here's another of the recent reports... the one you mentioned was from May 2nd, so i doubt it will affect today's price....
HLTH: MORE THOUGHTS ON THE QUARTER--MARKET PERFORM
Deutsche Banc Alex. Brown - US Equities
Conan Laughlin
May 03, 2000
Laughlin, Conan 617-261-3722 05/03/2000
Deutsche Banc Alex. Brown
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HEALTHEON/WEBMD CORPORATION [HLTH] "MKT. PERFORM"
More Thoughts on the Quarter
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Date: 05/01/2000 EPS 1999A 2000E 2001E
Price: 19.75 1Q (0.21) (0.42)A (0.23)
52-Wk Range: 126 - 16 2Q (0.18) (0.34) (0.22)
Ann Dividend: 0.0 3Q (0.17) (0.29) (0.20)
Ann Div Yld: 0.00% 4Q (0.48) (0.24) (0.17)
Mkt Cap (mm): 3,555 FY(Dec.) (1.18) (1.29) (0.82)
3-Yr Growth: 50% FY P/EPS NM NM NM
CY EPS (1.18) (1.29) (0.82)
Est. Changed Yes CY P/EPS NM NM NM
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Industry: E-HEALTH CARE
Shares Outstanding(Mil.): 180.0
Return On Equity (1999) : 0.0%
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HIGHLIGHTS:
- We are following up on a brief note published yesterday to provide
further thought and analysis on Healtheon/WebMD's first quarter results.
- Overall the quarter was mixed, in our view, with strong total same-store
growth (+30% q/q) held back by continued weakness in transaction processing
revenues (+3% q/q).
- Advertising and e-commerce revenues were up sharply (+160% q/q), and
backlog now stands at $450 million, positive signs that our "monetizing the
network" thesis has some l-t traction.
- However, we are somewhat concerned by the structurally low nature of
gross margins, particularly given the significant contribution from
advertising/e-commerce revenues.
- We would wait for better visibility on: 1) a re-acceleration in
transaction revenues, 2) structural improvements in gross margins, and 3)
closure of the pending acquisitions of Envoy and Medical
Manager/CareInsite, before becoming more aggressive on HLTH shares.
Maintaining MARKET PERFORM rating.
DETAILS:
1Q00 RESULTS
Healtheon/WebMD reported first quarter results yesterday morning before the
market open. Revenue for the quarter was $65.9 million, ahead of the
Company's pre-released estimate of $62 million, $4 million ahead of our
(reduced) $61.9 million estimate, and a 98% sequential increase over 4Q99
($33.2 million). Same-store revenue increased 30% by our estimates from $47
million in Q499 to $61 million. Gross margin of 10% was in line with our
reduced estimate, yet not as high as we had hoped (see below). Cash
operating expenses of $92.4 million exceeded our $66.0 million estimate,
resulting in cash EPS of ($0.42) versus our ($0.31) estimate.
Same-Store Revenue Growth Analysis ($ millions)*
4Q99 1Q00 %Chg
Transactions $25.5 $26.4 3.5%
Advert/e-commerce 7.5 19.4 158.6%
Subscriptions 4.7 6.8 44.7%
Products/services 8.9 8.3 -6.7%
Total $46.6 $60.9 30.7%
*1Q00 transaction revenues excludes $2.5 million in estimated Kinetra
revenues. 1Q00 products & services revenues exclude $2.5 million in
estimated News Corp. revenues.
TRANSACTION BUSINESS REMAINS WEAK
Transaction revenue accounted for 44% of total revenue at $28.9 million.
This figure includes approximately $2.5 million in contribution from the
Kinetra acquisition (which closed on Feb 2). The same-store comparison in
4Q99 was $25.5 million, implying sequential revenue growth of roughly 3.5%.
Recall that 4Q99 transaction revenues were also weak, down 20-25% by our
estimates versus the 3Q99 (see below). We are optimistic that greater
integration with the physician practice software vendors (expected in 2H00)
will drive a re-accleration in the company's transaction business, though
we are taking a cautious stance on the timing of those initiatives relative
to our revenue growth assumptions.
Estimated Same-Store Transaction Revenues*
3Q99 4Q99 % Chg 1Q00 % Chg
Healtheon (as reported) $28.7 -- -- -- --
One-time revenue (6.0) -- -- -- --
Adj. Healtheon 22.7 -- -- -- --
% Transaction revs 75% -- -- -- --
Transaction revs 17.1 -- -- -- --
MEDE (as reported) 14.6 -- -- -- --
% Transaction revs 95% -- -- -- --
Transaction revs 13.9 -- -- -- --
Total Transaction Revs $31.0 $25.5 (22%) $26.4 +3.5%
* 1Q00 transaction revenues exclude $2.5 million in estimated Kinetra
revenues.
The total number of transactions grew to 131 million. The Company had a net
increase of 4 million Healtheon/MEDE transactions, and added 8 million
Kinetra transactions. The net increase in Healtheon/MEDE transactions was
adversely impacted (by 4 million transactions) as a result of the loss of
Rite-Aid and Walgreen's business tied to Healtheon/WebMD's strategic
partnership with CVS. Internet (real-time) transactions increased 41% in
the quarter to 4.8 million, though we note these transactions are not
necessarily incremenatal. Healtheon/WebMD ended the quarter with 40 payers
connected on a real-time basis, though the strong Internet transaction
growth was driven with only 6 of those payers live for the full quarter.
Our sense is that as Healtheon/WebMD converts batch EDI transactions to the
Web, the marginal unit economics will improve significantly.
Same-store Transaction Analysis:
Total 1Q00 transactions 131 million
Less: Kinetra 8 million
Adjusted 1Q00 transactions 123 million
Total 4Q99 transactions 119 million
% change +3.4%
STRONG GROWTH IN ADVERTISING/E-COMMERCE AND SUBSCRIPTIONS
Advertising & e-commerce revenue, which are generated from 1) page views on
consumer and professional sites and 2) access fees to third parties (i.e.
"monetizing the network") reached $19.4 million, or 30% of total revenue,
up from $4.1 million in 4Q99 (+159% from Q499 pro forma). Subscription
revenue, accounted for by 100K registered physician users and 21.5K
administrative users, increased 152% from 4Q99 to $6.8 million,
representing 10% of total revenue. Products and services revenue totaled
$10.8 million, or 16% of total revenue, an increase of $3.8 million from
4Q99.
Professional Subscriptions 4Q99 1Q00 %Chg
Doctors 68K 100K +47%
Administrative 12K 22K +79%
SIGNIFICANT BACKLOG ADDS REVENUE VISIBILITY
Healtheon/WebMD ended 1Q00 with $850 million in backlog revenue,
representing $450 million in advertising & e-commerce revenue, $250 million
in subscription revenue and $150 million in products & services revenue, in
addition to $1.16 billion in cash.
SOME CONCERNS ABOUT MARGINS
The first quarter gross margin of 9.9% was essentially in line with our
10.0% estimate. However, we are somewhat concerned about the structurally
low nature of gross margins, particularly given the significant
outperformance on the advertising/e-commerce line, which should carry a
very high gross margin (think Yahoo! and AOL). Total COGS in the quarter
were $59.4 million. Management indicated that there were roughly $8 million
in revenue sharing commissions (paid back to Microsoft et. al.), and $16
million in content licensing and development costs, suggesting the company
generated a negative gross margin in its advertising/e-commerce business in
the quarter. Over time, we expect advertising and e-commerce to generate
significant margins for the company, though we are taking a cautious stance
vis-a-vis the timing and magnitude of that contribution. We are looking for
gross margins of 15% in 2Q00, 18% for 2000 and 31.5% in 2001.
Expenses for the first quarter rose to $92.4 million, well ahead of our
$66.0 million estimate and $57.2 million in 4Q99, driven predominantly by
sales and marketing spending. Development and engineering expense and G&A
expense were both below our estimate, at $11.6 million (versus our $12.0
million estimate and $8.8 million in 4Q99) and $12.7 million (versus our
$14.0 million estimate and $12.5 million in 4Q99), respectively. Sales &
Marketing expense increased 90% sequentially from 4Q99 ($35.9 million) to
$68.2 million, well ahead of our $40 million estimate, leading to a widened
operating loss of $85.9 million versus a $58.8 million loss in 4Q99.
CLOSING ENVOY ACQUISITION IS KEY TO THE STORY
Currently, the DOJ is conducting a second review of the Company's pending
acquisition of Envoy Corp., which was announced in January of this year.
While we remain optimistic that the transaction will close in the second
quarter, it is difficult to know what the Justice Department will decide.
It is our belief that a decision to block the merger would have a negative
impact on the stock given the importance of payor connectivity to
Healtheon/WebMD's longer-term business model. We became much more bullish
on the Healtheon/WebMD story after the Envoy acquisition was announced.
Envoy is the nation's largest processor of health care EDI transactions,
processing approximately 1.4 billion pharmacy, medical, dental and patient
statement transactions annually. Upon closing the acquisition,
Healtheon/WebMD would have an estimated run-rate of more than 2 billion
"administrative" transactions flowing through its network, representing
roughly 42% of the estimated 4.7 billion claims processed in 1999, and more
than 65% of all claims processed electronically. Envoy's connections to
approximately 250K physicians, 35K pharmacies, 47K dentists, 4,500
hospitals and over 900 payors, would significantly expand Healtheon/WebMD's
reach, and ability to monetize its network. Revisiting the terms of the
agreement, Healtheon/WebMD offered 35 million shares and $400 million in
cash, which based on current prices, is valued at $1.1 billion.
DSOs DECLINE SEQUENTIALLY
On a pro forma basis factoring a full quarter's contribution from Kinetra
and News Corp., DSOs declined 6 days to 95. Our report yesterday stating
that DSOs were 100 days did not factor the purchase acquisitions in the
quarter (Kinetra and News Corp). Deferred revenues grew nicely in the
quarter to $10.5 million from $4.8 million.
MODEL UPDATED AND AVAILABLE
We have updated our model for all of the closed transactions. Our 2000
revenue estimate is $319.8 million, with EBITDA loss estimate of $283.1
million. Our 2001 revenue and EBITDA loss estimates are $461.4 million
(+44%) and $191.6 million, respectively. Below is a table of our revenue
mix estimates.
Estimated 2000 and 2001 Revenues
2000E % Total 2001E % Total
Transactions $124.6 39% $146.9 32%
Advert/E-Commerce 99.9 31% 167.7 36%
Subscriptions 42.5 13% 70.8 15%
Products/Services 52.8 17% 76.0 16%
Total $319.8 100% $461.4 100%
y/y growth % NA +44% |
