Acquisitions to Fuel Growth at WageWorks Inc.

Image source: WageWorks.

WageWorks (NYSE: WAGE) reported third-quarter results on Nov. 9. The administrator of consumer-directed benefits is enjoying strong organic growth in its main business lines, while also using acquisitions to further expand its customer base.

WageWorks results: The raw numbers

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Data source: WageWorks Q3 2016 earnings press release. YOY = year over year.

What happened with WageWorks this quarter?

Total revenue rose 7% year over year to $88.9 million, fueled by sales increases in WageWorks' healthcare (up 15% to $48.5 million), commuter (up 10% to $17.6 million), and COBRA (up 53% to $18.7 million) divisions. Notably, WageWorks' organic growth rate across these three core areas of its business was 20% in the third quarter.

"We are in the midst of another record-setting new sales year driven by increased interest across all of our products from employers of all sizes," saidCEO Joe Jackson in a press release. "We continue to enter into new carrier and channel partnerships, which are producing additional opportunities and solid growth."

Other revenue, however, decreased to$4.2 million from$12.7 millionin the prior-year quarter, due to a public exchange relationship that the company ended in 2015.

WageWorks' profitability also declined, with gross margin and non-GAAP operating margin falling to 66% and 24%, respectively, compared to 68% and 26.3% in Q3 2015.

In turn, EBITDA (earnings before interest, taxes, depreciation, and amortization) -- adjusted to exclude stock-based compensation, acquisition-related expenses, and certain other items -- remained flat at $26.5 million. And non-GAAP net income fell 3% to$12.6 million, or$0.34per share.

Looking forward

WageWorks announced a deal to acquire Automatic Data Processing's (NASDAQ: ADP) Consumer Health Spending Account (CHSA) and Consolidated Omnibus Reconciliation Act Businesses (COBRA) businesses on Nov. 1. WageWorks will pay ADP $235 million in cash for these assets, and the deal is expected to close by the end of November. WageWorks believes these businesses will boost its revenue and adjusted EBITDA by $87 million to $92 million and $13 million to $16 million, respectively, in 2017.

WageWorks also adjusted its outlook for the current year to account for the impact of the deal, including:

• Full-year 2016 revenue of $366 million to $369 million, up from prior estimates of $356 million to $366 million.
• Adjusted EBITDA of $107 million to $109 million, down from $107 million to $111 million.
• Non-GAAP EPS of $1.35 to $1.38, vs. $1.35 to $1.41.

"We are excited about our pending acquisition of ADP's Consumer Health Spending Account and COBRA businesses and our new ongoing partnership with ADP, added Jackson. "We are poised to finish 2016 with strong momentum, as we are clearly executing on our multiple avenues for growth."

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Joe Tenebruso has no position in any stocks mentioned. The Motley Fool recommends Automatic Data Processing and WageWorks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.