HWAY 4Q EPS Misses, Minor Profit

Healthways ( HWAY - Analyst Report ) reported fourth quarter 2012 adjusted (excluding one-time expenses) earnings per share of 5 cents, missing the Zacks Consensus Estimate of 6 cents per share.

Net income was minor at $0.6 million (or 2 cents per share) versus a loss of $177.1 million ($5.32 per share) a year ago. The company’s results continue to reflect the loss of the Cigna Corp. ( CI - Analyst Report ) contract.

For 2012, adjusted earnings per share were 27 cents, trailing the Zacks Consensus Estimate of 28 cents.

Revenues

Revenues decreased 2.7% year over year to $175 million in the fourth quarter, in line with the Zacks Consensus Estimate. Sales were adversely impacted in the fourth quarter by the early inking of two large contracts.

For 2012, sales were $677 million, down 1.7% year over year, meeting the Zacks Consensus Estimate. Revenues dropped by $70 million in 2012 on account of the gradual conclusion of the Cigna contract.

Margins

Gross margin dipped 450 basis points year over year to 21.5% in the quarter. Healthways posted an operating margin of 2.8%, compared with -96.3% a year ago. Selling, general and administrative expenses increased 15.3% year over year to $17.4 million.

Balance Sheet and Cash Flow

Healthways ended the fourth quarter with cash and cash equivalents of only $1.8 million, up about 100% year over year. Long-term debt was $278.5 million, up 4.7% year over year.

Contract Activity

Healthways inked 34 new, expanded or extended contracts in the quarter. This count included twelve fresh contracts, twelve extended contracts and ten expanded contracts.

Outlook

For 2013, Healthways continues to expect sales in a band of $710 million and $750 million, up 5% to 11% year over year. The company expects higher revenues for 2013 despite a drop of $80 million from the end of the Cigna and one other contract. Healthways forecasts higher sales in the second half of 2013 as fresh contracts inked in 2012 will take 6 months to 24 months to take off.

The company projects EBITDA margin of about 10.5% to 12.5% (earlier 10% to 13%) for 2013. It expects EBITDA margin to increase sequentially during 2013 on account of initial ramp up of expenses for new large contracts and as performance-linked fees kick in with the passage of time.

Healthways guided to earnings per share of about 25 cents to 35 cents for 2013. Loss per share is expected to be 15 cents for the first quarter of 2013.

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.

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 over 15,000 centers across the U.S. and caters to several million eligible enrollees. Despite its unique scalable model, Healthways may face many challenges in the short term. The company competes with Express Scripts Holding Company ( ESRX - Analyst Report ) among others.

Healthways carries a Zacks Rank #2 (Buy). Omnicare Inc. ( OCR - Snapshot Report ) also carry a Zacks Rank #2 (Buy) and is expected to do well.