IPO Preview: WageWorks

| About: WageWorks, Inc. (WAGE)

Based in San Mateo, California, WageWorks (NYSE:WAGE) scheduled a $75 million IPO with a market capitalization of $283 million at a price range mid-point of $11, for Thursday, May 10, 2012. [S-1]

WAGE is one of 12 IPOs scheduled for the week of May 7 (Full IPO calendar here).

Manager, Joint Managers: William Blair; Stifel Nicolaus Weisel.

WAGE is an on-demand provider of tax-advantaged programs for consumer-directed health, commuter and other employee spending account benefits, or CDBs, in the United States.

The March quarter is seasonally high, and for 2012 WAGE generated revenue of $44 million up from $35 million for the March 2011 quarter. Adjusted, fully taxed earnings were $2 million up from $1.9 million for the year earlier quarter.

March 2012 quarter earnings were essentially flat in even though revenue 25% compared to the year earlier quarter. There's seems to be no reason to chase after WAGE on its IPO.

WAGE is a leading on-demand provider of tax-advantaged programs for consumer-directed health, commuter and other employee spending account benefits (also called 'CDBs') in the United States.

WAGE administers and operates a broad array of CDBs, including spending account management programs such as health and dependent care Flexible Spending Accounts, Health Savings Accounts, Health Reimbursement Arrangements, and commuter benefits, such as transit and parking programs.

WAGE's business and operational results are subject to seasonality as a result of open enrollment for CDB programs and decreased use of commuter program offerings during typical vacation months.

The number of accounts that generate revenue is typically greatest during the first calendar quarter due primarily to three factors.

  • New employer clients and their employee participants typically begin service on January 1.
  • During the first calendar quarter, WAGE is also servicing the end of plan year activity for existing clients and employee participants who do not continue participation into the next plan year.
  • WAGE receives the majority of cash for pre-funded accounts from employer clients in late December or early January, which results in higher cash balances during our first quarter.

In comparison to other quarters, revenue is highest in the first quarter and lowest in the second and third quarters. Thereafter, WAGE's revenue generally grows gradually in the fourth quarter as employer clients hire new employees who then elect to participate in WAGE's programs, thereby increasing the monthly minimum billing amount. The minimum billing amount is not, however, generally subject to downward revision when employees leave their employers because WAGE continues to administer those former employee participants' accounts for the remainder of the plan year.

WAGE has one issued patent which expires in 2027.

The market for CDBs is highly competitive, rapidly evolving and fragmented. Key categories of competitors include:

National CDB specialists, such as TASC or SHPS, Inc.;
Health insurance carriers, such as Aetna or UHC;
Human resources consulting firms, such as Aon Hewitt;
Payroll providers, such as ADP or Ceridian;
Small regional TPAs focused on CDBs; and
Commercial banks, such as Bank of America.

WAGE also competes against many regional third party administrators who often lack sufficient resources to rapidly implement new technologies or to tailor their operations and service offerings in response to evolving rules and regulations.

VantagePoint Capital Partners, 75% pre-IPO
Advent International Corporation, 12% pre-iPO
Entities affiliated with Camden Partners, 10% pre-IPO.

At December 31, 2011, WAGE had 838 employees, including 717 full-time employees

WAGE expects to net $61.1 million from its IPO with proceeds allocated to working capital and general corporate purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This WAGE IPO report is based on a reading and analysis of WAGE's S-1 filing which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.