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Edited Transcript of WAGE earnings conference call or presentation 18-Mar-19 9:00pm GMT

Q4 2017 & Q1, Q2, Q3 2018 WageWorks Inc Earnings and Outlook Call

San Mateo Mar 26, 2019 (Thomson StreetEvents) -- Edited Transcript of WageWorks Inc earnings conference call or presentation Monday, March 18, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edgar O. Montes

WageWorks, Inc. - President, CEO & Director

* Ismail Dawood

WageWorks, Inc. - CFO

* Michael Smiley

WageWorks, Inc. - Head of IR

* Stuart Charles Harvey

WageWorks, Inc. - Executive Chairman

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Conference Call Participants

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* David Michael Grossman

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* David Michael Scharf

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* James John Stockton

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst

* Robert Paul Napoli

William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology

* Tobey O'Brien Sommer

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the WageWorks' financial results and outlook conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Smiley. Sir, you may begin.

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Michael Smiley, WageWorks, Inc. - Head of IR [2]

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Thank you, Valerie. Welcome to the WageWorks financial results and outlook conference call. Before we begin, I'll remind listeners that during the course of this call, we will make forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks and uncertainties regarding the operations and future results of WageWorks. In addition to the company's periodic current and annual reports filed with the Securities and Exchange Commission, please refer to the text of our investor presentation and forward-looking statements slide for discussion of the risks associated with such forward-looking statements.

Please note that on today's call, we will refer to certain non-GAAP financial measures. In particular, we will reference adjusted EBITDA, non-GAAP net income and non-GAAP operating income. We believe these non-GAAP measures provide useful information for investors with regards to the company's operating performance and comparability of financial results period-over-period. Please refer to our investor presentation for further information and a reconciliation of the non-GAAP performance measures to the GAAP financial results. This presentation is useful in reviewing the financial 2018 versus fiscal 2017 results discussed today.

I would like to pass the call over to Stuart Harvey, Executive Chairman of WageWorks.

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Stuart Charles Harvey, WageWorks, Inc. - Executive Chairman [3]

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Thanks, Michael, and thanks, everyone, for joining us today. All of us at WageWorks are well aware that this communication is long overdue and recognize that this is the first time many of you, who are listening in today, are hearing from me. I'm Stuart Harvey, Executive Chairman of WageWorks. I joined WageWorks in September of last year, and I can assure you that the process the board and management team have undertaken to address our financial reporting obligations to get our audited financials on file and to enhance our corporate governance in general has been extremely thorough. I'm pleased to confirm that we are coming out of the other side of this with no surprises and that the financial impacts are within the ranges previously estimated and communicated. We have a lot to cover in today's presentation, so along with Edgar Montes, our President and CEO; and Izzy Dawood, our Chief Financial Officer, I'm delighted to have this opportunity to provide you with an update on the current state of our company as well as our expected increased ability to compete in the future. We have published the presentation that we'll be walking through, and this presentation can be found by connecting to the Investor Relations section on our website.

Turning to Page 3 of the deck, who we are. WageWorks prides ourselves on being a leading provider of Consumer-Directed Benefits. As an industry leader, we offer a full suite of products that allow our clients and partners to offer turnkey solutions to their employees and participants. WageWorks offers HSAs, FSAs, COBRA and Commuter Consumer-Directed Benefits. Through the use of this product portfolio, employees and their families save money by using pretax dollars to pay for certain portions of their health care, dependent care and commuter expenses.

Moving to Slide 5, let's recap the events of last year. In March of last year, we announced a delay of our 2017 annual filing, which we are pleased to have filed today along with several other amended filings. We're now current with the NYSE listing requirements. We anticipate being current with all SEC reporting requirements by our Q1 2019 earnings call. During this challenging period, we have strengthened our board and management team by adding people [with the] skills and experience required for us to outperform. Now that we are current with our financial filings, we're taking advantage of this opportunity to share WageWorks' success story and future growth strategy with you.

On Slide 6, I'd like to further expand on our management team. Edgar Montes was named to the CEO and President role on April 2018 and brings significant operating experience in continuity to the company, having previously served as the company's COO for 6 years and serving at various company leadership positions for the previous 12. We're also fortunate to have John Saia join us as General Counsel. John joined us just recently after serving as AcelRx' General Counsel. And our CFO, Izzy Dawood, was appointed to the permanent CFO role in October 2018 and was previously CFO of Santander Consumer USA. Both Izzy and John have a combined -- have a combination of public and private company experience in their respective roles.

Finally, we just announced the promotion of our Chief Operating Officer, Scott Rose, who brings added strength to the areas such as customer support, integration of acquisitions and enhancements to customer experience overall. Scott has been with the company since 2016 and most recently served as our SVP of Customer Experience.

Moving to Slide 7. We've also ensured that our board has the right breadth and depth of experience to provide the necessary governance and support to execute our strategy. Our most recent addition to our board and on our committee was George Scanlon, who has most recently served as CEO of Fidelity National Financial and prior to that was EVP of Finance and CFO of FIS. George has served on a number of audit committees with publicly traded companies for the past several years. He's a terrific complement to our other audit committee members, Rob Metzger and Bruce Bodaken.

In addition to these positive changes that have already been made, we are actively interviewing additional independent board members to complement our current board. We expect to have some new members join us in relatively short order. All of the current candidates diversify our current board composition, and I would characterize their experience, character and knowledge as being nothing short of exceptional. We're extremely pleased to have the level of interest and talent pool in which we have to choose.

On Slide 8, you can see WageWorks' performance speaks for itself. Since our IPO in 2012, our stock performance has doubled the performance of the S&P 500. We've generated high teens revenue compound annual growth. We've achieved profitability every year. We've built a strong balance sheet, and we've generated substantial free cash flow to allow us to invest in company infrastructure and make acquisitions. By no means are we resting on our accomplishments as we're confident that we have a lot more value that we can generate in the future.

Let's take a look at where we see these opportunities. On Slide 10, let's shift our focus to the consumer-directed health care industry. As depicted on the left, growth continues overall in consumer-directed health plans with a projected cumulative annual growth rate of more than 11% from 2018 to 2021. HSAs, FSAs and HRAs comprise 60% of our overall revenue, so our focus on these 3 product sets provides excellent upside for WageWorks. We're also seeing higher relative growth in HSAs as more companies convert to consumer-directed high deductible health care plans. As you can see from the chart on the right, the industry emphasis for consumer-directed health plans has continued to increase, while demand for the traditional coverage is experiencing modest declines. In just a few minutes, Edgar will share our strategic plans to address the high deductible market.

Turning to Slide 11. Our focus shifts to the other aspects of our product set. COBRA and commuter benefits are more mature markets but remain a critical part of the clients' ability to offer tax-advantaged benefits to their employees and also comply with regulatory requirements. Similarly, we have a leading position in these products. With respect to COBRA, today's high employment environment translates to more COBRA-eligible employees, so we're very comfortable with the near-term stability of the product set.

On Slide 12, you'll see that the regulatory and legislative environments are critical elements of our business. We have highlighted several current initiatives being discussed, the vast majority of which are beneficial to us. Jody Dietel, our Chief Compliance Officer, has a very active dialogue with lawmakers, has done a great job in representing WageWorks and our industry in congressional hearings. As we think about these very real and very compelling opportunities, we're also focused on the regulatory environment and the impact it may have on our business as it continues to evolve. Our leaders actively engage on behalf of our clients and participants, educating legislators on the scope and impact these benefits have on our clients and participants and advocating to preserve and expand the tax advantages they offer.

Our multi-product portfolio helps mitigate risks from regulatory changes, significantly impacting any one product, and we maintain a healthy dialogue between our policy experts and our clients on all of these issues. This is not a partisan product. The cost of health care affects everyone, and for companies that offer our products and services, everyone benefits regardless of title or position.

On Page 13, we'll take a deeper dive and provide metrics that showcase WageWorks' industry leadership. What's unique about our company is that we're not reliant on any single product or revenue source. WageWorks has diversified revenue sources with revenue generated from 4 different products that drive administration fees, interchange fees and custodial fees.

For example, COBRA now accounts for over $100 million in revenue but represents just 22% of our revenue overall. We now have 1.1 million commuter accounts and over 3 million FSA accounts. WageWorks is a top 10 provider of HSA accounts and 1 of the fastest growing segments in the industry. We think the opportunity to advance this ranking in short order is very real.

Finally, this product diversity allows us to be the provider of choice for many of the nation's largest companies. A review of our top clients demonstrates that we service 63% to the Fortune 100 and 52% to the Fortune 500 companies for at least [1] (inaudible). Additionally, approximately 60% of our revenue in 2018 came from our valued third-party network partnerships with brokers and carriers.

Finally, turning to Slide 14. You'll see that our customer base includes some of the world's leading companies that include health care, financial services, manufacturing, technology and software, industrials and consumer products. With the breadth of services, continued innovation and focus on quality, we believe we have built long-tenured relationship with well-established and growing institutions. Some of these client relationships date back more than 15 years.

And now I'd like to turn the call over to Edgar Montes, our President and CEO, who'll share our plans for future growth and our strategic vision. Edgar?

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [4]

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Thank you, Stuart, and to all of you that are joining us on the call today, I thank you. Today, I'll be sharing the driving forces behind WageWorks' industry leadership and our vision to accelerate the company's growth. I've been privileged to be part of this team for more than a dozen years, and I can tell you that we -- what we've created here is very special. It begins with our dedicated employees who are the lifeblood of our organization. They take great pride in what they do knowing their work gives people power over their physical and financial health. We sponsor this culture of engagement through a strong sense of purpose, shared values and open and honest communication as displayed on Slide 16. We clearly understand that exceptional service starts with exceptional people.

Turning to Slide 17. We understand customer service is not just what we do. It's a fundamental part of who we are. When you take highly engaged teams and equip them with the best technology, you have a formula for superior service. This is why a majority of Fortune 100 and 500 companies continue in trusting WageWorks to support their employees, and we take this role very seriously. As you know, elite customers expect elite service, and our organization is designed to deliver it. Our commitment to service excellence is backed by ongoing investments and platforms such as Salesforce, the world's leading CRM solution; and Intradiem, a workforce management tool that puts training and communications at our call center agents' fingertips. You can see from our customer feedback that our culture of service enables us to turn what some may view as a transactional experience into a meaningful one for those who utilize our products. We never forget the emotions our customers share with us about their individual health experiences and their ability to pay for them with our products.

Turning to Slide 18. Though our service-oriented culture is just one of many ways WageWorks has distinguished itself in the market, we frequently hear from our clients and prospects that we have several other competitive advantages. First, the depth and breadth of our product portfolio creates a clear preference for WageWorks. Our diversified products mix not only helps mitigate our risk, but it also enables us to deliver customized solutions that meet clients' needs.

Second, as an industry leader, our unmatched experience and proven ability to scale create long-term value for our participants and clients. No client is too small or too large for us.

Third, the profitability of our business allows for ongoing investment and innovation in our product portfolio to ensure we stay one step ahead of where the industry is headed. This is crucial on our clients' decision-making process.

And fourth, we steadily invest in protecting our clients' data as the need for heightened data security accelerates. The maturity and continuing evolution of our information security programs not only addresses customers' demand but is setting a new standard for data protection amongst our peers.

Turning to Slide 19. Our competitive advantages position us well to continue to drive value for our shareholders. We have only scratched the surface of our opportunity to grow relationships with our expansive customer base. Our strong client relationships based on our performance enable us to have cross-selling discussions with our large middle-market and small business clients. They remain receptive to expanding our relationships as we continue to keep our servicing promises.

We also have an extensive runway to become an HSA leader by leveraging our existing infrastructure and our preferred custodian partnership with BNY Mellon. As a current top 10 provider, we already have a long history of experience and plan on becoming the provider of choice by focusing on providing better service, innovative product features and compelling economics for our customers. In addition, we will continue to enhance productivity from operational improvements and drive scale and efficiencies through ongoing investments in our platform and streamlining our processes.

Finally, we are leveraging our strong financial position and industry leadership to fuel growth through opportunistic acquisitions. We have a solid history of successfully completing acquisitions and continue to improve our integration capabilities.

Turning to Slide 20. And as Stuart mentioned, WageWorks has an extensive customer base, and we will sharpen our focus on expanding these relationships to drive growth. And our data supports this opportunity. We continue to benefit from enterprise renewal rates in excess of 90%. Our enterprise client satisfaction score also climbed from 95% to 97%, and our enterprise client Net Promoter Score recently jumped from 42 to 51. To put these scores in context, the average enterprise client Net Promoter Score for all industries is 30. We are grateful for the confidence our clients place on us by renewing their commitment to the value WageWorks provides. Going forward, we believe we can realize revenue retention rates of 95% or higher through our improved service and platform enhancements.

Turning to Slide 21. We're confident in our ability to grow existing client relationships because we have a track record of doing so. Here's an example of a recent case study involving a successful campaign to increase participation with one of our largest clients. We enabled year-over-year enrollment growth by executing a high-touch messaging campaign customized for our client's unique audiences in various divisions. Despite a shrinking participant base, this particular client still realized a 5% participant growth rate in year 1 and 3.4% in year 2. Our clients value our ability to deliver dynamic communications that foster engagement and grow participation. With the support of our clients, we intend to replicate this model across our customer base to drive incremental growth.

As we think about growth opportunities for WageWorks, there are a few that have us more energized than our ability to become a leading provider of health savings accounts. As you can see on the top left side of Slide 22, HSAs have benefited from the shift in preference to consumer-directed plans. And with over 700,000 HSA accounts representing $1.4 billion (sic) [$1.2 billion] in assets, along again with our strong partnership with BNY Mellon, we are very well positioned to capture additional market share. We routinely hear over and over again from clients that if we enhance our HSA product offering, WageWorks' full product suite will be formidable.

And as described on Slide 23, we are answering that market demand by launching an entirely revamped HSA offering. This includes a streamlined participant dashboard, increased app functionality and a more diverse investment lineup. Our new HSA OnCall functionality will allow participants to access future HSA contributions for eligible health care expenses before they are accumulated.

We are also expanding our service offering to include 24/7 phone and chat availability. Going forward, we will utilize a simplified pricing model to increase program participation. Our affordable, easy-to-administer and easy-to-use HSA program will create additional demand for WageWorks in the market and further bolster our industry leadership. In fact, early reaction from the market regarding our new capabilities has been overwhelmingly positive and is already opening doors to sales opportunities with new and existing clients.

Turning to Slide 24. A hallmark of the WageWorks' success has always been our focus on operational excellence. We outlined a number of ways we see our scale continuing to drive efficiencies, cost savings and process improvement across the business. For example, we have seen a year-over-year decrease in call volume in the midst of increased participation. This speaks to the effectiveness of our multi-channel customer experience strategy. And our focus on automation will only increase self-service opportunities. Additional rigor around strategic vendor management will improve economies of scale to drive down transactional costs. And finally, eliminating redundant systems will free up resources to continue to invest in our business and expand margins. We have plans in place to realize $15 million to $20 million in savings and additional revenue by 2022.

Turning to Slide 25. Whether it's through operational efficiencies or activating our numerous avenues for growth, our strategy is focused on driving results organically. However, we will seize opportunities to make acquisitions in a very fragmented market. We will continue to approach acquisitions with an emphasis on due diligence and careful integration planning to ensure the right fit for our business at the right time and for long-term success. We are committed to ensuring our actions translate into shareholder value creation.

On Slide 26, you'll see defined metrics and goals for each aspect of our growth strategy. We will realize improved revenue retention by deepening our customer relationships, and we will grow to over 1.2 million HSA accounts by the end of 2022 through our intense focus on HSA innovation and enhancements. We aim to drive $15 million to $20 million of annual savings and additional revenue by leveraging our scale and improving efficiencies, and acquisitions will remain a key business strategy for us to grow our business.

Now that we've had a chance to share our competitive advantages in the market and outline our detailed growth strategy, let's take a moment to walk through our financials. I will now turn the call over to our CFO, Izzy Dawood, who will lead us through this portion. Izzy?

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Ismail Dawood, WageWorks, Inc. - CFO [5]

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Thanks, Edgar, and thanks again to everyone for joining. As Stuart and Edgar mentioned, we're glad we're reengaging with the investment community. Before we go to the financials, it is important to understand the drivers of the restatement and presentation adjustments.

On Slide 28, we note 3 primary drivers. First was a revenue recognition related to the upfront revenue for the OPM contract. Second is a series of billing errors driven by ineffective controls or processes such as terminations, tier pricing structures, et cetera. The correction of these errors occurred in multiple periods. The third driver is the inconsistent offset of certain expenses against health care revenue. This offset has no impact on our financial results, cash flow or balance sheet. However, consistently applying the offset will lower expenses and lower revenue by the same amount in all the periods. I will go through details on the relevant pages. Additionally to note, we have not finished our offset analysis when we provided prior estimates.

Moving to Slide 29. Our full year 2016 results were restated, reducing our revenue by $9 million, and our adjusted EBITDA was restated by $7 million. The primary drivers of the change were the upfront revenue recognition of a large government contract and billing errors. Additionally, the revenue offset was $2 million, which reduced revenue expect -- expense by the same amount with no impact to adjusted EBITDA. We've previously estimated a restatement range of $6 million to $9 million for both adjusted EBITDA and revenue. Revenue was restated from $365 million to $356 million, a change of $9 million. After adjusting for the offset, our restated revenue decreased by $7 million, within our estimated range.

Our adjusted EBITDA was restated from $108 million to $101 million, also a change of $7 million. In addition to drivers above, net income was further impacted by the impairment of internally developed software. This had no impact to our EBITDA. Further details can be found in our restatement footnote in the 10-K filing.

On Slide 30, our 2017 results showed significant growth, predominantly aided by the ADP acquisition in late 2016. Total revenue increased 34% year-over-year to $476 million. Adjusted EBITDA was $147 million, an increase of 45% over 2016. The adjusted EBITDA margin was 31%. Non-GAAP net income for 2017 was $86 million.

Moving to 2018. Our results aren't final, but we expect revenue between $468 million and $472 million. The midpoint of this range represents a decrease of 1% year-over-year. As I had mentioned earlier, we have offset certain expenses against our revenue. And adjusted for the impact of the offset, the midpoint of the range would represent revenue growth of 1%, which is at the low end of our previous estimate. Our reported EBITDA is expected between $115 million to $118 million. As we had disclosed in prior periods, we normalized the reported EBITDA for excess restatement-related costs, which increased EBITDA by approximately $28 million. This implies a margin between 29% and 30% (sic) [31%], which is in line with our prior estimates. The adjustment for our restatement-related costs can be found in the appendix of this presentation.

The growth in 2018 was driven by growth in health care and commuter revenue offset by decline in COBRA revenue. Both health care and COBRA revenue were influenced by greater-than-expected revenue attrition primarily with our ADP acquisition, and a key partner, Alight, who moved their business to a newly created in-house platform. We're expecting both of these events to influence 2019 growth as well. The impact of these 2 items reduced our 2018 growth by approximately 3% with a marginal impact to our operating expenses.

In addition discussing 2018 financials, we're sharing new disclosures about our HSA business as well. As of December 31, 2018, our HSA business is expected to generate approximately $31 million, excluding interchange. We plan to share this information every quarter going forward. We have over 700,000 HSA accounts, which have cash balances of $1.2 billion. Our yield, net of participant expense, was approximately 1.4% for the year. However, we only earned custodial yield on approximately 70% of our cash balances. The net yield for earning balances was 1.9% in 2018 and expected to increase in 2019 as average Fed funds rates have moved higher. For reference, the average Fed funds rate in 2018 was approximately 1.8%.

Our review of offset adjusted growth is only relevant for 2017 to 2018 comparison, and we do not anticipate revisiting this concept in the future.

Turning now to 2019. We expect growth to be relatively modest with a slight decrease in margins as we continue to invest in key areas and position ourselves for the future. Consistent with 2018, we're affected by the impact of higher-than-expected revenue attrition from our ADP acquisition and the full year impact of Alight's transition. We believe the impact of these 2 items is approximately 1% to 2% of revenue growth. On a reported basis, we anticipate revenue growth of 0 to 3% and a normalized adjusted EBITDA margin between 26% and 30%.

Before we talk about the financial contribution of our growth strategy, on Slide 33, we're sharing our view of how we evaluate the nonbank custodian election. As you are aware, we have not made the nonbank custodian election and currently, do not have plans to make the election in the near future. As we walk down the slide, we believe our net yield and participant investment choices are competitive, and making the election does not create any additional advantage. Additionally, our current partnership lowers fiduciary risk, lowers the required continued investment and scale, and also leverages the security and safety that's provided by BNY Mellon, our preferred partner, which is a global systemically important financial institution or G-SIFI as designated by the Federal Reserve Board.

Moving to the next slide to resummarize the key pillars that drive our future growth. We will be deepening relationships with our existing clients through cross-sell and increased penetration. We will become a market leader in HSA by leveraging our existing infrastructure and custodian relationship. We will continue to invest in a scalable and efficient platform leading to operational improvements and ultimately, cost savings. And finally, we'll leverage the scale and industry leadership we already have to drive opportunistic acquisitions.

On Slide 35, translating our strategies into financial performance. Leveraging our customer base will add 2% to 3% cumulative annualized growth to our revenue. Our HSA strategy's also expected to add an additional 2% to 3% cumulative annualized growth to our revenue. Our combined CAGR for revenue is expected to be 4% to 6% from 2019 to 2022. The ability to deploy capital for acquisitions could add an additional 3% to 4% of cumulative annualized growth rate for revenue. Incorporating the value driven by our operational excellence program, we expect the CAGR of EBITDA to be between 9% to 12% before the impact of any acquisitions. Our estimate also includes all the necessary investments we will continue to make in our business to continue to grow. The projections imply margins in the low 30s.

Moving ahead, our business model generates significant cash flow with minimal balance sheet risk, allowing us to have a flexible capital allocation strategy. In the absence of actionable acquisitions, we will look to other alternatives, including buying back our shares and investing in our business. Since we have not acquired any businesses in the last 18 months, the board increased our share repurchase authorization to $150 million.

With that, I'll pass it back to Edgar.

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [6]

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Great. Thank you, Izzy. It's an incredibly exciting time for WageWorks. We have embraced a bold vision for growth powered by the fundamental strengths that have always driven our success. Our plan to become a leading HSA provider has been well received by the market and is already creating new business opportunities. We have limitless opportunity to deepen the relationships with our expansive loyal customer base, and our relentless focus on driving scale and operational efficiencies position us well for continued investment. The addition of top talent to our board and our executive leadership team has infused new energy into our efforts. But above all, our future is bright because our employees care deeply about the work we do at WageWorks. I'm in awe of the passion and commitment they bring to every interaction with our customers. Their efforts are the reason we stand tall as an industry leader, and I'm grateful for their loyalty and dedication.

Finally, I want to thank our customers and investors for their continued trust, confidence and support for WageWorks. With that, we are happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from David Scharf of JMP Securities.

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David Michael Scharf, JMP Securities LLC, Research Division - MD and Senior Research Analyst [2]

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It's good to reconnect after so long. A lot of questions. I'm sure a lot of others are going to dig into a lot of the numbers, but what I wanted to maybe start with a couple of high level ones. And the first is, when I got calls over the years from investors, it's incredible how we would almost think there's a singular focus on HSA. And as we see now while it's the focus of growth going forward, it's still a very small part of the business. So notwithstanding the positive attributes of diversification that you highlighted, can you explain how COBRA fits into, since it's over 20% of the company? I mean, it's technically not a Consumer-Directed Benefit. And can you speak to how that fits into the broader strategy and maybe the rationale for keeping that business (inaudible)?

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [3]

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Sure. Sure. David, it's good to speak to you again as well. So as you saw from the earlier slides, it is a good chunk of our business model. COBRA, for us, has been a product that our clients have been asking for. Whenever we've submitted, oftentimes, whether it's an RFP or we've done some cross-selling with clients, it's still a law of the land and there's still quite a bit of a demand for it. It fits well for us because, in many cases, the administration of COBRA plans is very consistent with what we do on the health care side. So I would tell you that, for us, it is important primarily because it's being driven by the demand by our customers and because of the fact that we've had a history of servicing it, whether it was a before acquisitions and then post acquisitions, it's a good chunk of our capabilities as well. So it does fit nicely for us because our clients are asking that, whether they're asking for health care, commuter benefits, and COBRA is a big part of it.

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David Michael Scharf, JMP Securities LLC, Research Division - MD and Senior Research Analyst [4]

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Okay. And well -- and maybe as a follow-up to that. Can -- I know there were a lot of metrics in the slides about renewal rates and targets and so forth. But given the dislocations that occurred, both because of the platform migrations and maybe some of the ADP integration as well, can you give us maybe a general update about, number one, whether 2019 is sort of the final year when we should see maybe some drag on growth from these migrations and whether there is just any other observations you can share about, excluding HSAs, just what adoption rates look like by employees and whether you think they've peaked or not?

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [5]

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Okay. So in terms of at least some observations relative to, you called, the dislocation, so for us, as we reported the -- still the retention rate's in the 90 percentile, which is still pretty strong and then obviously even higher retention rates with our enterprise clients, it was without a doubt, as we made the acquisition, we were very attracted to not just the ADP client portfolio, but it was also a very strong talent pool. And already, we've been deepening our relationships with the clients that we acquired from ADP. But at the same time, in the early days, there were some large clients that had already begun the process of seeing if there was another option for them. You combine that with the fact that as we begin the migration process and add other options, some of those early dislocations occurs, but we have certainly seen that slowdown. We have some of that wrapping around to this year, David, but I do believe that 2019 is where we've seen the majority of it happening. I don't envision that taking place any further into the future and again, because of the fact that we already know between our satisfaction scores, our Net Promoter Scores, those are really good indicators of our ability to retain the clients. And so for that, I'm very, very confident we're going to be able to minimize the number of accounts that [are trite] from us going forward.

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Operator [6]

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Our next question comes from Bob Napoli of William Blair.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [7]

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Question, I guess, going into 2019. Essentially, you're forecasting an acceleration of revenue growth from 2018. Is that -- what is driving the acceleration? Is it just the -- that you're through most of the conversion, platform conversion problems? And then the 4% to 6% you expect organic, do you expect that to resume? And is 2020 reasonable to get back to your target organic growth rate?

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [8]

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So Bob, just to make sure I understand. When you mentioned about accelerating the growth, I believe if you look at the guidance of the 0 to 3%, and it's pretty consistent with what we've -- are coming out for 2018 as well, so I'm not sure that I would describe it as accelerating. Having said that, we do have expectations that we will grow. Also, in terms of the -- I think, specifically you are questioning whether we thought the 4% to 6% was realistic for 2020. I do believe that. In fact, when you look at the plans to grow our business, all the areas that we highlighted for you, we were providing you guidance that we believe is very realistic. We're not necessarily giving you something that we'd call overly aggressive, so I'm pretty confident about that. Izzy, I don't know if you have anything else you'd like to add.

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Ismail Dawood, WageWorks, Inc. - CFO [9]

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Thanks, Edgar. No, that's right. So just to recap, Bob, it's 0 to 3% in 2019, again, based on a couple of factors we talked about. But getting back to the accelerated growth in 2020 and the investments we're making in 2019 and have been making through 2018 is laying the foundation for that growth.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [10]

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A follow-up question. The HSA business getting to 1.2 million accounts in 2022, I mean, it's a very nice growth rate from where you're at. But as -- is that intended to be all organic? And is there opportunity to become a bigger player inorganically? And what are the priorities from an inorganic perspective and opportunities?

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [11]

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Sure. Sure. Bob, that growth number, the 1.2 million, is based on organic growth, so we do expect to be able to sell that directly. I will also tell you -- I think you mentioned is there an opportunity for inorganic growth on HSAs. Obviously, you look at whatever possible targets are out there. So yes, there's certainly that opportunity, but we haven't baked any of that into our numbers. And I'm very confident, just based on the fact that we've improved the features of the HSA, we're improving the overall product. We're improving the functionality. We believe, and our sales organization has given us the same input, that it's been very well received, and we're confident we can achieve those numbers.

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Operator [12]

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Our next question comes from David Grossman of Stifel.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [13]

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So we've got a kind of really a new team in place and been in place, I guess, staggered over the last 12 months. As you think about your strategy going forward, Edgar, since your continuity among the group, what do you think have you identified the top 2 or 3 changes that you're making in terms of how you're approaching the market, how you're working and thinking about increasing penetrations in such a hurdle to kind of overcome in this industry? What's going to be different in your mind?

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [14]

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Sure, sure. So let me begin first what I think is consistent, and that is, without a doubt, the demand for the -- for all the products in our suite, David, has not changed. In fact, clients have stressed with us that the mix of our products is very important to them and the fact that we are now focusing, and this is where I'll give you my first sense of what we're doing differently, focusing on the HSAs, what's important to us is never to think of that as a replacement for our current mix. The demand is for both of them, whether it's the existing FSA or HRA business and HSA. The focus more than anything is to say let's go look at what the market is commanding and let's listen to our clients about what they're looking for. They look at options out in the market, and they'll tell us some things they would like different. And we're trying to adopt those changes. So in essence, focusing on those improvements is exactly what's being driven by our customer demand. So that's the first thing, is listening more to the clients on the HSA side about what they're looking for. The second one relative to what I would describe as what else you said that's different. I think more importantly, David, it's focusing on our existing client base. We've always talked to them. We've always spoken about opportunities, but what's different now is we have even more to offer to our clients and having our relationship management organization basically go in and have a conversation with them on everything that we do to talk about not only the performance that we're having but also the other products they should consider. And to be even more frank with you, David, we didn't know it was report HSA accounts. Sometimes, we had some clients that would tell us they didn't realize that we offered HSAs, and that's something that we have to improve upon. So for that, that's why we began reporting the numbers because it's important for more transparency, but we also want everyone to understand that this is a market we have been in and we're expecting to do even better in it.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [15]

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And then just going back to the sequencing of growth, and sorry to bundle a couple of things into one question. But if you can share with us what the organic assumption is, what it was in 2018, your organic growth and what your assumption is for 2019. And as part of that, when I just look at the numbers, it looks like the presumed assumption -- or the assumption underlying the '19 number is a greater contribution from new sales than what you experienced in 2018. And if that math is right, what underlies that confidence? Do you have that visibility already based on what you booked last year?

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [16]

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Yes. So in terms of what we give from guidance from an organic growth rate, you might recall, David, it was always difficult to separate out between what was acquired, especially as we start to integrate clients as well. I think if you looked at overall the guidance that was provided for 2018 that Izzy just gave maybe a few minutes ago, I think you would just consider that almost all predominantly a combination of organic because there were no acquisitions in the pipeline and any cross-selling that we have within the organization. As for 2019, yes, we do expect new sales to improve. If we consider the fact that we were certainly having to deal with distractions and other issues in 2018, I cannot give you a specific metric that said this impacted our 2018 selling season because it's hard to say when we were not included, but to think that it didn't impact us was probably not realistic. And now that we have been able to not just get on file, able to communicate our plans, able to enhance our products, able to focus on our customers more, we absolutely have expectations that our sales will grow, and I know our sales organization shares that confidence with me.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [17]

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Right. I think the question though on -- Edgar, on 2019 was that if I remember in your slides, I think new sales, probably contributed maybe $20 million to 2018 revenue. And just back of the envelope, it looks like maybe you're assuming $40 million to $50 million in new sales in 2019, and that's the math that I was referring to with the -- yes, and so much of the new sales, like you said, would be impacted by the 2018 issues.

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [18]

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Yes.

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Ismail Dawood, WageWorks, Inc. - CFO [19]

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Yes. So David, it's Izzy. Let me answer that, make sure we get the math right on it. You're right. We had about $19 million in sales, and that contributed to 2018 revenue. Going to 2019, our expected growth rate is 0 to 3%. So we assume that would be similar year-on-year levels. I think the big bump -- the bigger bump we see is really in 2020 when the tools and stuff we put in place this year hitting the selling season and early indications are at least the pipeline is larger than same time last year. So that increase in organic growth is really expected in 2020.

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Operator [20]

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Our next question comes from Tobey Sommer of SunTrust.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [21]

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I was wondering if you could talk to us about -- a little bit more about your philosophy, broad parameters, which you're going to screen for acquisitions, many management teams will talk about the valuations, accretion, et cetera or anything you could sketch out to us broadly. And you did talk about an increase in available share repurchase. How are you going to approach that? Is that open wall?

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [22]

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So Tobey, the first part on the philosophy on acquisitions, so let me just share with you that, as we look at acquisitions, there's -- obviously it's a fragmented market, and we still see a combination of small- to mid-sized companies as well as very large companies that certainly look appealing to us. But as we've shared in the past, it all depends on readiness. It depends on -- in terms of when those types of changes can actually happen. You should assume that we do have conversations with a lot of potential targets. And my philosophy is very similar to what we've done in the past, is look at what makes sense for us in terms of how it fits within our product mix but also spending quite a bit of time in understanding more about the clients as well as the talent that's in those organizations. I'm confident we will be able to proceed with acquisitions over time, but overall, we want to make sure it's a good fit. And the culture is very important. That's an important part of an acquisition strategy as well. The second question is around, I believe, you said it was buybacks if I recall. Is that what you said?

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [23]

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That's right.

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [24]

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So I don't know if you have an input you'd like to provide, Izzy or not. Actually, you know what, I think it will be best for Stuart to try to add to that. So Stuart, if you could please comment on that.

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Stuart Charles Harvey, WageWorks, Inc. - Executive Chairman [25]

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Yes, sure. So listen, if you really connect the dots on all the thread of questions here, what's really happening is this is almost a re-IPO of the company. It's almost a rebirth after being quite for -- since the first quarter of 2017. So the things that we're doing to drive organic growth, acquisitions, just the regular cadence of communications that's needed for you as analysts and the market and our shareholders to have some -- the transparency you need to make judgments on the company, so all these have to fit together. The buybacks is a piece of that. We looked at what happened to the stock. We know what the public market comps are. When we saw get hit as a board, we decided to increase the authorization for buybacks because we think it's a judicious use of capital. We generate a lot of cash. We're not over levered. If we had to pay off our debt tomorrow, the debt we have on the balance sheet, we could do it. So we're for what's the best interest of our shareholders here. And when we see the stock get hit the way it has, we think as a board to increase the buyback authorization by $50 million to $150 million is a prudent use of capital. It for sure helps our EPS. It leaves us some opportunities for rewards and incentives later on for our employees in terms of option grants and whatnot without hurting EPS. So we just think it's part of the -- it's just a piece of the picture of what we're doing to reestablish the operating fundamentals of a publicly traded company.

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Ismail Dawood, WageWorks, Inc. - CFO [26]

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And the last thing, I'll just top it off, David, you mentioned about kind of the -- Tobey mentioned the method in which we do a share repurchase. We look at open market as well as ASRs. It just kind of depends on discussions and the economics involved in the process.

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Operator [27]

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(Operator Instructions) Our next question comes from Jamie Stockton of Wells Fargo.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [28]

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I guess, maybe the first one quickly just on the SEC filings. I saw in the presentation, you guys expect to get current by mid-April. How long do you have now that you're caught up through the Q3 to -- for 2018?

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [29]

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Sure. I think we've been working obviously on those very, very hard. And for that, Izzy, I know you have the most recent update.

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Ismail Dawood, WageWorks, Inc. - CFO [30]

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Sure. Good question there, Jamie. In terms of how long do we have, we do have close to 6 months, but that's not the intention. We expect to be timely filers by our Q1 deadline of May 10. That means we have the 2018 K-ed on and have the Q1 2019 on file as well.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [31]

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Okay. That's great. And then maybe just as you kind of laid out the various types of accounts that you guys touch, the FSA market, you kind -- I don't know that it was your data or someone else's data, but you showed a progression where that market continues to grow in the future at a relatively healthy look like kind of mid- to high single-digit rate. I guess, I would ask what's your level of confidence in that or -- and what you're kind of seeing in the marketplace as high-deductible health plan adoption continues to kind of march forward. Are there any kind of contradicting data points? If you can just talk about FSA market growth, that would be great.

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [32]

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Sure. So Jamie, in terms of FSA overall, we are not seeing a decrease in our FSA demand from our clients or from the market. There are still quite a bit of interest in that. In fact, it's oftentimes, whenever we talk about whether it's HSAs, FSAs are always being discussed at the same time. We still see, just based on a variety of different studies, that there's a steady increase in our FSA demand as well as the FSA market. So again, if we just look at the data both internally and we look at some of the information that's available to us externally, we still see that growing.

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Operator [33]

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Our next question comes from David Scharf with JMP Securities.

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David Michael Scharf, JMP Securities LLC, Research Division - MD and Senior Research Analyst [34]

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I wanted to actually make sure that I understood the slides and the commentary about the nonbank custodian election. Is this effectively sort of abandoning the custodial status that the company got a year ago and opting to just continue to operate in a partnership with BNY Mellon? Or is it some sort of hybrid?

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [35]

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Sure. So before, Izzy, because I know that was in Izzy's overview. As we'd spoken about last year about applying for the nonbank custodian, clearly, there was an interest to pursue, what -- if there was additional benefit for us. And David, when we start to look at our own existing arrangements as well as working with BNY to see what else we can do to improve it, that was something that Izzy took the lead on. I'm certainly happy to have Izzy describe more about what he was sharing. But we do remain quite confident that by not moving towards a nonbank custodian election that we actually have pretty good economics. So for that, I'll ask Izzy to comment.

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Ismail Dawood, WageWorks, Inc. - CFO [36]

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Sure. And David, I think the best way to describe is to have your cake and eat it too. We still have the flexibility of making that election to become a nonbank custodian. But as we've done the analysis and obviously having a preferred partner in this process, we don't see the benefit at this time to make that election. We still have to dig into kind of how long the election's valid and the likes, but going -- right now in the foreseeable future, we believe the economics and the risks outweigh in terms of staying in our current custodial partnership with BNY Mellon and growing that relationship.

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David Michael Scharf, JMP Securities LLC, Research Division - MD and Senior Research Analyst [37]

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Got it. And does that calculus change in a high-rate environment? Obviously, given the Fed's recent comments, that's probably more academic. But with the expectation a year or so ago when that status was granted or at least the option to apply for it, was that decision based on the expectation you would be capturing more yield as a custodian?

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Ismail Dawood, WageWorks, Inc. - CFO [38]

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That was the initial assumption, yes. And I think one of the biggest changes since, I think, the company spoke and has come back is I have to give credit to our partner who ensured that we create a win-win situation. I'll go further and reiterate. On our earning balances with BNY Mellon -- and we only earn on 70% of our balances because we have multiple custodians. But on the balances we earn, we earn close to 1.9%, which is right in line with Fed funds, and that is net of any participant expense. So we believe that is an attractive and competitive yield on those assets. So unless anything dramatically changes, we don't anticipate making the nonbank custodian election. As rates go up as I indicated as well, in 2019, we expect that yield to go up as Fed funds have gone up. So we'll continue to monitor and see what the results are.

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [39]

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And David, we'll just evaluate it as time goes on, but again, as of now we're confident with our strategy.

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Operator [40]

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I'm showing no further questions at this time. I'd like to turn the conference back over to Edgar Montes for any closing remarks.

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Edgar O. Montes, WageWorks, Inc. - President, CEO & Director [41]

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Great, excellent. Well, thank you very much, Valerie. And to all of you that joined our call and to listen to our story, I'm very grateful for you to continue to entrust us not only with the -- our clients but also entrusting us with our information that we're providing you as well as providing, I think, more so in the future some additional transparency. I think many of you shared with me in the past that you'd like to see more metrics reported from us, and you should begin to expect to see that as we go forward as well. Again, we're very confident in the strategy that we have laid out here today, and we look forward to having additional conversations with many of you to go into more detail as needed. So again, thanks for your time today, and we look forward to speaking to you again soon. Bye-bye, everyone.

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Operator [42]

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Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.