WebMD starts to recuperate

Online health company WebMD may be on the road to recovery, but analysts said the company still has a long way to go before it's back in full health.

On Thursday, the Internet healthcare information firm reported a smaller-than-expected loss for the fourth-quarter, topping First Call's consensus estimate for a loss of 16 cents a share by two pennies. Elmwood Park, N.J.-based WebMD said losses shrank to $51.8 million, or 14 cents per share, excluding restructuring, integration and non-cash expenses. The company also said it would exit the year with a profit before restructuring, integration and non-cash charges.???

WebMD (Nasdaq: HLTH) shares were up 88 cents to $6.69 Friday, or 15 percent, Friday morning.?

Although WebMD, which was built through a series of acquisitions, is in the middle of a big restructuring effort, analysts said the company's fourth quarter shows improvement. SG Cowen called WebMD a "strong buy."???

Wall Street has always had high expectations for the company formerly known as Healtheon/WebMD, largely because of its connection with Netscape co-founder Jim Clark, who helped start Healtheon. Clark resigned from the company's board in February, along with co-CEO Jeffrey Arnold, leaving CEO Martin J. Wygod at the helm.

In order to grow quickly, WebMD went on an acquisition binge. It acquired Envoy in May, and just last September, got final shareholder approval for the acquisitions of Medical Manager (Nasdaq: MMGR) and its CareInSite (Nasdaq: CARI) subsidiary, as well as a deal with OnHealth Network Corp. (Nasdaq: ONHN). WebMD recorded $408 million in restructuring?and?integration?charges in the fourth quarter, and has said there is more to come.?

But WebMD has struggled to integrate its numerous acquisitions. Aside from renegotiating some of its mergers amid flagging share prices--in June, WebMD (Nasdaq: HLTH) just barely saved its acquisition with Medical Manager and its subsidiary CareInSite--the company also has a huge number of partnerships to renegotiate, in an effort to cut down on unprofitable contracts negotiated in the heyday of dot-com mania.?

Redoing deals, a first step

Last night, the company announced that it had signed a nonbinding letter of intent to revise its strategic partnership with Microsoft (Nasdaq: MSFT), and announced a similar revised deal with AOL Time Warner (NYSE: AOL) was in the works.

Management was confident that a revised deal with AOL Time Warner would be significant, but declined to provide details. The agreement is a done deal though, executives said. "If it doesn't come into play within the next two weeks, I'll give everyone on this call David Coburn's home number," Wygod said on the conference call, referring to AOL's senior vice president of business affairs.?

Analysts said the benefits of the new deals are not just financial. The contracts could also help WebMD overcome one of its biggest problems. "Due to the Microsoft funding and a potential expanded AOL relationship, healthcare groups who had shunned the company may going forward be inclined to work with WebMD," SG Cowen Securities analyst John Souter wrote in a research note.?

The company also just restructured its four-year deal with Medtronic to a?new?three-year arrangement, and has renegotiated deals with News Corp. and Dupont. And WebMD has become entangled in a court battle with Quintiles, a pharmaceutical outsourcing firm that is demanding WebMD continue to supply it with electronic health information. WebMD tried to pull out of the deal saying that it had given Quintiles too much data--data that could be used to identify a specific person.

Renegotiations have loaded the company with charges. Management indicated about $13 million of fourth-quarter revenue will disappear in the March quarter due to recently renegotiated partnerships. The company will lose some revenue as it eliminates non-strategic or non-profitable deals. WebMD also said the changes will continue to dent pro forma revenue for 2001, though the related cost savings will mean the company's operations will be break-even in the fourth quarter of fiscal 2001.???

On a conference call, analysts made it clear they wanted WebMD management to change bad deals quickly.?WebMD will finish "everything we can wrap up" in the next 60 days, Wygod said, but he added it was impossible to predict a timeline for certain deals because of conflicts inherited from acquired companies.

WebMD will take more charges as a result of the renegotiations in the next quarter and the June quarter, Wygod said.

Broader restructuring

Though WebMD is on the right track with its restructuring and renegotiating efforts, investors will have to be willing to stick it out for the long haul, analysts said. WebMD's restructuring is a multi-year project.??

Though SG Cowen's John Souter upgraded WebMD to "strong buy," from "buy," based on the company's restructuring progress, he added that the process "is a multi-year, not a multi-quarter event."?

Souter added that his upgrade is based more on the promise of the company's business model than its expectations of 2001 operating results.??

There were also a few negatives announced on the conference call. Management said that it doesn't expect growth until 2002, more one-time charges are likely this year, and 2001 estimates are coming down. The restructuring is also taking much longer than expected.??

Other analysts were also optimistic about the company's business plan. ING Barings analyst Ruby Holder maintained a "buy" rating and encouraged "investors to get re-familiarized with the story as we expect significant activity in the near term." Holder said that WebMD appears close to completing its renegotiations, which should position it to start delivering significant growth.

Morgan Stanley Dean Witter analyst Marie Rossi reiterated an "outperform" rating and also said that the company had been making progress, something that should soon be reflected in shares. "The stock appears to be at the low end of our valuation range," Rossi wrote.

But WR Hambrecht & Co analyst Josh Fisher opted to maintain his "neutral" rating.?

The company is "still in building mode," and its "outlook remains murky," Fisher wrote.??

Fisher reduced his 2001 revenue estimate by 11 percent to $742 million--near the low end of WebMD's new $740 million to $750 million range--and said he was disappointed by the company's unwillingness to answer questions about its business.??

"There remains significant uncertainty about WebMD's future growth strategy," Fisher wrote. The company didn't elaborate much on its plan to roll-out a new software for physicians on wireless devices which it has said is now in beta testing. "How much will doctors pay for these devices? How much do these handheld devices cost to deploy? How fast can WebMD scale this new business?"?