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WageWorks, Inc. (NYSE:WAGE)

Q1 2013 Earnings Call

May, 09, 2013, 05:00 pm ET

Executives

Staci Mortenson - Investor Relations, ICR

Joe Jackson - CEO

Rich Green - CFO

Analysts

Bob Napoli - William Blair

David Grossman - Stifel Nicolaus

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 WageWorks, Incorporated Earnings Conference Call. My name is Tony and I will be your 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 would now like to turn the conference over to Ms. Staci Mortenson from ICR. Please proceed.

Staci Mortenson

Thank you. Good afternoon and thank you for joining us today to review WageWorks’ first quarter 2013 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 Laws, including projections of future operating results for our second quarter and our fiscal year ending December 31, 2013. Our selling efforts and the anticipated benefits from those efforts, anticipated benefits from our Aflac relationship, anticipated benefits from our marketing efforts; expected benefits of our portfolio purchases including our most recent acquisition of Crosby Benefit Systems, the demand for consumer directed benefits, market trends for the industries in which we compete; our expectations and beliefs concerning how those 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 statements. Important factors such as risks related to regulation 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-advantage 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 March 31, 2013

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 reconciliation to the most directly comparable GAAP financial measures available in our first quarter 2013 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 would like to turn the call over to WageWorks’ Chief Executive Officer, Joe Jackson. Joe?

Joe Jackson

Thanks Staci and I would like to start by thanking all of you for joining us today, just one day shy of our one-year anniversary as a public company.

We started 2013 on a very strong note. This was a direct result of our successful 2012 selling season, client renewal period and an increase in demand for consumer directed benefits. In addition, our focus on providing outstanding customer service is critical especially during the first quarter as new participants start to use our products.

Providing an excellent partisan experience, right from the beginning, builds recurring relationships which are key to our long-term success. We are also benefiting from the fact that consumer directed health and commuter benefits have never been more top of mind for employers, employees and their families as they try to better manage their out of pocket costs. We are well positioned in the marketplace and I am confident that we will continue to execute on our business and growth strategies.

Turning to the highlights of the first quarter, we reported total revenue of $56.1 million, an increase of 27% over the prior period. Our GAAP operating income was $7.5 million, leading to GAAP net income attributable to common shareholders per diluted common share of $0.14.

Our non-GAAP operating income was $11.2 million, leading to non-GAAP net income per diluted common share of $0.20.

Non-GAAP adjusted EBITDA was very strong at $14 million, an increase of 47% over the prior-year period.

With regard to revenue, we are particularly pleased with our organic growth, which accelerated to approximately 11.5% in the first quarter. As I have shared with many of you before, we have had a long stated strategy of reaching double-digit organic growth and this is a great step in that direction. While we still have three more quarters to go in the year, in a tough organic growth comparing the fourth quarter due to the Aflac business, we are now confident, we can achieve an organic growth rate of between 9% and 10% for the full year 2013, which is an increase from our prior guidance of 8% to 9%. This organic growth has been driven by strong new client additions increasing participation rates, cross-selling and new channel partnerships.

During the first quarter, we saw strong demand in our commuter business. As you may remember in early January this year, Congress extended parity for pre-tax transit and parking benefits through the American Tax Payer Relief Act of 2012; a deal to avoid the fiscal-cliff. The actual increased the pre-tax transit benefit to $245 per month, re-establish imparity between the transit and parking benefits.

At the time of our last earnings call, we were hopeful this change would have a positive impact on our business, but we are not ready to quantify it until we have some more proof. We are pleased to see the positive impact on our first quarter results and also that everyday commuters and businesses increasingly are realizing the benefits of these commuter programs.

Our healthcare business also remained strong driven by the fact that employers and employees are trying to better manage their healthcare costs and our offerings are an important part of that strategy. Our industry leading broad array of consumer directed benefits provides us with multiple options to meet the needs of employers and employees in an evolving healthcare environment.

We are also off to a fast start with this year selling season. Our pipeline is strong. We are actively engaged in many sales and cross-sell opportunities and we are very confident that we will have another strong sales year. We hope to provide you with some new client announcements as we progress through the year.

On the channel partner front we have discussed with you that in addition to the success we have in transitioning the existing Aflac employer clients and participants to our platform, their sales agents throughout the U.S. are now offering the full suite of WageWorks products and services to Aflac’s new and existing employer clients. Our progress continues to be strong and through the first four months of the 2013, we have added approximately 175 new employers through the Aflac sales channel. This is an addition to the 135 employers that were signed during the latter part of 2012. We are pleased with our ongoing progress and continue to believe that channel partnerships like Aflac are important pieces of our growth strategy and are something that we will definitely continue to pursue.

And finally, I am excited to announce the completion of another portfolio purchase, Crosby Benefit Systems; a third party administrator based in Newton, Massachusetts. Crosby works with several hundred employer clients across a range of industries with significant focus in higher education and healthcare. Crosby serves the needs of small businesses to large corporations by providing their employees with a range of consumer directed benefits including FSAs, HRAs, COBRA benefits continuation, direct bill benefit enrolment and eligibility management as well as commuter and tuition benefits. With their reputation for high touch client service and strong cross-selling capabilities Crosby fits squarely within our stated portfolio purchase strategy including having great broker and client relationships, providing exemplary service, expanding our reach into key verticals such higher education and healthcare and once part of the WageWorks family having the opportunity to increase growth and realize operating efficiencies.

Rich will provide you with the impact Crosby will have at our 2013 financials in a moment. We continue to see promising opportunities for continued industry consolidation, have an effective blueprint for successfully integrating acquired companies and making one to three portfolio purchases a year is a key piece of our growth strategy. The three companies we acquired in 2012 Choice Strategies, TransitChek and Benefit Concepts have performed well meeting our expectations on the top and bottom line and our expectation is the same for Crosby. In closing, this was a strong quarter for WageWorks and we are as optimistic as ever on our opportunity and our ability to execute. This is giving us confidence to increase our full year guidance. As I have said many times before at WageWorks we believe we are just getting started.

And with that I will now turn the call over to Rich Green our CFO.

Rich Green

Thanks Joe. I will start by providing details on our strong financial performance during the first quarter, then I will discuss our financial guidance for the second quarter and full year 2013. Total revenue for first quarter was $56.1 million, an increase of 27% over the same period last year and again exceeding our guidance. Healthcare revenue was $35.7 million for the quarter, an increase of 22% compared to the first quarter of 2012. Commuter revenue was $14.7 million for the first quarter, an increase of 23% over the same period last year; and as Joe indicated our commuter revenue benefited from the reestablishing of the parity between the transit and parking benefits. Other revenue was $5.7 million, an increase of 84% compared to the same period last year. Other revenue growth was primarily driven by the Benefits Concepts acquisition as a significant portion of their revenue was from COBRA and enrolment in eligibility which we recorded in this revenue category on the income statement.

Let's turn to costs and margins. We are reviewing our numbers on a GAAP basis and where applicable on a non-GAAP basis. The non-GAAP numbers for the first quarter exclude stock based compensation expense, the amortization of acquired intangibles, contingent consideration expense and the related tax impact of these 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 first quarter was $35.5 million and represented a gross margin of 63%, compared with a 62% gross margin in the first quarter of 2012. The increase in gross margin was primarily attributable to leveraging our operations as we continue to scale our business. Operating expenses totaled $28 million in the first quarter compared to $23.5 million in the same period last year. Our first quarter expenses increased year-over-year due to cost associated with the three acquisitions made in 2012 and in addition, Q1 is a high expense period as we keep staffing levels high and our service organization to support the higher call volume and more customer service personnel as a new program year begins and the new participants have more questions.

As a result, our income from operations on a GAAP basis for the first quarter was $7.5 million, representing an operating margin of 13%, an increase compared with GAAP operating income of $3.8 million, or an operating margin of 9% in the same period last year. Our non-GAAP income from operations was $11.2 million for the quarter, representing a non-GAAP operating margin of 20%. For the same period last year, non-GAAP income from operations was $7.4 million, representing a non-GAAP operating margin of 17%. Our GAAP net income attributable to common stockholders was $4.6 million or $0.14 per share based upon 33.8 million diluted shares in the first quarter of 2013. This compares to GAAP net income attributable to common stockholders of $313,000 or $0.02 per share based upon 17 million diluted shares in the first quarter of 2012; that’s inclusive of 1.5 million of accretion of redemption premium expense.

On a non-GAAP basis, our net income was $6.9 million for the first quarter of 2013, which assumes a tax rate of 40% compared to non-GAAP net income of 3.9 million for the first quarter of 2012, which also assumed a tax rate of 40%. Non-GAAP net income for diluted common share was $0.20 for the first quarter of 2013, and $0.12 for first quarter of 2012, based upon $33.8 million and $31.6 million shares outstanding respectively. Non-GAAP adjusted EBITDA for the first quarter was 14 million compared to $9.5 million in the first quarter of 2012 and represents a 47% increase over the previous period last year.

Moving to the balance sheet, cash and cash equivalents total $329.2 million as of March 31, 2013 compared to 305.1 million as of December 31, 2012. Before turning to guidance, I wanted to provide some additional financial details related to the acquisition of Crosby Benefit Systems, which we announce on Monday May 6th. The deal structure is very similar to the previous portfolio purchases with an initial payment at close and additional earn out payments over the next couple of years, subject to the key achievement of milestones around client retention and growth. We currently believe that Crosby will add approximately $2.5 million in revenue in 2013. We also currently believe that the transaction will be neutral to adjusted EBITDA for the remainder of 2013. And as Joe mentioned overtime, we expect to realize operating efficiencies and improve those margins more online with the company average.

Now let me turn our thoughts to the second quarter and full year 2013, which includes addition of Crosby. Starting with the second quarter, we expect total revenue to be in the range of 51.8 million to 52.8 million; GAAP net income per diluted share of $0.07 to $0.09; 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 second quarter excludes stock-based compensation expense, the amortization of acquired intangibles and contingent consideration expense. GAAP to non-GAAP net income per diluted share assumes a tax rate of 40% and a weighted average shares outstanding of approximately $35.4 million. Non GAAP adjusted EBITDA for the second quarter 2013 is expected to be in the range of $12.7 million to $13.2 million.

For the full year 2013, we are raising our guidance. We now expect total revenue to be in the range of $212 million to $214 million. GAAP net income attributable to common stockholder per diluted share is expected to be in the rage of $0.32 to $0.40. Our GAAP EPS range now includes additional stock based compensation that was not contemplated in our prior guidance. This is primarily due to the acceleration of certain prior performance grants. Non-GAAP net income per diluted share is expected to be in the range of $0.61 to $0.69. 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 expense. GAAP and non-GAAP net income per diluted share assume the tax rate of 40% and the weighted share is outstanding or expected to be approximately $35.1 million. Non GAAP adjusted EBITDA for the full year 2013 is now expected to be in the range $50 million to $53 million.

So in summary, we are very pleased with our strong first quarter performance and believe we are well positioned for a successful 2013. So with that operator I believe we are ready to turn it over to question and answer.

Question-and-Answer Session

Operator

Your first question comes from the line of Bob Napoli [William Blair]. Please proceed.

Bob Napoli - William Blair

Let see, I was wondering if you could talk a little bit about the pipeline that you have, you have been able to maintain momentum on organic new business, new company signings and I was wondering if you could give some kind of therefore any metrics you could give in that regard?

Joe Jackson

Yeah, you know I think around this time, Bob, it's [June] and thanks for the question. If you look back kind of this time last year, I think we had stated that our pipeline as far as RFPs and things that we are working on where the highest that they had been at least since I have been here. I would tell you that we are off to a fast start this year. We are a little bit ahead of where we were at this point last year with regard to opportunities. I think now is between now and kind of mid summer is really when we have a lot of our finalists meetings and that's when we really begin to execute and close transactions. We've closed a few deals already this year. And I think the momentum that really started last year is continuing on and getting stronger if anything.

Bob Napoli - William Blair

Okay. And I guess I mean the Aflac, are you getting momentum with Aflac, I mean is it, -- once it’s in the system, do you expect them to add businesses at a faster pace, I mean it’s a pretty good pace that you have from last year to this year, but just maybe a feel for Aflac to channel partnerships and if you are working on any other potential significant channel partnerships, I know you have one with Towers Watson.

Joe Jackson

Yeah. First of all with Aflac, like I said in the remarks, we are very pleased with the number of new clients signings that they have had, particularly in the first three or four months of this year. We thought what we got towards the end of 2012 was very nice as well. You know this is our kind of first year with the Aflac sales force out selling our products. So in the first four months, we've got a 175 new clients. We will continue to see that, I think we are continuing to see that momentum you know grow as we get through the year. So I think once we get one year kind of through the new client sign, we will have a better idea.

We've had some discussions with them on what they historically saw with regard to new client signings and I think we are ahead of that pace right now. So we are very pleased with the number of and the transition as far as clients and participants to us that continues to grow. We see new clients coming, so it’s been a tremendous success so far and I see nothing that would stop it from continuing.

Channel partnerships are a key part of what we do. You mentioned Towers. We had a lot of success with them last year in adding new clients. The pipeline with the Towers relationship looks pretty strong this year. We've already had one sales win whereas three or four others we are pursuing right now with them. So that's tracking quite nicely.

And with regard to other channel partnerships, absolutely, it is a key component of our growth strategy. We continue to talk to folks that could be good partners for us going forward and I'm optimistic you will see us do more of these in the future as they've really proven to be a nice channel from a new sales standpoint for us to grow.

Bob Napoli - William Blair

And then last question I was wondering if you could give any update on use it or lose it?

Joe Jackson

Right. We are still continuing to monitor it. We've continued to have some meetings over the last couple of months. The one thing I would say is between Treasury and the IRS, they are continually putting out reams of guidance on a weekly basis because of a number of things with the Affordable Care Act and all that they are trying to get out. I know they continue to work the issue on use it or lose it. We are still optimistic we will hopefully see a change. But from a timing standpoint, like I said before, it's hard to predict. We're optimistic we will see something this year and we will just have to kind of wait and see how it progresses over the next few months.

Operator

Your next question comes from the line of Mr. David Grossman [Stifel Nicolaus]. Please proceed.

David Grossman - Stifel Nicolaus

It's David Grossman from Stifel. Joe, maybe you could talk a little bit, just step back and tell us a little bit about what you are seeing in the broader market, particularly as it relates to what some of your clients and perspective clients are thinking in terms of their benefit plans for 2014? Do you see any changes in terms of them trying to adopt different strategies, different types of plans, any changes that would be meaningful for us as we think about what new bookings may look like for next year?

Joe Jackson

David, I think a lot of employers are spending a lot of timeframe to position themselves to best be able to anticipate what would be coming in 2014. What we see I think is a lot of good noise if you will, whether it's in article, whether it's in meeting we have with clients, whether it's conferences we attend on the fact that a lot of employers seem to be moving or having or taking a lot more time to analyze what they can do with regard to consumer directed benefits, whether they are account based plans, whether they are defining contribution plans. We see a lot more talk and a lot more noise about that in the industry.

And from our perspective, that’s very good because any sort of account based defined contribution plan fits squarely within the product set that we offer. I think as employer start to look at how they want to position themselves in a post ObamaCare market, I have talked a lot before about smaller employers really looking hard about how they work in conjunction with the exchanges potentially to set up defined benefit plans or defined contribution plans that would be card based that would allow their employees to go out and buy services and insurance through exchanges.

So I think a lot of the talk and a lot of the buzz is currently being generated in the industry that we hear. I think look it's very well within the kind of product set that we have and we are trying to position ourselves with our clients to be a single source solution for these options going forward.

David Grossman - Stifel Nicolaus

And are you relatively indifferent if HSAs become a bigger percentage of the market?

Joe Jackson

Yeah. I mean I think from there it's an account based program. We administered HSAs today. It's a growth product for us. So I think we talk to our clients all the time and new clients as well about taking advantage of our platform, which provides the employer through kind of a low type (inaudible) on our plastic, the ability to operate multiple products including in HSA through one plastic. So that’s a competitive edge for us in the marketplace and if HSAs continue to grow, we are very pleased with that.

David Grossman - Stifel Nicolaus

Okay. And I am wondering if I could just go back to just a quarter in the outlook. If you think about what grow the upside in revenue as well as the upward revision to the organic growth rate, can you give us at least a qualitative sense of how much of that is coming from the installed based, how much of that maybe coming from better productivity out of the channel like Aflac or perhaps even better year-over-year performance from the companies that you’ve acquired and fully integrated?

Joe Jackson

Yeah, the last one you brought up was something we really didn't mention there, but we have seen some good growth in some of the acquired companies Choice Strategies and benefit time that's transit check from year ago, so we’ve had some additional growth there. You heard us mention on the transit and the commuter side, we saw a bump in the enrollments there that I think was driven not only by the increase in the limit up to $245, but I think over the last three or four months there is many urban areas where transit authorities have announced fairly increases.

And anytime that somebody announces a fairly increase in your community in that area and the cost is going to work just went up, that causes people to probably spend a little bit more time evaluating options and taking advantage of the pre-tax benefit as one that hopefully more and more will take advantage of but that was part of what healthy upside in the first quarter.

As well as on the healthcare side, particularly HRAs, where a lot of times David wins somebody sets up a program with us before a potential participant or an employee can get a car and get some money, they have to qualify, whether it’s taking a health assessment, risk task, having a blood pressure check that allows them to qualify to receive dollars which then generates a new account.

So kind of the late January, February and March timeframe because we do several hundred HRAs and have many clients offering them today, we saw growth in participation there as well. So I think everything you mentioned the combination of all have driven the -- obviously we talked about the Aflac upside which has been quite good. So I think all of them have probably equal components in what drove our organic revenue rate north of our growth rate north of 10% to approximately 11.5% and we are thrilled with that.

David Grossman - Stifel Nicolaus

And just one other thing was, it was really on the expenses, is the spike in G&A in the quarter, is that all seasonal or was there something else that was in there in the quarter that perhaps wasn't there last year?

Rich Green

Well, David this is Rich. Again, we had some additional 123R, so that's obviously some of that stop expense is going to be for the balance of the year. Also we do finished out our audit in the first quarter so depending on the timing of that January is just a little bit more expense, but there's nothing profound going on in G&A other than those factors.

David Grossman - Stifel Nicolaus

And the tax rate Rich you know it looks like on a GAAP basis it was 35, but when you adjust the proforma its at 40, is the GAAP rate should it be 40 going forward or did I, I might not understand it?

Rich Green

Going forward its 40, every quarter we depending on tax credits in this particular case in the first quarter we benefited from a retroactive credit that was granted by I believe it was Congress; for 2012 that we took the benefit of in the first quarter that actually dropped at about 5%. But going forward again we expect it to normalize out to be 40%.

Operator

(Operator Instructions) Your next question comes from the line of [Mr. Michael Wong].

Unidentified Analyst

Just a couple of questions for you. So I guess as you think about the cross selling activity that you are seeing thus far or kind of what you are seeing in the pipeline; what ultimately are your assumptions around cross selling this year and maybe you can give a general sense for how that might compare against last year. And then when you drill into that are you seeing more of the cross selling going on right now in the S&B or is it more going on in the enterprise?

Joe Jackson

I think it’s in both. I think there is a strong cross sell initiative on the enterprise side for sure. We started really focusing if you recall probably three years ago now and having dedicated people focused on selling new products to existing clients. You know remember about two-thirds of our clients still use us for only one product; our cross sell last year was larger in a dollar new sales dollar amount than it was in any other year prior. I think when I look at some of the things that we are looking at now from a cross sell perspective, I would expect our cross sell numbers this year to be as high if not higher than in the year before and I see that continuing to grow. I think as more and more products are starting to become popular in our space whether it’s an HSA or an HRA or an FSA. Those can be combined and we see a lot, like I said, a lot of interest from employers on adding and consolidating those products in to one platform and when they decide to do that or look to do that, that plays very well in to our hands.

Unidentified Analyst

In terms of the improvement that you are seeing in participation rate both across commuter and healthcare, is any of it attributed to new marketing programs that you’ve enrolled or that you have rolled out to help drive some engagement or is that benefit still coming, and may be you just can update us on what you are doing with respect to some of these newer programs and social etcetera.

Joe Jackson

Sure. Actually, a very good question. So, obviously we spent a lot of time and effort trying to improve the education and awareness marketing programs that we do each year to try and drive volume. We hired Britta in September of last year, so she didn’t really have the opportunity to put a mark on the opening enrollment season in 2012. But that being said, 2013 I think is a little bit different story. I think if you notice, we took up EBITDA in our guidance to 50 to 53, which might raise some question with regard to the amount we raised in revenue and part of that is starting in the second quarter and throughout the year we’ll be investing in some marketing programs whether it's awareness, education, direct to employers, through social media, etcetera. There is a plan this year to roll some of that out in the last three quarters of the year and hopefully what that will do is continue to build on the momentum we've seen of people begin able to take advantage of this products. So I am optimistic that a lot of the programs and things we're working on will show some benefit in the open enrollment season in 2013 and really see that in 2014.

Unidentified Analyst

And then just kind of last question for you; so use it or lose it, in terms of your optimism around this getting done; if I had to ask you whether or not you felt more optimistic now than you ever have or less optimistic, how would you answer that?

Joe Jackson

How would I answer that? I am always optimistic about it, it's a rule that makes no sense, it's a rule that in the legislative branch of our government has bipartisan support. There is not many things out there that bipartisan support right now. Use It Or Lose It is one of them. So that’s my legislative standpoint. From the regulatory standpoint both within the IRS and treasury from the meetings and conversations I have had I believe that there is quite widespread support out there including the White House to see this change happen. So I am as optimistic now that we will see the change as ever, but also qualify that with what I have said each time and that is I have no control and there is no timeframe under which a change could be made, and a change could not be made.

And I think one of the more important things is you’ve seen us kind of display today, what I think is a tremendous quarter and what hopefully positions us to be a very successful 2013 and beyond and none of our plans, none of our guidance, none of our assumptions, none of our long term targets, none of our target operating models, statistics ever assumed Use It Or Lose It goes away. So we are a strong company continuing to grow I think Use It Or Lose It will be a plus when it does happen, but the timing Michael is just I can say I am optimistic, but I would be [sizing] to if I told you I had any idea of a timeframe, it will just be one people inside to do it.

Operator

Your next question comes from the line of Bob Napoli of William Blair. Please proceed.

Bob Napoli - William Blair

Okay, I just want to thank you for the follow up. Just wanted to ask about your M&A pipeline and strategy, the benefit concepts field that you did at the end of last year had a bit of the new product for you, I guess in the enrollment side, and I just wanted to first of all what the pipeline looks like, you consistently been doing deals one at the end of last year, one just now a smaller one, but how does that pipeline look, how do you feel about it and are there new products that you are looking at in that pipeline?

Joe Jackson

Yeah, but so much new products, I mean the pipeline is very strong, because the Crosby transaction from the annual revenue point of view today there approximately maybe right around $5 million in revenue, we will see 2.5 of that through the remainder of this year. And again it’s towards the lower range of our $5 million to $25 million range that we’ve provided. But I have to tell you Crosby is an organization that we have been chasing for a number of years, great reputation in the market, great client base, great people that run the organization and probably a couple of our most successful acquisitions that we have done and they all have been good. But couple of the most successful ones have been in kind of the $5 million to $6 million revenue range that have grown rapidly once we required them. So even though that is a little bit at the smaller end of the range, we are very optimistic and extremely pleased to have products begin to fold now, but I think going forward, one to three years, we will continue to focus on the patch that we're after. Now there are still a few hundred of them out there. So whether or not they bring new products it's probably not likely but they will bring things that complement what we do today.

Bob Napoli - William Blair

Okay. And then just in your guidance, your tax rate of 35, I think you are assuming 35.5 million shares. Is that assuming that what -- stock prices assuming is that assuming, I guess? Is that I think you assuming that stock price appreciates during the course of the year to get to that amount of share versus where you are right now?

Rich Green

I think we generally always look at the share price kind of in the quarter, Bob, and then look at it a couple of dollars higher in terms of that through the balance of the year. We've been undershooting it just a bit here with the performance of the stock which is a great problem to have, but the other factor obviously, the factors in to the share count on a GAAP basis is going to be the when the extra options convert during the quarter and that’s essential what drop the share count from what we first anticipated from 35 down to 33.8, but obviously going through the balance of the year, we're expecting that to kind of get back into volume where we were expected just a little bit delay.

Bob Napoli - William Blair

Okay. What negative effect, there has to be some negative effect I guess from the cap on maybe on interchange revenue that had on $2,500 for the FSA. Has there been -- I mean, I am sure it's in your guidance but what negative effect is there on your business from that capital?

Rich Green

I am sure there is some hidden but we almost exactly on what we've targeted related to interchange for the year. It's right in line with what we had projected and it's running very steady and so we've not seen drop in interchange in either the acquired entity that we acquired or just a base business.

Bob Napoli - William Blair

Was there any pick up in your penetration rate on your customer base this year versus last year as you look at a full quarter, are you still around the 25% level?

Joe Jackson

I think we are probably a little more to that Bob, on FSAs, I think the participation rate of HRAs has grown pretty well, HSAs as well. Commuter picked up significantly in the first quarter, so that was good. So we see them all picking up a little bit, so that’s great news.

Bob Napoli - William Blair

How were you positioned for HSAs, I mean I think there is -- I think the expectation that HSAs will become a -- will grow even faster under the ObamaCare if you would and how was your competitive position on HSAs versus FSAs?

Joe Jackson

It's an account based consumer directive benefit, so we are as able and have the quality associated with HSAs and want them as much as we would FSAs or HRAs. I wouldn’t say that there is really a difference between the three, I think we all comes on account based plan.

Bob Napoli - William Blair

Okay.

Joe Jackson

And by the way in the answer I think we are very well-positioned. I think the one thing that we have going for us compared to a lot of our competitors who might just be HSA only players is employers can work with us and have an HSA or limited purpose FSA, potentially a employer funded HRA that can all be loaded on to one account, can all be access through one plastic and we provide the employers the ability to designate at what point in time the dollars are spend, whether it's HSA dollars first, company seeded dollar second or vice versa, So that is big plus from our standpoint. And then when attach the quality of service that we provide on the backend, I think it’s a pretty compelling proposition for employers and based upon what I see in our pipeline that's resonating.

Operator

Mr. Joe Jackson, please proceed.

Joe Jackson

Great. Thank you, operator. And thank you all again for joining us today. As I mentioned at the start tomorrow is the one year anniversary of WageWorks becoming a public company. It’s been an exciting year for the company and I wanted you to take quick moment to say thank you to all of our employees for everything that they do every day to help our company continue to be successful. And finally a big thank you to all of our clients for placing their trust and confidence in WageWorks, it’s very much appreciated. Thank you all again and we look forward to talking to you next quarter. Thank you, Operator.

Operator

Thank you very much. This concludes today's conference. Thank you for your participation and you may now disconnect. Have a great day.

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