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WebMD Health, (NASDAQ:WBMD)

Q2 2006 Earnings Conference Call

August 3, 2006, 4:45 p.m. EST

Executives:

Martin J. Wygod, Chairman

Anthony Vuolo, Chief Financial Officer

Wayne T. Gattinella, President and Chief Executive Officer

David Gang, EVP and Chief Technology Officer

Risa Fisher, Vice President of Investor Relations

Analysts:

Bill Morrison, JMP Securities

Anthony Noto, Goldman Sachs

David Veal, Morgan Stanley

Mark Mahaney, Citigroup

Rob Kelly, Smith Barney

Anthony Petrone, Maxim Group

Justin Balda, Citadel

Operator

Good afternoon and welcome to the WebMD Health Corporation June 2006 Quarterly Conference Call. Today’s conference is being recorded. I would now turn the call over to Risa Fisher, Vice President of Investor Relations.

Risa Fisher, Vice President of Investor Relations

Good afternoon and welcome to our second quarter earnings call. I will read the following statement concerning forward-looking disclosures. All statements made today other than statements of historical facts are forward-looking statements including those regarding our guidance on future financial results and other projections or measures of our future performance and the amount and timing of the benefits expected from acquisition from new products and services and from other potential sources of additional revenue. These statements speak only as of today and are based on our current plans and expectations and they involve risks and uncertainties that could cause actual future events or results to be different from those described including risks relating to market acceptance of our products and services, relationships with customers or strategic partners, difficulties in integrating acquired businesses, and changes in economic, political or regulatory conditions or other trends affecting the healthcare, internet, and information technology industries. Many of these risks and uncertainties are described in our SEC filings. We expressly disclaim any intent or obligation to update these forward-looking statements.

The earnings release issued today is available on our website at www.wbmd.com in the Investor Relations section and has also been included in a Form 8-K filed today with the SEC. The Form 8-K and our other SEC filings are also available on our website and on the SEC’s website. The release in Form 8-K that we filed today includes reconciliations between GAAP and non-GAAP financial measures to be presented in this call. I’d now like to turn the call over to our Chief Financial Officer, Tony Vuolo.

Anthony Vuolo, Chief Financial Officer

Thank you, Risa. Good afternoon and I thank everybody for joining us today. On the call me today are Martin Wygod, Chairman of the Board; Wayne Gattinella, President and CEO; and David Gang, Executive Vice President and Chief Technology Officer. I will review our second quarter financial results and updated 2006 guidance, Wayne will then review the quarter and our 2006 initiatives, Marty will make some closing comments, and then we’ll open it up for Q&A.

Revenues for the June quarter was $56.6 million compared to $41 million last year, an increase of 38%. Advertising and sponsorship revenue increased 36%, licensing revenue increased 49%, and publishing and other revenue increased 72%. Earnings before interest, taxes, depreciation, amortization, and other non-cash items or adjusted EBITDA for the June 2006 quarter was $9.6 million compared to $3.3 million last year, an increase of 190%. Adjusted EBITDA as a percent of revenue improved to 17% from 8% last year. Adjusted EBITDA per diluted share was $0.17 compared to $0.07 last year. Adjusted EBITDA per share for the June 2006 quarter was computed using a weighted average share count of 58.1 million shares, which includes the diluted impact of outstanding stock options.

Adjusted EBITDA for the June 2005 quarter included a $3.15 million charge primarily related to severance and recruiting expenses. Of this $3.15 million approximately 24%, 8%, and 68% were included in cost of operations, sales and marketing, and general and administrative expense respectively. Excluding revenue of $5.8 million from acquisitions, which did not contribute any margin during the quarter and the severance and recruiting charge of $3.15 million in 2005, the adjusted EBITDA margin on incremental revenue was 32% for the quarter. The adjusted EBITDA margin on incremental revenue compared to the March 2006 quarter was 47%.

Online services segment adjusted EBITDA increased by 127% to $9 million for 18.2% of segment revenue, compared to $4 million or 10.8% of segment revenue last year. Publishing and other services adjusted EBITDA was $593,000 or 8.5% of segment revenue compared to a loss of $668,000 or 16.4% of segment revenue last year.

The net loss for the quarter was $1.2 million or $0.02 per share, which includes $5.8 million of stock compensation expense relating to the adoptions of FAS 123R on January 1, 2006. Excluding the impact of FAS 123R, net income would have been $4.6 million or $0.08 per share. This compares with a net loss of $1.6 million or $0.03 per share a year ago.

Looking further at the increase in revenue of 38% compared to last year, this growth was a result of advertising and sponsorship revenue which increased 36% resulting primarily from organic growth but also from our acquisitions of Conceptis Technologies in December 2005 and eMedicine in January 2006. During the quarter we began the sales integration of these acquisitions, with advertising revenues on these sites of approximately $3.8 million for the quarter.

As we anticipated, this quarter reflects the impact of winding down some of the revenue commitments we inherited from these acquisitions, offset by new revenue contracts including the heart.org, which is a core Conceptis site, and eMedicine.com into the WebMD Health Networkers sites. Including the revenues from Conceptis and eMedicine, the increase in advertising and sponsorship revenues was 22% compared to last year. However, this somewhat understates the amount of organic growth because we are now balancing the placement of our advertising across all of our sites in the WebMD network including Conceptis and eMedicine making year-over-year comparisons more difficult.

Private portal licensing revenue increased 49%, again primarily from organic growth. The acquisition of Summex was completed on June 13, 2006, which was about a month later than we had originally anticipated and contributed only $290,000 of revenue for the quarter.

Publishing and other service revenue increased $2.9 million or 72%. This was primarily due to $1.7 million in offline medical education revenues as a result of the Conceptis acquisition and higher revenues from our Little Blue Book physician-oriented offerings. As you know, we’ve been phasing out certain content syndication in our products. Quarterly content syndication and other revenues declined by $914,000 compared to last year.

Looking at expenses, cost of operations was $25.7 million or 45.4% of revenue for the quarter, compared to $18.6 million or 45.4% of revenue last year. Included in cost of operations are non-cash expenses of $2.4 million, compared to just $276,000 last year. The increases in non-cash expenses primarily relate to stock compensation expense as a result of the adoption of FAS 123R. Excluding non-cash expenses cost of operations as a percentage of revenue improved to 41.1% from 44.8% last year, an improvement of 370 basis points.

Sales and marketing expense was $16.9 million or 29.9% of revenue, compared to $12.1 million or 29.6% of revenue last year. Included in sales and marketing are non-cash expenses of $2.7 million this year, compared to just $1.5 million last year. The increase in non-cash expenses primarily related to stock-based compensation as a result of the adoption of FAS 123R. Excluding non-cash expenses sales and marketing expense as a percent of revenue improved to 25.1% from 26% last year.

General and administrative expense was $12.6 million or 22.2% of revenue, compared to $8.7 million or 21.1% of revenue last year. Again, included in sales and marketing expense are non-cash expenses of $3.1 million this year compared to none last year. The increase in non-cash expenses primarily relates to the stock compensation expense as a result of the adoption of 123R. Excluding non-cash expenses, general and administrative expenses as a percent of revenue improved to 16.8% from 21.1% last year.

General and administrative expenses include 845,000 of service fees to Emdeon, our parent company, a decline of $1.6 million from a year ago as many of the resources that where previously provided to us by our parent were transferred to our business unit after the IPO and are now included in our expenses rather than included as a corporate allocation charge. Our general and administrative expenses in 2006 reflect public company related expenses which did not exist in the same period last year.

Depreciation and amortization was $4 million compared to $3 million last year. This increase was due to a combination of the impact of the acquisitions and increased levels of capital expenditures. Interest income totaled $1.5 million for the quarter resulting from the investment of the remaining proceeds from our IPO last September. Provision for income taxes for the quarter was 4000 compared to 91,000 last year.

The weighted average share count for the quarter was 56.1 million. This share count excludes the diluted impact of stock options, since we have reported a loss for the quarter. The diluted share count including the impact of stock options was 58.1 million shares.

Turning to the balance sheet, our cash and investments at June 30, 2006, was $104.3 million. Operating cash flow for the quarter was $16 million compared to $7.2 million last year, an increase of 122%. Operating cash flow for the first six months of 2006 was $28.3 million compared to $13.4 million last year, an increase of 111%. Capital expenditures for the quarter were $6 million.

Turning to the financial guidance for 2006, our updated financial guidance now anticipates the planned acquisition of Medsite which was announced last month and the Summex acquisition which was completed on June 13th. As always, our financial guidance considers among other things the timing of expected delivery for programs sold, assumptions as per the timing of new sales activity, expenses related to our integration of recent acquisitions, and timing and synergies related to those efforts, continued investment in our infrastructure and organization to support both our public and private portal offerings and the launch of new products, and expansion of our sales and marketing organization.

For the entire year our updated guidance in combination with the first half results yields an increase in revenue range of $244 million to $249 million for the year, which represents an increase of 44% to 47% over 2005, an increase in the adjusted EBITDA to a range of $48 million to $51 million or $0.83 or $0.87 per diluted share, which represents an increase of 71% to 78% compared to last year, net loss of $4.2 million to $1.2 million or $0.08 per share to $0.02 per share, compared to net income of $7.7 million last year. Excluding the impact of FAS 123R, which was estimated at $24 million for 2006, our projected net income would be approximately $20 million to $23 million, increases of over 155% to 195% compared to 2005 net income of $7.7 million.

Our updated guidance for the balance of 2006 is as follows: our revenue guidance increases to a range of $137 million to $142 million in the second half of 2006, mostly as a result of the anticipated Medsite acquisition, which is contributing about 80% of the increase in the high end of our previous guidance range. This represents an increase of 45% to 51% compared to the second half of 2005. We expect the revenue distribution for the second half of 2006 to be approximately 65% from advertising and sponsorship in the September quarter increasing to 70% to 71% in the December quarter, primarily due to normal business seasonality and the full quarter impact of the Medsite acquisition. Advertising and sponsorship revenue growth is estimated to 27% to 32% in the last half of 2006 compared to last year when excluding acquisition related revenue from both 2005 and 2006.

We expect approximately 22% from licensing for each of these September and December quarters, approximately 1% from content syndication and other revenue for each of these September and December quarters and approximately 12% from publishing and other revenue in the September quarter declining to 6% to 7% in the December quarter. This decline results from normal business seasonality and planned reductions in traditional medical education revenues as we begin to curtail some of these product offerings.

Our guidance for adjusted EBITDA for the second half of 2006 remains consistent with our prior guidance at $32.4 million to $34.5 million, which we believe represents strong performance considering that we are absorbing both losses and integration of ramp up expenses related to our most recent acquisition. We expect that we will be able to absorb these additional expenses through additional margin in other areas.

Our guidance for the following line items is being updated to reflect the anticipated acquisition of Medsite. Interest income for the second half of 2006 is expected to be $1.7 to $2 million, depreciation and amortization for the second half of 2006 is expected to be $12.3 million and $12.7 million, non-cash stock-based compensation expense for the second half of 2006 is expected to be $13.4 million. Non-cash advertising for the second half of 2006 is expected to be approximately $4.6 million to $4.8 million, and income tax expense for the second half of 2006 is expected to be approximately $2.1 million. This yields a net income of $1.1 million to $4.1 million for the last six months of 2006. This includes $12.5 million of stock-based compensation expense related to the adoption of FAS 123R. Excluding this amount our projected net income is $13.6 million to $16.6 million.

We are revising our estimates for capital expenditures for 2006 to $25 million to $30 million as a result of the Summex and Medsite acquisitions as well as the relocation of our private portals business offices to large offices during the latter half of 2006 to accommodate future growth. The schedule outlining the Company’s financial guidance including additional quarterly guidance is attached to the press release we issued today.

Now, I’d like to turn the call over to Wayne.

Wayne T. Gattinella, President and Chief Executive Officer

Thank you, Tony. I am really pleased with our most recent quarter’s financial results across each of our business segments and with a visible progress we are making towards delivering on the Company’s overall strategic plan.

Our online advertising and sponsorship revenues grew by 36% this quarter reflecting both strong organic growth and the integration of eMedicine and the heart.org acquisitions into the WebMD health network where we are now leveraging our national sales force distribution and product delivery platform. This quarter we continued to increase our penetration of biopharmaceutical and medical device companies with both our consumer and professional promotion and educational programs. Sales to large consumer package goods companies reached new levels as we expanded our base of consumer brand, focused on reaching health-involved consumers.

In the June quarter, we ran approximately 400 individual online programs versus approximately 275 programs in the same period a year ago. The reach of the WebMD Health Network continued to expand significantly during the quarter with the average number of unique users in the second quarter reaching 30.5 million per month, an increase of 24% over the prior year period.

Page view traffic during the second quarter totaled 714 million pages, an increase of 22% over the prior year period. Increases in page views per user on our core WebMD and Medscape.com sites were offset by the lower usage profile that we see form users on our affiliate and acquired sites.

We’re also beginning to benefit from increased search referral traffic as a result of our network sites becoming more optimized for external search engines. For example, WebMD and Medscape now increasingly rank in the top 10 results when running a refined health-related search on Google’s Co-op Search product, which incorporates trust and authority as part of their search algorithm. In addition, we’re launching new WebMD cobranded health channels on EarthLink and DrugStore.com adding to our network of affiliate sites.

Our online reach to physicians also continued to significantly expand. In the second quarter we exceeded 1 million physician visits per month to our professional sites. New research shows that 83% of doctors have used Medscape in the past 12 months for medical information related to their practice, more than twice the number that used the number two site, the National Institute of Health.

In the June quarter, a record 490,000 continuing medical education programs were completed on our professional network. That’s an increase of 70% over the same period a year ago. The fact is that Large Pharma continues to support physicians’ education activity as an important piece of their overall disease and treatment awareness strategies.

Last month, we announced a definitive agreement to acquire certain assets of Medsite, the leader in direct to physician eDetailing services. Medsite provides an end-to-end solution that includes program development, targeted recruitment, and online distribution and delivery. The acquisition of Medsite will enable us to provide an expanded set of online solutions to our BioPharma customers that will help to increase the sales efficiencies of their own direct detailing efforts to doctors. Recent research indicates that 36% of physicians have participated in an eDetailing session and will participate again, and another 41% of doctors have not yet participated but would consider it.

We conducted our Ace Annual WebMD Health Forum out in Laguna Beach. Over 100 business leaders from the leading pharmaceutical, biotech, and medical device companies spent two and a half days with us discussing the emerging trends and opportunities in the growing demand for digital health information and its impact on consumers and healthcare professional. Experts in healthcare policy, research, technology, and marketing addressed our group including Dr. Andrew von Eschenbach, acting commissioner of the FDA, Bill George, former and chairman and CEO of Medtronic, and Dr. Jack Lewin, CEO of the California Medical Association and the newly appointed CEO of the American College of Cardiology. The Health Forum provides us with a unique opportunity to showcase WebMD’s new products and services with our clients as they begin their marketing planning for the coming year.

During the second quarter we continued to make visible progress on our key portal technology initiatives that are designed to increase traffic to our network, create new sponsored revenue opportunities, and further enable our users to make more informed self-decisions. We recently launched WebMD First Aid and Emergency Center providing fast access to acute health issues directly from our home page. First Aid leverages new content from our eMedicine.com property and features over 250 health topics commonly searched on our site. We also launched WebMD Drug Search on our home page just last week allowing users to search for prescription and over-the-counter medications either by brand or generic name or by health condition. Results for each drug search include their interactions, warnings, uses, side effects, and even product visuals. Both of these new site features are now fully optimized for external search and will add a significant amount of new high-value inventory for our clients to effectively the most relevant audience with their brand messaging.

Turning now to our private health portals market, we continue to extend our lead in providing private health and benefits portals to large employers in health plans. During the quarter we implemented new health platforms for a number of organizations that included Verizon, St. Joseph’s Hospital, Sonoma County, and Honda of America. We are also implementing new services for several existing accounts that include WellPoint, IBM, Cigna, Microsoft, Dell, and Pepsico. Our install base of private portal clients at the end of June 2006 totaled 82 companies compared to 66 at the end of June 2005.

At the core of the WebMD health and benefits platform is a personal health record that is built on both self-reported and claims based data allowing us to better support an individual’s personal health decisions. WebMD is rapidly becoming the market leader in providing a fully deployed personal health record that integrates a person’s health history with our medical, pharmaceutical, and lab providers. As further confirmation of our leadership in this space, last month WebMD was awarded the contract by the Center for Medicare and Medicaid Services to conduct a six-month personal health record feasibility test to determine how claims data could be used to create a PHR for Medicare beneficiaries working in conjunction with the business unit of our parent company, Emdeon.

During the second quarter we completed the first phase of our new data warehouse that will enable us to significantly scale the breadth of our personal health record applications that enable consumers to create, maintain, and securely communicate their personal health information as appropriate. We also completed the work on a Spanish language version of our private health portal in order to support the significant number of large accounts who are now seeking a custom language application.

In June, we acquired Summex, a leading provider of comprehensive health and wellness programs that includes on and offline health risk assessments, lifestyle education, and personalized telephonic health coaching. Summex helps corporations and health plans reduce their healthcare costs and improve the overall health of their employees and plan members by deploying a team of professional health coaches who work one-on-one with employees and plan members to modify high-risk behaviors that could lead to illness and increase medical costs. The Summex programs complement our online health and benefits platform as we are now beginning to market these services to both new and existing customers.

We continue to invest in the development of advanced decision support tools that empower consumers with personalized information that will deliver greater choice, convenience, and control in the healthcare that they receive. We are beginning to leverage our platform to integrate both the health and financial planning tools needed in the consumer directed health plan market. Our new healthcare retirement planning tools, for example, will help consumer plan for their needs in the near term and in retirement in order to maximize use of their HSA funds.

In summary, with another strong quarter of both financial and operating results WebMD is well positioned to capitalize on the market trends in our business, both in the public portals market and BioPharma continues to shift more of the consumer and professional marketing dollars online, and in the private portals business as major employers and health plans seek a consumer facing platform as they move towards consumer-directed healthcare. With our strong assets, domain expertise, and established brand, WebMD is uniquely poised to continue to benefit from the strong secular trends in our industry.

Now, I’d like to turn it over to Marty Wygod for some closing comments before we open it up for questions and answers.

Martin J. Wygod, Chairman

Thank you, Wayne. Echoing Wayne’s comments I am very pleased with this quarter’s financial and operating results. We continue to strengthen our leadership position in what can be described as a very large and under penetrated market. By leveraging our experience, assets, and brand we have become the driving force empowering consumers to play an increased role in their health. Understanding that healthcare is not driven by consumers alone, we are creating valuable health and benefit applications that consumers will use, physicians will support, and employers and health plans will rely on. We have been able to deliver strong revenue and earnings growth while at the same time making the investments necessary to achieve our vision. We will continue to invest in our products and our people to create and support a high growth company.

Just looking at the size of our organization alone, we have grown by almost 50% in the last year, bringing the total number of employees to nearly 900. I feel confident that we have assembled a team that will be able to capitalize tremendous opportunities we see ahead and would also be able to meet the challenges that inevitably accompany being the leader in what it is essentially to a nascent market.

Thank you for joining us today. Operator, at this point we are ready field questions.

Question-and-Answer Session

Operator

Thank you. At this time, we are ready to begin the question and answer session. To ask a question please press * and 1. Please limit your questions to one question. Once again to ask a question please press * and 1, and to remove your question press * and 2. One moment please. Our first question comes from Bill Morrison of JMP Securities, your line is open.

Bill Morrison, JMP Securities

Hi, thanks. I can’t resist, I need to ask two questions. First, I guess you mentioned Google that you guys have optimized for their data of their new health vertical. I was wondering if you could talk a little about the optimization efforts for the other major search engines, Yahoo and MSN and I guess Google on google.com, and how are those efforts are progressing? Secondly, when you mentioned that you brought on a bunch of new inventory through new products, I’m curious if you guys have talked to any of the private price optimization companies out there and whether or not you feel that there is an opportunity to use some of the yield managed analytics to drive your revenue for 1000…higher over in the next year or two? Thanks.

Wayne T. Gattinella, President and Chief Executive Officer

Thanks, I’m going to give it to David Gang who will answer the first part of the optimization question.

David Gang, EVP and Chief Technology Officer

The optimization efforts that we’ve been working on over the course of the year are focused a lot on Google and Yahoo optimization. We also did pickup optimization for the other search engines as well and we’ve seen a steady uptake in search optimization related visits over the course of the last two quarters.

Wayne T. Gattinella, President and Chief Executive Officer

In terms of yield management we are seeing growing yield of all of our inventory. I think two things are happening of note in our business. Number one, as you can see our inventory continues to grow. We had a 24% increase in visitors this quarter and corresponding increase in traffic. So, just from a page view standpoint our inventory continues to grow, and with the redesign and re-engineering of the site we’ve also basically re-optimized each page with more valuable inventory as well. So, we’re seeing a consistent uptick in terms of the book to sell through, the value per page, and ultimately the overall revenue momentum that we’re gaining in sort of the advertising market overall.

Bill Morrison, JMP Securities

Great, thanks a lot.

Operator

Our next question comes from Anthony Noto of Goldman Sachs, your line is open.

Anthony Noto, Goldman Sachs

Thank you very much, just one question. You focused on filling some key strategic and technical holes with acquisition since you’ve gone public and I’m just wondering if you think the pace of acquisitions will stay where it’s been on a quarterly basis and how do you think the acquisitions impact your longer term or particularly the EBITDA margins of 45%? And then just one clarification, organic growth last quarter was 27% on a year-over-year basis, I was wondering what it was this quarter? Thanks.

Wayne T. Gattinella, President and Chief Executive Officer

In terms of just acquisition strategy, Anthony, we continue obviously to look at assets we can leverage in the market either on the public portal site or the private portal site, either that enables us to increase our footprint and reach of our public portals distribution as we’ve been able to do it both on the consumer side and the highly valuable professional side. And in the private portals markets, as we look to continue to expand our service capabilities that extend the value we can provide to our employer and health plan clients we see that as a really important way to continue to monetize and increase our overall revenue yield within these high value, high margin, and long term kind of customers. So, I see us continue to look for value as we find it.

Martin J. Wygod, Chairman

Anthony, also to add a little on this, these are acquisitions of companies that fit so strategically with us, the integration is quite easy. And on the relationship question as far as the margins on our incremental revenue going forward, even though these are entities that are currently not making a profit they will not interfere in any form or manner of the margins on our incremental revenue.

Wayne T. Gattinella, President and Chief Executive Officer

Anthony, just to answer your last question in terms of the Company as a whole to exclude the $5.8 million in revenue that we identified related to acquisitions during the quarter, the year-over-year growth rate was 24%, a little lower than it was in the first quarter and as I discussed on the call we had anticipated a transition from a sales and inventory perspective in terms of some run off on the existing revenues that we inherited with the acquisitions of Conceptis and eMedicine, and it was going to be a small hold before we could ramp up and place new inventory on that, and we anticipated that in our guidance initially, and we think we are going to recover from that in the last half of the year, as I mentioned in my comments.

Anthony Noto, Goldman Sachs

Great, thank you.

Operator

Our next question comes from David Veal, Morgan Stanley, your line is open.

David Veal, Morgan Stanley

I’m just wondering if you can talk about the private portal sites, you mentioned that WellPoint and Cigna were taking sort of incremental new products, can you give a little more color on how their needs are evolving and also just a little more color on the ’07 selling season?

Wayne T. Gattinella, President and Chief Executive Officer

In terms of fiber portal products upgrades and upsells there are several services that we see as a book of business opportunity. I mentioned the in-language opportunity. Actually WellPoint is our first client that we’re implementing the Spanish speaking version of our platform. It’s important from a marketing standpoint for their base of customers and for us, it gives us the ability to generate additional revenues with similar applications, only in this case being in language. The whole personal health record opportunity for us to continue to expand the services that spin off from building personal health profiles is enormous -- the idea of personalized messaging, of communications, of decision support, information that we can spin from that. Our new services that are emerging as we gain critical mass penetration of the personal health record is the first step, and again that’s some of what you see happening with some of the large customers who have been out there for a period of time and are now sort of moving to the next phase of applying the personal health information tools to their customer base. In terms of the selling season for 2007, certainly we are still focused on filling out the rest of the year. You can see the kind of growth rate that we’re forecasting for the second half and you can see the pickup. Right now, the selling season is red hot for us; I mean the second quarter over the past few years for us has been a little bit of a slow down in the selling period because first quarter is so active it just appears that the market sort of takes the rest in the second quarter and then starts to rev up as they look towards the balance of the year. This past second quarter was stronger than any second quarter selling period we’ve had, and again you start to see that reflected over time, but right now we’ve got the largest and best sales force we’ve had at any period prior. We have deeper client relationships that are more open right now to moving more of their dollars online, and we have new products and services that the new site architecture and engineering is providing that gives us the ability to monetize our relationships in a way that is much larger than ever before. So, we’re pretty excited about the selling period right now.

David Veal, Morgan Stanley

Great, I appreciate the comments.

Operator

Our next question comes from Mark Mahaney of Citigroup, your line is open.

Mark Mahaney, Citigroup

Great, thank you very much. If I could ask three questions please, just the math on the Medsite contribution should it be something around $8 million in the back half of this year? Secondly, any updated comments on the AOL relationship and anything in what they announced yesterday that has implications for your relationship, i think it expires in April or at least set up for re-negotiation in April. Then the third thing, you talked about growth in both sell through and in pricing, it looks like it is pretty robust in both sides for your advertising and sponsorship, going forwards is there a particular reason why one of those drivers could be greater than the other or should we continue to expect robust growth drivers from both sell through and from pricing? Thank you.

Anthony Vuolo, Chief Financial Officer

Mark, this is Tony Vuolo. On the first question, from the Medsite contribution, I think the number is more like $7 million rather than $8 million, the high end of our guidance I think went up about $9 million, and in my comments 8% of that was attributable to Medsite and that would get you closer to 7%.

Wayne T. Gattinella, President and Chief Executive Officer

With respect to AOL, we are in discussions now in terms of how that relationship is going to evolve beyond next May. We’re not really at liberty to provide detail at this point, but certainly as soon as we have it we’ll put it out there. The third part as I understood it — tell me if I’m getting it wrong Mark —was the balance between self-rate and pricing. There is pricing opportunity for us that we’ve begun to let out particularly in the professional side because of our really unmatched presence in the professional market. There have been opportunities there that we’ve put out there really each year over the last few years, but I would tell you that if I had to sort of answer directly sell through right now is driving the growth of our business. Pricing I think will come over time certainly as the demand in the market starts to match supply, but right now we’re out there trying to develop as much new business as we can and new relationships, not just at the company level but at the brand level as the seed that we can nuture over time both with new products and services. So, I would say that sell through is a bigger drive at the moment.

Mark Mahaney, Citigroup

Thank you very much.

Operator

Our n ext question comes from Rob Kelly, Smith Barney.

Rob Kelly, Smith Barney

Would you comment about recent speculation regarding your partnership with Google? And with regard to your new health simplified channel with Phillips, can you explain how you’re compensated as well as the nature of that contract?

Martin J. Wygod, Chairman

The question in relation to Google, we would not be able to comment on that at this time. And Wayne, why don’t you respond on the question in relation to Phillips.

Wayne T. Gattinella, President and Chief Executive Officer

On the Phillips program, which is really a significant program for us, if you see it on the site it’s up there pretty boldly today on the home page. It’s a branding strategy for the company and I think what’s interesting as you look at it is that they see WebMD as a unique place to start to build that sort of health positioning and consequently they’ve worked with us exclusively to build a strong presence on WebMD, only on WebMD, to start to put a corporate branded message into the market place to the kind of audience that they’re trying to reach. If I understood the question, the way we get paid for that is like many of our editorial/strategic programs. It’s a combination of the applications we build, the presence that we give them throughout our site, and a lot of the tool sets that we sort of customize for them, which is kind of our secret sauce where as opposed to selling just pure CPM based advertising we’re able to really build a total solution that has longevity and value as opposed to just sort of impressions and sort of commodity measurements.

Rob Kelly, Smith Barney

Thanks.

Operator

Our next question comes from Rob Kelley, Smith Barney.

Rob Kelly, Smith Barney

It’s been answered, thank you.

Operator

Once again to ask a question please press * and 1. Our next question comes from Anthony Petrone, Maxim Group.

Anthony Petrone, Maxim Group

Thank you, just a couple of questions on Medsite. Medsite has an internal marketing team there, I was wondering if you guys plan on keeping them on board, and if not when will you release that employee base? Just on the customer base, they have 60 launch customers, I’m wondering what percentage of that customer base represents new customers for WebMD and what percentage represents existing overlapping customers?

Wayne T. Gattinella, President and Chief Executive Officer

We see the Medsite acquisition as a strategic product acquisition but also as a great employee acquisition as well. There is a lot of talent in that company that is incremental to our current organization, and given the growth that we have today and project for the future it’s an organization that we value and see as one that will help contribute to our growth in the future. We share many of the same customers given that robust focus in the pharmaceutical medicine device industry, but as the leader in eDetailing what they bring is a completely new incremental and different product revenue stream that today we don’t currently have. So, it’s actually good news that we share many of the same customers because it gives us a lot of synergy from an account management and relationship standpoint, but in the same token it gives us an incremental revenue stream that we look to leverage as a product line but also over time as we can integrate it with other WebMD services create an even stronger value proposition than what they successfully put out there to date.

Martin J. Wygod, Chairman

This challenge in eDetailing is the physician base. When you combine our physician base along with theirs, it puts us in a position so that we should be able to make this a very important growth segment to our business.

Anthony Petrone, Maxim Group

And on their repository, there is no overlap there, everything you brought on from the 400,000 physicians they have in their data repository are all new physicians that you now have under Medscape.

Wayne T. Gattinella, President and Chief Executive Officer

They’re not all new physicians. There are only about 450,000 prescribing physicians in the U.S. But the information that they have available on those physicians is different than what we have, because theirs is a push contact database that they’ve been able to optimize relative to getting physicians to respond to an invitation to participate in a particular program. So, it’s actually a very robust marketing database that complements a lot of the information we hold in our current database. It does give us additional physicians, but equally gives us additional information that makes the combined database even more valuable.

Anthony Petrone, Maxim Group

Thank you very much.

Operator

Our next question comes from Justin Balda.

Justin Balda, Citadel

Hi, I’d like to ask about the increase in your guidance. I think, Anthony, you indicated that 80% of the increase is coming from the Medsite acquisition, is that 80% of the increase to the full year ‘06 guidance or just to the increase in your second half guidance?

Anthony Vuolo, Chief Financial Officer

Increase to the second half guidance and it was the increase in the high end of the range.

Anthony Vuolo, Chief Financial Officer

Okay, and then if I could just ask a followup to Anthony Noto’s question from earlier about the organic growth rate, I think in the second quarter you indicated it was 24% and the explanation for the slight slow down relative to the first quarter, I didn’t fully understand, if you can maybe elaborate on that a little bit.

Wayne T. Gattinella, President and Chief Executive Officer

Sure, as we anticipated this quarter, we were running off some of the legacy contracts and the acquisitions that we made in terms of the heart.org and eMedicine, and we’re including them as part of our network now, so we’re really kind of rebuilding the revenue stream there because we sell across our network and we place programs and promotions on the WebMD site and also on the heart.org and eMedicine. So, we anticipated that we’re going to be having a little bit of transition there and it was part of our guidance for the June quarter previously.

Justin Balda, Citadel

Okay, great, thank you.

Operator

At this time there are no further questions.

Wayne T. Gattinella, President and Chief Executive Officer

Okay, we’d like to thank everyone for joining us today. You see that we’re very excited about the results that we just published and we’re excited about the second half of this year. We look forward to sharing those results with you next quarter. Thank you for joining us.

Operator

As a reminder it is necessary there is a replay available of this call which can be accessed for free at 866-395-9163, or if you’re calling from outside the U.S. at 203-369-0499. There is no pass code required. The webcast replay is available on our website as well. Thank you for joining us today.

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Source: WebMD Health Q2 2006 Earnings Conference Call Transcript (WBMD)
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