WageWorks (WAGE) Joseph L. Jackson on Q4 2015 Results - Earnings Call Transcript

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WageWorks, Inc. (NYSE:WAGE) Q4 2015 Earnings Call February 18, 2016 5:00 PM ET

Executives

Kimberly L. Wilford - Senior Vice President, General Counsel & Corporate Secretary

Joseph L. Jackson - Chief Executive Officer & Director

Colm Callan - Chief Financial Officer

Analysts

Bob P. Napoli - William Blair & Co. LLC

David M. Scharf - JMP Securities LLC

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

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Stephen B. Lynch - Wells Fargo Securities LLC

Steven Wardell - Leerink Partners LLC

Steve J. McManus - Sidoti & Co. LLC

Operator

Good day, ladies and gentlemen, and welcome to the WageWorks Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to turn the conference over to Kim Wilford. Please go ahead.

Kimberly L. Wilford - Senior Vice President, General Counsel & Corporate Secretary

Thank you, operator. Good afternoon and thank you for joining us today to review our fourth quarter and full year 2015 financial results. With me on the call today are Joe Jackson, Chief Executive Officer; and Colm Callan, Chief Financial Officer. After prepared remarks, we will open the call up 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 first quarter of 2016 and our fiscal year ending December 31, 2016; expected benefits of our acquisition of CONEXIS, our selling efforts and the anticipated benefits from those efforts; anticipated benefits of a carryover provision as it relates to Healthcare Flexible Spending Accounts, expected benefits from developments in the commuter space, changes in one of our custodial arrangements, our channel partnerships, portfolio purchases, and exchange opportunities; the demand for consumer-directed benefits; market trends for the industries in which we compete, our expectations and beliefs concerning how those trends will affect our operating results, and our strategic and operational plans, objectives and goals.

These statements are based on our 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 or integrate additional acquisition targets or channel partners to capitalize on exchange opportunities and risks related to employer and employee adoption of tax advantaged 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 under the section caption Forward-Looking Statements and elsewhere in our Quarterly Report on Form 10-Q for the period ended September 30, 2015. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These statements reflect our views only as of today, and should not be relied upon as representing our views as of any subsequent date. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. You should review our SEC filings carefully and with the understanding that actual future results may be materially different from what we expect.

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 fourth quarter and full year 2015 earnings press release, which can be found at www.wageworks.com in the Investor Relations section. Also, please note that our webcast in 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 our Chief Executive Officer, Joe Jackson. Joe?

Joseph L. Jackson - Chief Executive Officer & Director

Thanks, Kim, and I'd like to start by thanking you all for joining us today. Our fourth quarter concluded another strong year for WageWorks. We again delivered record performance during our Enterprise and SMB selling seasons, and just completed a very successful open enrollment period, where we saw increased demand for all of our products, with particular strength in HSAs. As expected, we also saw higher employee adoption of FSAs as a result of our effective messaging and communication on the carryover provision. Our transition of Ceridian's portfolio of COBRA and Direct Bill services to WageWorks platform is progressing well. And we continue to be excited about other similar opportunities.

We are seeing positive momentum in all aspects of our business, and are very pleased with the recent developments in the commuter space. We enter 2016 well positioned to execute on our numerous avenues for growth and to take advantage of the opportunities resulting from our unmatched level of service, our consolidated multi-product platform and our strengthening market position.

Turning to the results, total revenue for the quarter was $83.1 million, an increase of 6% over the prior year period. Non-GAAP adjusted EBITDA was very strong at $25.8 million, an increase of 42% over the prior year period. Both of these metrics exceeded our stated guidance ranges. For the full year 2015, we reported total revenue of $334.3 million, representing an increase of 25% over 2014. Our organic growth rate for the full year was 11%. Non-GAAP adjusted EBITDA for the full year 2015 was $96.5 million, an increase of 35% over the prior year.

I'm very pleased with the leverage we were able to realize in our business during 2015. As you may remember when we acquired CONEXIS, we said that we believed that within 18 months to 24 months from the time of acquisition, we would be able to achieve the margin improvement that we have historically accomplished, which is at or better than company adjusted EBITDA margins. Our results clearly illustrate that we're executing on our strategy and have met that goal. We have added a significant number of new customers to our 2016 client base, and we now administer Consumer-Directed Benefits for 58,000 employers and approximately 4.5 million participants. Within these counts are now 68% of the Fortune 100 and 55% of the Fortune 500.

Our retention rates remain outstanding, which speaks directly to the quality of our products and customer service teams. Our impressive performance was driven by strong execution across the board from our direct sales teams, exchange partners, resellers, channel partners and brokers. Our commitment to service excellence, which is another key driver of our success, further bolstered our results. I'm pleased to report that for the ninth consecutive year, we successfully exceeded our service levels for the busy month of January when our call volumes tripled. Our ability to answer calls timely, within seconds, is only surpassed by doing so while maintaining a 92% first call resolution rate. This is a testament to the passion of our team and a meaningful differentiator in the marketplace.

Moving to our healthcare business, HSAs were again our fastest growing product, with accounts increasing by 45% year-over-year, well above the industry average. And we expect this trend to continue as market demand shifts towards high deductible health plans. One of our objectives in the HSA space has been to increase our revenues by better monetizing the assets generated by these accounts, particularly in a rising interest rate environment. Today, we are excited to announce one such non-exclusive arrangement that we believe combined with our state-of-the-art platform and outstanding service, positions us well for not only future account growth, but revenue growth in this expanding market.

The FSA portion of our business also continues to grow, particularly amongst companies that have adopted the carryover provision. In 2015, the share of healthcare FSA clients that adopted carryover grew to approximately 55%, which is estimated to exceed the industry standard by a significant margin, and a trend we expect will continue in 2016 and beyond. For those clients who adopt carryover, we continue to see double-digit increases in employee participation rates.

During the quarter, we began transitioning Ceridian's COBRA and Direct Bill portfolio to the WageWorks platform. As expected, we saw minimal revenue contribution in Q4, and believe revenue will begin to ramp towards the end of the first quarter. A significant share of the business will be transitioning effective April 1 as most of the larger employer clients asked us to accommodate this timing. We continue to believe that once fully transitioned, the annual organic revenue run rate will be up to $25 million.

Turning to private exchanges, we continue to see positive momentum in this space. We added a significant new exchange partner at the beginning of the year and are excited about the potential of that relationship. Over the last couple of years, we've more than tripled our revenue in this market, and believe there will be an acceleration in 2016 and beyond as this model continues to gain traction in the industry.

As many of you already know, the end of December brought some exciting developments in the commuter space. After years of hard work and with the help of many members of Congress, we were pleased to see permanent parity established between the transit and parking benefit cap levels. The Omnibus Appropriations and Tax Extender Package which President Obama signed into law in mid-December increased the monthly IRS cap on pre-tax commuter benefit deductions for both parkers and public transportation commuters from $250 and $130 respectively to now $255 for both products.

In addition to saving commuters more money on their taxes, the legislation will help employers of all sizes save more money on payroll taxes. In addition, as we have discussed with you in the past, several major metropolitan areas including San Francisco and Washington D.C. have implemented ordinances, mandating that employers with a certain number of employees offer commuter benefits. Effective January 1 of this year, New York City implemented a similar ordinance. We tripled the number of new clients albeit small ones we signed in January and have seen an appreciable uptick in interest over the last few months. We believe that the various city ordinances just mentioned, combined with the permanently higher transit benefit caps will result in positive gains for our commuter business in 2016 and beyond.

Moving to our M&A strategy, we have a solid pipeline of acquisition targets, and as you know a strong track record of successfully integrating acquired companies. Concurrently, we are also working on a number of channel partnership opportunities similar to our Ceridian and AFLAC relationships, which I think you will agree are great for our business. All of these targets, whether M&A or channel partnerships, are an integral part of our growth strategy and you should expect us to complete one to three of these types of deals per year.

Before I turn the call over to Colm, I wanted to provide you with an update on our long-term operating model. As many of you know at the conclusion of each year, we review some of our key metrics and create a three-year outlook based upon what we're seeing in the industry. As a result of these discussions over the next three years, we continue to anticipate an overall annual revenue growth rate of 15% to 25% with 9% to 14% coming from organic means based upon the long-term business drivers we have outlined. Gross margin is expected to remain in the range of 63% to 67%, operating margin is expected to remain in the range of 13% to 18%. Lastly, we are increasing our expected adjusted EBITDA margin to be in the range of 28% to 34%, as we continue to drive scale and pursue additional acquisitions.

In closing, this is another very strong quarter and year for WageWorks. As we look towards 2016, I have never been more excited about the opportunities we see, how the industry is evolving in our ability to add market share. When you combine the fact that our sales team continues to deliver record results, our HSA business which grew by 45% for the year, will benefit from increased revenue with our new custodial arrangement, growth tailwinds in all of our core products. In fact, if you exclude the reduction in revenue in our other category, the combined 2016 organic growth rate for our healthcare, commuter and COBRA businesses is expected to be in the mid-to-high teens. We also have a robust pipeline of deal opportunities, an ability to continuously scale and a best-in-class management team with a track record of delivering high quality service and execution. It is no wonder that we feel like we're just getting started.

Now, I'll turn the call over to Colm for a review of the numbers.

Colm Callan - Chief Financial Officer

Thanks, Joe. I would also like to add my thanks to all of you for joining us on the call this afternoon. Before I begin, please note that every time I reference non-GAAP numbers on this call, those non-GAAP numbers exclude stock-based compensation expense, the amortization of acquired intangibles, certain severance and related charges, contingent consideration expense, and the related tax impact of these items assuming a 40% tax rate. A GAAP to non-GAAP reconciliation can be found in the tables of our press release, which is available on our website.

Now, I will provide details on our strong financial performance during the fourth quarter and full year 2015, then I'll discuss our financial guidance for the first quarter and full year 2016. Total revenue for the fourth quarter was $83.1 million, an increase of 6% over the same period last year. Healthcare revenue was $43.3 million for the quarter, an increase of 9% compared to the fourth quarter of 2014. Commuter revenue was $16 million for the fourth quarter, an increase of 3% over the same period last year. COBRA revenue was $14.2 million, a decrease of 3% over the fourth quarter of 2014 due to a very tough compare.

As you may recall, organic revenue grew almost 18% overall in Q4 2014 and COBRA was a key driver of that growth based on the timing of certain activity-based fees we charge. We believe COBRA will continue to be a significant contributor to our growth in 2016. Other revenue was $9.7 million, an increase of 17% compared to the same period last year, but a decrease compared to $12.7 million in the prior quarter as we exited the public exchange relationship.

Let's now turn to costs and margins. We will review our numbers on a GAAP basis and, where applicable, on a non-GAAP basis. Gross profit for the fourth quarter was $54.1 million and represents a gross margin of 65%, compared to the 60% gross margin in the fourth quarter of 2014. Operating expenses totaled $43.4 million in the fourth quarter, compared with $41.5 million in the same period last year. In the fourth quarter of 2015, we had approximately $7.7 million in amortization and change in contingent consideration, versus $6.3 million in the fourth quarter of 2014.

As a result, our income from operations on a GAAP basis for the fourth quarter was $10.8 million, representing an operating margin of 13%, compared with GAAP operating income of $5.7 million, or an operating margin of 7.2% in the same period last year. Our non-GAAP income from operations was $20.8 million for the fourth quarter, representing a non-GAAP operating margin of 25%. For the same period last year, non-GAAP income from operations was $14.3 million, representing a non-GAAP operating margin of 18.2%. Our GAAP net income was $6.2 million, or $0.17 per share, based on 36.6 million diluted shares in the fourth quarter of 2015. This compares to GAAP net income of $3.1 million, or $0.08 per share based on 36.5 million diluted shares in the fourth quarter of 2014.

On a non-GAAP basis, our net income was $12 million for the fourth quarter of 2015, compared to a non-GAAP net income of $8.3 million for the fourth quarter of 2014. Non-GAAP net income per diluted common share was $0.33 for the fourth quarter of 2015 compared with $0.23 for the fourth quarter of 2014, based on 36.6 million shares and 36.5 million shares outstanding, respectively.

Non-GAAP adjusted EBITDA for the fourth quarter was $25.8 million, an increase of 43% year-over-year, resulting in a 31% adjusted EBITDA margin. This compares to $18.1 million or a 23% margin in the fourth quarter of 2014. Our EBITDA results add to our proven track record of integrating acquisitions and investing for growth while we scale.

Now, I will briefly recap our full-year results. Total revenue was $334.3 million, a 25% increase over 2014 and above the high-end of our guidance. Organic growth for the full year was 11%. Healthcare revenue increased 13% to a $176.6 million. Commuter revenue increased 3% to $63.9 million. COBRA revenue was $51.3 million, an increase of 60% over 2014. And other revenue increased 135% to $42.5 million. Non-GAAP net income was $45.8 million compared to a non-GAAP net income of $34.2 million in 2014. Non-GAAP net income per diluted common share was a $1.25 for the full year 2015 and $0.94 for 2014, based on 36.6 million shares and 36.3 million shares outstanding respectively. Non-GAAP adjusted EBITDA for the full year was $96.5 million compared to $71.7 million in 2014, which represents an increase of 35%.

Moving to the balance sheet, cash and cash equivalents totaled $500.9 million as of December 31, 2015, compared to a $413.3 million as of December 31, 2014. In 2015, we generated approximately $114.3 million in cash from operating activities, compared to generating $54.4 million in cash from operating activities in 2014. This significant increase is largely the result of the growth in and profitability of our business.

Now let me turn to our guidance. As a reminder, the outlook we are providing today does not include the impact of any acquisitions. We entered 2016 with good visibility into our full year revenue and adjusted EBITDA, including the timing of when we expect to realize those results. Starting with the first quarter, we expect total revenue to be in the range of $85 million to $87 million. Non-GAAP net income per diluted share is expected to be in the range of $0.28 to $0.29, which assumes a tax rate of approximately 40%, and approximately 36.8 million weighted average shares outstanding. Non-GAAP adjusted EBITDA for the first quarter of 2015 is expected to be in the range of $23.5 million to $24.5 million. As Joe discussed, it will take until April 1 until we fully on-board the Ceridian business, which we now expect to contribute roughly $1 million to $2 million in revenues in Q1 2016.

Additionally, as a reminder, the public exchange relationship that we mutually agreed to transition last year, generated $6 million in revenues in Q1 2015, which will not recur this year. For the full year 2016, we expect total revenue to be in the range of $356 million to $366 million. Non-GAAP net income per diluted share is expected to be in the range of $1.35 to $1.41, which assumes a tax rate of approximately 40%, and approximately 36.8 million weighted average shares outstanding.

Non-GAAP adjusted EBITDA for the full year of 2016 is expected to be in the range of $107 million to $111 million. Our guidance reflects strong annual organic revenue growth of 7% to 10%, with revenue growth rates expected to accelerate as we move through the year. Excluding the headwind associated with the public exchange relationship I just mentioned, which was part of our other revenue category, the combined organic growth rate in our core businesses of healthcare, commuter and COBRA is expected to be in the mid-to-high teens for the year. Our Q1 adjusted EBITDA guidance assumes seasonal expenses associated with Q1 open enrollment and a meaningful number of new participants we have onboarded.

In summary, we are pleased with our strong fourth quarter and full year 2015 performance and believe we are well-positioned for continued success in 2016 and beyond.

Operator, I think we are ready to begin the Q&A session. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operating Instructions] And our first question comes from the line of Bob Napoli of William Blair. Your line is now open.

Bob P. Napoli - William Blair & Co. LLC

Thank you. Good afternoon. I guess first question would be on the HSA business. Just the 45% growth that you had, do you see – I know it was coming off of a smaller base. What level of accounts do you have in that business today? And can you tell – how are you – are those businesses essentially – are more of those cross-sells to your current customers? Is that where they are coming from, or are they coming through other channel partnerships?

Joseph L. Jackson - Chief Executive Officer & Director

Well, thanks, Bob. I think there is a mix on how they are coming a lot through new clients. There's also a significant number that are coming through cross-sells where we already have a relationship, whether it's on the commuter side, the COBRA side or other healthcare businesses. I think the thing that we're very pleased with is not only do we see new accounts coming on board and the growth obviously associated with those, but the growth of accounts from our existing HSA client base was actually very good and contributed to that overall number. So, a 45% growth in our HSA business is something I think that we're thrilled about. I think it will continue. And now with our relationship with a custodial partner where we'll be able to participate in some of those other lines of fees and in interest rate spread, I think it positions us well to be a very prominent player in this market going forward.

Bob P. Napoli - William Blair & Co. LLC

Okay. And then with regards to – you mentioned a new major non-exclusive partnership for the HSA business.

Joseph L. Jackson - Chief Executive Officer & Director

Yes.

Bob P. Napoli - William Blair & Co. LLC

Is that an insurance company or is it a...

Joseph L. Jackson - Chief Executive Officer & Director

Oh no, no. It's a bank, a bank custodial partner.

Bob P. Napoli - William Blair & Co. LLC

Oh, that's a bank custodial partner. Okay.

Joseph L. Jackson - Chief Executive Officer & Director

Yeah. Yeah. And so if you remember, we put out an RFP in the fourth quarter.

Bob P. Napoli - William Blair & Co. LLC

Right.

Joseph L. Jackson - Chief Executive Officer & Director

We've just recently concluded that. This is fairly recent news, so between our partner and us, we're going to hold off on formal notification of who they are. But suffice it to say we're pleased with what we see and I think the additional revenue associated through this relationship will build throughout the year.

Bob P. Napoli - William Blair & Co. LLC

Okay. And then just last question. On the M&A front, obviously your balance sheet is in really strong position. You still reiterated one deals to three deals per year and you also mentioned a strong pipeline. Has anything changed as far as the types of deals you're looking for as you become a bigger company? Are you looking for larger transactions? Are there larger deals out there? Are there HSA specific deals? Are there tangential businesses? Just some thoughts on the M&A, the size and types of businesses that you're looking for?

Joseph L. Jackson - Chief Executive Officer & Director

Yes. Well, I think, the answer is probably all of the above to what you mentioned. I think our pipeline is stronger than I can remember seeing it before, both from our traditional kind of portfolio purchase lines, in addition to channel partnerships like with Aflac and Ceridian, and then just some other I would call, from an administration standpoint, larger opportunities. Obviously, the $5 million to $10 million acquisition, although we like them, doesn't move the needle as much as it used to. So I think it's fair to say that we're looking more meaningful transactions that can move the needle that also fall very well in line with what we do today. So, again, I think as we start this year even compared in years past that I can recall, the number of larger, not only acquisition opportunities, but larger kind of new sale and channel partnership opportunities that we see throughout 2016 – that I think we're going to execute on some throughout 2016, we're in a stronger position now at the beginning of this year than I can remember in any of the years past.

Bob P. Napoli - William Blair & Co. LLC

All right. Thank you.

Joseph L. Jackson - Chief Executive Officer & Director

Sure, Bob. Thank you.

Operator

Thank you. And our next question comes from the line of David Scharf of JMP. Your line is now open.

David M. Scharf - JMP Securities LLC

Hi, good afternoon. Thanks for taking my questions. First off, just reflecting on the strong margins in the fourth quarter, it's typically a depressed quarter seasonally, given all the temporary call center support you need. Was there anything in the quarter that you would characterize as a one-time benefit or was that a good way about thinking about typical fourth quarter margins based on the profile and product mix going forward?

Joseph L. Jackson - Chief Executive Officer & Director

Right. Right. That's a good question, David. Thank you. Because you'll remember in the third quarter our margins were a little bit higher because of a couple of one-time issues. What I can tell you in the fourth quarter is there were none. I think, it's a testament of our ability to continue to scale. I think it's also a testament, quite frankly, to the decision we made to mutually terminate a relationship earlier in the year. So I think that's really the key driver, but there was no one-time unique thing that won't reoccur that happened in the fourth quarter. Those margins are based upon run rate.

David M. Scharf - JMP Securities LLC

Got it. Got it. Just shifting back to the prior questions on the HSA traction.

Joseph L. Jackson - Chief Executive Officer & Director

Yes.

David M. Scharf - JMP Securities LLC

I assume it's minimal, but is there any custodial revenue share that's captured in the top line guidance for this year.

Joseph L. Jackson - Chief Executive Officer & Director

For this year, I would say marginal, because I think it's going to ramp up as we head throughout the year, but to get maybe a little bit of perspective there, we've talked before about kind of the average price per participant in our core lines of business. Commuter was always a little bit higher, healthcare was usually broken out between FSAs and HRAs and then HSAs were the lower. I think going forward HSAs will now be level two or a little above the traditional healthcare products we have. So we're pretty excited about this transaction, especially if and when interest rates continue to go up over the next few years.

David M. Scharf - JMP Securities LLC

Got it. And of the roughly I think you said around 4.5 million health accounts entering this year, was that correct Joe?

Joseph L. Jackson - Chief Executive Officer & Director

No, I said overall 4.5 million participants.

David M. Scharf - JMP Securities LLC

Participants.

Joseph L. Jackson - Chief Executive Officer & Director

That would include...

David M. Scharf - JMP Securities LLC

What is...?

Joseph L. Jackson - Chief Executive Officer & Director

That would include commuter as well.

David M. Scharf - JMP Securities LLC

Oh commuter, I'm sorry. So which I believe back in June it was little over 1 million health accounts for commuter, but to the extent health is in call it 3.25 million health accounts or so. I mean where we would the mix now between FSA and HAS. I know...

Joseph L. Jackson - Chief Executive Officer & Director

Right.

David M. Scharf - JMP Securities LLC

...it was the transition ultimately to flip into two-thirds HAS. Are we getting close to that as employers start offering more high-deductible plans and some even start dropping non-high deductible plans?

Joseph L. Jackson - Chief Executive Officer & Director

Yes. We don't see many dropping, but what I would say – it's a good question. Historically, I've talked many times about kind of the two-thirds, one-third; two-thirds being FSA, one-third being HSA and HRA. I would say today you're right, the gap is closing. It's probably close to 60%-40% now with the significant bump that we saw in HSAs. But, again, we really don't see any cannibalization to-date. On the FSA side, industry-wide participation rates are in the mid-20%s. I think ours are a little over 30% and hopefully on their way to 40% as we've talked about before. But between both products we see a 45% growth in HSAs, we do see double-digit growth in FSAs where the carryover provision is used.

So I think as we predicted in the direction that we're heading, it probably won't be too much longer before we hit that 50%-50% split. And again, I just want to preface that by all three products continue to grow and obviously HSA is growing at a faster pace.

David M. Scharf - JMP Securities LLC

Sure. Last question on the guidance. If I just take the midpoints of both EBITDA and revenue, it looks like on an annualized basis, it's roughly 30% margins. Given what you were just able to accomplish margin-wise in the fourth quarter, which seasonally has higher than usual expenses, should we be thinking about the guidance as being conservative on the margin front this year, or is it artificially depressed just based on upfront conversion cost still for Ceridian. Trying to get a sense for...

Joseph L. Jackson - Chief Executive Officer & Director

Yes.

David M. Scharf - JMP Securities LLC

How to think about what you just reported versus what you're guiding?

Joseph L. Jackson - Chief Executive Officer & Director

Yes. I would say, again, we always strive to under-promise and over-deliver. So I guess I'd always be guilty of a little bit of conservatism. But I think the one thing I would point to is our target operating model where we took that up to 28% to 34%. So, clearly, we believe there is an ability to continue to drive scale here. I think even when we looked at our target operating model that is the one area where we do forecast acquisitions. So even though – and obviously we plan to do acquisitions, but to take our EBITDA margin to 28% to 34% and that would include acquisitions, should give you some idea of the confidence that we have in our ability to continue to grow margins.

David M. Scharf - JMP Securities LLC

Got it. Thank you.

Joseph L. Jackson - Chief Executive Officer & Director

Sure. Thank you.

Operator

And our next question comes from the line of David Grossman of Stifel. Your line is now open.

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

Thanks. Good afternoon, guys. I wonder if I could just follow up on the last question. So you just reported between $97 million and $98 million of EBITDA for 2016, and inclusive in that number is losses from the terminated client, which I think you guys have said is somewhere around $7.5 million. So that would take you to about $105 million for the year, and you're guiding – I think you said $107 million to $111 million if I got it right. So perhaps you can help reconcile why when you adjust for the termination of that client, why the growth off that adjusted basis is so low?

Colm Callan - Chief Financial Officer

Hey, David, it's Colm. We wouldn't say the growth is low. We think we're pretty pleased with the guidance we had given in the $107 million to $111 million at 30% margins for the year is still a meaningful improvement over what we just posted, and based on what we see at this point in time we think, as Joe mentioned, reasonable but prudent to guide to those levels, if and when we have a reason to increase the range that we're comfortable with, we'll provide it to you, but at this point based on what we see we think it's appropriate.

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

Right. So then maybe just going back to the fourth quarter then, based on what you saw going into the quarter and what you actually experienced, what were the major differences between what you saw going into the quarter and what the outcome was which was substantially higher than where you guided?

Colm Callan - Chief Financial Officer

Yes, I'd say the biggest key was something Joe touched on earlier, which is on the service and being able to resolve calls 92% first time answered. So we just maybe didn't have to rely on as many outsourced services there. So we were able to leverage a lot more of our installed employees in the call centers. They do a great job for us every day and really we were able to drive efficiencies and the profitability of the business in Q4.

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

Right. But I think you beat on the revenue also pretty materially, if I have the numbers right. So it sounds like the top line came in much better, which I think it would be much beyond service levels and operating efficiency. So maybe just on the top line, what was it that came in so much better? It looks like it's showing up in other revenue maybe, so perhaps you could help us better understand maybe what's (35:50)?

Colm Callan - Chief Financial Officer

Yes. The top line revenue was improved by about $300,000 of what we had guided to, which we're happy with, but it's not a huge driver in terms of the profitability of the business. It was more on the cost control side that drove things there, but there were some improvements – interchange on the healthcare side was better and there was some outperformance in the other category as well. We got a little bit more revenues than we had been anticipating from the terminated client that we had in October, but overall, there's not one key thing that drove outperformance in Q4.

Joseph L. Jackson - Chief Executive Officer & Director

Yes, I think, what we've seen as well, David, is that the contact rates in our call center we continue to drive those down through self-servicing options, people taking advantage our mobile applications in the marketplace, and then as we again plan to kind of ramp-up for not only the Ceridian business that's coming on board, but also for a lot of the new clients that were coming on board. That ramp, as we continue monthly to look at kind of hiring levels based upon contact rates, et cetera, would probably cause us not to have to hire as many people as we maybe thought we would because of the good contact rates. So there's a whole mixture of things that kind of drove it. And then as well, again, driving costs out especially in our other category from the relationship that we mutually agreed to transition and obviously that continues to help as well.

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

All right. And then I guess back to the two changes you are making in the model when you talk about with the custodian...

Joseph L. Jackson - Chief Executive Officer & Director

Yes.

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

So is that going to ultimately include the installed base of accounts or is that pretty much focused on new relationships going forward?

Joseph L. Jackson - Chief Executive Officer & Director

It will include the vast majority, and I should say the – and the only reason I don't say all is through some of the acquisitions we've done, et cetera, we have straggling number of HSA accounts that would be with other custodians. That's why I don't say all. But if you kind of look at our core platform that we operate on, it would be all.

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

Okay. And is the reason that it's being eased in over the course of the year just takes that long to repay for all the accounts and you have to wait for open enrollment next year, or is there something else beyond that?

Joseph L. Jackson - Chief Executive Officer & Director

No, I think is there is a notice periods you have to provide and kind of a rollout of a new structure to some of the employers, et cetera, but again, we're working pretty hard just to finalize and pay for the existing transaction that I just talked about and then we'll begin the process of rolling that out through the year. I would tell you we're very confident that by the end of this year all of our HSA accounts on our core platform will be under this new model.

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

Okay. And just one last thing. As I think we also talked about relationships with the carriers and trying to engage them more as an HSA channel, just curious where we are on that? And what your thoughts are about that strategy and how they impact the growth of that business?

Joseph L. Jackson - Chief Executive Officer & Director

Well, a couple things I would say. As I think I can't remember if I'd mentioned this to you, David, or not. But in our national sales force, we upped the resources there by about five full-time employees for 2016. One of the reasons we did that is we took one in particular of our best sales and relationship individuals out there and put her in-charge of going out and focusing on carrier relationships as we have discussed.

I think the traction that we're getting in the marketplace today on that particular front, especially with our white labeling capabilities now, very optimistic that there'll be a lot of success there in 2016 and beyond.

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

All right, guys. Thanks very much.

Joseph L. Jackson - Chief Executive Officer & Director

Sure, David. Thank you.

Operator

And our next question comes from the line of Tobey Sommer of SunTrust. Your line is now open.

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Thanks. I'm curious if maybe you can give us some color on what areas may be the most attractive to you from an acquisition standpoint because some of the areas that you have in the portfolio are forecasted to grow at different rates and wondering what your thoughts are on the topic?

Joseph L. Jackson - Chief Executive Officer & Director

Yeah. I don't think that there's a lot of acquisition opportunities in the commuter space. I think we're pleased with some of the things that we've seen and done in the COBRA space with our acquisition of CONEXIS, with our channel partnership with Ceridian. So there maybe some other things there that we'll look at. We're focused heavily on the healthcare side, obviously. I think one of the I think byproducts of the relationship we now have with our custodial partner is I think it puts us in a better position to be able to get more aggressive, and to be a player in HSA acquisition potential, whether that's not only the accounts that we would service and administer, but also the assets that come with that, so I think we'll be a player in that space going forward as well. So, I don't know that I'd prioritize them Tobey, it's a good question, obviously I think where we can, we're focusing on trying to maximize either the acquisitions or the channel partnership on the healthcare side.

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Okay. Thank you. Could you talk a little bit about what the delay in the Cadillac tax means for you, if anything? Thanks.

Joseph L. Jackson - Chief Executive Officer & Director

Yeah. Well, the delay pushes – obviously pushes it out to 2020. So I think it has a couple of positive impacts not only for us, but for our industry. I think the fact that the Cadillac tax is still looming now in 2020 will continue to focus employers on potentially getting ready to manage to the caps that they would have to adhere to under the Cadillac tax as currently written. So I think just having it out there continues to drive more employers to offer high deductible health plans which obviously would generate more HSA accounts. So that's a good thing.

I think – and I'm still very confident that by the time the Cadillac tax would go into force – go into play in 2020, there'll be adjustments made to the language that's in that law today. And I think one of the key things it will change is the pre-tax contributions of health savings accounts and flexible spending accounts, I think will be removed from the calculation of that tax. I think had it not been moved out to 2020, I think we already would have seen that change been put through to remove HSAs and FSAs from the calculation of that cap. So, I think having it out there till 2020 still focuses employers on high deductible health plans. So, I think it's an overall positive.

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Okay. My last question, I'll get back in the queue. Just wondering if you could talk about opportunities and elaborate a little bit on what was already said on exchanges, in particular the private exchanges and how you may be able to participate even more fully in that? Thanks.

Joseph L. Jackson - Chief Executive Officer & Director

Yeah. Well, I think we're pleased with the number of exchanges, private exchanges we work with. I think that number will continue to grow. Obviously, we work with Willis Towers Watson on their private exchange, and I think they've reported some pretty good growth that they've seen in their private exchange, and obviously, that is a benefit to us. We're continuing to work with them, and we'll continue to work with them I think for the foreseeable future.

We're very pleased with a new exchange partner that we signed up at the beginning of the year. I think, they'll end up being a strong player in this industry, especially on the private exchange side and we're happy to be a part of that. So, those couple of things I think with the traction that Towers has seen, the traction some of our others have seen and a new large exchange that we have in place, now from January, I think gives us cause to be optimistic that this business will continue to grow. And if you look over the last couple of years, I think we've tripled the volume that we have internally. So, it's probably not growing as fast as that old Accenture study would have predicted, but I think it's been steady and will continue to be.

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Thanks very much.

Joseph L. Jackson - Chief Executive Officer & Director

Thanks, Tobey.

Operator

And our next question comes from the line of Stephen Lynch of Wells Fargo. Your line is now open.

Stephen B. Lynch - Wells Fargo Securities LLC

Hey, guys. Thanks for taking the questions. Just real quick on organic growth for the fourth quarter. I know you said that it was 11% for the full year, but I was wondering if you could give us the number for the quarter excluding the impact of the terminated customer?

Colm Callan - Chief Financial Officer

Yes. I don't have it broken out without the terminated customer, Stephen, but overall it would be the same 6% for the year that we reported top line. I can break it out for you.

Stephen B. Lynch - Wells Fargo Securities LLC

Okay.

Colm Callan - Chief Financial Officer

I think the...

Stephen B. Lynch - Wells Fargo Securities LLC

That'd be great, you can come back to me with that, if you want later on.

Colm Callan - Chief Financial Officer

Yes.

Stephen B. Lynch - Wells Fargo Securities LLC

I was also wondering, Colm, if you could quantify maybe for us, how much revenue you got from the terminated client during Q4?

Colm Callan - Chief Financial Officer

Sure. It's close to just under $4 million roughly in Q4. So if you back that out of the – for the previous year, what we disclosed I think in the K last year you should be able to get to an organic growth rate.

Stephen B. Lynch - Wells Fargo Securities LLC

Yeah, that helps a lot. That certainly will get me to the calculation. And then the last one I had, Joe just coming back to the M&A topic really quick. Based on the reiteration of the three-year target for revenue growth and the commentary about continuing to expect one to three portfolio purchases a year going forward. Should we maybe expect to see an announcement sometime in the first half of the year or is this going to be something that would be later part of the year?

Joseph L. Jackson - Chief Executive Officer & Director

Well, I think there's a number of things and a number of opportunities we're looking at, those are always hard to predict as far as the timing. I think as I sit here today, I'd like to think that we would have transactions completed by mid-year. But again, I don't want to be held hostage on a date. So, I think we will close on them as quickly as we can, and I think there – I think by the time we get to the end of the year, I think we will have met our objective there of one to three transactions a year and hopefully towards the higher end.

Stephen B. Lynch - Wells Fargo Securities LLC

Okay. Thanks.

Operator

Thank you. And our next question comes from the line of Steven Wardell of Leerink Partners. Your line is now open.

Steven Wardell - Leerink Partners LLC

Hey, guys. Thanks for taking my questions. So, my first question is you guys have just finished your selling season and can you give us some color on that, what are some of the trends you're seeing with employers and others? What is spurring some of the growth you're seeing? Is there anything that's holding you back you think with buyers?

Joseph L. Jackson - Chief Executive Officer & Director

Well, I think you're right. We had a great year. We had a terrific year on the HSA side. Healthcare overall I think was very strong. We had a very good selling year on the COBRA front. I think kind of some of the lessons learned is I think, we see more and more employers liking the fact that we can supply the full range of Consumer-Directed Benefit services on a consolidated proprietary platform. So, I think that rather than having to go to two or three different entities to get these services, going to one player, I think there's some advantages there. I think the service that I mentioned earlier that we provide on an ongoing basis is a differentiator by far. I gave some of the statistics on what we're able to accomplish in January, which is our busiest month of the year and being able to answer the phone in seconds. We never take that for granted, in fact many in our industry answer the phone in minutes or hours in January. So, for us to be able to not only answer within seconds, but to answer on the first call 92% of the time, I don't believe that there's anybody in the industry that can compare to that.

Then you get to some of the technology that we offer and innovations that we bring to make these products more efficient, more user-friendly and really focused on, as I mentioned earlier, more of those self-servicing options. Not only is that a benefit I think to the participants that we serve and obviously, there's a bottom-line benefit to that as well. So, I think what we see overall is a reaffirmation of why people do business with us. And I think it makes us really focus on continuing to improve in those areas. So that we can continue to gain share.

Steven Wardell - Leerink Partners LLC

Thanks. And when you look at the HSAs 45% growth, what do you think is fundamentally driving that, is it greater education about the value of HSAs among employees or is there something else driving it like a massive shift by employers to high deductible health plans or something else?

Joseph L. Jackson - Chief Executive Officer & Director

I think there's a little bit of both there. I don't know that one really stands out. I think with a lot of employers where we've historically had relationships on the commuter side, or on other healthcare products. When it comes time for those employers to roll out a high deductible health plan that will generate HSA accounts, I think it's pretty comfortable for them to know that they can rely on their existing administrator who I think they would tell you has done pretty well in servicing the other healthcare or commuter products that those employees use. So basically being able to use the same platform, work with the same servicing team, et cetera. I think that drives a lot of employers to utilize us on the HSA side.

And then, I think going forward with the white labeling capability that we have and really focusing on carriers, I think, that's another avenue of opportunity that we have yet to tap into, but I'm very confident that there'll be some successes there that will continue to further bolster the HSA growth and that tied to the new relationship, custodial relationship that we have, I think positions us well to be a leader in that space going forward.

Steven Wardell - Leerink Partners LLC

Great. And can you provide some color on what happened with HRAs this year? How have they been doing?

Joseph L. Jackson - Chief Executive Officer & Director

Yeah. I think, where employers have focused on lot of wellness initiatives of incenting their employees to take better care of themselves, HRAs are always a top of mind product with employers there. I think we've seen steady growth there, probably a little bit north of what we've seen on the FSA side, but obviously significantly below the 45% on the HSA side. But I think those will continue to be steady growers as well and HRAs are an excellent component of the service offering that we have.

Steven Wardell - Leerink Partners LLC

Great. Thank you.

Operator

Thank you. And our next question comes from the line of Steve McManus of Sidoti & Co. Your line is now open.

Steve J. McManus - Sidoti & Co. LLC

Hey, guys. Appreciate you taking my questions.

Joseph L. Jackson - Chief Executive Officer & Director

Sure.

Steve J. McManus - Sidoti & Co. LLC

So the first one I have, is on the commuter side. Looking at kind of the segment growth trajectory, it kind of slowed a bit from the last couple of quarters. Is that mainly just typical seasonality or is there anything worth noting there?

Joseph L. Jackson - Chief Executive Officer & Director

I don't think there is anything worth noting. I think it's fairly seasonal. I think the change you're going to see in commuter will really start in the first quarter, kind of from what we've seen today, as I mentioned earlier. In a normal January, especially in the New York area, we'll normally signup about 50 new employers, albeit small ones primarily. This January was around 160.

So, I think it's beginning to resonate with employers in New York that there is an ordinance out there that they need to comply with. There is actually a six-month grace period in New York that started January 1, that gets employer six months to comply with the ordinance before fines kick in. So based upon what we've seen in January, and now early February, I think that will be a nice tailwind for the commuter business. Remember, these are mostly smaller accounts, but they add up over time. And I think it will be a nice tailwind in the commuter space for 2016 and probably going forward as well.

Steve J. McManus - Sidoti & Co. LLC

Okay. Great. That definitely helps. And then has there been any integration issues or headwinds with respect to the expanded Ceridian book or has it been relatively smooth so far?

Joseph L. Jackson - Chief Executive Officer & Director

It's been relatively smooth. I think we're making very good progress. I think the only real change that was made was we had anticipated having many more of the larger employers on early in the first quarter. What became apparent is we kind of got through the holiday season and into January, is that with many of these large employers, you're just starting a new plan year. The resources that are required to facilitate these change or changes are always difficult to garner especially early in the year. And again, we're always faced with a choice there, which is, do we force-march the clients to a February or a March implementation or do we accommodate their request to move and they ask to move to April 1.

And so, we're in the business of trying to establish long-term positive relationships with many of these clients. By the way, you saw our client number in the Fortune 100, jumped from 60 to 68. You saw the Fortune 500 number jump quite a bit as well. Well, some of those would be some of the Ceridian clients that are on board or coming on board. So, we feel that was in the best interests of the long-term relationships with these clients to accommodate their request, so they will all be on board by April 1.

Steve J. McManus - Sidoti & Co. LLC

Okay, great. And then, your CapEx was a bit higher than the norm in 2015, I guess is as expected. Should we expect that to kind of tick down moving into 2016 or going to stay at the same run rate?

Colm Callan - Chief Financial Officer

No. You should see it step down a little bit in 2016 as compared to 2015 as a percentage of revenues.

Steve J. McManus - Sidoti & Co. LLC

Okay. And the last one, I know you guys touched on the HSAs a lot, but how sustainable do you think that 45% growth run rate is moving out the next few quarters?

Joseph L. Jackson - Chief Executive Officer & Director

Well, I mean, if you look at kind of the pipeline that we see early this year for HSA opportunities, it's hard to predict 40%, 45% growth – I think we should see strong growth in these products, or in this product in particular going forward. I think there was a study that came out just today or the day before that said that year-over-year HSA volume was up 22%, ours is at 45%. So, I think somewhere between I think those two numbers, I think you should see over the next few years.

And more to the point and just wanted to follow-up a little bit on the Ceridian discussion. I think if you – and for the folks that have been following us for a couple of years, you'll remember 2014 was a year where we built up our revenue growth throughout the year, because of strong number of mid-year starts, strong number of opportunities that would begin in the kind of middle to latter parts of the year. I think 2016 at this point looks a lot like 2014. So, as Colm said, we should see revenue building throughout the year. Obviously, Ceridian being fully ramped April 1 will be a plus in the second quarter and beyond. And then, I think when you look at some of the mid-year starts both on the healthcare side, the COBRA side, some of the channel partnership opportunities that we're pursuing right now, I think that kind of trajectory of revenue growth in 2016 will be very similar to what we saw in 2014.

Steve J. McManus - Sidoti & Co. LLC

Okay, great. Thanks a lot, guys. I appreciate it.

Operator

Thank you. And our final question is a follow-up from the line of Bob Napoli of William Blair. Your line is now open.

Bob P. Napoli - William Blair & Co. LLC

Hi. I just wanted to – I mean, going through the cash flow statement, looking at – the cash flow from operating activity is $114 million for 2015. Is there anything unusual in that number and do you expect to be able to grow off of that number and what is your outlook for CapEx in 2015?

Colm Callan - Chief Financial Officer

So...

Joseph L. Jackson - Chief Executive Officer & Director

2016.

Bob P. Napoli - William Blair & Co. LLC

I mean 2016, sorry.

Colm Callan - Chief Financial Officer

Yes. Yeah, Bob, I wouldn't expect us to continue to drive as much of an increase in cash flow in 2016 as compared as we saw in 2015 versus 2014. We just had more discipline across – one, the business was just performing great in 2015. We had much better discipline around working capital management, so extending our payables and collecting receivables much faster. You saw some – meaningful contribution of that was from customer obligations. So, it's really across the board there and we're still not a cash tax payer, so that helps to – obviously once we start paying cash taxes, that will have an impact on the cash flow statement.

In terms of the CapEx for the year, something in the order of probably 6% to 8% of revenue, so $20 million and $25 million is something that we expect a little bit of a step down from what we saw in 2015.

Bob P. Napoli - William Blair & Co. LLC

Great. Thank you.

Operator

Thank you. And I'd now like to turn the call back to Joe Jackson, Chief Executive Officer for final remarks.

Joseph L. Jackson - Chief Executive Officer & Director

All right. Well, thank you operator and thank you all and very good questions, I very much appreciate it. Again I'd like to again say thank you to all of our team members, the folks in the call center, the claims operations, client services, marketing operations, IT, throughout the board. The type of results that we've been able to accomplish has really been a team effort and I reiterate again, I think where we stand today versus where we stood other years at this point, I'm very optimistic about what we see, a lot of positive tailwinds in all of our core products. The HSA business along with a new custodial relationship, I think positions us for some very significant growth in that business going forward. I think we've seen the core businesses. As I talked about just organic growth in our core business, you're in the mid-to-high teens. So, I think from our perspective, our plan is to continue to execute to what we've said we were going to do. I think we have a great track record of doing that. I think we have a team in place to get it done. And look forward to kind of giving you guys updates throughout the year on how we're doing. So, again, I appreciate all your time, and look forward to talking to you next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.

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