Healthequity, Inc. Q2 FY2022 Earnings Call

Thank you, May and good afternoon. Welcome to HealthEquity’s second quarter fiscal year 2022 earnings conference call. My name is Richard Putnam. I do Investor Relations here for HealthEquity and joining me today is Jon Kessler, our President and CEO; Dr. Steve Neeleman, our Vice Chair and Founder of the Company; Tyson Murdock, the company’s EVP and CFO; and Ted Bloomberg, EVP and COO. Before I turn the call over to Jon, I have two important reminders. First, a press release announcing our financial results for the second quarter of fiscal year 2022 was issued after the market closed this afternoon. The metrics reported in the press release include contributions from our wholly owned subsidiary WageWorks and the account it administers. The press release also includes definitions of certain non-GAAP financial measures that we will reference here today. A copy of today’s press release including the reconciliations of these non-GAAP measures with comparable GAAP measures and a recording of this webcast can be found on our Investor Relations website. Second, our comments and responses to your questions today reflect management’s view as of today and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates, and 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 risk and uncertainties that may cause the 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 other risks that may affect our future results or the market price of our stock and they are detailed in our latest annual report on Form 10-K and in subsequent periodic reports that we file with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future events. At the conclusion of our prepared remarks, we will turn the call over to the operator to provide instructions and to host our Q&A. With that, I'll turn the call over to our CEO, Jon Kessler.

Thank you, Richard. It gets better every time. Hello everyone, and thanks for joining us this afternoon. Today we have good news to report. We're announcing strong results for HealthEquity's second quarter of fiscal '22 ended July 31 and we are reaffirming guidance for the fiscal '22 full year. I will discuss our Q2 results and pending acquisitions. Ted will review operations and integration progress, and Tyson will review the financial details of the quarter and provide updated guidance for fiscal '22. Steve is here to join us for Q&A. As always, let's start with the five key metrics that drive our business. The team delivered strong year-over-year growth in HSA members and assets while commuter yield headwinds continue to impact revenue. Revenue of $189.1 million grew 7% versus the second quarter of last year due to improving year-over-year HSA member asset and other CDB growth along with one-time COBRA subsidy revenue that hit largely in Q2, and that was all partially offset of course, by lower custodial yields and commuter benefit utilization, which remains well below pre-pandemic revenue levels. Adjusted EBITDA of $65.5 million grew similarly sequentially, and up from the second quarter of last year of $60.0 million. Total accounts ended the quarter at $13.1 million, which does not include the nearly 700,000 commuter accounts that went into suspense since the beginning of the pandemic. HSA members at quarter's end reached 6.0 million, up 11% year-over-year, and HSA assets at quarter's end reached a record 15.5 billion, up a larger 27% from a year ago. The team delivered very strong first half sales results, including a fiscal second quarter record of 180,000 new HSAs, up 67% from 108,000 opened in Q2 last year. To date this fiscal year, we have welcomed 295,000 new HSA members, up 38% year-over-year, and more than in the same period in any year of our history. HSA assets grew by $458 million during the quarter, with most of that growth ending up in investments as members and their employers continue to contribute and invest. Investing HSA members in fact grew 42% year-over-year, with more of our members connecting health and wealth. The average balance of HSA members grew a robust 14% year-over-year, even during a quarter where members' spend increased interchange revenue by 23% year-over-year. So, people were spending and still contributing. CDB accounts continued to grow as well, even without a commuter rebound. The strong organic results in Q2 do not include the acquisitions of Further or Fifth Third Bank's HSA portfolio, which have not yet closed. We believe the Further and Fifth Third transactions will enhance HealthEquity's market leadership and scale in our core and growing HSA business, adding approximately 0.7 million HSAs and 2 billion of custodial assets upon their closings later this year. Further, we'll also strengthen the network partner strategy that has helped fuel HealthEquity's HSA growth from the start with significant new partners, increased commitment to the Blue Cross and Blue Shield system, new API-based platform capabilities to support flexible branding and deeper integration of HealthEquity into partner offerings that truly are exciting things on the way. As was reported in this morning's 8-K filing, the Further agreement has been amended moving the target date for close for the bulk of the business to November and creating a separate closing process for these 0.3 billion assets. This provides fiduciaries time for review before transfer while protecting deal value through an earn-out structure negotiated with the sellers. The Fifth Third portfolio transfer will occur shortly. We are pleased with the results we're reporting today in light of the pandemic's continuing impact. Commuter revenue remains well under 50% of pre-pandemic levels with the Delta variant, leading many employers to push back return to office plans as you all know. Card spend plateaued in Q2, which we also see as an effect of the Delta variant. These headwinds will eventually abate of course, and the team has the opportunity for a strong second half capitalizing on a great sales start to the year. I will now turn the call to Ted to review our operations and integration.

Thanks, Jon. As Jon mentioned, we're pleased to report that second quarter new HSA sales were up 67% year-over-year and 56% sequentially from the first quarter this year. As you know, we recently promoted Steve Lindsay, a 15-year HealthEquity veteran to the position of Executive Vice President of Sales and Relationship Management. Steve has led the teams responsible for successful cross-selling efforts, expanding our partner relationships, including launching our record keeper partnership effort and delivering high quality service to enterprise clients, making them want to do more business with us. In fact, Steve and his team recently forged a partnership with Health Care Service Corporation, better known as HCSC, to bring HealthEquity's total health solution bundle to HCSC's Blue Cross and Blue Shield licensees in five states. Factoring in the Further acquisition, we will soon be working together with approximately two thirds of Blue Cross Blue Shield licenses to connect health and wealth. Steve is purple through and through and has demonstrated his capabilities and we look forward to benefiting from his impact in this expanded role. As we move into open enrollment with our clients and partners, we are optimistic as employers and employees reengage with their benefit programs. The marketing and engagement programs we have built are working. Our clients we have spoken with are overwhelmingly supportive of deploying them, and we believe we can successfully educate our members and prospective members on the benefits we help their employer offer. We are also excited about Fifth Third and Further. We expect to complete the close and migration of Fifth Third before the end of Q3. They have been an exceptional partner supporting the transition and referring new business to us already. With respect to Further, we've gotten to know their team and couldn't be more impressed. Planning efforts are underway to achieve $15 million of cost and revenue synergies within three years of close and growth opportunities with their existing clients and health plans are exciting. The WageWorks integration effort is winding down with another platform migration completed and $5 million of additional synergies achieved in Q2. While we have completed 18 migrations and achieved $70 million of run rates synergies to date, there remain a number of small to mid-size migrations to complete, to achieve the remaining $10 million of the promised $80 million of permanent run rate synergies. During Q2, we also completed the rationalization of our post WageWorks physical footprint. The team's stellar performance over the past 18 months working from home has eased the process of concentrating future in-office work to just two locations, Draper, Utah, and Irving, Texas, along with a creative space for our awesome luminaries in Seattle. I'd also like to offer kudos to the entire organization for the tireless efforts to execute against the recent COBRA subsidy regulation. Our Q2 financial results reflect the realization of that concerted effort. We're now shifting our focus to deliver a successful busy season, and we are highly optimistic that the investments we've made in self-service technology, training, staffing, and simplifying our platform will help us deliver purple during our busiest time of year. Early returns are positive as we are meeting or exceeding service levels across the business. While there is still much to do, the first half of fiscal '22 has yielded record new HSA sales, strong integration synergies, and successful, scalable operational results; thanks to the continued efforts from team purple. Now I will turn it over to Tyson to review financial results and guidance.

Thank you, Ted. I'll review our second quarter GAAP and non-GAAP financial results. A reconciliation of GAAP measures to non-GAAP measures is found in today's press release. Second quarter revenue grew 7% as Jon mentioned, with each of our revenue components posting year-over-year gains. Service revenue grew 5% to $109.2 million representing 58% of total revenue in the quarter. The second quarter growth in service revenue is primarily attributable to 8% growth in average total accounts driven by growth in COBRA, partially offset by commuter accounts in suspense from the impact of the pandemic. While there remains an opportunity to provide additional COBRA services in the second half of fiscal '22, most of the upfront work and nearly all the subsidiary revenue was recognized in Q2. Custodial revenue grew 4% to $48.8 million in the second quarter, compared to $46.9 million in the prior second quarter, with 18% growth in average HSA cash with yield at 88% growth in average HSA investments with yield, more than offsetting a 33 basis point decline in the annualized yield on HSA cash. The annualized interest yield was 177 basis points on HSA cash with yield during the second quarter of 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. Interchange revenue grew 23% to $31.1 million representing 16% of total revenue in the quarter. The interchange revenue increase was primarily due to a rebound in spend across our platforms in the quarter and growth in average total accounts. Gross profit was $112 million compared to $101.8 million in the second quarter of last year and gross margin was 59% in the quarter. Earning expenses were $112.8 million or 60% of revenue, while amortization of acquired intangible assets and merger integration expenses together represented 19% of revenue. Net loss for the second quarter was $3.8 million or a loss of $0.05 per share on a GAAP EPS basis. Our non-GAAP net income was $33.4 million for the second quarter this year, up from $30.1 million a year ago. Non-GAAP net income per share was $0.40 per share compared to $0.42 per share last year. Adjusted EBITDA for the quarter grew 9% to $65.5 million and adjusted EBITDA margin was 35% higher than prior trends due to the COBRA subsidy revenue in the quarter. For the first six months of fiscal '22, revenue was $373.3 million, up 2% compared to the first six months of last year. GAAP net loss was $6.4 million or $0.08 per diluted share, while non-GAAP net income was $64.4 million or $0.78 per diluted share and adjusted EBITDA was $124.5 million, up 1% from the prior year, resulting in a 33% adjusted EBITDA margin for the first half of this fiscal year. Turning to the balance sheet, as of July 31, we had $754 million of cash and cash equivalents against $974 million of debt outstanding, net of issuance cost, with no outstanding amounts drawn on our line of credit. The cash balance, of course, still includes the funding required to close the Further and Fifth Third HSA acquisitions. As you know, we routinely have on file with the SEC a shelf registration statement on Form S3 to assure you we have access to the capital markets as needed. Our existing shelf registration expired yesterday, which means you will see a new S3 soon. Based on where we ended the second quarter and our current view of the economic environment, we are maintaining guidance for fiscal '22 that we previously provided, which includes revenue for fiscal '22 to range between $755 million and $765 million; non-GAAP net income to be between $122 million and $126 million, resulting in non-GAAP diluted net income between $1.45 and $1.50 per share based upon an estimated 84 million shares outstanding for the year, and adjusted EBITDA between $241 million and $247 million. Today's guidance includes our most recent estimate of service, custodial and interchange revenue based on results today. Compared to last quarter, our guidance includes a more conservative outlook for commuter revenue and interchange for the remainder of this year, due to the Delta variant surge, offset by the addition of Fifth Third bank revenue expected in Q4. We now expect to close the Further acquisition in Q4 this year. Guidance does not include any potential impact from the Further acquisition, except for the associated preparatory merger and integration expenses incurred through July 31, 2021. Our full year GAAP net loss and loss per share guidance includes the impact of these year-to-date merger and integration expenses. Our guidance assumes a rate on HSA cash with yield of approximately 175 basis points, unchanged from prior periods. Our yield guidance does not factor in the pending Further asset and migration to HealthEquity depository and insurance partners after then prevailing rates. Guidance also includes the benefit of run-rate synergies achieved from WageWorks that Ted mentioned. The outlook for fiscal '22 assumes a projected statutory income tax rate of approximately 25% and a diluted share count at 84 million. Though we don't provide quarterly guidance, let me speak for a moment about seasonality. During Q2, the company benefited from incremental revenue connected to the administration of COBRA subsidies included in the pandemic stimulus legislation. As you know, the stimulus plan subsidies ran from April to September. However, the bulk of revenue related to upfront notification and administration of the subsidies were earned in our second quarter. Guidance reflects our expectation of little additional COBRA subsidy revenue in Q3, and of course, none in Q4. Pre-pandemic, we also had a seasonal interchange pattern where Q1 and Q4 were seasonally higher with Q3 being the lowest quarter for interchange revenue. As Jon mentioned, we have seen a plateau of spending excluding commuter and expect to return to the pre-pandemic seasonal revenue patterns for interchange again excluding commuter services. As we've done in recent reporting periods, our full-year guidance includes the 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 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, Tyson. The story of this call, I think, is around improved efficiency, as Tyson mentioned, as well as of course sales performance in Q2 and for the entire first half. And these are both team sports and in this case, particularly thinking about sales, the team includes everyone at HealthEquity, our network partners, our clients, and their benefits advisors. And I wanted to say a brief thank you to that group who have worked very hard with us over this period of time where there's a lot of uncertainty to really produce good results. And so with that, let's open the call to questions, operator.

Your first question comes from Greg Peters of Raymond James. Your line is open.

Good afternoon, everyone at HealthEquity. Well, thank you for the call. And I guess I'm supposed to ask one question with one follow-up. Is that the rules you didn't really?

You're in Florida. I don't think anyone follows any rules anyway, so…

Well, but yes, exactly. Well, I'm going to try and be respectful of my peers. I'll stick to one question one follow-up. So let's focus on custodial revenue, and I think many are focused on, or are paying attention to where the three-year jumbo CD rate is. It really hasn't moved much and more importantly, the data coming out of the banking industry suggests there's just not a lot of new loan demand. And so I thought I'd just provide you the opportunity to talk about your perspective on the cash yield that you're going to be able to generate, beyond just this year with your depository partners.

Tyson, could you start by discussing our guidance for this year and how we are approaching the remainder of it? Then I'll share my thoughts on our long-term strategy.

Yeah, so for Q2, we achieved 177 basis points, and we're guiding for 175. We've maintained this outlook despite the decrease in rates because we are confident in our ability to place funds. As the season progresses, we're closely monitoring our strategies to optimize those instruments. We believe we've generated more demand through an increase in depository partners and other collaborators, so we feel positive about our previous guidance and our current outlook.

I won't provide multi-year guidance, but I feel positive about our business model. Our independence from any specific bank, insurance company, or investment firm gives us flexibility to adapt and serve our members better, which helps us maintain value while keeping fees low. We're approaching the placement season and actively exploring options with banks as expected. While the banking sector may face long-term challenges, particularly concerning loan demand and government regulations pushing for treasury purchases, we see some opportunities as well. We've noticed a mix shift within our cash assets, especially between the FDIC deposit product and our enhanced rates product, Yield Plus, which generates higher rates for our members and for us. With the Further acquisition, we will gain significant enhanced rates business on the HSA side, which will help us better educate our members about their options. We're also working to build long-term relationships with partners to create stability in our offerings. We'll provide guidance for the 2023 fiscal year soon, likely between December and February. It’s important to keep in mind that the mix shift in our cash component could be beneficial. We stand out from competitors as we aren't tied to proprietary money market funds, allowing us to allocate funds where they're most effective.

That makes sense. As a follow-up, the investment community has a lot of speculation regarding the adoption of high deductible health plans this year and new HSAs. Some people are suggesting that the growth in the industry for high deductible health plans and HSAs isn't what it used to be. Could you share your opinion on the industry's outlook beyond this year? I know you spoke optimistically about your strong second quarter results, but I'm curious about your perspective on the industry outlook.

My basic perspective is that there is a clear distinction among providers. Some have the scale and scope to effectively meet the needs of potential distribution partners, employers, and members, while others are more limited. If you examine our results alongside others that have been reported, you can observe this divergence. When considering the market, I believe the ultimate outcome will fall somewhere between the top performers and the rest, and our goal is to be among the leaders. I feel positive about our performance in the first half of this year, and we'll see what others, like Devon, report. Overall, based on the information available, this seems to be the case.

Just on that point…

And I should say in terms of both accounts and assets, so that seems pretty good.

On the account side, though, you used to talk about how the industry and we used to observe how the industry used to generate, give or take three million new accounts per year, kind of last year with COVID. When you think about this year and next year, do you think we can get back to that three million account per year industry sort of run rate, or is it going to be it feels like it's going to be less that's the final question.

I acknowledge that you've made a strong commitment to this initiative, and I'm glad to see that. However, I don't have a definitive answer at this point, and I think it's unclear for everyone. We will have to navigate through the year to gather insights. What I do know is that the growth in this market will unfold over an extended period. In my perspective, we are approximately 30 million accounts in a potential market of 60 million, a belief I've maintained through various economic cycles. The fundamental factors driving this situation remain constant. Healthcare is indeed part of this, but the notion of denying individuals the opportunity to spend tax-efficiently and save for retirement doesn't appear to be a temporary trend. Therefore, I believe there are significant growth opportunities ahead, and our goal is to seize as many of them as possible.

Your next question comes from the line of Anne Samuel of JPMorgan. Your line is open.

Thanks for taking the question. I was hoping maybe you could provide some incremental color on the incremental conservatism around commuter and interchange, and then maybe as we think about the commuter business, is there any offset from loom, as commuters start to think about getting to work in different ways? Thanks.

Tyson.

Yeah. Hi, Anne, I'm doing well, thank you. I appreciate your question. Like you, I'm closely observing how the situation is developing. As we considered the commuter aspect over the second half of the year, we reflected on our thoughts from 90 days ago, especially with the Delta variant emerging and the related news. We analyzed our business return timeline along with other companies' plans, while also keeping an eye on how people are using our products. Given these factors, we felt it was wise to adopt a more cautious approach for the latter half of the year. Each passing day reinforces my belief that the return to the office will be a gradual process. The same caution applies to interchange, as we noted rising case numbers, which suggests that people are behaving differently. This persistent issue necessitates a conservative stance to safeguard our performance in the second half of the year. As for your other question about Loom, we're optimistic about the team's progress. Their platform tends to see increased usage and interest when people return to the office, leading to valuable discussions about the commuter benefits integrated into it. If we consider the long-term perspective over quarterly shifts, I believe this will significantly benefit us. That’s all I have for now, Jon. Any other comments?

No, I think that makes sense. We aren't certain about the second half of the year. While we are pleased that we may have been more cautious than others, indicating that we were not predicting Delta, back in June when the outlook seemed positive, we exercised caution and received some criticism for it. In retrospect, that caution regarding the pace of commuter rollback was justified. I don’t have a crystal ball, so we aim to guide based on what we observe, and if we can achieve better results, we certainly will, just as we did this quarter.

Your next question comes from the line of George Hill of Deutsche Bank. Your line is open.

Jon, I'm going to lead the witness here a little bit, which is we look at a tough rate environment. The Delta variant slowing Commuter and interchange expect, I guess I would ask any changes in how you guys think about cap deployment.

I don't know where you're leading me to. That's my concern. I don't know. George, what do you think?

Shouldn't Jon, don't ask me, I'm a former banker. I'll sell you something.

It's good that it's former. As you can see from our activities, the M&A pipeline presents many opportunities. Moving forward, we will focus on portfolio acquisitions that generate immediate cash flow, similar to Fifth Third. This is the right approach in the current environment. While we don’t expect anything extreme, we have consistently generated cash and identified effective ways to utilize it for strong and predictable returns to our shareholders. This is likely what we will pursue, and there seems to be a solid pipeline for these opportunities. I don't anticipate making any strategic pivots given the current environment. With Further, we chose to deepen our commitment to our health plan partners and enhance our technology capabilities through more API work, grey label initiatives, and product integration. This approach is reasonable to me, but it's a modest shift. I don’t foresee any significant pivots in the near future.

Yeah, I think you saw exactly where I was leading you. I think that the more direct question would've just been like, do you see more opportunity in the businesses you're currently in, or is there a chance to take greater share of wallet with the clients you serve with new offerings? But I think you gave me the answer pretty clearly. Thank you.

Yeah, I think we have plenty of wallet share opportunity within the products we have from a cross-sell perspective. And that was helpful in this quarter. It's been helpful for the last year, and that's probably let's go and get the wallet share we can with our existing products, and one nice thing about that, and maybe in a further question, Ted will have a chance to elaborate on this is, we're really honing our skills in that area and so if there are other opportunities later down the line, great.

Your next question comes from the line of Donald Hooker of KeyBanc. Your line is open.

Great, good afternoon. Thank you for this question here. So I'm sorry if I missed this, but you talked about the Cobra subsidies benefiting the quarter. Did you size them, or was that the entirety of the sort of upside to your expectations?

Yeah, I think the way to look at that, Don, thanks for the question is just when you saw us go through guidance increases over the course of the spring. So you saw us raise for Cobra and loom, you know, early on. And then, as, as it started materialize a little bit more in there. And so that was the way that we sort of sort of messaged that, but we didn't go out and just specifically size the increase. But those things kind of played out like we expected and it was you know, probably a little better and that was good. So a lot of hard work by the team to get it done and, and to do it right. And so I think it proved a lot of things in our business as well about what we're capable of doing.

Super, maybe one quick follow up. You guys commented going into the enrollment season here, you had some learnings from last year from the COVID environment around self-service training and technology and whatnot. Are there one or two things you would highlight to us that could be sort of some, give us some room for optimism this benefits enrollment season from what you learned last year?

Yeah. Ted, why don't you take that one?

I had a feeling that that pitch was coming from Jon. Yeah, I would say there's two or three things that give me great optimism. The first one is the way that we do virtual education and open enrollment support. In previous years we were constrained a little bit by how physically proximal we could get to our members and prospective members. And it was fairly inefficient. And I think one of the great things that, you know, COVID helped us with in that we were on top of was moving to a virtual model. We can serve more people, help more people create more content be with the families when they want to engage with the content. Like we don't have to show up at work. We can, you know, we can create content on demand and support that with team members where if you want to sit down with your spouse and go through your benefits where they are to support that effort. And the results that we saw last year were really a cause for optimism. And we're off to an equally good, if not better start this year. So I think the pivot to virtual open enrollment and the way we were able to support that and the way our clients kind of jumped on board with partnering with us to support that is one big cause for optimism. I think second big cause for optimism is maybe a little bit less sexy on the revenue side, but equally important, which is we don't have 22 platforms anymore. That really helps, right? We've done a lot of work over the last two years. We've done 18 migrations. You know, that doesn't mean we've sun-set 18 platforms because some of those migrations are multi-step, but we're serving far fewer platforms with far more robust and capable cross-training, and far better awareness of what both our clients and members are asking us for. And it's helping us service people more effectively and without stuff falling through the cracks. I think that puts us in a better position to have a successful busy season. So those would be the two points I would make — one on the growth side.

And then one on both the cost containment and service side that are exciting from my chair. I don't if you have anything to add there.

I think if you take all that together and throw in the discussion that we've had over the last few quarters here with regard to technology investments in both API-based infrastructure and also from a data perspective, I, I mean, I think it's not very OB from the results in recent quarters with all the noise around COVID and other factors. But you know, underneath the covers, what we are trying to do is the way we look at this is we are in a market that from a secular perspective is going to have decent growth and certainly steady growth. And we're going to outperform the way we can turn that into spectacular outperformance, particularly from a margin perspective that is growing revenue and serving people efficiently is, you know, by maintaining our roots as a true technology company. And you're going to see those who watch closely, very closely have already seen investments in that area. And you're going to see more in terms of both people and feature functionality and so forth as we begin to integrate further. There is a lot of opportunity to apply technology to a market that is going to be there for us. We feel very confident about that and that we're already able to outperform to make that even better. And an opening moment is just kind of one great example of that, but for good luck with that.

Thanks, Don.

Your next question comes from the line of Sean Dodge of RBC Capital Markets. Your line is open.

I guess first, just a quick clarification on the guidance. Is there a revenue contribution from Fifth Third and this round that was not included in the last quarter's guidance? Nice. And you want to hit that one?

Yes, there is actually. And so we have included that that was, you know, we, we talked about that is essentially sort of the offset in there to kind of maintain I hadn't. So you do have that, you know, organic growth located in there, but it's, but it's relatively small.

Okay. Fair enough and then another kind of quick one on a further and fit there. There's, like I said, about 700,000 HSAs between the two. Is this a, it's like a net estimate, or do you have a sense of the net contribution of the quality HSAs that this will bring, net of account duplicates, zero balance accounts and nutrition and stuff with the migration that I think you saw with WageWorks?

I think the answer to that is roughly yes. There are I want to think about particularly with further where we are less, you know, because we're not in both cases we're not closed yet in, for, in the case of further because of antitrust and all kinds stuff. There's a little bit of probably information that we're missing that, that makes that imperfect, but order of magnitude of the answers.

Your next question comes from the line of David Larsen of BTIG. Your line is open.

Hi, can you talk about your EBITDA margin expectations going forward you know, longer term in the medium term and also maybe your costs overall? It looks like as a percentage of revenue on a year-over-year basis, sales and marketing and tech and development and G&A are all up. And they're also obviously up sequentially. So just any thoughts there and, and like the $80 million in cost synergies, that's a really big number. That's like one quarter's worth of full adjusted EBITDA. So just any thoughts on what your expectations are for EBITDA margin expansion going forward? We are very helpful. Thank you.

Tyson, why don't you hit this one and I can preview, but go ahead.

Sounds good. What we continue to talk about terminally and externally is that we'll continue to grow revenue at a steady clip, you know, into double digits as account growth occurs, and obviously asset growth is another counter to that. And then growing EBITDA margin even a little bit more quickly than that. And so that's getting to the efficiencies and, and Jon was mentioning this earlier, and that's really about how we service our clients for our biggest cost lie. And so you think about the virtualization of enrollment, you think about self-service opportunities, you think about the consolidation of the platforms, which as you mentioned, that relates largely to that cost synergy that's occurring as we consolidate those platforms. Everything around those platforms is, was located in that synergy related to particularly service, but at all other aspects. And even if you think about, like you said, sales and marketing, technology, and G&A, you know, there are efficiency opportunities, I think even beyond that synergy estimate, as we've said before. And then I think just to kind of hit into the operating parts of the operating expenses, and your question was broad. So I'm trying to make sure I took a couple of little scrolling notes here, but let me know if I missed something here, of course, on the technology side, there's large investments that are occurring that are capitalized, but of course, then the amortization starts to occur on that. There's also the talent that we have within technology and, you know, paying for that. So you've got the related to top comp in there as well. You get the right talent into the doors, we merged platforms. And as we try to get down to essentially single platform, which again, increases that efficiency. And then if I talked a little bit about sales and marketing, I think this has been something that really under the tutelage of Ted and other leaders, we've really made a lot of progress here and built out this function at the company over the last particularly three years to really do this in a way that allows our users to learn more quicker, easier about HSA growth. And I think that, you know, a quarter of growth in HSHS is it is, you know, it can be a little bit of a Testament to that. And then we'll see how we do when we go through an enrollment season. So I think that investment's worth it, of course within technology, you've got security, that's a big focus of the company as we mature and get larger, you know, to make sure that we've got the appropriate security in place. And so I think all those things you're seeing are just really investments for that long-term future. When we think about where we're going to be over the years, and as we move towards that, Tam, I guess I'll stop there, but I probably didn't hit everything David, but you can. I guess, ask another question or Jon, maybe add to those things, maybe just one thing that may not be obvious is unless you look down below is that is the effect of stock comp expense on an adjusted basis on each of these expense items particularly the OpEx items and we, David, is as we've I think discussed. But over the last few years here, we've gone from options to RSUs. And then in the case of our senior, most executives PRS use based on relative TSR. And I think as investors, that's what people want us to do. But the practical effect is as you probably know, is that, that from an accounting perspective, you know, you, you get additional expense without any additional burn. And so, so that's had, I think in percentage terms, some effect, that's not a material on these as, as kind of the accounting of that as spooled out. And so, maybe offline, if we want to detail some of that, we can, but that's something that's in these numbers that matters.

Okay, great. No, that's very helpful. Thank you very much. And then just any color around the health card spend, which would be great. And are you seeing volumes come back up both on the inpatient side and on the ambulatory side?

So I'll start and then throw to Tyson. We, you know, we, we said last quarter that we felt like looking at spend that spend for the first quarter of our fiscal year had kind of reached back to pre-pandemic levels. And that was true. You know, things were a little more, well, maybe I'll just answer, but things were a little more patchy in the second quarter in the sense that we had good months and then particularly, you know, as we got towards the end of the quarter and you saw a little more potentially effect from Delta a little bit softer, not, not anything like the pandemic period of time, but, but a little bit softer. And I think that's consistent with what other folks have reported in terms of utilization and life. I don't know that to be true, but I suspect it to be true. And we did take a little bit off the table for the second half of the year and thinking about this just cause like, we don't know what's going to happen, but overall we're kind of, as I think this was said a couple of times in the prepared remarks, and then we kind of feel like we've plateaued at this level. And then, just we just have to think about it as do you, as you forecast remainder of the year that, you know, pre pandemic seasonally, the first and fourth quarters are our strongest. And the second in particular, the third quarters are our weakest just because of people's spending patterns. And so those are other factors that are out there.

Okay. Thanks very much. Congrats on a good quarter.

Your next question comes from the line of Scott Schoenhaus of Stephens. Your line is open.

Thanks for taking my questions. So my first question is on the new HSA member growth looks like it's the largest new member as in any Q2 going back in my model in recent years. Can you provide us on any color where this is coming from? Is it more on the cross-selling opportunities that you're executing on, on the WageWorks client base? Any color would be great.

Sure. Thanks for the question. I think it's really three things. I think the first one is some deals that were stock last year getting unstuck, which helps. I think a second place would be sort of general channel performance. The record keeper channel is really showing some growth for us, but we're also doing very well with our health plans and with our benefits advisors and brokers and consultants. I think that's another place where we're winning. I think maybe there's four, the third one is just really good net hiring from existing clients. A lot of our clients are experiencing an economic recovery and therefore, you know, adding team members and those team members open HSAs, which is super helpful. And then we continue to have, as you alluded to a strong trunk cross-sale year as well, especially in the enterprise space, meaning our largest clients, I would say those four things.

That's great. And I guess my follow-up question is around that last cross-sell opportunity, particularly on the wage work side. I believe when you guys were acquired wage, less than 3% of their clients had an HSA account. Where's that today? And then how has COVID impacted the cross-selling opportunity for the HSA business given the current impaired commuter market?

Yeah. I'm happy to take that one Jon. Thanks. Sorry. So I think from, I think it's a crosswind COVID a crosswind from a cross-sell perspective on the one hand, I think we're the beneficiary of some vendor and partner consolidation that might come from an overtaxed people's department. And so I think we're winning some cross-sale deals and pulling some cross-sale deals through the pipeline faster because vendor consolidation is attractive to overburdened HR departments. I think on the flip side, we're seeing a little bit of paralysis saying, yeah, we want to go with you guys, but we just can't make a move this year, which we actually think sets us up well in the future. And, you know, with respect to cross, I don't have that number. We can try to follow up with you on what percentage of WageWorks clients, legacy WageWorks clients offer an HSA but I would just highlight two things. The first one is our, is an HSA home. We're actually experiencing a lot of other consumer-directed benefit account cross-sell into legacy health equity base. And then and then, you know, that HSA cross-sell into the wage base. And I would say the biggest opportunity remaining that we haven't quite cracked the code on is sort of that below the enterprise space. Cross-sell we meaning our top several hundred clients, but the few thousand clients below that space, I think that we're sort of just revving up the engines there. So to me, that's one of the reasons for optimism, thanks very much.

Your next question comes from the line of Allen Lutz of Bank of America. Your line is open.

Thanks for taking the questions. Hey, Jon, I'm going back to the service revenue. There was a nice step up sequentially. I guess, outside Cobra and then outside of adding new accounts, is there anything that increased sequentially in there that we should think about?

I texted him, I hit this one. I think sequentially, you know, you're specifically stating that there's, I mean, I would be pretty consistent when you think about, you know, other things like commuter interchange, obviously interchange, we call it out as more stabilized commuters, you know, pretty flat sequentially, if you will, other than maybe the card swipes, starting the app and with the users that are already in there, but that's pretty small. And so it's really just that big, COBRA piece of revenue that kind of causes that to be, you know, kind of an anomaly for the year relative to someone's just smoothing out the rest of the quarters. And so, I call it that I tried to kind of pick that apart even a little bit more. I, you know, like I said, HSAs are largely set up at the beginning of the year. Obviously we had a good Q2, so that adds in a lot, but most of the HSAs are going to come in and season. Right. I've still got two Q2s pretty big. So anyway, I would say that's about it. I don't know Jon, any other thoughts you have?

Yeah, I did just, I think you have all the right factors, Allen. I mean, the big picture is that, that in terms of the winds that are out there is biggest picture is we have a bundle strategy and our bundle strategy is about while that may produce a slight headwind to per unit service fees. It, it's a boon to margin profit, total revenue. However you want to think about and apropos Ted's last answer, looking more specifically at this period this year know, basically look at the first half you've got if you just divide services like total account you've, you're down 5% year-over-year. Well, what's going on there you are. On the one hand you've got the commuter accounts that are in suspense that really hurt because they are from a servicing perspective, our highest pro account product. And then on the other side, COBRA subsidy, someone else and, you know, both of those things are going to abate over time and you know, it you'll be, we'll be right back where we started, which is, you know, by and large, our basic view of, of service fees is that they're pretty steady. With the effect of, of, you know, in total with, you know, things like bundling and make shifts and so forth, that may happen from time to time you're having an impact.

That's great. And then on the selling season, is there any way to quantify how the selling season is going maybe versus fiscal 21 and fiscal 20? You know, is it reasonable to expect account growth you know, to be in terms of new account ads to be at similar levels or you know, whatever you can provide there.

Thanks. We are trying to move away from the business we entered during the pandemic to improve understanding of our operations. We began sharing some pipeline information, although we did not do that this time. I think I mentioned last quarter that we would aim to step back from that business, and we are doing so. Instead, let’s focus on the performance so far this year. In the first half, we opened 295,000 HSAs and grew the CDB business by about 3%. Based on previous years, it appears we will perform better this year compared to past years. However, we need to ensure we deliver on this potential, which hinges on three key factors. First, we need to complete sales, particularly with our health plan partners who typically have sales later in the year with smaller clients. The addition of HCSC as a new partner is beneficial, as it’s our first year working with them, which brings new opportunities. Secondly, executing effectively during open enrollment is crucial. We performed well during open enrollment last year, which was particularly impactful given the circumstances leading up to it, and we have made a concerted effort to prepare for this year's enrollment. Lastly, macroeconomic conditions play a role. The increase in hiring among benefit-eligible individuals during the first half of the year has been advantageous compared to last year. This growth from our clients translates to more business for us, and we hope to see continued positive trends in the second half. While we can control the first two factors, the third is beyond our control, so we will focus on what we can influence.

Your next question comes from the line of Stephanie Davis with SVB Leerink. Your line is open.

For a minute I thought we weren't going to hear from you. I couldn't believe this is actually a joy all for Stephanie. She was on. Come on, come on.

Well, thank you for taking my question. I'm good. I'm good. One of the positives for a lower interest rate environment is that your competitive landscape is becoming more favorable with that in mind. How should we think about the cadence of portfolio acquisitions going forward? Can we expect us continuation of that piece of two acquisitions within five months? Like you've done with Further and the Third, and can you talk about what the pipeline looks like for potential targets?

Yeah, we don't operate with any particular cadence, as you know, we don't want to price stuff into the market that isn't there and people are like, Ooh, will you promise. So I guess you know, but, and I will say that further is a little bit different in the sense that it has also a, you know, a technology element and a strong, strong panel element that, that kind of I think make it a larger transaction along with the product and the, of course, the ability to really scale out our enhanced rates product. And, and so that problem, but I think if I look at like the Fifth Third type transactions, we'd love to be doing those kinds of things at that size we're below all day. And what I expect that you will see from us over the course of the next couple of quarters are in particular, I think what you're going to see is we're going to try and, and, and w I think we're going to try and do everything we can to position the company to be able to do those. And one of the things that's, I think, remarkable and you know, we will, as I, as iconic that entail average on a little bit in the call or in the prepared remarks, I should say you know, we, we, we the I'm going to focus on Fifth Third per second, Fifth Third will be closed pretty shortly here. And close means that the migration happened in that transaction. So, oh yes, we're still doing wage works and we're working to gear up further. And those are, you know, real transactions involving people and processes and so forth. But, oh, by the way, there's a well-oiled machine there that is serving new customers, working with a new partner to make their customers happy, making them happy, bringing them onboard doing it in a compliant way and that's, I think in terms of our opportunities to outperform the market, if we can outperform organically and then, oh, by the way, have a steady stream of these over the long term that really bodes well in terms of our ability to generate, ultimately to generate a cash flow that reflects in the value of the shares. So I guess without committing to a cadence, my answer is that we are certainly going to try and set the company up to continue to do these things, you know, as they materialize and your premise that is, you know, low for long environment, there should be more of them is right. And our ability both through cross-sell and through a broader product set and through enhanced rates, so forth to really capitalize on these transactions in a low for long environment is I think better than anyone else in the market.

That's very helpful color. One more follow-up from me on your connecting health and wealth strategy, given that one of your competitors is expand it into the retiree reimbursement arrangements market. Can you provide some color on if your current product suite includes that offering, or if it's an area you want to expand into?

It does. I wasn't, I was, I have to know, I'm not sure what the point of the press release was, but we read the same press release and I mean, I don’t know, it's probably a good argument for doing fewer rather than more press releases, which we, we have tried to embrace. But maybe, you know, the answer is yes. And there are these are typically HRA accounts. There are some other flavors obviously the VBA business that we'll be picking up with Further is a sort of a form of those accounts as well. And those are out there. I don't know that there a particular, you know magic area of market wide growth. What I do know is that what we want to be there to do is to provide total solutions to our clients, into our partners, so that our partners, aren't running around looking for one from here and one from there and whatnot, and, and, and having those capabilities really helps do that.

Your next question comes from the line…

I note the non-denial on the idea that Stephanie's in the Hampton. So take that for what do you obviously had a great quarter in terms of HSA ads. I'm wondering if you could talk a little bit about what you're seeing in terms of the competitive environment on the whole, you know, there's obviously one large competitor out there that some people focus on, but on the flip side, there's, it's a fragmented market and there's a lot of players that probably aren't being super aggressive. So when you, when you think about the entire competitive environment, how, how would you net it out in terms of, you know, for this coming selling season and, and going into, you know, next year, and then I have a follow-up.

Yeah, I think I would go to and I'm going to ask Pat if he would like to elaborate where Steve for that matter. Since both of them spend plenty of time out there, you know, kind of in hand to hand combat I think the big picture is around scale and scope and you know, our, our, what I think of as our most significant competitors obviously Fidelity we've talked about and, and then UNH, in terms of size they're great competitors, but you know what the implication of that is that there are great companies that also want to partner with us. So they're good companies, but, you know, Vanguard is a great company and HCSC is a great company. And an ADP is a great company, and those are all companies that are partnered with us and we don't, it doesn't just have to be us and we don't have to carry all the freight. And that's always been a bit of our secret sauce and not so secret sauce. And, you know, when you look at what we're doing from technology perspective, and even from a people perspective, if you look at, at, at the move to bring Steve and Steve Lindsay into sales leadership, that's a strategy, that's a strategic calculation on our part about the value of having both the ability to go out and meet a client wherever they are, whether that's directly with their broker with they're wanting with the health plan partner with a retirement partner with a Ben admin partner with a payroll partner, I guess. And so I just think it's a winning formula to have somebody in the industry that does that. And we're that somebody Ted you, anything else you'd add to that?

No, you said you made the points on about district distributing through channels that I was going to, but I think Steve Neil, and then you lead the league in in the executives at finalist meetings. Would you, would you care to offer any commentary on what you're seeing out there? Sure. I wish we could be in person. I'll tell you that, but, you know, finalist means remotely aren't the best situation, but I think we're working through it, but I think the short of it is, is the more things change more. They stay the same. We know about UNH selling within their footprint. We know about Fidelity, kind of trying to connect the 401ks. We've heard that for a long time, but I think with the announcement that we made today about HCSC, I mean, we really do have the broadest kind of channel partnerships in the country. And I think that for companies that don't have their own solution, which most large health plans don't, I mean the biggest do, but the most large ones and small ones, mid-sized ones and everyone's stone. And, you know, they come to HealthEquity because they know that we're going to help them compete. And the reason why they choose this is, and we'll tell you, this is that they think that aligned with HealthEquity, they have a better chance to win and retain business. And so we're just doubled down on that strategy. We do some direct sales, but we do a lot of channel sales. And so I don't think it's changed that much honestly, in the last four to five years.

That's great. And then you've had a lot of time to think about further, and I'm wondering if you can add some additional comments with regards to just the technology and the channel partnership that you're going to gain with further. As you've looked at it even more and gained a further appreciation of what it brings to the table, Ted, why don't you start this one?

Sure. First of all, I'll point out that whenever you're talking about further, you inadvertently used the word further, you just did it. And I do it 17 times a day. It definitely happens. But I think that the, that the, the punch line is we're incredibly excited about the distribution relationships that they have. And these are some of the nation's best and most effective, most forward-thinking health plans. And we look forward to continuing to grow and develop the partnerships with them, starting on we're doing as much planning as we can while bound, obviously by the data sharing rules that are in place to ensure that we remain competitors until we close. But we're really excited about that. I think from a technology perspective, it's for me, it's a little bit less about technology and a little bit about meeting the health plan partners where they are. Jon used the terms I hadn't heard of used before, which is great labeling, right? Which is which I'm interpreting him to me. You know, it's not quite white labeling, it's lots of different choices about how health plans want to go to market with HSAs. And I think not only this further have technology that we'll be able to avail ourselves up relatively quickly, but they also have expertise in doing we're really excited about. And we think we have a lot to learn from them in terms of how which of those buttons with pressing, which of those buttons matters. Sometimes it can be a co-brand sometimes it can be getting all the way into the entire communication stream that the health plan deploys and it's really trying to meet those health plan partners where they are to make their, you know, to help them take HSA and other consumer-directed benefits to market as effectively as possible. I think that's what we're most excited about and then in the last one I would make, before I turn it over to John to see if he has anything to add, is one of the things that constrains the growth of fast-growing companies is talent. And, and, you know, and, and so you want to find consumer-directed benefit, experienced, talented, capable people, wherever you can. And w that's one of the things we're really excited about with respect to the further acquisition, because we think that it's nearly 400 people who can help contribute right away and understand the industry and have been successful in the industry. And I think that's another huge opportunity for us from a, you know, from a closing further perspective and, you know, candidly, I just can't wait to close it and get on with it.

There are no further questions at this time. I will now turn the call over to Jon Kessler for closing remarks.

Hi everyone. Thank you. Stay safe, stay sane. It's going to get better. We're all getting through this. Our team's doing a good job of getting through it. We hope you're pleased with today's results and we're hoping to deliver more of them to you over the next quarter. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.