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Healthways Reports Fourth-Quarter Earnings of $0.31 Per Diluted Share and Fiscal 2007 Earnings of $1.22 Per Diluted Share

Posted on: Wednesday, 17 October 2007, 18:00 CDT

Ben R. Leedle, Jr., president and chief executive officer of Healthways, Inc. (NASDAQ: HWAY), today announced financial results for the fourth quarter and twelve months ended August 31, 2007. Total revenues for the quarter increased 48% to $170.4 million from $114.9 million for the fourth quarter of fiscal 2006. As expected, net income for the fourth quarter of fiscal 2007 was $11.5 million, or $0.31 per diluted share, compared with $14.0 million, or $0.38 per diluted share, for the fourth quarter of fiscal 2006.

Total year revenues increased 49% for fiscal 2007 to $615.6 million from $412.3 million for fiscal 2006. Net income rose 21% for fiscal 2007 to $45.1 million from $37.2 million for fiscal 2006, while earnings per diluted share increased 20% to $1.22 from $1.02.

"We are pleased with Healthways' performance for both the fourth quarter and fiscal 2007," Mr. Leedle remarked. "Our core commercial business earnings met or exceeded the high end of our earnings guidance each quarter throughout the fiscal year. These earnings contributed to the 50% growth in the Company's overall EBITDA for the fiscal year to $130.5 million from $86.7 million for fiscal 2006, which, despite the increased cost of both our international and MHS initiatives in fiscal 2007, drove a slight improvement in EBITDA as a percentage of revenues.

COMPARISON OF EBITDA AND RECONCILIATION TO NET INCOME

See pages 9 and 10 for a reconciliation of GAAP and non-GAAP results

(Dollars in thousands)

Twelve Months Ended

August 31,

%

2007

2006

Change

Total EBITDA

$

130,513

$

86,730

50%

Interest expense

18,185

1,053

Income tax expense

30,163

24,009

Depreciation and amortization

37,044

24,517

Net income

$

45,121

$

37,151

21%

"We achieved these results even as we continued to invest in enhanced product offerings that significantly expand our ability to meaningfully engage every person within a given population, regardless of age or health status, with solutions proven to maintain or improve their health and productivity. These investments are consistent with the long history of innovation and thought leadership that have led to our current market position and will fuel our continuing drive toward integrated, personalized and comprehensive WholeHealth solutions. At the same time, we are being presented with substantial new growth opportunities for our current solutions from both our existing base of available lives and potential new customers, both domestically and abroad.

"The strong sales momentum we have built was again evident in the growth of our core commercial revenues, which increased 53% for the fourth quarter and 54% for the full fiscal year when compared with the same periods in the prior year. The Axia acquisition completed in December 2006 contributed significantly to this growth. Core commercial earnings for the fourth quarter exceeded our guidance, even after accounting for the impact of Axia integration; preparation for large contract implementations; and somewhat lower than expected summer utilization of our seniors' physical activity program, SilverSneakers®.

"Our expanding growth prospects were also demonstrated by the fourth-quarter announcement of our first international contract, a three-year agreement with Deutsche Angestellten Krankenkasse (DAK), Germany, to provide Health and Care SupportSM solutions for a portion of its members with chronic diseases. Our costs related to this contract and other international efforts were $0.06 per diluted share for the fourth quarter, $0.02 higher than expected, which were offset by better than expected fourth-quarter results for both our core commercial business and for the two Medicare Health Support (MHS) pilots in which we participate."

COMPARISON OF COMPONENTS OF NET INCOME PER DILUTED SHARE

See pages 9 and 10 for a reconciliation of GAAP and non-GAAP results

Three Months Ended

Twelve Months Ended

August 31,

%

August 31,

%

2007

2006

Chg.

2007

2006

Chg.

Core commercial

$

0.45

$

0.45

-

%

$

1.77

$

1.29

37

%

MHS

(0.08

)

(0.05

)

(0.44

)

(0.21

)

Domestic

0.37

0.40

(8

)%

1.34

(1)

1.09

(1)

23

%

International

(0.06

)

(0.02

)

(0.12

)

(0.06

)

EPS, GAAP basis

$

0.31

$

0.38

(18

)%

$

1.22

$

1.02

(1)

20

%

(1) Figures may not add due to rounding.

Additional Highlights

Continued expansion of billed lives and available lives. Due to new contracts implemented with both new and existing customers, Healthways' billed lives increased by approximately 350,000 during the quarter and by over 1 million during the second half of fiscal 2007. As a result, billed lives totaled 27.4 million at the end of fiscal 2007, which represented approximately 15% penetration of the Company's total available lives of 188.5 million at year end.

Consistent with earlier trends, Healthways' expansion of billed lives for the fourth quarter reflected the implementation of a variety of new, extended or expanded contracts with health plans and self-insured employers and across the Company's breadth of Health and Care Support solutions. Since the end of fiscal 2006, Healthways has signed 150 new, extended or expanded health plan or direct-to-employer contracts. In addition, driven by increasing employer demand for proven solutions, Healthways expanded its contracts with self-insured employers -- either on behalf of our health plan customers or on a direct-to-employer basis -- by 54% to a total of 890 at the end of fiscal 2007 from 579 at the end of fiscal 2006.

Significant backlog and strong pipeline of potential contracts. Healthways' backlog of annualized revenues for contracts signed but not yet implemented at the end of fiscal 2007 totaled approximately $40 million. Contracts signed since the end of fiscal 2007 have increased the backlog by approximately $6 million.

In addition, Healthways' pipeline of potential contracts continues to expand. This demand reflects the growing recognition among health plans and self-insured employers of the increasing healthcare cost management and productivity improvement benefits to be gained by addressing the health needs of every individual in their specific populations. The Company believes the current strength of the pipeline reflects its unique and demonstrated ability to drive meaningful outcomes, at scale, across its comprehensive and differentiated continuum of Health and Care Support solutions.

DAK contract represents strong entry into large international market. Healthways recently announced a three-year agreement with Deutsche Angestellten Krankenkasse (DAK) to provide Health and Care Support solutions to approximately 50,000 of DAK's members with diabetes, heart disease and chronic obstructive pulmonary disease in two regions of Germany. This contract is structured as a no-risk, fixed fee arrangement with the potential for incentive bonuses in the event performance exceeds contractual targets. Healthways expects the contract, once implemented, to be generally similar in operation and in profitability to its domestic commercial contracts. DAK serves 6.2 million individuals nationwide, more than 800,000 of whom suffer from these chronic diseases.

16 customers initiated under Medco alliance. Healthways has expanded the number of its customers under the 10-year alliance entered in fiscal 2006 with Medco Health Solutions, Inc. and is currently providing or implementing solutions for a total of 16 customers, primarily self-insured employers. While these contracts are based on the companies' initial collaboration, Optimal Health®, the alliance continues to develop innovative products and services to leverage Healthways Health and Care Support solutions with Medco's real-time patient-specific pharmacy information and pharmacy benefit management services.

Substantial cash flow from operations drives further debt reduction. Healthways generated cash flow from operations of $37.1 million for the fourth quarter and $107.3 million for the full fiscal year. Among other uses of cash during the fourth quarter, the Company invested $22.6 million in the purchase of assets from First Opinion Corporation and $5.7 million in stock repurchases, while spending $20.5 million to reduce bank debt, completing the fiscal year with $47.7 million in cash and cash equivalents. As a result, Healthways' debt-to-total capitalization improved to 45% at the end of the fiscal year from 48% and 51% at the end of the third and second quarters of fiscal 2007, respectively.

Financial Guidance

Revenue

Healthways today established its guidance for revenues for fiscal 2008 in a range of $782 million to $815 million. The implied 27% to 32% growth over fiscal 2007 revenues that this range represents is consistent with the Company's expectation of sustainable growth in its domestic revenues. In addition, Healthways expects to record its first revenues related to the DAK international contract during fiscal 2008 in a range of $8 million to $10 million. In prior years the Company reported its domestic operations separately as core commercial operations and the MHS pilots. However, given the relative size of the MHS pilots to the rest of the business, their limited remaining term and relative financial predictability, the Company will be reporting these results with the core commercial results on a combined basis for fiscal 2008 as our "domestic" business. While the Company does not anticipate any performance revenues from its MHS pilots for fiscal 2008, its domestic guidance does include revenues in a range of $4 million to $5 million from fixed payments related to the Company's participation in the CIGNA Phase I pilot.

COMPARISON OF COMPONENTS OF REVENUES FOR

FISCAL 2008 (GUIDANCE) AND FISCAL 2007

(Dollars in millions)

Fiscal 2008

%

(Guidance)

Fiscal 2007

Change

Domestic

$

774.0 - 805.0

$

615.6

26 - 31%

International

8.0 - 10.0

-

Total Company

$

782.0 - 815.0

$

615.6

27 - 32%

Earnings

The Company today also established its guidance for earnings per diluted share for fiscal 2008 in a range of $1.77 to $1.86, or 45% to 52% above $1.22 for fiscal 2007. Consistent with previous years, the substantial continuing growth of our core commercial business is expected to fund the costs of the remaining term of the MHS Phase I pilots and the early stage of international initiatives. Healthways' guidance for fiscal 2008 earnings per diluted share for the domestic business is in a range of $1.88 to $1.95, which includes anticipated costs of $0.10 related to the Company's move into a new consolidated enterprise headquarters and an expected net cost impact of the MHS pilots of approximately $0.25. The Company's guidance for fiscal 2008 earnings per diluted share is also based on expected net costs in a range of $0.09 to $0.11 related to Healthways' international business.

COMPARISON OF FISCAL 2008 EPS GUIDANCE TO FISCAL 2007 RESULTS

AND COMPONENTS OF FIRST-QUARTER FISCAL 2008 GUIDANCE

See pages 9 and 10 for a reconciliation of GAAP and non-GAAP results

Twelve Months

Three Months

Ending

Ending

Aug. 31, 2008

Ended

%

Nov. 30, 2007

(Guidance)

Aug. 31, 2007

Change

(Guidance)

Domestic

$

1.88 - 1.95

$

1.34

40 - 46%

$

0.33 - 0.34

International

(0.11)-(0.09)

(0.12

)

(0.06)-(0.05)

Earnings per diluted share, GAAP basis

$

1.77 - 1.86

$

1.22

45 - 52%

$

0.27 - 0.29

Summary

Mr. Leedle concluded, "We produced another year of significant profitable growth for fiscal 2007, while further strengthening our position of industry leadership. We believe our success reflects our ability to provide validated outcomes at scale, even as we continue to enhance our value proposition through industry transforming innovation. As a result of our accomplishments during the fiscal year, such as the completion of the Axia acquisition, the progress and learning achieved in our MHS pilots and the signing of our first international Health and Care Support contract, we believe our prospects for long-term growth have increased substantially. We remain confident that, as we continue to build toward our vision of fully integrated, personalized WholeHealth solutions, the further expansion of our value proposition will drive a complementary and long-term expansion of our revenue and profit growth opportunities."

Conference Call

Healthways will hold a conference call to discuss this release today at 5:00 p.m. Eastern time. Investors will have the opportunity to listen to the conference call live over the Internet by going to www.healthways.com and clicking Investor Relations, or by going to www.earnings.com, at least 15 minutes early to register, download and install any necessary audio software. For those who cannot listen to the live broadcast, a telephonic replay will be available for one week at 719-457-0820, code 4396238, and the replay will also be available on the Company's Web site for the next 12 months.

Safe Harbor Provisions

This press release contains forward-looking statements that are based upon current expectations and involve a number of risks and uncertainties. Those forward-looking statements include all statements that are not historical statements of fact and those regarding the intent, belief or expectations of the Company, including, without limitation, all statements regarding the Company's future earnings and results of operations. In order for the Company to utilize the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, investors are hereby cautioned that the following important factors, among others, may affect these forward-looking statements. Consequently, actual operations and results may differ materially from those expressed in these forward-looking statements. The important factors include but are not limited to: the effect of any new or proposed legislation, regulations and interpretations relating to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, including the potential expansion to Phase II for MHS Programs; the Company's ability to accurately forecast performance and the timing of revenue recognition under the terms of its health plan contracts and/or its Cooperative Agreement with CMS ahead of data collection and reconciliation in order to provide forward-looking guidance; the Company's ability to effect the financial and clinical outcomes under its Cooperative Agreement with CMS and reach mutual agreement with CMS with respect to results necessary to achieve success under Phase I of the Medicare Health Support Pilots; the Company's ability to anticipate the rate of market acceptance of Health and Care Support solutions and the individual market dynamics in potential international markets; the ability of the Company to accurately forecast the costs necessary to implement the Company's strategy of establishing a presence in these markets; the Company's ability to sign and implement new contracts for Health and Care Support solutions; the Company's ability to effect cost savings and clinical outcomes improvements under Health and Care Support contracts and reach mutual agreement with customers with respect to cost savings, or to effect such savings and improvements within the time frames contemplated by the Company; the ability of the Company's customers and/or CMS to provide timely and accurate data that is essential to the operation and measurement of the Company's performance under the terms of its health plan contracts; the Company's ability to favorably resolve contract billing and interpretation issues with its customers; increased leverage incurred in conjunction with the acquisition of Axia and our ability to service our debt and make principal and interest payments as those payments become due; the Company's ability to integrate the operations of Axia and other acquired businesses or technologies into the Company's business and to achieve the results provided in our guidance with respect to Axia; the Company's ability to renew and/or maintain contracts with its customers under existing terms or restructure these contracts on terms that would not have a material negative impact on the Company's results of operations; unusual and unforeseen patterns of healthcare utilization by individuals with diabetes, cardiac, respiratory and/or other diseases or conditions for which the Company provides services; and other risks detailed in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2006 and other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise any such forward-looking statements.

About Healthways

Healthways is the leading provider of specialized, comprehensive Health and Care SupportSM solutions to help millions of people maintain or improve their health and, as a result, reduce overall healthcare costs. Healthways' solutions are designed to help healthy individuals stay healthy, mitigate and slow the progression of disease associated with family or lifestyle risk factors and promote the best possible health for those already affected by disease. Our proven, evidence-based programs provide highly specific and personalized interventions for each individual in a population, irrespective of age or health status, and are delivered to consumers by phone, mail, internet and face-to-face interactions, both domestically and internationally. Healthways also provides a national, fully accredited complementary and alternative Health Provider Network, offering convenient access to individuals who seek health services outside of, and in conjunction with, the traditional healthcare system. For more information, please visit www.healthways.com.

HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

Three Months Ended

Twelve Months Ended

August 31,

August 31,

2007

2006

2007

2006

Revenues

$

170,350

$

114,876

$

615,586

$

412,308

Cost of services (exclusive of depreciation and amortization of $7,257, $5,382, $27,677, and $19,948, respectively, included below)

115,455

72,876

417,721

281,161

Selling, general and administrative expenses

19,361

12,498

67,352

44,417

Depreciation and amortization

9,819

6,434

37,044

24,517

Operating income

25,715

23,068

93,469

62,213

Interest expense

5,652

257

18,185

1,053

Income before income taxes

20,063

22,811

75,284

61,160

Income tax expense

8,592

8,784

30,163

24,009

Net income

$

11,471

$

14,027

$

45,121

$

37,151

Earnings per share:

Basic

$

0.32

$

0.41

$

1.29

$

1.08

Diluted

$

0.31

$

0.38

$

1.22

$

1.02

Weighted average common shares and equivalents:

Basic

35,463

34,589

35,049

34,348

Diluted

37,364

36,687

37,002

36,379

See accompanying notes to the consolidated financial statements.

Healthways, Inc.

Statistical Information

(In thousands)

(Unaudited)

August 31,

August 31,

2007

2006

Operating Statistics

Available Lives

188,500

76,900

Billed Lives

27,446

2,426

Annualized revenue in backlog

$

39,900

$

6,625

Healthways, Inc.

Reconciliations of Non-GAAP Measures to GAAP Measures

(Unaudited)

Reconciliation of Core Commercial Diluted Earnings Per Share (EPS) to Diluted EPS, GAAP Basis

Three Months

Year

Three Months

Year

Ended

Ended

Ended

Ended

August 31,

2007

August 31,

2007

August 31,

2006

August 31,

2006

Core commercial EPS(1)

$

0.45

$

1.77

$

0.45

$

1.29

EPS (loss) attributable to MHS pilots(2)

(0.08

)

(0.44

)

(0.05

)

(0.21

)

Domestic EPS(3)(5)

0.37

1.34

0.40

1.09

EPS (loss) attributable to international initiatives(4)

(0.06

)

(0.12

)

(0.02

)

(0.06

)

EPS, GAAP basis(5)

$

0.31

$

1.22

$

0.38

$

1.02

(1) Core commercial EPS is a non-GAAP financial measure.  The Company excludes EPS attributable to MHS pilots and international initiatives from this measure and relies on core commercial EPS because of its comparability to the Company's historical operating results.  The Company believes it is useful to investors to provide disclosures of its operating results on the same basis as that used by management.  You should not consider core commercial EPS in isolation or as a substitute for EPS determined in accordance with accounting principles generally accepted in the United States.

(2) EPS (loss) attributable to MHS pilots includes revenues and costs associated with the preparation and operation of the MHS pilots in Maryland and the District of Columbia and in Georgia.

(3) Domestic EPS is a non-GAAP financial measure.  The Company excludes EPS attributable to international initiatives from this measure and relies on domestic EPS because of its comparability to the Company's historical operating results and EPS guidance.  The Company believes it is useful to investors to provide disclosures of its operating results and guidance on the same basis as that used by management.  You should not consider domestic EPS in isolation or as a substitute for EPS determined in accordance with accounting principles generally accepted in the United States.

(4) EPS (loss) attributable to international initiatives includes costs to implement the Company's strategy of establishing a presence in international markets as well as costs of securing and implementing its first international contract.

(5) Figures may not add due to rounding

Reconciliation of Domestic Diluted EPS Guidance to Diluted EPS Guidance, GAAP Basis

Three Months Ending

Twelve Months Ending

November 30,

2007

August 31,

2008

Domestic EPS guidance(6)

$

0.33 -- 0.34

$

1.88 -- 1.95

EPS (loss) guidance attributable to international operations(7)

(0.06) - (0.05

)

(0.11) - (0.09

)

EPS guidance, GAAP basis

$

0.27 - 0.29

$

1.77 - 1.86

(6) Domestic EPS guidance is a non-GAAP financial measure.  The Company excludes EPS (loss) guidance attributable to international operations from this measure and relies on domestic EPS guidance because of its comparability to the Company's historical operating results.  The Company believes it is useful to investors to provide disclosures of its operating results and guidance on the same basis as that used by management.  You should not consider domestic EPS guidance in isolation or as a substitute for EPS guidance determined in accordance with accounting principles generally accepted in the United States.

(7) EPS (loss) guidance attributable to international operations includes anticipated revenues and costs attributable to securing and operating international contracts.

Reconciliation of Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) to Net Income (in thousands)

Twelve Months Ended

August 31, 2007

August 31, 2006

Total EBITDA(8)

$

130,513

$

86,730

Interest expense

18,185

1,053

Income tax expense

30,163

24,009

Depreciation and amortization

37,044

24,517

Net income

$

45,121

$

37,151

(8) EBITDA is a non-GAAP financial measure.  The Company excludes interest, taxes, depreciation and amortization from this measure and provides EBITDA to enhance investors' understanding of the Company's operating performance and its capacity to fund capital expenditures and working capital requirements.  The Company believes it is useful to investors to provide disclosures of its operating results on the same basis as that used by management.  You should not consider EBITDA in isolation or as a substitute for net income determined in accordance with accounting principles generally accepted in the United States.

HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

August 31,

August 31,

2007

2006

Assets

Current assets:

Cash and cash equivalents

$

47,655

$

154,792

Accounts receivable, net

80,201

52,978

Prepaid expenses and other current assets

14,689

9,397

Income taxes receivable

1,741

--

Deferred tax asset

7,145

3,726

Total current assets

151,431

220,893

Property and equipment

Leasehold improvements

19,268

15,693

Computer equipment and related software

87,843

70,524

Furniture and office equipment

20,435

18,533

Capital projects in process

12,336

5,325

139,882

110,075

Less accumulated depreciation

(81,160

)

(63,525

)

Net property and equipment

58,722

46,550

Long-term deferred tax asset

--

2,557

Other assets

15,609

4,052

Customer contracts, net

41,777

3,660

Other intangible assets, net

77,722

8,539

Goodwill, net

483,584

96,135

Total assets

$

828,845

$

382,386

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$

13,630

$

9,221

Accrued salaries and benefits

18,960

36,007

Accrued liabilities

22,146

5,429

Deferred revenue

7,918

319

Contract billings in excess of earned revenue

72,829

35,013

Income taxes payable

--

7,906

Current portion of long-term debt

2,213

180

Current portion of long-term liabilities

2,943

2,349

Total current liabilities

140,639

96,424

Long-term debt

297,059

236

Long-term deferred tax liability

14,009

--

Other long-term liabilities

14,388

10,853

Stockholders' equity

Preferred stock

$.001 par value, 5,000,000 shares authorized, none outstanding

--

--

Common stock

$.001 par value, 75,000,000 shares authorized, 35,606,482 and 34,597,748 shares outstanding

35

35

Additional paid-in capital

188,126

140,200

Retained earnings

174,641

134,622

Accumulated other comprehensive income (loss)

(52

)

16

Total stockholders' equity

362,750

274,873

Total liabilities and stockholders' equity

$

828,845

$

382,386

See accompanying notes to the consolidated financial statements.

HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

Twelve Months Ended

August 31,

2007

2006

Cash flows from operating activities:

Net income

$

45,121

$

37,151

Adjustments to reconcile net income to net cash provided by operating activities, net of business acquisitions:

Depreciation and amortization

37,044

24,517

Amortization of deferred loan costs

991

476

Share-based employee compensation expense

18,836

13,982

Excess tax benefits from share-based payment arrangements

(12,152

)

(10,936

)

Increase in accounts receivable, net

(2,749

)

(12,281

)

Increase in other current assets

(3,299

)

(3,716

)

(Decrease) increase in accounts payable

(1,143

)

5,599

(Decrease) increase in accrued salaries and benefits

(21,362

)

9,162

Increase in other current liabilities

52,227

46,434

Deferred income taxes

(10,866

)

(11,217

)

Other

5,092

3,621

Decrease (increase) in other assets

834

(1,539

)

Payments on other long-term liabilities

(1,247

)

(1,445

)

Net cash flows provided by operating activities

107,327

99,808

Cash flows from investing activities:

Acquisition of property and equipment

(29,507

)

(27,356

)

Acquisitions, net of cash acquired

(493,071

)

(115

)

Purchase of investment

(9,045

)

--

Other, net

(13

)

--

Net cash flows used in investing activities

(531,636

)

(27,471

)

Cash flows from financing activities:

Decrease in restricted cash

--

3,811

Proceeds from issuance of long-term debt

350,000

--

Deferred loan costs

(4,357

)

(924

)

Proceeds from sale of unregistered common stock

5,000

--

Repurchases of common stock

(5,654

)

--

Excess tax benefits from share-based payment arrangements

12,152

10,936

Payments of long-term debt

(51,190

)

(163

)

Exercise of stock options

11,221

5,328

Net cash flows provided by financing activities

317,172

18,988

Net (decrease) increase in cash and cash equivalents

(107,137

)

91,325

Cash and cash equivalents, beginning of period

154,792

63,467

Cash and cash equivalents, end of period

$

47,655

$

154,792

See accompanying notes to the consolidated financial statements.

Source: Business Wire

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