Uncertainty Drives JMP Securities' Wageworks Downgrade

Wageworks Inc WAGE released two regulatory filings Wednesday that put an end to JMP Securities' bullish case for the stock.

The Analyst

Analyst David Scharf downgraded Wageworks from Market Outperform to Market Perform

The Thesis

Wageworks' regulatory filings contained three news releases, Scharf said in the downgrade note. (See his track record here.)

They are: 

• The departure of Executive Chairman Joe Jackson, which shouldn't be a surprise, since he stepped down as CEO in April, the analyst said. 
• The reiteration of the impact of potential restatements on historical financial results, including expectations for a decline in 2016 revenue, adjusted EBITDA and net income of $6.5-$9.5 million, $6-$9 million and $3.5-$5.5 million, respectively. The review of 2017 numbers remain ongoing.
• Third, and perhaps most concerning, initial 2018 revenue and EBITDA guidance were offered notably short of what Scharf was modeling. Wageworks' top-line growth guidance of just 1-4 percent is short of the 7 percent expected, he said. 

The analyst's conversations with management makes it clear client churn is "considerably higher" compared to prior years, and it is unclear if revenue declines in FSA and Cobra products will recur in out years, Scharf said.

Wageworks said it lost an unnamed, important broker relationship although it is difficult to quantify the financial impact, the analyst said. 

The lack of clarity on WageWorks' revenue growth over the next few years implies the bullish case for the stock is no longer warranted, according to JMP. 

Price Action

Wageworks shares were plunging 15.65 percent to $41.50 at the time of publication Thursday.

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