Tuesday after the markets closed, Healthways reported relatively solid second-quarter results—highlighted by an acceleration in organic sales growth to 11.3%; adjusted EBITDA also were solid at $17.2 million, just shy of the $17.5 million consensus estimate but up 18.7% year-over-year. Adjusted EPS were $0.01, beating the Street forecast by a penny. Lastly, management reiterated 2014 guidance across the board.
Of particular note, management guided to roughly breakeven second-quarter results on its fourth quarter 2013 EPS call; however, given the emerging proxy battle, it indicated during the first quarter 2014 call that second-quarter results could be affected by as much as an additional $1.5 million due to the proxy fight. We do not believe consensus estimates fully incorporated this expense, and management did not break out the proxy costs separately in the earnings release, as we expected—thus the actual bottom-line results are even better than they appear at first blush.
Again, the more important message from this quarter is that after a multi-year period of investments in technology and new service offerings, which transformed the company from a disease management vendor into a provider of population health management services, Healthways is now in the early stages of a period of sustainable high-single- to low-double-digit organic sales growth. Another key message from the quarter is that the Dean Ornish program is resonating very well in the market and should be a consistent growth contributor
The company’s sales performance this quarter demonstrates the yield of these investments—with total sales growing 11.3% (all organic) to $180.6 million, registering modestly above the $179.4 million consensus estimate. Despite the proxy fight expenses, margins and earnings also improved during the period, in part due to higher sales; adjusted EBITDA margin increased by 60 basis points year-over-year and 260 basis points sequentially, to 9.5%, while adjusted earnings per share of $0.01 were better than both the $0.03 loss reported in the prior-year period and the breakeven consensus target; again, numbers would have been even stronger if the company had not incurred $1.5 million dollars fighting the proxy battle during the period.