Healthequity, Inc. Q4 FY2021 Earnings Call

Good afternoon, and welcome to HealthEquity's Fiscal 2021 Earnings Conference Call. My name is Richard Putnam, Investor Relations for HealthEquity. And joining me today is Jon Kessler, President and CEO; Dr. Steve Neeleman, Vice Chair and Founder of the company; Darcy Mott, the company's Executive Vice President and CFO; Tyson Murdock, Executive Vice President and Deputy CFO; and Ted Bloomberg, our Executive Vice President and Chief Operating Officer. Before I turn the call over to Jon, I have two important reminders. First, a press release announcing our financial results was issued after the market close this afternoon. The metrics reported in the press release include the contributions from our wholly owned subsidiary WageWorks and accounts it administers. The press release also includes the definitions of certain non-GAAP financial measures that we'll reference today. A copy of today's press release, including reconciliations of these non-GAAP measures and comparable GAAP measures and a recording of our webcast can be found at 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, March 15, 2021, and will contain forward-looking statements as defined by the SEC, including 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. And these forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the statements made here today. As a result, we caution you against placing undue reliance on these forward-looking statements. And we also encourage you to review the discussion of these factors and risks that may affect our future results or the market price of our stock that are detailed in our latest annual report on Form 10-K and subsequent periodic 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 at the conclusion of our prepared remarks, we will turn the call over to our operator to provide instructions and to host our Q&A. I'll now turn the call over to our CEO, Jon Kessler.

Thank you, Richard, and in deference to my mother's favorite TV show, You Are My American Idol. Hello, everyone and thank you for joining us this afternoon. Today, we are announcing strong results for HealthEquity's fiscal fourth quarter and for the full fiscal 2021, which ended on January 31st, and we're providing guidance for fiscal '22. After briefly touching on our fiscal '21 results, after I do that, Ted will review operations and touch on the recent Luum acquisition. Darcy and Tyson will tag team the financial results, details of fiscal '21, and guidance for fiscal '22 based on the results we're reporting today. And Steve is here to join us for Q&A. Fiscal '21 revenue of $734 million is up 38% year-over-year, and along with adjusted EBITDA of $241 million is a record due largely to our WageWorks acquisition last fiscal year. As reported last month, we ended FY'21 with 12.8 million total accounts and our 5.8 million HealthEquity HSA members ended FY'21 with $14.3 billion in HSA assets. We were pleased with that growth and results but we hadn't yet seen how those compared to the market. Devin, our scorekeeper of sorts, reported January attendance to its 2020 year-end report that estimates market-wide growth of 6% year-over-year in HSAs compared to our 11% organic growth, and 22% market-wide HSA asset growth compared to our 26% organic HSA asset growth. Note the organic numbers exclude losses from the WageWorks acquisition and migration, but either way, those are good; we’re beating the market as we promised to do. We continue to hold number one market share of HSAs with 19%, and we're in second place in HSA assets at 16%. Now let's look forward. While the pandemic remains with us and could result in conditions we are not anticipating, the HealthEquity team is committed to beating fiscal 2021 results that I've just reviewed, demonstrating the strategic value of our total solution strategy. Last month, we talked about headwinds felt in fiscal '21 that might be turning into tailwinds for fiscal ‘22. And Ted, in addition to touching on our sales results, which tell such a good story, we think we’re starting to see other tailwind evidence as well. For example, we've seen a reversal in bond yields, as indicated by the 10-year treasury moving from around 0.9% at the start of January this year to above 1.5% this week. Well, treasury yields are not directly related to yields that our depository partners provide. There's a high long-term correlation, particularly between five and 10-year treasuries and five-year jumbo CDs. With our HSA cash assets already placed for fiscal '22, we don't expect that we'll see much of an impact from this year's yields, but we think a steepening yield curve does bode well for next year and beyond. We're also seeing more opportunities in M&A. And we think we're well positioned to opportunistically attract both portfolio acquisitions and to expand our capabilities to serve our partners, clients, and members. For example, we announced the acquisition of Luum last week. Luum is a SaaS-based technology company that provides a commuter solution beyond monthly passes and that employers are looking for as they need help returning their teams to work safely. Luum's flexible platform supports tailored policy incentives for the post-pandemic hybrid workplace and helps employers to thoughtfully approach green initiatives to reduce the carbon footprint of commutes. We welcome our new teammates, our luminaries in Seattle, and we're excited about how they will help our partners, clients, and members return to work. And finally, from a headwinds perspective, the government passed the third stimulus bill recently that, among other benefits, provides for COBRA subsidies for six months and increases, more precisely, doubles the dependent care FSA spending limits for the '21 calendar year. Both of these provide relief to families who have been impacted by the pandemic and its effect on access to healthcare, and also indicate that legislators and regulators are listening when we talk about opportunities to do the right thing. I'll now turn the call over to Ted to review operations.

Thanks, Jon. Hello, everybody. We are very pleased with the operating results that we delivered in Q4 and for all of fiscal '21, especially given the very challenging circumstances COVID presented. We were able to make tremendous progress on integrating WageWorks, and we found efficiencies that allowed us to raise our synergy target from $50 million to $80 million, with $60 million of run-rate synergies achieved to the end of FY '21. We onshored member phone calls, we completed 13 migrations with a heavy focus on HSAs, and we saw our member and client experience scores improve. We unified our brand and released the first version of our integrated platform to strong reviews on both portal and mobile, and met our service level commitments during this year. However, there's more work to be done. We're targeting another six migrations this year, along with integration work to support our newest acquisition of Luum. We intend to roll out the next iteration of our integrated platform with features that our clients, members, and partners are excited about. As I mentioned in February, our sales results year-to-date remain ahead of where they were last year. We believe this performance can be attributed to market receptiveness of our total solution, the work we have done building strong distribution partnerships, and the incredible work our onboarding teams did making new clients feel the purple love this December and January. We hope to see this positive trend continue as unemployment bottoms out, Americans get vaccinated, and clients and members return to work and re-engage with their benefit solutions. Speaking of returning to work, let me share a little bit about our newest teammates, our luminaries in Seattle. We are so excited to welcome Luum to help us drive our commuter benefit beyond monthly transit passes and help solve real back-to-work challenges for our clients. The post-COVID commute environment will look very different, with employers wanting to deliver flexible benefits and incentivize employee behaviors to manage tight parking solutions and make better use of alternative transit. Luum can also help companies take basic ESG steps; they have a proven track record of lowering drive-alone rates and reducing car trips. We believe in that mission, and we believe that Luum will fulfill our commitment to continuously innovate our services to meet the evolving needs of our clients, large and small. We also see opportunity as legislative and regulatory relief is extended to our members and clients through the passing of a 100% COBRA subsidy that will help Americans stay covered. We will shortly roll out plans to help our clients fulfill their obligations and help our members find the coverage that is right for them. While there is a significant operational undertaking to pull this off, it is our obligation to serve our clients and members in this capacity. There is a lot going on, and I would like to say thank you to our over 3,000 teammates, who are working so hard on behalf of our members, clients, and partners to deliver all the work I referenced above in a purple fashion in challenging circumstances. Now I will turn it over to Darcy to talk about our results.

Thank you, Ted. I will review our fourth quarter GAAP and non-GAAP financial results. A reconciliation of GAAP measures to non-GAAP measures is found in today's press release. Our fiscal fourth quarter financial results include the operations of WageWorks, which was acquired in August of 2019 and included five months, including the full fourth quarter of fiscal year 2020. Fourth quarter revenue declined 6% as the economic effects of the pandemic impacted each of our three categories. Service revenue declined 9% to $111.3 million, representing 59% of total revenue in the quarter. The decrease is primarily attributable to a 5% decline in CDB accounts at year-end, including an over 50% decrease in commuter, while the growth in HSAs helped average total accounts remain flat year-over-year. The full year revenue decreased 2% to $48.6 million in the fourth quarter, representing 26% of revenue in the quarter. The decline was primarily due to a 31 basis point decline in the annualized yield on HSA cash, partially offset by year-over-year growth of 16% in average HSA cash with yield and 66% growth in average HSA investments with yield. The annualized interest rate yield was 1.97% on HSA cash with yield during the fourth quarter this year. This yield is a blended rate for all HSA cash with yield during the quarter. The HSA assets table of today's press release provides additional details. As previously mentioned, we have migrated 97% of the HSA assets to the HealthEquity custodial platform. Interchange revenue declined 5% to $28.3 million, representing 15% of total revenue in the quarter. The interchange revenue decline was primarily due to reduced spending across our platforms in the quarter. Gross profit was $100.9 million compared to $113.7 million in the fourth quarter of last year. Gross margin was 54% in the quarter. Operating expenses were $100.8 million or 54% of revenue, including amortization of acquired intangible assets and merger integration expenses, which together represented 17% of revenue. Income from operations was $0.1 million compared to $14.5 million in the prior year. Net income for the fourth quarter was $5.4 million or $0.07 per share on a GAAP EPS basis compared to a loss of $0.2 million or a loss of zero cents per share in the prior year. Our non-GAAP net income was $33.39 for the quarter, compared to $28.4 million a year ago, a 17% increase. Non-GAAP net income per share was $0.42 per share compared to $0.40 per year last year. Adjusted EBITDA for the quarter decreased 8% to $56.6 million, and the adjusted EBITDA margin was 30%, while operating through the impact of COVID. For the full fiscal year, revenue was $733.6 million, resulting in gross profit of $415.3 million or a gross profit margin of 57%. Income from operations was $35.7 million and adjusted EBITDA was $240.8 million. Turning to the balance sheet, as of January 31, 2021, we had $329 million of cash and cash equivalents with $987 million of debt outstanding, net of issuance cost, with no outstanding amounts drawn on our line of credit. The cash balance, of course, does not include the roughly $416 million of additional cash from our equity offering a few weeks ago, nor the outflow of funds used in the Luum acquisition. Since I will be turning the CFO reins over to Tyson in a couple of weeks, I will turn the time over to him to provide the guidance for his first fiscal year of responsibility.

Thanks, Darcy. It's been a pleasure serving with you, and we're all glad he's sticking around to help us with other areas of the company going forward. Darcy makes everyone better when he's around. Based on where we ended fiscal '21 and our current view of the economic environment now expected for fiscal '22, we expect to generate revenue for fiscal '22 in a range between $750 million and $760 million. We expect our non-GAAP net income to be between $115 million and $119 million, resulting in non-GAAP diluted net income between $1.37 and $1.42 per share based upon an estimated 84 million shares outstanding for the year. We expect HealthEquity's adjusted EBITDA to be between $240 million and $246 million for fiscal '22. Today's guidance includes our most recent estimate of service, custodial and interchange revenue based on early fiscal '22 results as well as modest revenue expectations from the acquisition of Luum, and COBRA uptake based on the recent stimulus bill weighted towards the latter part of the year. Guidance also assumes a yield on HSA cash with a yield of approximately 175 basis points, as well as the effect of approximately $60 million of achieved run-rate synergies we discussed, which will be fully realized in fiscal '22. The outlook for fiscal '22 assumes a projected statutory income tax rate of approximately 25%. As we've done in recent reporting periods, our full-year 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 earnings release. In addition, while the amortization of acquired intangibles is 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.

Thanks, Tyson, well done. Plus one to Ted. Thanks to the team for a very special year under very unique circumstances. And also to Tyson's, thanks to my friend, Darcy Mott. None of you would ever have heard of HealthEquity, and Purple culture certainly would not be as strong and stable without Darcy and his 14 years of service to our team and our mission. When Darcy joined a small team of fewer than 100 team members here, HealthEquity had a handful of health plan relationships, 20,000 HSA members, and all of $20 million of HSA assets. He's remarkable in the truest sense of the word. His wisdom and financial talents turned the company profitable, prepared it for our IPO, and grew it to where we stand today. But Darcy is a complicated guy; outwardly mild-mannered, he drives the fastest car of the lot. That's true. He's a finance guy through and through, but he's stepping out of the CFO role and signing up to continue to work just as hard at HealthEquity's mission, but for less money. Well, I don't know. But I think we've got a great bargain, and all of us truly look forward to continuing to work with Darcy for as long as we can keep him. Thank you, my friend. With that, let's open the call up to questions. Operator?

And we have a question from Greg Peters of Raymond James.

Darcy, I guess you're going to be giving up your responsibilities. But I guess remember, the next best round of golf is right around the corner. I think it was Ben Hogan who said the most important shot in golf is the next one, and it looks like you're going to have a lot of opportunities going forward. So I guess I am only allowed to ask one question in one part. So with that, I know you raised the capital, you’ve announced the one transaction. We've been hearing in the marketplace about increased interest from others who are well-capitalized, well-funded about interest in doing M&A in the space. So the question for you, or you Jon and your management team, is do feel like the multiples for deals is moving up, and do you feel like the competition for these deals has increased to the point where maybe some of them will not be as attractive as they once might have been?

Well, I guess I would say the way we look at our plan with regard to the capital that we raised and the capital the business generated is primarily to deploy from an M&A perspective in two areas. The first is, and I think the primary of deployment, is around competitive and portfolio-type acquisitions. And I'll come back to that; the second is in areas where we can expand our capabilities, like Luum, for example. I think your question is kind of about the first. I do think that there are lots of people who are interested in our market, and that should say something to those who think, well, to the extent anyone thinks there won't be growth here, that's strong evidence in the opposite direction. That having been said, our competitive advantage when we look at the transactions that work for us, Greg, is that I think nobody knows how to operate in this business better than us, and no one knows how to generate synergies broadly speaking better than us. We've done it time and time again, especially from portfolio acquisitions. And on the cost side, we have already done it with WageWorks. So I think we have some real advantages in terms of deploying capital for a return. I don't doubt that there are other people who will deploy capital. What I think our investors are interested in is, when we deploy it, are we deploying it to generate a high return for them, and I have every confidence that we're going to identify what we have identified, and we will successfully pursue transaction activity that helps us grow, take advantage of our scale, etc., and do what we do well to generate a return for you. So that's kind of how I feel about it.

Your next question is from Robert Jones of Goldman Sachs.

I guess the question is really just hoping to learn a little bit more about Luum. I guess just within that, a little bit more around the type of offering, specifically the customer overlap, cross-sell opportunity. And then anything you'd be willing to share on just how the economic model is set up with the offering would be helpful. But yes, just in general, a little bit more on Luum would be great.

Ted, why don't I throw this one to you? Is that all right?

That's great. We were doing rock-paper-scissors for who would get the Luum question, and I won; thanks for the question. We are enormously excited about Luum. Here's the way we think about it operationally, and then I'll turn it back over to Jon to see if he has anything to add strategically. Our commuter business is, by and large, monthly transit passes. When we studied the landscape throughout the last year, as we watched what happened to the commuter business during COVID, we realized that the needs that are critical from employers and our most discerning business partners had was for a more holistic solution. Someone that could help them expand the commuter benefit to include daily parking, to include alternative modes of transportation, to include making sure their junior analysts at Goldman Sachs get home safely if they stay late at night with a connected Uber or Lyft. All of those types of benefits were sort of the next generation commuter benefits for the more discerning clients. And so we started going out in the marketplace to figure out whether it made more sense for us to build those incremental capabilities or to acquire them. We found this amazing company that was like-minded about what the demand was in the marketplace, had already signed up some of the most forward-thinking and critical enterprises in the US as their clients and worked with those clients to build a model that would work. We felt really good that Luum is where the puck is going. And so that's sort of how we intend to deploy it. We do think there are cross-sell opportunities, but really just by broadening the commuter value proposition within our own commuter base. There's no league tables like there are with HSAs, but we believe we're the largest or near the largest commuter provider in the US. And we think we have an opportunity to take this awesome incremental solution to those partners to help them succeed in a post-COVID commute environment. That's sort of the operational answer. Jon, if you want to touch on any of the strategic stuff.

No, I think that was well put. I'm not sure I would add much to that except to say, Rob, that we felt like, over the remaining part of this year, it's almost as though we are, from a member's perspective, reintroducing our commuter business. Now members still have accounts and so forth, and there's not much work for them to do, but they're busy. And at the same time, we know our customers are reintroducing, for lack of a better term, members to work. And it's funny to think about it this way, but for a lot of people, that's a big challenge. From our perspective, the combination of Luum and our existing commuter benefits product is really the best way to do that; it's the best way to reintroduce people to work from a commuting perspective. There are lots of other issues out there, but on this one, we have the best solution and we have the ability to take that to thousands and thousands of clients over time. That's a really attractive thing and will serve us well broadly. So when I talked at the beginning of the conversation about headwinds to tailwinds, I always forget; commuter has something where it will be great to have tailwinds again. And I think Luum really lets us make the most of those tailwinds.

And our next question is from George Hill of Deutsche Bank.

I guess, Jon, what I wanted to ask you is that should we think of Luum as white label for deals that might happen in the healthcare space? And I might even ask you what you think of as Luum with health care and talk a little bit more about where you see the M&A white space on the health care side of the business?

Well, first of all, if I've got Luum with healthcare, I'm not going to announce it here. So I'm not going to answer that. But you knew I was going to say that, but I do think that there are elements of this that are very attractive from a playbook perspective. Luum is not a large company; it is not bringing with it a ton of legacy revenue, etc. And it’s a company that has had to innovate to survive and succeed in facing very unique challenges. So they've had to develop very unique solutions. From a talent acquisition standpoint and the right way to bring in talent, if we're going to do build-buy type integrations, this is exactly how I prefer to do it. In general, the white space in healthcare, in my mind, continues to be around the consumers’ role in the financial aspects of healthcare. We have not yet cracked the code on helping consumers truly understand everything involved with their healthcare financing while making that process stress-free. So while that may not be the most interesting thing for a managed care organization, healthcare provider, or pharmaceutical company, it's really interesting to us. We occupy a very unique position within healthcare, and we will continue to drive change in the system. So I guess that's a long way to say yes, I believe this is the kind of playbook we hope to follow in healthcare. I do see opportunities in healthcare, and they will likely center around our continued efforts to connect health and wealth, ensuring that consumers, when they understand the financial aspects of healthcare, improve the entire system.

Jon, if I can have a quick follow-up, I guess one thing I would ask about is the upcoming selling season. We've started to hear from some benefits consultants that while there wasn't a lot of movement in calendar '20, calendar '21 seems to be all for a bang. I would love any up-to-the-minute comments you'd be willing to provide around kind of sales and RFPs?

Well, this is going to make Greg and Marco very jealous because they didn't get a second thing. So I'm not sure I can address part B. But Ted, if you wouldn't mind commenting on what we're seeing from a sales funnel perspective and also in our channel checks with the consultants and so forth?

I think what we find echoes your channel check as well, right? We've seen one of the reasons why, as I stated, our results year-to-date are ahead of last year-to-date is in part because some of those slipped RFPs became closed sales in the early part of this year. So I would say our findings are pretty consistent with what you're hearing from your benefits consultant connections. We certainly hope it continues, but thus far, we do feel a little wind at our back early from a volume perspective.

And Jon, I guess, technically, I didn't answer the first one. So maybe that's my first question.

And your next question is from Sandy Draper with Truist Securities.

And Darcy, I know you're still going to be hanging around, but I'm glad; it's been great working with you. Just wanted to share that. I think this is one question, Jon. I think this is one question, and I'm not sure if it goes to Darcy or if it goes to you, Jon, or maybe to Tyson, but I'm going to try to wrap it up. When I think about sort of the puts and takes around impacts to cash flow over the next couple of years, outside of like where rates go and what accounts you win, I think about, one, I think it's $26 million in your projections, the merger integration costs. I'm pretty sure that ends at the end of this year. Then you've got commuter is still down 50%, and I think we all probably don’t believe it’s ever going to go all the way back up. But could you remind us where commuter sort of was and think about what that lift looks like? And then, Tyson, you talked about COBRA being a boost at the end of this year, is there a possibility that may be going into next year that, that drops off? I'm just trying to think about those puts and takes, and as we think about sort of a baseline normalized EBITDA or cash flow number, I'm just thinking about those three buckets. So I think that's one question, but that's my best attempt at bringing it into one.

I'll begin with the statistic mentioned. As we previously discussed, commuter represents approximately 75% of our run-rate revenue business product, and it remains profitable, even though it's down over 50%. This addresses that part of your inquiry. You also mentioned the factors that enhance EBITDA or cash flow metrics, and in the long run, as Jon highlighted, rates are a primary factor in this regard. Even with the expected COBRA lift in the middle to latter part of this year related to our work on notifications and associated fees, the effectiveness of its usage will become clearer within the year. However, the rates will be the main focus driving long-term margins. Additionally, I want to mention the interchange rates and how they are starting to normalize. While they haven't fully returned to pre-COVID levels yet, we still have a normalized quarter in Q1 to deal with before our comparisons to the pandemic quarters shift. The timing of everything aligning as we come out of the pandemic is uncertain, but it is encouraging to see some of these rate indicators increasing, which bodes well for our business considering the assets we were able to generate in the previous season.

And that $26 million, just to confirm, that does; that’s the last of the merger integration expenses?

Yes, that was the other point. Yes, that is. And we're committed to be on budget, and that will be gone relative to the WageWorks acquisition by the end of the year. Ted is on track to make that happen operationally, and we're tracking it.

And your next question is from Donald Hooker of KeyBanc.

So I guess maybe just a follow-up there on Sandy's question on cash flow. Just when you look into next year, just to hone our models here, obviously, the balance sheet is much better now with the equity offering. But just to think in terms of CapEx, I'll just keep it to that. What's been your assumptions around CapEx, obviously, nearly one year with the two companies together? And are there any investments you need to make into Luum that might elevate that in the near term?

I'll make some general comments and then hand it over to Tyson to discuss our expectations regarding capital expenditures this year. The main factors driving our CapEx are the investments that Ted and his team are making in transforming our platform to a fully API-driven microservices environment. The benefits of this transformation are evident, especially in the results we've shared over the last quarter with the initial version of PLUM. We've committed to releasing over a dozen new items this year, which is the focus of our efforts. This will provide long-term benefits, not only in terms of cost savings but also in transaction efficiency, with Luum being a prime example. While we anticipate some short-term expenses related to Luum, our effectiveness has greatly improved compared to two years ago, which will be a valuable lesson for us. Tyson, could you share some insights on our projected CapEx this year compared to last year?

I mean it's gone a little and it's going to be around 10% of revenue, approximately in that area. All the things Jon outlined are true. We're going to have our foot on the gas to make those improvements and also track what we think the returns will be to that. So excited to get that done and really upgrade our technology.

And your next question is from Stephanie Davis of SVB Leerink.

Darcy, obviously, a very well-deserved move, but you will be so very, very missed. Since you're transitioning from that CFO seat, I think I’ll ask Tyson about my guidance question. So not a bad time move.

He's getting used to it.

So from the press release, it sounds like you guys are executing well on wage synergies. There's $20 million more coming this year, but profitability did look a little bit soft in the guidance. Is this a function of the expectations for a strong selling season, which was talked about in the prepared remarks, that cost could offset the wage savings, or is it some of the investments you've talked about before, or is there really anything else to call out, maybe some conservatism in the back-to-work assumptions?

Yes. Stephanie, I believe the main point is that a significant portion of our profitability comes from improvements in rates. As Darcy mentioned, we are nearing 200 basis points for the quarter, but for the full year, it will be 175 basis points. You may have observed that this has decreased as interest rates have dropped. This decline is one factor that hinders margin improvement. If commuter trends bounce back, we could recover some of those funds up to about $75 million, and I think Luum might assist with that. However, I'm not factoring that in yet since I haven't seen it materialize, and if it does, it might occur in the latter half of the year. We will certainly discuss any developments. One major reason for the current situation is that Luum won't significantly contribute to margins; it's a new venture with limited revenue, and most resources are being reinvested into the business. So, those are the primary reasons for our current position. I believe we will finish the year strongly, and maintaining consistency provides a solid foundation moving forward.

And then one quick follow-up, Jon. I need to hear how you definitively know that Darcy drives the fastest car in the lot; that's very important. Thank you.

He's taken me for a ride in it. If it’s not the fastest car on the lot, then the fastest car is very well hidden. I'm pretty sure everyone knows that. By the way, it’s not the first one he had; he used to have the fastest car, and now he has an even faster one. For those concerned about environmental impact, I believe it's some kind of hybrid. So it's not one of those Teslas; it's a different hybrid vehicle. He’s driving fast, but he’s also driving clean.

Your next question is from David Larsen of BTIG.

Can you talk a little bit about how Luum is priced? Like, I mean, does the revenue coming from Luum depend on people actually commuting to work, or is it more of a subscription sort of model? And let's say, half of your customers were to purchase Luum, what sort of revenue run rate could you get to, let's say, five years from now? Could it bring you up to $75 million five years from now? Just any color around that would be very helpful.

Yes. I'll give this one a shot and then ask Ted to add to it. Maybe he'll have a more coherent answer. Luum's primary business is a subscription-type business. So it is somewhat similar to the core of COBRA, where it's dependent on the number of team members or employees rather than who's driving or what have you. And that's because the solution has something to offer everyone. One example that Ted hasn’t addressed is that it's the opportunity to help employers as we see, for example, work-from-home cost reimbursement mandates coming out. Luum has some capabilities in that area. That, again, is sort of ensuring every commute or no commute at all. And so that's how Luum is priced. It provides in the broader commuter business some stability relative to variability in commuting. I don't know that I have done the calculation you were asking for. I would not want to do it on the fly. But I will say that one thing I think is particularly interesting about Luum is that it can make a meaningful contribution to the return of this commuter business. One thing I might have said in response to Greg's question is one thing I like about this transaction from our shareholders’ perspective is that I am confident it will yield material returns expressed in terms of IRR or return on invested capital. While the percentage may be big, the numbers are yet to be seen. But the IRR will work here. Our clients really never had to consider these issues. Now, with return to work—some of the examples Ted offered—there are important matters to address. I’m hopeful that the pandemic does not lead to a situation where we abandon alternative commute modes and everyone drives to work alone. We know Luum has a solution for closed-loop carpool reservations, which can be implemented for staggered work schedules. That’s the kind of offering that hungry and focused companies need, and we are pleased to provide that solution to a much larger audience.

And then just one more quick one. With the synergies from Wage, you're going to be, I think, $80 million by the end of fiscal '22. Should we expect to see a sizable increase in adjusted EBITDA in fiscal '23, assuming that there's some improvement in yield, and at a minimum, commuter doesn't worsen? Because there's very modest adjusted EBITDA growth from '21 to '22.

I mean we're not giving guidance here, but I would sure hope so.

And your next question is from Mark Marcon of Baird.

And Darcy, congratulations. It's been truly a pleasure working with you since the IPO. You will be missed, but it has been fantastic, and I hope we can stay in contact. I mean what you've done has been remarkable. I thought Jon said it incredibly well, but it really is something. Questions on Luum. I'm just wondering, as you're thinking about it—first of all, how much of a contribution will it make for this year? And any parameters that you can provide us in terms of a revenue expectation and EBIT/EBITDA margin expectation? Just any sort of framing of the current size? I know it's small. And then strategically, what I'm wondering is to what extent is there an opportunity to sell it as a standalone product being additive to your existing client base? And to what extent will it help you in RFPs from a commuter perspective as well as help greater differentiate all of your CDB offerings in a holistic manner, demonstrating that you’re forward-thinking in your solutions regarding areas important in the future?

Ted, why don’t you take the second half of that question? And then we’ll come back to Tyson for the first.

We have high hopes for Luum’s ability to be added to our existing many thousands of commuter clients. Not all of them will necessarily lend themselves to a comprehensive solution, but we're excited about it. We believe our RFP process will benefit from offering something as part of the benefit package that really no one else can; we believe it will help our RFP responses stand out. Our preliminary conversations with both current and prospective clients have been promising with a lot of positive reactions. The Luum team is exceptional, bringing great ideas, and we look forward to combining our efforts. We feel pretty optimistic about it. I’ll turn it over to Tyson to answer your economic question.

Mark, it’s small and it doesn’t drive margin, but there’s upside. If you look at their website, you’ll see the kind of clients and partnerships they have. That provides a nice market check there on who they’re working with. There’s a nice opportunity to support us as we claw back through the commuter business too. It will sync up nicely with that because of the way the cards integrate with their solutions, but it’s small in terms of revenue to begin with.

I’ll say one other thing about this, not to prolong the discussion, but the Luum team is composed of accomplished individuals. They’ve operated in the technology space, and they recognized a passion and need for improvement in this segment of commuting, particularly using a talent acquisition standpoint and we find the common purpose as a shared philosophy around our respective teams. The focus on engagement, the use of technology to drive that engagement, and the opportunity for success while driving thoughtful change in the industry is in alignment. It just felt like a good fit for us, as we've as individuals that we can still serve our shareholders while giving us the opportunity to introduce innovative solutions.

And your next question is from Sean Dodge of RBC Capital Markets.

So Tyson, you said a couple of times now that rates are one of the bigger long-term swing factors for margins. Jon, you said accurately noted the rise in 10-year yields that we've seen, and you're saying that yields probably don't impact you much this year but might in future years. Can you walk us through how quickly and to what extent these moves typically flow through to you all? I know it takes some time to affect the instruments you're benchmarks, and I guess, how often are you placing new cash? Is it only annually? And then you ladder it in three, four years. So every year, you've got some rolling off that are being replaced. But I guess just a quick reeducation given that there is actually something to be encouraged about on the kind of the rate outlook.

We generally ladder things, and most of our placements occur in the December, January timeframe. So when Tyson guided that our rates were 175, it’s because most of the money that we anticipate for this year is already placed in deposit agreements. Because of the wage migration this past year, we did enter into some newer contracts mid-year than we typically would. When those start rolling off in the future, there might be a bit more mid-year movement. We're always seeking yield enhancement opportunities, and when rates improve, that will benefit us. But as we stated on this call, most of that benefit will come to next year based on placements we make in December and January. Does that make sense?

And your next question is from Allen Lutz of Bank of America.

I guess to follow up there, the two-year treasury is only at about 15 basis points, and the five-year has backed up, I think, is kind of what you were mentioning at the top of the call to almost 1% or about 85 basis points. So there’s a big spread between the two-year treasury and the five-year. I guess when you kind of talk about the optimism that you had, is that just based off of the treasury curve movement being a potential precursor to improvements in CDs? Or are you actually having more positive conversations with depository institutions about where you could place rates?

Well, this is a little bit of a quiet period in terms of our conversations. We've completed a lot of placements over the course of December and January. I will say during that period, as we got into January, things did firm up quite a bit. What we're discussing is really to some extent giving our 20 partners a preview of our needs for next year. There’s been a lot of interest in that. This interest is bounded primarily on questions from different depository partners about what loan volume is going to be, in particular, and what duration that loan volume is going to come from. I can’t say there aren’t questions, but I think the conversations relative to what we were seeing last March and April were much tougher. So I think this situation is much better, and we see positive signs regarding reflation as we've seen about 50% of lost jobs come back. These are all good indications for both our company and for placement opportunities.

And then the revenue increase, about $10 million since we spoke a few weeks ago. Is there any way you can break out sort of where that improvement is coming from? Is it related to COBRA, from Luum, more confidence on the reopening? Just if you could kind of bucket that for us.

Tyson, I don't think we're going to break it out too much, but it certainly is related to the things you mentioned, and you could be right.

We started from the promise of growing top line post-COVID; we believed we could deliver, and we feel we did. There are still challenges we faced in Q4 where revenue was still down in every category compared to Q4. We are in these COVID quarters. We still have that Q1 which will follow a similar vein. Yes, we’re working through COBRA, and we'll see growth from that. Luum adds a little as I mentioned, but it’s small. Overall, it's a mixed bag having the implications discussed as we consider things like an increasing commuter towards the end of the year, but not much. I'm checking the news like everyone else. As vaccines roll out, we are hopeful that will change the way people move around.

There are no further questions at this time. I would like to turn the conference over to Jon for closing remarks.

Yes. Thanks, everyone, again, for joining us. Please, I know things are getting better, but let's all just stay safe and sane. One more comment on Darcy: Darcy is a Dodgers fan, and while I'm not sure I'm as keen on bleeding blue as purple, I would note that I believe that it is the case that the highest batting average among any Dodger, of Brooklyn or Los Angeles, is Willie Keeler. I think it's 352, maybe 356. So Darcy is not only an integral part of our team but also one who is leaving this role, and I believe he’s been able to meet your earnings expectations consistently on a quarterly basis. The ability to provide strategic insights and deliver results is part of Darcy's legacy which will endure, and I assure you that his unique contributions to our culture will remain. We look forward to meeting and exceeding expectations in the upcoming quarters. Thank you all very much.

Thank you, Jon. Have a great time.

Okay. Bye-bye, buddy.

And this concludes today's conference.