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WageWorks, Inc. (NYSE:WAGE)

Q4 2012 Earnings Conference Call

February 20, 2013, 05:00 PM ET

Executives

Joseph L. Jackson - CEO

Richard T. Green - CFO

Staci Mortenson - Investor Relations, ICR

Analysts

Robert Napoli - William Blair & Co.

David Grossman - Stifel, Nicolaus & Company

David Scharf - JMP Securities

Marc Fuller - Needham & Company, Llc

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 WageWorks Inc. Earnings Conference Call. My name is [Tisha], and I will be the operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the conference over to your host for today, Ms. Staci Mortenson. Please proceed.

Staci Mortenson

Thank you, operator. Good afternoon and thank you for joining us today to review WageWorks fourth quarter and full-year 2012 financial results. With me on the call today are Joe Jackson, Chief Executive Officer; and Rich Green, Chief Financial Officer. After prepared remarks, we will open-up the call to a question-and-answer session.

During this call we may make statements related to our business that will be considered forward-looking statements under Federal Securities Law, including projections of future operating results for our first quarter and our fiscal year ending December 31, 2013. Our selling efforts and the anticipated benefits from those effort, anticipated benefits from our Aflac relationship, and anticipated financial impact of such relationship, anticipated benefits from our marketing efforts; expected benefits of our portfolio purchases, market trends for the industries in which we compete; our expectations and beliefs concerning how these trends will affect our operating results and our strategic and operational plans, objectives and goals. These statements are based on management’s current expectations and assumptions that are subject to risks and uncertainties.

Actual results may differ materially from those set forth in such statement. Important factors such as risks relating to regulations affecting our industry; our ability to successfully identify, acquire or integrate additional portfolio purchases or acquisition targets and risks related to employer and employee adoption of tax-advantaged benefits plans could cause actual results to differ materially from those in the forward-looking statements. These factors are addressed in the earnings press release that we issued today under the section captioned Forward-looking Statements, elsewhere in our Quarterly Report on Form 10-Q for the quarter ended September 31, 2012.

We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. WageWorks expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements made herein.

Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliations most directly comparable GAAP financial measures is available on our fourth quarter and full-year 2012 earnings press release, which can be found at www.wageworks.com in the Investor Relations section. Also please note that our webcast and today’s call will be available on our website in the Investor Relations section.

With that, I’d like to turn the call over to WageWorks Chief Executive Officer, Joe Jackson. Joe?

Joseph L. Jackson

Thank you, Staci. And I’d like to start by thanking all of you for joining us today. Our fourth quarter was a very strong close to an excellent year for WageWorks. During 2012 we added a substantial number of new employer clients and employee participants and maintain our outstanding client renewal rates. We have completed a successful open enrollment season that was comparable with previous years and actually a bit better. The investments we’ve made across our product offering and go to market initiatives are paying off, extending our leadership position in the consumer directed benefits space. As we enter 2013, we believe we’re extremely well positioned to capture the significant opportunity we see ahead of us.

Turning to the financial highlights for the fourth quarter, we reported total revenue of $46.7 million, an increase of 37% over the prior-year period. Our GAAP operating income was $5.3 million leading to GAAP net income attributable to common shareholders per diluted common share of $0.09. Our non-GAAP operating income was $7.7 million, leading to a non-GAAP net income per diluted common share of $0.13. Non-GAAP adjusted EBITDA was $10.4 million, an increase of 57% over the prior-year period.

For the full-year of 2012, we report a total revenue of $177.3 million, representing an increase of 31% over 2011. Organic growth for the full-year was a little over 8% above our stated objective of 7% and a continued acceleration from 2011. Our GAAP operating income for the full-year 2012 was $18.9 million, leading to GAAP net income attributable to common shareholders per diluted share of $0.33.

Our non-GAAP operating income for the full-year of 2012 was $31.7 million, leading to non-GAAP net income per diluted common share of $0.58. Non-GAAP adjusted EBITDA for the full-year of 2012 was $41.4 million, a 37% increase over 2011.

Following our successful enterprise selling season, we completed our SMB selling season and client renewal period during the fourth quarter. We achieved strong results in both areas, further validating the increased – increasing interest in consumer directed benefits and strong execution by our sales team or servicing organization and our channel partners.

As of January 31st, we have over 27,000 employer clients and are providing service to over 2.8 million employee participants throughout the country. During the year we had a meaningful number of new marquee logos to our client base including City of Los Angeles, Pandora, Denver Health and Hospital Authority, and Qualcomm. We now work with 50 of the Fortune 100 and a 184 of the Fortune 500. And overall our renewal rates remain very strong.

These impressive results were due to several factors including one, our commitment to providing outstanding service. Two, our innovative technology solutions. Third, our industry leadership position and finally consumer engagement, which means driving more employee participation.

On the channel partnership front, the number of Aflac employer clients and participants transitioning to us has surpassed our expectations. We now believe we should achieve a little above the high-end of our previous 2013 revenue contribution guidance from Aflac of $5 million to $7 million.

During the quarter we also announced that we acquired Benefit Concepts Inc., a leading provider of outsource benefit solutions based in East Providence, Rhode Island. Benefit Concepts serves the needs of several 100 mid-sized and large employers by providing their employees with a range of consumer directed benefits including healthcare such as FSAs, HRAs, COBRA benefits continuation as well as benefit enrollment and eligibility management. This acquisition fits squarely within our stated portfolio purchase strategy of acquiring companies that provide best of breed services similar to WageWorks had great broker and client relationships and once part of the WageWorks family have the opportunity to increase growth and realize operating efficiencies.

During 2012 Benefit Concepts was one of three companies we acquired. Our acquisitions of Choice Strategies and TransitChek were completed in Q1 of 2012 and both has performed well, meeting our expectations on both the top and bottom line. Most importantly we see opportunities to drive additional synergies in all three companies going forward.

As we look towards 2013, we remain aligned around strategic goals to enable our growth. These include first, increasing participation. With our new Chief Marketing Officer onboard, we plan to increase our investments in programs design to educate and increase awareness, including through the use of social media. These programs will be designed to assist us in increasing employee participation in our programs. Also with the rollout of the affordable Care Act and state healthcare exchanges, employee benefits are top of mind right now. And smaller businesses in particular, are looking for innovative ways to help employees manage cost. We intend to capitalize on this heightened awareness as many of our products meet these emerging needs.

Second, continuing to sign up new employers. We will continue to focus on our direct sales organization and channel partners in order to capture more of the significant market share available to us. Third, cross-selling. We will continue to focus on selling new products to existing clients, to our dedicated cross-sell team. As I’ve said before, approximately 2/3s of our employer base currently use WageWorks for only one product. This is a big opportunity for us.

And finally, we will continue to executing on our stated strategy of making one to three portfolio purchases a year. We see very promising opportunities for continued industry consolidation. We have a set blue print on how to successfully integrate acquired companies and see this as an integral piece of our growth strategy.

In closing, as we enter 2013, we now have strong visibility into our full-year target revenue and adjusted EBITDA. We believe for full-year 2013 revenue will increase to approximately $206 million to $209 million. EBITDA will be in the range of $49 million to $52 million and additionally we expect between 8% and 9% organic growth, a continued acceleration from 2012.

Our business model affords us significant advantages and we believe that these combined with the investments we’re making in sales, in marketing, and in our product offering position us well to deliver on our growth objectives. As I’ve said many times before, our team here at WageWorks believe we’re just getting started.

Now I’d like to turn the call over to Rich, to run through the numbers. Rich?

Richard T. Green

Thanks, Joe. I will start by providing details on the strong financial performance during the fourth quarter and then full-year 2012. Then I will discuss the financial guidance for the first quarter and full-year 2013.

Total revenue for fourth quarter was $46.7 million, an increase of 37% over the same period last year exceeding our guidance. Healthcare revenue was $29.6 million for the quarter, an increase of 32% compared to the fourth quarter of 2011. Commuter revenue was $13.5 million for the fourth quarter, an increase of 60% over the same period last year. Other revenue was $3.6 million, an increase of 12% compared to the same period last year.

Let’s now turn to costs and margin. We will review our numbers on a GAAP basis and were applicable on a non-GAAP basis. The non-GAAP numbers for the fourth quarter excludes stock-based compensation expense, the amortization of acquired intangibles, contingent consideration expense and then the related tax impact of those items. A GAAP to non-GAAP reconciliation can be found in the tables of our press release, which is available on our website.

Gross profit for the fourth quarter of 2012 was $29.9 million and represented a gross margin of 64% compared with a 57% gross margin in the fourth quarter of 2011. The increase in gross margin was primarily attributable to leveraging our operations as we continue to scale our business. Operating expenses totaled $24.6 million in the fourth quarter compared to $17.1 million in the same period last year.

Our fourth quarter expenses increased seasonally as we staffed up our service organization in advance of the new business in our busy January season, , and realized expenses associated with issuing and reissuing prepaid debit cards. In addition, we had increased expenses associated with the development, implementation and customer service ramp up in support of the transition of the Aflac employer customers.

As a result, our income from operations on a GAAP basis for the fourth quarter of 2012 was $5.3 million, representing an operating margin of 11%. An increase compared with GAAP operating income of $2.4 million or an operating margin of 7% in the same period last year. Our non-GAAP income from operations was $7.7 million for the fourth quarter, representing a non-GAAP operating margin of 16.5%. For the same period last year non-GAAP income from operations was $4.5 million, representing a non-GAAP operating margin of 13.2%.

Our GAAP net income attributable to common stockholders was $2.7 million or $0.09 per share based upon 31.9 million diluted shares in the fourth quarter of 2012. This compares to GAAP net income attributable to common stockholders of $22.5 million or $1.03 per share based upon $21.8 million diluted shares in the fourth quarter of 2011. That’s inclusive of the 25.9 million that we received from the release of the tax valuation allowance in 2011.

On a non-GAAP basis, net income was $4.3 million for the fourth quarter of 2012, which assumed a tax rate of 41% compared to a non-GAAP net income of $4.8 million for the fourth quarter of 2011, which assumes a tax rate of 10%. Non-GAAP net income per diluted common share was $0.13 for the fourth quarter of 2012 and $0.16 for the fourth quarter of 2011 based upon 31.9 million and 30.3 million shares outstanding respectively. Non-GAAP adjusted EBITDA for the fourth quarter of 2012 was $10.4 million that compared to $6.7 million in the fourth quarter of 2011 and represents a 57% increase over the previous year period.

Now I will recap our full-year results. Total revenue was $177.3 million, a 31% increase over 2011 and ahead of our expectations. Organic growth for the full-year was slightly above 8%, a net improvement from the prior-year period. Healthcare revenue increased 24% to $112.9 million. Commuter revenue increased 55% to $51.8 million and other revenue increased 10% to $12.6 million.

For the full-year, operating expenses were $93.7 million compared to $66.4 million in 2011 resulting in income from operations on a GAAP basis for the full-year of $18.9 million, an increase compared with the GAAP operating income of $13.6 million in 2011. Non-GAAP income from operations was $31.7 million and represented a non-GAAP operating margin of 18%, this is an increase compared to non-GAAP income from operations of $21.2 million or non-GAAP operating margin of 15.6% for 2011.

For the full-year 2012 our GAAP net income attributable to common stockholders was $7.9 million or $0.33 per share on a diluted basis compared the GAAP net income attributable to common stockholders of $28.7 million or $1.43 per diluted share in 2011, based upon 24.4 and 20.1 million shares outstanding respectively. 2011 GAAP, net income attributable common stockholders per diluted EPS benefited from the release of $25.9 million tax valuation allowance in 2011.

Non-GAAP net income was $17.5 million which assumes a tax rate of 41% compared to a non-GAAP net income of $21 million for 2011 which assumed the tax rate of 6%. Non-GAAP net income per diluted share was $0.58 for the full-year of 2012 and $0.67 for 2011 based upon 30 million and 31.2 million shares outstanding respectively. Non-GAAP adjusted EBITDA for the full-year 2012 was $41.4 million compared to $30.3 million in 2011 and represents an increase of 37%. We’re very pleased with the leverage we’re able to achieve in the business as we continue to grow and scale our operations realizing the ongoing efficiencies not only from the base business but also our portfolio purchases.

Now moving to the balance sheet, cash and cash equivalents totaled $305.1 million as of December 31, 2012 compared to $238.9 million as of September 30, 2012 and $154.6 million as of December 31, 2011. In 2012 we generated approximately $56.1 million in cash from operating activities compared to generating $55.2 million in cash from operating activities in 2011.

Now let’s turn our thoughts to the first quarter and full-year 2013. As Joe had mentioned we have a great business model and we ended the year with very strong visibility to our projected 2013 revenue and adjusted EBITDA. Starting with the first quarter, we expect total revenue to be in the range of $54.2 million to $54.8 million. GAAP net income per diluted share of $0.10 to $0.11 and non-GAAP net income per diluted share of $0.15 to $0.17.

Our expectation of non-GAAP net income per diluted share for the first quarter excludes stock based compensation expenses, the amortization of acquired intangibles and contingent consideration expense. GAAP and non-GAAP net income per diluted share assume a tax rate of 40.4% and a weighted average of shares outstanding of 35 million. Non-GAAP adjusted EBITDA for the first quarter of 2013 is expected to be in the range of $12.6 million to $13.1 million.

For the full-year of 2013, we expect total revenue to be in the range of $206 million to $209 million. GAAP net income attributable to common stockholders per diluted share is expected to be in the range of $0.35 to $0.42 and non-GAAP net income per diluted share is expected to be in the range of $0.57 to $0.65. Our expectation of non-GAAP net income per diluted share for the full-year excludes stock based compensation expense, the amortization of acquired intangibles and contingent consideration expenses. GAAP and non-GAAP net income per diluted share assume a tax rate of 40.4% and weighted average shares outstanding are expected to be approximately 35.5 million. Non-GAAP adjusted EBITDA for the full-year 2013 is expected to be in the range of $49 million to $52 million.

And again since this is our first time as a public company providing full-year guidance, I just wanted to remind everyone of our normal seasonal patterns and starting with revenue, the first quarter is traditionally our strongest quarter for WageWorks as we benefit from the new accounts added as well as first quarter has grace period revenue on prior-year FSA accounts. Interchanged revenues are traditionally highest in the first quarter as we see a high usage of debit cards from the new funds as well as the remaining funds from the prior-year grace period.

We typically see sequential revenue decline in the second quarter as there’s less interchanged span and we don’t benefit from the grace period revenue. The third quarter is traditionally our lowest quarter of the year for revenue as interchanged revenue lessens and we have some summer seasonality associated with our Commuter revenue. And then fourth quarter traditionally increases as we have some POP plan revenue from the compliant services we provide to our SMB clients.

On the expense side, Q4 is traditionally our highest expense quarter as we staff up for the open enrollment period as well as our card production expense for the reissue and the issuing of our prepaid debit cards. This is followed by Q1 expenses when we typically have higher call volumes and more customer service personal, as the new program year begins and new participants have more questions on their accounts.

So in summary, we’re very pleased with our strong fourth quarter and our full-year performance. We entered 2013 with a larger employer and employee participant base, expanded sales channels and a broader product portfolio. We’ll continue to execute against our gross rate and are well positioned to deliver on our stated objectives.

So with that operator, I think we’re ready to begin our question-and-answer session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Bob Napoli from William Blair. Please proceed.

Robert Napoli - William Blair & Co.

Thank you, good evening. Nice job. I was really surprised by the revenue growth in the fourth quarter, quarter-over-quarter I guess, in Healthcare and I know you had Aflac added to that, and I would just like to get a little more color on maybe what drove that quarter-over-quarter growth. How of that is Aflac, and what, Joe the organic growth in the fourth quarter?

Joseph L. Jackson

Well, Bob the -- well first of all organic growth in the fourth quarter, we usually don’t break it out by quarter. If you remember I think what we said in the third quarter we were still tracking the 7% organic growth, in the fourth quarter or for the full-year we ended up a little over 8%. So, again we saw a strong organic revenue growth in the fourth quarter which drove it up a percent and that’s primarily through Aflac. And if you remember from Aflac, we were waiting for contracts to come in from employers throughout the year and in particular in the fourth quarter especially in kind of October and November we saw more of them come in than we had anticipated which was great news for us and probably drives the majority of the increased revenue growth in the fourth quarter.

Richard T. Green

And a little bit on, we end up with more POP revenues than what we had first anticipated.

Robert Napoli - William Blair & Co.

Okay.

Joseph L. Jackson

No, it's good stuff.

Robert Napoli - William Blair & Co.

The additional integration benefits that you have from the acquisitions, the three deals that you made last year -- one, I don’t know if you count that the last acquisition as a 2013 deal or 2012 deal, but and I’m just wondering kind of what the types of additional integration benefits you feel we have from those acquisitions?

Joseph L. Jackson

Yeah, I think the – for example the first two done in the first quarter we were able to as we normally do see some benefit from them in 2012 and we’ll continue to see more of that in 2013 and we’ll continue to see more of it in 2014 as well. With regard to benefit concepts you’re right, they closed on December 31, so I think the way that goes is now, we’ll count it towards 2012, and then by the end of the year we’ll count it at 2013. But when we acquired them, they said as I mentioned right into our sweet spot of what we’ve done with portfolio purchases in the past and I would say from what we’ve seen from them early on is that there’s been only a couple of months. I think they’ll be right in the same category as the others that we’ve done and we should see some benefit from them this year and more benefit going into ’14, but the point I was trying to make is, with all three of them that we’ve recently done, we’re seeing as we normally do increase growth, we’re seeing more efficiencies of greater profitability and also there’s great cross sell opportunities that I have talked about before with regard to especially at Transitchek and at Choice Strategies that we’re implementing some plans on that will take effect for 2012 and 2014.

Richard T. Green

Yeah, and Bob just for clarity, benefit concepts is really only impacting our balance sheet, and our cash flow, balance sheet in terms of, both of them earlier impact purchase accounting. There’s really no P&L impact associated with them.

Robert Napoli - William Blair & Co.

Okay. And then any early thoughts on Healthcare exchanges and the Affordable Care Act and how that's going to affect your business in 2013? Or going forward, the opportunities that it may open up for you or other challenges?

Joseph L. Jackson

I don’t know that we look to see 2013 as a big revenue opportunity from the exchanges. Bob, I can tell you that, Jody is spending a lot of her time researching and getting this introduced at the right levels at the exchanges that are being created as well as from the Federal side, and I think with a lot of the work that she’s doing and what we see kind of going forward, especially with smaller employers we think that there’s some things that we can bring to the table for them as these things become -- roll out more into 2013 and especially into 2014, that a lot of our products especially like HRAs can be a real benefit to the small employer taking advantage of or looking to take advantage of what the exchanges have to offer. So, we don’t have a lot of, I wouldn’t say we had any revenue built in for 2013. I think we’re -- it's still early and we’re in kind of the introduction stages and trying to get plugged in where we need to, to really take advantage of it going forward.

Robert Napoli - William Blair & Co.

All right. Thank you.

Joseph L. Jackson

Sure, Bob. Thanks.

Operator

Your next question comes from the line of David Grossman from Stifel, Nicolaus. Please proceed.

David Grossman - Stifel, Nicolaus & Company

Thank you. Good afternoon. I was just wondering, Joe, if you could comment at all on what you saw in the fourth quarter, in terms of participation rates among the new customers versus participation rates in the install base?

Joseph L. Jackson

Well, from a -- I would say that overall what we saw was a couple of things. One; as we go through the open enrollment season really what we try and do is continue to educate and continue to make folks aware of the value of the programs. We then get the enrollment files and really start to begin to study and see what happen. What I can say is, what we saw when I mentioned that it was a little bit better than historically. We track participation rates from existing clients in a couple of different ways. One is how many people reenroll in the program. And number two; how many new participants enter the programs from existing employers. And I think between both of those we saw a little bit of a bump from previous years or especially from last year which was a little bump from the year before.

So, the trajectory is going in the right direction. I mean, I wouldn’t call it material kind of increases maybe a point, point and a half something like that, but increases nonetheless which are encouraging to us. On the new employer side we really don’t have the previous years numbers to go back and check with regard to re-enrollees or new people joining the program as we get the file just kind of for the first time with the number of participants. We were really pleased with what we saw from new employers coming onboard with what we assumed to be the number of participants to what we actually received. Again we saw a little bit of an increase there. Again, nothing material probably in the point to two point range. But again, what we're pleased about is, whether it was new participants or whether it was people reenrolling, we saw a little bit more positive activity there than we have in the past.

David Grossman - Stifel, Nicolaus & Company

And do new employers typically have participation rates that are below the install base?

Joseph L. Jackson

Yes. And if – and we go through and we do some obviously some education and some awareness and some programs during kind of the open enrollment season. But what we historically should see is, not just from this year, but next year seeing that continuing to increase. So there should be some opportunity there to get them up to the levels that we would normally see for kind of average levels of participation.

David Grossman - Stifel, Nicolaus & Company

Okay. And then, secondly, since you've been around, there's really been no genuine sustained employment growth in the U.S. What are your thoughts on what the impact is from the people coming into the workforce off the unemployment line? Do you think they’d participate at a higher rate? Or do you think should come in at this, like the corporate average. And what -- again, since you haven't seen it, since you've been there, any other thoughts you may have on what the impact of better employment market may be for you?

Joseph L. Jackson

Yeah, again I think as people do reenter the workforce and they get that new job having been out of work for a period of time, I think it's highly likely that people will spend a lot more time and effort understanding the benefits that are being offered to them. And if we do a good job in those materials really demonstrating the value that these programs provide especially to middle-class families. I think we should see an above average increase in the number of folks taking advantage of these programs that reenter the workforce.

And again, hopefully if that goes forward, I would go – if I go back to kind of 2007, I think we historically saw about a half a percent a month growth in flexible spending account participation throughout the year which would be kind of new hires and things like that. And if you look at our participation rates of our average it's roughly about 26%, the industry is a little under 23%, we should see some uptick there. But, if you had to look at I think, new people coming in and reentering the workforce after having been out of it for a period of time, I think we’ll get – I don’t know what the percentage would be, but I bet it's probably higher than our norm that we would see in people taking advantage of these programs.

David Grossman - Stifel, Nicolaus & Company

All right. And actually since this is our -- all of our first cycle through with you guys at the beginning of the year. Given just, the degree of visibility that you have, how should we think outside of acquisitions and the seasonality of Commuter? What drives that revenue number up or down? What are the primary determinants that would make that number different?

Joseph L. Jackson

Right. I think it's probably mostly up, and what you’ll see is obviously new hires throughout the year can be brought onboard. We have other employers that will start where their open enrollment season is kind of mid-year or April or September so, we’ll see some new starts there. Commuter, COBRA products like that people can start end year with their products with us which would cause revenue to go up. So, I think there is, when we’ve looked at this historically, and that’s why we gave you a little bit of range on organic growth is that, over the last couple of years what we’ve seen is throughout the year we’ve been able to add revenue that kind of bumps up our organic growth rate, hope to do that again and plan to do that again this year.

But those are some of the drivers primarily up. I mean, if you really want to look at what could be some of the drivers that could bring it down, I think with regard to Healthcare never say never, but that kind of looks fairly well locked in, it’s all recurring. On the Commuter side, you can have people opt-in and opt-out throughout the year, so that can be -- have a little bit more fluctuation to it, but we have seen pretty consistent seasonal trends on Commuter that have been very consistent year-over-year. COBRA business and some of our E&E business can kind of come on and come off, so I suppose that could be some areas that historically could drive it down a bit. But, I wouldn’t see that there would be anything material really on the downside or really on the upside last year being a little unique with the Aflac transition, but primarily that’s where kind of the visibility comes from, the fact that’s recurring and the renewal rates that we have should lock in things pretty well.

David Grossman - Stifel, Nicolaus & Company

All right, good. Thank you. And just one last question. In terms of the ‘13 guidance – as I recall, benefit concepts was about $15 million business, with $1 million to $1.5 million of EBITDA. Is that roughly the assumption that we should use for the increment for them in ‘13?

Joseph L. Jackson

That is exactly the assumption you should use.

David Grossman - Stifel, Nicolaus & Company

Okay, great. Thank you very much.

Joseph L. Jackson

All right. Thanks, David.

Operator

Your next question comes from the line of David Scharf from JMP Securities. Please proceed.

David Scharf - JMP Securities

Hi, good afternoon. Thanks for taking my questions. Joe, I wanted to circle back to the discussion and participation. I believe in your prepared remarks you mentioned that you’re going to engage in some more investments and programs this year to help kind of educate and drive perhaps greater participation among employers. Can you talk a little bit about perhaps what lessons you've learned in the past about maybe what strategy maybe have not worked, and what kind of things you might engage in differently this time around?

Joseph L. Jackson

Well, I think we’ve tried dozens of different programs all with varying degrees of success or not so much success. But, I think what we’re excited about is the fact that I think we made a great hire in the Chief Marketing Officer role somebody that has a track record that’s been successful in the similar kind of program that we would look at here which is trying to get more people to take advantage of a product or a service. So, I think what Britta brings to the table is a lot more experience, a much more successful track record that we’ve seen in kind of marketing to individuals and making them aware of the value and the benefits of these products. So, I think with some of the programs that she’s beginning to outline with some of the hires that she’s made internally here, I kind of look at it like we’re hitting with a clean slate.

We’re looking at new avenues for communication especially through social media which I think can get the message out to many more people much faster. And I think she kind of understands what we need to do and kind of the programs that we could launch that would drive more participation than we’ve historically seen. Now, we have to see the results of that, but I think going forward we’ll continue to invest prudently in probably a number of programs, and as I have said before where we can gain traction in moving kind of that one in five participation rate to two in five which we intend to get to hopefully very soon.

We’ll invest dollars to drive new participation growth in areas that show promise, and I think as I’ve said before I think we’re all excited about some of the programs that we see that will rollout this year.

David Scharf - JMP Securities

Got it. In terms of magnitude, though, we're talking about investments around the edges I assume. No step function and now we ought to think about the marketing expenditures?

Joseph L. Jackson

No, like I said I think we’d be prudent about it. However if we really thought something that moves the needle, we’d probably give you guys a little bit of heads up, but if I thought that I could make a substantial investment that would really drive participation, I think we’ll do it and I think you would want me to do it.

David Scharf - JMP Securities

Got it. Speaking of moving the needle; does the increase in the Transit allowance -- I guess from $125 to $240 a month. Has there been any noticeable impact in that so far from this enrollment season? Through expenses, obviously.?

Joseph L. Jackson

Well, first of all you went to $245, and I think it will be a plus. First of all I think the people that historically have been participants will continue to be participants and probably move their elections up. And after using a Commuter debit card we’ll see increased interchange along with that. One of the businesses that TransitChek runs is more of a voucher base business where the revenue is determined on the amount of the face value, the amount that they’re purchased by the employer.

So, when the limits go to $245 that means they’re spending more money which drives our commission rates up, so we should see some benefit there. And it's still little too early in the year, but we’ll probably give you a more clear update on that when we report first quarter. But I would say right now we’re optimistic that we should see a nice bump in the Commuter revenue due to the change in the limit.

Richard T. Green

Yeah, and we’ve contemplated that in terms of our revenue projections too.

Joseph L. Jackson

Yeah.

David Scharf - JMP Securities

You have, okay, that was just a follow-up. Last question for you, which is more kind of housecleaning. The weighted average share count in your 2013 guidance, the 35.5 million with 10% plus over this year, how is -- how should we think about that ramping throughout?

Joseph L. Jackson

Well, it really is driven by two things, one is just more options being exercised as well as stock price being higher and then as well as we did have some warrants that were outstanding that basically have been exercised or contributed to the number of quote unquote in the money shares that are outstanding.

Richard T. Green

You mean stock options and the money?

Joseph L. Jackson

Yeah, well in other words on the treasury method they’re only kind of partially counted, once they’re exercised it's fully counted obviously raising the share count, that in combination with the warrants being exercised.

David Scharf - JMP Securities

And are you just -- for beginning of your guidance, where you've laid out 35.5 million based on treasury method, you’re just basing that on today's price, I assume?

Joseph L. Jackson

No, we tried to contemplate in the first quarter -- in our first quarter guidance a little bit of a bump in the stock price just to kind of the trend.

David Scharf - JMP Securities

Got it.

Joseph L. Jackson

And for the full-year obviously we’re contemplating two things, stock price as well as any shares that were issued with new employees.

David Scharf - JMP Securities

Perfect. Thank you.

Joseph L. Jackson

Thank you, David.

Operator

Your next question comes from the line of Marc Fuller from Needham. Please proceed.

Marc Fuller - Needham & Company, Llc

Hey, guys. Just a couple of my questions have been answered already, but kind of one around open enrollment. Just kind of wondering in terms of how participation rose across different product lines and kind of compare those to your internal expectations?

Richard T. Green

Could you repeat the question one more time, sorry.

Marc Fuller - Needham & Company, Llc

Yes, sorry. How did that participation rates look kind of across different products, and then compare those to your internal expectations.

Richard T. Green

No, I think they were in line like, Joe said and also – a little bit maybe of a modest bump up compared to the year-over-year.

Marc Fuller - Needham & Company, Llc

Okay, so no product was particularly strong or weak or anything like that?

Richard T. Green

In terms of you’re talking kind of the same store sales in terms of cross inline versus new sales, yes I think they’re basically the modest bump up.

Joseph L. Jackson

Then I think it depends on what the new sale is, a lot of how we measure our open enrollment historically has been through kind of flexible spending accounts. If you look at – we don’t break out all of the Healthcare products, but we probably follow the industry norm in that – if you look at HSAs and HRAs they’re probably growing in the faster rate just because of the size than FSAs. But when you kind of combine in all together I think we would have seen, I mean, from the FSAs a modest bump and then the other products probably more in line with industry trends, which will be a bit higher.

Marc Fuller - Needham & Company, Llc

Okay. Okay.

Joseph L. Jackson

(Indiscernible) I need to say.

Marc Fuller - Needham & Company, Llc

All right. That's it for me. Thanks, guys.

Joseph L. Jackson

Thank you.

Richard T. Green

Thank you.

Operator

(Operator Instructions) You have a follow-up question from the line of Bob Napoli from William Blair. Please proceed.

Robert Napoli - William Blair & Co.

Thank you. Just a question on the competitive front, I mean, a year-ago, 2011, I think you had one of your big insurance competitors acquire a large private competitor of yours and like ADP made an acquisition early last year. I wonder if you’re seeing – it is what changes – obviously it didn’t affect your ability to sign new clients last year. But if you’re seeing any changes, any new competitors, or more difficult competitors, less competitive, what you’re seeing on a competitive front?

Joseph L. Jackson

Bob I would still say periodically we don’t see one individual competitor really consistently. Its the probably the same cast of characters that we talked to you about before. So we really haven’t seen a real change in the competitive environment or the landscape overall. And then from what I’m seeing with regard to kind of as we’re building sales pipeline for 2013 and new deal wins, we feel real good about the competitive position we’re in right now.

Robert Napoli - William Blair & Co.

Okay. And then just on the Commuter tax break, they kind of – I mean it kind of threw a little bit of a curveball and that they made it retroactive for 2012.

Joseph L. Jackson

Right.

Robert Napoli - William Blair & Co.

Does that cause any challenges on the operational front or how did that – how did that play out?

Joseph L. Jackson

Yeah. That’s kind of a basically a net neutral for us. We’re employers, we choose to go back and allow retroactivity. We would provide reports and information on what was elected by that individual throughout the year. And we know help employers with any questions, I know [Jody] did a real good job of putting out some webinars and education to folks. But its really – there is no revenue for us going back into 2012 or for 2013 and just trying to kind of help the employers define how to go back and provide that retroactivity – retroactive benefit if they so choose.

Richard T. Green

I think most of the work the employer has …

Joseph L. Jackson

Yeah, right. Not really much of us.

Richard T. Green

… payroll deductions and how they adjust their W-2s.

Robert Napoli - William Blair & Co.

Okay. And then, the M&A pipeline – and Joe, you sounded like you had an active pipeline. But I was wondering if you could give a little bit of an update, and a feel whether – you just closed the deal or how confident or how comfortable you would be in doing additional acquisitions in the near-term?

Joseph L. Jackson

We are its full speed ahead. We have a very active pipeline that we’re working through and again we – we still plan to do kind of one to three year. Benefit Concepts, we can add it to one-year or the other depending on how it looks, but right now its three. For last year – but I think you will see us continue to where we can find the right opportunity and it fits in with the criteria that we’ve established and meets the kind of parameters under which we’ve historically done deals. We will continue to do them and we’re actively pursuing – we’re always actively pursuing and are at this time as well.

Robert Napoli - William Blair & Co.

Great. Thank you.

Joseph L. Jackson

Thank you, Bob.

Operator

Ladies and gentlemen, we have no more questions in the queue. I would now like to turn the conference back over to Joe Jackson for any closing remarks. Please proceed.

Joseph L. Jackson

Okay, operator. Thank you very much. And before we conclude, I just want to reiterate how excited we’re about the opportunities ahead of us. 2012 was an outstanding year for our Company, our public offering. We feel good about 2013 as well. But most importantly none of this would be possible without our clients first and foremost as well as all of the WageWorks employees who work hard everyday to make these results possible. And to everyone of them I offer my sincere thanks and appreciation for the job well done. So, again thank you all for joining and we look forward to talking to you in a couple of months on the first quarter results. Thank you.

Richard T. Green

Thank you.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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