Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  
TRANSCRIPT SPONSOR
Better Than AdSense

WebMD Health, (WBMD)

Q4 2006 Earnings Call

February 21, 2007 4:45 pm ET

Executives

Risa Fisher - Vice President of Investor Relations

Tony Vuolo - CFO

Marty Wygod - Chairman

Wayne Gattinella - President and CEO

David Gang - EVP and CTO

Analysts

Anthony Noto - Goldman Sachs

Corey Tobin - William Blair

Matthew Rycheck - Citigroup

Rob Kelly - Citigroup

Heath Terry - Credit Suisse

Brian Pitz - Banc of America

Jack Kelly - Smith Barney

Sandy Draper - JMP Securities

Anthony Petrone - Maxim Group

Presentation

Operator

Good afternoon everyone and welcome to the WebMD Health Corporation December 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

Good afternoon and welcome to our fourth quarter earnings call. I will read the following statement concerning forward-looking disclosures.

All statements made today other than statements of historical facts are forward-looking statements, including those regarding our guidance on future financial results and other projections or measures of our future performance, our expectations concerning the growth of online marketing budget, other market opportunities, and our ability to capitalize on them, and the amount and timing of the benefits expected from acquisitions from new products and services and from other potential sources of additional revenue.

These statements speak only as of today and are based on our current plans and expectations and they involve risks and uncertainties that could cause actual future events or results to be different from those described, including risks relating to market acceptance of our products and services, relationships with customers or strategic partners, difficulties in integrating acquired businesses, and changes in economic, political, or regulatory conditions, or other trends affecting the healthcare, Internet, and information technology industries. Many of these risks and uncertainties are described in our SEC filings. We expressly disclaim any intent or obligation to update these forward-looking statements.

The earnings release issued today is available on our website at www.wbmd.com in the Investor Relations section, and has also been furnished in the Form 8-K filed today with the SEC. The Form 8-K and our other SEC filings are also available on our website and on the SEC’s website. The release includes reconciliations between GAAP and non-GAAP financial measures to be presented in this call.

I’d now like to turn the call over to our Chief Financial Officer, Tony Vuolo.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Seven types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Tony Vuolo

Thanks, Risa. Good afternoon everyone. Thank you for joining us today. On the call with me today are; Marty Wygod, Chairman of the Board; Wayne Gattinella, our President and CEO; and David Gang, Executive Vice President and Chief Technology Officer.

I will review our fourth quarter financial results and provide updated 2007 financial guidance. Wayne will then review the quarter and discuss our 2007 initiatives. And lastly, Marty will make some closing comments, and then we’ll open it up for Q&A.

Revenue for the December quarter was $80.6 million compared to $49.1 million last year, an increase of 64%. Advertising and sponsorship revenue increased 79%. Licensing revenue increased 57%, and publishing and other revenue increased 9%. Including acquisition-related revenues of $12.5 million for the December 2006 quarter and $1.3 million in the December 2005 quarter, revenue growth was 42% over the prior year.

Adjusted EBITDA for the December 2006 quarter was $22.3 million compared to $12.4 million last year, an increase of 79%. Adjusted EBITDA as a percent of revenue improved to 27.7% from 25.3% last year. Adjusted EBITDA per diluted share was $0.38 compared to $0.22 last year.

The adjusted EBITDA margin on incremental revenue was 31% for the December quarter. Excluding the impact of the acquisitions discussed earlier, the adjusted EBITDA margin on incremental revenue was about 45% in December quarter.

Online Services segment adjusted EBITDA increased 79% to $22.7 million or 29.9% of segment revenue compared to $12.7 million or 28.3% of segment revenue last year.

Publishing and Other Services adjusted EBITDA loss was $410,000 compared to a loss of $279,000 last year.

Net income for the quarter was $8.9 million or $0.15 per share, which includes $4.4 million of stock compensation expense related to the adoption of FAS 123R. Excluding the impact of FAS 123R, net income would have been $13.3 million or $0.23 per share. This compares with net income of $6.1 million or $0.11 per share a year ago.

Looking further at the revenue increase of 64%, advertising and sponsorship revenue increased 79% to $58.1 million, resulting primarily from internal growth and also from our acquisitions.

Acquisitions contributed a total of $9.5 million in revenue in December 2006 quarter and $933,000 in the December 2005 quarter. Excluding these revenues, advertising and sponsorship increased 54% compared to last year.

Private portal licensing revenue increased 57% to $17.3 million. Again, resulting primarily from internal growth and also from our acquisitions of Summex in June 2006 and Subimo in mid-December 2006, which together contributed $2.5 million of revenue during a quarter. Licensing revenues increased 34% compared to last year after adjusting for these revenues.

Publishing and Other Service revenue increased $4.5 million or 9%. Revenues from Conceptis offline CME acquired in December 2005 were 406,000 compared to $323,000 last year. Excluding these revenues, publishing and other revenues increased 7% from last year.

Looking at expenses, cost of operations was $29 million or 36% of revenue for the quarter, compared to $19 million or 38.7% of revenue last year. Included in cost of operations are non-cash expenses of $1.6 million compared to just $212,000 last year. The increase in non-cash expenses primarily related 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 was 34% compared to 38.3% last year, an improvement of 430 basis points.

Sales and marketing expense was $23.2 million or 28.9% of revenue, compared to $15.1 million or 30.7% of revenue last year. Included in sales and marketing are non-cash expenses of $4.2 million this year compared to $3.9 million last year. Excluding non-cash expenses, sales and marketing expense as a percent of revenue was 23.6% compared to 22.7% last year. This increase was due to the impact of acquisitions made during 2005 and 2006.

General and administrative expense was $14.4 million or 17.9% of revenue compared to $7.8 million or 15.8% of revenue last year. Included in G&A, are non-cash expenses of $2.6 million this year compared to $1.1 million last year. The increase in non-cash expenses relates primarily 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 14.7% compared to 13.7% last year.

Our general and administrative expenses in 2006 reflect public company related expenses, which increased in magnitude compared to last year when we had just completed our public offering, along with additional G&A expenses from the acquired companies.

Depreciation and amortization was $5 million compared to $2.7 million last year. This increase was due to a combination of the impact of acquisitions and increased level of capital expenditures.

Interest income totaled $962,000 for the quarter, a decline of $818,000 from last year due to cash used in acquisitions. The provision for income taxes was $965,000 for the quarter compared to $222,000 last year. The weighted average share count for the quarter was $58.4 million.

Turning to our balance sheet, cash and investments at December 31, 2006 was $54.2 million. As we previously announced on February 6, Emdeon reimbursed WebMD $140 million for the estimated utilization of our NOLs in 2006 in connection with Emdeon’s sale of certain of its businesses. This amount will be finalized when the 2006 federal tax returns are filed by Emdeon.

Operating cash flow for the quarter was $9.4 million compared to $9.6 million last year. Operating cash flow for the full year of 2006 was $52.8 million compared to $28.6 million last year, representing a nearly 100% conversion of adjusted EBITDA into operating cash flow for calendar year 2006.

We stated in our prior calls, quarterly operating cash flow can be impacted by the timing of cut-off of compensation accruals, other expense accruals, the billing and collection of accounts receivable, and reimbursements to Emdeon in relation to the end of the quarter.

Capital expenditures were $11 million for the December quarter.

Briefly summarizing the full year of 2006, revenues were $253.9 million, an increase of 50% over last year. Adjusting for the impact of acquisitions on 2006 and 2005 revenues, revenues increased 32% over the prior year.

Adjusted EBITDA was $53.1 million, an increase of 87% over the last year. The margin on incremental revenue for 2006 was 29%. Excluding the impact of acquisitions on 2005 and 2006 revenue and adjusted EBITDA and the impact of a $3.1 million one-time charge in 2005, the adjusted EBITDA margin on incremental revenue for 2006 was in excess of 40%.

Net income for 2006 was $4.5 million or $0.08 per share, which includes $21.8 million of stock-based compensation expense due to the January 1, 2006 adoption of FAS 123R. Without this, net income would have been $26.3 million or $0.45 per share compared to $7.7 million or $0.15 per share a year ago. We estimate that our NOL at the end of 2006 will be about $240 million after the utilization of some of our NOLs by our parent company.

Turning to 2007 financial guidance, our financial guidance considers among other things, the timing of expected delivery of programs or assumptions as to the timing of new sales activity, expenses related to the integration of our recent acquisitions 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, and the expansion of our sales and marketing organization.

We are increasing our 2007 revenue guidance to a range of $336 million to $352 million, reflecting revenue growth of approximately 32% to 39% over 2006. We stated in our last call, our 2007 revenue guidance assumes the loss of $5 million in annualized revenue and earnings related to the expected expiration of our agreement with AOL beginning in May 2007 and the elimination of offline CME revenue, which contributed $4 million of 2006 revenues.

Our 2007 revenue guidance assumes the following revenue distribution, approximately 68% to 69% from advertising and sponsorship, approximately 24% to 25% from the licensing of our private portal products, and approximately 7% from publishing and content syndication.

We are increasing our 2007 adjusted EBITDA guidance to a range of $77 million to $84 million or approximately 23% to 24% of revenue. Adjusted EBITDA per share is expected to be $1.28 to $1.40 per share for 2007. This represents an increase in adjusted EBITDA of 45% to 58% over 2006.

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.

Our 2007 guidance for net income is increasing to $21 million to $29 million or $0.35 to $0.48 per share compared to 2006 net income of $4.5 million or $0.08 per share. This assumes a weighted average share outstanding for 2007 of $60 million diluted shares.

The adjusted EBITDA margin on incremental revenue for 2007 is estimated to be 29% to 32%, which includes the impact of our recent Summex, Medsite, and Subimo acquisition, which we do not expect to collectively contribute significantly to adjusted EBITDA, as a result of both substantially lower historical margins and planned integration expenses to achieve synergies in the future.

Excluding the impact of the above acquisitions, we expect adjusted EBITDA margin on incremental revenue for 2007 to be greater than 45%. We expect capital expenditures for 2007 to be approximately $15 million to $20 million.

As you know, our business experiences seasonality and our quarterly revenue and earnings are always more weighted towards the third and fourth quarters. We stated in our last call, we expect the quarterly distribution of 2007 in revenues and adjusted EBITDA as a percentage of total year to be comparable to 2006.

We expect quarterly revenue distribution for 2007 to be approximately 20% to 21% in the March quarter, 22% to 23% in the June quarter, 26% to 27% in the September quarter, and 30% to 31% in the December quarter.

We expect the quarterly adjusted EBITDA distribution for 2007 to be approximately 13% in the March quarter, 18% in the June quarter, 27% in the September quarter, and 42% in the December quarter. These percentages very closely approximate the 2006 quarterly revenue and adjusted EBITDA distribution.

We expect adjusted EBITDA margins to be 14.5% to 16% in the March quarter, increasing to 31% to 32% by the December quarter. For the year, we expect adjusted EBITDA margins of approximately 23% to 24% compared to 21% in 2006.

A schedule summarizing quarterly and annual financial guidance as well as the reconciliation between GAAP and non-GAAP financial measures is attached to this press release and being furnished as an exhibit to our current report on Form 8-K being filed by the company today with the Securities and Exchange Commission.

I would now like to turn the call over to Wayne.

Wayne Gattinella

Thank you, Tony. The revenue and operating results announced today are powerful signs that WebMD is gaining increased momentum with both our users and our sponsors. WebMD is the most recognized and trusted brand of health information today and we continue to be the number one source of health information for both consumers and healthcare professionals.

Our advertising revenues during the fourth quarter, excluding the impact of new acquisitions made during the year increased by 54%. As large biopharmaceutical and consumer packaged goods companies continue to shift more of the consumer and professional marketing budgets online, we are expanding our marketing resources as well as the infrastructure necessary to drive continued success in each of our major markets.

Unique users to the WebMD network reached a record 35.5 million per month during the quarter, an increase of 38% over the same period last year. Page view traffic totaled 815 million pages during the quarter, an increase of 36% over the prior year. Over 95% of our page view traffic during the fourth quarter was generated on WebMD owned and operated sites.

During the quarter, we ran approximately 530 individual online sponsor programs as compared to approximately 319 programs in the prior year. Our online reach to physicians also continues to expand, as we average well over 1 million physician visits per month to our professional network.

During the quarter, 626,000 Continuing Medical Education or CME programs were completed on our professional sites, an increase of 48% compared to last year. For the full year 2006, we delivered a record 2 million CME programs online, which represent 60% growth over 2005.

At 12:01 AM today, we reached another major milestone in our company's history. After more than 18 months of investment in new technology development, design, data profiling, and content integration, we are proud to launch the next generation consumer health portal.

The new WebMD health portal establishes the next level of personalization, information, community and care that will dramatically enrich the user experience and further empower people to make more informed health decisions. The new WebMD health portal also creates expanded opportunities for sponsor promotion and will help boost overall WebMD traffic through improved external search engine optimization.

As part of our new portal, WebMD will now provide every user with access to their own personal health record as part of WebMD Health Manager, a free service that enable consumers to securely store and maintain their personal health history. The WebMD Health Manager provides the health assessment tools that enable people to learn their personal health score and take a more active role in managing their family's health.

There are many other new and exciting areas in the WebMD site that I hope you will take the time to experience for yourself. For example, our new advanced Symptom Checker features an interactive graphical interface linked to the clinical rules that help people pinpoint potential conditions that are associated with physical symptoms.

The new WebMD Health Search application delivers the highest level of relevant search results with the ability to refine a health-related query for symptoms, for diagnosis, for treatment and care, prevention and even other related conditions.

New WebMD Community Centers add to our more than 140 peer-to-peer health boards to help people benefit from the experiences of others with similar health needs. Our new expert blogs provide an even greater understanding of living with a particular health condition from some of the countries preeminent experts in the respective medical field.

And finally, more than 60 new health, wellness and lifestyle centers help to guide a person to the most current set of symptom, treatment and care information for each health topic. These guides were produced by the WebMD editorial staff in collaboration with our proprietary network of over 8,000 practicing doctors across the country.

More than 1,300 broadcast quality health video are now featured within our health centers, creating a more engaging experience for our users and a powerful new advertising format for our sponsors.

Turning to our private portals market, WebMd continues to extend its lead in providing large employer and health plans with the co-branded health and benefits portal for their employees and plan members.

During the fourth quarter, we implemented new online health platforms for new clients, including Archer Daniels Midland, HealthNet, Pacific Source Health Plans, APWU Health Plan, Consumers Energy, Dun & Bradstreet, and IAC/Interactive Corp. Our installed base of companies using our private portal platform at the end of 2006 totaled 99 organizations compared to 78 one year ago.

During the quarter, we completed the acquisition of Subimo, a provider of healthcare decision support services for large employers, health plans, and financial institutions. We are now combining the WebMD health and benefits platform with Subimo's advanced online health applications to expand our suite of products and services in the employer and health plan markets.

As a result of our acquisitions in the private portals business, we also have approximately 150 additional customers who now purchase standalone health decision services from WebMD.

As we look at the year ahead of us, we are very excited about the new opportunities that we see. In our online public portals markets, we will continue to increase the reach of our WebMD health network, leveraging the investment in our newly implemented content management platform to efficiently meet the growing demand of the online advertising markets.

We will expand our online capabilities in the physician marketplace as reductions in pharmaceutical detailed sales forces create greater urgency to replace their traditional marketing strategies. We will continue to invest in new applications that increase the utilization and engagement for our valued WebMD users.

Finally, we will build the business models that will expand our distribution in the emerging mobile information market and look to new markets outside the US to extend our highly regarded brand.

In the private portals markets, we will expand our health and benefits decision applications to support the continued migration of large employers and health plans to consumerism. We will extend the portability of the WebMD health record to facilitate universal consumer access, and begin to provide for the interoperability of our personal health record with electronic medical records at the point of care.

We will expand our lifestyle and health coaching services to address incremental care management market opportunities, and we will deliver new physician directory capabilities that provide consumers with greater cost and quality transparency when choosing a doctor.

In summary, our strong operating results this quarter further demonstrate that WebMD is uniquely positioned to capitalize on the market trends in our business, both in the public portal's market as biopharma and consumer packaged good company shift more of their marketing online, and in the private portals market, as major employers and health plans seek a consumer facing platform to support their transition to consumer-directed healthcare.

I would now like to turn it over to Marty Wygod for some closing comments.

Marty Wygod

Thanks, Wayne. A strong fourth quarter results reinforce our continued market leadership. With our user and page views, each growing over 35% year-over-year, and with continued strong growth expected throughout 2007, we continue to differentiate ourselves from the competition.

We have been able to grow our traffic in the key strategic medical specialties and conditions that are of highest value to our biopharma customers. The size and complexity of the programs that we are discussing with our pharma customers is increasing substantially.

Big Pharma is taking significant steps to reduce their detailed sales force and is actively looking for ways to reach physicians more effectively and cost efficiently. Pharma realizes the importance and challenge of implementing a coordinated communication strategy for both physicians and their patients.

All of this plays to our unique competitive advantages and reinforces the notion that we are reaching an important inflexion point. Our key customers are realizing the significance of the time that physicians in the right specialties and patients in the appropriate disease categories are spending online with us. We are uniquely positioned to capitalize on these market trends.

We have the assets in place and the resources necessary to capitalize on the sizable market opportunities and to leverage them into strong, sustainable revenue and earnings growth. We have about 200 million in cash, which is sufficient to finance our internal initiatives and to allow us to do additional capability acquisitions.

Regardless of whether we develop or acquire applications, we are unique in our ability to leverage these investments over our broad distribution in both the public and private portal markets. In 2006, we demonstrated that we were able to achieve margin expansion, despite investing significantly in our workforce and infrastructure to support our future growth.

And despite the negative short-term impact of acquiring companies with nominal earnings, as Tony earlier pointed out for 2006, excluding the impact of acquisitions, we achieved a margin on incremental revenues in excess of 40%.

We believe that this will increase over the coming years, as our revenues will grow substantially faster than our rate of additional expenditures. We see tremendous opportunities in the markets we currently serve and there are significant opportunities in other areas as well.

I would like to thank all of you for joining us today. And operator, at this time, we're ready to field questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Anthony Noto with Goldman Sachs.

Anthony Noto - Goldman Sachs

Thank you. I actually have three, if you don't mind. The first question is, you've seen an acceleration in the revenue growth year-over-year organically to 42% in the fourth quarter from 34% in the third, which is obviously positive, I was just wondering if you could give us a little bit of detail behind the drivers of that? Your page views look like they accelerated as well, was that the driver? That’s the first question.

The second question is could you give us some data points on the potential incremental benefits of the new portal in terms of page views per user or time per user, other sort of drivers of future revenue growth?

And then third question is you are driving a significant incremental margin in the fourth quarter here, I know you are backing out the acquisitions getting to over 40%. But just on a reported basis, including acquisitions, if you just back out stock-based competition of users who have reported EBITDA number ex-stock-based comp, it's getting to 27.7% margin. But you are not guiding to a 27.7% margin for next year. Why wouldn’t you at least be up and to the right from here? Thanks.

Wayne Gattinella

Anthony, this is Wayne. I will start on your first question and then we will go around the horn here. In terms of the growth of the fourth quarter, it's really from fundamental growth in the key markets that we are focused on. We saw very strong strength in the fourth quarter in our advertising markets coming from both biopharma and increasingly consumer packaged goods companies.

The inventory growth that we've continued to build, which is highly targeted and therefore highly valued to those kinds of companies, continues to attract more brands within the companies that we work with and more dollars within the brands that we've worked with over time. We have a sales force and a client facing organization that is not only highly experienced and highly skilled, but that we've continued to grow during 2006. And it's starting to pay off even more rapidly than it has in years past.

And then finally, I would tell you that the brand continues to gain momentum and strength in terms of its public reorganization as the most trusted source of health information. You continue to see the WebMD brand in the marketplace through CBS Nightly News, content syndication, through other partnered utilization, and through more references to WebMD, and general news and health and interest stories.

So I think that it's the combination of both our public portal assets and increased private portal strength that is reflected in the fourth quarter revenues.

And your second question in terms of what the measurable benefits of the new site are, I'm going to have David Gang speak to that who is sitting with us here today.

David Gang

Anthony, I think the way to look at the new site is in a couple of different key areas. One is, of course we have been investing in it for quite sometime, so they are part of the steady growth. We have gotten leads into the new site. We have put up a fair amount of new and engaging applications on the site. One is the new WebMD guide, which we talked about earlier.

Those are packages of all of the key information and key condition in wellness areas, covering over 3,000 articles that are knitted well together for consumers to browse through.

The Symptom Checker and the way that we engage people in asking questions and providing answers through series of refinements, will keep people engaged in this site even longer. And then the video library of over 1,300 videos across many different categories, it’s also put together, again, in easy browseable form, will allow users to stay on the site longer and enjoy the information that we provide with all of our videos.

So, one of the things we’ve really tried to achieve is to be able to increase the amount of time that people spend on this site, make it much easier for people to find more information on WebMD for first and subsequent visits, and then of course the consistent navigation and structure of our content will make it easier for users to use the site and search engines to actually pickup the content on the site.

So, I would expect that we would continue to see a positive momentum with both the unique users that are using the site and page view growth.

Wayne Gattinella

Tony, do you want to handle the margin part?

Tony Vuolo

Anthony, this is Tony Vuolo. In relation to your last question, the reason why -- in terms of the margin guidance, 27.7% of the fourth quarter versus guidance of 23% to 24% for the whole year for 2007, really was in the seasonality of our business. In 2007, we anticipate the December quarter to have roughly 42% of revenues, which is very comparable to what the percentage of revenues in 2006 is.

So, given the seasonality in our business, I'll get into some of the reasons for that seasonality in a minute, our revenues are much more weighted towards the back half of the year and our margins always start out lower and increase every quarter and reach a high point in the December quarter, and then kind of like readjust back down because of the seasonality.

That seasonality is really related to few different areas. Just focus on the December quarter versus the March quarter of the following year. Number one, our advertising and sponsorship revenues are typically highest there. Most of what we do is sponsored programs, but we always see a pick up in what we call media sales, which are really non-sponsored programs sales in the December quarter. And that typically declines in March quarter then starts to build up again.

Number two, the December quarter is typically a high-volume quarter for our educational sponsored programs around CME, because most of our physicians' CME monitoring years correspond to a calendar year. So, those programs are more weighted towards the back half of the year. And at least for our customer base, they tend to take the first quarter and set their budgets and then really start to spend the money and ramp it up for the end of the first quarter, and reaching a crescendo in the fourth quarter.

And finally, our publishing revenues are typically higher in the fourth quarter because of just the timing of when we release some of our annual publications, which is tied to revenue recognition and they aren't in Q1. So, I think when you look at margins, you really got to look at either each quarter compared to its corresponding quarter in the previous year or you got to look at the whole year. So, our adjusted EBITDA margins for 2006 were about 21% and our guidance has that increasing from 23% to 24% in 2007.

Anthony Noto - Goldman Sachs

Great. Thanks for the additional clarity.

Operator

Our next question comes from Corey Tobin with William Blair.

Corey Tobin - William Blair

Hi, good afternoon, fantastic quarter, congratulations. A couple of quick questions, one, I know you don’t give a backlog number, but I wanted to just see if there is any commentary you could provide with respect to -- as you guys look at backlog, where does that stand with respect to the new '07 guidance. And any kind of commentary you could give us with respect to confidence in the '07 guidance would be appreciated.

And then second question, any update in terms of linking the personal health record that is now available [within] the sites with the various different EMRs that are out there in the marketplace today? Thanks.

Wayne Gattinella

Corey, we don't give a so-called backlog number, and I think you can look at two things. In the fourth quarter of 2006, we had a very strong sales period, particularly in the public portals side of our markets, so that’s an activity that didn't necessarily book in the fourth quarter, but that were advanced sales going into 2007. So, it was a strong sales period for us and we see that as a great indicator for how we view 2007 activity.

In the private portals market, we are really in sort of the early stage of our sales cycle, because most of our employer and health plan programs implement during the third and early part of the fourth quarter. So that sales season is very busy right now, but in that case, you are really talking about programs that again typically you are going to execute some time six months from today. But again, we see the market is very active. We see the growth of our network and reach, making ourselves more attractive to even large consumer package advertisers, who demand large reach in their own advertising programs, and again we see that as great signs for our 2007 growth.

In terms of your second question, how we intend to link our personal health record to electronic medical records, as I alluded to in our speaking notes, it is part of our strategy for 2007. We have some particular marketing plans that were just not yet prepared to disclose in detail, but that are designed to both link WebMD's large scale of personal health records that are out there today at the point of care, as well as create greater portability of that information securely on both our private portal license site as well as the public WebMD portal, and we expect to be able to provide more information on those plans as the year unfolds.

Corey Tobin - William Blair

So, maybe towards the second half of the year, look for an update on that?

Wayne Gattinella

Exactly.

Corey Tobin - William Blair

And then final, sorry, one other one, if I may, any update on the CMS pilot program?

Wayne Gattinella

The CMS program, which is the pilot that we were awarded in a summer of last year to will provide personal health records for a sampling of Medicare recipients, went very well. The program concluded at the end of 2006 and right now it’s under review within the center for Medicare services, as we wait to see what their direction is as the next step.

Corey Tobin - William Blair

Great. And do you have any anticipated timing at this point or is it still too earlier?

Wayne Gattinella

I can't anticipate what the government is going to do there yet. I just know that it's under review right now.

Corey Tobin - William Blair

Great, congratulation again, thanks.

Tony Vuolo

Thank you.

Operator

Our next question comes from Mark Mahaney with Citigroup.

Matthew Rycheck - Citigroup

Hi, this is actually [Matthew Rycheck] for Mark. Couple of questions, first just a follow-up on the new site launch. What kind of impact or how material do you think it will be in terms of search rank, I know in the past, in WebMD the key property hasn't shown up very highly, and will it have a material impact, will that be something that we see over the next couple of quarters?

And then secondly, on international expansion, I think that’s the first time I have heard you mention that. I am just wondering sort of which geographies and would that be primarily on the advertising side only or do you have plans to expand on the portal side there, the licensing side, that is? Thank you.

Wayne Gattinella

Yeah. David, do you want to handle the search ranking question?

David Gang

This David Gang, on the search question, we have actually done a lot work over the course of 2006 to improve search ranking and WebMD has consistently shown up every month a little bit better in both Google and Yahoo and we're pleased with this. We obviously don’t control their algorithms, so I would say that first off we paid attention to user experience with the new site. Secondly, we paid attention to optimization for what we believe, certainly, will bring us more organic search traffic and we do think we are going to see a continued lift in that, even more so than we did last year. But it has been a consistent steady rise through the course of 2006 going into 2007.

Marty Wygod

On international, we are currently evaluating and conducting meetings with several potential strategic partners in different countries as well as potential financial partners that are interested in financing our expansion internationally. It's still in an early stage, but we think in the second half of the year, we will be able to explain what our strategy is going to be probably by country, as I said, later on this year.

Matthew Rycheck - Citigroup

Great. Thanks very much.

Operator

Our next question comes from Rob Kelly with Citigroup.

Rob Kelly - Citigroup.

Would you comment as to future competition, and who in all probability would be your strongest competitors? And regarding your public and private portals, can you discuss the strongest advantages versus other players and any barriers to entry that you have created?

Wayne Gattinella

Yeah, this is Wayne, let me start. We built the leading brand of health information for consumers and for physicians over more than ten years now. WebMD launched as a brand ten years ago, Medscape actually more than ten years ago, and the position that we play in the marketplace, we think gives, us a tremendous lead over any new entrants into the market.

We have got tremendous experience with respect to our management team, both in healthcare as well as online services and we have more than 1,000 employees company-wide who are focused on and delivering really one core asset and that is the most relevant and useable health information.

With that said, certainly the business market is large enough to support multiple players. We fully expect to see multiple players enter the market again as traditional forms of marketing in the healthcare space moves online. But we feel that we have got a tremendous lead to be able to continue to lead in this market, and it's certainly something that we, from an innovation and planning standpoint, are focused on maintaining.

Tony Vuolo

I also think it's important to realize that this whole area is totally underpenetrated. You have pharma, biotech, and CPG spending more than $22 billion currently to promote their products to physicians and to consumers. Our real competition today is against the offline, the more traditional methods of education and promotion.

On the public portal, I think one thing that's extremely important is the powerful database that tracks the information seeking behavior of hundreds of thousands of physicians, which we can uniquely advantage with our eDetailing services that we will be rolling out in the second half of this year. There were more than 2 million CME programs that were completed in our site last year, but there's more than five to ten times that number of healthcare professionals that take these programs but do not bother to request the credits.

On the private portal side, one thing that I think is not yet appreciated at all by the Street is the exclusive rights that WebMD has in relation to Emdeon business services. That today is responsible for more than 70% of the electronic medical claims between providers and payers in this space. We have the exclusive rights to this.

So, we’re in a unique position to populate the consumers that come online with their personal health records, with claims from the business services. Our competitors will have to go to the 500 or 1,000 payers out there to try to get from them this data and then try to populate it, if they are able to, on to these different programs. I think it's going to be very difficult for someone to really compete in these specific areas over the next few years.

Rob Kelly - Citigroup.

Thanks very much.

Operator

Our next question comes from Heath Terry with Credit Suisse

Heath Terry - Credit Suisse

Great. I was wondering if you could talk just a little bit about what's implied in you guidance in terms of the impact of the site architecture, both as a catalyst for revenue growth and then also in terms of cost savings now that you are past this big spending phase on getting the site rearchitectured?

Wayne Gattinella

Yeah, this is Wayne. Our revenues in 2007 anticipate largely current, steady-state strategies. Meaning that, the new site launch was part of our business plan. It’s factored into our expectations for continued reach and distribution in the market. It's factored for the ability to monetize new services that the former platform couldn’t support like video programming, like other rich media, like some of the new applications that we have built.

But I would also say that, the platform from a technology standpoint will give us the ability to develop new services faster and innovate more quickly, and those sorts of future services are not factored into our 2007 business model. So, our ability to move quickly on that is something that we are certainly geared to do.

Heath Terry - Credit Suisse

Okay. And then from a cost perspective, what kind of number should we expect or what should we see on the cost side, now that you are not having to spend to rearchitecture the site, will those resources simply be redirected to developing the new services that you are talking about, or will there actually be a dollar-for-dollar decrease in the amount of expense associated with that?

Wayne Gattinella

What we just launched was a platform that for the moment is supporting WebMD.com, and our goal is to take the other consumer sites that have been acquired over the last 24-month period, and move them on to the new platform. And then, also during 2007, take our professional sites Medscape as well as several of the other newly acquired sites and move them to a common platform.

The goal is, as we exit 2007, to have all of our content, all of our assets sitting on a common technology, serving capability that will create not only greater efficiency for us in the future, but give us the ability to interlink and use some of the assets that today are sitting in separate sort of bins if you will and be able to leverage them through interlinking across our entire network.

Heath Terry - Credit Suisse

Great. Thank you.

Operator

Our next question comes from Brian Pitz with Banc of America.

Brian Pitz - Banc of America

Thank you. Looks like you are seeing advertising revenue decelerating a little bit, it's about 37% year-over-year for '07, and that compares to 54% in '06. Can you provide some color on this despite seeing such strong demand for online pharma advertising and then also from a micro standpoint, would you comment on the actual penetration of online ad dollars within pharma company budgets, and what percent of their budgets do you think they could eventually be leveraging online over time? Thanks.

Tony Vuolo

Yeah, Brian, I think you are comparing a little bit of apples and oranges. The 54% increase in advertising sponsorship weighted just to the fourth quarter, it was lower than that for the year. And as I have discussed in some of my comments previously, our revenues are putting a very heavily weighted towards the fourth quarter, particularly on the advertising and sponsorship line. So it's kind of comparing two different percentages in [hours]. Wayne, do you want to take the second half of that?

Wayne Gattinella

Yeah. I think, with respect to what we see on the pharmaceutical side of the business, there is still, relatively speaking, a small amount of the marketing dollars that are reflected online. Our estimate is that less than 5% of total pharma marketing spend is online. So, why have we been able to certainly demonstrate strong growth in that marketplace? We strongly believe that the future holds the potential for much stronger growth. And I think you have got two key pressure points in that market that imply that that point in time is coming soon.

On the consumer side, there continues to be tremendous pressure on pharmaceutical companies to move away from more the recent 30-second DTC TV advertising format into more educational format that have the ability to communicate not only the benefits of their products but also the potential risk. And we believe that plays well into what we do as well as the online, their Internet depth of content that we can deliver.

On the professional side, where there are even more dollars spent, the recent announcements by Pfizer and now other pharmaceutical companies to cut back on traditional sales force means of pharmaceutical marketing also plays well for us as the effectiveness and efficiency of their detailed sales approaches, are winnowing. And again, we see that as a potential inflexion point as they need to move those marketing tactics to where the audience is and that is the Internet and our WebMD.

Brian Pitz - Banc of America

Great, thanks.

Operator

Our next question comes from Jack Kelly with Smith Barney.

Jack Kelly - Smith Barney

Yes, what is the correlation between page views, unique users, and you revenues and earnings please?

Wayne Gattinella

This is Wayne, Jack. As a media asset, certainly our reach, our ability to demonstrate to large advertiser that not only do we have a highly motivated and targeted audience but that the numbers are meaningful to make a difference to their own businesses, the growth in our users and more importantly the page views that they consume is an important metric to be able to attract more business.

Technically, it’s the page views that we are monetizing as we build custom educational areas for large companies to be able to reach their target markets. When we talk about the big numbers, 35 million users per month, the more important numbers become the subsets of that, that is typically a company's product is not trying to reach all 35 million but it's trying to reach a piece of that audience.

And the point is that as we are now reaching critical mass, it means that the subsets are also large and meaningful. So we can deliver very meaningful results to companies whose products may be narrowly focused on a particular condition or lifestyle segments, or even more broadly, for example, to our men's health segment or women's health segment.

Similarly, in the professional side, with more than one million physician visits, we can demonstrate important reach to the specialties within that number. And again, the large pharma and medical device companies typically in their product strategies are trying to reach a particular specialty. So, we are able to demonstrate important reach and effectiveness even in the subsets within the specialties that they are trying to target.

Marty Wygod

With the dramatic increase in page views, we have not and we will not have go out like other companies and purchase traffic to deliver on contracts, which makes the quality of what we do substantially higher than anyone else, and make us much more comfortable on delivering the return on investment to the pharmaceutical industry.

Jack Kelly - Smith Barney

I noticed Steve Case created a bit of media excitement with news of revolution and health, new service offerings, and assuming they get squared away, can they become a viable competitor?

Wayne Gattinella

Well, again, I think that we've got a tremendous lead. We have the most recognized and trusted brand of health information in the market. We have more than 10 years focused on the business that WebMD and Medscape has been focused on. We have the largest healthcare audience online. We have more than 1,000 people focused in this area with new health services continuing to evolve. So, it's a market that can support more than one company for sure, but we feel that we have a tremendous lead as new entrants certainly will be coming into the marketplace.

Jack Kelly - Smith Barney

Thank you.

Operator

Our next question comes from Sandy Draper with JMP Securities.

Sandy Draper - JMP Securities

Thanks and good afternoon. Wayne, I wanted to see if you could just comment a little bit either qualitatively or quantitatively about the penetration on the private portal side in terms of all the different things you offer out there. What I am trying to get a sense of is, the growth opportunity of adding new customers versus the growth opportunity of going back to the customers you have signed over the past few years in keeping and adding on more products as existing customers? Thanks.

Wayne Gattinella

Yeah. And it's really both ends, Sandy. We continue to build what we refer to as our health and benefits platform presence in the market and that's where a large enterprise is licensing access to WebMD's full decision support services that begins with profiling an employee based on health history and then presenting decision supports services that leverage that personal health profile to help people make more informed choices.

But in addition to the platform, we have been moving into other services that could be both added on to the platform or even sold as standalone services. So, for example, our quality services product that began with the acquisition of HealthShare a couple of years ago is gaining strength in the hospital market, in the health plan market and is an add-on into our employer platform market.

We acquired Summex, the health coaching organization last June. And again, with health coaching now pushing us more towards the behavioral management opportunity, we're able to build health coaching as an adjunct and add-on to our platforms, but also we're pursuing many standalone opportunities, where coaching services is being sold in separately.

And now finally, with Subimo coming into our business late in 2006, they were primarily focused on standalone services. We think that's still a good strategy to maintain to both bring in new customers that perhaps aren't ready for the entire platform and use that as a way into increasing market both for our standalone services but for our platform. So, we're cross-selling both ways.

We are adding services to our existing set of platform customers and we are continuing to sell standalone services to clients who aren't yet ready for the full platform. And we really see both strategies as a means to a common end, where we want to really be the best interface that helps employees and health plan members to make the best informed health choices.

Sandy Draper - JMP Securities

Great, thanks. That’s helpful commentary, Wayne.

Wayne Gattinella

Yeah.

Marty Wygod

I think it's important to understand that we're only into February and we just introduced our new site today. We're trying to give you guidance for this year and going forward and as we get more information, as we get future into the sales year, as our customer base is able to appreciate what we have in place, if there's reason for it, we will be updating this at the end of the first quarter.

Operator

And our last question comes from Anthony Petrone with the Maxim Group.

Anthony Petrone - Maxim Group

Great, thanks. Just a follow-up on the trends in the large pharma, have you seen any impacts thus far, I know these announcements started may towards the second half of '06, have you seen any positive impact from the shift in sales and marketing spend there yet, or if not, when do you expect to see that shift?

Wayne Gattinella

Anthony, its Wayne. Again, we saw a strong fourth quarter in our selling season, the fourth quarter kicks off our sales season for the following year. So, there is a lot of activity in the market right now. It's still early in the year. I can tell you that I have personally been in front of several major pharmaceutical companies since the first of this year at the highest levels of management. I think we are seeing an increased interest at the higher levels of management than perhaps we had seen in the past where it was typically at the brand manager level.

And again, it's not surprising because they have been fairly open about the need to change their marketing mix and channel strategy from the traditional, either sale force approach or even the direct-to-consumer broadcast advertising approach. So, the discussions are very active. I don’t want to, at this point, speculate what that’s going to mean in terms of specific business, but we are at the table with many high-level discussions inside of these large companies today.

Anthony Petrone - Maxim Group

Thank you very much.

Wayne Gattinella

Thank you for joining us today.

Risa Fisher

And as a reminder, if necessary, there is a replay available of this call, which can be accessed toll free at 866-485-6430, or if you are calling from outside the US at 203-369-1629. There is no pass code required. There's also the webcast replay available on our website as well. Thank you for joining us today.

Operator

That concludes the conference. You may disconnect at this time.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Six types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: WebMD Health Q4 2006 Earnings Call Transcript
This Transcript
All Transcripts