Second Quarter Fiscal Year 2023 Earnings Conference Call. My name is Richard Putnam, and I handle Investor Relations for HealthEquity. Today, I am joined by Jon Kessler, our President and CEO; Dr. Steve Neeleman, our Vice-Chair and Founder; and Tyson Murdock, our Executive Vice President and CFO. Before I hand over the call to Jon, I have two important reminders. First, we issued a press release announcing our financial results for the second quarter of fiscal year 2023 after the market closed today. This press release includes contributions from our wholly owned subsidiary WageWorks and the accounts it manages. It also outlines certain non-GAAP financial measures that we will discuss today. You can find a copy of the press release, which includes reconciliations of these non-GAAP measures with corresponding GAAP measures, along with a recording of the webcast on our Investor Relations website at ir.healthequity.com. Second, our comments and answers to your questions today represent management's views as of September 6, 2022, and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates, or other information that could be viewed as forward-looking. Several important factors related to our business could impact the forward-looking statements made today. These statements are subject to risks and uncertainties that may result in actual outcomes differing significantly from what is expressed here today. We advise you against placing undue reliance on these forward-looking statements and encourage you to review the discussion of these factors and other risks that could affect our future results or the market price of our stock, as detailed in our latest Annual Report on Form 10-K and subsequent periodic reports filed with the SEC. We do not assume any obligation to revise or update these forward-looking statements based on new information or future events. At the end of our prepared remarks, we will open the call for Q&A with the assistance of our operator. Now, let's turn it over to our CEO, Jon Kessler.

Thank you, Richard, and thanks everyone for joining us this afternoon. Today, we are announcing solid results for HealthEquity’s fiscal 2023 second quarter on the back of strong performance in our core HSA business and we're also raising our full-year outlook. I will discuss Q2 operating results, and Tyson will review the financial results in detail and provide updated guidance. And then, Steve is here for Q&A. Let's start with the five key metrics that drive our business. As always, revenue of $206.1 million grew 9% versus the second quarter last year, driven by strong organic and acquisitive growth at HSA members and assets, and that was notwithstanding non-recurring regulatory drivers of CDB service fees in the year-ago period. Excluding these non-recurring factors, revenue grew 15% year-over-year. Adjusted EBITDA of $67.0 million grew 2% versus the second quarter of last year, weighed down by the absence of those regulatory drivers and the timing of synergies from the further acquisition. Total accounts grew to $14.5 million, up 11% compared to Q2 last year, HSA members reached $7.5 million, up 26% year-over-year, and HealthEquity’s HSA members grew their assets to a record $20.5 billion at quarter's end, which is up an even larger 33% from a year ago. Team Purple continued its strong FY '23 sales effort adding 196,000 HSAs, which is 9% more than we added in the second quarter of last year. Organic account growth of 12% over the past year is, we believe well ahead of the market. Looking forward to year-end, we are particularly excited about pipeline growth from network partners, conversion of enterprise cross-sell opportunities and enterprise uptakes of max enroll, which is our package of virtual education and live support for clients’ employees considering stepping up to an HSA-qualified health plan and an HSA during this open enrollment season. Despite volatile market conditions, HSA invested assets grew $111 million in the quarter, HSA investing members grew 28% and the average balance of our HSA members overall grew 5% year-over-year. Custodial revenue growth was very strong. On top of the small favorable impact of in-quarter increases in the overnight Fed funds rate, robust adoption by HSA members of HealthEquity's enhanced rates offering in Q2 puts us on track to meet or exceed our target of having 20% of HSA cash in enhanced rates by the end of the fiscal year. Both macro conditions and the team's efforts are, we believe, creating the opportunity for years of custodial growth to come. Robust card fee growth suggests that inflationary pressures in the broader economy have not put a dent in consumption of medical and other covered services by consumers to date. As you may recall, card fees in the year-ago period were high due to the timing of pandemic extended run-offs, particularly FSAs and HRAs. We are of course carefully monitoring for signs of inflation or a COVID resurgence crimping member spend beyond the usual seasonality that we see in Q3. Today's results and the guidance Tyson will detail in a moment would be even stronger, but for softness in CDB administration services. As you know, HealthEquity offers CDB services to increase core HSA opportunities and indeed, cross-selling and bundled selling have helped drive record HSA sales as I discussed a moment ago. However, service fees from CDBs themselves declined through the first half of fiscal ‘23 versus the same period in fiscal ‘22, primarily due to one-time COBRA subsidy-driven income in the year-ago period, and greater than expected CDB fee attrition from the now completed WageWorks platform migration. Service costs declined sequentially in Q2 as promised, and we believe there is more opportunity in efficiencies, as well as commuters slow but steady recovery. As pandemic and WageWorks integration impacts finally received, we believe that CDBs can bring net unit growth and a larger contribution to growth profits alongside the great things that are happening in the HSA core. With that, I will turn it over to Tyson to review the financial details and give us some guidance.

Thank you, Jon. 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 increased 9% year-over-year with lower service revenue more than offset by robust custodial and interchange growth. Service revenue was $103 million, down $6.1 million or 6% year-over-year. Last year’s second quarter included approximately $10 million of non-recurring revenue attributed to the COBRA subsidy. Excluding the non-recurring subsidy impact, Q2 service revenue grew approximately 4% primarily from strong HSA growth and an uptick in commuters returning to work, offsetting about $5 million of FSA and COBRA revenue attrition that Jon mentioned. Custodial revenue grew 34% to $65.6 million in the second quarter, benefiting from 30% growth in average HSA cash and 37% growth in average HSA investments, combined with an uptick in the annualized yield on HSA cash. The annualized interest rate yield on HSA cash was 180 basis points during the second quarter of this year and 175 basis points year-to-date compared to 177 and 178, respectively for last year. This yield is a blended rate for all HSA cash during the quarter and represents a better-than-expected yield due to rate hikes in June and July, impacting the variable rate portion of our HSA cash combined with higher enhanced rate balances in the quarter. Interchange revenue grew 20% to $37.5 million compared to $31.1 million in the same quarter last year. As Jon mentioned, interchange revenue in the year-ago period benefited from accelerated spend as FSA rollover extensions expired year-over-year growth in Q2 benefited from growth in average total accounts with cards and increased spend per account. Gross profit was $117.8 million compared to $112 million in the second quarter of last year. Gross margin was 57% in the second quarter this year versus 59% in the year-ago period, and service costs decreased $6 million sequentially as we executed on our commitment to address our overstaffing and member services as we discussed with you approximately 90 days ago. However, we have work to do to bring our expectations of service costs in line with revenue in future periods. This includes realizing additional efficiency from the integration work and managing the impact of inflation on service costs. In addition, we are committed to delivering the $15 million of synergies connected to the further integration, the bulk of which is associated with the exit of the transition services agreement and the consolidation of the platform expected to be realized in fiscal '24 and '25. Operating expenses were $120.2 million or 58% of revenue, including amortization of acquired intangible assets and merger integration expenses, which together represented 15% of revenue. Loss from operations was $2.4 million. Net loss for the second quarter was $10.7 million or a loss of $0.13 per share on a GAAP EPS basis compared to a net loss of $3.8 million or $0.05 per share in the prior year. Our non-GAAP net income was $28.1 million for the second quarter this year, compared to $33.4 million a year ago. Non-GAAP net income per share was $0.33 per share compared to $0.40 per share last year. Adjusted EBITDA for the quarter was 67 million and adjusted EBITDA margin was 33%. For the first six months of fiscal '23 revenue was $411.8 million, up 10% compared to the first six months of last year. GAAP net loss was $24.3 million or $0.29 per diluted share. Non-GAAP net income was $50.8 million or $0.60 per diluted share, and adjusted EBITDA was $125.4 million, up 1% from the prior year, resulting in a 30% adjusted EBITDA margin for the first half of this fiscal year. Turning to the balance sheet as of July 31, 2022, we had $177 million of cash and cash equivalents with $928 million of debt outstanding net of issuance costs. This includes $346 million of variable rate debt. There are no outstanding amounts drawn on our $1 billion line of credit. We are providing the following revision to our guidance for fiscal '23. We are increasing our revenue estimates for fiscal '23 to range between $834 million and $844 million. We are maintaining non-GAAP net income to be between $103 million and $111 million reflecting increased interest expense offsetting the benefit of higher operating income. This results in non-GAAP diluted net income between $1.23 and $1.32 per share based upon an estimated 84 million shares outstanding for the year. We are raising our adjusted EBITDA estimate to be between $252 million and $262 million. Today’s guidance includes our most recent estimate of service, custodial and interchange revenue and expense based on results today. On service revenue, today's guidance reflects the continued solid performance of core HSA offsetting the full-year impact of the roughly $5 million per quarter of CDB service fee attrition observed in the first half. We remain cautious on increased commuter uptake based on the strong sales outlook Jon discussed and continuing labor market tightness. Today's guidance assumes incremental service costs during the peak season comparable to those experienced in prior years. On custodial revenue, today's guidance assumes a full-year yield on HSA cash of at least 180 basis points pointing to a stronger second half based upon current conditions. As in the past, our guidance does not assume further increases in the overnight funds rate or other changes in macro-economic policy for the remainder of the fiscal year. Additional rate hikes would have only a modest impact this year but would have a much greater impact on fiscal '24 and beyond as we roll over fixed-rate contracts and place new HSA cash from growth at the end of the fiscal year. In the same vein, today's guidance reflects additional interest expense on HealthEquity's variable rate debt for the second half of fiscal '23 based on current conditions, but not further rate hikes. On interchange, we want to remind you that Q3 has historically been our weakest interchange revenue quarter. We expect the normal sequential decline in spend in Q3 with a rebound in Q4 due to use or lose spending in January growth. Finally, we assume a projected statutory income tax rate of approximately 25% and a diluted share count of 84 million in our calculation of non-GAAP net income and earnings per share. 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 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.

You should have a button that just says that and it's like a little recorded button. Anyway, before we go to Q&A, I'd like to take a moment on behalf of Team Purple to thank Ted Bloomberg, our Former COO. We truly appreciate everything that Ted has done to help us connect health and wealth through the WageWorks integration, the pandemic, the acquisition of enhanced rates, and other milestones. We all wish Ted the best. The team, along with our partners and clients, is now focused on delivering a deep purple open enrollment in the upcoming onboarding season, hopefully that won’t cause any copyright issues. I've mentioned before that present sales are the best predictor of future sales. Based on what I've said today and what we are reporting, we anticipate a very busy and productive remainder of the fiscal year. Thank you.

Thank you. Our first question comes from C. Gregory Peters with Raymond James. You may proceed.

So I guess let's start off with the sales results. And I just tried to unpack the strong new HSA number that you reported for the second quarter and trying to figure out the components of what are existing customers just from new employees, new accounts coming on board just kind of break apart what led to the, I would think better than expected result there.

Yes. It’s a great question. Thank you, Greg. So just kind of for sake of summary, if I look at the first half of the year as a whole, we've added 355,000 accounts or opened 355,000 accounts and account closures have been very much under control. And that 355,000 is 20% plus, relative to last year, which itself was obviously the best we've ever had for the first half. And kind of, if you - you've been with us kind of from the beginning here, and you remember when we would report 400,000 for a year and be pretty happy about it. So, reporting this kind of number for the first half feels pretty good. And to your question, if I look at the components of that and try and break it down as we said at the end of the first quarter the fact that the labor market has remained strong is definitely a factor.

The first half of the year has been our best ever. If you have been with us from the start, you might recall when we would be pleased to report 400,000 for the entire year. So, seeing the numbers for the first half is quite satisfying. Regarding your question, analyzing the components, as mentioned at the end of the first quarter, the strength of the labor market has certainly played a role.

Before the break, can you hear us? I'm not sure if Greg will still have a microphone. So I'll answer his questions, and then we will need to work on getting Greg's parts B through L. But…

Jon, can you hear me?

We can hear you.

Awesome.

All right. Well, it was just fun. When I was doing this in my neighbor's bedroom, right at the pandemic start, it was much more reliable than what we got built on now that we're all back traveling the way we used to. Anyways, so Greg, your question, why don't you re-ask the first part of your question, and I'll start answering over.

My question focused on the net new sales results for HSAs in the second quarter, which are definitely stronger than anticipated. I wanted to understand what contributed to this strong result. Were there anomalies in existing accounts with new employees that might not be repeated? Did we see new accounts or new employers that boosted these results? I'm looking to break down the components of the sales results for new HSAs.

Yes. So to repeat a little bit, and then I'll get to the new stuff. If I look at the first half of the year, as a whole, we added 355,000 - we opened 355,000 new accounts. And that's 20% over year-over-year. And obviously, last year was pretty good, too. As your question suggests, Greg, the strong labor market in particular, continued strong job adds, as people come back into the workforce and so forth, definitely played a role. And you can see that in the growth of existing clients, that is existing logos at the client level. And as we said, after we reported, truthfully, after we reported the fourth quarter, and again, after we reported the first, we did want to caution people, kind of not to go crazy with this, because obviously that can turn around on us. That having been said, even without that factor, we had a very strong quarter. And there wasn't anything in particular, no 50,000 account thing that came on or anything along those lines. But rather, we in particular, what continues to perform? Well, Greg is our - if I look across our channels, the stuff that focuses on the middle market, where you can see new adds in the middle of the year and new client logos in the middle of the year, continues to perform well. And parenthetically, we were reporting HSAs. But as I look - commented in the prepared remarks, from a pipeline perspective, as I look towards the end of the year, I'm also quite enthusiastic, notwithstanding the current softness, about the new sales on the CDB side. We have some really good opportunities to close here, and close meaning ultimately get the member input from them. And we'll also see if we get some – finally, see some post-pandemic rebound in the FSAs that we haven't yet seen. So - but no, there isn't some single factor outside of obviously employment growth, giving us a boost here that we commented on the first quarter as well.

Okay, got it. I guess the second question, probably directed more towards Tyson, but probably Steve or Jon, you'll chime in on this. So you've raised your revenue guidance for the year, you've raised your adjusted EPS guidance, but your adjusted EBITDA guidance, but you've kept your EPS guidance flat. So I'm just trying to reconcile the different moving parts why two components are going up and the other isn't? Does that make sense?

There we go. Yes, I mean, this is really about the interest expense that we have on the other side, right? That compounded with the fact with tax effect, non-GAAP net income. And then also just going back to the service cost that we talked about as well. And really building in, those are in there, plus some additional travel costs. There just was a place where we were like, we don't want to get ahead of ourselves on that even though we're generating a lot of good high-margin revenue, we realized that is not falling down to the bottom line, but those are the reasons why. And it's really thinking about that debt costs coming in and the rates increasing $350 million TOA.

And just a point of clarification on that Tyson, how much of the debt is variable?

$350 million. So if you think about how that calculates out, that's about $2.5 million of additional interest cost. And then you think about the other piece of that is the tax effects of the rest stuff falling down through non-GAAP EPS. So that's about $3 million worth of items that don't get added back in that reconciliation versus they do in the EBITDA reconciliation.

Got it. Thanks for the answers.

Thanks, Greg.

Our next question comes from Allen Lutz with Bank of America. You may proceed.

Hey, Allen.

Hey, everyone, thanks for taking the questions. I guess my first question here on the sequential increasing custodial revenue, about $6 million here. Is there any way to frame what percent of that is coming from that increase in the Fed Funds, Jon, you mentioned? And then what percent is coming from enhanced yield? And if there's anything else is in there, too?

Yes, you have it right regarding the two contributors. When considering the rate increases from the Fed, I view those as significant policy factors that are responsible for the majority of the effect. It's important to note that we benefit from these on the variable cash we have, which can be as high as a billion dollars, although it starts to decrease towards the end of the year. To put it in perspective, this factor accounts for more than 50% of the effects, while enhanced rates make up the rest. We're very satisfied with our current standing. If these trends persist, we will be in an excellent position by the end of the year, although much of that benefit won’t reflect in this year's results. There are three operational elements performing well: first, the product's performance regarding liquidity controls is on point; second, the rate performance for HealthEquity and its members is aligning with our predictions; and third, regarding uptake, which I mentioned earlier, we feel very confident about achieving our 20% goal by year-end and even exceeding it. This benefit will become more apparent in 2024 and 2025, as we are securing benefits at a favorable time for an extended period.

Thank you. And then kind of on the core HSA business, obviously we have a Devenir report coming out soon. In 2020, and 2021, the industry was growing call it mid-single digits. As we think about kind of what you think the industry grew at so far year-to-date. Is there any reason to think that we deviated from there? I know, you mentioned that kind of the mid-market was strong to HealthEquity. But is there anything that you're seeing there that would kind of make you think that the market growth rate is changing one way or another?

I wouldn't be surprised to see a slight increase in market growth, possibly in the high single digits, but I don't have prior insight into that. However, our results suggest it’s a possibility. As I mentioned earlier, we are nearly back to pre-pandemic levels of total benefits eligible employment and are now slightly above those levels, which is encouraging. Additionally, many people have reentered the labor force and, given the job availability, are likely to find employment soon. So, from my viewpoint, a modest uptick seems plausible. However, on an organic level, it may not significantly impact us, as we reported 26% year-over-year growth overall and 12% organic growth year-over-year in accounts, which surpasses whatever the market may achieve. Coupled with strong asset growth, despite market fluctuations, this aligns with our objectives.

That's great. Thank you.

Thank you. One moment for questions.

I feel like the bounciness of the questions is in direct proportion to how nice of a summer people have doing things like that could be. Because Greg was pretty bouncy. So I'm thinking a lot of time on the beach in St. Petersburg. Allen, very bouncy.

I had a great summer. But guys have a pretty high burn out. And the bouncing is, I got to keep the pep up. Talk to me about your commuter revenues, you're in the office, you're having IT. She's on in the office, my team is in the office? Are you seeing commuter folk come back and what are you baking into guidance?

I want to mention that my IT team is not in the office right now as they are attending another banks' conference, so I won't name them to avoid putting anyone's IT team in a difficult position. However, the HealthEquity technology team and corporate infrastructure team have been proactive in asking if we need assistance, and I've received several immediate texts from them. Moving on to commuter revenue, it continues to grow at a modest but steady rate. We see growth on the interchange side, which is a smaller part of commuter revenue, as well as on the service fee side. Looking back through the pandemic, pricing on commuter has remained strong. We have taken steps to ensure more consistent performance going forward. I have high hopes for the commuter business, but I recognize that hope alone isn't a strategy. From a forecasting standpoint, we will remain cautious given our past experiences. We will evaluate our results each quarter and adjust our forecasts accordingly. After HSA, commuter revenue is our fastest-growing segment in percentage terms, and we've made significant improvements during the pandemic to enhance margins and product flexibility. Six months ago, I was uncertain about its recovery, but I feel more optimistic now. While it's clear that a full return to the office isn't happening, as people adapt to a hybrid working model, the utilization of commuter benefits is increasing, particularly as most revenue comes from service fees, which are starting to rebound. Although the recovery is slower than expected, I'm feeling hopeful about the growth trajectory.

Got it. So thrice bitten, incredibly shy, but still more optimistic than we were before. We're just not faking it.

Yes. As you know, we are all pretty shy people around here anyway.

Of course. So with that in mind, then I look at your guidance and you raised by more than the B, which is pretty uncommon versus what you guys historically did. So, Tyson is that a change in philosophy?

In the last year’s earnings call, Tyson, would you want to speak to this?

That’s very not modern view.

Yes. I think what it is, is it just kind of calculates out. So if you think about what we've said about the variable portion of the cash, which is 500 to a billion, if you kind of go to the midpoint, do the math on the raises, you get a number that's underneath that seven plus the enhanced rate portion that comes in there. And so in my mind, it's just the math working out. And then, like I said before, it's just how much can we get to come down to margin and as we get more acceleration, we get placements. In the end of the year, we're going to make more and more progress against that. We just need the rates to just stay where they're at or get a little better. And that's a very positive thing for us all in.

All right, positive change in philosophy. Well, thank you guys appreciate it.

Let's not go crazy with the positive change in philosophy. But it does pencil out. I mean, it is, if you look at the change that we made in yield guide on the custodial side, and run that out, it kind of explains all of it.

Great, that's very helpful. Thanks a lot.

Now, how do we turn it into profit? Yes, I appreciate the question and the way you asked about service margins, just to reflect on. Just keep on going, even though I have found, margin is very high. The same is true with interchange, those are contract-based costs. There's our treasury and banking ops team that's in there, a few other people, but it scales very well. So you have those as drivers and the rate, particularly as the biggest driver of gross margin, but the real work and we're most of the people in our organization, are focused and were the people that are in our organization where the costs are, is in that service cost line item. And so really garnering efficiency there when you think about trying to reduce contacts, but still have great service. When you think about the platform migrations that we've made, and the technology improvements that we'll make over time, putting those efficiencies in there, and actually getting them into a volume forecast that we have less people in there serving at a better rate is the way to is improve that. And I think we can, we will improve that service margin over time. Now, if you look at the service margin and the EBITDA margin, they're both up about 500 basis points, sequentially, they kind of go together because the rest of its kind of moving along. But I think we can still make improvement there. So watch for that. Also, the further synergies you've already talked a lot about that. But that's another thing that will come in over time and help improve those margins. And then, now go back to kind of one of our original statements, which is, we're going to, when it comes down to it, we're going to try to grow EBITDA margins a little faster than revenue. So, Jon talked about revenue and when you have interest rates at the right end of the scale. That's what helps us to accomplish that. And so now like another person that asked me was Sandy, those interest rates are higher than they were back in ‘19, we've actually changed the way that we monetized. The custodial assets, when you think about enhanced rates and other things that we've done to improve the way we monetize. So not only do we have the higher rates we're going to be we do it in a better way. And we've changed the structure of the business to do that. So I am optimistic about being able to improve margins and continue to have that tailwind over the course of the subsequent years here.

Great, thanks very much. Congrats on a very good quarter.

Our next question comes from Glen Santangelo with Jefferies. You may proceed.

Oh, yes. Thanks and good evening. Thanks for taking the questions. Hey, Jon, I want to ask you about the service fee portion of the business. I mean, it seems like there's obviously a lot of good things going on the HSA and custodian side. But if I think I heard you correctly, it kind of sounds like some of that strength is being offset by lower service fees. And I think Tyson, in your prepared remarks, you suggested you're seeing $5 million per quarter and service fee deterioration. I think you gave some numbers on a year-over-year basis, normalizing for the COBRA subsidies that you got last year. So I was wondering if you could just elaborate a little bit more on the service fee portion of the business and kind of what you're seeing and assuming for the balance of the year. Thanks.

Why don’t you start this one, Tyson.

Yes, that we wanted the – to lay those out pretty concisely in the script. I think you did a good restatement of it, Glen. So appreciate that. I won't regurgitate that back. But we're really what we're trying to say is that there is, some revenue decline related to migration and some of the attrition that occur, if there is, we got to got that done. And so we want to make sure people are aware of that. And so just calling out specifically to CDBs, relative to that $5 million decline per quarter. I mean, the thing you need to keep in mind too is, it's really there's headwind automatically there because you have the $10 million of subsidy revenue from last Q2, on the COBRA side from the legislation, not there this year. And then you also have that decline we're talking about on the COBRA side. So COBRA comes down quite a bit because of low unemployment rate and a subsidy coming off. And then you have some FSA decline because of the way that we did the migrations. And just, some follow up there. So we wanted to call that out. We called out service expense in Q1 as a little overstated. We got that under control. That was the $5 million to $7 million. But I still think there's opportunities there when you think about bringing that service cost in line with that revenue. I know that wasn't particular to your question necessarily, but it really to me is kind of full sale, running that part of it. So I don't know, maybe there's a follow on there, Jon can add to that.

I view the situation as follows. Firstly, I want to emphasize that our HSA-related service fees, which represent a small portion of our overall service fees, have shown strong performance in both the second and first quarters. Although we do not typically break down service revenue by product, we can affirm that HSA service revenue grew at the same rate as HSA accounts, indicating effective work from our team to maintain strong revenue efficiency despite rising rates. Regarding the CDB side, there are two main factors to consider when looking at the full year. The first is the absence of the COBRA subsidy, which accounted for about $10 million in the second quarter last year and is not present this year. The second factor, which has been reflected in our guidance, is our commitment to complete the WageWorks platform migrations. We communicated our intent to largely finish this effort in fiscal '22 and confirmed we would not include the integration costs in our financial adjustments thereafter. Upon reviewing our detailed reports, we note that our actual spending on the integrations is slightly below our expectations. As we completed this transition, our focus has been on delivering excellent service without leaving customers in unfavorable pricing situations. This dedication appears to have benefited us in terms of cross-selling and sales on the CDB side, which are performing well this year. Moving into fiscal '24, we anticipate that the CDB business, predominantly composed of service fees, will begin to significantly contribute to our overall growth, which has not been the case in fiscal '21 or '22, even prior to the pandemic. Looking ahead, the bar you should set for us is that the CDB should deliver growth. While costs per account have remained stable, indicating we managed expenses well in the face of inflation, there are still opportunities for improvement. These include finalizing the remaining HSA-focused integrations, which will yield savings, and capitalizing on efficiency gains from the streamlining we have undertaken in recent years.

Oh, yes. Thanks and good evening. Thanks for taking the questions. Hey, Jon, I want to ask you, about the service fee portion of the business. I mean, it seems like there's obviously a lot of good things going on the HSA and custodian side. But if I think I heard you correctly, it kind of sounds like some of that strength is being offset by lower service fees. And I think Tyson, in your prepared remarks, you suggested you're seeing $5 million per quarter and service fee deterioration. I think you gave some numbers on a year-over-year basis, normalizing for the COBRA subsidies that you got last year. So I was wondering if you could just elaborate a little bit more on the service fee portion of the business and kind of what you're seeing and assuming for the balance of the year. Thanks.

Hey, guys, congratulations on a very, very good quarter here. What was the revenue and earnings contribution from Health Savings Administrators and also further?

Yes. We haven't reported our health savings on an annual basis before. It contributed for most, if not all, of this quarter. However, it's a small amount, likely around one or two million dollars. Tyson, would you like to address this further?

Yes, I want to emphasize what we mentioned earlier. We haven't provided an update on this, but the business was around $60 million with a 20% EBITDA margin. We're focused on enhancing that margin with $15 million in synergies that will materialize over time, potentially increasing the margin to about 40% eventually. Currently, we're in the process of transitioning, the TSA, and we plan to implement a technology platform shift in '24 and '25. These improvements will enhance servicing costs and revenue while also benefiting the technology aspect due to those synergies.

I mean, one of the flip sides, I just say, of the sales side of things that we talked about is, we're seeing very good production and good partnership from the 10 new health plans that we became partners with as a result of the further acquisition. And a piece of that is having taken, I think, a very collaborative approach to how we're approaching the platform work that we have to do, the features they're going to get, talking to them about how we can deliver more value, being able to deliver the full CDB bundle that that they kind of didn't really have with further. And we had a meeting, actually our first live customer event since pandemic back in July, with all of our blues partners, and obviously, that group makes up a big chunk of that. And so I think that taking it a little bit slow on the further synergy, which we said we would take slow at the very outset, is paying dividends on the sales side. And so that seems like it's okay.

Great. So it sounds like you're generating good revenue synergies from both of those transactions. That's great. And then there's a lot of chatter in the market about the risk of a recession, potential slowdown on hiring. I mean, are you seeing any of this at all? Or is this actually working to your benefit with people maybe saving more? And, obviously an increase in interest rates? I mean, any thoughts there would be great.

Yes, I appreciate this question because it allows me to discuss macroeconomic trends, albeit humorously since I'm not exactly an expert in that area. Firstly, the slowdown in hiring isn't evident in our data or in national statistics. Last month's figures showed an increase of 350,000 new jobs, while the consensus was around 352,000. In terms of steady job creation, given current demographics, the range is typically between 100,000 and 150,000. What's actually occurring is an influx of people returning to the workforce, contributing to job creation. We haven’t observed a slowdown in our data. However, as Chairman Powell mentioned, employment will be part of the challenges ahead. The critical question isn't solely about the unemployment rate, but rather the pace of job creation. For instance, I wouldn't expect our new Health Savings Accounts (HSAs) to grow by 20% year-over-year without significant job growth in the latter half of the year, which seems unlikely. Therefore, while our forecasts indicate we anticipate a strong end of the year by historical standards, we’re not expecting sustained growth throughout the entire fiscal year. In August, our data and national data do not support a narrative of diminished job growth. Regarding your second question about spending, given inflation, we expect the growth of balances per HSA to slow. And indeed, we’ve witnessed this, with average balance growth around 5% year-over-year, down from the 10%, 11%, or 12% we've seen in recent years. A substantial factor in this reduction is the decline in equity net asset values during the quarter. Overall, during inflationary periods, savings rates tend to decrease, which is somewhat counterintuitive. Conversely, following economic shocks, savings rates tend to rise. This has led to a decrease in average balance growth into the single digits. Despite this, the growth remains at healthy levels, especially considering the significant reductions in asset values that occurred during the quarter. Currently, approximately a third of total assets are held in debt and equity securities.

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

Our next question comes from Glen Santangelo with Jefferies. You may proceed.

Oh, yes. Thanks and good evening. Thanks for taking the questions. Hey, Jon, I want to ask you, about the service fee portion of the business. I mean, it seems like there's obviously a lot of good things going on the HSA and custodian side. But if I think I heard you correctly, it kind of sounds like some of that strength is being offset by lower service fees. And I think Tyson, in your prepared remarks, you suggested you're seeing $5 million per quarter and service fee deterioration. I think you gave some numbers on a year-over-year basis, normalizing for the COBRA subsidies that you got last year. So I was wondering if you could just elaborate a little bit more on the service fee portion of the business and kind of what you're seeing and assuming for the balance of the year. Thanks.

Thanks very much. And Jon, I was definitely going to be the next one you're going to call on.

I mean, the truth is, I don't know where you are at the time, I think you're out biking, raise money. You're like Superman on a bike.

I'm not on a bike right now or you will hear wind rushing. So most of my questions have actually been asked. So a couple of quick ones. I just want to make sure I understand when you're talking about the service fee attrition, or is it actual accounts going away? Or is it pricing pressure in that? So that's the first part. But then also, Jon, I heard you, I think in the prepared remarks, say, based on the sales and some other things you expect to see CDBs starting to be a growth factor. Again, I would assume that's not the back half of this year, but you're talking about maybe next year or the year out that you would expect CBDs to start to actually be a positive growth contributor. Thanks.

Thank you for your question, Mark. I want to emphasize that Ted has been instrumental in supporting our team through various operational challenges, and he will undoubtedly succeed in his future endeavors. During this transition, veteran Brad Bennion has stepped in on an interim basis. Brad has been with the company for around 16 or 17 years and has a deep understanding of our operations. His primary focus is to deliver effectively for our clients, members, and team. We're aiming for an outstanding peak season, which Angelique Hill, who oversees operations, suggests we rename as growth season. While that hasn't caught on yet, I'm on board with the idea. We believe that prioritizing these elements will aid in our long-term business growth and reinforce our brand's reputation. Currently, many in our industry seem to be scrambling to match our initiatives, whether it’s through competitive rates or bundled services. However, delivering a differentiated experience during peak season will set us apart, especially as some established competitors may face difficulties. As we go forward, our approach will continue to center around this. I will be in Milwaukee on Wednesday, engaging with some of our teammates, and our discussions will focus on ensuring a successful peak season. In terms of broader organizational changes, we recognize that the healthcare and benefits sectors have been slow to adopt new technology. Nonetheless, we are witnessing a relative acceleration in the adoption of API-driven workflows, which positions us favorably as a partner-oriented organization. Our goal is to enhance our focus on leveraging available technologies that our partners and clients are increasingly keen to implement. This strategy will allow us to be better partners, deepen our service offerings, and ultimately improve efficiency. Two years ago, we committed to bringing all of our live voice operations onshore, a decision that was made for our customers and the country, though it was not inexpensive. To offset those costs, we are enhancing engagement through chat, AI, and technology that directs inquiries to the right personnel. This will lead to improved service and reduced costs over time. Overall, we are shifting towards utilizing our technological capabilities, capitalizing on our unique position as a partnering organization in the industry, and expect this to yield competitive advantages in both the short and long term.

Perfect. Jon, thanks a lot for the thorough response. Appreciate it.

Wednesday, Milwaukee Brewers, be there. I'll buy your sausage. If I'm allowed to do that, if your compliance people let me do that.

Thank you. And I'm not showing any further questions at this time, I would now like to turn the call back over to Jon Kessler for any further remarks.

Well, an hour and 39 minutes that may be a record. I'm not sure why we want to repeat, but with some interruptions, thanks, everyone, for being patient with the technical difficulties that our connectivity provider had today. And I was just kidding about the other firm, the firm that sponsored this conference, they had nothing to do with it. And I don't say that just because they're supposedly buying me dinner later. But again, thanks everyone. We do feel like we reported a really strong quarter we do feel like, I hope tell here like there's more work we can do to correct on some of these revenue efficiency issues on the CDB side and we can do those things, as I was saying this was edited out earlier. I really do think we're in a position over the next few years to report spectacular results to you and we look forward to actually showing you that. That's it. Bye-bye. See you later.

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