Healthways (HWAY) Q2 Earnings Shine, Revenues Miss Mark

Healthways, Inc. (NASDAQ:HWAY) reported second-quarter 2016 earnings of 54 cents per share, which beat the Zacks Consensus Estimate by a stellar 53 cents. Notably, earnings also improved 83.9% on a year-over-year basis.

The upside was driven by a 10.2% improvement in revenues of approximately $125 million from the year-ago quarter. However, the revenue figure missed the consensus estimate by $64 million.

Quarter Details

Adjusted EBITDA advanced 9.6% year over year to $26 million in the reported quarter, compared with $23 million in the year-ago quarter. This was mainly driven by a remarkable performance by the network solutions business. By the end of 2016, management expects revenues to exceed $500 million and EBITDA margins to go beyond 20%.

Selling, general & administrative expenses (SG&A), as a percentage of revenues, decreased 280 basis points (bps) from the year-ago quarter to 8.1%. However, cost of services, as a percentage of revenues, surged 290 bps to 71.1%; depreciation expenses contracted 10 bps to 1.5%. Thus, operating margin at the company remained flat year over year.

Management expects expenses in the restructuring of the ‘corporate support infrastructure’ (IT infrastructure, separate back office, rebranding company) in the band of $5–$7 million. Annualized savings by the close of 2016 is anticipated between $14 million and $16 million.

Management also apprehends an additional expenditure of $35–$45 million for all the discontinued operations for the remainder of the year (mostly in third quarter). Additionally, the costs related to separation of ShareCare range between $4 million and $6 million.

Going ahead, Healthways is set to focus exclusively on the three business units – network solutions, SilverSneakers and Prime and Physical Medicine. The Medicare Advantage Plan is also expected to perform well under the Medicare star rating system.

Guidance Withdrawn

Based on the divestiture of the Total Population Health Services (TPHS) business unit to ShareCare, management has withdrawn its previously given financial guidance for 2016.

Zacks Rank & Other Key Picks

Currently, Healthway carries a Zacks Rank #2 (Buy).

Other favorably ranked stocks in the broader medical space are Natus Medical Inc (NASDAQ:BABY) , BioTelemetry Inc (NASDAQ:BEAT) and Halyard Health Inc (NYSE:HYH) . All the stocks sport a Zacks Rank #1 (Strong Buy).