WebMD Healthcorp: Shareholders Overreact As The Recovery Picks Up Steam

| About: WebMD Health (WBMD)

Shares of WebMD Healthcorp (NASDAQ:WBMD) have reached their highest level since the start of 2012 after the internet platform, focused on health advice for consumers, is recovering faster than anticipated from last year's poor operational performance. While the company is in a full recovery modus, and can demonstrate significant operating leverage into the remainder of the year and next year, I remain on the sidelines. Trading at 20 times 2011's peak earnings, the market is becoming too optimistic about the recovery.

Preliminary Second Quarter Results

WebMD expects to generate second quarter revenues between $124 and $125 million. This implies that revenues are expected to increase between 10 and 11% compared to last year. Furthermore, the forecast comes in far ahead of WebMD's previous guidance of revenues in excess of $115 million and consensus estimates of $118.8 million. Adjusted EBITDA are expected to come in around $29 million, more than doubling from last year. Adjusted EBITDA margins come in around 23% of revenues, ahead of the guided minimum of 18%.

All in all, net income is expected to come in around $3 million, or $0.05 per diluted share. Earlier, WebMD guided for a net loss of around 1% of quarterly revenues.

Strong Guidance For The Remainder Of The Year

On the back of the strong revenue and margin performance, WebMD is raising its full year outlook. Full year revenues are expected to come in between $485 and $505 million, up 3 to 7% compared to last year. This implies that the company has raised both its lower and upper end of the range by $35 million. Adjusted EBITDA will come in around $100 to $110 million, up 37 to 50% on the year. The guidance is very strong, upped by $25 million at the lower end of the range and demonstrates the high degree of operating leverage in its business model.

Full year net income is expected to come in between $3 and $11 million. This compares to a guided loss of between $1.5 and $13 million before.


The company notes that it operates with roughly $1 billion in cash and equivalents as of June. WebMD operates with roughly $800 million in convertible notes outstanding for a net cash position of approximately $200 million. Full year revenues for 2012 came in at $469.9 million, down 15.9% on the year before. As operating expenses kept increasing, WebMD reported a net loss of $20.3 million.

Factoring in gains of 26% on Friday, with shares trading at $34 per share, the market values the company at $1.70 billion. This values operating assets of the firm at $1.5 billion. As such, operating assets are valued around 3.0 times this year's expected annual revenues and over 200 times earnings. Currently, WebMD does not pay a dividend.

Some Historical Perspective

Between 2008 and 2011, shares of WebMD were moving in a steady uptrend, rising from $20 towards highs approaching $60 at the start of 2011. Following a dramatic last year, shares fell to lows of $13 at the end of 2012. As the company is restoring revenue growth and has returned to profitability, shares have seen spectacular returns already, with shares having risen almost 140% this year.

Between 2009 and 2012, WebMD has managed to increase its revenues by a cumulative 7% towards $470 million. Net profits fell from $118 million to a loss of $20 million last year, in the meantime on the back of the poor results last year.

Investment Thesis

Shareholders appreciate the very quick turnaround. After years of growth, the company reported falling revenues for 2012, accompanied by a net loss. Back in May, CEO Cavan Redmond resigned on the back of the poor results after cutting almost 15% of its workforce. WebMD's veteran David Schlanger has since replaced him, and he can already report tangible improvements for the second quarter.

Pharma advertising revenue on WebMD's websites is increasing on the back of the new selling strategy, allowing the firm to report its first profit in six quarters. Underlying the results are healthy traffic figures on the company's websites. During the quarter, its websites attracted 125.5 million unique users per month, which generated a total of 2.64 billion page views. Traffic was up 17% in terms of unique visits, while total page views increased by 6%.

It is understandable why investors are enthusiastic. The second quarter return to profitability comes quicker than expected and the strong revenue guidance for the remainder of the year will largely flow through towards the bottom line. Furthermore, the company is already optimistic about next year's prospects on the back of contracts which have already been announced with Blue Cross and the Blue Shield Association Federal Employee Program.

The company is in full recovery modus, and the massive jump on Friday already prices this in. This is understandable given the incredible degree of operating leverage in the company's business model. The aggressive cost cuts imply that a great deal of additional revenues directly flows through the bottom line.

As such, peak operating earnings of $110 million, realized back in 2011, are not that unlikely for 2014. Still the company would trade around 20 times annual earnings in such a scenario after reporting net earnings of $75 million for 2011. This is rather steep given the significant work ahead. I will not jump on the bandwagon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.