HLTH Q2 2007 Earnings Call Transcript

| About: Emdeon Corp. (HLTH-OLD)
Wall Street Breakfast

HLTH Corporation (HLTH-OLD)

Q2 2007 Earnings Call

July 31, 2007 4:45 am ET


Marty Wygod - Chairman

Kevin Cameron - CEO

Mark Funston - EVP and CFO

Wayne Gattinella - CEO and President, WebMD

Tony Vuolo - EVP, Finance, and CFO, WebMD

Risa Fisher - VP, IR


Megan Barker- Goldman Sachs

Sandy Draper - Raymond James

Philip Cam - Oracle Investment Management

John Kelly - Smith Barney

Mark Mahoney - Citigroup

Rob Kelly - Smith Barney

Anthony Petrone - Maxim Group

Corey Tobin - William Blair

James Kumpel - Friedman Billings Ramsey

Heath Terry - Credit Suisse



Good afternoon and welcome to HLTH Corporation's and WebMD Health Corp. June 2007 Quarterly Conference Call. Today's conference is being recorded. I will now like to turn the call over to Ms. Risa Fisher, Vice President of Investor Relations. Please go ahead.

Risa Fisher

Good afternoon this is a joint conference call to discuss Health and WebMD’s second quarter financial results. I will read the following statements concerning 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 Health and WebMD’s future performance, our expectations concerning the growth of our online marketing budget, other market opportunities, and our ability to capitalize on them, and the amount and timing of the benefits expected from acquisitions and other transactions from new products and services, and from other potential sources of additional revenue.

These statements speak only as of today and are based on our current plans and expectations, and they involve risks and uncertainties that could cause actual future events or results to be different from those described, including the risks and uncertainties that are described in Health and WebMD’s SEC filings, except as required by law, Health and WebMD do not undertake any obligation to update our forward-looking statements to reflect future events or circumstances.

The earnings release issued today by us is available at website at www.hlth.com, in Investor Relation section and is also being included in Form 8-K filed today with the SEC. The earnings release issued today by WebMD is available at www.wbmd.com in the Investor Relation section and is also being included in Form 8-K filed today with the SEC. The respective Form 8-K’s and other SEC filing are also available on Health and WebMD’s respective websites and on the SEC's website. The releases in Form 8-K that were filed today include reconciliations between GAAP and non-GAAP financial measures to be presented on this call.

I would now like to turn the call over to Kevin Cameron, CEO of Health Corporation.

Kevin Cameron

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

Wayne and Tony will review the financial and operating highlights of WebMD for the second quarter and then Mark and I will discuss HLTH's second quarter results. Marty will then make some closing comments before we open it up for Q&A. I would like to turn the call over the Tony Vuolo CFO of WebMD.

Tony Vuolo

Thanks Kevin. Please note that the comparison to WebMD's prior period results reflects the impacts of the change in prior year's income tax provisions related to the accounting treatment of tax deductible goodwill amortization, which we discuss on our last conferences call. This change resulted in an increase in non-cash differed income tax expense in prior periods. WebMD filed the amended forms 10-Q and 10-K on May 10 2007 to revise its prior quarter results.

WebMD revenues for the June 2007 quarter the $78.5 million compared to $56.6 million last year an increase of 39%. Advertising and sponsorship revenue increased 45% and licensing revenues increase 61% over the June 2006 quarter.

Publishing and other revenues was $5.6 million a decline of $1.4 million compared to last year. This decline includes the impact of our previously announced decision to discontinue our offline CME products. This product contributed $1.7 million in revenue last year and no revenues this year.

Revenues growth was 29% over the prior year when excluding accusation related revenues of $9.7 million for the June 2007 quarter and $290,000 in the June 2006 quarter.

A $1.7 million in offline CME revenue in the June 2006 quarter, I which is a just referenced and the impact of the AOL expiration 30, 2007, which contributed $649,000 in revenue in June 2007 and $1.6 million of revenue in June 2006.

Adjusted EBITDA of for the June 2007 quarter was $15.2 million compared to $9.6 million last year, an increase of 58%. Adjusted EBITDA as a percent of revenue improved 230 basis points, 19.3% from 17% last year. Adjusted EBITDA per diluted share was $0.25 compared to $0.17 last year. The adjusted EBITDA margin on incremental revenue was 25% for the June 2007 quarter.

Excluding the impact of the revenues from acquisitions, the revenue and adjusted EBITDA impact of the expired AOL arrangement discontinued offline CME products discussed earlier and 450,000 in severance expenses incurred during the June quarter.

The adjusted EBITDA margin on incremental revenue was about 45% for the June 2007 quarter. Online services segment adjusted EBITDA increased 56% to $14 million or 19.3% of segment revenue compared to $9 million or 18.2% of segment revenue last year.

Publishing and other services adjusted EBITDA was $1.1 million compared to $593,000 last year. Net income for the quarter was $5.4 million or $0.09 per share compared to a net loss of $853,000 or $0.02 per share last year.

Looking further at the revenue increase of 39%, advertising and sponsorship revenue increased 45% to $52.4 million, resulting primarily from internal growth and also from acquisitions Acquisitions contributed a total of $5.1 million of revenue in the June 2007 quarter. Excluding these revenues and the impact of the expired AOL agreement, advertising and sponsorship revenue increased 35% compared to last year.

Private portal licensing revenue increased 61% to $19.8 million, again resulting from both internal growth and from our acquisitions of Summex and Subimo, which together contributed $4.5 million during this quarter and $290,000 last year. Licensing revenues increased 27% compared to last year after adjusting for these revenues.

Looking at certain expenses; depreciation and amortization was $6.9 million compared to $4 million last year. The increase was due to a combination of the impact of acquisitions and increased levels of capital expenditures.

Non-cash advertising expense, as expected, was zero this quarter, compared to $1.2 million last year, as we have shifted our utilization of our available inventory to the latter part of the year.

Non-cash stock compensation expense was $4.5 million compared to $7 million last year, reflecting the impact of the accelerated divesting methodology used for stock ramp before the adoption of FAS 123(NYSE:R).

Interest income totaled $3.1 million for the quarter, an increase of $1.6 million from last year due to increased cash available for investment.

The provision for income taxes was $1.3 million for the quarter compared to an income tax benefit of $293,000 last year. The income tax provision for this quarter includes the non-cash expense of $500,000 related to the current period impact of the deferred tax liability for tax deductible goodwill.

The weighted average diluted share count for the quarter was $59.8 million.

Turning to our balance sheet; cash and investment as of June 30, 2007 was $240 million. Operating cash flow for the quarter was $31.9 million compared to $16 million last year. As we stated on prior calls, quarterly operating cash flows can be impacted by the timing of the cut off of compensation accruals, other expense accruals, the billing and collection of receivable and reimbursements to health in relation to quarter's end. Capital expenditures for the quarter were $5 million.

Turning to financial guidance; WebMD's revenue guidance for the September and December quarters is unchanged. We had increased our guidance for adjusted EBITDA by about $2 million to $2.5 million for the last six months of 2007 to reflect expected higher margins on incremental revenue, resulting from the acceleration of the benefits of our infrastructure investments and acquisition synergies that we mentioned on our last call.

Our guidance for net income increases by $1 million to $2 million for the last six months of 2007, to reflect the increase in adjusted EBITDA, and our expectations for higher interest income and lower non-cash expenses, offset, in part, by higher income tax expense, as the result of the current year impact of reporting a non-cash income tax expense related to tax deductible goodwill and amortization that we discussed in the last quarterly call.

A schedule summarizing WebMD's updated quarterly guidance and annual financial guidance, as well as the reconciliation between GAAP and non-GAAP measures is attached with press release we issued today.

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

Wayne Gattinella

Thank you, Tony. Our second quarter operating results demonstrate the strong progress that we continue to make towards delivering WebMD overall strategic plan. Our advertising and sponsorship revenues during the quarter increased 45% versus a year ago, as we continue to expand our business with biopharmaceutical and consumer products companies.

In the second quarter, we ran approximately 500 individual online programs compared to 400 in the prior year. Traffic to the WebMD Health Network reached 40.3 million unique users per month during the quarter, an increase of 32% over the same period a year ago.

Our page view traffic totaled 890 million pages during the quarter, an increase of 25% over the prior year period.

As we previously announced our programming relationship with AOL ended on April 30. So excluding AOL Health users and page views from the current and prior year quarters, our user and page view traffic grew 40% and 30% respectively.

Our online reach to physicians also continues to lead the industry as we generated more than one million physician visits per month to our professional network.

During the quarter 760,000 continuing medical education or CME programs were completed on our professional sites, an increase of 55% over last year. The Internet continues to replace the traditional sources that physicians turn to for medical information. And the latest Manhattan Research again confirms Medscape as the number one source of health information that physicians turn to today.

To support our strong sales momentum we hosted the 9th Annual WebMD Health Forum at Laguna Beach just two weeks ago. We had over 100 business leaders representing 55 of the leading pharmaceutical, biotech and medical device companies, along with invited industry experts who joined us for two and half day to discuss the latest trends in health information, research, technology and marketing.

The Health Forum provides the powerful opportunity for us to showcase the latest WebMD products and services at a time when clients are building the business plans for the coming year.

As new technologies continue to drive greater transparency in all facets of information, the opportunity to replace conventional marketing approaches with WebMD's online channels that more effectively connect with patients and healthcare professionals is beginning to take hold.

During the quarter we announced a new multi-year partnership with Susan G Komen for the Cure, the world’s largest grassroots network of cancer survivors and activists. We are building the Susan G Komen for the Cure Breast Care Curriculum Center on Medscape, designed to provide physicians, patients and care givers with practical information and timely access to important data and issues that affect the management of breast cancer. Komen’s mission is to put the latest research and information into the hands of health care providers and their patients and they recognize that the trust, credibility and large community of health involved users of WebMD cannot be replicated anywhere else.

Earlier this month we announced a new innovative product Search CME that enables physicians to earn continuing medical education credit for the medical search activity on Medscape. This new search feature helps physicians find the latest health information online, while earning continuing medical education credit at the same time. Medscape is the only open portal to provide this unique service for physicians.

Leveraging our new portal technology platform that we launched in February of this year, we have now launched several new consumer products during the second quarter that create new sponsored revenue opportunities and further empower our users to make informed health decisions.

WebMD health check is the new personalized health assessment that helps people measure their health risk across the wide spectrum of issues and delivers a personalized online action plan based on an individuals understanding and the readiness to change.

The newest release of WebMD symptom checker a proprietary graphic inter phase that helps people visually pinpoint potential condition associated with our physical symptoms, now provides integrated symptom search features, as well as contextual video and content [lengths] for sponsors.

We continue to strength WebMD's market position, as the most recognized and trusted brand of health information. This quarter we renewed our programming relationship with CBS news to provide the network with daily health news feeds for their on-air broadcast news, through August of 2008. During the second quarter WebMD was name to the Time magazine list of 25 sites we can’t live without and was also named best of the web in Health by Ford.

Now, turning to our private portals market, WebMD continues to lead the market in providing co-branded health and benefits portals to large employers in health plans. Due in the quarter we implemented new health platforms for MVP Health Care, Select Health and Principle Financial Group.

In addition, we implemented our first integrated WebMD Health Coaching platform for both the University of Utah and for Deere and Company, providing them with the new suite of online and telephonic lifestyle management programs designed to reduce modifiable health risk behaviors across their employee population.

Our total installed base of companies, now employing the WebMD private portal platform at the end of the second quarter totaled 108 organizations compared to 82 one year ago. We also serve approximately 150 additional customers who purchase our standalone health decisions support services.

During the quarter we launched the next generation of our proprietary health risk assessment that incorporates new risk factors, a greater level of personalization and tighter integration with our new Health Coaching lifestyle management programs. Also due in the quarter we executed the first phase of our new data warehouse client reporting system that provides our clients with the program performance metrics on demand.

As the healthcare marketplace continues to move towards greater consumer accountability and control, WebMD has significantly increased its market position in this quarter in providing the innovated decision support solutions that helped individuals make more informed health decision.

In addition to making the necessary investments that will positioned Web MD to achieve substantial long-term revenue growth and margin expansion, we are also announcing changes to our senior management organization that too are designed to support our anticipated growth. Effective immediately Tony Vuolo, currently our Chief Financial Officer will assume the new position of Chief Operating Officer of WebMD.

Tony will concentrate on providing the internal operating oversight that will also allow me to focus on the numerous opportunities that will further accelerate our Company’s growth. In addition we have a search underway for a Chief Technology Officer that will lead our highly talented technology team across the WebMD organization.

Finally Mark Funston, CFO of our parent Company will now take on the additional responsibilities as CFO of WebMD. I look forward to having the opportunity to work closely with Mark at this exciting time in our Company’s evolution. With that I'd now like to turn the call over to Mark.

Mark Funston

Thanks Wayne. Before I review HLTH's second quarter results I would like add that I am very pleased to be able to take on the additional responsibilities at WebMD. Since joining HLTH, I have had an opportunity to work with many people at WebMD. That's an exceptional finance organization in place and I look forward to working more closely with them, Wayne and the rest of the team on a daily basis.

Turning then to Health consolidated revenue for the June 2007 quarter was $129.3 million compared to $291.6 million a year ago.

Adjusted EBITDA was $21.1 million or $0.11 per share in the June 2007 quarter compared to $55 million or $0.19 per share a year ago. And the income from continued operations in the June 2007 quarter was $11.2 million or $0.06 per share compared to $15.5 million or $0.05 per share a year ago.

In comparing these results for the quarter ended June 30, 2007 with the prior year period, please note the following. For the June 2007 quarter, our 48% portion of Emdeon Business Services income is reflected in line item equity in earnings of EBS Master LLC.

For the prior year period, the results of Emdeon Business Services are included in our consolidated revenue in earnings. Because of this required presentation, our reporting regarding EBS as well as our consolidated results will not be comparable to the respective prior year periods until after we reach the anniversary of the transaction.

HLTH prior period results reflect the impact of the change in prior year's income tax provision related to the accounting treatment of tax deductible goodwill and amortization, which HLTH discussed on our last conference call. This change impacted non-cash deferred income tax expense in the prior periods.

HLTH filed an amended Form 10-K on May 10, 2007 to revise its prior period results.

Looking at our segment results specifically. Tony just reviewed the WebMD segment. I will now cover the remaining segments of HLTH.

ViPS segment revenue was $25.9 million for the June quarter, up 4% from $24.9 million a year ago, reflecting increases in both our government and health payer businesses. ViPS segment adjusted EBITDA was $5.1 million, which was flat with the prior year.

Operating margin was 19.8% in the current quarter reflecting a slight decrease from the year ago period due primarily to a change in the revenue mix and our government business.

Porex segment revenue was $25 million for June quarter compared to $22.7 million a year ago, an increase of 10%, driven primarily by growth in our consumer and surgical products, combined with the impact of favorable foreign currency exchange rates.

Porex segment adjusted EBITDA was $7.3 million versus $7 million in the prior year, an increase of 4%. Operating margins decreased to 29.4% from 31.1% in the year ago period, primarily due to higher insurance and marketing expenses.

Corporate expense for the June 2007 quarter was $6.5 million or approximately 5% of consolidated revenues compared to $11.5 million a year ago. As we noted in the past quarters, we are providing certain transition services to EBS LLC and Sage. The fees we have received for these services in the June 2007 quarter were $1.5 million and are included within the Corporate segment as an offset to the cost of providing the related services.

While not considered an operating segment anymore, we recorded $7.6 million of equity in earnings of EBS LLC in the June 2007 quarter, reflecting our 48% portion of their income.

Net interest income for the quarter was $5.5 million compared with net interest expense of $0.2 million in the second quarter of the prior year. The increase in interest income is primarily due to interest earned on higher cash balances.

Finally, while we do not project or include expenses related to the DOJ investigation in our guidance, our second quarter results did include $471,000 in expenses HLTH incurred related to this investigation compared with $275,000 for the same period last year.

These costs are for the legal and related expenses that the company incurs in connection with the investigation. These expenses have historically been and will continue to be presented on a separate line titled legal expense within the continuing operations.

Additionally, as described in the Form 8-K that HLTH filed on July 23, HLTH took a pre-tax charge of $57.8 million during the June 2007 quarter which reflects an estimate of our indemnification obligation for defense cost to the nine former Officers and Directors of our former subsidiary Emdeon Practice Services who were indicted in connection with the DOJ investigation. Because all the indicted individuals were employees of our former Practice Services segment which was sold to Sage in September 2006, this charge has been reflected in discontinued operations.

Turning to our balance sheet; as of June 30, 2007 HLTH had approximately $739 million in cash and short-term investments on a consolidated basis. This amount includes $240 million in cash and short-term investments held by WebMD. You will also notice the line item in the liability section of our balance sheet titled Liabilities of Discontinued Operations. This liability represents the accrual of the indemnification obligation previously discussed less the payments made prior to quarter end.

Operating cash flow from continuing operations in the June 2007 quarter was $38.2 million compared to $53.8 million a year ago. The decrease over the prior year period and cash flow from continuing operations is primarily due to EBS being treated as an equity investment in the current quarter.

While we share in 48% of EBS' earnings, we did not receive cash distributions from this investment during the quarter.

Our capital expenditures for the June 2007 quarter were $6.9 million. Cash flows during the June 2007 quarter include the receipt of approximately $39.9 million from exercise of stock options, of which $38.6 million related to HLTH stock options.

Additionally, we repurchased approximately 2.45 million shares of our common stock between April 1, 2007 and today, on a scale down price which represents a small percentage of the amount we are able to buy.

The total outstanding share count as of June 30, 2007. The total outstanding share count as of June 30, 2007 was 179.6 6 million shares offered during the 2007 quarter, all the alternative shares of HLTH's convertible, redeemable, exchangeable preferred stock, were converted by the holder into an aggregate of 10.6 million shares of HLTH common stock. This conversion had no impact on basic or diluted shares outstanding, as these preferred shares have previously been included in both our basic and diluted shares outstanding.

Turning to financial guidance, including the results for the second quarter announced today, HLTH’s full year 2007 guidance is updated as follows. HLTH narrowed its revenue guidance range to $538.3 million to $553.3 million from $537. 4 million to $556.4 million.

HLTH increased its guidance range earnings for adjusted EBITDA by $1.1 million to $3 million to $102.2 million to $110.4 million primarily to reflect expected higher margins on incremental revenue of WebMD, partially offset by lower than anticipated results ViPS primarily in the third quarter.

Health increased its guidance range for income from continuing operations by $3.4 million to $5.5 million to $45 million to $54. 3 million, primarily to reflect the increase in WebMD’s adjusted EBITDA and its expectation for higher interest income and lower non-cash expenses attributable to WebMD, offset in part by higher income tax expense of WebMD and lower than anticipated results at ViPS primarily in the third quarter.

As a reminder our press release including the comparative financials and the summary of our 2007 guidance is available on our website.

Now I‘d like to turn it over to Kevin Cameron to go over the operating highlights for ViPS, Porex and Corporate.

Kevin Cameron

Great thanks, Mark. Turning to ViPS, sales within this ViPS Health Payer Solutions Group were steady, work continues on the design, development and implementation of the Blue Health Intelligence or BHI initiative. As a Multiplan data warehouse, BHI will let participating Blue Plans capture and access clinical data derived from patient-care to enhance best practices, reduce costs, and improve patient safety.

Initially, the warehouse will store clinical records for 20 Blue Plan operations and 79 million people. Expandable to house a 100 million people, we expect that the BHI will be the largest data warehouse in the U.S. And we are enthusiastic about it. Looking ahead this project should drive additional sales opportunities to each of the individual Blue Plan potentially as the project progresses.

During the second quarter ViPS Health Payer Solutions Group enjoyed strong [renewal] rates across the board and completed contracted negotiations for several new health plans for our [broadened use] in Hedis measurement software products.

Last quarter we announces the works has began with Massachusetts Health Quality Partners on a pilot program, that will allow MHQP to evaluate physician and provide their performance based on specified quality measures by aggregating commercial, Medicare and Medicaid claims data and analyzing that data using ViPS proprietary performance measurement software. The program is part of centers with Medicare and Medicaid services, CMS project known as Better Quality Information to Improve Care for Medicare Beneficiaries.

CMS is implementing its programs through four regional collaboratives, including MHQP. We are on schedule to deliver the first set of quality measure to MHQP during, the current third quarter.

ViPS Government Solutions Group is continuing to work on a number of key CMS projects at this time which includes the Retiree Drug Subsidy program, Medicare Secondary Payer National Recovery System, Medicare Eligibility Integration, Integrated Data Repository for Part D and the ViPS Medicare System.

As Mark mentioned we have reduce our guidance ViPS for the third quarter by $2.5 million to reflect the unexpected cancellation of one contract. ViPS was engaged under the contract [gaffed] up and began to work ahead of the anticipated completion of a deliverable two CMS by another vendor unrelated to ViPS.

Unfortunately this other vendor sales to deliver on their project leaving ViPS with no work to take on. We expect this project will return, however the timing is indeterminate and that’s caused the short fall that we expect in the third quarter.

We remain very enthusiastic about ViPS growth prospects in the government [sector]. We are a major contractor for CMS and we have unique knowledge and a strong reputation for delivering timely high quality services. Historically our government business had been dependant on the nature and timing on what can be large contract towards particularly CMS.

Due to the ongoing implementation of a new contracting vehicle at CMS during 2007 as well as some delays in funding the awarding of the number of contracts has been delayed this year. That said, the pipeline is very strong and we believe there will be significant opportunities later in the year going into 2008.

Turning to Porex, Porex continues to generate consistent results. Growth in this quarter was driven primarily by our consumer and surgical products. Porex's focus continues to be on improving is manufacturing processes in order to generate efficiencies, reduce costs and improve the quality of its products.

Porex also developed several new patented applications and continues to introduce new proprietary products to the market. With facilities located in the U.S., Europe and Asia Porex is strategically positioned to meet the need of its intimate customers as they transition their businesses globally.

Briefly touching on our investment in Emdeon Business Services, EBS. delivered strong results in the quarter. Revenue was a record $201.2 million. During the quarter, EBS introduced its new payment manger product and continued to experience strength across most of its business lines. We continue to be pleased with the performance of EBS and we are enthusiastic about the prospects for our 48% investment.

Turing to Corporate, we continue to execute our restructuring plan. In the second quarter, there were additional scheduled reductions in headcount, which enabled us to reduce our overhead to better reflect our current ongoing operations. Overall, we delivered solid results this quarter.

Importantly we continue to build up the products and services that will allow us to take advantage of the opportunities we see ahead of us. We are especially enthusiastic about the tremendous opportunities ahead at WebMD.

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

Marty Wygod

Thanks Kevin. As you have heard on this call, WebMD again demonstrated significant progress in each of its key markets. Our leadership position in online health information services is very strong. We are making the investments necessary to further expand our leadership and to deliver the future products and services that will position us to achieve substantial long-term revenue growth and margin expansion.

As Wayne indicated, we are changing our senior management structure to best position ourselves for this anticipated growth. By creating a Chief Operating Officer position, we can better leverage Tony's skills and deep knowledge of our organization and the industry. I have worked with Tony for over 20 years and for the period of time that we were at Medco together. Tony had significant operational responsibilities during the periods of Medco's highest growth.

This move will enable Wayne to spend time on other opportunities to further accelerate our growth. We also have a search underway for a Chief Technology Officer. With technology and operation so integrated in our business, it was important to us to bring in Tony's depth of knowledge in the healthcare industry as it is likely that a CTO that we will bring on probably will not be from that background.

In summary, WebMD delivered another strong quarter. As Tony indicated, we have raised our guidance to reflect additional margin expansion on incremental revenues in the last six months of this year, reflecting an acceleration of the benefits of our infrastructure investments and acquisitions synergies. We are extremely enthusiastic about the opportunities ahead.

Operator, at this time we'd like to open it up for questions.

Question-and-Answer Session


Thank you, sir. Today's question-and-answer session will be conducted electronically (Operator Instructions) And we will go first to Anthony Noto with Goldman Sachs.

Megan Barker- Goldman Sachs

It's actually Megan Barker on for Anthony. Just one question, on WebMD by our calculation, the CPM grew about 16% year-over-year which is an acceleration. I am just wondering if you can give us any color on how much of that is due to sell through versus higher CPM? Thanks.

Kevin Cameron

It’s a combination of both, our sell through continues to increase even as our traffic itself has been going up. But we have also taken opportunities for slight increases in pricing as the market opportunity has presented itself as well. We have been able to demonstrate very strong performance for our client sponsored programs across both our consumer and professional sites.

And while we are able to deliver a very efficient sort of audience matured for our sponsors, the target ability of the sites has also enabled us to raise the value of each targeted visitor that we can deliver for a sponsored program. So our sales momentum is strong. We are selling more than any period in the past, more programs I think as we talked about. But at the same time wherever is some pricing opportunity we have taken that as well.


We will go next to Corey Tobin with William Blair. Mr. Tobin, your line is open, please go ahead. Alright, we will go next to Sandy Draper with Raymond James.

Sandy Draper - Raymond James

Thank you. First question would be for Wayne. Wayne, last quarter you commented on a little bit of a slow down in the private portal market on an extended sales cycle. Any updates on that, staying the same, getting better, getting worse?

And then a quick follow-on for Marty. On the last call Marty, you commented about your interest in potentially continuing to shrink the capitalization through share repurchases. Obviously, the stock has come down here recently. We'd love to hear your thoughts about the strong cash position, any thoughts on doing some type of accelerated buyback? Thank You.

Wayne Gattinella

Thanks Sandy. I will take the first one. In terms of what we commented on, on the sales cycle in the first quarter, as we referenced as the sophistication of the programs that we begun to deliver on our private portal's market has increased. It slowed the sales decisioning a little bit, because there was a little bit a more of a complex decision on the buyer side. So for example, we acquired Summex just over a year ago a new health coaching capability. We integrated it into our decision support platform and we began to sell health coaching services as part of our core health and benefits platform. As you just heard, we announced our first two installations with our new health coaching platform and we expect that in the second half of this year, you will hear new client implementations with that service as well.

In the first quarter we announced a new clinical messaging product and again we expect in the second half of this year, next quarter’s call you will hear some new accounts being announced for that service as well. So well in the beginning of this year we saw these new service which have higher value for us and higher value for our clients. Taking hold we also that sort of sales cycle of moving from presentation of a contract was taking a little bit long. Now you are going to start to experience why the accounts now are being announced as that, sort of catching up if you will to that new time frame with these kinds of services.

Marty Wygod

This is Marty Wygod’s response to the second half of that question, but before I do that also, you all should take in to consideration that as the size of our contracts grows substantially with each of our prospective accounts, the complexity increases, the period of time that takes to get the approvals from the customer’s side can be little bit longer and more importantly the period of time from the time we received the contract to the time it goes through our process and we get it online up and running the way we want to have it up and running, which is one of the major reasons why slowly moving into this position is very key, because the longer it, the longer it takes us to go ahead and be able to start to buck it from a GAAP perspective.

But I think we are trying to make strides in this area and I think it could be a benefit with firmly focusing on that and I think you will see improvements on that, the, the next year to come on. But there is a big deference when you are doing $3 million with the accounts and when are doing $15 million without an account and the complexity of it as I said before makes it a little bit more complicated. But these are health signs in the growth of the company and the evolution of the company.

As far as the buyback program, we’ve concertedly brought back the securities, on a scale down and I believe the Board will be giving us additional approval of above and beyond what we have to buyback. The buybacks are much more substantial amount and it’s still as this does take place with the Board we will release that.


Thank you, sir. We’ll take your next question from Philip Cam with Oracle Investment Management.

Philip Cam - Oracle Investment Management

Hi, I just had a quick question with respect to the incremental margin on the revenue. Can you provide any other color as to how much those margins can increase from where they are right now?

Tony Vuolo

Sure, Tony Vuolo. As we said in the past, I think year-over-year we expect our margin on incremental revenue to expand with the type of revenue growth that we've experienced. In terms of giving any color, how much of that can go up year-to-year that’s a little hard to predict at this point, because it depends on things like the mix of the revenues and how we would and I think we would finance initiatives like international expansion.

So, we absolutely expect to expand but this point, to try give you any more color on that, as the years go out is a little bit of crystal ball game and when we get to the point when we provide guidance we will also give our viewpoint at that point of the margin expansion.

Philip Cam - Oracle Investment Management

Thank you.


We will go next to John Kelly with Smith Barney.

John Kelly - Smith Barney

Yes could you mentioned, you’ve mentioned this a moment ago. Is there anything going on internationally?

Marty Wygod

We are at different stages of negotiations with strategic partners as well as with how we perhaps would structure it, with possibly with outside money as well as ours. And we may likely structure in such ways so that it will be what balance for a period of time. So because of the expenses involved in certain areas. So we may not end up consolidating to begin with but we would be putting all the important metrics out there.

I think we will have all this put in shape the second half of this year, which is what we do. I think this is going to be a major positive for the Company long-term and I think we are in a very unique position to capitalize and monetize both of the physicians and patients internationally really how do this such high regard.

There have been several, several foreign nes papers that have put out articles in relation either are Medscape or WebMD can. It's amazing the amazing the amount of reputation and awareness that exists in other countries.


We will take our next question from Mark Mahoney with Citigroup.

Mark Mahoney - Citigroup

Thank you. Could you provide some more color on the growth you are seeing in page views in the unique users? Are there particularly new parts from a consumer prospective that new parts of the platform that people are going to?

And then secondly could you talk about some of your R&D plans and again mostly on the consumer side, are there particular features, areas of content that you are looking to develop over the next 12 to 24 months? Thank you.

Wayne Gattinella

Sure Mark. I mean just to give you a little bit of color on the traffic growth and what we are seeing in terms of pages. As you know, we launched our new consumer platform in February. One of the goals of the platform was to dramatically improve the user experience partially by eliminating so-called navigational pages and getting people to the essence of the information that they were looking for more quickly.

And what we are seeing as a result is that a lot of new personalization technology tools like our Symptom Checker product, our new personalization tools, our new use of video etcetera. All of them are getting significant uptake. So if you do the math, you will see that we've probably dropped average pages per user by a little less than half a page since the launch which is good news for us, because again we are getting our users to the results faster. And our goal was of course to bring them back to our site as a result of highest satisfaction more often. And everything seems to be working nicely from that standpoint.

We've seen the quick through rate on our homepage overall, where many of these tools leave increased by more than 40% post-launch. We've seen our new HLTH search product captured a much greater share of overall traffic. We measured the exit rates. When people leave the site, we see that they are actually finding what they are looking for more often now on WebMD search products and clicking through to the internal content rather than sort of leaving the site if you will, perhaps from frustrations sometimes if they don't find the privatized results that they seek.

So all-in-all, we are really pleased even with the first four months or so after launch. As you know, we've launched dozens of new health and wellness standards. And from an R&D perspective, there is a lot of time being spent today programming out all other parts of the consumer side from both the depth of contents stand point as well as increasing new standards.

In the second quarter, we published 22 additional new health centers and we see that it's not just about disease and conditions, content and traffic, that's of interest when people come to WebMD. But increasingly, it is about health and wellness. It's about diet, nutrition. It's about lifestyle management. And that's the kind of audience that we continue to build on top of our core health management audience and that really plays a big part of our financial future with consumers products companies being the target of that effort.

Mark Mahoney - Citigroup

Great. Thank you for the detail.

Wayne Gattinella

Thank you.


We will go next to Rob Kelly with Smith Barney.

Rob Kelly - Smith Barney

Are you seeing any pricing pressure in any of your pharmaceutical product and consumer product sides from the excess ad inventory on the search network side such as MySpace?

Wayne Gattinella

Not whatsoever, while there is a significant amount of increase inventory out on the market overall as a result as your referenced the new social networking sites. And also the big ad networks that aggregate much smaller sites into vertical syndicated channels.

We have been able to continue to value the WebMD audience and user at a very high level and be able to maintain or even improve our pricing in the marketplace overall. So we have really not seen any impact of the low-end [math] like network aggregators that typically are low rate performance based, not very targeted, although with some maybe behavioral targeting overlaid on top or able to position their traffic in some form of a vertical. And again I think that's an important representation of how strong the brand and the branded traffic that we represent is able to maintain its value in the marketplace.

Rob Kelly - Smith Barney



We'll go next to Anthony Petrone at Maxim Group.

Anthony Petrone - Maxim Group

Thanks guys. Congratulations on the good quarter. Just looking at some of the seasonal factors that affect the business here, particularly in advertising and sponsorship, are you seeing that as it relates to the budgeting cycles of some of your many end users on that end, are you seeing those customers actually make budgeting decisions soon or as early as done online advertising, are they allocating those knowledge quicker than they were say one or two years ago?

Wayne Gattinella

Anthony, it's early I mean we are still in July here. But as I mentioned, we had our Health Forum, which is our annual client event a couple of weeks ago. And coming from that we are for the first time I would say beginning to get serious inquiries from clients for 2008 inventory. And while it's to early too really to discuss anything specific, it's starting to feel like we have an opportunity to be able to entertain upfront purchasing on our await inventory in any significant way for the first time. So it's something that I monitor on a daily basis in terms of the level of interest in demand and the timing of that. It's a little early to really comment on your question. It's a really good question. And hopefully one that we would be able to give you a more specifics on next quarter.

Anthony Petrone - Maxim Group

Excellent. Just a quick follow-up if you look at J&J going out, they are cutting significant reductions to the workforce so on and so forth, some trends we've been seeing for a while. Are you seeing those costs cutting trends across that customer base actually benefit to your online ad business as the way of allocating more dollars to you guys. I mean has that trend begun and that was something that was in the works for quite a while and I just wondering if there has been any acceleration on that end.

Wayne Gattinella

Well, the cost cutting that’s just going on at pharma and that began at least on the commercial side with their sales force. It began several quarters ago. What we are really seeing is they are shifting, so whether they are cutting or not the fact is they are beginning of shift the budgets more too online.

J&J spent more than $1 billion last year in pure advertising and we know that even if they cut those numbers by some percentage point, we stand to pick up an increasingly piece of that. But candidly there is still a lot of room to go up there as large pharmas still spend, the vast majority 96% -97% of its advertising and marketing dollars in traditional offline channels.

So our focus is to able to continue to gain as the shift-off of these less efficient and in some cases deteriorating channels, demonstrate themselves for the people that have a accountability for building an efficient brand presence in the marketplace. We are gaining strength every quarter. Our numbers reflect that but we still don’t think we are that big inflection point where the major shift has yet begun and obviously therefore we continue to build our core assets to be able to support because that time will come soon.


We’ll go next to Corey Tobin with William Blair.

Corey Tobin - William Blair

Hi good afternoon. Sorry about the earlier with respect to my questions relating to change of the site recently. Have you seen any difference in terms of trends, in terms of [waits] of time on the site per user?

Wayne Gattinella

Cory, we have nothing I can speak to on call yet and as I mentioned we actually cut down some of the navigational pages there. It may show themselves if as the time on site one in reality, that’s not really constant in the content well. So as we've gotten this site to a level of sort of normalcy that we want to start from now we have base line that we want to be able to build. The page view traffic, time on site retention in term of frequency of visit and the like, and those are the kinds of measures that we've just now starting to benchmark and be able to measure on a go forward basis.

Corey Tobin - William Blair

Okay great thanks. Shifting for a second to the private portal site. You mentioned a number of times the size of some of the engagements you are going after, some of the contracts that you’ve going after are getting progressively larger. At what point do you broaden the distribution for that product line and then start going after one midsize account as opposed to the largest employers.

Wayne Gattinella

Well we were not that market today due to our distributor relationship and while we have direct sale force that is out specifically targeting the Fortune 250s and very large health plans, we've contracted with many of the larger benefits consultants or benefit managers who sell our portal services either embedded into their platform or as a standalone service.

We've had a multiyear relationship with Fidelity and [Fact gild] services that they provide to their accounts that we announced a quarter or ago, new relationships with Mercer and Workscape and so we continue to [Aeon] has been longstanding distributed partner of ours and many of the health plans themselves sell through our service through their new corporate accounts and particularly to the small and the mid size accounts in the regional markets.

So our growth comes both ways. We’ve mentioned a handful of 150 accounts that we service today was some standalone services. Some of those comes through our distribution relationships and our goal is a consolidated take any of these small or standalone customers that we may service and continue to upgrade them or up-sell them through a full platform sale but we want to cover the entire market but of course efficiently and so that’s how we grow we should have [caught the buyer], sales strategy should be able to do that.


We will go next to James Kumpel with Friedman Billings Ramsey.

James Kumpel - Friedman Billings Ramsey

Hi good evening. Guys can you talk a little bit about on with regard to the employer relationship. Whether or not you’ve considered any sort of bricks and mortar partnerships with some of the ready clinics or the guys I tried to are trying to develop sort of in-house clinics for the employees?

Marty Wygod

We are in the early stage of the discussion with some of these at this point and we could see ways we can work together in the future.

James Kumpel - Friedman Billings Ramsey

Okay. Would that be early stages like sometime in 2008, we can expect something possibly.

Marty Wygod

I believe so.

James Kumpel - Friedman Billings Ramsey

Okay. And then secondly can you give a little bit of color on how the Emdeon business services unit has changed since it’s basically been spun into a different type of ownerships, so are there different products or different ways it goes to market to try drive it’s growth down.

Kevin Cameron

I will take that. This is Kevin. No I don’t think there’s a lot of different ways that it goes to market. They are continuing to execute on their business plan though and the primary factors that are affecting that business are, it's been able to focus for a good couple of years now on building out its infrastructure and on innovating in the marketplace. So the payment product, the payment manager product I mentioned is a very new product that we think will help drive adoption of both electronic remittance and payments on the physician side and the consumer side. And they continue to have growth on their provider facing solution, their paper and electronic payment solutions in the real-time market and are stable so far and on the claim side of the market and that's driving the growth. And there continues to be big cost reduction opportunities in that business as we moved to better technologies and improved the infrastructure there.


(Operator Instructions) We will go next to Rob Kelly with Smith Barney.

Rob Kelly - Smith Barney

Can you give a little color on $58 million reserve you set up and why do you have to sue?

Mark Funston

Sure, this is Mark Funston. Really, I will tell you the two are unrelated to each other, the charge and the suit. We took the charge this quarter because we received an update that we will be able to determine a range for a reasonable estimate of what we think our indemnification obligation is separately on the suite, while it's not on our policy to comment on pending litigation. I can tell you that we have DNL policies with unused limits and amounts which should be sufficient to cover the advancement of legal fees and expenses for the nine indicted former employees of Practice Services. To the insurance companies including two primary payers under our DNL policies have funded their obligation under the policies subject to the customary reservation of rights. Although there can be no assurance that we will prevail. We believe the insurance companies named in a lawsuit are required to advance these costs under the terms of our policies.

Rob Kelly - Smith Barney



And we will go next to Heath Terry with Credit Suisse

Heath Terry - Credit Suisse

Great, thank you. I was wondering you talked about the re-architecture driving improved user experience. Can you also talk about what it's doing to your placement within the search engine, and to what extent, you have actually seen a measurable improvement and how that's tracking against your expectation?

Wayne Gattinella

Yeah. One of the major objectives behind the re-architecture was to make our content more easily searched and therefore ranked higher in a support so-called organic search on the search engines. We still get a fair amount of traffic to the search engines today, albeit most of it is coming from people actually typing WebMD into the search box. So they are willing to take two-click approach to get into our destination.

In terms of natural search, we are announcing a measurable difference, an increased in our organic search ranking on key terms and we do monitor, measure and manage this now very, very tightly. We will be putting up metrics later this year, as it becomes something that is a little more consistent and sustainable. But we are beginning to see early uptick in our organic search ranking and this is an area of tremendous opportunity for us.

The old platform, given that it was the original platform, the company had launched on more than seven or eight years ago, was never designed for external search algorithmic ranking and consequently, it's an area that we just not have benefited from even though our traffic has increased anyway. So stay tuned as we have said towards the latter half of this year, we expect our ability to rank more highly on the external search engines, will start to become evident in the traffic numbers. And, so far the early signs are that we are on track to be able to deliver on that.


And there appear to be no further questions at this time. As a reminder, there is replay available of this call which can be accessed toll free at 888-203-1112, or if you are calling from outside the U.S. at 719-457-0820. The pass code is 9018704. There is also the webcast replay available on HLTH Corporation's and WebMD's websites as well. Again this does conclude today's conference call. Thank you for joining us today.

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