Healthways, Inc



|Healthways, Inc. |(HWAY – NYSE) |$17.55 |

Note: More details to come; changes are highlighted. Except where noted, and highlighted, no other section of this report has been updated

Reason for Report: Flash Update: 2Q13 Earnings

Prev. Ed.: May 28, 2013; 1Q13 Earnings Update (share price and broker material as of May 6, 2013)

Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.

Flash Update

Healthways’ Loss Narrower-Than-Expected; Guides Down – Jul 25, 2013

Healthways reported 2Q13 loss per share of $0.03 narrower than the Zacks Consensus Estimate and the company’s expectations of a loss of $0.05 per share. However, the result is worse than the 2Q12 EPS of $0.15.

In 2Q13, net loss was $1.1million versus net income of $5.1 million in 2Q12. The company’s results continue to reflect the loss of the Cigna Corp. contract and one other contract.

Revenues

Revenues declined 4.7% y/y to $162.3 million in 2Q13, trailing the Zacks Consensus Estimate of $171 million. However, upon exclusion of the two terminal contracts, revenues improved 11.7% from 2Q12.

Margins

As gross profit dipped 29.6% to $28.8 million, gross margin contracted a massive 630 basis points (bps) y/y to 17.7% in 2Q13. Selling, general and administrative expenses decreased 4.7% y/y to $14.3 million. Healthways witnessed operating margin contraction of 630 bps y/y to 8.9%.

Balance Sheet and Cash Flow

Healthways ended 2Q13 with cash and cash equivalents of only $2.3 million compared with $1.8 million at the end of FY12. Long-term debt was almost $254 million compared with $278.5 million at the end of FY12.

Contract Activity

Healthways inked 25 new, expanded or extended contracts in 2Q13. This count included 2 fresh contracts, 12 extended contracts and 11 expanded contracts. The company also renewed its contract with Australia’s largest not-for-profit health insurer Hospital Contributions Fund (HCF).

Outlook

The company affirmed its sales guidance for FY13. Healthways continues to expect sales in a band of $710─$750 million, reflecting growth of 5%─11% y/y. The current Zacks Consensus Estimate of $728 million lies within the outlook band. The company expects higher revenues for FY13 despite a drop of $80 million on account of the termination of two contracts. Healthways forecasts higher sales in the 2H13 as fresh contracts inked in FY12 take off in the upcoming quarters.

However, the company tweaked its outlook for bottom line to reflect the effect of its cash convertible senior notes due in FY18. Healthways expect EPS of about $0.18─$0.28 compared with prior outlook of $0.25─$0.35 for FY13. The current Zacks Consensus Estimate of $0.29 is pegged higher than the revised guidance.

Strategic Developments

Healthways disclosed an exclusive strategic partnership with Beacon Health System to strengthen its market position. The company’s collaboration with Beacon will assess market opportunities to deliver scalable solutions to improve population health and well-being.

On the other hand, Healthways revealed an exclusive partnership with Dr. Dean Ornish to operate and license the suite of Ornish Lifestyle Management Programs. The program is well-aligned with the company’s goal to help individuals cut down on health-related risk factors by encouraging them to change lifestyle behaviors that lead to chronic conditions. Notably, Dr. Ornish’s Program for Reversing Heart Disease is covered by Medicare as a branded program under a new benefit category.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON HWAY

Portfolio Manager Executive Summary

Healthways Inc. (HWAY) is the leading provider of specialized, comprehensive solutions that help millions of people maintain or improve their health and well-being and, as a result, reduce expenditure on healthcare. Healthways' solutions are designed to help healthy individuals stay healthy, mitigate, and slow down the progression of diseases associated with family or lifestyle risk factors. Healthways helps to promote the best possible health for those already affected by disease.

Of the nine firms providing ratings on Healthways, 55.6% (five firms) assigned neutral ratings, 33.3% (three firms) provided positive ratings and 11.1% (one firm) gave a negative rating.

Neutral or negative or equivalent outlook (6/9): While the neutral or negative firms are satisfied that results posted by Healthways are in line with expectations, they remain concerned about the effect of loss of Cigna contract. They believe that Healthways remains one of the few pure plays in disease management and presents an opportunity to participate in the growth of this sector. They, however, believe that uncertainty about healthcare reform and sluggish economy are exerting a negative impact on new business. The lack of business momentum is highlighted by the end of the Deutsche Angestellten Krankenkasse (DAK) contract in Germany. They also worry about the lack of visibility into future growth, particularly because of the still unclear impact of healthcare reform on the company. Despite contract wins, international operations have a relatively minor contribution.

Positive or equivalent outlook (3/9): The bullish firms believe that HWAY shares present a compelling, long-term investment opportunity although it may face challenges in the short term. They believe that the extension and renewal of significant contracts, along with fresh contract wins, in 1Q13 and FY12 may propel the revenue and earnings of the company in the long run. Furthermore, they repose faith in the business model of the company. In this regard, they believe that the company has fine tuned its model for population health management, which incorporates critical drivers of growth in spending.

Long-Term Outlook: Despite the loss of the Cigna contract, the firms are of the opinion that investors should not underestimate the value of the growing interest in consumerism, health care information, health and productivity management, and public/private partnerships designed to focus on the unique needs of seniors and the disadvantaged. Consumers need better information upon which their decision-making will be based. They will use this information to improve their health, prevent expensive and debilitating health issues, address their health issues and select providers. Most of the analysts believe Healthways is well positioned to benefit as these concepts gain support in the larger health markets.

May 28, 2013

Overview

Analysts identified the following factors for evaluating the investment merits of HWAY:

|Key Positive Arguments |Key Negative Arguments |

|Healthways has been a pioneer in providing disease management (DM) and |Markets for chronic care management services remain competitive and can |

|complex case management (CM) services to health plans and self-insured |impact the company’s ability to grow its existing business or develop |

|employers. |new businesses. |

|The prospects for Healthways’ core commercial segment remain robust. More |The health care business is highly regulated and government entities |

|buyers (specifically employers) are turning to HWAY as a single-source |provide reimbursement only for a portion of the services provided by |

|solution for health and care support needs. |Healthways. The resulting pressure might continue into the future. |

|Healthways has a management team with proven skills and resources to |Continued high unemployment means fewer individuals are covered by |

|successfully execute its business plans. |employer sponsored health plans or by companies directly. This reduces |

|The company is the leader in a strategically critical and rapidly evolving |the number of lives using Healthways’ disease management services and |

|part of the health care services market. |consequently its revenue. |

|International contracts may yet be a meaningful contributor to top-line. |Client concentration is an area of concern. The prospects of the company|

|Healthways has extended and won new contracts which will positively affect |may be damaged if large contracts are not renewed. |

|the company’s financials in the long run. |Cigna ended its contract with Healthways in FY13, which is a severe blow|

| |to the company. |

Based in Nashville, Tennessee, Healthways, Inc. (HWAY) provides health and care support programs and services in the United States. The company offers disease management and care enhancement services to health plans, the Centers for Medicare and Medicaid Services (CMS), and hospitals. It also offers wellness programs to health plans and employers in 50 states in the United States, the District of Columbia, Puerto Rico, and Guam. Its health support programs include providing members with educational material and personal interactions with trained nurses to create and sustain healthier behaviors. Healthways also offers the Care Support product line, which includes programs for people with diabetes, coronary artery disease, heart failure, asthma, chronic obstructive pulmonary disease, end-stage renal disease, cancer, chronic kidney disease, depression, tobacco addiction, acid-related stomach disorders, atrial fibrillation, decubitus ulcer, fibromyalgia, hepatitis C, inflammatory bowel disease, irritable bowel syndrome, low-back pain, osteoarthritis, osteoporosis, and urinary incontinence, as well as population management. Further information on the company can be found at its website: .

Note: The company’s fiscal year ends on December 31.

Mar 28, 2013

Long-Term Growth

Healthways has significant opportunities for growth in three key areas: the commercial, Medicare, and international markets. The company aims to grow its commercial business by adding new customers and new programs. It has also begun to explore international market opportunities, and these could contribute substantially to its growth in the coming years. The company continues to invest heavily in technology and is continually expanding and improving proprietary clinical, data management, and reporting systems to continue to meet the information management requirements of health care support services. The main objective of disease management is to help patients avoid hospitalization by eliminating gaps in care that can negatively impact outcomes and cost.

The analysts acknowledge that growth in the company’s core care support (or disease management) business will likely slow down over the coming years (law of large numbers, less penetration opportunities in domestic accounts, etc.) and they also believe that the addition of health support (or wellness) and the company’s ability to cross sell these programs to the existing customers will allow it to maintain its industry-leading growth rate. In addition, the company’s ability to bid on contracts with a comprehensive whole-health offering enhances the company’s value proposition and would allow it to capture a disproportionate share of new business over the coming years.

While the company may lose some contracts, it is well positioned to win a large share of the industry’s business going forward. Healthways’ extensive and fully-accredited complementary and alternative provider network offers convenient access to the significant number of individuals who seek health services outside the traditional health care system.

Management continues to firmly believe that chronic disease management solutions, as they are delivered by the company, must be utilized as at least a part of the solution in working with chronically ill patients. The company is expected to show growth again over time due to the strong macro demand for wellness and disease management services that should exist over at least the next 7 to10 years.

May 28, 2013

Target Price/Valuation

The Zacks Digest average price target is $13.20 (- 6.5% from the current price). Five firms out of nine provided a price target.

Of the nine firms who assigned ratings on the stock, five firms assigned neutral ratings, three gave positive ratings and one firm rendered a negative rating.

|Rating Distribution |

|Positive |33.3% |

|Neutral |55.6% |

|Negative |11.1% |

|Avg. Target Price |$13.20↑ |

|Maximum Target |$19.00 |

|Minimum Target |$9.00 |

|No. of Analysts with Target Price/Total |5/9 |

|Downside from Current |6.5% |

|Maximum Upside from Current |34.6% |

|Minimum Downside from Current |36.3% |

Recent Events

On Apr 18, 2013, Healthways announced its 1Q13 earnings results. Highlights are as follows:

• Total revenue was $165.2 million in 1Q13, flat y/y.

• Adjusted loss per share was $0.12 in 1Q13 versus loss per share of $0.08 in 1Q12.

Revenue

Revenue was flat y/y at $165.2 million in 1Q13, beating the Zacks Consensus Estimate of $164 million. Upon exclusion of the two terminal contracts, sales increased 12.6%.

With regards to business development during 1Q13, Healthways inked 21 new, expanded or extended contracts in 1Q13. This count included five fresh contracts, nine extended contracts and seven expanded contracts.

The company indicated that about 5% of revenues for FY13 may be lead by performance-linked charges. This is down from 7% in FY12.

Domestic Programs

Healthways is gaining from greater demand for population health management offerings from providers. Between 2Q12 and 1Q13, the company inked deals with Wellmont Health, Carondelet, Queens Health Systems, Mercy Health and Texas Health Resources.

During 4Q12, Healthways extended its contract with Capital District Physicians' Health Plan (CDPHP) by three years until 2015 to deliver Healthways’ SilverSneakers Fitness Program. This program will be availed by 30,000 CDPHP Medicare Advantage qualified participants in 24 counties in New York State.

It also extended its contract with the Independent Blue Cross (IBC). Healthways offered the SilverSneakers Fitness Program to the eligible participants of IBC.

During 2Q12, Healthways significantly extended and expanded an existing wellness contract with WellPoint, Inc (WLP). The renewed contract runs till 2015. The company will include its latest well-being capabilities in the contract, thereby enhancing the comprehensiveness of its services.

During 2Q12, Healthways inked a 10-year deal with a health system for Physician Directed Population Health (or PDPH) management. Its new client is Texas Health Resources, a non-profit organization which serves about 6.4 million people.

Healthways announced a significant contract in 3Q11, which both extended and expanded its pre-existing seven-year relationship with Wellmark Blue Cross and Blue Shield for five more years. This deal will support the Iowa Healthiest State Initiative. Its main effort will be the implementation of the 10-community Blue Zones Project, which is the biggest integrated well-being improvement effort launched till date.

Healthways also launched in 3Q11, a contract with Equity Healthcare LLC, a subsidiary of Blackstone Group. The purpose was to aid portfolio companies of the concerned private equity firms to provide cost-effective and quality care to employees. Healthways will provide its integrated Well-Being Improvement Solution under a 3-year contract. The company will strive to lower costs and enhance employee health for the portfolio companies of Equity Healthcare’s private equity clients, including Blackstone.

Healthways had earlier, on January 25, 2011, sealed a 10-year deal with the Hawaii Medical Service Association (HMSA), the Blue Cross and Blue Shield licensee in Hawaii, to take over the latter’s health management functions and wellness programs provided to 700,000 individual, commercial and government sponsored participants.

International Programs

On April 2013, Healthways revealed that it inked a 5-year agreement with SulAmérica, the biggest health care insurer of Brazil. The agreement provides Healthways with access to over 1.5 million adult enrollees with SulAmérica. The contract between the two parties intends to enhance a population’s well being. The early emphasis of the agreement will be the complete evaluation of the well being of a large number of SulAmérica’s enrollees. The two parties will implement, during 2013, portions of the Healthways Well-Being Improvement Solution. SulAmérica Insurance, Pensions and Investments is the biggest insurance company in Brazil. The company operates in four segments, namely, Autos and Casualties, Personal Insurance, Private Pensions and Assets Management and Health and Dental. It has more than 6.7 million clients.

In May 2012, Healthways started services for Caisse Nationale d’Assurance Maladie des Travailleurs Salaries (CNAMTS) of France. Healthways was chosen by CNAMTS in FY11, to provide facilities to enhance the well being of diabetics in France and French territories. Under the four-year contract, the company will collaborate with its French partner (Attran) to provide disease management facilities to persons with diabetes and other chronic illnesses. Healthways plans to unite its partner’s management information system with its own Embrace disease management system. This program will be an optional process, which will be initiated by the individual’s doctor, with other diseases to be added later.

The DAK contract in Germany ended in 1Q11 on account of financial losses at DAK’s end.

Outlook: The company affirmed its guidance for FY13. For FY13, Healthways continues to expect sales in a band of $710 million and $750 million, up 5% to 11% y/y. The company expects higher revenue for FY13 despite a drop of $80 million from the end of the Cigna and one other contract. Healthways forecasts higher sales in the 2H13 as fresh contracts inked in FY12 will take 6 months to 24 months to take off. Also, performance-linked fees will be recognized in 2H13. The company expects its pre-existing clientele at closure of FY12 to generate higher revenue of $85 million for 2014 as compared to FY13.

Business Development

Healthways continues to experience strong demand for its SilverSneakers wellness program. SilverSneakers is a wellness program designed for Medicare eligible individuals. It offers physical activity as well as health education, often in a social setting. Many individuals enrolled in Medicare Advantage, the private sector Medicare program, participate in SilverSneakers. In connection with this, the company expanded its SilverSneakers network. Beginning on January 1, 2009, Curves International, a large fitness club franchisor, became part of the SilverSneakers network, allowing the SilverSneakers Fitness Program to be offered at 6,500 Curves locations in the U.S. and bringing the total number of participating fitness center locations to almost 10,000. The company did not disclose the contribution from Silver Sneakers.

The company also extended or expanded its contracts with its existing clients and added a number of contracts directly with employers. Among these contracts, the company offers WholeHealth contracts. WholeHealth goes beyond medical cost savings to deal with productivity and how it relates to health and well being. It will run on a new, fully integrated IT infrastructure called Embrace. Embrace will enable Healthways to integrate data from all the health care entities with which an individual interacts (to the extent that data are available electronically).

Margin

Reported gross margin dipped 60 basis points y/y to 14.5% in the reported quarter. Healthways posted reported operating margin of -1.6%, compared with -0.6% a year ago. Selling, general and administrative expenses dipped 4.7% year over year to $13.1 million.

EBITDA was $10.8 million, or 6.5% of revenue, in 1Q13.

Outlook: The company continues to project EBITDA margin of about 10.5% to 12.5% (compared to EBITDA margin of 11.9% for FY12) for FY13. It expects EBITDA margin to increase sequentially during FY13 on account of initial ramp up of expenses for new large contracts and as performance-linked fees kick in with the passage of time.

Earnings per Share

The company reported net loss of $3.9 million, or $0.12 per share, in the reported quarter compared with a net loss of $2.7 million, or $0.08 per share, in the year-ago quarter. Net loss of $0.12 was narrower than the Zacks Consensus Estimate of a loss of $0.15 for 1Q13. The company’s results continue to reflect the loss of the Cigna Corp. (CI) contract and one other contract.

Outlook: Healthways continues to guide to EPS of about $0.25 to $0.35 for FY13. Loss per share is expected to be $0.05 for 2Q13.

– The Online Stock Research Community

Discover what other investors are saying about Healthways (HWAY) at:

HWAY profile on

|Analyst |Priyanka Saha |

|Copy Editor | |

|Content Ed. |Nikita Sharma |

|Lead Analyst | |

|QCA | |

|No. of brokers reported/ Total | |

|brokers | |

|Reason for Update |Flash |

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