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Wall Street questions WebMD's AOL deal

The online health company passes off its new agreement with AOL Time Warner as a huge positive, but analysts say it won't mean much--at least for the next couple of years.

WebMD touted its renegotiated deal with AOL Time Warner on its first-quarter conference call Tuesday. But analysts on Wednesday said it won't help the online health company's prospects at least for the next couple of years.

Shares were down 92 cents, or 10 percent, to $8.13 in morning trading Wednesday. The drop added to the stock's steep decline of 53 percent so far for the year, even though after the company's fourth quarter, analysts noted that it could be on the road to recovery.

WebMD's efforts to renegotiate its many pacts are a part of the company's turnaround plan, analysts said. WebMD, built through a series of acquisitions, operates a consumer portal and provides software and services to doctors.

In addition to the AOL deal, WebMD has renegotiated deals with Microsoft, IDX, and others that were signed on in the dot-com heyday, when companies shelled out big bucks for exposure. The company's reworked agreements have resulted in hefty charges over the last few quarters, but should eventually help WebMD's bottom line.

And the bottom line could use some help. Including charges, WebMD lost more than $1 billion in its first quarter. Excluding restructuring, integration and noncash expenses, WebMD said its first-quarter loss narrowed to $32.7 million, or 9 cents per share. First Call's consensus estimate had expected a loss of 11 cents. Revenue more than doubled to $184.5 million, compared with $65.9 million in the same quarter a year ago.

The company also said it would cut an additional 350 jobs, or 7 percent of employees, as it attempts to make a profit before charges by year's end.

WebMD's focus, however, was on its rearranged deal with AOL Time Warner.

The new AOL deal, under which WebMD will provide content to AOL Health and other sites, is a revenue-sharing agreement that will begin by the end of the month. That's much better than the original 1999 agreement inked with CareInSite, which WebMD later bought. Under that deal, the company was to pay $30 million to AOL, and AOL would have the option to purchase 10 million shares of CareInSite stock, and another 10 million over the next year, according to WR Hambrecht analyst Josh Fisher.

Though WebMD may not be paying AOL under the new deal, it isn't getting much out of it either, Fisher said.

"WebMD executives were definitely upbeat about the deal. We were not," Fisher wrote in his research note. The deal is similar to the one Drkoop.com inked in 1999, where consumers were expected to store all health-related records on Drkoop's site, Fisher said. And that plan failed because consumers just weren't ready to store such personal information on the Net.

"Maybe consumers are ready now, but we do not see how WebMD will make money from this venture," Fisher wrote. The earliest WebMD would take in revenue from the deal is 2002, he predicted.

Much ado about nothing?
Fisher expressed surprise at the number of analysts who gushed over the deal on the conference call. "Maybe they were excited over the size and leveraging power of the deal, but as far as making money from it, that's another story," Fisher said.

UBS Warburg analyst Michael Clulow was upbeat about the new AOL agreement but said in a phone interview that "real growth will come one or two years from now." Nevertheless, the deal is "a huge positive" said Clulow, who emphasized that it gives WebMD an audience of 26 million AOL users--a hefty sum, especially when combined with its Microsoft MSN audience.

ABN AMRO analyst Ruby Holder called the deal "very very positive."

"It's not about adding revenue over the next two or three quarters, it's about how valuable the user base is over time," Holder said.

But other analysts were skeptical.

"Ho-Hum," Morgan Stanley Dean Witter's Marie Rossi titled her research note. The analyst was unimpressed by WebMD's failure to give financial details.

The AOL arrangement is "nice, but don't get too excited," said Goldman Sachs analyst Stephen Savas.

"It's important to note that WebMD does NOT have an exclusive," Savas wrote, also comparing the deal with the one Drkoop struck with the portal. The agreement adds to brand building, but "the value is not tangible...in the next year or two," he said.

Although the company is casting off one more tarnished deal, WebMD still has a ways to go. On the company's fourth-quarter conference call, CEO Martin Wygod had vowed the company would wrap up changes to all its deals in the next 60 days.

But WebMD still has a few renegotiations on the burner. It is still "in the process of negotiating new arrangements with Medic Computer Systems and others," according to the company's most recent filings with the Securities and Exchange Commission.

"They're still wrapping some up," Clulow said. "There'll be another one-time charge in the second quarter."