WebMD Health Corp. (NASDAQ:WBMD)
Q1 2010 Earnings Call
May 4, 2010 04:45 pm ET
Risa Fisher - VP of IR
Marty Wygod - Chairman
Wayne Gattinella - President and CEO
Tony Vuolo - CFO and COO
Mark Mahaney - Citigroup
Mark May - Needham & Company
Gerard Heymen - JPMorgan
Ingrid Chung - Goldman Sachs
Scott Kessler - Standard and Poor's
James Kumpel - Madison Williams
Good afternoon and welcome to WebMD Health Corps March 2010 Quarterly 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.
Good afternoon. This conference call to discuss WebMD’s first quarter results. The earnings release issued today by WebMD is available at www.wbmd.com in the Investor Relations section.
The release issued today include reconciliations between GAAP and non-GAAP financial measures to be presented in 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. Information concerning the risks and uncertainties can be found at WebMD’s SEC filings.
I’d now like to turn the call over to Marty Wygod, Chairman of WebMD.
Thank you, Risa. Good afternoon and thank you for joining us today. Joining me on the call today are Wayne Gattinella, CEO and President and Tony Vuolo, CFO and Chief Operating Officer.
I’m very pleased with the results announced today. From the balance sheet perspective, we completed several transactions in the last month which put us in a strong position to both fund our internal initiatives and allow us to pursue external opportunities. We completed a tender offering which reduced our shares outstanding by approximately 10%. We sold our auction rate securities for total consideration of $286 million in our Porex notes for 97% of phase so that our cash balance is now completely liquid. In addition, we have the upside on the auction rate securities over the next two years.
For an ongoing perspective, our advertising and sponsorship business is growing strongly. We continue to stand out as the market leader in a large and under penetrated market. The WebMD brand is the most recognized and trusted icon in health information in the size and quality of our highly engaged consumer and professional audience continues to differentiate us from other media properties.
The momentum we talked about on our last conference call continues to build. We are seeing our biopharma and consumer package goods advertising customers moving more of their spending online and we expect this trend to continue for quite a long period of time. The margin leverage in our business model was again evidence as our earnings growth continues to outpace our top line growth.
With these strong and expanding margins we are able to invest the new technologies and innovative services that we support our continued momentum accelerate our future growth and create value for our shareholders over the long-term.
Basically we feel that we are sitting in the in the catbird seat. I’d like to turn it over to Tony and then to Wayne to review the first quarter financial and operating results respectively and then we’ll take questions at the end.
Thank you, Marty. As a reminder WebMD and its former parent company Health Corporation completed their merger in October 23, 2009. The applicable accounting treatment for the merger require that Health be considered the acquiring entity of the WebMD minority interest and therefore the pre-acquisition consolidated financial statements of Health became the historical financial statements of WebMD beginning with the closing of the merger which occurred during the fourth quarter of 2009.
Accordingly the 2009 results for those at health at the giving effect of the merger exchange ratio on the historical health shares outstanding. WebMD delivered strong financial results for the March 2010 quarter. WebMD revenue for the March quarter was a $108 million compared to $90.3 million last year, an increase of 20%. Adjusted EBITDA was $25.7 million an increase of 68% compared to last year.
Breakdown the revenue increase for you, public portal, advertising and sponsorship revenue which represented 80% of total revenues this quarter increased 28% to $86.3 million. As anticipated, private portal services revenue which represented 20% of total revenue this quarter decreased $1.2 million to $21.8 million. The adjusted EBITDA margin of 23.7% for the quarter was approximately 680 basis points higher than last year. Our ability to efficiently leverage our revenue growth is demonstrated in the first quarter result, as our Adjusted EBITDA margin on incremental revenue was 59%. The Adjusted EBITDA margin on incremental revenue reflects the impact of the reduction in corporate expenses for the quarter as compared to a year ago when health maintained larger corporate operations and separate public company expenses.
Even without the impact of this reduction in corporate expenses, the adjusted EBITDA margin on incremental revenue would have been about 50%. Non-cash stock compensation expense was $7.8 million for the quarter, compared to $9.2 million last year. As we previously disclosed on Form 8-K filed on April 26, we recorded a pre-tax non-cash charge of $28.8 million during the quarter related to the sale of our auction rate security. WebMD sold all 348 million principal amount of its holdings of auction rate securities for 286 million in cash. Under the sale agreement, WebMD has effectively retained a potential upside over the next two years, should the liquidity and value return to the auction rate securities markets.
During the quarter, we repurchased 19.3 million face value of the 3-1/8 convertible notes and had conversions of $83.9 million face value of the 3-1/8 convertible notes. These transactions resulted in the loss of $3.7 million as compared to a gain in convertible note repurchases of $6.6 million last year. The company recorded and income tax benefit for the quarter of $20 million which includes a $22.2 million tax benefits related to the sale of the auction rate securities and a $1.5 million tax benefit, related to the losses on a convertible note. Excluding these losses and the related tax benefits, the income tax provision would have been $3.7 million or 42% of pre-tax income.
Loss from continuing operations including the charges related to auction rate securities and convertible notes for the first quarter was a loss of $3.8 million compared to a loss of $200,000 last year. Net loss was $3.8 million or $0.07 per share compared to income of $415,000 or $0.01 per share last year. Excluding the after tax impact of the losses related to the auction rate securities and convertible notes, net income would have been $5.1 million or $0.09 per share for the quarter. This is based on the weighted average diluted share count of $57.2 million which is what the share count would have been for the EPS calculation, when excluding the impact of the auction rate securities in convertible note charge. This compares to a net loss of $3.8 million or $0.08 per share for 2009 after excluding the after-tax gain related to the convertible note repurchases in the prior year.
Operating cash flow from continuing operations was $27.4 million for the quarter. As we have stated in the past, quarterly operating cash flows can be impacted by the timing of compensation accruals and other accruals in relation to quarter’s end and the billing and collection of receivables from our customers.
Capital expenditures for the quarter were $3.1 million. During the first quarter, we paid $6.8 million to settle payment for shares tended in December, 2009 but not delivered until January 2010. We also repurchased approximately 166,000 shares of our common stock for approximately $6.5 million under our previously announced buyback program.
As of March 31, 2010 we had approximately $808 million in cash and investments, including $286 million in auction rate securities and $65.5 million in a senior secured note that we received in the sale of health products business. We also had approximately $412 million in aggregate principle amount of convertible notes outstanding.
Subsequent to March 31, 2010, we received the cash proceeds of $65.5 million for the sale of the Porex senior secured notes. We also received $286 million from the sale of the auction rate securities. We used $242 million in cash to repurchase 5.2 million shares in a tender offer which was completed in early April.
Additionally, through April 30 we also had conversions of $41.9 million of the one and three quarter notes and $12.7 million of the 3-1/8 note into an aggregate of approximately 1.6 million shares. The principle amount of the convertible notes outstanding as of April 30 is 223 million for the one and three quarter notes which are callable by the company in June 2010 and 134 million of the 3-1/8 note which are first callable by the company in September of 2010.
As of April 30, there were 52.5 million WebMD shares outstanding. This amount excludes shares issuable on the future exercise of stock option, approximately one million shares of unvested restricted stock and approximately 6.43 million shares related to the future conversion of the one and three quarter notes and 3.83 million shares related to the future conversion of the 3-1/8% convertible notes.
Turning to financial guidance for 2010, we are reaffirming our revenue and adjusted EBITDA guidance that we first issued on February 18, 2010. We have provided an updated guidance schedule attached to the press release we issued today to reflect the impact on interest income, interest expense, and share counts resulting from the tender offer to sales investments and convertible note conversion.
Our assumptions for interest income and interest expense anticipate the remaining amounts outstanding of the one and three quarters percent convertible notes will convert to equity in June 2010. Our assumptions for basic and diluted weighted average shares outstanding also anticipate that the one and three quarter convertible notes will convert to equity in June 2010 and as these convertible notes will be considered in a diluted share calculation through the date of expected conversion based on our income expectations through 2010.
Our 3-1/8 convertible notes are first called by the company in September 2010. Upon conversion of these notes the company may elect to deliver in lieu of shares, cash or combination of cash and shares as provided by the indenture. Our guidance for 2010 assumes that the remaining 134 million of 3-1/8 notes will remain outstanding for the balance of the year and have been excluded from earnings per share and weighted average share count guidance as they are anti-dilutive to 2010 earnings per share. However should the holder of these notes exercise their right to convert or should the company exercise its right to call the notes in the September 2010, then our guidance would be adjusted accordingly.
Looking specifically at the second quarter of 2010, we expect revenue to be in excess of a $115 million, an increase in excess of 16% from last year. They expect advertising revenue growth rate to be in excess of 23%. We expect adjusted EBITDA to be in excess of 26% of revenue and we expect income from continuing operations to be in excess of 6% of revenue.
Schedule summarizing the company’s 2010 financial guidance as well as the reconciliation between GAAP and non-GAAP financial measures is attached to the press release issued today.
And now I would like to turn the call over to Wayne to discuss the operating results in more detail.
Our first quarter results represent another strong financial quarter and a solid start to our new fiscal year. Advertising revenues this quarter increased 28% as compared to a very good quarter a year ago and our ad revenues increased by 16%. As Marty commented, we are continuing to experience increased demand from large biopharma customers. We are shifting a greater share both our direct-to-consumer and direct to physician marketing to WebMD properties as well as from growing demand of major consumer products companies who are increasing their marketing presence at our customer site. The significant scale and strong engagement of our consumer and physician audience are drawing more dollars from traditional marketing channels as the transformation of healthcare marketing is accelerated.
Traffic to the WebMD network of sites continues to reach new level as unique visitors this quarter averaged 82.1 million unique visitors per month, an increase of 33%. Page views during the quarter grew 22% to over 1.8 billion pages. In this quarter we added a new high quality affiliate site drugs.com to our network and even with the addition of drugs.com, approximately 92% of our page view inventory is delivered on sites that we own and operate and have full control of the content and publishing. Search engine optimization that is the ability to optimize the natural ranking our branded content in conjunction with health related searches on Google and others, continues to fuel the efficient growth of our targeted inventory.
As we discussed before, search engine optimization plays an important part in our overall traffic strategy. Generally speaking someone who comes to us through search consumes less pages than someone who comes directly to our site and as the proportion of search referral traffic in our network increases, we do expect that our unique users will grow faster than our pages.
Our professional network with medscape.com as the flagship site continues to draw increasing numbers of physician to rely on medscape as their primarily source of medical information. Online physician traffic through our professional network during the first quarter reached nearly two million monthly physician visits. Online medical education on our professional sites was approximately 1.5 million completed programs this quarter, consistent with the prior year. We’ve begun to put less emphasis on creating unsponsored medical education programs in place of broader medical news and issues that are important to the business of medicine.
Nevertheless, Medscape continues to lead the market and providing the majority of online continuing medical education to physician. Physician Connect our social networking channel designed exclusively for physicians continues to expand. Nearly 130,000 physicians are now registered to participate in online discussions on Medscape, using our secured site to discuss clinical and non-clinical topics related to the practice in medicine.
During the quarter, we launched the new social networking platform for consumers called the WebMD Health Exchange. WebMD Health Exchange builds on the hundreds of health communities that previously existed on our site and that now more closely integrate the social health experience throughout each of our core content areas.
WebMD health exchange gives consumers the opportunity to participate in expert moderated communities or to create their own private community. WebMD health exchange leverages the knowledge and credibility of leading experts from our renowned medical institution, where consumers can discuss personal challenges, ask questions and receive direct answers and support.
Our penetration into the mobile health information market has also continued to expand this quarter. WebMD mobile for consumers was nearly 1.6 million downloads since launch, provides consumer with a vital interactive health tools to check the personal symptoms, find drug, treatment, even emergency first aid information, all on the same mobile health applications.
Medscape mobile proposition has attracted over 300,000 users and has quickly become the premier clinical reference tool at the point of care, eclipsing most other handheld medical applications. During the quarter, we released the new version of Medscape mobile that provides in depth clinical reference data on diseases, conditions and procedures that now also includes medical images and video to provide visual support to our medical content.
Just last week we expanded the Medscape mobile platform for Blackberry users in addition to the iPhone. We believe that our free feature rich medical mobile application will make it increasingly challenging for subscription-based models to retain their physician customer basis in the future.
We are also currently testing several new health applications that we plan to launch on app of new iPad in the next several weeks. Finally, we are very proud to be named as the most trusted consumer brand according to the latest Millward Brown's Global Consumer Brand study. The WebMD brand ranked number one in the US ahead of Tylenol, Amazon even FedEx in the latest consumer brand equity study that this research firm has been running for the last 12 years.
Turning to our private portals business, the private portal business represented about 20% of our revenues during the first quarter with revenue decreasing by approximately $1.2 million from the prior year. The downsizing of many of our existing corporate clients has impacted this business but we continue to focus on up selling additional services such as coaching into our installed customer base. We have recently recruited new senior leadership across several key functions in this business unit and these include in the areas of marketing, sales, account management and technology.
Our long-term view of the opportunity in the employer, payer and government markets remains positive. Organizations clearly recognize the value that personalized health information can play in better managing the health and cause good care for their employees and plan members. WebMD’s health and benefits services including our personal health record preventative care services have been proven ways to improve health outcome and make health care more affordable.
So, in summary our first quarter results announced today demonstrate WebMD’s continued leadership in the online health and wellness market, WebMD is steadily establishing itself into the essential marketing channel for the largest biopharma and consumer product companies in America.
The strength of the WebMD brand, the size and quality of our audio, the sophistication of our technology platform and the unmatched depth and experience of our organization clearly distinguishes WebMD from any other challenger in market place and provides a clear path for sustainable growth for many years to come.
At this time Operator we would like to open it up for questions please
(Operator Instructions) Our first is coming from Mark Mahaney from Citigroup
Mark Mahaney - Citigroup
Wayne couple of questions that I could get away with, first that user growth, that 30% plus year-over-year that kind of is little bit off the charge given your patterns so could you maybe give a little bit more color on what could you think could appear from that and then maybe an update on percentage of your advertising that comes from the non-biopharma sector that CPG sector.
And the finally, is there any interesting pattern from your perspective in terms of those biopharma dollars that are coming on if there is greater growth for you in that ad budget that’s targeted towards physicians versus consumers or has it pretty evenly balanced the growth that we are targeting at those two end markets?
In terms of our traffic growth, we saw a very nice solid growth across all of our properties weatherby.com or owns and operated affiliates, owned and operate site and then as I mentioned, we also brought on a new affiliate site drugs.com this quarter that was in our numbers a year ago. If you look at our mix of inventory for the quarter as we said about 92% of the page view inventory was delivered on the site that we fully own and operate, probably about 6% of it was delivered on drugs.com and the remaining 2% just came from other small affiliate deals.
So, as I did comment, search engine optimization has been a significant source of traffic as for that we focused heavily on ensuring that our branded content shows up on the natural search result which doesn’t cost our money but certainly provides high quality traffic and varied targeted ideas for us. In terms of the mix of bio, non bio add dollars, as I'm sure you are aware, we don’t break those revenues out
But we have continued to see a very nice growth in our consumer products areas. We continue to focus on the largest of those companies like the J&J and P&G brands in the market and we continue to penetrate them more deeply. But we’ve also attracted several new customers over the past couple of quarter that we commented on as well. So we see that as a continuing emerging area for us as many of those companies are focusing on health and, sort of a healthy conscious customer and see the quality of our traffic is a very important way of mentioning that branding. I figured Brad’s question was how important is the physician based on my revenues are for us in relationship to consumer. And I think again, as we commented in the past is that the online revenues between the consumer marketplace and the physician marketplace are roughly balanced. But we do have very unique position in the physician area as a competitive landscape is pretty small and pretty broad if you will, Medscape has a very clear market leadership position in reaching physicians online right now and we expected that will continue for quite sometime.
I think I’ll also Wayne on that you’ll see more coordinated, larger programs where the pharma companies is asking us to rollout a physician program simultaneously with the consumer program. And we’ve started to see some substantial uptake in those part of the contracts.
Mark Mahaney - Citigroup
Thank you Martin, thank you Wayne.
Okay, thank you. Our next question in the queue comes from Mark May from Needham & Company.
Mark May - Needham & Company
Thank you, thanks for taking my questions. I think I had two. It’s sort of a follow on to Mahaney’s question. Is it still true that the physician side of your business is growing faster than consumer and then private portal side, I would have sought that that was a business bit may be it would have start to take to grow again as in corporate profits improved overall, that doesn’t seem to be the case, may be if you can talk a little bit about why that is, why there might be a lag there? And should we expect for at least the next few quarters that the private portal segment might continue to cause negative year-on-year growth? Thanks.
So - I’ll respond to this. The physician question, our physician is not going faster than our consumer business right now. We’re seeing both ends of that see-saw growing quite rapidly. Again as we’ve commented our consumer business is the combination of core pharmaceutical companies as well as other healthcare companies that have products focused squarely on the healthy content consumer and we generated business in both end of that so we had specialized sales forces that focus differently became the position and consumer audiences, now that the pharmaceutical companies invest heavily or reaching doctors, we see that as a significant engine for growth for the future but I will say in terms of the growth rates of both ends of that spectrum we are seeing pretty solid and roughly equivalent growth from both ends.
On the private portal you can expect that to be balance, for the balance to the year a 3% top line, bottom line you should see sales picking up in 2011 for up some revenue pick up over the fourth quarter of 2011 and then 11 will pick up in 2012 given substantially new very qualified new management team we are building out a number of new applications, products, et cetera over the next six to 12 months and I think you are going to see substantially better results long term.
Okay, thank you. Our next question is coming from (inaudible) from UBS.
I’m already aware there is some talk in the markets about Everyday Health being a competitor of yours. Could you talk about the differences as you see them between WebMD and Everyday Health? Thanks.
I’ll handle that Marty. Well, let me step by saying that healthcare market is very large and still untapped so we believe that this market place can support many players overtime but its your question looking specifically at Everyday Health, I am actually look at the latest comp score report right here in it. If you look at it and you have access to it as well, it shows that only 10% of their monthly inventory actually runs on everydayhealth.com.
The overwhelming majority runs on sites that the company doesn’t actually own so practically speaking they really operate more like an ad network rather than high quality health destination and we are at 92% of WebMD’s inventories on sites that we own and operate, we control the quality of the content, the majority of Everyday Health traffic is on affiliate sites and again if you look more closely, you will see that those are mostly a loose confederation of diet, fitness, even e-commerce.
So let me summarize the differences as I see them, one, without a meaningful consumer brand they must rely heavily on either purchasing traffic or adding new network deals in order to build their inventory which is both expensive and it creates lower quality traffic but I know for fact its not that valuable to large pharmas. Two, because we do own our insights, we are building our long-term assets as opposed to kind of rented network where your partners can exit at any point, in fact for example one as we talked about one of their most targeted network partners drug.com actually left the Everyday Health network last year to join us just this past January. And three, I would say as a well established brand destination, we are able to monetize both our consumer and physician inventory with large pharma in a way that in ad network, like in Everyday Health will never be able to do which is why I believe in their pharma revenues are a very small fraction of what we generate today and its going to look that way for a long time to come.
Let me add just one thing to that. We’ll be paranoid about everybody in this industry but we’re much more concerned about the major players out there, whether be a Google, a yahoo, a Microsoft. Next question.
Okay. Thank you. We’ll go with our next question on Gerard Heymen from JPMorgan.
Gerard Heymen - JPMorgan
Good earnings gentlemen. Marty, I just want to go a little bit further on that private portal question? Could you tell us what you think the rate of revenue for sales and earnings growth for the company would be, hence the private portal?
Let me have our Chief Financial Officer answer that.
I think when it comes to the revenue, you can see pretty much that the impact that the private portal is having on the total revenues of the company, if you just looked at the advertising and sponsorship revenues and trend in growth rate there, you, those growth rates are far in access of what they are on a consolidated basis when you include the private portal. From an earnings perspective, the growth in our margin, in our margin percentage is also impacted by the private portal given the flatness in its revenues and the extent of some of things that we’re investing in now, here for the future. So excluding the private portal, our gross and EBITDA would be even more significant than what we demonstrated during the quarter.
And to put in some laymen terms, our rate of growth of EBITDA in top line would be substantially higher, if it did not have the private portal.
Okay, thank you. Our next question is coming from Ingrid Chung from Goldman Sachs.
Ingrid Chung - Goldman Sachs
So a couple of questions. First is, I was wondering if you can give us an update on your international initiatives in the UK, what should we expect to see or when should we expect to see material costs or revenue from your international business? And then secondly, I was wondering if you see any other significant affiliate opportunities on the horizon, and did drugs.com come to you?
Well Ingrid, with respect to our launch of the WebMD Boots site in the UK last fall, we are continuing to see traffic growth which of course, is the first stage of building that business right now. Our partner on the other side, boots who is the largest pharmacy in the UK began a countrywide marketing campaign at their expense beginning in the first quarter that’s continuing and the nature of the relationship is such that we share in the costs, us more in the operating side than more on the marketing side and we ultimately share in the revenues. So you’re not going to see any sort of change in our cost lines with respect to the support in the marketing of that side.
From a revenue standpoint, a little bit of chicken and the egg. As the traffic grows, we have put our first fulltime sales resources on the ground over there, but you’re not really going to see anything in terms of the revenue line reflect that business until sometime in 2011 as it’s really right now and in a build mode. But we’ll certainly update you as we get more visibility in terms of the actual numbers there.
Marty you want to comment on the affiliate question?
And you want to know whether drugs.com or why they came to us sort of whether we went to them, or they came to us?
Ingrid Chung - Goldman Sachs
Yes, and if you see any other opportunities there?
That's the unusual question. What's the reason for the question?
Ingrid Chung - Goldman Sachs
I’m just wondering if you are going to see more of these affiliate deals come into you.
I understand. Well, I guess that the only thing we could say that could help give you any direction there is that, the affiliates get very disappointed if they only get the minimum amount of volume off of their working relationship with whomever they have it with and on drugs.com they were only getting the minimum amount required guaranteed of the contract. So, that they felt that they were never getting a meaningful amount of sales off of their inventory. And I think that was the compelling reason and that the other affiliates feel the same way I think you can expect the other affiliates probably coming to us as well.
(Operators Instructions). We’ll go with our next question from Scott Kessler from Standard and Poor's.
Scott Kessler - Standard and Poor's
Thanks a lot. Can you provide an update on your international expansion plans particularly as it pertained to the monetization efforts? Thanks a lot.
Sure, we again as I commented, we launched our first consumer site outside the US last fall and a partnership with Boots in the UK and as I commented that we are in the build mode right there right now from a traffic standpoint that say launched in October, our goal is to make it the most visited health site in the UK and everything says right now we're on track to ultimately get there. We haven’t really talked about it any specificity what our plans are, in addition to that initiative. So at this point I can only tell you that we are in active discussion, we have built a very flexible publishing platform that enables us to leverage our current content but yet publish it in country in a way that we can easily adapt and support it and I do think that we will be talking about in more detail what our plans are in that regard by the end of the this year.
Scott Kessler - Standard and Poor's
Can you talk at all about, over the last six months or so obviously you guys have done a lot from a transactional, financial perspective obviously. It seems like a majority of that is now in the past and I am wondering what the balance sheet kind of cleaned up, what you are plan on doing with that cash? Would you be looking to do some acquisitions, you haven’t really been very active in that regard perhaps because of all that’s been going on. I am kind of wondering what your thinking is on that front?
Right now we have trouble finding any acquisitions out there that are any better than the growth prospects of our own stock.
Okay and I do show one final question coming from James Kumpel from Madison Williams
James Kumpel - Madison Williams
Since you got that number one ranking for consumer brand, do you have any plans in particular to leverage that or basically rent it out to other trusted products?
Good question, we've began since the study came out late February, really early March we certainly began to leverage it in the market place. It is a study of leading consumer brand so in the top 10 there were only two websites, we were number and amazon.com was in the top five. All the rest are really kind of either consumer household brands or like a FedEx commercial brand. We’ve begun to use it very nicely with consumer packaged goods companies who again, from a branding standpoint really want to associate their brands with other media properties that boost their image and boost their ranking or levels with consumer. So that’s underway and it's working well.
In terms of licensing or using our brand elsewhere, we’re very careful about that. We’re asked that question almost every week by some company and while we do it selectively, we do it very strategically, we’re also very careful not to over expose the brand outside of our core health and information space in way that's potentially dissolute its creditability overtime. So its not that we’re opposed to it but I would also tell you we’re as a brand Stuart we're very-very careful about it.
James Kumpel - Madison Williams
And then Tony, can you just walk through some of the mechanics, the assumptions on shares outstanding over the course of the year? You got the safety of deluded shares right now and can you just walk us through how that progressed over the year to get to the $65 million average to the year?
Sure. I think I commented in the prepared comments. The additional shares that we anticipated coming from the one and three quarter converse that is not reflected yet in the $52.5 million outstanding which I just come back to that page which is about 6.43 million shares that ultimately will come into the share count.
In addition to that, you have the deluded impact of stock option which is also in our share count assumption. And as I said on the 3-1/8 notes, although they do have the right to convert and we do have the ability to call them in September, he has not included in our share count guidance the 3.83 million shares that potentially issuable there because they are anti-dilutive to GAAP earnings.
James Kumpel - Madison Williams
Okay, so I mean it’s pretty apparent how you're basic share counts kind of average them close to $57 million but I was just kind of curious if you can walk us through that $13 million because I see may be that $11 million even if you had included the 3-1/8.
While your $52.5 million, the one and three quarter gives you another 6.8 million shares that get you almost the 60 million shares and the balance of the shares compared to our projections for the year really relates to the million restricted shares that are not included in the share count and then the balance of that relates to the dilutive impact of stock options. And as the stock price goes up, you get some additional (inaudible) from the stock options which we have contemplated in our guidance.
Okay, this does conclude our Q&A session for today and it also concludes your conference and as a reminder, if necessary, there is a replay available of this call which can be accessed toll free at 888-266-2081 or if you are calling from outside the US, you can dial it at 703-925-2533, the pass code is 1449543. There is also a webcast replay available on www.wbmd.com. Thank you for joining us today. Have a great day.
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