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WageWorks Reports Second Quarter 2016 Financial Results

(August 09, 2016)

“The first half of 2016 was another strong one for WageWorks. Our selling season is progressing extremely well due to record interest in all of our products. Employers are increasingly choosing us as their administrator for Consumer Directed Benefits because of our service excellence and the ease of use of our programs on one consolidated platform. We have entered into several new channel partnerships and have expanded others. We expect this positive momentum to continue in the second half of the year as we capitalize on the expansion we are seeing in the industry,” said Joe Jackson, Chief Executive Officer of WageWorks.

For the second quarter, WageWorks reported total revenue of $87.7 million, compared to $82.8 million for the second quarter of 2015, an increase of 6 percent. Healthcare revenue was $48.1 million, compared to $43.8 million for the second quarter of 2015, an increase of 10 percent. Commuter revenue was $17.4 million, compared to $16.0 million for the second quarter of 2015, an increase of 9 percent. COBRA revenue was $17.9 million, compared to $12.3 million for the second quarter of 2015, an increase of 46 percent. Other revenue was $4.4 million, compared to $10.6 million for the second quarter of 2015.

GAAP operating income was $4.6 million for the second quarter of 2016, compared to GAAP operating income of $6.8 million for the second quarter of 2015. On a non-GAAP basis, second quarter of 2016 operating income was $22.3 million, an increase compared to non-GAAP operating income of $17.5 million for the second quarter of 2015.

GAAP net income was $2.9 million, or $0.08 per diluted share, for the second quarter of 2016, compared to GAAP net income of $3.5 million, or $0.10 per diluted share, for the second quarter of 2015.

On a non-GAAP net income basis, second quarter of 2016 net income was $13.3 million, or $0.36 per diluted share, an increase compared to non-GAAP net income of $10.3 million, or $0.28 per diluted share, for the second quarter of 2015. Non-GAAP net income for the second quarter of 2015 and 2016 excludes expenses related to stock-based compensation, amortization of acquired intangibles, contingent consideration expense, severance costs related to integration initiatives and the related tax impact of these items.

Non-GAAP adjusted EBITDA was $27.5 million for the second quarter of 2016, a 24 percent increase compared to non-GAAP adjusted EBITDA of $22.2 million for the second quarter of 2015.

The reconciliation of the non-GAAP measures to the comparable GAAP measures for the second quarter 2016 and 2015 is detailed in the tables provided in this press release.

As of June 30, 2016, WageWorks had cash and cash equivalents totaling $569.0 million. This compares to cash and cash equivalents totaling $500.9 million as of December 31, 2015.

The Company's Conference Call Information
WageWorks will host a conference call today, August 9, 2016, at 5:00 p.m. ET to discuss the Company’s second quarter ended June 30, 2016 financial results and business outlook.

The live webcast of the conference call can be accessed under “Investor Relations” section of the Company’s website at www.wageworks.com. Those wishing to participate in the live call should dial (844) 778-4142 (toll-free) or (661) 378-9625, and enter pass code 49455016. Following the call, an archived webcast will be available in the “Investor Relations” section of the Company’s website at www.wageworks.com. A telephone replay will be available for one week at (855) 859-2056 (toll-free) or (404) 537-3406 using the pass code 49455016.

Non-GAAP Financial Information
To supplement the Company’s financial statements presented on a GAAP basis, the Company provides non-GAAP financial measure of net income, operating income, adjusted EBITDA and diluted earnings per share. By providing information about both the overall GAAP financial performance and the non-GAAP measures that focus on what management believes to be its ongoing business operations, the Company believes that the additional information enhances investors’ overall understanding of the Company’s business. The Company’s management believes it is useful for itself and investors to review, as applicable, both GAAP information that includes stock-based compensation, amortization of acquired intangibles, contingent consideration expense and the related tax impact of all of these items on the provision for income taxes, and the non-GAAP measures that exclude such information in order to assess the performance of the Company’s business for planning and forecasting in subsequent periods. The Company’s management does not itself, nor does it suggest that investors should consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Whenever the Company uses such a non-GAAP financial measure, it provides a reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above. Investors are also encouraged to review the Company’s GAAP financial statements as reported in its SEC filings.

Forward-Looking Statements

Statements in the press release and certain matters to be discussed on the first quarter conference call regarding WageWorks, Inc., which are not historical facts, are “forward- looking statements” within the meaning the Private Securities Litigation Reform Act of 1995. These forward looking statements may be identified by terms such as believe, expect, will, provide, should and the negative of these terms or other similar expressions. These statements, including statements relating to continuing to provide value to our employer clients and their employees through our consumer-directed benefits solutions, our acquisition of new employer clients, our retention of existing employer clients, the expected benefits of our channel partnerships, carrier, and exchange relationships, the demand for our consumer-directed benefits solutions, the industry trends regarding consumer-directed health plans, the expected benefits of our investments and the potential impact on our future operating results are based on current expectations and assumptions that are subject to risks and uncertainties. Our actual results could differ materially from those we anticipate as a result of various factors, including the continued availability of tax-advantaged consumer-directed benefits to employers and employees, our ability to successfully identify, acquire and integrate additional portfolio purchases or acquisition targets, our ability to raise awareness among employers and employees about the advantages of adopting and participating in consumer-directed benefits programs, our ability to acquire and retain new employer clients and to cross-sell our products to existing employer clients, our ability to identify and execute on channel partner, carrier,and exchange opportunities, the participation of employees in our employer clients’ consumer-directed benefits programs our ability to compete effectively with current and future competitors, our ability to provide high quality service in a cost efficient manner, and our ability to enhance our product functionality. For a discussion of these and other related risks, please refer to “Risk Factors” in our most recent report on Form 10-Q, which is available on the SEC’s website at www.sec.gov. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date made and we disclaim any obligation to update information contained in these forward-looking statements whether as a result of new information, future events, or otherwise. You should review our SEC filings carefully and with the understanding that our actual future results may be materially different from what we expect.

About WageWorks
WageWorks (NYSE:WAGE) is a leader in administering Consumer-Directed Benefits (CDBs), which empower employees to save money on taxes while also providing corporate tax advantages for employers. WageWorks is solely dedicated to administering CDBs, including pre-tax spending accounts, such as Health Savings Accounts (HSAs), health and dependent care Flexible Spending Accounts (FSAs), Health Reimbursement Arrangements (HRAs), as well as Commuter Benefit Services, including transit and parking programs, wellness programs, COBRA, and other employee benefits. WageWorks makes it easier to understand and take advantage of Consumer-Directed Benefits for 58,000 employers and approximately 4.5 million people. WageWorks is headquartered in San Mateo, California, with offices in major locations throughout the United States. For more information, visit www.wageworks.com.

WAGEWORKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
           
  Three Months Ended June 30,   Six Months Ended June 30,
    2015       2016       2015       2016  
      (unaudited)    
  (in thousands, except per share amounts)
Revenues:              
Healthcare $ 43,814     $ 48,070     $ 91,103     $ 98,440  
Commuter   16,028       17,383       31,925       34,759  
COBRA   12,313       17,879       24,883       33,285  
Other   10,602       4,393       20,142       8,243  
Total revenues   82,757       87,725       168,053       174,727  
Operating expenses:              
Cost of revenues (excluding amortization of internal use software)   29,775       28,411       61,846       59,671  
Technology and development   11,783       11,157       22,368       20,988  
Sales and marketing   12,490       14,385       25,621       28,305  
General and administrative   13,119       17,130       26,684       31,745  
Amortization and change in contingent consideration   6,732       11,695       13,011       19,140  
Employee termination and other charges   2,080       313       2,080       313  
Total operating expenses   75,979       83,091       151,610       160,162  
Income from operations   6,778       4,634       16,443       14,565  
Other income (expenses):              
Interest income   17       97       19       183  
Interest expense   (609)       (409)       (1,184)       (814)  
Other income (expense)   222       6       288       2  
Income before income taxes   6,408       4,328       15,566       13,936  
Income tax provision   (2,890)       (1,475)       (6,409)       (5,287)  
Net income $ 3,518     $ 2,853     $ 9,157     $ 8,649  
               
Basic net income per share $ 0.10     $ 0.08     $ 0.26     $ 0.24  
Diluted net income per share $ 0.10     $ 0.08     $ 0.25     $ 0.23  
               
Shares used in basic net income per share calculations   35,761       36,361       35,659       36,139  
Shares used in diluted net income per share calculations   36,596       37,195       36,634       36,862  
               
               
STOCK-BASED COMPENSATION EXPENSE
Total stock-based compensation expense included in the Consolidated Statements of Income is as follows:
               
Three Months Ended June 30,   Six Months Ended June 30,
    2015       2016       2015       2016  
      (unaudited)    
      (in thousands)    
Cost of revenues $ 898     $ 1,818     $ 1,699     $ 2,968  
Technology and development   295       659       342       1,144  
Sales and marketing   668       791       1,332       1,498  
General and administrative   2,952       5,583       5,876       9,232  
  $ 4,813     $ 8,851     $ 9,249     $ 14,842  

 

WAGEWORKS, INC.
CONSOLIDATED BALANCE SHEETS
       
  December 31, 2015   June 30, 2016
  (unaudited)
  (in thousands, except per share amounts)
ASSETS
Current assets:      
Cash and cash equivalents $ 500,918     $ 568,993  
Restricted cash, current portion   332       332  
Accounts receivable, less allowance for doubtful accounts of $1,071 and $1,861 at December 31, 2015 and June 30, 2016, respectively   72,271       93,979  
Prepaid expenses and other current assets   13,254       18,239  
Total current assets   586,775       681,543  
Property and equipment, net   47,955       48,426  
Goodwill   157,109       157,109  
Acquired intangible assets, net   82,616       90,769  
Deferred tax assets   9,837       9,837  
Other assets   4,447       4,275  
Total assets $ 888,739     $ 991,959  
       
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:      
Accounts payable and accrued expenses $ 60,541     $ 71,399  
Customer obligations   400,821       468,153  
Short-term contingent payment   739        
Other current liabilities   2,893       1,589  
Total current liabilities   464,994       541,141  
Long-term debt   78,996       79,064  
Other non-current liabilities   7,780       10,152  
Total liabilities   551,770       630,357  
Stockholders' equity:      
Common stock, $0.001 par value (authorized 1,000,000 shares; 36,055 shares issued and 35,936 shares outstanding at December 31, 2015 and 36,925 shares issued and 36,580 shares outstanding at June 30, 2016)   36       38  
Additional paid-in capital   343,166       368,519  
Treasury stock at cost (119 shares at December 31, 2015 and 345 shares at June 30, 2016)   (5,003)       (14,374)  
Retained earnings (accumulated deficit)   (1,230)       7,419  
Total stockholders' equity   336,969       361,602  
Total liabilities and stockholders’ equity $ 888,739     $ 991,959  

 

WAGEWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
               
      Six Months Ended June 30,  
        2015       2016  
    (unaudited)  
    (in thousands)  
Cash flows from operating activities:            
Net income     $ 9,157     $ 8,649  
Adjustments to reconcile net income to net cash provided by operating activities:            
Depreciation       3,153       3,813  
Amortization and change in contingent consideration       13,011       19,042  
Stock-based compensation       9,249       14,842  
Loss on disposal of fixed assets       27       199    
Provision for doubtful accounts       246       996    
Deferred taxes       1,804       -    
Excess tax benefit related to stock-based compensation       (4,255)       (5,287)    
Changes in operating assets and liabilities:            
Accounts receivable       (2,797)       (22,704)    
Prepaid expenses and other current assets       (2,999)       302    
Other assets       2,057       172    
Accounts payable and accrued expenses       8,628       (1,848)    
Customer obligations       46,697       67,332    
Other liabilities       3,983       1,136    
Net cash provided by operating activities       87,961       86,644    
Cash flows from investing activities:            
Purchases of property and equipment       (11,258)       (10,430)    
Cash paid for acquisition of intangible assets       -       (14,259)    
Net cash used in investing activities       (11,258)       (24,689)    
Cash flows from financing activities:            
Proceeds from exercise of common stock       2,812       9,665    
Proceeds from issuance of common stock (Employee Stock Purchase Plan)       1,378       1,192    
Payment of contingent consideration       (2,070)       (653)    
Payment for treasury stock acquired       -       (9,371)    
Excess tax benefit related to stock-based compensation       4,255       5,287    
Net cash provided by (used in) financing activities       6,375       6,120    
Net increase in cash and cash equivalents       83,078       68,075    
Cash and cash equivalents at beginning of period       413,301       500,918    
Cash and cash equivalents at end of period     $ 496,379     $ 568,993    

 

GAAP to Non-GAAP Reconciliations              
(In millions, except per share data)              
(unaudited)              
               
The following tables detail the reconciliation of GAAP financial measures to non-GAAP financial measures
included in this release:              
               
Operating income:              
  Three Months Ended
June 30,
  Six Months Ended
June 30,
    2015       2016       2015       2016  
               
GAAP income from operations $ 6.8     $ 4.6     $ 16.4     $ 14.6  
Stock-based compensation expense   4.8       8.8       9.2       14.8  
Amortization of acquired intangibles   3.8       8.6       7.6       12.9  
Employee termination and other charges   2.1       0.3       2.1       0.3  
Contingent consideration expense   -       -       0.1       -  
Non-GAAP income from operations $ 17.5     $ 22.3     $ 35.4     $ 42.6  
Non-GAAP income from operations as a percentage of total revenue   21.1 %     25.4 %     21.1 %     24.4 %
               
Net income:              
  Three Months Ended
June 30,
  Six Months Ended
June 30,
    2015       2016       2015       2016  
               
GAAP net income $ 3.5     $ 2.9     $ 9.2     $ 8.7  
Stock-based compensation expense   4.8       8.8       9.2       14.8  
Amortization of acquired intangibles   3.8       8.6       7.6       12.9  
Employee termination and other charges   2.1       0.3       2.1       0.3  
Contingent consideration expense   -       -       0.1       -  
Tax effect of above adjustments *   (3.9)       (7.3)       (7.4)       (11.5)  
Non-GAAP net income $ 10.3     $ 13.3     $ 20.8     $ 25.2  
               
Weighted-average shares outstanding used in computing GAAP and
Non- GAAP per share amounts (diluted)
  36.6       37.2       36.6       36.9  
               
Non-GAAP diluted net income per share $ 0.28     $ 0.36     $ 0.57     $ 0.68  
               
* Tax effect adjustment assumes a 40% tax rate              
               
Reconciliation of GAAP net income to Non-GAAP Adjusted EBITDA:              
  Three Months Ended
June 30,
  Six Months Ended
June 30,
    2015       2016       2015       2016  
GAAP net income $ 3.5     $ 2.9     $ 9.2     $ 8.7  
Interest income   (0.0)       (0.1)       (0.0)       (0.2)  
Interest expense   0.6       0.4       1.2       0.8  
Income tax provision   2.9       1.5       6.4       5.3  
Depreciation   1.6       2.0       3.2       3.8  
Amortization and change in contingent consideration   6.7       11.7       13.0       19.1  
Stock-based compensation expense   4.8       8.8       9.2       14.8  
Employee termination and other charges   2.1       0.3       2.1       0.3  
Adjusted EBITDA $ 22.2     $ 27.5     $ 44.2     $ 52.6  

 

Investor Contact:
Staci Mortenson
ICR
203-682-8273
Staci.mortenson@icrinc.com

Media Contact:
Britta Meyer
WageWorks, Inc.
650-577-5208
Britta.Meyer@wageworks.com