Healthways' (HWAY) CEO Ben Leedle on Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: Healthways, Inc. (HWAY)

Healthways, Inc. (NASDAQ:HWAY)

Q2 2014 Earnings Conference Call

July 23, 2014 5:00 p.m. ET

Executives

Ben Leedle – President and Chief Executive Officer

Alfred Lumsdaine - Chief Financial Officer

Chip Wochomurka – Investor Relations

Analysts

Sean Wieland - Piper Jaffray

Tom Carroll - Stifel Nicolaus & Co., Inc.

Joshua Raskin – Barclays

Ryan Daniels - William Blair & Company

David Styblo – Jefferies

Shawn Bevec - Deutsche Bank

Brooks O'Neil - Dougherty & Company

Operator

Please stand by, we are ready to begin.

Chip Wochomurka

Good afternoon and welcome to Healthways Second Quarter 2014 Earnings Conference Call. Today’s call is being recorded and will be available for replay beginning today and for one week by dialing (719) 457-0820. The replay pass code is 6919986. 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.

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 Leedle

Thank you. Good afternoon, everyone. Thank you for being with us today for our Second Quarter 2014 Conference Call. I'm here with Healthways' CFO, Alfred Lumsdaine. We'll both make some prepared remarks of our results for the second quarter, as well as our outlook and guidance for 2014. Following those remarks, we’ll open the call for your questions.

Let me get started. I’d like to point out the first key takeaway from our second quarter and first half results, is that they’re consistent with the past full year guidance we discussed with you in our last two calls. While, Alfred will review the specifics of our guidance in more detail, let me remind you of the four expectations underlying our guidance. Number one, that we would return to profitable growth during the year. Number two, that the combination of revenue growth, operating leverage and reduced strategic investment as a percentage of revenue would drive higher margins for the year. Number three, that strong cash flow and reduced capital spending as a percentage of revenue would lead to a significant decline in our debt-to-EBITDA ratio during the year. And finally number four, that more than half of our revenues and all of our adjusted earnings would occur in the second half of the year.

Based on our results for the second quarter and first half of 2014, we are on track to fulfil these expectations. We’ve now produced sequential quarter growth in revenues for four quarters. With 9% growth in revenues for the first half of the year, we’ve achieved an increase in adjusted EBITDA of 16%. A second key takeaway is that our markets continue to be very dynamic, and our business development momentum continues at a strong pace. We’ve continued to make progress on the four large contracts up for renewal in 2014.

During the second quarter, we renewed two of those contracts. One of these two contracts was the largest of the four. And we now expect to sign the remaining two during the third quarter. We also signed 19 new expanded or extended contracts during the second quarter across all our domestic customer markets. Further, our pipeline of potential contracts has continued to expand. And we expect to execute additional contracts across all our customer markets during the second half. We are in advanced stages of business development and/or contracting with dozens of health systems, hospitals and physician prospects and they’re uniformly focused on preparing themselves to take financial risk for managing the health of population.

Our Ornish program and our acute to post-acute care transition solution or CTS, are well positioned to meet the needs of this market during this transition. Both Ornish and CTS drive important value for providers by growing revenues from fee for service reimbursement a5nd by providing important quality and cost management impact for value-based payment arrangements, whether that be for ACOs and or for other payers. The Ornish program and CTS afford what we think of as a now and later value proposition that provides flexibility for the buyer to benefit no matter the reimbursement method, mix and rate of change that they are facing. As a result, these solutions are resonating with health plans and delivery systems, affording us the opportunity to establish key relationships, grow market share and in the future, expand the scope of these relationships in this market.

An example of ongoing progress we’re making is our new joint venture with Genesis Physicians Group, the largest IPA in North Texas. The joint venture called GenHealth will provide population health management for clinically integrated physicians’ networks. GenHealth already has its first physician network customer, including its affiliated ACO, which recently signed its first share savings contract with CMS’s Medicare Savings Program. Jim Walton, Genesis Physicians Group’s President and CEO, summed up the long-term potential we see in working directly with independent physicians quite well when he said and I quote, “As our ACO develop plans and processes to coordinate the care of Medicare and future commercial populations, we realized we needed a partner with the critical assets, expertise and experience in delivering proven value. We selected Healthways because of its unparalleled leadership and outcomes in the wellbeing improving space and because it is one the few companies offering a truly complete set of capabilities for effectively managing population health.”

Critical assets, expertise, experience and proven value, quickest way I know to demonstrate all four of these strengths is by pointing to the places we’ve already delivered them.

So let me close my prepared comments today by reviewing a news release that CareFirst, one of our most innovative and significant customers issued earlier this month. This release is about the year three costs and quality results related to the 1.1 million members in CareFirst’s Patient Center Medical Home Program. As CareFirst has previously stated, “Hopefully it plays an integral role in delivering its program” The release said that the medical cost for the CareFirst Patient Center Medical Home Program had been lower than expected for the third consecutive year and that key quality indicators show positive impact for members participating in the program as compared to members who are not. Specifically CareFirst reported that costs were 3.2% less than expected for 2013, following savings of 2.7% in 2012 and in the initial year of 2011, 1.5%. Those savings equate to $130 million in medical savings for 2013 and for the three years $267 million in medical savings.

In addition, the key quality measures of that program indicate that participating member had 6.5% fewer hospital admissions than nonparticipating members, 11% fewer days in the hospital, 8% fewer hospital readmissions and just over 11% fewer outpatient health facility visits. That’s just the most recent place our value preposition has been proven at scale. We have more than 90 peer reviewed publications proving the value of our solutions. Proof of both sustained consumer engagement and health behavior change are the key differentiators in this industry today. We believe you’d be hard pressed to find more than a few, if any, publications or independent third party validation about our competitors’ proof of value. Simply put, our domestic and international customers and our prospects are facing and dealing with transformational change to their business models. Increasingly they believe Healthways is the only company offering solutions that are proven and bring scale to help them successfully execute and navigate this critical transition.

I appreciate your attention to my comments this afternoon. I’m now going to ask Alfred to take you through the details of the financials of Q2 and the guidance and then forward outlook. Alfred?

Alfred Lumsdaine

Thanks, Ben. Good afternoon everyone. Second quarter revenues of $181 million represent a comparable quarter increase of over 11%. This revenue growth, combined with associated operational leverage and other operational efficiencies, produced comparable quarter EBITDA growth of nearly 19%.

Our adjusted net income per diluted share of $0.01 for the quarter represents an improvement from the $0.03 per share loss that we reported for the second quarter of 2013.

The GAAP net loss for the second quarter of $0.01 per share includes $0.03 per share of non-cash interest expense related to our senior convertible notes. Note that these numbers won’t exactly add due to rounding as noted in the reconciliation of non GAAP to GAAP measures that we included in the earnings release today.

Cash flow from operations for the quarter totaled just over $10 million. That’s approximately equal to our capital expenditures for the quarter. The leverage ratio under our credit at the end of the second quarter dropped to 3.9 times from 4.2 times at the end of the first quarter. Overall our financial performance for the second quarter continues to advance us towards meeting our full financial guidance for the year.

So now let’s turn to our financial guidance for the remainder of 2014. As we noted in our earnings release today, we are reaffirming our financial guidance for 2014. We continue to expect revenues and earnings to improve in the second half of 2014 compared to the first half of the year. There are three factors that we’ve previously discussed that will be essential to determining our second half financial performance. The first factor is ramping revenues under existing contracts. As you know, a number of our contracts come with revenue streams that expand over time either through enrolment growth or the expansion of service lines or both. The second factor is performance based fees tied to contractual targets, which as you know 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% to 5% of revenue. We continue to expect that a significant majority of this performance based revenue, up to 80% in fact, will be recognized in the second half of the year, with most of that expected in the fourth quarter.

The final factor is the signing and launch of new business, which in the second half of this year includes, but isn’t limited to, the ongoing deployment of our Ornish lifestyle management program for the growing number of health systems and hospitals.

From a revenue perspective, 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. Based on our first half revenue total of $357 million, our implied revenue range for the second half of 2014 is $373 million to $403 million, an increase of 4% to 13% compared with the first half of the year.

From an earnings per share perspective, our guidance to 2014 GAAP net loss per share remains in a range of $0.17 to $0.02. This includes our first quarter charge of $0.17 per share to settle a contractual dispute. We continue to expect full year adjusted earnings per diluted share to be in a range of $0.11 to $0.26, and related adjusted EBITDA margins to be in a range of 10.5% to 11.5%. Our full year guidance for adjusted earnings per diluted share excludes approximately $0.11 per share of non-cash interest, and $0.17 per share for the settlement charge previously mentioned.

With regard to cash flow expectations for 2014, we continue to expect operating cash flows for the full year to be in a range of $75 million to $85 million, and capital expenditures to be in a range of $40 million to $45 million, or between 5% and 6% of revenue. That would represent the lowest percentage of revenues since fiscal 2007.

In addition, we expect that free cash flow will be applied primarily toward debt repayment, and that the debt-to-EBITDA ratio as calculated under our credit agreement, will remain at approximately the current level of 3.9x for one more quarter before decreasing substantially to end the year at a below 3x.

So just a few final comments. It’s worth noting that the revenue growth reflected in the first half of 2014 is coming from all of our customer markets. As we’ve mentioned many times, our solutions are integrated into a common infrastructure, and the utilized common assets across multiple customer markets. This means that as revenues from any of our customer markets grow, we would expect to gain additional leverage from our existing cost structure. Our pipeline of growth opportunities continues to expand and our contract renewal performance so far this year is meeting our expectations. As a result, we remain confident in our expectations for growth at the topline, with expanding margins at the bottom line for the second half of 2014 and beyond.

With that operator, we’d like to open the call for questions.

Question-and-Answer Session

Operator

Our first question comes from Sean Wieland with Piper.

Sean Wieland - Piper Jaffray

So I'm hearing this quarter, the message is coming through loud and clear around the Ornish program, seems to be increasingly a competitive advantage particularly in the health system market. Are you intending on sending that message and what's happened in the past 90 days that is really bringing that program to maturity?

Ben Leedle

Great question, Sean. This is Ben. I think the intention of the message is to let you all be aware that when we put that deal together about a year ago now, we expected to see positive response to it given the configuration nature of that product, and the underlying proof and science on it. What I think we’ve maybe benefited from is the pressure on all organizations in healthcare to look for near-term revenue growth and this has a dynamic to it as the solution that affords the providers, whether they be physician groups or hospitals or integrated health systems, to bill on a fee-for-service basis for this, not only to Medicare, but now to a growing group of obviously Medicare Advantage and commercial payers. And with that, a significant opportunity to generate both economic value and at the same time begin to install programs that over time will serve itself well even if fee-for-service gets minimized and value based pay capitation grows. This program also is the vehicle that you would look to, to leverage and drive your high risk chronically ill membership through, because on the back side of this obviously there are medical claim savings and improved indicators of quality. So it’s very complete in terms of how it can in the near and long term serve to generate the value that the marketplace is looking for.

I think what gave it a boost Sean was WellPoint approving it as a covered program for all of its business across 14 States. And then following on the heels of that another regional blues plan HMSA not only doing the same thing for their membership and their State, but expanding the scope of eligibility criteria to go beyond the diagnosis of intensive cardiovascular disease to include diabetes and even as far out as people with two or more risk factors for chronic disease.

We are seeing traction and then obviously where we expected the sweet spot of this to be would be for Health Systems .Underneath those co-distribution programs with those health plans, we’re out developing contracts with their provider network of key health systems in their regions. But then also independently selling and growing a significant pipeline with health systems at large. And so the pipeline has grown larger and faster than we even expected and the timing for us in this year is that we expect the contracting to turn into implementation and to enrolment in the first cohorts over the back half of this year. It will contribute positively to revenues and profitability in 2014, but it really sets us up for even more significant growth from this program out into 2015 and beyond.

Sean Wieland - Piper Jaffray

Thanks for the detail. That’s helpful. Bigger picture question, if I could [inaudible] that is, some of the write-ups around population health management would point to the lack of ROI on certain population health programs. Do you track on an implementation by implementation basis, what percentage of your customers achieve positive ROIs? And what would be the characteristics of a program that would enable it to achieve [inaudible] through lower medical costs or through improved quality?

Ben Leedle

Yeah. I think absolutely, we think no ROI, no sustainability of business relationships. So all of our customers and we track in a very rigorous way the agreed upon methodology, the measurement, third parties being engaged to independently validate the impact of these. And those ROIs, we would expect and our clients expect to return a positive ROI in the first year with that ROI growing and expanding over a period of two, three, four, five years. I think you can see both sometimes crazy claims around the size of the ROIs. We typically would set both expectations and have seen as you do these programs on scale, a year one at a 1.5 ROI to 2 to 1 ROI growing to 2.5, 3, 3.5 ROI over a five year period.

And so those are where we are setting the expectations and I think the most important part of that is you have to have the data. You have to have clear eligibility and you have to be able to have a consistent methodology that’s agreed upon to be able to determine that. But that’s really what these programs are about. If you’re doing population health and you’re not managing and holding to the accountability of medical savings claims and quality improvement and in the end of the day propositioning in the commercial market back to sponsored groups that it can also impact productivity, I don’t think you can be competitive in this space.

Operator

Our next question comes from Tom Carroll with Stifel.

Tom Carroll - Stifel Nicolaus & Co., Inc.

Hey, good evening. Two questions for you, first on your CareFirst example, Ben, that you gave us. How can Healthways use these results to expand that business to other blues plans or health plans in general? And are you actively doing that? Do you have a strategy in place to extrapolate those results into some kind of sales pipeline? And then secondly, on first quarter you announced a win of a Fortune 100 firm that you said would be implemented during the second quarter. I was wondering if you could give us an update on this and maybe give us a take to fully stand up this customer in the back half of the year. And does that present any risk to the earnings that we are talking about here? Thanks.

Ben Leedle

Yeah, sure. Let me take them in reverse order. First of all we can confirm, we’ve got an awesome employer group team. They have absolutely delivered on all aspects of the implementation. That client is up and live and we expect profitable contribution from that client from the back half of this year. So very positive launch, implementation and currently operational, our score card all green on that client. You other question on CareFirst is two parts. One is how we will leverage it. I think we’ll leverage the outcomes here like we leverage our outcomes across many things that we do. We do use that as part of the proof point and differentiation of what we do as a company. And we do have as you know a pretty deep footprint into relationships with many of the blues plans already.

And so having the CareFirst program be as visible publically and as successful as it’s been has been good for us in terms of other blues plans looking to us and beginning to do work that affords us the chance to help them in a similar way as to how we are helping CareFirst. So there is a pipeline. We’ve converted and advanced some of our existing other blues plans with either components of what we are doing at CareFirst. And in some cases full out efforts that are similar in nature. We do expect that that is, we shared at the beginning of the year the growth contribution based on the mix of these different markets at a revenue level on a year over year basis. And questions were there is can you guys grow your commercial health plan market again? And we think we can we think the work we’ve done at CareFirst gives us strong credibility on these types of models to do that.

Tom Carroll - Stifel Nicolaus & Co., Inc.

So then just to follow up back on the Fortune 100 company, did you suggest that there would be profits that stem from that customer in the back half of 2014?

Alfred Lumsdaine

That’s correct, absolutely.

Ben Leedle

Absolutely.

Operator

Our next question comes from Josh Raskin with Barclays.

Joshua Raskin – Barclays

Hey, thanks guys, good evening. Just a first question on the revenue ramp, you guys talked about the 4% to 5% of revenues being performance based so midpoint that’s like $33 million. I think is at 80% in the second half so of course $27 million. And then I think you said most would be in the fourth quarter, but just trying to figure out sequentially what that means. Is that most being another 80% of the second half being in the fourth quarter, because that creates obviously a big dynamic in terms of sequential revenue growth. I just want to make sure I get that right.

Alfred Lumsdaine

Yeah. I think, you could think of it that way Josh. I don’t want to try to give you a pinpoint because as you know one of our biggest challenges is predicting the exact timing of performance based revenue. But at the same time yes, we would say certainly more than 50% of that 80% will be in the fourth quarter, and could it be as high as 80% of the 80%? That certainly could be, but again as soon as I say that we’ll have earlier recognition than we expect. And so we can vary a lot just based on when we have the data, when we are able to measure and are we hitting our performance criteria.

Joshua Raskin – Barclays

Okay, so definitely going to be more than half which I guess is typical seasonal, but and could be as much as 80 in some wide range within that. And then just on the earnings I guess the way I’m looking at it here as well, your adjusted net loss of $0.06 in the first half implies a midpoint of $0.24 in the second half adjusted EPS before the non-cash interest expense. Is that that one thirds, two thirds or would you expect definitively to be profitable in the third quarter? How do we think about the ramps there?

Alfred Lumsdaine

Well, again I hate to put exact timing because the performance based revenues can skew it so much, but clearly more of the profits would be in Q4 than in Q3 based on our expectation or the timing of performance-based revenues. Again, that’s going be the wild card that can skew that distribution of earnings significantly between Q3 and Q4. Certainly, we would expect just based on the commentary there would be a smaller increase in revenues because our performance-based fees from Q2 to Q3 are down from Q3 to Q4. And to the extent again those will fall straight to the bottom line for the prior quarters that are recognized. And so it can swing earnings fairly significantly. So again, of that math that you did at the midpoint clearly a majority would be expected to be Q4.

Joshua Raskin – Barclays

Right. Okay, that makes sense. And then just last question on the sequential revenue growth, I think revenues were up just under $4 million. I think last quarter you talked about the impact of weather. I think you said $3 million to $4 million on some of those fee-based businesses. So I'm curious, was there some quarter growth and some offset or was there just sort of a relatively steady quarter 2Q versus 1Q?

Alfred Lumsdaine

Yeah, I think relatively steady is right. You do get some benefit on the offs. We did have some weather in Q1 clearly. We talked about that from an expectation standpoint. You do have some seasonality with early in the year of screenings and New Year’s resolutions and you do actually see a bump in certain aspects of our business that are seasonal early in the year. So, yeah I think from a Q2 perspective we didn’t have a lot of noise.

Operator

Our next question comes from Ryan Daniels with William Blair.

Ryan Daniels - William Blair & Company

Hi guys. Thanks for taking the question. Ben, maybe a question for you in your prepared remarks, you commented that the contract pipeline has expanded. So can you offer a little bit more meat on that? Maybe what specific areas are growing US versus international, how large it is? Anything you want to throw out there to give us a little more color.

Ben Leedle

Sure. I think I've shared last couple calls where we were at the beginning of the year. We’re mid-year in the parts of the business that have a seasonal cycle to them, particularly the large employers. And what we’ve seen through the past six months is just a continued build in this pipeline to where it’s at a point at or greater than what we would have been experiencing last year at this time. So we think that that’s really positive. It's interesting that the things that are being demanded as part of those RFPs, a heavy focus on proving that you have – that you can bring the evidence that you can engage consumers, not just initially but sustainably around their health.

Do you have the capability to leverage open social or social media intervention in the mix of things that you bring? And can you help those employers who typically have multiple vendors engaged? Can you bring the technology that serves as a hub to integrate things so that the experience for the individual or the consumer, in this case employee and their family members is a very positive experience? Those get tested very heavily in this process. We are seeing more and more momentum in both interest seeking information, but also now seeing specifications in the RFPs around this idea of a quantitative self that how are you able to bring device integration so that people can get hard data that they have a quantifiable feedback about how they’re doing almost on a real time basis?

And so mixing those technology capabilities and doing that at scale continue to raise the bar and we think we’re incredibly well positioned given the investments that we’ve made over time and how we brought this to the marketplace. A little shift in incentives which I think is worth mentioning, Ryan that we’re seeing that government entities for employees are actually in part funding these programs through disincentives or premium up-charges for non-participation. So we find out it is an interesting trend. And then on the commercial side, the private sector, large employers really looking for the shifting of incentive payout in whatever form they are choosing to do it to be less about get your blood drawn as a screening and complete health assessment and we’ll give you an incentive to -- over the last couple of years it progressed to and we want to see some of degree of participation to more and more these employers now actually tying the incentive to people making progress around the things that are modifiable in terms of their health behaviors.

On the health plan side, we are continuing to also see two themes. What can be done to help them with their provider network? And I already touched upon that answering Sean’s question in preparing to both those health plans. Shifting risk, bringing new type of value paid models to the market and then obviously the other side of their businesses is the commercial level which is working with us to co-distribute the solutions that we deliver direct to employers through their relationship with their ASOs.

All in all I would say we are at or ahead of the business opportunities that funded the type of growth that’s contributed to two really strong years of growth to the topline the last two years. And you know how the cycle works. Things shifts from mounting growing pipeline to throughput out of that through the industry and our opportunities to negotiations, finalists, contracting and then final decisions being made late out into the third quarter and sometimes the fourth quarter. I think the last three months in summary and color around the pipeline domestically is that that are better than where we were a year ago.

On the international front, I’ll just make a couple of quick comments and then see of you have any follow ups Ryan. Active and pipelines, we’ve got several key business development opportunities that are in the later stages of development a positive way. As we said early in the year there was nothing in our guidance for new deals on international. I’m still not going to predict any timing. Whatever would happen at this point in 2014 is likely not to be material, either dilutive or accretive, but would be things that would be positively and solidly accretive into 2015. And it includes things that are further expansions within the countries where we have a footprint as well as adding a new country or countries. We are seeing very positive traction outside the US and I think having proven ourselves over the last five years than we can successfully export these service models in multitude of different business arrangement and still deliver the value into other countries’ health systems.

Ryan Daniels - William Blair & Company

Okay, that’s very helpful color. And maybe one logical follow up and then one more on the follow up to that. You’re giving us the pipeline has grown. That’s a good data point. How has your win rate or your competitive position changed year over year? Would you expect to come out of the third quarter with a similar level of new business to continue the growth trajectory we’ve seen?

Ben Leedle

Yeah. I think I would split the answer to that question. Obviously we are out there with Ornish in kind of a -- it’s not a cycle based or seasonal business development process like the large employers would be. And we expect that pipeline just to continue to keep growing. And so the win rate there is you win against ourselves because there’s just not – it’s such a unique program. It’s one of only three that have been approved by the government. And I think we’ve got a major head start to scale those programs.

So I think that’s going to continue to have I think high throughput out of what’s in the pipeline. Then you shift back over to the more traditional pipeline component. I don’t know that we would expect to win at any lesser rate than we have been over the last couple of years. And obviously we are hopeful that we can pick that up in a positive way. But I would at least characterize it that we’d be disappointed if we are not keeping pace with the type of win rate and throughput that we’ve seen in the last two years.

Ryan Daniels - William Blair & Company

Okay, and then two quick financials, do you have any thoughts on the -- or color on the proxy cost during the quarter? I know that was a pressure on the bottom line that I thought you were going to break out for us, but you didn’t mention. Any thoughts there?

Alfred Lumsdaine

Sure, Ryan. I’m happy to give you that, , roughly $1.5 million in the quarter.

Ryan Daniels - William Blair & Company

Okay. And then maybe one more follow-up to what Josh was talking about just in a little bit different manner to try to get expectations right here. You mentioned that your debt-to-EBITDA coverage of 3.9 will be flat going into the third quarter. If I look at the financial model you did $19 million in EBITDA in the third quarter, which will roll off. Should we be reading into that that will be replaced by $19 million-ish in the fourth quarter? Is that implicit guidance on the quarter or is there something with the …?

Ben Leedle

Yeah, there’s a lot of dynamics obviously just in terms of we had lower cash flows in this quarter than we might otherwise simply because of the timing of some operating items like when payables got cut and that sort of thing. So it's more a complex Ryan than just the EBITDA line in terms of how we model this out. And I just want to point towards, don’t expect a big change in the leverage covenant in the quarter. We could take down -- could it even pick up, possibly. It’s all going to depend on a lot of those things and the timing of performance-based revenues. So I don’t want to give you too much expectation. Obviously we don’t give quarterly guidance. It's really the year I want you to focus on. And our expectations whether we have some timing that pulls forward to Q3 or moves from Q3 to Q4 our expectations for the full year are fully intact.

Operator

Next we have Dave Styblo from Jefferies.

David Styblo – Jefferies

Great. Thanks and good evening. Couple questions. First one here is just about your performance fees. I'm peeling back that annual a little bit more. All the color there was helpful, but I'm curious, what visibility do you guys have into that at this point? Assuming whatever the number is 4% to 5%, do you already have a sense of how that’s tracking? Or is this basically something where in the third and fourth quarter you get all the data together and crunch all the numbers and then figure out where you were, and if you have earned those performance fees? Just trying to get a sense of your consistency.

Ben Leedle

Sure. It's more the latter than the former meaning we don’t know if we knew or had indicators of performance. We would be able to book. However there are certain things in terms of operating metrics that we track and that we understand and directionally give us confidence. We have historical performance and against our targets and models that give us confidence. So we have a very good track record of underwriting our fees at risk. The timing of recognition is always the biggest challenge of getting that exact because if you just don’t get the data that you need at the end of September and it move into October, predicting where it lands inside of the quarter is the biggest risk associated with that.

So I think the timing is much more of a risk than is whether we will recognize or not. And then another dynamic clearly when you have a new customer, you’re going to have less of a history than you do with – even though we still have obviously our underwriting and our years of experience working with any number of customers. So new customers present more of a challenge than existing customers where our expectations are pretty sound. So again our history of recognizing performance-based revenues I think as you know is very strong. The percentage of fees we have refunded historically are very small and our ability to predict ultimate recognition we think is pretty good. The biggest challenge is timing.

David Styblo – Jefferies

Okay, that’s helpful. Second question was if I step back and just hear what you’re talking about, the moment I'm in Ornish, the pipeline, some international opportunities, the fact you won a Fortune 100 client, all these point towards Healthways exiting the year likely t the high end of the revenue guidance and setting up what seems like would be an accelerated year of revenue growth next year. Is there anything that we need to consider that may be a spot one out as to why you’re more cautious and guarded about not moving up guidance to the higher end of at least revenue? I was thinking that revenue growth wouldn’t accelerate off this year’s number with the caveat being you’ve got a couple of large customers you still have to renew for this year.

Alfred Lumsdaine

Yeah. Well I think our expectation is that revenue growth would accelerate off this number. At the same time we’ve intentionally maintained a very wide range of revenue guidance for the year and the reasons are the things that I mentioned in my prepared remarks. We’ve got the timing and recognition of performance based fees. We have new business and we have ramping revenues under existing contracts, all of which contribute to what is still a relatively wide range of guidance. And where we land in the range will depend on those things. We also have deal structures so we have this robust pipeline that we talked about inclusive of these deals for the Ornish program. Ultimately if the structure of those deals, the risk profile you are going to have different factors that we don’t have full visibility to now that will impact what we actually recognize inside of this year and frankly just when do we sign them. Do we sign them December 31? Do we sign them 10/1? When do we start cohorts to the program? Those are all dynamics that will influence where we land in the range. But should you read from our comments that we have a robust pipeline that we would expect to exit the year stronger than we entered, yeah.

David Styblo – Jefferies

Okay, thanks and then the last was just on the pipeline. I think last quarter you did provide a number in the order I think it was $475 million. Are you providing an updated number for that? And then just on the timing of how you look at that pipeline, how far out do you look for that and is there a way for us to gauge how much of that might be front end loaded versus back end loaded over that time horizon.

Ben Leedle

Yeah. On the last part of your question, we wish that we were able to know the answer to that as we work these deals. Just the size of the pipeline, I told you it was -- had grown and has continued to grow. So all in the pipeline through RFP and through the direct relationship of selling and the efforts that we have between domestic and international is at least at about a $500 million in terms of opportunities. It’s material and you heard my comments to Ryan that a big source of that and the source of growth expansion over the first half of this year is from large employers. And we would expect that expansion at least on the seasonal things to be peaking now. It doesn’t mean that there may not be a late RFP emerge out that marketplace in the back half of the year. But historically a lot of the opportunity in the things that are on a seasonal calendar cycle are there. I guess to try to better understand your question when you talk about the second part of your question in terms of how should you think about what the form of the throughput of that looks like, maybe you could clarify your question again.

David Styblo – Jefferies

Well, I guess it would be helpful to understand what the criteria pipeline is? Does it only go out over one year or could it be three years to five years? And just trying to get a sense, some of it is seasonal because the employers go through a pattern every year. But Ornish is the sort of ongoing stream where you try to sell into. I guess what I’m trying to get at is how much of this pipeline might be within the next year or two that is more realistic that you are going off …

Ben Leedle

I would say almost 100% of this is within about the next 18 months and probably 80% plus, if not more is in the remainder of the next nine months. So these bids and these opportunities get driven by our clients annual fiscal planning cycles. And so they are very near term in terms of those things that come through those bids. Now there’s probably a few that are much more strategic in nature which have business development cycle times of between one. Those are longer cycles as well. But the majority of this is will come to some disposition or resolution about award. Whether they continue to go through with their proposal, whether they abandon it, all those different metrics come clear largely by the end of the fourth quarter this year.

Operator

Next we have Shawn Bevec from Deutsche Bank.

Shawn Bevec - Deutsche Bank

Thanks. On the performance based revenue, when you guys provided initial guidance earlier in the year, it was supposed to be 3% to 4% for this year and then last quarter you said 4% and then this quarter you’re saying 4% to 5%. I'm just wondering what's causing this to increase as we move throughout the year. And is there a chance that that could continue to increase as we get into the second half?

Alfred Lumsdaine

Yeah. I would say at this point it probably wouldn’t increase. Again as we go through the year, as we look at the pipeline, as we look at the potential for new business, it can change. So it is a static. It is not a static percent because of our pipeline, the potential structure of new deals and that sort of thing and frankly, our performance, our projected performance under those arrangements.

Shawn Bevec - Deutsche Bank

Okay. And then the three factors that you discussed that are crucial to the second half revenues, how much is the signing and launch of new business? How much is it dependent on that piece in particular?

Alfred Lumsdaine

Well again, I think that contributes to the width of our revenue range at the bottom of the range of our guidance. I would say we really don’t have any assumption of new business included.

Shawn Bevec - Deutsche Bank

Okay. And then just a question on the Ornish program. I know in third quarter last year, you guys provided an update that you had commitments from 9 health systems. How many do you have today? And do you expect more health system customers to be signed this year to come out from these Ornish arrangements that you already have developed?

Ben Leedle

Yep. So you’re thinking back to the third quarter conversation where I think we provided you kind of a list of those early commitments that were in contracting. We’ve gotten throughput operational enrollment cohorts, going through a good portion of that list. My commentary in the prepare remarks were that we have literally dozens of health systems, hospitals, physician groups in the latter stages of business development and are contracting. We’ve been asked how will we know when those who come through? Is there going to be an announcement on every one of those? You’re likely to see quite a bit of press release announcements. The relative timing of those press releases to the signings of those agreements can vary. And just like any employer business, sometimes we sign deals and there are no press release associated with it. So it’s going to vary, but we would expect a significant number of new contracts through our Ornish work through the back half of this year.

Shawn Bevec - Deutsche Bank

So you have dozens of customers now who have commitments with the customers on the Ornish program?

Ben Leedle

Yeah. The comments I had was we’ve had strong conversions from the original commitments and others and that we’re in the latter stages of business development and contracting with dozens.

Shawn Bevec - Deutsche Bank

Okay. And then two last housekeeping items. Has the expected mix of your revenue from the five customer markets changed at all since you provided that guidance initially at the beginning of the year? And then …

Alfred Lumsdaine

I will just interject. I think we’re right on track for the original projection in terms of how the revenue mix will fall.

Shawn Bevec - Deutsche Bank

Okay. And then the last piece. The 3Q share counts since you will be flipping over to profitability; do you have a sense for what that could be?

Alfred Lumsdaine

Yeah. I don’t have that handy. We might take that offline. I've got that. It's just not in front of me. But yeah, clearly historically that dilution has been a couple million shares.

Operator

Our next question is from Brooks O’Neil with Dougherty & Company.

Brooks O'Neil - Dougherty & Company

Good afternoon. I was just curious. I'm hearing a lot about success with new products. Could you just give us a sense of if the demand you’re seeing in the marketplace now is pretty broad-based across a lot of your historic strength of product and service offering? Or is it more narrowly focused right now?

Ben Leedle

Thanks for your question, Brooks. This is Ben. Probably the easiest way I can help characterize that in a quantifiable way we’d say the new business in the second quarter is example. 32% of the new business was through Medicare plans, 10% through commercial health plans. So together, those two representing about 42% of the purchasing source by customer type. 42% of it was with the health systems and physicians so providers, which continues to grow. And then about 16% with employer, but as you look at that remember the cycle time, the throughput for announcing of those types of contracts typically are in the fourth and first quarters. We continue to get the throughput through the second quarter. And then I guess to you point, what are they buying? When we think about three broad areas of service types that we provide, there is Care Management which includes our disease management, Complex Case Management, High Risk Care management. That was about 25% of the new business that was brought in.

Standalone wellness, which is focused on prevention and lifestyle behavior modification, continued consistence with what we’ve been seeing over the last year at about 45%. And then 30% of the new business was total population health. And so I think it’s a healthy mix. You hear more about – hear us talk maybe more about Ornish and some of those newer products as we try to share with you what is different in terms of what’s resonating in the market. But we have really good strength across the board for all the different components you’ve grown to know about what we do as well as the new things and a third of the market buying very broadly from us across the board so.

Brooks O'Neil - Dougherty & Company

Wait, And then just one other question, I’m curios obviously, we hear a lot about cost containment and drift I guess is one way to say it in the healthcare market place. What does it seem from a pricing standpoint in terms not really so much worried about competition. I’m just curious what the buyers are thinking about the price points you are asking from them for your services?

Ben Leedle

Well, I think we’ve been pretty consistent with our price point for a long time Brooks, because we are not paid on a cost plus just a fee type basis. We paid as a derivative of the outcome value that we are producing. And typically we express and ask for a third of the gross value that we are projecting being held accountable for. As you know in some cases going at total fee risk to produce and so we see consistent sustainability that that is a tenable place.

It’s a place of sustainability and we think our pricing sold solidly through the last couple of years and through so far this sell season this year.

Operator

There are no further questions, so this time for closing remarks we’ll turn the call over to Ben Leedle.

Ben Leedle

I just want to say thank you all for joining the call this afternoon. We appreciate your continued interest in following the company. Chip Wochomurka, who leads our investor relations, myself and Alfred are available for calls and looking forward to connecting with you over the next few months. Everybody have a good evening.

Operator

That does conclude today’s call, we appreciate your participation.

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