Welcome to HealthEquity’s First Quarter of Fiscal 2021 Earnings Call. Please note that this event is being recorded. Go ahead. Mr. Putnam? Thank you, Joelle. And good afternoon and welcome to HealthEquity’s first quarter fiscal year 2021 earnings conference call. Joining me today is Jon Kessler, President and CEO; Dr. Steve Neeleman, our Vice Chair and Founder; Darcy Mott, the Company's Executive Vice President and CFO; and Ted Bloomberg, our Chief Operating Officer. Before I turn the call over to Jon, I have three important reminders to provide. First, a copy of today's press release is posted earlier this afternoon on our Investor Relations website, which is ir.healthequity.com. Second, our comments and responses to your questions today reflect management's view as of today, June 2, 2020 and will include forward-looking statements as defined by the SEC, which include predictions, expectations, estimates, or other information that might be considered forward-looking. There are many important factors relating to our business, which could affect the forward-looking statements made today. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from statements made here today. As a result, we caution you against placing undue reliance on these forward-looking statements. We also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock detailed in our latest annual report on Form 10-K as well as subsequent or current reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future events. And third, during this call, we will reference certain non-GAAP financial measures that are defined in our press release. There you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Thank you for your patience. I'll now turn the call over to Mr. Jon Kessler, our CEO.

Thank you, Richard. Hello, everyone for joining us and thank you for joining us. During the quarter, and in the week since, our hearts have been filled with prayers for those who are dealing with personal loss, gratitude for those who are fighting the pandemic on the frontlines, but also with determination to help drive the recovery. We think the pandemic’s short-term disruption and its hit to financial performance have actually strengthened our culture and certainly accelerated our synergy attainment. We believe this moment has permanently accelerated market trends that were already in evidence before the pandemic that favor those like HealthEquity with operating scale, product depth, proprietary technology, and solid cultural foundations. On the call, I will discuss fiscal Q1 performance against key metrics and strategic implications of the COVID-19 pandemic and its economic fallout. Ted will describe our operational response to the pandemic, and Darcy will detail fiscal Q1 and expected operating performance. Steve will join us for market and regulatory color during Q&A. No doubt the pandemic and its economic fallout will hit our results in the near term; they already have. Fiscal Q1 revenue was $190 million and adjusted EBITDA of $63 million, while up 118% and 62% year-over-year respectively, were impacted by our members’ inability to use commuter benefits or spend on healthcare during an extended lockdown in the second half of Q1, as well as by lower interest yields, as anticipated on our Q4 earnings call. The adjusted EBITDA margin of 33% despite these conditions speaks to the profit potential in our business, and sales showed resilience as HealthEquity opened 104,000 new HSAs, growing total HSAs to 5.4 million. Similarly, HSA assets held steady at $11.5 billion despite steep market declines, and HSA cash grew by $40 million as members continued to contribute. Total accounts, which include CDBs, fell from 12.8 to 12.7 million with new CDBs and new HSAs offset by runoff of CY19 accounts on the CDB side as anticipated on our Q4 earnings call. Custodial revenue performed as we previously anticipated, and the team has kept depository partnerships healthy, adding more than $2 billion in capacity in just the last six months. That's a long way of saying we anticipated and hoped to give you a fantastic quarter when it started. But, the pandemic's impact on our financial performance will fade and will likely fade with the economy's gradual reopening. More importantly, we believe that the accelerated opportunity is permanent. We are likewise accelerating achievement of our operating synergies from the WageWorks integration; we're accelerating migration from legacy platforms; and we're accelerating deployment of our total solution for connecting health and wealth to employers and consumers who now more than ever are searching for win-win. So, I'd like to have Ted detail what the team delivered on this course in Q1. Ted?

Thanks, Jon. As Jon said, our response to the pandemic is to go faster. So, I'd like to tell you what that meant in Q1. The team reached $40 million and achieved net synergies in Q1, and we anticipate achieving our $50 million net synergy target by the end of this year's Q2, six quarters faster than initially promised and before fully achieving the benefits that will come from platform consolidation. Going forward, we will report these incremental benefits not as standalone synergies, but as cost reduction and margin improvement in the ordinary course. The team finished its fourth legacy platform migration and is on track to deliver six to eight more this year. As of today, more than half of HSAs and HSA assets have been migrated. Retention during these migrations has exceeded expectations, a testament to the hard work of our service delivery and relationship management teams. Our sales team has built a strong FY21 sales pipeline despite COVID-19. HSA bundled RFPs are significantly year-over-year. Over one-third of our large managed clients are in cross-sell discussions. We have launched new network partnerships across health plans, retirement providers, and benefits administrators. We have made good on our promise to bring remarkable Purple service to everything we do. In Q1, member call satisfaction scores on legacy WageWorks platforms increased 10 percentage points, driven by a strong performance from our frontline team members and on-shoring calls, a process we will complete this month. The team accomplished all of this while 97% of us were transitioned to remote status, an effort so effective that we believe HealthEquity could maintain a successful remote work posture indefinitely if needed. In fact, we recently announced internally that three of our smaller offices will not reopen post-pandemic. And finally, with all of that, we applied Purple spirit and innovation to immediately aid recovery for our members in a few ways. First, we are excited to formally launch our health savings score program. This is a proprietary algorithm that helps companies and individuals think about their retirement readiness and that of their employees from a health perspective. We are especially happy that the score isn't just a number. It comes with actionable recommendations to improve results. Our pilot clients love both the score and the recommendations, and we are excited to roll it out more broadly. Second, as many of you know, U.S. payrolls fell by 21.9 million workers in April with many additional new jobless claims in May. The newly unemployed are just now beginning to tackle the challenge of staying covered. As one of the largest managers of COBRA and other health benefit continuation programs, if not the largest, we see the present situation as an opportunity for Purple leadership. COBRA eligibility confirms multiple options to stay covered, options few consumers fully understand. So, in addition to 24/7 live support for our members and with a little help from our friends, we've launched healthequity.com/stay-covered, a public resource for consumers to learn about their employer-sponsored government and commercial coverage options. I encourage all of you to check that out. The team did right by commuter members as well, working with hundreds of transit and parking providers nationwide to facilitate refunds where monthly passes are not needed and launching what we believe to be the only comprehensive online resource for commuter pass refunds. Finally, when the IRS authorized disaster relief accounts, within days, our team had a solution ready for our clients and partners. These are things only an organization like HealthEquity with scale, depth, platform ownership, and a strong culture can do. And we are proud to be helping our members, clients, partners, and the public in these ways. I'll now turn the call over to Darcy to review the financials and outlook.

Thank you, Ted. I will review our first quarter GAAP and non-GAAP financial results. A reconciliation of the GAAP measures to non-GAAP measures is found in today's press release. Our fiscal first quarter financial results, as you know, include the operations of WageWorks, which was acquired in Q3 last year. First quarter revenue grew overall and organically in each of our three categories. Service revenue grew to $111.3 million, representing 59% of total revenue in the quarter and 315% year-over-year growth. The increase is primarily attributable to 173% growth in average total accounts from acquisitions, including WageWorks and new sales. Custodial revenue grew to $46.9 million in the first quarter, representing 25% of revenue in the quarter and 12% year-over-year growth. The increase is primarily attributable to 30% growth in both, HSA cash with yield and in HSA investments with yield year-over-year, partially offset by a lower annualized interest rate yield of 2.12% on HSA cash with yield. Previously, we have provided yield data on legacy HealthEquity HSA cash only. As Ted mentioned, we have now migrated over half of the legacy WageWorks HSA assets to the HealthEquity classic platform. Accordingly, we have adjusted our disclosures to separate HSA cash and investments with yield from those without yield. We will continue this separate disclosure until we have migrated the non-yielding HSA assets to become yielding assets. The HSA cash yield of 2.12% for the quarter is a blended rate for all HSA cash with yield during the quarter. The HSA assets table in today's press release provides additional details. Interchange revenue grew to $31.8 million, representing 17% of total revenue in the quarter and 74% year-over-year growth. The increase is primarily attributable to growth in average total accounts and a negotiated more favorable interchange share offset as Jon mentioned by significant falloff in spend across our platforms in the second half of the quarter. Gross profit nearly doubled, reaching $108.1 million compared to $57.8 million in the first quarter of last year. Gross margin was 57% in the quarter versus 57% for the fourth quarter and 66% for the first quarter of last year. Beyond the change in revenue mix resulting from the WageWorks acquisition, gross margin was impacted in Q1 by the decline in custodial cash yield, loss of high-margin interchange revenue, and COVID-19-related expenses associated with the transition of the team to remote work and other activities Ted mentioned. Operating expenses were $93 million or 49% of revenue, including amortization of acquired intangible assets and merger integration expenses, which together represented 17% of revenue. Income from operations was $8.1 million. We had net income for the first quarter of $1.8 million or $0.03 per share on a GAAP EPS basis. Our non-GAAP net income was $30.8 million for the quarter compared to $27.4 million a year ago, a 12% increase. Non-GAAP net income per share was $0.43 per share compared to $0.43 per share last year. Adjusted EBITDA for the quarter increased 62% to $63 million. And as Jon mentioned, adjusted EBITDA margin was 33%. On the balance sheet, as of April 30, 2020, we had $171 million of cash and cash equivalents with $1.2 billion of term A debt outstanding and no outstanding amounts drawn against our line of credit. Turning to guidance. As you know, the highly recurring nature of our business typically provides a high degree of visibility to future operating performance. Due to the pandemic, we are providing guidance for our second fiscal quarter ending July 31, 2020, as we expect that our second quarter results will be more fully impacted by COVID-19 than our first quarter. With prospects beyond the second quarter currently unclear and with significant uncertainty regarding the pace of reopening and economic recovery, we are withdrawing prior guidance for full fiscal year 2021. Specific variables that will impact our performance through the remainder of fiscal 2021 include, but are not limited to members’ access to and spending on healthcare, as shelter-in-place restrictions ease and their use of transit, parking and other commuter benefits as workplaces partially or fully reopen. The pace of recovery and employment will impact a number of our average total accounts and conversely, perhaps uptake in COBRA and other benefit continuation products among current or new COBRA eligible members. Across these and other variables there exists a wide range of plausible outcomes for the remainder of fiscal year 2021. Importantly, our guidance for our second quarter ending July 31, 2020, assumes that the conditions observed in April across these and other variables continue through the quarter, i.e. neither significant recovery nor significant further declines. Under these assumptions, we expect HealthEquity will generate revenue for Q2 fiscal 2021 in a range between $168 million and $173 million. We expect our non-GAAP net income to be between $17 million and $22 million, resulting in non-GAAP diluted net income per share between $0.23 and $0.30 per share. We expect HealthEquity's adjusted EBITDA to be between $42 million and $48 million for Q2 fiscal 2021. Today's guidance includes the effect of Q2 of having achieved approximately $40 million in annualized run rate net synergies, achieved as of the end of the first quarter, as Ted discussed, as well as achieving our goal of $50 million in total run rate synergies by the end of Q2. Realization of synergies are expected to be additive to both the top and bottom lines in fiscal year 2021 and beyond. We expect a yield of approximately 2.10% on HSA cash with yield during Q2. Our non-GAAP diluted net income per share estimate is based on an estimated diluted weighted average shares outstanding of approximately 73 million shares for the quarter. The outlook for Q2 fiscal 2021 assumes a projected statutory income tax rate of approximately 25%. Our guidance includes a detailed reconciliation of GAAP to the non-GAAP metrics provided in the earnings release. And a definition of all such items is included at the end of the range. In addition, while the amortization of acquired intangible assets is being excluded from non-GAAP net income, the revenue generated from those acquired intangible assets is not excluded. With that, I'll turn the call back over to Jon for some closing remarks.

Thanks, Darcy. This is normally where I have some specific thankful remarks. In this quarter, there are just too many people to thank for the extraordinary way and remarkable way in which our teammates have taken care of and supported each other during COVID, and more recently the thoughtful way in which they have begun to process the killing of George Floyd and the other recent events involving race in the country. I think, the best thing that we as leaders can do to honor the sacrifices of our team members and the fact that they are able to stay focused during these events, and the best way we can honor the trust that you as shareholders place in us is to stay at work and to attain our synergies as fast as we can to permanently accelerate or to take advantage of the permanent acceleration that we see in market trends that really, we feel we are very well positioned to capture and to further our mission of connecting health and wealth, and to do all of that in a way that leaves us with a stronger culture than coming into this particular crisis. And that's what we're going to try and do. So, with that, I will stop and welcome your questions.

Thank you. First question comes from Anne Samuel with JP Morgan. Your line is now open.

Hi, guys. Thanks for taking the question. You're not providing full-year guidance, but can you help us with how we should be thinking about what the COVID impact is on maybe each of the different business segments to kind of build that up, just particularly in 2Q, just given it’s a little bit below where we were expecting? Thanks.

Sure. I'll start by asking Darcy to elaborate a bit. The way to consider it is the impact of COVID in Q2, as your question was aimed at breaking that down into the various components of our business.

Yes.

The biggest impact in Q1 was related to spending and the lack of access individuals had to healthcare expenses, especially in April. Additionally, the decrease in commuter usage, due to the lack of commuting, also affected the situation. This was beyond what we had initially anticipated, particularly concerning the impact on rates that we observed. These factors were the primary influences in Q1 that set the stage for Q2. Darcy, could you elaborate on how you approached this as we looked ahead to Q2?

Yes. The spending has been the most notable element. If you examine the Q1 results and then look ahead to Q2, we began to see its effect in mid-March, coinciding with the shutdown of the country, which influenced Q1 results. For Q2, we used the spending rate we observed in April, a full month of shutdown, and projected that for May, June, and July. We recognize that this is likely a conservative estimate, but we prefer to be cautious as we assess the recovery speed. We are monitoring spending daily, and Tyson and his team are keeping a close eye on this. In terms of interchange, the components include spending related to healthcare in HSAs, FSAs, and HRAs, as well as commuter expenses. We always advise people to spend less and save more in HSAs, meaning when they don't withdraw money from their HSAs, it remains in their accounts, accruing interest for both them and us, which doesn't worry us in the long run. We encourage spending when necessary. However, for FSAs and HRAs, those funds are typically categorized as use it or lose it. Although there have been some delays or extensions to allow for spending, the principle is that since the money has been set aside in some capacity, spending will eventually return. We're unsure when exactly that will occur, but we do believe it will come back. The commuter segment is a smaller part of our total interchange; when that spending didn't happen in April, it won't occur until city services and transit systems resume. We expect this to recover as cities reopen, but we don't anticipate recovering the lost revenue. This is our perspective. There is some service revenue linked to these areas, particularly in commuting, that has been affected. The impact of unemployment on our service revenue has not become evident yet, but we will see. There has been speculation that increased COBRA may offset revenue losses due to unemployment, but we can't predict how these will align. We've taken a conservative approach, looking at what we gathered in April and projecting forward. I hope this provides sufficient insight into how we formulated our guidance for Q2. As always, we aim to adopt a cautious approach and fulfill our commitments.

Thank you. Our next question comes from George Hill with Deutsche Bank. Your line is now open.

I guess, maybe two things, Jon, on the guide. I appreciate you guys are extrapolating what you saw from April out through the balance of the quarter. Is there any change you'd be willing to comment on May? And my other question is as we think about kind of deposits and assets you guys are seeing, I guess, can you talk about what is the difference in the balance between kind of the market impact of the investments versus the beneficiaries who either have job risk or might be losing their jobs? The third question is, are you basically seeing people rate their HSAs as an immediate source of funding to buy healthcare products or do you feel like you're generally seeing account balances remain stable? Any granularity that you have there would be great.

I will provide an update on May, considering what Darcy mentioned earlier. The main concerns affecting us negatively are around commuting and healthcare spending. When I compare May to April, we see a slight increase in healthcare spending, although it's minimal. For instance, when asked how many times a family member visited a doctor this month, the answer was none. So, while there's a small uptick in pharmacy spending, we should approach this with caution. Regarding commuting, the situation hasn’t changed since April; commuting remains at a standstill. This represents about $7.5 million in monthly revenue for us. Some revenue still comes in for specific reasons, but overall, this area will remain impacted until we see a reopening. It’s important to note that it's not just public transit that’s affected, but also those who drive and pay for parking, as well as rideshare users. On the subject of COBRA, we are beginning to notice the effects of rising unemployment. Between mid-April and mid-May, we saw an increase in qualified events ranging from 10% to 30% year-over-year, which was mirrored by higher call volumes. Additionally, there was a modest rise in COBRA elections, which aligns with expectations, as typically, qualified events come from job transitions, but this is not the case now. Despite a slight stabilization in unemployment, our COBRA activity has decreased from its peaks. Regarding your question about HSAs, the answer is no; people are not draining their accounts. On the employer side, contributions were flat year-over-year, meaning employers have maintained their contributions. We saw no changes in April either. Our members' contribution levels remain strong, but spending from these accounts has decreased, mainly due to limited access to healthcare. People seem to be managing their HSAs wisely. We've actually seen a 38% increase in members who invest, which has outpaced account growth. This indicates a positive trend as members are staying level-headed despite market fluctuations and are focused on long-term strategies.

Our next question comes from Alex Paris with Barrington Research. Your line is now open.

Good afternoon, everyone. This is Chris sitting in for Alex. So, first off, I don't want to be the bearer of news, but assuming in an environment where COVID makes a comeback to some extent, similar to what we've seen with the flu, later this year, it has some impact on Q4, the primary selling season. Can you talk about just the things that are in place, given what you've experienced with your current workforce, and how the Company would be able to flex and sustain profitability? I don't want it to happen, but in a certain scenario like that, how the Company would be prepared?

Thank you. We are in a risk management environment, so it's prudent to consider potential bad news and plan accordingly. Since mid-February, our crisis management team has been doing excellent work, which enabled us to transition to remote work early in March, likely saving infections and possibly lives. That team is now focusing on planning a return to the office. However, as you've suggested, we intend to proceed cautiously with our return to work strategy. Although we lack specific insights, we’re uncertain about the near-term situation regarding regulatory requirements and whether the office environment will be productive. The team has been incredibly effective while working from home, and we believe the best approach to risk mitigation is to maintain this arrangement for now. We will be prepared to return to the office in phases when we feel we have satisfactory answers to pertinent questions. Regarding sales, this is indeed a unique sales cycle. However, it’s important to highlight some of the data Ted shared. One-third of our enterprise clients are in cross-sell discussions, and the number of RFPs we have is consistent year-over-year, which is impressive. Moreover, a larger share of these RFPs are bundled, indicating we're selling more services. Currently, three-quarters of our HSA RFPs include at least one of our CDBs, which is an increase from previous statistics. While we typically avoid discussing win rates at this point in the year, our win rates in the middle-sized employer segment are strong. We’re confident that we are securing business from competitors, and our expanded range of offerings is resonating with clients. Much of our sales activity for the upcoming fiscal year will be completed before next September. Additionally, we are concerned about how to educate new and existing members during the open enrollment period. To address this, we have initiated a fully online education program and are communicating this effort to all our clients. Despite being online, this program features real people who can engage in dialogue. We believe this will be our most unique and effective open enrollment cycle, providing our members and potential members access to a wealth of educational resources, whether in the form of materials, tools, or support personnel available around the clock. While we acknowledge that a resurgence of COVID could pose challenges for the economy, we are prepared to deliver exceptional services to our members, clients, and partners this fall.

Thank you. Our next question comes from Robert Jones with Goldman Sachs. Your line is now open.

Great. Thanks for taking the questions. I guess, just one clarification around COBRA. It wasn't clear to me what exactly contemplated. I know you’re taking recent trends and obviously trying to extrapolate them into at least 2Q. So, I just wanted to make sure I understood how much contribution, if any, is contemplated from COBRA in 2Q? And then, I guess, just taking a step back, Jon, you shared some high-level statistics about what you're seeing from your customer base as far as unemployment in recent months or recent weeks, one of the things that makes this obvious macro situation different from prior ones is folks holding on to benefits. So, I'm just curious if you'd be willing to share within the clients that have had layoffs, any perspective as far as those holding on to benefits, furloughed situation versus those that had been more severed permanently from those organizations? Thanks.

Yes, I'll address the second part of your question first, and then I'll have Darcy provide insights on what our assumptions are regarding COBRA for Q2. After that, I will also touch on the broader topic of effective unemployment and the potential implications for direct billing and similar matters. Sure. I think, consistent with our past practices, until we see it, we don't count it. So, notwithstanding the fact that people have put out the possibility that maybe our COBRA revenue will get a spike or start rising, we have not built that into our Q2 guidance. We’re watching it carefully to see what qualifying events happen and what kind of uptake we get, but until we start seeing the fruits of that with respect to revenue, we have not included that in the guidance.

So, returning to your broader question, during this period, we were able to conduct a survey across our entire client base. While no survey is perfect, the results were quite interesting. 59% of our clients are not planning layoffs, while 49% have either implemented or are planning to implement layoffs or furloughs of 25% or less of their workforce. I mention this hesitantly since 25% is a significant number, but importantly, we believe our client base is not insulated from the level of unemployment we're seeing, although we seem to be in a better situation than some. Regarding your question about COBRA direct billing, 62% of our clients plan to continue coverage for those who get laid off, and 93% expect to rehire most, if not all, of those affected. This indicates that clients are considering how to maintain benefits during this period, not just out of kindness but also because it makes practical sense if they expect those individuals to return to the workforce. Currently, direct billing constitutes around 5% to 7% of our COBRA business, and we view it as a subset of what we refer to as benefits continuation. Traditionally, direct billing has been for retirees, where the company provides health coverage for a period during retirement or as they leave the firm. In the current context, we believe there is potential for growth regarding those in temporary furlough situations. We see more employers interested in maintaining benefits because they expect to bring these employees back. Hence, we believe there is some potential for growth in this area. Our pipeline for both COBRA generally and retiree billing in particular remains quite healthy. However, we want to see results, so it’s something to consider further as we approach the latter half of the year.

Thank you. Our next question comes from Donald Hooker with KeyBanc. Your line is now open.

Great. Good afternoon. This might be a tough question to answer, but would love to hear your perspective in terms of, as you think about the competitive environment for your services. Everyone's feeling pain. I think, last quarter, we talked a little bit about how at WageWorks your exposure to interest on custodial cash is maybe a little bit less than some of your competitors, which could be obviously a relative positive for HealthEquity. Can you talk about what you think you might be seeing across other similar service providers to employers, and how they're sort of faring as well and competitively?

Yes. There are a couple of thoughts on. Thank you for the question. I'm going to answer. And then, since I know Steve has had an opportunity to talk to some of our competitors in the last few weeks, I'm going to ask him to maybe offer some color. First of all, as you referenced, I think the key fact for people to be aware of is that by virtue of a business model that we have evolved to and are continuing to evolve, there are competitors that are far more exposed to the current environment than we are. The average HSA provider generates about 50% of its margin from net interest income. And from the current quarter we just reported, we generated about 25% of total revenue from gross interest and of that about 23% or so was from the cash side. So, we feel like we have an opportunity to kind of come out of this ahead. More broadly, as you know, generally when downturns happen, people take a look at their businesses and look at opportunities where they really want to deploy scarce capital and where they don't. And so, markets consolidate. We think there are going to be consolidation opportunities. We’re certainly thinking about how to handle those, given our capital structure. But, we're not going to rush into anything because sometimes it's good to wait till you see the tide roll all the way out. But, we do think there are going to be those opportunities. And we’re going to be a winner in that environment. The experience that we've gone through in bringing WageWorks onto the platform and our prior experience with consolidated M&A I think is really helpful in this regard. Steve, do you want to offer any color as you've talked to different competitors, in particular the banks and others how they're thinking about this?

Sure. Thanks for the question, Don. I agree with what Darcy and Jon mentioned. I want to add that we face a wide range of competitors, including over 2,000 banks that primarily focus on single products. Most of these banks gather some HSAs through their business relationships and direct consumer interactions, but they typically offer limited additional products. HealthEquity has provided a broader product suite for about 12 to 13 years now. Since Jon joined us over 11 years ago, he has brought valuable expertise from his background in consumer record benefits, which has helped us accelerate our growth and has been key to that acceleration. The acquisition of Wage has also enhanced our competitive position. We experienced a similar downturn during the Great Recession, and as the market recovers, the dynamics shift slightly. Banks that we regularly engage with are beginning to see a decline in revenue. With changing interest rates, they are becoming more receptive to discussions with companies like HealthEquity that offer a wider range of benefits, referred to as CDBs. They are starting to notice that their margins are tightening on HSAs revenue. We are in ongoing discussions with these institutions, and we believe our scale in HSAs and CDBs enables us to excel. Our team is well-organized, and I was impressed during our recent meeting to see the efforts of not only our sales team but also the entire sales operations team in generating qualified leads, alongside our exceptional service, which remains our strongest selling point across all products. We are in a strong position, and I remember that during the 2008 period, we took advantage of opportunities for acquisitions, knowing that we were primarily a single provider of HSAs at the time.

Thank you. Our next question comes from Jamie Stockton with Wells Fargo. Your line is now open.

Maybe just one quick one, the non-HFA accounts, which are primarily from Wage, seems like turn was kind of high last quarter, maybe again this quarter in those accounts. Can you just talk about what your expectations are as we move through the rest of this year? I realize that the environment is making that calculus a little more complicated, but just any color there would be great.

Yes, Jamie, thanks. We finished the quarter with approximately 100,000 net CDBs lower than at the end of Q4. This was mainly due to a reduction of about 200,000 accounts, which we previously discussed in the Q4 call. We had hoped to handle these runoff accounts differently, but that wasn’t possible. To clarify, these accounts haven’t technically left us; they represent the conclusion of the 2019 calendar plan year with the respective grace periods. We may see a few more of these accounts this quarter as some employers have a longer grace period and the government has allowed extensions, although I believe most employers won’t take that option. Regardless, we might generate some revenue from this. It’s something we’ll need to adapt to annually when comparing the fourth and first quarters, which includes those runoff accounts. Excluding that factor, the non-HSA accounts business showed a slight sequential increase, especially in light of our concerns at the acquisition's close. I believe we have significant growth opportunities in that space. Our competitors seem unprepared to execute effectively at scale. They aren’t equipped to manage the kind of initiatives we are, like COBRA, and I doubt they’re ready to address the needs of the 20 million individuals who recently became unemployed. However, we can assist with actual payrolls, unlike our competitors. Despite a decrease in spend this quarter, our interchange remained steady sequentially. Furthermore, I don’t think others can match our efforts in education and service, which help us maintain high standards. Overall, I’m optimistic about the growth potential we have in these markets over the next few years.

Thank you. Our next question comes from Greg Peters with Raymond James. Your line is now open.

Good afternoon, team Purple. First question is on capital structure. Can you guys give us an update on your debt leverage, especially in the context of the revised adjusted EBITDA guidance that we could analyze out for the next couple of quarters?

Yes. I will start this one and then turn it over to Darcy. Did I forget to turn over to Darcy last time? I may have. Well, go ahead, Darcy.

We closely monitor this situation and provide quarterly reports. I just finished reviewing our latest quarter. In the upcoming quarters, we will realize the benefits of synergies that we have generated and will continue to generate. In terms of cash flow for this quarter, we experienced a decline of $20 million, primarily due to the payout of FY20 bonuses, which will not affect cash flow in future quarters. Furthermore, we have allocated significant cash resources to integration and merger-related activities, which will taper off by the end of this year. For the first quarter, our cash flow from operations was approximately $15 million, which would have been higher without the bonus payouts. We are confident in meeting our debt covenants and have flexibility regarding capital expenditures. Additionally, we anticipate the disappearance of certain one-time expenses going forward, which will improve both our cash position and enhance EBITDA as we navigate through these transitions.

Well, I want to emphasize that while I always have concerns about any personal or otherwise debts, I feel confident in managing within our current capital structure to meet our debt obligations this year. What matters more to me, and our Board, is that we are a growth company. When we took on debt for the WageWorks transaction, we expected to reduce our leverage fairly quickly. Now, with COVID, I believe the impacts on interchange will diminish, but I'm less optimistic about how quickly interest rate effects will fade. I don't want our focus on managing our existing debt to prevent us from aggressively investing in innovation, sales, or potential mergers and acquisitions. I will encourage changes to our capital structure if necessary to facilitate this. Currently, we benefit from having borrowed money at very low rates, and we intend to hold onto that. We will work on continuing to reduce our leverage while also being bold in our investments. We won't sacrifice growth or the opportunity to seize the advantages presented by the acceleration of existing market trends.

Thank you.

Was this like four or five parts…

I have five parts but I'm not allowed to ask them.

All right. Let’s go to the next one. We’ll come back. Stay, if you want, we’ll come back.

Thank you. Our next question comes from Vikram Kesavabhotla with Guggenheim Securities. Your line is now open.

Yes. Thank you for taking the question. I appreciate all the color you've given so far on the impact to the business. I'm just curious if we go back to the prior fiscal year guidance range, it seemed like some of the macro trends have been taken into consideration at the time and some of the assumptions that were embedded within that. And so, I'm just curious, if you can talk about what the biggest surprises have been relative to those initial assumptions based on how the market and consumer behavior has evolved here in the last few months. Any color there would be helpful as we try to put the forward commentary into context. Thanks.

When we provided guidance initially, we indicated that we were revising our expectations to account for approximately $30 million less revenue from interest related to custodial services than expected. At that time, we recognized that interest rates were unfavorable, and we wanted to clarify the impact of that change. We believed that although there might be some temporary disruptions—considering everything that was happening—these would be relatively brief. However, we did not foresee that people would struggle with long-term access to healthcare, which affects their ability to spend funds. The most surprising development has been the longer-term decline in revenue from commuting. While I know my colleagues might be hesitant about the term "impairment," I use it in a general sense to highlight the prolonged nature of these issues, lasting possibly three to six months or more, rather than just a few weeks, affecting both commuting and healthcare spending. Although I wish we had clearer visibility, there are reasonable expectations that healthcare spending will recover eventually, especially since flexible spending accounts have use-it-or-lose-it conditions. Most employers may be reluctant to forfeit those options, suggesting a potential return to previous spending levels, or even a catch-up in expenses. We aim to communicate our perspective honestly, which is what we’re doing now. Additionally, I’ve been impressed by our team’s adaptability during a time when we have had to allocate extra resources to maintain safety and operations. They've managed to realize synergies sooner than anticipated, even before fully transitioning from various legacy systems. There’s more to come in this regard. These have been the main surprises for us.

Thank you. Our next question comes from Stephanie Demko with SVB Leerink. Your line is now open.

Hey, guys. Thank you for taking my questions. And Jon, thank you for those closing remarks that touch on everything going on right now.

Yes, ma'am.

So, the new HSA wins came in better than we expected and better than the recent 1Q trend. So, how much of that was execution versus adding in new WageWorks channels or the cross sales off?

I think the biggest issue is the cross sales. Additionally, I believe we can consider the WageWorks channels. It's clear that what we're offering aligns with market demand. Consequently, there are individuals we previously wouldn't have reached who now see us as a viable option. Part of the answer lies in the relationships our team has built with both national and regional advisory firms in benefits, which enhances what WageWorks was doing through direct sales. As people become more aware of our product depth and breadth, we observe positive sentiment among them. This contributes to the increase, even accounting for the ‘19 runoffs, which is why CDBs were also up, despite it being a quarter that typically remains stable. Given the context of COVID, this all seems acceptable.

Is there anything you can give just to help kind of quantify how much of the help it was, given there are so many puts and takes right now in the quarter?

I don't think so. It's tough to do that on a quarterly basis. Normally, when we see something like this, it's challenging to provide a clear answer.

I appreciate it.

We added 104,000 HSAs in the quarter, which is 17% more than the same period last year. Typically, I would consider where those extra 15,000 HSAs came from, and it might be due to an employer bringing on a lot of new employees or some other unusual factors. However, there weren't many employers increasing their headcounts this quarter. Therefore, the growth seems to be primarily driven by new sales that positively influenced the quarter. While I believe we gained some momentum, it can fluctuate, and each week presents new challenges. This week, as you've mentioned, is particularly significant, and many people are inquiring about what I should communicate. Honestly, I'm not sure what to say or why anyone expects that I would know. We still haven't figured it out.

You would have thought that there was anything that could make us forget that we're in the middle of a global pandemic.

Yes, we haven't solved this for 400 years, and I'm not certain I will, but that won't stop me from trying. However, to shift to a more straightforward point, if you had asked me back in early March, just as we were beginning to understand the impact of COVID, if I would have taken our current sales pipeline and results from the last quarter, I would have jumped at the chance.

Good afternoon. Thank you for taking the questions. And Jon, thank you for those closing remarks that touch on everything going on right now.

Yes, ma'am.

Thank you for taking the questions.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.