Healthways, Inc. Double-Digit Organic Growth on the Horizon

Thursday, after the markets closed, Healthways reported somewhat noisy fourth-quarter results, given an accounting change that required the deferral of roughly $10 million in sales/profits into future periods. Importantly, the company provided services and incurred all the costs related to this revenue stream, received the entire $10 million in cash during the quarter, and maintains an ongoing relationship with the client; it simply determined that, given novel contract provisions signed in the fourth quarter, it would have to recognize the revenue in 2014 (roughly 40% of the total) and 2015 (roughly 60%) versus in fourth quarter 2013 as originally planned.

Overall, the company’s sales of $169.2 million were down from $175.2 million in the year-ago period and below the $174.8 million consensus forecast; sales would have topped estimates, at $179.2 million, if not for the revenue-recognition change. The company reported a loss per share of $0.15, with the revenue-recognition change hitting profits by $0.17; in absence of this change, EPS would have fallen in line with management’s breakeven to $0.06 guidance at roughly $0.02. Lastly, EBITDA registered at $10.3 million during the fourth quarter ($20.3 million excluding the revenue recognition change), versus our $18.1 million estimate.

As has been the case for all of fiscal 2013, results were negatively impacted by three transitory factors: 1) the loss of approximately $80 million in revenue from two sizable health plan contracts, 2) initial expenses ahead of a number of new contract go-lives, and 3) a slower-than-anticipated revenue ramp under novel provider contracts. Still, some analysts expect solid organic growth to surface during 2014, as the large contracts are no longer in the year-ago comparison and as Healthways begins to ramp up sales from recently awarded business.

Given the solid end to the year, management indicated that it expects all of its market segments—direct-to-employer, international, health plans, Medicare Advantage, and health systems—to experience sales growth and margin improvement in 2014. Management also, for the first time, provided clarity into the revenue contribution and expected growth of each of these five markets.