WebMD Health Corp's (WBMD) CEO Steven Zatz on Q1 2017 Results - Earnings Call Transcript

| About: WebMD Health (WBMD)

WebMD Health Corp (NASDAQ:WBMD)

Q1 2017 Earnings Conference Call

May 02, 2017, 16:45 ET


Mary Lerma - Director, IR

Steven Zatz - CEO and Director

Blake DeSimone - CFO and EVP


Alexander Draper - SunTrust Robinson Humphrey

Nicholas Jansen - Raymond James & Associates

David Larsen - Leerink Partners

Donald Hooker - KeyBanc Capital Markets

Peter Stabler - Wells Fargo Securities

Charles Rhyee - Cowen and Company

Heath Terry - Goldman Sachs Group


Welcome to WebMD Health Corp's. First Quarter 2017 Conference Call. Today's call is being recorded. I will now turn the call over to Mary Lerma, Director of Investor Relations.

Mary Lerma

Good afternoon. This conference call is to discuss WebMD's first quarter results. The earnings release issued today by WebMD is available at www.wbmd.com in the Investor Relations section. The release and the related Form 8-K include 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 Steve Zatz, Chief Executive Officer; and Blake DeSimone, Chief Financial Officer. We will take questions at the conclusion of our prepared remarks.

I would now like to turn it over to Steve Zatz, CEO of WebMD.

Steven Zatz

Thank you for joining us this afternoon. As expected, our first quarter results were below last year's, reflecting a more challenging macro environment for many of our biopharma customers and disappointing sales in 2016 in our WebMD Health Services business. These results were at the high end of our financial guidance provided in February, and we are reaffirming our 2017 guidance today.

We remain focused on restoring WebMD's growth by providing the highest-quality health content, guidance and tools for both consumers and health care professionals, as well as delivering superior results for advertisers and value for our shareholders.

We believe that a strong drug pipeline, the continued shift towards digital advertising and the increasing consumerization of health care presents significant opportunities for longer-term growth for WebMD.

Turning now to the financial results we reported today. Our first quarter revenue was $154.1 million, net income was $12.3 million and adjusted EBITDA was $41 million. Medscape, which accounts for approximately 60% of our advertising revenue, is the leading digital resource for medical news, clinical reference and medical education for physicians and other health care professionals. We believe that Medscape has the broadest scale and deepest online engagement with more physicians and health professionals than any other digital service, either in the U.S. or abroad.

During the first quarter worldwide, Medscape average approximately 8.7 million physician sessions per month, an increase of approximately 13% over the prior year period. Medscape is a registration site and most of our physician members come directly to Medscape rather than through search.

In the U.S., Medscape has approximately 675,000 registered U.S. physicians that are active on an annual basis. They represent a substantial majority of the practicing physicians in the U.S.

During the first quarter, an average of approximately 403,000 U.S. physicians were active on Medscape monthly. We also reached approximately 2 million other health care professionals in the U.S. annually, many of whom engage with patients and affect prescribing decisions, such as nurse practitioners and physician assistants.

In order to maintain its leadership position in providing the highest quality news, clinical reference and medical education, Medscape partners with leading academic medical centers, government agencies and professional societies.

Recently, we partnered with the Endocrine Society, the leading professional organization dealing with diseases, such as diabetes, obesity and other hormonal disorders. Through this partnership, Endocrine Society experts will work with Medscape editors to produce evidence-based original content for endocrinologists, primary care physicians and all others who care for patients affected by these disorders, which will assist them in providing the best care possible for their patients.

Endocrine Society experts will also share and discuss compelling case studies on Medscape Consult, our leading online community where physicians from around the world ask and answer questions about challenging patient care issues encountered in their clinical practice.

Last month, Medscape published the results of its seventh annual physician compensation report, which remains the most comprehensive and widely used report of its kind, having been read by more than 400,000 U.S. physicians who rely on Medscape for unique insights they simply can't get anywhere else.

Our latest report reveals an increase in job satisfaction, as well as the fact that male physicians continue to be compensated more highly than their female counterparts. The findings also highlight the extent which race and geography impact both pay and overall satisfaction. This year's report generated a great deal of interest and media coverage in a wide range of media outlets, including Bloomberg, Fast Company, Fortune, NBC News and USA TODAY.

Building on the virtual patient simulation work that we've done to mirror what physicians encounter in actual clinical practice, we are currently testing the use of virtual reality to enhance the effectiveness of medical education programs.

Earlier this year, we showcased an early prototype of these efforts, a simulated encounter targeted at improving the quality of care between a physician and a patient suffering from rheumatoid arthritis during the international meeting on simulation and health care and then again in March, at a conference in Barcelona.

According to a 2016 study, a majority of U.S. physicians have expressed interest in using virtual reality for both medical training and CME in order to learn about new treatment options and conditions. In light of our deep experience in creating clinical case-based programs and the growing interest in VR, we plan to make the investments necessary to be the leader in this emerging space.

Medscape's leadership extends outside the U.S. as well, where we are the leading source of medical information and continuing education with approximately 1.7 million active physicians annually. And we're investing to further expand our international presence to capture a greater share of the promotional budgets available outside the U.S.

According to Manhattan Research, Medscape is #1 in the top 5 EU, Latin America, India and Australia. And with our partner DXY, we have access to the largest physician audience in China. In addition to English, we have French, German, Spanish and Portuguese language editions of Medscape, and we have also created commercial programs for our customers in more than a dozen additional languages.

WebMD, which accounts for approximately 40% of advertising revenue, continues to be the leading digital destination for consumers interested in health and well-being content and tools. To put the size of our audience into perspective for you, within the health vertical, we are the market leader by a wide margin. According to comScore, average U.S. monthly visitors to the WebMD Health Network across both mobile and desktop on a de-duplicated basis was approximately 74 million during the first quarter, meaning that 30% of the total U.S. online population visits the WebMD Health Network monthly.

We believe that the trust people have in our original content and programming is a true differentiator that enables us to attract not just the larger but a much higher quality and more deeply engaged health audience than anywhere else on the web.

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 nearly 4x more page views than our next largest competitor, which is more page views than our next 7 competitors combined.

We're also #1 in virtually all of the 50 most important condition suffering populations online. Of course, what is most important is that we provide our customers with a safe and trusted environment to reach and engage the audiences that matter to them most across the devices and within the appropriate context.

We continue to have success growing our traffic and managing our inventory in the topic areas of greatest demand for our biopharma clients, and we expect to be able to continue to do so.

As I mentioned last quarter, we have begun making WebMD content available via Google Home and Amazon Alexa-enabled devices. Consumers are able to ask a wide variety of health care-related questions and in response, WebMD provides physician-reviewed answers about topics, including conditions, drugs, medical tests, side effects, symptoms and treatments in plain accessible language. Our voice-enabled offerings have been well-received by consumers of both devices, and we continue to enhance our offering by adding new content in response to user queries. In the coming months, we plan to make WebMD content available via additional alternative interfaces, including Facebook Messenger.

In late March, we introduced a redesigned and enhanced version of the WebMD pregnancy app for iPhone, which included new and updated tools that enable expectant mothers to track both their and their baby's health, as well as other helpful resources, such as access to WebMD's online pregnancy community. One of the most important aspects of this update is the use of Apple ResearchKit in the app to enable users who opt in to easily and anonymously enroll in a research study and share information about their pregnancy with medical researchers.

The study, which is being conducted by researchers at the Scripps Translational Science Institute, will help to improve our understanding of what elements contribute to healthy pregnancies and positive pregnancy outcomes. Somewhat surprisingly, pregnant women are one of the least-studied populations in medical research. We hope that by making the study available to the more than 1.5 million people who have downloaded our app, we can help advance research and ultimately, help women have healthier pregnancies and healthier babies. Earlier response has been a very positive, and we are especially pleased to have enrolled participants from 45 of the 50 states.

Last week, we began beta testing of our completely redesigned WebMD Symptom Checker, which will enable us to refine and enhance the tool ahead of the full launch this summer. Our new Symptom Checker tool will feature a new design optimized for use across various devices, and we'll make entering symptoms and finding the best answers quicker and easier.

Our Symptom Checker represents an important gateway for consumers seeking information about their health so they are better informed and more confident about what to do next. We believe that building on products like our Symptom Checker and the strength of our brands, we have an opportunity to play an even larger role in assisting our audience in the selection and access to a variety of health care services, such as appointment scheduling, online physician visits and lab testing services.

Turning to our health services business, which provides comprehensive population health management services for employers and health plans, revenue was $24.5 million in the first quarter compared to $28.3 million in the prior year period. Last month, we hit an important milestone. We completed our 3 millionth coaching session. Over the last 10 years, our coaches have put their education and experience to work to help people stop smoking, manage chronic conditions like diabetes, reduce stress, eat better and lose weight.

We believe that our population health management platform and related services present an important opportunity today and longer term, which is why we are making investments to modernize and scale our underlying technology platform and user experience. By doing so, our products and services as well as those we integrate from third parties, will offer users a more personalized and engaging experience. These investments are part of a multiyear project that will ensure we retain our market leadership for many years to come.

Turning to information services. Our information services comprised of subscription-based data services that use data from a legacy agreement with Change Healthcare, which terminates in February 2018. We licensed these data to informatics and consulting companies. Revenue from information services was $8 million in the first quarter compared to $7.9 million in the prior year period.

As we have previously indicated, our discussions with Change Healthcare around extending our agreement had stalled. In April, Change Healthcare filed a lawsuit challenging certain of our rights under the agreement to continue to use the data delivered to us during the term of the agreement after its termination in February 2018.

We believe that the agreement provides us with these rights and we intend to defend our position vigorously. The agreement's termination and the litigation are not expected to affect 2017 revenue or earnings, but its termination will result in a significant reduction of our information services revenue and earnings beyond February 2018.

I'd like to turn the call over to Blake at this time so we can walk you through the financial results.

Blake DeSimone

Thanks, Steve. As Steve mentioned, our first quarter results came in at the high end of the range of financial guidance we provided in February.

First quarter revenue was $154.1 million compared to $158.6 million last year, a decrease of 3%. Advertising and sponsorship revenue was $121.5 million compared to $122.4 million in the prior year period.

Breaking down our advertising and sponsorship revenue further. Revenue from biopharma and medical device clients increased slightly to $89.5 million compared to $88.7 million in the prior year period. And revenue from OTC, CPG and other clients decreased to $32 million compared to $33.8 million in the prior year period.

Health Services revenue was $24.5 million compared to $28.3 million in the prior year period. Information services revenue was $8 million compared to $7.9 million in the prior year period.

First quarter net income was $12.3 million or $0.30 per diluted share compared to $15.7 million or $0.36 per diluted share in the prior year period.

First quarter adjusted EBITDA was $41 million or 26.6% of revenue compared to $47.1 million or 29.7% of revenue in the prior year period.

During the first quarter, the company adopted a new accounting standard, ASU 2016-09, which addresses the accounting for income taxes related to stock-based awards. Effective January 1, 2017, excess tax benefits generated when stock awards vest or settle are no longer recognized in equity, but are instead recognized as a reduction to the income tax provision. Additionally, cash flows related to excess tax benefits are now required to be presented as an operating activity rather than a financing activity in the statement of cash flows.

The adoption of ASU 2016-09 resulted in the following, first, a net accumulative adjusted on the balance sheet resulting in an increase to retained earnings of $202.5 million as of January 1, 2017, primarily reflecting that recognition of the previously unrecognized deferred tax assets related to the excess tax benefits.

Second, a decrease in the income tax provision of $267,000 for the 3 months ended March 31, 2017, reflecting the recognition of excess tax benefits for stock-based awards that vested or settled during the first quarter, which was recognized in equity in prior year periods. And third, the reclassification of $7.9 million of excess tax benefits from financing activities to operating activities within the statement of cash flows for the 3 months ended March 31, 2016, to conform to the current year presentation.

The adoption of this new accounting standard will cause some unpredictability in the income tax provision in future periods due to the timing of settlement activity for stock-based awards.

Operating cash flow was approximately $44.9 million in the quarter. As we have stated previously, quarterly operating cash flows can be affected 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. Capital expenditures were $5.4 million in the quarter.

During the first quarter, WebMD did not repurchase any shares of its common stock under its stock repurchase program. As of March 31, 2017, approximately $45.6 million remained available for repurchases under the stock repurchase program. Under the repurchase program, we 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 March 31, we had approximately $1.034 billion in cash and investments, $1.06 billion in aggregate principal amount of convertible notes outstanding and approximately 37.8 million common shares outstanding, which includes approximately 700,000 unvested shares of restricted stock.

In February, we announced our board's decision to commence the process to explore and evaluate potential strategic alternatives focused on maximizing shareholder value. In light of that announcement, we have received inquiries as to the effect of potential transaction would have on our 3 outstanding convertible notes. The effect of any potential transaction on these notes will be dependent on the specific timing, structure and terms, including price of any particular transaction. Each of the indentures for these notes contains provisions that are commonly referred to as make-whole adjustments, where by holders of the notes may effectively receive a significant reduction to the conversion price resulting in those holders having the right for a defined period to receive a substantial number of additional shares of WebMD common stock.

The exact number of additional shares, if any, would depend on the terms of any potential transactions. I refer you to the most recent Form 10-K and the indentures for these notes that are filed as exhibits for more complete information.

Turning to our financial guidance. Taking our backlog and expected level of future sales activity into consideration, we are reaffirming the 2017 financial guidance that we issued in February. A schedule summarizing our financial guidance is attached to the press release we issued today.

At this time, we have approximately 75% of our remaining 2017 advertising revenue expectations in our backlog from sales that closed prior to March 31. This is about the same percentage that we had last year at this time. Visibility into the timing of advertising and sponsorship revenue is somewhat limited due to the length of contract and the variability of the timing and implementation of programs. The timing of quarterly revenue can often vary from year-to-year, and we are seeing that again this year.

For the second quarter of 2017, we expect revenue to be approximately $170 million to $173 million, an increase of approximately 1% to 3% from the prior year period. Net income to be $16.8 million to $18.4 million, a decrease of approximately 6% to an increase of approximately 3% from the prior year period.

Adjusted EBITDA to be approximately $49 million to $51 million, a decrease of approximately 2% to an increase of approximately 2% from the prior year period.

To highlight further the revenue breakdown in the second quarter, we expect advertising revenue from biopharma and medical device customers to be approximately 62.5% of revenue, representing an increase of approximately 6% to 7% over the prior year period.

We expect advertising revenue from OTC, CPG and other advertisers to be approximately 19% of revenue, representing an increase of approximately 4% to 6% from the prior year period. We expect Health Services revenue to be approximately 14% of revenue, representing a decrease of 15% to 17% from the prior year period. We expect information services revenue to be approximately 4.5% of revenue, representing an increase of approximately 6% to 8% from the prior year period.

Our advertising and sponsorship growth in Q2 is largely attributable to sold programs that are in the backlog and expected to be delivered in the quarter. This timing is consistent with the full year guidance we provided in February, when we commented that the expected delivery of our backlog entering the year was more weighted to the last three quarters.

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 operation, other nonrecurring onetime or unusual items or the strategic review.

Additionally, the income tax provision included in our 2017 guidance excludes any future excess tax benefits associated with stock-based awards because such adjustments will be dependent on actual exercise or settlement activity in future periods, which cannot be estimated at this time.

Please note there is a schedule summarizing our guidance in today's press release. Steve?

Steven Zatz

Thanks, Blake. In summary, our quarterly performance came in at the high end of the financial guidance we provided in February, and we are reaffirming our 2017 guidance. We believe that favorable industry trends present significant longer-term growth opportunities for WebMD. As demand for digital health services continues to grow, WebMD is well positioned to capitalize on opportunities, both domestically and internationally across all of our business.

Our confidence is due in large part to the strength of WebMD's unique assets, which include globally recognized brands that are trusted by consumers and physicians alike; the largest most engaged audiences of health-interested consumers and health care professionals; an industry-leading population health management platform; best-in-class targeting analytical and data measurement capabilities; a proven ability to positively impact patient and physician decision-making; and most importantly, our experience and talented employees.

Our Board of Directors' review of potential strategic alternatives is still active and ongoing and no specific timetable for completion of this review process has been set. Throughout this process, we have remained focused on running the business, executing our current strategy and ensuring that our customers and business partners are not impacted during this evaluation. We do not intend to comment further on the process unless or until we determine that further disclosure is appropriate or necessary.

I would like to close by saying that all of us at WebMD are very proud of the fact that every day, we help consumers and their physicians achieve the best possible health outcomes while at the same time, delivering results for our advertisers and value for our shareholders.

Operator, at this time, we'll take questions.

Question-and-Answer Session


[Operator Instructions]. And our first question comes from the line of Sandy Draper with SunTrust.

Alexander Draper

Just a question on the second quarter. You talked a lot about the visibility and the strength, the acceleration in biopharma. I'm just curious, is it driven more by new programs and new sponsorship coming on from new drugs or sort of rejuvenating from older drugs? And what I'm trying to get a sense of is in any given quarter or year, how much typical movement do you have if sort of top 5, top 10 revenue-producing brands? How much do they sort of come in and out on a quarterly or annual basis? I'm just trying to think about that and what's driving the second quarter.

Steven Zatz

Hey, Sandy, it's Steve. Look, our sales and revenue are really driven by a combination of newer products and new drug introductions that may have taken place in the last year and products that have been on the market longer but particularly are in competitive categories. So both are important to our success. As we've said before, any particular quarter can have some variability. But if you are asking more generally about what drives our business, certainly, newer products are very important to our success, but existing products, as I said particularly where there a significant degree of competition and challenges in reaching those patient populations, those certainly help drive our business as well.


And our next question comes from the line of Nick Jansen with Raymond James.

Nicholas Jansen

Just two quick ones, one to follow up on Sandy's question just in terms of we have seen a pretty nice acceleration in the number of new drug approvals over the last, let's call it, 90 days versus what we saw in 2016. So just trying to bridge that dynamic to the growth acceleration that you point on getting the back half for a full year guidance perspective. And then secondly, on OTC, CPG and other, down 5% but you kind of reiterated full year of up 8% to 11%, so wasn't sure if there is any sort of specific programs or things that we should be considering on that growth improvement for that segment?

Steven Zatz

Yes, Nick, this is Steve. There is no doubt we've seen an improvement in the approvals that are taking place at the FDA as I think you know they've approved of essentially twice as many products that we have seen in the same time period last year. The timing of our programs though can be pretty variable as compared to when those products are approved. And in some circumstances, we run programs ahead of approval and even after approval, it can take some time for a particular pharmaceutical company to decide they want to run a particular campaign. So again, similar to what I said to Sandy, that those are important to our business, but the timing can be pretty variable between an approval and when a campaign may run in a particular year.

Blake DeSimone

And then, this is Blake. The second part of your question on the OTC, CPG acceleration in the back half of the year. I think you're starting to see some of that in Q2 but it's, as we said at the beginning of the year and consistent now, the backlog based on prior year's sales that we had entering the year was more heavily weighted towards the last 3 quarters and that similar commentary on Q1 sales that closed also weighted towards Q2, 3 and 4. So no specific program, really just the timing of the delivery of the sold programs that are in our backlog right now.

Nicholas Jansen

That's helpful. If I could just squeeze one more, and if you kind of think about just the overall pharma backdrop today relative to in February when you originally provided the guidance for this year, has there been any notable change in terms of kind of just the underlying environment, excluding kind of the new drug approvals? Just your thoughts on the underlying environment would be helpful.

Steven Zatz

Nick, I think the things we were seeing in terms of pricing pressure, this real scrutiny of pharma pricing practices has not changed dramatically in the last couple of months. I think some of the uncertainty that the industry is experiencing and that we saw previously has continued. And I think we'll just have to see as the year evolves what transpires. But the focus on the pricing of pharmaceutical products, we see continuing right now.


And our next question comes from the line of David Larsen with Leerink.

David Larsen

Can you talk about your ability to basically fill the Information Services revenue line item in 2018 with data sources other than Change Healthcare? Any color on that would be very helpful.

Steven Zatz

Sure. As we said previously, where we to replace some of those data with other sources of third-party data, it would not be at the same margins that we've seen previously and probably not at the same level of sales and revenue that we currently have. We do continue to explore our first-party data. We have been working with a limited number of potential customers to try to understand the value of particularly the first-party data that's generated on Medscape. But we're early in that process and really don't have a prediction as to what the value and revenue stream might be. We have said previously that though if you're looking at modeling the revenue out of that segment, we expect it to decline significantly.

David Larsen

Okay. And then, in terms of health services, I think you hired a new Head of Sales. Any color on how he or she is progressing and any sort of re-ramp in the revenue growth expected from that line item?

Steven Zatz

Sure. And you're right, we did hire a new Head of Sales and we've substantially turned over that sales team over the last year or so. I think, as you know, that the sales cycle in that business is relatively long, and so we certainly believe we are assembling a sales team that's going to be much better and able to take advantage of market opportunities. But it's going to be a relatively slow process to ramp up. But we're pleased that we have a full or nearly full sales team in place and believe we have a sales and go-to-market strategy that will benefit us. It's just going to be a little bit of a slow ramp, again given, given the sales cycle in that business.

David Larsen

Okay. And then just one last one. I think you had mentioned a program that you are implementing Walgreens, the Relief Advisor program. Any general update there? And how can that benefit your revenue and can you deploy that at other chains like CVS, for example?

Steven Zatz

Well, we're really excited about the Relief Advisor because it's something that consumers can interact with and actually enter symptoms and then get some information about OTC-type products and what ingredients they need to be looking forward to treat their particular symptoms. I think we've all had the experience of standing in front of a pharmacy shelf and just being bewildered by the number of choices we had.

So although a consumer can use that application before they go in to pharmacy, they can also use it really right at the point at which they're trying to make a purchase decision. We continue to be in a close partnership with Walgreens around that product, as well as some of the other things we do. And we're encouraged that it really does take kind our assets, our trust and our ability to create tools like that and make them something that's a value to retailers who are trying to help consumers through, again, what can be challenging decisions in terms of what product to buy.


And our next question comes from the line of Donald Hooker with KeyBanc.

Donald Hooker

Just on the health services, employer health plan business that seems to be struggling a little bit. What do you think your competitors are growing in that business? Like what do you think are the current sort of trends are in that business in terms of demand growth? I guess that's a around the way, I mean, just to be blunt, I guess that's a way for me to ask like what is the normalized growth that perhaps we could hoped for over time?

Steven Zatz

Sure. I think what I would say about that market, first of all is that think it's pretty fragmented. I think some employers have cut back a little bit in terms of what they're spending, but we still think there's potential for growth. So I'm not sure, we are going to be able to give you a percentage that you can apply in a model. But I will say that we're investing significantly in that business.

We really are looking to improve the user experience, the back-end that handles data and that enables us to personalize that user experience because we do believe both in the employer and the payer market, there are opportunities, as well as we've said in other times, we think in other markets like the provider market and pharma market, particularly for pharma companies that are taking on risk that the population health management tools that we have and experience apply in those markets as well. So our current focus was to rebuild the management team. We are investing significantly in the platform because we do think that there's potential for growth over the long term and we want to take advantage of that.

Donald Hooker

And with respect to the other nonbiopharma advertising revenue, one of the things I've always hoped for is to see more provider advertising to consumers. How far-fetched is that? Are you seeing any signs of that? I think you referred last quarter to some positive signs in that area. How do you think that might play out in the near and long term?

Steven Zatz

Yes, we have mainly been growing our customer base of hospitals and other health care institutions that are looking to direct patients into the service lines of those hospitals. That's a growing business for us. We're investing in that business. We have some pretty unique capabilities when someone is looking up a particular topic, whether it's in an orthopedics area, whether it's related to cardiology and geo-target that individual with appropriate advertising to direct them into a service line that's in their location that may be able to treat the condition that they're researching. So we're trying to take advantage of our platform and we've been able to do that and grow that part of our business over the last several years and expect it to continue to grow.


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

Peter Stabler

Steven, I'm wondering if you could provide us a little more color in your prepared remarks, you were talking about the refurb of Symptom Checker and the impending roll out. And you mentioned that you thought it could activate a gateway to appointment scheduling and lab servicing and that kind of thing. Can you give us a little bit more detail on how that works? So has this become a bit of a closed electronic channel, requiring kind of sales force going out there and signing up partners? And then how do you market that to consumers? And just wondering if you could talk a little bit about that opportunity and is there a monetization path there as well?

Steven Zatz

Sure, I'd be happy to. I mean, if you start at a high level, typically, consumers have come into WebMD, got a lot of information about their condition, we're trying to make a decision as to what to do next and then literally had to leave WebMD to take that next step. And so what we're really looking to do is go from this providing of information to enabling those consumers and those patients to take action. We've mentioned that in the context of the Symptom Checker because a lot of people come into our site who are looking to take the health care action. They started the Symptom Checker. They're not quite sure what they have, they're not quite sure what to do next.

And so we think there's an opportunity as a part of that experience, as well as other experiences you would have on the site, to present those consumers with the sort of alternative they're looking for. They may be looking for direct-to-consumer lab testing. They may be looking then, after they've learned about their condition, to immediately engage in a telemedicine visit or they may want to make an online appointment for a visit with a physician sometime later. And again, historically, we haven't provided those services, but we see the ability given the number of consumers who come to us trying to take this first step in terms of understanding their condition that we can assist them and in taking the next step.

And look, the way that would be marketed and advertised is using the capabilities of the site. That they're on our site, they're looking to take an action, and we believe we can provide them with the links and the connection to many of the actions that they're looking to take. We're early in that process but we see the enhanced Symptom Checker is kind of a centerpiece for how we can start to provide that kind of service.

Peter Stabler

That's helpful. And if I could just one more quick question. Would this mean going out and kind of establishing partnerships with labs and third-party providers and health care pros, et cetera?

Steven Zatz

Yes, the general approach would be through partnerships with the appropriate providers in kind of the various areas that I discussed.


And our next question comes from the line of Charles Rhyee with Cowen.

Charles Rhyee

The other question -- I know you talked about the revenue contribution from Medscape being 60%. It's been a number -- I mean, can you talk about the relative growth rates between the 2 segments, WebMD and Medscape, is Medscape growing faster? I mean, but the statistics we saw here, you're saying 13% growth, both I would imagine so. Secondly, the EBITDA contribution between the two, is it similar to the revenue contribution. And if not, is it more or less? And then lastly, is it possible? I mean, is it possible to split the two business apart? Are there functions that are intrinsic to build that are combined. Just curious to see if you were able to -- if those 2 are able to be disaggregated?

Blake DeSimone

Hey, it's Blake. I'll try to answer each of those in part. But first, on the EBITDA contribution, as you know, we don't breakout the relative EBITDA contributions of the different business lines. So it's -- fleet average there. From a revenue perspective, I mean, two comments. I mean, from a -- is it a bigger portion of the business, the 60% versus a 40%?

So from an absolute dollar standpoint, it's growing more in absolute dollars, but the rate of growth since that 60% and 40% has been stable, the rate of growth has been generally consistent between the two sides of the business. And then the last point, relative to the separation, there are some costs that are clearly leveraged across the business, which is why we don't break out the EBITDA separately, but we've been working closely with JPMorgan as part of our strategic review, and we're looking at all the alternatives there.


And our next question comes from the line of Heath Terry with Goldman Sachs.

Heath Terry

I was wondering if you could give us a sense of your pharmaceutical advertisers on desktop, what portion of them are not also advertising pharmaceutical advertisers on mobile web or mobile maybe most importantly, mobile app. Just trying to get a sense of how big the conversion opportunity there still is.

Steven Zatz

Yes, they -- this is Steve. They are all essentially advertising across desktop and mobile. There's some pharmaceutical companies that still haven't fully mobile optimized their assets. But the programs we sell generally are we're going to reach the target audience that you're looking for, regardless of the device they come to us from. So if they come in a desktop, that's where your message will reach them. But if they come on the phone, that's where your message will reach them. So our programs generally are sold where they're committed to finding those -- that target audience and working with us across both desktop and mobile.

Heath Terry

And so when we spent time on the site and on the app and see a given category where there's a pharmaceutical advertisement on desktop but AT&T or Walgreens advertisement on mobile, is there generally a reason for that difference?

Steven Zatz

Well, generally, you'll see both across desktop and mobile where we haven't directly sold that inventory. It will be -- we'll employ programmatic to monetize that particular impression. But as you've seen, our mobile revenue continues to grow. There normally was some catching up to do particularly if you go back a couple of years when pharma wasn't quite, I think, committed to mobile, didn't have mobile assets, but we've seen that continued to grow year-over-year.


And our final question is from Sandy Draper with SunTrust.

Alexander Draper

And I apologize if I missed this in the prepared remarks, but I just want to make sure when I look at the margins being down and the gross margins being down, that's simply a function of the declining year-over-year revenue with the fixed nature, fixed cost nature of the business and there wasn't any discrete pricing pressure? Just wanted to make sure that I was reading that correctly.

Blake DeSimone

Yes, that's right. Before the full year guidance, we showed some modest year-over-year margin expansion. As we've said in the past, that margin expansion is largely attributable to leveraging the fixed infrastructure as we grow the top line with more of the growth coming in the back half of the year. You'll see the margin expansion from a year-over-year standpoint coming in the second half of the year and at this point, still on track for the full year guidance, which again has some modest year-over-year margin expansion.


Thank you. There are no further questions. 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 are calling from outside the U.S. at (404) 537-3406. The passcode is 473-1248. There is 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.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Tagged: , Internet Information Providers,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.