WebMD Q4 2005 Earnings Conference Call Transcript (WBMD)

Feb.24.06 | About: WebMD Health (WBMD)

WebMD (NASDAQ:WBMD)

Q4 2005 Earnings Conference Call

February 23rd 2006, 4:45 PM.

Executives

Martin J. Wygod, Chairman

Wayne T. Gattinella, President and Chief Executive Officer

David Gang, Executive Vice President and Chief Technology Officer

Anthony Vuolo, Chief Financial Officer

Risa Fisher, Vice President of Investor Relations

Analysts

Anthony Noto

Anthony Vanzetti

Richard Winkler

Brian Fitzgerald, Morgan Stanley

Sandy Draper, JMP Securities

Rob Kelly, Smith Barney

Mark Mahoney, Citigroup

Jack Kelly, Smith Barney

Anthony Petra, The Mexican Group

Operator

Good afternoon everyone and welcome to the WebMD Health Corporation, December 2005 Quarterly Conference Call. Today’s conference is being recorded. I will now turn the call over to Risa Fisher, Vice President of Investor Relations.

Risa Fisher, Vice President of Investor Relations

Good afternoon and welcome to our Fourth Quarter Earnings Call. I will read the following statement concerning forward-looking disclosure. All statements made today other than statements of historical facts are forward-looking statements including those regarding guidance on future financial results and other projections or measures of our future performance and the amount and timing of the benefits expected from acquisition from new products and services and from other potential sources of additional revenue. These statements speak only as of today and are based on our current plans and expectations and they involve risks and uncertainties that could cause actual future events or results to be different from those described including risks relating to market acceptance of our products and services, relationship with customers or strategic partners, difficulties in integrating acquired businesses, and changes in economic, critical, or regulatory conditions or other trends affecting the healthcare, Internet, and information technology industry. Many of these risks and uncertainties are described in our SEC filing.

We expressly disclaim any intent or obligations update in forward-looking statement. The earnings release issued today is available on our web site at www.wbmd.com in the Investor Relations section and has also been included in the Form 8-K filed today with the SEC. The Form 8-K and our other SEC filings are also available on our web site and on the SEC web site. The release in Form 8-K to be filed today includes reconciliation between GAAP and non-GAAP financial measures to be presented in this call. And now, I would like to turn the call over to our Chief Financial Officer, Anthony Vuolo.

Anthony Vuolo, Chief Financial Officer

Thanks Risa. Good afternoon everyone and thank you for joining us today. Joining me on the call are Martin J. Wygod, Chairman of the Board; Wayne T. Gattinella, President and CEO; and David Gang, Executive Vice President and Chief Technology Officer. I will review our fourth quarter financial results and updated 2006 financial guidance. Wayne will then review the quarter and discuss our 2006 initiatives, and lastly Marty Wygod will make some closing comments and then we will open it up for questions.

The revenue for the December 2005 quarter was $41.9 million, an increase of 26% compared to last year. Growth was a result of an increase in advertising sponsorship revenue to 25%, which includes the impact of the acquisition of Conceptis Technologies in December 2005. Conceptis contributed approximately $900,000 in revenue during the quarter, an increase in private portal licensing revenues of 96%, which includes the impact of the acquisition of HealthShare Technology in March 2005, excluding the $2.6 million in revenue from HealthShare, our private portal licensing revenue increased 50%. An increase in publishing and other service revenues were $2.2 million, which was the result of the introduction of WebMD’s magazine in April 2005. Higher revenues from our medical directory products and the provision of some off-line physician CME as a result of the Conceptis acquisition in December. These increases were offset by the expected decline in content syndication revenue, which was primarily related to the previously disclosed expiration of legacy arrangement with News Corp in January 2005, which contributed $3 million in revenue and net income in December 2004 quarter.

Looking at expenses, the cost of operation was $19 million or 38.7% of revenue for the quarter compared to $14.6 million or 37.4% of revenue from the prior year, an increase of 130 basis points. The increase was primarily due to a change in revenue mix compared to last year of the News Corp content syndication revenues, had no incremental costs. We replaced this quarter with revenues that have a more critical cost of operations. Cost of operations include non-cash expenses of $212,000 and $307,000 in the December 2005 and 2004 quarters respectively, primarily relating to non-cash stock compensation expense and non-cash advertising expense. Sales and marketing expense was $15.1 million or 30.7% of revenue for the quarter compared to 12 million or 30.8% of revenue in the prior year. Sales and marketing expense include non-cash expenses of $3.9 million and $2.3 million in December 2005 and 2004 quarters respectively, primarily relating to non-cash advertising expenses. The increase in non-cash advertising expenses is due to determination of an allocation back to the parent company for a portion of these expenses when the parent company changed its name in August 2005. General administrative expenses were $7.8 million or 15.8% of revenue for the quarter compared to $6.6 million or 16.9% of revenue in the prior year, improvement of 110 basis points. General administrative expenses include non-cash expenses of $1.1 million this year and $288,000 last year. The increase primarily relates for higher non-cash stock compensation expense, as a result of restricted stock issue to conjunction with the IPO in September 2005.

Additionally, including general administrative expenses during the quarter was approximately $700,000 as service fees from Emdeon, our parent company. Depreciation and amortization was $2.7 million compared to $1.9 million in the prior year. This increase was due to the impact of acquisitions made during 2005 and the end of 2004. Earnings before interests, taxes, depreciation, amortization, and other non-cash items, which we will refer to as adjusted EBITDA for the December 2005 quarter was $12.4 million or $0.22 per share compared to $8.7 million or $0.18 per share last year, an increase up to 45%. Interest income for the $1.8 million for the quarter resulting from the investments of our IPO process. The provision for income taxes, which relates to certain state income taxes and foreign taxes in December 2005 quarter was $222,000 compared to $58,000 last year. This all accumulates to a net income of $6.1 million or $0.11 per share in December 2005 quarter compared to $3.9 million or $0.08 per share for the prior year period, an increase of 56%. The diluted share capital in December 2005 quarter was $57.6 million shares. According to the balance sheet, our cash and investments of December 31, 2005 was $154 million. Operating cash flow for the quarter was $9.6 million compared to 2.5 million in the prior year. Capital expenditures were $2.5 million for the December quarter.

Briefly summarizing our full year 2005 results, revenues were $168.9 million, an increase of 26% over last year. Adjusted EBITDA was $28.4 million compared to $26.2 million in 2004. Excluding the News Corp impact on 2005 and 2004 and a $3.1 million charge in the June 2005 quarter is primarily related to severance. Adjusted EBITDA increased by $16.3 million, which represents 35.6% margin on incremental revenues.

Looking at the financial guidance for 2006, the financial guidance that we released today except among other things. The timing of expected delivery for program flow since our last earnings call, assumptions as to the timing of new sales activity. Expenses were weighted to the integration of our recent acquisitions and the timing of synergies relating to those efforts. Continued investment in our infrastructure and organization this fourth quarter, public and private portal offerings and the launch of new product opportunities. Expansion of our sales and marketing organization and public company related expenses, which we began to incur with the IPO, WebMD in September 2005.

Looking ahead, we expect revenues in 2006 to be between $220 and $230 million, an increase of 30% to 36% over 2005. This represents an increase to our previous revenue guidance reflecting our expanded product and distribution issues and our ability to leverage them across recent acquisitions. We expect the approximate revenue distributions to be 66% from advertising and sponsorship, 22% to 23% from our private portal licensing products, 9% to 10% from publishing and other services, and the balance from content syndication and other revenues. Based on these revenue expectations, adjusted EBITDA will be approximately $47 to $50 million or $0.80 to $0.85 per diluted share, which represents approximately 21% to 22% of revenues compared to $28.4 million or $0.56 per diluted share last year. The 2005 amounts include $3.1 million, one-time charge in the June 2005 quarter, primarily related to severance. This represents an increase in adjusted EBITDA of 65% to 76% compared to 2005. This represents an increase in adjusted EBITDA of 65% to 76% compared to 2005. This also represents an increase to our previous guidance, which was $45.5 to $47.5 million. Additionally, we accept interest income to be approximately $5 to $5.5 million for the year.

Depreciation and amortization to be approximately $16.5 to $17 million for the year, reflecting the impact of the Conceptis and eMedicine acquisitions and an increase level of capital expenditures. We expect non-cash advertising to be approximately $7.5 million for the year and non-cash stock compensation expense to be approximately $27 million, which includes the impact of adopting FAS 123R, which requires the expensing of employee stock options beginning January 1, which will increase stock compensation expense by approximately $23 million in 2006. The impact of adopting FAS 123R includes approximately $6 million in expense, so Emdeon equity securities held by WebMD health employees granted before WebMD was a public company. The effect of granting over 4 million shares of WebMD health stock options at the time of the IPO in September 2005 and stock options issued in conjunction with our acquisitions of eMedicine and Conceptis.

We expect acquisition for income taxes is to approximately $2.5 million for the year. This represents a provision for foreign paid local income taxes. As you know, we currently have to settle in a row of over $600 million, which is fully reserved in our balance sheet. Including the expected impact of adoption of FAS 123R are $23 million or $0.39 to $0.41 per share. We expect a net loss of $1.6 million or $0.03 per share, a net income of $2.5 million for $0.04 per share for 2006. This assumes our weighted average share as outstanding for 2006 of 56.1 million basic shares and 59 million diluted shares. Excluding the impact of FAS 123R our net income would be $21.4 to $25.5 million or $0.36 to $0.43 per share, an improvement over our previous guidance of $18 to $21 million with $0.31 to $0.36 per share.

As you can see from our historical results our business has experienced some seasonality and our revenue and earnings have been more weighted to the third and fourth quarters of the year. We anticipate similar weightings to continue, although our historical trends will be affected by the acquisitions of Conceptis and eMedicine both of which will break-even from a profitability perspective on the stand-alone basis. We will be incurring incremental expenses relating to the integration of these companies, in the first half of 2006 in order to achieve the revenue and expense synergies beginning in the later part of 2006. We believe that the acquisitions of Conceptis and eMedicine will make a positive contribution to adjusted EBITDA for the entire year. Although, they will have some negative impact in the first half of 2006.

The schedule outlining the company’s financial guidance including additional quarterly guidance is attached to the press release we issued today and is being furnished as an exhibit to current report on Form 8-K filed with the company today with the Securities and Exchange Commission. The extra capital expenditures for 2006 to be approximately $20 to $25 million the sum of our capital expenditures originally anticipated in way 2005 for current 2006. Additionally, during the March 2006 quarter, we will make contingent purchase price payment totaling $10 million while waiting for prior acquisitions and as you know we acquired eMedicine in January 2006 at $25.5 million cash. At this point, I would like to turn the call over to Wayne.

Wayne T. Gattinella, President and Chief Executive Officer

Thank you. I am excited about our accomplishments during the fourth quarter and in 2005 overall, as WebMD continues to increase its market position as the leading source of online health information and we began to implement the first phase of our strategic product plans for the future. In the public portals market the reach of our WebMD health network continued to expand significantly. Our traffic in the fourth quarter averaged 25.7 million unique monthly visitors, an increase of 21% from the same period a year ago and 4% higher than the prior quarter. Page views during the fourth quarter totaled 598 million pages, an increase of 26% from a year ago and 7% higher than the prior quarter. It is important to know that our traffic growth in the current quarter was achieved even while eliminating MSN from our network at the end of 2004. In the fourth quarter, 89% of our page views was served on WebMD owned and operated sites up from 76% in the fourth quarter of 2004. A recent study that was published by Manhattan research shows that 64% of all consumers looking for health information online in the last 90 days used WebMD, far greater than the number two player with only 29%. Comscore Media metrics data for December also shows the pages of WebMD were more than seven times greater than the next closest commercial health site.

Our online reached the physicians and healthcare professionals also continue to significantly expand. In the December quarter 424,000 continuing medical education programs or CME were completed on Medscape, an increase of 57% over the same period a year ago. For all of 2005, a record total of over 1.3 million medical education programs were completed on Medscape an increase of 41% over the full year 2004 furthering Medscape’s market position as the #1 online source for medical information and education for doctors. In December, we completed the acquisition of Conceptis and the cardiology site www.theheart.org. Together with our Medscape cardiology channel we now reach 85% of cardiologists in this high valued specialty. In January 2006, we completed the acquisition of www.emedicine.com, the leading source of medical reference information for physicians. Together with www.medscape.com, our flagship professional site, www.thehearth.org, and now www.emedicine.com, are overall reached to practicing physicians across virtually every practice specialty is unparalleled.

Our public portals client list continues to represent every leading pharmaceutical biotech and medical device company, as well as a growing list of major consumer package goods companies focused on reaching health involved consumers. In addition to further penetrating our existing BioPharma client, we are running several new branding campaigns for companies that now include GE Healthcare, American Express, Kellogg’s, and Coca Cola. We expect a consumer package goods segment to be a continuing source of growth for us in the future. In the December 2005 quarter, we ran a total of 319 individual online programs versus 267 programs in the December 2004 quarter. During this past fourth quarter we began to deliver a new technology infrastructure that is designed to increase search engine traffic to our sites, create new sponsored revenue opportunities, and deliver new online solutions that help consumers make more informed health decisions. We introduced the first phase of our new WebMD health search product that will deliver the most relevant information when consumers search for a health-related topic. WebMD health search implemented in early December is designed to deliver deeper search results across WebMD health contents. In the next 30 days, we plan to implement a next phase of WebMD search that will begin to deliver health search results across the entire web. As planned, we expect to implement additional enhancements to our health search products throughout 2006.

In the fourth quarter, we also launched a completely redesigned home page on www.webmd.com, making it easier to navigate our site and creating the architecture to support our new broadband programming. In December, we kick off our broadband programming with WebMD Daily, originally produced multimedia content served on WebMD’s customs video player. WebMD Daily delivers a 90-second video help story each day, that includes an opportunity for sponsors to stream the video commercial or promotional message within the WebMD feature or in the surrounding viewer area. As more consumers are turning to WebMD for complete information on both health and wellness issues, our new programming is designed to respond to the increasing demands from both our users and our commercial sponsors.

Turning now to the private health portals market, WebMD continued to increase its market lead in providing private health and benefits portals to large employers in health plans. Our pltform provides a single interface for all health and benefits decisions as a core of the WebMD platform, as a personal health record, that stores both self-reported and claims-based history allowing us to better support an individual’s personal health decisions. The WebMD health and benefits platform is an important and meaningful step towards the transformation of healthcare where the consumer is left at center of health decisions with more control over the care that they receive. In the December quarter we completed a record number of new client implementations including IBM, Brinker International, Cisco Systems, Shell Oil Company, MasterCard, WellPoint, and the employees of the State of North Carolina bringing our total private portal client at the end of 2005 to 78 companies compared to 62 at the end of 2004. This includes both accounts that we sold directly, as well as those that we co-marketed with our distribution partners. In addition, we support approximately 90-employer, payer, and hospital clients with our provider quality services delivered by the HealthShare Technology business unit that we acquired last March.

We see the demand for our help and benefits applications accelerating, as large employers and health plans continue to shift more financial responsibility to the employee and plan member. In the fourth quarter, we introduced WebMD cost estimator, a new decision-support application that helps consumers accurately estimate what their total cost would be for a particular course of treatment including related hospital, lab, physicians, and drug expenditures. The deployment of consumer directed healthcare is the fastest growing cost containment strategy today with recent studies indicating that nearly one-third of employers are planning to offer a consumer directed health plan option some time this year. Recent statistics indicate that enrollment in CDHPs, which is currently around 4 million people will increase to as many as 40 to 50 million consumers in the next four years as consumers will be required to assume even greater responsibility for their healthcare decisions. The kinds of decision-support applications delivered on the WebMD platform will be essential. With the added feature of the health saving account or HSA, we are enhancing our platform to integrate both the health and wealth planning tools needed in the CDHP market. As consumer-directed healthcare is attracting a large group of financial and healthcare players, we also see the opportunity for new partnerships emerging with the potential to further fuel our business in this fast developing market.

In summary, WebMD is uniquely positioned to capitalize on the market trends in our business both in the public portals market as BioPharma continues to shift more of their consumer and professional marketing online and in the private portal business as major employers and health plan seek a consumer facing platform as they move towards consumer-directed healthcare. We continue to significantly invest in the technical platform and operating infrastructure that will support our future growth. Our adjusted EBITDA margins on incremental revenues are just beginning to reflect a kind of operating leverage that we expect from this business. Our margins on incremental revenue excluding the impact of recent acquisitions are expected to be 40% in 2006. This represents an improvement over 400 basis points over 2005 after adjusting for the News Corp impact that Anthony previously discussed and we are confident that margins on incremental revenue beyond 2006 will continue to increase. Now I would like to turn it over to Martin Wygod, our chairman for some closing comments.

Martin J. Wygod, Chairman

Thanks Wayne. It has special meaning to me to be the chairman of a company that is a driving force in empowering consumers and physicians while at the same time helping to control the runaway across of healthcare to increase the acceptance of consumer-directed health plans. Data released earlier this week by CMS confirms that healthcare spending in 2005 exceeded $2 trillion and is expected to double in the next 10 years with consumers expected to spend $421 billion out of pocket on healthcare by the year 2015. WebMD is well positioned to capitalize on these market trends and to effect real change in our system. We have significant lead-time and many advantages to address the complex infrastructure required for employers and health plans to support more important health decisions. With our assets, expertise, and brand, WebMD is uniquely positioned to take advantage of the increased role consumers are applying in healthcare.

Before I open it up for Q&A, I would want to clarify some information with respect to a public announcement made last week by WebMD’s parent company’s Emdeon Corp. Emdeon announced in connection with increases received from several potential strategic buyers expressing an interest in acquiring its Emdeon business services and Emdeon practice services segments. The board of Emdeon authorized commencing a process to evaluate strategic alternatives relating to those businesses to maximize shareholder value. I want to make it clear that if Emdeon does strike at these businesses, there will not be an impact on WebMD and Emdeon does not have any plans to reduce its 86% ownership in WebMD. Also, there are inter-company agreements in place between WebMD and Emdeon, which were filed in a Form 8-K, which we believe captures the synergies. Additionally, there is a tax share agreement with Emdeon in place, under which WebMD would be compensated for use of its net operating loss by Emdeon in connection with the sale of Emdeon businesses. If the Emdeon business segments were sold, it would likely result in Emdeon utilizing the entire WebMD and OL. Therefore, WebMD would receive approximately $220 million from Emdeon. Thank you for joining us today. Operator at this time we would like to open it up for questions.

Question-and-Answer Session

Operator

Thank you, if you would like to ask a question please press *1. To cancel your question please press *2. Once again, it is *1 to ask a question and *2 to cancel. You will be prompted to record your first and last name, for a moment while the question is registered. Our first question comes from Anthony Noto.

Q – Anthony Noto

Thank you very much, this is my first question, as we look at the growth for 2006, is there a way to give us a sense of the organic online advertising growth just to see what that is ex-acquisitions and then also what is implied in your guidance for additional portal seeds on the portal side of the business, which is still at a very early stage, but if it has quite a bit of lead-time, can we get a perspective there. Thank you, could I have a followup.

A – Anthony Vuolo

In response to your first question, as we report, we will try to give you some color in terms of the revenue growth and what the acquisitions did in the year ago period. These acquisitions do bring with them a recurring revenue stream. Its only had some revenues stream when we bought them, but the reason that we made these acquisitions is that we saw synergy not only on the expense side, but from a revenue perspective in terms of leveraging our sales force and some of the product offerings that we have for class distribution from those acquisitions. So, as we report, we will try to give you some perspective, but I would hesitate to characterize that revenues coming from those web sites is not being organic because we have to generate that. We have to make that happen.

A – Martin J. Wygod

In other words what you are saying Anthony is that the growth is basically internal core growth.

A – Anthony Vuolo

Yeah, so we are leveraging the distribution that is there with our own sales organization to deliver the revenues in 2006. And Anthony, the second half of your question, you related to the private portal side?

Q – Anthony Noto

Correct, yes. Thank you.

A – Anthony Vuolo

There you know, when you look, if you translate our guidance, I think you are looking at growth rates there in 2006 approaching 50% for the private portal side. We really do not look at that on a per se basis, we really focus more on the corporate opportunities with employers and with health plans, so as opposed to per employee wise or per member products, we will continue to update people as to new account wins and new implementations as we go along and again given the nature of this business, most of the new accounts implementation happened in the third and fourth quarter, pretty heavily weighted towards the fourth quarter historically.

Q – Anthony Noto

And then one followup, eBay went through a process where their web site was not being crawled by the search engines Yahoo, Google, AskJeeves and others, they were not getting that component of re-traffic, which I understand was a similar case with www.webmd.com. I was wondering, what percent of your site have you converted over so that it can be more efficiently crawled on a percentage basis and when do you think it sort of gets to the percentage that you are comfortable with allowing the search engines to crawl? Thanks.

A – Anthony Vuolo

It is less about allowing and more about optimizing so that the search engines themselves are efficient. Today, actually some of the sites that we have recently acquired have been more efficient, just in terms of the way the content is structured and therefore the percent of traffic as they represent in terms of external search engines is relatively high, but of course www.webmd.com has been unfortunately relatively low, so even despite that of course our traffic has shown tremendous growth, all of it really being or the most of it being organic traffic, meaning people coming to WebMD directly or even typing in www.webmd.com in the browser. With our investment in the infrastructure, we have been making one of the critical benefits of that, that we expect to see the benefits in the second half of this year will be enabling our site to be more easily indexed and therefore enabling it to rank higher in external search results and certainly that’s an easier way for us to also drive incremental traffic even that we were paying for outside traffic, really has not been our strategy. It’s really been building the brand, building brand awareness, and really creating repeat traffic through retention. So again, I think, you can look to that towards the latter part of 2006.

Q – Anthony Noto

Thank you.

Operator

Our next question comes from Anthony Vanzetti.

Q - Anthony Vanzetti

Thanks, Anthony I was wondering if you could just go over the CapEx expectations for 2006, I know you said 20 to 25 million could you just break that out a little bit and talk about the accounting treatment for that.

A – Anthony Vuolo

Well, capital expenditure, it would all be capitalized on our balance sheet and amortized generally over 3 to 5 years. The bulk of those capital expenditures are technology related, either in the area of hardware to support some of the new product applications we have or web site development cost or internal use software to support the current web site and those would manifest themselves on the balance sheet either in computer equipment or capitalized as software and then be amortized will be appropriate.

Operator

Our next question comes from Richard Winkler.

Q – Richard Winkler

Hi, I have two quick questions. You are clearly positioned well on the private portal side reducing momentum towards consumer-driven health plans. I am wondering if the public portal benefits in anyway from this trend and how? The second question would be what are WebMD’s expectations over the next say five years for online spending by the pharmaceutical companies? Can you go out that far, can you give us a view of what changes you anticipate and how you are positioned to benefit from that? Thanks a lot.

A – Anthony Vuolo

Yeah, the first part is with consumer-directed healthcare, we do see that benefitting the public portal part of our business very much though. The fact is that as consumers will be required to assume greater responsibility for healthcare decisions, the need for greater depth of health information is going to increase and while we expect to satisfy a lot of that with the private health portal applications, the fact is that there will be consumers in the market looking for health information on demand and that clearly favors us, particularly as our brand is the most recognized and trusted brand of health information today. We also see that with consumer-directed, the quality of the user or significantly the need of that user is going to create not just demand to our site, but for greater page depth of information and again given that we ultimately monetize our page use, we also see consumer-directed benefitting, the overall inventory situation for us as well. In terms of what the market overall might look like over the next several years, you know, today as we said there is about $12 billion spent by pharmaceutical companies trying to reach consumers and physicians and roughly another $10 billion of consumer package companies spend trying to reach healthy-conscious consumers. We think that in the next several years, that spending will easily exceed $1 billion online and we certainly feel confident that we are well positioned to participate in that shift. We are really the only property that serves both the consumer and the physician with leading brand awareness and penetration of the market, the package goods sector is something that we are very focused on and as we mentioned earlier in this call increasingly demonstrating results with and again as that shift occurs, we see WebMD participating in each segment of that market change.

Operator

Our next question comes from David Biel of Morgan Stanley.

Q - Brian Fitzgerald

Hi, this is Brian Fitzgerald on for David Biel. A quick question on the rollout of WebMD daily. I know it is still in the early days, guys can you find any color as to may be how many streams are being viewed, how many streams are being advertised in front or may be what the demand is from advertisers to get into that forum? Thanks.

A - Anthony Vuolo

Sure, why don’t we ask David Gang to take that question up?

A – David Gang

Video package which we introduced in December, is showing a steady weekly increase in overall usage. The advertising sponsorship area for that has picked up also as well over the last several weeks and we are actually ahead of schedule on where our sponsors could expect us to be with video views in January and February.

Q - Brian Fitzgerald

Okay great, thanks.

Operator

Our next question comes from Sandy Draper of JMP Securities.

Q - Sandy Draper

Thanks. This is Sandy Draper. Two questions, one, Anthony can you, I think you commented that, or may be it was Wayne that the incremental margins on the business you expect in 2006 were around 40% or are you expecting the 40% type range. Can you remind me what they were in 2004 and 2005 and sort of the ramp here?

A - Anthony Vuolo

Yeah Sandy, I think in my comments, when you take 2005 and you back her at the News Corp impact, the margins on incremental revenue were 35.6% total and when you look at 2006, our guidance implies incremental margins in the 30% range, but that is a result of the acquisitions that are coming in break-even with an initial revenue stream and we certainly have to incur some expense upfront to realize the synergies from those acquisitions, which is why the 30%. So, I think, those are the two relative data points.

A - Wayne T. Gattinella

I think Sandy, it is important to note that we have pointed it out that I just noted one more time that as we expect incremental margins of 40% this year as you take the acquisitions out, that is in the phase of continuing to spend significantly to support the kind of growth that we really anticipate over the next several years. So, we are not at this point in time trying to milk, you know, every incremental margin of a dollar in the business right now. We think we can create a healthy balance between marginal improvements in our bottom-line while at the same time making sure that the investments we make are from the public and private side position us for the kind of market that we are looking at over the next several years.

Q - Sandy Draper

Okay, so would it be fair to say, obviously there is a lot of rooms for you guys as you said over the next few years that we probably shouldn’t be expecting you to, as you said, milk the maximum incremental margin because you want to take advantage of the longer-term opportunity?

A - Wayne T. Gattinella

That’s right. This is a long-term pry of us. We absolutely feel that we are in an early stage of an enormous market and that our brand is best positioned to play a major part of. We do expect margin improvements over the next several years, again, we are looking for improvement, that is what the balance of ensuring that we are poised and ready to take advantage of these secular terms.

Q - Sandy Draper

Okay, great and one quick followup on pricing. On the private portal side, I know you don’t look at this on a per se basis, but can you get us a sense of the deals you are signing today versus may be the early deals you were signing a year or two ago. Where is the pricing on a relative basis? Are you able to demonstrate more value and therefore price higher and then on the public side, are you still pretty committed to the long-term pricing model or have you given any more thought of looking at going to more of a paper performance now that you are getting better traction, you have got the data of going to a short-term gain that we are getting the benefit, we want to reap that awards that our customers our getting. Thanks.

A - Anthony Vuolo

On the private portal side, I think there is two points to note here, one, the size of the deals that we have been bringing on in the last 12 or 18 months are significantly larger than prior deals driven by certainly larger companies as the consumer directed is driving them into that market and into our platform as a great solution to it, but also the services that we are delivering as part of those deals are much more sophisticated. So, for example, if you look back a year and a half or two years ago, really the health information that we would collect on a person was mostly self-reported. So, we were selling health risk assessments inside of the platform together with other tools. Today, the personal health record, where we combine both self-reported data and integrated claims data is virtually the go to product right now that we put into the market and our ability to demonstrate higher value as a result of that product offering and ultimately get paid higher for it. It is a big part of that business growth. It is a great platform to continue to scale up our other new services when we acquired HealthShare Technologies earlier 2005, provide our quality services product. We were able to go back to our embedded base and also up sell them on provider quality services to provide other employees and plan numbers and certainly as we look forward.

Our acquisition strategy is to be able to both build but also potentially buy other hand services that allow us to leverage the existing base and as well the revenue opportunity from new client. In the public portals market, I don’t see us in the short term due and sort of paper click or you know, sort of the down and dirty paper performance fields its not the way we approached the market several years ago. We think that health is different than you know just a big search engine sort of application set differently, but the quality of the audience that we have and the value that is placed for large BioPharma client is far greater than sort of a paperclip model, I think warrants. This is not a commoditized web site where we certainly measure our value in terms of growth in users and page views, really we ultimately measure our value in terms of the depth and quality of the audience with those page views represent and certainly that is not just a consumer statement, but on the physician side where there is really no other effective way to reach doctors today then our family of websites. We think that the value still has the lot of headroom in terms of the ability to affect pricing in the market.

Q - Sandy Draper

Okay great thanks.

Operator

Our next question comes from Rob Kelly of Smith Barney.

Q - Rob Kelly

Could you give us some ideas relative growth and earnings in 2005 over 2004 if you could have eliminated the News Corp. contribution in 2004?

A - Martin J. Wygod

Sure, go ahead.

A - Anthony Vuolo

Sure, if you look at the December quarter, our adjusted EBITDA growth was 43% and that includes the 2004 income from News Corp. and if we were to eliminate that for the December quarter of 43% would have increased to about 118%. If you look at the full year again adjusted EBITDA was $28.4 million, it was $26.2 million last year and again if you eliminated the full effective News Corp. for the 12-month of 2004 and the one-month of 2005 adjusted EBITDA would have grown 93% compared to last year.

Rob Kelly

Thanks very much

Operator

Our next question comes from Mark Mahoney of Citigroup.

Q - Mark Mahoney

Hi, thank you. Two questions. First is, can you give an update on the number of brands that were a part of advertising and sponsorship, what is the comp number to that 296 in the September quarter of the 248 again in December quarter?

A - Anthony Vuolo

I think Wayne mentioned that well pertained, we call it something different, but the same numbers or the number that Wayne mentioned in his comment, which “I will just try to get right now.” It is 319 for the quarter versus 267 a year ago.

Q - Mark Mahoney

Great, thank you and then the other question has to do with the eMedicine acquisition and its impact on your 2006 guidance. I think eMedicine accounted for about $5 to $6 million in 2005 revenue. What is the assumption for what kind of revenue that would generate in 2006? Thank you.

A - Anthony Vuolo

We disclosed when we announced the eMedicine acquisition, have revenues of slightly less than $6 million and it was break-even from a revenue perspective. As I mentioned before in terms of the revenue that we expect from eMedicine, it is a little difficult and that we intend to move some of our own products on to that distribution property in sale site, so, although we certainly be generating revenue from that site you know, through out the course of 2006, so, you will see different products offerings on that site. As we approach 2006, we will try to give you some measure of what eMedicine was a year ago, so that you can add that back into your results and then measure it that way.

Q - Mark Mahoney

Great, thank you.

Operator

Our next question comes from Jack Kelly of Smith Barney.

Q – Jack Kelly

Martin, how do you see proper margins in the next few years on incremental increases in revenues?

A - Martin J. Wygod

I will give that to Anthony Vuolo.

A - Anthony Vuolo

Thanks.

As we said before we stopped question, again this is primary reference. We expect margins on incremental revenue for 2006 for excluding the impact of acquisitions would be 40% and when we look out over the next few years we see continued improvements in the margin from incremental revenue with the revenue growth that we anticipate. So, I think that number that was when you, that News Corp out 35% as well in 2005, 40% at the acquisitions in 2006 will continue to move up in the out years.

Q - Jack Kelly

How substantial?

Well I think that you could see incremental margins well in excess of 50%.

Q - Jack Kelly

That’s all we will get out of Anthony.

A - Anthony Vuolo

Before you get out of here, we do one year at a time. Thank you.

Operator

Our next question comes from Anthony Petra of The Mexican Group.

Q – Anthony Petra

Thanks. Questions on content and syndication, what percent of that was from AOL and you had a sequential downtick there, if you could just elaborate on that a little?

A – Anthony Vuolo

I think the AOL contribution in terms of the absolute dollars is. First of all the AOL if you are talking about content syndication, AOL has not reported on that one. The downtick here is purely related to the News Corp. expiration with effect of January 1, 2005.

Q - Anthony Petra

Okay and then AOL is in advertising.

A - Anthony Vuolo

It is in our advertising and sponsorships and on whole. It’s a part of our network. We place third party revenue on that site, on that property, the same way we do in growth of our own site and our other affiliate sites and we are right through on.

Q - Anthony Petra

All right just on the private portal clients. Are you approaching, I mean how many of the contracts are approaching expiration and did any of them renew yet or did any of them expire at this point?

A - Anthony Vuolo

We had several renew you know the business is not that old, so to speak and the contracts average three to four years in length. Our largest agreement that came up for renewal, little over a year ago, I believe was Microsoft that was a three-year deal and renewed with additional services being added to it. We have not lost any real account of any significance in this segment, but since we acquired it in 2002 or that we felt prior.

A - Wayne T. Gattinella

A huge majority of the accounts we have signed up representing the largest amount of sale participants employees really have only been up for very short period of time and some of them are not fully in store, but good percentage of them are really partially in store at this time.

Q - Anthony Petra

I just need the implementation cycle there and all the contracts with the government vertical are a little bit longer. I mean how many of those that you signed recently, I know you did North Carolina, but has that affected it in length the entire cycle.

A - Wayne T. Gattinella

If you are talking about the sale cycle, the sale cycle is what I would probably describe as a six-month kind of cycle. The selling season gets very hot, right now, first quarter, in anticipation of what tends to be the busiest operable implementation in that segment, which is the September, October, November timeframe, that’s our most new planned designed to announce in anticipation of the January 1 execution. If you are talking about implementation cycles, it generally takes us about 90 days to get a program from contract to going live, may be 75% of it is kind of basic existing company with capabilities and 20%, 25% is customized, but then even sales, the client themselves may not want the whole program rolled out on day one, so, for example if we are the council, we announce in the latest list, but may only be active employees and yet they may have a whole mother segment of retirees equal to the number of active employees that we will be implementing sometime later in 2006. In the case of WellPoint, which is really through acquisition a group of more than 18 different plans many of them with their own platforms, we have begun to execute on WellPoint, but many of those plans in the family will be implemented across 2006, so, that is not really a factor of our implementation cycle, that’s a more factor of the client and when they want those other population segments to roll in.

Q - Anthony Petra

And just it seems that you are actually grown within clients. I mean just going back to Microsoft, did they sign on for more subscriptions and is that a trend you expect to see?

A - Wayne T. Gattinella

Certainly more services and that’s the only trend. Our platform becomes a very core component in that enterprises ability to interface with theirs members. We stood above all the various carve outs, that the plan may have and so whether they switch out their commercial carriers or PBM, their health course, or any of other services that they provide, our platform sits above that and still gives their employee a consistent way to interface with those other downstream players. So, we are not really something that you would stretch out if you will, but rather the goal is to create a platform that the costumer grows with.

Q - Anthony Petra

Thank you guys.

Operator

Once again that is *1 to ask a question. Our next question comes from Sandy Draper of JMP Securities.

Q - Sandy Draper

Yes, they can’t get the S in there. It is Sandy Draper again. This is a question on the competitive size to the private portal. Have you noticed any change in the competitive landscape as you obviously ended up the year looking at how you are competing in the year selling towards the end of 2005 versus where you were at the end of 2004, are there any big changes there is it mostly educating the potential customer or there are players in there who you find are now trying to move into the market? Thanks.

A - Wayne T. Gattinella

Sandy, there are what we call sort of point solution players out there that they provide a piece of what we do. We still don’t really have a significant competitor in terms of the entire platform solution that we deliver. The closest thing that might come to a competitor would be a large commercial carrier that tries to develop all these services inside of their own product set, but the only way a customer can really gain access to that platform is by contracting for the carriers’ entire set of services. So, in terms of freestanding platform that an employer or even a plan can use as a plug and play application, we are way out in front right now.

Q - Sandy Draper

Okay, so you haven’t noticed any difference and like that Hewitts of the world, those that have haven’t been more competitive off late.

A - Wayne T. Gattinella

They are out there. They have always been out there. As a consultant their solution is to try to put together solutions based on multiple companies who are players in the market and again we see ourselves winning a lot of business in this segment and still way out in front.

Q- Sandy Draper

Okay great, thanks.

Operator

Our next question comes from Anthony Vanzetti

Q - Anthony Vanzetti

Thanks, do you think it was a little bit higher than I was expecting anything particularly this quarter and what can we expect for 2006 in terms of a normalized percent in revenue.

A - Anthony Vuolo

We are happy in terms of G&A for the quarter. I think where we came out was pretty much within our expectations. Since the IPO, we do have the burden of some additional public company cost that we haven’t had in the past that we provided for whether it its standalone audits, insurance, corporate governance etc. One of the things I would point out when you look at G&A though it might be a little high than what you are anticipating because most of the stock compensation expense that we reported during the quarter winds up in G&A. So, that was a pretty big increase from a year ago period. If you look at the back after change in stock compensation expense, you might come to a number will be closer than what you were looking at.

Q - Anthony Vanzetti

And in terms of FAS-123R, should that be pretty even throughout 2006?

A - Anthony Vuolo

I think, for the first three quarters it will be and then you will see a decline in the fourth quarter and if you look at the quarterly guidance for the past press release, we specifically pulled out that one line item to see what it does over the fourth quarter.

Q - Anthony Vanzetti

Okay great, thanks.

Operator

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