WebMD Health Corp (NASDAQ:WBMD) Q2 2016 Earnings Conference Call August 8, 2016 4:45 PM ET
Risa Fisher - VP of IR
David Schlanger - CEO
Peter Anevski - CFO
Nicholas Jansen - Raymond James
Peter Stabler - Wells Fargo
Charles Rhyee - Cowen and Company
Neil Doshi - Mizuho
David Larsen - Leerink Partners
Heath Terry - Goldman Sachs
Adam Klauber - William Blair
Good afternoon, and welcome to WebMD Health Corporation Second Quarter 2016 Conference Call. Today's call is being recorded. I will now turn the call over to Risa Fisher, Vice President of Investor Relations.
Good afternoon. This conference call is to discuss WebMD's second quarter results. The earnings release issued today by WebMD is available at 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 paragraph 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 Peter Anevski, Chief Financial Officer. We will take questions at the conclusion of our prepared remarks.
I'd now like to turn it over to David Schlanger, CEO of WebMD.
Thank you for joining us this afternoon. We are pleased to report strong second quarter results that are consistent with the high-end of the range of financial guidance we provided in May. Our revenue increased 13% to $167.6 million, net income increased 33% to $17.8 million and adjusted EBITDA increased 23% to $50.1 million. We are confident in our outlook for the second half of this year and are reaffirming our 2016 revenue and adjusted EBITDA guidance today and updating our 2016 net income guidance principally to reflect the issuance of 2.625% convertible notes during the second quarter.
Our strong second quarter results were driven by the 17% revenue growth we experienced in our biopharma advertising business. The environment for our biopharma customers remains positive and WebMD and Medscape continue to be integral to our customers' digital marketing strategies.
WebMD and Medscape are the preeminent sources and brands of health information and tools for consumers, physicians and other health care professionals. For consumers, according to comScore, nearly one-third of the US online population visits the WebMD Health Network monthly. Within the health category, we are the clear leader by a significant margin across unique visitors, page views and time spent on both desktop and mobile. We have approximately 55% more monthly visitors and 3 times more page views than the next largest competitor.
For physicians and health care professionals, according to Manhattan Research, Number 1 site for physicians in the US and is also now the Number 1 site in most major markets outside of the US. Medscape reaches 1.6 million physicians outside of the US and is Number 1 in each of the EU, Latin America, India and Australia. In China, we are also the Number 1 site with our partner, DXY. Medscape, which accounts for approximately 60% of our advertising revenue, is the premier source of medical news, clinical reference, point-of-care tools and medical education for physicians and healthcare professionals around the world. Our professional marketing capabilities uniquely drive value for our biopharma customers throughout the whole product lifecycle from launch to product maturity to post exclusivity status where digital becomes the only practical and cost-effective approach.
We continue to expand and improve our offerings across both promotion and education to create additional touch points and drive deeper engagement with physicians. As part of Medscape submission to improve patient care, we have been helping healthcare professionals navigate the various changes happening within their practices as well as within the medical profession overall through various community forms, special events, medical education, publications and events. This quarter, we published the widely read Medscape Residents Salary & Debt Report and the Medscape Vaccine Acceptance Report and just last week, we hosted 120 physicians at our new corporate headquarters for a special event on physician burnout. Additionally, in recognition of the high quality of our on-demand medical education, we were recently awarded a six-year renewal of our ACCME accreditation through joint accreditation for interprofessional continuing medical education. Highlighting our leadership in medical education, we are one of only a limited number of companies and the only digital platform to have received this joint accreditation.
During the second quarter, we averaged approximately 7.7 million global physician sessions per month on Medscape, an increase of approximately 11% over the prior-year period. In preparing for today's call, we realized that we incorrectly stated the number of global physician sessions last quarter. The correct number for Q1 is 7.7 million or 7% growth from the prior-year period, not the 8.1 million or 13% growth that we had said in May. Continuing our discussion of Medscape's audience. In the US, Medscape has approximately 656,000 registered US physicians that are active on an annual basis, representing a substantial majority of the practicing physicians in the US. In the second quarter, an average of approximately 403,000 US physicians were active monthly. Annually, we also reached approximately 2 million other healthcare professionals in the US, many of whom engage with patients and impact prescribing decisions, such as nurse practitioners and physician assistants and are therefore, an important audience for our advertisers.
WebMD, which accounts for approximately 40% of our advertising revenue, continues to be the leading source and brand of health information and tools for consumers. While we're pleased with our market leadership and strength of our offering, we are continually working to improve all aspects of the WebMD experience. For example, we are implementing a new response of site design, which will dramatically improve page load times and further drive engagement with our content and services. Staying true to our formula for taking complicated or confusing topics and presenting them in a way that's straightforward and easy to understand. We continue to update and enhance our content offerings, which include investing in new video and social experience so users can more easily discover, share and interact with our content, not just to our sites but across the web.
As I've mentioned on prior calls, we are bringing the WebMD brand to new environments and on to new platforms to strengthen our connection to existing users, enable us to reach new audiences, diversify our traffic sources and over time create additional monetization opportunities. During the quarter, we hosted our first digital content new fun event, where we showcase the breadth and depth up our lifestyle audience and previewed our newest video offerings. The event was well-received and served to reinforce WebMD's leadership in the eyes of the nearly 200 brand marketers and agency partners in attendance. We expect to continue these conversations during the balance of this year when we are part of the 2017 [Technical Difficulty] 2017 marketing programs.
Additionally, we are focused on creating tools for consumers that solve real problems, including in areas where additional transparency is sorely in health care. Last week, in six markets, we began testing WebMD Rx. The first release of a new tool that enabled consumers and physicians to better understand the cost of medications and in many cases enabled consumers to save money on prescription drugs at pharmacy retailers. Leveraging our consumer scale and trusted brand and building off the popularity of the drug information on our site, including drug monographs, pill identifier and medication reminder tools, WebMD Rx is a logical extension to our services. We anticipate marketing of WebMD Rx to begin later this year after an initial testing period. We have additional features and functionality planned for the 2017 release, which will further differentiate our offering from other tools in the marketplace.
We believe that our trusted brand and original content and programming enable us to attract not just a larger, but a higher quality and more deeply engaged audience than our competitors. According to comScore, average US monthly visitors to the WebMD Health Network across both mobile and desktop on a deduplicated basis was approximately 73.8 million during the second quarter. According to our internal traffic measures, which as we report, do not deduplicate users across properties or devices, traffic to the WebMD Health Network reached an average of 199 million unique users per month and generated 4.23 billion page views for the quarter, representing a 6% decrease in users and a 3% increase in page views when compared to the prior-year period.
Our content and tools are accessible to consumers on whatever platforms they wish to engage. From a revenue perspective, we've been successful in monetizing all of our ad inventory, including mobile, as our advertising customers are interested in reaching a targeted audience regardless of what device that audience member uses. Of the 4.23 billion page views we served in the second quarter, 41% of our page view traffic was from the US smartphone, 21% was from a US PC, 6% was from US tablet device and 32% was international. Consistent with industry trends, desktop and tablet utilization is being replaced by smartphones. With respect to sources of traffic to our consumer properties as we've previously discussed, we have seen declines in the number of referrals we received from Google and this has impacted the rate of growth of our overall traffic.
However, we have been successful in offsetting the majority of the decline in search referrals with targeted internal traffic growth initiatives. During the second quarter, approximately 58% of our US consumer page views were from organic search referrals primarily from Google. This compares to approximately 71% in the prior-year period. The remaining 42% of our US consumer page views are generated through direct traffic to our sites, newsletter outreach and referrals from social platforms. In the second quarter, we grew these direct sources of traffic by approximately 37% over the prior-year period. While our leadership position and overall traffic is a reflection of our strong brand and the trust consumers place in us, it is important to note that overall traffic is not a direct driver of our revenue. To demonstrate that our overall traffic trends do not directly correlate to our revenue growth, you don't have to look further than this quarter where we achieved the 13% advertising revenue growth on 3% page view growth.
We're able to achieve that because the majority of our WebMD advertising revenue is driven by certain highly targeted audience, and we have the expertise to build these audiences and driving engagement to these areas, which are of greatest demand to advertisers. We continue to invest in our user experiences and advertiser products, and believe we remain well positioned as a key partner to our biopharma and OTC, CPG advertising customers. Turning to WebMD Health Services. Health Services revenue, which we formerly referred to as private portal services increased 8% in the second quarter compared to the prior-year period. We are supportive of the new management we put in place last year. They are working diligently and making progress in a number of important areas, including enhancements to our product suite that make our services more personalized and engaging.
However, the benefit to these efforts are taking longer to materialize than we anticipated and the challenge has exacerbated because as it is now being reported in market studies, the rate of growth, employer-sponsored wellness programs is slowing. Given that we are still in the selling season, we don't have full visibility to 2017 revenue yet, however, based on our current sales pipeline and offsetting typical levels of customer churn, our 2017 health services revenue could decline by approximately 10% from 2016. Nevertheless, there are opportunities for 2017 we are actively pursuing, and we will continue to work diligently in the next few months to offset this potential decline. We continue to believe that the opportunity for our cloud-based population health platform and related services is substantial and we are well positioned from the market as our programs and solutions have demonstrated measurable clinical improvement, including in medication adherence, smoking cessation and weight loss, which across our customer base, we can now measure in tons, not pounds.
We are also looking to expand our client base beyond employers and health plans to include provider organizations and health systems particularly as they take on risks and can benefit from our population health and wellness services. We continue to build our team and [Technical Difficulty] Chief Technology Officer and a new Chief Medical Officer to WebMD Health Services. Turning to information services. Our information services comprise subscription-based data products and services that we license through data services, informatics and consulting company. These products are de-identified and not linked to any data generated from our websites. Revenue from information services was $7.2 million in the second quarter compared to $5.7 million in the prior-year period.
I'd like to turn the call over to Pete at this time so he can walk you through the financial results.
Thanks, David. As David mentioned, results we announced today are slightly above the high-end of the range of financial guidance provided in May. Second quarter revenue was $167.6 million compared to $148.3 million last year, an increase of 13%. Advertising and sponsorship revenue grew 13% to $131.7 million compared to $116.2 million in the prior-year period. Breaking down our advertising and sponsorship revenue further, revenue from biopharma and medical device client increased 17% compared to the prior-year period and revenue from OTC, CPG and other clients increased 3% compared to the prior-year period. Health services revenue was $28.6 million, an increase of 8% compared to $26.4 million in the prior-year period. Information services revenue was $7.2 million, an increase of 27% compared to $5.7 million in the prior-year period.
Second quarter net income increased 33% to $17.8 million or $0.39 per diluted share compared to $13.4 million or $0.32 per diluted share in the prior-year period. In the prior-year period, net income would have been $11.1 million or $0.27 per diluted share without the impact of a $2.5 million after-tax charge incurred in conjunction with the settlement of a patent infringement claim of $4.7 million non-cash income tax benefit due to the reversal of a tax valuation allowance and an after-tax gain on investments of $0.1 million. Second quarter adjusted EBITDA increased 23% to $50.1 million or 30% of revenue compared to $40.5 million or 27% of revenue in the prior-year period. The expansion in adjusted EBITDA margin was driven primarily by our ability to leverage our infrastructure on higher revenue.
Capital expenditures were $10.6 million in the quarter. All capital expenditures related to the buildout of our new corporate headquarters are now substantially complete. Operating cash flow was particularly strong this quarter and was approximately $68.8 million. This includes a cash tax benefit of $8.6 million related to the use of our tax NOLs generated by stock-based compensation, which, as required by GAAP, are included in the financing section of the cash flow statement rather than in the operating section. As we have 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 quarter's end and timing of interest payments on convertible notes.
During the second quarter, when we did not repurchase any shares of common stock under the stock repurchase program. As of June 30, 2016, approximately 34 million remained available for repurchases under WebMD 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. We adopted a new accounting pronouncement at the beginning of this year that requires debt issuance costs to be netted against the principal amount of the convertible notes in the balance sheet rather than be reflected in other assets. Prior year balances were classified to reflect this change. During the quarter, WebMD received net proceeds of $350.3 million and cash upon issuance of $360 million aggregate principal amount of 2.625% convertible note due 2023.
The notes are convertible into shares of WebMD common stock at an initial conversion price of $87.07 per share, which reflected a premium of approximately 30% over the closing price of the time of issuance. To increase the return on our cash balances, we moved a portion of our cash into short-term treasury securities during the quarter, which is presented as investments on the balance sheet. As of June 30, we had approximately $1.02 billion in cash and investments, $1.06 billion in aggregate principal amount of convertible notes outstanding and approximately 39 million common shares outstanding, which includes approximately 700,000 unvested shares of restricted stock.
Turning to our financial guidance. Today, we reaffirmed our 2016 revenue and adjusted EBITDA guidance and updated our 2016 net income guidance, principally to reflect the issuance of convertible notes during the second quarter. For the full-year 2016, we expect revenue to be $695 million to $708 million, an increase of approximately 9% to 11% from 2015. Our mix of revenues is expected to be as follows; advertising and sponsorship revenues expected to be approximately $559 million to $570 million, an increase of 12% to 14% over 2015; advertising and sponsorship revenue from biopharma clients will represent approximately 76.5% of advertising and sponsorship revenue and it is expected to grow approximately 15% to 17% in 2016; advertising and sponsorship revenue from OTC, CPG and other clients will represent approximately 23.5% of advertising and sponsorship revenue and is expected to grow 2% to 5% in 2016; health services revenue is expected to be approximately $109 million to $110 million compared to $110.4 million in 2015 and information services revenue is expected to be approximately $27 million to $28 million compared to $26.9 million in 2015.
We expect net income in 2016 to be approximately $82 million to $89.5 million or $1.78 to $1.90 per diluted share compared to $64 million or $1.48 per diluted share in 2015. We expect adjusted EBITDA in 2016 to be approximately $224 million to $232 million, an increase of 16% to 20% from 2015. Adjusted EBITDA as a percentage of revenue is expected to be approximately 32% to 33% compared to 30% in 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 have approximately 85% of our remaining 2016 advertising revenue expectations in our backlog as of June 30. This is about the same percentage as we had last year at this time.
Pending on the amount of our quarterly and annual net income, some or all of our outstanding convertible notes may become dilutive. We have attached a schedule to the press release we issued today, which provides the calculations under which the convertible notes would become dilutive. We expect capital expenditures for the full year to be approximately $30 million. As we have experienced historically, our quarterly revenue and expense trends can often be lumpy throughout the year. For the third quarter of 2016, we expect revenue to be approximately $168 million to $171 million, an increase of approximately 10% to 12% from the prior-year period, net income to be approximately $17 million to $18.5 million, an increase of approximately 29% to 40% from the prior-year period and adjusted EBITDA to be approximately $50.5 million to $52.5 million, an increase of approximately 9% to 13% from the prior-year period.
To highlight further the revenue breakdown in the third quarter, we expect advertising revenue from biopharma and medical device customers to be approximately 62% of total quarterly revenue, representing growth of approximately 16% to 18% over the prior-year period. We expect advertising revenue from OTC, CPG and other advertisers to be approximately 17.5% of total quarterly revenue, representing growth of approximately 2% to 4% over the prior-year period. We expect health services revenue to be approximately 16.5% of total quarterly revenue, representing growth of approximately 1% to 3% over the prior-year period. And we expect information services revenue to be approximately 4% of total quarterly revenue, representing growth of approximately 5% to 6% over the prior-year period.
Our guidance does not include the impact, if any, of future deployment of capital for items such as share repurchases, convertible note repurchases or acquisitions, gains or losses from discontinued operations or other nonrecurring onetime or unusual items. Please note that there is a schedule summarizing our guidance included in today's press release.
I'd like to now turn the call back over to David.
Thanks, Pete. In summary, our second quarter results reflect our consistent execution and leadership in a fast-paced dynamic digital marketplace. We continue to successfully navigate changing engagement patterns and user preferences and to raise the bar in Digital Health. We are committed to providing trusted content and tools and continually enhancing our experiences to meet and exceed our user’s needs.
The biopharma environment is positive with record levels of new products, both in the market and expected to be approved in the next few years. We are well positioned with many of the newest biopharma products. As evidence of this, we have worked with approximately 70% of the products that have been approved over the last 2.5 years. These new products consider WebMD and Medscape as essential to building their brands with physicians and consumers, and we expect to continue to be key components of their digital strategies going forward.
I also wanted to mention that we filed an 8-K this past Friday indicating that one of our board members, Kevin Cameron, has risen from our Board of Directors. I just wanted to thank Kevin for his many years of service to WebMD as a board member and for the financial contributions he made as CEO of our predecessor company.
Operator, at this time, we will take questions.
Thank you. [Operator Instructions] And our first question will come from Nicholas Jansen at Raymond James. Your line is now open.
Hey, guys. Congrats on a good quarter. I just wanted to dig a little bit deeper into the traffic trends that you're seeing. I know Google came out with their enhancement late in June. But just wanted to kind of get your thoughts on, I know not all traffic was created equal and it seems like you are doing pretty good with your outreach efforts to generate more traffic from the direct side of the house. But how sustainable is double-digit revenue growth on the private, excuse me, on the public portal side of things if traffic trends continue to stay negative? Thanks.
Well remember, Nick that, first of all, 60% of our revenue comes from Medscape which is not impacted by any of the Google traffic trends. And we've shown, particularly with respect to Medscape over the years that we've been able to continue to grow our revenues on a relatively static audience of physicians.
On the consumer side, one of the -- as we said many times, one of the areas of expertise we've developed over the years is growing traffic in areas of high interest to our advertisers, but also high interest to consumers. And you can see that when we talked on our prepared remarks, we grew our direct sources of traffic by 37%. So we feel very comfortable that we can continue to grow those audiences and meet the demands of our advertisers going forward.
Again, the overall traffic is very -- is nice and reflects our market leading position, but it's not directly correlated with our revenues. So that capability that we have that we can create content and program our sites that should build audiences in areas that are key interest industry is very, very important. But that's going to allow us to be able to continue to grow.
Thank you. And our next question will come from Peter Stabler at Wells Fargo. Your line is now open.
Good afternoon and thanks for taking a couple of questions. Just wanted to go back to the previous topic here, David, and wondering if you could unpack that a little bit for us. So of the 13% ad revenue growth, what kind of CPM, average CPM increase are you seeing or is this ad load issue or just kind of under relative contribution?
And then secondly, on the WebMD RX product you were talking about, can you just help me understand, is this a distinct consumer product or is this an offering within the larger WebMD consumer portal as it stands already? Thanks so much
So on the first part of the question, our advertising growth is really driven by more programs with more advertisers and bigger programs with our existing advertisers. It's not really being driven by increased pricing, but we've been -- unlike a lot of digital advertisers, we've not seen any erosion to our pricing because of the unique audiences we have. So again, we continue to generate good results for advertisers and they're spending more money with us and doing it across more brands and that's really what's driving the growth.
Could you just repeat your question quickly on WebMD RX?
Just wondering how the consumer is going to discover that? Is that a distinct offering from the portal or is that a feature set within the WebMD portal?
Well, it's going to be both. There will be a stand-alone app, but it will also be accessible both on our mobile and PC-based and tablet-based websites. And we actually have a fairly extensive marketing program planned for later this year after this initial testing period to make sure people know it's available, and that will be both a digital and physical marketing program in doctor’s offices. So we're going to be leveraging our presence in doctor’s offices where we've been so successful over the years with the magazine to help get WebMD RX materials in patient's hands.
Great. Thank you, David. That’s helpful.
Thank you. And our next question will come from Charles Rhyee at Cowen and Company. Your line is now open.
Great. Just a -- I might have missed a little bit earlier, when you talked about the potential decline in the health services business of up to 10%, when would you know for certain you talked about at the potential?
When we'll be able to give more specific guidance on 2017?
Yes. Is it just a function of guidance or is it you're still waiting to find out the final?
No. We're still pursuing activities that can impact 2017 with respect to both new customers and upsells to our existing customers, which is why in the prepared remarks, I talked about that we are actively pursuing some opportunities to close that gap. We'll certainly have a better sense in November when we do the next call where things stand on health services.
Okay. And then we've been talking about a little bit before -- earlier, when we think about the traffic decline, can you talk about the quality of the traffic, I guess, in a sense, can you attach how much revenue pulls through from that piece of the traffic because clearly, it doesn't seem like it's much if you are still driving 13% ad spend growth in the rest of the business.
No, I mean, I think, you have to remember, and we say this all along that's why we always say that our overall traffic is not correlated with revenue that small areas of our site generate large percentages of our revenue. Medscape is the perfect example of that which is a small piece of our traffic, but as you all know, 60% of our revenue. But it's the same even within our consumer experience. So you can't really measure -- there's no way to come up with a formula that has anything to do with any of the traffic declines in areas that are not -- those key areas of interest to industry and how that impacts our revenue. Remember, only a small part of our revenue is from kind of remnant advertising.
Okay, so then -- okay, that's helpful. Then, if we think about the key target areas that pharma is interested, can you give us a sense of what the growth rate is looking like there? Or is ad spend a good proxy for that -- the traffic growth?
We generate the traffic we need to satisfy customer demand is probably the best way to look at it. And the areas where we do that are dynamic, they change. As you know, new products come to market, the kind of competitive dynamics in therapeutic categories change. So as I said before, one of the areas of expertise and capabilities to develop is the ability to manage traffic to those areas.
No, I understand that. But let's take, for example, PCSK9, right, so if we look at overall cholesterol, I would just say the demand for cholesterol ad spending because of the new products is up meaningfully year-over-year, is that the right way to think about it? Maybe not obviously you could be narrow in terms of the type of product. But if we think more generally to the categories, is it fair to look at that? And is it the way you can give us a sense on the growth like in cholesterol, for example.
I don't have those numbers in front of me, to be honest with you. And it's not -- it’s frankly not all that helpful. We actually do business with both of the new PCSK9 products and for whatever programs that we've contracted to deliver on their behalf, we have an audience that satisfy those programs and high-quality audience at that. So that's what we make sure. And we're doing this in a -- it's a constant process. We try to stay ahead of what we know what products are coming to market, what therapeutic categories are going to be important over the next few years. So we stay ahead of where we need to make sure that we're programming our site and building content.
Okay, great. Thank you.
Thank you. And our next question will come from Neil Doshi at Mizuho. Your line is now open.
Right. Thanks. David, we saw a bit of a deceleration in the OTC, CPG and other category grew about 3% year-over-year this quarter. It's been growing kind of in the low to mid-teens over the past two quarters. Any color on why the deceleration and how we should think about that category? And then more broadly, how do you think the drug pipeline looks for the back half of this year and the patent cliff looking also for the back half of this year and then also into 2017? Thanks.
Yes, I'll start with your second question. And then I'll let Pete talk about some of the lumpiness you'll see on in some of our revenues. So the pharma pipeline over the next few years looks strong. By some industry estimates, you should see more new products coming to market in the next two to three years than you've seen in the prior two to three years. So again, it's a strong environment for new pharma products. The new products coming to market are -- add much more potential revenues of the pharma industry than should be lost through patent expirations, a fair number of the patent expiration are in Biologics, where you will see a limited number of biosimilars but again those create opportunities for us because the impact of a biosimilar on pricing for the end market product are much less severe than a small molecule generic. So overall, from a pharma market perspective, the number of brands in market, it’s a very promising period.
And regarding your first question, it is really just timing, which is why we always encourage people to look at the full year guidance and expectations. There were timing of programs in the first quarter, which showed higher growth than what we are expecting for the full year. And so it's not -- it's a small number. It's not necessarily deceleration, it's as much as it is our expectation for the full year. I don't see CPG and other.
Yes. And just remember that the majority of our ad programs run over four months, so what's four months particularly program runs during the course of the year is up to the client’s discretion.
Thank you. And our next question will come from David Larsen at Leerink Partners.
Hi, congratulations on a good quarter. Can you talk a bit about health services revenue line item, the growth of 8% looks like it rebounded, highest growth rate in the past four quarters. What drove that?
Yes. It’s similar to the first quarter that showed a decline. It's discretionary services that clients do beyond sort of the licensing of the platform. And so what happens is from a timing perspective, no different than the last answer on OTC CPG and other line, it does impact that quarterly revenue and quarterly growth rate and so that's why full year expectations, I think, are the best way to look at the health of that business.
Okay, great. And then how many clients roughly are we talking about? Like I think, last quarter, you said there was like around $1 million or so where the timing was unclear and that might push too. But how many clients make up that $1 million or so? Is it a handful or one or?
I'm not sure what the $1 million you are referring to is. If you're asking the question on how many clients impact discretionary services, they all can utilize it in some form or another, which is why it fluctuates from quarter-to-quarter but not wildly. And so that's the best answer I can give you. I'm not sure what the $1 million you are referring to is.
Okay. It’s just something that I picked up from last quarter’s transfer. And then with your comments around the 2017 potential 10% decline in health services revenue, is that -- I mean, is that what you are like given the current state of your business, what you might expect to see unless something changes? Or were you saying the nature of the market is somewhat volatile and it's unclear on what that sort of growth rate might be in 2017?
Well as I said in the prepared remarks, it is what you might expect to see based upon the current state of the sales pipeline and what would be a normal amount of client churn. And client churn consists of both client cancellations, but also clients under budgetary pressures that may cut back on their level of spend. Now having said that, there are opportunities we see in the marketplace that we are actively pursuing, and we have a concerted effort to try to close that gap. But from an early and again, it's August, so it's an early read, from an early read, we may be looking at a decline of up to 10% in that business. And as those of you that read some of the industry reports and some of the industry experts, the industry -- and we've heard this from some of the benefit consultancy, industry is seeing a slowing growth and adoption of corporate wellness programs. So we think that's creating some of the sales challenges we're having.
Okay, thanks and congrats on a good quarter.
Thank you. And our next question will come from Heath Terry at Goldman Sachs. Your line is now open.
Great. I know you touched on sort of the impact that Google is having to you on in terms of traffic from Google. I'm curious if you are seeing any impact to your other traffic from their efforts? Meaning, are there efforts that are driving more health related traffic to their properties impacting your direct traffic at all?
No, and what we have seen, Heath, is that our direct traffic has actually gone up. So that's been a positive as we’ve been managing our traffic. We've been able to increase our direct traffic, so -- and largely have been able to do that and make up for any declines we've seen as a result of the Google changes.
Great, thank you.
Thank you. And our next question will come from Adam Klauber at William Blair. Your line is now open.
Thanks and good afternoon. From what I understand and last year, this year, you've been benefiting as new drugs come to market. You’re helping structure their marketing, their digital marketing program. I guess how is the pipeline of that activity looking going into next year?
Yes, it's similar to what I said on the last -- one of the prior questions that there are many new products coming to market. As a data point, we've worked with 70% of the new molecules that have come to market in the past two years. And so we've become an important part of launch planning for many of these products. As you can imagine, not every product has a marketing budget, some of them are small products. So the 70% number is a strong number of those products that are actually going to be marketing themselves to physicians and/or consumers have come through a lot on WebMD and Medscape as very essential elements of their marketing plans. So as new products continue to be approved, we expect that case to continue.
Great. Thank you.
Thank you. [Operator Instructions] And our next question will come from Nicholas Jansen at Raymond James. Your line is now open.
Hi, guys. Just one follow-up regarding health services. I know it's been lumpy from year-to-year over the last couple of years. I'm just trying to get a better sense of how strategic that business is to you guys? It doesn’t feel like there's a significant amount of synergy between the two segments, but just wanted to get your broader thoughts on kind of the why together they work? Thanks.
Yes, we think that health services is a really important strategic element to what we do at WebMD. I mean, their programs in a much more personalized way and proactive way help people manage their health and make appropriate health decisions and really add measurable clinical outcomes in improving people's health and they're doing it digitally. So it's really where we see Digital Health going and particularly as more organizations and types of entities in the health care industry start taking on risk or expanding kind of their mandate to improve patient health.
So for instance, health systems as they start taking on risk the patient health, need ways to manage that. We see opportunities for many of the things that we do at health services. The pharma industry, as they think about moving beyond the pill and actually providing not just medicines, but health solution are going to need digital tools to accompany their medicines to help people manage their health. So we think all those tools and things that we've been doing at health services for 15 years are becoming -- are going to become more important, not less important. So it is important strategically and that's why we said in the prepared remarks we are focused on bringing those tools to other markets like the pharma industry [Technical Difficulty].
And then two quick follow-ups. First on Medscape, any type of growth in the quarter in terms of how we should be thinking about that? I know it would be helpful for folks. I know you only give this number once a year, about 60% of overall ad revenue comes from Netscape. But any specific numbers on growth might be helpful and useful as we think about this traffic deceleration. Thanks.
Sure. Well you can assume that the vast majority of what Medscape -- the advertising on Medscape is from our biopharma customers and you saw that our biopharma advertising line grew 17% this quarter. So I think you're are going to get a good sense Medscape is growing, our consumer biopharma business is growing also.
And then lastly just in terms of the M&A pipeline, I know you guys raised some money back in May, but any thoughts of M&A? Thanks.
Yes, and I know you are all probably tired of hearing the same thing for me, but we continue to be very active. We are starting to see some loosening in valuation expectations. So we're looking at a bunch of things. And hopefully if we see the right opportunity, we will be able to pursue it and we obviously have the capital to do so. So we feel very well-positioned.
Thank you. And I'm showing no further questions at this time. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. As a reminder, if necessary, there is a replay available of this call, which can be accessed toll-free at 855-859-2056. Or if you're calling from outside of the U.S. at 404-537-3406. The passcode is 45173141. There's also a webcast replay available on www.wbmd.com. Thank you for joining us today.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!