Healthways Drops on Q3 Earnings Miss

Zacks

Shares of Healthways Inc. (HWAY) plunged 31% to $11.41 on Oct 25, following the company’s dismal third-quarter 2013 financial results. Earnings dropped by a whopping 66.7% to 5 cents per share from the year-ago level of 15 cents and also missed the Zacks Consensus Estimate of 11 cents.

Net income came in at $1.8 million, down 64% from $5.0 million a year ago. Lower participation in the company’s wellness programs as a result of significant headwind in the underlying industry, led to the downfall. Moreover, management had overestimated the number of risk lives available in 2013 for its total population management services to health systems.

Revenues remained flat year over year at $166.6 million in the quarter, trailing the Zacks Consensus Estimate of $185 million. However, excluding the two terminal contracts, including the one with Cigna Corp. (CI), revenues improved 14.2% year over year.

As gross profit dipped 10.8% to $35.5 million, gross margin contracted 260 basis points (bps) to 21.3% in the quarter. Selling, general and administrative expenses increased 11.6% to $16.4 million. Healthways witnessed a massive operating margin contraction of 340 bps year over year to 3.7% in the quarter.

Contract Activity

Healthways inked 23 contracts in the reported quarter. This count included 7 fresh, 11 extended and 5 expanded contracts. The company has forged new contracts with Beacon Health Systems, Georgia Department of Community Health, Premera Blue Cross and extended its existing contract with Australia-based Hospitals Contributions Fund, BlueCross BlueShield of Tennessee, Highmark Health Services and L.A. Care Health Plan.

Balance Sheet

Healthways ended the quarter with cash and cash equivalents of $2.8 million, up 55.6% from $1.8 million at the end of 2012. Long-term debt was $246.9 million, down 11.3% from $278.5 million at the end of 2012.

Cash flow from operating activities increased to $51.3 million in the first nine months of 2013 compared with $23.4 million generated in the comparable year-ago period. HWAY generated net cash flow from operations of $12.5 million during the quarter under review.

Outlook

Healthways lowered its guidance for 2013, based on the company’s disappointing results in the first nine months of 2013 along with sluggish contribution of certain contracts to top-line growth. Management asserted that fluctuating commercial health plan membership coupled with lower number of risk lives available are the two main reasons for the weak outlook.

HWAY scaled down its full year-2013 revenue expectations to the range of $665-675 million from the earlier range of $710-$750 million. Fourth-quarter revenues are forecasted in the band of $171 million to $181 million. The current Zacks Consensus Estimate for the full year and fourth-quarter 2013 are $668 million and $173 million, respectively.

HWAY also tweaked its bottom-line outlook to reflect slower-than-anticipated market transition rate of risk-based lives to Accountable Care Organizations (ACOs). Management anticipates loss per share of about 4 cents to 10 cents compared with the prior outlook of earnings per share of 18–28 cents for 2013.

The current Zacks Consensus Estimate for earnings of 24 cents per share is pegged significantly higher than the revised guidance. Fourth-quarter 2013 earnings are expected in the range of nil to 6 cents. The Zacks Consensus Estimate of 26 cents also lies above the guided range.

The company also divulged its outlook for 2014. Revenues are expected in the band of $725 million to $760 million. Healthways continues to expect EBITDA margins to expand sequentially in 2014 and beyond.

Our Take

Healthways’ dwindling third-quarter results along with the weak outlook for 2013 and beyond, has raised significant concerns among investors regarding the future trend of the stock. The unexpected slowdown in the underlying market significantly hurt the company’s profitability, eventually leading management to lower its guidance for the rest of the year.

HWAY currently has a Zacks Rank #5 (Strong Sell). While we strongly recommend to avoid this stock, until there are signs of improvement, other medical services companies that are expected to do well include Express Scripts Holding Company (ESRX) and PAREXEL International Corporation (PRXL). Both these stocks carry a Zacks Rank #2 (Buy).

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