Too Portly for Profits
From today's TSCM:
Gorging on Deals Has Left WebMD Too Portly for Profits
By Tish Williams
Senior Writer
Originally posted at 9:10 AM ET 3/26/01 on RealMoney.com
You know the WebMD (HLTH:Nasdaq - news) feeling.
It's more than a Sunday morning food hangover -- your stomach rebelling from last night's bread, appetizer, full salad, thick steak, three glasses of wine, creme brulee and after-dinner cheese. WebMD CEO Martin Wygod is trying to work off a continuous two-year tasting menu of around 15 acquisitions and 50 content partnerships. WebMD made itself a big name by gobbling up all the traffic it could get its hands on, but these days Internet advertising can't pay the hefty price tag of those deals. Wygod's got to shed the weight and strengthen WebMD into an athletic provider of services and software to health care providers.
A wafer-thin mint?
WebMD reported its fourth-quarter earnings Thursday, putting a close to a 2000 of rebuilding. You might be surprised to hear that the health-related dot-com poster child had revenues of $775.3 million in 2000. The biggest piece of the WebMD revenue pie represents its transaction-processing business, or $94.1 million of the fourth quarter's $199 million in revenue. You might not be surprised that the content side of the business is a pool of acid, sizzling away the company's tender stomach lining.
WebMD took $408 million in charges in the fourth quarter, most of that related to fatty content deals made in those heady days of 1999. Back before the current management team was in place, WebMD dug into one of the great credibility builders of the day: deals with high-profile partners News Corp. (NWS:NYSE ADR - news), Microsoft (MSFT:Nasdaq - news) and DuPont (DD:NYSE - news). Fat lotta good those content-based deals do WebMD now that its major strength is the information technology it uses to connect doctors, suppliers, insurance providers and the like.
Acquired CEO Wygod, who was made co-CEO after WebMD bought Medical Manager and CareInsite, comes at the health care industry from the technology side. He spent 2000 popping Tums and working off the empty calories WebMD packed on when it was trying to make a name for its portal under WebMD's founder, once co-CEO and now alumnus Jeff Arnold.
Previously tempting and delicious, now a pool of bile floating north of the tonsils.
Take the biggest of the deals, a partnership with News Corp. to build a joint cable TV venture called the Health Network. WebMD hired ABC (DIS:NYSE - news) Television President Patricia Fili-Krushel and offered News Corp. a deal that would've added up to 21.3 million HLTH shares to Rupert Murdoch's empire. With WebMD gunning for transaction fees and a new handheld device effort, the venture made little sense. Wygod took a $279 million write-off in negotiating an end to the deal, handing the Health Network venture off to News Corp. and getting $205 million in advertising for his trouble.
WebMD did the same with Microsoft, writing up a lower-fat agreement that exchanges MSN exposure for WebMD's use of Microsoft products in its portal and the wireless handheld device WebMD hopes to get to doctors by the end of 2001. WebMD and DuPont chucked their content deal, leading to a $33.8 million charge.
"They've announced a two-phased restructuring. First, to integrate the 15 different companies represented by WebMD, which certainly is a nightmare," says UBS Warburg's Michael Clulow, who upgraded WebMD to a buy rating Friday (his firm has done banking for the company). "The second part is to look at all contracts -- what makes sense, what should be renegotiated -- and rationalize the product line."
Keep in mind, WebMD is expected to provide a lot of growth, while its management team is busy burning off the undesirable excess of years past. Wygod's got decades of experience in the industry, turning down the CEO spot at Merck before his days at Medical Manager. But he's spent the better part of a year just slimming WebMD down. Meanwhile, the Street waits for WebMD to make a profit--- current estimates show the company moving into the black in three or more quarters.
WebMD was just one of dozens of companies building its reputation on a vast array of content partners. Imagine the companies that gobbled up all the AOL exposure their soon-to-be precious dollars could buy. WebMD is a fine example of dot-com bingeing, but it's not the only company loosening its belt to make the pain go away. How many others are using up precious time and cash reserves undoing boom-time gorging? |
