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WebMD Health Corp. (NASDAQ:WBMD)

Q3 2011 Earnings Call

November 2, 2011 5:00 pm ET

Executives

Risa Fisher – Vice President Investor Relations

Martin J. Wygod – Executive Chairman of the Board

Wayne T. Gattinella – President, Chief Executive Officer & Director

Anthony Vuolo – Chief Financial Officer & Chief Operating Officer

Analysts

Analyst for Mark S. Mahaney – Citi

Analyst for Ryan Daniels – William Blair & Company

Ingrid Chung – Goldman Sachs

Mark May – Barclays Capital

Gerard Hayman – JP Morgan

Peter Stabler – Wells Fargo Securities

George Askew – Stifel Nicolaus

[Andrew Sluhue]

[Michael Baneer – PLF Capital]

Kevin Kopelman – Cowen & Company

Operator

Welcome to WebMD Health Corp.’s September 2011 quarterly conference call. Today’s call is being recorded. I will now turn the call over to Risa Fisher, Vice President of Investor Relations.

Risa Fisher

This conference call is to discuss WebMD’s third 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 projects 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’ll open the call and take questions. Now, I’d like to turn the call over to WebMD’s CFO and COO, Tony Vuolo.

TT

Revenue for the September 2011 quarter was $135.1 million which is equal to the prior year period. WebMD’s financial guidance for the third quarter as last disseminated on August 2nd had estimated revenue of $135 to $140 million. At our annual stockholders’ meeting on October 4th we stated that revenue was expected to be at low end of that range. Public portal advertising and sponsorship revenue which represented 85% of total revenue for this quarter increased 2% over the prior year period to $115 million. Private portal services revenue which represented 15% of total revenue for this quarter decreased 10% to $20.1 million.

Beginning on 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. The revenue and earnings that we recognized during the quarter was approximately $300,000 lower than what would have been recognized otherwise under the previous accounting standards.

Adjusted EBITDA for the quarters was $43.5 million, a decrease of 2% from the prior year. The adjusted EBITDA margin of 32% for the quarter, is above our guidance of 29% and consistent with comments we made at our annual meeting. Income from continuing operations for the quarter was $11.2 million or $0.19 per diluted share, a decrease of $3.4 million from the prior year period. This decrease includes an after tax increase of interest expense of approximately $2.3 million resulting from the convertible notes we issued earlier this year.

Income from continuing operations was 8.3% of the revenue which was slightly above our guidance of 6.4% of the revenue. Income from continuing operations includes an after tax loss on investments of $700,000 in the current period and in the prior period an after tax loss on convertible notes of approximately $1.4 million. Net income was $14.2 million or $0.24 per diluted share for the third quarter compared to $13.6 million or $0.22 per diluted share in the prior year period.

And income would have been $11.9 million or $0.20 per diluted share in the current period which compares to $16 million or $0.26 per diluted share in the prior year’s period without the effect in the current year period of an after tax loss on investments of $700,000 and after tax income from discontinued operations of $3 million. And in the prior year period, and after tax loss on convertible notes of $1.4 million and an after tax loss from discontinued operations of $1 million.

Operating cash flow was $21.4 million for the quarter which includes interest payments during the quarter of $10.5 million related to our convertible notes. We converted about 49% of our adjusted EBITDA at the operating cash flow in the third quarter and 78% year-to-date. These amounts exclude a cash tax benefit of $7.1 million for the third quarter and $24.9 million year-to-date related to the use of our tax NOLs which is included in the financing section of the cash flow statement rather than the operating section. [Inaudible] we are now using 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 for the third quarter would be about 65% and 97% year-to-date when including this benefit. As we stated in the past, quarterly operating cash flows can be impacted by the timing of compensation, accruals, and other accruals in relation to quarter’s end, the timing of interest payments on our convertible debt, and the billing and collection of receivables from our customers. Capital expenditures were $6.5 million for the quarter.

During the third quarter we repurchased approximately 2.05 million shares of our common stock for a total of $67 million. As of September 30, 2011 we had $1.1 billion in cash and cash equivalents. Subsequent to the quarter’s end, we repurchased approximately 775,000 shares of our common stock for a total of $22.5 million. On October 13th the board authorized a $75 million increase in the buyback program. As of today, we have approximately $90 million available under our current buyback program.

Turning to financial guidance for the balance of 2011, the earnings release issued today provides details of our updated financial guidance for the fourth quarter and full year 2011. We have reduced our fourth quarter revenue guidance primarily as a result of what we believe is a more cautious business outlook by many of our larger customers in the second half of 2011. The reduction in our financial guidance is primarily the result of less than expected fourth quarter revenue contribution from sales that occurred at the end of the third quarter as well as a reduction in expectations for fourth quarter revenue contributions from fourth quarter sales activity.

Although advertising and sponsorship sales for the third quarter were consistent with the low end of our assumptions, the revenue mix from these sales yielded less revenue for the fourth quarter of 2011 than we had expected and consequently we are taking a more conservative view of the fourth quarter revenue contribution from new sales that we make this calendar quarter. While we have historically seen a meaningful uptick in fourth quarter revenues as customers spend the balance of their remaining promotional dollars before year end, the low end of our new guidance now anticipates only a nominal amount of fourth quarter revenue contribution from sales made during this quarter.

Before turning the call over to Wayne, I also wanted to note the following items in relation to the guidance we issued today. We expect the weighted average basic share count and diluted share count for the full year to be $58 million and $60 million respectively. We do not expect the convertible notes will be dilutive to income per share for the full year period. For the fourth quarter, the convertible notes are not expected to be dilutive at the low end of our guidance range but are expected to be dilutive at the high end of our range. We expect capital expenditures for the fourth quarter to be approximately $5 to $10 million and the full year to be approximately $21 to $26 million.

I’d like to turn the call over to Wayne at this time.

Wayne T. Gattinella

Needless to say, we are not satisfied with our overall performance in the second half of the year and we are keenly focused on the actions necessary to address the recent declines in our top line growth. We’re working closely with each of our major customers as they finalize their 2012 marketing budgets to put forward a portfolio of digital solutions that can more efficiently target their customers and more effectively deliver measurable returns on their marketing investments.

Given the business challenges that many of our larger bio pharma customers are facing, this process is happening later in the year than we’ve seen in the past. As we get a better view of their budgets, we will provide an update regarding 2012. But our preliminary view at this time is that full year 2012 will be comparable to 2011 with the first half being slightly below 2011 and improvement occurring in the second half of the year.

As we previously discussed, we’re experiencing extended internal legal and regulatory review within our bio pharma customers for our larger sponsorship programs. We’ve been enhancing our product solutions to help streamline the legal and regulatory process and to maximize their timely implementation and revenue yield. We began the rollout of these new products in September and early indications have been positive.

We’re aggressively investing behind a steady flow of new services that are designed to increase the growth of our digital business and build new revenue streams for the company’s long term growth and profitability. We continue to develop the interactive technologies and decision support tools that more deeply personalize the online health experience for both our users and for our sponsors.

In September we launched a new set of interactive diabetes tools and content with Rite-Aid as our exclusive sponsor that provides their customers with comprehensive online and mobile access to personalized diabetes support for people living with diabetes and for their caregivers. We continue to build new content channels to expand our health and wellness audience and attract new categories of sponsors.

In October, we announced a new multiyear relationship with Bausch & Lomb at the annual meeting of The American Academy of Ophthalmology. Bausch & Lomb is the preeminent sponsor for our new eye health center on both WebMD and Medscape that provides a first of its kind suite of online resources designed to improve the care of eye health and encourages dialog between eye care professionals and consumers of all ages.

We’ve begun to make meaningful progress with expanding advertising and sponsorships outside the US. Several major product sponsors have contracted to promote their products on our BootsWebMD consumer site in the UK. We’re also beginning to monetize our global reach to healthcare professionals focusing our sales efforts on bio pharma customers across Western Europe.

Our leadership in the mobile health information market continued to expand this quarter. Consumer downloads of the WebMD mobile app exceed 7.5 million and our Medscape mobile app now reaches 1.6 million registered users. In fact, nearly half of Medscape physicians now access our site through both their desktop and their mobile devices. We’re planning to launch several new mobile services this quarter that will generate incremental revenue in 2012 and establish new revenue streams for the future.

In terms of our traffic growth, our online reach to health involved consumers and healthcare professionals continue to grow this quarter. Traffic on the company’s owned and operated sites averaged 87.8 unique users per month, an increase of 31% over a year ago and delivered over 2 billion pages for the quarter, a 27% increase. Adding in our affiliate partner sites, unique users to the WebMD network averaged 107 million users per month and pages views a total 2.2 billion, growth rates of 29% and 26% respectively.

With our strong organic traffic growth, we’ve decided that we are phasing out our affiliate sites by the end of this year. We appreciate the productive partnerships that we’ve had, and in particular, with our largest affiliate partner Drugs.com. Traffic to our professional network led by Medscape.com averaged approximately 2.5 million physician visits per month. We believe that the WebMD professional network reaches more doctors, more healthcare professionals, more frequently, in more countries than in any other health resource.

Finally, I’m extremely proud that WebMD was named the most trusted consumer brand in the US for the second consecutive year according to the Annual Consumer Study that is conducted by the well respected research firm Millward Brown.

Looking at our private portal business, the private portal business represented approximately 15% of our revenues for the third quarter. Revenue during the quarter declined by $2.1 million or about 10% from a year ago as the macroeconomic environment for employer funded programs has not improved.

In summary, I’m certainly not satisfied with the recent results. In hindsight I believe we’ve underestimated the length of time it would take for large pharmaceutical companies to shift large portions of their consumer and professional marketing budgets online. But I also believe that the changes in the pharmaceutical product portfolios that area occurring over the next few years will serve as the catalyst to accelerate that shift as their new products and associated marketing efforts move from broad lifestyle conditions to therapies that are designed to treat more targeted chronic populations with promotional strategies better suited for the highly targeted and information rich platforms that WebMD provides.

I’m firm in my conviction that WebMD is uniquely positioned to capitalize on the market opportunities that will deliver long term growth for our sponsors and for our shareholders. Our company has the means, the experience, the talent, and the will to leverage our assets in a large and still underdeveloped marketplace for the long term. I’d now like to turn the call over to Marty Wygod for some closing remarks and then we’ll take your questions.

Martin J. Wygod

While facing near term challenges, I remain confident that there’s a significant growth opportunity ahead for WebMD. While WebMD has become an integral part of large pharma’s digital strategy, the challenge is that digital marketing on the whole remains stagnant at roughly 5% of total marketing spend. As the clear leader in the space we need to intensify our efforts to demonstrate to pharma why they need to move dollars from traditional offline channels to more effective digital strategies.

Pharma is facing substantial market pressures as their product portfolios are changing and their marketing channels are becoming less effective. With these pressures, pharma is destined to redefine its marketing practices. I believe that it is these same pressures that will ultimately prove to be the strong catalyst for a meaningful shift by them to digital marketing solutions. WebMD offers a cost effective, efficient, and highly measurable alternative to traditional detailing to physicians and mass media to consumers. Our digital platforms allow pharma to reach both the high and previously difficult to reach low and mid [inaudible] subscribers as well as identify and engage appropriate patients more quickly and cost effectively than ever before.

We know that an informed patient interacting with a prepared and knowledgeable physician is most likely to result in a positive outcome. The strength of our assets is unparalleled through the most trusted and recognized brand of health information. We have the largest and highest quality audience of health involved consumers and healthcare professionals in any medium. Our breadth and depth of our content assets are unmatched by any other. The sophistication and scale of our technology platforms allows us to deliver tailored product messages to a highly targeted audience.

We are the most experienced and talented group of employees who are committed to advancing our marketing leading position and we have the financial strength to make the necessary investments. On behalf of the board of directions we understand and share the frustration and disappointment that we know you’re experiencing. We will take whatever steps are necessary to ensure that the company’s long term growth and to maximize shareholder value.

I’d now like to turn it over to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Analyst for Mark S. Mahaney – Citi.

Analyst for Mark S. Mahaney – Citi

A couple of questions, as the pharma companies are planning out their 2012 budgets what are right now their biggest concerns and at what point do you think will we start to see more share shifting over to online from pharma? Then I have another follow up.

Wayne T. Gattinella

I think their biggest concerns right now are margins. The portfolio mix for every company, whether they have products going on patent or they’re competing products now against other generics or other lookalikes in the market, suggest that they’re relooking at their overall marketing spend to be able to maximize their margins. We saw that in terms of the balance of 2011 commitments right now where Tony mentioned, at least for the fourth quarter right now, we’re taking a conservative view in terms of how much spend will come into the market for the remainder of the year and we’re just seeing budgets right now being finalized later in the year than what we have seen previously.

Analyst for Mark S. Mahaney – Citi

Wayne, can you also give us an update on the CPG side? I think earlier you’d noticed there was a slowdown last quarter in the CPG side. How’s that trending this quarter and also going into 2012?

Wayne T. Gattinella

You know again, I think 2012 is early right now to project but in the similar way we saw many of the larger CPG companies, particularly those in the health related spaces both get more conservative in terms of their end of year commitment, in a similar way they’re taking longer to really place their 2012 budgets out there than we’ve seen in the past. I mean, we’re in very close discussions and working closely with them to help construct those programs but the commitments towards them and ultimately the budgets that will support them again, are occurring later than what we’ve seen before.

Operator

Your next question comes from Analyst for Ryan Daniels – William Blair & Company.

Analyst for Ryan Daniels – William Blair & Company

I just wanted to kind of tie into the former question with a little bit more granularity in terms if you had to kind of characterize the reasons for the Q4 takedown, Tony I think you cited two reasons but if you had to weight one more than the other, was this a situation where you think the budget flush is going to be the bigger factor or the lack there of, or is it kind of this delayed implementation if you would, or kind of more spread out implementation in 2012?

TT

Well, in terms of some of the issues around medical/legal review which is delayed implementation in terms of this revision to guidance, I wouldn’t characterize that as being a significant contributor. The revision in guidance really related to after looking at our Q3 sales orders which come in at the very end of the quarter, and then understanding after you go through those orders, and there’s probably more than 1,000 orders to go through that there was less revenue contribution to the balance of 2011 than we anticipated. We went back and relooked at what our fourth quarter expectations were and made a more conservative estimate in light of what we saw in the third quarter.

So it’s really coming out of what we’re seeing in the back half of the year from many of our large customers which is right now they’re holding their budget dollars and not spending them the way they have in the past.

Analyst for Ryan Daniels – William Blair & Company

It sounds like they’re pulling back the dollars that would normally be there in Q4 to some extent so you don’t see this as a share shift in terms of they’re allocating it in a different direction? This is mostly the dollars being held back?

Anthony Vuolo

That’s our view. Our comment is that we’re taking, at least at the low end of the guidance a pretty conservative view as to what they may do. Obviously, the quarter’s not over but based upon the mix we saw in third quarter sales with a greater weight towards 2012 that’s the current view with respect to the outlook we’re providing.

Analyst for Ryan Daniels – William Blair & Company

I know with the budget commentary you’ve given you haven’t seen a lot, or a lot of your customers haven’t shared with you – they’re sharing it a little bit more later than you typically see but the ones you are seeing, are you seeing less money likely to be spent year-over-year with WebMD maybe capturing a larger share of that? Can you kind of give us a feeling for what your gut is kind of as it plays out next year?

Anthony Vuolo

Again, too soon to conclude but that is possible. There may be situations where budgets are cut and we’re going to effectively compete to take a greater share of what could be a smaller pie, is possible.

Operator

Your next question comes from Ingrid Chung – Goldman Sachs.

Ingrid Chung – Goldman Sachs

A couple of questions, Wayne you said last quarter that you were streamlining digital campaigns to help get them through regulatory compliance more quickly. I was just wondering if you could speak to how well that’s working and whether that’s helped the numbers somewhat? Then, you’ve also said in your general comments about 2012 that you expect trends to improve in the second half of 2012. I was wondering if you could speak to what gives you comfort that you will see trends improve in the second half?

Wayne T. Gattinella

To begin with, we did launch a new set of services early September, trained them early September, brought them to the market throughout the month. We’re actually seeing a positive uptick right now. We’re building a good pipeline. From a design standpoint, they are absolutely easier to move through the approval and implementation process. We actually have some services that will be sold and booked in the first quarter. At this point in time we’re pleased with the progress we’re making but we’re not done. There’s no doubt that-that regulatory review process is pretty complex and our changes and enhancements are not done as well but as far as I can speak to it at this very moment we’re pleased with the progress.

Martin J. Wygod

I think the other thing that we’re seeing in the second half, for the results in the second half of 2012 is that we’re currently in the process of contracting for several fairly substantial rollouts at that time. But as we’re getting into the contracting we’re realizing the timing from a GAAP point of view is basically that we’re not going to be booking any revenues from these until the very end of 2012 and into 2013. So as we previously thought there would be more of a revenue contribution coming through the second half of the year, we don’t feel confident on that at this point.

Operator

Your next question comes from Mark May – Barclays Capital.

Mark May – Barclays Capital

I think, not surprisingly there are many investors that are frustrated still trying to get a better handle on exactly what’s happening as it relates to the sponsorship slowdown and one thing that I wanted to ask you about is how much of this is related to the CME side of the business and CME partner sponsorships and maybe some changes as it relates to how those programs are run and sponsored? And when you talk generally around medical and legal review, are you specifically referring to primarily that part of your business?

Martin J. Wygod

No, not at all. The CME is playing no role in this whatsoever.

Wayne T. Gattinella

Just to clarify a little bit, medical education actually by design, does not go through medical/legal review because it’s an arm’s length grant and from a technical standpoint pharmaceutical companies are not supposed to be reviewing the content at that level. So it doesn’t pay into the medical/legal review. That’s much more by definition, related to all of their promotional marketing programs.

Medical education went through its own sets of kind of changes a couple of years ago when there was a much deeper separation inside the pharmaceutical companies in terms of how they had to budget and again, maintain arm’s length and we went through a lot of reengineering to be able to really interface with those new changes and as we stand right now we’re actually doing it pretty efficiently and effectively. So medical education is part of overall mix, it’s not an area that we view as a problem child.

Mark May – Barclays Capital

So most of the problem is on the consumer side of the business not on the HCP side in terms of revenue short fall?

Martin J. Wygod

The consumer as well as the professional, both.

Wayne T. Gattinella

It’s the promotional side of the business where the dollars themselves, which are primarily sitting out there in offline channels are pretty much still being spent in offline channels and clearly our role is to be able to accelerate that shift of those dollars. But, as we sit today, the predominate amount of consumer dollars are being spent on television and to a lesser extent print and on the professional side clearly, the dominate marketing spend is on the feet in the street.

Mark May – Barclays Capital

And what do you think was the catalyst of change as it relates to a change in the medical/legal review process that you’ve pointed to that began earlier this year? What was really the main catalyst for change in that review process?

Martin J. Wygod

It could possibly have been the major pharmas, a lot of them and a lot of our clients having to enter into corporate integrity agreements which really turned over a lot of the approval process after the brand managers awarded contracts to the legal regulatory departments of the pharma companies.

Wayne T. Gattinella

There’s a much deeper, more stringent, and hence longer review of any promotion that pharma puts out of any channel. I think you have a combination, as Marty said, of the integrity agreements that have shown a much brighter light on the information that does go out. And secondly, no doubt with less clarity from the FDA in terms of how certain digital approaches should be approached by pharmaceutical companies there’s been, from a regulatory standpoint inside those companies, a more conservative view as to how they should be using digital.

And the industry itself has been looking for more clarity from the FDA in that regard. To the best of my knowledge, while the FDA has been looking to provide that guidance we don’t really see, or have not heard at least that they’re ready to provide more specific guidance any time soon.

Mark May – Barclays Capital

One last question please, I think that while your buyback activity has been welcomed there have been some that would have liked to have seen more aggressive activity there. Is there anything that we should be considering that would preclude you from maybe doing a more aggressive buyback?

Martin J. Wygod

Well, I assume you’re familiar with the regs that exist in these buyback programs. It’s based on an average formula of the presentation of the average buy.

Mark May – Barclays Capital

I’m including tenders when I talk about buybacks.

Martin J. Wygod

I had the feeling you were.

Mark May – Barclays Capital

Is there anything we should be considering that would limit your ability to be more aggressive in this area?

Martin J. Wygod

Nothing that we’re comfortable discussing at this point.

Operator

Your next question comes from Gerard Hayman – JP Morgan.

Gerard Hayman – JP Morgan

What do you guys believe is the most compelling reason that the company will regain its momentum and have future growth over the long term?

Wayne T. Gattinella

I think there’s many reasons. We can elaborate on many of them. I can tell you factually that the product portfolios inside of pharmaceutical companies, we talked about a change in those portfolios as they’re moving from what has typically been much broader lifestyle blockbuster products to narrower more targeted population products, more chronic conditions, those are good changes for us. As we’ve said in the past, we’ve never really captured any significant amount of the big blockbusters because they can efficiently buy major broadcasts consumer channels and from a field force standpoint they can really cover the PCPs pretty well.

That change, and if you look at the line up of products that will be coming into market beginning of 2012 and continuing over the next several years is much more in our sweet spot, much better suited for the highly targeted platforms we have. And obviously, from an efficiency standpoint enables us to really create that reach in a highly effective way.

Martin J. Wygod

One of the things that jumpstarted me that I think is tremendously compelling is the ability we have to influence the prescribing of physicians and to go ahead and reach the lower and mid [inaudible] prescribing physicians, move the low [inaudible] up in certain disease categories to mid and the mid up to high prescribing as well as simultaneously being able to influence the patients in different disease categories that are online with us and have the necessary information of when they’re going to be seeing that physician next, of knowing what percentage of them and which ones are currently dissatisfied with their existing therapy, and be able to educate them and get them to go in to have the appropriate intervention with their physician, and have the appropriate branded discussion. Hopefully that physician has been properly educated by us and therefore resulting in the desired outcome from a branded discussion.

I think the ability that we have, the ability to prove that through our analytics is something that’s going to be a driving force for our company long term especially, as Wayne previously mentioned, as a lot of these introduction of new drugs or new indications come out on existing drugs where we can make a very cost effective approach here. Where it would be much more expensive for pharma to do it on their own.

Gerard Hayman – JP Morgan

Do you guys have any comment about any of the overseas operations right now as far as growth or what we might be looking for in the future?

Wayne T. Gattinella

We’re certainly not providing numbers on this call in terms of the future, other than the comment in this past year, 2011, we’ve started to see some meaningful uptick in our sales in western Europe both consumer and professional and we’ll be prepared to talk more about that when we talk about 2012 in more detail.

Martin J. Wygod

We have no excuse with the kind of reach we have for physicians in almost every major country, not to create and start to monetize that and provide services.

Operator

Your next question comes from Kevin Kopelman – Cowen & Company.

Kevin Kopelman – Cowen & Company

Looking at the Q4 shortfall, were there any additional cancellations of ad programs that were already contracted or was it more of a lack of selling new programs, or is it a combination of the two?

Anthony Vuolo

The change to our guidance in relation to our last guidance is primarily the result of what we just discussed. It was the lack of the sales orders that came in, in the third quarter and then the change in our outlook in the fourth quarter given what we saw as a result of the third quarter sales activity in terms of the balance of the year. That was the bulk of the explanation, it didn’t have to do with backlog movement.

Martin J. Wygod

Our backlog was adequate an in line, it’s just the percentage of that backlog that appears to be falling into the fourth quarter, or the lack of it into the fourth quarter, will be falling into the first three quarters of the year. And that’s not consistent with what we’ve seen in previous quarters or the corresponding quarter last year.

Kevin Kopelman – Cowen & Company

Could you talk about considering the lower than expected revenue levels how you’re thinking about managing costs?

Anthony Vuolo

If you notice from our guidance and from our trends, we have managed our expenses. They’re actually lower this quarter than they were the prior quarters. We always try to get more efficient in the delivery of our services and we continue to endeavor to do that. A certain amount of our spend relates to investments to the future and I think one of the things that we won’t do is make short term decisions that would impact future growth from another investment perspective.

Martin J. Wygod

There’s a lot of key hires we intend to make and new programs that we’re going to be entering into in the immediate future. So we don’t see much of a reduction from an expenditure point of view.

Kevin Kopelman – Cowen & Company

Just one last question, what was your thought process in shutting down the affiliate program and what’s the revenue impact from that?

Anthony Vuolo

We don’t see any revenue impact, which obviously was part of the decision. It does cost us money which was part of the decision, and we’ve consistently quarter-to-quarter seen very strong organic growth to our owned and operated sites at no acquisition costs which was also part of the decision.

Martin J. Wygod

And we didn’t shut it down, it was a mutual.

Operator

Your next question comes from Peter Stabler – Wells Fargo Securities.

Peter Stabler – Wells Fargo Securities

I’m trying to reconcile great strength you’re seeing in organic traffic and page views with the weakness in the guidance. 26% increase in the page views and organic traffic increases are pretty enviable when you look across the web marketplace. So I guess my question is are we seeing a real pricing pressure here? The average kind of effective CPM that you’re selling into the programs, is it coming down significantly and you’re not able to sell the more premium rich media, video, content integration and advertisers are opting for much more efficient buys? Is that something you’re seeing here?

Martin J. Wygod

That’s a good question. I think what you’re seeing here to a great degree which we haven’t focused on, is to a certain degree we have not really been as effective as we should be but we will be in the future in making sure that our customer base out there understands the value we bring to the table, the analytics behind the services we’re providing for them, as well as the ability that we have to get them the desired results at substantially lower cost.

I think if you want to pinpoint one thing, it’s been our lack of ability to really put out the appropriate analytics and get it in front of our customer base in such a way so they could fully appreciate the value add that we were bringing to the table.

Peter Stabler – Wells Fargo Securities

I guess one follow on is, I believe in prior calls you said that your use of kind of remnant display channels or selling avenues has been pretty limited but with this kind of inventory growth that you’re seeing, do you get more aggressive in kind of second tier sales channels?

Wayne T. Gattinella

I think you do. We’ve talked about the fact that we’ve implemented supply side technology into our network over the last few months. To your point, our inventory is growing, it’s organic but it’s definitely growing faster than our revenue. You don’t turn visitors down at no cost but there’s literally opportunity to look at other ways to monetize those unsold impressions. We’re rapidly moving towards being able to do that in an automated fashion that can create very frictionless yield for us in 2012.

Peter Stabler – Wells Fargo Securities

I guess one last question, with regard to 2012, on the non endemic sales side, what proportion of your programs are sold on a multi quarter basis? Or, I guess put another way, what kind of visibility do you have for non-pharma into next year? My impression is a lot of web sales in the non endemic arena for you would be happening more on a quarter-to-quarter basis so I’m just curious about your visibility there?

Wayne T. Gattinella

It’s a mix. You know, the larger CPG customers that we work with do buy on a longer cycle, six months, in some cases 12 months, but generally speaking the non endemics tend to think more in a campaign mode and campaigns generally are more kind of 90 day kind of view as opposed to 12 month views like pharma would typically pursue. So in fact, we do have many sponsored content like programs that by their very nature require at least a six month commitment and in many cases a 12 month. But, it is more mix than pharma.

Martin J. Wygod

And we’re starting to see the beginning of more and more lifestyle type of programs. These usually end up being one to three year type of programs.

Wayne T. Gattinella

We mentioned our new relationship with Bausch & Lomb, that’s a multiyear relationship and while I’m not going to suggest that’s representative of the majority of our non endemic business, that’s obviously where we’re trying to move that part of our business.

Operator

Your next question comes from George Askew – Stifel Nicolaus.

George Askew – Stifel Nicolaus

A couple of quick questions, can you tell us a little about any additional ad units or ad density that you’re placing on the website, on specifically WebMD.com?

Wayne T. Gattinella

I mean without getting into the nits and nats of it we have continued to use many of the latest IAB technology and advancements to consistently be able to support what customers and many times their agencies are looking for in terms of more compelling units whether they include multimedia dynamics, whether they have certain components preloaded into it - I mean, we support generally speaking, many of the new ad units. Our only restriction and requirement is that it is also respectful of the user interface.

We feel that we have a very highly respected branded site in a category that’s important to our users and we will not entertain ad units that interrupt the user experience in a way that really undermine why people originally come to WebMD.

George Askew – Stifel Nicolaus

Are there more ad units per page, or per primary page on the site? Given the challenges you’re facing are we seeing increasing ad inventory per page for example?

Wayne T. Gattinella

No, we’re not and you know you could infer when you see the kinds of traffic growth that we’ve had that that’s not necessary for us. As we talk about large growth in our unique and page use, that’s pretty broadly distributed across many of the channels. So we’re seeing those kinds of increases even in the most sought after parts of our site. And the net of it is we have not increased the impression tonnage per page for many, many years. That’s actually not been one of the things that we’ve done.

George Askew – Stifel Nicolaus

I kind of want to revisit the pharma not spending here in the fourth quarter, you addressed a moment ago that pharma’s focused on margins and I believe you referenced generics as well. Are we to infer from that, that the regulatory review process is not an incremental headwind in the fourth quarter for big pharma?

Wayne T. Gattinella

[Well, it’s] out there. It hasn’t changed so the regulatory review process definitely – especially with sponsored programs slows the cycle from sale to revenue. It just means you have to bake that into your planning. But I’m not going to suggest that that’s not one of the factors that we stare at when we look at our quarter-to-quarter growth. And again, a lot of our new services are being designed to be able to address some of that so they can get going faster.

George Askew – Stifel Nicolaus

But it has not changed? I mean, when do you think it stopped changing? When did the review process sort of max out and then stop changing? Was that a second quarter event?

Wayne T. Gattinella

You can’t predict it. It is a little bit of a pendulum. We’ve seen it swing in the past. It swung for education for a while and then it got easier and I think the current cycle are very much tied to the issues that many of the larger companies have had with other kinds of promotional compliance issues. And as part of their settlements they’re required now to undergo a more rigorous signoffs across many disciplines, separately to medical, separately to legal, and separately regulatory teams. Generally I have heard those settlements and the requirements can last a couple of years. But I wouldn’t try to predict it right now.

George Askew – Stifel Nicolaus

Final question, kind of anecdotally it seems that new drug launches are generally underwhelming in performance recently. Has that been a factor in what you’re seeing with big pharma? And are we right in that conclusion?

Wayne T. Gattinella

My view again is, you’re not going to see, to my knowledge, a big blockbuster in the near term akin to a LIPITOR or something similar. So when you say they haven’t succeeded, relative to what their expectations have been, I could name many products that are definitely hitting those expectations but those expectations are smaller in absolute size than perhaps some of the blockbusters that have come out over the past six to 10 years.

Martin J. Wygod

But you are accurate there is some underperformance that is taking place on introduction of new drugs.

Operator

Your next question comes from [Andrew Sluhue].

[Andrew Sluhue]

Can you comment on any M&A momentum for either looking at smaller targets or anything like that?

Martin J. Wygod

Right now we have nothing that is emanate that we’re looking at, at this point that is substantial in any form or matter.

Operator

Your next question comes from [Michael Baneer – PLF Capital].

[Michael Baneer – PLF Capital]

I just wanted to make sure, did I hear you correctly that the CPMs are not being affected?

Wayne T. Gattinella

Pricing is not a key variable right now behind the numbers that we’ve been reviewing. We still maintain a very strong premium approach to the marketplace but no doubt, especially in the CPG markets you have certain channels as you move further away from our endemic areas and more into the pure lifestyle areas, you’re going to be more price competitive but that price competitiveness has existed in those areas for quite a long time as well so I’m not suggesting that everything we do is at a premium price but I don’t see price erosion relative to generally speaking how our service are priced in general.

Wayne T. Gattinella

It’s more and more directed towards demonstrating the appropriate ROI that our pharma customers are receiving and the appropriate analytic back up to it so they can feel comfortable for the value for the money they’re spending.

[Michael Baneer – PLF Capital]

Did I understand correctly when you talked about that this is up to you to go back to your clients and show you why they should appreciate the value that you bring to them in terms of analytics and they are getting much greater value than they would be able to derive otherwise? Does this mean that you have enough campaigns for 2012 to really be meaningful to the revenue base?

Wayne T. Gattinella

I believe we do.

[Michael Baneer – PLF Capital]

One last question, over the last five years you essentially have doubled your revenues and everyone today understand the value of the web, and the social media, and the mobile computing and how it’s changing the way everyone communicates. There’s very little that we can draw the line, but looking top down, at some point, and this is going to your comment Marty, at some point the pharma will have to give in and the dollars would have to shift from where they are today to the web. How much of that can you truly control? And then because you’re so close to the budgets and how people think, how can you help them to move that needle so to speak?

Martin J. Wygod

I think it’s our obligation here to be able to demonstrate to the customer base the ROI and the value that we can bring and do it in such a way so it’s much more cost effective than the conventional or traditional methods that they’re currently using, and demonstrate to them what a dramatic competitive advantage they get in a therapeutic class by fully utilizing our services over others that are doing it in the more traditional way.

[Michael Baneer – PLF Capital]

One last question, your balance sheet is clearly overcapitalized and you’re beginning to take advantage of this. Is there any priority to the capital spending outside of the things you’ve done so far that you can help us understand, or you’re just going to continue to execute pretty much along the lines that you’ve done over the recent two years?

Martin J. Wygod

I think it is going to be relatively similar but I think you are going to see us spending more money going forward here in strategic areas of our site, beefing up certain areas that we think are needed for the kind of growth momentum that we want to get back in the future.

Operator

Your next question comes from Mark May – Barclays Capital.

Mark May – Barclays Capital

Just a follow up question, I think it was Wayne who referenced earlier some new programs that had launched in September. I was wondering if you could provide some more specifics no exactly what those entail? What sort of changes you’ve made?

Wayne T. Gattinella

What we did was take a lot of the audience qualification and targeting that was typically part of our sponsored programming where we literally developed custom programs including the content, and started to move some of that audience capability to target both sub-segments of who you’re trying to reach in simpler media like presentations. The consequence is, or the strategy is to take some of the value that was almost exclusively in these program solutions and replicate them in simpler presentations that again, by definition would not take the same medical/legal review process that customized content and sponsored programs do.

And so really, what we are providing now is kind of a menu option, if you will, for the customer based upon what they feel is certainly their goals but also their ability to get some of these programs through their internal process. And obviously, in those cases where it’s going to be more encumbersome then collectively we move towards the simpler approaches.

Mark May – Barclays Capital

I’m super sorry, I’m not sure I sort of got half that. Do you mind, is there another way of describing what you just said, maybe even using a real test case? I didn’t completely follow you.

Wayne T. Gattinella

Let’s just say that you are trying to reach people in our diabetes channel who are presumed to be qualified by virtue of the content and information they’re looking at in the channel. But now you’re actually more focused than just that, you’re trying to reach people that have been diagnosed and living with diabetes for at least two years, have been on an oral medication or therapy, that may be failing or at the minimum you’ve tried orals for a period of time of two years to try to move them potentially to new orals or maybe even insulin in that case.

In our program solutions, we do that in a very particular way to be able to qualify you in that regard based on the links that we promote, the content that we drive you into, and at the end you’re kind of at the bottom of the funnel in terms of hitting that qualification. We’re now bringing some of that capability up front to be able to prequalify you right up front and then serve you promotional units that might be more impression based knowing that we’ve been able to deliver those promotional units to that same target without necessarily having to go through the customized content approach.

Mark May – Barclays Capital

So rather than creating customer content and sponsorship programs enabling the targeting capability that you have to be utilized through more of a running network, or more of a traditional media buy, but still being able to target that same end user audience?

Wayne T. Gattinella

Exactly, and using a lot of our qualifiers through assessments or otherwise prior to delivering the media. So the media we can actually guarantee is hitting your particular profile.

Mark May – Barclays Capital

It sounds like there’s more kind of traditional or classical media buys don’t have as much of the red tape involved as these customer programs do?

Wayne T. Gattinella

It looks like a straight media buy but there’s a lot of prequalification going on so you’re getting both the intelligence of the content targeting with the simplicity of kind of a media unit if you will.

Mark May – Barclays Capital

But the trade off is you probably can’t charge as much of a premium for that?

Wayne T. Gattinella

It is premium priced and then you bake in other things in terms of minimum time or spend to drive value up if you will.

Operator

Your next question comes from Peter Stabler – Wells Fargo Securities.

Peter Stabler – Wells Fargo Securities

Overlooked in this conversation has been the private portal business. I’m wondering if you could give a bit of an outlook for that for 2012?

Anthony Vuolo

I think it’s still a little preliminary for 2012 as we haven’t completed our planning in that aspect of the business. But, at this point I wouldn’t anticipate any meaningful growth for 2012 at this point. There are some prospects that are still out there but I think 2012 is likely to be same levels as 2011.

Wayne T. Gattinella

We are starting to see a reasonable pickup in some new orders there so we could have a small pickup for the first time in several years on the private portal.

Peter Stabler – Wells Fargo Securities

Is the open enrollment timing a bit of a punctuation on the selling process?

Wayne T. Gattinella

No, by the time open enrollment comes it will be late. The selling is really done in the early part of the year in order to be prepared for open enrollment.

Peter Stabler – Wells Fargo Securities

It’s kind of a six month selling processes?

Wayne T. Gattinella

Generally speaking, that’s probably right.

Wayne T. Gattinella

I think the management there is starting to do a very good job and we’re starting to see some nice improvements.

Peter Stabler – Wells Fargo Securities

But longer term, I mean I understand the pressures on companies minimizing expense but longer term you’re confident you can return to growth here?

Wayne T. Gattinella

Yes.

Operator

I’m not showing any 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 the US at 404-537-3406, the passcode is 20193275. There is also a webcast replay available on www.WBMD.com. Thank you for joining us today.

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