The company concluded that there was a material weakness regarding its financial reporting, including revenue recognition issues related to the accounting for a government contact in FY16. Last night, it offered more color on the origin of the problem.
A number of billings errors resulted from ineffective controls, such as terminations and tier pricing structures. Additionally, the company identified a change in the presentation of healthcare revenue whereby certain expenses were inconsistently offset against healthcare revenue. This offset has no impact on the company’s financial results, cash flow, or balance sheet.
Since the company’s original announcement of a delayed filing, progress toward this resolution has been anything but smooth, though. From the time of its announcement on March 1, 2018, WAGE had six months to file its 10-K with the SEC. However, the company obviously didn't make that deadline, and it had to instead file for an extension last June.
Unsatisfied with the pace of the accounting review, the company terminated its contract with KPMG as its accounting firm on November 6, 2018. A week before that, the company’s board had approved the engagement of BDO USA to take over as its accounting firm.
WAGE also shook up its management team during this time, bringing on Izzy Dawood as its new CFO in October, who took over from Colm Callan, who had resigned not long after the internal control issues were identified. The company had by then also appointed Edgar Montes, who previously served as the company's COO, to the position of CEO.
With these accounting issues lingering throughout 2018, the company did not report quarterly earnings at all last year. However, on September 12, it did provide a range for the investigation’s expected financial impact on its operating results.
Specifically, the company said that it expected FY16 revenue to be lower by $6.5-9.5 mln (previously reported as $364.7 mln), adjusted EBITDA to be lower by $6-9 mln, and net income to be lower by $3.5-5.5 mln. It also issued guidance for FY18, seeing revenue growth of 1-4% with an adjusted EBITDA margin of 28-32%.
In its presentation last night, WAGE confirmed that its financial impacts are within the ranges confirmed or provided back in September. Furthermore, with these filings, WAGE is now current with NYSE listing requirements, and it expects to be current will all SEC reporting requirements by its 1Q19 earnings call.
The company’s 2018 results aren't yet final, but it reaffirmed that it sees revenue of $468-$472 mln, representing a decrease of 1% at the mid-point. Reported EBITDA is expected between $115-118 mln.
While the removal of this financial reporting overhang is a significant positive for WAGE, what's holding the stock up this morning is its soft FY19 guidance. The company is projecting revenue growth of 0-3%, equating to revenues of $477.5 mln at the mid-point.
Management commented that it anticipates being impacted by remnants of integration activities -- WAGE acquired ADP in November of 2016 -- as well as a phased approach with its partner migration. It also sees adj. EBITDA margin slipping to 26-30% from 28-32% in FY18 as it continues to invest in areas like HSA functionality and information security.