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Perspective on WebMD’s 3rd Qtr Numbers

by John Moore | October 30, 2008

WebMD and Healtheon jointly announced earnings for Q3 (ending Sept. 30th) late this afternoon. Sat in on the conference call and pick-up a few tidbits of information to pass along. Comments will focus on WebMD’s operations.

Why do an analysis of WebMD?

Quite simply, they are arguably the largest market player in online health. This is a young market and WebMD is the only company that we know which provides some visibility as to market trends, which can be extrapolated across the broader industry (with maybe the exception of the provider market).

So what do we learn from this quarter’s results?

Total Q3 revenue was $100.4M, up a strong 17%.

Decent growth in an economy that continues to sputter. Health & wellness spending is continuing as companies seek new marketing channels for the advertisements and employers look to control healthcare spending.

In the driver’s seat is online advertising/sponsorships (almost all from pharma) which saw 22% growth and represented $72M in revenue.

Obviously, this is the goose laying the golden eggs and they see continued growth for this sector in the future, though they caution it will be modest. In responding to a question regarding size of the opportunity, WebMD stated that only 5% of the $5B spent annually on direct to consumer pharma marketing is online today so plenty of upside growth. Looking at physician drug marketing opportunity looks even bigger as only 1% of total physician marketing spend ($13B) is spent online today.

The troubling news here is that WebMD sees, in the near term, flat to slight contraction in total pharma marketing budgets, thus less to go around. The challenge fo WebMD and any online health business that looks to ad revenue is convincing advertisers that their money is better spent online. This may work well for those with strong Brand recognition (WebMD or some of the Waterfront Media brands) or those targeting specific conditions, but broad-based plays that lack focus and brand recognition will not survive.

Their “private portal” business (this is the employer and payer PHR/portal business) saw a revenue gain of 11% bringing in $22.1M. The number of clients increased 15% from 112 to 129 today.

They are not seeing the same level of growth here as they are seeing in advertising so future investment will match expectations (e.g., low expectations=low investment). The ongoing economic crisis is not going to make it any easier to get self-insured employers to invest in these types of solutions unless the vendor can clearly and unequivocally show real short and long-term savings via the use of their solution. Unfortunately, for most PHR vendors, they simply do not have the track record to show such savings.

Looking Ahead:

With a $336M war chest at its disposal, WebMD again reiterated that it will be shopping for “synergistic businesses” to drive future growth.

Expect acquisitions that give them more places to sell advertising, particularly to physicians as it is appears to be a relatively untapped market. BTW, they stated that they forecast acquisition(s) to occur between now and the end of Q2’09.

Side Note: Their relatively new Physician Connect website (competes with Sermo), has seen strong membership growth, 65K physicians today (in Q1 they reported 20K physicians as members of Physician Connect).

Pessimistic growth for Q4 of 4-8% over Q3.

Clearly, they are seeing some budget pullback, most likely across all businesses.

In advertising, it is the trimming of advertising budgets. For private portals, most likely lay-offs leading to fewer participants/employees using service.

Though signaling growth in 2009, their projections have such a wide variance as to be virtually meaningless. Expect much of 2009 growth to be the inorganic (results of acquisitions).

At this point, it’s anyone’s guess as to how 2009 will shape up in the online health market. Clearly WebMD does not have much visibility, and it is unlikely that anyone does as there are simply too many factors in play from the financial crisis, to a new administration.

For those with deep pockets, this may be a good time to invest to grow market share. Those with less in their pockets should look to deepen relationships with their existing client-base and focus resources on selling add-ons while awaiting a market upturn.

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