Healthways stumbles after cut to 2012 outlook

NEW YORK -- Shares of Healthways Inc. slumped Friday after the wellness program operator posted disappointing third-quarter revenue and cut is annual net income guidance because of the costs associated with new contracts.

THE SPARK: The Nashville, Tenn., company said Thursday that its net income fell 47 percent, to $5 million, or 15 cents per share. Its revenue slipped 5 percent to $166.6 million.

Analysts expected Healthways to report net income of 13 cents per share and $172.5 million in revenue, according to FactSet.

The company is now forecasting adjusted net income of 24 to 30 cents per share in 2012, down from 38 to 50 cents per share. It narrowed its revenue estimate to $670 million to $685 million from $665 million to $705 million.

Analysts had been forecasting net income of 45 cents per share and $688.9 million in revenue on average.

THE BIG PICTURE: Healthways said it has signed several new contracts and expects to complete more before the end of the year. President and CEO Ben Leedle said Healthways will have to spend more money to implement the new contracts before the deals start bringing in significant amounts of revenue. Many of the contracts will take 6 to 18 months to reach their full revenue, he added.

Leedle said that two contracts the company has already renewed will bring in less revenue than expected in 2012 before increasing in 2013.

Healthways expects $710 million to $750 million in revenue in 2013. That includes an $80 million cut to revenue from a contract with health insurer Cigna Corp. that is ending in February. Analysts were estimating $715.1 million in revenue on average.

Leedle said the company expects $85 million in organic revenue growth in 2014 based on the new contracts. That suggests $795 million to $835 million in revenue before future contracts are included, and analyst had expected the company to post $784.9 million in revenue in 2014 on average.

THE ANALYSIS: William Blair & Co. analyst Ryan Daniels said the company is forecasting a weak fourth quarter, but he said the company's outlook is good and Healthways should be able to reach its 2013 targets.

"A return to sustainable top-line growth is under way, in our view," he wrote.

Stifel Nicolaus analyst Thomas Carroll said the company "is continuing to rebuild itself post-recession and post-Cigna." Both analysts rate the stock at the equivalent of "Buy."

SHARE ACTION: Shares of Healthways fell as much 22.7 percent Friday, but recovered the majority of those losses to close at $10.91, down 19 cents from Thursday's closing price. Healthways shares plunged more than 40 percent in October 2011 after the company announced a sharp reduction in revenue from Cigna, and in the last few months Healthways shares have returned to the levels they traded at before the end of that contract was disclosed.

The stock is up about 67 percent since the beginning of June.