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Emdeon Corporation, (HLTH)

Q1 2006 Earnings Conference Call

August 8, 2006, 4:45 pm ET

Executives

Risa Fisher - Vice President, Investor Relations

Kevin Cameron - Chief Executive Officer

Andrew C. Corbin - Executive Vice President and CFO

Martin Wygod - Chairman of Board of Directors

Sandy Draper - JMP Securities

Analysts

Christopher Mcfadden - Goldman Sachs

Sandy Draper - JMP Securities

James Kumpel - Friedman, Billings, and Ramsey

Duane Pfenningwerth - Raymond James

Corey Tobin - William Blair & Company

Anthony Vendetti - Maxim Group

Presentation

Operator

Good afternoon and welcome to Emdeon Corporation June 2006 Quarterly Conference Call. Today’s conference is being recorded. Thank you, I’ll now turn the meeting over to Ms. Risa Fisher, Vice President of Investor Relations. Ma’am, you may begin.

Risa Fisher - Vice President, Investor Relations

Good afternoon and welcome to Emdeon’s Q2 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 acquisitions and other transactions, from new products and services, and from other potential sources of additional revenue and the expected timing of completion of the sale of Emdeon Practice Services and completion of the expiration of possible transactions and other alternatives involving Emdeon Business Services. 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, our ability to develop and maintain relationships with healthcare industry participants including healthcare payers and providers and vendors of services to those payers and providers, difficulties in integrating acquired businesses, changes in economic, political or regulatory conditions or other trends affecting the healthcare, Internet, information technology, and plastics industries including matters relating to HIPAA and the outcome of the previously announced profits of exploring alternatives with respect to Emdeon Business Services and the sale of Emdeon Practice Services and the effect on those segments. Many of these risks and uncertainties are described in our SEC filings.

We expressly disclaim any intents or obligation to update these forward-looking statements. The earnings release issued today is available on our website at www.emdeon.com in the “About Emdeon” section and is also been included in the Form 8-K file 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 to be filed today include reconciliation’s 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 Executive Officer, Kevin Cameron.

Kevin M. Cameron - Chief Executive Officer

Hello everyone, thank you for joining us today. Joining me on the call today are Marty Wygod, Chairman of the Board, Andy Corbin, CFO of Emdeon Corporation and CEO of Emdeon Practice Services, Wayne Gattinella, CEO and President of WebMD, and Bill Midgette, CEO of Porex. After my opening comments Andy will review our financial results for the June quarter. I will then review the business segment results and some additional detail. Andy will review our guidance for the balance of 2006 and Marty will make some closing comments, and then we’ll take Q&A.

I hope that you all had a chance to read the release we issued at the close of the market today in which we announced the sale of Emdeon Practice Services to Sage Software for $565 million in cash. We are very proud of the substantial improvements we have made to Practice Services. These accomplishments are evident not only in our financial results but also in the value we’ve been able to realize for shareholders with today’s transaction. Importantly Sage is committed to work closely with Emdeon Business Services and WebMD in the coming years and we look forward to working with Sage as it grows its presence in the US healthcare market. Under the terms of our contracts, Emdeon Business Services will continue as the exclusive provider of electronic healthcare transaction services and patient statement services, for practice services through 2013. Emdeon Practice Services will continue its relationship with WebMD and will among other things exclusively integrate WebMD’s personal health record with its clinical products including its electronic medical record.

We expect to close the sale of Practice Services in September following termination or expiration of the (inaudible). Turning to the financial results we announce today. I’m very pleased with our strong Q2 results which refueled primarily by organic growth. We achieved record revenue and record adjusted EBITDA. Many of the strategic initiatives we have pursued are bearing fruit allowing us to increasingly wholly focus our efforts on the creation and delivery of new and innovative products and services. Now I’m going to turn it over to Andy to review Q2 results.

Andrew C. Corbin - Executive Vice President and CFO

Thanks Kevin, good afternoon. As a reminder, our press release including comparative financials and a summary of our detailed 2006 guidance is available on our website. As you refer to our consolidated statement of operations attached to the press release you will know that we have added detail to break down our total revenues product revenues and service revenues. When we file our June 30, 2006 10-Q it will include this detail for comparable June period as well as for the three year period ending 12-31-05.

We’ll now summarize our financial results for the Q2 relative to the same quarter a year ago and then highlight some additional financial items to assist you in understanding our financial performance. Consolidated revenue for the June 2006 quarter with $354.9 million compared to $322.6 million a year ago an increase of 10%. Earnings before interest, taxes, non-cash and other items which we refer to as adjusted EBITDA with $66.7 million or $0.22 per share compared to $45.7 million or $0.13 per share in the prior year, an increase of 46%. Net income was $23.2 million or $0.08 per share compared to $16.2 million or $0.05 per share in the prior year, an increase of 43.4%. For comparability purposes, I would like to highlight three items that impact net income year over year.

First, while we don’t project our included expenses related to the Department of Justice Investigation and our guidance. Our Q2 results for 2006 include approximately $275,000 of legal expenses related to this investigation compared to $4.3 million to the same period last year. Second our June 2006 results include $13.1 million of stock compensation expense compared to $716,000 for the same period last year reflecting the adoption of SFAS 123R and third, during the June 2006 quarter, we incurred $4.1 million as third party advisory fees for legal and accounting services related to our evaluation, strategic alternatives for our business services and practice services segment. Consolidated cost of operations was $197.1 million for the June 2006 quarter, compared to $182 million a year ago. The absolute dollar increase is primarily due to the higher revenues during the quarter.

Additionally included in the cost of operations in Q2 of 2006 is $3.7 million of non-cash stock compensation expenses with no comparable amount in the prior year. Excluding the impact of the stock compensation, cost of operations as a percentage of revenue was 54.5% in its June 2006 quarter compared to 56.4% of revenues a year ago an improvement of 190 basis points. Consolidated sales, marketing, general and administrative expense was $90 million or 25.4% of revenues for the June 2006 quarter compared to $83.5 million or 25.9% of revenues a year ago. Excluding non-cash items related to stock compensation and our non cash advertising consolidated SG&A was $80 million or 22.5% of revenues for the June 2006 quarter compared to $80.6 million or 25% of revenues a year ago an improvement of 250 basis points.

This improvements reflects our ability to increase revenues without a proportionate increase in certain general and administrative expenses. Now turning to our balance sheet. Our cash position on June 30, 2006 was approximately $389 million consisting of cash and short-term investments of which a $104.3 million is attributable WebMD. Operating cash flow in the June 2006 quarter was $68.5 million compared to $39.7 million for the same quarter a year ago. Majority of the increase in operating cash flow was a result of the increase in adjusted EBITDA. We have previously stated our operating cash flows can also be negatively or positively impacted by the timing, the cut off of compensation accruals, other expenses accruals, and a collection of receivables in relation to the quarters end.

Other items impacting our cash balance during the quarter include capital expenditures of $14.8 million, the acquisition of Summex by WebMD for $30 million, funding of our final ABF contingent payment of $17.9 million. $5.2 million for the repurchase of approximately 5100 shares of stock. Now I would like to turn it back to Kevin to give you some color on the individual business segments.

Kevin M. Cameron

Thank Andy. Emdeon business services revenue was a record $206.9 million in Q2 versus a $191.5 million a year ago. This 8.1% increase is attributable to the stronger performance across our remittance and payment, patient statement, direct revenue cycle management solutions and DIPS businesses, as well as the impact of the January ‘06 postal rate increase. Emdeon business services achieved record segment adjusted EBITDA of $49.6 million, a 22.7% increase from $40.4 million in the prior year. Operating margin increased to 24% in the June 06 quarter compared to 21.1% a year ago. Factors driving strong business services results during the quarter included the following. In our electronic medical transaction business we continuously -- growth in electronic claim transaction volume as new and existing channel partners increasingly look to us for their transaction needs.

Additionally we are seeing significant growth in the adoption of real time transactions including eligibility and electronic remittance advice otherwise known as ERA. Notably we signed new comprehensive agreements with two of our largest channel partners during the quarter. We saw strong top line and bottom line growth in our patient billing and payment business largely due to the sale and implementation of new clients. Our sales pipeline has increased, as we are focused on selling these services through our institutional and our channel partner sales forces. Our directive to provide a revenue cycle management solutions also are going strongly with sales and implementations up over 100% for the fist six months of this year versus the corresponding period last year.

In our paper remittance and payment business we are becoming increasingly successful in the large market. We’ve implemented five of our seven largest payer accounts in this business since the beginning of 2005. Our sales pipeline is growing substantially as payers increasingly consider outsourcing their paper remittance and payment needs to us in connection with our unique ability to drive adoptions of electronic remittance advise and electronic funds transfer. We had a strong quarter in our paper claim management business primarily due to the completion of a large software implementation that we had expected to occur in the Q3. We also continue to make operational improvements in the outsourcing portion of this business. These improvements are lowering our costs, and should enable us to reemphasis our selling efforts in this area. On the cost side we continue to low our cost and improve our margins through a variety of technology and process improvement initiatives.

Turning to Emdeon Practice Services, revenue was $77.3 million compared to $78.6 million last year, a slight decline from last year’s record revenue. Segment adjusted EBITDA for Emdeon Practice Services was $12.1 million compared to $8.2 million last year, an increase of 48.1% and operating margins were 15.7% compared to 10.4% in the prior year, which represent record highs for both adjusted EBITDA dollars and margin percent. These stronger than anticipated earnings results and significant year over year improvements are attributable favorable gross margin due to system revenue mix and pricing and lower operating expenses due to gains in operating efficiencies from our ongoing process improvement initiatives primarily reflected as lower compensation and infrastructure related expenses. We have been working hard to enhance our product offering to take advantage of the growth expected in the electronic health record market. On July 18th Certification Commission for Healthcare Information Technology feature announced the Practice Services Intergy EHR has been certified and meets ambulatory electronic health record criteria for 2006. This represents an important seal of approval and underscores our commitment to delivering quality products that help our physician customers improve quality of care in a more efficient and cost effective manner.

Turning to WebMD. WebMD delivered a strong quarter of both revenue and earnings growth with revenue for the June ‘06 quarter $56.6 million compared to $40.5 million last year an increase of 39.9%, an adjusted EBITDA for the June ‘06 quarter was $9.6 million compared to $2.8 million last year, an increase of 244%. In its public portals business the reach of the WebMD health network continue to expand significantly during the quarter with the average number of unique users in the Q2 reaching 30.5 million per month and page view traffic totaling 714 million pages during the quarter. Increase is of 24% and 22% respectively over the prior year period.

WebMD’s online reached to physicians also continue to significantly expand. In the Q2 there were over one million physician visits per month to WebMD’s professional sites and a record 490,000 continuing medical education programs where completed on WebMD’s professional network, an increase of 70% over the same period a year ago. WebMD continue to make visible progress on its key portal technology initiatives. WebMD is beginning to benefit from increased search referral traffic as a result of its network sites becoming more optimized for external search engines. New features on WebMD sites include the WebMD first aid and emergency center and WebMD drug search, both of which are fully optimized for external search and will add a significant amount of new high value inventory for WebMD’s clients to affectively reach the most relevant audience for their brand messaging.

In it’s private portals business WebMD also continue to extend its leadership in providing a private health and benefits portals to large employers and health plans. During the quarter new health platforms for a number of organizations including Horizon, St Joseph’s Hospitals, Sonoma County and Honda of America were implemented. Additionally several existing accounts including WellPoint, IBM, CIGNA, Microsoft, Dell, and PepsiCo implemented new services during the quarter. WebMD continues to invest both through internal development and acquisition and advanced decision support tools then the power consumers with the personalized information that will deliver greater choice convenience and control in the healthcare that they receive.

In June WebMD acquired Summex, provider of comprehensive health and wellness programs and include online and offline health risk assessments, lifestyle education and personalized telephonic health coaching. The Summex programs complement WebMD’s online health and benefits platform. After the quarter end WebMD announced that it has entered into a definitive agreement to acquire certain assets of Medsite, the leader in direct to physician eDetailing services. Medsite enables WebMD to provide an expanded set of online solutions to its BioPharma customers. WebMD is uniquely positioned to capitalize on the strong secured trends in the industry, both in the public portals market as BioPharma continues to shift more of their consumer and professional marketing online and in the private portals market as major employers in health plans seek a consumer facing platform as they move towards consumer directed healthcare. WebMD held their second quarter earnings call last Thursday and that webcast is available for replay if you would like additional information.

Okay, turning to Porex. Porex’s revenue is $22.7 millions for the June quarter compared to $20.4 million a year ago and increase of 11.1%. Segment adjusted EBITDA was $7 million versus $6.1 million in the prior year an increase of 16.2%. Operating margins were 31.1% compared to 29.7% last year. Last year Q3 was seasonally the strongest, however due to the timings of sales of certain products and based on our latest projections we expect the Q2 will be the strongest quarter of this year for Porex.

Turning to corporate. Corporate expenses for the June ‘06 quarter were $11.6 million or 3.3%of consolidated revenue compared to $11.7 million or 6.6% of consolidated revenue last year. The declining corporate expense as the percent of consolidated revenues reflects our ability to increase revenues without increasing our corporate expenses. Please note that both this year and last year reflect a corporate allocation to WebMD representing the cost of services that Emdeon provides to WebMD.

Andy will now walk you through our financial guidance for ’06.

Andrew C. Corbin

These guidance to be found attached to our press release issue today so you can refer to that documents and proceed. Our full year guidance for 2006 increase from the guidance we provided on May 4th. But the transaction of Sage is not yet closed we’re including practice services for the balance of 2006. We will provide enough information so that you can approximate practice services practice services and back it up with your models. First I will briefly review our assumptions relative to our guidance for 2006. Our guidance does not include any expenses related to the Department of Justice Investigation for the balance of this year. Our guidance does not reflect any projected expenses related to our evaluation of our strategic alternatives, for business services and practice services segments. Our guidance does not reflect any potential repurchase of shares, or else any securities which may occur of the balance of this year. Our guidance does reflect the pending acquisition of Medsite by WebMD. Cash and GAAP earnings per share are both calculated based on assumed weighted average share account of $300 million for full year 2006.

The 2006 consolidated revenues are expected to be between $1.43 billion and $1.45 billion an increase of approximately 12% to 14%from 2005. Timing if these revenues is expected break down as follows for the balance of 2006. Approximately 25% in Q3 and 27% in Q4. We expect adjusted EBIDTA to be between $251 and $264 million or $0.84 per share to $0.88 per share with the timing is as follows for the balance of 2006. Approximately 25% in Q3 to 28% in Q4. Including the impact of SFAS 123R we’re expecting 2006 net income of $89 to $98 million or $0.30 per share to $0.33 per share with the timing as follows for the balance of 2006: approximately 24% in Q3, 33% in Q4. More specifically by segment, Emdeon Business Services is expected to represent approximately 57% consolidated revenue in Q3 and 56% in Q4, we expect operating margins to be about 22% for the balance of the year.

We remind that we experience some seasonal in Q3 due to the lower transaction volumes we typically experienced as there are typically fewer clients and related transactions during the summer months. Anticipate that this will represent approximately 12% of business services segment revenues and 11% of business services segment adjusted EBIDTA for the full year of 2006. Emdeon practice services is expected to represent approximately 22% of consolidated revenue in Q3 and 21% in Q4. We expect operating margins of about 15% for the balance of the year. WebMD is expected to represent approximately 18% of consolidated revenue in Q3 to 19% in Q4. We expect operating margins of about 21% in Q3 and 26% in Q4. Additional details on WebMD’s guidance can be found in the press release issued by WebMD on August 3rd.

Porex is expected to represent approximately 6% of consolidated revenues for the balance of the year and delivered margins between 27% to 28%. Corporate expense is expected to represent approximately 3.2% and consolidated revenues for the balance of the year. Now I will provide some additional data points to help you complete your models, inter segment eliminations are expected to be approximately 2.5% of net revenues. Net interest income is expected to be approximately $900,000 to $1.2 million through the second half of 2006. Capital expenditures are expected to be between $70 and $80 million in 2006 and we have incurred $29 million through June 30th 2006. Depreciation and amortization is expected to be approximately $80 to $82 million for 2006 with the timing that’s follows for the balance of the year. Approximately 26% in Q3 to 27% in Q4. Non-cash advertising is expected to be approximately $7.4 to $7.6 million for 2006 with the timing as follows for the balance of the year. Approximately 23% in Q3, 39% for Q4 Stock compensation expense including the impact of SFAS 123R is expected to be approximately $48 to $49 million for the year the timing as follows for the balance of the year, approximately 26% in Q3 and 21% in Q4. The estimated NOL balance at June 30, 2006 is approximately $2.1 billion to approximately 69% Emdeon, 31% of WebMD. Our estimated tax expense in 2006 is approximately $22.3 to $23.3 million which equates to an effective tax rate of approximately 20% as it relates to the announced transaction with Sage. Emdeon and Sage will make --section. We will treat this transaction as a sale of assets for tax purposes.

Emdeon expects to recognize a taxable gain on the sale of its Emdeon practice services unit and expect to utilize a portion of its federal net operating loss carry forward to offset the gain on this transaction. Underlying the tax sharing agreement between Emdeon and WebMD, WebMD will be reimbursed for any of its annual help utilized by Emdeon in this transaction at a current federal statutory tax rate of 35%. Emdeon currently estimates a amount of WebMD and will utilize in this transaction will be approximately $240 to $260 million resulting in a reimbursement to WebMD at $84 to $91 million. The amount of utilization of WebMD’s in a while, in related reimbursement is based on various assumptions and will not be determined until a volume that Emdeon has consolidated 2006 tax return.

Turning to our Q3 2006 guidance, we expect revenues to be approximately $358 to $367 million. Adjusted EBIDTA to be approximately $0.20 to $0.22 per share and net income to be approximately $0.7 to $0.8 per share. Again these estimates are based on the same assumptions I mentioned earlier and now I’ll like to turn the call over to our Chairman Marty Wygod.

Martin J. Wygod - Chairman of Board of Directors

Thanks Andy, as Kevin mentioned at the start of this call we are very pleased to announce that Sage will be acquiring Practice Services. It’s very important to the Emdeon management team that the acquiring company shares the same vision and commitment to our customers and employees. We believe the Practice Services will provide Sage with a very strong foothold with the US healthcare market. Through the agreements that we’ve put in place in the junctions with this transaction, we believe that they have realize significant, value for our practice service assets while maintaining the synergies between practice services and business and WebMD respectively. We look forward to working with Sage in the US ahead. Before I opening up for Q&A we will also want publicly thank all of our employees and management who has spend a great deal of time over the last several months above and beyond their normal responsibilities to this evaluation process. We are very pleased with the outcome of the Practice Services piece of the process and we expect to conclude our evaluation of strategic alternatives by business services by late August or early September. Operator, we are now ready to take any questions.

Question-and-Answer-Session

Operator

Thank you, we will now begin the question and answer session. [Operator instructions]. Our first question comes from Christopher Mcfadden with Goldman Sachs, your line is open sir.

Christopher Mcfadden - Goldman Sachs

Thanks very much, two questions. One is the update you could provide relative to the business services that review and whether or not we should anticipate any changes there and then I am interested Kevin or Marty on your views on the new language released by CMS today in terms of the exemption for electronic health records. How impactful do you think this will be for the market and how and in what forms do you think that Emdeon is in a position to take advantage of some of this new liberalization in terms of information transfer among participants within the healthcare market place, thanks.

Kevin M. Cameron

Well, we respect your question Chris on business services. I think what we said is pretty much what we can say which is that we are continuing to evaluate that and that we will expect to have news for you at the end of August or early on September. With respect to the new -- that have come out that’s something that we are still looking at. I don’t have a deep answer to give you on this call right now.

Christopher Mcfadden - Goldman Sachs

Yeah, I understand. Stepping back and may be one last question and when you think about the transaction that you have announced today, can you give us any, you know sort of context of -- I am sure some of this will be forthcoming in your SEC filings. You talked about you know, certain number of participants or any other sort of context around as a negotiation that will perhaps try to help understand how you arrived at this particular partner and anything else that would, you know add some insight to the process, thanks.

Martin J. Wygod

Chris, this is Marty, and it was a very competitive process and this is where we ended up where we thought that the best price for the company and the best relationship going forward and the one that could help bring in the maximum amount of future value to WebMD as well as to business services.

Christopher Mcfadden - Goldman Sachs

Great thank you.

Operator

Our next question comes from Sandy Draper with JMP Securities, your line is open.

Sandy Draper - JMP Securities

Thank you. First question just related to the sale. Just want to make sure the timings you said in terms of the close would be sometime around September?

Kevin M. Cameron

Yeah, that’s right during the month of September.

Sandy Draper - JMP Securities

Okay and can you -- what’s the incremental cash? Is there any indication or direction you can give us on your balance sheet is going to be have a lot of cash, give me a sense on you know, where you would expect -- what you would expect to be doing with all that cash?

Kevin M. Cameron

You know what’s too early for us to comment on that.

Sandy Draper - JMP Securities

Okay, fair enough and then just one follow up operational question and I will jump back in the queue. Kevin, you know, looking at your guidance and I may have missed some in the commentary on the Business Services side, it looks like to get your numbers you would expect your operating margins to come down a little bit. Is there any incremental expense with obviously your income on margins where very-very strong this quarter. What would drive that EBITDA margins down in the back half of a year, and is that a trend that would stay into ‘07 or is it a short-term event?

Kevin M. Cameron

No, I think we are going to continue to perform well, the Q3 I think I mentioned the script is seasonally a lighter quarter for us. The doctors they go on vacation and the patients aren’t sick and that effects a lot of our transaction businesses. There are fewer working days that occur in the quarter, so we tend to pay people every two weeks, but the working days in the quarter and in this quarter, I think its started on a Saturday and ends on a Saturday and, yes some timing of holidays like 4th of July that -- they just make for less revenue days in the quarter if you will. So that’s why -- that’s most of what you are looking at it.

Sandy Draper - JMP Securities

Okay, so just short of the normal fluctuation to day-to-day operations, not any specific investments or issues.

Kevin M. Cameron

Yeah, I don’t think so, I did mentioned to, I think we had a significant software still on this quarter that was -- what we expected to come -- I don’t even think that effects the result.

Sandy Draper - JMP Securities

Okay great, I’ll jump back in the queue, thanks.

Operator

James Kumpel, Friedman, Billings, and Ramsey, you may ask your question.

James Kumpel - Friedman, Billings, and Ramsey

Hi, good evening congratulations from (inaudible) can you comment on what your annual balance will be following the close of the sales -- of the Sage?

Martin J. Wygod

Sure it will be approximately, this is approximate -- a $6 billion.

James Kumpel - Friedman, Billings, and Ramsey

$6 billion with --

Martin J. Wygod

With about $250 million of it coming from the WebMD components.

Martin J. Wygod

Right, I said that the --.

James Kumpel - Friedman, Billings, and Ramsey

$350, okay and Kevin can you comment on --

Martin J. Wygod

Yeah, only a portion from WebMD.

James Kumpel - Friedman, Billings, and Ramsey

Okay.

Kevin M. Cameron

I think your question for WebMD was $240 to $260 was the range that we established.

James Kumpel - Friedman, Billings, and Ramsey

What -- we get used by --

Martin J. Wygod

What we can use -- he is asking what will be left there and I think its $600, that’s it.

James Kumpel - Friedman, Billings, and Ramsey

Right and then in terms of the non-cash advertising, Kevin can you just comment on the nature of the seasonality, work swings so dramatically from such -- quarter, up to Q4 some of the factors behind that.

Kevin M. Cameron

Yeah, I think this is mostly -- Wayne this is -- used to WebMD.

James Kumpel - Friedman, Billings, and Ramsey

Right.

Wayne T. Gattinella

It’s the timing when we want to use the advertising, and this change is I think year to year basis.

James Kumpel - Friedman, Billings, and Ramsey

Right, okay, thank you very much Kevin.

Operator

Anthony Vendetti, Maxim Group, you may ask your question.

Anthony Vendetti - Maxim Group

Thanks good afternoon. Is it possible Marty, that the decision at the end of August, early September is to keep business services and if so if you could kind of talk about what might go into that decision and then lastly on DIPS which is the component that you wanted to retain. Is it possible that that would be included in the sale at the right price and if not do you intend to build around DIPS with the cash that you receive from these two sales?

Martin J. Wygod

No, no DIPS would not be included in any sale.

Anthony Vendetti - Maxim Group

Okay.

Martin J. Wygod

And I’m sorry what was the first question again?

Anthony Vendetti - Maxim Group

Just in terms of business services it is possible --

Martin J. Wygod

Sure, sure it is possible that we retain business services, plus we retain a portion of business services. We just have not reached that conclusion. There is a lot of different things on the table in front of us and whatever we do has one objective and one objective but only to maximize share hold the belly.

Anthony Vendetti - Maxim Group

Okay, but DIPS obviously a very important component. Is that something that you would build around or would you potentially use this cash to look for other strategic acquisitions?

Martin J. Wygod

It’s too early to comment on that.

Anthony Vendetti - Maxim Group

Okay great, okay thanks.

Operator

Duane Pfenningwerth, Raymond James you may ask your question.

Duane Pfenningwerth - Raymond James

Hi thanks, one of you can just comment on business services head count and how that’s changed year to year?

Andrew C. Corbin

The head count in business services is about the same year over year it’s not a number that we typically report. We have made you know we’ve been realizing efficiencies in certain areas of business services and growing others and so and that has come out to about the same that you know.

Duane Pfenningwerth - Raymond James

So would do you attribute the increase in your margin to pricing or mix this quarter and what’s specifically is the sort of, driver up the step-down in Q3?

Andrew C. Corbin

We continue to put, we continue to realize efficiencies in the businesses so some of the things are we renegotiated our contracting arrangements around some of our network hosting which has given us some savings this year, we are also, would rather change the way those arrangements work so that we can be more efficient in the way we utilize our technology and we can realize savings through types of initiatives. We are in the process of consolidating data centers, we have 9 data centers that are coming down to two data centers today and that’s happening right now that involves about $8 million capital expenditure for us and there is additional operating costs that comes in to play in the next two quarters accomplishing that but we’ll come out of it substantially ahead. We got a nice return on that investment going forward. So it’s those types of things, we are consolidating certain of our call centers and cross training people and how to handle centralizing those call centers and then cross training people and how to handle our different products and services that we can utilize those more effectively, some of those things involve interim cost, they all result in lower cost going forward.

Duane Pfenningwerth - Raymond James

Thank you and can you comment on the leadership and succession planning in business services, should you decide to retain that asset?

Andrew C. Corbin

It’s a lot of hypothetical steps.

Martin J. Wygod

I think it’s too early to comment on what we were going with business services we’ll let you know that when we know that.

Andrew C. Corbin

And that point -- Phil would clarify if there is a need to succession.

Duane Pfenningwerth - Raymond James

Okay, thanks for the answers.

Operator

Sandy Draper, JMP securities, you may ask your question.

Sandy Draper - JMP Securities

Thanks for taking the follow-up. Two quick questions. One can you give us the cost basis for the practice services assets to try to figure out the tax implications and then the follow-up would be, may be just you commented on the WebMD exclusivity in terms of integrating with SAGE I want to make sure understood is it exclusive for both parties, it is exclusive just for WebMD or exclusive just for SAGE?

Kevin M. Cameron

On the first question the tax basis and practice service in the assets is about $115 to $125 million with respect to the WebMD and business services agreements that well, they have many different elements to them SAGE/practice services is going to in one example integrate and allow for data flow to and from the practice service’s electronic health record products and the WebMD personal health record products and practice services will do that exclusively with WebMD. We would expect they are going forward WebMD will integrate their personal health record not only with practice services but other electronic health record systems and other providers of clinical data.

Sandy Draper - JMP Securities

Okay, great, that was good, I will try to get out So webMD is not precluded from working with other practice management or EHR vendors with their personal health record.

Kevin M. Cameron

No, not at all, that I think that would – that wouldn’t makes sense for webMD nor would it make sense for practice services because they want to be able to benefit from all that data.

Sandy Draper - JMP Securities

Okay, fantastic thanks.

Operator

Corey Tobin, William Blair & Company, may ask your question.

Corey Tobin - William Blair & Company

Hi, congratulations on the sale. Quick question regarding the guidance and these guys specifically don’t guide but this particular feeling for what the cash flow should be with operating cash flow in sort of, Capex as you look at it here for the rest of the year, thanks.

Martin J. Wygod

What I said on Capex. Was this going to be 70 million to 80 million and today we have already spent about 29.

Corey Tobin - William Blair & Company

Today meaning through June 30th?

Martin J. Wygod

Yeah, the June 30th, just confirm that for -- you real quick.

Corey Tobin - William Blair & Company

That’s right.

Martin J. Wygod

Yeah. In terms of cash flow, I don’t think we have put out projection, yeah. It would be correlated with the EBIDTA numbers but they haven’t put that up previously.

Corey Tobin - William Blair & Company

Okay great, thanks.

Operator

Anthony Vendetti, Maxim Group, you may ask your question.

Anthony Vendetti - Maxim Group

Thanks, just as quick follow up on this. Can you talk a little bit about the contract that you have or the trial contract that you have with CMS right now and kind of, where that’s at, how long that’s going to run and end of what that could result in if it’s successful.

Kevin M. Cameron

It’s a relatively small contract. I think the importance of it is – that it’s a combination of webMD and -- Webs where CMS is looking for us to -- with them, our personal house record and we are the only party that was selected amongst many as I understand it to do this on a pay basis and so, you know depending upon how that trial goes and where it goes we look it as a good step forward, there is clearly a desire at the federal level to have personal health records made available to all of the CMS beneficiaries.

Anthony Vendetti - Maxim Group

Well right now you have seen this is – right now a small contract, but ---

Martin J. Wygod

This is a project with CMS.

Anthony Vendetti - Maxim Group

Right, but if it goes well, the potential for to evolve into something much larger, correct?

Martin J. Wygod

Well that’s -- that’s my opinion, that, that would be up to CMS.

Anthony Vendetti - Maxim Group

Okay, good, all right thanks.

Operator

Ladies and Gentlemen, that was our final question. As a reminder if necessary there is a replay available of this call which can be accessed toll free at 800-284-7027 or if you are calling from outside the US at 402-220-9738. There is no password required. There is also the webcast replay available on the company’s web site as well. Thank you for joining us today

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Source: Emdeon Q2 2006 Earnings Conference Call Transcript (HLTH)
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