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

Executives

Ben R. Leedle Jr. – President and Chief Executive Officer

Mary A. Chaput – Chief Financial Officer

Analysts

Thomas Carroll - Stifel Nicolaus & Co., Inc.

Ryan Daniels - William Blair & Company LLC

Kyungho Newton Juhng - BB&T Capital Markets

Brooks O'Neil - Dougherty & Company LLC

Joshua Raskin - Barclays Capital

Daryn Miller - Goldman Sachs

Healthways Inc. (HWAY) Q1 2009 Earnings Call April 20, 2009 5:00 PM ET

Operator

Good afternoon and welcome to Healthways first quarter 2009 conference call. Today’s call is being recorded and will be available for replay beginning today and through April 29 by dialing 719-457-0820. The confirmation number for the replay is 4376582. The replay may also be accessed for the next 12 months at the company’s website, which is at www.healthways.com.

To the extent any non-GAAP financial measure is 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 2009. For this purpose any statements made during this call that are not statements of historical fact 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 herby cautioned that these statements may be affected by important factors among others set forth in Healthways filings with the Securities and Exchange Commission and in its first quarter news release 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’d like to turn the conference over to the company’s President and Chief Executive Officer, Mr. Ben Leedle. Please go ahead sir.

Ben R. Leedle Jr.

Thank you. Good afternoon. Thank you for being with us today to discuss our results for the first quarter of 2009. And as usual I’m here this afternoon with Healthways CFO Mary Chaput, and after our prepared remarks we’ll be glad to take your questions.

So I’ll start this afternoon by saying we are pleased with our first quarter results, having achieved adjusted earnings per diluted share $0.02 above our expectations and 11% greater than for the same period last year. Our analysis of our results pointed to two discrete factors that accounted for this stronger than expected performance. The first was a significant increase in the use of our Silver Sneakers Fitness Program following the January 1 launch of our strategic partnership with Curves, which made the program available to their members in approximately 6,500 Curves locations. We also experienced increased Silver Sneakers Program use in many of our other 3,500 exclusive certified fitness center locations used in support of the program.

Now this performance is consistent with increasing evidence about the effectiveness of Silver Sneakers in not only improving clinical outcomes and lowering medical costs, but also in improving members’ enjoyment of life. The benefits of the personal interactions that derive from participation in the Silver Sneakers Program are as important as those derived from the physical activity, and are a tremendous draw to initial and continuing participation in the program. You can be sure that any organization interested in keeping seniors motivated and engaged with regard to their health and wellbeing is aware of our success with this program. Proof of these results can be found on our website under peer reviewed articles about Healthways.

The second factor contributing to our better than expected first quarter performance was lower than anticipated attrition in billed lives due to increased unemployment. In fact, billed lives increased to 35.8 million at the end of the first quarter, an increase of nearly 3 million from the prior quarter. As a result, our penetration of our available lives increased to 18.4% at the quarter’s end. That’s up from 16.9% at December 31, 2008 and above 14.3% at March 31, 2008.

As we mentioned in our earnings release, our first quarter results are clearly a positive step toward our financial objectives for the full year. Despite this performance, however, we’re not changing our adjusted guidance for the year for two fundamental reasons. The first is that while the growth in unemployment has been dramatic since the start of 2008, it accelerated in the fourth quarter of 2008 and in the first quarter this year. Based on the trend during the quarter, which was validated by last weeks’ reports from the Department of Labor that unemployment is continuing to rise, we do not yet believe that the full impact of unemployment has been completely reflected in our billed lives or our financial results.

The second reason is that we continue to have limited visibility about the depth and the duration of the current recessionary economy. Although we remain optimistic about the long term growth potential of our business, one quarter is not sufficient for us to be more aggressive with our guidance for 2009, particularly in light of the potential impact either a worsening economic environment or a significantly delayed economic recovery could have.

Having discussed our first quarter results and some thoughts about our guidance, I want to update you on several of the topics that we addressed with you on our February 5 conference call regarding our expectations and plans for the remainder of 2009. With respect to new domestic business, we indicated during the February call that despite the economic environment, we expected to sign contracts with new and existing health plan and employer customers during 2009. This expectation was based on a healthy pipeline of active discussions, including companies for whom the economic downturn made improving employee health and reducing healthcare costs only more of a strategic imperative. We signed 18 new expanded or extended contracts during the first quarter including 9 with new customers. One of the new customer contracts was for a fully integrated, comprehensive, total population solution for a very large employer. The other 8 new customer contracts included both disease management and wellness programs purchased by both health plans and employers.

We also expanded into our extended 9 other agreements, among which included the addition of our wellness solutions for the ASO book of a significant regional Blues plan and two key health plan expansions for our Silver Sneakers Program for their Medicare Advantage lines of business. In addition, the last of the 4 previously discussed contracts that was up for renewal in 2009 auto renewed for another year and we are in discussions for what we hope will lead to expanded programs for the future. We believe that our pipeline will produce additional new contracts for the remainder of 2009.

On the international front, we’re continuing our initiatives to establish new markets and expand our presence in our existing ones. We are on track to launch our Australian contract by the end of next week as scheduled on May 1. In the summer we also expect to be finalizing the analysis of our first year performance in our 3 year agreement in Germany. While the worldwide economic environment presents the same challenges to contract finalization that we face domestically, we remain engaged in meaningful discussions about potential contracts around the world. In aggregate, these discussions support our confidence that international markets represent a major long term growth opportunity for Healthways.

The third area of focus that we discussed in our last call was our ongoing strategy to reposition the company, if not the entire industry, as the tested, proven and logical suppliers of solutions designed to reduce the demand for unnecessary or avoidable healthcare services for entire populations, irrespective of their health status. Our strategic approach to this repositioning is focused on creating and delivering solutions that keep healthy people healthy, mitigate or eliminate modifiable risks associated with or exacerbated by unhealthy lifestyle behaviors, and assure as we have historically optimized, evidence based care for those who have a known diagnosis of disease or condition.

As we’ve discussed with your previously, effective implementation of this approach required the development and adoption of a credible and accurate data source for those portions of the population whose states of health and wellbeing were not represented through traditional, administrative and claims data sets. As you also know, our 25 year relationship with Gallup was developed to meet just that need.

Accordingly, I’m delighted to be able to report on a number of important milestones with respect to the Gallup-Healthways Well-Being Index during the first quarter. First, the size of the database is now approaching half a million completed surveys, enabling consistent monthly reporting of the national index score and trends. Look for these to be released on the second Thursday of each month. Second, we entered into a strategic alliance with America’s health insurance plans or AHIP, the industry associated for essentially all the country’s health plans which not incidentally are the principal source of our revenues. The relationship with AHIP led to the third milestone in the quarter which was the release of the AHIP wellbeing reports for all 50 states and all 435 Congressional districts. The release of these reports garnered national media coverage and provided opportunities for unique conversations with Senators, members of Congress, and administration officials which we believe will have an important impact on the ongoing healthcare reform debate.

In addition, the coverage has led to opportunities to brief numerous governors and state municipal officials who are they themselves looking for new solutions to address the cost and productivity drain created by poor health and wellbeing in their constituencies. As anticipated, the alliance with AHIP has been dually noted and understood within the industry. Further, a number of health plans and leading employers have reached out to us for more information, and we anticipate continued joint efforts to drive uptake of the Gallup-Healthways Well-Being Index in our focused effort to make it the official statistic for health, wellbeing, productivity and effectiveness of solutions aimed at improving the scores of individuals and populations both domestically and abroad.

As health plans, employers, governments, other countries and other potential sponsors come to fully understand the power of the information that can be derived from the data underlying the Gallup-Healthways Well-Being Index, we anticipate increasing demand for integrated comprehensive solutions that improve wellbeing. We are beginning to see that demand manifest itself in the market, and we are and intend to remain uniquely positioned to serve it with comprehensive, fully integrated solutions designed specifically to assure our customers the caliber of real outcome that are the hallmark of our leadership role, our responsibility and our position in the industry.

And now I’m going to turn the call over to Mary, who is going to take a deeper drive into our financial results. Mary?

Mary A. Chaput

Thank you Ben and good afternoon everyone. Revenues for the quarter ended March 31, 2009 totaled $182.7 million. International operations contributed $3.5 million, a slight sequential decline from our quarter ended November 30, 2008, primarily due to weakened foreign exchange rates in this period. Domestic revenues were $179.2 million, a decrease of approximately $2.4 million from the quarter ended November 30, 2008, primarily due to revenues recorded in that previous quarter from the MHS pilots of $2.8 million and the oft times discussed loss of revenue from the termination of the Blue Cross-Blue Shield Minnesota contract on 12/31/08.

These declines were somewhat offset by a number of new contract starts on January 1, and significant growth in the member participation in our Silver Sneakers Program throughout the quarter. As expected, margins declined in this first fiscal quarter over the quarter ended November 30, 2008, primarily due to product mix in our new contracts that started on January 1, and the additional costs associated with promoting awareness of our new Silver Sneakers participating locations including the approximately 6,500 new Curves locations, which I might add was very successful.

Additionally based on achieving our internal performance targets, we accrued an additional amount of colleague bonus in accordance with the plan. Those costs are recorded in both the cost of services and SG&A lines of our P&L statement. Our GAAP earnings per diluted share for the quarter was a loss of $0.43, which included a pretax charge of $40 million or $0.73 per diluted share, related to the lawsuit settlement as announced last month. Excluding the impact of this charge, earnings per diluted share of $0.30 in the quarter came in $0.02 above the top end of our guidance range and consisted of $0.33 from domestic operations and a net cost impact of $0.03 from international operations.

For the second quarter, we expect our revenues to be slightly lower sequentially as a result of the potential impact of unemployment on the membership of both our health plan and employer customers, which may affect our billed lives and the effect of previously discussed restructured and terminated contracts. Percent gross margins from domestic operations are expected to improve slightly as the historically higher costs incurred in the November to February timeframe, and associated with contract starts are behind us.

SG&A costs are expected to be consistent with first quarter so for the second quarter we expect domestic operations will contribute earnings per diluted share in the range of $0.27 to $0.29, consistent with first quarter domestic earning results when excluding the gain from the sale of D2Hawkeye which was included in our first quarter guidance.

We expect international revenues to be essentially flat with the first quarter as we enter the early phases of membership enrollment in our new contract with HCF in Australia. Start up and initial operating costs associated with that new contract will put some pressure on international margin; therefore, we expect the net cost impact from international operations in the range of $0.04 to $0.05 per diluted share for the quarter ended June 30, 2009.

Total company earnings per diluted share in the second quarter are expected to be in the range of $0.22 to $0.25. While we’re pleased with the first quarter earnings and revenue results, our guidance remains unchanged for the full year. As we have previously mentioned, we believe that the full impact of rising unemployment has not yet been felt in the membership numbers of our healthcare customers or in the employment ranks of those employers that we serve directly. As a result, we expect revenues over the remaining quarters of the year, which still include a contingency pool for unknown attrition, to be lower than first quarter levels.

From an earnings perspective, the positive results from our domestic business in the first quarter leave us still in the range of our full year guidance of $1.00 to $1.12 from domestic operations. We anticipate that our international business will show earnings improvement in the second half of the year, as operations and resulting expected member participation in Australia ramp up. We therefore remain with a full year outlook of a net cost impact of $0.08 to $0.10 per diluted share for international operations.

And just a word on cash flow. For the first quarter, our cash flow from operations was a healthy $38.5 million. As expected, we ended the quarter with a cash balance in excess of $40 million as we prepare to make the required payment for the lawsuit settlement. We accomplished this with only a small increase in our debt of $8 million in the quarter.

Our capital expenditures for the first quarter were $11.5 million, primarily related to continued work on our new, integrated data and technology platform. Capital expenditures were expected to be more heavily weighted to the first half of the year in general, and we remain on target towards full year capital investments of approximately $35 million.

We continue to expect cash flow from operations to be in the range of $50 million to $70 million for the fiscal year. We remain committed to a debt reduction as our primary objective for the use of that cash.

And with that, Ben, I’ll turn it back over to you.

Ben R. Leedle Jr.

Thanks Mary. Before we open this up for Q&A, there are 2 final points I’d like to share with you. First, as our results for the first quarter show, we remain fully engaged in delivering value to our current customers. Second, we are continuing to make prudent investments to set the stage for and be prepared to respond to the incipient market demand for comprehensive, integrated population wide solutions that improve wellbeing.

I believe now is the time to act on our opportunities to drive the industry to an inflection point on wellbeing. The market is increasingly less interested in incremental steps, and the ultimate success of any health system reform plan also is likely to be dependent on the availability of just these kinds of solutions. We have a distinct first mover advantage in this market. With nearly 36 million billed lives producing substantial operating cash flow, we also have the financial capacity to act even in this environment.

In short, we are confident that we will weather the economic downturn and we are continuing to progress towards the realization of opportunities that drive our optimism about Healthways long term growth potential.

So thanks for being with us today, and now Operator we’d be happy to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Thomas Carroll - Stifel Nicolaus & Co., Inc.

Thomas Carroll - Stifel Nicolaus & Co., Inc.

I was wondering in terms of the revenue number you guys put up, it was higher than we were expecting. I wonder if you could give us some clarity on that, so maybe break it into three buckets if you could. You know, core commercial, international and MHS. Was there any MHS contribution in the quarter?

Mary A. Chaput

No there was no MHS contribution in the quarter. The international was up slightly, and again we’ve done comparisons over the fourth quarter I think in my script, and it was actually declined about $200 thousand and that was related to foreign exchange rates during that period. I’d say that the biggest increase came from the participation in the Silver Sneakers Program, which I think we had consciously estimated a level of membership with that, and I think I would say it exceeded our expectation. And of course we had the new contract starts which we expected. So a little bit offset by attrition, but basically it was a good quarter.

Thomas Carroll - Stifel Nicolaus & Co., Inc.

So there’s nothing in that revenue number that you consider to be a one time item at all?

Mary A. Chaput

No.

Thomas Carroll - Stifel Nicolaus & Co., Inc.

The follow up to the revenue question really, and you’re hitting on it with the Silver Sneakers comment, is maybe – and this is probably early relative to next year, but how do you think about the changes in the recent Medicare Advantage payment and its potential impact on the Silver Sneakers Program going forward?

Ben R. Leedle Jr.

Tom, this is Ben. I think it’s a great question and obviously there’s some that question the viability overall for Medicare Advantage. I think we kind of look out and say reform will take its shape around Medicare with a high rate of intensity. We expect Medicare Advantage to continue and we do expect the health plans running those programs to be under some degree of pressure over time as the rates get adjusted.

The one thing we’ve talked about in terms of the Silver Sneakers Program, and again there are solid third party publications around the outcome for those programs and I would leave you with some thoughts about that. One is this is a marketing tool of differentiation for those Medicare Advantage plans to attract Medicare beneficiaries to join their plan. If they’re interested in joining the plan because they have these unique programs, they are members that are able to be transported to or get to the fitness center and to participate in a physical activity program which obviously tends to be a group that is attractive to those health plans that they’ve looked to grow their membership.

The different publications have clearly reported out with rigorous evaluation a lower cost associated with comparable populations for those who are participating in these programs, and we know for certain one of the challenges in those Medicare Advantage plans is to keep the amount of churn people coming and then leaving their health plan numbers down as low as possible. And we know that those who are participating in this program have a much higher retention rate to stay in those health plans.

All of those, better cost, help with the medical loss ratio, management, attractive marketing engine and retention vehicle hit on all of the key drivers and levers that allow the Medicare Advantage Health Plan to grow and have that be a profitable business.

I would also say we worked hard towards the integration of that program with our disease management for seniors with chronic illness, both taking the learnings from our Medicare health support program and participation and refinement into a total population management model which we indicated the last time we talked that we had launched with a large Blues plan. And so in concert a high percentage of the Silver Sneaker participant also have one or more chronic illnesses. So there’s a natural tie to be able to take the capabilities we have and pull those together.

So I think, you know, we saw very positive response. I mentioned in my script that there were 2 health plans in the quarter that expanded their lines of business for Silver Sneaker to other regions for their book. I think it is going to be one of those programs that is one in which will continue to be in demand from the Medicare Advantage program.

Operator

Your next question comes from Ryan Daniels - William Blair & Company LLC.

Ryan Daniels - William Blair & Company LLC

Mary, I had a couple of quick questions for you up front. First off, can you just give us a feel for what we should expect the tax rate to be for the remainder of the year?

Mary A. Chaput

Sure. I think it’s going to remain in the 40 to 41% level. I think we reflected a lower tax rate due to the settlement and the taxability of a portion of that settlement but not all of it. So I think that sort of threw a little wrench in the tax rate this quarter.

Ryan Daniels - William Blair & Company LLC

And then if we look at the revenue, and I understand your conservatism here, but just kind of run rating it from Q1 levels it looks like there’s about a $50 to $80 million disconnect to your guidance, so you’re being conservative versus a run rate. And I think you’ve talked before about what every 1% in unemployment would drive in regards to your annual revenue. I guess we have to discount that a little bit, because now it’s only 3 quarters remaining. But is there anything unusual in the back half of the year we should be thinking about where contracts are up for renewal or maybe some smaller contracts will be terminated or just anything on a timing basis? Because I guess it seems awfully conservative, given what you put up for Q1 at this point.

Mary A. Chaput

Yes, I think just a couple of things. There are informally previously announced some contract restructurings and small terminations in the air. We have no additional renewals greater than 2% this year, so that’s not part of it. And I think that generally we’re just watching and again I guess in the Wall Street Journal just on Saturday there was a big article on increasing unemployment. And it’s just a little unclear what the economy is going to do. So we have baked that into our forecast.

Ryan Daniels - William Blair & Company LLC

And in regards to the – you mentioned earlier some small contract updates, if you will, during the renegotiation. Does that mean that that wasn’t reflected in the first quarter where we may see more of that in future quarters?

Mary A. Chaput

Well, I think the big one is Blue Cross-Blue Shield Minnesota. There was some restructuring on January 1, but there is some additional coming up throughout the year.

Ryan Daniels - William Blair & Company LLC

Okay. But that should be –

Mary A. Chaput

It’s not a big huge magnitude but again enough to provide us with a little caution and an expectation of declining revenues over the course of the year.

Ryan Daniels - William Blair & Company LLC

And then maybe a couple of bigger questions. Can you talk just a little bit about the rollout of the Embrace platform? I think it’s probably fair game because you guys disclosed this in some of your marketing pieces, but HMSA it appears that they’ve started using that and I’m curious how the rollout has gone. And then perhaps what the immediate benefit might be to the company, meaning Healthways, on potential cost reductions or cost to goods sold to clients, anything of that nature?

Ben R. Leedle Jr.

Sure. This is Ben. Hey Ryan. On the use of HMSA actually the adoption of that platform is coming up on a year on an earlier version of this. We will be, as we talked about earlier, beginning to migrate all of our customers to what we would think of as the third release of that Embrace platform which was aimed at being able to take on the scalability of the amount of business that we have across our entire enterprise. That work is coming to its conclusion this summer in terms of the technology build and [queuing] and preparation.

And then the migration would start beginning late summer, early fall and go through a large part of the next year. So we’ve talked about, for some period of time in previous comments, that we’re going to be operating both the current system which is PopWorks alongside of Embrace as we make those migrations. So you have probably some increasing costs before then and an appropriate expectation for gaining efficiency as well as functionality around the modalities for which we can support and deliver our programs.

So I think, Ryan, a lot of people think of Healthways as a disease management company only and one that fits some kind of label called traditional disease management, which would be telephonic. And I know you know because you spent the time that that’s not necessarily our current state and certainly with Embrace leaves us to be able to support through web-based, telephonic, to support anywhere, anytime, face to face, our venue based programs like Silver Sneakers and take advantage of the virtual communities that we’ve built online and shown success and outcomes with.

So this is just natural order and progression of what you’ve seen from us for a long time, which is the belief that in order to innovate the investments, the real investments have to be there around the underlying infrastructure and technology platform. And we believe that the Embrace platform is a separator for us distinctly in the marketplace in a positive way from everyone else that’s out there trying to do the things that we’re doing. So we’re excited about it and again the financial dynamics of that are going to be there’s going to be some costs in the back half of this year as an increase. They’ll carry into the next fiscal year. Before then we would expect to see some significant pick up in the efficiencies around delivering our capability.

Ryan Daniels - William Blair & Company LLC

Can you just talk a little bit, and maybe it’s too early to do so, but about the 2010 selling season? It sounds like Embrace will be one of the differentiators that your sales force is using out in the marketplace and really any feedback on that and kind of where are we in the selling process? And any update there would just be great. Thanks.

Ben R. Leedle Jr.

Sure. Let me give you just a little bit of color. I’ve tried to talk with you guys in terms of what we’re seeing from a formal request for proposals, as well as requests for information. During the first quarter, Ryan, we saw over 40 RFPs come through. Just to give you a sense, that is volume that’s down on a year-over-year basis on a comparable quarter timeframe about 35%. So what we had been seeing in the back half of last year is kind of continuing into the beginning of this year. But there’s still a healthy amount of business out for bid.

Interestingly, the number of requests for information are up. There were 19 of those during the quarter and they’re really aimed towards the 2010 and beyond timeframe. 85% of those RFIs were in an around very comprehensive, very large, what we would think of as whole health type capability. So we see that as continued encouragement and precursor for where this market is going.

On the straight up RFPs, they’re bidding out. About 45% of those were for wellness only; 30% were for DM only and about 25% of those were for an integrated solution for total population management. So if anything I would say compared to prior sequential quarters that we’ve talked about this, it looks as if people have drawn back just a little bit, both at the health plan and employer level, really focusing in on wellness. But not with the abandonment of pure play disease management or the abandonment still of a healthy amount of proposals that are out there for total population integrated solutions.

You know, I think on the whole health front in terms of the activity we have probably represented in that pipeline the largest number of lives largely through employers that we’ve had, so that has continued to grow. We’re excited and still expect to be able to land our alpha client which allows us to put to work the investments that we’ve made in Embrace and we do believe that that’s a differentiating factor, Ryan, from not only the RFPs through the RFIs but in support of delivery of our whole health capabilities in concert with our Well-Being Index as a metric to be able to measure the value of that solution.

So while it’s challenging times in our economy, I think people are still recognizing people still being the health plan’s employers, government of other countries, that sitting still and not doing anything more about the health, the people that are their constituents isn’t going to improve the situation. And so we continue to see a push forward for the kinds of capabilities that we have as a company.

Operator

Your next question comes from Kyungho Newton Juhng - BB&T Capital Markets.

Kyungho Newton Juhng - BB&T Capital Markets

First question is for Mary actually. Just the composition of your long term debt, I’m wondering if it’s changed at all. I saw in the cash flow statement that there was a pay down of $85 million but then the issuance of another $91, so the net is the $6 million or so that you were talking about earlier. Just wondering what of the debt was paid down and the terms on the new debt.

Mary A. Chaput

No, we have a very active and daily cash management program and so depending on the liabilities that comes in that need to get paid we’ll maybe take the cash balance down significantly and borrow against the revolver if need be. And there’s nothing unusual going on there. That’s just the normal inter-month fluctuation of that program.

Kyungho Newton Juhng - BB&T Capital Markets

So it’s the same type of debt, no changes to that front?

Mary A. Chaput

That’s right.

Kyungho Newton Juhng - BB&T Capital Markets

Mary, also on the D&A expense side, you know, you talked about it being higher year-over-year and it didn’t seem like there was that much increase this quarter. Should we be expecting that to kind of kick in next quarter? Or is it more of a back half of the year kind of uptick?

Mary A. Chaput

Yes, definitely back end of the year. I think we might have mentioned with the go live of Embrace that’s when depreciation will start on that investment, and that is expected to happen in the summer time. So Q3 and Q4 you should see that uptick that we were talking about.

Kyungho Newton Juhng - BB&T Capital Markets

Finally, Ben, one question for you. The choice to settle the lawsuit rather than fight it out, you know, obviously you’ve been kind of on the back burner for a long time and move forward. You know, in February you talked about the lawsuit not having merit and then in March we’re seeing a rather sizable settlement here. I was just wondering if there was something that gave you the opinion that the lawsuit had some more merit or was it just going to be too potentially distracting for you guys and that’s the choice that you made to kind of get it off the – kind of out of the picture?

Ben R. Leedle Jr.

It’s the second of your 2 comments. We saw obviously that certainly this was either going to get settled or it was going to trial. Trial would be a major distraction regardless. There would be costs associated with that that you have to factor into the decision. And then there’s the opportunity costs in terms of a significant long term distraction for the management team. So you combine that then with just the uncertainties that go with a jury trial, it doesn’t have anything to do with suddenly we thought that there was a meritous claim here. We just put all the things together, evaluated it and management and our board believed that now was the time to be able to address it and to be able to move on.

Kyungho Newton Juhng - BB&T Capital Markets

I’d just like to revisit the revenue guidance for going forward and your decision not to kind of move it upward from where it’s currently at. Understanding that we are looking at a bit of a decline going forward, but if I flat line the revenue for the next three quarters and I would end up with a pretty sizable decrease considering the number that you posted in the first quarter. And I just wanted to make sure that I understood this correctly, but the decline you’re entirely attributing to the unemployment factors and what’s already baked in in terms of the kind of the smaller contracts that are being reconfigured and or lost over the course of the next few quarters. Are there any way we can quantify that side of it, the back part of the contract changes?

Ben R. Leedle Jr.

We had – obviously we’re not giving out quarterly revenue guidance, so you’re talking about how to try to factor in, how to look at the last 9 months of the year. You know, for us it’s several factors which we’ve talked about, and I don’t know if this will answer your question for you, but we’re not certain and we don’t think too many people are, of exactly how the economy plays out for the rest of this year. We are pretty certain that at some point the expression of the unemployment will find its way through our financials. Matter of degree as compared to how we’ve forecasted on this will be a function of another 90 days out we’ll have a much – we think a much clearer picture of that.

And then obviously Mary touched on the fact that previously we announced some restructuring activities and terminations that wind their way through the back half of this year, and if we felt like now was the time with high certainty to push up the expectations around revenue for the year we’d certainly do that. From this vantage point, I would just tell you we got 1 good solid quarter under our belt for the year, it’s early, and stay tuned.

Mary A. Chaput

I’ll expand on one other factor that we have and Ben’s mentioned the big ones, but you know Silver Sneakers participation after New Year’s Eve resolutions and that kind of thing can tend to trend down. There’s a bit of a seasonality with that. And My Health IQ which is the HRA component is frequently given at the beginning of a benefit year and then given at the beginning of the next benefit year, and so the revenue associated with those programs tend to be in the first quarter.

Operator

Your next question comes from Brooks O'Neil - Dougherty & Company LLC.

Brooks O'Neil - Dougherty & Company LLC

I’m thinking about the margins and if I heard you correct, Mary, I think you attributed much of the decline in gross margin and increase in G&A to the colleague bonuses. I was hoping perhaps you could quantify the amount of dollars in each of those line items related to that. And if I’m misrepresenting what you said, any additional clarity on the factors driving those margin changes would be real helpful.

Mary A. Chaput

Okay. I wouldn’t say it was the primary so we talked about the promotional materials for Silver Sneakers, so I want you to try to imagine a whole network of approximately 6,500 locations and getting out the promotional materials like the branded balls and the bands and the hats and the T-shirts and the grand openings and getting people excited about coming. And those costs were significant, not only in the fourth quarter but continued into the first quarter. So that was a big piece of that.

Another piece is that our Silver Sneakers has overall a slightly margin that’s not quite as strong as the disease management where we’ve had 12, 14 years to get some efficiencies baked in there. The colleague bonus – I’m not going to give you a particular number but I think and if you look at the accrual you’d see an increase in that accrual, but sometimes that’s due to the timing of the payroll. But I would just say that we accrued it based on the established plan and it was a piece of that margin pressure.

Brooks O'Neil - Dougherty & Company LLC

Mentioning the accruals, I guess I did notice that there was a big jump in salaries and I think a big jump in just general liabilities, and I mean those were meaningful numbers. Any additional insight into what might be driving those? And did that have a big impact on cash flows in the quarter or anything?

Mary A. Chaput

Sure. Anytime you have an increase in liabilities that haven’t been paid that would be a positive impact, not to say it’s inappropriate but you pick accrued salaries, well that’s where the bonus would be accrued. And other liabilities would include the settlement.

Brooks O'Neil - Dougherty & Company LLC

I’m curious if you could just help us all understand your thinking about the gain on sale of D2Hawkeye and how that differs from your thinking about the legal settlement in the quarter? I think many of us are probably scratching our heads a little bit thinking that might be a one time item as well.

Mary A. Chaput

It is a one time item. It was included in our original guidance. I think we did disclose it in our 10-QT, although I’m not sure we did talk about it. So we had a minority interest in this company and the company was acquired and we recognized the gain from that acquisition. So there’s not much more to say about it. Does that answer your question?

Brooks O'Neil - Dougherty & Company LLC

Yes. I get your saying it’s a one time item and it’s probably okay for us all to think about it that way.

Mary A. Chaput

Absolutely.

Brooks O'Neil - Dougherty & Company LLC

And then maybe just lastly, obviously I think it was Ryan asked you about the impact of changes in Medicare Advantage on Silver Sneakers. I’m just curious if you or Ben could sort of wrap up in a general sense the pluses and minuses you’re taking away from the current health reform debate? Are there big items, or do you think it’s all too murky at this point to kind of seem to get a gauge on outlook for you guys as it relates to that topic?

Ben R. Leedle Jr.

I think when we think about the things that are going on and the general discussions on reform, obviously we think that there’s going to be some kind of effort to expand coverage, try to get everybody covered. The exciting thing that we’ve heard consistently, and I think it’s becoming one of the more clarified points about what’s going to be involved in that reform is the movement from just an illness fix-it shop model in healthcare to one that takes into account a new bias for prevention and wellness, which we think that that leaves our company extremely well positioned given the market leading capabilities that we have to support that interest from the government.

Chronic care certainly is a focus around quality and costs. I think the thing there around the chronic care is the expression and the interest to see the multi-modalities levered to the population. So I think the government looks at this and says we don’t want to throw the baby out with the bathwater in terms of what’s been learned around chronic care and chronic illness management over the past 10 or 15 years, but also to introduce supportive technology into that. Broadly which you know there’s been a lot of money earmarked to support healthcare IT, but also in that regard to Advantage then the data and the analytic insights that a company like Healthways has been able to garner without the kind of infrastructure that they’re talking about putting in place.

So we only see that adding to our efficiency and our effectiveness as that continues to develop. Comparative effectiveness, I think a lot of people think about that in terms of pharmacy or device but I think it also plays into services and certainly I think plays to our strong suit to be able to show cause and effect of what we do and to have it be evidence based and supported with rigorous research.

And we’ll continue to hear more and more about the medical home which I think has lots of different supporters with lots of different definitions. I think the general construct there is there needs to be a whole lot more coordination for the consumer in and around how to navigate the resources that already exist and to take advantage of new ones like what our company brings in the area of wellness and prevention. And to put those resources at the helm of the captain of the ship, which in a lot of these models is the primary care physician. We know a little something about how to help get that done.

And then the last thing that I think you’ll continue to hear, Brooks, is the issue around transparency and making certain that accountability is not just an idea but can be followed through with, and that the real value of work that goes on in the area of improving health is able to be seen as measure rigorously. We think the Well-Being Index is perfectly timed and its adoption rate at this point indicating that a lot of other people think so too is a great metric that crosses populations and is [agnostic] necessarily to a particular disease, and looking at a broader definition of health to include physical, emotional and social aspects of people’s health, that being wellbeing.

So we like the direction that reform is taking place in terms of the items of importance. What to get done seems to be getting clearer, how to get it done as you all well can tell is still a bit murky. And that’s the work that’s going to be going on I think in the rest of 2009. I think it’s very evident that the Senate is going to push very, very hard in supporting the President’s demand and interest in creating significant reform this year. There was activity from Kennedy and Baucus about pushing toward an expectation that material improvement around the items that I talked about could be made this year. So we’ll see. We’ll see.

We think Healthways is well positioned given the agenda items that continue to be a focal point in terms of how we’re positioned to be responding to the opportunities that will come from that.

Brooks O'Neil - Dougherty & Company LLC

Are you continuing to see employers being willing to modify benefit plan designs in order to engage members and employees more effectively in the benefit programs?

Ben R. Leedle Jr.

I don’t know. Are you thinking, Brooks, is that question in terms of incentives or rewards or penalties you mean?

Brooks O'Neil - Dougherty & Company LLC

Yes. Incentives, rewards, just modifying, maybe putting different types of co-pays and deductibles, just sort of seemed to me the trend as we got towards the end of last year and into early part of this year was employers really working to figure out how to design their benefits to optimize the uptake by the employees and hence the utilization of programs such as you offer.

Ben R. Leedle Jr.

I think that we’ll continue to see that. I think that that’s the conversation that’s going on actively which is when you look at the problem we have with healthcare and health in this country, it’s probably expressed as an economic problem. Its roots are probably more cultural and then who around the things that they control every day could and should be more responsible than the individual consumer? The question you have to ask is a shifting of either incentives, penalty or financial responsibility without equipping that consumer with the resources to be successful is not going to solve the problem.

So I think it’ll be a part of the equation what you’re asking about. I think consumers should expect to continue to bear more of the financial responsibility and I think the expectation from the consumer is going to push hard back on all of the constituencies to say help me out. Because we know only a small percentage of the general population can sustain doing all the right things around their health, longitudinally, and be successful; less than 10%. So now most of us including myself in the 90% and more are going to need some kind of assistance and support in getting that done. And I think that that’s the opportunity for Healthways.

Operator

Your next question comes from Joshua Raskin - Barclays Capital.

Joshua Raskin - Barclays Capital

Yes, my question is just going back to the D2Hawkeye gain, I guess I was a little surprised. I think this was the first I’ve heard of it and I was curious when this was included in guidance. I think, Mary, you said you guys had disclosed this previously, or?

Mary A. Chaput

We included it in our first quarter guidance. We were participating in the negotiations to some degree as that company was being acquired, so we included it in our guidance but didn’t necessarily call it out.

Joshua Raskin - Barclays Capital

I guess I was just a little surprised if it was, you know, 20% of the guidance of earnings for the first, I would have thought that would have been sort of material enough to have broken that out. I guess were you guys just not –

Mary A. Chaput

Well, we weren’t really in a position to discuss it at that point.

Joshua Raskin - Barclays Capital

Second question, just on the Silver Sneakers, obviously a huge expansion. Can you just remind me? I don’t know exactly how it works with the new Curves expansion. Is that part of MA plans rollout or is that separate?

Ben R. Leedle Jr.

Josh, it’s Ben. We deliver the curriculum of the Silver Sneakers Program through certified and credentialed fitness center locations. So we’ve had, as you know we have a fitness center network that we use for both the Medicare Advantage but also a broader set of fitness centers to support commercial membership with our health plans and employers. Overall, there’s about 15,000 fitness centers in our network.

Think of the Silver Sneakers fitness centers as kind of an exclusive provider sub-set of that network. And prior to Curves we had about 3,500 or so certified exclusive participating locations. Probably about half of those were YMCA. Others were different independent fitness centers that had gone through the credentialing process.

When we added Curves, it added about 6,500 locations that afforded the current health plans that we had that were signed up with Silver Sneakers as well as an opportunity to expand into different regions fairly quickly for others who had membership where we may have needed to build out network coverage for that. So Curves was a big deal for us in terms of establishing the infrastructure for the potential of delivering against the Silver Sneakers Programs for Medicare Advantage and for our, what we call our prime product for commercial fitness center use.

So I don’t know if that helps answer your question or not.

Joshua Raskin - Barclays Capital

Got it. Yes. But I guess just to follow up then, so I guess what percentage of the Silver Sneakers revenue that you’re generating with and without Curves, I guess, all in, how much of that is Medicare related? It sounded like there’s some relationship of commercial.

Ben R. Leedle Jr.

100% is Medicare Advantage.

Joshua Raskin - Barclays Capital

Okay. So 100% is Silver Sneakers.

Ben R. Leedle Jr.

Of the Silver Sneakers. That’s correct.

Joshua Raskin - Barclays Capital

And then I guess is there a way to get a breakdown of how much of that is in what we could call maybe network plans? You know, HMO’s, Medicare HMO’s versus the private fees for service plans?

Ben R. Leedle Jr.

There is some private fee for service but this is largely the Medicare HMO model. Yes, we’ve picked up as you might guess on some of our customers who have multiple lines of business for Medicare, we had picked up some of the private fee for service lives into the program. Probably 90-10 split ballpark between the HMO and the fee for service piece.

Joshua Raskin - Barclays Capital

And then Silver Sneakers I guess, in terms of revenues is that a material contract? You know, as you have sort of broken out in the past in terms of a threshold percentage of revenue, should we think of it in – is there way to sort of gauge, rough ballpark total revenues?

Mary A. Chaput

Well, because the revenues are spread among a number of these health plans, it’s not meeting the requirement to disclose like an over 10%. I will tell you that it is a significant part of our revenues and I would say that if Medicare Advantage stays in place, and it’s hard for me to imagine the government taking on 65 million people, you know, 47 of the uninsured and 11 out of Medicare Advantage and baby boomers of about 7 million entering the Medicare ranks over the next couple of years. It’s going to take quite a bit of time before there’s a movement away, I believe, in Medicare Advantage programs.

Joshua Raskin - Barclays Capital

Ben, you’d mentioned the fourth customer that you guys were working through the renewal that did indeed re-up for a year. Was there any change in contract or was it just one year at last year’s sort of rate?

Ben R. Leedle Jr.

One year at last year’s rate. So it’s an auto renewal mechanism. Obviously for us we want to be able to while we’re happy that the near term is addressed, the real energy goes to making certain that we have a little time now to work through the longer term view with that relationship.

Operator

Your last question comes from Daryn Miller - Goldman Sachs.

Daryn Miller - Goldman Sachs

Ben, is it possible to get a sense as far as what you guys are seeing in terms of unemployment impacting your business?

Ben R. Leedle Jr.

You know I think our general comments would tell you that in the first quarter we actually had sequential quarter increase in billed lives. Certainly there are some industry sectors, manufacturing, where specific employers have either closed plants or put people out on extended periods of plant shutdowns where certainly that’s an impact. But overall, we have not seen what you could expect to look at as the public figures for unemployment coming through on a relative logical relationship through the membership. Let me just put it that way.

So it’s hard for us to be able, particularly at a new point in the year when a lot of our business is through health plan membership, to know exactly what churn was people losing their jobs versus what churn was simply people leaving their jobs for other opportunities. So we’ll know more really about your question over the next 90 days we should get some sense of how to translate overall unemployment and that curve with its expression through our business. We’ve never operated under these type of circumstances so I don’t have any history to go off of for you.

Daryn Miller - Goldman Sachs

Are you guys providing a backlog still number?

Mary A. Chaput

Yes.

Daryn Miller - Goldman Sachs

I don’t know if I missed that.

Mary A. Chaput

No, you didn’t miss it. We didn’t include it in our release or anything. But the backlog is about $8.3 million. I’d say that the throughput is faster and we’ve had some major starts on January 1, but there’s a little more to go.

Daryn Miller - Goldman Sachs

And Mary the increase in accounts receivable, is that primarily due to the mix shift towards Silver Sneakers?

Mary A. Chaput

Well, I would say it’s a mix shift towards wellness in general. I would like to mention that we did collect about $37 million since the end of the quarter, and so timing always plays a factor in that.

Daryn Miller - Goldman Sachs

Do you have any overall equality statistics toward that AR, maybe like average age or something?

Mary A. Chaput

I will tell you the aging has continued to improve, quarter over quarter.

Operator

That does conclude the question-and-answer session today. At this time I would like to turn the program back to our presenters for closing additional comments.

Ben R. Leedle Jr.

I just want to thank you guys for being on the call today. Mary and I and Chip will be around so if you have questions give us a call. Thanks again and look forward to seeing you out in the marketplace.

Operator

Once again that does conclude today’s program. We thank you for attending and have a great day.

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. Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts