Healthequity, Inc. Q1 FY2024 Earnings Call

Good day and welcome. I would now like to turn the conference over to Richard Putnam to HealthEquity’s Earnings Call. Please go ahead. Thank you, Sara. Hello, everyone. Welcome to HealthEquity's first quarter of fiscal year 2024 earnings conference call. My name is Richard Putnam, Investor Relations for HealthEquity and joining me today on the call is Jon Kessler, President and CEO, Dr. Steve Neeleman, our Vice Chair and Founder of the company, and Tyson Murdock, the company's Executive Vice President and CFO. Before I turn the call over to Jon, I have two important reminders. First, a press release announcing our financial results for the first quarter of fiscal 2024 was issued after the market close this afternoon. The financial results included contributions from our wholly owned subsidiaries and accounts they administer. The press release also includes definitions of certain non-GAAP financial measures that we will reference today. A copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures and a recording of this webcast can be found on our Investor Relations website, which is ir.healthequity.com. Second, our comments and responses to your questions today reflect management's view as of today, June 5, 2023, and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates or other information that might be considered forward-looking. There are many important factors relating to our business, which could affect the forward-looking statements made today. These forward-looking statements are subject to risk and uncertainties that may cause our actual results to differ materially from statements made here today. We caution 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 as detailed in our annual report on Form 10-K and subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future events. At the conclusion of our prepared remarks, we will open up the call for Q&A with the help of our operator Sara. One final announcement before we hear from Jon, due to some conflicts recently encountered, we are postponing our Investor Day that was planned for July 11, to be at a later to be announced date. Once we have rescheduled the date, we will provide you with the press release and invitation. Now, over to you, Jon.

Hi, everyone, and thank you for joining us for a healthy start to fiscal 2024. I will discuss Q1 key metrics and our view on performance, and Tyson will detail Q1 results, as well as our raised guidance for the fiscal year, and Steve is here for Q&A. In Q1, the team delivered double-digit year-over-year growth in revenue, which was plus 19%, adjusted EBITDA, which was plus 48%, and HSA assets which were plus 10%. HSA members grew 9%, total accounts grew 4% muted by the previously discussed change in COBRA methodology. HealthEquity ended Q1 with 15 million total accounts, 8 million HSAs and 22 billion in HSA assets, all kind of round numbers, and 10% more of our HSA members became investors year-over-year, invested assets grew 12%, despite a dicey market. Team Purple started the selling year off strong with 134,000 new HSAs opened during the quarter, that's down 25,000 year-over-year and we expected a drop given the comp to last Q1's blistering job growth and turnover rates economy-wide, but we're particularly pleased actually that, that was nearly offset by new employer adds, including across the board for HSAs. In addition, at this time last year, we saw transfers of HSAs from banks that were exiting the business. Obviously, this year, and given the competition for cash, we did not see that same activity. Enterprise logo wins that will onboard later in the year were up noticeably year-over-year, driven by an expanded net partner footprint and employers seeking win-wins in anticipation of a tough calendar ‘24 benefits renewal. For the full-year, we are increasingly confident that increased HSA adoption at the employer level will help to offset lower macro job growth. Q1 saw some daylight on CDV growth, our CDV members grew accounts in the quarter by excluding COBRA as a whole by 4% and by 1%, if you simply exclude the aforementioned adjustment of COBRA accounting methodology. Health CDVs, FSAs and HRAs were strong, as the onboarding of significant new logos offset some seasonal runoffs, commuter maintained its slow rebound, extra ACA exchange subsidies continue to negatively impact COBRA uptake and therefore activity fees and to compensate for that, the team has begun raising fixed fees with good early success, which is very much needed. While there's much wood to chop on service fees, service costs actually fell by 40 basis points year-over-year, even as revenue increased despite wage gains for our team members as we benefited from a much calmer service environment versus a year ago quarter. As we discussed last quarter, rapid improvement in service tech continues to drive more interactions to chat and automated responses and we believe there is more to come of this over the longer term. Q1 also provided a preview of what we believe is to come over the longer term with respect to custodial fees as yields on our ladder bank deposit portfolio rose out of the COVID debts and more members chose enhanced rates for their HSA cash. You saw the strength of our model over the course of the quarter as we talked about in March. High short-term rates provided a boost to income on CDV client health loans as well. All of this added up to strong and resilient cash flow from operations, which as Tyson will detail, led to a return to GAAP profitability in Q1, allowed management to reduce outstanding balance on HealthEquity’s variable rate term loan A debt and enables us to continue to invest in future growth and innovation. Mr. Murdock will now detail the financial results and outlook.

Thank you, Jon. I will summarize our first quarter GAAP and non-GAAP financial results, with a reconciliation of GAAP measures to non-GAAP measures available in today's press release. First quarter revenue rose 19% compared to the previous year. Service revenue was $105.1 million, up 1% year-over-year, while custodial revenue increased 59% to $94.4 million in the first quarter. The annualized interest rate yield on HSA cash was 232 basis points. Interchange revenue climbed 7% to $44.9 million. Gross margin was 60% in the first quarter of this year compared to 54% in the same period last year. Net income for the first quarter was $4.1 million or $0.05 per share on a GAAP EPS basis. Our non-GAAP net income was $42.8 million for the first quarter, translating to $0.50 per share, up from $0.27 per share last year. Higher interest rates boosted custodial yields and generated interest income, though they also increased the interest rate on our remaining $287 million term loan A to 6.6%. Adjusted EBITDA for the quarter was $86.6 million, with an adjusted EBITDA margin of 35%, reflecting over a 700 basis point improvement from last year. As of April 30, 2023, we used $54 million in cash to reduce our outstanding variable debt, resulting in a quarter-end cash and cash equivalents balance of $226 million and $873 million in debt after issuance costs. We still have an available undrawn line of credit of $1 billion. For fiscal '24, we're raising our guidance and now expect revenue between $975 million and $985 million, with GAAP net income in the range of $9 million to $14 million. Non-GAAP net income is expected to be between $164 million and $171 million, leading to non-GAAP diluted net income between $1.88 and $1.97 per share based on an estimated 87 million shares outstanding for the year. We anticipate adjusted EBITDA to be between $333 million and $343 million. As Jon mentioned, our fiscal '24 interest rate assumptions, which are included in our guidance, are based on forward-looking market indicators, including the secured overnight financing rate and mid-duration treasury forward curves, as well as fed funds futures. We are increasing the expected average yield on HSA cash to about 235 basis points for fiscal '24, while average crediting rates for HSA members remain consistent. We expect a 20 basis point increase by the end of fiscal '24. Please remember that the crediting rates HSA members receive are determined according to the formula in our facility agreements. Our guidance also accounts for expected higher average interest rates on HealthEquity's variable rate debt compared to last year, partially balanced by the reduction in the outstanding amount of variable rate debt. Our guidance includes a more steady seasonal spread of revenue and earnings, which were disrupted last year by higher service costs in the first half as we emerged from the pandemic, alongside the rapidly rising rate environment that disproportionately affected the second half of last year. We expect interchange revenue to stabilize this year, along with a relatively steady interest rate environment for the remainder of this year. We are assuming a projected statutory income tax rate of about 25% and a diluted share count of 87 million, which now includes common share equivalents as we foresee positive GAAP net income this year. Achieving positive GAAP net income will affect our GAAP tax rate this year. As you're aware, because of the influence of discrete tax items, the calculated tax rate on a low level of pretax income can appear distorted, as shown by Q1's calculated 59% tax rate. Based on our full-year guidance, we anticipate a GAAP tax rate of about 50% for fiscal '24. As we have done in previous reporting periods, our full fiscal 2024 guidance includes a reconciliation of GAAP and non-GAAP metrics provided in the earnings release, along with definitions of all such items at the end of the earnings release. Additionally, while we exclude the amortization of acquired intangible assets from non-GAAP net income, the revenue generated from those intangible assets is included. With that, we anticipate you will have several questions, so let's go to our operator for Q&A instructions. Thank you.

Thank you. We will now begin the question-and-answer session. Our first question comes from Glen Santangelo with Jefferies. Please go ahead.

Yes, thanks and good evening and thanks for taking the question. Hey, Tyson, I just had a couple of quick financial questions, if I could, just to sort of help us sort of model this thing more correctly. It says now that you have total HSA assets of $14.1 billion could you give us a sense for how much of that fits in variable and maybe how much of it you're investing in? Is it still a third, a third, a third, is that the right way to think about it? And the reason I ask is because we're trying to assess not only this year, but next year and I know you don't want to comment on fiscal ’25, but at the current yield curve, it sort of looks like the yield would be even much more year-over-year in ’25 versus ‘24. Nice one, you don't know if I'm thinking about that math correctly and I'll stop there. Thanks.

Yes, that's a good question. The variable interest rate portion is indeed decreasing due to the increased rates, so it has less of an impact. Additionally, last year's rates rose significantly throughout the year, which affected the variable component in the second half, leading to concerns about its size. However, considering its scale, it's relatively small and will be more stable, even if there is a downward trend. Another consideration is how assets flow through the model, as they become more consistent with enhanced rates, affecting liquidity. When we think about the FDIC component, keep in mind it can be irregular due to past mergers and acquisitions, like those of WageWorks and Further. As we integrate these assets, they are placed in five-year contracts, meaning they need to remain in those contracts for the full five years. Consequently, when you look back, you might expect less to roll off in the upcoming year than you anticipate based on the one-third, one-third, one-third distribution from the three-year duration of those five-year placements. So, what I'm saying is that the figure is lower than that one-third. You would need to look back to before the major acquisitions to get a clearer picture of what that looks like. Therefore, it will indeed be a smaller number. Jon, do you have any further comments on this?

I was going to pull some other analysts who ask four or five part questions. Sorry, Sarah. I didn’t mean to interrupt.

Alright. No problem. Our next question comes from Stan Berenshteyn with Wells Fargo. Please go ahead.

Hi, thanks for taking my questions. First, I just want to make sure I called this correctly. You said you're increasing service fees that your employers are paying, and it seems like you're early in that. Can you just give us thoughts on the methodology? And how long do you expect until everybody is on board with the new pricing?

Well, that comment specifically refers to several quarters where COBRA has been somewhat challenging for us. Although I’m pleased to see positive numbers overall for CDB and even better figures when excluding COBRA, my focus was on COBRA. The main issue is that we now have additional subsidies in place for a few more years, often humorously dubbed the extra Affordable Care Act, which were implemented during the pandemic and have been extended. This has resulted in lower COBRA uptick. While it doesn't change the offer rates, it impacts what we refer to as activity fees in COBRA. We plan to compensate for this by increasing the service fee component. COBRA is marketed both directly and through our channel partners, particularly our healthcare partners. We aim to collaborate with them diligently and have started to introduce modest increases in service fees to offset the differences. I believe people anticipated this change as the cost of providing the service has not significantly altered. The focus remains on COBRA, and though this won't be a major growth driver, we want to ensure that overall CDB growth is positive without being a hindrance again.

Got it. And then maybe just a quick follow-up, and I don't know if you have any money on this. But just back to your prepared remarks, I think you commented that you had more focus on chat-based communications. Can you maybe just give us an update on the adoption of text-based communications within your member base? And then maybe related to that, are you seeing any opportunities to enhance member communication with maybe like generative AI technology that's coming up? Thanks.

I don't believe there was any financial impact from this. In all seriousness, I'd say that the advancements in these areas have significantly improved our capacity to automate communication for many basic inquiries we receive, ultimately leading to what members consider a superior experience. If you review a chart over the last six to eight months, you'll see that both text-based and automated text-based interactions have increased substantially. Currently, approximately one out of every six or seven of our transactions is text-based, and among those member interactions, about one out of three to one out of two are automated. The new developments are proving beneficial, and I expect this trend to continue. My comments also reflect that service costs have decreased year-over-year. Although there were other factors involved, such as last year's first quarter service costs being unfavorable, we still performed well even when accounting for that. I believe there is much more potential ahead for us to enhance member experience while simultaneously reducing service costs.

Awesome. Thanks so much.

Thanks, Stan.

Our next question comes from Anne Samuel with JPMorgan. Please go ahead.

Hey, thanks so much for taking my question and congrats on the great results. Jon, you spoke earlier in your prepared remarks about your strength in new employee adds for HSAs kind of coming in a little bit better than you had expected. I was just wondering if you could talk a little bit more about that. What are you seeing? Is it labor growth, better enrollment. What's driving that?

It’s interesting to note that our expectation, which we've communicated for some time, is that we have benefited from both growth in the labor market and turnover. If we look at last year, aside from Q4, the year-over-year variance decreased as turnover and job growth eased compared to the first quarter of last year. In this first quarter, the way I see it is that the growth in new clients, mainly smaller employers starting in February, March, and April, nearly balanced out the decline in organic growth from the same employers compared to last year. This is quite positive, especially given that nationwide job creation is at about 55% of the rate we experienced last year in Q1. It’s still impressive, but we are producing jobs at that reduced rate. Additionally, voluntary turnover has notably decreased across the economy, which gives us confidence. We did see fewer transfers of HSAs from smaller banks, likely due to institutions trying to retain deposits, which accounted for most of the year-over-year difference. Overall, we are confident that the growth in new clients will significantly offset the expected weakening in the labor market throughout the year. This message is meant to convey confidence and we hope it is received as such.

That’s great to hear. Thank you.

Thanks, Anne.

Our next question comes from George Hill with Deutsche Bank. Please go ahead.

Hey, good evening, guys. And thanks for taking the question. Jon, this might be kind of a dovetailed question on Anne's question that was just asked. But I thought I heard you say in your prepared commentary that you're seeing increased HSA adoption at the employer level that will kind of offset job growth. So I guess my question is like, are you guys seeing an underlying change in the adoption of HSA levels that is kind of different from the historical trend of them growing 3%-ish a year? And would be interested to hear you talk about what's driving that like in the underlying adoption rate.

It’s early in the year. When you consider our pipeline, which includes our wins expected to onboard later in the year, they are significantly ahead of last year. I think there are important factors at play here. Since Steve is on the line, perhaps he can share some insights about the activity at the employer level and with our partners, especially regarding any potential employer prospects in his current location.

Absolutely. I would have joined you in New York, but I wasn't invited. George, I didn't hear you chime in. We’ve discussed this in the past. I recall that we had a significant brand-name employer come on board in the first quarter with an HRA, which has positively impacted our CDB efforts. Looking at employers as we approach year-end, most seem to recognize that costs and inflation are rising. Many midsized employers are anxiously awaiting developments in health care claims. Health care professionals understand that hospitals are facing increased labor costs, and eventually, these will translate into higher costs for payers, which will ultimately impact employers. Additionally, when you consider the wage inflation challenges that employers face along with overall inflation, many are acknowledging the value of HSAs. They have reviewed our case studies and noticed how well big companies are implementing HSAs in innovative and engaging ways. We have a case study showing that by funding higher-income individuals' accounts, we can also fund lower-income individuals’ accounts more effectively, leading to increased adoption in areas where we previously saw less engagement. Coupled with our Engage360 MAX enrollment initiatives, where more employers are allowing us to connect with their employees ahead of enrollment, we are executing better than ever. While a recession can be tough for all businesses, we believe HSAs can attract more interest during challenging economic times due to their cost-saving benefits for employers. That’s the trend we’re observing, George. Thanks to our marketing and inside sales teams, we’re performing better than ever and spreading the word effectively. For new logos, as Jon mentioned, we’re optimistic. We’ve secured several significant sales and are excited about bringing on new clients this year.

That's super helpful. And if I could have what I hope is a very quick follow-up. Just a lot of us on the health care side are tracking the growth of the GLP-1 drugs that tend to come out of the gate pretty expensive and tend to blow through people's deductibles pretty quick. I was just wondering if you guys are seeing any impact at all on HSA balances or an increase in volatility of the balances through the GLP-1 drugs?

No, not yet.

Okay. Easy answer. Thank you.

Thanks, George.

Our next question comes from Greg Peters with Raymond James. Please go ahead.

Well, good afternoon, everyone.

Hey, Greg.

Steve, I'll invite you to New York if Jon won't just in case that matters.

Very kind of you. Thank you.

Yes. I guess can you comment on the seasonality in general administration and merger integration-related expenses? The reason why I'm asking is they came in a little bit below where I was certainly thinking, and I noticed you didn't change in merger integration guidance for the full-year. I would have thought that would have tapered off through the year, but it seems like you're sticking with that number. So just some detail on that would be helpful.

Yes. I mean we're sticking with the number. We got to spend it, and I think if the timing of it is just it's getting so small now that the timing may add some volatility to it, Greg, is what I would say. So and then you mentioned G&A as well.

Yes.

I want to make sure I understand that question a little bit more.

I'm sorry, but regarding the general and administration expense line item in the P&L, it came in a little lower than expected, and I'm curious if there are any specific factors contributing to that or if this represents the normalized expectation that we saw in the first quarter.

Yes, I can elaborate a bit on that point. Last year, we experienced some stock compensation forfeiture, which affected the numbers. When comparing last year to this year, you will notice an increase. However, if you consider the long-term trend, we are working on achieving some synergies that should also be reflected in those numbers. Overall, the fluctuations seem minor when you look at the data over an extended period. I hope that clarifies your question.

I think so. I can take the rest off-line. My other question was just on debt paydown that's running ahead. What's your expectation for the year on that?

Just we'll take it as we go. I mean we'll look at what it is. What we did there is we paid off the principal payments for quite some time. So you won't see any short-term portion of that anymore. And so cash accumulation is going to help that. And I'm talking about the next couple of years, we won't have principal payments on it. We were able to elect it that way. So we thought that was a positive thing to do for the business and just make a bite at it.

Okay. Makes sense. Thanks.

Thanks, Greg.

Our next question comes from Sandy Draper with Guggenheim. Please go ahead.

Thanks very much and congrats on the strong quarter. This is one question about seasonality, but it applies to two lines. So first off, just trying to make sure, sort of, asked a little bit earlier, Tyson, when I'm thinking about either sequentially or year-over-year, the change in account or revenue per account, I'm trying to get the dynamics of the strong growth in HSAs lower price. You're starting to see some uptick in the CDBs, at least sequentially. But you're still down, by my math, about $0.07. So should we be thinking about sort of flattish? Or is it the season should be thinking about a year-over-year change? And how do we think about seasonality there? And then I wasn't quite clear what you referenced when you commented about normal seasonality on the interchange with how you're usually thinking about it. The first quarter is the highest drops down for the next two and then steps back up in the fourth quarter, but maybe not for the first quarter. Is that what you're applying? So I just want to make sure I've got the seasonality of those two target.

Sure. I’ll address the second part, which you've already somewhat answered. We want to emphasize how seasonality operates. While you may perceive a slightly better growth rate this quarter, it's really just a reflection of the same seasonality. It's important to note that if you look back over time, factors like the pandemic and last year's acquisition, as well as previous events, have played a role. I want to ensure everyone understands that the quarterly performance tends to be more sequential, and we don't want anyone to misinterpret that. Additionally, we should consider the impact of variable rates from the second half of last year. So, that's a more comprehensive response to your question. To reiterate, the interchange portion has just normalized, and Jon will now address the first part.

Yes. I mean, Sandy, the first part of your question was really about, I think, was about unit service fees and meaning service fees over total accounts. And I think you've kind of got all the right pieces. I mean the bulk of service fees, as you know, come from the CDB side of the business. And so as HSAs grow total accounts, there's a little bit of downward pressure there just from a mix shift perspective. But we seem to be holding our own there pretty good, and I think that's a fair way to look at the full-year. I'd probably just leave it there.

Got it. That’s helpful. Thanks.

Thanks, Sandy.

Our next question comes from David Larsen with BTIG. Please go ahead.

Hi, congratulations on the good quarter. Can you talk a little bit more about your expectations for yield? I think you said it came in at 232 bps for the quarter. I think it was 211 bps last quarter. The guide, I think you said, is 235. Is that accurate? And then over what period of time will you expect to realize the benefit from the increase in the federal funds rate that has occurred over the past year? Will that take a couple of years? And I guess what I'm getting at is why only, I think, the 3 basis points of incremental yield between now and year-end. Thanks.

During the past fiscal year, the primary variability was associated with the small portion of our HSA cash held in variable instruments. Last year, interest rates increased significantly, driven by the rising federal funds rate, which largely accounted for the increase you observed, in addition to the strong growth in cash. This year, we will have to see how things unfold. Our guidance is based on forward curves, which indicate that variable rates are expected to peak and then decline. Our overall perspective is that this will lead to a much smoother situation throughout the year, similar to many earlier years. Therefore, our guidance reflects that understanding, and your initial observation is indeed accurate.

Okay. Great. And then can you maybe just talk a little bit about the interchange revenue? I think it was short a very, very good pop sequentially. I mean, what are the key drivers there? I mean is it commuter revenue? Is it health care utilization and general utilization in the hospital and physician office environment? Just any additional color there would be very helpful.

Yes, the commuter does contribute somewhat as it continues to grow. However, if we examine it closely, the growth we observed in interchange largely reflects the year-over-year increase in accounts with cards, including our new HSAs and some of our CUVs. That’s essentially what it comes down to.

Okay. Great. And if I could just squeeze one more in there. The HSA members, it was really flat sequentially. If we adjust for COBRA, what would that have been? And then when do you expect to fully comp the COBRA impact?

Could you ask that one more time? I'm sorry.

The number of HSA members relative to Jan '23, it was up a little bit sequentially, but looks kind of flat to me actually. Just is that because of the COBRA impact? And when would you expect to fully comp that?

Well, I think what you're referring to is total members. Let's just say HSA members are up 9%, total accounts on a year-over-year basis. You're talking sequentially. And to that point, David, our fourth quarter is when HSAs come in, there isn't a lot of HSAs. So your growth is going to be, what, $100 or 90 or something. And that's on the base of $8 million. So that's the first quarter is the answer to that.

Great. Thanks very much.

Thanks, David.

Our next question comes from Scott Schoenhaus with KeyBanc. Please go ahead.

Thanks. Congrats, guys. Thanks for taking my question. Apologies if I missed it, but state where you book the book of businesses in terms of enhanced rate? And did you reiterate your 30% target for the end of the year?

I didn't know that thing you risen to the level of something we reiterate. But yes, it's still our target.

Okay. And where are you currently at, Jon?

We're a few hundred basis points shy of that. We're going to get there.

Great. Great. And just a question on the M&A environment. I know that it has been kind of slower than you expected given that these banks want to hold on to the sticky HSA assets. Has anything changed from three months ago when you made those comments?

Fundamentally, I don't believe so. It's important to note that we have a ladder strategy, while some of our competitors have a more exposed approach due to their structure or other factors. If you're more vulnerable, perhaps some of the larger competitors are more at risk when it comes to short rates. This could be a period where they are quite concerned, especially if they anticipate volatility with short rates. There has been some discussion around this. However, our recent decision to pay down suggests that we believe this is a time for capital accumulation rather than expenditure. This also affects our new HSA openings, particularly regarding the smaller HSA transfers from smaller banks.

Thanks for the color.

Thanks, Scott.

Our next question comes from Stephanie Davis with SVB Bank. Please go ahead.

Hey guys. Congrats on the quarter and thank you for taking my question. So I hate to be the one to bring up bank turmoil. But last quarter, we did have a lot of discussions around enduring impact from some of the events in March and how it can maybe create greater demand for your sticky HSA deposits, and the bank turmoil has continued. So I was wondering if you've seen any greater interest in custodial partnerships from folks like additional banks or if you're still mostly focused on second-story banks and avoiding the regional bank opportunity?

I will say yes to your first question. Regarding your second question, what we focus on is the overall quality of the institution. It's not just that we're relying on the FDIC to support our members; rather, we aim to establish long-term relationships. We prefer to avoid having transactions that are one-off experiences, unlike some colleges, except for Florida, which has a different graduate situation.

And my colleges in this question, like Florida.

Florida is fantastic, and everyone is aware of that. They have a lot going on, and Florida is thriving. To answer your first question, yes, and regarding your second question, we will consider those factors. We're not in a phase for deploying cash right now, but we aim to establish lasting relationships with various institutions where we operate.

Let's follow up on that. Is there a way to get more detail on the yield side? You had a significant beat, so did the contract renegotiations exceed expectations, possibly not just from regional banks? Was it related to the floating rate mix or an enhanced rate mix? How sustainable is this, and could it just be an intra-quarter impact?

I don't think there will be a significant impact between quarters because most of the renegotiations we conduct occur at the end of the year. The benefits we observed in the first quarter mainly stemmed from efforts to enhance rates and the positive effect on variable cash, which contributes to yields. I believe this could provide a benefit at year-end. However, there are many factors to consider at that time, and year-end is still quite a while away. One advantage of our enhanced rates program, as it develops over multiple years, is that it will reduce the dependency on year-end outcomes. Therefore, we won’t need to hold our breath during December and January each year, which will be beneficial.

I’ll keep quite. All busy. Alright, thanks. I’ll hope back in the queue.

That's not a name we mentioned, because recruiters listen to these things. Say it.

Our next question comes from Mark Marcon with Baird. Please go ahead.

Hey, good afternoon and congratulations. And Steve, we would be thrilled if you were here in New York with us. So we’re super glad here.

I didn't even know I had any authority over where Steve went. That's a new thing. And I'm sorry, Mark, go ahead.

And we're looking forward to seeing you guys tomorrow. But just a very short question and then a little bit of a longer one. But the super short question is on the enhanced yield product, is the duration structure the same as what you've had on your traditional bank partnership agreements?

Our cash commitment with enhanced rates differs slightly because it is typically a 5-year commitment. The key difference is that, unlike bank products which require separate products for liquidity, here the liquidity is integrated. Therefore, when considering the average duration, including the portion we can easily access, it is much closer to our three-year track.

How sensitive is that portion of the enhanced deal product to changes in yields in the overall market? Is it a...

The liquidity component is included in the underlying rate we receive. This is designed not only to provide a higher overall yield but also to ensure consistency over time. Our goal is to maximize your returns from the business, especially in the short and medium term, as fixed income analysis.

Okay, great. I just wanted some general comments regarding the competitive environment. You continue to gain the most market share and grow rapidly. I'm curious how this has evolved over the last two years. What's your perspective, Jon?

I would generally say that we are seeing a continuation of long-standing trends. The seven-year information that was released since our last announcement shows that we have maintained our number one position in terms of both assets and accounts, and it indicates a consolidation. If you look at the largest players, the growth in market share has primarily come from HealthEquity and Fidelity. We compete with each other, but we also differ in that Fidelity does a lot of rollover business as people retire, which allows us to benefit at the expense of other players. Additionally, I want to mention that our team had a very successful year in terms of executing service for our clients, broker partners, retirement partners, and health partners at the end of the year. A positive experience encourages brokers to send more business our way in the following year, and this credit goes to Angelique Hill and her service team, along with Eli Rosner on the technology side and Merv and Larry on security and IT. I believe this contributes significantly to our success as well.

Thanks, Mark.

Terrific. Thank you. Look forward seeing you tomorrow.

Yes, sir.

Hey, Mark.

There’s still red eye, don't say it. I would call your bluff.

I like you, Mark, when there's snow on the ground and there's no snow back there. So…

He’s a skier. Who’s next?

Our next question comes from Allen Lutz with Bank of America. Please go ahead.

Thanks for taking the questions. I guess one for Tyson. You talked about the enhanced rate product kind of going from 0 to a goal of 30% this year. So over three years from nothing to 30% of the book. But I'm looking at the custodial cost of goods sold line, and that really hasn't moved as a percent of custodial cash over that time period. And I'm looking at the enhanced rates here, and they're obviously higher than the core rate that you're paying out to the consumer? So I'm just curious, is there something going on with the type of consumer that's electing for the enhanced rates? Do they have a much smaller cash portfolio than the average, just normal customer? I'm curious what the disconnect is there. Thanks.

I'm going to address this because the answer relates heavily to marketing considerations. There are two main points here. First, the uptake rate among new account holders is very high, and these new account holders typically have smaller balances. As a result, the impact on our custodial expenses has been relatively modest when you consider the overall situation. However, this may change over time in comparison to what would have happened with cash. This is really the main point. It's not just influenced by the Federal Reserve's decisions but rather by the fact that the people most likely to engage with our product are new customers who are making initial choices. Approximately 85% to 90% of our new enrollees are opting for enhanced rates. Second, those who maintain large cash balances that earn higher rates usually do so because they value the FDIC insurance. If that weren't the case, they would likely be investing those funds or placing them in short-term bond funds. Therefore, it makes sense to expect these customers to remain in FDIC-insured cash.

Got it. Thank you very much.

I thought about this question, too. We were curious about it over the last few quarters. And this is the first time in this form anyone's asked about it, but that's the answer.

Thanks, Allen.

This concludes our question-and-answer session. I would like to turn the conference back over to Jon Kessler for any closing remarks.

So first of all, thanks, everyone. I'm sorry if you've already pre-purchased Cabana ware, we'll do our best, like Richard. We did get this thing done in under an hour, which is something to celebrate for you as well as for us, and particularly for Richard. And I think there's a double standard on the length of answers, mine, where I think, on average, the shortest. But nonetheless thank you all, and I appreciate the team's work on a great quarter. And we will, if not earlier, see everyone back in September. Bye-bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.