Healthways Reports Third-Quarter Earnings of $0.26 Per Diluted Share

Healthways, Inc. (NASDAQ: HWAY) today announced financial results for the third quarter and nine months ended September 30, 2009. Total revenues for the quarter were $181.6 million compared with revenues of $187.4 million for the three months ended September 30, 2008. Net income for the third quarter of 2009 was $8.8 million, or $0.26 per diluted share, which was two cents above the Company’s earnings guidance range. Net income for the third quarter of 2008 was $15.6 million, or $0.45 per diluted share.

Ben R. Leedle, Jr., chief executive officer of Healthways, commented, "The performance of our domestic operations once again enabled us to exceed our revenue and earnings expectations for the quarter. These better than expected results for the third quarter were driven primarily by the timing of performance-based revenue recognition, as certain performance targets were measured and achieved earlier than forecast, and by higher than projected billed lives. The strong earnings performance by our domestic operations was slightly offset by higher than anticipated net costs in our international operations, primarily related to the start-up of the Australian contract with Hospitals Contribution Fund.

"The Company’s cash flow from operations was a strong $42.1 million for the third quarter. In addition to investing approximately $13.4 million in capital expenditures during the quarter, we also reduced our debt by $34.1 million. This reduction contributed to a debt to EBITDA ratio as calculated under our credit agreement of 2.0 at the end of the quarter, which is the low end of the forecasted range for 2009. Combined with our debt reduction during the first six months of the year, our total debt to capitalization has improved 410 basis points to 42.1% at the end of the third quarter from 46.2% at December 31, 2008.

"Since the beginning of the third quarter, we have signed new, expanded or extended contracts that reflect demand across the breadth of our solutions from new and existing Healthways customers, representing regional Blue Cross Blue Shield health plans, state governments, and Fortune 100 employers. Under these agreements, we will provide our chronic condition management, Silver Sneakers®, QuitNet® comprehensive smoking cessation, lifestyle health coaching, and/or WholeHealth solutions.

"Among these customers, we are pleased to report today a significant new agreement that expands our long-term relationship with Health Care Service Corporation (HCSC), one of the nation’s largest health plans. Under the terms of this multi-year agreement, Healthways will make its national fitness center network available to approximately 6.7 million of HCSC’s commercial members. With this unique business model and related services, we have created a new consumer solution designed to support healthy behaviors for individuals in a commercial population. This agreement is a further example of how our extensive infrastructure allows for the rapid creation of innovative solutions that differentiate Healthways competitively in the commercial market, just as Silver Sneakers has done in the Medicare Advantage market.”

Financial Guidance

Based on the performance of the Company’s domestic operations for the first nine months of 2009, Healthways today increased its guidance for 2009 revenues to a range of $708 million to $717 million from the previous range of $685 million to $700 million. This revision includes a new range for revenues from domestic operations of $691 million to $697 million, up from $668 million to $680 million previously. Guidance for 2009 revenues from international operations remains unchanged in a range of $17 million to $20 million.

Due to the anticipated increase in 2009 revenues, Healthways also revised its guidance for 2009 adjusted net income per diluted share, which excludes previously announced lawsuit settlement costs of $0.73 per diluted share, to a range of $1.01 to $1.05 compared with the previous range of $0.97 to $1.05. This new earnings guidance also reflects the expected $0.02 per diluted share net cost impact of the HealthHonors acquisition announced last week. Guidance for 2009 adjusted net income per diluted share includes a new range for domestic operations of $1.13 to $1.15 compared with $1.07 to $1.13 previously, while the net cost impact from international operations has increased to a range of $0.10 to $0.12 from the previous range of $0.08 to $0.10.

The Company’s guidance for net income per diluted share for the fourth quarter of 2009 is in a range of $0.19 to $0.23. Domestic operations are expected to produce net income per diluted share of $0.20 to $0.22, including the effect of the HealthHonors acquisition. Fourth-quarter 2009 results from international operations are expected to be in a range of $0.01 net cost per diluted share to $0.01 net income per diluted share.

Summary

Mr. Leedle concluded, "We are pleased by the better than expected financial performance of our domestic operations for the third quarter and throughout 2009 and by our continued contracting momentum. We are also building our potential for future growth through the expansion of our value proposition as evidenced by our recently announced third-quarter WholeHealth contract with a Fortune 100 company and our new contract with HCSC.

"While encouraged by the Company’s progress, we remain cautious in our near-term outlook because of uncertainty about the economic environment and the possible impact of both the high domestic unemployment rate and potential healthcare reform on our customers. Given today’s economic environment, we believe the timeframe for sustained and significant improvement in the rate of unemployment is still unclear and that the possibility remains for further attrition. Despite our caution, we believe we are well positioned to continue managing through the current environment, with substantial cash flow from operations, a strengthening financial position and ample liquidity.

"Longer-term, we remain confident of the Company’s prospects for further substantial growth. In both the U.S and internationally, health plans, employers and governments are increasingly focused on the potential for reducing the future growth of healthcare costs by reducing health risks and preventing or delaying disease onset and progression. Healthways has been a leading pioneer in the development and application of these strategies with a proven record that healthier people cost less. With solutions demonstrated to be the most comprehensive, integrated and scalable in the market, we are well positioned to leverage this increased focus to expand the populations we serve and, through successful performance, to create further shareholder value.”

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 5006460, 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, including our guidance and financial expectations for future periods, which 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 Company’s ability to sign and implement new contracts;
• the Company’s ability to accurately forecast performance in order to provide forward-looking guidance;
• the Company’s ability to reach mutual agreement with the Centers for Medicare and Medicaid Services (CMS) with respect to the Company’s results under Phase I of Medicare Health Support;
• the Company’s ability to accurately forecast the costs necessary to establish a presence in international markets;
• the risks associated with foreign currency exchange rate fluctuations;
• the Company’s ability to achieve estimated annualized revenue in backlog;
• the ability of the Company’s customers to provide timely and accurate data that is essential to the operation and measurement of the Company’s performance;
• the risks associated with changes in macroeconomic conditions;
• the Company’s ability to integrate acquired businesses or technologies into the Company’s business;
• 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;
• the Company’s ability to obtain adequate financing to provide the capital that may be necessary to support the Company’s operations and to support or guarantee the Company’s performance under new contracts;
• the impact of litigation involving the Company and/or its subsidiaries;
• the impact of future state, federal, and international health care and other applicable legislation and regulations, including health care reform, on the Company’s ability to deliver its services and on the financial health of the Company’s customers and their willingness to purchase the Company’s services; and
• other risks detailed in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2008, Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, 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 solutions to help millions of people maintain or improve their health and well-being and, as a result, reduce overall 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 and a national Fitness Center 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.

(1) Domestic EPS guidance excluding lawsuit settlement costs is a non-GAAP financial measure. The Company excludes EPS (loss) attributable to lawsuit settlement costs from this measure 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 excluding lawsuit settlement costs in isolation or as a substitute for EPS guidance determined in accordance with accounting principles generally accepted in the United States.

(2) Adjusted EPS guidance is a non-GAAP financial measure. The Company excludes EPS (loss) attributable to lawsuit settlement costs from this measure 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 Adjusted EPS guidance in isolation or as a substitute for EPS guidance determined in accordance with accounting principles generally accepted in the United States.

(3) EPS (loss) attributable to lawsuit settlement costs consists of pre-tax charges of $40.0 million related to the Company’s settlement of a qui tam lawsuit.