WebMD's Management Discusses Q4 2011 Results - Earnings Call Transcript

| About: WebMD Health (WBMD)

WebMD Health Corp (NASDAQ:WBMD)

Q4 2011 Earnings Call

February 23, 2012, 4:45 p.m. ET


Risa Fisher – VP Investor Relations

Martin J. Wygod – Executive Chairman of the Board

Anthony Vuolo – CFO, COO Interim CEO


Mark S. Mahaney – Citi

Heath Terry – Goldman Sachs

Steve Rubis – Stifel Nicolaus

Kevin Kopelman – Cowen & Company

Peter Stabler – Wells Fargo Securities

Kevin Allen – Barclays Capital

Scott Devitt – Morgan Stanley


Good afternoon and welcome to WebMD Health Corp.’s fourth quarter 2011 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

Good afternoon. This conference call is to discuss WebMD’s fourth quarter and year-end 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, and Tony Vuolo, Interim CFO and CFO. At the conclusion of our prepared remarks we’ll open the call and take questions. Now, I’d like to turn the call over our Chairman, Marty Wygod.

Martin Wygod

Thanks Risa. Good afternoon and thank you for joining us today. As you have seen in our financial results, 2011 was a difficult year. We expect the market challenges that impacted revenue trends in the latter half of 2011 to continue in 2012. Clearly our term outlook is difficult – our near-term outlook is difficult. However, we believe that our long-term growth opportunities are significant and we’ll continue to invest to best position ourselves to capture these opportunities. We’re the most recognized and trusted source of online healthcare information for consumers and healthcare professionals, and we are focused on continuing to strengthen our position as the market leader, to support our long-term growth.

With regard to our CEO search, we have created a board committee to oversee the selection of a permanent CEO and are meeting with potential candidates. The board is committed to conducting a thorough search process to identify the right person to lead the company, and we’ll complete the search as expeditiously as possible.

Importantly though, as you will hear from Tony, we are not standing still while this process is under way. Today we announced that we intend to commence a tender offer to repurchase 150 million of our shares through a modified Dutch Auction tender at a price within the range of 24.50 to $26 per share. At the minimum price of $24.50 per-share we would repurchase a maximum of approximately 6.1 million shares, which represents approximately 11% of our currently outstanding shares. We expect to commence this tender offer promptly at the filing of our company’s Form 10-K.

In considering capital allocation, the board recognizes that as we sit in early 2012, this will be a difficult year. We are just at the beginning of the necessary transition. Among other things, we need to hire a CEO, we may choose to add further depth to the senior management team, and as Tony will discuss, we have several initiatives that are focused on addressing the needs of the evolving market and positioning us for return to growth.

We have much to do to take advantage of the long-term opportunities, however, we want to provide some ability for shareholders to tender their shares for cash if they chose to do so. Details related to the tender offer will be set forth in our offer [inaudible] purchase to be filed with the SEC.

The entire executive management team and I are committed to doing all that we can to restore the company’s growth. The company needs to be in the best position to attract, retain, and motivate the talent necessary to reach our goals. In order to help accomplish this, all of our directors and executive officers, including Tony and myself, have decided to voluntarily surrender certain money stock options totaling approximately 1 million shares. These shares will be added to the 1.1 million shares still left available under our existing stock option plan, and will be available to attract new employees as well as incentivize current key employees. None of the executive officers of course will receive any consideration in exchange for the surrender of their options.

I’d now like to turn the call over to Tony.

Anthony Vuolo

Thanks, Marty. Before reviewing the financial results and outlook, I wanted to make a few comments. First, no one in the company is satisfied with our current situation. In the last six weeks we’ve committed ourselves to prioritizing the initiatives that will best position the company to take advantage of future growth opportunity. The management team is working hard to insure that the entire organization is aligned around our key initiatives.

Second, we are taking nothing for granted. We’re reexamining the way we do business to insure that we are as productive and as efficient as possible. We have realigned certain parts of the organization and we’ll continue to do so to insure that we function as efficiently as possible.

Third, we’re in dialog with our customers, trying to gain the best understanding of their internal challenges [inaudible], in order to be as innovative and responsive as possible, in developing marketing programs that address those needs.

Finally, we remain committed to extending our market leading position as the most trusted incredible source of health information for consumers and healthcare professionals. We will continue to invest in new content – new user functionality, to provide even more value to our audience.

While we are looking at a challenging year ahead of us, we believe the long-term opportunity is significant, and with the right investments and execution we will return to being a growth company.

Now turning to our fourth quarter and year-end 2011 results. Our results are consistent with the preliminary outlook that we provided on January 10, which indicated that our revenue and earnings would be between the low end and mid-point of the guidance range that we issued in November 2011.

Our fourth quarter revenues decreased 10.6% to 150.7 million. Public portal advertising and sponsorship revenue decreased 11% to 130.8 million, and private portal services revenue decreased 7.5% to 19.8 million.

Beginning on January 1, 2011, we were required to adopt accounting standards updates. 2009-13, which impacts the timing of revenue recognition for a certain of our advertising and sponsorship contracts that were entered in to after January 1, 2011.

The revenue and earnings we recognized during the fourth quarter was approximately 2.6 million lower than what has been otherwise recognized under the previous accounting standard. Fourth quarter adjusted EBITDA was 54.6 million or 36.3% of revenue.

During the fourth quarter, we recorded a pre-tax expense of 2.3 million for expenses related to the potential sale process, and a $3.8 million pretax gain related to our option on the auction rate securities that we divested in 2010.

Fourth quarter net income was $19.2 million or $0.33 per diluted share, compared to $36.6 million or $0.59 per diluted share in the prior year period. Net income would have been $18 million or $0.31 per diluted share in the current period, as compared to $29.3 million or $0.48 per diluted share in the prior year period, without the effect in the current year period of an after-tax gain on investments of $2.5 million and after-tax transaction cost of $1.3 million. And in the prior year period of an after-tax loss on convertible notes of $3.8 million, and an after-tax gain on investments of $8.3 million, along with an after-tax income from discontinued operations of $2.8 million.

Operating cash flow was 39.2 million for the fourth quarter. We converted about 72% of our adjusted EBITDA at the operating cash flow during the fourth quarter and 76% for the full-year. These amounts exclude a cash tax benefit of $5.3 million for the fourth quarter and $30.2 million for the full-year, 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. This is due to the fact that we are now using tax NOLs related to stock base compensation, which must be reported in the financing section of the cash flow statement.

Our conversion of adjusted EBITDA at the operating cash flow for the fourth quarter and full-year would be about 81% and 93% respectively when including this benefit.

As we have stated in the past, quarterly operating cash flow can be impacted by the timing of compensation accruals, other accruals in relation to quarter end, the timing of interest payments on a convertible debt, and the billing and collection of receivables from our customers.

Capital expenditures were $4.9 million for the quarter and $20.9 million for the full-year. For the full-year 2011, revenue increased 4.5% to 558.8 million, public portal advertising and sponsorship revenue increased 6.8% to 477.3 million and private portal services revenue decreased 7% to 81.5 million.

Full-year adjusted EBITDA increased 4.4% to $181.2 million. Full-year net income was $74.6 million or $1.25 per diluted share compared to $54.1 million or $0.88 per diluted share in the prior year period. Net income would have been $53.8 million or $0.90 per diluted share in the current period, this compares to $61.2 million or $1 per diluted share in the prior year period, without the effect in the current period of an after-tax gain on investments of 11.7 million, after-tax transaction cost of $1.3 million, and after-tax income from discontinued operation of 10.4 million. And in the prior year period, an after-tax loss on convertible notes of $14.1 million, and after-tax gain on investments of $5.2 million, and after-tax income from discontinued operations of $1.8 million.

During the fourth quarter, we repurchased approximately 819,000 shares of our common stock for $23.8 million. As of December 31, 2011 we had approximately $1.1 billion in cash and cash equivalent. There’s been no significant restock repurchase since year-end.

Today we issued financial guidance for 2012. Scheduled summarizing the company’s first quarter and full-year financial guidance, as well as a reconciliation between GAAP and non-GAAP financial measures, is attached to the press release we issued today.

Our outlook for 2012 is for revenue to range between $500 and $535 million, compared to $515 million in 2011. This is a decline of approximately 4% to 11% compared to 2011, and represents a large decline than we assumed in our preliminary outlook.

This revision primarily relates to the – our current visibility for pharmaceutical consumer advertising revenues, which indicates a lower revenue trend that we previously anticipated. The low end of this revenue range assumes the continuation of this trend for the entire year.

While we are working hard to turn this situation around as quickly as possible, we felt it was prudent to adjust our expectations given these are early indications.

We are forecasting expenses of $400 to $410 million compared to approximately $378 million in 2011. Our expense estimates assume continued investments in areas that we believe are important to our long-term success. However, we are reviewing expense levels closely, to achieve operating efficiencies that may offset some of this additional spending.

We are forecast adjusted EBITDA of $100 to $125 million, compared to the approximately $181 million for 2011. Our estimate for net interest expense of $23 million reflects the full-year impact of interest expense related to convertible notes issued in early 2011.

Appreciation and amortization expense is estimated to be $27 to #28 million, compared to $27 million in 2011. Stock compensation expense is expected to be approximately $46 to $48 million, compared to $40 million last year.

Marty mentioned earlier, all of our directors and executive officers have voluntarily decided to surrender approximately 1 million, in out of the money options, to acquire the company’s common stock, so that these options can be used to attract, retain, and motivate key employees.

Although these options are being voluntarily surrender, and the surrender of these options will – in exchange for no consideration, the accounting rules require that any unrecognized stock compensation expense amounts, be immediately expensed as a result of the surrender.

Approximately $8 million of stock compensation expense will be reflected in the March 2012 quarter results, related to the surrender of these options. The option surrender and the impact of – and the related expense impact was not contemplated six weeks ago when we gave our preliminary outlook.

The effective tax rate for 2012 will increase compared to last year due to a combination of a lower pretax income and permanent book versus taxable income difference. [Inaudible]

As a result, at the low end of our guidance range, we expect an income tax revision of $2 million, even though we aren’t forecasting pre-tax income, and at the high-end of our guidance range, the effective tax rate will be approximately 46%.

Again, most of this expense is non-cash. This will be offset by our NOLs. Our NOLs were approximately $700 million at the end of 2011. Continuing operations for 2012 is expected to range from a loss of 2 million to income of 15 million, compared to income of 64.2 million last year. This guidance does not include any estimates for gains or losses on investments, or discontinued operations, although such items may occur during the year.

Continuing operations per diluted share for the full-year is estimated to range from a loss of $0.04 to income of $0.26. We expect the weighted average basic and diluted share count for the first quarter of 2012 to be 56 million shares. For the full-year 2012, we expected the weighted average basic and diluted share count to be 57 and 58 million respectively.

We expect this convertible notes will not be diluted to income for the full-year or to any quarter during the year, and therefore they are not included in the diluted share count, and no income adjustments to the interest expense related to the convertible notes is required.

These amounts do not assume any repurchases of the company’s common stock, including any amount that may be repurchased in a tender offer we announced today. We expect capital expenditures for 2012 to be $25 to $30 million.

Looking specifically at the first quarter of 2012, we expect revenues to be in excess of $105 million. This reflects the on-going weakness at the [inaudible] to impact the company’s revenues in the second half of 2011 and continues today.

As a reminder, the advertising growth in the first half of 2011 was quite strong with advertising revenue growth in the March 2011 quarter reaching 28%. As we stated, when we issued our preliminary outlook six weeks ago, we expected revenue to decline more significantly in the first half of 2012 compared to the prior year with improvement in the second half of 2012.

We expect operating cash expenses to increase approximately 2% in the March 2012 quarter compared to the prior year period. Our first quarter adjusted EBITDA is expected to be approximately 10 to 11% of revenue compared to 28.8% in the prior year period.

Looking at non-cash and other items in the first quarter of 2012, net interest expense will reflect the full quarter impact of the convertible notes which we issued during the first quarter of 2011. We also expect to record a severance expense of approximately $1 million, primarily related to the departure of the former CEO.

As I mentioned earlier, we will reflect additional stock compensation expense of approximately $8 million in the March 2012 quarter related to the surrender of options. Obviously 2012 will be a tough year with significant lower revenues and earnings than last year. Many of our pharmaceutical customers continue to manage through their patent expirations of a number of block buster drugs.

These patent expirations are having a greater than previously anticipated impact on marketing expenditures across their entire product portfolios of some pharmaceutical companies. We are seeing across the board cuts in marketing expense as well as delays in budget planning and purchase decisions, particularly in the direct to consumer pharmaceutical marketing and advertising.

Our expectations contemplate continued budget constraints, and while we expect to see an increase in a number of new branded pharmaceutical products coming to market in 2012, the approval and watch of these products is not anticipated to begin until the second half of 2012, and therefore any marketing commitments at WebMD expects to receive from these new products, is not likely to contribute significantly to revenue until 2013.

We expect our consumer products markets to remain competitive primarily from the amount of available inventory available on social sites and through third-party ad networks. Despite the difficult environment, we continue to invest across our businesses as we move forward. Our initiatives are focused on addressing the ever evolving needs of the market.

We are creating and enhancing content areas, and improving the audience experience to coincide with where we see advertiser demand. We expect the macro environment part of our business will improve, as the trend in new drug approvals is expected to show a shift from high prevalence life style oriented drug, to lower prevalent condition oriented drugs. Products with lower incidence lend themselves a highly targeted digital marketing programs. We have unparallel reach to both consumers and healthcare professionals, and can deliver meaningful scale, even in the lowest prevalent condition.

Traffic to our owned and operated site during the fourth quarter averaged 91.9 million unique users per month, an increase of 33% over a year ago, and we delivered 2.14 billion page views for the quarter, a 30% increase. These amounts exclude traffic from our former affiliate partner sites.

As we discussed previously, as a result of our strong organic traffic growth, we have decided to phase out substantially all of our affiliate sites at the end of 2011. Traffic to our professional network led by medscape.com averaged approximately 2.8 million physician visits per month. We believe the WebMD professional network reaches more doctors, healthcare professionals more frequently, in more countries than any other health information resource. Medscape is uniquely able to reach healthcare professionals across any digital device, whether it be a computer, smartphone or tablet.

We will continue to invest in innovation when it comes to serving our audience. We are committed to building on our history of markets, leadership and creating new applications and products that will allow us to engage more frequently and meaningfully with our audiences.

We recognize that our success in achieving continued traffic growth with consumers and healthcare professionals, is one of our most valuable assets, and our innovation – our innovative new products and applications are focused on continuing to meet this goal.

We are making specific new investments in our personalization capability. We are building additional proprietary tools and applications that will allow users to capture and store data and information.

The most recent example of success in this area is the Baby app for iPhone and iPod – iPod Touch that we launched last month. It’s a free mobile app that gives parents quick and reliable access to pediatrician approved baby health and wellness information, as well as the ability to store and access important details of their baby’s health records. The WebMD Baby content was created exclusively for the app, and is personalized for the baby’s specific age, and will help new parents stay one step ahead of their baby’s growth and development.

The first four weeks we have over 100,000 downloads of the WebMD Baby app. We will continue to introduce new audience functionality, both in mobile and on our website throughout the year. We are focused proactively on addressing industry developments in the changing market dynamics, a commitment that we believe will help us maintain our market leadership.

In order to meet the needs of our customers, we will continue to adapt our products with a [inaudible] towards easing the inherent delays that internal pharmaceutical companies medical legal review processes create.

The consumer products market, we will focus specifically on products with the health and wellness characteristics where our audience is most prevalent – relevant and leveraging the WebMD brand association delivers the highest value. We are enhancing our product offerings for these types of advertisers.

We will invest in our insight and analytic capabilities to demonstrate the – better demonstrate the value of our digital marketing programs. As the market leader, we need to be at the forefront in translating our audience engagement to value for the marketer.

Currently, the ability to compare value created from digital marketing programs, for more widely used print television, and print channels, varies greatly among advertisers, particularly when a multi-channel approach is being utilized.

In hindsight, had we been more proactive in this area, we may have been able to offset some of the weakness we are now currently experiencing. Enhancing our analytics and insights to tangibly illustrate value we deliver to our customers is the key priority for us this year.

Clearly organic growth remains our core focus, however, with our strong balance sheet we are evaluating potential acquisitions and strategic partnerships, both domestic and international. We will not hesitate to take advantage of external opportunities that will position us for long-term growth.

Looking at the private portal business, the last few years have been investment years aimed at repositioning the product offering with more of a focus on wellness management capabilities. Our sales organization has been rebuilt, and we have the most active sales pipeline that we’ve seen in the last several years.

While we hope to win new business in 2012, the revenue impact from any new business awarded will not be seen until later in the year.

In summary, we believe by successfully executing on these and other initiatives, we will be able to restore revenue growth. We know 2012 is going to be a difficult year for the company, it’s employees and our shareholders. We believe we have the right focus to succeed in this challenging environment.

Before turning the call back to Marty for closing comments, I want to express my appreciation to the management team and to all of our employees for their input and their support over the last few weeks, and their continued support as we tackle the task ahead. I know that working together, we will succeed.

And now I’d like to turn the call back to Marty, for some closing comments, and then we’ll take questions.

Martin Wygod

Thanks Tony. We have the insights and capabilities necessary to best understand and capitalize on the future opportunities and dynamics of the pharmaceutical advertising market. Our core strength as well as the markets dynamics will support long-term growth. We believe that the combination of new drug introductions that are well suited to highly targeted digital marketing, and depressions facing pharmaceutical companies today, along with the better demonstrating the value of our unique marketing programs. [inaudible] … create a meaningful and sustainable shift to digital marketing. We believe that our initiatives around enhanced audience engagement, and improved program insights, and analytics will lead to a broader adoption of our market solutions.

We are improving all of the elements that are within our control, to drive shareholders’ value. We are confident that we will be successful. We have worked through a challenging environment before, and believe we can do so again. The assets assembled at WebMD cannot be easily replicated and our strategic advantages make us strong market leader.

The experience, talent, commitment of our organization to deliver innovative high quality health information services is unequaled. We look forward to reporting back to you on our progress.

Operator, at this time we would like to take the questions.

Question-and-Answer Session


Thank you, (Operator instructions). Our first question comes from Mark Mahaney from Citi, your line is now open.

Mark Mahaney (Neil) - Citi

Hi, this is Neil [inaudible] calling in for mark, Marty, can you tell us a little bit about what customers are saying when you talk to them, what are some of their concerns with online marketing, and specifically with WebMD, and are they also concerned with locking themselves into longer term contracts given the scope of the macro-economy both here and abroad? And then I have another follow up.

Martin J. Wygod

The first thing that I am seeing is just a general substantial cut back on the budget, and right now, I think they want to specifically see their return on investments, and the want something that is very, that can be verified easily by a third party of what that ROI actually is based on the programs that we deliver. We are currently working on putting these programs together for them, and we think that the kind of ROI we’ll be able to just look at them, is going to be very, very impressive to our customer base.

Mark Mahaney (Neil) - Citi

And then, Tony, in terms of your 2012 guidance, how much of that is a decline will come from the Pharma side versus the non, and then they go to CPG side? And then what can you do to compete more on the CPG given the CTM pressures by social media and network on that front?

Anthony Vuolo

Sure, in terms of the numbers for this year, they are primarily driven by the pharma side, we’ve said in the path of CPG, the side is weak but it’s much smaller piece of a revenue than our than or pharma basis.

In terms of the CPG environment, as I mentioned on the call, we provide a differentiated experience vis-à-vis the lower priced inventory where CPG advertisers can reach people out of context, and that value is – that’s translated to products that have the health and wellness orientation to them. So we are focused on approaching advertisers with those types of products with our programs where both the audience engagement within the context of their help, along with the association with the WebMD brand creates the most value for those advertisers.

Mark Mahaney (Neil) - Citi

Thank you Marty, thank you Tony.


Thank you, our next question comes from Heath Terry of Goldman Sachs, your line is now open.

Heath Terry – Goldman Sachs

Great, thank you, Tony, I was hoping you could give us a little more detail on the comments you made about if you had invested in certain areas you might have been avoiding some of the issues now. Where do you think that underinvestment was most sever, and I guess, to what would you attribute the decisions made then versus what you intend to do now?

Anthony Vuolo

I think hind sight is always 20/20, but as Marty commented, I think that, you know, one of the most important areas of focus is really in the area of marketing insights and analytics. You know, most pharma companies do employ – particularly on the consumer side, a multi-channel approach to marketing, so trying to demonstrate the value of a program, you know, on WebMD when they’re also reaching people in different channels – this has always been a challenge. And particularly since – what’s unique to healthcare, you know, the call of action is really to go to your doctor in terms of trying to monitor your impact on purchase intent. So we are starting to develop some better insights and analytics around demonstrating that better. We’ve implemented some of that currently through the use of market research on the site, and we are exploring different ways to supplement that with other third party sources of data to demonstrate the value that we can create by driving patient-physician engagement.

Heath Terry – Goldman Sachs

And would you say these analytic programs are somewhat similar to what advertisers are seeing through ad networks, or is this something that is going to be unique to WebMD?

Anthony Vuolo

I think this something that is going to be unique to WebMD.

Heath Terry – Goldman Sachs

Okay, great, and then I guess, could you – you mentioned the baby app on mobile, can you give us just a sense of how much of your traffic right now is coming from mobile, and if there is a corresponding number on revenue that you can talk about, or just, you know, where mobile monetization is right now versus where you see it going?

Anthony Vuolo

Sure, well, I tell you , right now from a mobile perspective, you know, from – certainly from a monetization perspective, we get almost none of our revenues coming from mobile. If you’ll look at the mobile app that we have today, both on the consumer side and even if you look at the Netscape mobile app, we’ve been more focused on gaining share of the – within mobile. So we have enough of the value proposition to go demonstrate to an advertiser, and I think, you know, when you look at mobile, I think you got to break mobile down, you know, into two different pieces. I think that the mobile smartphone opportunity, while incremental, will not be as significant as the traditional web because of the form factor doesn’t lend itself to the same level of engagement. And particularly for pharmaceutical companies, the form factor doesn’t lend itself to the regulatory issue that you need to deal with in terms of pharmaceutical advertising. I think the tablet is a different story and a much bigger opportunity. Within the tablet environment, you can pretty much recreate what you can do on a computer, and I think that represents equal monetization opportunity compared to the traditional web and given that it is more readily available, you’re not tapped into a computer, when you have your tablet it should also lead to more frequent engagement and higher usage of the internet in general, which would be good for us. In terms of our total traffic numbers, if you look at what we get through our apps, they are not a significant piece of our traffic, we do get – I don’t have the numbers right in front of me, but we do get a fair amount of traffic coming to our sites through mobile browsers, but you know, obviously the lion’s share of our traffic, it’s pulled in a traditional web.

Heath Terry – Goldman Sachs

Great, thank you.


Thank you, our next question comes from Steve Rubis of Stifel Nicholas, your line is now opened.

Steve Rubis – Stifel Nicholas

Hi, Steve Rubin on the line for George Askew this evening, thanks for taking my questions. 2010 and 2011 seem to represent peak results for adjusted EBITDA, can you discuss your thoughts on a normalized adjusted EBITDA run rate for the business in the future, and talk about some catalysts that you believe exist that can help WebMD reclaim it’s peak performance, and I have one follow up as well.

Anthony Vuolo

Sure, you know, you follow the company, you know, we were able to – you know, when we hit those periods, and I wouldn’t just limit them to 2009 and 2010, I think we had a pretty consistent track record since going public in 2005. Our cross infrastructure is relatively thick, so, we are able to leverage the growth pretty efficiently and continue invest in the business, yet, expand EBITDA margin.

Unfortunately, when you get into a period of revenue decline, which we are currently experiencing, you have the inverse relationship as it relates to EBITDA For 2012, we’ve decided to continue to invest in the areas that we think are important and will help us reach, or regain, our growth rate so we can regain the EBITDA leverage that you’ve seen in the last five years. And that’s what we are assuming for 2012. You know, I think when you start to look at years beyond 2012, you know, when we see revenue growth, you’ll see EBITDA leverage comparable to what you saw in the last five years – you know, I think we have a demonstrated track record being able to manage the expenses and infrastructure across growth, and we’re doing what we can for reinvigorated growth rate, and when we accomplish that, you will see that back in EBITDA leverage.

Steve Rubis – Stifel Nicholas

Thanks, and my follow up question, can you provide an update on premium pricing and really how your investments in the ROI analytics initiatives that you just discussed, what kind of help you regain and maintain momentum with your premium pricing, and then along with that, and it’s not related, can you provide some color around what happens to your NOLs in the event of a change in control. Thanks.

Anthony Vuolo

In relation to your comments about premium pricing, you know, when we price our products, you know, we obviously have been able to command a premium give our proposition in the market place, but it’s not like we have one price that goes across every, you know, type of inventory on WebMD. We’re very focused on, you know, each area, you know, that it’s a lifestyle area, or it’s a health condition oriented area, and the advertiser demand and inventory availability in each area, and we always, you know, set our prices accordingly.

I don’t think in terms of the experience that we are seeing right now that is so much a pricing issue as it is more of a macro issue around, you know, many of the large pharma-companies, you know, cutting back on their pharmaceutical advertising expense. That’s really kind of driving the issue. In terms of the focus on inside analytics, you know, that focus is important because of we are better able to demonstrate the value that we can create, that will – should accept them to in depth or their marketing dollars in digital marketing programs, because the can see the tangible ROI, but I don’t relate that to pricing, I kind of relate that to the macro environment and deal with that. I’m sorry, the – it kind of NOL on a change of control scenario, I think that the NOL should survive a change of control scenario, the utilization of the NOL in terms of new limitation would really depend more on what a potential transaction would look like, but in general, NOL…


Thank you our next question comes from Kevin Kopelman of Cowen & Company, your line is now open.

Kevin Kopelman – Cowen & Co.

Thanks a lot. First question is organic traffic to your websites continues to be very strong. Could you talk about what the key drivers are there and also have you seen any impact from Google’s recent change to their algorithm on help searches.

Anthony Vuolo

Sure, our traffic growth to our site is primarily related to all the effort that we put in to make sure that our content is credible and is highly search engine optimized so when people search on health-related terms a number of our sites come up in the search results. Over the years we have increasingly gotten more traffic research because that is how people choose to navigate the web as opposed to bookmarks. So organic traffic growth is derived from all of our effort to make sure that our content is deemed to be credible and again our efforts in research optimization. We’ve been monitoring the recent algorithm changes and user experience that Google has implemented and it’s only been about a week and half but we haven’t seen any impact on our traffic referrals coming from Google Search since they have implemented that change.

Kevin Kopelman – Cowen & Co.

Okay thanks and then another question. In your discussions with advertisers, do you have a sense of whether their wiliness to spend on digital advertising has stopped deteriorating and at this point it’s just about you rolling out new products or is it too hard to tell?

Anthony Vuolo

I think that it’s still a situation that influx. One of the reasons why we changed our guidance from what we thought it would be was going to be six weeks ago is that continuing recognition that Pharma companies are still not releasing dollars and many of them may just cut expenditures in 2012. So I think that is still evolving. I’ve read, in addition to what we hear from customers and different advertising agencies and I think they are also starting to see third party sources indicate that Pharma companies might be cutting back on GPC advertising. So I think that is still and evolving marketplace.

Kevin Kopelman – Cowen & Co.

Okay, thank you very much.


Thank you our next question comes from Peter Stabler – Wells Fargo, your line is now open.

Peter Stabler – Wells Fargo Securities

Thanks, could you comment a little bit on the percentage of your business that you sell through secondary channels. I think in the past, Tony, you said it’s been pretty minimal but then you’ve been evaluating alternatives in this realm and just wondering if there is any sort of color update there and I have one quick follow up, thanks.

Anthony Vuolo

Sure, we use some channels to try to monetize our excess inventory. We started to experiment with some of the third party ad networks and putting some of our revenue, some of our inventory out on some of those ad networks just to see what the receptivity is. We’ve also, if you’ve looked at the site, will utilize Google AdSense and in terms of the link product that they can bet within an ad unit. It represents a very small piece of our revenues. Probably less than 2% of our revenues between those two areas, so, it is not a meaningful source of our revenue; it is something that we continue to evaluate to see if particularly the use of some of the newer cell-side and demand-side platform technologies to see if we can better utilize those technologies to monetize excess inventory. So we will continue to experiment in that regard but it’s not, I don’t ever see that being a meaningful piece of our revenues.

Peter Stabler – Wells Fargo Securities

Thank you and then if you could answer one question or maybe give us a little more color around your former clients. Just trying to ascertain whether if you look across your portfolio of large pharma clients, how consistent to the budget weakness? Are there any pockets of growth or are you seeing a fairly tight range in terms of the decline and the hesitancy, or you know is it really just a situation as a firm block you’re seeing two system behavior?

Anthony Vuolo

I think that when you see one company, because they all behave a little bit different, but I would say that the larger companies that are really trying to deal with the impact of patent expirations over the next couple of years are the one that are most severely contracting budgets right now across their entire portfolio. So I think when you get beyond some of the larger companies there is opportunity particularly in the area of new drug launches because a fair number of the new drug launches are not going to be within large pharma. I think the only place within large pharma that you do see spending is in new drug launches and certainly that’s where we are focused along with trying to work with our clients to better show the value of the WebMD programs and when they do start to release marketing dollars on some of these in-market brands that we are there and can participate in that.

Peter Stabler – Wells Fargo Securities

And then finally, can you give us any color on how concentrated revenues are? Top 10? Top 25? Anything?

Anthony Vuolo

Well, we don’t have a customer currently that accounts for more than 10% of our revenue so if you look at the, it’s no surprise the bulk of our revenues are going to be coming from the pharmaceutical/biotech and med device arena. I don’t have available in terms in front of me the concentration in terms of number of different customers but not surprising if you looked at the top 20 – 25 pharma companies that’s going to account for a fair amount of our revenues. That accounts for the fair amount of the marketing spend.

Peter Stabler – Wells Fargo Securities



Thank you, our next question comes from Kevin Allen – Barclays Capital you’re line is now open.

Kevin Allen – Barclays Capital

Yes, Hi thanks. Can you just give us a sense of how much conservatism you have incorporated into your first quarter guidance?

Anthony Vuolo

Our first quarter guidance is based on all the information that we have available to us at this point in time. So we are half way through the quarter so we are giving you the best insight into the first quarter as we could.

Martin Wygod

It’s not conservative; it’s what we think it’s going to be.

Kevin Allen – Barclays Capital

Okay thanks. I guess secondly then what gives you comfort that you will see trend improve in the back half of the year?

Anthony Vuolo

Well when you look at, I think I commented on this in the prepared remarks, you look at the first half versus second half comparisons, the first half of last year wasparticular high revenue growth. I think our average high revenue in the first half of last year grew 28% versus the – which is one of the reasons you have such a big decline in the first half of the year. If you look at the last half of 2011, obviously our growth rate has already been impacted. So number one, the comparables get a little bit easier from that perspective and the only phenomena within our business is we normally see a pretty significant sequential decline from the fourth quarter of one year to the first quarter of the following year. Even if you went back and looked at a year ago and looked at the fourth quarter of 2010 to the first quarter of 2011 in the growth period revenues were probably down about 35, 36 million in those quarters. So, first quarter revenue is obviously weaker than we’d like it to be for the reasons we have discussed, but we should see the gradual increase in revenue that throughout the year [inaudible] although at a lower rate and you know when we get to the second half of the year a lot of the weakness that we are already seeing is already non-offensive itself in the second half of 2011.

Kevin Allen – Barclays Capital

Thank you.


Thank you, our next question comes from Scott Devitt of Morgan Stanley you’re line is now opened.

Scott Devitt – Morgan Stanley

Okay thanks. The commentary you have made around you former advertisers that relates to changes in regulatory approval cycles in the patent cliff, that all makes sense. I was wondering if you could talk a bit more about the RI tools and why now? Is it a response to advertisers who are telling you that the WebMD channel is not producing appropriate ROI’s relative to other online channels? Is online loosing shared offline or is it just simply that you are trying to be proactive during a cyclically weak period to explain to advertisers the return on the online channel. Thanks.

Anthony Vuolo

No I think it’s more the later. I think advertisers have traditionally have tried to measure that value in relation to engagement on the web [inaudible].

This type of challenging environment that is the type of marketing position that will win the day; and we think given our skill we are uniquely able to demonstrate that value beating any other competitor.

Scott Devitt – Morgan Stanley

Thank you.


Thank you. Our last question comes from [Michael Baneer – PLF Capital]. You’re line is now opened.

[Michale Baneer – PLF Capital]

Yes, good afternoon. Tony first to you, could you give us an update on the private portal business? I recall that we were hoping that 2012 would be the first year when we could start seeing customers coming back.

Antony Vuolo

Sure, as I said in my remarks we have the strongest pipeline that we’ve had in quite some period of time in the private portal and over the last couple of years we have refocused a lot of the investment and the products that there are on more wellness and management capabilities to augment what we are offering just in terms of content management and benefit administration and that focused on products in combination with rejuvenating that sale force has resulted in that pipeline and we’re expecting to win new business. Like even the implementation cycle, which tend to be long, the fact that most clients don’t want to implement a new platform until their open enrollment process which generally begins in September/October time frame we won’t see the benefit of it until then. If we are in a position, in the future, keep people abreast of new client opportunities and wins we’ll obviously do that.

[Michale Baneer – PLF Capital]

Thank you and as it relates to the public portal, you have focused on the ROI and market inside and analytics early on in 2011 and clearly this is probably the best way to convince your customers to switch, but if you take a step back and sort of share with us where you are with your discussions with the customers; because the key question continues to remain when will the 95% of the spending of the 10 plus billion dollars will be moving towards, what is about 15% spending in other industries. So we’re still way under penetrated on a relative basis in terms of how [inaudible] are spending money on the web. Can you share where you are in that process and what, if any, early indications you have received from your customers.

Anthony Vuolo

Well given the current micro environment most of our customers are only talking about the restriction that and the lack of budget that they have so the way to get more dollars is you really have to be able to show them ways that you can tangibly demonstrate more value, which we are attempting to do and we’ll continue to invest in those products and I think that as their own situations become a little bit clearer and their own needs become a little bit more clearer in terms of what budgets they do have to work with from a marketing perspective that that in combination with what we have to offer will get us down the path of garnering more of the total marketing [inaudible]. But when we try to go in right now and have those conversations, the initial response is that they are just cutting back across the board, so there is more work to do to work with our customers to get them to start to shift the dollars they have left to the digital market place.

[Michale Baneer – PLF Capital]

Am I correct to assume that you already have the analytics because the market insight has always been embedded in your (plan). You do have the analytics and you do have the way to show what the customer can get, it’s a matter of having them committing the dollars, is that correct?

Anthony Vuolo

Well, we do have a certain amount of analytics that demonstrate value but I think that we can do better and that’s where we are focused on in 2012.

Martin Wygod

I think the fact that we have a huge competitor of that because we have a huge amount of very engaged inventory and we have the ability and practically every disease category to make a meaningful difference for a product in that field, in that therapeutic class. I think that we just have not gone far enough in really differentiating what we deliver compared to what anyone else in the industry is delivery and how we can actually, in the future, guarantee the necessary ROI’s to our customer base. We’ve got the necessary reserve inventory so we can always meet those ROIs. I think it is just a matter of creating a better product with a backup of third-party analytics to be able to make it so compelling that if they don’t use us they will be at a competitors disadvantage in that therapeutic class if we do it with somebody else.

[Michale Baneer – PLF Capital]

Thank you, you’ve been very helpful. Just one follow up, Marty to you, as you’re looking at the second half of 2012 and ’13 with the new products that pharma will be coming out where do you think, and I don’t want to be putting real numbers on this, but clearly they would have to spend a significant about of money to offset the declines in what they are losing. Is this too early to even think about what those dollars may be or do you have any line of site at all as to when those dollars begin to come towards you?

Martin Wygod

I think it is premature, unfortunately right now, you can all see by the results that we are going to report in the first quarter that we’re still in a very bad downward trend. The key here is to stabilize it and reverse it and retain our growth. It’s a major job that is in front of us. I think we can get there. I am confident with our management team and the commitment they have in our employees and I think we will have the right direction and hopefully in the near future we can bring in the right CEO that can come in and direct this growth.

[Michale Baneer – PLF Capital]

Thank you so much, best of luck.


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