WebMD Health's (WBMD) CEO David Schlanger on Q4 2015 Results - Earnings Call Transcript

| About: WebMD Health (WBMD)

WebMD Health Corp (NASDAQ:WBMD)

Q4 2015 Earnings Conference Call

February 23, 2016 4:45 p.m. ET


Risa Fisher - VP, Investor Relations

David Schlanger - Chief Executive Officer

Pete Anevski - Chief Financial Officer


Charles Rhyee - Cowen and Company

Steven Wardell - Leerink Partners

Peter Stabler - Wells Fargo Securities

Nicholas Jansen - Raymond James

Gerald Haman - JP Morgan

Katelyn Young - William Blair


Good afternoon ladies and gentlemen and welcome to the WebMD Health Corp's Fourth Quarter 2015 Conference Call. Today’s call is being recorded. I will now turn the call over to Risa Fisher, Vice President of Investor Relations.

Risa Fisher

Good afternoon. This conference call is to discuss WebMD's fourth quarter 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. Further information regarding WebMD including information concerning risks and uncertainties can be found in WebMD's SEC filings and the information on this conference call is intended to be presented in conjunction with the information contained in such filings.

Joining us with prepared remarks today are David Schlanger Chief Executive Officer and Pete Anevski, Chief Financial Officer. We will take questions at the conclusion of our prepared remarks.

I would now like to turn it over to David Schlanger, CEO of WebMD.

David Schlanger

Thank you for joining us this afternoon. We are very pleased to report record revenue and earnings for both the fourth quarter and full year and to provide you with our financial guidance for 2016 which anticipates accelerating growth in advertising sponsorship revenue driven particularly by the strong momentum we see from our biopharma customers.

The fourth quarter results released today are consistent with the preliminary views we shared in mid-January. We finished the quarter and full year just above the high end of our financial guidance. In the fourth quarter, we delivered 18% revenue growth accompanied by a 40% increase in adjusted EBITDA, compared to the prior year period.

For the full year we delivered 10% revenue growth accompanied by a 22% increase in adjusted EBITDA over the prior year. In 2015 advertising and sponsorship revenue grew 10% to $499 million. Bio-pharma represented 74% of advertising revenue and grew approximately 13% in 2015 compared to 8% growth in 2014. The bio-pharma environment remains healthy and we expect to further accelerate revenue growth in this important customer segment in 2016.

Advertising revenue from OTC, CPG and other customers grew 2.5% in 2015. WebMD and Medscape are the preeminent sources and brands of health information and tools for consumers, physicians and other healthcare professionals. Our trusted tools and content empower consumers to make informed decisions about their health and wellness. According to comScore within the health category, WebMD ranks number one by a significant margin across unique visitors, page views and time spent on both desktop and mobile. And our leadership is not just about broad reach. WebMD also continues to be number one in virtually all the 50 most important condition suffering populations online.

For physicians and healthcare professionals throughout the world, Medscape is the premier source of medical news, clinical reference, point of care tools and medical education. According to Manhattan Research, Medscape is the number one site for physicians in the US and has extended its leadership position to the EU where it is also number one.

During the fourth quarter, average US monthly visitors to WebMD across both mobile and desktop on a de-duplicated basis increased 7% from the prior year to approximately 73.8 million, which is approximately 50% larger than our next closest competitor. According to our internal traffic measures which as we report do not de-duplicate users across properties or devices, traffic to the WebMD health network reached an average of 201 million unique users per month and generated 3.97 billion page views for the quarter, increases of 6% and 7% respectively when compared to the prior year period. Of the 3.97 billion page views we served in the fourth quarter, 39% of our page view traffic was from US smartphone, 23% was from US PC, 7% was from US tablet device, and 31% was international.

In 2015 we continued to make good progress in monetizing our mobile audience with our advertisers and sponsors. As a result, our mobile revenue increased 21% to approximately $189 million or 38% of our advertising revenue. This compares to $156 million or 34% of advertising revenue in 2014. Today the majority of programs we sell are multiplatform and over time we expect our revenue delivery to approximate our traffic distribution.

On Medscape, during the fourth quarter we averaged approximately 7.3 million physician sessions per month, an increase of approximately 9% over the prior year period. In the US, Medscape has approximately 664,000 registered US physicians that are active on an annual basis, representing a substantial majority of the practicing physicians in the US. During the fourth quarter, an average of approximately 402,000 US physicians were active monthly.

We also reached approximately 2 million other US healthcare professionals, many of whom engaged with patients and impact prescribing decisions such as nurse practitioners and physician assistants and are therefore an important audience for our advertisers.

As you know, virtually all of our traffic is generated organically and the largest source of our traffic is organic or non-paid search from Google. For the last several years, consistent with many other Internet companies, our traffic growth has been driven primarily by the broad adoption of mobile devices.

Starting in the third quarter of 2015, we began to experience a decline in the rate of growth of our overall traffic which has continued into the current quarter. We are working to understand the reasons for this change. Nonetheless, we have largely maintained our search rankings and our market share of digital wallet.

Hitwise shows that WebMD.com consistently received approximately 20% of all organic health information searches over the course of the past year. Based on the information available to us, we believe that two potential factors are at play. Firstly, according to data available to us there has been a slowing in the rate of growth of the total volume of searches across the digital health information sector. And secondly, Google has implemented changes to the presentation of its search results. Although it is difficult to quantify these factors, we continuously monitor our traffic sources and referral patterns and as we've done in the past we will implement changes when applicable.

We are fortunate, because unlike others in our industry, our model of owning and programming our sites enables us to build audiences and drive engagement in the highly targeted segments of greatest demand to advertisers. Our fourth-quarter results demonstrate this as we generated 25% advertising revenue growth on overall page view growth of 7%. Going forward we believe we have sufficient track to satisfy demand from our advertising and sponsorship clients.

Accelerating growth in our advertising business is being driven by a number of factors. We've established WebMD as a key digital partner to our clients by offering a wide array of integrated multiplatform marketing and education programs. For our advertisers we enable access to highly targeted consumer and physician audiences of scale at a time most likely to impact decision-making and with measurable outcomes. In 2015 we’ve continued to leverage these strengths to differentiate and distance ourselves from our competition. As evidence of this, in 2015 we grew revenue from top 25 IMS ranked pharma companies by 18%.

In addition, the macro environment for our bio-pharma advertising customers remains positive. The last two years were particularly strong for new product approvals with 41 new molecules approved in 2014 and 45 approved in 2015. For many of the newest pharmaceutical products, digital is an integral part of our overall marketing strategy as these new products are generally expensive therapies that treat complex conditions affecting relatively small patient populations.

In 2015, we delivered advertising solutions for approximately 60% of products that received FDA approval in 2014 and ’15. We are well-positioned for 2016 with a number of products both in market and the pipeline for FDA approval is strong. According to IMS, we will see 25% more new drug approvals and line extensions in the next five years than we did in the last five years. Additionally, because physicians must continuously stay abreast of new development in treatment options, the macro environment for our educational programs is also positive. We closely monitor the FDA pipeline of new approvals and line extensions to inform our content development and traffic strategies.

While overall traffic to our site reflects our market leadership and strong brand, it is not a direct driver of our revenue growth. As a result, we focus on creating content and programming our site to build robust audiences in areas most important to both our users and our advertisers. For example, the number of visitors to topic areas such as multiple sclerosis, hepatitis C or rheumatoid arthritis is small relative to our total audience. Yet each of these therapeutic areas are currently high-value categories from a sponsorship standpoint and of high interest to patients seeking new treatment solutions.

The same dynamic is true of Medscape with a total physician audience is small compared to our consumer audience and yet in each of the last three years Medscape has contributed approximately 60% of our total advertising revenue, primarily from our bio-pharma customers. To meet the changing needs of consumers and diversify our sources of traffic, we are pursuing a strategy to take our content and brand off networking to new environments. Given the increasing prominence of social networks as important platforms for finding and consuming content, we're making investments that will enable users to more easily discover, share and interact with content from WebMD, not just on our sites but across the web. The investments are aimed towards the creation and promotion of new content offerings that are tailored to specific social networks and platforms.

Our strategy to extend our content and brand off network will in some cases allow us to drive people go back to WebMD sites where we can monetize that traffic as we do today and in other cases allow us to create new monetization models as we engage with users outside of WebMD.

Another key aspect of our strategy is to create new video content that is both highly engaging and easily shareable across social networks. We’re in the process of launching more than 12 new video series that range from short, snackable, social friendly episodes such as how to’s and explainers to longer form programming hosted by well-known journalists. To continue to build new video content into a scalable library, we are growing our team of video producers and editors as well as building additional in-house expertise to create branded video content for our advertisers.

We are also partnering with independent production companies, including Robin Roberts’ Rock'n Robin Productions, Soledad O'Brien's Starfish Media and IKA Collective, all creative studios with deep experience in digital video content. To support our video strategy, we've also made significant investments in our platform and player technologies and we built two new state-of-the-art studios.

While it’s still early, we’re pleased by the initial response from users and advertisers. Based on our testing, we’ve seen increases in viewership and engagement metrics which in some cases are trending higher than established industry benchmarks. Today taking WebMD to new environments and on to new platforms will strengthen our connection to existing users, reach new audiences and help diversify our traffic sources. Over time we expect these efforts to create additional monetization opportunities.

Turning to our international opportunities, although we continue to evaluate select consumer opportunities in certain large markets, like India and China, due to the pharma regulatory environment, the commercial opportunity for WebMD and the consumer market outside of the US is limited. However there is a significant opportunity for Medscape directed at healthcare professionals. Market estimates indicate that pharmaceutical companies spend roughly $15 billion each year to reach physicians in the US and roughly an equivalent amount to reach physicians outside the US. Today there are approximately 1.5 million physicians outside of the US that are active on Medscape. We believe this is the largest online global audience of physicians and healthcare professionals.

Just like in the US we provide an unparalleled level of value to physicians around the world. The recent Zika outbreak highlights the timeliness and trust in our content as well as the global reach and power of our physician community. In November, more than a month before it garnered mainstream media attention, a physician in Brazil posed the question on Medscape Consult, our new crowd sourced clinical knowledge platform which supports physicians with peer-to-peer insights and evidence-based answers at the point of care. This physician was seeing a considerable number of children born with microcephaly in a small region in Brazil. He asked his peers on Medscape Consult whether they thought there might be a connection between microcephaly and the Zika virus infection during pregnancy.

Once the potential connection was recognized by the medical community we quickly launched resource centers in multiple languages on Medscape, including daily news and updates from experts around the world and from our partners including the CDC. Since mid-November, physicians from 217 countries have visited Medscape and engaged with over 1.3 million pages of Zika related content.

We also launched similar in-depth coverage for consumers on WebMD. While we have a sizable international community of physicians active on Medscape already, we are investing to drive deeper penetration in particular markets. We have an initiative underway to greatly expand our in-language content. We now have French, German and recently launched Spanish editions of Medscape. A Portuguese edition is coming later this year, although we worked quickly in recent weeks to launch our Zika content in multiple languages including Portuguese, in certain markets like China and Japan we’ve elected to work with local market partners to localize our content and expand our reach.

From a monetization perspective, in 2015 revenue from our international operations, which is primarily Medscape, grew 24% to $57 million. Excluding the impact of currency fluctuations, international revenue growth would have been 29% in 2015. We opened our first international office in London this past year and we are continuing to invest in our sales organization outside the US to drive further growth.

This year we will continue to invest in our user experiences to expand our reach, drive deeper engagement and create additional advertising and other revenue opportunities. Sitting at the intersection of healthcare and technology, we believe there are significant opportunities to solve problems for our users as healthcare evolves and as consumer and physician needs change. For example, more healthcare costs continue to shift to consumers, consumers will need tools that help them achieve both the optimal clinical outcome and to do so at the lowest possible cost.

Today, however, decision-making regarding healthcare remains largely uninformed when it comes to price, quality and alternatives. Unfortunately it's far easier to compare prices, relative service levels and quality of restaurants, hotels or virtually any other product online than it is to make a fully informed decision regarding the purchase of healthcare product or service. Even a simple generic prescription, you often don't know the price you'll have to pay for the product until you’re standing at the register at the pharmacy counter ready to check out. We've begun to address this problem with enhancements to our provider directly that, among other things, allow users to compare physician experience levels around specific procedures and conditions, and we continue to work on other opportunities to better informed consumer decision-making.

Consumers are also facing the healthcare system that as the shortage of primary care physicians that is expected to get worse in the coming years, we feel that alternative primary care options like telemedicine may be a solution to both this issue and consumers’ additional cost burdens. And we believe that we are well positioned to provide access to alternative primary care services as the needs of consumers continue to get more acute. With our distribution, brand and consumer trust, we think we can play an important role in opportunities like these as they evolve.

Turning to our private portal services. WebMD Health Services works with an impressive client base and is powered by the depth of knowledge that comes with being a pioneer in the industry. Our services guide consumers to smarter health and wellness decisions and improved outcomes.

Revenue from private portal services declined 5% in the fourth quarter compared to the prior year period but grew 7% for the full-year 2015 compared to the prior year. With respect to our fourth-quarter results, please note that a portion of our private portal services revenue is at the discretion of the customer and therefore the timing of when those services are delivered impacts the growth rates quarter to quarter.

Under the leadership of the new CEO of WebMD Health Services Ben Slocum, several key initiatives are underway to create long-term sustainable growth. These initiatives include improving our go-to-market effort, elevating the awareness and understanding of WebMD Health Services among benefits consultants, strengthening our focus on the consumer and continually advancing our product offering. Specifically our Wellness Challenges product will undergo a series of enhancements in 2016 that expand the workplace culture of wellness by creating friendly team and individual competitions.

Additionally, a key element of our product strategy is the upcoming launch of our native app Wellness at Your Side which will build on the foundation of our existing platform, yet reimagines the user experience by leveraging the advantages of smartphone technology and convenience. Due to the long sales cycle in this business, these initiatives are not expected to impact 2016 revenue. Currently we expect revenue of WebMD Health Services to be flat in 2016.

I continue to believe that the market for our cloud-based platform is a substantial opportunity for us as companies continue to focus on their employees’ health and wellness. I am confident that the WebMD brand, our comprehensive service offering and our pipeline of product extensions and updates position us for long-term growth.

Turning to information services. Compared to the respective prior year periods, revenue from information services declined 7% in the fourth quarter but grew 16% for the full-year 2015. Our information services comprise subscription-based data products and services that we license to data services, informatics and consulting companies. These products are de-identified and not linked to any data generated from our websites.

I’d like to turn the call over to Pete at this time so he can walk you through our financial results.

Pete Anevski

Thanks, David. The results we announced today are consistent with the high end of the range of financial guidance we last provided in November in conjunction with our third quarter earnings report. Fourth-quarter revenue was $192.1 million compared to $162.7 million last year, an increase of 18%. Advertising and sponsorship revenue grew 25% to $158.3 million compared to $127 million in the prior year period.

Breaking down our advertising and sponsorship revenue further. Revenue from bio-pharma and medical device clients increased 28% compared to the prior year period and revenue from OTC, CPG and other clients increased 16% compared to the prior year period.

Private portal services revenue was $27.2 million compared to $28.6 million in the prior year period. Information services revenue was $6.6 million compared to $7.1 million in the prior year period. Fourth-quarter adjusted EBITDA increased 40% to $67.4 million or 35% of revenue compared to $48.1 million or 30% of revenue in the prior year period. The 500 basis point expansion in adjusted EBITDA margin was driven primarily by our ability to leverage our infrastructure on higher revenue.

Fourth-quarter income from continuing operations increased 81% to $27.5 million or $0.60 per diluted share compared to $15.2 million or $0.36 per diluted share in the prior year period. Fourth-quarter net income increased 69% to $27.5 million or $0.60 per diluted share compared to $16.3 million or $0.38 per diluted share in the prior year period.

Capital expenditures were $22.7 million in the quarter and $48.4 million for the full-year 2015, of which $28 million was associated with our new corporate headquarters. Operating cash flow was approximately $47.4 million for the fourth quarter which includes the cash tax benefit of $17 million related to the use of our tax NOLs generated by stock-based compensation, which as required by GAAP is included in the financing section of the cash flow statement rather than in the operating section.

As we’ve stated previously, quarterly operating cash flows can be impacted by the timing of billing and collection of receivables from our customers, compensation accruals and other accruals in relation to quarters’ end and the timing of interest payments on our convertible notes.

During the fourth quarter, WebMD did not repurchase any shares of its common stock under a stock repurchase program. As of December 31 2015, approximately 34 million remained available for repurchases under WebMD’s stock repurchase program. Under the repurchase program, WebMD may repurchase shares from time to time in the open market through block trades or in private transactions depending on market conditions and other factors.

As of December 31, we had approximately $641 million in cash and cash equivalents, $803 million in aggregate principal amount of convertible notes outstanding and approximately 37.7 million common shares outstanding which include 800,000 unvested shares of restricted stock.

Turning to our financial guidance. For the full-year 2016 we expect revenue to be approximately $685 million to $705 million, an increase of approximately 8% to 11% from 2015.

Our mix of revenue is expected to be as follows. Advertising and sponsorship revenue is expected to be approximately $549 million to $567 million, an increase of 10% to 14% over 2015. Advertising and sponsorship revenue from bio-pharma clients will represent approximately 77% of advertising and sponsorship revenue and is expected to grow approximately 13% to 17% in 2016. Advertising and sponsorship revenue from OTC, CPG and other clients will represent approximately 23% of advertising and sponsorship revenue and is expected to grow 0 to 4%. This growth is being impacted by an anticipated reduction in marketing spend from one of our larger OTC product clients because they are now facing private-label competition.

Private portal services revenue is expected to be approximately $109 million to $110 million compared to $110.4 million in 2015. Information services revenue is expected to be approximately $27 million to $28 million compared to $26.9 million in 2015.

We expect adjusted EBITDA in 2016 to be approximately $219 million to $230 million, an increase of 13% to 19% in 2015. Adjusted EBITDA as a percentage of revenue is expected to be approximately 32% to 33% compared to 30% in 2015, and we expect net income in 2016 to be approximately $79 million to $89 million or $1.75 to $1.90 per diluted share compared to $64 million or $1.48 per diluted share in 2015.

As of December 31, 2015, our net operating loss carryforwards were approximately $615 million. We have $103 million of convertible notes outstanding that mature and will be paid on March 31. Our annual guidance gives effect to that maturity.

Depending on the amount of our quarterly and annual net income, some or all of our outstanding convertible notes may become dilutive. We have attached the schedule to the press release we issued today which provides the calculations under which the convertible notes would become dilutive.

In 2016, we expect capital expenditures to be approximately $30 million to $35 million. Included in this amount is approximately $7 million for the final expenditures relating to the new corporate headquarters.

As we have experienced historically, our quarterly revenue trends can often be lumpy throughout the year. For the first quarter of 2016, we expect revenue to be approximately $154.5 million to $157.5 million, an increase of approximately 8% to 10% from the prior year period. Adjusted EBITDA to be approximately $43.5 million to $45.5 million and the increase of approximately 12% to 17% in the prior year period and net income to be approximately $13.2 million to $14.7 million.

To highlight further the revenue breakdown in the first quarter, we expect advertising revenue from bio-pharma and medical device customers to be approximately 56% of total quarterly revenue, representing growth of approximately 14% to 16% over the prior year. We expect advertising revenue from OTC, CPG and other advertisers to be approximately 21% of total quarterly revenue representing growth of approximately 8% to 10% over the prior year period.

We expect private portal services revenue to be approximately 18.5% of total quarterly revenue which is flat revenue compared to the prior year and we expect information services revenue to be approximately 4.5% of total quarterly revenue representing a revenue decline of 14% to 15% compared to the prior year period. This decline in the first quarter is primarily due to the extension in restructuring, the significant customer contract during 2015.

While visibility into our advertising and sponsorship revenue is somewhat limited due to length of contracts and the variability of the timing and implementation of programs, we’re entering the year with approximately 60% of our 2015 advertising revenue expectations in our backlog as of December 31. This is about the same percentage of advertising revenue we had in our backlog when we entered 2015. Our guidance does not include the impact, if any, of future deployment of capital for items such as share purchases, convertible note purchases or acquisitions, gains or and losses from discontinued operations or other nonrecurring one time or unusual items. Please note that there is a schedule summarizing our guidance included in today's press release.

I’d like to turn the call back over to David.

David Schlanger

Thanks, Pete. In summary, we are pleased to have generated the most quarterly and full-year revenue in the company’s history. The fourth quarter in particular demonstrates our ability to scale our business and highlights the power of our assets and the substantial advantages of our brands, audiences and unique programming. Looking forward, the macro environment for pharma remains strong.

We’re also excited to have recently moved into our new corporate headquarters and are now getting settled into our new home. We are well-positioned to deliver another year of strong growth in 2016.

Operator, at this time we will take questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Charles Rhyee with Cowen and Company.

Charles Rhyee

Thanks for taking questions, guys. When we’re thinking about the accelerating growth here in the bio-pharma side, obviously you talked about the tailwinds in terms of new introductions. Can you talk about right now what is your mix like in terms of specialty advertising spending versus more traditional spending? Maybe just, can you give us a sense of relative growth between the two, any sense on relative size in terms of mix?

David Schlanger

We don't really look at the pharma that way. I mean there are all new medicines that are coming out. Our sweet spot as we talked about in the past is really with many of these medicines that are more targeted in nature and are designed for relatively small patient populations, whether you call them specialty medications or not, necessarily isn’t all that relevant. But that's where we’ve really historically been the strongest as opposed to the broader lifestyle drugs like Viagra for instance. And if you look at pharma pipelines, they are certainly very robust and a robust with those types of products as we said during the prepared remarks. And you can see based on our prepared remarks that when you look at products that have come online the last two years of doing business across our business lines with 60% of those new products, and you have to remember that not all new products that have been approved even at marketing budgets at all. So we feel that we are doing really well with it, and new products are coming to market, and when you look at just the level of growth we’ve had across the top 25 pharma companies, again we really feel that we've done a great job really establishing WebMD and Medscape as key marketing partners to all pharma brands.

Charles Rhyee

If I could have just a follow up, you also talked about opportunities around like some things like telehealth, can you talk about where the company is in terms of fleshing out some of these meet opportunities? I know in the past you’ve talked about valuation as being sort of a limiting factor, with the market kind of pulling back in the last six, 12 months, have you seen sort of a rebasing on expectations on some of these potential ideas?

David Schlanger

Well, I think you kind of asked two questions, one is more generally M&A related and the other is with respect to telehealth specifically. I think we believe that the company that alternative primary care like telehealth will eventually gain a wider adoption and we think that WebMD is well-positioned to provide access to those services because of the trust in our brands and our distribution, telehealth like some other things we’re thinking about, where it's likely we may enter the telehealth business either through a partnership or acquisition and in general, we are starting to see -- after a long period where valuations were very very high, we are starting to see some moderation and changing of expectations among sellers. So hopefully in the future we can be more active from both an M&A perspective and a partnership perspective.


Thank you. And our next question comes from the line of Steven Wardell from Leerink Partners.

Steven Wardell

So I am wondering, can you tell us more about what you've been hearing, say, over the last three months from pharma customers, what’s on their minds, what are the trends that they are seeing? Are they are deliberately shifting more to online? Do they have – are their budgets being affected by a potential pharma pricing pressure in 2016? I’d just like to – you have been talking to buyers for a while now. Would love to hear what they're thinking.

David Schlanger

Well, again as I mentioned before, it is a strong period of time for pharma with respect to creating new therapies and really curing diseases that heretofore have been really untreatable. So a great period of time from public health perspective. You know these -- our clients have spent an enormous amount of research and development dollars and a lot of time getting these products to market. And they have as you know limited patent exclusivity. So they’re continuing to be very active in marketing these products and we haven't seen any changes with respect to their proclivity to market, regarding some of the political discourse around consumer advertising, pharma pricing, and again it’s because of the dynamics we talked about, and very expensive to get a product to market, very time-consuming and limited patent exclusivity.

We also think that if there is a some continued pressure on pharma pricing, we really feel well-positioned as a company because pharma -- is if there is some pressure on pricing, we think pharmaceutical marketers may have to get more surgical in their tactics and clearly will focus more of their tactics on marketing platforms where we can target the precise audience they are looking for and provide them with a outcome that’s measurable both of which we do. And we now have a fairly strong history of delivering strong ROI to our customers on their programs. So again we feel very well-positioned in light of the macro environment, including some of those issues that you mentioned.


Thank you. And our next question comes from the line of Peter Stabler from Wells Fargo Securities.

Peter Stabler

David, I want to go back to your comments in your prepared remarks about traffic. On the one hand, you said you're very comfortable with the amount of traffic you have and satisfying advertising demand. Could you give us a sense of your exposure to Google? You did mention some algorithm changes having a negative impact. Are there things that you could do from an SEO perspective to address that, or do you think it’s kind of out of your control at this point? And then I wanted to make sure I heard correctly, on the Medscape, the mix between Medscape and consumer portal, did you say that Medscape is currently about 60% of total advertising and sponsorship revenue?

David Schlanger

So I'll answer the last question first, because it’s the shortest answer. That’s right, Peter. It’s about 60% of our total advertising and sponsorship revenue on Medscape. With respect to the traffic, you also did hear correctly that we have enough capacity to meet our advertiser demand. And as we said many times, Google is a significant traffic source for us, and when it comes to SEO, there are always things that you’re constantly doing to make sure that you maintain your search rankings. We have been around a long time. Our content is highly valued by consumers, by physicians and also highly ranked by the search engines, and we don't believe that situation is going to change.

As we also said in the prepared remarks, according to third-party measurement services, we’ve continued to maintain our market share of organic searches across the digital health industry. Our search rankings are largely unchanged. So again we continue to monitor the situation and to the extent there are changes you can make to improve your search position, we do that. We have in-house expertise that allows us to do that. And some of our longer-term strategies around social and video are to diversify our traffic sources and make sure that our content is in front of our audiences and people that need it, beyond those that go to search and ask questions of search engines like Google.

Peter Stabler

And it’s safe to say that Medscape traffic is – there is virtually no exposure to Google there, right?

David Schlanger

Yes. Our Medscape traffic is again largely a registered base of physicians that are loyal and frequent users of our service. And remember with many of our Medscape programs, their invitation programs, so we reach out to our physicians and healthcare professionals proactively to get them and get to engage in programs.


Thank you. Your next question comes from the line of Nicholas Jansen from Raymond James.

Nicholas Jansen

Hey [inaudible]

David Schlanger

Hey Nick, if you’re on a mobile phone, we’re not hearing you, so, we’re not getting your question.

Nicholas Jansen

Can you hear me now?

David Schlanger

Still not coming through. You may have to redial until we can hear your question.


Our next question comes from the line of Gerald Haman from JP Morgan.

Gerald Haman

Gentlemen, first of all, I want to congratulate you on a great quarter. I have really two questions. First to David; David, lately WebMD and Walgreens have had been the topic of many stories in the press. With that as a backdrop, can you elaborate a little bit on WebMD’s current relationship with Walgreens and explain how this relationship is profitable to WebMD presently and what do you foresee in the future?

David Schlanger

We have a very strong and positive relationship with Walgreens. We work with them in some very unique ways that we have not worked with industry partners in the past. Although Walgreens does do some advertising on WebMD, the bulk of the relationship is really about WebMD sharing its content and brand with Walgreens that Walgreens has integrated into both its digital and its physical world experiences. So if you go into Walgreens stores, you’re going to begin to see -- if you haven't already more WebMD content, if you use Walgreens’ digital experiences you’ll see WebMD content, you will see our interactive digital health coaching tool [indiscernible] to WebMD and it's a very -- with respect to the economics it’s a relatively simple relationship that Walgreens pays us for the ability to utilize those services and that content.

Gerald Haman

I noticed something recently back in October-November where you talked about potentially kiosks going in to all the Walgreens stores from WebMD. Is that something that's happening or do you expect that to happen?

David Schlanger

I mean I am not sure where you specifically saw that, because it didn’t come from us. But we’re constantly – again we have a very good relationship with Walgreens. We’re constantly discussing with them ways that we can expand and extend our relationship and enable them to take better advantage of all the capabilities we’ve created here.

Gerald Haman

And I have a question for Peter. Peter, there are currently three convertibles on the balance sheet of the company, one I know is coming due in about a month or by next month. The second that I'm more interested in is 1.5% coupon $350 million face value, that seems to have triggered its conversion price. Can you tell me if that would allow the company if it wished to, to call those bonds in, or if there is any criteria that would allow them to do it once triggering that conversion price?

Pete Anevski

I can get back on that. I don’t have that information. I think it’s just that I am having some of these bullets right now. So I will let you know hopefully by the end of this call.


Thank you. Our next question comes from the line of Katelyn Young from William Blair.

Katelyn Young

Hi, good afternoon everyone. I was wondering if you could talk more on the international piece and specifically do a quick compare, contrast between more of the Western European regions versus the Asian markets, and particularly do you see a large difference in the uptick of the Medscape product by the local physician base or which countries or regions are more immediately available for growth and monetization?

David Schlanger

Sure. So we think the outside US opportunity for Medscape as I said in the prepared remarks is a significant one. And you can see over the last few years once we started focusing on it, we’ve been able to generate really nice growth there. We’ve built a substantial physician audience outside the US, beginning with our English-language content because many physicians around the world are either educated in English or speak English. As it may not be surprised, our penetration in any country is really dependent upon that country's culture. We've done better at getting higher penetration rates in many European countries. We’re continuing to focus on increasing those penetration rates by recruiting physicians, by creating in-language content. In Asia, particularly in China and Japan which are very large markets, we did not have the physician penetration we were looking for directly. We didn’t have some of the in-language expertise that we were looking for that we needed to grow our audience there.

So we were able to enter into partnerships that did two things. They allowed us to quickly get critical scale of physicians in both countries -- both of those countries which are very important from a western pharma perspective but also we were able to secure local expertise and with respect to translating our content and creating additional local language content. From a pharma perspective, markets around the world are important, and as I mentioned, the major Western European markets are important but so are the markets in Asia. In fact, Japan is – I’ve read some industry estimates that Japan is the number two market for Western pharma, and I know China is quickly on its heels. So again they are all important markets and we’re trying to really take a global approach to Medscape’s opportunities.

Katelyn Young

And then a quick question on the OTC, CPG segment. It looks like the growth rate for Q1 is materially higher than the full-year outlook. Is that just due to the timing of the marketings and decrease in loan [ph] customer, or is there something else we should be thinking about?

David Schlanger

You can address this in general but the question was about timing of OTC and revenues higher in Q1 and the rest of the year. It’s really just timing at certain programs.

Pete Anevski

There is nothing unique about the growth in the first quarter versus the full year, it’s just timing of programs.

And just going back to the other question regarding the remaining convertible notes, none of them are callable by the company, they could only be tendered or repurchased by the company but none of them are callable by us.

End of Q&A


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