IPO Preview: WageWorks

| About: WageWorks, Inc. (WAGE)
This article is now exclusive for PRO subscribers.

Based in San Mateo, California, WageWorks (proposed symbol WAGE) scheduled a $75 million IPO with a market capitalization of $325 million at a price range mid-point of $13 for Friday, August 5, 2011. The full IPO calendar for the week of August 1 includes 3 scheduled IPOs.

OBSERVATIONS -- WAGE provides tax-advantaged health programs for employees. The problem here is the overall uncertainty regarding health care programs, especially as related to taxes.

A second issue is the lack of internal growth:

“In each period (from 2008) our revenue growth resulted primarily from increases in healthcare revenue from portfolio purchases.”

A third issue is that WAGE originally filed for an IPO April 25, 2011. A three month delay to a scheduled pricing date sends off negative implications.

VALUATION -- In addition, revenue declined in the June quarter to $33.6 million from $35 million. A revenue decline going into an IPO is always a red flag.

In terms of pricing, at the price range mid-point of $13, WAGE would sell for 2.4 times sales, 40 times annualized six month earnings, 3.4 times book value and 9.6 times tangible book value.

40 times earnings is way too much to pay for a company with flat quarterly revenue with no apparent internal, organic growth – unless there is something major on the horizon that is not revealed in the July 19th S-1 filing.

WAGE Valuation Metrics

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

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

CLIENTS -- WAGE’s clients include 37 of the Fortune 100, 122 of the Fortune 500 and over 2,100 SMBs. At January 31, 2011, WAGE had approximately 1.8 million employee participants from more than 4,700 employer clients.

In 2010, employee participants used 1.5 million WageWorks prepaid debit cards. WAGE’s largest client represented only 3.3% of 2010 revenues and the top 10 clients represented only 13.9% of our 2010 revenues.

COMPETITION -- The market for CDBs is highly competitive, rapidly evolving and fragmented. Key categories of competitors include:
• National CDB specialists, such as PayFlex Systems, Inc. or SHPS, Inc.;
• Health insurance carriers, such as Aetna (NYSE:AET) or UHC;
• Human resources consulting firms, such as Aon Hewitt (NYSE:AON);
• Payroll providers, such as ADP (NASDAQ:ADP) or Ceridian;
• Small regional TPAs focused on CDBs; and
• Commercial banks, such as Bank of America (NYSE:BAC).

INTELLECTUAL PROPERTY -- WAGE has one issued patent which expires in 2027.

-- The sale of 5.77 million shares by WAGE is expected to net $65.3 million. The IPO proceeds are allocated for working capital, including funding of customer obligations, and general corporate purposes, including further expansion of sales and marketing efforts, continued investments in technology and development and for capital expenditures.

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