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WebMD Health, (NASDAQ:WBMD)

Q1 2007 Earnings Call

May 01, 2007 4:45 pm ET

Executives

Risa Fisher - VP of Investor Relations

Tony Vuolo - CFO

Marty Wygod - Chairman

Wayne Gattinella - President and CEO

Analysts

Jennifer Watson - Goldman Sachs

Sandy Draper - Raymond James

Brian Pitz - Banc of America

Rob Kelly - Smith Barney

Mark Mahaney - Citi Research

Heath Terry - Credit Suisse

Bill Morrison - JMP Securities

Anthony Petrone - Maxim Group

Len Podolsky - Piper Jaffray

Sandy Draper - Raymond James

Jeremy - William Blair & Company

Rob Kelly - Smith Barney

Kar Kwong - Needham & Company

Presentation

Operator

Good afternoon everyone and welcome to the WebMD Health Corporation March 2007 Quarterly Conference Call. Today's conference is being recorded. I will now turn the call over to Risa Fisher, Vice President of Investor Relations.

Risa Fisher

Good afternoon, and welcome to our first quarter earnings call. I will now read a statement concerning our forward-looking disclosures.

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

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

The earnings release issued today is available on our website at www.wbmd.com in the Investor Relations section. Our SEC filings are also available on our website and on the SEC's website. The release includes reconciliations between GAAP and non-GAAP financial measures to be presented in this call.

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

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Tony Vuolo

Good afternoon and thank you for joining us today. On the call with me are Marty Wygod, Chairman of the Board and Wayne Gattinella, President and CEO.

I will review our preliminary first quarter financial results and the preliminary financial guidance for the balance of the year. Wayne will then review the quarter and discuss some of our 2007 initiatives. And lastly, Marty will make some closing comments before we open it up for Q&A.

As we noted in the press release we have labeled these results preliminary, because we have identified a correction, which needs to be made relating to prior period income tax expense. The Company has recently identified errors in non-cash income tax expense and related deferred tax liabilities in the aggregate amount estimated to be of $4 million for prior period, primarily 2006.

The company has netted the deferred tax liability resulting from the amortization of goodwill against deferred tax assets relating to the company's NOL’s. Because these deferred tax liabilities have an indefinite life, it should not have been netted against the deferred tax assets with a definite life.

The company is in the process of determining whether the correction of this error will be reflected in the results for the March 2007 quarter or will be reflected by amending its financial statements for prior periods.

The preliminary results and financial guidance discussed on the call today with respect to income tax expense and net income do not reflect the impact of the correction. The correction will not have any impact on previously reported revenue, adjusted EBITDA, or operating cash flows.

Revenue for the March 2007 quarter was $73 million, compared to $50.1 million last year, an increase of 46%. Advertising and sponsorship revenue increased 45% and licensing revenue increased 76% over the March 2006 quarter.

Publishing and other revenue was $4.5 million, a decline of $431,000 compared to last year. This decline includes the impact of our previously announced decision to discontinue our offline CME products. These products contributed $1.4 million in revenue last year and no revenue this year.

Including the acquisition-related revenues of $9.3 million for the March 2007 quarter and $1.4 million in offline CME revenue in the March 2006 quarter, which I just referred, and adding back $335,000, which is the pre-acquisition revenue of eMedicine in the March 2006 quarter. Revenue growth was 30% over the prior year.

Adjusted EBITDA for the March 2007 quarter was $12.6 million, compared to $6.5 million last year, an increase of 93%. Adjusted EBITDA as a percent of revenue improved 430 basis points to 17.3% from 13% last year. Adjusted EBITDA per diluted share was $0.21 compared to $0.11 last year.

Adjusted EBITDA margin on incremental revenue was 27% for the March 2007 quarter. Excluding the impact of the acquisitions discussed earlier, the adjusted EBITDA margin on incremental revenue was about 45% for the March 2007 quarter.

Online Services segment adjusted EBITDA increased 65% to $30 million or 19% of segment revenue, compared $7.9 million or 17.4% of segment revenue last year.

Publishing and Other Services adjusted EBITDA loss was $385,000 compared to a loss of $1.3 million last year. Net income for the quarter was $706,000 or $0.01 per share compared to a net loss of $4.2 million or $0.07 per share last year.

Looking further at the revenue increase, advertising and sponsorship revenue increased 45% to $47.4 million, resulting primarily from internal growth and also from acquisitions. Acquisitions contributed a total of $4.1 million in the March 2007 quarter.

Excluding these revenues and the pro forma impact of the $335,000 of pre-acquisition revenues of eMedicine in the March 2006 quarter, advertising and sponsorship revenue increased 31% compared to last year.

Private portal licensing revenue increased 76% to $20.1 million, again resulting from both internal growth and our acquisitions of Summex and Subimo, which together contributed $5.2 million during the quarter.

The March quarter reflects the first full quarter of revenue contribution from our acquisition of Subimo in mid-December of last year, which only contributed about $500,000 in revenue in 2006. Licensing revenues increased 30% compared to last year after adjusting for these revenues.

Publishing and other service revenues were $4.5 million for the quarter. Revenues from Conceptis offline CME products were $1.4 million in the prior year and zero in the current period.

Looking at expenses, cost of operations was $29.7 million or 40.7% of revenue for the quarter, compared to $24.7 million or 49.4% of revenue last year. Included in cost of operations are non-cash expenses of $1.6 million compared to $2.3 million last year. Excluding non-cash expenses cost of operations as a percent of revenue was 38.5 % compared to 44.7% last year, an improvement of 620 basis points.

Sales and marketing expense was $22.9 million or 31.3% of revenue, compared to $15.5 million or 31% of revenue last year. Included in sales and marketing are non-cash expenses of $3.6 million this year compared to $3.1 million last year. Excluding non-cash expenses, sales and marketing expense as a percent of revenue was 26.4% compared to 24.9% last year. The increase was due to the impact of acquisitions made during 2006.

General and administrative expense was $15.5 million or 21.3% of revenue compared to $11.9 million or 23.8% of revenue last year. Included in G&A, are non-cash expenses of $2.5 million this year compared to $3.2 million last year. Excluding non-cash expenses general and administrative expense as a percent of revenue was 17.8% compared to 17.4% last year, again due to the impact of our 2006 acquisitions.

Depreciation and amortization was $6 million compared to $3.5 million last year. This increase was due to a combination of the impact of acquisitions and the increased level of capital expenditures.

Interest income totaled $2 million for the quarter, an increase of $537,000 from last year due to increased cash available for investment. The provision for income taxes was $210,000 for the quarter compared to zero last year. The weighted average diluted share count for the quarter was $59.6 million.

Turning to our balance sheet, cash and investments at December 31, 2007 were $212 million. As we previously announced this cash includes $140 million from the reimbursement by Emdeon of the estimated utilization of our NOLs in 2006 in connection with the sale of its businesses. This estimate will be finalized later in 2007 in conjunction with the filing of the consolidated federal income tax returns by Emdeon.

Operating cash flow for the quarter was $30 million. As we stated in our prior calls quarterly operating cash flow can be impacted by the timing of cut off of compensation accruals, other expense accruals, the billing and collection of receivables and reimbursements to Emdeon in relation to the quarter's end. Capital expenditures for the quarter were $4.8 million.

Turning to financial guidance; we remain comfortable with our previously issued financial guidance for the remainder of 2007. Our financial guidance considers among other things, the expiration of our arrangement with AOL on April 30, 2007, which has contributed approximately $5 million in both annual revenue and earnings. The impact of our previously announced decision to discontinue our offline CME products, which contributed approximately $4 million in revenue in 2006; the expected timing and delivery for programs sold.

The seasonality related to our private portal business, as most new accounts are not implemented until the latter part of the calendar year; and lengthening the sales and implementation cycles as a result of the new products integrated with our private portal platform.

Seasonality of our advertising and sponsorship revenues which are typically weighted to the latter half of the calendar year. Seasonality of our publishing related revenues which are more typically weighted to the third quarter. Assumptions as to the timing of new sales activity; expenses related to our recent acquisitions, the integration of our recent acquisitions, and the timing of synergies related to those efforts; continued investment in our infrastructure and organization to support both our public and private portal offerings, and the launch of new products and the expansion of our sales and marketing organization.

As I previously mentioned, the income tax expense and net income do not reflect the impact, if any, related to the correction referred to above. While we remain comfortable with our previously issued financial guidance for the remainder of 2007, we do not expect that we would exceed our guidance for the June 2007 quarter. The June quarter historically does not see significant new account additions for our private portal services.

Additionally, the June quarter will only reflect one month of revenue from our expiring AOL relationship, which contributed $1.8 million in revenue in the March 2007 quarter. It is possible that we may see higher than anticipated margin expansion on incremental revenues in the last two quarters of 2007 then contemplated by our current guidance as a result of an acceleration of the benefits of our infrastructure investments and acquisition synergies. We expect to provide a further update on our next earnings call.

Our full year 2007 guidance assumes the following revenue distribution; approximately $237 million to $245 million from advertising and sponsorship, approximately $80 million to $85 million from licensing, approximately $2 million from content syndication and other; and approximately $21 million to $22 million from publishing. This annual revenue distribution reflects the lengthening of our private portal sales and implementation cycles, which was discussed in the press release and which Wayne will comment on further in a few moments.

A schedule summarizing quarterly and annual financial guidance as well as the reconciliation between GAAP and non-GAAP financial measures is attached to the press release we issued today.

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

Wayne Gattinella

Thanks Tony. WebMD continues to extend its market lead as the most recognized and trusted brand of health information, and I believe that our first quarter results represent important new milestones in furthering our leadership. Traffic to the WebMD network reached the record 41.7 million unique monthly users during the quarter, that's an increase of 43% over the same period a year ago.

Our page views totaled a record 963 million pages during the quarter, an increase of 29% over the prior year. More than 95% of our page view traffic in the first quarter was generated on WebMD-owned and operated sites, and while our programming relationship with AOL officially ended yesterday, in fact AOL only represented 2% of our page views during the first quarter.

Our online reach to physicians also leads the industry as we again reached more than 1 million physician visits per month to our professional network in the first quarter. During the quarter, 690,000 continuing medical education or CME programs were completed on our professional sites for an increase of 44% compared to last year.

In the second quarter, we expect to complete the integration of our Medsite programming with Medscape distribution that will bring a case based set of educational programs through our combined physician audience.

Our online sales activity to biopharma and consumer products companies was very strong this quarter, as companies continue to shift more of their consumer and professional marketing budgets online. During the first quarter we ran approximately 500 individual online programs and that compares to about 400 programs in the same period a year ago.

We're beginning to expand our sales and marketing resources as the infrastructure necessary to drive continued growth in each of our major market becomes resourced.

During the quarter, we launched our next-generation consumer health portal together with free access to the WebMD Personal Health Record. The new WebMD health portal delivers the next level of personalization, information, community and care that empowers people to make more informed health decisions.

We're delighted with the initial results. We're seeing increased utilization in the newest areas of the site, especially the new interactive area such as community, video and WebMD Health Search. Early results are also showing greater effectiveness from the newly redesigned sponsored areas of the site.

An important feature of our new site is the more than 60 health, wellness and lifestyle centers. Each center features original WebMD content and medically reviewed articles, news, community, features and health assessments for each major topic.

To help support the launch of eight new wellness and lifestyle centers, WebMD has entered into new editorial partnerships with several leading publishers of consumer health, wellness and lifestyle publications that include Rodale Inc. and their key publications Men's Health, Women's Health, Prevention, and Runner's World. Hearst Corp. and their publications Good Housekeeping, Redbook, Esquire, Country Living and Marie Claire, Southern Progress and their publications Health Magazine, Cooking Light, Southern living, and Martha Stewart Living Omnimedia's Body and Soul.

Wellness and lifestyle areas such as diet, nutrition, skin and beauty and parenting represent significant opportunities to extend the WebMD brand of health information to our users and to a growing base of new consumer health advertisers.

The technology platform that is now supporting our new consumer site is also being expanded to support all of our sites including Medscape. We expect that the entire WebMD network of sites will be operating on a common platform within the next 12 months creating a more efficient web publishing operation and greater flexibility in speed to market for new online services.

Let's talk about our private portals market now. During the quarter we implemented online heath platforms for Liberty Mutual and Lear Corporation. As well as entered into two new distribution agreements with benefits outsourcing partners Workscape and Mercer to market the WebMD platform to their customer bases. Mercer is the world's largest health and benefits consulting firm in the US and their outsourcing business is one of the fastest growing in the middle market.

Our installed base of companies using our private portal platform at the end of the first quarter totaled 103 organizations compared to 80 a year ago. We also have approximately 150 additional customers who purchased standalone health decisions services from us. We are also seeing strong renewal rates from our existing customers, as we have now renewed 19 of the 20 accounts that have come up for renewal this year.

As the healthcare market place continues to trend towards greater consumer accountability and control, WebMD continues to invest in innovative decision-support solutions to help individuals make informed health decisions.

During the quarter, we introduced several new products to the employer and payer markets that are integrated with our health and benefits platform. Through our research and experience, WebMD has found that our member's first experience with their health plan or employer-sponsored portal is often when they are searching for a provider.

The new WebMD provider and treatment decision-support suite combines our proprietary provider directory services with cost, quality, and treatment information in a user-friendly online application. Our new product is designed to get consumers greater transparency when selecting their doctor or hospital by using objective, accurate, and meaningful information.

WebMD Health Alerts is a new product that integrates with the WebMD Personal Health Record to securely message consumers regarding potential gaps in their care, using the latest evidence-based guidelines.

Health Alerts provides a powerful way to keep employees and health plan members informed of personal health situations and to facilitate a structured discussion with their physician or care provider.

Lastly, WebMD Health Coach is our integrated suite of online and telephonic lifestyle management program that leverage our recent acquisition of Summex. Our new Health Coach product creates an innovative solution for large employers and plans to efficiently reduce modifiable health risk behaviors across their employee and member populations, and to reduce the high cost of preventable medical care.

These newest products are an exciting addition to our private portal's platform and represent an important opportunity to continue to increase our revenue penetration of both current and prospective customers. We expect to announce our first set of customers for these new services in the coming months.

I would point out however that due to the added complexity of these integrated service offerings, we are experiencing a somewhat longer sales and implementation cycle for our private portal platform than what we have typically seen in the past.

To close, we are very excited about our growth opportunities in 2007 and beyond. Our market position in online health information services has never been stronger. The investments that we have been making in our technology infrastructure, position us for continued market expansion with expanding margins.

Our organization of more than 1,000 highly experienced health information professionals is far ahead of anyone else in this industry. We will continue to invest in the new products and applications that improve the experience for our users and the value for our business sponsors.

And finally, we will continue to build new business models that expand our reach and distribution in the emerging mobile information markets, as well as look to new markets outside of the US.

Now, I would like to turn it over to Marty for some closing comments.

Marty Wygod

Thanks, Wayne. We continue to demonstrate strength and leadership in each of our key markets again this quarter. As Wayne said, we expanded our reach with a record 41.7 million unique monthly users, 963 million total page views, and most importantly 95% were generated on WebMD-owned and operated sites.

Additionally, we have over 1 million physician visits each month. A strong brand recognition and user loyalty reinforces that we have become the industry standard for delivering trusted, high-quality, comprehensive, and credible information online to both consumers and physicians.

With pharma and consumer product companies spending over $20 billion annually on education and promotion there is a tremendous opportunity and incentive to move a meaningful portion of that spending online. Our pharma and consumer product customers are seeing significant return on investment from our programs and our recent sales to key accounts have more than doubled over the same period, one year ago.

We have seen the initial ways in which the Internet has changed healthcare, but the real benefits to the U.S. Healthcare Industry are still to come. As the market leader we understand the implied responsibility to drive the industry forward while improving patient outcomes and reducing the cost of care are important priorities for us. Our newest products, which combine proven health coaching techniques when the interactivity and accessibility of the Internet are the next step in preventing patients from falling into major disease categories in the first place.

I'm excited about these new products and expect they will contribute to our long-term growth. We are very well positioned to have a major positive impact on healthcare going forward. Thank you for joining us today. And operator, at this time, we're ready to field questions.

Question-and-Answer Session

Operator

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

Jennifer Watson - Goldman Sachs

Hi, this is actually Jennifer Watson in for Anthony. I was wondering if you could discuss the lengthening of the sales and implementation cycle within the private portal business. If it's something that you guys see as temporary, if you'll be able to shorten the cycle overtime in your view and also if you could just discuss the relative difference and how long it takes for the sales and implementation versus previously when you weren't dealing with all the new products?

Wayne Gattinella

Sure, Jennifer. This is Wayne. What we are seeing is as we've introduced a series of new products that are more claims and profile based. We launched a brand new health risk assessment only a few months ago. We've expanded on personal health record product. We've recently put into the market a new clinical alerts product and with the advent of Summex, which was a telephone based coaching capability we're now integrated with an online service. And the consequences is that the level of detail and information that's required to both make this sale and ultimately the information that we need to tick in to implement the sale has been somewhat extended.

We still however see that the business on a go-forward basis will maintain its current level of momentum. I don't know if I would call it temporary so much as part of an increasing set of new services that are really designed to move up the chain value that we are able to provide to our client.

It's important to know that when I speak of each of these individual services, we're also able to increase the value and the revenue string that we get from these products. So it's tended to slow the sale cycle down a bit, it's complexified implementation certainly versus when we had a simple decision support product, but in the short term we expect to more than make-up for the difference with higher advertising and sponsorship revenues and by the end of this year certainly expect that the business will be in a normal sort of continue.

Jennifer Watson - Goldman Sachs

Can you talk to the interest you've seen from existing partnerships that you have in implementing these new products or is it more on the new partners that you are signing up?

Wayne Gattinella

We are not in a position to announce anything specific yet; however the next several months we do expect to be able to announce new customers for contracting with this new extended set of services. As you may know our busiest period from an implementation’s standpoint is late third quarter, early fourth quarter. We don't actually announce new customers until they are in the implementation cycle. And so we do expect to make several important new announcements in the second half of this year.

Jennifer Watson - Goldman Sachs

Great, thank you.

Operator

Our next question comes from Sandy Draper with Raymond James.

Sandy Draper - Raymond James

Thanks and good afternoon. First, I just want to, with that kind of focus on the one last customer, Wayne, I would just be curious that the customer you did lose, or that didn't renew; did they give you any feedback, were they are going to someone else, just trying to do it in-house. What was the feedback on why that customer actually decided not to renew?

Wayne Gattinella

Yeah. It was a very small customer and it was a budget item for them based upon the health of their own core business.

Sandy Draper - Raymond James

Okay, great. That's helpful. And then second, I think the Mercer deal sounds exciting. Is there any exclusivity there, and if I remember correctly, they were doing some of the stuff they're trying to bundle it with some other vendors. Just help me to understand where you fit now into the Mercer bag of tricks?

Wayne Gattinella

There is exclusivity in terms of the co-marketing relationship on their part. As you may know, we do work with several outsourcing providers in the marketplace. But this is an important one because of the leadership that they represent in the middle market, which is a market that we don't direct sell with our own sales force typically, given its size. But they are tremendously respected organization. They have great coverage across the U.S. They have a big consulting business that our services play well into, and we are currently in a process of both training and then ultimately scaling that distribution and their sales into starting with their customer base beginning in 2007.

Sandy Draper - Raymond James

Okay. And then as you are going out and training, is it something your sales people be brought in to help sale, or you train their sales force, and they are selling completely independently?

Wayne Gattinella

It's a little of both Sandy. We have sales executives in our company, who are focused solely on distributor partnerships and we have people, who are solely focused just on the Mercer partnership, for example. And they work closely with folks on the other side to both develop and ultimately implement those training programs.

Sandy Draper - Raymond James

Okay, great. I'll jump back into queue. Thanks Wayne.

Operator

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

Brian Pitz - Banc of America

Thank you. Can you talk about advertising trends you are seeing, any push toward new advertising forms such as video or demand for deeper, less premium content, and then specifically any particular pockets of strength that were notable in the quarter? Thanks.

Wayne Gattinella

We really had a very, very strong first quarter Brian, and that follows on the heels of the strong fourth quarter sales period. In the biopharma market, we are focused on a relatively small number of accounts. It's really about penetration, and we are seeing a significant uptick in both consumer and professional spend online from what we have seen in years past. Our sort of blend of marketing program tends to be sponsored content inside of WebMD as opposed to just sort of standalone ad units. But with the ads in of our new site, a new video player, new interactive capabilities, a brand new interactive Symptom Checker, and many new responsible areas of the site together with what I just see as a acceleration of the use of web-based marketing on the behalf of those clients. In total, we are not only seeing greater activity in terms of units, but we are seeing larger average sales size in terms of the total dollars that these companies are committing to.

Brian Pitz - Banc of America

Great. And just a quick follow up. Do you participate in any ad exchanges and if not, would you consider placing inventory on an exchange? Thanks.

Wayne Gattinella

Yeah. We really just do that on a very limited basis. We have a small partnership with Google with their AdSense product. That typically in the early part of the year when health advertising demand is slightly down, we use them as filler. But, our expectation is we have a very strong direct sales forces and that strong inventory even with kind of growth that you saw this quarter in terms of traffic, we expect to be able to leverage at the pricing and the margins that are own direct businesses is used to selling at.

Brian Pitz - Banc of America

Thank you very much.

Operator

Our next question comes from Corey Tobin with William Blair & Company.

Jeremy - William Blair & Company

Hi good afternoon. It's Jeremy for Corey. Tony, I'm wondering if you could drill down on this incremental margin comments that you provided. Did I hear you right, you said a 45% incremental adjusted EBITDA margin in the quarter?

Tony Vuolo

That's correct.

Jeremy - William Blair & Company

Okay. And if I did the cal correct I think the full year guidance is somewhere in the low 30% range is that?

Tony Vuolo

Excluding the impact of acquisitions I think that's probably right.

Jeremy - William Blair & Company

All Right. So, I'm just curious if you can provide some thoughts on, I mean I think you mentioned that some of the platform investments might be like sort of the wildcard in the year. Are you thinking upside it is a function of top-line revenue that may come from enhanced web traffic from improving in search rankings or are you thinking it's more of a wind down of operating expenses?

Tony Vuolo

Well, I think let me just make sure I understand the question correct. Firstly, just a comment on your last question to make sure I was clear. The 30% number you mentioned would include the impact of the acquisition, not excluded.

Jeremy - William Blair & Company

Okay.

Tony Vuolo

If we excluded it, it would be comparable to the 45% we just saw.

Jeremy - William Blair & Company

Okay, okay.

Tony Vuolo

In terms of the reference in terms of the potential opportunities in the back half of the year, I think that just we're looking at it. A lot of the investments that we've made and the acquisitions that we've made, we've done certain things to get scale and synergy and there is the potential to realize that scale and synergy more in the back half of the year than what we currently contemplated based on the revenue growth that's been forecasted.

Jeremy - William Blair & Company

Okay. And Wayne and Marty, with respect to your comments on pharmaceutical budgets, a percentage of that is online versus kind of your traditional channels. I mean when you talk to your large customers, can you provide some may be qualitative commentary on some of the feedback you're getting from them on where it sort of been as a percentage and where it might go in the future?

Marty Wygod

It's very hard to generalize, but all of major pharma are looking very carefully at the opportunities available to them on the Internet and are trying to figure out what their Internet strategy is going to be going forward. But we are seeing for the first time major pharma reserving inventory in certain disease categories as well as contracting with us sooner even though the programs are not setup yet. And as I said before, we are seeing large number of key accounts very recently where they are doubling the size of their orders with us compared to a year ago.

Jeremy - William Blair & Company

Okay. Thank you.

Operator

Our next question comes from Rob Kelly with Smith Barney.

Rob Kelly - Smith Barney

We hear a great deal of noise about meaningful competition. Can you comment?

Wayne Gattinella

I got to say and Marty might add on to this, but in terms of our online business we are not feeling the impact of any new competition in this market. Again, I believe that our sales experience in the last couple of quarters is a good demonstration of that. We know the strength of the brands in the category that we sell to and the kinds of customers that we attract is clearly recognized as the strongest in the marketplace. We've got the most experienced and greatest number of sales, account management product and development people in this industry.

We feel very good about our market position right now and very good about our relationships and where we are in the marketplace. I mean, I know there has been a lot of competitive PR activity recently, but it doesn't really match to the level of business activity that we've seen.

Marty Wygod

The major pharmas also confirmed really with us that they really do not get the same ROI, they don't get the same results, and they definitely don't get anywhere close to the necessary traffic. And it does appear that we're pulling further and further away from the rest of the players in the field.

Rob Kelly - Smith Barney

Can you just touch on some of the barriers to entry? Where you stand in your different segments?

Marty Wygod

There's quite a few, I think some of those important ones is that we've reached that critical mass of the dramatic growth that we've had to get up to the 41 million unique users and the approaching the billion page views a quarter. But, I think the most important thing is that all of our traffic for the large overwhelming majority of everything we're getting in page views etcetera are generated within the owned and operated site. So, we are not relying on anyone else for our traffic or our business.

I think that the quality of our content, the number of improved applications that we have rolled out. The fact that the physician as well as the patient comes to us for medical information or healthcare information is really our strongest barrier to entry. I think in the future it will become very apparent on the patterns that we're have applied for and are receiving that it's going to be very difficult for other players now in the future to compete with us.

Rob Kelly - Smith Barney

Thanks.

Operator

Our next question comes from Mark Mahaney with [Citi Research].

Mark Mahaney - Citi Research

Great, thanks very much. Wayne what you are showing is an acceleration in traffic growth over the last couple of quarters. But, you are showing a deceleration in ad sponsorship revenue albeit in very high levels. It's almost as if it's tough to keep with the pace of demand you have on your site.

It sounds like the launch in the next-generation consumer health portal may be part of that pass air. But at this point as, Wayne really you could you quantify how much of an impact that could have on your sponsorship opportunities either in terms of more inventory or in terms of more pricing power so that can give you. And at what point may be you could that advertising and sponsorship revenue growth could actually be accelerated to catch up to the demand?

Wayne Gattinella

Yeah.

Mark Mahaney - Citi Research

Thank you very much.

Wayne Gattinella

Yeah. Well, as you have seen our traffic growth over the last few sequential quarters has been significant and ahead of the revenue, but that's a good thing. We don't want to be banging up against a ceiling of inventory. So we are catching up to it to some extent, but clearly on track in terms of what we expected and what we continue to expect. What we did with the new site launch was two things; one of course was to dramatically improve the user experience and I am sure you have now looked at or seen a lot of the interactive, not only 2.0 applications but the new WebMD proprietary applications that again on a preliminary basis we are very pleased with.

We saw even with the launch of the new site continued traffic growth even despite the fact that many people on the outside were saying, you might see a short-term deceleration in traffic or at least that's what sites have experienced when they have launched. We didn't see that. So we feel like we are in a good position now, as both search engine optimization begins to really play a more important part of our traffic towards the latter part of this year as well as we give people more reasons to come back and stay longer as future drivers of traffic.

The other key objective of the new site launch was to create new sponsorable areas that could both command a so called premium for a stronger engagement of the consumer in sponsored product, in content and information, and also be able to support greater volume of advertisers as we do expect an acceleration on the business side in the markets that we compete in. So you are really seeing both things happen. If you look on the site, we have maintained a nice balance between editorial and user-based information together with very targeted and relevant sponsored-based information on whether that be on a Symptom Checker interactive tool, video is a major part of the new site launch, 1300 new health videos. We are seeing a very nice sell through right now on our video usage. We are seeing a very strong click-through rate and video stream served versus where we were, almost a threefold increase in the last six weeks. And we are seeing very strong engagement rates in the sponsored areas. So we think the formula is there as you are going to appreciate. There is a little bit of art as well as science to what we are doing on this site. But with what we are able to measure and continue to building on the platform, we are very excited about the prospects over the latter part of this year and certainly into the further.

Mark Mahaney - Citi Research

Thank you, Wayne.

Operator

Our next question comes from Heath Terry with Credit Suisse.

Heath Terry - Credit Suisse

Great. I was wondering if you go into a little bit more detail about what kind of changes you've seen in traffic, and more specifically, search ranking since the re-architecture. I realized it's still relatively early days, but if any color you can provide there will be useful?

Wayne Gattinella

Yeah. Our search rankings are relatively static from where they were pre-launch. That's not surprising again, as the new site is designed for search engine optimization in terms of its construct. It does take several months to re-index, and ultimately see that in the numbers. We do track that we track it daily and weekly against key health terms. But I would tell you that if I look at the comps in January versus the comps in March, it's relatively the same. Interestingly that still if you look at the hit wise report of the most searched health terms on Google, the top four terms on Google still are WebMD and our derivatives of WebMD. So, we don't buy traffic, but we look to organic growth internally and from external search engines as a part of our business today, but a growing part, as we do become more optimized over the balance of the year.

Heath Terry - Credit Suisse

Great. Thank you very much.

Operator

Our next question comes from Bill Morrison with JMP Securities.

Bill Morrison - JMP Securities

Hi thanks. A couple of questions, I just want to clarify the last comment, Tony I think was saying you don't buy traffic, so you don't spend any marketing dollars on (inaudible) to drive traffic to your site.

Wayne Gattinella

It's negligible. As for spending, it’s in the tens of thousands of dollars and it would be opportunistic for a very specific reason.

Bill Morrison - JMP Securities

Right. Okay. Thanks for that clarification. And secondly, I noticed that page views while the growth is very strong, they were not quite as strong as users, so page views per user looked like they were down 10% and kind of even turning that way. We've seen those kind of trend at a lot of other companies we cover in the media space, and I'm just curious as to your thoughts on the value of looking at the page view metric and a world where AJAX is becoming a bigger part and video, bigger part of sites and whether or not that should be a metric that we really look at moving forward very carefully or what should we be looking at the users? Can you give us maybe some more quantitative metrics around other drivers of your revenue like video, et cetera? Thanks.

Wayne Gattinella

Yeah, I mean as you indicated, page views is being, it's becoming less of an apples-to-apples comp. As AJAX like technologies now gives people more to do on so-called a single page and even if you look at our new site redesigned, for example with Symptom Checker, there is a lot you can do with respect to clicking on an animation, having access to content clicking or content all of which now just counts as a single page whereas in the old design that might have been a three or four page sort of activity. We're not going to sit here today and sort of redefine how the industry should benchmark utilization, but I still think page views is at least as an industry comp right now is decent.

We also look at monetizable pages because you can bump the numbers up with sort of phantom navigation pages or pages that really are either content laid or even monetizable. We in our redesign, made the site easier to use. In doing that we actually eliminated what might have been interim index or navigation pages and that's somewhat what you're seeing when you see the difference between the growth of users versus the growth in pages. But when we look at the actual monetizable pages the actual so called inventory, we're seeing that's increasing at a comparable rate of visitors than kind of what you're saying as that a more thin level of just gross page views during that.

Bill Morrison - JMP Securities

Thanks.

Operator

Our next question comes from Anthony Petrone with the Maxim Group.

Anthony Petrone - Maxim Group

Great, thanks guys. Just a follow-up, so just to clarify monetizable pages is actually as a percent of total pages on all the portals has actually increased and you've taken a lot of?

Anthony Petrone - Maxim Group

Hello?

Wayne Gattinella

Yeah, I'm here.

Anthony Petrone - Maxim Group

Hi, the number of non-monetizable pages is actually taken out of the equation. Could we assume that more of the pages that visitors go to are monetizable?

Wayne Gattinella

You're talking about our WebMD, I assume?

Anthony Petrone - Maxim Group

Yes.

Wayne Gattinella

You know again when we redesigned the site and did a lot of focus groups to look at how many pages that it was taking people to get to the answer to the content. In the prior navigation what we tried to do was eliminate a lot of the interim pages. Some of those were monetizable, some of those weren't. When we look at the current level of pages and inventory that we're serving, we didn't lose. We’ve increased the mix of monetizable, which means from on a total basis we didn't lose any monetizable inventory in that period.

And that's good because what we believe is that by making the user experience more streamlined and making it easier to get to the answer and creating greater satisfaction, we're more likely to get that person to comeback again and effectively increase the overall pages from that user over time. Even though in a single session it's possible that it went down.

Anthony Petrone - Maxim Group

So, can you speak a little bit to pricing on a high level? You have more premium space available on the sites, but you do have some competition coming in. Can you just speak to where pricing may go if competition does indeed increase?

Wayne Gattinella

We have been able to maintain and improve pricing over in the last several years and we have done that as Marty indicated first and foremost, because the value proposition that we bring to the market is an integrated consumer and professional solution to pharma. We have got the largest professional audience online. There is a distant number two in terms of the commercial market. There really is no other strong alternative. And we know that for every dollar that pharma spends on DTC marketing they are spending $2 to $3 on direct-to-physician marketing.

So, we have been able to create bundle kinds of services that are intended to both inform the patient, inform the physician and create together much more cohesive relationship, which is ultimately where the value is created on behalf of the pharmaceutical companies. And in doing that we are able to not only maintain strong pricing, but also be able to demonstrate increasingly strong return on investment on the part of the client. We don't really see anything in the marketplace from a competitive standpoint that would jeopardize that right now.

Anthony Petrone - Maxim Group

And just a couple of modeling questions, if I look at G&A during the quarter, how much was associated with the portal launch? And how much could we expect is out of the equation now that the launch is completed?

Tony Vuolo

From a G&A perspective much of the portal launch was done with our internal resources dedicated to the efforts. I think that as I alluded in my comment, some leverage in our infrastructure going forward resulting from that investment. But, at this point we are not in a position we could really quantify yet because we still need to kind of go through, get a better measure of experience with people getting trained in all the new tools that they have available to them. So, we would be updating on that level in our future phone call.

Anthony Petrone - Maxim Group

Okay, great. And if any during the quarter, how much was associated to David Gang's departure, if any?

Tony Vuolo

From a financial perspective there is nothing in the March quarter related to David Gang's departure as the departure occurred after the end of the quarter.

Anthony Petrone - Maxim Group

Okay. And one final, just on the share count between adjusted EBITDA and GAAP. Can you just give us a little color on where the difference lies there?

Tony Vuolo

I'm sorry. Can you ask that question again?

Anthony Petrone - Maxim Group

The share count between adjusted EBITDA and GAAP EPS, can you just give us a little color on the difference between those two?

Tony Vuolo

You mean between the basic and dilutive?

Anthony Petrone - Maxim Group

No, between adjusted EBITDA you have in different share count, you're basing that also on different share count?

Tony Vuolo

This quarter it's off the same share count, because we have net income for the quarter. But, when we had quarters where we had a net loss, we always use the diluted share count because we have in EBITDA the positive number.

Anthony Petrone - Maxim Group

Okay. I'm mixed up between something in the press release, that's fine. Thanks guys.

Tony Vuolo

Okay.

Operator

Our next question comes from Len Podolsky with Piper Jaffray.

Len Podolsky - Piper Jaffray

Hi guys, thanks for taking the question. I just want to head quickly on the care alerts that you mentioned earlier in the call. Can you give us a little bit more color on what that product is? Where the data is coming from? To whom it's being delivered and what the platform and delivery is?

Wayne Gattinella

Sure. We are essentially taking in -- first of all we have to build up the personal health records. So, what we are doing is with both self-reported and claims based data that's imported into their health record. We are passing that through a set of rules that's based on evidence-based guidelines and identifying from a care management standpoint any commissions, omissions in care relative to the rules that would presumably either call attention to the consumer or might just be from a preventative standpoint. Information and messages related to better managing either a condition or lifestyle risks.

The information or the messaging is sent to their secure mailbox, which actually sits inside of their personal health information, inside the private portal. So, it's inside of the log-in. It's only available to the individual and is intended both to alert them to the potential risk. Also refer them to relevant content or information that we are serving up inside of that private portal. So, there is some self help, if you will, or things that the individual can do on their own.

And in the event that it's something that's a little higher risk, for example, a potential drug issue or interaction issue that we would have gotten the [Rx claim]. We might call out something the recommendation is that they discuss with their doctor.

Len Podolsky - Piper Jaffray

Okay. So at this point the communication is really exclusively focused on the consumer?

Wayne Gattinella

Yes. Right now, the alerts are focused exclusively at the consumer levels.

Len Podolsky - Piper Jaffray

Is there any way to loop the physician into that communication?

Wayne Gattinella

We do have plans for that. The initial product is at the consumer level. The intent, of course, is for the consumers to be able to print and share the information with the doc. I'm not in a position to give you the specifics on our new product development at the physician level.

Len Podolsky - Piper Jaffray

Right.

Wayne Gattinella

But, it is in our plans to be able to not only share that same information with the physician, but also set up a separate set of physician-directed alerts.

Len Podolsky - Piper Jaffray

Okay. Now, can you talk little bit about what the receptivity is at the employer to this product and if you see any competition. I imagine it is a pretty early point in the game for this kind of product?

Wayne Gattinella

We think that this product combined with some of the other services that we've also announced like our Health Coach service is really where we want to take the platform. So, while we began by putting a decision-support platform in place that enabled the individual to make more informed health choices on their own. We are now employing a more directed approach to also identify of the profile any particular risk and proactively messaging and trying to reach the individual to better manage their health. And we are doing this through care alerts, which is electronic messaging and also through coaching, which is a combination of electronic as well as telephone.

With respect to clients, again, we expect to announce several new clients that will be contracted with these services over the next few months. I can tell you the marketplace is looking for services like this. The goal of our clients is to be able to better manage not only the identified conditions the person has, but the preventable conditions or preventable situation to basically reduce cost by keeping people out of the hospital, out of the doctor's offices before it actually occurs. And this is an area of tremendous opportunity within that's we are able to demonstrate a very strong ROI for the investment made. It has the potential to put the services and the business that we have with our clients today in a new category.

Len Podolsky - Piper Jaffray

Thanks very much I appreciate your time.

Operator

Our next question comes from Sandy Draper with Raymond James.

Sandy Draper - Raymond James

Thanks. Just a couple of quick follow-ups, I think for Tony. I know you haven't given any longer term guidance beyond '07 but two things just curious; one on the tax side. What should we be thinking about how to sort of think about taxes from a longer term basis relative to your NOL’s obviously they're bouncing around a little bit now and so is there a point at which they stabilize and how do we factor that?

And then the second question would be obviously the non-cash stock comp is moderate this year. How do you think about that number longer term is that something that you sort of tie the revenue as a percentage of revenue? There's an absolute number that we should expect to increase or decrease maybe some thoughts about where that number would trend? Thanks.

Tony Vuolo

Okay. The first question Sandy on the tax provision. I would as you're aware we have to pay significant NOL. At some point in time when we demonstrate in earnings history, which may occur in next year, we’ll be in a position where we will start to reverse some of our valuation allowance against those NOL’s and start to book a normal tax provision, even though we won't pay the taxes.

So, I know that most analysts do in addition to looking our reported net income and people always looking at a pro forma net income that assumes the tax rate that can compare us to other people. But the point that I would make is even when we start booking a take the one-time benefit in booking normal tax provision, it's not going to result in an actual cash outlay by the company till we exhaust those NOL’s. So I think we'll probably be in that position, sometime, as we approach 2008. Your second question and you have to refresh me again here.

Sandy Draper - Raymond James

Just on the non-, yeah.

Tony Vuolo

It's moderated a little bit because unlike most other companies, we option the whole company at the IPO on one date at the price of the IPO. Most companies, who are public or who are gone public have a little different history, because they have options that were granted before the company was public at much lower values. So that's a number that will come down overtime as those options begin to invest and we get the initial expensing behind us.

We look at how our employees are incented in relation to their performance, their position in the company, that's after we really don't have a metric that we tie it to percentage of revenue, etcetera. We are very keenly aware of the marketplace, what it takes to be competitive from a compensation perspective and in our marketplace equity compensation is something that helps us retain and attract people. So, we don't have any hard metrics implied to top line, but we respond to -- what our perceptions are in terms of the marketplace.

Sandy Draper - Raymond James

Okay. Thank you very much.

Operator

I am sorry. The next question comes from Corey Tobin, William Blair & Company.

Jeremy - William Blair & Company

Hi, it's Jeremy again, a quick follow-up. There has been some noise coming from the hill with respect to more torrents on DTC advertising and I am wondering that you guys can provide some perspective from sort of the WebMD perspective on one whether you feel to what extent internet advertising may or may not be included in such legislation and two even if its passed what is the sequential impact there, how do you think about that?

Marty Wygod

This is Marty. It's still quite early and these bills keep modifying, combining etcetera. I'm not sure what momentum they'll have if any, but currently a lot of the pharma companies have cut backs substantially on advertising, on TV, on introduction of new products for at least the first six months or 12 months. They have done this on a voluntary basis. And we tend to think that if there are any regulations or bills that are eventually passed that the internet is going to be a much better place to educate the consumer with the details on the drug and competitive drugs and drug interactions et cetera than a 30 second commercial on TV. So we do not believe it will hurt us. It has not hurt us up to this point and it is possible it could end up being advantageous to us. But it's still too early to say based upon the continuing changing language of the respective bills.

Jeremy - William Blair & Company

Okay, thanks, great.

Operator

Our next question comes from Rob Kelly with Smith Barney.

Rob Kelly - Smith Barney

My question has been answered. Thanks.

Operator

Our next question comes from Kar Kwong with Needham & Company.

Kar Kwong - Needham & Company

Hi, thanks for taking my question. Could you please talk a little about what's driving the short jump in incremental EBITDA margins in the fourth quarter? It looks like guidance implies incremental EBITDA margins around 40%, the historical trend has been in the high 20% to 30% range?

Tony Vuolo

Well, I think if you go back, first of all we have a lot of seasonality into our business as I discussed in my comments and as we talked to you on prior call. If you go back and look historically at our quarterly EBITDA trends, you will see that the fourth quarter contributes the most in terms of both absolute EBITDA dollars and percentages, and that trend is contemplated in our guidance for this year as what you would have seen in 2006 and 2005. Our business does have a lot of leverage and given the seasonality of our revenues, we are able to scale produce efficiently in the fourth quarter when we see the higher revenue volume.

Kar Kwong - Needham & Company

Thanks.

Operator

As a reminder, if necessary, there is a replay available on this call, which can be accessed toll free at 888-562-4474, or if you are calling from outside the U.S. at 402-530-7662. There is no pass code required. There is also the webcast replay available on our website as well. Thank you for joining us today.

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Source: WebMD Health Q1 2007 Earnings Call Transcript
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