HLTH (HLTH)

TOP CONTRIBUTORS

Naveen Kasthuri

Dan Pan

HLTH's (NASDAQ: HLTH) primary business is its investment in the online health information website WebMD Health (WBMD). With 2008 sales of $382.7 million, HLTH Corp. provides ad-supported medical content to consumers and private online portals for employers and professionals to manage health records.^[1][2] As of first quarter 2009, HLTH owned 84% of WebMD Health (WBMD), which is its only business segment.^{[3] [4]} 95.7% of HLTH Corp's revenue and return on investment comes from WebMD's healthcare-oriented website via the website's advertisements and subscriptions to its IT-based healthcare management service.^[5][6] The remaining 4.3% of HLTH Corp's revenue come from WebMD's magazine publishing segment.^[6]

With healthcare costs increasing an average of 7.6% each year since 2000, employers and healthcare providers are moving medical records online for lower costs. ^{[7] [8]} The increasing revenue that WebMD receives due to employers moving health records online is a large contributor to WebMD's average 21.8% year-over-year increase in revenue since 2006.^[9][6] This corresponds to the 19.8% increase in HLTH Corp's WebMD business segment.^[6]

WebMD depends on contextual advertising on its website for revenue, with 72% of the company's revenue coming from advertising as of first quarter 2009.^[10] Such a dependence makes it vulnerable to general economic conditions. In the third quarter of 2008, a weakening of the U.S. economy caused WebMD to revise their 2008 revenue forecasts downward by 4%.^[11] WebMD's online advertising increased by 20.3% over that time, in line with the revised forecast.^[10]

Business Overview

HLTH Corp Revenue and Net Income from 2006 to 2008^[13]

Business and Financial Metrics

HLTH Corporation was previously known as Emdeon. In May 2007, the company sold all stock of Emdeon Business Services and renamed itself.^[14] Due to this, HLTH total revenue decreased by 63.5% or $577.2 million from $908.9 million in 2007.^[13] The loss resulted entirely from HLTH's decision to sell all holdings of Emdeon Business Services. ^[13][15] Thus, the divestment also resulted in a 78.5% decrease in operating costs.^[13] The increase in revenue due to the company's investments in WebMD amounted to $98 million and minimized the shock to the company.^[15] Due to the selling, HLTH Corp's 2006-2008 net income figures are ambiguous. In essence, the company's 2008 net income has decreased by a proportionate 26.8% since 2006.^[13]

With the previous investments sold, the company focused on planning further operations with WebMD Health (WBMD). In January of 2008, HLTH Corp planned a merger with WebMD and expected to complete the merger quickly due to HLTH's 84% stake in WebMD.^[16] However, the 2008 financial crisis forced HLTH to withdraw the heavily planned merger with WebMD Health (WBMD) in October 2008. ^[16] The merger termination contract specified that HLTH was responsible for the costs that WebMD had incurred due to the planned merger.^[16] For the first nine months of 2008, the merger planning process and costs have totaled to roughly $6 million with no return on investment due to the mutual cancellation of the merger.^[17]

Excluding this merger cost, HLTH Corp's operating costs for the year of 2008 were $138.4 million, or 36.7% of the revenue.^[18] Since 2008, HLTH Corp's operating costs have increased by 17.9% almost entirely due to the company's focus on marketing and selling WebMD's advertisement and health information services.^[18] General administrative costs declined by 14.2% as a result of the selling of Emdeon Business Services.^[18]

Business Segments

HLTH Corp Revenue Mix^[6]

• WebMD Online Services (95% of Total Revenue)^[6] runs the WebMD website and makes money through advertisements and subscription fees from its health record management portals. 71.5% of WebMD Online Services revenue comes from selling sponsored advertisement space on its website to health institutions.^[10] WebMD also offers private online health portals that provide employers and health institutions health record management. These Health IT services provided by WebMD comprise of 28.5% of WebMD Online Services revenue.^[10] Revenue from WebMD Online services grew by 17.0% or $53.1 million in 2008 primarily due to a 20.3% increase in WebMD advertisement revenue.^[6] The increase in advertisement revenue is attributed to the increase in the number of unique online sponsored advertisement programs.^[6] This segment contributed $275.79 million in revenues for HLTH Corp in 2008.^[6]

• WebMD Publishing Services (5% of Total Revenue)^[6] publishes two periodicals, The Little Blue Book and WebMD The Magazine. The Little Blue Book is a physician's directory for practicing doctors and WebMD The Magazine is distributed free of charge to patients in waiting rooms.^[19] The revenue is primarily from advertisements in both of WebMD's publications. Revenue from WebMD Publishing Services decreased by 12.1% in 2008 due to a decrease in advertisement partnerships in the two magazines.^[20][6]. This segment contributed $16.4 million in revenues for HLTH Corp in 2008. ^[6]

• Divested and Discontinued Operations: While HLTH Corp maintains that it is currently invested only in two business segments, revenues from discontinued operations and previous projects such as Porex and ViPS continue to trickle in. In the year of 2008, discontinued operations accounted for approximately $93 million in revenues.^[21] However, HLTH Corp deems this revenue transient and limits accounting for this revenue source in its annual reports.

Key Trends and Forces

Web Ad-based Revenues are not Recession-Proof

The U.S based online advertisement revenue optimization service Pubmatic conducted a survey in the fourth quarter of 2008 and reported that there was a significant decline in Q4 2008 on a year-over-year basis.^[22] Large advertising websites such as Google and Yahoo had average online advertisement prices decline an average of 54%.^[23][22] Medium-sized websites such as WebMD Health (WBMD) had prices decline by an average of 12%. Due to the 2008 financial crisis, most companies had to decrease the overall advertisement budgets.^[22][23] Since 72% of WebMD's revenue come from online advertisement hosting, WebMD has seen a decline in revenue growth.^[10][11] WebMD issued a warning and a lowered earnings forecast specifically citing problems in the company's advertisement revenue.^[11]

Global Movement Towards Digitizing Healthcare

As of 2008, 23.6% of WebMD's revenue comes from the fast-growing sector of healthcare database management. ^[10] WebMD assists healthcare workers by offering private portals to employers, healthcare providers, and hospitals to help manage records online.^[10] Since 2005, there has been an 18.4% increase in hospitals using digital healthcare services and digital patient records.^[24] HIMMS, a market research unit, reports that in 2008, hospitals using IT services increased by up to 10%.^[24] With 1620 out of the roughly 5700 hospitals using HIT, HIMMS analysts report that the U.S hospital IT market is nearly $33 billion in the US.^[25] Similarly, Credit Suisse analysts estimate that $30 billion dollars of opportunity exist globally for healthcare information technology services.^[26] They also report that although the 2008 financial crisis slowed spending on IT in the short term, the migration to IT-based healthcare is inevitable.^[24] The emergence of the electronic medical record has helped hospitals manage data efficiently. Whereas transportation and human error were important factors in paper healthcare systems, digital systems are instant and accessible without error. Hospitals, insurance agents, and employers use IT services to ensure smooth performance, ease of operability, proper patient care, and financial flexibility. While the adoption of IT services to manage health institutions has been slow, there is increasing demand for permanent IT-based healthcare systems. ^[25] HLTH Corp, WebMD Health and other companies that offer health information services have the opportunity to provide their services to health institutions in the long term.^[27]

Increasing Healthcare Costs have Forced People to Move Online

With healthcare costs increasing on an average of 7.6% each year since 2000, employers and healthcare providers are moving medical records online or lower costs. ^[28][29] Rather than spending for health insurance or visiting the doctor, people are increasingly self-reliant for healthcare. Similarly, employers are moving medical records online rather than hiring doctors. In 2008, a Harris Interactive reported that 61% of all adults U.S, or 150 million people have gone online to obtain healthcare information.^[30] As more countries modernize, more people start to rely for online help due to rising healthcare costs. A Harris Interactive survey reported that 86% of internet users who consult health websites find their help reliable.^[31] Reliable information ensures sustained online traffic for health information. Since WebMD Health relies on the internet for revenue, reliability and global modernization means larger web traffic and larger ad revenues. WebMD has been growing at an average of 21.8% year over year since 2006 exclusively due to larger web traffic, ad revenues, and private subscription services.^[9][10]

Competition

WebMD's public network of sites competes with portals hosted by Yahoo! (YHOO), MSN, and AOL offering health and wellness advice. The market for online health services and digital health records is becoming increasingly competitive with Google's launch of Google Health^[32] and Microsoft's launch of Healthvault.^[33]

HLTH Corporation's competitors for WebMD's health record management portal include:

• McKesson (MCK): is one of the world's largest corporations in the pharmaceutical distribution industry. ^[36] McKesson provides enterprise-level software services such as healthcare database management to hospitals and other healthcare organizations.
• Cerner (CERN) : Cerner Corporation is the second largest provider by market share of healthcare information technology (HIT) services in the healthcare industry.^{[37] [38]} Cerner's primary business involves leasing software to help medical organizations manage data and finances electronically.
• Eclipsys (ECLP): Eclipsys Corporation develops and licenses proprietary software for the healthcare industry. The end users of the software include clinicians, physicians, nurses, and administrative support and ancillary staff of healthcare organizations. The company also provides professional services such as implementation, integration, product, training, and maintenance support, remote hosting applications, network services, and consulting services to its customers.
• Allscripts Healthcare Solutions (MDRX): AllScripts HealthCare Solutions provides clinical software and information services for physicians that assist in medication.

Market Share of Companies in Healthcare IT sector ^{[39] [40]}

References

1. ↑ Yahoo!: Healthcare Information Services Industry Leaders and Laggars
2. ↑ Yahoo! Key Statistics: HLTH Corp
3. ↑ ^{3.0 3.1} About HLTH
4. ↑ HLTH Corp 2008 Annual Report, Item 1, Introduction, Page 1 (PDF 8)
5. ↑ HLTH Corporate Profile
6. ↑ ^{6.00 6.01 6.02 6.03 6.04 6.05 6.06 6.07 6.08 6.09 6.10 6.11 6.12} Calculation from: HLTH Corp 2008 10-K, Item 7, Revenue by Operating Segment, page 83 (PDF 90)
7. ↑ Kaiser data on the growth in Healthcare from 2000-2005
8. ↑ Government data on the growth in Healthcare in 2006 and 2007
9. ↑ ^{9.0 9.1} Calculation from: Morngingstar Financials: WebMD(WBMD)
10. ↑ ^{10.0 10.1 10.2 10.3 10.4 10.5 10.6 10.7} Calculation from: WebMD Health 2008 10-K, Item 7. Result of Operations by Operating Segment, page 64
11. ↑ ^{11.0 11.1 11.2} Marketwatch News: WebMD Cuts 2008 Forecast, April 23, 2008
12. ↑ Marketwatch: WebMD profile
13. ↑ ^{13.0 13.1 13.2 13.3 13.4} HLTH Corp 2008 10-K, Result of Operations, page 75(PDF 82)
14. ↑ HLTH Corp 2007 10-K, Item 1, Introduction, page 1
15. ↑ ^{15.0 15.1} HLTH Corp 3rd Quarter 10-Q, November 10, 2008, page 14
16. ↑ ^{16.0 16.1 16.2} HLTH Corp 3rd Quarter 2008 10-Q, Item 2, Termination of Proposed Merger with WHC, page 34
17. ↑ HLTH Corp 3rd Quarter 2008 10-Q, Item 2, Result of Operations, page 47
18. ↑ ^{18.0 18.1 18.2} HLTH Corp 2008 10-K, Item 7, Result of Operations, page 75(PDF 82)
19. ↑ HLTH Corp 2008 3rd Quarter 10-Q, Item 2, Introduction, Segments, page 33, Nov 10, 2008
20. ↑ HLTH Corp 2008 3rd Quarter 10-Q, Item 2. Results of Operations by Business Segments, page 51, Nov 10, 2008
21. ↑ Calculation from: HLTH Corp 2008 10-K, Item 6, Selected Financial Data, page 59 (PDF 66)
22. ↑ ^{22.0 22.1 22.2} Q4: Web Ad Economy Enters Recession; Display Ad Prices Decline
23. ↑ ^{23.0 23.1} Pubmatic Ad-Price Index Q4 2008, page 9
24. ↑ ^{24.0 24.1 24.2} Health Data Management: 06/30/08
25. ↑ ^{25.0 25.1} MSNBC: Severe US Recession Already Having Major Effect on the Healthcare Sector, 08/01/2009
26. ↑ InvestorPlace: Healthcare Stimulus would Boost Cerner, 12/23/2008
27. ↑ Seeking Alpha: 5 Bear Market Tech Opportunities, 12/02/2008
28. ↑ Kaiser data on the growth in Healthcare from 2000-2005
29. ↑ Government data on the growth in Healthcare in 2006 and 2007
30. ↑ Harris Interactive HealthCare News 2008, Volume 8 Issue 8, page 1
31. ↑ Harris Interactive HealthCare News 2008, Volume 8 Issue 8, page 4
32. ↑ Google Health Launch
33. ↑ New York Times article on Microsoft's entry into the personal health market HealthVault
34. ↑ Compete.com Website Information
35. ↑ WebMD 2008 10-K, Item 1, Introduction, page 1 (PDF 8)
36. ↑ Wikinvest: McKesson
37. ↑ Cerner Corporate Profile
38. ↑ Yahoo Key Statistics: CERN
39. ↑ ^{39.0 39.1} CIBC World Markets Corp Cerner Corp. Analyst Cover Initiation, page 5, 2/22/2007
40. ↑ ^{40.0 40.1} SmartMoney: Upward Price Momentum Bodes Well for Stocks, 3/19/2007
41. ↑ ^{41.0 41.1 41.2 41.3} MarketWatch Company Financials