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Emdeon Corporation (HLTH)

Q4 2006 Earnings Call

February 22, 2007 4:45 pm ET

Executives

Risa Fisher - Vice President, IR

Kevin Cameron - CEO

Marty Wygod - Chairman

Mark Funston - CFO

Wayne Gattinella - CEO and President, WebMD

Analysts

Alex Alvarez - Goldman Sachs

Jeffrey Harris - Serials Capital Management

Rob Kelly - Citigroup

Anthony Petrone - Maxim Group

Richard Adams - SAC Capital

Jerry - William Blair

Duane Pfennigwerth - Raymond James

Presentation

Operator

Good afternoon and welcome to Emdeon Corporation's December 2006 Quarterly Conference Call. Your lines will on a listen-only mode until the question-and-answer session of the conference. Today's conference is recorded. I will now turn the call over to Risa Fisher, Vice President of Investor Relations.

Risa Fisher

Good afternoon and welcome to Emdeon's fourth quarter earnings call. I will read the following statements concerning forward-looking disclosures. All statement made today other than statements of historical fact 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 budgets, other market opportunities, and our ability to capitalize on them, and the amount and timing of the benefits expected from acquisitions and other transactions from new products and services, and from other potential sources of additional revenue.

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 product and services, our ability to develop and maintain relationships with healthcare industry participants, including healthcare payers and providers and vendors of services to those payers and providers, difficulties in integrating acquired businesses, changes in economic, political, or regulatory conditions, or other trends affecting the healthcare, Internet, information technology, and plastics industries, including matters relating to HIPAA.

Many of these risks and uncertainties are described in our SEC filings. Except as required by law, we do not undertake any obligation to update our forward-looking statements to reflect future events or circumstances. The earnings release issued today is available on our website at www.emdeon.com, in the "About Emdeon" 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 would now like to turn the call over to our Chief Executive Officer, Kevin Cameron.

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Kevin Cameron

Thanks, Risa. Good afternoon everybody, and thank you for joining us today. Joining me on the call today are Marty Wygod, Chairman of the Board; Mark Funston, Chief Financial Officer; Wayne Gattinella, CEO and President of WebMD; and Tony Vuolo, CFO of WebMD.

After may opening comments, Mark will review our financial results. I will then add some color on the business segments. Mark will review our guidance for '07, and Marty will make some closing comments before we open it up for Q&A.

2006 was a year of significant accomplishments for Emdeon. And I'm very pleased with the results. We substantially repositioned the company, selling two major divisions and repurchasing a significant portion of our shares. From an operating perspective, we turned in record results across all of our segments, as well as Emdeon Business Services, and we downsized our corporate infrastructure and costs. I want to thank all of our employees who went the extra mile and really win some in 2006 to make all of this happen.

Turning more specifically to the fourth quarter. During the fourth quarter, we completed two significant transactions. On November 16th, we sold 52% of our Emdeon Business Services segment to an affiliate of General Atlantic LLC. We received approximately $1.2 billion in cash and retained a 48% interest in business services, which is referred to in our financial statements as EBS Master LLC. The transaction was structured, so Emdeon and General Atlantic each owned interest in a limited liability company, which owns the entities comprising Emdeon Business Services, excluding ViPS.

The acquisition was financed with approximately $925 million in bank debt. And this bank debt is a liability of the LLC, and neither an obligation of nor guaranteed by Emdeon Corporation or its subsidiaries. While General Atlantic owns 52% of Business Services, Emdeon and General Atlantic have an equal number of board members. This transaction allowed us to both realize significant cash proceeds, as well as to participate in the future performance of the business through our remaining 48% ownership stake.

The proceeds from the Business Services transaction were used primarily to complete our self-tender offer on September 4. Emdeon purchased approximately 129.2 million shares of its common stock at $12 per share for a total cost of about $1.55 billion. We reduced our outstanding shares by about 45% through the self-tender.

By reducing Emdeon's share count significantly and simplifying Emdeon's corporate structure, Emdeon's shareholders now effectively, substantially participate in the performance of WebMD, Emdeon's primary asset.

At this time, I'd like to introduce and turn the call over to Mark Funston, our Chief Financial Officer. Mark joined us in November, following the departure of Andy Corbin, who is now heading up the Practice Services business we sold to Sage. Prior to joining Emdeon, Mark had over 14 years experience as Chief Financial Officer of two public companies. Most recently, Mark served as Executive Vice President and Chief Financial Officer of Group 1 Software until its acquisition by Pitney Bowes. We are very happy to have Mark on board.

And now, I'll turn the call over to Mark.

Mark Funston

Thanks, Kevin. As a reminder, our press release including comparative financials and summary of our 2007 guidance is available on our website. In comparing Emdeon's results for the quarter and year ended December 31, 2006 with prior year periods, please note the following.

As we noted last quarter, Emdeon's Practice Services is treated as a discontinued operation as results are recorded on the line, income from discontinued operations net of tax for all periods presented in our financial statements. That line also includes for the year ended December 31, 2006, a gain of $353.2 million net of income taxes on the sale of Emdeon Practice Services.

Unlike Practice Services, Emdeon Business Services is not treated as a discontinued operation because Emdeon retained a significant ownership interest. Accordingly, Emdeon business services is included in our consolidated financial results for the first 47 days of the fourth quarter until the date the transaction was completed and for the entire prior period.

For the remaining 45 days of the fourth quarter, Emdeon's 48% portion of EBS' income is reflected in the line item, equity in earnings of EBS Master LLC. Because of this presentation, the EBS segment results as well as consolidated results are not comparable on a year-over-year basis.

Emdeon's segment presentation reflects the reclassification of ViPS as a separate business segment. Prior to the third quarter of 2006, ViPS had been reported as part of Emdeon's Business Services segment. Prior period results have been reclassified to reflect the current presentation.

The tender offer that was completed in 2006 reduced the share count by 129.2 million shares. However, on a weighted average basis, only a reduction of approximately 38 million shares for the quarter and 9.6 million shares for the year ended December 31st, 2006, are reflected in the earnings per share calculation.

For the quarter and year ended December 31st, 2006, the convertible notes are dilutive to earning per share. And therefore, in accordance with GAAP, the calculation of diluted earnings per share assumes the conversion of the notes in the 42 million shares of common stock, as of the beginning of the applicable periods. And income from continuing operations, net income has been adjusted to exclude the interest expense associated with the notes. Approximately, $4.6 million and $18.4 million for quarter and year ended December 31st, 2006, respectively.

As you will notice, this has a disproportionately negative impact on the calculation of adjusted EBITDA per share because interest expense is already excluded from this measure.

Looking now to our segment results. Specifically, Emdeon Business Services segment revenue was $103.1 million. Solely for purposes of permitting comparison of these results to the prior period, assuming the addition of EBS Master LLC revenue for the 45 days following the sale, segment revenue would have been approximately $192 million, which represents an increase of 11.4% over the prior year. Primarily driven by growth in electronic transactions, paper remittances, and payments, patient statements, and revenue cycle management solutions.

Emdeon Business Services earnings before interest, taxes, non-cash, and other items, which we refer to as adjusted EBITDA, was $25.4 million. And assuming the addition of EBS Master LLC adjusted EBITDA for the 45 days following the sale, after taking into account the LLC's cost of operations and the relevant adjustments, which differ from those applicable to Emdeon, segment adjusted EBITDA would have been approximately $44.4 million. An increase of 26.1% over the prior year. Primarily driven by the higher revenues.

Business Services Segment revenue for 2006 through the date of the sale on November 16th, 2006, was $661.1 million. And segment adjusted EBITDA was $152.9 million. Again, for purposes of permitting comparison to the prior period, segment revenue would have been $750 million compared to $689.3 million in 2005, or an increase of 8.8%. And segment adjusted EBITDA would have been $172 million compared to the $138.5 million in 2005, or an increase of 24.2%, using the same adjustments noted above.

WebMD segment revenue was $80.6 million for the December quarter, compared to $49.1 million a year ago, an increase of 64.1% driven by strong growth in online services. WebMD segment adjusted EBITDA was $22.3 million versus $12.4 million in the prior year, an increase of 79.3% driven by the increase in revenues. Operating margins were 27.7% compared to 25.3% last year.

For the full year of 2006, WebMD segment revenue was $253.9 million, compared to $168.2 million in 2005, an increase of 50.9%. And segment adjusted EBITDA was $53.1 million in 2006, compared to $27.5 million in 2005, an increase of 92.7%.

ViPS segment revenue was $25.3 million for the December quarter compared to $24 million a year ago, an increase of 5.6%, reflecting an increase in consulting services and license revenues. ViPS segment adjusted EBITDA was $5 million versus $4.9 million in the prior year, an increase of 1.8%. Operating margins decreased slightly to 19.8% from 20.5% last year, primarily as a result of revenue mix.

For the full year of 2006, ViPS segment revenue was $98.9 million, compared to $90.3 million in 2005, or an increase of 9.5%. And segment adjusted EBITDA was $20.5 million in 2006, compared to $16.9 million in 2005, an increase of 21.4%.

Porex segment revenue was $21.2 million for the December quarter, compared $18.5 million a year ago, an increase of 14.6%, driven primarily by sales of industrial and other products in Europe, and healthcare and writing products in United States.

Porex segment adjusted EBITDA was $6.2 million versus $4.7 million in the prior year, an increase of 33.4%. Operating margins were 29.5% compared 25.3% last year. The increase in EBITDA and operating margins were primarily driven by increased revenue.

For the full year of 2006, Porex revenue was $85.7 million, compared to $79.1 million in 2005, an increase of 8.3%. And segment adjusted EBITDA was $25 million in 2006, compared to $22.5 million in 2005, an increase of 10.9%.

Corporate expense for the December, 2006 quarter was $9.8 million or approximately 4.3% of consolidated revenue, compared to $13.6 million or approximately 5.2% of consolidated revenue last year. For the full year of 2006, corporate expense was $43.4 million, compared to $49.5 million in 2005. Please note that our corporate expense in the fourth quarter includes approximately $700,000 in severance charges from our corporate downsizing.

Net interest income for the quarter was $12.2 million, compared with $3.5 million in the fourth quarter of the prior year. The increase in interest income is primarily due to interest earned on the proceeds from the EBS transaction and the sale of EPS.

During the quarter, we recognized a pretax gain from the EBS transaction, totaling $352.3 million. Income tax expense for the quarter was $44.1 million. Of which, approximately $24 million is payable in cash and the balance predominantly relates to the release of valuation allowance charge to goodwill. The tax provision is primarily related to the gain from the EBS transactions.

I would like to highlight two other items that impact income from continuing operations. First, while we do not project or include expenses related to the DOJ investigation in our guidance, our fourth quarter results for 2006 did include $738,000 in expenses related to this investigation, compared with $3.5 million compared to the same period last year.

Second, our December, 2006 results include $9.7 million of stock-based compensation expense, compared with $1.2 million for the same period last year, reflecting our adoption of SFAS 123R.

In summary, consolidated revenue for the December 2006 quarter was $230.1 million. Adjusted EBITDA was $49.2 million or $0.16 per share. Income from continuing operations was $345.5 million or $1.14 per share, and net income was $346.4 million or $1.14 per share. Again included in income from continuing operations is a gain of $352.3 million related to the EBS transactions.

Consolidated cost of operations was $117.8 million for the December 2006 quarter, which includes $1.9 million of non-cash stock compensation expense. Excluding the impact of the stock compensation expense, cost of operations as a percentage of revenue was 50.4% in the December 2006 quarter, compared to 57.1% a year ago.

Consolidated sales, marketing, general and administrative expense was $71.4 million or 31% of revenues for the December 2006 quarter. Excluding non-cash items related to stock compensation and our non-cash advertising consolidated sales, marketing, general, and administrative expense was $61.1 million or 26.6% of revenues for the December 2006 quarter, compared to $60.5 million or 22.9% a year ago.

Turning to our balance sheet. When looking at our balance sheet, you will note a new asset account titled 'Due from EBS Master LLC' with a balance of $30.7 million as of December 31, 2006. This balance has been paid in full since year end, and primarily related to true-up provisions set forth in the agreements relating to the sale of EBS.

As of December 31, 2006, Emdeon had approximately $648.8 million in cash and short-term investments on a consolidated basis, including $54.2 million in cash and short-term investments held by WebMD.

On February 6, 2007, Emdeon transferred $140 million to WebMD as reimbursement for Emdeon's utilization of a portion of WebMD's net operating loss carry forwards in connection with the Emdeon Practice Services and Emdeon Business Services sales transactions. This payment was made in accordance with the tax-sharing agreement between the two companies. The amount is an estimate and is subject to adjustment in connection with filing the actual tax returns.

Operating cash flow from continuing operations in the December 2006 quarter was $37.2 million. As we have previously stated, our operating cash flows can also be negatively or positively impacted by the timing of the cutoff compensation accruals, other expense accruals, and a collection of receivables in relation to the quarter's end.

Other items impacting our cash balance during the quarter included the receipt of $1.2 billion from the EBS transaction, the purchase of approximately 129 million shares through our tender offer for a total of $1.55 billion, capital expenditures of $16.7 million, and the receipt of approximately $88 million from exercises of Emdeon stock options.

In particular, we experienced a sharp increase in exercise activity of Emdeon stock options, this quarter and during the first 45 days of 2007 because most of the stock options held by employees of the Practice Services and Business Services segments expired 90 days from the transaction closing dates.

Approximately, 11.3 million Emdeon shares were issued as a result of these option exercises during the fourth quarter, which results in a total outstanding share count of $162 million as of December 31st, 2006. As of today, there are approximately 167 million common shares outstanding because of additional options exercises between 12/31/2006 and today.

As a reminder, these numbers do not include the 10.6 million shares into which Caliper's preferred stock is convertible.

To quickly summarize the results for the full year 2006, revenues were $1.1 billion. Adjusted EBITDA was approximately $208.1 million or $0.63 per share. Income from continuing operations was $396.7 million, or $1.25 per share. And net income was $767.7 million or $2.37 per share. As we've stated previously, net income included both the $352.3 million gain from the EBS transaction, as well as $371.1 million of income from discontinued operations of Practice Services, which includes the gain on the sale of that business.

Other notable items for the full year 2006. Capital expenditures were $54.9 million, compared to $51.3 million in 2005. Cash flow from continuing operations was $173 million, compared to $128.9 million last year. Stock repurchases in 2006, including the tender offer completed in December, totaled 137.5 million shares at a total cost of $1.635 billion. Proceeds from stock option exercises were $156.1 million. As of December 31st, 2006, the net operating loss carry forwards were $1.2 billion. Of which, $240 million is attributable to WebMD.

And finally, as previously mentioned, net proceeds from the EBS transaction and the sale of Practice Services were $1.2 billion and $522.6 million respectively, excluding $35 million from the sale of EPS that is being held in escrow.

Now, I'd like to turn it back to Kevin to give you some additional color on the individual business segments.

Kevin Cameron

Thank you, Mark. Our 84% owned subsidiary WebMD announced its quarterly results and held a separate conference call yesterday. And although, we will be reviewing the highlights of their results today, I would encourage you to listen to a replay of WebMD's conference call, which is available on www.wbmd.com.

WebMD is the most recognized and trusted brand of health information today and continues to be the number one source of health information for both consumers and health care professionals. WebMD reported strong fourth quarter financial and operating results with unique users and page views, each growing over 35% from the prior year period. WebMD continues to differentiate itself from the competition.

WebMD's online reach to physicians continued to expand with well over 1 million physician visits per month, occurring on its professional network. During the quarter, 626,000 continuing medical education or CME programs were completed on WebMD's professional sites, an increase of 48% compared to last year. For the full year 2006, WebMD delivered a record 2 million CME programs online, which represents 60% growth over the prior year.

WebMD reached a major milestone yesterday. After more than 18 months of investment in new technology development, design, data profiling, and content integration, WebMD proudly launched 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.

There are many other new and exciting areas on the WebMD site, and I hope you will take the time to experience for yourself, including the new advanced Symptom Checker, new WebMD Health Search, new WebMD Community Centers, and Expert Blogs, as well as more than 60 new health, wellness, and lifestyle centers. There are more than 1,300 broadcast quality health videos now featured within the centers, creating a more engaging user experience and a powerful new advertising format for our sponsors.

In its private portals market, WebMD continues to extend its lead in providing large employers and health plans with a co-branded health and benefit portal for their employees and plan members.

During the fourth quarter, WebMD 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. WebMD's installed base of companies using its private portal platform as of the end of 2006 totaled 99 organizations compared to 78 a year ago.

Looking at 2007, we are very excited about the new opportunities for WebMD. In its online public portals markets, WebMD will continue to increase the reach of its WebMD health network, leveraging the investment in its newly implemented content management platform to efficiently meet the growing demands of the online advertising markets.

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

Finally, WebMD will build the business models that expand its distribution in the emerging mobile information market and look to new markets outside the United States to extend its highly regarded brand.

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

WebMD will expand its lifestyle and health coaching services to address incremental care management market opportunities, and WebMD will deliver new physician directory capabilities to provide consumers with greater cost and quality transparency when choosing a doctor. We're very excited about the near-and long-term growth opportunities for WebMD.

Turning our ViPS business segment. ViPS provides healthcare, data management, analytics, decision support, and process automation solutions and related information technology services to government, Blue Cross Blue Shield, and commercial healthcare payers. ViPS solutions and services help its clients improve patient outcomes, increase customer satisfaction, and reduce costs.

ViPS Government Solutions Group continues to be a vendor of choice in the Medicare arena and throughout 2006 grew through a number of new contracts, task orders, and contract extensions with a center for Medicare and Medicaid services.

CMS, serving as both a prime and/or partner systems integrator, ViPS grew its presence within the public sector. Today, ViPS is working on a number of key projects, which include the Retiree Drug Subsidy program, the Medicare Secondary Payer Recovery system, Medicare Eligibility Integration, and the ViPS Medicare System.

ViPS recently concluded a pilot project funded by CMS using the WebMD Personal Health Record. This CMS study tested the feasibility of using Medicare data with impersonal health records. As prime contractor, ViPS partnered with WebMD on the study. It focused on such critical factors as how to populate and test the viability of integrating Personal Health Records with Medicare fee-for-service eligibility and claims data. We believe this pilot was quite successful.

Within ViPS HealthPayer Solutions Group, sales of ViPS Solutions were steady. The company's position as s a leading provider of care analytics and data warehousing solutions was further strengthened through the Blue Cross Blue Shield Association's selection of ViPS in partnership with Computer Science Corporation, otherwise known as CSC, for the design, development, and implementation of Blue Health Intelligence, or the BHI.

As a Multiplan data warehouse, BHI will let participating Blue plans captures and access clinical data derived from patient care to enhance best practices, reduce costs, and improve patient safety. Initially, the warehouse will store clinical records for 20 blue plan operations and 79 million people, expandable to house records for 100 million people. We believe BHI will be the largest data warehouse in the United States healthcare market.

Turning to our Porex Business segment. Porex continues to deliver consistent results with strong operating margins and cash flow. Porex recorded its best year ever in 2006.

Turning to our investment in Emdeon Business Services. Emdeon Business Services performed well throughout 2006 with a record fourth quarter and full-year results. EBS experienced strength across their payer and provider businesses, including electronic transactions, paper remittance and payments, patient statements, and revenue cycle management solutions. EBS importantly continues to invest in its infrastructure, consolidating systems, and facilitating new product innovation.

We are particularly excited about the innovations EBS is making in advanced claiming applications, including enhanced editing and PPO routing, payment applications including multipayer electronic remittance advice, and electronic payment solutions, and assured payment applications that help providers collect or guarantee the collection of appropriate amounts from patients before they leave the provider's facility.

Turning to corporate. During the fourth quarter, we also reduced the size and structure of our corporate overhead to better reflect our current ongoing operations. While certain expenses were reduced immediately following the sales of Practice Services and Business Services, other reductions will need to occur over time to coincide with the end dates of the transition services we are providing to EBS Master LLC and Sage. These transition services, for which we received compensation, were agreed to in connection with the sales of EBS and EPS, and include items such as payroll and accounts payable services, tax services, human resources services, and certain information technology support.

As most of these services under these transition services agreements come to an end over the next 12 months, further cost reductions generally will be implemented during '07. While there will be additional severance and retention expenses associated with these cost reductions, the majority but not all of our expenses related to the provision of these services will be offset by the fees that we receive from EBS and Sage. These fees were $2.2 million during the fourth quarter of '06. We will be including these fees for these services within our corporate segment, partially offsetting the cost of providing these services.

Finally, please note that both this year and last year reflect a corporate allocation to WebMD, representing the cost of the services that Emdeon provides to WebMD. Mark will now walk you through our financial guidance for 2007.

Mark Funston

A summary of the 2007 financial guidance, I'm about to review can be found attached to our press release issued today, so you can refer to that document as I proceed. First, I will briefly review our assumptions relative to our guidance for 2007. Our guidance does not include any expenses related to the Department of Justice investigation. Our guidance does not reflect any potential repurchases of shares of our outstanding securities, which may occur in 2007.

Cash and GAAP earnings per share are both calculated based on an assumed, weighted average share count of 190 million diluted shares for full year 2007. We've included estimates of the impact in 2007 of the costs associated with transition service agreements discussed above. However, pursuant to the transition service agreements, the period of transition services may be extended. And, this would impact the timing of costs and reimbursements associated with these agreements.

2007 consolidated revenues are expected to be between $531 million and $554 million, an increase of approximately 21% to 27% from 2006, if you exclude Business Services from 2006 results. The timing of these revenues is expected to breakdown as follows; approximately $116 million to $120 million in Q1, approximately $126 million to $130 million in Q2, approximately $138 million to $145 million in Q3, and approximately $151 million to $159 million in Q4.

We expect consolidated adjusted EBITDA to be between $97 million $108 million or $0.51 to $0.57 cents per share, representing an increase of approximately 76% to 96% over the prior year, if you exclude Business Services results from the 2006 results.

Including the impact of SFAS 123R, we are expecting 2007 income from continuing operations to be $32.5 million to $46.5 million or $0.17 to $0.24 cents per share. More specifically by segment, WebMD revenue is expected to be between $336 million $352 million, an increase of 32% to 39% over the prior year.

Adjusted EBITDA is expected to be $77 million to $84 million, an increase of 45% to 58% over the prior year. WebMD provided comprehensive 2007 guidance yesterday, and additional details on WebMD's guidance can be found in an Exhibit attached to the press release they issued yesterday.

ViPS revenue is expected to be between $105.5 million $109 million, an increase of 7% to 10% over the prior year. Adjusted EBITDA margins as a percentage of segment revenue are expected to be approximately 19% in Q1, and increasing to 21% thereafter.

Porex revenue is expected to be between $89.5 million and $93 million, an increase of 4% to 9% over the prior year. Adjusted EBITDA margins are expected to be approximately 27% in Q1, 31% in Q2, 30% in Q3, and 29% in Q4.

Corporate expense is expected to represent approximately 6.2% of consolidated revenue in Q1, decreasing to 4.1% of consolidated revenue in Q4. Please note that our corporate expense in 2007 will include approximately $1.2 million in stay put payments and severance charges relating to already planned and communicated employee terminations.

Some additional data points to help you complete your models. Inter-segmental eliminations are expected to be negligible. Net interest income is expected to be approximately $17.5 million to $18.5 million. Capital expenditures are expected to be between approximately $23 million to $28 million, with WebMD comprising 65% to 70% of this amount.

Depreciation and amortization is expected to be approximately $50.5 million to $51.5 million for 2007. Non-cash advertising is expected to be approximately $5 million to $5.5 million for 2007. Non-cash stock compensation expense is expected to be approximately $40 million to $41 million for the year.

Emdeon's 48% portion of EBS's income is expected to be approximately $29.5 million to $32 million for 2007. Minority interest in WebMD is expected to be between $3 million $4 million for 2007.

Our estimated tax expense in 2007 is expected to be approximately $10.5 million to $12.5 million, which equates to an effective tax rate of approximately 22% to 24%.

I would now like to turn the call over to our Chairman, Marty Wygod.

Marty Wygod

Thanks Mark. Hopefully, if people missed this morning, which they probably did, to see Wayne Gattinella on Squawk Box, it's really something to watch. We're little bit concerned because we understand there are offers that have came in from Hollywood for him. But, I think sanity will prevail here.

To begin with, in 2006 we had a very ambitious agenda evaluating two of Emdeon's core businesses with the view of maximizing value for shareholders. A year later, I am pleased to report we successfully accomplished this task. We substantially repositioned the company by selling Emdeon Practice Services and 52% of Emdeon Business Services. We were able to use the proceeds to significantly reduce the number of shares outstanding.

As Kevin pointed out that these changes in Emdeon's corporate structure effectively, Emdeon's shareholders have a greater participation in the success of WebMD. WebMD is uniquely positioned as the market leader in a large and highly under-penetrated market. The external trends in the business are providing a strong tailwind.

In our public portals market, biopharma and consumer package goods companies are shifting more of their marketing online. And in our private portals market, major employers and health plans are seeking a consumer-facing platform to support their transition to consumer-directed healthcare.

With the leading brands, significant lead time, outstanding technology, and distribution to both physicians and consumers that are difficult to replicate, WebMD is in an enviable position. WebMD has the assets in place and the resources necessary to capitalize on the sizable market opportunities and to leverage them into strong, sustainable revenue, as well as earnings growth.

In 2006, excluding the impact of acquisitions, WebMD achieved a margin, an incremental revenue mix in excess of 40%. And we believe this increase over the coming years as revenues grow substantially faster than the rate of additional expenditures.

I am enthusiastic about the opportunities ahead. Many Emdeon shareholders have expressed to me that their primary objective in owning Emdeon is to participate in the success of WebMD. We fully understand this. As in the past, we always will seek to maximize value to our shareholders.

Operator, we're open to take questions at this point.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Alex Alvarez, Goldman Sachs. Your line is open.

Alex Alvarez - Goldman Sachs

Thank you. It's Alex in for Chris, if I could ask a couple of questions on Business Services? First, what role does Emdeon, the parent company, play in helping Business Services with the day-to-day tactical issues of running that business? And then secondly, what role is Emdeon playing? And how do you interact with General Atlantic in terms of helping define the long-term strategy for that business?

Marty Wygod

Kevin, you want to take that?

Kevin Cameron

Sure. Well, on a day-to-day basis, we have our Board of Directors right now that we share equally with General Atlantic. And, we have a CEO search that we're in the latter stages for Business Services. We have a great management team down there that's running this business today with my aid and the aid of some folks at General Atlantic. So, that's what happens on a day-to-day basis.

In terms of how we work with General Atlantic, strategically, everybody's got their ideas and something to offer. Again, I think the management team at Business Services is quite strong. The strategy is well laid out. And there's a lot of progress and innovation going on down there right now. So, I think it's rather well understood at this point within the company at least.

Alex Alvarez - Goldman Sachs

Okay. And has any decision, Kevin, been made about sort of maybe bringing someone else into the company to take over some of the things that you're doing or any additional changes to the executive team at Emdeon?

Kevin Cameron

As I mentioned, there's a CEO search going on. It's been going on since actually prior to closing the deal. It includes external and internal candidates. And, I think we're in the latter stages of that search.

Alex Alvarez - Goldman Sachs

All right. Thank you.

Operator

[Jeffrey Harris, Serials Capital Management]. Your line is open.

Jeffrey Harris - Serials Capital Management

Good evening. First, I'd like as a shareholder to congratulate Kevin and the team for a strong operational performance in '06 and also for the progress in restructuring the company. With that, I would just like to ask a question or two if I may. First, on the fourth quarter, the adjusted EBITDA per share was $0.16. I was wondering whether you could in some way pro forma that by excluding the contribution from Business Services and any other divested entity such that we can bridge that number to the guidance for 2007?

And then, the two other questions were; one, any thoughts of uses for the substantial cash on the balance sheet? And then finally, you mentioned in the guidance $190 million weighted average shares for '07. And yet, if I look at the year end share count plus the preferred, it looks like its $176 million. So, I'm just trying to understand the increase in the share count from that to the $190 million in the guidance? Thank you.

Operator

Rob Kelly, Citigroup. Your line is open.

Rob Kelly - Citigroup

I think they're going to answer that question first.

Marty Wygod

We have to answer it. We can't go to the next one.

Kevin Cameron

We didn't answer the question that just occurred. So, let me take them in reverse order. And everybody, am I being heard? Assuming I'm being heard. Okay. So, first of all with respect to the share count, the 176 million is the basic shares outstanding including the 10.6 million underlined the Caliper's convertible preferred stock. The 190 million is the diluted share count for the year, which included the options using the treasury stock method. So that's the difference on that one.

In terms of the cash balance, I don't think we've set forth a specific use for the cash, but --

Marty Wygod

Kevin, perhaps I can comment on it.

Kevin Cameron

Go ahead.

Marty Wygod

As you can see, over the last year, we've shrunk the capitalization by close to 200 million shares. We also have an ongoing buyback program in place. I think it's obvious from our actions over the last year that we feel the best potential for our shareholders is the growth that exists in the future from WebMD. And the best way to participate that is on the continuous shrinking of the capitalization. So, I think that, that perhaps somewhat answers that question. And I think the overwhelming majority of the investors in Emdeon and surprisingly what we have 260 million shares have traded since the tender. We have 160 some odd million shares outstanding. From the sense I've received from a lot of them is that their interest really is in the WebMD.

Jeffrey Harris - Serials Capital Management

Okay.

Mark Funston

And as far as a bridge from 2006 to 2007, in our segment results you can separately see the EBS EBITDA and the EPS results are all excluded from our EBITDA, because they're in discontinued operations. So, it's a pretty easy matter of looking at our segment results and just not including EBS in the prior year to compare that with our guidance which of course doesn't include EPS going forward in the segment results.

Jeffrey Harris - Serials Capital Management

But the $0.16 reported in the fourth quarter I assume that includes a full quarter of Business Services or it doesn't?

Mark Funston

It included Business Services up until the date of the transaction.

Jeffrey Harris - Serials Capital Management

Okay. If we strip that out what does that equal? Or I guess I can do it, but--

Mark Funston

Yeah, it's in there. Just to be clear, Practice Services because we completely sold it, is a discontinued op. And it was removed from our results going forward, and also from all of our historical results. Business Services is not a discontinued op, so it's included in our results through November 16th. And then, it becomes simply equity in our unconsolidated entity. And so, the only thing that it comes in underneath the EBITDA line going forward.

Jeffrey Harris - Serials Capital Management

Okay. Thank you very much. Congrats again.

Mark Funston

Operator, next question.

Operator

Rob Kelly, your line is open.

Rob Kelly - Citigroup

As a long-term shareholder, I just wanted to thank you, Kevin for everything that you have done for shareholders over the past few years. Thanks a lot.

Kevin Cameron

Thank you. I appreciate it, as well as the rest of the management team here. Operator?

Operator

Anthony Petrone, Maxim Group. Your line is open.

Anthony Petrone - Maxim Group

Thanks guys, great job over the past with the restructuring. Just on the buyback if you could share? How much have you bought back under the latest repurchase authorization?

Marty Wygod

Approximately, 1.2 million shares additional with an average price of around [$12.58].

Anthony Petrone - Maxim Group

All right. Great. And just going back to some comments yesterday, Marty, on just how the private portal business is benefiting from the ownership of Business Service. In terms of competitive wins, I mean how often have you seen that as an issue on winning competitively out there in the market within the private portal market?

Marty Wygod

Yeah, it's hard to say the specific reasons why we have been winning all the contracts that we have over the last year and a half and how much the accounts fully understand the importance of this. So, that's a very difficult question to answer. I believe it's going to be something extremely advantageous to us going forward with the ability to populate the PHR's with this claims data. And, I think it does put us in a very strong competitive position.

Kevin Cameron

Let me add to that, I think the relationship between Business Services and actually the relationship that still exists with Sage that WebMD has are very powerful. It's the ability to link the personal health record with the electronic health records in the physician office. It's the ability to work on patient portals for patients to come in and be able to interact with their doctors in different ways.

At Business Services, it's the ability to use Business Services, penetration of the small and mid-sized payer market, to offer the personal health record and also personal financial records, which mutually advantage the businesses because you can move from paper processes to electronic processes on the consumer side.

In the patient billing area, there's, again, areas to interact with those consumers and with Business Services. So I think the relationships that we retained are very beneficial to WebMD. And for that matter, they're mutually beneficial to those companies.

Anthony Petrone - Maxim Group

That's very helpful. And just in term of competitively if you can share, who have you seen competitively within the private portal market that would be helpful?

Marty Wygod

It's different companies under different circumstances. It's not consistently anyone there. And usually, it's several of them that get together create a consortium to compete against us. Wayne, do you want to add anything to this?

Wayne Gattinella

I just add also that it can include the health plans themselves. So you've got some of the larger plans like United, who may offer some of the same services as WebMD to try to protect their commercial business.

Marty Wygod

That includes United, Aetna, CIGNA.

Wayne Gattinella

Yeah.

Anthony Petrone - Maxim Group

Okay.

Marty Wygod

And usually, it's during open enrollment, the employee has the ability to choose in the large companies, which plan they want to opt into during open enrollment that really puts us at a substantial advantage because the employer wants to have an independent third party in there, instead of having one of the payers taking over the service.

Anthony Petrone - Maxim Group

Great. And, just one final one. Moving to the introduction of the new portal, do you expect that eventually as traffic increases, especially with physicians and more consumers coming on? If that comes to fruition, do you expect a change in pricing for in consumers that was buying real estate on your websites?

Marty Wygod

Well, I think based on the new products that Wayne and his team are rolling out and developing at this time, that you are going to see improved pricing in 2008 indirectly as a result of the types of new products and combined marketing programs that we'll be introducing to the pharmaceutical and CPG industry.

Anthony Petrone - Maxim Group

Great, guys. Thank you very much.

Operator

[Richard Adams, SAC Capital]. Your line is open.

Richard Adams - SAC Capital

Hey, guys, thanks. I understand investors wanting to play WebMD through Emdeon. But when I look at the value of the WebMD equity, it's essentially equivalent to the current market value of Emdeon implying basically Emdeon shareholders are getting the rest of the assets for free. So, I guess, my question is, are there plans or a strategy to monetize the NOL at Emdeon because that seems to be a considerable asset of the company?

Marty Wygod

We're continuously evaluating all sorts of different alternatives available to the parent company and the subsidiary that would end up maximizing shareholder value. And, we'll continue to be working at it. But we can't give you anything specific at this time.

Richard Adams - SAC Capital

Of the $1.2 billion, I think you said $240 million is WebMD. The remainder of that, the roughly $1 billion, should we assume you can utilize that entire amount?

Marty Wygod

Well, it would be our intention to utilize it one way or another.

Richard Adams - SAC Capital

Okay.

Marty Wygod

We would not want to lose it, and a lot different types of transaction could result in the partial loss of that.

Richard Adams - SAC Capital

And in just evaluating the current business segments, can you give a rough breakdown as to how the corporate expenses, the $43 million in 2006 are allocated or would be allocated as segments?

Marty Wygod

Sure. Wayne, do you or Mark want to take a shot at that, or do you want to get that information and give it to him offline?

Mark Funston

You're talking about the corporate expense at Emdeon and how that's allocated to the segments?

Richard Adams - SAC Capital

Right.

Mark Funston

Yeah. It's not really, a lot of it's not expensed, we allocate per se. So, its things like D&O insurance and other types of insurance wherein there one big plug. It is the executive management of the company, the legal department, its shared services, such as employee benefit contracting and so forth. WebMD's piece is specified and is billed out to WebMD and recognized in our financial statements. But other than that, it's not allocated per se.

Marty Wygod

And as we indicated, we're bringing those expenditures down very substantially. We still have some obligations for the next year for Practice Services and Business Services, but we think you'll going to see a continued dramatic reduction in those expenditures. Also in the past year or two, the size of the legal expenditures, external legal have been extremely high. One of these are coming down very dramatically.

Richard Adams - SAC Capital

Okay. Thank you.

Operator

Corey Tobin, William Blair. Your line is open.

Jerry - William Blair

Hi, it's [Jerry] for Corey. Quick follow up on the share count. I'm wondering of the 190, are you anticipating in any given quarter that the two convertible notes are dilutive?

Mark Funston

Not in the 190.

Jerry - William Blair

Not in the 190. Okay. And with respect to the sort of parent sub-relationship between Emdeon and WebMD, curious year round, I would see around 85% now. And as WebMD continues, that share count continues to increase proportionally and the Emdeon stake in that is going to decrease. And I'm wondering is that number sort of approaches, let's say, 80%. Are there any limitations to the parent from a tax standpoint that you're going to imminently run into?

Marty Wygod

Yeah. We obviously would not want it to go down below 80% for a lot of different reasons. The least of which would be tax purposes. So, it's important to keep it at the 80% level.

Jerry - William Blair

Okay. Thank you.

Operator

Our final question comes from Duane Pfennigwerth, Raymond James. Your line is open.

Duane Pfennigwerth - Raymond James

Hi, thanks for taking the question. Just with regard to the EBS business, I know there's no claim to the parent on the debt for EBS. But is there any separate note between EBS and Emdeon?

Marty Wygod

No, there is not

Duane Pfennigwerth - Raymond James

Thank you.

Operator

As a reminder, if necessary there is a replay available of this call, which can be accessed toll free at 866-501-0069, or if you are calling from outside the United States, at 203-369-1813. There is no pass code required. There is also the webcast replay available on the company's website as well. Thank you for joining us today.

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