WebMD Health CEO Discusses Q2 2011 Results - Earnings Call Transcript

| About: WebMD Health (WBMD)

WebMD Health Corp. (NASDAQ:WBMD)

Q2 2011 Earnings Call

August 2, 2011 4:45 pm ET

Executives

Risa Fisher - VP of Investor Relations

Marty Wygod - Chairman

Wayne Gattinella - President and CEO

Tony Vuolo - CFO and COO

Analysts

Mark Mahaney - Citi

Ingrid Chung - Goldman Sachs

Ryan Daniels - William Blair

Gerard Hayman - JPMorgan

Sandy Draper - Raymond James

Scott Kessler - Standard & Poor's Equity

Michael Bunyaner - TLF Capital

Steve Rubis - Stifel Nicolaus

Henri Moudi - Weisel Asset Management

Operator

Welcome to the WebMD Health Corp's June 2011 quarterly conference call. I'd now turn the call over to Risa Fisher, Vice President of Investor Relations.

Risa Fisher

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

The explanatory paragraphs in the release concerning forward-looking disclosures and related risks and uncertainties also apply to forward-looking disclosures made during this call, including those regarding our guidance on future financial results and other projections or measures of WebMD's future performance. Information concerning the risks and uncertainties can be found in WebMD's SEC filings.

Joining us on today's call are Marty Wygod, Chairman of WebMD; Wayne Gattinella, CEO and President; and Tony Vuolo, CFO and COO. At the conclusion of our prepared remarks, we will open the call and take questions.

Now I'd now like to turn the call over to WebMD's CFO and COO, Tony Vuolo.

Tony Vuolo

Good afternoon. Thank you for joining us today. WebMD results for the second quarter are in line with our previous financial guidance and with our preliminary earnings release on July 18, 2011.

Revenue for the June 2011 quarter increased 15% to $141.4 million. To break down the revenue increase for you, public portal advertising and sponsorship revenue, which represented 86% of total revenue this quarter, increased 20% to $121.1 million. Private portal services revenue, which represented 14% of total revenue this quarter, decreased 8% to $20.3 million.

Beginning January 1, 2011, we were required to adopt Accounting Standards Update 2009-13, which impacts the timing of revenue recognition for certain of our advertising and sponsorship contracts that were entered into after January 1, 2011.

During the quarter, we recognized approximately $1.9 million in revenue and earnings that would have otherwise been recognized later in 2011 under the previous accounting standard.

Our adjusted EBITDA for the quarter increased 32% to $45.3 million. The adjusted EBITDA margin of 32% for the quarter was approximately 400 basis points higher than our prior-year period. The adjusted EBITDA margin on incremental revenue was 59% for the June quarter.

Income from continuing operations for the second quarter was $14.2 million or $0.23 per diluted share, an increase of 85%. Income from continuing operations includes an after-tax gain on investments of $1 million in the current period and in the prior period an after-tax gain on investments of $3.6 million as an after-tax loss on convertible notes of $6.6 million.

Net income was $21.6 million or $0.36 per diluted share. Net income would have been approximately $13.2 million or $0.22 per diluted share in the current period as compared to $10.7 million or $0.18 per diluted share in the prior period without the effect in the current period of the items I just mentioned as well as an after-tax gain from discontinued operations of $7.4 million attributable to the resolution of a Department of Justice investigation relating to a business that was divested in 2006.

Operating cash flow for the quarter was $51.6 million. In the second quarter, we converted about 114% of our adjusted EBITDA to operating cash flow. This amount excludes a cash tax benefit of $10.5 million on the quarter related to the use of our tax NOLs which is included in the financing section of the cash flow statement rather than in the operating section.

This is due to the fact that we are now utilizing tax NOLs related to stock-based compensation, which must be reported in the financing section of the cash flow statement. Our conversion of adjusted EBITDA to operating cash flow in the second quarter put us in about 137% when including this benefit.

As we've stated in the past, our quarterly operating cash flows can be impacted by the timing of compensation accruals and other accruals in relation to quarter's end, the timing of interest payments on our convertible debt and the billing and collection of our receivables from our customers. Capital expenditures for the quarter were $4.7 million.

Since March 31, 2011, we have purchased approximately 872,000 shares of WebMD common stock at an average price of $34.77 per share for a total of approximately $30 million under our buyback program. As of today, we've used all the funds available under our buyback program. Any future buyback programs or other share repurchases such as tender offers is subject to future Board action. We do not intend to comment on any potential or future share buybacks on our call today. As of June 30, 2011, we have $1.15 billion in cash and cash equivalents.

Turning to our financial guidance for 2011, our guidance for the year is unchanged from that we issued on July 18, and we've included a schedule attached to this press release that incorporates that guidance that was issued on July 18.

Our guidance implies a sequential increase in revenue and earnings between the third and fourth quarter, as we have historically experienced. The guidance contemplates expectations for revenue from sales that occurred between now and yearend, which includes the historical seasonal bump we experienced in the fourth quarter, which is why the range for the year is so wide.

Additionally, some of the delays that we experienced furthered stock date of some programs out of the September quarter and into the December quarter. As our biopharma sponsorship programs tend to run six to 12 months in length, the delay of a program out of the September quarter and into the December quarter would not impact our December quarter expectations as the revenue was already contemplated. The sponsorship program would run its contractual length from the launch date, and we would realize the delayed revenue at the end of the program.

Our guidance further implies strong sequential adjusted margin improvement from Q3 to Q4 that we historically experienced. We expect to manage our costs and expenses for the balance of the year to achieve these operating margins despite the lower revenue growth rate.

And now, I'd like to turn the call over to Wayne.

Wayne Gattinella

Thanks, Tony. As Tony just summarized, our financial results for the second quarter are in line with a preliminary earning release on July 18 and so was the growth in our audience. WebMD is the recognized leader and the most trusted health information brand, as evidenced by another quarter of strong organic traffic growth.

Traffic to the WebMD network of sites hit new levels this quarter with visitors reaching nearly 105 million unique users per month, an increase of 30% over a year ago. Page views during the quarter grew 24% to nearly 2.2 billion pages. Our growth was driven primarily WebMD owned and operated sites, which together reached 83 million unique users per month and 2 billion page views this quarter, increases of 28% and 24% respectively from a year ago. Over 90% of our page views are now delivered on WebMD's sites that we own and operate and have full control of the editorial content and pricing.

We uniquely benefit from our strong brand recognition in external search as the WebMD name continues to be the top health-related term that consumers search for each month. And through search engine optimization, our owned and operated sites rank on the first page of natural search results for more than 400 of the top 500 most frequently searched health terms on the leading search engines.

Our professional network, led by Medscape.com, also continued to attract greater numbers of physicians with traffic to our professional network averaged more than 2.6 million physician visits per month. We believe that the WebMD professional network reaches more doctors, more healthcare professionals, more frequently, in more countries both in U.S. and throughout the rest of the world than any other health information resource.

This quarter, we began to deploy the power of demand and supply-side platform technologies to extend the reach of our network across the web and optimize the yield of our inventory on both the direct and indirect basis. We're closely evaluating the incremental leverage that these platforms can produce for our business in the future.

Our leadership in the mobile health information market continued to expand as our WebMD Mobile app for consumers and Medscape Mobile for positions consistently ranked at the top of all health and medical mobile apps.

WebMD Mobile for consumers has generated 6.5 million downloads since launch and is now available on the iPhone, iPad and the Android. Medscape Mobile for healthcare professionals has now surpassed 1.4 million registered users and is available on the iPhone, iPad, Android and the Blackberry.

As we announced on July 18, our financial guidance for the second half of 2011 was revised downward to reflect the number of factors that are impacting our advertising growth over the next two quarters. First, we're experiencing extended internal legal and regulatory reviews of larger biopharma sponsorship programs that were sold in previous quarters in both consumer and professional markets. Those reviews are causing longer delays in the launch of these programs than what's previously planned.

Secondly, unrelated but also impacting us at the same time, are recent and unexpected delays or cancellations of a few consumer products sponsorships that were scheduled to launch in the second half of the year. These cancellations were due to budget cuts and operating issues that were specific to those individual CPG companies.

In light of both of these issues, we also reduced our expectations for new advertising sales that would contribute to revenues in the second half of this year. As a result, as we stated on July 18, we expect the growth of our ad and sponsorship revenues to improve commencing in the middle of next year.

This quarter, we're launching a new portfolio of streamlined sponsorship products that are designed to better facilitate the internal regulatory review and approval process of our biopharma customers and speed the time to implementation. In addition to faster execution, our newest services will also leverage enhanced technologies to enable pharmaceutical companies to more closely match their targeted ad relevance and brand-specific messaging with the relevant needs and actions of WebMD's qualified health audience.

Our new products will further incorporate WebMD's advanced programming platforms and combine personalization, multimedia and mobile technology to markedly integrate the patient-physician communications opportunity.

This past June, we hosted our 13th Annual WebMD Health Forum, bringing together hundreds of business leaders from the leading biopharma and medical device companies to discuss the most important changes that are transforming the marketplace. With record attendance this year, the event positions us well as our customers enter the strategic planning cycles and set their 2012 budgets.

We continue to expand our content assets to engage consumers in new and unique ways. Last month, we launched our newest lifestyle channel called WebMD Healthy Beauty. Healthy Beauty takes the holistic view that natural beauty is a direct reflection of the overall health and wellbeing. Our new channel creates a visual user experience to deliver the relevant content, tools and community resources to support a healthy and vibrant lifestyle. We have a growing pipeline of consumer products companies seeking to sponsor several areas of our new health and beauty channel.

During the quarter, we continued to expand our relationships with the government health agencies to support their new initiatives. In June, WebMD was granted an exclusive from the USDA to first announce the unveiling of the agency's new food icon that was replacing the original food pyramid. WebMD was also chosen to join the Surgeon General and Secretary of Agriculture on a panel of experts for a Q-and-A session on the new My Plate icon.

We continue to attract new talent to our leadership team. Most recently, we welcomed Greg Mason who has joined WebMD as the Executive Vice President of Consumer Services. Greg comes from CBS Interactive, was Senior Vice President and GM for the technology business in New Division. He oversaw the online operations for the company's brand portfolio that includes CNET, CBS News, BNET, CBS MoneyWatch, ZDNet and Tech Republic, which together reach upwards of 150 million consumers and business professionals.

Turning to the private portal, the private portal represented 14% of our revenues this second quarter. Revenues during the quarter declined by 8% from a year ago as the macroeconomic environment for employer-funded programs continues to be weak. As we announced on July 18, we have decreased our expectations for licensing revenue in the second half of this year as we now anticipate fewer new customer additions to offset customer attrition. While we did see stronger sales activity in the earlier part of the year, it did not translate into the number of new customer implementations as we had expected.

In summary, while I am definitely not satisfied with our company's growth in the near term, I do believe that the opportunities in our market are strong today as they have ever been. The transformation of our clients who still heavily rely on traditional channels is underway. WebMD is the health information brand that consumers and the physicians rely on most on the desktop, on mobile platforms and increasingly in global market.

The experience, the talent, the commitment of our organization to deliver innovative high-quality health information services are unequaled. And as the growth in the health and wellness markets will drive the greater demand for more effective communication platforms, WebMD is uniquely positioned to capitalize on those opportunities and to deliver on long-term growth ahead.

I'd like to now turn the call over to Marty Wygod for some closing remarks, and then we will take your questions.

Marty Wygod

Thanks, Wayne. Although our short-term growth is disappointing than that what we anticipated, we continue to be a strong market leader in a large and still under-penetrated market. As I recently stated, I have the utmost confidence in the growth prospects for WebMD. My conviction is supported by the strength of the assets we have assembled and the value we deliver to our customers.

WebMD's digital communication platform uniquely provides pharma with the ability to educate clinicians on newly available treatment options and key differentiators from other products on the market, while at the same time reaching and informing qualified patient to seek treatment from their physician.

As the blockbuster products lose patent exclusivity and more specialized products come to market, pharma companies must adopt this new approach to marketing and leverage the competitive advantages through the new digital framework. We are delivering content and tools that deliver a superior level of engagement for both physicians and consumers. Our services encourage healthy living and foster and educate in timely dialogue, which drives better outcomes and lower costs.

At this time, operator, we would like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Mark Mahaney from Citi.

Mark Mahaney - Citi

I was wondering if you could address two issues related to the near-term or next-year trends. The confidence you have that you'll see a reacceleration of growth sometime next year, is there a visibility into when maybe the internal regulatory pressure will subside? And secondly, on the CPG sponsorships, to what extent do you see an issue with pricing or is it purely specific to those companies, just to address the issue, whether there is new competitive risk because of the larger display ad network, social network, et cetera?

Marty Wygod

To the first part of your question, Mark, improvements we see by the second half are several-fold. First, the most important is that the opportunities in the marketplace are as strong as ever before both in the pharma and the CPG markets. The transformation of the client base from what is still predominately traditional marketing channels to digital is underway. It's still very under-penetrated. We feel strongly that we're still very early in that process and in the game. So the opportunity has not been diminished by any stretch.

I have a high level of confidence that the new portfolio of products that we're rolling out this quarter will be extremely successful. Early indications and my discussions with several major accounts have been very positive, again both in pharma and CPG, and our marketplace position as the preeminent brand that consumers and physicians rely on, as you've seen based on our traffic growth both on desktop and mobile, continues to grow. So all of this gives me confidence that we'll see meaningful uptick in our revenue growth by this time next year.

In terms of the CPG market, the issues that we face in terms of cancellations or delays were isolated to a few, but unfortunately large customers that have been sold in prior quarters and who themselves made internal decisions to either defer or in some cases just cancel our programs in conjunction with overall budget cut. I don't see pricing pressure in that marketplace from our standpoint. I actually see growing opportunities because of their increased desire to reach the kinds of customers that we are able to deliver for them.

The launch of our new Healthy Beauty channel has already been met with strong interest in the CPG marketplace. So we continue to view that segment as one that would be very important for our growth to come.

Operator

And our next question comes from the line of Ingrid Chung from Goldman Sachs.

Ingrid Chung - Goldman Sachs

I was wondering if you could give us an update on your plans regarding M&A. Are you still looking at acquiring the same two companies that you're looking at before? And then secondly, I was wondering if you could describe the streamlining for campaigns that you're doing? Does that mean removing social and mobile aspects or any sort of color there would be appreciated?

Wayne Gattinella

Without getting into too much detail about the product definitions, they actually leveraged our platforms more than they had before. Social media still continues to be a challenge for the pharmaceutical companies as the FDA is not providing clear guidance in the appropriate use of that from a marketing channel standpoint. Community is still very important from a traffic standpoint, but we don't yet have clear guidance to monetize that opportunity at least in the pharma markets.

So when we refer to streamlining, we're really talking about the pharma marketplace where the regulatory review of sponsored content has just taken on a higher level of conservatism and elongated review process. And in the end, it's put us where we are today with programs that we had expected to execute earlier that unfortunately we're implementing now. So it does mean focusing our programming efforts on content and information that may have already have been pre-approved, that might have already been in use for some period of time in essence that provides for new content and health information that will more quickly go through that MLR, Medical Legal Review.

But also at the same time, adding some new enhancement that gives pharmaceutical companies the ability to better match from an audience standpoint the people that are trying to reach; and I think that represents the future of the internet and it certainly represents the future of WebMD, by really incorporating new technologies that enable our customers to more closely match their targeted ad relevance and brand messaging with our audience in our view. And again, based on discussions I've already been having with several large customers, it represents some very significant near-term opportunities for us.

Marty Wygod

From the acquisition point of view either as a result of the due diligence we've done or other reasons, we do not have any momentum right now in the acquisition field. There is nothing at all to tell.

Operator

And our next question comes from line of Ryan Daniels from William Blair.

Ryan Daniels - William Blair

Just want to hit a little bit again on some of the pharma hesitation, I'm curious if you can provide a little more color on a how broad that was in regards to the programs that we're going to be implementing in the back half. Are we talking fairly broad hesitation for some of these novel programs, or was this similar to CPG that it was a couple of isolated customers, but they were big potential revenue generators?

Marty Wygod

It was broader then CPG, which in this case of CPG was really more isolated to few instances. It's consistent with what we have seen and have been commenting on since our first quarter call, which is just a greater level of caution and hence a longer approval cycle in general for most of large pharmas, particularly for the deeper and more sophisticated program solutions that we've provided in the past.

We believe some of this is related to prior actions that had been taken against those companies for marketing practices not related to WebMD or digital, but it giving these companies a reason to more carefully scrutinize and ultimately review anything that their brands or their corporate name is attached to.

So again, it's not from a compliance standpoint an issue in terms of what we have been producing. But nevertheless from a cycle time standpoint, it's created a process that's again longer than what we had experienced and had expected.

Ryan Daniels - William Blair

They've already gotten budget dollars, if you will, allocated to WebMD's program, but those programs are getting delayed. Is there any way outside of the streamlining, which it sounds like might take a while to drive growth there, to capture those budget dollars on a quicker base to start driving growth maybe going back to program similar to a few years ago that got through the MLR easier, anything you guys can do there?

Wayne Gattinella

There is, Ryan, and we have been doing that. So certainly we don't stand still. So where there is an opportunity to go back and redesign and redefine those programs to your point in ways that can better go through those cycles, we are doing that. But nevertheless, in the process of doing that, it still added cycle time to what we had hoped.

Ryan Daniels- William Blair

I think Marty made some comments just on the generic ways and I think the impact of a blockbuster probably won't be that acute on you and maybe the more disease-specific orphan drugs will be a better vehicle to launch on WebMD. Can you give a little more color around the magnitude of revenue generated from those blockbusters, because I do think it's been a bit of a concern, but maybe it's a little bit of red herring?

Wayne Gattinella

If you look at the market data, it estimates that there is roughly about $100 billion of branded pharmaceutical products coming off patent between 2010and 2015. But there is also estimated to be roughly another $100 billion of new products being introduced in that same timeframe. The difference is that the products coming off patent, to your point, are more larger blockbuster Lipitor like products and the newer products being introduced are smaller in size, a little more disease-focused and at the end of the day actually a little more in our sweet spot.

In general lifestyle products like a Viagra or Lipitor, we tend not to attract significant dollars where those products are typically more on television or in general advertising, but where you do have more products that are more focused towards smaller populations, lower incidence, oftentimes higher pricing and higher value, we are much more successful, because again we can better pinpoint the audience and demonstrate a much stronger ROI when those length of therapy and the ultimate value of that therapy is more valuable to the pharmaceutical company.

So as we've commented in the past, we don't have a significant amount of embedded revenues in the largest of pharma products coming off patent, and certainly we're very focused with our key customers as the new pipeline of products is being introduced to market.

Tony Vuolo

And I think more direct to the question that you asked might be that probably over the next three years or so maybe there is $80 million worth of business that we perhaps will lose as a result of generic substitution.

Ryan Daniels- William Blair

Over the three years or annual?

Wayne Gattinella

What would that be, Tony, on an annualized basis if you ran it.

Tony Vuolo

Well, that's a number that if you look at, that was coming off over the next three years.

Wayne Gattinella

And we lose 100% of it?

Tony Vuolo

And obviously you are not replacing it with other offsets in the category.

Wayne Gattinella

But that's over the next three-year period of time. I think we're going to be able to offset that very simply.

Operator

And our next question comes from the line of Gerard Hayman from JPMorgan.

Gerard Hayman - JPMorgan

Marty, what confidence can we have in the projections of a strong and substantial pickup in revenues and earnings next year and predominantly in the second half of next year?

Marty Wygod

Well, I can give my view on it and then Wayne can give his. Obviously, we have a pretty good feel already on the second half of this year, in the fourth quarter, and I think Wayne has already going through that in a little bit of detail. We took a very careful look at this, and we're very comfortable with what we've put out there for this year and the longer range projection where we're talking about a very meaningful pickup starting in the second half of next year.

I really think with a new products and services we're going to be rolling out here that we're going to see a major impact during that period of time starting probably in the third quarter of next year.

Wayne Gattinella

No, I think you've nailed it. And again, I would just reinforce the fact that the marketplace opportunity is as large as it's been and the competitive frame for us has not changed in any meaningful way; while at the same time, the audience that continues to increase for us to monetize continues to grow. So for us, the macro environment that we are selling into and our brand leadership continues to represent in our view a very, very strong potential.

Gerard Hayman - JPMorgan

When would you possibly expect to see greater contribution to our businesses from revenues from oversees, predominantly areas that we are expanding to?

Wayne Gattinella

We do expect that. We are beginning to experience increased growth there. From a revenue standpoint we'll comment on that next quarter. We have a sales team on the ground now throughout many of the leading European countries, and we're beginning to really leverage the strength of our global presence, particularly on the professional marketplace to start in ways that we think will become more significant by 2012.

Operator

And our next question comes from the line of Sandy Draper from Raymond James.

Sandy Draper - Raymond James

Are you guys willing to give an approximation or some type of split between the impact that the pharmaceutical business have in terms of our vision versus consumer side. Give me some type of color or quantification of 50-50, 60-40, or how we should take that spilt.

Wayne Gattinella

I don't understand question, I'm sorry.

Wayne Gattinella

Well, I think what we've commented on, Sandy, is that the revenues between our consumers and our professional segments are fairly balanced. Our consumer segment includes pharma consumers and CPG consumers. And obviously professional is for dominantly Pharma. We haven't commented on the delta or the changes that were made for the second half and how they apply. But I can tell you that with respect to Pharma, as I mentioned, the delays that we've experienced in large pharma affected many of those companies because that's the situation they're in.

On the CPG side, it didn't affect nearly as many situations, but for us the couple of few that it did impact were larger in size.

Marty Wygod

So when you think about, Tony, the total shortfall here in the third and fourth quarter, what we're talking about is $15 million, $20 million?

Tony Vuolo

On a per quarter compared to the previous guidance?

Sandy Draper - Raymond James

Right. So it's not that much. It's just a few unique situations that unfortunately went the wrong way for us. But that's no excuse, because we should have had the other backup revenue. So we would never have had this hiccup. But we'll make up for it and get the momentum back for even the second half of next year, and you'll start to see it in the fourth quarter.

Sandy Draper - Raymond James

Just want to make sure I understand, in terms of the broader slower response from Pharma, is it predominantly or is it all around social media or is the review not just on the newer portion, but it's also on the some of the existing traditional businesses; you're also seeing some additional review there as well?

Wayne Gattinella

It is on more what you refer to as traditional kinds of programming, albeit programming that's gotten overtime deeper, in-depth and sophistication of content. As pharma continues this segment, the marketplaces themselves in a finer way in the products that they provide are also getting finer indications that the level of content detail and segmentation also follows.

And the delays and the review process that has now really been more institutionalized in most of large pharma, it's a three-legged store, it's a medical review, it's a legal review, it's a regulatory review, it's done more in committee form now rather than an individual reviewer. It oftentimes as we've experienced even upon review goes to second level reviews and hence the cycle for the beginning to end process has been extended, in some cases fairly widely.

We've seen changes in the market like this before. Back in 2008, with some of the new products we introduced, we for the first time really started to hit MLR process that was deeper than what we had experienced. And our response to that changes to our product lines and our services that in fact could more streamline that review process.

If you go back and look at the history of that, it took two or three quarters for the changes, the selling and then ultimately the revenue that we gained from those sales, to be seen in our quarterlies. And every indication for that right is it's going to probably take that same level of effort in time before you start to see that turn around.

Sandy Draper - Raymond James

The new products and the new offerings, is that mostly focused on what the consumers and physicians are going to see and then you turn around marking that too? Is it the customer or is it repackaging what you already have in terms of the new offering to the actual buyer? I just want to make sure I'm clear on where the new part is. Is it the doctor and consumer, or is it actually just the new packaging to the pharmaceutical or consumer products company?

Tony Vuolo

It's both actually, Sandy, because in addition to streamlining them for purposes of getting fast review at the pharmaceutical company, there is also opportunities for us to enhance the value of those services to the clients. And so the introduction of better audience targeting, the introduction of stronger metrics, the introduction of tighter demonstration of ROI to the client, the ability to do it at a higher scale, we're taking the opportunity to both make the changes from an operating standpoint that we clearly understand are critical, but at the same time as you introduce the product, we're putting more value into it in terms of how they're delivered, who they're delivered to and how we measure that deliverability to add strength to its appeal.

Operator

And our next question comes from the line of Scott Kessler from Standard & Poor's Equity.

Scott Kessler - Standard & Poor's Equity

It sounds like the way you're addressing some of the challenges with biopharma advertisers is to plan new products. I'm wondering what you're doing to secure better results from existing products. And I guess, along the lines of your prior response, I'm wondering if you could provide additional details about the expected new offerings, particularly from a timing perspective?

Wayne Gattinella

The timing is next month. So we've already previewed these services with a few select customers. We actually have a number of large customers that are already in 2012 discussions. Of course, in those discussions, we're talking about our future services. And from a mainstream standpoint, those services will begin to be rolled out into our sales organizations this month in August in anticipation of market availabilities starting in September.

Scott Kessler - Standard & Poor's Equity

Can you talk a little bit about the first part of my question which is essentially, I think a lot of us understand some of the regulatory and legal challenges that you're facing indirectly as a result of some of the issues faced by the biopharma advertisers. But I'm wondering what you guys are doing to make the process easier for them or is there anything that you can do at this point.

Wayne Gattinella

Well, I can't influence their process. What we can do is play to the process in a way that has less friction and faster cycles, which we have always done. One of the expertise that we have in health is actually how the MLR reviews take place, because when we do provide the materials to the companies for a review, believe me those are books that are fully cited and designed to take a lot of work out of the research that's typically required when an attorney or a regulatory person has to review the information itself.

So what we're really doing is revisiting the newer approaches that companies are now applying, which is more rigorous and more conservative. And by the way, it differs by company, because they interpret the regulatory requirements a little bit differently, or those individual companies perhaps are under a different order based on prior actions.

And so it does actually require responding to each individual company's needs and limitations. And within the framework of their compliance requirements, we then are recasting how those particular services from a depth of content, from a breadth of content and ultimately the way their products or services are integrated into that content in order to be again more easily reviewed and complying under whatever sets of vendors they are currently looking at that under.

Marty Wygod

It's a learning curve that we are walking them through, and I think they are starting to realize and understand that all of the major problems they have had, of course their corporate integrity agreements and there are major finds out there, the chance of that happening under our formats are totally eliminated.

So there is no ability to have any off-label marketing, et cetera. We have to make it a little simpler for them and we have to get them comfortable. And I think it's important to make sure that the major Washington law firms that deal with the FDA get their views into the marketplace as well on behalf of big pharma and what they should be comfortable with and what they should not be.

Operator

And our next question comes from the line of Michael Bunyaner from TLF Capital.

Michael Bunyaner - TLF Capital

My first question has to do with the overall advertising spending and by both pharma and CPG on the web as it relates to the products that you helped them advertise. That total spending, as we've discussed, has been plus/minus-5% over their total spend. When do you think the major shift may begin toward a larger number, whether it's 7% or 10% of their spend both in terms of units.

And then the second part of this, when we're going into the fall and begin to speak to our customers again, what type of a percentage of their spend do you think you will see going into the '12? Do you see the growth in terms of market share gain?

Marty Wygod

I think it's a little challenging for us to be accurately responsive to what you're asking. It's just that we're trying to get the timing of something which is tough. That's why we've taken a conservative approach on talking about the more meaningful increase in our rate of growth on our revenue and earnings in the second half of next year. It could happen sooner.

I think it's going to start with two or three large pharma companies. The first one is out there to understand the huge competitive advantage they have in stepping out with us. And I think then the others will follow. But it's hard to tie that into the increase in the percentage that's going to go to the digital marketplace. It's going to be gradual, but I think we'll get a disproportionate share of that gradual increase.

Michael Bunyaner - TLF Capital

And on the consumer side, companies like Procter & Gamble, and Wayne and I had discussions about this in the past, spent an enormous amount of money trying to find a specific customer to their products. You do provide that value added. Do you see the consumer companies that have healthcare products begin to shift more toward not just you, but just in general in terms of the web advertising?

Marty Wygod

I think there is an irreversible trend taking place, and it's just a question of building momentum. Let's not forget how many years it took for the advertisers to follow the iBulls on cable. It took a decade. It's happening now and I think this is the movement that we're going to see take place over the next five years. There is no doubt about it.

There is no industry out there that's as fragmented as the healthcare industry, as you all know. And it's setup perfectly for communicating our mind. We have the most important highest quality of the patients coming online as well as the physicians and spending multiples, more page views online with us than any other potential competitor out there in the healthcare sector.

So I think it's going to happen. We're going to be the major beneficiary. The new products that we're rolling out there are going to accelerate that. And our best educated guess at this time is you'll see the meaningful impact starting to take place in a meaningful way, getting us back up to the higher growth rates, topline, bottomline by the second half of next year.

Michael Bunyaner - TLF Capital

And that would include the comment that Marty you made earlier in terms of $15 million to $20 million that was an essential miss versus the previous estimates, is that correct?

Marty Wygod

Yes.

Michael Bunyaner - TLF Capital

Clearly, the stock market has basically taken away $800 million of market hit. You've been extremely thoughtful about your capital structure. Although you said you were not going to comment, would you share your thoughts and philosophy as you go forward, because you are over-capitalized? And if you don't have any acquisitions, should we assume that you will not be at bank?

Marty Wygod

Well, you can assume we're not going to be at bank. It's our objective here to maximize the shareholder value here for our shareholders. We're as upset as you're with this huge hiccup we've had in our growth rate and the resulting impact it's had crushing the enterprise value of our company.

So we're going to do whatever it needs to be done from internal perspective or from a financial perspective and make whatever decision is appropriate here to maximize shareholder value.

Operator

And our next question comes from the line of Steve Rubis from Stifel Nicolaus.

Steve Rubis - Stifel Nicolaus

Our channel check suggests that a lack of clarity regarding FDA guidance on social media has created an environment of extreme conservatism which you've alluded to during the Q&A. We know that there has been uncertainty regarding the FDA's initial guidance going back to December 2010. Can you provide some more color on why the lead times have not lengthened sooner?

And then my next question, our channel checks also suggest that off-label issues are currently significant issue for advertisers. Can you tell us what sort of problems off-label advertising or off-label usage of drugs pose advertisers on your platform and has it even been an issue?

Wayne Gattinella

Sure, the social media concerns from the FDA have all, but really stalled any efforts from pharma to capitalize on user-generated content or discussion. So I don't want anybody to sort of infer that the kinds of delays that we've been staring at have been related to social media, because in fact we really have not optimized or monetized social media to the pharma market on their behalf. So that really is not a factor.

The factor that has been impacting their review process and cycles are related to just the general consumer-related promotions that they have in the marketplace and professional promotions that from a branding standpoint have put a higher level of concern on the part of the regulatory bodies in Washington due to prior practices that were out of compliance and in fact deploying the same practices in any channel including online.

There is a fact that as they are spending more online, naturally the companies and the regulatory bodies are taking just a closer look. So we're really at the heart of innovation, creating new capabilities, new services, new approaches. And the end result is, is those new approaches are being examined more carefully than in the past. I don't think the examination is a problem per se. It's the length of time that it's taking.

The concerns of off-label marketing, which at the end of the day in some shape or form behind all of these reviews, have a long history in the industry, predominantly where sales representatives may have misrepresented the approved on-label claims that a products is approved to have. And the consequence of that is, is there has been some very significant fines applied to most of the major pharmas in the last year or two. There have been consent agreements arrived at between large pharma and several bodies.

And in addition to the monies that have been paid, again there are review processes for the future that are now more onerous, certainly more careful and in the end more time consuming that what we've seen in the past. And that affects everyone's business that goes with these pharmaceutical companies.

Operator

(Operator Instruction) Our next question comes from the line of Scott Kessler from Standard & Poor's Equity.

Scott Kessler - Standard & Poor's Equity

Could you talk a little bit about your sales force? Is it where you want it to be? Do you need some more people? Was execution an issue over the last quarter? Any thoughts on the sales force would be really helpful.

Wayne Gattinella

Our sales force has continued to grow. It's grown in the segments that you would expect in terms of DTC pharma and the professional side. It's grown significantly on the CPG-focused side, which is the different group of people. And most recently, it's been growing in countries outside of the U.S. as our significant physician audience, not here just in U.S. but around the world, is beginning to be sizable enough that pharmaceutical companies are tapping into our ability to reach doctors digitally in their local markets.

In terms of the productivity of the sales force, again if I steer down the particular issues that we're addressing right now, I would say they are more related to product than they're to the selling of the products, because irrespective of how good a salesperson is, especially in the pharma market, the review and approval processes that we've being commenting on today are inherent in the ultimate execution of that program irrespective of how fast or how effectively we might have sold it in the beginning.

So I think that is does have more to do with the product solutions, at least in the barriers that we're steering. And that's good, because that's more controllable. It means that we can more immediately impact the uptick in those services, because it's not about getting better people selling them. It's really about creating a more relevant solution given the current situations, which is why our confidence in terms of addressing and more importantly selling in these solutions is as high as it is.

Marty Wygod

We do have a challenge. We do have to get on these new products and services that we're going to be introducing the appropriate training to our sales team. But we have the highest confidence with Dorothy Gemmell who heads that up. She is a professional and she does an excellent job and she reports up to Wayne, and there is no doubt in my mind that the sales team is going to be totally up to speed within the next few weeks on all the new offerings that we're going to be sending out there.

Operator

And our next question comes from the line of Sandy Draper from Raymond James.

Sandy Draper - Raymond James

I realized that most of the issue here is around the delays in pharma. Have you seen any situation where any of these delays or cancellations that you would say maybe cannot because there is a competitive dynamic or because the customer is starting to question whether they gain ROI? Are there any situations like that, or is this really all coming down to the more MLR review issue?

Wayne Gattinella

The issues that we have commented on and more importantly the ones that have impacted our second half revision were not deals that were lost per se, but in fact they were programs that were sold in, in some cases fully contracted. So we're already past the contracting process.

And another case is well into the review processes, where in fact a couple of large companies changed their own internal guidelines and hence programs that were prepared to go live started over again from a review cycle. So we're looking at not your typical pricing competitive what-it-takes-to-get-a-deal-done kinds of market issues, but something that's much more internal, less controllable on our side. And as we have commented on over the last 60 days or so, things that have changed from the way we understood them to be just before that timeframe.

Operator

(Operator Instructions) And our final question comes from the line of Henri Moudi from Weisel Asset Management.

Henri Moudi - Weisel Asset Management

The interest income from the quarter is reported at $51,000?

Tony Vuolo

Right now, we have our funds invested very conservatively in short-term treasuries, which don't yield all that much today. But we're not in a position where we want to take any risk with the cash, which is why the amount is so low. That's the primary reason for the low amount of interest income.

Henri Moudi - Weisel Asset Management

The interest expense at $5.8 million, from what I can gather, it equates to roughly a third of your net income. Do you view that as a sustainable model?

Tony Vuolo

I couldn't hear that. Could you repeat that?

Marty Wygod

I'm sorry; we're having trouble hearing the question.

Henri Moudi - Weisel Asset Management

Interest expense just reported came in at $5.8 million; net income from continuing operations, $14.2 million. So just roughly speaking, one-third of your reported net income is reflected in interest expense. Given just where yields are now and your inability to earn any return on the cash balance, is this model sustainable, or the operation of the business is generating $40 million in income, but using nearly $6 million in interest.

Tony Vuolo

Let me just make one comment in terms of the math. The $5.8 million is a pre-tax number. The $14 million is an after-tax number. So it's not exactly a third. You have to tax deduct the interest expense number. We've raised the funds, deployed the funds, and we have the funds invested short term as risk-free as we could to keep the funds until they deploy.

So is this the model that we expected long term? No. We expected to deploy the funds and generate a higher level of income from the funds.

Marty Wygod

The world has rapidly changed, but we're sitting in the right financial position, because we're sitting with $1.150 billion in cash and $800 million with 2% or 2%-and-a-fraction convertible notes with the average conversion up at $69 a share. So we're in the best possible financial position.

I think I understand what you're getting at, Henry. No, this is not a situation that we can go on with this way. Obviously, it doesn't make any sense. And in one form or another, we should make appropriate use for the capital we have. And I'm sure our Board is going to consider this on a regular basis.

Henri Moudi - Weisel Asset Management

In the past, you've guided on your M&A strategy that your focus on areas in your core business and acquisitions that are accretive. Given the recent stock performance, has that guidance changed?

Marty Wygod

No, the guidance hasn't changed. The only thing that has changed is obviously the senior management as well as the Board has to look at alternative uses of capital here and what makes the most sense from our shareholders' perspective, from a long-term perspective. And these are the things that the Board is reviewing.

Operator

Thank you, sir. We have no further questions in the queue. As a reminder, if necessary, there is a replay available of this call which can be accessed toll free at 855-859-2056, or if you are calling from outside of the U.S. at 404-537-3406. The pass code is 84710124. There is also a webcast replay available on www.wbmd.com.

Thank you for joining us today. You may now disconnect.

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