HWAY 3Q Down Y-Y; Outlook Slides

Zacks

Healthways (HWAY) reported third quarter 2012 adjusted (excluding one-time expenses) earnings per share of 15 cents, beating the Zacks Consensus Estimate of 13 cents per share but falling short of the year-ago earnings of 28 cents per share.

Net income declined 46.9% year over year to $5 million. The company’s results continue to reflect the loss of the Cigna (CI) contract.

Revenues

Revenues decreased 5.5% year over year to $166.6 million in the third quarter, missing the Zacks Consensus Estimate of $172 million. Revenues were driven by the acknowledgement of performance-based fees. Upon exclusion of the Cigna contract, revenues improved 6% year over year.

Margins

Gross margin dipped 260 basis points year over year to 23.9% in the quarter. Healthways posted an operating margin of 7.1%, down 420 basis points year over year. Selling, general and administrative expenses increased 3.8% year over year to $14.7 million.

Balance Sheet

Healthways ended the third quarter with cash and cash equivalents of only $2.6 million, down almost 61.3% year over year. Long-term debt was $281.6 million, up 3.2% year over year.

Contract Activity

Healthways inked 30 new, expanded or extended contracts in the quarter. This count included twelve fresh contracts, eight expanded and extended contracts and ten extended contracts. These contracts are spread across domestic as well as overseas markets.

Outlook

For 2012, Healthways revised its forecast revenues to a narrower band of $670 million and $685 million compared with the earlier guidance of $665 million to $705 million. This estimate includes domestic revenues in the range of $643 million to $653 million and overseas revenues of about $27 million to $32 million.

The company also lowered its forecast earnings per share in the range of 24 cents to 30 cents for 2012 compared to its prior guidance of 38 cents to 50 cents. This estimate comprises earnings per share from domestic sources in a range of 24 cents to 28 cents and from overseas operations in a band of zero and 2 cents.

Net operating cash flow for 2012 is expected in a range of $50 million to $65 million compared to the earlier forecast of $60 million to $80 million. The company expects to incur $50 million as capital expenditures for the current year.

For 2013, Healthways envisages revenues in a range of $710 to $750 million (after accounting $80 million for Cigna contract loss). Moreover, the company expects organic revenues for 2014 to exceed 2013 revenues by at least $85 million with incremental revenues from additional contracts. EBITDA margin for 2013 is expected in a band of 10% and 13% (closer to the 2012 band of 11% and 13%).

The Healthways model encourages people to make favorable lifestyle changes that lead to enhanced well-being, reduced healthcare costs, improved performance and economic value for customers. The company has invested in technology platforms that provide scalable support with large populations. It has tie-ups with a large proportion of U.S. health plans and counts many millions of lives in its customer base.

Healthways is the leader in a strategically critical and rapidly evolving part of the health care services market. Its fitness program (SilverSneakers) for seniors is available at 14,000 centers across the U.S. and caters to several million eligible enrollees. Despite its unique scalable model, Healthways may face many challenges in the short term. The company competes with Express Scripts Holding Company (ESRX) among others.

Healthways carries a Zacks #4 Rank, which translates into a short-term Sell rating.

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