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Emdeon (HLTH)

Q3 2006 Earnings Call

November 2, 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

Anthony Vuolo, Chief Financial Officer

Wayne T. Gattinella, CEO and President, WebMD Health

Martin Wygod, Chairman of Board of Directors

Analysts:

Sandy Draper, JMP Securities

Anthony Vendetti, Maxim Group

Anthony Petrone, Maxim Group

Anthony Noto, Goldman Sachs

Heath Perry, Credit Suisse

Mark Mahaney, Citigroup

Rob Kelly, Smith Barney

Brian Pitts, Banc of America

Andrew Schlossel, Private Investor

Duane Pfenningwerth, Raymond James

Operator

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

Risa Fisher, Vice President, Investor Relations

Good afternoon. This is a joint conference to discuss Emdeon and WebMD’s third quarter financial results. 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 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 a 52% interest in 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 products and services, the company’s 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 pending sale transaction involving Emdeon Business Services and it’s effect on that segments and on Emdeon. Many of these risks and uncertainties are described in the company’s respective SEC filings; except as required by applicable law or regulation, Emdeon and WebMD do not undertake any obligation to update their forward-looking statements to reflect future events or circumstances.

The earnings release issued today by Emdeon is available at www.emdeon.com in the “About Emdeon” section and has also been included in the Form 8-K filed today with the SEC. The earnings release issued today by WebMD is available at www.wbmd.com in the investor relation section and has also been included in the Form 8-filed today with the SEC. The respective Form 8-K and other SEC filings are also available on Emdeon’s and WebMD’s respective websites and on the SEC’s website. The releases in Form 8-K that were 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 Kevin Cameron, CEO of Emdeon.

Kevin M. Cameron, CEO, Emdeon

Good afternoon and thank you for joining us today. Joining me on the call today are Marty Wygod, Chairman of WebMD and Emdeon, Wayne Gattinella, CEO and President of WebMD, Andy Corbin, CFO of Emdeon, Tony Vuolo, CFO of WebMD, and we also have Ann Mond Johnson, Founder and President of Subimo joining us as well today.

As you may have seen in our press release earlier today, WebMD has signed an agreement to acquire Subimo, a leading provider of healthcare decision support applications; we’re very excited about this acquisition. Andy and I will review the financial and operating highlights of Emdeon for the third quarter, and then we’ll turn it over to Wayne and Tony to discuss WebMD’s results, the acquisition of Subimo, and WebMD’s preliminary guidance for 2007. We will take questions on either company at the end of this call. I will now turn it over Andy.

Andrew C. Corbin, CFO, Emdeon

Thanks Kevin. Good afternoon and thank you for joining us today. As a reminder, our press release including comparative financials is available on our website. Before I summarize Emdeon Corporation’s financial results for the third quarter of 2006, I would like to highlight some new items reflected in our financial statements released today. First, our results reflect the reclassification of Emdeon Practice Services as a discontinued operation in the current and prior year period due to the completion of the sale of Emdeon Practice Services to Sage Software in September 2006.

Second, our results also reflect an increase in revenue and an offsetting increase in expense of approximately $14 million and $13 million for the September 2006 and the September 2005 quarter respectively, related to the inter-company activity between the discontinued Emdeon Practice Services segment and other Emdeon operating segments, primarily Emdeon Business Services. These amounts which include postage have previously been eliminated in consolidation prior to Emdeon Practice Services being reflected as a discontinued operation.

Third, please note that we are now reporting ViPS as a standalone segment. Previously ViPS was included in the Emdeon Business Services segment. And fourth, the assets and liabilities of the Emdeon Business Services segment are now reflected in the current balance sheet as assets and liabilities held for sale.

I will now review Emdeon financial results for the third quarter relative to the same quarter a year ago and then highlights of additional financial items to assist you in understanding our financial performance.

Consolidated revenue for the September 2006 quarter was $299.7 million compared to $261 million a year ago, an increase of 14.8%. Earnings before interest, taxes, non-cash and other items, which we refer to as adjusted EBITDA, was $59.6 million or $0.20 per share, compared to $39.2 million or $0.11 per share in the prior year, an increase of 51.9%. Income from continuing operations was $23.7 million or $0.08 per share compared to $12.9 million or $0.03 per share in the prior year, an increase of 84.1%. For comparability purposes, I would like to highlight three items that impact income from continuing operations on a year-over-year basis.

First, while we do not project or include expenses related to the DOJ investigation in our guidance, our third results for 2006 did include approximately $1 million of legal expenses related to this investigation compared to $5.9 million for the same period last year. Second, our September 2006 results include $11.2 million of stock-based compensation expense compared to $1.1 million for the same period last year reflecting our adoption of SFAS 123R. And third, during the September 2006 quarter, we incurred $2.1 million of third-party advisory fees for legal and accounting services related to the pending sale of Emdeon Business Services.

Income from discontinued operations was $358 million, which includes a gain on the sales of Practice Services of $352.3 million, net of income taxes. Although the majority of the gain was shielded by our NOLs, Emdeon did incur a cash tax obligation of approximately $12.5 million for certain state and other taxes.

Net income was $381.7 million or $1.27 per share compared to $14.1 million or $0.04 per share in the prior year, which again reflects a gain of $352.3 million, net of income taxes on the sale of Practice Services. Consolidated cost of operations was $169.7 million for the September 2006 quarter, compared to $152.1 million in the prior year period. The absolute dollar increase is primarily due to higher revenues during the quarter.

Additionally, included in the cost of operations in the third quarter of 2006 is $3 million of non-cash stock compensation expense with no comparable amount in the prior year. Excluding the impact of stock compensation, cost of operations as a percentage of revenue was 55.6% in the September 2006 quarter compared to 58.3% of revenues a year ago, an improvement of 270 basis points.

Consolidated sales, marketing, general and administrative expense was $74.1 million or 24.7% of revenues in the September 2006 quarter compared to $63.9 million or 24.5% of revenues a year ago. Excluding non-cash items related to stock-based compensation and our non-cash advertising, consolidated SG&A was $64.5 million or 21.5% of revenues for the September 2006 quarter compared to $60.9 million or 23.3% of revenues a year ago, an improvement of 180 basis points.

Turning to our balance sheet, our cash position at September 30, 2006, was approximately $947.4 million consisting of cash and short-term investments, of which $85.1 million is attributable to WebMD. Operating cash flow in the September 2006 quarter was $35.4 million compared to $28.3 million for the same quarter a year ago. The increase in operating cash flow was a result of the increase in adjusted EBITDA, partially offset by an increase in working capital. As we have previously stated, our operating cash flows can also be negatively or positively impacted by the timing of the cut off of compensation accruals, other expense accruals, and the collection of receivables in relation to the quarter’s end.

Other items impacting our cash balance during the quarter included capital expenditures of $10.8 million, the acquisition of Medsite by WebMD for $31 million net of cash acquired, and the receipt of $524.2 million in the sales of Practice Services.

Now I would like to turn it over to Kevin to give you some color on the individual business segments.

Kevin M. Cameron, Chief Executive Officer

Thank Andy. As we previously announced on September 26th, Emdeon entered into a definitive agreement to sell a 52% interest in its Emdeon Business Services segment other than ViPS to General Atlantic, LLC, a leading global private equity firm, in a transaction which values Emdeon Business Services at $1.5 billion. We expect to receive approximately $1.2 billion in cash and to retain a 48% interest in Emdeon Business Services valued at about $300 million.

The acquisition will be financed with approximately $925 million in bank debt and in investment of approximately $320 million by General Atlantic. The transaction will be structured so that Emdeon and General Atlantic each owned interests in a Limited Liability Company, an LLC, which will own Emdeon Business Services. The bank debt will be an obligation of an entity wholly owned by the LLC and will not be an obligation of Emdeon Corporation.

Currently, General Atlantic is in the final stages of obtaining the requisite financing for the transaction. We have received notice of early termination of the Hart-Scott-Rodino waiting period. This transaction allows Emdeon to tax efficiently real-life significant value from Emdeon Business Services while preserving its ability to participate in the future growth of Emdeon Business Services through its 48% ownership stake.

Looking at Emdeon Business Services performance in the third quarter, revenue was $187.3 million in the quarter versus $171.4 million a year ago. This 9.3% increase is attributable to strength across our business including, in particular, remittance in payment solutions, patient billing, and our direct to provider solutions as well as the impact of the January 8, 2006 postal rate increase. Emdeon Business Services segment adjusted EBITDA was $44.5 million, an increase of 38% from adjusted EBITDA of $32.3 million in the prior year.

Operating margin increased to 23.8% in the September ’06 quarter compared to 18.8% a year ago as a result of higher revenue and the continued achievement of operating efficiencies and cost savings. This was a strong quarter for Business Services especially when you factor in the seasonal slow down in healthcare utilization during the summer months and the lower number of work days in the quarter. Business Services results continue to be fueled by the same factors that have driven growth over the past several quarters. Looking ahead, we see significant opportunity in eligibility and health benefit verification services as well as paper and electronic remittance and payment services.

Looking at our ViPS business, ViPS revenue was $24.8 million in the third quarter versus $24.3 million a year ago. ViPS segment adjusted EBITDA was $5.3 million, a 33% increase from $4 million in the prior year. Operating margin increased to 21.3% in the September ’06 quarter compared to 16.4% a year ago, and the improvement in margin was largely due to favorable revenue mix.

ViPS was recently awarded a follow-on contract from the Centers for Medicare and Medicaid Services, CMS, for ongoing maintenance and support of the ViPS Medicare Systems, the VMS system. This latest task order awarded on the professional information technology services contract vehicle, otherwise known as PITS is valued at $50 million covering a complete contract term of one base year and four option years.

Turning to Porex, Porex revenue was $21.3 million for the September quarter compared to $20.4 million a year ago, an increase of 4.4%. Segment adjusted EBITDA was $6.1 million versus $6.4 million in the prior year, a decrease of 3.9%. Operating margins were 28.8% compared to 31.3% last year. Revenue increased due to strength in sales at healthcare and consumer products. Adjusted EBITA decreased somewhat primarily due to the sales mix and increase in the cost of raw materials.

Turning to corporate, corporate expense for the September ’06 quarter was $11 million or 3.7% of consolidated revenue compared $to 12.5 million or 4.8% of consolidated revenue last year.

Turning to financial guidance for the fourth quarter, we have included this guidance in the press release issued today, so you can refer to that document as I proceed. Since the transaction with General Atlantic is not yet closed, we are including Business Services in our consolidated financial guidance for the full balance of 2006. Our fourth quarter guidance reflects the following assumptions: our guidance does not include any expenses related to the Department of Justice investigation. Our guidance does not reflect any remaining advisory fees to be paid in connection with the sale of Business Services. Our guidance does not reflect any potential repurchases of shares of our outstanding securities which may occur over the balance of this year including the previously announced tender offer by Emdeon to repurchase up to 100 million of its common stock, which is expected to close in early December. Cash and GAAP earnings per share are both calculated based on assumed weighted average share count of 300 million shares for the full year 2006. We expect the fourth quarter revenues to be approximately $305 million to $310 million, adjusted EBITDA to be approximately $0.20 to $0.21 per share, and net income to be approximately $0.09 to $0.10 per share.

Emdeon Business Services excluding ViPS is expected to represent approximately 61% of consolidated revenue with operating margins of approximately 22% in the fourth quarter. ViPS is expected to represent approximately 8% of consolidated revenue with operating margins of approximately 20% to 21% in the fourth quarter.

WebMD is expected to represent approximately 24% to 25% of consolidated revenue with operating margins of approximately 26% to 27% in the fourth quarter. Tony will walk you through additional detail on WebMD’s guidance in a few moments.

Porex is expected to represent approximately 6% of consolidated revenue with operating margins of approximately 7% in the fourth quarter. Corporate expense is expected to represent approximately 3.4% of consolidated revenue in the fourth quarter. Inter-segmental eliminations are expected to be negligible in the fourth quarter. Please refer to the Emdeon guidance table provided in our press release for below-the-line items that reconcile to net income.

While we have included Business Services in our fourth quarter guidance, I would like to point out that after the close of transaction on a go-forward basis, Business Services will not be reported as a segment of Emdeon. Instead, we will report a single line item on our income statement that represents 48% of the net income of Business Services LLC. Please note that the net income reported will be net of interest expense related to the debt of the LLC. As previously announced, we expect to be in a position to provide guidance for 2007 early next year.

I will now turn it over to Tony Vuolo to review WebMD’s financial results.

Anthony Vuolo, Chief Financial Officer

Thanks, Kevin. Revenue for the September quarter for WebMD was $66.6 million, compared to $45.1 million last year, an increase of 48%. Advertising and sponsorship revenue increase 55%, licensing revenue increased 61%, and publishing and other revenue increased 31%. Including revenues is $6.2 million for the quarter relating to our Conceptis, eMedicine, Summex, and Medsite acquisitions, revenue increased 34% compared to last year. Adjusted EBIDTA for the September 2006 quarter was $14.6 million compared to $9.1 million last year, an increase of 61%.

Adjusted EBITDA as a percent of revenue improved to 22% from 20.1% last year. Adjusted EBITDA per diluted share was $0.25 compared to $0.19 last year. Adjusted EBITDA margin on incremental revenue compared to last year was 26%. Excluding the impact of acquisitions, the adjusted EBITDA margin on incremental revenue was over 40% for the quarter.

Online services segment adjusted EBITDA increased 63% to $12.7 million or 21.6% of segment revenue compared to $7.8 million or 19.9% of segment revenue last year. Publishing and other services adjusted EBITDA was $1.9 million or 24.8% of segment revenues compared to $1.3 million or 21.9% of segment revenue last year.

Net income for the quarter was $1 million or $0.02 per share, which includes $5.9 million in stock compensation expense relating to the adoption of FAS 123R. Excluding the impact of FAS 123R, net income would have been $6.9 million or $0.12 per share. This compares to net income of $4.1 million or $0.09 per share a year ago.

Looking further at the revenue increase of 48%, this growth was a result of advertising and sponsorship revenue which increased 55% to $43.5 million, resulting primarily from internal growth and also from our acquisitions of Conceptis and eMedicine, and our most recent acquisition of Medsite, which was completed on September 12, 2006. These acquisitions contributed a total of $4.2 million in revenue for the quarter with Medsite contributing approximately $700,000 of these revenues in the 18 days following the close. Excluding these revenues from these acquisitions, advertising and sponsorship revenue increased 40% compared to last year.

Private portal licensing revenue increased 61%, again resulting primarily from internal growth but also from our acquisition of Summex Corporation in June 2006, which contributed $1.6 million for the quarter. Excluding the Summex revenues, licensing revenues increased 43% compared to last year. Publishing and other service revenue increased $1.8 million or 31%. This was primarily due to the timing of the WebMD the Magazine, which shipped two issues this quarter compared to one issue last year and approximately $400,000 of offline medical education revenues from the Conceptis acquisition.

Including these Conceptis revenues, publishing and other revenues increased 24% from last year. As you know, we’ve been phasing out certain content syndication in other products, accordingly content syndication and other revenue declined by $1.3 million compared to last year.

Looking at expenses, cost of operations was $26.9 million or 40.4% of revenue for the quarter compared to $18 million or 40% of revenue last year. Including the cost of operations our non-cash expenses were $2.4 million, compared to just $140,000 last year. The increase in non-cash expenses primarily relates to stock compensation expense as a result of the adoption of FAS 123R. Excluding non-cash expenses cost of operations as a percent of revenue improved to 36.9% from 39.7% last year, an improvement of 280 basis points.

Sales and marketing expense was $20.5 million or 30.7% of revenue compared to $13.5 million or 30% of revenue last year. Included in sales and marketing expense are non-cash expenses of $3.3 million this year compared to just $1.7 million last year. The increase in non-cash expenses primarily relates to stock-based compensation expense as a result of the adoption of FAS 123R. Excluding non-cash expenses, sales and marketing expense as a percent of revenue improved to 25.8% from 26.2% last year.

General and administrative expense was $13.5 million or 20.3% of revenue, compared to $6.6 million or 14.6% of revenue last year. Included in G&A, our non-cash expenses are $3.3 million this year compared to just $276,000 last year. Again the increase in non-cash expenses primarily relates to stock compensation expense as a result of the adoption of FAS 123R. Excluding non-cash expenses, general and administrative expense as a percent of revenue was 15.3% compared to 14% last year. Our general and administrative expenses in 2006 reflect public company expenses which did not exist in the same period last year along with additional G&A expenses from the acquired companies.

Depreciation and amortization was $5.1 million compared to $2.7 million last year. This increase was due to a combination of the impact of the acquisition and increased levels of capital expenditures. Interest income totals $1.2 million for the quarter resulting from the investments of the remaining IPO proceeds form last September. The provision for income taxes was $896,000 for the quarter compared to $112,000 last year. The weighted average share count for the quarter was $58.1 million.

Turning to our balance sheet, our cash and investments as of September 30, 2006, was $85.1 million. Operating cash flow for the quarter was $15.1 million compared to $5.4 million last year. Operating cash flow for the first nine months of 2006 was $43.4 million compared to $19 million last year. As Andy mentioned previously, operating cash flows can be impacted by the timing of cut off of compensation accruals, other expense accruals, reinvestments to Emdeon for services and the billing and collection of receivables in relation to the quarter’s end. Capital expenditures for the quarter were $4.7 million.

Moving on to financial guidance, our financial guidance for the December 2006 quarter and for 2007 considers among other things the timing of delivery of programs sold, assumptions as to the timing of new sales activity, expenses related to the integration of our recent acquisition, and the timing of 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, expansion of our sales and marketing organization, the previously announced anticipated expiration of the agreement with AOL on May 1, 2007, the acquisition of Subimo which is expected to be completed in the month of December, and the receipt of approximately $129 million to $143 million in cash as a result of Emdeon’s use of our net operating account reports.

Our guidance for the December 2006 quarter has been updated for the acquisition of Subimo, which we expect will be completed in December. Our updated guidance is for revenues of $73.5 million to $76.5 million, adjusted EBITDA of $19.3 million to $20.5 million, and net income of $4.3 million to $6.6 million. We expect the revenue distribution for the December 2006 quarter to be 70% to 71% from advertising and sponsorship, 22% from licensing, and 6$ to 7% from publishing, and 1% from content syndication and other revenue. Included in the press release we issued today is a reconciliation of adjusted EBITDA for net income.

Our guidance for 2007 is still preliminary and subject to further refinement as we conclude our 2007 planning process. Our preliminary outlook for 2007 is for revenues of $330 million to $340 million, reflecting an increase of 32% to 38% over expected 2006 revenues.

Our 2007 guidance assumes the loss of $5 million in annualized revenues and earnings related to the expected expiration of the AOL agreement beginning in May 2007 and the elimination of offline CMU revenue, which contributed $4 million to $5 million of expected 2006 revenues. These revenues reductions were offset by the revenue from our Subimo acquisition. Our 2007 revenue guidance assumes the following revenue distribution: approximately 68% from advertising and sponsorship, approximately 25% from our private portal products, and approximately 7% from publishing and content syndication revenues.

We will be continuing the integration of our acquisitions in 2007 and investing and expanding our sales and marketing organization and enhancing our technology infrastructure and organization to support new product opportunities. Based on these revenue expectations and the anticipated incremental expenditures, we believe adjusted EBITDA will be $72 million to $78 million or 22% to 23% of revenues for 2007.

Adjusted EBITA per share is expected to be $1.20 to $1.30 per share for 2007. This represents an increase in adjusted EBITA of 40% to 56% over anticipated 2006 results. We expect net income of $13 million to $23 million or $0.22 to $0.38 per share compared to expected 2006 net income of a break even to a net income of $2.3 million or $0.04 per share.

Included in the press release that we issued today is a reconciliation of adjusted EBITDA to net income. The adjusted EBITDA margin on incremental revenue for 2007 is estimated to be 28% to 31% which includes the negative impact of our recent Summex and Medsite acquisitions and our pending acquisition of Subimo, which we did not expect to collectively contribute significantly to adjusted EBITDA as a result of both substantially lower historical margins and planned integration expenses to achieve their synergies in the future. Including the impact of the above acquisition, we expect the adjusted EBITDA margin on incremental revenue for 2007 to be greater than 40%.

As you know, our business experience is seasonality and our revenue and earnings are more weighted for the third and fourth quarters. We expect the quarterly distribution of 2007 revenues and adjusted EBITDA as a percentage of the total year to be comparable to 2006. We expect to provide further quarterly guidance and future costs. Now, I’d like to turn the call over Wayne.

Wayne T. Gattinella, CEO and President, WebMD Health

Thank you, Tony. This quarter we continued to demonstrate substantial progress in each of our major business markets as we continue to build the leading online health destination for both consumers and healthcare professionals. Our online advertising revenues excluding the impact of new acquisitions made during 2006 increased by 40%. This growth reflects the strong demand from both biopharmaceutical and consumer packaged goods companies as they are beginning to shift more of the consumer and position marketing to the internet. With the acquisitions of eMedicine, the Heart.org, and most recently Medsite, we are now delivering more services and greater distribution to our key accounts, which will be important to our future revenue growth.

The reach of the WebMD health network continued to expand with the average number of unique users in the third quarter reaching a record 32.3 million users per month, an increase of 30% over the same period a year. Page view traffic during the third quarter totaled 729 million pages, an increase of 30% over the prior year period. Over 93% of our page view traffic in the third quarter was generated on WebMD owned and operated sites. 6% of our users and 3% of our page view traffic was generated on our cobranded health channel on AOL.

During the quarter we ran approximately 460 sponsored online programs as compared to approximately 320 programs in the prior year. Our online reach to physicians also continues to significant expand. We continue to average well over 1 million physician visits per month to our professional network. During the quarter 487,000 continuing medical education or CME programs were completed on our professional site, an increase of 55% compared to last year.

During the third quarter we continued to make visible progress on our key portals technology initiatives that are designed to increase traffic to our network, create new sponsored revenue opportunities, and further engage our users as they make more informed health decisions. We are on track to launch our new publishing platform for webmd.com in the fourth quarter of this year, creating a new architecture that will power all of our network sites in 2007 and deliver a new level of internal efficiency and external effectiveness across the entire WebMD health network.

We continue to strength WebMD’s market position as the most recognized and trusted brand of health information. The hallmark of our WebMD brand is the credibility of the information that we produce. In September, we launched a new programming partnership with CBS News, under which the two companies work closely together to produce cobranded medical and health news segments on the CBS evening news with Katie Clark. WebMD the Magazine, distributed to more than 85% of physician offices around the country reached a record number of pages and advertisers in the latest September-October issue. Also, in October, we kicked off our new national advertising campaign beginning with the Major League Baseball Playoff that positions WebMD as the most trusted source of health information for better information brings better health.

In the private portals market, we continue to extend our market lead in providing a cobranded health and benefits platform that helps employees and health plan members make more informed health decisions. During the third quarter we implemented new online health decision platforms for many large corporations. That includes Kroger, JC Penny, EBS, Medtronic…and Rock-Tenn Company. We also licensed our health platform to new health plans in government organizations that included Blue Cross Blue Shield Alabama, ConnectiCare, and New Mexico Public School System. Our installed based of private portal clients at the end of September 2006 totaled 91 organizations compared to 73 a year ago.

We continue to invest in the development of advanced decision support tools that empower consumers with the personalized information they need. During the quarter we implemented our new health savings account or HSA retirement planning application that integrates both the health and financial planning tools needed in the emerging consumer directed health plan market. We are beginning to see the benefits from the integration of our recent acquisition of Summex, the leading provider of lifestyle education and health coaching as we have begun to actively sell these services as a part of our health and benefits platform for large employers in health plan.

Today, we announced the definitive agreement to acquire Subimo, a provider of health care decisions support applications to large employers, health plan for financial institutions. We will combine this marketing leading private health and benefits platform with Subimo’s advanced online health applications that will enable us together to expand our suite of products and services and accelerate our market leadership. The acquisition of Subimo will enable WebMD to better address the emerging consumer directed health plan market by providing consumers with the advanced tools they need to gain greater transparency into the cost and quality of care.

In summary, with another strong quarter of financial and operating results, WebMD is well positioned to capitalize on the powerful market trends in our business, both in the public portals market as biopharma continues to ship more of the consumer and professional marketing online and in the private portals market as major employers and health plans move towards consumer directed healthcare for the future.

I’d now like to turn it over to Marty for some closing comments.

Martin J. Wygod, Chairman of Board of Directors

Thanks Wayne and great results, great job. We are obviously going through a transition period at the parent company, Emdeon. We’re on track to close the transaction with General Atlantic in the third or fourth week of November. I feel very comfortable that our partnership with GA will prove fruitful. Working together with us we believe that the perspective and the expertise that General Atlantic brings to the table will help maximize the value of business services.

Following the close of the Business Services transaction, we anticipate closing our previously announced tender offer for Emdeon shares in early December. WebMD is which our major asset going forward continues to demonstrate, as you have heard market leadership ands strong growth. We are excited about the opportunities ahead of us. As you also may know Andy Corbin our CFO will be leaving us to go with Practice Services Business which we sold to Sage Software. We want to thank him for the substantial effort that he put in, the job that he got done, and we look forward to working with him in his new role at Sage.

Operator, at this time we’d like to focus in on taking questions, first possibly on Emdeon and then on WebMD.

Question-and-Answer Session

Operator

Thank you sir. To ask a question, please press * and 1, please limit questions to one per turn. Once again, to ask a question please press * and 1. One moment. Our first question comes from Sandy Draper with JMP Securities, your line is open.

Sandy Draper, JMP Securities

Thank you very much for taking the question and maybe I can get a couple of just housekeeping questions in and then sort of a broader question. One, are we going to get any restated result for the Emdeon in terms of what the business looks like excluding Practice Services or you’re basically going to wait to get historical numbers until we have the sale of Business Services?

Kevin M. Cameron, CEO, Emdeon

Practice Services are pulled out of the comparable numbers.

Sandy Draper, JMP Securities

Right, but I guess in terms of the other quarters, not just this quarter and last quarter but other quarters in trying to build the model.

Andrew C. Corbin, CFO, Emdeon

There was an 8-K I may have missed it.

Kevin M. Cameron, CEO, Emdeon

Four days following the close of the transaction there was a…I’m not sure which document it is that was filed.

Sandy Draper, JMP Securities

Okay, I’ll go back and check that. On the organic growth side for WebMD, obviously the numbers are 30%, the revenue for page view growth is really strong, was there any acquisition impact in that or is that 100% organic, because that’s a really strong pickup?

Anthony Vuolo, CFO, WebMD

The major acquisition that would have impacted would have been eMedicine which has been on that number since January this year, so when you look at particularly just from second to third quarter there was no acquisition impact on a sequential quarter basis, but eMedicine is in our results as I said from January 1st, and that’s got to be the only acquisition that would be contributing traffic.

Sandy Draper, JMP Securities

Great, that’s helpful. And then the final question, I got on the call a little bit late, did you give you any commentary and if you did just refer me back to the transcript on the lack of growth of ViPS in the quarter because obviously it’s up in the first nine months but it didn’t grow as much in this most recent quarter, is there anything that’s driving that?

Martin J. Wygod, Chairman of Board of Directors

I think it’s probably the timing of certain contracts, but the question is, Kevin, because of the fluctuations taking place on the ViPS operating results in consecutive quarters.

Kevin M. Cameron, CEO, Emdeon

It’s the ebb and flow of the business, the mix of business that we do. So within the government business, there are higher margin and lower margin services that we provide. The commercial payer business tends to be higher margins than the government businesses, and so we had strength within that commercial payer business this year relative to the government business last year, and then also just the mix on the government side, so it’s a revenue mix issue.

Sandy Draper, JMP Securities

Okay, so there is just some normal quarterly volatility? We may not have seen it much obviously because ViPS was a pretty small part of Business Services.

Kevin M. Cameron, CEO, Emdeon

I don’t if it’s normal quarterly volatility. If you think of the government side of the business, you’re bringing in new contracts on the front end and then there are contracts that run their course and come off the backend, and then we have experienced growth on the commercial payer side, so that’s what’s happened.

Sandy Draper, JMP Securities

Okay, great, thank you very much.

Operator

Our next question comes from Anthony Vendetti with Maxim Group, your line is open.

Anthony Vendetti, Maxim Group

Thank you. I was wondering Marty if you could talk a little bit about what you intend to do with the cash raise from the tender offer and from some of these divestitures in terms of your go-forward strategy?

Martin J. Wygod, Chairman of Board of Directors

Well, we’re utilizing cash in the tender offers. If the tender is successful, that’s going to use $1.2 billion and change leaving us with approximately $700 million, and at this time we are really unable to comment on what we’re going to be doing with the additional transactions if any with the company or with the cash going forward. As soon as we’ve put together and zeroed in on which alternative we would like to follow, we will let the street know.

Anthony Vendetti, Maxim Group

Okay, so no comment as to whether or not you would be investing more in the ViPS business or what other potential?

Martin J. Wygod, Chairman of Board of Directors

Not at this time, we have not reached any conclusions yet.

Anthony Vendetti, Maxim Group

When do you think you might articulate that?

Martin J. Wygod, Chairman of Board of Directors

It’s hard to say, I would think at least by the early part of next year.

Anthony Vuolo, Chief Financial Officer

To the earlier question about the pro-forma results without excluding the Practice Services segment, those were filed in the 8-K on September 20th just following the close of the transaction.

Anthony Vendetti, Maxim Group

Okay, thanks.

Operator

Our next question comes from Anthony Petrone with Maxim Group, your line is open.

Anthony Petrone, Maxim Group

Thank you. Just a followup on ViPS, just to clarify this, ViPS employed third-party consultants when providing project personnel to its customers on some of its projects, and where is it in the development cycle or the Medicare monetization act projects, some of the projects they were doing when you actually purchased the entity?

Kevin M. Cameron, CEO, Emdeon

We largely service our business with our own employees, so I think that answer to your first question is no. With respect to Medicare monetization it continues to be a strong trend for us that we benefit from. It’s generating a lot of major projects at CMS. When we bought ViPS in August 2004, it had no prime contracts. We won three prime contracts since that time and we hope to win more, so that’s working in our favor.

Anthony Petrone, Maxim Group

In terms of WebMD in the Subimo acquisition, is there any overlap with Subimo customers at this point and is there any opportunity of selling services to the existing customer base of WebMD?

Wayne T. Gattinella, CEO and President, WebMD Health

There are a few customers that we share jointly but the majority of the business is incremental if you go from a relationship standpoint, and importantly therefore we see a significant opportunity to upsell both sides of our customer base and that’s part of our plan for the future.

Anthony Petrone, Maxim Group

And then just final question, in terms of acquisitions for WebMD, do you expect any further through ’06 or you’re done at this point, what are the plans for 2007 in terms of acquisitions?

Martin J. Wygod, Chairman of Board of Directors

Whenever we can find businesses or applications that fit well with our distribution or with our other assets we will take advantage of them. At this point, we don’t know if we’re going to be doing any others between now and the end of the year, but there is a possibility that we may do one.

Anthony Petrone, Maxim Group

Okay, thank you.

Operator

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

Anthony Noto, Goldman Sachs

Thank you very much. There’s a trend in the market place to see increased inventory as it relates to display or graphical advertising and some of this inventory is increasingly being sold through networks or market places. I was wondering if there is a way for you to participate in that trend as you had commented specifically on the percentage of page views or impressions that you’re selling today out of the available page views or impressions you could sell, and could this secular change that we’re seeing potentially give you an ability to increase your sell through and actually accelerate revenue growth from here as it relates to advertising? Thank you.

Wayne T. Gattinella, CEO and President, WebMD Health

Right now, Anthony, as you know, we’re growing all of our traffic organically, so we’re still not participating significantly at the website although we’re starting to see that occur even in the site changes that have been made over the last couple of quarters. We expect a big push coming from the new platform implementation at the end of this quarter as we look forward to 2007. And our ability to monetize that incremental inventory in our view in the sector that we compete in health, we’ve been able to demonstrate a strong premium to both pharmaceutical med device, biotech, and increasingly consumer packaged goods companies who value the kind of user on WebMD, who exhibits a significant amount of page view engagements, and it’s a motivation to respond and react to promotional information in the category. We’ve looked at the potential to participate in some of the ad network distribution, but candidly the economics as compared to what we’re able to sell our own inventories through on a direct basis just aren’t strong enough right now and from our own sales forces and distribution standpoint our organic growth is predicated upon continuing the base of inventory in the future much like we have today.

Anthony Noto, Goldman Sachs

Could you give us a sense for what percentage of the sort of page views you have today that you’re actually selling or placing ads on relative to the ultimate potential, are you selling 80% of the available inventory and if you want to sell more there’s another 20% that’s available to sell if you wanted to?

Wayne T. Gattinella, CEO and President, WebMD Health

Yeah, we don’t really talk about sell through rates. You can see the kind of traffic growth that we’ve been able to demonstrate each quarter and it’s our goal to continue to do that as the demand for that demand for that inventory continues.

Martin J. Wygod, Chairman of Board of Directors

We’re not optimizing it at this point, but we anticipate being able to do that next year.

Anthony Noto, Goldman Sachs

Okay, thank you very much.

Operator

Our next question comes from Heath Perry with Credit Suisse, your line is open.

Heath Perry, Credit Suisse

Great, I was wondering if you could just talk to us a little bit about what we should expect the site to look like post the infrastructure shift over, is it something that consumers are actually going to see, how will we know when it’s actually happening and is it something that will happen all at once like a light switch being flipped or is it something that’s going to happen over the course of the month?

Wayne T. Gattinella, CEO and President, WebMD Health

There are pieces that have begun to happen, such things for example as the redesign of our homepage, new condition center designs. We’ve begun to introduce some new applications like our new drug search tools, first date and what not. But yes, as the new platform implements this quarter it will be somewhat like a light switch. You will see overnight a complete new look to the site, you’ll see redesign condition area, you’ll see a new search product, you’ll see our symptom checker application which is a very strong part of our site, go through a complete new look and importantly a much deeper dive in the content and information that you’re able to get as a result of using that. You’ll see a new video platform component, so it will be what might look like the flick of a switch. Obviously there’s been a lot of work going to make that switch occur but it will not be a slow process. We’ve already been QA testing the changes represented by the new platform. We feel very confident in terms of the changeover this quarter and we’re very excited about the richness of the new applications for both users as well as the new advertising opportunities that it will support into 2007 as well.

Heath Perry, Credit Suisse

Great, and as that happens once we log onto the site one day and see kind of the different design and stuff, should we expect to see after that just the gradual improvement in search placement or search result placement due to that switch over?

Wayne T. Gattinella, CEO and President, WebMD Health

Yes, beginning with our core site, webmd.com, which will be the first major site in our network that will supported by the new platform, then throughout 2007 we will bringing on the other sites in our network on to that platform as well. So, the optimization from external search, you’ll see initially on webmd.com and then through 2007 you’ll see it start to occur across the network.

Heath Perry, Credit Suisse

Great, thank you very much.

Operator

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

Mark Mahaney, Citigroup

Great, thank you. I just wanted to peel back a little bit more into the organic role for advertising and sponsorship this quarter, it seems like you came in very nicely ahead of what you had thought it would come in the for the quarter, could you peel it back; was it more physician oriented or consumer oriented advertising or was it more traffic, was it more pricing, sell through or a combination of all the above, is there anymore color you can give on that?

Martin J. Wygod, Chairman of Board of Directors

Combination of all the above.

Wayne T. Gattinella, CEO and President, WebMD Health

I think that’s right. I think that volumes certainly played the most significant part of the increase. We have been able to adjust pricing in certain places along the way. The physician side of our network continues to demonstrate very strong growth. We’ve been able to grow the network and we’ve been able to grow the revenues, it’s quite simple as that. And the farmer demand for directed physician marketing, whether it be promotion or education is very strong, but we also have seen very strong growth on the consumer side, again notably not just from traditional pharma but also in the consumer package goods segment, we’re really seeing that part of the market accelerate at least with respect to our revenues as again the demand for health and wellness, inventory, and the audience seems to be ineffaceable right now.

Martin J. Wygod, Chairman of Board of Directors

And there’s lot of the selective price increasing that we have put through in that quarter, really probably didn’t show up in that quarter.

Mark Mahaney, Citigroup

Thank you very much.

Operator

Our next question comes from Rob Kelly Smith Barney, you’re line is opened.

Rob Kelly, Smith Barney

It’s unusual to have a president of a newly acquired company the size of Subimo address a quarterly meeting of Emdeon WebMD, is Ann Mond Johnson going to play a more significant role in the company as a whole and so could you elaborate please?

Martin J. Wygod, Chairman of Board of Directors

Sure, Ann demonstrated with her partners a tremendous amount of initiatives and knowledge in this industry and she’s a very welcome talent to the management team at WebMD, and I think her knowledge and she is going to be very important not only in assisting in the integration of the business but also in being a driving force in the area of the part we’re going to play in consumer directed health plans. So, we thought it was worthwhile since we’re relying her on a lot to have her on the score and let her get a little flavor for it, and we think she’s going to be a very important asset as well as her partners.

Rob Kelly, Smith Barney

Thanks.

Operator

Our next question comes from Brian Pitts with Banc of America, your line is open.

Brian Pitts, Banc of America

Thank you. First question on Subimo, can you give us more commentary around the structure of the deal. It seems like 40% of the purchase price or roughly $24 million will not be paid until two years after closing, can you talk about the rationale for this, is it tax benefit related or performance incentive? And then a question on your private health and benefit portals, you guys are doing a great job of adding more and more, roughly 18 I think year-over-year new portals that you’ve added, can you talk about the longer term opportunity, is that a good runrate to assume and at what stage does that tend to track down?

Martin J. Wygod, Chairman of Board of Directors

First part of the question on the acquisition, it was motivated by a lot of different things. We thought on this transaction it was very important that they retained stock. It is not an earn out situation on the acquisition and I believe Tony will give conditions of this in detail that will be filed.

Anthony Vuolo, Chief Financial Officer

Yeah, we’ll file in AK with more detail on the acquisition.

Martin J. Wygod, Chairman of Board of Directors

So, you’ll see every nuance to it in the AK immediately and some of it’s partially tax driven, but the main thing is really driven just to see to it that they will have meaningful equity participations going forward and the company going forward.

Brian Pitts, Banc of America

Great, and just any comments on the health portal what to expect, how big is that opportunity longer term in terms of number of partners?

Wayne T. Gattinella, CEO and President, WebMD Health

I think we believe that the opportunity is enormous for us. The kind of growth that you should expect at least if you were reflecting just on the number of new customers coming in the door, we’ll continue on a consistent path. We announced implementations, not contract signings, so as you hear new accounts being named those are programs that have gone live and that can tend to be somewhat seasonal in terms of the actual implementations, but if we look at the demand in the market, the sales pipeline, the upside opportunity, not just on the employer and health plan side but the government segment, the union segment, and other segments that are now expressing interest in our applications. We certainly believe that that segment of the market will continue to play an important part of our growth in 2007 and certainly over the next several years as well.

Martin J. Wygod, Chairman of Board of Directors

I also think a good barometer for this would be…the major companies, the employers around the country, how many of them really are interested in this point of moving towards consumer directed health plans because that makes the services that we are providing a necessity.

Brian Pitts, Banc of America

Great, thanks a lot.

Operator

Our next question comes from Andrew Schlossel, a private investor, you’re line is opened.

Andrew Schlossel, Private Investor

Hi, how are you doing? I’ve been a shareholder of Emdeon for three years and WebMD since its IPL, and I’ve been happy with the performance of the stock. I was wondering if management could elaborate on some of the reasoning behind all the options being granted recently.

Martin J. Wygod, Chairman of Board of Directors

To motivate the management, to have them continue to make money along with the public shareholders.

Andrew Schlossel, Private Investor

Okay.

Martin J. Wygod, Chairman of Board of Directors

It’s the practice that we’ve always had. If you notice our IPO, our pay scales our below that, which is based on the performance and what’s been accomplished at these companies if you go back to see where they came from since you have a little history. So, the pay schedule is probably a little bit on the low side and we reward people very equitably we feel from a stock option perspective.

Andrew Schlossel, Private Investor

Okay, I understand that. I guess some of my frustration has just been WebMD would be a lot more profitable if it was granting a little less options.

Martin J. Wygod, Chairman of Board of Directors

Well, if you go ahead and take the number of shares outstanding and see what we’ve really granted there, I really think it’s extremely conservative.

Andrew Schlossel, Private Investor

Okay, I appreciate your time.

Martin J. Wygod, Chairman of Board of Directors

No problem.

Operator

Our next question comes from Duane Pfenningwerth with Raymond James, your line is open.

Duane Pfenningwerth, Raymond James

Hi, thanks. Just wanted to back track to Emdeon a little bit; can you give us any sense maybe even at a high level of what EBS would be as a percent of the $11 million in corporate cost this quarter?

Andrew C. Corbin, Executive Vice President and CFO

We don’t really break it out that way. A lot of the Emdeon corporate costs are shared services for certain functions, for example tax that goes across the entire company, they are not segment specific, so we don’t really have a break out like that.

Duane Pfenningwerth, Raymond James

Can you give us I guess of the major cost buckets, SG&A, D&A, engineering and development; what portion of that would move off the income statement with EBS?

Kevin M. Cameron, Chief Executive Officer

Business Services is really operated as a standalone unit in a lot of ways. It had its own legal department, its own HR department. It’s a standalone operating business that received corporate support. There’s also a transition services arrangement that runs out actually with both Sage and Business Services, they can run out as long as two years. So, I’m not sure where your question is going.

Duane Pfenningwerth, Raymond James

Sure, just in terms of building a forward model that would be somewhat informed as I take Business Services off the income statement going forward assuming that that does close how we actually add back the cost to that.

Kevin M. Cameron, Chief Executive Officer

I don’t think that’s the right way to look at it, and I think it all depends; we continue to have operating assets, we continue to have substantial liquidity and where we go with the company.

Duane Pfenningwerth, Raymond James

Okay fair enough, can you provide us with the ViPS number in the second quarter, last quarter, both revenue and EBITDA?

Andrew C. Corbin, Executive Vice President and CFO

Last quarter revenues in EBITDA were as a percent of Business Services, so that’s out there, I have to find it specifically.

Duane Pfenningwerth, Raymond James

Okay, can you just remind us what roles from a leadership perspective you’re looking to fill both from Emdeon Corporation and Business Services specifically and any update on those searches?

Martin J. Wygod, Chairman of Board of Directors

Sure. Obviously we have to sort the role of Chief Financial Officer with Any moving on to Practice Services, and we’re currently on top of that and by the 9th or the 10th of the month we will announce to the street how we’re going to be replacing that. We also are going to sort out what position Kevin is going to play going forward with us. It’s going to be a senior important position at the company, but probably next year you’ll see a change in that arena, but we have not landed specifically on the change, the specific role that he would play. Other than that, I say it’s going to be a senior role at the company. We do have some early discussions with different people to possibly take on the CEO position, but we’re very premature in that arena. And of course I’ll be here forever.

Duane Pfenningwerth, Raymond James

That pretty much covers it, and then the last one I had was if you can give us any sense for where you think the EBS debt will play?

Martin J. Wygod, Chairman of Board of Directors

That’s not out there yet and I know Citi is in the process of marketing that at this time.

Duane Pfenningwerth, Raymond James

Okay, and one last final one, I know it’s difficult to say now, but how long would you envision having a minority interest investment in EBS?

Martin J. Wygod, Chairman of Board of Directors

That can always change but we’re very pleased with the partnership that we have and our intention is to work with GA and grow this internally and possibly externally and we’re looking at it currently I think with a very long-term perspective.

Duane Pfenningwerth, Raymond James

Thanks very much.

Operator

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

Sandy Draper, JMP Securities

Thanks and Kevin I appreciate your comments, I did check on the 10-K. My question, I didn’t phrase it well, are we going to get the segment level reporting because that’s where I generally build out my model, I don’t know if that’s something we’ll have to wait for or is that something that can be provided as opposed to the consolidated?

Andrew C. Corbin, Executive Vice President and CFO

I see, you’re trying to figure out the inter-companies?

Sandy Draper, JMP Securities

No, less about the inter-companies, but in terms of comparable quarter to quarter to come up with the adjusted EBITDA and cash EPS numbers to look at, the different ad backs and everything, I just want to make sure I have the accurate number there, and then just to understand the segment trends, I understand you may not be able to provide that, I did note that was going to be available as well as the consolidated.

Andrew C. Corbin, Executive Vice President and CFO

Business Services, the segments are comparable with the EBITDA line, so you can do that with the information that’s out there. So the only one where you don’t really have historical information is ViPS, although I think that’s been a relatively steady business for us and you’ll see that as we report the numbers going forward.

Kevin M. Cameron, Chief Executive Officer

I think in the last two calls this year, ViPS as a percent of Business Services in terms of revenue and EBITDA.

Sandy Draper, JMP Securities

Okay. I’ll go back on the transcripts and look at that. And then about the add back, I mean can make some guesstimates of it and would like to know if there is a way that you could provide a hard number so I can make sure I’ve got it modeled back early.

Andrew C. Corbin, Executive Vice President and CFO

I don’t know what add back we’re talking about.

Sandy Draper, JMP Securities

And it may not change, just like the stock compensation, the difference between amortization and pre-paid content amortization, maybe those numbers are not changing at all?

Andrew C. Corbin, Executive Vice President and CFO

Yes, on the below line?

Sandy Draper, JMP Securities

Exactly, where you sort of do your adjustment from GAAP back up to adjusted EBITDA, if there are any changes in those numbers?

Andrew C. Corbin, Executive Vice President and CFO

We’ll take a look at that and maybe we’ll put something out.

Sandy Draper, JMP Securities

That will be very helpful, thank you very much.

Operator

Thank you. There are no other questions at this time. As a reminder, if necessary, there is a replay available of this call which can be accessed toll free at 866-479-8684 or if you are calling from outside of the U.S. at 203-369-1544. There is no pass code required. There is also the webcast replay available on Emdeon and WebMD’s websites as well. Thank you for joining us today.

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Source: Emdeon Q3 2006 Earnings Call Transcript
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