Healthways (HWAY) reported third-quarter fiscal 2011 earnings per share of 28 cents, beating the Zacks Consensus Estimate of 27 cents but falling short of the year-ago earnings of 30 cents per share. Net income dropped 10% year over year to $9.5 million.
Revenues and Margins
Revenues came in at $176.2 million in the third quarter, up 3.3% year over year, beating the Zacks Consensus Estimate of $175 million.
Healthways’ operating income dropped 3.1% year over year to $20 million in the reported quarter. Operating margin shrank to 11.3% from 12.1% in the year-ago quarter.
Balance Sheet and Cash Flow
The company had cash and cash equivalents of only $6.6 million, as of September 30, 2011, more than double year over year. Long-term debt stood at $272.8 million, up 17.8% year over year. Debt to capitalization was 38.4%, as of September 30, up 430 basis points (bps) during the quarter.
Contract Activity
During the reported quarter, Healthways inked 28 new, expanded or extended contracts. The company experienced a 60% year-over-year growth in Requests for Proposals (“RFP”). Close to 50% of the fresh contracts and RFPs were concentrated on total population health management. The company also derived new opportunities from direct contacts (on a non-RFP basis).
Healthways announced a significant contract, in the third quarter, which both extended and expanded its pre-existing 7-year relationship with Wellmark Blue Cross and Blue Shield for 5 more years. This deal will support the Iowa Healthiest State Initiative. Its main effort will be the implementation of the 10-community Blue Zones Project, which is the biggest integrated well-being improvement effort launched till date.
Healthways also launched a contract with Equity Healthcare LLC, a subsidiary of Blackstone Group. The purpose was to aid portfolio companies of the concerned private equity firms provide cost-effective and quality care to employees. Healthways will provide its integrated Well-Being Improvement Solution under a three-year contract. The company will strive to lower cost and enhance employee health for the portfolio companies of Equity Healthcare’s private equity clients, including Blackstone.
Cigna Corporation (CI) announced that it would gradually unwind, in 2012, its current contract with Healthways which is scheduled to end in February 2013. Healthways is expected to generate revenues of $110 million to $115 million from the Cigna contract in 2011, which is expected to fall by $60 million to $65 million for 2012.
Outlook
Healthways has reaffirmed its revenue guidance for 2011 of between $672 million and $710 million. It continues to assume revenues from domestic operations of about $650 million to $680 million. International sales are expected in the range of $22 million to $30 million.
The company has narrowed its earnings guidance for 2011 to a range of 90 cents to $1.00 (from 90 cents to $1.08 earlier) mainly on account of an anticipated delay in the timing of achieving some revenue milestones (in the Caisse Nationale d’Assurance Maladie des Travailleurs Salaries (“CNAMTS”) contract) from late 2011 to early 2012. The company forecasts net income of 97 cents to $1.04 a share from domestic operations and a loss of 7 cents to a loss of 4 cents a share from international ventures for 2011.
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 80% of U.S. health plans and counts 39.7 million lives in its customer base.
Due to its unique scalable business model, Healthways shares present a compelling, long-term investment opportunity although it may face many challenges in the short term. 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 centers across the U.S. Healthways competes with Express Scrips (ESRX) among others. Currently we are Neutral on Healthways.
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