long as the customer stays with their new insurer.
But customers have proven to be fickle. The two health insurance funds that make up the majority of iSelect’s trail book have been unable to lock down their recently joined members, the company said on Friday. In industry parlance, the health funds have shown an “increased policy attrition rate”.
Select Equities analyst Danny Goldberg said iSelect’s accounting practice was appropriate, and used in other industries like mortgage broking. But he said the downgrade showed how the practice can overvalue companies by bringing forward earnings that may not eventuate. “Some of that value was eroded today,” he said.
The stock slumped by 3.6 per cent to $1.20 on Friday. It has fallen 32 per cent since its sharemarket debut in June 2013 and has never traded above the listing price of $1.85.
Chief executive Alex Stevens, who was appointed in March, said the health insurance was still “highly attractive”. “The market dynamics – including recent above-trend price rises on health insurance policies which led us to revalue the trail book – do, however, represent a growth opportunity for the company,” he said in a statement.
Perpetual portfolio manager Jack Collopy, who holds a 11.9 per cent stake in iSelect, said the higher churn rates among health fund members is a “double-edged sword”. If customers are indeed switching more, it should boost iSelect’s ability to generate business, but reduces recurring commissions.
The trail book still accounts for 28 per cent of total revenue. However, the company says this has fallen recently.
The company said that 2014 annual revenue and underlying earnings before interest, tax, depreciation and amortisation, which remove the effect of the downgrade and other undisclosed one-off items, will be 14 per cent and 10 per cent higher, respectively. Perpetual's Mr Collopy said that was in line with analyst estimates.