Healthways' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.13.14 | About: Healthways, Inc. (HWAY)

Healthways, Inc. (NASDAQ:HWAY)

Q4 2013 Results Earnings Conference Call

February 13, 2014, 5:00 pm ET

Executives

Chip Wochomurka - Investor Relations

Ben Leedle - President, Chief Executive Officer, Director

Alfred Lumsdaine - Chief Financial Officer

Analysts

Sean Wieland - Piper

Josh Raskin - Barclays

Ryan Daniels - William Blair

Tom Carroll - Stifel

Shawn Bevec - Deutsche Bank

Mohan Naidu - Stephens

Mike Petusky - Noble Fin

Operator

Please stand by, we are ready to begin.

Chip Wochomurka

Good afternoon, and welcome to the Healthways' fourth quarter 2013 conference call. Today's call is being recorded and will be available for replay beginning later today and through February 23 by dialing (719) 457-0820. The replay passcode is 9513816. The replay may also be accessed for the next 12 months on the company's website.

To the extent any non-GAAP financial measures 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 also posted on the company's website. You will find a PDF of the supporting materials that the company will use in its prepared remarks this afternoon by going to the Investors page and looking at the information for the fourth quarter 2013 earnings conference call.

Please review the second page of this material which includes important information about any forward-looking information included in the presentation. 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 quarterly and annual operating and financial performance for 2014 and beyond.

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 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 today's 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 would like to turn the conference over to the company's President and Chief Executive Officer, Mr. Ben Leedle. Please go ahead, sir.

Ben Leedle

Good afternoon. Thank you for being with us today for our fourth quarter 2013 conference call. I am here today with Healthways' CFO, Alfred Lumsdaine. We will both make some prepared remarks about our results for the fourth quarter, as well as our outlook and guidance for 2014. Following those remarks, we will open the floor for your questions.

I will begin this afternoon by making two simple and brief points. In our discussion with you last quarter we were clear about our expectations for achieving GAAP revenue growth in 2014 and expanding our EBITDA margins versus 2013. So my first point is that those expectations have not changed. My second point is that we missed our expected financial results for the fourth quarter solely due to the effect of an accounting determination on one new contract. This impact had absolutely nothing to do with either our performance on this contract or any other aspect of our business. Further as we discussed in today's release, the impact of the accounting determination will actually improve the results for the company in 2014 and 2015.

I am taking the time to open and to make these two points because we know the headline impact of what is nothing more than a timing issue will be disproportionate to its actual impact on our business. In the context of our cautious optimism, entering 2014 we want to make sure you appreciate that both the accounting determination and its immediate impact on 2013 results are isolated to this one contract.

I will now ask Alfred to discuss this issue and our fourth-quarter results in more detail as well as our 2014 guidance. I will then have some additional comments about our market position and business development. Alfred?

Alfred Lumsdaine

Thanks, Ben. Good afternoon, everyone. Fourth-quarter revenue of $169 million was $6 million less than the fourth quarter of 2012. Excluding the impact of the two terminated contracts our revenues increased 5% on a comparable quarter basis. On a sequential quarter basis, revenue increased by $3 million or approximately 2%.

As we mentioned in today's release, our expectations and guidance for the fourth quarter included the completion of a new agreement with an existing long-term customer for whom we provide multiple service lines. Based upon a term sheet at the end of the third quarter, we anticipated we generate $10 million of fees to be recognized as revenue during the fourth quarter for services that we performed during the third and fourth quarters. This agreement was finalized in the fourth quarter and we subsequently received full payment of the $10 million.

However following a comprehensive review with our independent auditor, particularly focused on certain new contractual provisions in the final agreement which was completed in connection with a large related distribution agreement into future years, we made a determination to recognize the benefit of the $10 million payment over 2014 and 2015. It should be noted that all of the costs related to this $10 million were incurred in 2013. So the impact of this deferral will drop straight to the bottom line in 2014 and 2015. The important point I would make on this topic is that the accounting treatment in no way diminishes the value of the business or the underlying economics of this agreement. It's simply a matter of timing of recognition for accounting purposes.

During the fourth quarter, we incurred a net loss per share of $0.15. The decision to defer recognition of the $10 million fee resulted in a $0.17 per share negative impact to our previous expectations. Obviously this determination also impacted our EBITDA margins for the quarter which ended at 6.1%. Our cash flow from operations for the fourth quarter was approximately $20 million and capital expenditures for the fourth-quarter totaled $9 million.

In summary, for the fourth quarter, if the recognition of the $10 million fee had occurred as we had originally forecast, we would have been squarely within our guidance for both revenue and earnings. For the full year of 2013, our revenue was $663 million and we incurred a loss of $0.25 per share which included $0.05 per share of non-cash interest expense from the convertible bond financing we completed in July 2013. Consistent with our original expectations for the year, our cash flow from operations for 2013 was approximately $72 million and our capital expenditures for the year totaled just over $41 million. A substantial majority of our free cash flow was applied towards debt reduction.

So now let's turn to our financial guidance for 2014. Before I begin, I draw your attention to the presentation materials posted on our website under the link to today's webcast that I will refer to in a moment. Based upon our current visibility, we are solidifying our revenue guidance for 2014 to be in a range of $730 million to $760 million. There are three elements that drive our projected revenue growth during 2014.

The first factor is retention. As we indicated in our earnings release and Ben will expand on this further in a moment, we renewed all three of the large contracts up for renewal in 2013 and in fact have had our best year of revenue retention since 2008.

The second factor is ramping revenues under existing contracts. As you know many of our contracts come with revenue streams that expand over time, either through enrollment growth or the expansion of service lines or both. At the same time, as I indicated at the end of the third quarter, we are taking a more conservative approach to quantifying the revenue ramp under our contracts with health system customers for 2014.

The third and final factor driving our projected revenue growth is new business. At the bottom end of our 2014 range, we have included no new business for 2014 that is not either been sold are committed to as of today.

Now referring to the presentation materials posted on our website, on slide number three you will see a table that provides a revenue percentage breakdown among our five primary customer types. As you review the comparison of revenue percentages by customer type for 2013 compared to 2014, an important take away is that all of our customer markets are expected to grow in 2014. In total, we expect revenue to grow between approximately 10% and 15% for 2014 compared to 2013. Our expectation continues to be for very strong revenue growth off of a small base for our health systems market, strong growth of 20% or more in our Direct-to-Employer market and solid mid-single to low double-digit growth in our commercial health plan, international and Medicare advantage markets.

We plan to share our actual and expected revenue breakdown in a similar manner on an annual basis only, as a quarterly snapshot can be somewhat misleading, primarily because of the timing of performance-based revenue recognition. As noted in today's release, we expect EBITDA margins to expand significantly year-over-year in 2014. If you refer to slide number four, you will see that our final EBITDA margin for 2013 was 8.2%. This result was obviously impacted by the previously mentioned determination to defer recognition of $10 million.

As we move into 2014, we expect to achieve EBITDA margins for the year in a range of 10.5% to 11.5% or a growth of 230 to 330 basis points compared to 2013. As a result of this margin expansion, for 2014 we expect to achieve adjusted earnings per diluted share between $0.11 and $0.26 which will be reduced by expected non-cash interest expense of $0.11 per diluted share resulting in GAAP earnings per diluted share guidance in a range of breakeven to $0.15. Also on slide four, you will see that we expect to generate operating cash flow in a range of $75 million to $85 million for 2014.

Our capital expenditures for 2013 of just over $41 million were a little lower than we expected. That was a result of some timing of payments that moved from 2013 into 2014. We expect 2014 capital expenditures to approximate 2013 level and be in a range of $40 million to $45 million. We currently expect that most of our free cash flow will be applied towards debt reduction.

With regard to our debt covenants, as a consequence of the deferral of recognizing the $10 million fee, we ended the year much tighter than we had anticipated, at 4.67 times leverage. We expect our leverage ratio to decline slightly through the first quarter before beginning to decline more significantly during Q2. We expect that by the end of the year the leverage ratio will have declined significantly to approximately 3 times or less.

Also as indicated on slide number four, we expect our overall tax rate for the full year to be approximately 43%. Finally, we expect that our total interest expense both cash and non-cash will increase by approximately $2 million in 2014 compared to 2013 and that our depreciation and amortization expense will increase approximately 4 million in 2014 compared to 2013.

So I would like to turn now to our expectations regarding the shape of our financial performance in 2014. Let me begin by emphasizing that we have full confidence we are returning to a period of growth in both revenue and earnings. At the same time the expected shape of revenue growth through the year will differ somewhat from the expected shape of EBITDA margin and earnings growth. We expect revenue to show strong sequential quarter growth in the first quarter with more modest subsequent sequential quarter growth thereafter that will come from ramping revenues, new contract starts and the recognition of performance-based revenues.

The shape of quarterly EBITDA margin and earnings for 2014 is somewhat different than revenue primarily as a result of two key factors. The most influential factor is the timing of performance-based revenue recognition. Although we expect the amount of performance-based fee recognition in 2014 be similar to that in 2013 in a range of 3% to 4% of revenue, a significant majority of this revenue, in fact more than 80%, is currently forecast for the second half of the year.

The second factor that significantly influences the progression of margins and earnings during the year is that the front half of the year, particularly the first quarter, is burdened with the rollover of implementation costs as we launch significant new business in January. This year is no exception and these costs fall off significantly as we move through the second quarter.

As a result of these two factors, we expect the loss in the first quarter at approximately the same level as the $0.12 per share loss we incurred in the first quarter of 2013. I would note the first quarter of 2014 includes approximately $0.03 of non-cash interest per share that was not an element of our 2013 results. We would expect earnings to be approximately breakeven for the second quarter with most or all of our full-year profits to be generated in the second half of 2014.

So I would just make just a few closing observations. We are confident the underlying strength of our value proposition is becoming more widely understood and our unique and proven well-being improvement approach towards population health management is driving increasing demand for our services. All of our solutions are tied into a common infrastructure and utilize a common set of assets across our customer markets. In financial terms, this means that with each of our customer markets expected to grow over the next three to five years, we would expect to gain significant leverage from our cost structure as we grow.

And our 2014 guidance clearly supports this dynamic. We believe this expected revenue growth and the resulting leverage gives us excellent visibility to improved earnings performance across the multi-year period.

So with that, I would like to turn the call back over to Ben.

Ben Leedle

Thanks, Alfred. Just some final comments. Our path to sustained profitable growth is clearer now that it's been for several years. Factors contributing to that clarity include the following.

We have made the fundamental investments in infrastructure in solution development that allows us to deliver our well-being solutions at scale. We have built, acquired or partnered for new and necessary capabilities. We have evolved from the world's leading disease management company to the world's leading well-being improvement company. We have developed our solution across health plan, employer, health system, physician and government customers, both here in the U.S. and abroad. We have proven our expanded value proposition that people with higher well-being cost less and perform better and we have delivered on this promise consistently.

As a result of these and other accomplishment, 2012 and 2013 were the most successful business development years in the company's 33 year history. As you read in today's release and you just heard Alfred discuss in a whole lot of detail our guidance anticipate that we will return to profitable growth in the second half of this year. Sustaining that growth in 2015 and beyond will depend on two key factors. Our continued execution success and our future track record in business development. Simply put we have to deliver the promised value, keep and expand existing customer relationships and then add new customers to our portfolio.

In past calls, we spent a lot of time on the steps taken to assure our ability to consistently deliver the value. Today I want to spend a few more minutes giving you some color about our business development effort. As we mentioned in today's release, we added 25 new customers across all our markets in 2013 and expanded or extended our relationship with 79 others. We were successful securing our three large contracts each representing more than 2% of 2012 revenues that were up for renewal in 2013. And overall we retain 92% of our customers and 93% of our enterprise run rate revenue. That's consistent with our historical benchmarks to fuel growth.

These contracting achievements resulted in our increasing the number of individuals that have access to our solutions from 45 million lives at the beginning of 2013 to 68 million lives today. Of that total, 53 million or approximately 80% of our lives are here in the U.S. with 15 million lives internationally. And approximately 20% of our U.S. based lives that we are serving now are Medicare and Medicaid beneficiaries.

The annual revenue impact of new business secured during 2013 and for 2014 and beyond is approximately $125 million at target performance. Looking forward, we expect industry demand for population health management programs will increase as the growth in value-based payment requires new approaches for the effective management of risk. Further, we expect the continued evidence of superior outcomes from our well-being improvement solution will drive a disproportionate share of this new demand to us.

And with that, I want to thank you for your interest and your attention and I will now ask the operator to open the floor to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).We will go first to Sean Wieland with Piper.

Sean Wieland - Piper

Hi, thanks, guys. So have got to ask about this, of course, the $10 million deferral. So a number of questions here. What percentage of this is the entire agreement? $10 million is X percent of what? Talk about the provisions, specifically in the contract, that caused the deferral of this revenue? And how much of this is can be recognized in '14 and how much is going to be recognized in '15?

Ben Leedle

Sure, and if I forget a component of the questions, Sean, just let me know. In terms of the specific contractual provisions, we are not going to go into that kind of detail. It's obviously customer confidential. At the same time, all of the $10 million relates to a specific body of work under a specific agreement with this customer. The customer happens to have multiple service lines with us and there was a related agreement that was entered into near the same time as this one.

There is nothing we have to do to cause the recognition of the $10 million. It will happen toward products completed but it just so happens that given some of the complexities and the linkage to other lines of work because of some specific contractual facts that the recognition got pushed out of '13 into '14 and '15 as we finalize this agreement.

Sean Wieland - Piper

So how much is going to be in '14? And how much is going to be in '15?

Ben Leedle

I am sorry. It will be about 40:60 or somewhere between a third, two-thirds to 40:60 in that kind of range.

Sean Wieland - Piper

So one-third in '14 or two-thirds in '14 and one-third in '15?

Ben Leedle

Just that. We will call it 40% or $4 million in '14 and $6 million in '15, approximately.

Sean Wieland - Piper

Okay. All right, that's helpful.

Ben Leedle

Sean, I would interject, just all of this is included in our guidance.

Sean Wieland - Piper

Sure. I understand. And your decision to maybe take a more conservative stance on the guidance going forward. Sounds like it's a smart move. Tell us, when you gave us guidance for 2013 a year ago, you gave us a kind of a comparison of how much of net new business was anticipated in your guidance for '13 and today it would be zero, but what was it last year?

Alfred Lumsdaine

I think the biggest, the most fundamental change, is how we are treating, as I think you are aware the potential for attributed populations inside of her health system contracts and we are taking a significantly more conservative view until we have absolutely, I will call it, certainty that those populations have been contracted for, data has been exchanged, go live date just that, until all those things are in place, we are not going to put it into our guidance. I think compared to last year, and it was yet tens of millions of dollars that we had, based on the visibility that we had at that time.

Sean Wieland - Piper

Okay, last question, I promise. Why isn't that opportunity working yet?

Ben Leedle

Yes, Sean. I think the things that I outlined on the call for the third quarter and we have been asked a lot in between, how is it going .We are seeing progression, albeit at a force even that we would like to see. In terms of the factors that Alfred just outlined and the challenge that we talked about was, for health plans and health systems to paper these ACOs deals doesn't really require a lot other than that of a mutual mindset to put them together.

To operate them requires a pretty high (inaudible) around technology, data and assuring that there is an infrastructure at the delivery system level to be able to service those. So there's a gate at the front end that without solid processes for data exchange, refining and confirming eligibility of the intended population and how that fits back with these attribution models down to the individual patient/member and physician, there's a lot involved there. And historically, health systems have not been required to do data handling and analytics and application work at that type of level and traditionally health plans haven't put data over to health systems in this nature, particularly in the commercial space.

I think there is a difference, Sean, probably between Medicare Advantage work that's going on in the marketplace for some of this has been going on before ACA versus particularly commercial because there is one other factor in it that creates some complexity which is, in the end of the day most of that commercial business is under group policy not individual policy, which means there's another party engaged which is the employer and many times a particular delivery system is not going to have 100% coverage for where the core relationships of the employees and dependent family members of employer group are.

So there's lots of upfront communication, a lots of data handling and a lots of assurances that the targeted population is being matched up appropriately with the identified physicians of attribution. It is taking longer in the marketplace in general and specifically with those who we partnered with. It's not that progress isn't being made but that that's just not in our forecast until we meet the criteria that Alfred outlined which is simply, we have the data or the population, we have confirmed the eligibility, that information is prepared to run through the analytics to populate the application workflows and that we have a start date to go on. And when we know we have those things, you will see us reporting out the progression of that through the year.

Sean Wieland - Piper

That's very helpful. Thank you very much.

Operator

We will go next to Josh Raskin with Barclays.

Josh Raskin - Barclays

Hi, thanks. Just a quick one. I got the $4 million on the deferral in '14. Is that straight line as a $1 million a quarter? Is that how we should think about it?

Alfred Lumsdaine

I wouldn't think of it as a straight line, although it's so small on the relative impact of our guidance overall. You wouldn't be far off inside if you thought of it that way.

Josh Raskin - Barclays

Okay, and then just speaking on that last question about the systems and hospitals, if I look at your guidance and I appreciate the new stat supplement, if you sort of just do the math on the 5% growing at 8%, it's up, even at the low-end 75%, mid-point closer to 80%. So that seems like, obviously, a big ramp up, o although based on your commentary, it sounded like it was taking a lot slower. So I just want to juxtapose those two comments that it is coming in slower but you are guiding to revenues up 80% in that system/hospital/(inaudible)?

Alfred Lumsdaine

I want to be as clear as I can on this. We have multiple sources of revenue with our health system clients. The conversation and the answer to the question that Sean just had was really targeted around ACO risk lives that are either in capitated arrangements on behalf of the delivery system or some type of gainsharing model. In addition to that, we have consulting revenue streams, we have service line for chronic centers of excellence and particularly, as you know we have introduced the Dr. Dean Ornish Lifestyle, intensive lifestyle program.

So part of what you are seeing there is growth or the commitments for the Ornish program and obviously a final of revenue area we are being asked to take are Blue Zones solution which is really partnering with particularly the not-for-profit based health systems working on establishing community health improvements and that's a final stream of revenue. So all of that growth is not solely dependent upon the number of risk lives coming through ACO agreements where we are partnered. A portion of it is but we can grow with health systems in lots different ways.

Josh Raskin - Barclays

Okay, got you. Speaking on that one, just one line down. The international about 4%. I think that implies something in the ballpark of $26.5 million in '13. I think the last time you guys gave was guidance back for 2012, it was anywhere between $27 million and $32 million. So is it fair to say that international has been slightly down that in 2013 overall?

Alfred Lumsdaine

Yes, I think there's been some churn in their business and I ma back a number of years where we had contract that was not extended with DAK in Germany. So there has been replacement of that revenue stream and I think we have got a real good base particularly with the extension of our arrangement with HCF. We are seeing growth in all of our markets and they have a very robust pipeline. I will interject, not too dissimilar than with our health systems attributed lives. We are pretty conservative in incorporating pipeline opportunities internationally because we just know that they take longer to just stay and see throughput. So we have been very conservative in our outlook in terms of the pipeline as it relates international.

Josh Raskin - Barclays

Got you, and then just last the one there. On the MA plans. I know that's down but if you do the math, the revenues themselves are up at the midpoint of guidance of 5.5%. Is that a little SilverSneakers in there or they are other services. And I guess, just size of SilverSneakers within there and if SilverSneakers is up in 2014 on a net basis. I know you guys have a big expansion with Humana.

Alfred Lumsdaine

Yes, SilverSneakers is up in 2014. It's certainly not all. We view our business in the customer markets. SilverSneakers is not all of the product line that we sell to MA plans. There's other service lines as well. It is a majority of the revenue streams as a product inside of our MA plans. And it is growing. As you know, it's a fairly penetrated into the market in terms of market share. So while we still see greenfield opportunity, clearly it's not as robust as it has been from a historical standpoint because of penetration.

Josh Raskin - Barclays

Okay, and just one comment. I guess it could be helpful if we got the 2012 percentages as well, just to see a little bit of trend on some of the actuals. Just one comment there.

Alfred Lumsdaine

Okay.

Josh Raskin - Barclays

Thanks, guys.

Alfred Lumsdaine

Thanks.

Operator

We will go next to Ryan Daniels with William Blair.

Ryan Daniels - William Blair

Yes, thanks for taking my question. I will add to Josh's comments. We appreciate the incremental bid as well. It's very helpful. I want to go back to Sean's questions about what went wrong with the ACO ramp. I know you discussed it tonight. You discussed in the last call but maybe take a different as to what's going right or are you seeing any of the tides turn there. I know it's not in your guidance but any of the tides turn such as you think '14 could be a better year on that front with your existing customers?

Alfred Lumsdaine

I think a couple of things developing in that work. Most of what we have communicated are around that model in terms of ACOs have been as a function of relationships we have with what I would think of as integrated health systems and that work is progressing. And so having the infrastructure in place, doing the change management for all the different stakeholders in that equation, handling the data, preparing and doing the analytics, all of that work is in an advanced mode from where we were at the end of the third quarter. Until we have all of the elements again that we talked about, we made a commitment to you guys in late October that it wouldn't be in our forecast until all aspects have been met.

We don't want that because they are not in the forecast to represent in any way that this work isn't ongoing or progressing or that we don't expect that we will continue to expand on this. The thing I would comment is, we are engaged, as you know, with at its core of this work, post our acquisition of Ascentia a couple years ago now, with Renaissance Health Network, a primary care I PA in suburbs of Philadelphia. And while that was the initial physician enterprise model that kind of stood alone separate from facility based organizations, we have seen continued growth in demand, Ryan, in terms of both the pipeline and progression of that pipeline for more of those types of structures that will provide similar access for us to support and participate in the management of downstream risk from Medicare Advantage and commercial payers.

So my color on that is simply, we are heads down. We are making consistent progress forward. And as we go through the year, we will update you on the throughput of that work.

Ryan Daniels - William Blair

Okay, helpful color. And then, I guess another one on the financial outlook you always give us. I am curious how many of the large contracts are up for renewal in '14, kind of a percent of revenue and number of contracts?

Ben Leedle

Yes. Just let me recap.' 13 that we just finished. I know, Alfred said and I said, it was in the release. We had three contracts and the way we report these is any contract that is 2% or greater of the prior-year revenues is something that we will track and talk about. So for 2013 that was three contracts greater than 2%, roughly representing 7.5% of 2012 revenue and in '14 it's significantly higher. Not in terms of the number of contracts but in terms of the percentage of 2013 revenues. We have four key contracts greater than 2% representing 19.9% of the 2013 revenue stream.

The other point I would make is, the term dates on those are all 12/31/13. So it's not going to impact our '14 year. Obviously our comments that were prepared pointed to the success for growth beyond '14 is a function of several things. One of those, obviously, critically important is this piece of work that we are engaged in.

I would tell you that we are already significantly advanced in three of the four and the fourth one isn't behind. It's just on kind of a normal course timeline for where we would expect it to be in these renewal discussions. So it's work that began well back into late spring and summer of last year, knowing that contracts of these size in order always take time and it's a critically important inflection point as they and we digest our performance, which is all strong on each one of these and we are confident with the progress that we are making and our expectations would be to be able to get these renewed.

Ryan Daniels - William Blair

And I don't know if you want to provide direct color on this but anything unique about those four? They are more exposed to the SilverSneakers, Direct-to-Employer or health plan markets?

Ben Leedle

That's the one thing that we haven't provided as a level of detail historically and I really can't, at this point, for all sorts of reasons of confidentiality with those agreements.

Ryan Daniels - William Blair

Okay, and I appreciate that, and then a final one here. Just last quarter you talked about two bigger accounts that you thought may have come in, in Q4. I think one of them maybe the WellPoint Ornish deal but can you just give us any color on where those are?

Ben Leedle

Yes, well. One was the WellPoint Ornish deal. We have communicated that obviously post our 8-K release and you probably saw, it was Tuesday this week, WellPoint's release that gave a little fuller picture of that from their perspective. And I have been happy to update people that we continue to make good progress on the second one. At the end of the third quarter we told you there was two in progress. We had pretty good confidence we would get one of those done before the end of '13. And that the other one would likely rollover into this year. And I think there's a strong possibility that we will bring that to conclusion one way or the other before the end of our second quarter.

Ryan Daniels - William Blair

Okay. Thanks, guys.

Operator

And we will go next to Tom Carroll with Stifel.

Tom Carroll - Stifel

Hi, guys. Good afternoon. I want to come back to the accounting adjustment issue here. So, Alfred, the $4 million that will roll into 2014, does that equate to roughly $0.11 a share?

Alfred Lumsdaine

No, I would say, it was closer to $0.06 to $0.07 a share, Tom.

Tom Carroll - Stifel

So do you not ay tax on that in 2013?

Alfred Lumsdaine

No, we will pay tax. It will obviously be a component of our tax rate. I think $4 million pretax will translate into, again, probably around closer to $0.07 per share, $0.06 or $0.07.

Tom Carroll - Stifel

Okay. So just widely.

Alfred Lumsdaine

It maybe a little high. So it maybe $0.06 but it's in that range.

Tom Carroll - Stifel

So that in the context of your new guidance range for this year. If we look at your breakeven to $0.15 a share positive, adjust out that item that's sliding into this year, we are looking at an adjusted range of kind of a negative $0.07 to roughly positive $0.07, call. I am trying to think about that in the context, again, of what seems to be a pretty positive story still. A lot of contract signs, the bottom end of your revenue coming up which might actually be related to this adjustment, that's another question. So maybe, has something changed? Are you feeling cost pressures in other places? I felt like we would be seeing a bigger number than the guidance here today. Or would you suggest that there is just, given the experience of 2013 and not perhaps wanting to repeat it in 2014, there's a heavier dose of conservatism built-in? So maybe a little more color around how you establish your guidance for this year?

Ben Leedle

Sure. Well, I think we been pretty transparent that there is more conservatism than when we approach 2013. We have been very specific around one element of building the guidance. And I think we do want to be appropriately conservative with how we come to the market with our guidance. I would also call your attention to the $0.11, $0.12 approximately of non-cash interest expense. That is another accounting, I call it an accounting artifact, of the P&L item that will never result in us actually paying cash. So when you are looking at that, your back of the envelope, there's another element too that causes is a lack of comparability from '13 to '14. We had about $0.05 of that non-cash interest in '13 and we will have about $0.11 in '14. So again, I would just conclude your question by, I think you are correct that we want to more conservative, intentionally and appropriately in how we construct our guidance. If some of the things turn out to come to fruition quicker or in a more robust way than we actually forecast, then we will be back to you and we will included once we have better visibility.

Tom Carroll - Stifel

So then another question in terms of the risk lives being completely taken out of guidance. We have got, going from last year, you had some estimate of what would be in there and what it would contribute if we pull that out. We are pushing that perhaps into this year and thanks for your commentary on it already. Would you suggest the probability of those falling into 2014 is higher given we got another year under our belts and those contracts have matured a bit more and the T's are crossed a little better? And would you suggest the probability of you coming back this year is a bit higher?

Ben Leedle

I think that's fair. I know for certain we will have more lives in 2014 than we did in 2013. I think the market continues to move in the direction of these types of structures. So the probability of us gaining lives that we didn't have in our guidance is higher than it was a year ago, just because of the market movement. I think that's a fair conclusion as well. But again, unless it meets all the thresholds we have discussed we are not going to put it into our guidance.

Tom Carroll - Stifel

So do you have any better sense of timing in terms of when or when you won't know if those are going to be slowing in?

Ben Leedle

I would tell you that on the longest established partnerships, we can say that we have a different confidence interval around the timing. You know there's good reason for it not being in the forecast, because things sliding a month can move it from one period to the next. And we are just not going to put ourselves in a position to probably be certainly wrong again about that when the opportunity that we will have during the year, to Alfred's point, we expect to have more lives and we expect to be able to talk about this progressively through the year as we go and I think that's probably the best that we will be able to give you at this time.

Tom Carroll - Stifel

Okay. That's great. So on the revenue guidance, the bottom end you raised a bit. Was that related to the accounting adjustment or was that just a better view of --

Ben Leedle

That was accounting. As I mentioned, the accounting matter with the $10 million and that's fully incorporated into our guidance and obviously there's a lot of things but change in the course since we talked to you last which was four months ago. So roll it all together and we feel very confident about the $730 million to $760 million.

Tom Carroll - Stifel

And then you guys have talked about perhaps doing an Investor Day. Any news on that?

Ben Leedle

Yes. That's good question. I think we are pretty far down the path and planning to do one and we would anticipate that it would be in the late fall, mid-November timeframe but I think we are pretty well set to do something this year.

Tom Carroll - Stifel

Okay, and then one last one and I will jump off. So the WellPoint deal with the Dean Ornish program, obviously we have all read up on it. It's a positive thing. It works. There's good numbers. How should we, as analysts and investors, think about the contribution of this contract to Healthways over time? Trying to put some numbers around it relative to this year and next year or even just the potential of it. So if you could chat about that a little bit?

Ben Leedle

So you are familiar with the model and the revenue model for us on that is a function of getting these services set up with health systems and physicians and then identifying the population that meets the diagnostic criteria for eligibility and then getting those folks enrolled and driven through the program. So all of this depends on two factors. One, the number of Ornish sites that we will bring up over time which begins to become a network once there's enough of those set up in regions or in particular geographic areas. And then the other factor on contribution is the volume that successfully flows through that program.

So you should expect that there would be a ramp for the Ornish business as it gets expressed not only this year but would continue to ramp across the next couple of years. And that, at target performance, the contribution of the Ornish business probably delivers slightly better than what you have seen as our present EBITDA margins over the last couple of years. So it's going to be a positive contribution to the expanding margin profile.

Tom Carroll - Stifel

So this is a 10% to 12% EBITDA business for Healthways?

Ben Leedle

I think it's safe to say that it's at least that.

Tom Carroll - Stifel

Okay, great. Thank you very much.

Operator

We will go next to Shawn Bevec with Deutsche Bank.

Shawn Bevec - Deutsche Bank

Thanks, guys. Going back to that, the contract that resulted in the accounting adjustment. Do you guys have any others, any similar contracts with any other customers where this issue could occur again? I was just trying to determine what the risks there might be.

Ben Leedle

Sure. No, this was a unique fact set with the customer and with the customer in terms of how those contracts are structured and the contractual provisions.

Shawn Bevec - Deutsche Bank

Okay, and then going to the ACO lives. You took all of ACO lives out of your guidance in the third quarter. I ma just wondering if you are starting to see any of those come in or we are still sort of at this base of no lives hitting the P&L yet?

Ben Leedle

What we said was, we were going to take out of the forecast any future lives. I don't want to confuse that with the fact that there is a base of lives that we are actually delivering and supporting today and more expected but the more expected part of that is not reflected in the forecast. So it's not that we would have taken out lives that we are serving out of the forecast. It's the prospective and/or signed contracts that haven't met all of the operational criteria that we have laid out that wouldn't be in the forecast.

Shawn Bevec - Deutsche Bank

Yes, I understand that. I was just wondering if any of the lives that you had previously assumed were going to come online and then you have removed those, have any of those now come online from when you did that in the third quarter to today?

Ben Leedle

A small number.

Shawn Bevec - Deutsche Bank

Small number. And then lastly, with regards to your long-term margin targets in the 15% to 18% range, can you remind us when the timing of that when you expect that you might be able to get to that range?

Ben Leedle

We think we been pretty candid to the low-end. You are probably talking somewhere in the three to five year range. You see the progression from '13 to '14 of 230 to 330 basis point. That will be a big step. It wouldn't take too many years at that pace. Now I don't know that will be that dramatic. Obviously you have got some of the impact of this $10 million that's driving of a component of that. But I think we still see a three to five year walk back to the low-end of that range as wholly intact.

Shawn Bevec - Deutsche Bank

Okay, and then one more last one. The SilverSneakers contract extension with Humana, how many of their MA members did you access previously. And I don't know if you disclose this but what percentage of the SilverSneakers revenue has Humana comprised historically?

Ben Leedle

Yes, I don't have those numbers specifically in terms of the first part of your question. Historically, as you know, Humana is our largest customer. They were just over 11% of our revenues in 2012. It is probably going to be a little less than that in 2013 as a percentage of revenues but still there will be more than 10% of our revenue. And again that number has grown as they have added their last Tuesday.

Shawn Bevec - Deutsche Bank

Okay, great. Thanks, guys.

Operator

We will go next to Mohan Naidu with Stephens.

Mohan Naidu - Stephens

Thank you for taking my question, guys. Ben, you have talked a lot about the risk contracts. Can we spend a few minutes on the employer market that you are seeing? Obviously, your growth is strong there on the employer and you find another employer contract, I believe, this quarter. Can you talk about like what they are looking at? And especially with exchanges coming into the picture, how are planning to play around that market?

Ben Leedle

Sure. Appreciate your question. We were seeing very strong growth in our Direct-to-Employer business. We are seeing also an expansion in the expectations of the services and the size of the committed value proposition and the nature of the guarantees that are expected. And we think that that's been a good thing for our business as our model has been based on designing and performing an impact for which they keep two-thirds of the benefit and we share in a third of the benefit at a high-level business model.

It fits along this line that the large employers are not only looking for medical cost savings, they are looking for things that can help improve the well-being of their workforce and their dependent family members that they are covering. I think a couple of new things that are emerging and I think if you watch what's going on strategically in the marketplace, you will see strong evidence of this. Traditionally, programs to improve health and help manage disease inside of a large employer have been programs that have been constructed within the confines and the scope of the benefits and the distribution of those benefits. Meaning the people that could take advantage of those were essentially the workforce, in some cases only and/or the workforce and their dependent family members.

What we have seen over the last 18 months is a really strong focus from those large employers on engagement. So less about the science of whether or not if you had people engaged and expose them to some intervention or support to change behaviors and lead to lower cost and better performance. The energy has moved to how do I get and keep people engaged so that those interventions actually have a chance of working and yielding the results.

To that end, there has been a big movement in strategies around mobile first with the workforces. And specifically, at a certain level of the services to afford employees and dependent family members to open up those services and offer them to their friends. So the advent of the application of social network, gaming applications and tying that to an open benefit structure rather than just a closed group structure are all big movement in this space. You may have seen recently the announcement at McKesson and RedBrick around this area. United Optum's acquisition of (inaudible), our five year development with MeYou health.

So we really think that there's three specific categories of results that you have to deliver on to grow your business with employers. You have got to show solid engagement that can be sustained. You have to be able to bring proven solutions that have an underlying science and proof of their effectiveness in order to drive lower medical costs and improve performance in the workplace. And I think that our progress on that front that's afforded us to really be a leader in this space and compete with the big wins in '13.

I will share with you, people have asked us the have size of the pipelines in the past and we have been hesitant to do that only because what might be bid isn't always what gets procured in the end. And in some cases some of the ids in the pipeline, particularly in large employer space go through a process and then get kicked over into a subsequent year rather than a decision. So putting all of that aside, just to give you a sense of our pipeline, in the U.S. we have a pipeline currently about a $0.25 billion represented at annualized revenue opportunity at target performance and the largest part of that pipeline is for the employer market place. I can size for you, it's about $100 million in potential.

So we do believe that this is a tremendous opportunity and an area of growth that we think will continue to do well with, going forward to '14. At this point seasonally, yes, there is probably some opportunity in '14 to add some revenue but the majority of the opportunity now is or most of that pipeline is for 1/1/15 and beyond.

Mohan Naidu - Stephens

Got it. Are you seeing any of your large employers talk about the exchanges and if they were to go that route, especially in the private exchanges, like how would you play in there?

Ben Leedle

Well, on the private exchanges, you are still going to need these services because somebody else is going to be at risk, mainly the individual and the people that are putting up these private exchange mechanisms. To answer first part of your question, no, we are not hearing from our large employer customer and it probably makes sense because they make big commitments to us in multi-year commitments to work with us which means they are fully committed to staying and owning the self-insured risk on medical costs and the performance related health in their population.

We know that there's been some movement, an early movement, that are really going to have to show that the model of private exchanges are going to afford the delivery of the same value that's sustainable as what's happening in the group benefits space. So I just still think it's a rapid process and it's going to be hard to predict, at least in our near-term. We are not expecting to be negatively affected or positively affected by the private exchanges.

Mohan Naidu - Stephens

Got it. Thanks, Ben. One quick question, Alfred, for you. You mentioned a tax rate of 43% for full-year. Can you help us out in the quarterly progression, especially in the first half of the year how should we look at the tax rate?

Alfred Lumsdaine

Yes. But only because as move from a loss to profitability, it can get a little funky. So I think using something in that same ballpark throughout the year is as reasonable as anything.

Mohan Naidu - Stephens

All right. Thank you very much for taking my questions.

Operator

And we will go to Mike Petusky with Noble Fin.

Mike Petusky - Noble Fin

Yes. Thanks. Most of my stuff has been asked and answered but just a quick question. I understand you said the four large contracts, 19.9% of rev, term at the end of the year. How much of your total book of business, though, is up for renewal in '14?

Alfred Lumsdaine

Well, I think I will look at it this way, Mike. I think our average contract, you could look at as four years. So in a normal year you would have 25% up for renewal. Now we do work really hard to renew stuff early and often you are seeing, we are successful in that. And that's probably not bad. I don't know the answer. I know because of the way we categorize because we would really have lots of contracts that are small that are up for renewal but it's probably not a bad way to look at it.

Ben Leedle

Also keep in mind that we do have a portion of our business where we are having our services distributed to self-insured employers in partnership with health plans and some of the renewals aren't a Healthways renewal with that employer but rather the health plan renewal with that employer. So when you look at average commercial churn of 25% per year, and I shared numbers with you that we retained 92%, we are at a fraction of the churn that's going on in the commercial industry at the health plan level. But there is that other factor is well in the mix.

Mike Petusky - Noble Fin

Okay. All right. Very good. Thanks, guys.

Operator

Due to time constraints that concludes our question-and-answer session. Mr. Leedle, I would like to turn it back over to you for any additional or closing remarks.

Ben Leedle

I want to thank everybody for calling in and Alfred and Chip Wochomurka, who leads our IR will be available and looking forward to connecting with you. Everybody have a good evening.

Operator

Thank you. That does conclude our conference. You may now disconnect.

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Healthways, Inc. (HWAY): Q4 EPS of -$0.12 misses by $0.15. Revenue of $169.2M (-3.4% Y/Y) misses by $5.36M.