Healthways Sees 4Q Loss on Lower Revs - Analyst Blog


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Healthways Inc. ( HWAY ) posted an adjusted loss of 12 cents for the fourth quarter of 2013 compared with earnings of 5 cents per share in the comparable quarter of 2012 and missed the Zacks Consensus Estimate of earnings of 3 cents per share. The decline in earnings can be attributable to lower revenues and higher cost of services during the quarter.

Revenues in the quarter dipped 3.4% to $169.2 million, also lagging the Zacks Consensus Estimate of $174 million. However, excluding the two terminated contracts, including the one with Cigna Corp. ( CI ), revenues increased 5.2% in the quarter to $169.0 million.

For full year 2013, Healthways reported adjusted net loss of 19 cents per share compared with adjusted earnings of 27 cents per share in 2012. Revenues declined 2.1% to $663.3 million in the year. However, excluding the two terminated contracts, revenues for the year grew 10.8% to $659.8 million.

The adjusted figures for both the quarter and full year exclude non-cash interest expense in 2013 and a restructuring charge in 2012.

Healthways failed to meet its own revenue expectations of 171 to $181 million for the fourth quarter and $665-$675 million for the full year due to the accounting treatment of $10 million of fees under an expanded agreement for new services signed with an existing long-term customer in the fourth quarter.

Healthways' guidance had included $10 million as revenues. However, the company collected payment for the $10 million of fees in Jan 2014. It now plans to recognize $10 million in the 2014 and 2015 results.

Operating loss in the quarter was $3.0 million compared with an operating profit of $4.9 million. For the full year, operating profit declined significantly to $1.9 million from $28.9 million in 2012.

Contract Activity

Healthways inked 35 contracts in the reported quarter. This count included 11 fresh, 10 expanded, and 14 extended contracts. The company has forged contracts with WellPoint in the U.S., SulAmérica in Brazil, renewed contract with Hospitals Contributions Fund (HCF) in Australia, and extended contract under the New South Wales Connecting Care.

These apart, Healthways signed nine new, expanded or extended contracts for its SilverSneakers Fitness Program, including an expansion with Humana. It also reached agreement to advance the population health management capabilities of its existing customers - Renaissance Health Network and Carondelet Health Network. It also expanded its contract with Texas Health Resources and Hawaii Medical Service Association and broadened its strategic relationship with Dan Buettner and Blue Zones.

For the full year 2013, Healthways signed 104 contracts. This includes 25 new contracts, 33 expanded contracts, and 46 extended contracts. The company also renewed all three of its largest contracts, which are due for renewal in 2013.

Financial Position

Healthways ended the year with cash and cash equivalents of $2.6 million, up 46.9% from $1.8 million as of Dec 31, 2012. Long-term debt was $251.9 million, down 13.2% from $290.3 million at the end of 2012. Consequently, long-term debt-to-capitalization ratio fell 560 basis points to 45.4% from 51.0% as of Dec 31, 2012.

In 2013, cash flow from operating activities surged 75.8% to $71.5 million compared with $40.7 million in 2012, despite lower earnings. The improvement was driven by significant decrease in accounts receivable and considerable increase in accounts payable. Capital expenditures fell 15.5% to $41.3 million from $48.9 million a year ago.

2014 Outlook

For 2014, Healthways upgraded its revenue guidance to a range of $730 to $760 million (reflecting a 10-15% rise from 2013) from the earlier range of $725 to $760 million, provided in Oct 2013. The current Zacks Consensus Estimate for 2014 revenues of $737 million lies within the guided range.

The company continues to expect EBITDA margins to increase 230 to 330 bps from 8.2% in 2013 to 10.5-11.5% for 2014. Healthways expects adjusted earnings in a range of 11 to 26 cents per share. The current Zacks Consensus Estimate for 2014 earnings of 15 cents lies within the guided range.

Healthways expects to report a loss in the 2014 first quarter at the same level as in the first quarter of 2013. However, it expects to breakeven in the second quarter and report sequential increase in profitability in the third and fourth quarters, driven by the timing of recognizing performance-based fees.

Our Take

Despite dwindling earnings and revenues in the fourth quarter, investors look optimistic about the Healthways' guidance, which reflects improvement. As a result, shares of the company rose 0.7% after the earning release. However, we are concerned about slowdown in the underlying market that can significantly hurt the company's profitability.

Currently, Healthways retains a Zacks Rank #4 (Sell). Some better-ranked stocks in the medical services industry include BioTelemetry, Inc. ( BEAT ) and Quintiles Transnational Holdings Inc. ( Q ). Both these stocks carry a Zacks Rank #1 (Strong Buy).

BIOTELEMETRY (BEAT): Free Stock Analysis Report

CIGNA CORP (CI): Free Stock Analysis Report

HEALTHWAYS INC (HWAY): Free Stock Analysis Report

QUINTILES TRANS (Q): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
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