WageWorks (WAGE) Joseph L. Jackson on Q2 2016 Results - Earnings Call Transcript

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

WageWorks, Inc. (NYSE:WAGE) Q2 2016 Earnings Call August 9, 2016 5:00 PM ET

Executives

Kim Wilford - Senior Vice President, General Counsel & Corporate Secretary

Joseph L. Jackson - Chief Executive Officer & Director

Colm M. Callan - Chief Financial Officer

Analysts

David Grossman - Stifel Financial Corp.

Bob P. Napoli - William Blair & Co. LLC

Stephen B. Lynch - Wells Fargo Securities LLC

David M. Scharf - JMP Securities LLC

Mayank Tandon - Needham & Co. LLC

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the WageWorks Incorporated Second Quarter 2016 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 conference is being recorded. I would now like to introduce your host for today's conference Ms. Kim Wilford. Ms. Wilford, you may begin.

Kim Wilford - Senior Vice President, General Counsel & Corporate Secretary

Thank you, operator. Good afternoon and thank you for joining us today to review our second quarter 2016 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 up the call to a question-and-answer session.

During this call, we may make statements related to our business that will be considered forward-looking statements under federal securities laws, including projections of future operating results for our third quarter of 2016 and our fiscal year ending December 31, 2016, the expected benefits from our selling efforts, our channel partnerships, portfolio purchases, and exchange opportunities; the developments in a commuter space, the demand for consumer-directed benefit; 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 sales 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 today under the section captioned Forward-Looking Statements and elsewhere in our Quarterly Report on Form 10-Q for the period ended June 30, 2016. 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 or 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 measures is available in our first quarter 2016 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. We finished the first half of 2016 on a terrific note. Our selling season is progressing extremely well due to record interest in all of our products. Our plans to transition the existing participants on the United States Office of Personnel Management's Federal Flexible Spending Account Program, to our platform on September 1 remain on track. To remind you, this opportunity includes approximately 2.3 million eligible employees and brings approximately 350,000 participants to our platform. We have also entered into several new channel partnerships this year, and expanded others. And in all cases, these relationships are already producing solid revenue opportunities.

Finally, we see strong results in our Commuter business due to the New York City ordinance and the permanent parity established between transit and parking benefit cap levels, along with some new channel partnerships. We entered the back half of 2016 with a strong momentum that positions us well to execute on our multiple avenues of growth and to capitalize on the large and expanding opportunity in front of us. I'll discuss all of these exciting developments in a moment, but first let me walk through the numbers.

Total revenue for the second quarter was $87.7 million, an increase of 6% over the prior year period. I'm especially pleased with the leverage we continue to realize, as our non-GAAP adjusted EBITDA was $27.5 million, an increase of 24% over the prior year period and above the high-end of our guidance.

The organic growth rate of our core businesses of Healthcare, Commuter, and COBRA was an impressive 16% in the second quarter, demonstrating the underlying strength of our business. As we have discussed previously, we expect our organic revenue growth to continue to accelerate as we move through the year, especially in the fourth quarter.

We've delivered outstanding performance during our enterprise selling season so far this year. We have seen increased interest from employers in our products across the board. As more and more companies realize the financial advantages associated with offering Consumer-Directed Benefits or participating in one of our transit or parking programs, they are increasingly choosing WageWorks as their administrator, because of our service excellence and the ease of use of our programs, which are all offered on one consolidated state of the art platform.

To put this year's sales results in perspective, even excluding our large contract with the Office of Personnel Management, we would still be on track to achieve another record-breaking year, whether it's new sales or cross-selling additional products to existing employers, carrier relationships, channel partners or private exchanges, they are all outperforming the previous year's results. And remember that we had a record selling season in 2015 as well.

Among our key wins so far this year are Michaels, who is offering our HSA, FSA and commuter products. CoAdvantage is offering FSA, commuter and COBRA. Colliers International, who has chosen us to administer their FSA, commuter and COBRA programs. Northwestern University has selected us for their COBRA and direct bill benefits. And Huron will be offering our Fitness Reimbursement Program. Michaels, CoAdvantage, and Huron were all mid-year starts effective July 1. In addition, NYU Medical, a long-time FSA and commuter client, has selected us to administer their COBRA and direct bill benefits starting this October. And we are expanding our commuter program with AT&T and DIRECTV.

Our SMB sales season, which is more third quarter and fourth quarter based, is also off to a great start. Last quarter we announced we were selected by the United States Office of Personnel Management, or OPM, to administer its Federal Flexible Spending Account Program. We remain on track to transition all existing participants to our platform on September 1. All agencies that are part of the Federal FSA Program will hold their open enrollment for the January 1, 2017 plan year during the fourth quarter, all together representing over 2.3 million eligible employees.

We are well underway with our preparations for their open enrollment season, with several communications and marketing programs designed specifically for them that are ready to roll out. We remain confident that we can help the OPM increase their participation rates for 2017 and beyond. We are very excited about this relationship with the federal government and plan to invest in this opportunity to ensure it expands over time.

We have had tremendous success signing new channel partners this year and expanding our relationship with others. As an example, the national Blue Cross Blue Shield organization has selected WageWorks to take part in a special marketing program where all of our products will be offered to Blue's plans throughout the country. We have also entered agreements with Delta Dental and Davis Vision, where both of these new partners will offer our products to their client base.

Just as we are having success with channel partners on our healthcare-related products, we also recently signed some new relationships focused on offering our commuter benefits. Specifically, during the quarter, we entered into an agreement with Alegeus Technologies. Alegeus will provide a white-label version of our comprehensive commuter benefit offering to their health plan providers and third-party administrator clients.

We also entered into an exciting new partnership with a well-known provider of on-demand transportation services that allows certain riders to use pre-tax dollars to help pay for the cost of their ride to and from work. Relationships like these will help drive the momentum in our Commuter business that began building in the first half of this year.

Staying with Commuter business for a moment, our TransitChek Basic program revenue, which caters primarily to small and mid-sized companies in New York City, achieved high-teen growth year-over-year for the first six months of 2016. The number of new clients placing orders via TransitChek Basic substantially increased for the first six months of 2016 versus the prior year and the revenue from these new clients more than doubled from the same period in 2015. We believe this strength is primarily driven by the permanent parity established between transit and parking cap levels that went into effect at the end of 2015, as well as New York City mandating that employers with 20 or more employees offer pre-tax commuter benefits effective January 1 of this year.

Overall, it is clear we are successfully executing on our growth strategy. With our record results in the new sales area and expanding revenue opportunities through our partner, carrier and channel partner relationships, we are positioning ourselves well for a strong finish to 2016, while simultaneously creating a solid foundation for 2017 and beyond.

In addition, we are also always actively pursuing acquisition opportunities and working to ensure that we expand our footprint. We are excited about our pipeline of acquisition targets and we'll continue to be an active player in the continued consolidation of our industry.

In closing, we delivered another strong quarter. We are very pleased with the 16% organic growth rate from our core businesses, which we believe will accelerate in the back half of the year, particularly in Q4. More importantly, with that growth, we continue to drive scale as demonstrated by our 24% growth in EBITDA, which translates to a 31.4% EBITDA margin. I continue to believe that our industry is at an inflection point that will drive strong growth in Consumer Directed Benefits for the foreseeable future. And as a leader in our industry with a large and expanding footprint, I believe we will get more than our fair share. Today, WageWorks is in the strongest financial position in its history, and even with that said, we believe our journey is just getting started.

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

Colm M. 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, 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'll provide details regarding our strong financial performance during the second quarter, then I'll discuss our financial guidance for the third quarter and full year 2016. Total revenue for the second quarter was strong at $87.7 million, an increase of 6% over the same period last year. Healthcare revenue was $48.1 million for the quarter, an increase of 10% compared to the second quarter of 2015. Commuter revenue was $17.4 million for the second quarter, an increase of 8% compared to the same period last year.

COBRA revenue was $17.9 million, an increase of 45% over the second quarter of 2015 which was primarily driven by the expected contributions from Ceridian, as well as overall strength in our COBRA business. Other revenue was $4.4 million, compared to $10.6 million at the same period last year, reflecting the discontinuation of our public exchange relationship. Excluding the headwinds associated with that public exchange relationship, growth in our core business, comprised of Healthcare, Commuter and COBRA was strong at 16%.

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 second quarter was $59.3 million and represents a gross margin of 68% compared to a 64% gross margin in the second quarter of 2015. Operating expenses totaled $54.7 million in the second quarter, compared with $46.2 million in the same period last year. In the second quarter of 2016, we had approximately $11.7 million in amortization and change in contingent consideration versus $6.7 million in the second quarter of 2015. This increase was primarily driven by $3.8 million of accelerated amortization, associated with the public exchange relationship that we initially agreed to terminate during 2015.

Based on accounting guidelines, we had previously been expecting to amortize these amounts through the end of 2017. As a result, our income from operations on a GAAP basis for the second quarter was $4.6 million, representing an operating margin of 5.3% compared with GAAP operating income of $6.8 million or an operating margin of 8.2% in the same period last year. Our non-GAAP income from operations was $22.3 million in the second quarter, representing a non-GAAP operating margin of 25.4%. At the same period last year, non-GAAP income from operations was $17.5 million, representing a non-GAAP operating margin of 21.1%.

Our GAAP net income was $2.9 million or $0.08 per share based on 37.2 million diluted shares in the second quarter of 2016. This compares to GAAP net income of $3.5 million or $0.10 per share based on 36.6 million diluted shares in the second quarter of 2015. On a non-GAAP basis, our net income was $13.3 million for the second quarter of 2016 compared to a non-GAAP net income of $10.3 million for the second quarter of 2015. Non-GAAP net income per diluted common share was $0.36 for the second quarter of 2016 compared with $0.28 for the second quarter of 2015 based on 37.2 million shares and 36.6 million shares outstanding respectively. Non-GAAP adjusted EBITDA for the second quarter was $27.5 million, an increase of 24% year-over-year and a 31% margin compared to $22.2 million in the second quarter of 2015 or a 27% margin. We are pleased with the leverage we are able to realize in our business.

Moving to the balance sheet, cash and cash equivalents totaled $569 million as of June 30, 2016 compared to $496.4 million as of June 30, 2015. In the first six months of 2016, we generated approximately $86.6 million in cash from operating activities compared to generating $88 million in cash from operating activities in the first six months of 2015.

Now, let me turn to our thoughts on the full year and third quarter of 2016. Starting with the full year 2016, we continue to expect total revenues to be in the range of $356 million to $366 million. Non-GAAP net income per diluted share is still expected to be in the range of $1.35 to $1.41, which assumes the tax rate of approximately 40% and approximately 36.8 million weighted average shares outstanding. We continue to expect non-GAAP adjusted EBITDA for the full year of 2016 to be in the range of $107 million to $111 million.

Our full year guidance continues to reflect strong annual organic revenue growth of 7% to 10% and revenue growth rates are expected to accelerate as we move through the year. We continue to expect the organic growth rate in our core businesses of Healthcare, Commuter, and COBRA to be in the mid-to-high teens for the year.

For the third quarter, we expect total revenue to be in the range of $86 million to $88 million. This revenue guidance reflects strength in our business including mid-year starts and revenues generated by the transition of the OPM business on September 1, offset by the normal Q3 seasonal declines we typically see in interchange and commuter revenue. Non-GAAP net income per diluted share is expected to be in the range of $0.32 to $0.33, and assumes a tax rate of approximately 40%, and approximately 37.2 million weighted average shares outstanding. Non-GAAP adjusted EBITDA for the third quarter of 2016 is expected to be in the range of $25.2 million to $26.2 million, which takes new account, the start-up, open enrollment and on-boarding costs we expect to incur during the transition and implementation of the OPM.

In summary, we had a great first half of 2016, and I believe we have built strong momentum for continued success in the second half of the year and beyond.

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

Question-and-Answer Session

Operator

Thank you. Our first question comes from the line of David Grossman with Stifel Financial. Your line is open.

David Grossman - Stifel Financial Corp.

Hi. Thanks. First, just before we get starting, Colm, could you just read the third quarter revenue guide again, as well as your share count for the year?

Colm M. Callan - Chief Financial Officer

Third quarter revenue is $86 million to $88 million, and we haven't updated the share count for the full year, so it's still 36.8 million.

David Grossman - Stifel Financial Corp.

Okay. So, you still expect 37.2 million in the third quarter?

Colm M. Callan - Chief Financial Officer

Correct.

David Grossman - Stifel Financial Corp.

Okay. I'm wondering if I can just ask you a little bit on COBRA, so if you back out the impact of the Prudential business, could you – excuse me – not the Prudential, the Ceridian...

Colm M. Callan - Chief Financial Officer

Ceridian.

David Grossman - Stifel Financial Corp.

Help me understand what the year-over-year compare looks like.

Colm M. Callan - Chief Financial Officer

David, I think as we mentioned earlier, on a previous call, we expected the full revenue run rate of the Ceridian revenue to be in the range of $5 million to $6 million for the quarter. We saw most of that number in the quarter, so it's a little more than $5 million related to Ceridian for Q2. So if you wanted to back that out, you can do the comparison that you're looking to try to make I think.

David Grossman - Stifel Financial Corp.

So, is relatively flat the way to think about the COBRA business then for the balance of the year, ex-whatever you are going get from Ceridian?

Colm M. Callan - Chief Financial Officer

I'm not sure. I mean even when you back out the Ceridian component of it, COBRA would have grown in Q2. So, I mean the growth from quarter-to-quarter isn't expected to be that different, but it should be up year-over-year.

Joseph L. Jackson - Chief Executive Officer & Director

And I also think that...

David Grossman - Stifel Financial Corp.

Right.

Joseph L. Jackson - Chief Executive Officer & Director

Between now and the end of the year, especially late third quarter, early fourth quarter, we've got some pretty large COBRA starts that come into play as well.

David Grossman - Stifel Financial Corp.

Got it. And actually just in the context really of that comment, it sounds like you had a pretty big uptick in midyear starts. Can you give us any – or dimension at all, for us, what the midyear starts look like this year versus maybe what you have seen in prior years?

Joseph L. Jackson - Chief Executive Officer & Director

Well, I think it's probably been a little stronger this year, actually we would have been stronger in the second quarter We had a couple of clients who decided to delay and wait until late third quarter, early fourth quarter which will make that part of the year probably even stronger. I think we're seeing a more mid-year transition. We're seeing more RFP – first of all, we're seeing more RFPs across the board by a large number. And so, I think this year's mid-year starts and starts kind of in the late third quarter, early fourth quarter are I think pretty significantly larger than we've seen in past years. Why that has happened, I don't know. But it also correlates a little bit to the overall success that we're seeing in the new sales area.

As I mentioned if you back out kind of what we're seeing from the OPM, which is significant in and of itself, our new sales numbers whether it's from channel partners, carrier partners, private exchanges, cross-selling or just signing up new employers, is very strong. I mean as an example, year-to-date we have signed contracts with 1,100 employers, 13 of them in the Fortune 500. So I think you'll see some uptick in the back half of the year. And as I said in the remarks, I think we're positioning ourselves and setting up very well for 2017 and beyond.

David Grossman - Stifel Financial Corp.

And then just back to some of your remarks again, Joe, about you talked about Blue Cross Blue Shield as a new carrier relationship. Can you maybe talk at all about any others that you may have and particularly as it relates to white-labeling perhaps some of your products including the high-deductible products?

Joseph L. Jackson - Chief Executive Officer & Director

No, agreed. So, you remember, David, at the end of last year, we've made some changes in our sales organization where we took one of our best folks and put them in-charge of establishing carrier relationships, growing existing carrier relationships and then offering our products, not only through our WageWorks branded platform, but through a white label platform. So, so far this year, we have seen new carrier relationships I think it's in the 13 to 16 number if you include carriers and some channel partnerships. I think if you just include strict relationships with carriers, it's probably 12 to 13 new relationships.

David Grossman - Stifel Financial Corp.

And how should we think about how that's impacting the growth in particularly your high deductible product, given the FSA product has done quite well?

Joseph L. Jackson - Chief Executive Officer & Director

Right. I think what you'll see is depending upon the carrier, they're in different stages of rollout, different stages of rollout with products. Several of the new carriers, we can't mention, because they are using white label products and that defeats the purpose a little bit when we're behind the scenes and they're offering a product branded by themselves.

But I think whether it's HSAs, FSAs, you've heard a couple of channel partnership relationships we established on the commuter side in the quarter. So I think to try and predict what each one of those relationships will do over time is going to be tough, but I think we're heading in the right direction and I think you'll see contributions from all of them, which should contribute to continuing the solid growth rates that we've seen.

David Grossman - Stifel Financial Corp.

All right, guys. Great. Thanks very much.

Joseph L. Jackson - Chief Executive Officer & Director

Sure. Thank you, David.

Operator

Thank you. Our next question comes from the line of Bob Napoli with William Blair. Your line is open.

Bob P. Napoli - William Blair & Co. LLC

Thank you. Nice quarter.

Colm M. Callan - Chief Financial Officer

Thanks, Bob.

Bob P. Napoli - William Blair & Co. LLC

Looking at going into the guidance in the third quarter with this, are you looking at about $2 million of startup costs? Is that what I should be reading into the EBITDA guidance?

Joseph L. Jackson - Chief Executive Officer & Director

Well, I think the EBITDA guidance, Bob, well, first of all, it's kind of what we expected. So there's nothing in there that's a shock or a difference. In the normal Q2 to Q3, we'll see seasonal reductions in interchanging commuter, which happen to be pretty high margin products. So, obviously, that has a bigger impact on EBITDA.

But I would tell you in the quarter, one of the things that we're investing in this year, probably more than what we thought of early on, is the open enrollment for OPM. We've been very pleased with the reception that we've got there and the willingness that they have to try things to generate more enrollment or more take-up, which has been great. So from that perspective, with 2.3 million eligibles and you have a client that's wanting to grow their participation rates, to me that's a great place to spend some money. And we are.

I think as well from the Fed standpoint, as this relationship starts up in September 1, there's some uniquenesses to it where there's been a blackout for a period of time in advance of September 1 where people can submit claims, but they're not processed until after September 1. So there's a buildup of claims that will take place during August. So we think in September our call volume could be a little higher than we had anticipated, although we don't know that yet.

So we were trying to the best we could foresee what the call volume potentially could be like and try and ensure that we had enough people in the seats to be able to take phone calls and ensure that the transition goes from a service perspective in a pretty high quality way.

So, I would say all of those things probably impacted the guidance we provided for the third quarter, which is normal for us. We try to be conservative. But with a couple of those unknowns out there, we feel real good about where we're at, and especially the investment in open enrollment for OPM.

Bob P. Napoli - William Blair & Co. LLC

Okay. The gross margin you had this quarter was pretty impressive, almost 68%. What are your thoughts on margins as you look over the next few years? Do you see more upside to EBITDA margins? Do you expect to get into the mid-30%s over the next couple of years?

Colm M. Callan - Chief Financial Officer

Sure, Bob. So it all comes back to, as we said before, what happens with acquisitions. But absent any acquisitions, we think we can get into the mid to high 30%s pretty quickly.

But to address your questions specifically about gross margins, remember a year ago we had the public exchange relationship that was very cost of goods intensive. You see a year later when you don't have them, that's the primary reason for the difference in the gross margin improvement.

So I wouldn't expect 4 points of improvement year-over-year, but we still expect to see scale improvements as we continue to grow, obviously mitigated by any acquisitions that we do, which tend to come at lower margins than we typically operate at.

Joseph L. Jackson - Chief Executive Officer & Director

And, Bob, this is Joe. Colm was right. From the standpoint although the 31.4% EBITDA margin for the quarter is impressive and we're pleased with it, there is still a lot of upside here. And really the only governor on speed at which we move here will be acquisitions, and obviously, we intend to continue to play a role in the consolidation of the industry.

But for example, in the quarter, as part of our ongoing efficiencies and synergies that we do, we had a office on 40th and Sixth Avenue in Manhattan that we acquired, I believe, in late 2010 with the TransitChek organization. We've sunsetted that office in the New York in the quarter and it's just one of a number of opportunities like that that we have pegged out and we'll execute on in not only the coming months but years. So, again, absent acquisitions, you would expect us to be in the mid-to-high 30%s EBITDA margins in a short period of time.

Bob P. Napoli - William Blair & Co. LLC

All right. Thank you. Appreciate it.

Operator

Thank you. Our next question comes from the line of Stephen Lynch with Wells Fargo. Your line is open.

Stephen B. Lynch - Wells Fargo Securities LLC

Hey, guys. Thanks for taking the questions. A nice quarter.

Colm M. Callan - Chief Financial Officer

Thank you.

Stephen B. Lynch - Wells Fargo Securities LLC

Should we expect the New York City Transit Ordinance contribution to continue building over the next couple of quarters or does Q2 pretty much represent the full run rate?

Joseph L. Jackson - Chief Executive Officer & Director

No, I think, we would hopefully can continue to see it build. There are still employers out there that I'm sure are getting into the process of completing the requirements to satisfy the ordinance. We're still seeing a nice new sales pipeline coming out of New York due to the ordinance. We're seeing good orders on the basic business, as I mentioned before.

I think as well couple of the channel partnerships that we've entered into on the commuter side will help us, not only in New York but throughout the country. But specifically I think that it will be a good couple of years as we go through not only the parity – or people getting used to the parity and the cap levels, but also for the ordinance in New York and we're already starting to hear some rumblings of several other major metropolitan areas in the country that are looking at what happened in New York and considering similar ordinances. So I would hope the momentum here continues through 2016 and hopefully into 2017 and beyond.

Stephen B. Lynch - Wells Fargo Securities LLC

That's great. And, Joe, could you talk a little bit about pricing in the HSA market right now? Can you give us a sense for the dispersion of fees that vendors are charging? Is everyone charging the same amount per employee, or is there some variation? And then maybe also on top of that, given the new custodial fees that you guys are expecting to start getting from HSA balances, can you talk about how that impacts the total cost of ownership that you're offering?

Joseph L. Jackson - Chief Executive Officer & Director

Okay. If you look from a pricing standpoint on the per participant per month that is charged to the employer, in that particular case, we see that to be fairly level over the last couple of years, pretty consistent. Usually it depends on the size of the employer as it does in all of our products. The larger employer, the pricing gets to be a little bit more competitive, the smaller employer they're a little bit on the higher side of pricing.

So on that particular piece, I think it's pretty consistent. It can be $0.20 difference one way or the other, but there is not a significant gap between competitors and things like that from what we've seen, and we're winning a lot in the market right now. On the opportunity we see with our custodial relationship, as we've talked about before, we think that's more of a 2017 and 2018 impact. There are some high-level numbers that we'll have to wait and see to see how many new accounts we get this year, how the balances grow this year, and any new clients we get this year. And I think when we give our guidance for 2017, we'll have a pretty good view on what that will look like and the opportunity there will look like into 2017, but it's several million dollars.

I think the one area on the HSA side where there is some competitive differences is on the fees that are charged to employees on the banking and investment side. And we feel our offering of fees that are charged to the individual are very, very competitive in the marketplace today. But I think that's an area where you'll see some differences that employers are really starting to focus on that I think probably drives a little bit more compression in the fee side there, on the investment side, and then on holding the asset side going forward.

Stephen B. Lynch - Wells Fargo Securities LLC

That's great. Thanks, Joe.

Joseph L. Jackson - Chief Executive Officer & Director

Sure.

Operator

Thank you. Our next question comes from the line of David Scharf with JMP. Your line is open.

David M. Scharf - JMP Securities LLC

Hi. Thanks for taking my questions as well.

Joseph L. Jackson - Chief Executive Officer & Director

Sure.

David M. Scharf - JMP Securities LLC

Joe, I may have missed it. I know you outlined a few examples of new insurance partners and were white labeling. Have you mentioned how many carriers, new carriers you've signed up year-to-date?

Joseph L. Jackson - Chief Executive Officer & Director

New this year is around 13 carriers.

David M. Scharf - JMP Securities LLC

13 carriers, got it. Okay. And how does that compare with a year ago, just to give us a sense for traction?

Joseph L. Jackson - Chief Executive Officer & Director

Well, first of all, it's a great result for this year. I think when you consider the channel partnership, carrier, et cetera, your numbers are getting somewhere in the 50 carriers to 60 carriers range. And don't quote me on that, David, or count but I'm just kind of off the top of my head from looking that up few weeks ago. But clearly 13 new ones this year is a significant accomplishment, and again we have a nice pipeline of new ones we continue to work as well as existing carriers where we can add additional services to the offerings they current provide today.

David M. Scharf - JMP Securities LLC

Got it. Got it. And you partially answered this one on commuter. I know you addressed the New York changes. It sounds like, you still see some more runway there. I'm trying to get a sense, once we anniversary or lap the permanent parity regulatory lift.

Joseph L. Jackson - Chief Executive Officer & Director

Yes.

David M. Scharf - JMP Securities LLC

Trying to get a better feel for what the inherent organic growth outlook in commuter, what range we should be thinking about maybe over the next 18 months or so? Obviously, we got a lift from that one-time parity, but once we lap that, is it sort of mid-to-high single digit when we still factor in a little more runway from New York?

Joseph L. Jackson - Chief Executive Officer & Director

Well, I think we'll get a better idea once we do anniversary it and get into the first, second quarter of next year. I think that's one growth component of commuter. But make no mistake, with any of our products, I expect them to be in high-single, low-double digits and double digits where you can every year going forward.

David M. Scharf - JMP Securities LLC

Got it. Okay. And just shifting to the OPM contract, I know last quarter you mentioned it wasn't, I guess, a big 500,000 employee agency...

Joseph L. Jackson - Chief Executive Officer & Director

Yes.

David M. Scharf - JMP Securities LLC

...that's not part of the OPM, but they're joining the FSA umbrella contract. Are you able to announce which agency that is yet?

Joseph L. Jackson - Chief Executive Officer & Director

You tried really hard.

David M. Scharf - JMP Securities LLC

Okay.

Joseph L. Jackson - Chief Executive Officer & Director

But at this point, no, they are coming onboard. They're a part of the $2.3 million and 350,000 accounts that I talked about. I would anticipate being able to disclose that agency hopefully here in the next 30 days to 60 days.

David M. Scharf - JMP Securities LLC

Okay, got it. And moving beyond the FSA contract, how many separate agencies are you going to be serving with this umbrella contract. And specifically, how many of them, maybe all have negotiated their own individual HSA processing? I'm trying to get a sense for whether on a one-off basis that's going to be part of potentially a 2017 selling effort?

Joseph L. Jackson - Chief Executive Officer & Director

Yes. The best I can tell now, Dave, and we've been working obviously more closely and really closely with that group right now. There's about 300 federal agencies that are part of the group of 2.3 million eligibles that we're bringing on coming September 1 and then some on January 1. I think, and I don't know the size of each individual agency, but I think there's approximately about a 1,000 federal agencies out there. So now I don't know the piece of the pie that the 300 federal agencies that we work with are of the total. And the good news is the OPM continues to try and convince other agencies to join the FSA Fed program and we will provide whatever help we can do there to make sure they are successful going forward.

David M. Scharf - JMP Securities LLC

Got it. But on the HSA side...

Joseph L. Jackson - Chief Executive Officer & Director

Yes.

David M. Scharf - JMP Securities LLC

...do you have a sense – I mean, it's not been a priority – of whether all 300 of those agencies that you're going to be serving are offering high-deductible account and have an HSA processor in place?

Joseph L. Jackson - Chief Executive Officer & Director

Yes. I can't answer that because I don't know.

David M. Scharf - JMP Securities LLC

Okay.

Joseph L. Jackson - Chief Executive Officer & Director

What I do know is whereas the FSA product is consolidated within the FSA Fed program, today there is not a HSA Fed program. I think where there are high-deductible plans offered to federal employees, it's done more on an offering provided by a significant number of carriers. And I think most of whatever HSA accounts are out there probably are with the individual carrier that the employee signs up with.

David M. Scharf - JMP Securities LLC

Got it. Just one last question on the guidance. You mentioned obviously organic growth is going to accelerate throughout the year based on the Q3 and Q4 or full-year guidance. The implication is organic revenues growth is going to be exiting the year at or north of 20%.

Just thinking about going from mid-teens now to exiting the year at 20%, how much of – Ceridian was already part of Q2, so I'm trying to understand is it primarily coming from the mid-year, June, new clients that you signed up that are going to start contributing in the back-half of the year? Is it coming from just further commuter clients coming onboard or from some of the partnerships you've signed? It seems to be a pretty big ramp when you already factor in the fact that the new COBRA business already contributed to Q2.

Joseph L. Jackson - Chief Executive Officer & Director

Right. Well, everything that you described as components of that growth in the back half are true. The couple that you left out were, you left out the OPM, which starts in September and goes through the end of the year. And there are a number of fairly large k late third quarter, early fourth quarter starts.

I think you're exiting or you say exiting the year at above 20% organic growth, that might be a bit heavy on the upside. It might be 1 point, 1.5 point too high at this point. Again, that said, we are active in not only the acquisition area and pursuing channel partnership opportunities, much like Ceridian, Aflac, et cetera.

So, remember, Ceridian came onboard and provided about $2 million a month in revenue out of the gate. So put that off to the side. I think everything that you mentioned and then adding on the OPM business is one of the reasons why we feel confident and comfortable with our guidance and that organic growth will accelerate throughout the year, particularly in the fourth quarter.

David M. Scharf - JMP Securities LLC

Got it. Got it. Thank you.

Joseph L. Jackson - Chief Executive Officer & Director

Sure.

Operator

Thank you. Our next question comes from the line of Mayank Tandon with Needham & Company. Your line is now open.

Mayank Tandon - Needham & Co. LLC

Thank you. Good evening. Good job on the numbers. Just wanted to go back on guidance. Sorry if I missed this. Colm, I want to confirm that you did indicate that the revenue guide for the year and the EPS guide for the year, that has not changed, right, from what you've given back last quarter?

Colm M. Callan - Chief Financial Officer

That's correct.

Mayank Tandon - Needham & Co. LLC

Okay. Thanks. So most of my questions have been answered, but I did want to go back to the growth outlook for 2017. I know you haven't given specific guidance, but given where you're ending 2016 and some of the tailwinds, especially the OPM contract coming on live, Joe, is it reasonable to expect that your growth rate in 2017 should be at the upper end of that 9% to 14% long-term target that you have talked about previously?

Joseph L. Jackson - Chief Executive Officer & Director

Well, first of all, I'll start with the classic we're not providing guidance to 2017 yet, or I'll get kicked under the table by my CFO.

Mayank Tandon - Needham & Co. LLC

Right.

Joseph L. Jackson - Chief Executive Officer & Director

So, look, with the OPM contact, we have the material part of our HSA custodial relationship kicking in next year. The sales results we're seeing from Jim Lynch, who runs our sales area and his team are outstanding and continue to grow. I think we're positioning ourselves very well as we move into 2017. And, again, that doesn't include any acquisitions, any channel partnerships, where, again, we're very active on both sides of that equation.

So like I said, our company is in the best financial position it's ever been in with probably more opportunities out there that we feel confident that we can execute on. And when you combine the service that we offer, the consumer engagement that gets people involved in these programs, the industry leadership and the technology and innovation we bring, I feel real comfortable about that 9% to 14% guideline going forward. Where it ends up I guess we'll have to see at the end of the year, but when we get through open enrollment, et cetera. But like you said, there's a lot of good things happening.

Mayank Tandon - Needham & Co. LLC

Right. And that's helpful color. And then just turning to margins, I wanted to get a little bit of a break down as you look at the roadmap for margin expansion. How much can we expect to see gross margins move up from current levels? Again, I think you had one of the healthier margins in the recent quarter.

And then in terms of the OpEx lines, where do we see the most leverage, is it mostly G&A driven or could we expect some leverage also on the sales and marketing and R&D?

Colm M. Callan - Chief Financial Officer

Hey, Mayank. Yeah, it's Colm. So you shouldn't expect that kind of 4 point step up year-over-year in the gross margin, although we do think there's still opportunities there to take advantage of more automation and just getting people to use the app more and processing things on their own from a self-service standpoint.

But we think that there's opportunities for margin expansion on the operating expenses in all of the line items you mentioned. Definitely on the G&A side, we can support a much larger business on the base that we have here today. And we think that there is still some opportunities on the R&D line.

With respect to sales and marketing, we consciously made a decision at the beginning of this year to invest in that line this year. We added about five heads to our sales team and reorganized, as I think Joe touched on earlier, about putting some resources against some of these partnership opportunities that while they are generating costs in year right now that they should lead to meaningful revenue growth opportunities in future years. So that's one area where you might see us invest in more in the near-term to sort of make sure we drive the top-line growth, but over time there definitely is some opportunities for margin expansion there as well.

Joseph L. Jackson - Chief Executive Officer & Director

And I think Mayank what Colm had talked about on the margin side and the investment side, as I mentioned earlier, we are investing in the OPM's open enrollment process and we'll continue to because of what we see there as a pretty significant opportunity. We are also going to invest a little bit in the OPM side, as I mentioned earlier, with the blackout of the submission of claims.

We would anticipate that there would probably be more calls than we would have expected in September, and we want to make sure that we have enough people on that are prepared to be able to make that a smooth transition and provide high quality service, kind of on that first impression standpoint. And what gives us the confidence to do that is the discipline and the philosophy that we have which I have talked about many times at Edgar Institute (48:37) throughout our operational and call center and claims area and whether it's technology or anywhere else.

As we grow, we have the discipline in place to ensure that our expense growth never outpaces our revenue growth, and by continuing to meet and exceed those kind of expectations that gives us the confidence for short-term investments because we know in the long-term getting that revenue on board what we can turn it into from a margin perspective.

Mayank Tandon - Needham & Co. LLC

All right, that's very helpful. Thank you very much.

Operator

Thank you. Our next question comes from the line of Tobey Sommer with SunTrust. Your line is open.

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Thanks. Wanted to start off by asking a question on the OPM. Is the adoption of products in that book today different than your existing business and customers and as you've learned more about that book of business, have you learned of any obstacles to increasing the adoption of those products or do you think you have opportunity in front of you? Thank you.

Joseph L. Jackson - Chief Executive Officer & Director

Yeah, I think clearly opportunity, Tobey. I think whereas the penetration rate we see from our book of business is little over 30%, industry-wide approximately 24%, I think what we see at the OPM is kind of a somewhere between 10% and 15%. I won't know the exact numbers for a little bit yet, but clearly opportunity.

And I think I've mentioned to many of you, as we went through the sales process, as we got down to kind of the short strokes, one of the things that the OPM continued to ask us was to get examples, samples of communications, education and awareness programs we've used in the past to drive more participation. And as we've gotten engaged with the group working towards this transition, which is a very large transition, especially within our industry, a lot of focus has been on making sure that we can transition to our platform in as transparent and smooth a way as possible.

But in parallel, getting a lot of good reception from the folks at the OPM on the marketing side as I mentioned, we've already put together and have ready to go several education awareness marketing programs that are designed specifically for them. Now, we're very optimistic that we can drive that participation going forward. What that will be during the first open enrollment campaign that we have with them, I don't know. We'll know a lot as we get towards early next year.

But I'm sure like anything, there will be some things that work, some things that don't work as well as we had anticipated and some new things that we'll want to try each year. So, I would like to think within the next two to three years we can get them at least to where the industry averages are, if not closer to where our book of business average is today.

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Thank you. That's helpful. In the HSA business, that marketplace has seen some consolidation particularly among the largest participants. Do you see any impact of that consolidation on the marketplace and your ability to win new business?

Joseph L. Jackson - Chief Executive Officer & Director

No. I would say from the HSA RFP pipeline that we have for the new clients coming on board, the growth of existing clients, and from our perspective, I think with the relationship that we have now with our custodial partner, I think that positions us well to be able to get involved in a much more meaningful way when opportunities present themselves like they have in the industry so far, maybe not to the extent of the largest ones that have been acquired over the last couple of years, but small to mid size and also kind of working with carriers and driving that as a distribution channel, I think will help as well.

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Okay. Last question from me just on acquisitions. Has anything changed out in the marketplace that's kind of slowed the pace of acquisition, maybe you're having conversations with about bigger chunk of your properties that take longer to consummate. Just curious about your perspective on what seems like a decent wait since the last one? Thank you.

Joseph L. Jackson - Chief Executive Officer & Director

Right. No, I wouldn't say that there's been any significant changes in the last few quarters or even the last couple of years. There is a significant number of small to medium size administrators out there. Many of which we were continually in conversation with. I think as I've said before, it's more of a timing issue for the owners as to when those things occur. I think there are larger opportunities that we're better positioned now to go after than may be we have been in the last few years. And as I mentioned before, I kind of look at the acquisition area now as kind of a deal area, so it'd be kind of pure acquisition as well as kind of channel partnerships in the vein of Ceridian and Aflac. And again, we're working on a number of those opportunities as well. We always say we plan to do one to three per year, and I wouldn't change that statement or that belief at this point.

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Thanks for your help, Joe.

Joseph L. Jackson - Chief Executive Officer & Director

Sure. Thanks, Tobey.

Operator

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Joe Jackson for any closing remarks.

Joseph L. Jackson - Chief Executive Officer & Director

Thank you, operator. And again, I'd like to thank all of you for joining today. I know there's a lot of employees that tune in and listen to our call, and I just want to say thank you to all of them for all that you do to allow me to deliver this kind of news for our company. It's a pleasure to do and I'm very proud of everyone who contributes to this. So, like I said, we've had a great first half, we have a lot of momentum moving into the second half with a lot of opportunity ahead of us and I look forward to our executing on that as we move through the year. Thank you all very much, and we'll talk to you soon.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!