WebMD Won`t Act Khaki
May 22, 2001 9:15 AM (ET)
An apocryphal story can be just a legend or it can tell you something significant. In the case of WebMD (HLTH, Trade), the scuttlebutt that made me sit up and pay attention is significant, even if it isn't entirely accurate.
I don't know whether the following conversation actually took place, but this is what the venture-capital community is saying about WebMD's CEO Martin Wygod: Apparently, in late February or early March, Wygod called Kleiner Perkins partner John Doerr, one of the largest investors in WebMD, and told him that he should, "take his Silicon Valley managers and get out of Dodge, because the medical-services guys were going to make WebMD a success."
This is significant, because it tells us that Wygod knows doctors won't simply adopt the Web because the nerds tell them to -- that building a successful medical-services company takes a ruthless focus on what doctors actually need.
Good Medicine Takes Hold WebMD, which merged with Healtheon (the Kleiner Perkins-backed Web-based medical-software company) in November 1999, came under Wygod's control after it purchased his software company (Medical Manager) in September 2000.
This story about the dismissal of John Doerr's khaki-clad execs may not be completely true, but it does say that the venture community believes WebMD no longer thinks Web software is great for Web software's sake.
WebMD knows that it has to deliver real value to doctors, medical-office managers and hospital companies. Wygod has built two medical-services successes -- and the Silicon Valley managers, along with Healtheon founder Jim Clark, did not take the medical industry by storm.
Wygod's recent performance, including having beaten Street earnings estimates by two cents a share in the last quarter, is a sign that WebMD is taking hold of its destiny.
Heading for a Profit WebMD has healed most of the major wounds that led investors to flee the stock in early 2000 -- it had legions of personnel that were not adding value. More than 1,400 layoffs later, the company has pared costs while tripling quarterly revenue year-over-year.
The company recorded extraordinary depreciation charges related to acquisitions and a reorganization charges that totaled $968 million last quarter -- operating costs came in about $83 million higher than revenue. At current growth rates -- and it is reasonable to conclude that the last year has been one of the worst imaginable for a technology company, so the growth should continue -- WebMD will reach profitability in three to five quarters.
Consensus estimates project that WebMD will earn 12 cents a share in 2002. With $640 million in cash and short-term investments, as well as $179 million in net accounts receivable, WebMD is well positioned to reach profitability with cash left for strategic growth.
WebMD is still spending $125 million a quarter on marketing and administrative costs, a figure that can still use some trimming.
One long-term win on the marketing side was Wygod's resigning of strategic alliances with both AOL Time Warner (AOL, Trade) and Microsoft's (MSFT, Trade) MSN. WebMD will provide health content for these online services, keeping its brand in front of the public. That consumer identity is important to another key challenge WebMD faces.
Hand It to the Doctors Generally, the WebMD skeptics say that the real barrier to the company's success is doctors' resistance to technology. I don't agree that doctors resist the use of technology -- they seem to thrive on technology, when it helps their practices succeed.
Doctors' offices are increasingly automated, especially their interactions with health maintenance organizations. Medical offices are networked, but usually to proprietary systems. WebMD's business is to move the entire industry onto the Web, where data can be shared more seamlessly than in proprietary systems.
The real problem in medical offices is not in the last mile, like the consumer market, but in the last 30 feet, where the docs do their walking around. For a century, everything has been written down, but in hundreds of thousands of different doctors' handwriting. The Web, whether wireless or wired, takes away some of the individual qualities doctors cherish.
WebMD has to reduce errors in prescriptions and billing systems, as well as provide cross-industry standardized information that facilitates improved communication between doctors and their own systems, medical offices with HMOs, pharmacies, pharmaceutical companies, and other participants in the healthcare value chain.
Once the company has addressed these kinds of problems, which it is working toward through deals like the expanded alliance with IDX Systems Corp., a claims-processing partner, and insurance provider Aetna (AET, Trade), it will be well positioned to succeed.
WebMD shares have risen as high as 9.44 since the earnings announcement May 8 and now trade around 8.10. Looking out a year, to profitability, this is still inexpensive. Yes, WebMD is one of the infamous Internet Bubble stocks, but it has the legs to be a part of the post-bubble economy.
Ratcliffe is Chief Content Officer and Editor-in-Chief of the ON24 Network, a personalized financial broadcast network for individual investors. He is also a longtime executive and investor in the technology industry. Ratcliffe's insights and analysis of the high-tech industry will appear twice each week. WebMD is a holding in The Wired Investor portfolios, the model portfolios Ratcliffe manages through a subscription service. Positions can change at any time.
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