WageWorks' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 8.13 | About: WageWorks, Inc. (WAGE)

WageWorks, Inc. (NYSE:WAGE)

Q2 2013 Earnings Conference Call

August 7, 2013 5:00 PM ET

Executives

Staci Mortenson – Investor Relations-ICR

Joseph L. Jackson – Chief Executive Officer

Richard T. Green – Chief Financial Officer

Analysts

Bob P. Napoli – William Blair & Co. LLC

David M. Grossman – Stifel, Nicolaus & Co., Inc.

David M. Scharf – JMP Securities LLC

Michael Huang – Needham & Company

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter WageWorks Incorporated Earnings Conference Call. My name is Britney, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

At this time, I would now like to turn the presentation over to your host for today, Staci Mortenson. Please proceed, ma’am.

Staci Mortenson

Thank you. Good afternoon, and thank you for joining us today to review WageWorks’ second 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 third quarter and our fiscal year ending December 31, 2013. Our selling efforts and the anticipated benefits from those efforts, anticipated benefits from our channel partnerships, expected benefits of our portfolio purchases, the demand for consumer-directed benefits, market trends for the industries in which we compete; anticipated benefits of exchange opportunities, our expectations and believes concerning how these trends will affect our operating results and our strategic and operational plans, objectives and goals. These figures 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 regulations affecting our industry; our ability to successfully identify, acquire, integrate additional portfolio purchases, acquisition targets or channel, partnerships 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 June 30, 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 reconciliations to the most directly comparable GAAP financial measures available on our second 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?

Joseph L. Jackson

Thanks, Staci, and I would like to start by thanking all of you for joining us today. We just finished a very successful first half of 2013 and are excited about the opportunities ahead.

Our financials are strong and our prospects for full-year 2013 have gotten better. Demand for consumer-directed benefits is growing and our enterprise selling season is growing very well with several new significant signs. We are also excited to announce today that we’ve signed an important new channel partnership with Ceridian.

Also, with the establishment of private healthcare exchanges related to the Affordable Care Act, we believe our addressable market is expanding meaningfully. Our new partnership with Towers Watson, which we announced earlier in the quarter, is a great example of this.

I’ll provide more details on each of these areas in a moment, but first, we’ll start with the financials. We had a very strong second quarter, reporting total revenue of $54.6 million, an increase of 25% over the prior year period. Our GAAP operating income was $6.7 million, leading to GAAP net income attributable to common shareholders per diluted common share of $0.11. Our non-GAAP operating income was $11.9 million, leading to non-GAAP net income per diluted common share of $0.20. Non-GAAP adjusted EBITDA was very strong at $14.9 million, an increase of 37% over the prior year period.

With regard to revenue, we’re particularly pleased with our organic growth, which was solid again at approximately 11.5% in the quarter. This is a strong step in the continued acceleration of our organic growth rate, which we now believe will be 10% to 11% for the full-year 2013 versus the 9% to 10% we previously stated, and up from a little over 8% for the full-year of 2012.

This organic growth has been driven by strong new client additions, increasing participation rates, cross-selling, and channel partnerships. We are very pleased with our progress so far in this year’s selling season. Our pipeline is strong; we’re actively engaged in many new sales and cross-sell opportunities.

We’ve recently signed a number of new clients adding several more on the Fortune 500 list. As you know, our enterprise selling season is in full swing in the third quarter, and we are optimistic about our ability to close an increasing amount of new and cross-sell business yet this year. Our SMB sales efforts, which are more third and fourth quarter based, are also progressing well and off to a good start.

Now, I’d like to spend a moment on another opportunity to grow our business and further strengthen our position in the marketplace. We recently entered into a channel partner arrangement with Ceridian, which is very similar to our agreement with Aflac.

Beginning October 2013 and continuing into 2014, we will be transitioning Ceridian’s existing consumer-directed benefit account administration business to WageWorks. Currently, Ceridian has approximately 1,500 direct healthcare clients and approximately 175,000 participants. In addition, we’ve entered into a reseller agreement for Ceridian to sell the full suite of WageWorks’ healthcare and commuter products to their new and existing clients.

As with our previously announced channel partnership with Aflac, we are not assuming any facilities, people or property, and all Ceridian clients transitioning to us will sign a new WageWorks contract. Our expectation here is that there will be minimal revenue contribution in 2013 and revenue will begin to ramp at the start of 2014. Right now it’s too early to give a more exact revenue contribution for 2014, as we don’t have enough details yet on the expected timing of employer transitions. What we can tell you is that once transitioned, we expect the full-year organic revenue impact to be between $9.5 million and $11.5 million.

Similar to Aflac, we expect to have some 2013 expenses in anticipation of the January 4, 2014 employer client transitions, but we are still working through this and plan to provide you with an expected 2013 expense impact when we report our third quarter earnings. We’re really excited about this new agreement and we’ll continue pursuing more channel partnerships like these in the future.

I also want to spend a moment discussing what we believe is an expanding market opportunity for our industry related to the Affordable Care Act. Over the last year and certainly in the last quarter, we’ve seen an increasing amount of media and press coverage regarding the rollout of private exchanges and the potential impact on an employers approach to employee benefit.

As thought leaders in the consumer-directed benefit space, I wanted to share how we and other industry leaders see the opportunity evolving and more specifically our role. According to the 2012 Mercer National Survey of Employer-Sponsored Health Plans, full replacement strategies are becoming more common as employers look for ways to lower their benefit costs and promote healthcare consumerism.

Instead of designing and offering specifically defined benefits, employers are choosing to make fixed dollar contributions that employees use to purchase group health products and other programs of their choice. This shift in approach is continuing to fuel growth in consumer-directed benefit accounts like HRAs and HSAs, by pairing them with these plans and also providing wellness incentive accounts to improve the health status of their workforce.

Private exchanges essentially offer employees a marketplace with which to use this defined contribution provided by the employer to purchase benefits, including healthcare, dental and vision. Many of the private exchanges use a wellness component as the foundation for their plan design.

The funding of wellness accounts can be into an HRA, FSA or HSA. Having one administrator like WageWorks manage all of an employee’s consumer-directed benefit accounts with one card and flexible payment options is an advantage for the employee as it allows for individual choice and ease of use. While private exchanges can evolve a single medical carrier offering multiple medical options, it’s more common that a private exchange has multiple carriers each with a few medical, dental or vision options, which is an additional driver to use a company like WageWorks as we are agnostic to the carrier.

We believe private exchanges offer a significant long-term growth opportunity for WageWorks, as over time, more employers move to private exchanges, where an employee can select from a menu of coverage that includes integrated consumer-directed benefit programs. We also believe many of the coverage options will embed these products.

Some recently released data further supports our optimism about the adoption of private exchanges. A recent study by Accenture highlights that private exchange enrollment is expected to increase from 1 million employees in 2014 to 40 million in 2018. This shift in how employers think about health benefits has the potential to be even more dramatic than the transition employers made from pension plans to 401K accounts, approximately 20 years ago.

Today, participation rates within companies offering 401K plans are averaging over 80%. We think private exchanges provide a growth catalyst that could enable consumer-directed benefits to follow an adoption path similar to 401Ks. A great example of an exchange opportunity in action is our recently announced partnership with Towers Watson.

We are now the exclusive administrator of HSAs and HRAs for one exchange active, Towers Watson’s offering for active full-time employees. We had a longstanding relationship with Towers Watson, our platform has delivered dedicated service and support for their clients for years, and we’ll now provide a powerful combination of healthcare strategy and solutions expertise for their private exchange participants as well.

One exchange active will begin enrolling participants this fall, for January 1, 2014 health plan start dates. In closing, this was another strong quarter for WageWorks. And we are as optimistic as ever about our business and our ability to benefit from our expanding opportunity. This is giving us confidence to increase our full-year guidance.

As I’ve said many times before and today now more than ever, we believe at WageWorks we are just getting started.

So with that, I’ll turn it over to Rich Green, our CFO. Rich?

Richard T. Green

Thanks, Joe. I’ll start by providing details on our strong financial performance during the second quarter then I’ll discuss our financial guidance for the third quarter and full-year 2013.

Total revenue for the second quarter was $54.6 million, an increase of 25% over the same period last year exceeding our guidance. Healthcare revenue was $33.9 million for the quarter, an increase of 23% compared to the second quarter of 2012. Commuter revenue was $14.7 million for the second quarter, an increase of 11% over the same period last year.

Our commuter revenue continued to benefit from new subscribers and the reestablished parity between transit and parking benefits. Other revenue was $6 million, an increase of 103% compared to the same period last year. Other revenue growth was driven primarily by the Benefit Concepts acquisition as a significant portion of the revenue was from the COBRA and the enrollment and eligibility products, which we record in this revenue category on the income statement.

Let’s turn to costs and margins. We will review our numbers on a GAAP basis and where applicable on a non-GAAP basis. The non-GAAP numbers for the second 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 second quarter was $34.6 million and represented a gross margin of 63%, compared with a 64% gross margin in the second quarter of 2012. Operating expenses totaled $27.9 million in the second quarter, compared to $23.3 million in the same period last year. Our second quarter expenses increased year-over-year due to costs associated with the recent acquisitions and ongoing investments to drive growth and innovation in the business.

As a result, our income from operations on a GAAP basis for the second quarter was $6.7 million, representing an operating margin of 12%, an increase compared with the GAAP operating income of $4.8 million or an operating margin of 11% in the same period last year.

Our non-GAAP income from operations was $11.9 million for the second quarter, representing a non-GAAP operating margin of 22%. For the same period last year, non-GAAP income from operations was $8.4 million, representing a non-GAAP operating margin of 19%.

Our GAAP net income attributable to common stockholders was $4 million or $0.11 per share based upon $35 million diluted shares in the second quarter of 2013. This compares to GAAP net income attributable to common stockholders of $2.4 million or $0.10 per share based upon $24.3 million diluted shares in the second quarter of 2012. That’s inclusive of $778,000 of accretion of redemption premium expense in that period.

On a non-GAAP basis, our net income was $7.1 million for the second quarter of 2013, which assumes a tax rate of 40%, compared to a non-GAAP net income of $4.7 million for the second quarter of 2012, which assumes a tax rate of 41%.

Non-GAAP net income per diluted common share was $0.20 for the second quarter of 2013 and $0.15 for the second quarter of 2012, based upon 35 million and 30.8 million shares outstanding respectively. Non-GAAP adjusted EBITDA for the second quarter was $14.9 million, compared to $10.9 million in the second quarter of 2012 and represents a 37% increase over the previous year’s period.

Moving to the balance sheet, cash and cash equivalents totaled $355 million as of June 30, 2013, compared to $305.1 million as of December 31, 2012.

Now, let me turn to our thoughts to the third quarter and full-year 2013. Starting with the third quarter, we expect total revenue to be in the range of $52.6 million to $53.6 million, GAAP net income per diluted share of $0.08 to $0.09 and non-GAAP net income per diluted share of $0.17 to $0.18. Our expectation of non-GAAP net income per diluted share for the third quarter excludes stock-based compensation expense, the amortization of acquired intangibles and contingent consideration expense.

GAAP and non-GAAP net income per diluted share assumes a tax rate of approximately 40% and weighted average shares outstanding of approximately $35.5 million. Non-GAAP adjusted EBITDA for the third quarter of 2013 is expected to be in the range of $13.3 million to $13.8 million.

For the full-year 2013, we’re raising our guidance. We expect total revenue to be in the range of $216.4 million to $218.4 million. GAAP net income attributable to common stockholders per diluted share is expected to be in the range of $0.38 to $0.42. Non-GAAP net income per diluted share is expected to be in the range of $0.71 to $0.75.

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 diluted share assumes the tax rate of approximately 40% and weighted shares outstanding are expected to be approximately 35 million.

Non-GAAP adjusted EBITDA for the full-year of 2013 is now expected to be in the range of $54 million to $56 million. Our full-year expenses will be incrementally higher than we previously expected due to additional fees associated with the coming SOx compliant. Due to various factors, we will now have to be SOx compliant in 2013, which is earlier than expected. We’re well on our way, but we will be accelerating some expenses primarily in professional services and auditor fees. Even with these expenses, we are still raising our profitability guidance.

So in summary, we are very pleased with our strong second quarter performance and believe we are well positioned for continued success in 2013.

So with that operator, I think we are ready to begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Bob Napoli representing William Blair. Please proceed.

Bob P. Napoli – William Blair & Co. LLC

Thank you very much. Congratulations on not only the quarter, but your new partnership with Ceridian and also the Towers Watson.

Joseph L. Jackson

Thanks Bob.

Bob P. Napoli – William Blair & Co. LLC

Maybe a quick questions on Ceridian…

Joseph L. Jackson

Yeah.

Bob P. Napoli – William Blair & Co. LLC

…and the timing you said, a little bit in 2013 and then through 2014, do you expect to fully – I mean, if we were thinking about, and would it be fair to think about one times in the $15 million to $16 million that sets in the Q, 10-Q of $15 million to $16 million purchase price, will that be equal to the revenue that you expect on a annual basis?

Joseph L. Jackson

No, it would be – I think the revenue we would anticipate in full ramp here would probably be somewhere as we said between $9.5 million and $11.5 million.

Bob P. Napoli – William Blair & Co. LLC

Okay. $9.5 million and $11.5 million, and how much of that would come on board, would you expect to get in the calendar year 2014?

Joseph L. Jackson

We hope the vast majority, if not all of it, and Bob, the reason we’re a little sketchy about it at this point is, obviously, we’ve just recently concluded the transaction. We’ve just started the reach out to employers and if you kind of rewind a little bit, at this point in the scenario with Aflac, we’re already four months into the process. So here, we’re kind of starting late – a little bit later in the year and that’s why we think by the next time, we do, for example, when we do our Q3 call, we’ll have a much better idea of the timing of transition for employers.

We think we’ll probably get some POP revenue in the fourth quarter, again, not sure how much yet. And I think it would be our objective, our mutual objective that we want to get as many of the employers to transition at the beginning of the year as we possibly can. I think that’s a very efficient way to affect the transition as of the end of a plan year, and we just have to get the reach out to employers and kind of talk to them about what we think and kind of what they want to do and that will kind of drive the timing of the transitions. But obviously more sooner rather than later, but conceivably you should have – you could have some transitions taking place throughout 2014.

Bob P. Napoli – William Blair & Co. LLC

Great. And then on Towers Watson, I think the Towers has talked about 2015 being the period of the biggest ramp, but do you expect anything material in 2014 out of Towers Watson?

Joseph L. Jackson

I think we expect some…

Bob P. Napoli – William Blair & Co. LLC

(Inaudible)

Joseph L. Jackson

Yeah, some in 2014, it’s still bit unclear yet as to how many employers would transition in – at the end of 2013 beginning of 2014, yeah I’ve read the same things, and I think they plan to – they have a terrific exchange, I think it’s going to be a great opportunity for employers to take advantage of, and I think the targets that they’ve kind of provided out there, we’d stand behind and do whatever we can to help with.

Bob P. Napoli – William Blair & Co. LLC

Great. And last question was, everything going on with Ceridian and Towers are, are you still looking at making acquisitions in 2013?

Joseph L. Jackson

Always. Again, like I told, it might be other day, congratulations on getting this one done, so it’s an excellent teed up for. So, I think the plan is still to do one to three year, we’ve got an active pipeline out there and we’ll continue to work it and trying to get as many as we can done as quickly as we can.

Bob P. Napoli – William Blair & Co. LLC

Thank you.

Joseph L. Jackson

But the answer to your question, full steam ahead on that.

Bob P. Napoli – William Blair & Co. LLC

Thanks a lot.

Joseph L. Jackson

Thanks, Bob.

Operator

And your next question comes from the line of David Grossman representing Stifel. Please proceed.

David M. Grossman – Stifel, Nicolaus & Co., Inc.

Thank you. Good afternoon. I’m wondering, perhaps you can help us understand when you look at the results for the quarter and your expectations for the balance of the year. What was the biggest difference between where we were three months ago and where we are now?

Joseph L. Jackson

Well, I don’t know if there is one thing I’d call out David. I think what we saw was strength broadly across our business. We did a little bit better than we expected across all three of our reporting revenue segments. Commuter continues to see the benefits from Congress extending the parity for the pre-tax transit and parking benefits.

And as you recall, earlier on when we said, when this happen, we wanted to see, how this played out and the impact on our business and obviously it’s been a positive. We’ve had some benefits in other revenue, we’ll go to Benefit Concepts acquisition and things like that. But I think it has been a strength across our entire business.

David M. Grossman – Stifel, Nicolaus & Co., Inc.

And I think you gave us a little color on – a commentary about the bookings year-to-date.

Richard T. Green

Right.

David M. Grossman – Stifel, Nicolaus & Co., Inc.

Can you give us anymore details in terms of where we are now versus where we were last year, the number of Fortune 500 accounts that you signed or anything that may give us a little more flavor for what your thoughts and what‘s in the pipeline?

Joseph L. Jackson

Right. I think as we’ve talked before, nothing would make me happier than to sit here and list for you the number of new clients that we’ve signed, because I think if you saw the names and I think we got it five in the Fortune 500, it’s a very impressive list. But in a lot of instances like I stated before, either because the employer hasn’t notified their employees yet of the change, hasn’t notified their existing administrator of the change, or in some instances just doesn’t want their name mentioned, we abide by that.

So suffice it to say with regard to pipeline, with regard to where we at with sales year-to-date, with regard to where we are at with finalist meetings and things that are currently in play, we are head of last year in every category. Jim Lynch’s sales team out there throughout the country, are doing a fantastic job. The channel partners are doing a great job. Our broker network continues to feed us business and from a cross-sell perspective, we continue to add more products with existing clients. So it’s the one thing I wish I could is would be to provide the names, but we tend to kind of air on the side what our clients want us to do.

David M. Grossman – Stifel, Nicolaus & Co., Inc.

And has there been any change so in the competitive environment or landscape as you kind of go into the selling season here?

Joseph L. Jackson

We’re winning more than we have ever in the past. I think we are getting to the table more than we have in the past. A lot of that is due to, I think, the reputation of our service in the marketplace, some brand awareness, and probably the fact that we’re a public company, that’s probably helped as well. But from a competitive side we see still some of the same names out there. We see some newer names. We see less of some of the existing folks that we’ve seen before that been acquired. But from the perspective of kind of how the landscape sits today, I don’t think there has been any meaningful change, I think we just continue to get better.

David M. Grossman – Stifel, Nicolaus & Co., Inc.

Okay. And then just transitioning quickly to the Ceridian relationship, congratulations for getting that done. Can you help us understand what differences if any exists between the Ceridian deal and the Aflac deal?

Joseph L. Jackson

There is really not a lot of material difference at all. What you end up doing is we pay for as I mentioned earlier with both of them. There is no facilities, no people, no property, no platforms that were acquiring. We have to get each client to sign a new agreement, so there is a very concerted effort with teams from Ceridian and WageWorks that will be going out and talking to their client base and executing those new agreements and talking and scheduling transition dates. And what we end up doing is we end up pain for the revenue that is delivered.

So, clients and employers out there have a choice just like they did with Aflac. And I think, one of the compelling reasons why we are an attractive partner is we can demonstrate experience of having transition successfully large blocks of employer clients much like we did with Aflac, and I see no reason and our team see no reason that we can affect the same sort of transition and movement here. But that’s primarily why I get a range. I mean, if you were buying the business, there is no range to get. The fact that we have to go out and get people to sign new agreements, that’s kind of why I provide the range and we do have a confidence level that we should definitely within that range and where we can do better, we will.

David M. Grossman – Stifel, Nicolaus & Co., Inc.

Right and my impression is that Ceridian has probably more enterprise clients than Aflac, and where Aflac is more entrenched in small and medium business, in fact, that’s the right kind of relationship. Is there an implication at all for mix or is it pretty much the same regardless?

Joseph L. Jackson

That’s probably, David, if I had to say if there is a difference, the one difference I would say is Aflac is primarily small businesses. You’re right, Ceridian has a terrific portfolio of large, medium sized clients. They’ve been a great company to work with throughout this process. I think what’s their objective is here is to provide the best possible service to those employers. Ceridian does a great job on the payroll side. And I think what we can add to the client experience that they get from Ceridian by utilizing our platform and our consumer-directed benefit products, I think it’s a strong positive. Yeah, if I have to say, there is one different stay, but it’s the size of the employers.

David M. Grossman – Stifel, Nicolaus & Co., Inc.

That doesn’t really affect the revenue profile, right.

Joseph L. Jackson

No.

David M. Grossman – Stifel, Nicolaus & Co., Inc.

Right, okay. And then just lastly in that relationship the expenses, I know you are just signing this thing as it really just getting your arms around what exists. But as I recall with Aflac you were able to offset some of those expenses by bringing on-boarding some of the clients before the end of the calendar year. So should we expect this relationship to be pretty much just the – an expense year for Ceridian given the size of the company, are there particular employers and we are going to really have much revenue this year, so that we really have just the raw expense.

Richard T. Green

I think, you are right. I think it’s basically the raw expense. What we have to do and what we’ll get a better hand along over the next kind of 30 days to 60 days will be the timing of many of the transition. So the impact in the fourth quarter will have probably a direct correlation to how many employers are ready to go on January 1 with their transition. My preference is to move as many as we can, as quickly as we can. So we have a larger number coming in January along with a larger number and amount of new sales that we’re generating from our sales force, that will be correlation that impacts the amount of – of expense Edgar and his team have to kind of put in place to prepare for that revenue coming on in January.

David M. Grossman – Stifel, Nicolaus & Co., Inc.

I got it. Okay. And then just a last question is really on the Towers deal. As we think about the mechanics of how these relationships work with the exchanges, is the net EBITDA contribution of $1 of revenue any different coming from the exchanges versus just a straight out sale to a commercial client or is there some difference between them?

Joseph L. Jackson

No difference.

David M. Grossman – Stifel, Nicolaus & Co., Inc.

Great. Thank you.

Joseph L. Jackson

Sure, David. Thank you.

Operator

(Operator Instructions) And your last – and your next question comes from the line of David Scharf representing JMP. Please proceed.

David M. Scharf – JMP Securities LLC

Hi. Good afternoon. Thanks for taking my questions. Though most have been addressed obviously, Joe, but I wanted to just kind of dig in a little more on understanding kind of the sources of upside in the quarter, particularly given, how much visibility you have in Q2 is obviously, it’s selling season, but you’re not really bringing bodies on board. When we think about 4%, 5% revenue upside to your guidance, is most of this coming from more interchange than expected? And can you may be update us on what percentage of healthcare revenue is now coming from interchange fees?

Richard T. Green

Yeah, hi, David. This is Rich. I mean, I think, Joe kind of tried to allude to all the sectors basically are exceeding. Obviously, commuter is kind of leading the way. It’s one of the things I think we talked about kind of that first quarter time is that we were doing pretty well in the TransitChek side of the business with their bulk product and it’s just a matter of making sure that trend is going to continue and obviously we had a good second quarter with that.

Interchange is a component of it and again, I believe I don’t have up-to-date year-to-date numbers, but I believe we’re still in the 12% range in terms of our total revenue mix, but again, healthcare was strong. We continued as well and other revenue was a more modest lift, but we did well there as well. I think it’s well David, I think there are a couple of things, a lot of times with HRAs in particular to beginning of the year when an employee has to take a health risk assessment or a biometric screening in order to get the money. Sometimes the accounts don’t come on until mid delayed first quarter.

So I think we saw some of that in the first quarter that obviously correlated into the second quarter at a full ramp. I think we saw Aflac continue grow in the first quarter kind of sequentially throughout the quarter. We still see a little bit of that, but that’s obviously helped in the second quarter. And then on commuter we have more participants and our both business have seen some benefit from order, remember on the book we pay – we get paid a commission based upon the dollar value and obviously when the limites went up that obviously helps that process as well.

David M. Scharf – JMP Securities LLC

Got it. Just staying on the interchange topic, I mean just given that – an incremental dollar spend on the card versus otherwise is so profitable. Is there any change in the percentage of transactions that are taking place on your debit cards and any change in the average size per transaction on those cards?

Joseph L. Jackson

No, and not that I have seen David.

Richard T. Green

It still continues to ramp as it traditionally has. I mean there is a little bit of cyclical revenue throughout the year, but it’s still tackle….

Joseph L. Jackson

Yeah, again, that’s the patents that we’ve talked about where it will trend down, here it’s based upon healthcare spend, not the commuter side.

Richard T. Green

Right.

David M. Scharf – JMP Securities LLC

Okay, got it. Rich, anything that could be characterized as delayed investment spending or anything in the quarter, I mean the – obviously the EBITDA margin advanced well north of what we are looking for north of 27%. In the second half you are going to have the Ceridian cost, but…

Richard T. Green

Well, again, nothing out of the ordinary. We have our normal seasonality, which will obviously start in late third quarter where we’ll have to ramp for the season, we’ll have our open enrollment and we [issue] plastics and those kinds of things. But there’s nothing that’s unusual in terms of we delayed this year, that we had some kind of benefited, it as a windfall in terms of our EBITDA in the second quarter, if that’s what you’re asking?

David M. Scharf – JMP Securities LLC

Yeah, right, right. Got it, got it. And lastly, what – I apologize, I’m sure the answer is embedded either in a footnote or it’s related to recent acquisition activity, but the stock comp in the quarter was considerably north of what we’ve been used to seeing, was there unusual earn outs in the quarter?

Joseph L. Jackson

No, there was no earn outs, but we do have performance based shares, but obviously, I think it mildly impacted first quarter, but obviously, it had a full impact in second quarter. So I think that’s what we’re seeing.

David M. Scharf – JMP Securities LLC

So is that the expected seasonal pattern for most performance based, it starts to hit…

Joseph L. Jackson

Well, again, it’s a little different than normal stock-based comp, which basically just amortizes over a period of time. In this case, we’ve always got to look at the performance criteria to determine whether we need to accelerate it. And so there is always going to be some potential that depending upon the criteria that we might have to adjust it, but we don’t think it’s going to be adjusted from the current run rate that it’s on...

Joseph L. Jackson

Yeah, David I think, we’ve got performance-based shares that are out there. And as Rich said, I mean the real driver here is each quarter you get us around both internally and with the auditors and kind of look at what are the performance goals attached to those options, and then you have to make a decision based on the likelihood that will achieve those numbers or achieve the trigger to Basel’s options, once you kind of make that assumption, they kind of force you to take it in that quarter.

David M. Scharf – JMP Securities LLC

But you got to change the denominators…

Joseph L. Jackson

Yeah.

David M. Scharf – JMP Securities LLC

So your amortization period will get shrunk if those criteria appear to be met within a sooner timeframe?

Joseph L. Jackson

Right David, so that’s what’s ends up happening.

David M. Scharf – JMP Securities LLC

Got it, got it. Thank so much.

Richard T. Green

Sure, David. Thank you.

Operator

And your next question comes from the line of Michael Huang representing Needham & Company. Please proceed.

Michael Huang – Needham & Company

Hey, thanks very much, and I apologize if this was covered in the prepared remarks, I jumped on a little bit late. So it’s nice to hear about the Fortune 500 wins. I was wondering if you can drill into that and helps us understand typically who you are replacing there and did you actually mention if they were healthcare or commuter customers or both ,and could you remind us again like how many Fortune 500 wins last year same time?

Joseph L. Jackson

Well. So let me try and cover a couple of those questions. I think with regard to the Fortune 500 wins compared to this time last year. If we have added five now, I don’t if we added five or six a year before. Last year, we had a big win with General Electric, so that mastered a little bit. But I think the mix is roughly about the same, then with regard to healthcare and commuter, several of those are healthcare only, a couple of them are healthcare and commuter. So there has been a nice mix there, a couple of them are cross-sells as well. And then the third part of your question, Mike was…

Michael Huang – Needham & Company

Who you’re typically replacing?

Joseph L. Jackson

Various administrators, I don’t think there is one in particular, I think if I go through the larger deals in my mind of the companies we replaced, I’m not sure that we nipped at somebody more than once. So it seemed to be from a variety of different folks.

Michael Huang – Needham & Company

Okay, got you. And just drilling into the cross-selling activity in the quarter, I mean it seemed like it was pretty strong, I mean did you mention, was it more kind of healthcare and commuter customers or the other way around and then just remind us again are you doing anything different with respect to kind of how you are going after the cross-selling opportunity?

Joseph L. Jackson

Well, I think, Jim and his team have got people that are dedicated to doing nothing more than to selling new products to existing clients. If I look back on the quarter, I don’t have the exact breakdown in front of me, but if I look back on the finalist meetings I attended, that were cross-sells, I think in two of them it was – they were a commuter client going to healthcare, and I think in one of them, there was a healthcare going to commuter, and then there was one that was a COBRA client that we were pitching healthcare and commuter too. So it can be a – there is not really a consistent theme. I think it’s a good mix all around.

Michael Huang – Needham & Company

Okay, and just remind us again in terms of kind of average number of products per customer, do you have a kind of an updated metric there and maybe just kind of give us a relative comparison, maybe about a year ago?

Joseph L. Jackson

Right. I still kind of stick to about two-thirds of our client’s uses for one product that may not sound right, because of the success we’ve had in cross-selling, but we’re also adding a lot more employers. So for example, when we added employers at Crosby and they’ve done a – they’ve been terrific since they’ve been on board. Benefit Concepts has been a terrific acquisition for us. There’s a few thousand clients that come there – come from there that are usually, primarily one product accounts that we worked to cross-sell. So the sea level there never really continues to drop that much, because we continue to add more employers.

Michael Huang – Needham & Company

Okay. And then just based on strength of pipeline – strength of pipeline activity et cetera, what’s your view on the number of kind of field reps that you have now and what are your hiring plans going into 2014?

Joseph L. Jackson

Yeah. I don’t think we had a lot of hiring plans. I think we like the team that we have. We’ve got a number of resources in place and but don’t forget, I mean we added a whole number of Aflac. Sales were up flat. So they continue to generate new business. We’ve got a nation-wide group of terrific brokers that we work with that are good feeders of business.

And if you look at something like we did with Ceridian, I mean the reseller relationship we have with them, I mean that’s like putting, I don’t how many more dozen feet on the street to continue to pitch the product, so although we may not be hiring existing full-time sales people here and we continue to monitor that, well where we think we need some people. I think we’re pretty comfortable with where we are at, and continue to see more people pitching our products and services in the marketplace.

Michael Huang – Needham & Company

Great thanks so much.

Joseph L. Jackson

Sure.

Operator

And your last question is a follow up question from line of Bob Napoli representing William Blair. Please proceed, sir.

Bob P. Napoli – William Blair & Co. LLC

Thanks. I just wanted to get a feel for how the acquisitions you made were progressing, the benefit concepts added a new product for you with the enrollment eligibility, so I was wondering just how those were progressing and if there’s still synergies to get out of some of the early 2012 deals Choice and TransitChek, so maybe a little update on synergies and…

Joseph L. Jackson

Sure.

Bob P. Napoli – William Blair & Co. LLC

…how are the new deals progressing?

Joseph L. Jackson

Right. Synergies, Bob, we’re continuing to execute on. I mean, I think if you – I’ll go back to the MHM acquisition, the Creative Benefits acquisition, the PBS acquisition out of Denver, with regard to especially MHM and PBS are still a number of synergies we’re driving there.

The later acquisitions of TransitChek in New York and FBMC in Tallahassee, we continue to see synergies being driven there all the time. BCI and Crosby are probably still pretty new to really talk about executing synergies there. I think we’re able to start doing there, start to generate some revenue synergies. And what we’ve seen from the COBRA product and the E&E product that BCI has brought to bear for us, that’s creating more opportunities. I was on a couple of calls this week with them talking about pretty significant opportunities there chasing with the help of our sales folks and that's great.

So I've been pleased knock wood I have been pleased with every acquisition we done and BCI and Crosby, I think will over time end up being outstanding acquisitions for us as much like the others.

Bob P. Napoli – William Blair & Co. LLC

Great, thank you. That's all I had.

Joseph L. Jackson

Sure, Bob. Thank you.

Operator

There are no further questions in the queue at this time. I would now turn the call back over to Mr. Jackson for further comments.

Joseph L. Jackson

Okay, thank you operator, and thank you all again, for your time today. It’s been an exciting time here at WageWorks. I would just conclude by saying thank you to all of our employees for making these results happen. Top to bottom, we have a great team, and I’m very proud of them and confident in their ability to continue to execute. So thank you all again and we look forward to talking to you next quarter.

Operator

Ladies and gentlemen, that concludes the presentation for today’s conference. You may now all disconnect and have a wonderful day.

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