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Executives

Risa Fisher

Cavan M. Redmond - Chief Executive Officer, Director and Member of Executive Committee

Anthony Vuolo - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Martin J. Wygod - Chairman, Member of Executive Committee and Member of Strategic Planning Committee

Analysts

Ryan Daniels - William Blair & Company L.L.C., Research Division

Jordan Monahan - Morgan Stanley, Research Division

Steve Rubis - Stifel, Nicolaus & Co., Inc., Research Division

WebMD Health (WBMD) Q3 2012 Earnings Call November 1, 2012 4:45 PM ET

Operator

Good afternoon, and welcome to WebMD Health Corp.'s Third Quarter 2012 Conference Call. Today's call is being recorded. I would now turn the call over to Risa Fisher, Vice President of Investor Relations.

Risa Fisher

Good afternoon. This conference call is to discuss WebMD's third quarter results. The earnings release issued today by WebMD is available at www.wbmd.com in the Investor Relations section. The release includes reconciliations between GAAP and non-GAAP financial measures, which will be discussed during this call. The explanatory paragraphs in the release concerning forward-looking disclosures and related risks and uncertainties also apply to forward-looking disclosures made during this call, including those regarding our guidance on future financial results and other projections or measures of WebMD's future performance. Information concerning the risks and uncertainties can be found in WebMD's SEC filings.

Joining us on today's call are Marty Wygod, Chairman of WebMD; Cavan Redmond, Chief Executive Officer; and Tony Vuolo, Chief Financial Officer. At the conclusion of our prepared remarks, we will open the call and take questions.

Now I'd like to turn the call over to our CEO, Cavan Redmond.

Cavan M. Redmond

Thank you, Risa. Good afternoon, and thank you for joining us today. I hope that all of you that have been impacted by Hurricane Sandy will be up on the road to recovery shortly. Our headquarters are located in lower Manhattan, where we've an out of power since Monday. Although our corporate offices are physically closed, we have not had any disruption of our services to our consumers or to our physician users. A very special thanks to our technical operations teams, who have been working around-the-clock to make this happen.

Today, WebMD is at the crossroad of 2 changing industries, healthcare and the Internet, that holds a clear promise of our future long-term growth. WebMD's competitive advantage remains strong. Our brands, WebMD and Medscape, provide the largest combined reach to healthcare professionals, patients and health-oriented consumers on the Internet. We have established our brands as the source of trusted healthcare information, and we are well positioned to remain the market leader by focusing on: continued personalization of the user experience through our multiscreen approach, leveraging the use apps and other deeper engagement tools on mobile devices and desktops; continued expansion beyond conditioned areas into health, wellness and lifestyle; and creating ways to support consumers and physicians by developing applications that provide timely information and interactions throughout the patients and physician healthcare continuum.

We are building the future based upon the fact that WebMD attracts the largest, most engaged audience seeking health and wellness information and is one of the most trusted brands in the U.S. We engage consumers, patients, physicians and other healthcare professionals across our multiscreen experience, allowing us to empower and enable health decisions anytime and anywhere.

During the quarter, we reached an average of 107 million monthly unique visitors and delivered 2.5 billion page views, increases of 22% and 24% over the prior-year period, respectively.

Also, we not only provide scale in general health categories, but we also provide high-quality scale in specific areas of importance to biopharma and health-oriented consumer product companies. According to comScore's latest report, we ranked #1 in the reached for both the overall health category and in every one of the top 25 health topics they track, including allergy, chronic pain, and asthma. With our Professional Network, we believe that we've reached more physicians, more healthcare professionals, more frequently in more countries than any other health information resource. During the quarter, traffic to Medscape and our Professional Network averaged approximately 2.8 million physician visits per month.

As with many Internet companies, mobile phones and tablet utilization is driving overall page view growth, with approximately 25% of our page views in the first 9 months of this year delivered on a smartphone or a tablet. We are seeing -- we are starting to see a shift in traffic from desktop to tablet, with desktop page views starting to decline year-over-year and being offset by the growth of tablet page views. We are well positioned to capitalize on this consumer trend as our websites are optimized for tablet and can deliver the similar experience on both audience and sponsors on the tablet.

We have comprehensive view of our business underway. While this review is ongoing, we have begun to make changes to better meet customer requirements and best position us for future success. This will not be a short-term fix but rather a series of steps required to build the company towards long-term sustainable growth.

During the quarter, we brought new products to market and continued to expand our footprint, which will help us to create a platform for future growth and opportunities. WebMD Baby, our award-winning app targeted at new moms, which expanded to the Android platform. WebMD Pain Coach, a mobile app for consumers and patients living with chronic pain, is a mobile companion to assist consumers through daily health and wellness choices so that they can manage their pain while living healthier lives.

We began to implement a complete redesign of our healthy living sites, including beauty, diet, food and fitness and family and pregnancy. As part of our increased focus on healthy living, we also unveiled a new design of WebMD Magazine in September. Our magazine is distributed to more than 85% of the highest prescribing doctors' offices in the U.S. and is available as a free interactive app for the iPad. The iPad app is consistently the #1 downloaded health magazine app in Apple's newsstand.

We have redesigned WebMD Answers to drive deeper engagement by incorporating user-generated content as well as increased personalization, creating a stronger value proposition for registered consumers. We expanded our international footprint with the launch of Medscape Germany.

Looking at the monetization side -- monetization of our site, our revenue model will evolve to meet the current challenges of today's digital market, particularly in the pharmaceutical space. We believe there is a shortened visibility into digital budgets for large pharmaceutical companies and their agencies. In a recent survey of digital healthcare marketers, approximately 2/3 of them identified only 7 months as the visibility they currently have for their digital budgets. At WebMD, we need to modify our sales and product approach to reflect shorter duration commitment that can be made more quickly and executed.

We also need to simplify our pricing and product bundling to enable customers to better compare us to other digital alternatives. And we need to better position -- we need to be better positioned for digital expenditures allocated to lifestyle and non-endemic healthcare sites.

We have taken important initial steps to make our products and their pricing simpler for advertisers, and we're beginning to better meet our customers' requirement by changing the way we look at the market. We have contracts with leading pharmaceutical advertisers to play unique and integral roles in both new launches, as well as existing brands in key therapeutic areas, including pain, inflammation and cardiovascular. These programs, whose timing is subject to product regulatory approval, are currently scheduled to launch over the course of 2013. These programs will be the first where we apply our enhanced analytics to optimize messages against the most relevant and qualified audiences and better illustrate the impact of our campaigns against the customers' stated marketing objectives. We believe the scale and engagement of our audience, combined with the advanced analytics capabilities, will be unmatched by others in the industry.

We're also demonstrating unique value of our reach, engagement and analytic capability with consumer product advertising. We recently launched the first-of-its-kind program with Reckitt Benckiser. Through the aggregate non-identifiable data we collect, WebMD is uniquely able to serve as a realtime indicator to track for specific cough, cold and flu symptoms or peaking, so that we can grant -- so we can present consumers with the most relevant information in a highly targeted and efficient manner across both desktop and mobile devices.

However, even though we're making progress and seeing positive indications from recent changes we have made so far, we continue to operate in a challenging and changing marketplace. I don't see these pressures in our current customer segment abating next year. Broadly speaking, the majority of our revenue comes from biopharma customers who have been hit hardest by the rippling effects of patent expiration, generic substitution, product delays and budget cuts. This impacts their spending on consumer marketing, physician marketing and medical education.

Additionally, the availability of alternative digital channels directed at consumers also continues to increase. Lifestyle, video and social sites are competing for digital ad dollars. It is, therefore, incumbent upon us to be better differentiating with the value we provide to our marketing and selling efforts. We believe our focus on product modifications and analytics will allow us to more effectively compete with these alternative channels.

Turning quickly to our Private Portal business. When I look at our Private Portal business, I'm encouraged by the recent new customer wins, including Boeing, which we are the largest employer account, and Medtronic, our first multi-condition management customer. As we move to population management, we have launched 3 of the top 5 condition areas, including coronary artery disease, congestive heart failure and diabetes. We will launch COPD asthma in the fourth quarter, and we'll be introducing new mobile capabilities to drive engagement and further empower users to achieve their health goals. Although we are making progress, we're continuing to see competition from large insurers and expect attrition in 2013. But we believe we can offset that with continued upsells and new customers like Boeing.

Looking broadly across WebMD's business, I don't expect that the new contracts I mentioned or the changes we've made to products, pricing and sales forces to offset the current negative trends we see in our business to at least the first half of 2013.

The company historically experiences a sequential decline in revenue from the fourth quarter to the first and second quarter of the following fiscal year. We expect a sequential decline of comparable magnitude in the first and second quarter of 2013. The prospect of lower revenues would be expected to result in an operating deficit at our current level of expenses in the first half of 2013. We have begun the process of rationalizing our infrastructure to streamline operations and reduce costs throughout the entire company.

In summary, in the near term, I remain focused on completing our strategic review, looking at all the areas of our business to determine our go-to-market strategy and ensuring that our efforts to rationalize our infrastructure are successful. We are identifying the areas where investment is needed, and we're building to create a diversified revenue stream for future growth.

I'd like to turn over to Tony at this time to run through our third quarterly results.

Anthony Vuolo

Thanks, Cavan. We announced our third quarter results today, which are consistent with our financial guidance. Our third quarter revenue was $117.5 million compared to $135.1 million last year. Public Portal advertising and sponsorship revenue was $97.6 million compared to $115 million in the prior year, and Private Portal services revenue was $19.9 million compared to $20.1 million in the prior year.

Third quarter adjusted EBITDA was $17.6 million or 15% of revenue compared to $43.5 million or 32% of revenue in the prior year period. Third quarter net loss from continuing operations was $3.1 million or $0.06 per share compared to net income from continuing operations of $11.2 million or $0.19 per diluted share in the prior year period.

We recorded after-tax income from discontinued operations of $2.2 million for a business that we divested in 2006. In the prior year period, we recorded an after-tax loss on investments of $700,000 and after-tax income from discontinued operations of $3 million.

Net loss was $900,000 for the quarter or $0.02 per diluted share compared to net income of $14.2 million or $0.24 per diluted share in the prior year period.

Operating cash flow was approximately $18.6 million for the third quarter. As we have stated in the past, quarterly operating cash flows can be impacted by the timing of compensation accruals and other accruals in relation to quarter's end, the timing of interest payments on our convertible debt and the billing and collection of receivables from our customers.

Capital expenditures were $12.4 million in the quarter, which includes payments related to the planned leasehold improvements of our Private Portal facilities.

During the third quarter, we utilized approximately $1.7 million of cash to repurchase 117,000 shares of our common stock under our authorized share repurchase program. There are approximately $64 million remaining in our buyback program.

As of September 30, 2012, we had $969 million in cash and cash equivalents.

Turning to financial guidance. We narrowed the range of our financial guidance in the press release issued today. To summarize the guidance for 2012, revenue is expected to be between $455 million and $470 million. Adjusted EBITDA is expected to be approximately $60 million to $70 million. Loss from continuing operations is expected to be between $14.6 million and $21.9 million or $0.29 to $0.43 per diluted share. We expect the weighted average basic and diluted share count for the year to be approximately 51 million.

We expect capital expenditures for the year to be approximately $35 million. Our capital expenditures for the year include the remaining planned leasehold improvements to our 2 Private Portal facilities, as well as other smaller projects that we expect to be completed this year.

The schedule summarizing our financial guidance is included in today's press release. Our guidance does not include the impact, if any, of future deployment of capital for items such as share repurchases or acquisitions, the current review of business, products, processes and operations or resolution of our liabilities from discontinued operations, such as we saw in September quarter, and other nonrecurring one-time or unusual items.

As Cavan mentioned, we have always seen a sequential decline in revenue and earnings between the fourth quarter and the first quarter, and we expect that trend to continue in 2013. As been our past practice, we'll provide further guidance for 2013 when we report our year-end results.

Now I'd like to pass it over to Marty Wygod for some closing comments before we open the call up questions.

Martin J. Wygod

Thanks, Tony. As we previously stated, we are facing a challenging period ahead as we work through the issues facing our business and the pharma and Internet industries in general. Notwithstanding these challenges, I am confident about our future. A principal source of my confidence is our employees, who have shown both dedication and innovation in attacking these challenges and moving them towards solutions.

On behalf of our Board, I want to thank them for their ongoing commitment to WebMD. Together with their efforts and our unique assets, I continue to be optimistic that we'll be well positioned to capitalize on the opportunities presented in this transitioning healthcare environment.

WebMD has built an unparalleled reach to health and wellness motivated consumers, as well as health care professionals. That capability, together with our strong balance sheet, will allow us to take full advantage of acquiring or venturing with companies that can assist us in leveraging the value and more fully monetizing our audiences. We are actively pursuing these opportunities to enhance our future prospects.

At this time, we would like to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Ryan Daniels from William Blair.

Ryan Daniels - William Blair & Company L.L.C., Research Division

With more traffic moving to mobile, can you guys just give us an update on the monetization efforts for your mobile offerings?

Cavan M. Redmond

Yes, this is Cavan. I'll give that an answer. The advantage we have in mobile is the same as we have in tablet, which is that we optimized, essentially, our assets, to be able to work on those. And through the combination of being able to do registrations, combined with being able to tailor an experience there, we believe in the future that we'll have a great opportunity in the entire mobile space. But in particular on the tablet, as everybody knows, there's been a series of new tablets that have been rolled out. The tablet experience, the opportunity to monetize the tablet, while not identical or is very similar to the desktop for us given that the types of searches and the amount of essentially viewable screen that's available, so we'll be concentrating on both of those efforts.

Operator

Our next question comes from Jordan Monahan from Morgan Stanley.

Jordan Monahan - Morgan Stanley, Research Division

The first is when I look at your unique users and page views, for the past few quarters, they've been relatively stable. So you're growing year-on-year but sequentially, you're about flat. I'm wondering, do you think that consumers up the margin are going elsewhere to find information? Or do you think you've more or less saturated the consumer market for information? And then the second is, I'm just wondering if you might be able to offer anymore clarity on some of the investments versus some of the cuts that you might consider either in the fourth quarter or first half of next year?

Cavan M. Redmond

Yes, I'll take actually your question on the users and ask Marty to comment on the second part. When I take a look at the users, we have, obviously, a very large number of both patients and consumers who are coming to our website. So I think the sheer size of, if you will, of the current base gives us a great deal of confidence in how our website is being used. There have always been opportunities for consumers and health-care-seeking people to use other sites on the Web. But what we find is we're the go-to place on the Web and we continue to be, both looking at our traffic, but also looking at the very subjects that they go to. And I think that that's one of our core strengths. And Marty, maybe on the investment area?

Martin J. Wygod

First, let me just respond a little bit more, expand on what Cavan was saying. I think if you look at our consecutive quarters last year of our growth of uniques and page views, you'll see that they're very consistent with this year's. So if you look at that carefully, if you'd like, we can send you a sheet on that so you'd see that it's fairly consistent. And the second question was in relation to allocation of our proceeds?

Jordan Monahan - Morgan Stanley, Research Division

The second question was really just how you're thinking about balancing investments versus potential cuts or rationalizations in the fourth quarter or first half of next year?

Martin J. Wygod

Well, the rationalizations or the cuts, as you referred to them, is things that we definitely have to do in order to reemploy those monies back into the areas of growth. There's really no correlation, though, between the 2.

Operator

Our next question comes from Steve Rubis from Stifel, Nicolaus.

Steve Rubis - Stifel, Nicolaus & Co., Inc., Research Division

I hope you and families are doing as well as possible given the current circumstances due to the recent storm. The first question I have is, can you help us better understand how to interpret the 8 consecutive quarters of deferred revenue growth declines? What does deferred revenue growth actually contain? And then when do you see an inflection point occurring given the easy comps?

Anthony Vuolo

Well, let me -- I'll comment on the deferred revenue. This is Tony. I'll comment on the deferred revenue. Yes, deferred revenue on our balance sheet represents amounts that we bill to customers in advance of providing the service. And there are a lot of factors that impact that from an accounting perspective, including the timing of when we issue the bill to the customers in relation to when we provide the service. So the monthly cutoffs are important to that and also how we contract with the customers because we're flexible with our customers and can meet their needs in terms of how they would like to pay for the services. Obviously, we'd like to get paid in advance, but given the quality of our customer base, if we need to get paid in arrears, we don't want to a problem with that, either. So in terms of the consecutive quarters of decline in deferred revenue growth, unfortunately, it corresponds to what's been happening with the top line, in general. So hopefully, that responds to the deferred revenue question. What is the second question? Sorry.

Steve Rubis - Stifel, Nicolaus & Co., Inc., Research Division

Yes, the next question was really, yes, I'd like to say congratulations on the customer adds of the Private Portal business as that business seems to be doing significantly better. Can you help us understand, I guess, what's changed in the segment? And then also when do you see a possible inflection point in this business as well? And then finally, would you ever consider turning to Private Portal into an in-house incubator service similar to the efforts that Etna CarePaths kind of presented on the Health CIO conference recently?

Cavan M. Redmond

Yes, let me take your questions, Steve, and then ask Tony if he could comment also. When I take a look at the Private Portal, they've been doing a great job at winning new businesses, as you've noted, and as we mentioned in the call so far. However, attrition in that business, of course, or the turnover of existing clients, is also a reality of that business. So we believe that we've got it balanced right now, but it's going to be essentially a continuing competitive environment with the large insurers and others continuing to focus on that particular market. So as I take a look at what we're doing right now, we're rolling out innovation, we've got the areas that we've mentioned that we're focusing on, and we are winning new contracts. But that has to be balanced with a shift in the marketplace with the increasing competition. And Tony, if you want to add anything?

Anthony Vuolo

No, I think, Cavan, you pretty well summarized it in terms of the marketplace there. Yes, the service that the Private Portal offers is informed by much more information than we have on the public portal, given the access of the information we get from both health plans and the employers. We can create a much more unique experience than we can on the public portal. Notwithstanding that, part of what we're looking at across the company is understanding the different product offerings and looking for ways to leverage the best of the Private Portal across the web and vice versa, the best of what we have in the public portal for the Private Portal experience. And that's part of the review that's currently ongoing.

Steve Rubis - Stifel, Nicolaus & Co., Inc., Research Division

That sounds pretty interesting. And that's a good segue into my last question, which, congratulations on your launch of the WebMD Pain Coach. We believe that that's an initiative that will likely prove an important pathway for you guys in your turnaround. In terms of your strategy around this going forward, what can we expect to see in terms of apps going forward? Are you going to do additional indications? Are you going to wait and see how this app works? Any sort of color you can give around that would be great.

Cavan M. Redmond

Yes, I can't be specific in terms of which apps we're going to launch when for a lot of reasons, including competitive reasons. But I would say that philosophically, we believe that the mobile devices is essentially the device of choice for many consumers and a gateway product essentially into looking at health care. So we'll continue to both upgrade apps as the opportunities in the marketplace are created, and take things like the Pain Coach and the Baby app into our future projects. But at this point, we don't want to be in a more specific.

Operator

Our next question will next question comes from Andrew Southwell [ph], private investor.

Unknown Attendee

I just have a couple of questions for you. In your press release on September 10, you attached a slide that stated that visitors to WebMD spend about 7 minutes on WebMD.com across all devices. Can you give any color around this number? And is it increasing or decreasing and by how much?

Cavan M. Redmond

Andrew, this is Cavan. I tell you, I don't have that number with me, but we can follow up after and provide you the exact number for this quarter.

Unknown Attendee

Okay, yes. I just thought it was an interesting stat that I never saw before. So I just was kind thinking [indiscernible] to as a follow-up question, I guess, as relates to this, given there's so much talk about unique users and page views. So one of the Wall Street firms insinuated that you're actually losing market share as a percentage of page views. I was wondering if you had any comments on that? Or if you could shed some light of kind of how you see that?

Cavan M. Redmond

Yes, Let me tell you how I see it. When you look at -- when we look at engagement, which, obviously, page views is a part of, you need look at essentially all 3 of the major platforms that are being used. So mobile in terms of the smartphones that are available, tablets, and the desktop. If one were to look just strictly at desktop, you may get one impression of how not just our site, but any site performs. But when we take a look at it, we look at the traffic and the engagement that we're getting on the mobile devices, which in this case I'm talking about the smartphone and the tablet, we were seeing that we have greater engagement in those devices than even historically you do on the desktop. So we're seeing essentially that's a strong vehicle for us given how we're programmed in those areas. And we expect that to continue to be a strong source of engagement for health care consumers and those who are looking for health care.

Unknown Attendee

So I trust then that, that number, the 7, which is why I'm so interested in the 7 minutes, I trust that, that number is actually increasing?

Cavan M. Redmond

We'll have to get you that exact number, okay?

Unknown Attendee

The exact number but -- okay. That was kind of wild going in that direction. Okay. Just a different question, are there any ROI metric that you're now offering that you -- that the company wasn't offering 6 months ago, or has there been any progress in that area?

Cavan M. Redmond

We're in the process of building our analytic capability up, so we've made some significant hires in that area and began the process of increasing our analytics as we go into 2013, so we're experimenting a lot. As we go into 2013 we'll have a broader product offering that will be a part of WebMD does with our customers.

Operator

[Operator Instructions] We have no more questions. Thank you. As a reminder, if necessary, there will be a replay available for this call, which can be accessed toll free at (855) 859-2056, or if you are calling from outside the U.S. at (404) 537-3406. The passcode is 38372181. There is also a webcast replay available on www.wbmd.com. Thank you for joining us today.

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