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WebMD Health (NASDAQ:WBMD)

Q2 2013 Earnings Call

July 31, 2013 4:45 pm ET

Executives

Risa Fisher

David Schlanger - Interim Chief Executive Officer

Peter Anevski - Chief Financial Officer and Executive Vice President

Martin J. Wygod - Chairman, Member of Executive Committee and Member of Strategic Planning Committee

Analysts

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Steve Rubis - Stifel, Nicolaus & Co., Inc., Research Division

Heath P. Terry - Goldman Sachs Group Inc., Research Division

Operator

Good afternoon, and welcome to WebMD Health Corp. Second Quarter 2013 Conference Call. Today's call is being recorded. I would now like to turn the call over to Risa Fisher, Vice President of Investor Relations.

Risa Fisher

Good afternoon. This conference call is to discuss WebMD's second quarter results. The earnings release issued today by WebMD is available at www.wbmd.com in the Investor Relations section. The release includes reconciliations between GAAP and non-GAAP financial measures, which will be discussed during this call.

The explanatory paragraphs in the release 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 WebMD's future performance. Further information regarding WebMD, including information concerning risks and uncertainties can be found in WebMD's SEC filings and the information on this conference call is intended to be presented in conjunction with such filings.

Joining us on today's call are Marty Wygod, Chairman of WebMD; David Schlanger, Interim CEO; and Pete Anevski, CFO. At the conclusion of our prepared remarks, we will open the call and take questions.

David Schlanger

Good afternoon and thank you for joining us this afternoon. The financial results released today are consistent with the preliminary results we released on July 12. We are pleased to report a strong second quarter and reaffirm our increased revenue and earnings expectations for the balance of 2013, driven by improvements in our public portals advertising business, particularly with our biopharmaceutical customers.

WebMD is the most trusted resource firm powering health care decisions. WebMD's market leadership is demonstrated by our ability to meet the demands of consumers and physicians with health information and tools tailored to their specific interests at the right time, on the right screen, through our websites, mobile-optimized sites and apps.

To illustrate our market leadership, during the quarter, the WebMD Health network reached an average of 125.5 million monthly unique visitors and delivered 2.64 billion page views, increases of 17% and 6%, respectively, over the prior year period.

During the quarter, approximately 37% of our page view traffic was from the U.S. desktop, 29% was from a U.S. smartphone, 8% was from a U.S. tablet device, and 26% was international. The decline, as compared to the prior year period, in our desktop page view traffic was 21%. The decline in desktop page views was partially offset by our growth in tablet traffic. Combined, U.S. desktop and tablet page view traffic was down 13% in Q2 compared to the prior year period.

It is important to note that we are able to monetize tablet traffic in a similar manner to desktop.

Since the beginning of the year, our traffic has been partially impacted by the broader trend across the Internet of lower desktop page view consumption. In addition, there have been changes to Google's search algorithms, which have had a negative impact on some of the consumer sites that we publish other than our flagship site, wbmd.com. We have taken steps over the last several last addressed this. We just recently started to see some positive impact. While we only have a few weeks of data at this point, we are cautiously optimistic that this will translate into improved page view growth.

Nevertheless, to put WebMD's traffic and scale into perspective, in recent comScore rankings, the WebMD Health Network ranked #1 in the health information category, #1 in all 50 of the largest conditions suffering populations online, as the #1 health -- mobile health destination, and #33 at the top 100 U.S. Web properties.

Medscape continues to be leading online destination for health care professionals. During the quarter, across our multi-screen platform, we averaged approximately 5.5 million physician sessions per month, an increase of 9% over the prior year period. Previously, we cited a metric that we called physician visits, which aggregated multiple visits from a single physician in any 24-hour period into what we reported as a single physician visit. A total physician sessions metric recognizes each unique session across devices, and we believe better represents the actual engagement of physicians on our sites.

We continue to be focused on furthering WebMD's leadership position in online health information and services, and developing through both internal effort and external transactions, additional products, services and revenue streams.

As part of that effort, yesterday, we launched a new channel on WebMD, the Health Care Reform Center. As the most trusted resource for empowering health care decisions, it is a natural extension for WebMD to offer at no cost to our users, interactive tools and content to help consumers understand and navigate the changes planned for health insurance coverage in 2014.

Our unique approach to simplifying health care decision-making is being applied to help consumers better understand how to navigate the Affordable Care Act. Initial tools being rolled out are designed to help consumers better understand their options under the Affordable Care Act, including helping consumers compare plans in order to determine what type of plan is best suited for them based on their own individual health needs and estimating premiums for both subsidized and unsubsidized users based upon plan level, their income and location.

Across our multiscreen platform, we are investing in greater personalization of the WebMD experience in order to drive both deeper engagement and increased user frequency. We are making significant changes to our user experiences with initial areas of the reengineering being implemented this year.

An example of our commitment to enhance the user's experience is the launch of a redesigned version of our flagship WebMD app, first being introduced on the iPhone. With this launch, the new WebMD app provides personalized engaging, multimedia lifestyle content, along with the physician-reviewed health content and interactive tools that have driven the WebMD app's success to date.

This is the latest milestone in our commitment to create and deliver the most engaging health content based on the specific personal health needs and interest of each user. The new app allows a user to customize content based on his or her own healthy living interests and goals. It also includes expanded local search for health providers and enhanced health information that users can choose from and save on over 26,000 conditions, drugs and first aid topics.

The new app also features -- also includes a feature that is the first step in building the foundation to connect patients to their health care providers. The new WebMD app will connect with and support the new patient instruction feature in our Medscape app for health care professionals. Medscape patient instructions allows physicians to securely send education and instructions on thousands of conditions, procedures and drugs to their patients. Patients can securely and conveniently read the instructions and information on the WebMD app for iPhone, as well as WebMD's mobile Web and desktop sites.

As we broaden our mobile offerings for consumers and physicians, we are also expanding our mobile sponsorship products for advertisers. On a professional side, we are seeing sales traction for our mobile products set, which was introduced into the marketplace first.

On the consumer side, we are beginning to experience increased demand for mobile advertising and sponsorship, and we are beginning to include mobile components in many of the program configurations we provide to advertisers. To support those efforts, we are introducing a robust suite of new ad technologies and products.

We expect that our mobile offerings will be adopted by our consumer products customers first as CPG companies are generally further along in their own mobile site development, and they don't have the same medical and regulatory review issues as biopharmaceutical companies have. We are, however, developing a strategy and solution set for our biopharma customers to help them more easily navigate the regulatory environment as it relates to consumer advertising on mobile.

We have just launched new marketing sciences capabilities to further differentiate our advertising and sponsorship products and demonstrate their premium value to advertisers. We are training our sales force on the capabilities of our new WebMD analytics lab in time for the start of the fall selling season. These new and enhanced capabilities allow us to better demonstrate the quality of our audience, better profile and segment our audience and better measure the effectiveness and efficiency of WebMD as a marketing platform.

In terms of new diversified revenue streams to drive accelerated long-term growth, we are positioning WebMD and Medscape as the hub of a set of services that will facilitate information exchange and digital communication between patients and their health care providers. As our health care system evolves and as consumers and health care providers assume more financial risk for the provision of care, these changes will present additional revenue opportunities for WebMD. In addition to our internal efforts, we are in active discussions in due diligence with several potential strategic and technology partners in this area.

Turning to our Private Portal business. We are doing a development and implementation work necessary to meet the January 1 launch date for the Blue Cross Blue Shield Federal Employee Program, the largest single contract in the history of WebMD Health Services, and for other significant new commitments to which we expect will generate revenue beginning in 2014.

In conclusion, while there are still challenges facing the pharmaceutical industry that are impacting us, we have made progress in implementing the necessary changes and improvements to regain initial momentum in our marketplace. We are also taking the steps needed to capture additional advertising sponsorship opportunities, including in mobile. We believe we are well-positioned to leverage our unmatched audiences and brands to further our market leadership, diversify our revenue streams and drive long-term growth.

I'd now like to turn the call over to Pete at this time.

Peter Anevski

Thanks, David. As David mentioned, the strong second quarter results we announced today are consistent with preliminary results we issued on July 12.

Second quarter revenue was $125.3 million compared to $112.7 million the last year, an increase of 11%. Public Portal advertising and sponsorship revenue was $105.8 million compared to $93.7 million in the prior year.

Private portal services revenue was $19.5 million compared to $18.9 million in the prior year. Second quarter adjusted EBITDA increased 105% to $29.2 million or 23.3% of revenue, compared to $14.2 million or 12.6% of revenue in the prior year period. The increased margin is attributable to higher revenues, as well as lower expenses, resulting from savings achieved to our previously announced December 2012 workforce and other cost reductions.

Second quarter net income was $2.6 million or $0.05 per diluted share, compared to net loss of $5.6 million or $0.11 per diluted share in the prior year period. Operating cash flow was approximately $23 million for the second quarter.

As we have stated in the past, quarterly operating cash flows can be impacted by the timing of competition accruals and other accruals in relation to quarters end, the timing of interest payments in our convertible notes and the billing and collection of receivables from our customers.

Capital expenditures were $4.5 million in the quarter. As of June 30, WebMD had approximately $1 billion in cash and cash equivalents, and $800 million in aggregate principal amount of convertible notes outstanding.

During the second quarter, we didn't repurchase any shares of our common stock. During July, we used approximately $7.7 million of cash to purchase 268,000 shares of our common stock under our authorized share repurchase program. Currently, there is approximately $54 million remaining in our buyback program.

Turning to our guidance for the balance of this year. As David mentioned, the increase in our guidance, which we previously announced on July 12, reflects better-than-expected performance in our public portal advertising business, particularly as it relates to our bioPHARMA advertising clients.

Revenue in the June quarter coming from biopharma products that will lose patent protection in either 2013 or 2014 was less than 4%, and at this time, we are continuing to see an improving environment for some of our customers. However, we continue to evaluate the broader impact of patent expirations because as we have seen in the past, patent expirations could have a rippling effect and lead to delays in budgeting and purchase decisions, as well as reductions in marketing, selling and educational expenditures across product portfolios.

For the full year, we expect revenue of $485 million to $505 million, an increase of 3% to 7% from the prior year. Adjusted EBITDA of $100 million to $110 million, an increase of 37% to 50% from the prior year, and net income of $3 million to $11 million.

Our guidance reflects actual results for the first half of 2013, visibility for the second half of 2013 based upon several factors, including orders received to date and those expected for the balance of the year. Anticipated expenses relating to new private portal customer implementations, as well as public portal initiatives, such as enhanced data and analytics and new content and enhanced offerings for both users and advertisers.

We expect the weighted average basic and diluted share count for the year to be approximately 50 million and 52 million, respectively. We expect capital expenditures for the year to be approximately $20 million.

For the third quarter, we expect revenue to be in excess of $128 million, adjusted EBITDA to be in excess of 22% of revenue and net income to be approximately 3% of revenue. Our guidance does not include the impact, if any, of future deployment of capital for items such as share repurchases or acquisitions, gains or losses from discontinued operations or other nonrecurring onetime or unusual items.

I'd like to turn the call over to our Chairman, Marty Wygod, and then we'll open up the call for your questions.

Martin J. Wygod

Thank you, Pete. As David and Pete have discussed, we are pleased to be delivering improved financial results. I want to thank the senior executive team for the rapid progress they have demonstrated in the short period of time and for their support in enabling a smooth transition.

I also wanted to point out that, as you saw in our press release today, the board has decided to terminate the Stockholder Rights Plan, or the poison pill, which has been in place since November 2011. We believe the plan has served its purpose during what was a challenging period for our company. Our board has the ability to adopt new rights agreement to comparable arrangements, if in the exercise of its fiduciary duties, it determines it is in the best interest of WebMD and its stockholders.

We are saddened by the loss of Dr. AR Moossa, a member of our board since the time of our IPO in 2005. Dr. Moossa brought his many years of experience as a physician and medical educator to WebMD, we were fortunate to have him share his wisdom with us as a member of our board. He will be greatly missed by his friends and colleagues at WebMD.

The board has decided not to appoint a replacement, instead has reduced the size of the board to 11 members.

Before we open it up for any Q&A, I would also like to provide you with an update on our process to identify a permanent CEO. The company has been through a challenging period. We are now seeing initial momentum across our business. No decision has been made at this time. Progress is being demonstrated throughout the organization, and the senior management has the full support of the board and is empowered to take all necessary steps to drive both our short-term and long-term success.

Operator, at this time, we'd like to see if there are any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Peter Stabler with Wells Fargo Securities.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

A couple, if I may, please. I guess, first of all, wondering, David, if you could speak a little bit more about the PHR opportunity. We're interested in understanding a little bit more about the additional revenue streams. And specifically, does the guidance that you offer today for the remainder of the year include any anticipated revenues from these services that you're talking about, linking doctors and consumers to the PHR? Or is this really a 2014 strategic effort and we'll see the monetization then? And I have another follow-up after that.

David Schlanger

Just to clarify, some of the initiatives we have around enabling digital communication and information exchange between consumers and physicians aren't really focused on the PHR. So it's not a PHR initiative. Our private portal actually has a very successful business in providing decision support platforms for large corporate employers and health plans, which include a PHR. But the initiatives we're talking about are not PHR focused. With respect to revenue around some of those initiatives where we create that level of connectivity, there's nothing that you'll see in 2013 and it's really a long-term strategy.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Okay. Great. Secondly, on the 3% to 7% target for advertising growth for the public portal, can you give us a sense of your view on whether you're keeping pace with the comeback of pharma advertising directed towards consumers here? Is that pace faster? Are you losing share, are you gaining share? I realize you don't have a precise barometer on aggregated spending across the industry. But just, I guess, more of your color commentary and thoughts on that?

Peter Anevski

As you just mentioned, we don't have a precise barometer. I would tell you that we continue to receive positive feedback. We do feel loosening up of budgets and-- at our clients. But we are also feeling -- getting good feedback relative to the initiatives that we have last year. So the momentum continues in terms of what we're doing until we feel good about it.

Operator

Our next question comes from Steve Rubis with Stifel.

Steve Rubis - Stifel, Nicolaus & Co., Inc., Research Division

I'd like to start by drilling into the continued sequential acceleration and deferred revenue growth you reported. Can you just help us better understand what's behind this? Is it just a continuance of the effects of the rate card changes and unbundling? Or are there other things going on that are causing advertisers to reengage with the platform? And then I have a couple of follow-ups.

Peter Anevski

There's nothing specific like the unbundling or anything like that, that would drive the deferred revenues. As we said in the past, there's a lot of factors that come into play relative to deferred revenue, some of which are contractual terms. And so I don't know that I would place that much reliance on that trend and tie it into a strong predictive indicator.

Steve Rubis - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Next, mobile really seems to be a hot button issue right now for you guys. A concern we get from many investors is around the cannibalization of traffic in terms of the shift from PC to mobile. Can you help us understand what current ad units on the PC Web page might translate well to your mobile apps and explain your value proposition for mobile? And then, beyond that, do you believe that your mobile data, generated by consumers and physicians, might have value to other constituents in the health care supply chain?

David Schlanger

Well, right now, we're at the very beginning, especially on the consumer side, at monetizing mobile, and we really do view it as an incremental opportunity, particularly in light of that, we've continued to have ample desktop page view inventory to satisfy our revenue expectations. We are in the process of rolling out to our sales force a very robust suite of mobile ad technologies and products so that they can be responsive to the increased consumer demand we're seeing with really the most modern ad technologies. They're not necessarily at all related to the types of ad units you would see in a desktop experience, but are uniquely suited for our mobile products. So I don't know if that's responsive to your question.

Steve Rubis - Stifel, Nicolaus & Co., Inc., Research Division

No, that's good. I think, I'm just trying to find out if you guys believe also if there's greater value in that data other than just proving advertising ROI in terms of maybe driving growth in other parts of your business, like in private portals in terms of -- which segues into the next question of the idea of the removal of the rights plan and timing around some sort of a strategic agreement with say a health care IT type company. Does that mobile value -- mobile data have value to someone like that in the supply chain?

David Schlanger

Well, we view mobile as a very important step in our goal of making WebMD a personalized experience for its users across platforms. And mobile devices are ideally suited for that, whether they capture biometric data or allow a person just to enter data that's relevant to them at the time. And that data allows us across our platform to personalize the experience, make that data actionable, to really benefit the user and provide a more relevant experience. As you provide a more relevant experience for the user, you're also providing a superior marketing platform for advertisers by creating a more highly engaged relevant user to the advertiser. And again, as we increase, through personalization, our user engagement and frequency, I apologize for the siren in the background, we also begin to increase our page view inventory and just the scale of our site as an advertising platform.

Steve Rubis - Stifel, Nicolaus & Co., Inc., Research Division

Okay. That's fair. Then my final question and I'll get out of the queue. We've seen some chatter that there could be some devices that you guys might be working on in terms of your Qualcomm Life partnership, can you give us any sense of timing or what's going on with that partnership?

David Schlanger

Yes, Qualcomm is one of our tactics that's consistent with the strategy I just mentioned and that's using mobile technology along with biometric devices and apps to really create a personalized experience and position WebMD as the central place where people store their device and app data and where we can make that data actionable and allow people to really get value out of that data. And you'll start -- and you will begin to see the initial iterations of that by the end of this year.

Operator

Our next question comes from Heath Terry with Goldman Sachs.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

When you look at the increase in revenue per page within your desktop business, can you help us understand the components of that? How much of it is coming from a decrease in the number of page views that are coming from the -- that are coming from some of your non webmd.com brand as a result of the Google ranking issue versus seeing higher prices due to unbundling and how much of an impact that had this quarter and how much of an impact do you think each of those components are going to have in future quarters?

Peter Anevski

This is Pete. I don't know that I would call it higher prices, I think what you may have meant was higher sell-through. It is the result of higher sell-through of our current inventory. Yes, the impact of desktop traffic decline does have an impact on that, I don't have unbundled, if you will, in terms of a calculation, but it's really the success of our higher sell-through that continues.

David Schlanger

The only other thing I would add is that not all of our monetization activities are around display media. We have a substantial sponsorship business. And if -- you're citing the decline in page view inventory, but from a visit and unique user perspective, we have been, like the rest of the Internet, been able to maintain our unique user and visit traffic at the levels they've been in over the past year or so. And so we can monetize those users irrespective of the amount of page views they consume.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

And I'll ask, I guess, specifically on the unbundling, to the extent that, that's been a benefit in Q1, Q2, should we expect that similar benefit in Q3 and Q4 up until you begin to annualize that next year?

Peter Anevski

There's nothing that we're seeing that would indicate that the current trend that we're seeing will change and our guidance reflects what we anticipate for the balance of the year.

Operator

[Operator Instructions] And I'm not showing any further questions at this time.

Martin J. Wygod

That's great.

David Schlanger

Thanks, operator.

Peter Anevski

Thank you.

Operator

As a reminder, if necessary, there is a replay available for this call, which can be accessed toll-free at (855) 859-2056, or if you're calling from outside the U.S., at (404) 537-3406. The passcode is 18701084. There's also a webcast replay available at www.wbmd.com. Thank you for joining us today.

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