Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Healthways, Inc. (NASDAQ:HWAY)

F1Q09 Earnings Call

January 8, 2009 5:00 pm ET

Executives

Ben R. Leedle Jr. - Chief Executive Officer

Mary A. Chaput - Chief Financial Officer

Analysts

Ryan Daniels - William Blair & Company, L.L.C.

K. Newton Juhng - BB&T Capital Markets

Constantine Davides - JMP Securities

Brooks O'Neil - Dougherty & Company LLC

Daryn Miller - Goldman Sachs

Joshua Raskin - Barclays Capital

Thomas Carroll - Stifel Nicolaus & Company, Inc.

Operator

Good afternoon and welcome to the Healthways Conference Call to discuss today’s earnings news release for the 3 months ended November 30, 2008. Today's call is being recorded and will be available for replay beginning today until January 16th by dialing 719-457-0820. The confirmation number for the replay is 1567040. The replay may be accessed for the next 12 months at the company's website, www.healthways.com.

To the extent any non-GAAP financial measures are discussed in today’s call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in today’s news release which is posted on the company’s website.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements among others regarding Healthways expected operating and financial performance. For this purpose, any statements made during this call that are not subject to historical facts may be deemed to be forward-looking statements.

Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors among others set forth in Healthways filings with the Securities and Exchange Commission and in its news release issued today, and consequently actual operations and results may differ materially from the results discussed in the forward-looking statements.

The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events, or otherwise.

At this time, for opening remarks, I would like to turn the conference over to the company’s President and Chief Executive Officer, Mr. Ben Leedle.

Ben R. Leedle Jr.

Thank you for being with us today to discuss our results for the November quarter, and as usual, I'm here this afternoon with Healthways' CFO, Mary Chaput.

I will begin with a brief overview of our results as well as some thoughts about our positioning in the current environment. Mary will then cover our numbers in greater detail, and after her comments, we will be glad to take your questions.

So, our results for the November quarter were consistent with our guidance, and the primary drivers of our business for the quarter were in line with our previous discussion. We produced 23% comparable quarter EPS growth while strengthening our financial position through additional debt reduction. Furthermore, despite worsening economic conditions in the US and abroad, we continue to sign more contracts with health plans and employers. These signed contracts and other milestones achieved since the end of fiscal 2008 demonstrates some points about our business that I think are worth remembering as the economic slowdown plays out going forward.

First, the wellbeing, productivity, and cost issues that our solutions addressed remain absolutely relevant regardless of the economic environment. As we mentioned in our last call, we've seen a lengthening of the sale cycle, a large portion of which we believe results from the difficult economy which is likely to continue in the coming months. At the same time, however, we've also heard from both existing and perspective new customers that current conditions have made addressing individual well-being and the continuing increases in health care costs an even greater imperative, but despite increasing uncertainty about the economy since our October conference call, we are very encouraged to find among other contracts for essentially all our services with a large fortune 100 employer and also with HCF, one of Australia's largest private health insurers.

The second related point is that we're continuing to position this company for the long term. We are the leader in a growing industry, and we are financially sound. We have contracts with more than 100 health plans and with over 1000 employers, more than 100 of those employers for which we contracted directly, and we remain in the forefront of a wave of demand driven change that we expect will refocus the health care industry away from providing episodic fee per service encounters with individuals to an outcomes approach built on solutions to improve well-being and paid for based on performance.

We expect these strengths to help us weather the current environment while we continue to enhance our potential for long-term growth.

That said, we have taken and will continue to take significant proactive steps to counter the near-term impact of the current environment. As previously discussed, these actions include the streamlining of our management structures and continued consolidation of any excess capacity. In addition, as we indicated in our news release, we are also engaged in contract discussions with some existing customers with a goal of ensuring our long-term profitable relationship. These discussions are neither unexpected nor even necessarily a negative with regard to the long-term growth of Healthways' shareholder value.

To understand why this is the case, it is important to understand that we have four primary levers of negotiation around our contracts. These are; one, the scope of services we provide; two, the level of risk that we undertake; three, the length of the contract term; and four, our contract fees. And these levers give us multiple opportunities to reach a mutually beneficial balance between our customers' needs and our long-term goals both in the original contract and then as circumstances change over time.

Throughout our long history, we've been able to leverage these contract discussion opportunities successfully by first understanding the value we provide, secondly by balancing the interaction of the value levers to assure the contract structure meets both our customers' goals and Healthways' goals, and finally, third, having the discipline to back away from situations that are not mutually beneficial.

So, for example, in the early days, our health plan business, it was not at all unusual for us to negotiate reduced contract fees for our customers in return for a reduction in the contract risk that we were taking. By appropriately balancing these different levers, we would avoid having contract fees becoming a zero some gain. Instead we enabled our reaching an agreement that satisfied both the customer and us enhanced the strength of our continuing relationship, and more often than not led to increased future business as our services and our value proposition expanded over time.

So today, as a service business with a value proposition that does continue to expand substantially, we still enter these discussions with a goal of preserving a long-term customer relationship on mutually acceptable terms. In today's environment it's not surprise we've seen a focus on fees from some of our customers, and in the substantial majority of those cases, we found a balance needed to accommodate our customer while still achieving our long-term goals usually through an expansion of a contract term. Again, the key is striking a balance that is mutually beneficial, and our strong rates of long-term customer retention and long-term earnings growth are indicative of our ability to continue achieving this balance successfully.

So, in summary, I'll say once more that Healthways is well prepared to weather the challenges of the current environment. We also are confident that substantial long-term potential inherent in our value proposition and our business model. We truly believe we are entering an inflection point in the health care industry in which demand for comprehensive integrated approaches like our WholeHealth Solution to improve health and wellbeing and reduce cost will predominate. We intend to remain at the industry's forefront in our ability to meet this demand. So, thank you for your time this afternoon, and now we'll ask Mary to take us through a more detailed review of the financials.

Mary A. Chaput

Good afternoon. We achieved revenues of $185.4 million for the quarter ended November 30th 2008. International revenues totaled $3.8 million, a slight sequential decline over our fiscal 2008 fourth quarter due to weakening foreign exchange rate. Domestic revenues totaled $181.6 million, which included $2.8 million from our Medicare Health Support pilot based on continued improvement in our results. Domestic commercial revenues were down approximately $4 million on a sequential quarter comparison. This sequential quarter decline was a result of previously announced restructuring of certain contracts, the wind down of Blue Cross and Blue Shield Minnesota, and a full quarter impact of the terminations of smaller contracts due to financial difficulties or consolidation all of which we have discussed at our quarterly calls throughout fiscal 2008.

As expected, sequential margins declined slightly as a result of those lower revenues and initial costs associated with the preparation for new contracts starts on January 1st. Somewhat offsetting those higher costs are lower amortization and depreciation expense in addition to lower interest expense as we paid down over $41 million on a long-term debt in the quarter. Earnings per diluted share in the quarter came in at the top end of our guidance at $0.37 and consisted as expected and provided for in our guidance of a penny dilution from International and $0.38 contribution from the domestic operations. As we prepare to execute on the change in our fiscal year to a calendar year, which began on January 1, 2009, we want to provide you with some information regarding the month of December, given the previously announced noteworthy activity.

The process of streamlining and restructuring our management is now essentially complete and is expected to result in a net charge of approximately $13 million in December which includes $9 million related to severance costs net of equity forfeitures and capacity consolidation and $4 million for the write-off of a certain intangible asset. The stock options tender offer is also complete and is expected to result in a non-cash charge in December of approximately $12 million, which represents the acceleration of the remaining unrecognized costs of those unvested options. Keep in mind too that there will be additional operating costs in the month of December to capture the majority of upfront implementation expenses associated with those new contracts starting on January 1st including the previously announced expansion of our Silver Sneakers Fitness Center Network. Those particular costs include significant end-market advertising expenditures associated with grand opening expenses and Silver Sneakers branded promotional giveaways for new participants in the over 6500 new Curves Fitness locations.

Although we are not prepared to give you 2009 guidance today, we do want to provide you with information regarding some of the dynamics that we are seeing that will affect our 2009 results. We’ve discussed previously the total year impact of domestic commercial contracts going away or reduced in scope, which for the calendar year of 2009 will approximate $70 million. In addition, we recognized approximately $9 million in fiscal 2008 revenues from the Medicare Health Support pilot which are unlikely to be repeated in 2009. So the year over year domestic revenue declines that we know about are approximately $79 million. We do not know yet the effect that unemployment will have on our billed lives, but using a 3% attrition rate would revenues by another $20 million. Based on these assumptions and possibly no organic growth in our customers membership-wise, we could be starting with a decline of approximately $90 to $100 million in run rate revenues, which would need to be filled with new business in order for us to stay flat with 2008 revenue levels.

Our current backlog which represents estimated first year annualized revenues at target performance for contracts not yet started total $32 million at the end of November. Keep in mind this amount includes some contracts that will not start on January 1st including the Australian contract scheduled to go live on May 1st.

Now on the positive side, we have added $5 million to the November 30 backlog associated with contracts signed since December 1st, which includes 2 expansions with current customers, one new large employer, and one new health plan. In addition, there are still a small number of large RSPs that have not yet been finalized that we believe we are in a good position to win.

The streamlining of the management structure that we have undertaken over the last few months is expected to generate significant savings through 2009, and we are prepared to continue to reduce excess capacity if warranted. As Ben mentioned, we will continue to invest in 2009 in the future strength of the company – our solutions, our technology, and our colleagues. The demand for health and wellness solutions continues to make headlines worldwide and medical and lost productivity costs escalate. Our focus, and this will have some ramifications on our 2009 costs, will be on securing our first Whole Health pilot, establishing and expanding the value of the Gallup Healthways Well-Being Index as the industry’s most comprehensive and credible metric for well-being, expanding international opportunities, and working with people on our domestic governments to provide relief from the impact of our increasingly fragmented and dysfunctional healthcare system.

As always, we will continue to be focused on delivering on our promised to current customers and to that end, other costs will be incurred in 2009. For example, mid year, we will be migrating our customers to our new integrated platform which will enhance member experience and accelerate operational efficiency and flexibility. Medicare Advantage ranks are swelling, and we have developed new and proven solutions to address the special needs of this growing population.

We will be implementing our new Australian Health and Care Support contract, a 5-year contract, which will ramp over time to cover the health needs of 1.2 million Australians. Finally, we are in a strong financial position as we face into this uncertain economy. Our reduced debt load coupled with strong operating cash flow generation, available capacity under our current bank facility at favorable pricing, and reduced capital expenditures in 2009 puts us in a solid position both to make the investments required for us to maintain our leadership position and to deal with the uncertainties and the opportunities that a difficult economy may bring us.

With that, we will now open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Ryan Daniels with William Blair.

Ryan Daniels – William Blair

You both discussed a little bit some of the implications of losing the revenue and the run rate there, and I am curious how much of that was reflected in the November period results? Did we see a run rate of that or just a portion of that during the period? Any color there?

Mary Chaput

I think we did, Ryan. I think at the end of the second quarter, during our earning call, we actually talked about a $10 million reduction in the second half versus the first half of the year, and that has continued to decline.

Ryan Daniels – William Blair

So we should look at around $90 to $100 that you’re talking about in loss revenue, we would want to take that out of ’08 fiscal revenue and then start growth from that point?

Mary Chaput

Actually you could take the fourth quarter and annualize it and probably take it out of that, and that will get you close to the answer. Now remember that MHS revenue in the quarter annualized is close to $10 million, and that we are not going include that in our guidance at this point for the 2009 calendar year.

Ryan Daniels – William Blair

In regards to the MHS revenue recognition during the period, was that again on the refreshed population or is that actually going back to the original population where some of the data now that the program is over is actually improving in the second half of the pilot?

Ben Leedle

It’s in both the original cohort and in the refreshed.

Ryan Daniels – William Blair

Ben, this is an opportune time to talk about this too because the Research Triangle Institute came out with its report, and I guess in some regards broke the veil on the vendors by putting names and data. Is your data consistent with what was reported in theirs after the first 18 months, and therefore it must be a pretty big improvement in the back half for you guys to be recognizing revenue now?

Ben Leedle

I think that’s a good assumption. One of the things you’ll see in that report, and there’s lots of data and information in there, and again that is the look that CMS has it as and recognizes for the timeframe that it is, so at 18 months, you have to go back in the history of how we reported to you guys and what we saw happening. That was the time when we saw ourselves not hitting savings and concerned that something was fundamentally awry inside of the data and the comparability of the groups. So at this point in time, the report that you’re referencing has some really critical important information in there. It shows in there that we had engaged and retained engagement once we had gotten consent at the highest level of all the different combination between those two things. And I think the other piece in there that you say, that’s critical mass that we were able to get in terms of not only getting a consent but keeping people actively engaged with us in the program with their providers, and then we’ve always taken the approach as you know and believe that we were different in that in all of our interventions are designed to drive improved health and that cost savings follow, moving the needle, and if you go back into that report and you look at the top two by a long shot in terms of performance around the clinical indications here which would indicate that health is improving in those participants was our standalone and the deep work with that we did with Cigna while they participated in this on that other pilot. So, it is not a surprise to us, and I think the tenor that we have taken for some time has been don’t be quick to judge too early in terms of how this going to move in terms of likely opportunity to capture the financial impact that everybody is looking for, so while I can’t speak probably much further past than what Cardiomediastinal silhouette and RTI has shared with the marketplace, I can validate based on the financial reporting that we’re doing that we’ve continued since the back half of 18 months that aren’t represented here to continue to recognize more and more revenue as a function of our continued performance as the maturity of the data and the information in time that’s gone by.

Ryan Daniels – William Blair

I know you mentioned you probably won’t be including any Medicare revenue in the forward numbers, so there could be some upside. Did you guys actually anticipate this recognition during the period ended November, so was that included in your guidance?

Ben Leedle

When we put out our guidance, it was not. As you know, Ryan, we spent three years talking about this part of our business, and it’s been a hard and difficult conversation only because data kind of eeks out as we go forward, and so when we made the decision about a year and a half ago that we were going to stay in and finish the thing, it was because we believed we’d be able to show that progress could be made, and even when CMS and others came out in the first report to Congress and identified the issues around loss randomization of comparability between the groups and the complexity that that provides and never really knowing the deep understanding that against even those design flaw issues and administrative issues around the program, we have been able to continually show improving performance around probably the indicator than at the end of the day most people are most interested in, which is the financial aspect of this, and I would tell you to our confidence, we wouldn’t have stayed in if we didn’t think we could get performance, but in terms of how we’ve set guidance as you know, we have just been very conservative around that and not included it as a part of the guidance that we most recently put out there, so it was not in the first quarter.

Ryan Daniels – William Blair

Was there any cost associated with that? I know in the past you paid out bonuses. Did you guys do that again, or did this one actually flow through?

Mary Chaput

Some bonus was actually accrued on that, and we did anticipate about $500,000 to $600,000 of revenue. We had gotten a report that was under analysis at the end of our last quarter. We completed that analysis, and we knew that about $500 to $600 would then come through, and the remainder came through on this last report, and we did accrue some bonuses, so some of that did not drop to the bottomline.

Operator

Our next question will come from Newton Juhng with BB&T Capital Markets.

Newton Juhng – BB&T Capital Markets

The cash position going down to under $5 million, if I’m not mistaken, considering that at some point you might have to give back the cash for the MHS pilot, can we expect that kind of a reconciliation to happen anytime in the next couple of quarters or are we looking further out?

Mary Chaput

I think the reconciliation is going to be towards the end of the calendar year. I’m not concerned about our cash balance. We are generating good operating cash flow. Our CapEx next year is expected to be less than half of what it was this year, and so we were aggressive and plan to be aggressive in playing down our debt going forward, but we are also forecasting our cash needs. We’ve got $288 million plus available on our current facility, and again we are generating great cash flow, so I’m not at all worried about cash.

Newton Juhng – BB&T Capital Markets

So you’re comfortable with where the level is even though it’s a little lighter than historical trend. The only other question I had was just regard to as we look beyond the month here and into the March quarter, how can we look at the comparable results here? Are you going to be providing that with the releases? Are you planning on maybe giving upfront levels of the different buckets here since the buckets are really changing in terms of the timeframe on the quarters and so on?

Ben Leedle

Are you talking about churning out comparable looks in retrospect on the new fiscal quarter?

Newton Juhng – BB&T Capital Markets

Correct Ben. As you move to December fiscal year end, I’m just kind of concerned that I’m not going to be able to get apples to apples from you guys, or is that something that you have already figured out? Maybe a little of an advanced question, but I’m just thinking about how I’m going to be looking as I move my model to a December fiscal year end.

Mary Chaput

The SEC will require us, of course, and we’d happy to provide those quarter over quarter comparisons, but in your models, until you have that, I would recommend you use the closest comparable quarter.

Operator

The next question comes from Constantine Davides with JMP Securities.

Constantine Davides - JMP Securities

Any update on those two remaining renewals that you talked about in the previous quarter?

Mary Chaput

We are progressing very nicely on the third. The fourth doesn’t really come up for renewal until the middle of the calendar year. We very positive on that one as well, but they have not been completed yet.

Constantine Davides - JMP Securities

I’m just a curious as you exit ‘08, beginning of ‘09 here, if you have sort of revisited the Great West relationship with CIGNA and just kind of wondering how those discussions are going and where their heads are at with regards to migrating over to the Healthways platform?

Ben Leedle

The Great West conversation we had with CIGNA over the last year. As we go into ‘09, we are still in conversation, and we will be talking more in a month, I guess, from this week about our ‘09 guidance, and we’ll be able to provide you, I think, more color on a whole lot of what you are asking.

Constantine Davides - JMP Securities

Mary, what was the international revenue contribution in the quarter?

Mary Chaput

I believe it was $3.8 million in the quarter.

Operator

The next question comes from Brooks O'Neil with Dougherty & Company LLC.

Brooks O'Neil - Dougherty & Company LLC

I’ll start with a follow-on Ryan’s questions on MHS. Obviously a casual reading of the second report in my view would yield a pretty negative or pessimistic impression of how it was progressing. I assume from reading the introduction that RTI collaborated pretty closely with CMS in putting that second report together, so I guess my question is, is it your impression at this point that CMS has a clear and positive impression of the progress you are able to make in the back half of the pilot or is it your impression that CMS is pretty pessimistic about the performance of Healthways and the other participants in the pilots still at this time?

Ben Leedle

Brooks, I won’t speak for CMS and can’t. CMS's voice obviously is in the moment changing, as you know, in terms of the people. What I can tell you whether or not CMS is aware of our progress. Certainly they are because they are the ones that sent us the reports that show the further separation between our group and the control group that affords us the opportunity to be able to book more revenues on progressive performance improvement over time.

Brooks O'Neil - Dougherty & Company LLC

Is that separation that occurred across three or four key metrics that they were measuring in the pilot, not only the financial but the satisfaction and the quality improvement and what not?

Ben Leedle

I think we’ve been pretty clear for some time that the requirements and performance targets as it relates to both satisfaction and to the clinical indicators. You are looking at a report that’s 18 months old. We’ve been talking about our performance that’s well past that timeframe, but those two indicators had been achieved, and that we continue to make progress to our budget neutrality, particularly in the refresh cohort, but we also continue to make progress towards that goal in the original cohort as well. We just are consistently seeing what we thought we would see over time as it relates to both the continued performance on satisfaction in clinical and the improvement around the financial.

Brooks O'Neil - Dougherty & Company LLC

Can you give us any update on the German on how that contract has continued to progress?

Ben Leedle

We are right about at a year since we launched operations. It will probably be another three to six months before we finalize the first year results with our client, and at that point, the results would be compared against targets. With excess of target performance, there would be a gain share opportunity. That would go through analysis and final reconciliation, and then that would take the conversations to the point where BAK would be looking at their determination around expanding this. So we have a real important, probably 3-, 6-, 9-month window here in and around what’s been completed which is the first year of operations, and as we’ve sat with the client, and as we have tracked the metrics independent of the client in both scenarios, we have a really strong performance trend line on the key indicators, so as those continue to be measured as the year finished out and as the aging of that data moves forward over the next few months, we’ll be in a position to be sitting down and doing our first international first year operational and contractual performance reconciliation, and we’ll keep you tuned in. We feel like the plan that we had was executed well, on target or better than target operationally, and we are excited to be moving into our second year of operations and being able to be in a position to talk about the actual performance in definitive terms to the rest of the world on our first international contract.

Brooks O'Neil - Dougherty & Company LLC

Can you just give us any feel that you are willing to share with regard to your relationship with CIGNA? You commented to Constantine that we might hear a little bit more about Great West, but obviously they’ve trimmed their workforce and commented that they expect to lose some enrollment in the next year?

Ben Leedle

I would tell you obviously to the degree that their membership enrollment is down, and if that comes in the form of lost employer business where we’d have been doing work with them, obviously it’ll have an impact. I think Mary mentioned obviously the pressures that are on our health plan customers, and in some cases we are seeing health plan growth, and in other cases we are seeing health plan contraction in membership, and in some cases seeing both inside of a single health plan depending upon what line of business that you want to talk about, so it’s as simple as just adding or subtraction, it’s adding or subtraction within what lines of business for what products and services that we do before we’ll get deeper clarity, and for us, this first quarter ‘09 is going to be really important in terms of seeing the net wash across our customer base. In terms our relationship with CIGNA, as you know it’s a great long-term relationship, and last year we renewed for an additional five years. We think our relationship is easily the largest disease management franchise on the planet and that it has performed extremely well and has persisted through lots of different changes both at CIGNA and at Healthways over ten plus years, and we would not expect to see anything other than our continued partnership being successful into the marketplace.

Brooks O'Neil - Dougherty & Company LLC

Mary, you gave us a lot of color on gross margins and SG&A expense. I’m just wondering if you could help this simple-minded fellow with directional feeling on whether you expect gross margins in the sequential quarters to be up or down and the same thing with the SG&A trend as a percentage of revenue?

Mary Chaput

Are you are talking about the first quarter of 2009?

Brooks O'Neil - Dougherty & Company LLC

Yes.

Mary Chaput

We’re really not going to give guidance. I have given you some thoughts of some of the activities we’ll be involved in and some of the things that you should consider in your models, but we are really not prepared to give any ‘09 guidance at this time.

Brooks O'Neil - Dougherty & Company LLC

Maybe I can just ask you a little bit about attrition. Obviously, you had some planned attrition. Have you lost any people you didn’t want to lose and anybody of particular significance?

Ben Leedle

No.

Brooks O'Neil - Dougherty & Company LLC

I listened to a presentation by Steve Helmsley at United yesterday at which he commented that, in their impression, they are seeing a real change on the part of employers’ willingness to consider benefit designs and engage employees more directly in managing their health and a real appetite for care management from employers. Obviously the economy is one factor, but a greater willingness and those two key metrics by customers might be a very positive thing for your business going forward. Any comments?

Ben Leedle

I would just comment that in the most recent 30-day period, we would tend to agree with his assessment/analysis. I gave out some RFP trends the last time that we released earnings in the fall, back in October, and just to update date you on those, I had given you a sense of what was going on through September at that time. We now have October, November, and December RFP activity, and it’s interesting as we compare year over year same period for October and November, the RFP volume is down about 20 to 40%, and looking at that obviously was not an exciting thing to be looking at, and then December came along, and we saw in a comparable year over year variance of a positive 40% increase in the RFP activity. I think it probably is not inconsistent with what many businesses, companies, and people were doing during October and November, which is taking a deep pause, trying assess where they were, what the broader economic indication might mean for them in their business, and I think maybe what Steve was pointing to in terms of what they were seeing and what I’m pointing to in terms of a data piece to support that and what we are seeing in terms of our conservations and the comment that I made in my prepared remarks is that they may have paused and it may have slowed down momentarily, but it looks like the conclusion is it’s full steam ahead on all of this. If there would be anything that I would put out cautionary in that it is we also look at the relative mix of where the RFPs are coming from. That hasn’t changed, so I do think he is right that the employers are really driving this for now, but what they were asking for, what it disease management, was it wellness, was it an integrative model? What we did see as a larger than past history mix of that spike in December was in and around prevention and wellness. I think that will continue to be something, they know they need to move forward. A lot have adopted some form of disease in care management/case management over the years where the real expansion then drives towards integration comes in as inclusion of keeping healthy people healthy, being able to help people modify their lifestyle, behaviors, and risks that we think of as wellness and prevention, and even as late as this afternoon, Daschle in his testimony before the Senate had indicated “there needs to be a paradigm shift from illness to wellness.” Understanding that shift would open up opportunities in agencies even outside the government HHS to market the idea of wellness so that it’s pervasive through all the government departments and into the market place, and that prevention has to be hot and wellness has be cool as in vogue, and they have to be a part of all the aspects of our lives, and he quantified the impact potential being for every dollar spent on prevention in the healthcare industry could net out a little over $5.50 in cost. So I think the steam that maybe you heard from Steve and what you're hearing from me, you're going to hear over and over again. There has to be something done to be able to improve the wellbeing of people, whether they be in the workforce, whether it be a senior population, because that's the approach that's going to yield both intervention and effective change in the demand side of this equation and continue to make progress on the supply side or the treatment/illness end of the equation. So it's not an either/or; it's a both, and that's why we continue to believe that we're so well positioned for the long-term as a lot of these changes move forward.

Brooks O'Neil - Dougherty & Company LLC

That's great. Thank you. Remember what I said before, “Sell like hell.”

Ben R. Leedle Jr.

Yes. We haven't forgotten it.

Operator

We go now to Daryn Miller with Goldman Sachs.

Daryn Miller - Goldman Sachs

How much longer will the window stay open for you guys to able to record MHS revenue?

Mary A. Chaput

We'll get another ARP report in springtime and I think that'll be last one, I figure that we'll be doing analytics for quite a while and reconciling with CMS in a period that, and I think I mentioned earlier, that we probably wouldn't get any conclusions before the end of the calendar year. It's possible I suppose we could get something sooner, but I am not counting on it.

Ben R. Leedle Jr.

You're talking about it without respect to either potential final disposition or reconciliation of the DIE, like what occurred this quarter; how many more quarters ahead?

Daryn Miller - Goldman Sachs

Exactly.

Ben R. Leedle Jr.

Likely one to two quarters.

Daryn Miller - Goldman Sachs

Mary, accounts receivables and DSO seem like it was a little bit higher. Was there anything going on there?

Mary A. Chaput

Yes. This is a historical seasonality of the Thanksgiving holiday that typically people take off for the holiday and leave their bills unpaid. So, by the end of December we collected approximately $66 million related to that quarter end balance, and our 60-day bucket from our domestic commercial businesses declined by 30%. So we don't anticipate any unusual collectability issues or patterns. The profile of our customer base continues to be of very high quality, credit wise and personality wise.

Daryn Miller - Goldman Sachs

The stock option tender offer; exactly what was that? It's a non-cash charge, so I don't quite understand that.

Mary A. Chaput

Not unlike many companies we had a substantial number of grants that are given to our management teams to retain them and incentivize them that were underwater, they were invested, they were amortizing over the next few years with no value, not creating any value with them. So this gave us an opportunity to reduce the overhang without increasing dilution, and we did not include the CEO or our board of directors in that offer. So it recreated a pool that we can now reissue in order to retain and attract the management going forward, and we think that was in the best interest of the shareholders and the management team.

Daryn Miller - Goldman Sachs

So, do you plan to reissue to those same individuals at a lower price?

Mary A. Chaput

No. The reissue will be based on the annual grant process and there are discretionary grants associated with that, that all goes through the competition committee as it relates especially to the executive officers, and do not anticipate a one-for-one grant awards. We paid fair value as calculated by an independent third party and it costs approximately $700,000 which we felt again was a small price to pay for reducing that overhang without increasing dilution and realigning the management team.

Daryn Miller - Goldman Sachs

Okay, and then in terms of streamlining the management team, how much in annualized savings do you think we are going to see in '09?

Mary A. Chaput

We haven't quite completed that effort in the following regard. There are still folks that could push for positions that are open inside the company, and so that work is not yet complete. We are in the process of finalizing our budget as well for fiscal '09, and while we certainly expect to book some savings associated with those activities, I think we at this point rather not provide the savings attached to either the restructuring or the tender offer because until we have that '09 outlook they really don't have meaning in a standalone way. We'll be providing that to you in February, hopefully that'll work for you.

Daryn Miller - Goldman Sachs

Okay, and then in terms of capacity consolidation, have you guys closed down or shut down any specific cost centers in total?

Ben R. Leedle Jr.

No, not in total. Obviously one of the things we shared with you is that when we finished up our MHS pilot, our center of operations related to that back in '08 in the fourth quarter that we would be pulling those costs out of the system. So, it's been more of a function of looking at capacity, consolidation opportunities, and making certain that as we look to reduce excess capacity as Mary indicated in both her script and comments, we would continue to do. That gets balanced with what do we have coming in for new growth on top, where does that need to be serviced, and how then is this best addressed? So, it's been more a function of reducing some of the capacity across several different operating sites and locations. We have through acquisitions operating sites that aren't necessarily traditional, like how you might think of the call centers, and we have been successful and able to trim down the number of those operating sites and when we took a look at the entire portfolio of our real estate from a leases standpoint, it would not be unreasonable to be thinking about a 15% to 20% goal for our reduction, and we've made significant progress and meaningful progress along that path. We'll be updating you more in and around capacity, the shape, the nature of that capacity, and where we stand in our guidance call that's coming up in 30 days.

Daryn Miller - Goldman Sachs

Ben, it was very helpful that you outlined those four different levers that you have, that you can pull; when we look at the first three, your highlighted scope of services, level of risk, and contract term, in general what are you seeing that you're giving up on those? Is scope of services getting smaller? A lower level of risk? Directionally, can you talk of each of those three points?

Ben R. Leedle Jr.

Yes. We pulled hard historically and that's why I went through the example on the risk piece. The percentage of risk in the quarter was 4%. If you follow the company over a particular meaningful period of time you would have known that not long ago that that might have been as high as 30% or 40%, and so we did have the opportunity to be able to trade term and fees mostly as the leverage changes in and around risk. So, in the current environment with risk being fairly well a lever that's been pulled hard before, it's really what we're seeing is modifications in scope and you can expect that where those conversations take place, those clients aren't wanting to have us go away, they are wanting to make certain that they have absolutely the highest likelihood of the greatest return for the dollar spent, which means some of it is narrowing in scope, but it is done so in a way that it doesn't abandon participants in the program, it may change levels of intensity with certain targeting that gets done. So, that changes both where the intensity of resources go and the overall absolute resource pool put to it. And then, in adjustment with that scope, it affords offering them an opportunity to look at some different fee structures in the near term, and then we're still pulling hard on the term lever which, we're in a contract service business, keeping our contracts, finding a way to deal with change over time, is probably the single most important competency that we have in terms of the longevity and sustainability of the company, the business, and everything that we're doing. So those three levers are the ones that are most put in play at this point.

Daryn Miller - Goldman Sachs

So, just to be clear, contract term is getting longer?

Ben R. Leedle Jr.

Yes, it can depend, there are situations where we may do something with scope and fee that doesn't affect term, but in a lot of cases in order to get everybody, all parties to where they want to be, it may be that the only way to balance it out is to secure additional years of term, and yes, that's happening.

Operator

We will take our next question from Joshua Raskin with Barclays Capital.

Joshua Raskin with Barclays Capital

A couple of questions, and I'll be brief, and I think most of it was answers, but just Mary, you had said that the first quarter '09, that run rate of revenues, that's a good starting point for next year or that's a good starting point to take the $90 million to $100 million?

Mary A. Chaput

That's a good starting point to take the $90 million to $100 million out of that run rate.

Joshua Raskin with Barclays Capital

Okay, and starting with 1Q '09, take out the MHS revenues as well, or you were saying...

Mary A. Chaput

The $90 million to $100 million included the $9 million of MHS that was recognized in the fiscal year. I know it's a little confusing here, but when I talked about the $70 million, that was a calendar year to calendar year reduction, and so then when I got the question from Ryan, he not knowing what our calendar year, what's it like, because we don't have December, and you could probably get there, I said, for ease of your calculation, just take this first quarter, annualize it, and you're going to be close enough.

Joshua Raskin with Barclays Capital

Okay, and then we add on what we think expected growth is using your backlog, the matrix, and then we assume, it sounds like you're guiding towards margin expansion after the streamlining, but we'll sort of figure that out. Okay, and then, second on the renegotiations, as you're going through that, is there any sense of magnitude of your customer base, sort of, what percentage of customers have renegotiated and is there a percentage of customers that are still renegotiating or have approached you about renegotiating, or how do we think about how pervasive this is across your book?

Ben R. Leedle Jr.

I would say from the number of customers, it's a minority, and obviously it's a minority that tends to fall into the mid sized, upper mid sized level relationship where we're doing a lot of different things and can afford the flexibility to have that conversation. One of the comments that I put in my prepared remarks is that we can pretty easily assess where it's not mutually beneficial and that their levers aren't going to matter in terms of both the mindset and the nature of the relationship. So, they tend to be the mid size band of customers, but the number of few. So, this is not like 30%, 40%, 50%, or 60% of our customer base that's talking to us about these things.

Joshua Raskin with Barclays Capital

Okay, that makes sense, and then just the last question, maybe for Mary, on the timing of the charges, both the stock option tender as well as the delayering, I am just curious, what were the hurdles, why December as opposed to November or January?

Mary A. Chaput

It takes time to plan those events, and in the case of the tender offer there was a filing that was required and a time required for it, and so that's how it occurred in the business process. So, certainly it wasn't our desire to have the delayering occur in the month of December before the holidays obviously, but that's the way it all worked out.

Joshua Raskin with Barclays Capital

Okay, but there were specific things that needed to occur in order to recognize that charge and they occurred in December, is that fair?

Mary A. Chaput

Absolutely. I would say all of those things are based on the accounting rule. We talked about this process, I think, in October, and we had talked about it being the delayering process being underway, but the way it works is that people as they get, perhaps their jobs get eliminated, they went into a pull on us, there was another opportunity for them to take a job inside the company, then we allow them that opportunity to take those jobs, so that cost us some time associated with that process. The tender offer, also, we had to create a filing and then the window for people to respond to that filing, there was a period of time that had to be taken into account, and all those things just sort of rolled together and hit in December.

Operator

Our final question today will come from Thomas Carroll with Stifel Nicolaus & Company, Inc.

Thomas Carroll - Stifel Nicolaus & Company, Inc.

A couple of quick followups, everything really has been answered, but I just to confirm especially with what's going on at CIGNA, you don't anticipate any contract changes as you have your relationship with CIGNA right now going forward, at least in 2009?

Ben R. Leedle Jr.

No, we aren't anticipating that, and we spent a good chunk of 2007 and into early 2008 renewing early on both parties' mutual interest in order to establish our contract that we currently have, which was a 5-year extension and essentially been in that less than a year since that time. If there are dramatic issues that again makes best sense for us and best sense for CIGNA as a customer, we're going to do what we need to do to stay in a relationship that makes sense and support our customer, but at this point there is no indication that that changing thing would be the case.

Thomas Carroll - Stifel Nicolaus & Company, Inc.

Okay, and then a second followup on Josh's question about December expense; is it fair to say that you guys are packing as much expense into December as possible and that first quarter '09 will be mostly free of one-time expenses that you see right now?

Mary A. Chaput

We are not allowed to call them one-time expenses, but no, that was not the intention. We can't really say at this point in time there is going to be more, what you might call, unusual activities. I think Ben mentioned and we are prepared certainly to rise to continue to reduce excess capacity. These are just the business decisions that had to be made and we make them when we think the right time is there and this happened to all occur in December, but that's not to say that there won't be more in the future if business conditions warrant.

Operator

That concludes today's question and answer session. At this time, I'd like to turn the conference back to Mr. Leedle for any closing remarks.

Ben R. Leedle Jr.

Thank you for being on the call today. I do want to note that I am sorry there are probably a few of you who still had questions that we didn't get to in the time for the call. We're not going anywhere at this point. So, we'd encourage you to please give us a call. Mary and I would be happy to handle those questions if they didn't get answered in some of the other people's questions that were addressed. Thank you again and have a good night.

Operator

Thank you for your participation in today's conference. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Healthways, Inc., F1Q09 (Qtr End 11/30/08) Earnings Call Transcript
This Transcript
All Transcripts