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WBMD > SEC Filings for WBMD > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for WEBMD HEALTH CORP.

Form 10-Q for WEBMD HEALTH CORP.


7-Nov-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Item 2 contains forward-looking statements with respect to possible events, outcomes or results that are, and are expected to continue to be, subject to risks, uncertainties and contingencies. See "Forward-Looking Statements" on page iii above. The results of operations for the periods reflected in this Quarterly Report are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in our forward-looking statements as a result of various factors, including but not limited to those listed under "Risk Factors" in Part II, Item 1A of this Quarterly Report, those discussed in this Item 2 and those included elsewhere in this Quarterly Report. In this Item 2, dollar amounts (other than per share amounts) are stated in thousands, unless otherwise noted.

Overview

Management's discussion and analysis of financial condition and results of operations, or MD&A, is provided as a supplement to the Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report and is intended to provide an understanding of our results of operations, financial condition and changes in our results of operations and financial condition. Our MD&A is organized as follows:

• Introduction. This section provides: a general description of our company and its business; background information on certain trends, transactions and other developments affecting our company; and a discussion of how seasonal factors may impact the timing of our revenue.

• Critical Accounting Estimates and Policies. This section discusses those accounting policies that are considered important to the evaluation and reporting of our financial condition and results of operations, and whose application requires us to exercise subjective and often complex judgments in making estimates and assumptions. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission (which we refer to as the SEC).

• Results of Operations and Supplemental Financial and Operating Information. These sections provide our analysis and outlook for the significant line items on our statements of operations, as well as other information that we deem meaningful to understand our results of operations on a consolidated basis.

• Liquidity and Capital Resources. This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments that existed as of September 30, 2013.

• Recent Accounting Pronouncements. This section provides a summary of the most recent authoritative accounting standards and guidance that have either been recently adopted by our company or may be adopted in the future.

Introduction

Our Company. WebMD Health Corp. is a Delaware corporation that was incorporated on May 3, 2005. We completed an initial public offering on September 28, 2005. Our Common Stock trades under the symbol "WBMD" on the Nasdaq Global Select Market.

Our Business. We are a leading provider of health information services to consumers, physicians and other healthcare professionals, employers and health plans through our public and private online portals, mobile platforms and health-focused publications. The WebMD Health Network includes: www.WebMD.com, our primary public portal for consumers and related mobile services; www.Medscape.com, our primary public portal for physicians and other healthcare professionals and related mobile services; and other sites through which we provide branded content. Our services for consumers enable them to obtain information on health and wellness topics or on a particular disease or condition, to assess their personal health status, to use online trackers, tools and quizzes, to locate physicians, to receive periodic e-mailed newsletters and alerts on topics of individual interest, and to participate in online communities with peers and experts. Our services for physicians and


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healthcare professionals make it easier for them to access clinical reference sources, stay abreast of the latest clinical information, learn about new treatment options, earn continuing medical education (which we refer to as CME) credit and communicate with peers. We do not charge any usage, membership or download fees for access to our public portals or mobile platforms. We generate revenue from our public portals and mobile platforms primarily through the sale of various types of advertising and sponsorship programs to our clients, which include: pharmaceutical, biotechnology and medical device companies; healthcare services companies; consumer products companies whose products relate to health, wellness, diet, fitness, lifestyle, safety and illness prevention; and various other businesses, organizations and governmental entities. Advertisers and sponsors use our services to reach, educate and inform target audiences of consumers, physicians and other healthcare professionals. We also generate revenue from advertising sold in WebMD Magazine, a consumer magazine distributed to physician office waiting rooms. In addition, we generate revenue from the sale of certain information products.

Our private portals enable employers and health plans to provide their employees and members with access to personalized health and benefit information and decision-support tools that help them to make more informed benefit, treatment and provider decisions and motivate them to make healthier lifestyle choices. We also provide health and condition management programs for use by our private portals clients' employees and members to help them achieve their wellness goals. In addition, we offer clients telephonic, online and onsite health coaching services for their employees and members. We generate revenue from our private portals through the licensing of our technology and content to employers and health plans, either directly or through our distributors. We offer our health coaching services and our health and condition management programs on a per participant basis.

Background Information on Certain Trends and Developments Affecting Our Business. Key trends and developments affecting the use of healthcare information services of the types we provide or are developing and our ability to generate revenue from those services include the following:

• Use of the Internet by Consumers and Physicians. The Internet has emerged as a major communications medium and has fundamentally changed many sectors of the economy, including the marketing and sales of financial services, travel, and entertainment, among others. The Internet is also changing the healthcare industry and has transformed how consumers and physicians find and utilize healthcare information.

- Healthcare consumers increasingly seek to educate themselves online about their healthcare-related issues, motivated by the desire to become better informed patients and to become more engaged healthcare consumers because of the larger share of healthcare costs they are being asked to bear due to changes in the benefit designs being offered by health plans and employers. The Internet has fundamentally changed the way consumers obtain health and wellness information, enabling them to have immediate access to searchable information and dynamic interactive content to check symptoms, understand diseases, find providers and evaluate treatment options.

- The Internet has become a primary source of information for physicians and other healthcare professionals seeking to improve clinical practice and to interact with their peers. The Internet has also become one of the primary means for physicians and other healthcare professionals to obtain CME and CE.

• Traffic Trends. Traffic to The WebMD Health Network was an average of 138.0 million unique users per month and total traffic of 2.95 billion page views during the third quarter of 2013, increases of 29% and 15%, respectively, over the prior year period. Traffic to our online portals for physicians and other healthcare professionals averaged approximately 5.5 million physician sessions per month during the third quarter of 2013, an increase of 10% over the prior year period.

Consumers and healthcare professionals are increasingly using smartphones, tablets and other mobile devices to access the Internet, with physicians increasingly using mobile devices during treatment at the point of care. Accordingly, the portion of our page views from mobile devices has increased rapidly in the past several years as usage has increased on mobile devices. During the third quarter of 2013, approximately 34% of our page views came from a U.S. desktop, approximately 31% came from a U.S.


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smartphone; approximately 8% came from a U.S. tablet device; and approximately 26% came from non-U.S. sources. The decline in our desktop page view traffic from the prior year period was approximately 13%, which represented a significant improvement over the declines of 19% and 21% that we experienced in the first and second quarters of 2013, as compared to the prior year periods. The decline in desktop page views was partially offset by the growth in tablet traffic, which we are able to monetize similarly to desktop page views. Combined U.S. desktop and tablet page view traffic was down 4% in the third quarter of 2013, as compared to the prior year period, which also represented a significant improvement compared to the declines of 13% that we experienced in each of the first and second quarters of 2013, as compared to the prior year periods. As discussed under "- Efforts to Increase Advertising and Sponsorship Revenue from Mobile" below, we are beginning to see some demand for advertising on smartphones, but the amount of revenue achieved in the third quarter of 2013 was not meaningful. If users access our services through smartphones as a substitute for access through personal computers and tablets, or if our page views from desktop computers continue to decline for other reasons, and if we are unable to successfully implement monetization strategies for smartphone traffic, our financial results could be negatively affected. Nonetheless, we expect to have more than enough desktop and tablet page view inventory on The WebMD Health Network to meet the expected demand from advertisers and sponsors for our services for the remainder of 2013.

One factor that significantly reduced traffic, in the first half of 2013, to some of the consumer sites in The WebMD Health Network (other than WebMD.com, our flagship site) was changes in Google's algorithms and other processes that lowered the ranking of those sites in Google search results. Starting in July 2013, we began to see a reversal of this trend, with improvement continuing through the rest of the third quarter. We intend to continue our efforts to increase our page views by providing quality content and tools, as well as by designing our Websites to deliver that content and tools in ways that will cause them to rank well in algorithmic search engine results (which is commonly referred to as search engine optimization or SEO). However, we cannot be certain that our SEO efforts will result in continued improvement or, if they do, how long that will be maintained.

• Online Marketing and Education Spending for Healthcare Products. Pharmaceutical, biotechnology and medical device companies spend large amounts each year marketing their products and educating consumers and physicians about them; however, only a small portion is currently spent on online services. We believe that these companies, which comprise the majority of the advertisers and sponsors of our public portals, are aware of the effectiveness of the Internet relative to traditional media in providing health, clinical and product-related information to consumers and physicians. In addition, in an effort to improve operating efficiencies, some pharmaceutical companies have been reducing their field sales forces in the past several years. However, notwithstanding our general expectation for increased future demand, we cannot predict the extent or the pace of any shift by pharmaceutical, biotechnology and medical device companies of their marketing expenditures to online services. In addition, as discussed under "- Other Factors Affecting the Demand for Our Advertising and Sponsorship Services" below, many of these companies reduced their overall marketing and education spending in 2012 and could do so in the future as part of cost-cutting efforts they may implement. Furthermore, our advertising and sponsorship revenue may vary significantly from quarter to quarter due to a number of other factors, including general economic and regulatory conditions and the following:

- The majority of our advertising and sponsorship contracts are for terms of approximately four to twelve months. We have relatively few longer term advertising and sponsorship contracts.

- The time between the date of initial contact with a potential advertiser or sponsor regarding a specific program and the execution of a contract with the advertiser or sponsor for that program, as well as the additional time period before our services are delivered, may be longer than expected, especially for medium-sized and larger contracts, and may be subject to delays over which we have little or no control, including as a result of budgetary constraints of the advertiser or sponsor or their need for internal approvals, including internal approvals relating to compliance with the laws and regulations applicable to the marketing of healthcare products. We have experienced, from time to time, a lengthening of this internal review


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process by pharmaceutical and biotechnology companies, which has resulted in delays in contracting as well as delays in recognizing expected revenue under executed contracts and which may continue to cause such delays.

Other factors that may affect the timing of contracting for specific programs with advertisers and sponsors, or receipt of revenue under such contracts, include: the timing of Food and Drug Administration ("FDA") approval for new products or for new approved uses for existing products; the timing of FDA approval of generic products that compete with existing brand name products and any increase in the number or significance of such approvals or of withdrawals of products from the market; consolidation of companies in the pharmaceutical and biotechnology industries; the timing of roll-outs of new or enhanced services on our public portals; seasonal factors relating to the prevalence of specific health conditions and other seasonal factors that may affect the timing of promotional campaigns for specific products; and the scheduling of conferences for physicians and other healthcare professionals.

• Efforts to Increase Advertising and Sponsorship Revenue from Mobile. We remain focused on delivering a multi-screen platform that engages users through desktop portals, through tablet devices and through smartphones. Since we are able to monetize tablet page views similarly to desktop page views, our mobile monetization efforts are focused on monetizing page views from smartphones and references to "mobile" and "mobile monetization" below are to smartphones and the page views they genereate. During the third quarter of 2013, we released a new version of our flagship WebMD App for iPhone®. The new app allows the user to customize content based on his or her own health interests and goals. It also includes expanded local search for health providers and enhanced health information that users can choose from and save on conditions, drugs and first aid topics.

As we broaden our mobile offerings for consumers and physicians, we are also expanding our mobile sponsorship products for advertisers. Mobile, while not yet a meaningful source of revenue for us, could be an important area of growth for the future and we view mobile monetization as an opportunity for incremental revenue. We are beginning to experience demand from customers for mobile advertising and to include mobile components in many of the program configurations that we offer to advertisers and sponsors. However, we are unable to predict when or to what extent such demand will increase. We are also seeing certain differences in such demand among our offerings:

- With respect to our mobile offerings for physicians, we are seeing some sales traction with advertisers for our mobile product set.

- We are also beginning to experience demand for mobile advertising and sponsorship with respect to our consumer offerings. We expect that our mobile offerings for consumers will be adopted by our consumer products customers sooner than biopharmaceutical customers as consumer products companies do not have the issues regarding medical and regulatory review that biopharmaceutical companies have. Advertisements for biopharmaceutical products are subject to various regulatory requirements, including requirements to include certain specified information, that are more challenging to meet on the smaller smartphone screen size. We are, however, developing strategies to assist our biopharmaceutical customers in navigating the regulatory environment as it relates to consumer advertising on mobile.

As discussed under "- Traffic Trends" above, the portion of our page views from smartphones has increased rapidly in the past several years. Accordingly, if we are unable to successfully implement monetization strategies for our mobile services, our business and prospects could be adversely affected.

• Other Factors Affecting the Demand for Our Advertising and Sponsorship Services. Some of our pharmaceutical company customers have experienced patent expirations for certain of their products in the past two years and some are expected to experience patent expirations over the next several years. In the pharmaceutical industry, patent expirations allow for competition from lower-priced generic versions of the patented drugs and generally result in the termination of marketing efforts for the drug. We believe that patent expirations led to significant overall reductions in marketing, selling and educational expenditures by some pharmaceutical companies in 2012 across their entire product portfolios. However,


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we believe that amounts budgeted for online advertising have increased for some of our biopharmaceutical customers in the first three quarters of 2013, although we cannot predict if that will continue.

In addition to pharmaceutical, biotechnology and medical device companies, our public portals advertisers and sponsors include consumer products companies, particularly for products that relate to health, wellness, diet, fitness, lifestyle, safety and illness prevention. Revenues from consumer products companies are more likely to reflect general economic conditions, and to be reduced to a greater extent during economic downturns, than revenues from pharmaceutical, biotechnology and medical device companies. Accordingly, revenues from these customers may be subject to significant quarter-to-quarter variations.

Our advertising and sponsorship services are subject to competition from numerous alternatives, including other Internet sites that focus on health-related content, Internet search engines, social media Internet sites, general interest consumer sites and traditional media. Such competition may result in smaller customer commitments or pressure to reduce prices, both of which could reduce our revenues and profit margins. In response to changes in the preferences of our advertisers and sponsors, particularly our pharmaceutical company clients, we have modified our sales and product approach to offer services that can be executed more quickly and we have simplified our products and pricing. We believe this is allowing these clients to better compare our services, and the value they provide, to other digital alternatives. We are also investing in more robust data and analytics capabilities to provide our customers with new value measurements and insights through proprietary analytics tools.

• Use of Health Management Applications. In a healthcare market where a greater share of the responsibility for healthcare costs and decision-making has been shifting to consumers, use of information technology to assist consumers in making informed decisions about healthcare has also increased. We believe that, through our private portals, we are well positioned to play a role in this environment. However, our strategy depends, in part, on increasing usage of our private portal services by our employer and health plan clients' employees and members and being able to demonstrate a sufficient return on investment and other benefits for our private portals clients from those services. Increasing usage of our private portal services requires us to continue to develop new and updated applications, features and services. In addition, we face competition in the area of online healthcare decision-support tools and health management applications. Many of our competitors have greater financial, technical, product development, marketing and other resources than we do, and may be better known than we are. We also expect that, for clients that have been adversely affected by general economic conditions or are seeking to reduce expenses for other reasons, we may continue to experience some reduction in contract renewals for our private portal services, as well as some reductions in the size of existing contracts.

• International. The WebMD Health Network includes the following international sites: the co-branded Boots WebMD health information site for United Kingdom consumers at www.WebMD.boots.com; and Medscape France (www.medscape.fr) and Medscape Germany (www.medscapemedizin.de), our physician portals in those two countries. We also seek to monetize traffic to Medscape from physicians outside the United States. We plan to continue to pursue opportunities to expand the reach of our brands outside the United States. In certain markets outside the United States, we expect to accomplish this through partnerships or joint ventures with other companies having expertise in the specific country or region, while in other such markets we expect to rely primarily on our own internal resources.

• Healthcare Reform Legislation. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (which we refer to as the Affordable Care Act), was signed into law in March 2010. The Affordable Care Act makes extensive changes to the system of healthcare insurance and benefits in the United States. In general, the Affordable Care Act seeks to reduce healthcare costs and decrease the number of uninsured legal United States residents by, among other things, requiring individuals to carry, and certain employers to offer, health insurance or be subject to penalties. The Affordable Care Act also imposes new regulations on health insurers, including guaranteed coverage requirements, prohibitions on certain annual and all lifetime limits on amounts paid on behalf of or to plan members, increased restrictions on rescinding coverage, establishment of minimum medical


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loss ratio requirements, a requirement to cover certain preventive services on a first dollar basis, the establishment of state insurance exchanges and essential benefit packages, and greater limitations on how health insurers price certain of their products. The Affordable Care Act also contains provisions that will affect the revenues and profits of pharmaceutical and medical device companies, including new taxes on certain sales of their products. Many of the provisions of the Affordable Care Act that expand insurance coverage will not become effective until 2014 or later, and many provisions require regulations and interpretive guidance to be issued before they will be fully implemented. Some provisions do not apply to health plans that were in place when the Affordable Care Act was enacted and have not been substantially changed since. In addition, it is difficult to foresee how individuals and businesses will respond to the choices available to them under the Affordable Care Act. Furthermore, the Affordable Care Act will result in future state legislative and regulatory changes, which we are unable to predict at this time, in order for states to comply with certain provisions of the Affordable Care Act and to participate in grants and other incentive opportunities. In addition, Congress has considered various proposals to repeal some or all of the Affordable Care Act.

While we do not currently anticipate any significant adverse effects on WebMD as a direct result of the application of the Affordable Care Act to our business or on our company in its capacity as an employer, we are unable to predict what the indirect impacts of the Affordable Care Act will be on WebMD's business through its effects on other healthcare industry participants, including pharmaceutical and medical device companies that are advertisers and sponsors of our public portals and employers and health plans that are clients of our private portals. Healthcare industry participants may respond to the Affordable Care Act or to uncertainties created by the Affordable Care Act by reducing their expenditures or postponing expenditure decisions, including expenditures for our services, which could have a material adverse effect on our business. However, we believe that certain aspects of the Affordable Care Act and future implementing regulations that seek to reduce healthcare costs may create opportunities for WebMD, including with respect to our personal health record applications and health and benefits decision-support tools and, more generally, with respect to our capabilities in providing health and wellness information and education. For example, the Affordable Care Act encourages use of wellness programs through grants to small employers to establish such programs, permission for employers to offer larger rewards than under prior law, in the form of waivers of cost-sharing, premium discounts, or additional benefits, to employees for participating in these programs and meeting certain standards, and the inclusion of wellness services and chronic disease management among the essential health benefits that certain plans are required to provide. In addition, in connection with the implementation of the Affordable Care Act, we have launched a new channel on WebMD.com that provides information and decision-support tools to help consumers understand their options and choose an appropriate health plan based on their needs. However, we cannot yet determine the scope of the other opportunities that the Affordable Care Act may create or what competition we may face in our efforts to pursue such opportunities.

• Other Initiatives. We are pursuing, and intend to continue to identify, new business opportunities where our consumer and physician audiences and our resources can be leveraged to develop additional products and services. For example, we are in the early stages of developing the capabilities to position WebMD and Medscape as a hub for a set of services that will facilitate information exchange and digital communication between healthcare providers and their patients. As an initial step, the recently released version of our flagship WebMD App for iPhone® will support the new "Patient Instructions" feature available to healthcare professionals in our Medscape App. Medscape Patient Instructions allows physicians and other medical professionals to securely send education and instructions on conditions, procedures and drugs to their patients. Patients can securely and conveniently read the instructions and information on the WebMD App for . . .

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