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WageWorks Reports Third Quarter 2014 Financial Results

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WageWorks, Inc. (the “Company”) (NYSE:WAGE) , a leader in administering Consumer-Directed Benefits (CDBs), which empower employees to save money on taxes while also providing corporate tax advantages for employers, today announced the Company’s financial results for its third quarter ended September 30, 2014.

“I am very pleased with our third quarter results. As demand for Consumer-Directed Benefits increases, we continue to execute on our growth strategies and are well on our way to meeting our 2014 objectives. We just completed another record enterprise selling season, and are very excited about the initial results of our SMB selling season and Open Enrollment period. Our integration efforts with CONEXIS are well down the path, as we are already leveraging the strengths of our respective infrastructures and resources. On the commuter side of our business, we are well-positioned to benefit from the trend of city ordinances, most recently in New York, that require employers to provide commuter benefits,” said Joe Jackson, Chief Executive Officer of WageWorks. “Finally, we continue to see encouraging results from our channel partnerships, as well as private and public exchange relationships.”

For the third quarter, WageWorks reported total revenue of $68.0 million, compared to $53.6 million for the third quarter of 2013, an increase of 27 percent. Healthcare revenue was $38.6 million, compared to $32.6 million for the third quarter of 2013, an increase of 18 percent. Commuter revenue was $15.1 million, compared to $14.9 million for the third quarter of 2013, an increase of 1 percent. COBRA revenue was $9.5 million, compared to $3.8 million for the third quarter of 2013, an increase of 149 percent. Other revenue was $4.8 million, compared to $2.1 million for the third quarter of 2013, an increase of 123 percent.

GAAP operating income was $6.6 million for the third quarter of 2014, compared to GAAP operating income of $9.9 million for the third quarter of 2013. On a non-GAAP basis, third quarter of 2014 operating income was $13.8 million, compared to non-GAAP operating income of $11.3 million for the third quarter of 2013.

GAAP net income was $4.1 million, or $0.11 per diluted share, for the third quarter of 2014, compared to GAAP net income of $7.8 million, or $0.22 per diluted share, for the third quarter of 2013.

On a non-GAAP net income basis, third quarter of 2014 net income was $8.5 million, or $0.24 per diluted share, compared to non-GAAP net income of $6.6 million, or $0.18 per diluted share, for the third quarter of 2013. Non-GAAP net income for the third quarter of 2013 and 2014 excludes expenses related to stock-based compensation, amortization of acquired intangibles, contingent consideration expense and the related tax impact of these items.

Non-GAAP adjusted EBITDA was $18.0 million for the third quarter of 2014, a 27 percent increase compared to non-GAAP adjusted EBITDA of $14.2 million for the third quarter of 2013.

The reconciliation of the non-GAAP measures to the comparable GAAP measures for the third quarter 2014 and 2013 is detailed in the tables provided in this press release.

As of September 30, 2014, WageWorks had cash and cash equivalents totaling $386.4 million. This compares to cash and cash equivalents totaling $360.0 million as of December 31, 2013.

The Company’s Conference Call Information

WageWorks will host a conference call today, November 6, 2014, at 5:00 p.m. ET to discuss the Company’s third quarter ended September 30, 2014 financial results and business outlook.

The live webcast of the conference call can be accessed under “Investor Relations” section of the Company’s website at www.wageworks.com. Those wishing to participate in the live call should dial 877-546-5019 (toll-free) or 857-244-7551, and enter pass code 95342824. Following the call, an archived webcast will be available in the “Investor Relations” section of the Company’s website at www.wageworks.com. A telephone replay will be available for one week at 888-286-8010 (toll-free) or 617-801-6888 using the pass code 69695026.

Non-GAAP Financial Information

To supplement the Company’s financial statements presented on a GAAP basis, the Company provides non-GAAP financial measure of net income, operating income, adjusted EBITDA and diluted earnings per share. By providing information about both the overall GAAP financial performance and the non-GAAP measures that focus on what management believes to be its ongoing business operations, the Company believes that the additional information enhances investors’ overall understanding of the Company’s business. The Company’s management believes it is useful for itself and investors to review, as applicable, both GAAP information that includes stock-based compensation, amortization of acquired intangibles, contingent consideration gain and expense and the related tax impact of all of these items on the provision for income taxes, and the non-GAAP measures that exclude such information in order to assess the performance of the Company’s business for planning and forecasting in subsequent periods. The Company’s management does not itself, nor does it suggest that investors should consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Whenever the Company uses such a non-GAAP financial measure, it provides a reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above. Investors are also encouraged to review the Company’s GAAP financial statements as reported in its SEC filings.

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 of the Private Securities Litigation Reform Act of 1995. These forward looking statements may be identified by terms such as believe, expect, will, provide, 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 existing employer clients, the expected benefits of our channel partnerships, the demand for our consumer-directed benefits solutions, the industry trends regarding consumer-directed health plans and exchange opportunities, the expected benefits of the carryover provision, the expected benefits of our investments 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, our ability to identify and execute on channel partner and exchange opportunities, the participation of employees in our employer clients’ consumer-directed benefits programs and whether the carryover provision will have any impact thereon, our ability to compete effectively with current and future competitors, our ability to provide high quality service in a cost efficient manner, our ability to successfully partner with private exchanges, and our ability to enhance our product functionality. For a discussion of these and other related risks, please refer to “Risk Factors” in our most recent report on Form 10-Q, 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 and we disclaim any obligation to update information contained in these forward-looking statements whether as a result of new information, future events, or otherwise. 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 leader in administering Consumer-Directed Benefits (CDBs), which empower employees to save money on taxes while also providing corporate tax advantages for employers. WageWorks is solely dedicated to administering CDBs, including pre-tax spending accounts, such as health and dependent care Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs), as well as Commuter Benefit Services, including transit and parking programs, wellness programs, COBRA, and other employee benefits. WageWorks makes it easier to understand and take advantage of Consumer-Directed Benefits for more than 45,000 employers and more than 3.8 million people. WageWorks is headquartered in San Mateo, California, with offices in major locations throughout the United States. For more information, visit www.wageworks.com.

WAGEWORKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, Nine Months Ended September 30,
2013 2014 2013 2014
(unaudited)
(in thousands, except per share amounts)
Revenues:
Healthcare $ 32,646 $ 38,600 $ 102,244 $ 116,176
Commuter 14,949 15,078 44,378 46,171
COBRA 3,837 9,544 11,002 17,283
Other 2,139 4,776 6,623 9,745
Total revenues 53,571 67,998 164,247 189,375
Operating expenses:
Cost of revenues (excluding amortization of internal use software) 19,300 24,951 59,845 68,905
Technology and development 4,934 8,242 16,501 18,739
Sales and marketing 8,713 12,059 25,637 30,758
General and administrative 10,185 10,470 28,402 30,941
Amortization and change in contingent consideration 554 5,688 9,741 14,657
Total operating expenses 43,686 61,410 140,126 164,000
Income from operations 9,885 6,588 24,121 25,375
Other income (expenses):
Interest income 3 1 16 3
Interest expense (326 ) (499 ) (1,073 ) (1,010 )
Other income 7 713 40 737
Income before income taxes 9,569 6,803 23,104 25,105
Income tax provision (1,818 ) (2,690 ) (6,725 ) (9,961 )
Net income 7,751 4,113 16,379 15,144
Basic net income per share $ 0.23 $ 0.12 $ 0.49 $ 0.43
Diluted net income per share $ 0.22 $ 0.11 $ 0.47 $ 0.42
Shares used in basic net income per share calculations 34,134 35,234 33,285 35,062
Shares used in diluted net income per share calculations 35,875 36,152 34,929 36,267
STOCK-BASED COMPENSATION EXPENSE
Total stock-based compensation expense included in the Consolidated Statements of Income is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2013 2014 2013 2014
(unaudited)
Cost of revenues $ 316 $ 721 713 $ 1,547
Technology and development 224 367 566 862
Sales and marketing 303 665 790 1,563
General and administrative 2,075 1,981 4,407 6,040
$ 2,918 $ 3,734 $ 6,476 $ 10,012
WAGEWORKS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2013 September 30, 2014
(unaudited)
(in thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 359,958 $ 386,352

Restricted cash

331 332
Accounts receivable, less allowance for doubtful accounts of $467 and $777 at December 31, 2013 and September 30, 2014, respectively 32,863 44,465
Deferred tax assets – current 1,985 1,985
Prepaid expenses and other current assets 10,135 16,728
Total current assets 405,272 449,862
Property and equipment, net 26,532 33,811
Goodwill 97,636 157,089
Acquired intangible assets, net 42,786 96,902
Deferred tax asset 10,666 9,329
Other assets 16,763 11,262
Total assets $ 599,655 $ 758,255
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 49,419 $ 52,426
Customer obligations 281,153 342,457
Short-term contingent payment 4,265 3,126
Other current liabilities 1,592 11,992
Total current liabilities 336,429 410,001
Long-term debt 29,448 79,181
Long-term contingent payment, net of current portion 3,802 684
Other non-current liabilities 1,844 1,619
Total liabilities 371,523 491,485
Stockholders’ equity:

Common stock, $0.001 par value. Authorized 1,000,000 shares; issued 34,746 shares at December 31, 2013 and 35,302 shares at September 30, 2014

35 35
Additional paid-in capital 270,519 294,013
Accumulated deficit (42,422 ) (27,278 )
Total stockholders’ equity 228,132 266,770
Total liabilities and stockholders’ equity $ 599,655 $ 758,255
WAGEWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
2013 2014

(unaudited)

(in thousands)

Cash flows from operating activities:
Net income $ 16,379 $ 15,144
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 2,627 2,864
Amortization and change in contingent consideration 9,741 14,657
Stock-based compensation 6,476 10,012
Loss on disposal of fixed assets 91 14
Payment of contingent consideration in excess of initial measurement (643 )
Provision for doubtful accounts 115 (441 )
Deferred taxes 6,118 8,267
Excess tax benefit from the exercise of stock options (7,084 ) (7,706 )
Changes in operating assets and liabilities:
Accounts receivable (7,156 ) (10,907 )
Prepaid expenses and other current assets (2,084 ) (5,256 )
Other assets 308 (2,608 )
Accounts payable and accrued expenses 4,310 480
Customer obligations (11,044 ) (514 )
Other liabilities (2,517 ) (1,055 )
Net cash provided by operating activities 15,637 22,951

Cash flows from investing activities:

Purchases of property and equipment (10,791 ) (11,628 )
Cash consideration for business acquisitions, net of cash acquired (751 ) (44,314 )
Cash paid for acquisition of client contracts (1,219 )
Advance payment for acquisition of client contracts (15,000 )
Change in restricted cash 3,248 (1 )
Net cash used in investing activities (24,513 ) (55,943 )
Cash flows from financing activities:
Proceeds from debt 49,663
Repayment of debt (15,000 )
Proceeds from follow-on offering net of underwriters commissions and discounts 11,550
Proceeds from exercise of common stock options 14,446 4,726
Proceeds from issuance of common stock (Employee Stock Purchase Plan) 1,467 1,776
Payment of contingent consideration (6,629 ) (4,485 )
Excess tax benefit from the exercise of stock options 7,084 7,706
Net cash provided by financing activities 12,918 59,386
Net increase in cash and cash equivalents 4,042 26,394
Cash and cash equivalents at beginning of period 305,052 359,958
Cash and cash equivalents at end of period $ 309,094 $ 386,352
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,
2013 2014 2013 2014
GAAP income from operations $ 9.9 $ 6.6 $ 24.1 $ 25.4
Stock-based compensation 2.9 3.7 6.5 10.0
Amortization of acquired intangibles 2.3 3.4 6.9 7.8
Contingent consideration (3.8 ) 0.1 (3.0 ) 0.3
Non-GAAP income from operations $ 11.3 $ 13.8 $ 34.5 $ 43.5
Non-GAAP income from operations as a percentage of total revenue 21.1 % 20.3 % 21.0 % 23.0 %
Net income:
Three Months Ended September 30, Nine Months Ended September 30,
2013 2014 2013 2014
GAAP net income $ 7.8 $ 4.1 $ 16.4 $ 15.1
Stock-based compensation 2.9 3.7 6.5 10.0
Amortization of acquired intangibles 2.3 3.4 6.9 7.8
Contingent consideration (3.8 ) 0.1 (3.0 ) 0.3
Tax effect of above adjustments * (2.6 ) (2.8 ) (6.7 ) (7.2 )
Non-GAAP net income $ 6.6 $ 8.5 $ 20.1 $ 26.0
Weighted average shares outstanding used in computing Non-GAAP per share amounts (diluted) 35.9

36.2 34.9 36.3
Non-GAAP diluted net income per share $ 0.18 $ 0.24 $ 0.58 $ 0.72
* Tax effect adjustment assumes a 40% tax rate
Reconciliation of GAAP net income to Non-GAAP Adjusted EBITDA:
Three Months Ended September 30, Nine Months Ended September 30,
2013 2014 2013 2014
GAAP net income $ 7.8 $ 4.1 $ 16.4 $ 15.1
Interest income (0.0 ) (0.0 ) (0.0 ) (0.0 )
Interest expense 0.3 0.5 1.1 1.0
Income tax provision 1.8 2.7 6.7 10.0
Depreciation 0.8

1.3

2.6 2.9
Amortization and change in contingent consideration 0.6

5.7

9.7 14.6
Stock-based compensation expense 2.9 3.7 6.5 10.0
Adjusted EBITDA $ 14.2 $ 18.0 $ 43.0 $ 53.6

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