WebMD: Good Execution, But Valuation Remains Stretched (WBMD)

Feb.27.06 | About: WebMD Health (WBMD)

Mark Mahaney Smith Barney CitigroupCitigroup analyst Mark Mahaney on WebMD's (NASDAQ:WBMD) Q4 earnings:


• WBMD reported a Modest Beat & Raise quarter -- $49.1MM rev./$0.11 EPS vs. $49.0MM/$0.09 Citi and $48.8MM/$0.09 Street. '06 guidance of $220-$230MM rev. & $47-$50MM EBITDA was higher than Street at $218MM and $47MM, though the eMedicine.com acquisition ($6MM '05 rev) was a boost.

• Fundamentals improved -- organic rev. growth accelerated from 23% Y/Y in Sept to 24% in Dec. And organic EBITDA margin expanded 950 bps Y/Y to a record high 25.3%.

• We are incrementally less negative -- our fully-taxed, adjusted '06 EPS increases from $0.52 to $0.55, and our PT rises from $22 to $25.

• Our valuation-based Sell remains. WBMD trades at 37X our '06 EBITDA estimate ($48MM), while comps CNET & MNST trade at 22X and 20X. 37X is a material premium to est. 23% l-t growth rate. WBMD's market opportunity, competitive position, and fundies are strong, but not THAT strong.

Did WBMD’s fundamentals improve?
Yes. We estimate that the company’s organic revenue growth accelerated from 23% in September to 24% in December. Note that we are making numerous adjustments to get at these growth rates. First, we are removing from each 2004 quarter approximately $3MM in News Corp. license revenue. Second, we are removing the estimated contribution from acquisitions, as detailed below.

Also, organic EBITDA margins expanded 950 bps Y/Y to a record high 25.3%, with organic incremental margins of over 50%, a sign of significant leverage in the model. Note that for this calculation we are adjusting 2004 results by the $3MM in News Corp license revenue and treating it as all margin.

Were fundamentals better than the Street expected? Yes, modestly. WBMD reported December quarter revenue of $49.1MM and GAAP EPS of $0.11 vs. Street estimates of $48.8MM and $0.09 EPS, respectively.

Did the company raise guidance relative to the Street? Yes, modestly. 2006 guidance of $220-$230MM rev. & $47-$50MM EBITDA was higher than the Street at $218MM and $47MM. However, the eMedicine.com acquisition, whichWebMD announced on January 18th, likely boosted this outlook. Per the company, eMedicine.com generated $6MM in 2005 revenue.