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WageWorks Reports Third Quarter 2012 Financial Results

Forward-Looking Statements

Statements in the press release and certain matters to be discussed on the third quarter conference call regarding WageWorks, Inc., which are not historical facts, are “forward- looking statements” within the meaning the Private Securities Litigation Reform Act of 1995. These forward looking statements may be identified by terms such as believe, expect, may, will, provide, could and should and the negative of these terms or other similar expressions. These statements, including statements relating to continuing to provide value to our employer clients and their employees through our consumer-directed benefits solutions, our acquisition of new employer clients, our retention of exiting employer clients, the demand for our consumer-directed benefits solutions, the expected benefits of the Enterprise and SMB selling season and the potential impact on our future operating results are based on current expectations and assumptions that are subject to risks and uncertainties. Our actual results could differ materially from those we anticipate as a result of various factors, including the continued availability of tax-advantaged consumer-directed benefits to employers and employees, our ability to successfully identify, acquire and integrate additional portfolio purchases or acquisition targets, our ability to raise awareness among employers and employees about the advantages of adopting and participating in consumer-directed benefits programs, our ability to acquire and retain new employer clients and to cross-sell our products to existing employer clients, the participation of employees in our employer clients’ consumer-directed benefits programs, our ability to compete effectively with current and future competitors, our ability to provide high quality service in a cost efficient manner and our ability to enhance our product functionality. For a discussion of these and other related risks, please refer to “Risk Factors” in our Registration Statement on Form S-1, which is available on the SEC’s website at www.sec.gov. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date made. You should review our SEC filings carefully and with the understanding that our actual future results may be materially different from what we expect.

About WageWorks

WageWorks (NYSE:WAGE) is a leading provider of consumer-directed benefit programs in the United States. WageWorks administers and operates a broad array of products, including spending account management programs, such as health and dependent care Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs) and commuter benefits.

WAGEWORKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
       
Three Months Ended September 30, Nine Months Ended September 30,
  2011     2012     2011     2012  
(unaudited)
(in thousands, except per share amounts)
Revenues:
Healthcare $ 21,511 $ 26,508 $ 68,590 $ 83,353
Commuter 8,271 13,090 24,860 38,302
Other   2,665     2,940     8,182     8,970  
Total revenues   32,447     42,538     101,632     130,625  
 
Operating expenses:
Cost of revenues (excluding amortization of internal use software) 12,537 15,210 41,147 47,887
Technology and development 3,403 4,784 10,342 13,746
Sales and marketing 4,733 6,901 15,191 21,377
General and administrative 5,163 6,950 15,629 21,753
Amortization and change in contingent consideration   2,985     3,713     8,160     12,245  
Total operating expenses   28,821     37,558     90,469     117,008  
Income from operations 3,626 4,980 11,163 13,617
Other income (expenses):
Interest income 7 14 27 33
Interest expense (125 ) (456 ) (322 ) (1,313 )
Gain on revaluation of warrants 627 - 568 381
Other income   -     19     -     46  
Income before income taxes 4,135 4,557 11,436 12,764
Income tax provision   (234 )   (2,034 )   (635 )   (5,007 )
Net income 3,901 2,523 10,801 7,757
Accretion of redemption premium expense   387     -     (5,305 )   (2,301 )
Net income attributable to common stockholders $ 4,288   $ 2,523   $ 5,496   $ 5,456  
Add back: accretion of redemption premium related to
dilutive redeemable preferred stock   (1,014 )   -     69     (260 )
Net income attributable to common stockholders for diluted EPS $ 3,274   $ 2,523   $ 5,565   $ 5,196  
 
Basic net income per share attributable to common stockholders $ 2.79 $ 0.09 $ 3.58 $ 0.38
Diluted net income per share attributable to common stockholders $ 0.17 $ 0.08 $ 0.32 $ 0.21
 
Shares used in basic net income per share calculations 1,536 26,755 1,534 14,235
Shares used in diluted net income per share calculations 19,379 31,632 17,415 24,411
 
 
STOCK-BASED COMPENSATION EXPENSE
Total stock-based compensation expense included in the Consolidated Statements of Operations is as follows:
 
Three Months Ended September 30, Nine Months Ended September 30,
  2011     2012     2011     2012  
(unaudited)
Cost of revenues $ 44 $ 68 171 $ 219
Technology and development 62 84 197 221
Sales and marketing 95 75 307 298
General and administrative   311     954     1,036     2,117  
$ 512   $ 1,181   $ 1,711   $ 2,855  

WAGEWORKS, INC.
CONSOLIDATED BALANCE SHEETS
   
December 31, 2011   September 30, 2012

(unaudited)

(in thousands, except per share amounts)

ASSETS
Current assets:
Cash and cash equivalents $ 154,621 $ 238,861
Restricted cash, current portion 2,383 980
Accounts receivable, less allowance for doubtful accounts of $69 and $152 at December 31, 2011 and September 30, 2012, respectively 15,647 20,421
Prepaid expenses and other current assets   7,178     12,922  
Total current assets 179,829 273,184
Restricted cash, net of current portion 2,526 2,432
Property and equipment, net 19,014 23,560
Goodwill 46,233 75,822
Acquired intangible assets, net 12,555 33,541
Deferred tax asset 16,978 7,358
Other assets   1,561     1,786  
Total assets $ 278,696   $ 417,683  
 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 21,415 $ 39,281
Customer obligations 169,959 191,783
Short-term contingent payment 8,976 10,087
Short-term debt 14,901 -
Other current liabilities   394     534  
Total current liabilities 215,645 241,685
Long-term debt - 44,465
Warrants 1,119 -
Other non-current liabilities   1,820     2,541  
Total liabilities 218,584 288,691
Redeemable convertible preferred stock:
Redeemable convertible preferred stock, Series C ($24,999 liquidation preference). Authorized
6,306 shares; issued and outstanding 5,882 shares at December 31, 2011 and no shares
outstanding at September 30, 2012 36,570 -
Redeemable convertible preferred stock, Series D ($15,998 liquidation preference). Authorized
2,465 shares; issued and outstanding 2,465 shares at December 31, 2011 and no shares
outstanding at September 30, 2012 17,771 -
Redeemable convertible preferred stock, Series E ($21,179 liquidation preference). Authorized
5,295 shares; issued and outstanding 5,295 shares at December 31, 2011 and no shares
outstanding at September 30, 2012   27,828     -  
Total redeemable convertible preferred stock 82,169 -
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value ($31,916 liquidation preference). Authorized
26,392 shares, outstanding 17,645 shares at December 31, 2011 and no shares
outstanding at September 30, 2012 33,965 -
Common stock, $0.001 par value. Authorized 1,000,000 shares; issued 1,738 shares at
December 31, 2011 and 26,794 shares at September 30, 2012 2 27
Treasury stock at cost 192 shares at December 31, 2011 and 200 shares at September 30, 2012 (433 ) (545 )
Additional paid-in capital 19,029 196,373
Accumulated deficit   (74,620 )   (66,863 )
Total stockholders' equity (deficit)   (22,057 )   128,992  
Total liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit) $ 278,696   $ 417,683  

WAGEWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
     
Nine Months Ended September 30,
  2011     2012  

(unaudited)

(in thousands)

Cash flows from operating activities:
Net income $ 10,801 $ 7,757
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 2,602 2,190
Amortization and change in contingent consideration 8,160 12,245
Stock-based compensation 1,711 2,855
Revaluation of warrants (568 ) (381 )
Loss on disposal of fixed assets 6 25
Loss on impairment of long-lived assets 72 -
Payment of contingent consideration in excess of initial measurement (662 ) (3,361 )
Provision for doubtful accounts 170 (412 )
Deferred taxes 336 4,879
Changes in operating assets and liabilities:
Accounts receivable (3,431 ) (3,313 )
Prepaid expenses and other current assets (3,481 ) (2,381 )
Other assets 224 (15 )
Accounts payable and accrued expenses (3,273 ) 4,050
Customer obligations 4,538 (18,891 )
Other liabilities   (318 )   317  
Net cash provided by operating activities   16,887     5,564  
Cash flows used in investing activities:
Purchases of property and equipment (6,368 ) (9,634 )
Cash consideration for business acquisitions, net of cash acquired (1,852 ) 8,551
Cash paid for acquisition of client contracts - (711 )
Change in restricted cash   (89 )   1,957  
Net cash (used in) provided by investing activities   (8,309 )   163  
Cash flows from financing activities:
Proceeds from debt 12,129 29,564
Proceeds from initial public offering net of underwriters commissions and discounts - 62,566
Proceeds from exercise of common stock options 15 154
Proceeds from issuance of common stock (Employee Stock Purchase Plan) - 451
Payment of contingent consideration (4,288 ) (14,110 )
Purchase of treasury stock   (21 )   (112 )
Net cash provided by financing activities   7,835     78,513  
Net increase in cash and cash equivalents 16,413 84,240
Cash and cash equivalents at beginning of period   104,280     154,621  
Cash and cash equivalents at end of period $ 120,693   $ 238,861  

GAAP to Non-GAAP Reconciliations
(In millions, except per share data)
(unaudited)
       
 
The following tables detail the reconciliation of GAAP financial measures to non-GAAP financial measures included in this release:
 
Operating income:
Three Months Ended September 30,   Nine Months Ended September 30,
  2011     2012     2011     2012  
 
GAAP income from operations $ 3.6 $ 5.0 $ 11.2 $ 13.6
Stock-based compensation 0.5 1.2 1.7 2.9
Amortization of acquired intangibles 0.7 1.7 2.1 4.7
Contingent consideration   0.8     0.2     1.7     2.7  
Non-GAAP income from operations $ 5.6   $ 8.1   $ 16.7   $ 23.9  
Non-GAAP income from operations as a percentage of total revenue 17.3 % 19.0 % 16.4 % 18.3 %
 
Net income:
Three Months Ended September 30,   Nine Months Ended September 30,
  2011     2012     2011     2012  
 
GAAP net income attributable to common stockholders for diluted EPS $ 3.3 $ 2.5 $ 5.6 $ 5.2
Accretion of redemption premium expense (0.4 ) - 5.3 2.3
Stock-based compensation 0.5 1.2 1.7 2.9
Amortization of acquired intangibles 0.7 1.7 2.1 4.7
Gains from revaluation of warrants (0.6 ) - (0.6 ) (0.4 )
Contingent consideration 0.8 0.2 1.7 2.7
Tax effect of above adjustments   (0.1 )   (1.1 )   (0.3 )   (4.3 )
Non-GAAP net income $ 4.2   $ 4.5   $ 15.5   $ 13.1  
 
Weighted average shares outstanding used in computing GAAP per share amounts (diluted) 19.4 31.6 17.4 24.4
Add:
Additional weighted average shares giving effect to initial public offering 7.5 - 7.5 3.7
Additional weighted average shares giving effect to anti-dilutive preferred shares   2.6     -     5.6     2.8  
Weighted average shares used in computing Non-GAAP per share amounts **   29.5     31.6     30.5     30.9  
 
Non-GAAP diluted net income per share $ 0.14 $ 0.14 $ 0.51 $ 0.42
 
** Reflects the issuance of shares of common stock as though the completion of the initial public offering had occurred at the beginning of the respective periods and anti-dilutive preferred shares excluded from the calculation of GAAP per share amounts.
 
Reconciliation of GAAP net income attributable to common stockholders to Non-GAAP Adjusted EBITDA:
Three Months Ended September 30,   Nine Months Ended September 30,
  2011     2012     2011     2012  
GAAP net income attributable to common stockholders $ 4.3 $ 2.5 $ 5.5 $ 5.5
Accretion of redemption premium expense (0.4 ) - 5.3 2.3
Interest income (0.0 ) (0.0 ) (0.0 ) (0.0 )
Interest expense 0.1 0.5 0.3 1.3
Income tax provision 0.2 2.0 0.6 5.0
Depreciation 0.9 0.7 2.6 2.2
Amortization and change in contingent consideration 3.0 3.7 8.2 12.2
Stock-based compensation expense 0.5 1.2 1.7 2.9
Gains from revaluation of warrants   (0.6 )   -     (0.6 )   (0.4 )
Adjusted EBITDA $ 8.0   $ 10.6   $ 23.6   $ 31.0  




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