Healthways Up on Narrower-than-Expected Q1 Loss - Analyst Blog

Healthways Inc. HWAY posted a loss per share of 7 cents in the first quarter of 2014, lower than the loss of 12 cents per share in the prior-year quarter, an improvement of 41.7% year over year. Loss reported was also narrower than the Zacks Consensus Estimate of a loss of 11 cents per share.

The adjusted net loss for the quarter excludes non-cash interest expense of 3 cents per share and a settlement charge of 17 cents per share. Adjusted net loss for the quarter was $2.6 million, down 34.8% from a net loss of $3.9 million incurred in the same quarter last year.

Revenues for the quarter came in at $176.8 million, increasing 7.0% from $165.2 million in the year-ago quarter. Revenues were in line with the Zacks Consensus Estimate.

Shares of Healthways jumped nearly 11.3% after the company reported better-than-expected first-quarter results, to close at $18.16 at the last reported session.

Contract Activity

Healthways signed 20 contracts during the first quarter, including 5 with new customers, 7 expansions and 8 extensions. These contracts were broad-based among the company's four domestic customer markets: commercial health plans; Medicare Advantage plans; large employers; and health systems, hospitals and physicians.

Healthways also signed a significant new contract with a global Fortune 100 company for services beginning in the second quarter of 2014. The company won this contract from a long-term incumbent national health plan provider. Under the three-year agreement, the company will provide a broad set of services designed to improve employee well-being, reduce lifestyle risk factors, increase productivity and lower costs.

Healthways' latest win demonstrates the popularity of the company's proprietary Well-Being Improvement Solution among its customers. The company also has a substantial and active pipeline of potential contracts with new and existing customers in both domestic and international markets.

Margins

For the first quarter of 2014, gross profit rose 19.7% to $28.6 million from $23.9 million in the first quarter of 2013. Consequently, gross margin expanded 170 basis points (bps) to 16.2% from 14.5% a year ago.

Operating loss in the quarter escalated nearly fourfold (285.6%) to $10.5 million from a loss of $2.7 million incurred in the prior-year quarter while operating (loss) margin increased 430 bps to 5.9% from 1.6% a year ago.

Healthways reported adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of $12.2 million for the first quarter of 2014, up 12.8% from $10.8 million in the prior-year quarter. Adjusted EBITDA margin increased 40 bps to 6.9% from 6.5% in the first quarter of 2013.

Financial Position

Healthways had cash and cash equivalents of $2.2 million as of Mar 31, 2014, down 9.5% from $2.4 million as of Mar 31, 2013. Long-term debt was $262.9 million, down 2.2% from $268.8 million as of Mar 31, 2013. Consequently, long-term debt-to-capitalization ratio fell 220 bps to 47.1% from 49.3% a year ago.

During the first quarter, cash flow from operations fell significantly by 65% to $9.1 million from $26.0 million in the prior-year quarter. The decline was due to the timing of collections on accounts receivable as well as normal fluctuations. Capital expenditures declined 6.2% to $10.6 million from $11.3 million a year ago.

2014 Outlook

Healthways affirmed its 2014 financial guidance. Healthways expects adjusted earnings in a range of 11 to 26 cents per share for 2014. The current Zacks Consensus Estimate of 16 cents lies within the guided range.

Revenue guidance for 2014 remained in a range of $730 million to $760 million, reflecting an increase of approximately 10–15% over 2013. The current Zacks Consensus Estimate of $739 million lies within the guided range.

The company continues to expect EBITDA margins in a range of 10.5–11.5% for 2014. Operating cash flows for the full year are expected in a range of $75 million to $85 million, whereas capital expenditures are anticipated in a range of $40 million to $45 million.

Healthways expects revenues and earnings to grow sequentially through the year from first-quarter levels, primarily driven by new business wins, timing of recognizing performance-based fees and expanding revenues under existing contracts.

Our Take

We are impressed with Healthways' better-than-expected first quarter results with improved revenues and shrinking losses, as well as its consistent expectations for 2014.

Healthways continues to experience increased demand for its population health services and, in particular, its Well-Being Improvement Solution, which is expected to drive margin expansion and revenue growth going forward.

Furthermore, as health care costs rise and baby boomers continue to age, the need for fee-based specialized health solutions should only increase, which in turn will play into the hands of Healthways.

Currently, Healthways carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical services industry include Envision Healthcare Holdings, Inc. EVHC, BG Medicine, Inc. BGMD and Omnicare Inc. OCR. While Envision Healthcare Holdings sports a Zacks Rank #1 (Strong Buy), both BG Medicine and Omnicare retain a Zacks Rank #2 (Buy).