Healthways Inc.’s (HWAY) third-quarter 2014 adjusted earnings per share remained flat at 8 cents compared with the year-ago level. Adjusted earnings were also in line with the Zacks Consensus Estimate. Notably, adjusted net earnings for the quarter improved 11.2% to $3.0 million from $2.7 million in the prior-year quarter.
On a reported basis, Healthways recorded net earnings of $2.0 million in the quarter, up 9.7% from the year-ago level of $1.8 million. On a per share basis, net earnings remained flat at 5 cents.
Revenues for the quarter came in at $185.7 million, increasing 11.4% from $166.6 million in the year-ago quarter and meeting the Zacks Consensus Estimate of $186 million.
Contract Activity
Healthways signed 23 contracts in the third quarter, including 5 with new customers, 5 related to expansions and 13 to 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.
Margins
In the third quarter of 2014, gross profit rose 3.4% to $36.7 million, however, gross margin contracted 150 basis points (bps) to 19.8% from 21.3% a year ago.
Operating earnings in the quarter spiked 23.8% to $7.6 million from $6.1 million in the third quarter of 2013. Operating margin increased 40 bps to 4.1% from 3.7% a year ago.
Healthways reported adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of $50.4 million for the first nine months of 2014, up 13.5% from $44.4 million in the comparable year-ago period. Adjusted EBITDA margin improved 30 bps to 9.3% from 9.0% in the first nine months of 2013.
Financial Position
Healthways had cash and cash equivalents of $1.7 million as of Sep 30, 2014, down 33.9% from $2.6 million as of Dec 31, 2013. Long-term debt stood at $237.4 million, down marginally by 0.1% from $237.6 million as of Dec 31, 2013. However, the long-term debt-to-capitalization ratio increased 20 bps to 44.2% from 44.0% as of Dec 31, 2013.
In the first nine months of 2014, cash flow from operations totaled $32.3 million, down significantly by 37.1% from the comparable year-ago period. Meanwhile, capital expenditures stood at $31.9 million, down 2.8% from the year-earlier period.
2014 Outlook
Healthways affirmed its 2014 financial guidance and expects adjusted earnings in the range of 11 to 26 cents per share for the year. The current Zacks Consensus Estimate of 20 cents lies within the guided range.
Revenue guidance for 2014 has been reiterated in the band of $730 to $760 million, reflecting an increase of approximately 10–15% over 2013. The current Zacks Consensus Estimate of $742 million lies within the guided range.
The company continues to expect EBITDA margins in the range of 10.5–11.5% for 2014. Operating cash flow for the full year is expected in the band of $75 to $85 million, whereas capital expenditures are anticipated in the band of $40–$45 million, or between 5 and 6% of revenues.
Our Take
Healthways’ third-quarter results were consistent with our expectations and demonstrated continued growth momentum. Also, Healthways maintained its earnings and revenue guidance for 2014.
The company has a substantial and active pipeline of potential contracts with new and existing customers in both domestic and international markets. Revenues continue to be driven by new business wins, timing of recognizing performance-based fees and expansion of existing contracts.
Furthermore, Healthways is making consistent progress with four large contracts scheduled for renewal in 2014. The company also sees increased demand for its population health services which is expected to drive margin expansion and revenue growth going forward.
Currently, Healthways carries a Zacks Rank #2 (Buy). Other stocks worth considering in the medical services industry include Charles River Laboratories International, Inc. (CRL), ICON Public Limited Company (ICLR) and BG Medicine, Inc. (BGMD). While both Charles River Laboratories International and ICON Public Limited Company sport a Zacks Rank #1 (Strong Buy), BG Medicine carries the same Zacks Rank as Healthways.
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