Hello, and welcome to the HealthEquity Fourth Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. As a reminder, this conference is being recorded. I would now like to hand the call to Richard Putnam. Please go ahead.

Thank you, MJ. Hello, everyone. Happy Vernal Equinox, and welcome to HealthEquity's fourth quarter fiscal year-end and 2024 earnings conference call. My name is Richard Putnam, Investor Relations for HealthEquity, and joining me today is Jon Kessler, President and CEO; James Lucania, Executive Vice President and CFO; and Dr. Steve Neeleman, Vice Chair and Founder of the Company. Before I turn the call over to Jon, I have a couple of reminders. First, a press release announcing the financial results for our full year and fourth quarter of fiscal 2024 was issued after the market closed this afternoon. These financial results include the contributions from our wholly-owned subsidiaries and the accounts they administer but do not include any impact from the BenefitWallet HSA portfolio acquisition. The press release 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, March 19, 2024, 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 risks and uncertainties that may cause the 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 stocks as detailed in our latest annual report on Form 10-K and any 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. With that out of the way, let's turn the call over to Jon Kessler.

Hi there. Thank you, Richard. Today is also baseball's opening day in addition to being the vernal equinox. Should be a national holiday. The good news is you do not need the permission of Major League Baseball to reproduce or account this call. You don't need anyone's permission. So with that, thank you for joining us. And since we just held our Investor Day, Jim and I are going to keep prepared remarks, and of course, Steve is here for Q&A. In fiscal '24, the team delivered double-digit year-over-year growth in revenue at 16% and reached the $1 billion in revenue milestone. Adjusted EBITDA grew more than twice as fast at 36%, and in sales, as we previously reported, new logo growth and network partner production drove a record Q4 and a strong year overall. Members and assets grew 9% and 14% respectively in fiscal '24, and the team opened 949,000 new HSAs from sales. HealthEquity ended the fiscal year with 8.7 million HSA members in total. More than 30% of HSA cash is now in enhanced rates. Investing members and invested assets grew 13% and 28%, respectively. Total HSA assets reached $25.2 billion, and total accounts grew 5%, including from organic CDB net growth for the first time since the pandemic began. Now, if you weren't at our Investor Day or if you were dazzled by the mountain views, listen up. Management aims to continue strong top-line growth and competitive outperformance while doubling non-GAAP net income per share from fiscal 2024 levels over the next three years. To do this, we have focused capital investment on our proprietary health accounts platform and the ecosystem to which it connects us, leveraging foundations in the cloud, in data science, and in API technology to deliver remarkable experiences, to deepen partnerships, and to drive member outcomes. We call those 3Ds. We further leverage our platform through opportunistic HSA portfolio acquisitions such as BenefitWallet, the transition of which we expect to complete in Q2. This three-year strategy will, we believe, not only build shareholder value but also advance HealthEquity's mission, which is to save and improve lives by empowering healthcare consumers. It's important stuff. Now to Jim to detail other important stuff, which is our Q4 and fiscal '24 performance and enhanced guidance for fiscal 2025.

Thank you, Jon. First, I just want to thank all of you that joined us for our Investor Day last month. I hope you found it informative. I'll briefly highlight fourth quarter fiscal year GAAP and non-GAAP financial results. As always, we provide a reconciliation of GAAP measures to non-GAAP measures in today's press release. As a reminder, the results presented here reflect the reclassifications of our income statement we described in an 8-K filed on February 21, both for fiscal '24 and the prior year for comparison. Fourth quarter revenue increased 12% year-over-year. Service revenue was $118.6 million, down 1% year-over-year, reflecting the final runoff of National Emergency activity. Custodial revenue grew 35% to $105.4 million in the fourth quarter. The annualized interest rate yield on HSA cash was 268 basis points for the quarter. Interchange revenue grew 6% to $38.4 million. Gross profit as a percentage of revenue was 62% in the fourth quarter this year, up from 58% in the fourth quarter last year. Net income for the fourth quarter was $26.4 million or $0.30 per share on a GAAP EPS basis. Our non-GAAP net income was $55 million or $0.63 per share versus $0.37 per share last year. Adjusted EBITDA for the quarter was $98.8 million, and adjusted EBITDA as a percentage of revenue was 38%, a 620 basis point improvement over the same quarter last year. For the full fiscal year of 2024, revenue was $999.6 million, which Jon generously rounded up to $1 billion, up 16% compared to last year. GAAP net income was $55.7 million or $0.64 per diluted share, and non-GAAP net income was $195.5 million or $2.25 per diluted share, up 71% and 65%, respectively, compared to last year. Adjusted EBITDA was $369.2 million, up 36% from the prior year, resulting in adjusted EBITDA as a percentage of revenue of 37% for this fiscal year. Turning to the balance sheet. As of January 31, 2024, cash on hand was $404 million, boosted by $243 million of cash flow from operations for the full fiscal year. The company had $875 million of debt outstanding net of issuance costs. We continue to have a $1 billion undrawn line of credit available. We anticipate using both cash and drawing on the line of credit over the next few months in connection with the closings of the BenefitWallet HSA portfolio acquisition. Today's fiscal '25 guidance reflects the carry forward of stronger than expected Q4 sales and efficiencies from the technology investments Jon mentioned, offset by a slightly higher mix of investments versus cash in HSA assets. We expect revenue in a range between $1.14 billion and $1.16 billion. GAAP net income in a range of $73 million to $88 million or $0.83 to $0.99 per share. We expect non-GAAP net income to be between $247 million and $262 million or $2.79 and $2.96 per share based upon an estimated 89 million shares outstanding for the year. This is a big deposit towards our goal of doubling non-GAAP net income per share to our $4.50 goal by fiscal 2027. Finally, we expect adjusted EBITDA to be between $438 million and $458 million. Our guidance reflects an expectation for an average yield on HSA cash of approximately 300 basis points for fiscal '25. As a reminder, we base custodial yield assumptions embedded in guidance on an analysis of forward-looking market indicators such as the secured overnight financing rate and mid-duration treasury forward curves. These are, of course, subject to change and not perfect predictors of future market conditions. As Jon mentioned, we ended fiscal '24 with about 30% of HSA cash in enhanced rates and expect that mix shift from basic rates to continue as over 80% of new deposits flow into enhanced rates. Our guidance also includes the expected impacts of the BenefitWallet HSA portfolio acquisition anticipated to be completed in multiple tranches by the end of Q2. Cost impacts include interest expense due to an increase in the amount of variable rate debt outstanding and drawdown of corporate cash to fund the acquisition and onboarding costs beyond normal seasonal costs to serve in Q1 and Q2. We expect full run rate benefit in Q3 and beyond. We assume a non-GAAP income tax rate of approximately 25% and a diluted share count of 89 million, including common share equivalents. Based on our current full year guidance, we project a GAAP tax rate for fiscal 2025 at about 28%. As we've done in recent reporting periods, our full fiscal 2025 guidance includes a 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 included. With that, we know you have a number of questions, so let's go right to our operator for Q&A.

Today's first question comes from George Hill with Deutsche Bank.

Jon, I might be in trouble here, because I think you guys called on me in the queue faster than I can type. When I look at the custodial revenue in my model for the quarter, it looks like it was down a touch sequentially while a lot of the KPIs that underpin that. Again, I'm hoping I got a good fat finger on my model here. Could you break down what metrics drove the sequential decline in custodial revenue where given the company's strong performance and also the KPIs, I would have expected that to be up?

Yes. So let me give a partial response and then ask Jim to elaborate. I believe, George, that one of the things that will be important for everyone this quarter to remember is that we have, as we outlined in an 8-K around our Investor Day and then discussed at Investor Day, we've made a few changes in how we classify revenue within the three buckets of revenue on our income statement. And I believe that what you may be looking at is a little bit of an apples-to-oranges comparison as a result of that, because one of the things that we've done is, I think appropriately so given its growth, is we're treating the revenue that we generate from the service of managing invested assets as what it is, which is a service. And conversely, a benefit of doing that is that now the custodial line is more purely two things: it's revenue generated from yield on HSA cash and revenue generated from yield on client-held funds. And so that's a big piece of what you're describing, I believe. Jim, do you want to elaborate on that or on any other factors?

Yes. No, that's precisely what it's going to be. And so you'll for the benefit of everyone on the call, the details of the shifting components in the prior periods will be outlined in a footnote in the 10-K, which we'll hope to get on file as soon as possible in the next few days or so hopefully.

Yes. And Jon, you got Jon and Jim, you guys detailed that, and I should have kind of remembered that as I was working my way through the model. And then I guess if I could just do a quick follow-up. The enhanced rates progress on the enhanced rates product, I guess would just love any comments that you have about the selling season as you push forward and continue demand around that.

Yes. Well, actually, Jim, you want to comment on this?

Yes. Sorry, you broke up a little bit there, but the question was about progress of moving toward growing the enhanced rate mix.

Yes, that was it.

Yes, yes. So that yes, I think what we've outlined, nothing has really changed in the strategy. We'll get a little bit of a more of a step function bump up in that percentage because of the upcoming BenefitWallet placements. So getting a big slug of dollars that we can more than 80% place in enhanced rates is the expectation. And then the same, the organic growth in the business is also being contributed almost 80% plus into enhanced rates. So you're going to see that number come up, and we've shared our goal is in that same three-year timeframe where we're trying to double non-GAAP net income per share. We're also trying to increase the percentage or the mix of cash, HSA cash and enhanced rates from 30% up to 60%. So will it be nice and even quarterly growth? No. But that's the objective to get from 30% to 60% in the next three years.

The next question is from Stan Berenshteyn with Wells Fargo.

Maybe sticking with the enhanced rates, it looks like annuities are holding up a bit better than 5-year treasury rates. Just curious what kind of spread are you seeing over 5-year treasuries as you're locking in these enhanced rate products right now?

Jim?

Yes. Again, you also at Investor Day, we outlined our sort of average expected spread is 5-year T plus 75 basis points on average. So some a little higher, some a little lower, but these spreads don't actually change, right? When we have a partner, we sort of negotiate the formula. And so we're not shopping in the retail market each time we place these assets.

And maybe for the follow-up. At the Investor Day, there was definitely some excitement over the chat-based communications that you're pushing forward with members. I'm just curious, what percentage of inbound member communications are text-based now, and how has that changed over the same time last year?

Yes. Let me first say that I think the long-term vision is that chat is just one mechanism for this kind of stuff. And then by long-term, I don't mean the Jetsons. I mean over our strategic horizon here. Although, I guess, now the Jetsons would be in the past. I don't know. But, so I'm going to answer your question in terms of both chat and other automated forms of handling calls. And so that number is still relatively low in terms of true automation ignoring just IVR type stuff. But low might be, we're up to kind of 15 to 20%. And in addition, we've also, in the last couple of months here, rolled out a similar functionality for our client services center that handles inbounds from our clients as well as many of our brokers that we deal with, and which I frankly did not expect would be a big hit but has been used rather aggressively. And that number has increased from, let's say, roughly 10, roughly 1,000 basis points over the last year, so 10%. And, we're going to try and drive it farther and faster. And the keys to doing that in our view are, one, is to continue to use the technology for what it's great at, which is improving the quality of the dialogue. And the main way we do that is by continuing to train the technology on actual experiences backed with our VOC data as well as with all of the data in our existing systems. The second way that we expand this is by, as I suggested a moment ago, expanding beyond the chat format. So, we actually just went live in the last couple of days with our first iteration of work on the voice side. I wish I could explain the details of it, but I can't. I do know that it's using a wonderful product from our partner Google, who is a customer of ours and also a great partner on this work and that it leverages our existing cloud infrastructure. But so we think this number can continue to grow and the results in our view can be three things. One is obviously lower cost, but the second is not only a better experience for our members and clients but actually a better experience for our agents who the agents that are part of this, ultimately, while it obviously reduces the total number, the agents who are there can be better paid and really use their skills. And then lastly, looked at from the perspective of our partner ecosystem, I think we mentioned this on the call at Investor Day, there are opportunities for both customization and personalization of messaging with items that are of interest to our partners. And that can be as simple as branding, but sometimes, but I think more importantly, you can get to areas like doing more personalization of what you're talking about than any human could ever do. And so, I feel great about the fact that we kind of stepped out on this a little bit before there was a buzzword called AI or truthfully or generative AI at least or at least before I even knew it was generative AI. But, we're in a great spot and we're leveraging our partners at Microsoft on the infrastructure side and then obviously with this new bit on the application side of Google and doing some really neat stuff.

The next question comes from Glen Santangelo with Jefferies.

Listen, obviously, a lot of good news to talk about on the custodial revenue side, but I was hoping we could maybe dig in a little bit to the service and interchange revenues. With service revenues being down a little bit relative to the account growth that you had last year, I'm kind of curious if you could talk about the pricing environment in terms of what you saw this selling season. Then on the interchange side, I don't know if there's anything related to change healthcare and that issue that may have impacted the quarter? And I'll stop there.

Jim, why don't you hit the first part of Glen's question, and I'll hit the second part.

Yes. So on the service side, what you're seeing is a couple of things. So yes, certainly, the market competition remains the same, right? Nothing has changed there. So we face competition on large market RFPs, and we're going to continue to face a little bit of pricing headwinds on a per product average revenue per user on the service line. The other piece you're seeing is the end of the national emergency that, like I mentioned in my comments. So you think of that as an FSA account that we have with a member that's open for several years, because of the extension. You might have a 23, a 22 and a 21 and a 20-year open. We count that as one account, but we're getting revenue for each of those years. So with all of those national emergency items coming to an end in Q4, you don't see the accounts go away, but the revenue per account does go away in that case. And then the last piece is just mix shift, right? HSA is a low service fee product relative to CDBs. So as we continue to grow HSAs faster than CDBs, we will see blended average revenue per total accounts come down. So you have sort of a multiple headwind there on pricing. Aside from all of the pricing impacts, service revenue does grow with accounts. So acknowledge that that's a little more challenging to forecast. But that's, we think of sort of service and interchange together as our service revenue streams. They do grow with accounts. The piece we call service has that little extra headwind of pricing pressure and mix shift.

Yes. And I was with regard to the question on change, which I prefer to call Optum for reasons that should be obvious. But nonetheless, we'll use change here. We have not seen any on the revenue side, interchange flow side, we have not seen any impact in Q1 thus far. We certainly took a look at particularly the last couple of days of February when this kind of started out. And so far, I think so good on that front. And but in addition, I will say that since a lot of the public discourse and appropriately so here has been about the speed with which providers are getting paid and pharmacies are getting paid and therefore, able to give people access to medications and medical services. We have not had any disruption in the payments that we issue. And that includes the fact that we utilize change as our partner for what we call virtual cards. So these are payments to physicians. The virtual card systems of change were not impacted by this incident. And so, we continue to be able to get our providers paid and get our members reimbursed and get our pharmacies paid, and that seems like a good thing. And maybe I'll just as long as you break the topic, I'll say one other thing about it, which is that from a security perspective, while Optum United change have not come forth with much clarity with regard to the underlying vulnerability that was the source of this. We have, there's been a lot of discussion in the intelligence community about in the cyber intelligence community about what it might be. And I suppose one benefit of that is that, it's identified a number of what would have otherwise been zero-day vulnerabilities. And our team has been very active in as those kind of come out in that world and we monitor those through our own resources and third parties. As we monitor those items, we identify whether there are threats within our own systems. And if there are any threats within our own systems, we take that. But at the end of the day, it's yet another reminder of the fact that there's a reason why we spend more on cybersecurity than we do on marketing. It's both the right thing to do, and it's an appropriate thing to do. And if you're going to be a market leader, you're going to have to step up to that, particularly in an industry where you have both health and financial data in your systems.

The next question comes from Greg Peters with Raymond James.

I think this is a good segue. So you're just talking about cybersecurity and your focus on that and it's being important. I wanted to pivot to credit risk, not only with your depository, but also your enhanced yield partners. And the reason why is that because you're seeing some continuing challenges inside some of the bank companies. And then secondly, there's this persistent concern about commercial real estate exposures. And when I'm just curious how you evaluate your partners both on the depository enhanced yield in the context of these types of external risks that we read about, seems like almost every day?

You want me to start with that one, Jon? Look, I mean, I think this is the purpose of our—we have a custodial cash committee within the company, and the board also provides oversight of the activities of that custodial cash committee. This is what we do. We try to diversify the portfolio of partners that we work with, and we do monitor the activity of each of those partners. On the bank deposit side, we're not placing like these deposits are not treated as mass deposits of health equity into the member banks. They're treated as many small deposits that are fully FDIC insured by the federal government. So they add up to $2,000 here and there adds up to a large deposit with the bank. And then on the insurance side, I think as we've talked about, right? We are, at the start of this program, working with highly rated, the blue-chip insurance company partners here. And we are adding another criteria there of being a small percentage of their of any of our insurance partners' balance sheet, right? It's not just diversifying the dollars across our partners. We are trying to make sure that we're a very small part of the liabilities of said insurance company. But yes, acknowledge that as we mix shift towards more insurance partner, our ability to risk manage becomes marginally heightened there as we don't have the FDIC pass-through.

Jon, did you want to add anything or should I just plow on to my follow-up question?

Now ahead, sir.

So BenefitWallet is the integration is underway. So again, when you're dealing with M&A and you guys have a track record of this, there's always surprises and unforeseen challenges. Is anything popped up on your radar that you want to call out that has been unusual so far? I know you've sort of identified the expectation of when we get expect to transfer everything over. But just curious if it's meeting plans or where there's been some deviations?

I think by and large, Greg, so far so good. As you know and others may not, I know you do. But one of the things we did with this transaction is that we structured it such that we're not acquiring any technology systems or the like. And that has a number of benefits. First of all, it significantly reduces the possibility of surprises. But in addition, it also reduces things like temporary cybersecurity threat environments, those kind of things. And it's been a good model for us for smaller transactions. This will be the largest of not only in fact, this will be the largest HSA transfer, I believe, ever done, but certainly the largest of this type. And so, so far so good. What we will do is once the transaction is complete, as we do with other transactions, we'll give you a precise reporting of accounts, assets or precise is the wrong word, but we'll give you a final tally of accounts and assets, so that you're able to understand the distinction between organic and these kinds of acquisitions. There was if you look back, we talked about kind of where these numbers might end up, but also the agreement itself contemplates the possibility of them being slightly higher or slightly lower depending on any number of factors. And so you'll be able to get a pretty clear view of how this thing ends up, and that'll be that. But so far, the team, Brad, Mike Reske, Kelly King and the whole team at HealthEquity as well as at BenefitWallet, the conduit team there have done a great job of moving this thing forward. And we're really excited about the fact that we now begin to welcome members as we've begun to do in the last couple of weeks as each of these tranches is getting 10-K or 8-K I should say.

The next question comes from Sean Dodge with RBC Capital Markets.

Maybe just coming at the pricing service fee question in a little bit different ways. If we look at revenue per customer, on one of the last calls, Jon, you talked about customer fields, so fields being fees plus yields. As yields have increased, how much pushback or skin, I guess, have you had to give up on the fee side? Maybe kind of catalyze more by higher yields and not necessarily from any change in the competitive landscape. Is there been, I guess, has there been a meaningful shift there? And then over the longer run, should we think about average revenue performance customer outside of cross being pretty stable, where lower fees offset higher yields? Or do you think there's some kind of net gain where higher yields you don't necessarily have to give all the back end in fees or lower fees?

What your question suggests, Sean, is and it is an important observation that there is some, I'm an economist, so I'll say it this way. There is some cross elasticity between what's happening with yields and in particular what's happening with the spot market and pricing pressure. That's a natural thing, and it makes a lot of sense from the perspective, particularly of larger customers. But I actually think when you look at it, I've been somewhat underwhelmed, I'll say, by the extent to which there has been that kind of competitive pricing pressure. I think the bigger issue is that, is two issues. One is that and as it relates to this year and one is more generally is that is the pace of, for lack of a better term, mix shift as Jim put it earlier. And that mix shift being towards HSA, which in terms of total revenue per customer is awesome or total margin per customer, however you want to think about it is awesome per account. But if I focus solely on service revenues, it's a little bit of a downer, because HSAs tend to have the lowest monthly fees and then there are a few other things. Now you've got the fees from investments in there. But they're going to be lower service fees, whereas conversely, for example, the highest service fee per account product is commuter. Fantastic. And as well as COBRA. But I don't think anyone would say that COBRA is a big margin maker. And it's because you don't have a bunch of other revenue sources there. And so, I think that's really the biggest factor. And so as you model this, I mean, there should be some correlation between the pace of relative growth of HSA versus the rest of our business in terms of accounts. And the pressure that you might see on these for lack of a better term, unit services. Second point is that I think now for more unique to this year is that as we reported, we did very very well with relative to our expectations this year with our new logo business and particularly with our enterprise. And of course, enterprise, where you get new logos is where you're going to be most competitive, particularly when those logos are coming with existing assets. And so the fact that we did well on assets is in part reflected, the sort of other side of that coin is that you're going to be more competitive on your HSA fees for that business. So, that's a thing that that's worth considering in particular for this year, but it doesn't move the needle that much. I don't I don't know. I mean expressed on an account, service fee for total account basis, maybe it's moved the needle a half percent. I don't know. And then the last point I'd make is a little bit into our strategic planning horizon. So thinking about beyond fiscal 2025, it is very much our goal or a goal of ours to grow the non-custodial line. Remember, we think about service revenue as inclusive of interchange. And the reason we break out interchange from the rest of service revenue is just that it's big. It's material. But if you look at that line as a whole, or for that matter, exclude interchange if you want to, right? Our goal is very much to see that line grow. And the way that's going to happen is several fold. The first is, as we talked about it at the investor day, it's going to be about the growth of incremental services as we talked about, both new and then turning that CDB growth from, okay. Now we've got it to the place where notwithstanding the national emergency type stuff. It's a black maybe it's a one. I don't know. It's black at least a black zero, but it's not a crooked number. That will be helpful. But also incremental services around data analytics and the like that we talked about at Investor Day. So over time, we do want this thing to grow. We're never going to shy away from the fact that the custodial businesses, the component of revenue is and should be a growth engine for the business, particularly if balances continue to grow. And that we're able, we've been able to and I think we're going to continue to be able to make it both more productive and less cyclical. But it's not like we're forgetting about the service revenue. We're going to try and grow this over time.

The next question is from Allen Lutz with Bank of America.

I guess for Jon or Jim here. The technology and development spend has increased pretty dramatically over the past two years. But if you look at this past quarter, it was flat year-over-year. And at Investor Day, you talked about a lot of the investments you're making in digital CDB parts, cost transparency, cybersecurity. So I guess as we think about this fourth quarter number here and you think about what's embedded in the fiscal 2025 guidance, do you expect the technology development spend to be more flattish or is that kind of continue to grow trajectory has over the past 24 months?

Fire away.

Sure. I can take that. So no, you should definitely not assume that the tech and dev spend is going to be flat. I think what we've talked about in the past and Jon has talked about before my time here is that we were reaching the peak last fiscal year of the spending as a percentage of revenue. So we're a little above 22%, kind of 22%-ish now. So we should start seeing more efficiency. But no, we're going to continue to invest in the business. So the idea is efficiency at the margin level, not trying to flatten the raw dollars of tech and dev spend.

MJ, do we have another question?

Maybe we lost MJ. Did that happen? Without MJ, we got nothing.

Yes. I can't bring up the questions. MJ has to do that.

Something funny is going on. This call is very adventurous so far, everybody. There's a lot of someone's transcribing me saying this right now, aren't they?

The next question comes from Stephanie Davis with Barclays.

Maybe MJ didn't put me on because she knows how sick you guys are of answering all my questions. I think, I talked to you every week.

You got us to Miami, my hometown. Stephanie got us to within, like, literally my hometown of well, I guess, in my case, Miami Beach, which is where we were. So that was we were 50 blocks or something from where I was born. Can't do better than that.

Well, congrats on the quarter. But Florida man, Jon Kessler, I have a question. When I think about your recent investor day versus the last investor day you've had. There was way less CDB talk. And I'm looking at your CDB line, and we're actually seeing account growth again this year. So I love a little bit of a look back on how that industrial logic of marrying HSAs and CDBs played out. And if we think about the future, do you think we get to the same level of accounts we saw during the wage transaction, or where does this line go?

I really appreciate that question, actually. I mean, I can't get them all, but this one yes. I do. Because you noticed something that as we kind of looked at investor day and things like sometimes things just happen as you go through it and you don't quite notice them, and this is one of them. And, so here's my thought. First, the core logic was not we are going to like, we have leg 1, and now we're going to have leg 2. That sort of thing. It was that acquiring the CDB business at scale gave us the opportunity to grow our HSA business in two ways. One, by playing on more fields and two, by, that we weren't able to play on before and two, of course, by giving us clients to cross-sell to. All evidence is that that happened. And the easiest way to see that is that when you look at HSA at either gross HSA openings or net adds, whatever you want to look at, right, when you look at our sales numbers. Notwithstanding the fact that the HSA market is still growing by the same amount year-over-year instead of capturing roughly 20% of that growth as we were pre-wage. Right now we're capturing, and we'll see. I noticed that Devenir put out there. We're going to have our market announcement, like, 5 minutes before this earnings call. So, I'm guessing maybe they listened to the earnings call and they used some of this information and then in a couple of weeks, they have their thing. But they're wonderful people, and I shouldn't tease them that way. But let's say, from an account perspective, we're capturing a third of the market and maybe in the aggregate 30%. And so it works. That having been said, I think, what I would have did say at the time of transaction having at least some amount of expertise in that business was that the CDB business itself was extraordinarily steady. And it turned out it wasn't. And it wasn't primarily as a result of and I don't want to be cheeky about it. I mean, it's primarily as a result of pandemic. And even at the outset of the pandemic, as you'll recall, we didn't anticipate the level of unsteadiness of that business. And so, obviously, there's a commuter component that people talk about. But in addition to that, there's the fact that the dependent care, which is part of the FSA piece, when you know, kind of disappeared for a while and is still well below its prior levels. And then, thanks to some of the recovery legislation, we got this sort of brief blip in COBRA that then went away. And then, in addition to that, we've got the fact that the ACA marketplaces are subsidized and that subsidy appears like it's going to continue. And so actual COBRA uptake relative to which is a portion of COBRA revenues kind of came down. And so like that's a lot of movement that we were not anticipating having to deal with. And so as we look at it going forward, what we want to be doing, as I said in earlier answers, we want to be growing the CDB business. We want to be taking market share. And since the business as a whole is, I'm going to put commuter aside, whatever. Let's assume it's kind of where it is. But broadly speaking, it's only going to grow at the rate of workforce, which is like what percent. When we want to be growing at a crooked number, that means we're taking market share, right? And I think we're well positioned to do that. We have more scale than anyone else. We're actually investing in the product, because as a result of all of our investments, two examples being, we have and these are not future examples. They already happen. We are rolling out, we're in the mixed of rolling out what have been through, our chip cards and, like, people say, chip card, what's the big deal? Well, let's, so far, no one else has done something where we have a staff card that is also a chip card that will actually also be available on mobile wallet. What does that mean? It means that you can have two or three of our products on the same card, and there doesn't even have to be a card, right? Now it's also not easy, because it turns out that unlike regular chip cards, there's not as much standardization as the Mastercard and Visa people think there is out there in the retail world, and so there's some bumpiness there. But it's a great product. Second example is through the use of AI. We've got to a place where you can take, as you saw at investor day, take a picture of a receipt from Publics. You can have whatever on there. We can tell you what it is, and we can approve it right then. And that's the biggest pain point with the largest of the CDB products, which is the FSA. So, I think it's reasonable to believe that we can get to a place where we're at single-digit growth in that product. And so that's the plan. We'll also look, Stephanie, we will continue to look carefully at, what do we need to own, what do we not need to own. But it's always going to be in the context, at least as far as I'm concerned. It's going to be in the context of strengthening our core business. Everything we talked about at Investor Day in terms of new product, the health payment account product we talked about, which is a form of smoothing deductible costs for people who don't who do, but also don't have the benefits of HSAs. It's always going to be in service of two things. One is our core product, which is our custodial accounts, and the second is the mission of helping people, helping empower consumers and in doing so and saving really saving and improving lives when we listen to what people say. So that being the case, that's how we, that's kind of the framework through which we look at it, and think that's a reasonable view of what you should be expecting from us over time. I would very much have expected to and like to have gotten to that place quicker than we have. It's easy for me to blame the pandemic, but we have some responsibility for that too, including myself.

It kind of shows it's more, it's not that you're not focusing on. It's just that's not an area of innovation as much, which is more kind of the focus for moving forward.

What I think is, if you look at for us. Let me say it this way. A piece of in order to achieve the three-year target that we laid out, this is one of the things that in all likelihood we're going to achieve. That is to say, to go back to I think it was Alan's question. I could be wrong. If I am, I apologize. But regarding service revenue, one of the things we're going to have to achieve to get there is we're going to have to grow that service revenue. We can grow service revenue by innovating new products and innovating and by growing our CDB space. And we can innovate within the CDB space somewhere. And given that, again, I don't think the hurdle is, like, super high, but I do think it's probably fair that it's also true that at the margin, these are not as profitable products. So, is it always going to be the first thing on a priority list? No. That's it.

Thanks sneaking one for Jim? Or is this, I mean, that was a long answer. I'm also happy to give it to you.

Go for it.

Let me annoy you with this one. So you've given us a ton of clarity on our custodial revenue. So if I look at the incremental EBITDA dollars in your guidance compared to your incremental custodial profit, there's a pretty big delta in that, even compared to prior years, which doesn't really square with this whole shifting of R&D dollars as opposed to adding new headcount. So is there anything beyond conservatism to call out there about why there would be maybe a lower conversion rate?

So maybe a little more clarity because I didn't give you guidance on custodial profit dollars.

But you have given us clarity on the custodial AUM, how it trends. You've given us clarity on what's graduating and you've also stock exchange. I think the one factor that it's important to consider in this whole discussion is the other element of custodial, which is the CHF. In CHF world, custodial revenue from CHF is going to decline this year. Because if depending on what one believes, but for the forward, SOFR curves, so kind of plain old forward curve that CNBC talks about all day. We're going to have lower short rates later in the year. And that hasn't occurred yet, obviously, but that's reflected in our guide and so forth. So that's the one area in which that short cash area is the one area where you'll see sensitivity. I think that's, I'm guessing that is the biggest source of the variance that you're describing.

The next question comes from David Larsen with BTIG.

Can you talk a little bit about your care coordination software solution? I think it's really interesting how you can compare prices at different providers, hospitals for different procedures that ties in perfectly with like the needs of high deductible account members might have. I think it ties in great with what health plans are trying to accomplish. How many plans is that deployed to? How many plans is that deployed to, please? And just any thoughts on the uptake rate of it and the impact it can have on total cost trend?

So let me say first and we tried to make this distinction at Investor Day. This item is still in beta. So it's the deployment today is very limited. And I would describe it more as a feature in my mind than a product. And the reason I say this is that is as follows. There are people who've tried to build businesses out of this as you well know. And for the most part, they have failed. And certainly in the public markets, they have not done well. And the way we've approached it is the view that you can get 80% of the benefit with 20% of the stuff now that you have the benefits of ML for the business logic and generative AI for the UI to some extent. And so that's what we're really trying to do, and we're going to try and do this across multiple applications. And we're not, I don't really think of it as a unique threat to the businesses that are in that space. They're going to face that threat one way or the other. And so our approach is to partner. So this, for example, this solution is, as we said at Investor Day, is it's not, it's us being able to access some of that logic, through APIs and the like and then also access some of the ML and AI services to kind of make it as good as we can. So I guess I'll just say, one, this is something that's in beta. Two, I would look at it as principally as a source of support for competitive differentiation versus it's going to be in the near-term it's own revenue line. We will, I think, ultimately have some kind of a broad analytics and services business that we'll talk about more. We began to talk about it at Investor Day, but it's early for that. And so I think the way I'd look at it is exactly as you said, which is I think it's good strong feature, and it's an ability to deliver something that people want in a way that's easier for them to consume and that's ultimately less expensive than it's been delivered in the past, which would mean it's going to be made more available. The last part of your question, David, about sort of the impact on broader healthcare trend, here's my view. Again, I will say as someone who's been part of and observed the battles about all of the massive, all the ways that people have that are supposedly going to bend trend, which for the most part haven't done much over the years. Here's an interesting fact. When you, if you look at healthcare as a percentage of U.S. GDP, in 2010, it was 17.2%, and the projection was that by now, it would be '24. It's still 17. Right? Nobody talks about that, but it's true. What happened? What changed? It's not I mean, the Affordable Care Act did a bunch of good things in my view, but it did not do much to bend the cost curve. That was not the objective. It enhanced access. The biggest change that's occurred over that period of time has been two things. One is, the incremental involvement of consumers in healthcare and the second is the reduction in cost of many of the everyday type pharmaceuticals and procedures that we do, in part because consumers are involved, in part because of the push towards generics and the like, even if obviously there are certain drugs that are extensive. And so the way I look at it is, it's not that any of these tools per se bends the trend. It's that they all make the involvement of consumers more effective. And that in the whole is what has a positive effect on the trend among other things. And so that's the way we look at it. And when I look at our clients who have been most effective and tried the hardest to utilize tools effectively over the course of not 1 year or 2 years, but 5 years or 10 years or in the case of I think about one client that we've had now for 17 years. It's not like special, and it doesn't have only a young population and all that kind of stuff. It's not a high-tech type situation. They've been successful at holding healthcare inflation through CPI and not just when CPI was 6%, right? Or 8.4 or whatever it was in last year. And so, you can do this. And it's not going to be the magic that that heals all of healthcare, but it's absolutely part of the toolbox. And our job is to, we didn't create this tool, but we can sharpen it. And in doing so, we sharpen every other tool, whether that tool is wellness program, transparency type stuff, telemedicine, whatever it may be, generics. What we do sharpens every one of those tools, and that's how we help bend the trend, which ultimately makes healthcare more affordable and by helping people understand it, makes them better uses of it.

Thanks, David.

I feel like Richard's getting really mad at me now. He's getting mad. He's like, I've got answers way too long.

The next question comes from Mark Marcon with Baird.

Just relative to BenefitWallet, any updates that you can provide there just in terms of the way of what you expect Conduent had a call? Is there any reason why you shouldn't be able to achieve the same level of profitability or the same interest rates on the funds that they've achieved? Is there anything structurally different? Or is there any portion of the BenefitWallet portfolio that isn't coming over to you?

So I think I can give a short answer to this one. To the last part of your question, yes, the answer is well, there are two parts. One is the non-HSA component of the business so that they have some FSAs and the like, and they are not part of this transaction, and they will continue to be managed by Conduent's broader human resources outsourcing business. And then secondly, of course, as in all transactions, there will be some attrition both in the midst of the transaction and some that might occur shortly thereafter. But that will try to account for that and we certainly have tried to account for it in our thinking. As to the first part of your question, I do think it's important to note, and I have to admit I have not looked at the transcript of Conduent's call, but I know that the executive team there is very entertaining. So I'm guessing it was more fun than ours. But I would note that like many of our competitors, the way that Conduent or let me say this without generics. Many of our competitors, the way that they their strategy for deployment of funds is that they are deployed in banks, and importantly, they are deployed at short rates. So that means much more variability. And so if you look at fiscal, let's say or I would say calendar 2023, like that was an awesome strategy in calendar '23. And it continues to be an awesome strategy until it isn't. It would have been a very, very difficult strategy in, let's say, calendar '20. So as you know, we deploy on a ladder, and we've taken a number of steps to kind of make sure that's as smooth as possible. So that will be different. I would not I don't know what Conduent said off the top of my head with regard to this, but you should think about us as deploying these assets in accordance with the ladder and process that Jim has described at Nazi.

The next question comes from Jack Wallace with Guggenheim.

I'll keep this quick. Jim, I think this one's going to be directed at you. Just wanted to get a high-level puts and takes net of any of the reclassifications of what to be about a 50 basis point lift of the EBITDA guide for the year. Just wondering if that's mostly some of the benefits from the technology investments that Jon mentioned earlier or if there's anything else we should be thinking about?

Yes. No, nothing huge, right? What we're trying to do is roll in the being a little bit ahead on sales, a little bit ahead on accounts and trying to factor in the comment that I made during the discussion about when markets are good, you see a little bit of shift towards investment from cash, and just small adjustments down the cost line. So yes, 50 basis points, I want to call within the rounding error there, but just providing you a little more precision and with more perfect information here.

This concludes our question-and-answer session. I'd like to turn the call back over to Jon Kessler for closing remarks.

An hour and five minutes. Not bad. Thanks everyone for joining us. We will be releasing our 10-K shortly, working hard to get that done for you, recognizing that there are some changes this year, and I'm sure it will be a real page-turner. So thanks all very much.

Thank you all.

The conference has now concluded. Thank you for your participation. You may now disconnect your lines and have a nice day.