WageWorks' (WAGE) CEO Joe Jackson On Q2 2014 Results - Earnings Call Transcript

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 |  About: WageWorks, Inc. (WAGE)
by: SA Transcripts

Operator

Ladies and gentlemen, welcome and thank you for joining the Second Quarter 2014 WageWorks Earnings Call. My name is Ryan, I'll be the operator on the event, and all participants are now in listen-only mode. Later we will open the lines to facilitate question and answer. (Operator Instructions) And as a reminder, we're recording the event for replay.

Now, I'll pass the call off to Miss Lisa Sheldon, Investor Relations.

Lisa Sheldon

Thank you, Ryan. Good afternoon and thank you for joining us today to review WageWorks' second quarter 2014 financial results. With me on the call today are Joe Jackson, Chief Executive Officer; and Rich Green, Chief Financial Officer. After the 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 the Federal Securities Laws, including the projections of future operating results for our third quarter of 2014 and our fiscal year ending December 31st, 2014.

Expected benefits of our acquisition of CONEXIS, our selling efforts, and the anticipated benefits from those efforts, anticipated benefits of the modification to the Use-It-Or-Lose-It relating to healthcare flexible spending accounts, expected benefits from our channel partnerships, and from 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 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, and 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, or integrate additional portfolio purchases, acquisition targets or channel partners, capitalize on exchange opportunities, and risks related to employer and employee adoption of tax advantageous benefit 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, and elsewhere in our quarterly report on Form 10-Q for the period ended June 30th, 2014.

Given these uncertainties, you should not place undue reliance on these forward-looking statements. These statements reflect WageWorks' views only as of today and should not be relied upon as representing WageWorks views as of any subsequent date.

WageWorks expressly disclaims any obligations or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. You should review WageWorks' SEC filings carefully, and with the understanding that actual future results may be materially different from what WageWorks expects.

Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation to the most directly comparable GAAP financial measure is available in our second quarter 2014 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?

Joe Jackson

Thank you, Lisa, and I'd like to start by thanking you all for joining us today. We just finished a very successful first half of 2014, as demand for consumer-directed benefits continues to grow, and we continued to execute on our stated objectives.

Our enterprise selling season is going extremely well, with several new significant signings. We also saw an increase in FSA participation rates for our mid-year start clients, who took advantage of the change to the Use-It-Or-Lose-It provision. The onboarding of Ceridian clients to the WageWorks' platform continues to progress according to plan, and it's largely complete.

And finally, we are thrilled about the acquisition of CONEXIS, a recognized leader in employee benefits administration, as well as our new channel partnership with their former parent company Word & Brown, one of the most reputable names in the health insurance and employee benefit space.

I'll provide more details on each of these areas in a moment, but first, let's review the financials. We had a strong second quarter, reporting total revenue of $58.8 million, an increase of 8% over the prior year period. On an organic basis, revenue grew 7%, in line with our expectations.

As a reminder, we expect our organic growth rates to accelerate in the back half of the year, as we have now onboarded several new mid-year start clients as well as a significant portion of the Ceridian business.

We continue to expect our 2014 organic growth rate to be between 9.5% and 10.5%. Non-GAAP adjusted EBITDA was very strong at $17.5 million, an increase of 17% over the prior year period.

This year's selling season is progressing very well. 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, including the state of Kentucky, which will now become one of our top 10 clients, and Stifel Financial Corporation, which is now an HSA, FSA, and commuter client.

As you know, our enterprise selling season is in full swing in the third quarter, and we're optimistic about our ability to close an increasing amount of new business. We also continue to see positive results from our cross-selling efforts.

As an example, Baylor Health Care and the Mitre Corporation, both current FSA clients, will be adding HSA effective in January. Our SMB sales efforts, which are more third and fourth quarter based, are also off to a solid start.

The carryover provision for FSAs has generated a positive impact on employee participation in those employers who have already adopted the amended rule. For our mid-year start employer clients that took advantage of the carryover, we saw a double-digit increase in enrollments. Our marketing team continues to be very active with education and awareness programs to support the important Fall Open Enrollment season.

We believe the two data points we have now are encouraging, and continue to expect even more widespread adoption of the carryover provision yet this year and a resulting increase in FSA enrollments each of the next few years.

As always, we will keep you updated on our progress and provide you with the results of the 2015 Open Enrollment season on our fourth quarter earnings call.

The transition of Ceridian accounts to the WageWorks' platform continues, and is tracking to our full year expectations. We now have the vast majority of their clients on our platform. We will bring on several thousand more participants between now and the end of the year, with the final few large employers transitioned at the end of this year, and we continue to expect the annual organic revenue impact at the full run rate to be $9.5 million to $11.5 million.

Turning to our exciting announcement of the acquisition of CONEXIS. With a commitment to outstanding customer service, CONEXIS serves the needs of over 16,000 organizations of all sizes by providing account-based plan services, as well as COBRA administration and Direct Bill services to corporations, state and local governments, and business process outsourcing companies. They also provide public and private exchange services to insurance carriers and health plans.

Rich will take you through the financial details during his remarks, but I wanted to emphasize that CONEXIS is a great strategic fit for WageWorks, meeting our acquisition criteria head-on by growing our customer base, enhancing our platform, expanding our presence within private and now public exchanges, as well as establishing a relationship with a new channel partner.

A particularly exciting component of CONEXIS is Connector. Connector is a technology platform that supports the participation of health carriers in federal and state public insurance exchanges. With Connector, individual enrollments in a carrier's insurance plan through a state or federal exchange are collected and transmitted to CONEXIS.

CONEXIS validates and processes the enrollment and eligibility information, then provides ongoing premium billing, remittance and customer care services on behalf of the carrier. Connector relieves carriers of many of the administrative complexities and IT integration requirements for participation in the public exchanges so they can concentrate on underwriting and customer care for their offerings.

Connector is already operational within 10 state exchanges, three of which are running on the Federal exchange and we're hopeful that additional opportunities will arise for WageWorks within public exchanges.

I'm also pleased to announce that we have established a channel partnership with the Word & Brown Companies, which includes one of the largest general agencies in California and Nevada. Currently, two of their subsidiaries offer CONEXIS' Consumer- Directed Benefits and COBRA related services to their customers.

They have thousands of general agents who will continue offering on an exclusive basis, the CONEXIS products as well as WageWorks products, including HSA, HRA FSA and commuter. We are excited about this new relationship and continue to believe that channel partnerships are an integral piece of our growth strategy.

Today, we also announced that Rich Green, our CFO will be leaving WageWorks to pursue other opportunities. Rich will stay on as CFO over the next few months until his successor is found in order to ensure an orderly transition. We have initiated a search for his successor and expect to conclude the search process in the near future.

Rich has been instrumental in our success, guiding WageWorks through a successful IPO, creating a track record of strong financial results and providing outstanding leadership. We thank him for his efforts and wish him all the best in the future.

I'll close by saying that I'm very pleased with the progress we have made in the first half of the year and expect our track record of solid execution to continue throughout the selling season, as we meet the needs of new and existing employer clients and their employees through our diverse offerings and outstanding customer service.

I'm very happy to welcome the CONEXIS team to the WageWorks family and I'm excited about the new opportunities our partnership with the Word & Brown Companies creates. And now, with our involvement in public exchanges, our addressable market continues to expand and I now believe more than ever that we are just getting started.

With that I'll turn the call over to Rich Green. Rich.

Rich Green

Thanks Joe. I'll start by providing details on our strong financial performance during the second quarter of 2014, then I will discuss the expected financial impact from CONEXIS, and our financial guidance for the third quarter and full year 2014.

Total revenue for the second quarter was $58.8 million, an increase of 8% over the same period last year. Healthcare revenue was $37.6 million for the quarter, an increase of 11% compared to the second quarter of 2013.

Commuter revenue was $15.1 million for the second quarter, an increase of 2% over the same period last year. Other revenue was $6.1 million, an increase of 2% compared to the same period last year.

Let's turn to cost and margins. Again, we will review our numbers on a GAAP basis and were applicable on non-GAAP basis. The non-GAAP numbers for the second quarter excludes stock-based compensation expense, the amortization of acquired intangibles, contingent consideration expense and a 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 margin for the second quarter was $37.6 million and represents gross margin of 64%, compared to 63% gross margin in the second quarter of 2013. Operating expenses totaled $29.7 million in the second quarter, compared with $27.9 million in the same period last year.

In the second quarter of 2014 we had approximately $4.5 million amortization and change in contingent consideration versus $4.7 million in the second quarter of 2013. As a result, our income on operations on a GAAP basis for the second quarter was $7.9 million, representing an operating margin of 13.4%, an increase compared with GAAP operating income of $6.7 million or an operating margin of 12.3% in the same period last year.

Our non-GAAP income from operations was $14.5 million for the second quarter, representing a non-GAAP operating margin of 24.6%. For the same period last year, non-GAAP income from operations was $11.9 million, representing a non-GAAP operating margin of 21.9%. Again, we are very pleased with the leverage that we've been able to produce in this business and obviously we intend to continue to scale into the future.

Our GAAP net income was $4.6 million or $0.13 per share based upon 36.3 million diluted shares in the second quarter of 2014 and this compares to GAAP net income of $4 million or $0.11 per share based up on 35 million diluted shares in the second quarter of 2013.

On a non-GAAP basis, our net income was $8.6 million for the second quarter of 2014, which assumes a tax rate of approximately 40% compared to a non-GAAP net income of $74.1 million of the second quarter of 2013 which assumes a tax rate of 40%.

Non-GAAP net income diluted share exceeded our guidance and was $0.24 for the second quarter of 2014 and $0.20 for the second quarter of 2013 based up on 36.3 million and 35 million shares outstanding respectively.

Non-GAAP adjusted EBITDA for the second quarter was $17.5 million and exceeded our guidance. This compares to $14.9 million in the second quarter of 2013, an increase of 17% over the previous year period.

Now before turning to guidance, I want to spend a moment on the financial details of the CONEXIS acquisition. WageWorks paid $118 million in cash for CONEXIS. The transaction was financed both by cash on the balance sheet and drawing down of approximately $50 million from our credit line.

For the remainder of 2014, we currently expect CONEXIS to contribute $23 million to $ 25 million in revenue and to have a slightly positive impact to adjusted EBITDA. We also expect CONEXIS to have a meaningfully positive impact to adjusted EBITDA in 2015 as we realize revenue and operating expense synergies.

A GAAP net income per diluted share basis, we expect the acquisition to be neutral to marginally accretive for the remainder of 2014, again after transaction and acquisition amortization cost.

For the third quarter of 2014, given that we've only had CONEXIS on board for two months, we expect the acquisition to contribute $8 million to $9 million in revenue to have a marginally positive impact to adjusted EBITDA. On a GAAP net income per diluted share basis for the third quarter of 2014, we expect the acquisition to be neutral after transaction and acquisition amortization cost.

Now, let's turn our thoughts to the third quarter and full year 2014. Again, this is inclusive of CONEXIS. Starting with the third quarter, we expect total revenue to be in the range of $66.5 million to $67.5 million. GAAP net income diluted share of $0.09 to $0.11 and non-GAAP net income per diluted share of $0.21 to $0.22.

Our expectation of non-GAAP net income per diluted share for the third quarter excludes stock-based compensation expense, the amortization of acquired intangibles, contingent consideration expense and the related tax impacts for these items.

GAAP and non-GAAP net income per diluted share assume a tax rate of approximately 40% and weighted average shares outstanding of 36.5 million. Non-GAAP adjusted EBITDA for the third quarter of 2014 is expected to be in the range of $16.4 million to $17 million.

For the full year 2014, we now expect total revenue to be in the range of $263 million to $265 million. GAAP net income per diluted share is expected to be in the range of $0.46 to $0.50. Non-GAAP net income per diluted share is now expected to be in the range of $0.90 to $0.93.

Our expectation of non-GAAP net income per diluted share for the full year excludes stock-based compensation expense, the amortization of acquired intangibles, contingent consideration expense and the related tax impacts for these items.

GAAP and non-GAAP net income per diluted share assume tax a rate of approximately 40% and weighted average shares outstanding are expected to be approximately 36.8 million. Non-GAAP adjusted EBITDA for the full year of 2014 is now expected to be in the range of $69 million to $70.2 million.

So, in summary, we are extremely pleased with our second quarter performance, and believe we're well positioned to successfully execute on our strategy and growth objectives during the rest of 2014 and into the future.

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

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes through from Bob Napoli, William Blair.

Bob Napoli - William Blair & Co.

Thank you. Good afternoon. I guess on the CONEXIS acquisition as we think about 2015, the amount of revenue that is generated if you take what you gave for the balance of 2014 that would suggest about a $60 million of revenue full year for CONEXIS and you know kind of what is the growth rate of that business? What would you expect in 2015? And then related to that if you could talk about EBITDA margin expectations.

Joe Jackson

Hi Bob, it's Joe. Thanks for your question. That's right I think the way I would look at CONEXIS as far as the 12 months of this year really even the trailing 12 is to be kind of in the low 60s and I would say the way you could look at that would be to assume that their kind of organic growth rates are similar to what ours are. I think that's the best direction I can give you.

There are some intangibles yet to be determined going into 2015 with the Connector product with some other new sales that you know that they continue to realize, but I think that's a good barometer to use.

With regard to EBITDA margins, I think like most acquisitions that we've done historically, their EBITDA margins would be somewhere south of what we are today, and I would anticipate that kind of over the next 12 to 18 to 24 months that you would see them at least up to kind of the WageWorks EBITDA margins based upon kind of what we see today.

Bob Napoli - William Blair & Co.

Okay. And then I mean I guess if you could talk about the product mix in CONEXIS as the -- the COBRA sounds like it's a big part of that and I wasn't sure, I think COBRA I mean there some different views of where COBRA is going long-term is you give kind of a feel for the mix of product and then why you felt that mix or the products that they have was going to be able to continue to grow at the same rates?

Joe Jackson

Right so if you broke down their business today, I would say the largest part of it would be COBRA Direct Bill and then probably health care products kind of like what we offer today, and then probably the rest of that made up through the Connector product which I think is a pretty fast-growing product at this point.

So, you know from a COBRA perspective, the law is not going away, Direct Bill I think we're selling more Direct Bill this year than we have in any year in the past, so we are optimistic about those two products continuing to be offered and allow us to be able to scale those going forward.

The healthcare business obviously makes sense, it is right in what we do today and then with the Connector product now being involved somewhat significantly in the public exchange marketplace as well as the private exchange marketplace, it is hard to determine kind of the growth trajectory of that product to-date, but there's some exciting potential going forward.

Bob Napoli - William Blair & Co.

Okay. And then the Liazon -- is that -- the partnership with Liazon is that now up and running? And what are your thoughts on the Liazon product and the HSA product? Are you -- is that product all coming to you? Maybe talk a little bit about Liazon.

Joe Jackson

Well first of all yes that product is coming to us. Liazon is obviously part of Towers One Active Exchange. We are working first of all we are ready to begin taking volume on both of their exchanges. They report I believe it some point next week so with regard to the details of the volumes and the employers that they are signing up with those exchanges as you can imagine I'm going to leave that to them to talk about. But rest assured we're working very closely with both groups and anticipate a lot of success going forward. They are great partner to work with.

Bob Napoli - William Blair & Co.

And then my last question and I'll turn it over. Rich, what made you decide to want to move on?

Rich Green

Hi Bob. Well first of all, it has been a great six years at WageWorks. Certainly, Joe and the team and we've accomplished a lot and it's certainly been a privilege to work. But it's kind of my career was time to look at some other opportunities and see what else I could do. But in terms of a kind of the business itself, it's certainly I'm going to make it a smooth transition and I'm confident that Joe and team cannot skip a beat and a lot of success in the future, so nothing more than that.

Bob Napoli - William Blair & Co.

Okay. Thank you.

Joe Jackson

Thanks Bob.

Operator

Next question comes through from David Grossman - Stifel Financial.

David Grossman - Stifel Nicolaus

Thank you.

Joe Jackson

Hey, David.

David Grossman - Stifel Nicolaus

Hey Joe, hey Rich. I was just looking at the price for CONEXIS, which obviously is a little bit bigger prize than you paid out at least on a revenue multiple than what you've done historically for much smaller businesses and just wondering if that you could help us understand does that reflect perhaps the technology element that didn’t exist in the other that scale or is the market perhaps getting a little more competitive for some of the bigger assets out there?

Joe Jackson

Yes, I don't think that there's a real comparison between CONEXIS and some of the other deals that we've done right much, much smaller. So, I've always said that from a portfolio purchase standpoint kind of our stated strategies with regard to multiples that we pay the earn out process, et cetera, the blueprint that we will continue to utilize.

I think with this transaction -- I also always said that we would like to do more strategic acquisitions as well where they presented themselves. And clearly this is one that presented it -- that presented to ourselves over the last few months.

When I look at the fact that we eliminate a strong competitor in the industry really looking at kind of four portfolio purchases in one here, a channel partner -- channel partnership relationship with ongoing revenue there, the Connector product which now puts us square in the middle of administration and the public exchanges as well as private exchanges and number of the carrier relationships that they have, the large clients, the great service that they provide, the loyal client base and broker base that they have, and I think when I kind of look at some of the other comparables, maybe not exactly in our space, but kind of in our industry, we feel real good with the price that we paid.

David Grossman - Stifel Nicolaus

And just in terms of underlying profitability of the Connector business, should we assume that if that gains momentum and gets to scale that that should be over time a higher margin business than the remainder or should attract pretty much in line with the healthcare business and the other administrative businesses that you have?

Joe Jackson

Yes, David, I'd say it's probably a little early to tell exactly where it's going to end up. But I would say as we've kind of gone in and looked at it I think our intentions would be to bring it at least kind of where our corporate margins of benefit ends up higher than that, that's great, but I think we're still a little early days yet to really determine kind of what that will be it, kind of full ramp.

David Grossman - Stifel Nicolaus

Okay, got it. Thanks for that and let me just kind of ask a broader question about the market. There's a lot of cross-currency here now with obviously the HSAs gaining momentum, the change in the FSA rule, and obviously the use of HRAs.

I'm wondering if you could help us better understand the relationship. For example when someone takes an HAS, are you able to isolate what the trend is if they previously had an FSA, so does the HSA business at all cannibalize the FSA market?

And I guess secondly, on the HRAs, do you have any data that can help us better understand what grade the HRA market is growing? And what you know I assume the HRAs really not in employee choice but an employer choice and any metrics that you can give is to help us understand the underlying trend there as well?

Joe Jackson

Okay. I don't know that I have a lot of new news there, but if I can't reiterate kind of what we've talked about, I think we are in a really enviable position. You have three products whether it's in FSA and HSA or an HRA, all growing, all have positive outlooks, going forward.

FSAs, we believe -- and from what we're seeing, data is backing up the fact that we believe FSAs will continue to accelerate and are gaining momentum just like HRAs and HSAs for continued growth in the marketplace.

I think more and more employers are going to take advantage of the carry over provision and my stated goal all along has always been to kind of move this industry from kind of a one in five rate to two in five participation rate. I think we are well on our way to getting there and then hopefully in the next few years you start to talk about three in five. But that product is growing and has momentum.

HSAs, another product, growing with a lot of momentum, especially in some of the private exchanges we work with as well as just clients directly. I mentioned, the MITRE Corporation and Baylor Healthcare, who have an FSA today, who are introducing an HSA and providing that business to us, I think, in many ways because of the consolidated platform that we have that lets employers offer and support all of these products on one consolidated platform and on one plastic.

So HSAs we are seeing ramp up. We are seeing a lot more new clients that have signed up so far this year. And the remainder of the year and then HRAs, you are right its employer offered and the good news there, as I think that’s really centered along kind of the employer mentality going forward to provide wellness initiatives to their employees to help them maintain their health, understand some of the concerns that they may have in maintaining health.

And I think some of the components that whether it’s a high-blood pressure test, whether it’s a health risk assessment or a biometric screening, all of those type of things, I think employers are adapting and embracing and will continue to over the next several years.

So, I don’t have a lot of specific data at my figure types with regard to the growth in HRAs, but I would still standby my view that currently about two-thirds of our account base are FSAs, about a third are HRAs and HSAs, all three growing and I would say over the next few years if we had the same conversation, I would tell you that FSAs and HRAs and HSAs would be about half -- if you combine HRAs and HSAs together, about half -- 50% each of what we do.

So, very optimistic about the continued growth. I think these products are being embraced and adopted more and more each year and will continue to going forward. It’s a great way for people to utilize pre-tax dollars to fund out-of-pocket healthcare expenses which continue to go up.

David Grossman - Stifel Nicolaus

All right. Thanks for that. And just finally, on Liazon, and I'm not sure maybe I missed this in the last question. But do you have a sense yet of -- I think you went live with them July 1st, are you expecting that the vast majority of the install base comes over, over time or is that when they renew their plan year that they would then have the opportunity to switch over your platform?

Joe Jackson

Well, I think the plan is to switch them over when they kind of anniversary their plan date.

David Grossman - Stifel Nicolaus

Is there a particular concentration of when the portfolio turns over?

Joe Jackson

I'm assuming much like most employers the majority of that would be kind of end of the year 12/31/11. But if I remember right, I think there are several clients that are March implementation or March plan year dates, June plan year dates. I think we still have some coming up this year in October. So -- but the majority, David, is probably going to be at the end of the year.

David Grossman - Stifel Nicolaus

Okay. Very good. Thank you. And Rich good luck.

Rich Green

All right. Thanks.

Joe Jackson

He is not going anywhere right away. So -- all right. Okay. Next question.

Operator

Next, you have David Scharf with JMP.

David Scharf - JMP Securities

Yeah. Good afternoon. Thanks for taking my call. First thing, in terms of assessing the new channel partnership with Word & Brown, I mean, I know in the past when you inked arrangements with both Aflac and Ceridian and you attempted to quantify what the annualized impact could be and obviously that was more direct in terms of converting certain number of accounts over.

But is there any similar type color you could help us with in terms of how to think about this channel arrangement?

Joe Jackson

Well, if you really wanted to look at it, they owned CONEXIS. So, if you think about their revenue being in the low $60 million than we now own that particular channel for them. So, on the other deals when we quantified numbers, it was quantifying numbers of their existing business. So, the low $60 million in revenue for CONEXIS would kind of be their business. How much of that has actually come from the Word & Brown Companies over the last few years, I don’t have a number on.

David Scharf - JMP Securities

Okay. It was really the -- yeah, that was what I was curious about. Okay.

Joe Jackson

Yeah, yeah. So, they, along with Aflac, along with Ceridian, along with Towers, along with several other kind of distribution partner channel partnerships that we have kind of bring additional revenue each year that kind of goes into our organic mix and we are excited about what I think these folks can bring to the table.

David Scharf - JMP Securities

Got it. Got it. Helpful. And Joe on the private exchange side, I mean, obviously, we will hear more from Towers next year and -- as far as the opportunity there. Everybody has read the same three white papers. But is there just any kind of anecdotal industry chat over the last couple of months from benefits consultants, brokers, agencies, you can share with us particularly, in terms of what you think the SMB adoption might be not just for wage, but more broadly nationally?

Joe Jackson

Yeah. I don’t know that I have any industry scuttlebutt or rumors or anything. Other than I haven’t read a negative piece on private exchanges, yet all seems to continuing to grow and actually growing to larger numbers than what we thought where larger numbers a year ago.

So, when asked and when I kind of looked at it, I don’t know exactly what the ramp up will be for employers going forward. And Towers, I'm sure will give a very good kind of current status on where they are at going into to 2015 and what they think 2016 and 2017 look like.

But what I tell people all along is, whatever they come up with and whatever their plans are going forward and whatever we see the adoption of employers into private exchanges become, there is no bad news for us.

If they are above expectations, that’s great news, at expectations, great news and below expectations, great news. I just think that I'm bought into the fact that what those white paper say is the -- I think there is clear value not only to the employer but to the employee on what we are seeing these private exchanges become.

And I think that the sky limit to where they are going to be. The ramp up of how long it takes to get there, I think Towers will shed some light on that and that’s really theirs to shed. But whatever they end up with, we’re going to be thrilled and pleased with what we get.

David Scharf - JMP Securities

Got it, got it. We will stay tuned. And a housekeeping item here, I haven’t done all the math here. But just quickly looking at the new guidance, it looks like revenue -- is it fair to say that the revenue guidance was updated slowly for the acquisition, no change to the organic outlook from a quarter ago?

Joe Jackson

Well, to be honest with you David, over the last few weeks is we are trying to close this transaction and get the numbers in place. I haven’t spent a lot of time trying to dissect what -- who was what and what was which beforehand. I think we feel really good about the revenue range that we've -- obviously, real good about the revenue range we provided today, which combines the CONEXIS business for the two months of the third quarter and the full year with ours.

I think -- but I would say from -- maybe some guidance for your thoughts there would be that, I felt -- I would still feel real good about the revenue range that we provided prior to CONEXIS, at least that range. And then from what we are seeing going forward, a combination of the two companies obviously is going to make it better overall going forward, obviously.

David Scharf - JMP Securities

Got it. And just one last one, on the midyear employers, it sounds like very nice increase in participation rates. Sounds like it was kind of similar to the -- those initial 1,200 at the end of the day…

Joe Jackson

David, I would -- go ahead, go ahead.

David Scharf - JMP Securities

Well, I was just going to follow-up and inquire of those that shows to take advantage of the carrier overprovision at midyear. What percentage of the available employers with midyear did that represent?

Joe Jackson

Probably a -- I don’t have the exact percentage, because we will have a lot of midyear employer -- kind of those midyear starts where we have 29,000 employers, so you can imagine you’re going to have some with three employees kind of a thing starting midyear. What I would tell you, overall though is, a nice portion -- probably at least half took advantage of the carry over. It's not a big number though.

And if I'm honest, I kind of look back at the 1,200 that took advantage of the carry over at the end of the last year coming into January of this year and remember I said that was kind of a mid-to-high-teens increase, I think what we saw in the second quarter is definitely double-digits, but I would call it more low-to-mid-teens.

And I don’t think that we see really anything negative than that. I think we are just pleased to see that kind of bump in enrollments, whether it's 12%, 15%, 18%, 19%, I think as we continue to educate and people start to understand the value of what's on the table for them, we're going to see over the next few years' significant growth in flexible spending accounts.

David Scharf - JMP Securities

Got it. Got it. But the universe that did have midyear enrollments -- over 50% actually took advantage of carry over, is that right?

Joe Jackson

Yeah, I think that’s about right. Small numbers, though, small number and small employers.

David Scharf - JMP Securities

Right. Got it, got it. Thanks so much.

Joe Jackson

Sure.

Operator

Next we have Tobey Sommer with SunTrust.

Joe Jackson

Hi, Tobey.

Tobey Sommer - SunTrust Robinson Humphrey

Hello, good afternoon. I'm curious, how you see progress in adoption on the exchanges this fall and if you still think there is an opportunity for WageWorks to maybe even increase and expand its exposure beyond their relationship with Towers and Liazon. Thanks.

Joe Jackson

Yeah. Well, I think with this CONEXIS transaction, we've expanded our relationships in the private exchanges and established a significant relationship within public exchange. I think we'll continue to expand relationships within, hopefully, both of those areas over the next couple of years.

I think it becomes, as I've stated before, the exchange business is going to become a viable revenue grower for us each year with as far as number of accounts coming on board. It probably wound up being a significant growth area for us going forward. But that will combine with revenue generated from channel partners, revenue generated from new employer accounts, revenue generated from more people taking advantage of accounts or taking advantage of products within existing accounts, cross-selling of new products.

Now the public exchange opportunity with Connector in our addressable market continues to expand. We are thrilled about it and I think that we are going to end up getting more than our fair share of that going forward.

So the -- whatever is announced with regard to employers moving from defined benefits to defined contributions this year with regard to exchanges, I think any of that will be positive for 2015 along with the other revenue components that we have, growth components that we have. And I think it just going to get bigger going forward especially on the exchange side.

Tobey Sommer - SunTrust Robinson Humphrey

Thanks Joe. I'm curious of your larger customers as they look at their plan design for this fall, if you've seen a shift with a more significant proportion of those customers moving exclusively to high deductible plans?

Joe Jackson

Yeah, I would say we've seen a shift over time -- this is probably over the last few years where people began offering high deductible plans and they are becoming more and more popular. And if you look at the large employers, I would say the vast majority offer some type of a high deductible plan today.

I think they are continuing to promote them just as they are other insurance lines. But the high deductible health plans would be probably the most popular and the most growing area of the overall coverage offerings.

I wouldn’t say that we are seeing a movement of really any of our larger employers to adjust the high deductible health plan offering. I think we've talked to a number of them, they said they'd like to get there over time, but I haven’t seen kind of the spigot being shot off immediately and says, well, now you have to pick a high deductible health plan I think that continue to promote them, continue to push them but there's PPOs and HMOs and other offerings as well.

Tobey Sommer - SunTrust Robinson Humphrey

Okay thanks. And just curious from a growth perspective, with what's ahead of you with the change in Use-It-Or-Lose-It in the move to higher deductible and consumer driven healthcare and exchanges what you see as the governors to growth for your business sort of operationally and if growth is going to accelerate as I think it is, where do you see the pressure points in the business trying to ramp up that pace of growth?

Joe Jackson

Look we -- I think we have a blueprint in place that we can execute on and it worked very well. I think we have a management team that has a lot of experience not only here at WageWorks, but in previous roles of running organizations and scaling organizations much larger than we are today.

I'm not sure that there's a governor that I look at. Our strategy is to have the biggest footprint in the marketplace. And that will come from all of the revenue growth components that I talked about earlier as well as continued consolidation.

We're not done with the portfolio purchase program. We have a nice pipeline out there. We're continuing to work that. But I'm really confident in our team's ability to continue to grow to continue to grow at an increasing rate and most importantly to continue to scale.

We maintain a laser-focused approach on ensuring that our expense line is growing slower than our topline. And when you have that as a philosophy and a core belief, going forward, we should be able to continue to scale and continue to provide outstanding results similar to what you've seen over the past couple of years.

Tobey Sommer - SunTrust Robinson Humphrey

Thank you very much. Just one numbers question for me. I didn't quite catch the third quarter EBITDA guidance, if you could repeat that, that would be great. Thanks.

Joe Jackson

Sure. Yes, just give me one second.

Rich Green

$16.4 million to $17 million.

Joe Jackson

$16.4 million to $17 million.

Tobey Sommer - SunTrust Robinson Humphrey

Thank you very much.

Rich Green

Sure, no problem.

Joe Jackson

Thanks, Toby.

Operator

We have another question coming -- some follow-up coming through from Bob Napoli again with William Blair.

Bob Napoli - William Blair & Co.

Thank you. Just on the CONEXIS, does that company come with key management that will remain with the business?

Joe Jackson

Absolutely. A senior leadership team there that is based in Irving, Texas, and the management team or their leadership team who Edgar and I spent a lot of time with last week remains intact, engaged, and already hitting the ground running.

Bob Napoli - William Blair & Co.

Okay. And then, was the deal competitive? And what was the process? How long have you been looking at it?

Joe Jackson

Well, I've been talking to the folks at the Word & Brown companies off and on for the last four or five years. And we really started talking a few months ago about establishing a mutually beneficial relationship going forward, much to what I've described today.

And I think we looked at them and their philosophy of service, and their passion about service and client satisfaction. When you compare that to ours, there's a lot here that's one plus one equals three.

So, I think both companies felt like this was the right transaction to move forward with. We concluded it in a fairly rapid rate and now feel good about the combination of both companies, which I said this already started. So, we're hitting the ground running, day one and expect a lot of positive outcomes going forward.

Bob Napoli - William Blair & Co.

Great. And then, just a big picture question on the exchanges. I think there's a little bit of confusion, or at least I'm confused, about whether if a large company moves into the Towers Exchange per se, large or small, but probably more difficult for large.

But if they're using a competitor's products on HSAs or FSA accounts and they go into the Towers Exchange, is there -- is it clear that they have to go with the Towers HSA product? Or if it's in the Liazon business with that product, or can they stay with the current provider that they have?

Joe Jackson

Well, let me -- I can try and be real clear here. If a company decides to go there's a defined contribution method and enter the Towers One Active Exchange, then they will be using WageWorks' HSA and HRA products, period. So, if they have existing HSA and HRA products, either those will -- well they won't be part of the exchange. So inside that exchange, Bob, when an employer comes in, if they have an HRA or an HSA, that comes to us. We're the exclusive provider for employers within that exchange.

Bob Napoli - William Blair & Co.

Great, thanks. And this last question, I'm still a little confused I guess on the public exchange piece. On what Connector is going to do and what the opportunities are for WageWorks in public exchanges?

Joe Jackson

Well, if you think about it, we're working with a major carrier today with the Connector product. And as that carrier offers insurance services within a public exchange, and an individual decides to take insurance coverage from that carrier, then the enrollment, eligibility qualifications, et cetera are done by WageWorks. And ongoing, as I mentioned, the premium billing, the customer care will all be handled by WageWorks.

Bob Napoli - William Blair & Co.

Okay, great. Thank you.

Joe Jackson

Well, or I should say CONEXIS, a division of WageWorks.

Bob Napoli - William Blair & Co.

Right. Okay. Thank you.

Joe Jackson

Sure.

Operator

We have no further questions in queue.

Joe Jackson

Okay. All right, operator, well thank you and thank you all for being on the phone today. It's been an outstanding quarter for us. I think when we look at our performance, topped with the CONEXIS acquisition for all of the things that I talked about from the standpoint of eliminating a competitor, establishing a channel partner relationship, involvement in public exchanges. The carrier relationships and large clients that come with it, like I said, it's head on into our acquisition strategy, and the strategy of our company as a whole.

So, I do say a lot that we're just getting started as a company. But I think when you look at all of those components, now bringing in the public exchange capability and opportunity, our market is expanding. And we plan to take it manage of it.

So, thank you all again. By the way, a quick welcome to I'm sure there's many people listening today in Orange, California and Irving, Texas, wanted to give a shout out to all the CONEXIS employees that are listening in. And we thank you all. We look for to working with you, and we welcome you to WageWorks.

And then I give another quick thank you to all the people at WageWorks that made this transaction happen, and everything they do to continue to show these results. So, proud of all of you, and look forward to updating you all next quarter on our results. Thank you very much.

Operator

Great thanks, everyone, for your time and your participation. And you may disconnect, and have a great rest of the day.

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