TSC Ratings Update: 'Hold' Healthways

We rate Healthways (HWAY Quote) a HOLD. Our rating is supported by the company's top-line growth and higher earnings countered by its weak cash and liquidity position. Although the margins and returns are improving, rising expenses along with mounting debt may negatively impact the company's performance in the upcoming quarters.

HIGHLIGHTS

-- Top-line growth. Healthways Inc.'s Q1 FY09 revenue grew 5.5% to $185.40 million from $175.82 million in the prior year's quarter due to contributions from the commencement of new contracts, increase in the recognition of performance-based fees and growth in the number of self-insured employers on behalf of its health plan customers. Domestic commercial available lives and domestic commercial billed lives advanced 6.3% and 22.5%, respectively.

-- Higher earnings. During Q1 FY09, earnings increased on the back of higher revenue growth. Net income for the quarter swelled 12.5% to $12.58 million or $0.37 per share compared to $11.18 million or $0.30 per share in the prior year's quarter attributed to higher revenue.

-- Improving margins and returns. During the quarter, gross profit margin widened 103 basis points to 30.40% from 29.37% and operating margin increased 31 basis points to 14.15% from 13.84%. Moreover, return on assets and return on equity increased 123 basis points and 377 basis points to 6.37% and 15.33% respectively.

-- Weak cash and liquidity position. Healthways' cash and cash equivalents plunged 92.0% to $4.35 million from $54.53 million while net operating cash flow declined 15.0% to $21.65 million when compared to the same quarter last year. Moreover, the company has a quick ratio of 0.75 which shows its inability to meet short-term cash requirements.