Healthways Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.24.14 | About: Healthways, Inc. (HWAY)

Healthways (NASDAQ:HWAY)

Q1 2014 Earnings Call

April 24, 2014 5:00 pm ET

Executives

Chip Wochomurka

Ben R. Leedle - Chief Executive Officer, President and Executive Director

Alfred Lumsdaine - Chief Financial Officer and Executive Vice President

Analysts

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

Joshua R. Raskin - Barclays Capital, Research Division

Shawn Bevec - Deutsche Bank AG, Research Division

Mohan A. Naidu - Stephens Inc., Research Division

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

David A. Styblo - Jefferies LLC, Research Division

Chip Wochomurka

Good morning -- good afternoon, excuse me, and welcome to Healthways First Quarter 2014 Earnings Conference Call. Today's call is being recorded and will be available for replay beginning today and through May 5, by dialing (719) 457-0820. The replay pass code is 9895727. The replay may also be accessed for the next 12 months on the company's website. To the extent any non-GAAP financial measure is discussed in today's call, you will also find the 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. 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're 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'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

Good afternoon, everyone. Thank you for being with us today for our First Quarter 2014 Conference Call. I'm here, as usual, with Healthways' CFO, Alfred Lumsdaine. We'll both make some remarks about our results for the first quarter, as well as our outlook and guidance for 2014. Following those remarks, we'll open the floor for your questions. Our first quarter results are a demonstration of the operating momentum that underpins our outlook for the year and our confidence that we are on the right path to sustained profitable growth. This quarter marked our third consecutive quarter of sequential revenue increases. In fact, it was our highest quarterly year-over-year revenue increase since the fourth quarter of 2008. We continue to expect double-digit revenue growth for the year, and accordingly, are affirming our revenue outlook for 2014. This double-digit revenue growth will come from the contribution of business development from each customer market, driven by a high rate of revenue retention, expanded engagements with existing clients, new business wins and anticipated recognition of performance-based fees in the second half of the year. Our top line growth, combined with the seasonal decline in contract implementation costs, as well as a decline in strategic investments, is expected to drive increased operating leverage and margins over the balance of the year and beyond. So we are affirming our earnings outlook for 2014, excluding the impact of the settlement charge that we announced last week. As we've described previously, we've made considerable investments over the past few years to transition Healthways from a disease management company to a population health services company. Those transformation-related investments are complete and we now have a scalable platform that will create significant operating leverage as our revenue grows. As we move forward, each $100 million of incremental revenue for the next 4 to 5 years is expected to yield 100 to 200 basis points of EBITDA margin expansion until we return to our target EBITDA margins of mid to upper teens. As we all know, the key to sustained profitability is growing the top line by signing new customers, and keeping and expanding the existing relationships. Thanks to the hard work of our team, our innovation and value proposition are resonating in the marketplace. During the first quarter we signed 20 contracts, including: 5 contracts with new customers; 7 contract expansions; and 8 contract extensions. These contracts were distributed across all our domestic markets. We continue to expect to sign more new, extended and expanded contracts throughout the remainder of 2014 and beyond. As just one example of the market's recognition of our unique and proven capabilities, the American Hospital Association, or the AHA, last week, announced its exclusive endorsement of our acute to post-acute care transition solution. The AHA chose Healthways' solution from among 14 companies whose services that they reviewed in detail as part of their due diligence process. Importantly, the most sophisticated customers, prospects and brokers know by experience that they need something different, something more, to sustainably engage and address the underlying health and performance of the workforce and dependent family members. They're increasingly adopting strategies for improving well-being, and we are uniquely positioned in the competitive landscape to meet this demand. So as we announced today, we signed a significant contract with a new customer that is a global Fortune 100 company. So with a highly rigorous and competitive process, we replaced the long-term incumbent provider who was a national health plan. And we believe this win is the latest demonstration that our proprietary Well-Being Improvement Solution is resonating with customers. They are buying our proven value proposition that people with higher well-being perform better and cost less. I'll now ask Alfred to walk through our Q1 results and provide more detail on our customer traction. Alfred?

Alfred Lumsdaine

Thanks, Ben. Good afternoon, everyone. First quarter revenue was up $177 million, were the highest quarterly revenues we've produced since the fourth quarter of 2011. The comparable quarter revenue increase of 7% was our largest since the fourth quarter of fiscal 2008. Excluding the previously announced settlement charge, on a comparable quarter basis, EBITDA grew at almost twice the rate of revenue growth, or nearly 13%. It should be noted that we saw a small revenue -- negative revenue impact of approximately $3 million to $4 million from certain of our fee-based services such as health screenings and fitness center visits, which we attribute to the extreme weather experienced throughout much of the country during the first quarter. Our adjusted loss of $0.07 per share for the quarter represents a significant improvement from the $0.12 per share loss that we reported in the first quarter of 2013. The GAAP net loss for the first quarter of $0.27 per share includes 2 items that were excluded from our adjusted earnings per share results. The first item is $0.03 per share of non-cash interest expense for the quarter, related to our senior convertible notes. The second item is the $0.17 per share impact from the settlement with BlueCross BlueShield of Minnesota that we announced last week. Cash flow from operations for the quarter totaled just over $9 million. This is a little lower than we expected as our accounts receivable DSO at March 31 increased by 9 days compared to year end. This increase is attributable to the normal fluctuations that we can see and the timing of collections on accounts receivable. It isn't too unusual given the very strong receivables collection we experienced in the fourth quarter of 2013. Capital expenditures for the quarter were just under $11 million. Primarily as a result of the slightly lower-than-expected cash flow from operations, our leverage ratio under our credit agreement at the end of the first quarter ticked up slightly to 4.2x, that's up from 4.13x at the end of last year. So now, let's turn to our financial guidance for the remainder of 2014. We continue to expect revenues and earnings to grow sequentially throughout the year from first quarter levels, primarily as a result of the 3 specific factors that we reviewed in our call in February. First, as is typical, we have new business wins that are scheduled to launch at various times throughout the year, one example of which is the major new Fortune 100 employer that we announced today. Second, performance-based fees tied to our contractual targets typically require a certain amount of time to achieve and/or measure results. We expect the amount of performance-based fee recognition in 2014 will be approximately 4% of revenue, a similar percentage to 2013. And we continue to expect that a significant majority of this revenue, approximately 80% in fact, will be recognized in the second half of the year. The final factor is ramping revenues under existing contracts. A number of our contracts come with revenue streams that expand over time, either through enrollment growth or the expansion of service lines or both. We continue to expect 2014 revenues will be in a range of $730 million to $760 million, an increase of approximately 10% to 15% over 2013 revenues. Following our first quarter sequential revenue growth of approximately 5%, we would expect modest sequential revenue growth in the second quarter with an accelerating rate of sequential quarterly revenue growth as we move through the second half of the year. From an income per share perspective, our previous guidance for GAAP net income per diluted share for 2014 was in a range of breakeven to $0.15. We've adjusted this range to a net loss per share in the range of $0.17 to $0.02 simply to reflect the previously discussed settlement charge. We continue to expect full year adjusted earnings per diluted share will be in a range of $0.11 to $0.26, and the related adjusted EBITDA margins will be in a range of 10.5% to 11.5%, as we gain operating leverage from our scalable platform and infrastructure.

As with revenue, we expect margins will grow sequentially throughout the year. Accordingly, we anticipate that second quarter adjusted earnings per share will improve sequentially from the first quarter and accelerate thereafter in the back half of the year. I would also note that while we included estimated cost for our ongoing proxy contest within our original guidance, we now expect that this cost will exceed our original estimate and this could be by as much as $1.5 million. And this cost will fall disproportionately into the second quarter. Our full year guidance for adjusted earnings per diluted share of $0.11 to $0.26 remains intact. This range excludes approximately $0.11 per share of non-cash interest and $0.17 per share charge for the contract settlement.

With regard to cash flow expectations for 2014. We continue to expect operating cash flows for the full year will be in a range of $75 million to $85 million, and capital expenditures will be in a range of $40 million to $45 million, or between 5% and 6% of revenue. We expect capital expenditures, as a percentage of revenue, in 2014 will be our smallest since fiscal 2007. And if you include acquisitions, we would expect that our level of total investments, as a percentage of revenue, would be the smallest since fiscal 2005. This is clear evidence that most of the incremental investments required for our transformation into the leading total population health company have been completed. In addition, we continue to expect that free cash flow will be applied primarily toward debt repayment and that the debt-to-EBITDA ratio under our credit agreement will decrease from the current level of 4.2x to end the year at or below 3x. So just a few final comments. As reflected in our first quarter results, our unique and proven Well-Being Improvement approach to total population health management is driving increasing demand for our services. These results solidify our belief that with the transformation of our capabilities from a disease management focus to the leader in total population management is essentially complete, an increase in revenue will drive margin expansion. Our solutions are integrated into a common infrastructure and utilize common assets across multiple customer markets. This means that as each of our customer markets grow, we expect to gain significant additional leverage from our existing cost structure, a dynamic that underlies our 2014 financial guidance. So with that, I'd like to turn the call back over to Ben for some additional remarks.

Ben R. Leedle

Thanks, Alfred. I'll be brief here before we go to your questions. Let me quickly make a few closing remarks. As you're seeing through our customer wins and endorsements, the demand for population health solutions continues to be strong, and we have a unique value proposition with our Well-Being Improvement Solution and many competitive advantages. We have distinct first-mover advantage. We have the most comprehensive set of capabilities across the broadest spectrum of markets. We guarantee our results. Our data collection and analytics capabilities are leading in the healthcare industry. We have powerful and exclusive academic, technology and intellectual property partnerships with more than 90 peer-reviewed publications to lead the market in proof of value. Our operations, infrastructure and technology platform are highly scalable, currently servicing more than 60 million individuals. We are delivering on our promise to improve health, reduce cost and increase productivity and performance. And this translates to sustained value creation for our customers and shareholders alike. We'll now be happy to take your questions. Operator, if you could please open up the line.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take first Ryan Daniels with William Blair.

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

I apologize I had to hop on a little late, but let me start with SilverSneakers. I think I heard you mention some weakness given the weather. Are you able to somehow determine what that is? I mean, clearly, it's a big piece of the business. I know it's all utilization-based, which is unique, and I'm sure people weren't going out in the inclement weather to go to the gym. So any color on maybe the impact that had in the quarter?

Alfred Lumsdaine

Yes, I think, Ryan, we have pretty good expectations by market in terms of the number of eligible members and the planned visits per member. So we can target pretty specifically where we have variance, and in the case of the first quarter, much of it was in the Northeast as you might expect. And so we think the total impact -- and it wasn't just SilverSneakers, but even things like wellness screens were impacted. So we put that impact at roughly $3 million to $4 million and feel pretty confident that was the impact to us.

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

Okay. That's very helpful color. And then, any more color you can provide on the 2014 selling season? I know we're starting to go, I believe, into the heart of that as we approach the summer months. So kind of what are you seeing in the marketplace? I know employer has been strong. But has that continued, what are you seeing? And are you seeing the re-percolation of maybe more ACO type contracts with health providers?

Ben R. Leedle

Ryan, this is Ben. Just to give you some color on the pipeline. Last quarter, I think we talked, in aggregate, a pipeline representing about a $350 million revenue opportunity, all in. And that included, I think, a split of $250 million domestic and $100 million on an international basis. We've really seen a jump over the last 90 days. So that would have been data as of 12/31 of '13. So at the end of March, that pipeline now is approaching $0.5 billion, so $475 million; $375 million of that, domestic. So the growth has come and the expansion of the domestic pipeline in the last 90 days. And incredibly, I think we shared with you the direct employer part of that pipeline was sitting at about $100 million of the $250 million at the end of '13. It's essentially doubled to about a couple of $100 million in the pipeline for direct employer. International has held steady. As you know, those cycle times are longer and less employer group benefits driven. But we believe that we'll continue to see robust opportunity for us to continue to add new business to the enterprise.

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

Okay, that's great. And 2 more quick ones. Just on the proxy contest. I think you said you had incorporated some cost in your guidance, but now, you think it could be an additional $1.5 million above that in the second quarter. Is that $1.5 million not included in your bottom line guidance? Or -- I'm just trying to read into that a little bit more. How should we think about the guidance versus the increased proxy cost on the bottom line?

Alfred Lumsdaine

No. Obviously, we're affirming our guidance, inclusive of our estimated cost. So we've reaffirmed our range. But obviously, too, the impact inside of the second quarter will be greater than we previously expected.

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

Okay. Is the overall cost, though, higher than your expected? I mean, are you effectively raising your bottom line guidance but saying it's being offset by higher proxy cost? Or am I...

Alfred Lumsdaine

I guess, if you're looking at it on a full year basis, you could come to that conclusion.

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

Okay. It's an important point, I think. And then maybe lastly, just on the BlueCross/BlueShield of Minnesota settlement. Not the settlement itself, I know that's been going on for 5 or 6 years. But it looks like you left the door open -- I don't know if you've talked about this earlier, so I apologize, but it looks like you left the door open to actually start working together again in the future. So maybe, Ben, if you could provide any color there? I don't know if you can, but if you could, that would be great.

Ben R. Leedle

As you can bet, these processes require a lot of work from both organizations, and over the recent timeframe, had the opportunity to get to know the new leadership team at BlueCross/BlueShield Minnesota. The CEO and CFO, in particular, were heavily engaged in this process, and we had the opportunity to talk about not only the past work that we had done there and thoughts about how to bring this open item to a conclusion that they inherited, but also, was there a form and a way in which -- the way in which we came to conclusion on that would afford both organizations the time to explore the opportunity to do work together into the future. So highly complementary of their leadership team and excited for the opportunity to spend, essentially, the balance of the next couple of quarters, working with them to determine the option that you saw in that settlement for them to be able to add services with us and for us to gain an old client back in new form.

Operator

And we'll take our next question from Josh Raskin with Barclays.

Joshua R. Raskin - Barclays Capital, Research Division

Just the first question, just on the Fortune 500 -- Fortune 100 customer win, I'm sorry. We're just curious what the revenue opportunity, how we should think about that? And with the understanding that the revenue guidance range is relatively large, I'm just curious the range didn't change at all. So are you just more comfortable maybe towards the higher point or were there other things that offset it to keep you within a range? I'm just curious what the opportunity is there.

Alfred Lumsdaine

I mean, I think, Josh, we're early in the year, so it would be premature for us to be thinking about changing ranges. To your point, the range is pretty wide. But clearly, having a signed customer that's Fortune 100, you can understand, we think, it's a reasonably sizable revenue opportunity. Although it's starting midyear and will be ramping -- but I think your analysis is correct. It just gives us higher confidence of the range and where we might land in the range.

Joshua R. Raskin - Barclays Capital, Research Division

Okay. Got you. And then, last quarter, you guys gave some of that really helpful revenue mix breakdown. And so I'm just curious if there's any update, if you have, actually, the breakdown by segment, that would be particularly helpful. But maybe since you gave that guidance, any changes -- I think you gave the 2014 expected guidance, but hospital systems, international, et cetera, any changes within those buckets or...?

Alfred Lumsdaine

No, not at all. I think as we said in February, the guidance is really only meaningful on an annual basis because of things like performance-based revenues. And so I think, I specifically said, we didn't feel like it would be meaningful to provide it on a quarterly basis. Obviously, we're headed to a mix that's significantly different for the year than what we had previously indicated. We'd be happy to update it -- that, but I think our expectations would be fully consistent with our communications in February.

Joshua R. Raskin - Barclays Capital, Research Division

Okay. I guess, specifically, I would have thought, maybe the large employer was previously, I think, 13%, maybe that ticks up an MA [ph] just because of the weather in the first quarter, maybe that ticks down. Is that fair, 1% or 2% here and there?

Alfred Lumsdaine

I think at this point, meaningfully, we're comfortable with the percentage that we provided. Could they change by 1% here or there? Yes. But, yes, we're very comfortable with the -- for the full year with those percentages still being very consistent with what we indicated.

Joshua R. Raskin - Barclays Capital, Research Division

Got you. And then just last question on the population health offerings, I think you put in the press release, "rigorously proven the expanded value." And it seems as though you feel as though you've reached sort of a tipping point or a real change in the business. So I'm curious, from a sales perspective, what's the pitch now to large hospital systems and how has that changed over the last, say, year or so? Is there incremental data that you're providing? And if so, what did that sort of tell you as a customer?

Ben R. Leedle

Yes, Josh, that's a great question. I think the one thing for sure that's changed as we completed out our platform and some of the final investments to prepare to work with those health systems over the last year, that much of that interest was originated around their work to both evaluate and/or enter into agreements through the formation of an ACO structure. And we've done that not just with health systems and their integrated physicians, but also with independent physician organizations. So in both of those areas, I think the focus of our work was bringing tools, processes and planning and forecasting of the populations that they either intended to take risk on or had contracted to take risk on. And as we've moved forward with a more robust set of services in support of that work, the AHA announcement was a big thing for us. Our work stood up in the marketplace as the only one, and now exclusively, that the American Hospital Association is endorsing. That care transition solution is really focused around kind of the immediacy of the management and the coordination of acute to post-acute transitions. Our Navvis team is engaged; just recently, supported 8 health systems in their applications to CMS for bundled payments. We're doing strategy work, governance work. We're being asked to put together and support really what's thought of as functioning network so that you've got the defined referral partners established that afford these organizations to take on more sophisticated contracting business models that involve risk. And then doing a great job with them with targeted populations on the inpatient side with chronic illness, service line management. And then, on an outpatient basis, having rapid uptake of the Dean Ornish program, where those services are being leveraged in the outpatient arena as treatment, as alternative treatment to typical pathways of surgery and medicine and other methods. So I guess, I would say the biggest change for us is having started 24, 36 months ago around a fairly narrow construct called ACOs to now a much broader set of services with their own distinct revenue streams that can be brought in, kind of phased over time or completely pulled together, in a comprehensive set of services. And that's really where we see ourselves right now in the marketplace. As you know, we took out of our forecast, any risk lives that we don't have a signed contract, all the data, distinctly understanding attributional lives to the physicians that we're supporting and a start date in hand. And they won't be in any of our forecast or projections until all those criteria have been met. And then, I would just say, the competition in this space just continues to heat up. We're seeing national health plans aim in similar fashion. We're seeing what started out as really consulting businesses begin to step into the analytics and early portion of services mix. We have kind of traditional competitors and leaders, [indiscernible] the WebMDs and others of the world, that are moving into the stream of work. And then certainly, organizations like the Premier Alliance and large ATIT companies aiming for this space. So the other point of change that I would make is we have to prove what it is that we're doing creates a distinct value that's measurable. It is our competitive advantage in the marketplace. And those 90 peer-reviewed publications have been stacked over the last 5 or 6 years to show the progression of our ability to create that impact. So that's kind of the state-of-the-state for us inside of the health systems and physician world. And we expect to grow it appreciably, albeit off of a relatively small base within the mix. But I think our segmentation would have forecast about 80% growth this year in that part of the business, and we believe we're on plan to do that.

Joshua R. Raskin - Barclays Capital, Research Division

Okay. And then just so I make sure I understand from a data perspective. It sounds like now, you've got some information where you can actually show success or you could show data in terms of the impact that you bring to other systems. Do you now have enough longitudinal information to sort of show that to prospective customers?

Ben R. Leedle

I do believe in parts of these service lines, there's enough longitudinal data to look at a pre-post period. There's enough data on volume through the episodic aspects of these things so that it's credible. And we expect to continue, in the near term, to put out further publications supporting that, those outcomes. So yes, we have outcomes. Are we in an end state in that regard? No. Everybody is going to look for more and more longitudinal outcomes the longer people are at this. But I do think it's been a very short track for everybody. And inside of that short track, we're unaware of any organization that's serving this marketplace that has put up more hard evidence through third-party, peer-reviewed publications around their methods and their outcomes, and ultimately, the value impact than what we've done. So I would tell you, I think we're leading in that regard, and we're still not satisfied and we'll just continue to push for more in that regard.

Operator

We'll now move to Shawn Bevec with Deutsche Bank.

Shawn Bevec - Deutsche Bank AG, Research Division

Sticking with the health systems, can you talk at all about if you think about the entire opportunity of ACO risk lives, where you sort of stand from a penetration standpoint in terms of those lives coming online?

Ben R. Leedle

Miniscule.

Shawn Bevec - Deutsche Bank AG, Research Division

So no more have really come online? I mean, I think it was very small when you reported last quarter. So you really haven't seen any traction there or any more uptick from those lives?

Ben R. Leedle

There's -- I think there's a difference between us meeting all our criteria, which we told you would then be evidenced in our forecast, versus whether or not there's progress being made.

Alfred Lumsdaine

Yes, I think to Ben's point, there's progress being made, but I heard the question as where do we stand relative to what we see the opportunity is? We see the opportunity as enormous, but it's going to come, to all of our previous conversations, over a period of time, and we don't think we're anywhere close to that tipping point, hence the conservatism by which we approach putting those types of lives into our expectations.

Shawn Bevec - Deutsche Bank AG, Research Division

Okay. And can you discuss how many people in the employer segment currently have access to Healthways' solutions compared to how many you serve to the special health plan?

Ben R. Leedle

That's a life breakup. Is that number of lives that you're looking for?

Shawn Bevec - Deutsche Bank AG, Research Division

Yes.

Ben R. Leedle

Out of our total lives?

Shawn Bevec - Deutsche Bank AG, Research Division

Yes. To get a sense for how big the employer and the health system -- I'm sorry, the commercial health plans.

Ben R. Leedle

I don't have the life breakout. We look at it as obviously, a percentage of our business from a revenue standpoint. Let me ask Chip Wochomurka, who leads our IR, to take that offline with you and get you that answer.

Shawn Bevec - Deutsche Bank AG, Research Division

Sure. And then one other thing. Can you size the strategic investments that you guys have been making over the last several years maybe by just framing it, how much was spent in 2013 relative to how much is going to be spent in 2014? Obviously, recognizing that's going to trend down significantly this year.

Alfred Lumsdaine

Yes, I think the easiest way to think about it is we view the maintenance CapEx needs of this business at about 5% of our revenues. So if you go back in time and calculate the delta between what our CapEx and/or our acquisitions were over that time in excess of that 5%, I think that would give you a pretty good indication of what we view the strategic investments were.

Operator

We'll now take Mohan Naidu with Stephens Inc.

Mohan A. Naidu - Stephens Inc., Research Division

Ben, following up with the prior question, can you talk about the existing contracts that you have with the health systems? How far are you getting to a point where you can actually bring on risk lives and be revenue-generating risk lives for you?

Ben R. Leedle

We -- I think we were clearly indicating as late as back at the end of Q3 that there were risk lives being served and the expectation that more is coming. So the infrastructure in place with those health systems that have been previously announced, the work to be able to accommodate and service those lives is largely in place. Part of the leverage that we talked about is where do we have installed platform and where there are available lives that generate revenue for us able to be grown on that platform. And so in each of those health systems, we've largely progressed to the point for either currently handling some number of risk lives or are prepared to initiate that over the course of this year.

Mohan A. Naidu - Stephens Inc., Research Division

Okay. So is the hold up really that the health systems have to start finding patients into the system that would be revenue-generating for you? From your perspective, you're all ready to take on the patients.

Ben R. Leedle

That's right. From a tools, the systems, the capability, the data management, the staffing capability, all ready to go from that standpoint.

Mohan A. Naidu - Stephens Inc., Research Division

Okay. In general though, are you seeing any changes in at-risk populations? Health systems, are they taking on more at risk population or they're holding on steady right now to figure out what they are trying to do with the existing population?

Ben R. Leedle

I kind of look at the market, and I talked about this before, that last year, the intellectual desire to move forward with taking on risk lives was very high. And that was evidenced by the number of ACO relationships that were established in the commercial market alone between large health plans and these health systems. And I think I talked to the third quarter that the slowdown was -- putting the deal together is one thing, making certain that all the parties' roles, responsibilities and dataflow matched up with the intellectual desire had a gap. And that I see kind of second wave of activity, now that the relationships are established, to really hone down on the specific populations and methods for growing those over time, and making certain that all of the operating infrastructure between all of the parties; not just between us and our health system clients or physicians, but also between those organizations and the payers who are bringing the lives and the risk models forward. And I just think that there's a broad-based progression taking place right now across the U.S. and that we'll begin to see more throughput in the industry through these models over the course of the next 6, 12 and 18 months.

Alfred Lumsdaine

And Ben touched on this, Mohan, and I would just reinforce it, it's not just the systems that we're talking about, the physician organizations as well. We're seeing tangible work to move forward.

Mohan A. Naidu - Stephens Inc., Research Division

Got it. And last question. Any updates on Ornish program?

Ben R. Leedle

Yes, glad you asked. Obviously, a lot of activity. As you know, we signed -- allow me to back up. Back to Q3 earnings release and early Q4, we talked to you about the early commitments that were in place that we expected to move to contracting. There were 9 organizations that, I believe, that we listed in that timeframe: 3 of those are already up and running; 2 of those are in implementation; and 4 in final contracting. So just from that early cohort, all of those organizations are expected to be up and going by midyear. Then in December, we signed a major, I think of it as a co-distribution agreement with WellPoint to support their 35 million lives in their 14 states. We're in the first 100-day period post signing that contract. All of the focus in the near term has been around standing up all the infrastructure and people processes and technologies to support that and to advance the formation, the targeting and the establishment of the pipeline to support WellPoint's network of providers. And the way that you can think about that is we've identified 78 different geographic markets within those 14 states. We are -- have a target lift for that pipeline of about 500 hospitals. And we would expect that, that health plan type model is of high interest to other Blue Plans where we have partnerships. And so we'd expect to see more of that as part of our pipeline work as well. And then outside of WellPoint and other Blue Plans, there is 50 more direct contracting opportunities in our pipeline with hospitals and/or IPAs. So the interest and the progression is robust. It's early, but I think just like that care transition solution, the Ornish program is an opportunity to go pursue something that in a fee-for-service world for these providers, is going to produce revenue. As they take on more risk lives, it helps them manage that risk. And the payers are able to bring this as an enhancement, not only to their relations and support of their models for reimbursement with their networks, but also benefit from the medical savings that are well-established to occur once an enrollee goes and completes that program. So we see the uptake of those types of services as a real high interest at this point from the market.

Mohan A. Naidu - Stephens Inc., Research Division

That's very helpful. One last question, I promise. Any updates on the renewals? I'm sorry if I missed that if you have already commented...

Ben R. Leedle

No, it's a good question, nobody's asked that. Just to recap, we have 4 contracts that we reported out that are represented up of more than 2% of our 2013 revenues. In total, that basket's right at 20%, 19.9%. And so I think the color we gave the last time we talked about this when we gave full year guidance and reported on '13, was that 3 of those 4 were progressing on a kind of accelerated pace. One note, just a reminder, all 4 of those contracts expire on 12/31 of '14. So it's not a '14 impact, but a very important part of the equation for us to drive net growth forward for the business is getting all 4 of these renewed. And we would tell you that we are very pleased with the progress. We're not completed with any of those 4 renewals at this point, nor we have expected to be. But we think that we've advanced all of them materially and continue to be confident that we'd be successful in renewing them.

Operator

[Operator Instructions] We'll now take Brooks O'Neil with Dougherty & Company.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

I was just curious, if you could give us any color on your settlement with BlueCross Minnesota? I guess I was under the impression that they terminated the contract with you, and I was kind of surprised that you agreed to pay them $9 million.

Alfred Lumsdaine

Well, Brooks, obviously, the contract goes back to the 2001-2008 time period. So over a period, a long, long period of time had passed. As you know, the mechanism that this was being mediated under was binding arbitration; and therefore, that comes as a process that has inherent uncertainties with it, and obviously, is binding. And as Ben alluded to earlier, as we -- as that went through the arbitration process in October of '13, both parties at the end of that came to a point to consider and discuss business solutions, the timing of which ultimately landed in a place where we have paid them $4 million and an option for them to take $5.5 million next year or in lieu of a bundle of service discounts. So I think it's just one of those situations where, given the nature of the binding arbitration process, we felt as if that form of settlement and the consideration of potentially working together again moving forward was the right choice for shareholders.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

Okay, that's helpful. And then I was just hoping you could give us a feel -- I think there was like a $10 million pushout in the fourth quarter. You kind of commented that you would spread that through 2014 and 2015. I was hoping you might share with us how much of it fell into Q1.

Alfred Lumsdaine

Yes. I mean, I think you can look at it. It's not quite ratable, Brooks. I think maybe -- I can't even recall if we said, I think it was maybe 40% in '14, 60% in '15. But so you could just, from that standpoint, take those percentages and consider it ratable.

Operator

And we'll now move on to Dave Styblo with Jefferies.

David A. Styblo - Jefferies LLC, Research Division

First one, I just want to make sure I understand a couple of moving parts in the first quarter here. I think you guys previously talked about the 1Q '14 results being roughly equal to 1Q of '13. So I'm just wondering if the $0.07 loss or $12 million of EBITDA starting point is a little bit better because of a fundamental reason or was there some shift in the timing of expenses, or perhaps, another explanation for that?

Alfred Lumsdaine

No, I think what we've -- our comments would indicate that it's in lockstep with the revenue increase that we saw year-over-year that -- which was 7% on a year-over-year basis. And as we've said, we expect leverage, operating leverage, as we grow, enhance the EBITDA. Adjusted EBITDA growth year-over-year was roughly 13%.

David A. Styblo - Jefferies LLC, Research Division

Okay. I guess, I was wondering because especially with the pushout of the $3 million to $4 million of revenue, what -- wouldn't that have materially changed the results there? Was there some other offset or upside that you guys are experiencing?

Alfred Lumsdaine

No, I think as we indicated, that $3 million to $4 million would have been obviously, likely, very comparable margins to the rest of the business. So I think it's just, again, just demonstrating the ability to leverage our current cost structure as we grow, and with the focus on cost management as we grow as well. I think it's really that simple, which is, hopefully, the message we've been sending as we came into this year of what our expectations were for continued leverage of a common infrastructure and cost base as we grow.

David A. Styblo - Jefferies LLC, Research Division

Okay. I'd like to just come back to the Fortune 100 contract that you guys have inked here. And just can you give us a little bit more color about the nature of the work that you're doing and how you're getting paid? Is it going to be a PMPM or some sort of flat revenue? And how much certainty that you have on the first 6 months or 12 months of the revenue profile? And then how we should think about that? I think you've -- in the release, you have mentioned the growth could increase in '15. Is that a, I don't want to say guaranteed situation, but is there something that the client has signed up for in '15 that's going to add additional services or is it something where you think you could just expand the work that you're doing with then?

Ben R. Leedle

So I'll take that in pieces. Part of that question was: How do we get paid for the services that we're doing? These are broad-based health improvement services that are -- they're obviously aimed around lifestyle risk management; being able to help baseline, their population, in terms of well-being measurement; being able to help them support people in a targeted fashion with not only web and mobile-based self-directed support, but also with telephonic and in-person coaching. So it is a broad-based solution. It paid on a per member per month basis. Some portion of that per member per month fee, as you would expect, is at risk for performance guarantees around that value proposition, but also around our process. And then the expansion alluded to in the release was around further depth on the services and driving more objective measurement on the risk factors into the second year through an effort around biometric screening. So the services will expand from '14 into '15. As we noted, it's an important and material contract. We believe that this company is looked to by others in the industry as kind of a bellwether for an approach and strategy to drive value, not only in terms of this from a benefits perspective, but more sophisticated in looking at how does this work translate into better performance in their overall business. And we think that is something that shouldn't be missed in terms of the messaging we're trying to create because it's what the large employers are really looking for.

David A. Styblo - Jefferies LLC, Research Division

Okay. Is there any way you can give us even a rough range of the revenue coming from this contract in the first year before you'd expand the services?

Alfred Lumsdaine

No, I think generally, we don't give ranges on individual contracts.

David A. Styblo - Jefferies LLC, Research Division

Had to ask, okay. Last one was -- would -- just on the contract signings and expansions and so forth. Is there anything material in the 5 new contracts or to some expansions that we should think about there? And then on the 8 renewals, is there any material change in the economics from the renewals, or are they going to look -- is that pretty much the same as they have looked?

Ben R. Leedle

I think that those are on par with the most recent experience we have in terms of the revenue retention around the extended, which we think of as straightforward renewals. Obviously, a portion of those were renewals with added scope, which we see as a really good sign because that's the customer saying, we like what you did for us in the initial days of your work and we want you to keep doing that, but we also are going to ask you to do more. And the 5 new, obviously, we continue to be asked to drive solutions into the Medicare Advantage space and into the fitness solutions that we bring to the marketplace. So those were heavily weighted in that regard for the first quarter.

Operator

At this time, we have no further questions. So I'd like to turn the call back to Mr. Leedle for closing comments.

Ben R. Leedle

I'll just thank you for your time today. Alfred and Chip and I are here and available. We look forward to talking with you. If you have questions, please contact us, and I'm sure we'll be spending time with all of you in the near-term. Thank you.

Operator

Once again, that does conclude today's conference. Thank you for your participation.

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Healthways, Inc. (HWAY): Q1 EPS of -$0.07 beats by $0.04. Revenue of $176.8M (+7.0% Y/Y) misses by $0.33M.