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WebMD Health Corp. (NASDAQ:WBMD)

Q1 2009 Earnings Call Transcript

May 5, 2009 4:45 pm ET

Executives

Risa Fisher – VP of IR

Marty Wygod – Chairman, WebMD; Chairman and Acting CEO, HLTH Corporation

Mark Funston – EVP and CFO

Wayne Gattinella – CEO and President

Analysts

Anthony Petrone – Maxim Group

Mark Mahaney – Citigroup

Jerin Hayman [ph] – UBS Financial

Jennifer Watson – Goldman Sachs

Josh Patersons [ph] – Westwind Capital [ph]

Mark May – Needham & Company

Corey Tobin – William Blair

William Morrison – ThinkEquity

Operator

Good afternoon and welcome to the HLTH Corporation and WebMD HLTH Corp’s March 2009 quarterly conference call. Today’s call is being recorded.

I will now turn the call over to Risa Fisher, Vice President of Investor Relations.

Risa Fisher

Good afternoon. This is a joint conference call to discuss HLTH and WebMD's first quarter financial results. The earnings release issued today by HLTH is available at www.hlth.com in the Investor Relations section. The earnings release issued today by WebMD is available at www.wbmd.com also in the Investor Relations section.

The releases issued today include reconciliations between GAAP and non-GAAP financial measures to be presented in this call. The explanatory paragraph in those releases concerning forward-looking disclosures and related risks and uncertainties also apply to forward-looking disclosures made during this call including those regarding our guidance on future financial results and other projections or measures of HLTH and WebMD's future performance. Information concerning the risks and uncertainties can be found in HLTH and WebMD's SEC filings.

I would now like to turn the call over to Marty Wygod, Chairman of WebMD and Chairman and Acting CEO of HLTH Corporation.

Marty Wygod

Thanks, Risa. Good afternoon and thank you for joining us today. Joining me on the call today are Wayne Gattinella, CEO and President of WebMD; Mark Funston, CFO of HLTH and WebMD; and Tony Vuolo, COO of WebMD.

I am pleased that in this challenging economic environment, WebMD is continuing deliver strong results. WebMD saw 16% growth in online advertising revenue during a period where most companies are seeing declines. WebMD continues to solidify its leadership position as the most recognized and trusted brand of health information.

Some of our competitive advantages include the strength of the WebMD brand, the size and quality of our audience, the sophisticated and unique set of services we offer our advertisers, and the sizable technology investment and expertise we have built over many years.

As Wayne will shortly discuss, we have recently launched a number of new products that are seeing strong reception in the marketplace. We expect to have a number of additional customers for these products implemented in the latter part of the year. The size and the breadth of the overall market opportunity is substantial. And I am confident that as a result of the momentum and strategic position, WebMD will create substantial value for our shareholders over the long term.

I would like to turn it over to Mark Funston and then Wayne Gattinella to review the first quarter financial and operating results respectively. And then we will take your questions at the end. Thank you.

Mark Funston

Thank you, Marty. Please note that WebMD has decided to divest and seek buyer for its Little Blue Book print directory business as it is not strategic to the rest of WebMD’s business. The Little Blue Book business is now reflected as a discontinued operation in WebMD’s and HLTH’s financial statements in the current and prior year periods. The Little Blue Book business was expected to generate $1.5 million and $10 million in revenue for the first quarter and full year 2009, respectively. Adjusted EBITDA for this business was expected to be a loss of $300,000, and earnings of $2 million for the first quarter and full year 2009, respectively.

As a result of our decision to divest the print directory operation of the Little Blue Book, we will no longer present a stand-alone publishing segment in our financial statement. WebMD’s magazine and other print products are reflected in Print revenue. Content syndication and other revenues are now included in advertising and sponsorship revenue. HLTH’s results also present the ViPS and Porex businesses as discontinued operations in the current and prior year periods, reflecting the sale of ViPS in July 2008 and the ongoing process to divest Porex.

I will now review WebMD’s first quarter results. WebMD revenue for the March 2009 quarter was $90.3 million compared to $80.7 million last year, an increase of 12%. First quarter revenue from continuing operations was at the upper end of our guidance range after adjusting for the $1.5 million in revenue we were anticipating from Little Blue Book, which is now reflected as discontinued operations. Looking at the revenue increase of 12%, advertising and sponsorship revenue which represents 73% of revenue increased 16% to $65.4 million. Private portal licensing revenue which represents 26% of revenue increased 5% to $23 million. Print revenues decreased $384,000 to $1.9 million.

WebMD’s adjusted EBITDA for the March 2009 quarter was $18.7 million or $0.32 per share compared to $16.3 million or $0.28 per share, an increase of 14%. Adjusted EBITDA of 20.7% for the first quarter of 2009 was 40 basis points higher than last year and was above our prior financial guidance after adjusting for the classification of the Little Blue Book business as a discontinued operation.

Excluding the impact of the impairment on auction rate securities in the prior year period, our effective tax rate in the March 2009 quarter was reduced slightly to 41%.

Non-cash stock compensation expense was $5.5 million compared to $3.7 million last year. The increase reflects a broad based equity rate by WebMD in the fourth quarter of 2008.

Income from continuing operations was $3.2 million or $0.06 per share for the first quarter compared to a loss of $23 million or $0.40 per share last year, and prior year period reflected an impairment charge of $27.4 million related to auction rate securities. If it had been included in continuing operations during the March 2009 quarter, the Little Blue Book would have contributed $573,000 in revenue and reduced adjusted EBITDA by $506,000. After reflecting depreciation, amortization, stock compensation, as well as a tax benefit, loss from discontinued operations was $423,000, or $0.01 per share compared to a loss of $372,000 or $0.00 per share in the prior year period.

Net income was $2.8 million or $0.05 per share for the first quarter compared to a net loss of $23.3 million or $0.40 per share last year.

WebMD’s weighted average diluted share count using computing per share amounts for the March 2009 quarter was $58.1 million.

Operating cash flows from continuing operations was $14.7 million for the March 2009 quarter. As we have stated on prior calls, quarterly operating cash flows can be impacted by the timing of the cutoff of compensation accruals, other expense accruals, the billing and collection of receivables from our customers, and reimbursements to HLTH in relation to the quarter’s end.

Capital expenditures were $5.3 million for the March 2009 quarter.

WebMD had $331.8 million in cash and investments at March 31, 2009 including student loan backed auction rate securities with a fair value of $127 million. These ARS have a base amount of $164.2 million.

Turning now to HLTH’s consolidated financial results. As I mentioned earlier, HLTH’s Porex and ViPS businesses and WebMD’s Little Blue Book business are all reflected as discontinued operations in the current and prior periods.

HLTH’s consolidated revenue for the March 2009 quarter was $90.3 million compared to $80.7 million in the prior year, an increase of 12%. Adjusted EBITDA was $15.3 million in the March 2009 quarter compared to $11.3 million in the prior year, an increase of 35%. In addition to the adjusted EBITDA from WebMD’s segments, adjusted EBITDA on a consolidated basis also includes HLTH’s corporate expense which for the March 2009 quarter was $3.4 million compared to $5.1 million a year ago.

HLTH’s consolidated interest income for the quarter was $2.3 million compared with $11.9 million in the prior year reflecting lower cash balances invested at lower interest rates. HLTH’s consolidated interest expense was $6.5 million in both the current and prior year quarters, which includes non-cash interest expense of $2.8 million and $2.7 million in the current and prior periods, respectively. This non-cash interest expense reflects the required adoption during the first quarter of a new accounting rule known as APB 14-1, which requires companies to record additional non-cash interest expense on certain types of convertible debt. The 3.125% [ph] convertible notes we have outstanding fall into the scope of this new accounting rule, and accordingly we are required to record the incremental non-cash interest expense for the current period and all period periods. The adoption of the standard in the first quarter had no impact on cash flows.

During the quarter, HLTH purchased 76.5 million base amount of its 1.75% convertible notes and $18 million base amount of its 3.125% convertible notes. The aggregate cash used for these purchases was $86.7 million; however $8.5 million of this amount was not paid during the quarter due to a scheduled settlement date of early April. Accordingly, the $8.5 million is reflected as liability on the balance sheet as of March 31, 2009. We recorded an aggregate gain of $6.6 million related to these purchases during the quarter, which is presented as a separate line item on the P&L.

HLTH loss from continuing operations for the first quarter was $194,000 or $0.00 per share as compared to income from continuing operations of $458 million or $2.03 per share in the prior year period. HLTH’s income from discontinued operations was $609,000 or $0.00 per share as compared to $3.1 million in the prior year period or $0.01 per share.

HLTH’s net income was $415,000 or $0.00 per share as compared to $461 million or $2.04 per share in the prior year period. Income from continuing operations and net income in the prior year period include a gain on the sale of EBS of $538 million and an impairment charge of $60.1 million related to auction rate securities.

At March 31, 2009, HLTH had approximately $828 million in cash and investments, of which $332 million is attributable to WebMD. These amounts include the fair value of investments in student loan backed auction rate securities totaling $274 million, of which $127 million is attributable to WebMD. HLTH and WebMD have extended their standby lines of credit from Citigroup. These lines of credit allow HLTH and WebMD to borrow up to 75% of the face amount of their respective ARS holdings until April 2010 with recourse only to the ARS holdings pledged as collateral. The face value of the ARS held by HLTH was $354.4 million as of March 31, 2009, of which $164.2 million was attributable to WebMD. To date, no borrowings by HLTH or WebMD have been made under these facilities.

HLTH’s weighted average share count using computing per share amounts for the March 2009 quarter was $101.7 million.

Turning to financial guidance; we provided 2009 financial guidance for WebMD on October 30, 2008. Today, we are reiterating that guidance, but have adjusted it to reflect the discontinued operations of the Little Blue Book print directory business. Accordingly, we are adjusting our full year 2009 revenue guidance by $10 million, bringing our range to $410 million to $440 million. We are adjusting our 2009 adjusted EBITDA by $2 million to a range of $105 million to $120 million. Attached to today’s press release is a schedule, which reflects this adjustment. We do not expect our new imitative (inaudible) to have a material impact on 2009 results.

Looking specifically at the second quarter of 2009, we expect WebMD revenue to be in the range of $97 million to $99 million and Adjusted EBITDA margin to be approximately 22%. These amounts represent approximately 17% growth in advertising revenue and 5% growth in licensing revenue.

HLTH's financial guidance has also been modified to reflect the adjustment for the treatment of the Little Blue Book as a discontinued operation at WebMD. Scheduled summarizing WebMD’s and HLTH's financial guidance as well as reconciliations between GAAP and non-GAAP financial measures are attached to the respective press release issued today.

I’d now like to turn it over to Wayne to discuss WebMD’s operating results in more detail.

Wayne Gattinella

Thank you, Mark. We are please that even in this economic environment, our company continues to deliver strong results.

Our network traffic from both consumers and physicians continues to increase organically. Advertising demand for the WebMD audience remains strong, and our ad revenues are growing significantly faster than the market overall. Even as many large biopharma and consumer product companies are reducing their overall ad budget this year, WebMD is benefitting as they consolidate their spending with fewer high quality media properties. Importantly, our market pricing has remained stable as we are able to demonstrate and deliver consistently strong performance for our customers.

The WebMD brand has fast become the most recognized and trusted icon in health information. Just this past quarter, WebMD was featured in everything from opera’s magazine where Dr. Aars [ph] recommended WebMD’s health brand that he trusts. Today’s show where WebMD was cited as the top site for online dieting to February’s Glamour magazine that lifted WebMD as one of the best health sites to visit in their article, 15 little health tips every woman should know.

We continue to permeate even (inaudible) WebMD was recently incorporated into popular prime time television shows like 30 Rock and the Doctors this past quarter. And importantly, in the midst of the recent swine flu pandemic, WebMD has been sort after by the leading TV networks, the National Press, to provide our expert commentary on the related health issues that concerns consumers the most.

WebMD also continues to benefit as the most frequently searched health term on the Internet. Traffic to the WebMD Health Network during the quarter reached a record 61.6 billion [ph] unique users per month, that’s an increase of 19% versus the same period a year ago. And our page views during the quarter grew by 24% to 1.5 billion pages delivered. Virtually, all of our traffic was generated organically, not purchased, on health sites that are wholly owned and operated by WebMD where we are in full control of the programming and pricing of our inventory.

And what WebMD is to consumers Medscape is to healthcare professionals. Medscape continues to be the leading source of medical information for physicians with our network reach exceeding 1.5 million monthly physician visits during the first quarter. Online medical education on our professional sites reached 1.5 million completed programs during the quarter as online medical education continues to replace the previous traditional sources.

Community is an increasingly important feature on our professional site. We now have more than 110,000 physicians that are registered to securely engage with each other on Physician Connect, our professional community offering on Medscape. We recently completed the technical integration of our professional Web site on to the same technology platform that we currently operate our consumer business, and we expect to realize many of the same operating benefits. The Medscape portal will now take advantage of a more efficient Web publishing operation that will give us greater speed to market for new services and greater ability to monetize inventory and traffic growth through search engine optimization. Our physician users will quickly experience greater use of multimedia programming, and a far greater level of personalization and ease of navigation.

On our professional portal, we launched a new physician formulary status product that enables biopharma companies to target their online promotions to physician based on the managed care formularies in their area of service. This new formulary product launched on Medscape was our first sponsorship from Endo Pharmaceuticals. Also during the first quarter in our consumer portal, we launched a new sponsored product called WebMD TV that’s delivered on WebMD.com. This new digital integration platform delivers a true TV-like experience to our users and it leverages our content, our editorial expertise with the latest multimedia technologies that enable large advertisers to broadcast patient education and promotional programs in valuable areas of our site. This new product launched in March and our first sponsor, Genentech sponsored a WebMD TV program in the area of rheumatoid arthritis.

We already sold several additional sponsorships for these new products that include an innovative combination of video, flash animation, interactive assessment tools and other propriety editorial assets. We are unique in our ability to both develop and distribute these types of sponsorship programs. Given the nature of these programs and our customers’ timing requirements, several of the launch dates are still being finalized. They may launch as late as September which means it’s possible that we wouldn’t see the full benefit of these programs until the fourth quarter of this year.

On the international front, Medcenter, our professional portal targets physician in Latin America, Mexico and Spain now has over 103,000 physicians registered on to our network, more than double the number a year ago. And in March, we announced our first major consumer initiative overseas as we entered into a long term strategic relationships with Boots UK, the leading pharmacy-led health and beauty retailer in the United Kingdom. Together, we will launch a consumer health and wellness portal in UK later this year. This new joint offering aims to leverage WebMD’s online consumer health assets and expertise with Boots’ preeminent position as the leading health care source and provider of pharmacy in the UK. The UK has one of the largest Internet audiences in Europe. There were 40 million people or two-thirds of all households with access to the Internet. In addition, the UK has the largest adverting market in Europe estimated at $30 billion a year with approximately 15% or $4.5 billion devoted to online advertising. The Boots’ partnership is an important step to expand WebMD’s presence internationally as we continue to work on additional global initiative.

We also see the mobile market as an important opportunity for future growth and we continue to experience some early success this year. Our consumer mobile applications have already surpassed 500,000 downloads since launching on the iPhone last November [ph] with strong page views and utilization rates. And later this month we will be launching our first iPhone application for physician delivering timely drug reference data combined with related Medscape content in order to facilitate high quality patient care on demand.

Let’s turn to our private portals market. At the end of the first quarter, our installed base of companies that licensed [ph] the WebMD portal platform totaled 134 organizations compared to 122 a year ago. We also have approximately 140 additional customers who purchased our stand-alone health physician support services. During the quarter, we launched integrated platform and coaching services for the Mississippi State and School Employees Health Insurance Management Board and the Carolinas Healthcare System. In addition, we renewed our platform services with (inaudible), the largest commercial carrier in the country.

As we discussed over the last six months our 2009 guidance reflects the fact that the growth in new customers for our products [ph] or services would be offset by the downsizing or in some cases the loss of current employers whose businesses have been fairly severely impacted by the economy, most notably those in the financial services and automotive industry.

As we've said while the economy will impact the growth of our private portal business in the short term, this does not change our long term view of the opportunity in the employer impaired markets. Companies clearly recognize the value that personalized health information can play in better managing the health and cost of care for their employees and plan members. With the added focus on stimulus appropriations for health care IT from Washington, there's a heightened level of interest in the value of personal health information. WebMD’s Health and Benefits platform services including our personal health record and preventative care services are proven ways to improve healthcare outcomes and make health care more accessible and efficient and therefore more affordable for American families.

So in summary, we begin this year with strong optimism that our overall business growth will be far less impacted by the broader economic issues than other market sectors. WebMD’s advertising and sponsorship revenues that represent 73% of our total revenues this quarter grew by 16%, while virtually all the other online media portals are reporting decline. Our margins continue to expand as the demand for our high quality and highly engaged users is increasing at the expense of other forms of media. And we continue to invest in the new technologies and innovative services that will support our continued momentum and will accelerate our growth in the quarters ahead.

Thank you for being on this call. Operator, at this we’d like to open it up for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Anthony Petrone from Maxim Group.

Anthony Petrone – Maxim Group

Great, thanks. Just to start with some of the WebMD streaming you mentioned, in terms of total pricing on those new ads and the impact of cost of services, if you can just maybe give a little bit more detail on how compares to overall pricing of the core (inaudible) sponsorship offerings relative to what you are now offering in terms of streaming?

Marty Wygod

Pricing wise, Anthony, these are premium priced sponsored programs as they both incorporate newer kinds of multimedia capabilities and there's a lot of sort of custom development that takes place in the development of these programs. You can go on the site today, on the consumer site, for example if you search on rheumatoid arthritis you’ll see the kinds of programs that we’ve built in this case, with Genentech, and I think you’ll certainly get a sense of both the unique quality and impact that these programs have. What we are seeing is that in this market with – I would say kind of flight to quality that many of the ad sponsors are looking for, they are looking to really engage their customers much greater than they have in the past. And what we are seeing is their measure of success is moving away from just clicks to more metrics of engagements, and the nature of these new products that we are rolling out are designed specifically to that do, to engage the consumer more deeply into the content.

Anthony Petrone – Maxim Group

Just in terms of implementation cycle, just to get an idea, how long would it take to get a new customer up and running an extensive streaming video ad?

Marty Wygod

It depends on how much custom work is underway. So it really depends on how much either existing video, the customer has for use already or how much new development is required, and then of course in the case of pharmaceuticals companies there is a medical legal review process. So like many of our largest sponsored programs, the cycle time typically is a little bit longer than peer media but it can differ again based on the amount of custom work required.

Operator

Thank you. Our next question comes from Mark Mahaney of Citigroup.

Mark Mahaney – Citigroup

Thank you. Two questions please. Could you just review again the UK deal and the financial impact from that to what extent any revenue and profits will show up from that on your P&L.? And then, Wayne, if I can ask you a specific question about the June quarter. Your guidance does imply what you consistently guided to which is an acceleration in advertising revenue starting in June quarter. Could you be specific about one or two things that perhaps you are already seeing in the June quarter that gives you conviction in that rate of acceleration? Thank you very much.

Wayne Gattinella

Sure. So with respect to the partnership with Boots in the UK, Mark, that’s a partnership where we are each leveraging our assets. In our case we are building this new consumer portal. We will host it. We are taking a lot of our existing assets and we are sizing them so to speak for the British market. And all that work is currently underway. In the case of Boots, with their tremendous presence both physically and also through advertising and online channels that already exist in UK, they are providing not only the in-market expertise but a lot of the in-market promotion, both in-store and through other promotional channels. So as we launch it later this year, they will really be the on the ground sort of sponsor and distributor of the new portal. WebMD will have sales responsibly to monetize the new portals that we are taking responsibility for the sales of the asset. We will jointly share in both the costs of development and execution and ultimately also in the profit. We don’t have anything in 2009 in terms of contribution coming from the project nor do we expect anything significant. And we will comment more in 2010 as we get closer to the end of this year and observe both the uptick and get a better sense on the potential side in the years to come.

Your second question, in terms of the June quarter and what do we see in the marketplace that implies an acceleration of online ad business. We saw great momentum as we exited 2008 with a lot of pre-buying for 2009. And we continue to see strong momentum for – demand for WebMD inventory in the market at this time, both on the consumer and professional side of our business.

There's a lot of dislocation happening in the pharma market that is benefiting us. We are seeing a general shift away from the general portal, at least in the health space. We are seeing virtually no pharmaceutical spend on any of the pure play community sites. We are seeing a decrease in DTC print and TV. And we are seeing a strong demand for engagement rather than just simply clicks and visits. And all of those things are benefitting our brand of audience and our quality of audience and again we see that momentum really continuing.

As I commented, we've really seen pricing stabilize. We have not given the nature of our product services and the quality of our audience. We have not had any significant price pressures that have impacted our revenues on a go forward basis.

Operator

Thank you. Our next question comes from Jerin Hayman [ph] from UBS Financial.

Jerin Hayman – UBS Financial

Yes, gentlemen. Good earnings results. My question is there seems to be a bit of confusion out there about hits to Web sites. Could you explain how yours differentiates from the competitors?

Wayne Gattinella

If I understand the question, many of the online health sites are really more of an aggregated networks rather than true health destinations, if you will. And so a lot of the traffic that is often reported by these ad networks is really just amalgamation or an aggregation of many of the sites that they ramp in the market, but typically don't program from a content standpoint and don't control from an overall editorial standpoint. The difference is WebMD’s network is wholly owned 99% of our traffic drives through the sites that we wholly owned, operate and program. And so just from a long lasting credibility and control standpoint, the quality of what we can deliver to a sponsor is consistent, it's guaranteed. They don’t have to wonder where their ads are appearing or in the context of what content their ads are appearing. Again, we have full control of that. And in addition, we don’t purchase traffic to pump the numbers. And then there is a game that is played with a lot of the comScore reporting that comes out on a monthly and quarterly basis where again a lot of the networks that they are trying to gain headlines for having the most visits that month or some other sort veneer metric, they'll go on to – the search engines and purchase traffic at the end of the month to sort of pump those numbers. Again, our traffic is organic. We don’t purchase traffic in the outside market. We certainly benefitted as being the recognized brand that people come to directly and we benefit from the fact that our brand is the most frequently searched on health term even on Google. And again, even if you search on a health related terms, you will find most often, our content is ranking highly in the natural results whereas a lot of those networks don’t even show up in sort of search engine (inaudible).

Operator

Thank you. Our next question comes from Jennifer Watson from Goldman Sachs.

Jennifer Watson – Goldman Sachs

Great, thank you. Two questions. Can you comment on what’s happening to your sales cycles relative to a few months ago, and then a year ago both in the advertising and promotional line as well as the private portal. And then also if you can just help us understand the dynamics of revenue per page view. I know obviously the campaigns are priced on a customized basis. But if we look at the revenue per page view it is declining. If you can help us understand why that is, is it just a matter of the incremental page views that people are looking at. They don’t have a lot of advertising or whatever the case may be.

Wayne Gattinella

Jennifer, When you say sales cycle what are you referring to. Just the time to close a sale? Or –

Jennifer Watson – Goldman Sachs

Yes, basically looking at from the time you start discussions to the time that the advertising goes up, and you start recognizing the revenue.

Wayne Gattinella

I mean, we really haven’t seen that change much in the pharma market. Just by its nature we've been in that market for several years. And so from an experience standpoint, we are pretty comfortable with the time to close and ultimately the time to revenue. We do have some new products that we just introduced as I mentioned that have some new multimedia and components that potentially may represent a slightly longer execution cycle. But we are still sort of working with these new services. In the CPG or consumer packaged goods market, which is a market that we’ve been developing for the last couple of years. What’s happening in that frame of marketplace is we are – we are really now starting to bring in larger deals in that segment or it's not just pure media promotion. So even if you go on the site today you'll being to see sponsored destinations and highly customized editorial even for household lifestyle like packages goods products. So that sales cycle has actually elongated somewhat as we are now developing and ultimately – pitching and developing longer term higher value strategic program. But it’s sort of the nature of the deal. The benefits outweigh the length of your sales cycle in that segment. In terms of the revenue per page view, as we said in the past, our goal is to continue to grow our traffic efficiently and organically. We see that as a lead indicator our future growth and we never want to be in a situation where we are bumping up against the ceiling of limited inventory simply to optimize revenue per page view across the network.

So it's not unusual that given our traffic growth as we've now exceeded 1.5 billion page views this quarter, if you just do the pure division of revenue divided by pages delivered to see in any quarter you might mathematically see a decline. Our revenues continue to grow overall, and our ability to maximize the investment that we do deliver is a good thing. We don’t want to suck up a lot of page use unnecessarily and our ability to really efficiently optimize each page that we deliver is good thing for us.

Jennifer Watson – Goldman Sachs

Great. Thank you.

Operator

Thank you. Our next question comes from Josh Patersons [ph] from Westwind Capital [ph].

Josh Patersons – Westwind Capital

Hi, guys. Two questions. The first, can you help us understand the free cash flow profile of the business a bit better. In particular, can you talk through cash taxes for the year and how you can utilize the health center well and CapEx for the year?

Mark Funston

Sure WebMD does utilize the HLTH NOL or can utilize, it has access to the HLTH NOL. So the cash taxes are probably a good way to think about them. It's about one-third of the GAAP taxes that you will see on the P&L. The capital expenditures, we expect to be in the range of $20 million to $25 million this year.

Josh Patersons – Westwind Capital

Okay, thank you. And on the technology evolution for Medscape, can you describe a bit the benefits that you experienced for WebMD, and the key areas or things that allows you to do for Medscape?

Marty Wygod

Sure. First and foremost, it gives us a more flexible publishing platform that many of the new 2.0 type technologies on community and video and animation require. So it just gives us a much better palette to be able to create more engaging programs on. And again, if you look at the current view of WebMD.com versus have you seen it two years ago on the old platform, you would see a market difference in the kinds of again capabilities that even our core content now utilizes. So a lot of video, a lot of animation and alike. Secondly, gives us ability to create a much higher level of personalization so through registered data and then utilization of that data, it gives us the ability to deliver a better user experience through personalization. Third, search engine optimization is an important part of our traffic growth and the new platform enables us to better tag and consistently publishing articles in a way that is more search engine friendly, and then delivers higher natural results when someone is searching on a particular health term. And fourth, the new platform gives us a much stronger ability to monetize all of those things. Again we have an integrated platform that works better with the ad service and that gives us quicker cycle time to deliver sponsor programs. So we saw a much stronger uplift in consumer growth as a result of the new platform and we expect again to see those same kinds of benefits with the implementation of that pipeline on the professional portal.

Josh Patersons – Westwind Capital

And when does it get implemented?

Marty Wygod

We are now live on the platform. It's been up for approximately 30 days now.

Josh Patersons – Westwind Capital

Okay. Thanks very much, guys.

Marty Wygod

You are welcome.

Operator

Thank you. Our next question comes from Mark May of Needham.

Mark May – Needham & Company

Thank you. I apologize if this has already been addressed. I got in a little late. What was your estimated Little Blue Book contribution for your second quarter guidance?

Mark Funston

We don’t guide – now that is in discontinued operations, we really won’t be guiding to it. I can tell you that there's seasonality historically in that business so there's usually a higher revenue contribution in the second and third quarters and a higher EBITDA. But we don’t actually provide guidance now that’s in discontinued –

Mark May – Needham & Company

That’s good enough. And maybe the bigger picture in terms of how you are going after trying to capture more of what you call the CPG category revenue? Can you talk a little bit about your content strategy and how you are building product and content to be attractive to the audience and the advertisers in those categories, and some of the things that you're doing?

Mark Funston

Sure, Mark. In the pure pharma market, we continue to go deep across conditions that have a high level of traffic and of course, where there is a lot of sponsorship as well. But really, what we have done is we have expanded significantly beyond sort of disease and conditions to now really start to cover more deeply general lifestyle areas. So that has enabled us to expand our revenues in areas such as skin care or healthy home or even pet care, other health-related verticals that don't have significant user demand and also have significant sponsor opportunities. You know, the goal, several years ago was to take the WebMD brand that was already well-recognized when people had a medical condition and start to really again extend it in areas that when people really just have a general question about their health, women's health, men's health, diet, fitness, nutrition, and the like and again, that has enabled us to start to develop a robust sponsorship relationship of many as a large consumer packaged goods company.

And on the professional side, you know, again, particularly now with the new platform, we are using a lot of expert video, live interviews at medical events in order to both give physicians who can't travel or send those kinds of events sort of real-time and first-hand access to the experts that are speaking and of course because that archive, it gives healthcare professionals the ability to go on later and search on those topics and still go back and listen to leading experts in their field talk about things that are relevant to that doctor's practicing matter.

Mark May – Needham & Company

Excellent. Maybe one more follow-up. Can you talk about your visibility, maybe six months out and how that has changed from maybe two years ago?

Wayne Gattinella

You know, as we said, we tend to have pretty good visibility quarter out, decent visibility two quarters out, and then of course, it drops from there, as we still have more work to do. You know, right now, in terms of our guidance, we are extremely comfortable with the guidance that is out there right now. We have got, in my view, very strong momentum coming into this year. From a sales standpoint, we have had several consistent constitutive good quarters. I can look at what the pipeline looks like and feel good about on the continued demand that I see. I think a lot of the structural changes that are happening to our clients that they have been struggling with for the last 12 to 18 months are now better to find and so their strategies are better articulated, which helps us expose on the consumer side as especially in the pharma markets, they are now starting to shift their dollars from the traditional approaches of BTC, but its significantly affects their approaches in the physician market, where as you are aware, there has been major structural changes in the traditional sales force model and as they look to new ways of reaching doctors, you know, Medscape sits in a very strong and unique position in its ability to reach physicians online.

Operator

Thank you. Our next question comes from Corey Tobin from William Blair.

Corey Tobin – William Blair

Hi, thanks for taking my question. Just Mark, a real quick housekeeping question if you could. Can you give us the dotcom breakout by expense line item?

Mark Funston

Sure. The cost of operations, it is $1,623,000; sales and marketing, $1,550,000 and general and administrative, $2,350,000. And as for the line numbers, I can give you the comparatives for 2008 as well; cost of operations, $1,116,000; sales and marketing, $1,126,000; and G&A, $1,438,000 in Q1.

Corey Tobin – William Blair

Great, thank you.

Operator

Thank you. Our next question comes from William Morrison from ThinkEquity. Your question please.

William Morrison – ThinkEquity

Hi, one question, and I joined late, so I apologize if someone already asked this, but I was wondering if you could comment if there is an issue in the paid search market in the pharmaceutical industry this quarter and wondering if you could just comment about do you think you might benefit from this, could your advertising be susceptible to some of the same issues as they are talking about on the paid search side, and just maybe comment generally about what happened.

Mark Funston

Sure, Bill. Let me explain what the issue is. So the FDA notified more than a dozen large pharmaceutical companies several weeks ago or months ago or so that their search marketing was not in compliance with FDA regulations for what they refer to as ISI, which is Important Safety Information. Simply said, if a pharmaceutical company is promoting a product by name, in terms of its brand, that promotion must be accompanied by any of the warnings or sort of label indications that indicated safety profiles for a patient. And in the case of search marketing, the FDA's view was that a lot of the pharmaceutical marketing on search, where they were buying keywords featuring their product names in the paid search area, but not displaying any of these important safety information until a click away, meaning if you clicked on the paid search term and then got to the pharma site, that is where the safety information was. The FDA's opinion is that that safety information needs to be right up front, not a click away.

The result of that is virtually every major pharmaceutical company took down their paid product search promotion and it is still not up today. What you will see is non-branded promotions as well as the branded search promotions down. In terms of its effect on our business, there were similar requirements put on a lot of the display ads, so again now today, as you see, a lot of the display ads running, you will see that safety information within sort of the banner. If I keep scrolling or might be – information the user will scroll, but it is available within the banner as opposed to one click banner. We have brought all of those ads up to compliance for the most part. We have modified in our own pharma promotional areas any of those requirements, made sure they are in compliance, there are still some outliers that have gone through some legal review in the pharma side to make sure that they're consistent, but in general, we were able to move very quickly and adapt to these changes, unlike search, where there is still not a solution for them.

How we see that in the future is we see that fairly potentially benefiting our business, Needless to say while customers spend with us, they still spend a fair amount with the search engines, trying to drive traffic to their own pharma sites and now in the absence of a big part of that traffic-driving effort, those dollars either go away, they don't spend them or they need to find another way to write that traffic. Needless to say, we're all over it and as it came up several weeks ago, we saw that as a potential new market opportunity for us to grab dollars that the other guys weren't getting.

Operator

Thank you. This does conclude the question-and-answer session of today's program. As a reminder, if necessary, there is a replay available of this call, which can be accessed toll free at 888-266-2081 or if you are calling from outside the US, at 703-925-2533. The passcode is 1351-048. There is also the webcast replay available on HLDH corporation and WebMD's Web site as well. Thank you for joining us today.

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Source: WebMD Health Corp. Q1 2009 Earnings Call Transcript
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