A closer look at WageWorks (NYSE: WAGE) as a potential investment idea.

1. NYSE: WAGE
Jason A. Moser
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2.  Consumer directed benefit (CDB) plans such as Flex
Spending Accounts (FSA), Health Reimbursement
Arrangements (HRA) and Health Savings Accounts
(HSA) are effective vehicles that help minimize
employees’ tax exposure.
 WageWorks is a pure play provider offering these
vehicles to US businesses of all sizes with ample
room to grow its customer base. The value
proposition it offers to employees and employers
makes it an interesting portfolio candidate.
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The idea

3. 3
What does WageWorks do?
WageWorks provides consumer-directed
benefits programs (CDBs) to employees to
save money on taxes in the UA. These
programs include Flexible Spending
Accounts (FSA), Health Reimbursement
Arrangements (HRA), commuter
programs, COBRA and operational
services to its clients.

4. Market opportunity
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The Affordable Care Act imposes a $2,500 limit,
indexed to inflation, on pre-tax dollar employee
contributions made to a healthcare FSA for plan
years that begin on or after January 1, 2013.
Current laws and regulations limit the amount of
pre-tax dollars employees can contribute to
dependent care FSAs to $5,000 per tax year.
For 2014, the monthly maximum is $130 for transit
or vanpooling, $250 for parking and $20 for bicycle
reimbursement.

5. Market opportunity
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6.  Changes in healthcare legislation have resulted in heavier
than forecasted enrollment in private healthcare
exchanges.
 So far this year 3 million people have enrolled through
private exchanges. This growth is being driven primarily by
small and mid-size businesses.
 Accenture estimates this enrollment number will reach 40
million employees by 2018, surpassing those in state and
federally funded programs.
 Employees moving to these private exchanges typically
take less coverage/higher deductible plans. This means
more out of pocket expense which means greater incentive
to participate in some form of CDB.
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Private exchange opportunity

7. CDB programs with large clients typically
run 3-4 years and provide for monthly
fees based on participants.
SMBs (small/medium businesses)
typically sign for 1-3 year terms, monthly
fee remains constant throughout the
term.
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How do they make money?

8. Direct Sales
SMB Distribution Channel
Group Purchasing Organizations
Channel Partnerships
Private Exchanges
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How do they make money?

9. WageWorks metrics that matter
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2012 2013
Employee
participants
2.8 million 3.2 million
Employer clients 27,000 29,000
WageWorks Prepaid
Debit Cards Used
2.2 million 3.9 million

10. 10
Sales growth

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Robust margins

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Use it or lose it no more
 Previous iterations of health flex
spending accounts stated whatever
you didn’t use you would lose.
 This was unreasonable. Healthcare
expenses are difficult to predict; the
prospect of throwing money away is
too high a hurdle.
 On October 31, 2013 US Treasury
modified this clause. Today
participants may now carry up to
$500 of their unused balance forward
to the following year’s plan.

13. Revenue breakdown
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14.  Shares trade at 68X earnings; EV/EBIDTA of 30; 57X FCF; 7X sales.
 Balance sheet has $371 million cash versus $30 million in debt.
 From 2009-2013 the top line has grown at 19% CAGR; bottom line 122%.
 Profitable every year since 2011; FCF positive since 2009.
 Management calling for 15%-25% CAGR top line in coming years.
 At 20% WAGE is doing $545 million in sales for 2018. Net margin of 11%
results in $60 million net income.
 At 30X earnings you have a market cap of $1.8 billion. But would the
market pay more for growth? 40X? 50X? Maybe. It’s paying 68X today.
 Modeling out 20% annual revenue growth next five years and operating
margin expanding over time still pegs shares pricey at $45 today.
 This stock pulls below $40 and I start getting interested assuming the
fundamentals are still sound.
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Understanding future worth

15. CEO/Director Joe Jackson: CEO since 2/2007,
formerly at Western Union.
SVP and Co-Founder Clem O’Donnell: serves as
COO of Tracker Corp., CTO of WAGE from 2000-
2009.
CFO Colm Callan: CFO since 9/2014, came from
eBay and PayPal.
COO Edgar Montes: COO since 12/2012 with the
company since 2007.
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Management

16.  Strategery: Growing via acquisition is risky. These are modest portfolio
additions though so they’re less risky.
 Legislation: Any changes in healthcare or tax legislation that works against
them could hinder growth.
 Pure: While WAGE is a pure play, it is also much smaller than some of its
competitors with greater financial resources and reach.
 Growth: If growth based on growing the customer base and new offerings
fails to take hold, investors may bail.
 Channels: Channel partner strategy is also a meaningful growth lever, we
want to see these continue.
 Recession: Fewer jobs, tighter pursestrings, you get the picture.
 Participation: One of the big hurdles continues to be educating employees
to the benefits of participating. Also an opportunity for WAGE.
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Risks

17. Large health insurers
Payroll companies
Commercial banks
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Competition

18.  Taxes are a drag on employees’ income.
 Consumer Directed Benefit (CDB) accounts offer relatively
simple options to minimize one’s exposure.
 Healthcare, childcare, commuting are WAGE’s core offerings.
 Opportunities to engage and educate consumers on the value
proposition for both employees and employers.
 Private exchanges could be a big catalyst in the coming years.
 A pure play with customer-centric management WAGE has
the opportunity to outshine larger, less-focused competition.
 The stock today at 68X earnings is rich, however a pullback
could present investors with a compelling opportunity.
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Bottom line for investors

19. Remember, investing is all
about the future. There are
never any guarantees and you're
taking a measure of a leap of faith
every single time.
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