Healthways ( ( HWAY - Analyst Report ) reported second quarter 2012 adjusted (excluding one-time expenses) earnings per share of 15 cents, easily beating the Zacks Consensus Estimate of 7 cents per share but falling short of the year-ago earnings of 17 cents per share.

Net income came in at $5.1 million, down 12.5% year over year. The results for the reported quarter reflect the loss of the Cigna ( CI - Analyst Report ) contract.

Revenues

Revenues increased almost 0.4% year over year to $170.2 million in the second quarter, surpassing the Zacks Consensus Estimate of $169 million. Revenues were driven by the acknowledgement of performance-based fees. Upon exclusion of the Cigna contract, revenues improved 11% year over year.

Margins

Gross margin declined 170 basis points year over year to 24% in the quarter. Healthways posted an operating margin of 7.7%, down 240 basis points year-over-year. Selling, general and administrative expenses decreased 15.3% year over year to approximately $15 million.

Balance Sheet and Cash Flow

The company ended the second quarter of 2012 with cash and cash equivalents of only $1.3 million, up almost 38.4% year over year. Long-term debt was $283.1 million, up 26.8% year over year. Net cash flow from operations dipped 22.8% year over year to $21.7 million.

Contract Activity

Healthways inked 23 new, expanded or extended contracts in the quarter. This count included nine fresh contracts, one expanded contract, two expanded and extended contracts and 11 extended contracts.

These contracts are spread across domestic as well as overseas markets. The company has also started providing services for its contract with the French firm Caisse Nationale d’Assurance Maladie des Travailleurs Salaries (CNAMTS) from May, 2012.

Recent Developments

Healthways acquired Ascentia Healthcare Solutions in the second quarter. The company also forged a keystone 10-year contract for Physician-Directed Population Health (PDHP) Management with Texas Health Resources in the quarter.

Healthways has extended and expanded its pre-existing wellness solutions contract with WellPoint, Inc. ( WLP - Analyst Report ) . The renewed contract is binding through 2015. The company also extended its SilverSneakers Fitness Program contract with WellPoint.

Outlook

For 2012, Healthways maintains its forecast revenues in a band of $665 million and $705 million. This estimate includes domestic revenues in the range of $638 million to $670 million and overseas revenues of about $27 million to $35 million.

The company maintained its forecast earnings per share in the range of 38 cents to 50 cents for 2012. The estimate includes an additional expenditure impact of 4 cents per share due to the refinancing of Healthways’ senior credit facilities. This estimate comprises earnings per share from domestic sources in a range of 38 cents to 46 cents and from overseas operations in a band of zero to 4 cents.

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.

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 14,000 centers across the U.S. and caters to several million eligible enrollees. Healthways competes with Express Scripts ( ESRX - Analyst Report ) among others.

We currently have a Neutral recommendation on Healthways. The stock retains a Zacks #3 Rank, which translates into a short-term Hold rating.