Healthequity, Inc. Q1 FY2025 Earnings Call

Thank you, Gary. Very fine job. Hello, everyone, and welcome to HealthEquity's first quarter of fiscal year 2025 earnings conference call. My name is Richard Putnam. I do Investor Relations for HealthEquity. Joining me today is Jon Kessler, President and CEO; Dr. Steve Neeleman, Vice Chair and Founder of the company; and James Lucania, Executive Vice President and CFO. Before I turn the call over to Jon, I have a couple of reminders, as we usually do. First, a press release announcing the financial results for our first quarter of fiscal 2025 was issued after the market closed this afternoon. These financial results included the contributions from our wholly-owned subsidiaries and accounts they administer. The press release includes definitions of certain non-GAAP financial measures that we will reference today. You can find on our Investor Relations website a copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures, and the recording of this webcast; that website is ir.healthequity.com. Second, our comments and responses to your questions today reflect management's view as of today, June 3, 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 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 the latest annual report on Form 10-K, 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 for future events. With that out of the way, it's over to Jon Kessler.

Hi, everybody, and thank you for joining us for this healthy start to fiscal 2025. That was Richard Putnam, and you may not want to quit your day job. I will discuss Q1 key metrics and progress against our strategy. Jim will touch on Q1 results and detail our raised guidance for fiscal '25, and Steve is here for today. So, here we go. Wow! In Q1, the team delivered again, double-digit year-over-year growth across nearly all of HealthEquity's key metrics, including revenue, which was plus 18%; adjusted EBITDA, which was plus 36%, that's two times as much; and HSA Assets, which were plus 22%. HSA members grew 13% from strong HSA sales and BenefitWallet, each of which I will detail in a moment. Strong HSA growth drove total accounts up 7%. HealthEquity ended Q1 with 16 million total accounts, including 9 million HSAs, holding $27 billion in HSA Assets. HSA Assets overall increased $2.1 billion in the quarter, including $0.4 billion of organic growth. 20% more of our HSA members became investors year-over-year, helping to drive invested assets up 39%. And by the way, this quarter our HSA investors gained access to $0 brokerage trading of individual stocks and ETFs. Returning to HSA growth, Team Purple started the selling year off with 194,000 new HSAs, a record for a first quarter and 60,000 or 45% more than Q1 last year. So, what happened? First, accounts from existing clients and partners grew very nicely, even more so than during the banner macro-driven Q1 two years ago. In particular, we got a boost from the Blues health plan partners that joined HealthEquity from further a little more than two years ago and are now more accustomed to working with us. Second, accounts from new logos, that's in quotes, mostly small and mid-sized employers at this time of year, continued the positive trend that we saw over the course of fiscal '24. Beyond the organic HSAs, the team transitioned two of the three tranches of BenefitWallet in Q1, adding approximately 400,000 HSAs and $1.6 billion of HSA Assets. The final BenefitWallet transfer occurred last month at the beginning of Q2. And by completing the largest HSA portfolio transfer we've seen, HealthEquity's small but effective core dev team has improved our visibility for fiscal year '25 results, created opportunities for CDB cross sales, which includes our new Enroll360 name for MaxEnroll, deployments into fiscal '26, and established a foundation to enhance custodial yield for years to come. CDB accounts decreased by 1% compared to the first quarter of last year, following the end of the national emergency in May and account run-off later last year. Excluding this factor, we again achieved positive CDB growth year-over-year. The key metrics support our long-term strategy, which we refer to as 3Ds. The first is delivering an outstanding experience by virtualizing our service and digitizing paper and plastic on our cloud-based health accounts platform to lower service costs while ensuring member satisfaction. In Q1, service costs as a percentage of revenue dropped by 400 basis points year-over-year. We launched additional AI-driven service technology and expanded claims automation for FSA members, as presented at Investor Day. We also introduced HealthEquity's stacked account card for mobile wallets on iOS and Android to select enterprise clients. The second D is strengthening partnerships across the ecosystem to increase sales without compromising margins. Alongside our ongoing development of the technology backbone of APIs, we added insurers and capacity in the Enhanced Rates program, accommodating higher than expected adoption, with over 85% of new BenefitWallet members' HSA cash in Enhanced Rates. The third D is enhancing member outcomes through new data-driven services that provide clients and partners with insights and engage members to take action. In Q1, we received valuable feedback from clients and partners who participated in live sessions on our analyzer, transparency, health payment account, and other new services in development. All of this contributes to a quarter of investment for the future while maintaining strong top-line margin and cash flow from operations growth in the present, which Jim will now elaborate on.

John. I will briefly highlight our first 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 our fiscal year 2024 10-K, both for fiscal year '24 and '25 for comparison. First quarter revenue increased 18% year-over-year. Service revenue was $118.2 million, up 6% year-over-year, reflecting a higher number of HSAs and invested HSA Assets, partially offset by the runoff of National Emergency CDB activity. Service revenue also benefited from a $2.5 million catch-up accrual of investment record-keeping fees in the quarter that will not be repeated in subsequent quarters. Custodial revenue grew 37% to $121.6 million in the first quarter. The annualized interest rate yield on HSA cash was 2.93% for the quarter. Interchange revenue grew 6% to $47.7 million. Gross profit as a percent of revenue was 65% in the first quarter this year, up from 61% in the first quarter last year. Net income for the first quarter was $28.8 million or $0.33 per share on a GAAP EPS basis. Our non-GAAP net income was $70.3 million or $0.80 per share versus $0.50 per share last year. GAAP results reflect the impact of a difference in the timing of stock compensation expense from performance stock units granted during the quarter compared to those granted in prior years. Adjusted EBITDA for the quarter was $117.4 million, up 36% compared to Q1 last year. And adjusted EBITDA as a percentage of revenue was 41%, a 540 basis point improvement over the same quarter last year. Turning to the balance sheet. As of the quarter-end April 30, 2024, cash on hand was $251 million, as we generated $65 million of cash flow from operations and used $199 million of cash for the first two BenefitWallet closings in the quarter. The company had $926 million of debt outstanding, net of issuance costs, including $50 million drawn on our line of credit in connection with the BenefitWallet HSA portfolio acquisition. The third and final BenefitWallet tranche was funded with an additional $175 million draw on the line of credit subsequent to the quarter-end. Today's fiscal 2025 guidance reflects the carry forward of our strong sales trajectory, higher expected custodial revenue, and operational efficiencies resulting from our technology investments. We expect revenue in a range between $1.16 billion and $1.18 billion. GAAP net income in a range of $90 million to $105 million, or $1.01 to $1.18 per share. We expect non-GAAP net income to be between $261 million and $276 million, or $2.93 and $3.10 per share based upon an estimated 89 million shares outstanding for the year. Finally, we expect adjusted EBITDA to be between $454 million and $474 million. With the placement of the BenefitWallet HSA cash complete, we're raising our guidance for an average yield on HSA cash between 3% and 3.05% for fiscal 2025. As a reminder, we base custodial yield assumptions embedded in guidance on projected HSA cash deployments and rollovers, a schedule of which is contained in today's release and 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. Our guidance also includes the expected impact of our now completed BenefitWallet HSA portfolio acquisition on the remainder of the fiscal year, including higher revenue and earnings along with higher net interest expense due to an increase in the amount of variable rate debt outstanding and drawdown of corporate cash to fund the acquisition. We expect to pay this variable rate debt down with cash from operations over the next several quarters. 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 now project a GAAP tax rate for fiscal 2025 at about 25% as well. As we've done in previous 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 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.

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

Hi, thanks for taking my question. Hey, Jon, I have a high-level question. Based on the feedback we're getting, all the metrics that you reported were obviously up and that contributed to the top-line and EBITDA beat. But some would push back and make the case that maybe the better results are more acquisition-driven or more rates-oriented. And so, I guess the question to you is what's the message to investors that may be concerned about the level of organic growth and may be concerned that rates are coming down in the near to intermediate terms? Just would love to get your high-level take on how you think about the organic growth and the risk that rates come down later this year. Thanks.

Wait, how do they get at it so quickly, Glen? Who are these people?

I can probably tell you, but I won't.

I'll bet. I wonder if they might have a reading interest. Let's see. First, you can't please everyone. Second, we included the BenefitWallet transaction in our previous guidance. We can discuss whether others need to delve into the details of our thoughts versus expectations. However, we guided at the end of March, and by then, we had already completed the first tranche, with the second tranche on April 9. So, it's difficult to argue that we arrived at a different outcome than we anticipated. Regarding the broader question of our performance's rate sensitivity, the correct approach is to consider the long-term custodial benefit from a growing collection of accounts and assets. The evidence suggests that this number is significantly higher than previously expected. As Jim has mentioned numerous times, according to our schedules, regardless of current economic forecasts, within any forecast, we will see that over the next two to three years, we have not yet reached what could be considered the current non-cyclical rate, let alone the peak rate, which typically lags behind market peaks. Therefore, I would describe this situation as a need for investors and others to fully understand how this model operates now and how we've developed it over the past several years. That's my response. Jim, would you like to add anything?

Yeah. No, I wouldn't add anything to that, right? Like we keep updating that repricing table, which is in this Q, right? So, just as Jon said, right, we're repricing placements in the mid-1% range for the next couple of fiscal years after this one is over. And based where we've guided to where we think we'll be in basic Enhanced Rate mix, you can impute the spread we're earning over treasury. So, as Jon said, yeah, we're still a ways away from neutral, at least in current reasonable ranges of bounds of what neutral might be.

All right. Well, congrats. Thanks for the thoughts. Much appreciated.

Thanks, Glen.

Thank you. See you tomorrow.

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

Hey, good afternoon, and thanks for taking the questions. I think if we back out BenefitWallet tranches, you grew accounts 8.1% in the quarter, if we back out those two tranches. Can you kind of talk about how quickly the market is growing as we kind of turn the calendar to 2024? And then, any changes that you're seeing this year versus last? Thanks.

If you're going to do that calculation, you also need to exclude accounts that were part of those tranches but that we de-duped, or however you want to phrase it. So, the number is a bit higher than that. Looking at the market overall, Devenir's last estimate indicates that the market on the account side is growing around 6% to 8%, so we're clearly doing a bit better than that. I would invite Steve to comment on this, but one thing we're noticing in the early part of the sales season is a lot of energy around the accounts that we're acquiring from new small groups, particularly from our health plans. Steve, maybe you can share some insights on what you think is driving this.

Sure. Thank you for the question, Allen. We continually assess the potential market with these health plans, and it's striking to see that we have not deeply penetrated their core base. The bottom line is that there are significant opportunities with them. This situation stems partly from companies that have not fully adopted health savings accounts, which we have offered over the years as an option. Typically, finance departments see the tax benefits right away, but it takes longer for the wider audience to realize that every dollar contributed to an HSA translates to around 35% to 40% more spending power compared to paying from a regular savings account. We continue to see steady progress. When you consider medical inflation alongside this factor, the impact becomes even clearer; as inflation diminishes each dollar spent, the tax benefits can effectively restore multiple dollars in purchasing power. The market adoption rates can vary between 30% and 35% or more, depending on different studies, which indicates that we still have considerable room for growth. Most of the health plans we've partnered with have been with us for only a few years, particularly following the Further deal, and our team, which has been fantastic, has been working diligently with them. We have amazing opportunities ahead. The key is to persist in our daily efforts to engage brokers, consultants, health plan sales representatives, and account executives to present our solutions. By partnering with HealthEquity, they can not only secure more business but also improve retention. We recently held a successful client summit with many of our Blues plans attending, and we have ongoing meetings with our non-Blues plans throughout the year. There is tremendous potential for collaboration, and it is exciting to see how much opportunity remains when working with these plans and the employers seeking affordable coverage with great tax advantages.

Great. Thanks, Steve.

Thanks, Steve.

The next question is from Greg Peters with Raymond James. Please go ahead.

Good afternoon, everyone.

Hi. Hey, Greg.

I'll focus my only question on your adjusted EBITDA margin improvement, which was at least ahead of our estimates. And I guess what I'm curious about, given the updated guidance, is there any sort of seasonality that will flow through the margins as we think about the remaining three quarters? Because the first quarter was quite strong.

Yes, for sure, right. So I think you know that the normal seasonal trends of the interchange line, of course, obviously strong to start off the year. We, obviously, had that true-up that I mentioned in the service revenue line that's not going to occur. I think what you're seeing is great progress on costs, but a bit of that especially in that second dev line. We'd like to be moving faster on a few things, got some open roles, so you'll see that line normalize throughout the year. So, you are seeing a bit of a high number versus what we call a normalized Q1.

Got it. Thanks.

I think we've mentioned that there's an accounting item totaling $2.5 million. When considering revenue around $1 billion, the math becomes straightforward. This does have an impact. We're guiding to a midpoint of approximately 40%, and we achieved 41%. I anticipate that our usual seasonal pattern will show a significant decline in the fourth quarter, but we also aim to stabilize our expense fluctuations through technology improvements, and we may make some progress on that front this year, presenting potential upsides.

Thank you.

Greg got two answers with one question.

Yeah, that was two with one question. Well done.

Got it, guys. Have a good afternoon.

Missed you at Shake Shack last night, Greg.

Yes.

I visited in your honor.

Thanks, Greg.

The next question is from George Hill with Deutsche Bank. Please go ahead.

Yeah. Good afternoon, guys, and thanks for taking the question. I guess, first is, you guys had a goal to get to 80% of dollars from the BenefitWallet acquisition into the Enhanced Rates product. And I guess I just wanted to ask about your progress on that. And then, I have a quick follow-up.

Sure. Do we have a follow-up? If so, let's turn it back to Greg for that.

I'm taking Greg's follow-up.

We ended up achieving around 85% with BenefitWallet compared to our target of 80%, which is beneficial. It may not seem significant, just 5% or 60 basis points, but it's still helpful. As we mentioned, this success can be attributed to two factors. First, our efforts to clarify the program, and second, the strength of our partners. It reminds me of our early experiences with banks, where the key was to avoid dependence on a single partner and instead maintain a diverse portfolio that allows for a robust market. Credit is due to the team, whose contributions we don't publicly acknowledge to protect them from recruiters, but they know their importance in communicating the program effectively.

Thank you, Jon. I have a quick follow-up regarding the utilization trend we are monitoring in healthcare. Did the BenefitWallet acquisition significantly affect interchange revenue? I am trying to understand organic interchange growth. Essentially, are you observing an increase in utilization within your HSA business, where people are purchasing more, which should reflect in the interchange revenue? It seems like this quarter's figures might have been influenced by the acquisition. Thank you.

Yes. The short answer is that when addressing your question, we are not seeing a significant impact from GLP-1s or any other factor on HSA spending. In fact, if you examine the details, HSA spending this quarter was slightly lower than we anticipated, while FSA/HRA spending was higher, even accounting for seasonal trends and run-outs that contributed to increased spending this quarter. This question comes up frequently, and while Richard often gets asked about it, we just don't have conclusive evidence of a trend.

I'm not taking...

In all seriousness, I don't see it. Regarding the first part of the question about BenefitWallet, I think the answer is somewhat affected. There was a time when people didn't have access to their accounts, which might explain why HSA underperformed slightly. If the question is whether this quarter provides any support for that thesis, I can't find any evidence to disprove it.

The next question is from Stan Berenshteyn with Wells Fargo Securities. Please go ahead.

Hi. Thanks for answering my questions. Regarding digital wallets, Jon, during the Investor Day, you and your team discussed the capabilities in detail. Could you share whether the rollout of the digital wallet has had any impact on member adoption and reception, and if it has assisted in driving client conversions? Thank you.

Client conversions have been beneficial. It's still early for the digital wallet. Specifically, we're working on a couple of things simultaneously. First, we're consolidating various processor agreements into one, which affects our 16 million cardholders as a card conversion. Our card conversions are a bit complex. Second, we've implemented chip technology, which, while typical in traditional banking, is a bigger deal for us due to lack of standard procedures at the merchant level, especially in pharmacies. We previously noted this challenge, and we've managed to address it successfully. Lastly, we're integrating everything, including the stacked card, into mobile. Ultimately, this will assist us in two ways. Primarily, it serves as an innovation that generates discussion during new client sales and FSA conversions, particularly when we stack those on top of HSA clients. While we don't report FSA sales figures, I can say that we're performing well in that pipeline this year. We don't provide information on our pipeline. However, I believe this will help in two main ways. First, the expenses related to open enrollment are largely driven by the need to produce and distribute cards. I want to emphasize that we will continue to handle this process this year and are not pressuring anyone to switch to mobile wallet. Eventually, mobile wallet will become the default option. At that time, what is currently our busy season will transition to a busy week, which will be much easier to manage.

Got it. Very helpful. Maybe just a quick follow-up. So obviously, you're talking about digital wallet, lots of flexibility, usability there that's opening up on the mobile side. I'm just curious, does this allow you to expand maybe into lifestyle spending accounts? And is this something that you have considered? Thank you.

We have a lifestyle product available that performs adequately. It's probably fair to say there's more discussion than substance regarding lifestyle accounts. However, we do have that product, and it's compatible with the wallet. There are users who prefer not to use a card for various reasons. To summarize, while we acknowledge the existence of lifestyle accounts, our primary focus is on empowering consumers with healthcare. There is some overlap between lifestyle and healthcare, but expanding the lifestyle spending account category is not a major priority for us as it doesn't significantly impact our overall goals. We believe there is potential there, but it’s not substantial enough to make a significant difference.

Thanks, Dan.

The next question is from David Larsen with BTIG. Please go ahead.

Hey, congratulations on a great quarter. Can you talk a little bit about your take rate or your yield sort of by investment category? And if you don't want to get too specific, I totally understand that. But like you have cash, you have Enhanced Rates, and then you have what I think of as like your legacy sort of investment accounts. And I sort of thought that your yield was lower on invested assets. So, as more money goes into the Enhanced Rates products, could that potentially pressure your yield or not? And your yield seems fine, but just any color there would be very helpful. Thank you.

I’ll break that down. Firstly, we no longer have custodial revenue from investments, which was a significant change. The custodial line now reflects the combination of the HSA cash yield on Enhanced Rates and basic rates. Typically, we're seeing returns around five-year treasury rates plus approximately 75 basis points on Enhanced Rates and about ten basis points on basic rates. The return is based on the time of placement, creating a diverse mix. On the investment side, we’re earning about 30 basis points on our headline rate for invested assets, which averages out to approximately 28 basis points in the service revenue line. I don’t usually frame it the way you described. It’s not that our members will transfer all their cash into the investment account; rather, it's a cash account alongside a brokerage account. As our members save higher amounts, they transition into becoming investors. It's not just one option or the other. We are increasing the cash balance, which allows them to become investors. While we earn less on additional investment dollars, this approach is beneficial for the member at that stage. Long-term, I prefer being tied to the US markets in that investment role, as we assist members in growing their accounts, and ideally, they transition to managed account clients, allowing us to further support their growth. It's not a matter of either/or; as a member matures, they start to invest.

Okay, great. Thank you very much.

Thanks, David.

Thanks, David.

The next question is from Stephanie Davis with Barclays. Please go ahead.

Hey, everyone. Thank you for my question. Congratulations on the quarter. Jon, I need to ask about the mobile wallet feature. I really dislike carrying my HealthEquity card on the subway. Does this mean I don’t have to anymore and can just use my phone?

It works now.

It finally works? Apple Wallet? We're done?

Yes.

Okay.

And I will say, the thank you for that really belongs to New York MTA. It's easy to underestimate the complexity of what they're doing with this product, and we went through this whole thing where there was some non-standard programming in their system and yada, yada, yada, and MTA did a great job of getting their folks, their contractors, in gear in a way that I don't think we all normally expect from the New York City subway. But I do appreciate that and not just because I'm taking the subway back to my hotel.

Okay. So, let's put this framework in mind. You talked about chip cards in one of your early question answers. Chip cards ain't cheap issue.

That's right.

Are you going to find a way to have users opt out of a card overall so you can get rid of that cost from your whole expense algorithm? Or am I getting ahead of my skis?

The answer is yes. As I mentioned in the commentary, our ultimate aim is to address this challenging aspect of open enrollment. When I bring this up, I often get looks from my team that suggest they find it more difficult than it appears. However, we believe this approach is correct, especially considering the complexity of families. There may be one card for our member and another for a stepchild. Our perspective is that the idea of a physical card as a form of advertisement is becoming outdated, and that mobile will become the default option. This transition means that users will receive their cards sooner, and updating them will be more straightforward. Overall, this shift brings numerous benefits. That being said, Stephanie, while it is true that those chips are not free, we do get to amortize them over a couple of years. However, the bigger issue is the costs and the difficulties that members and clients experience during the process that occurs from early December to early January. This involves translating a member's open enrollment decision to the client's closure of open enrollment, along with the subsequent processing by their vendor, data transmission to us, card issuance, printing, packaging, and mailing during the Christmas season.

Get rid of it all.

We are looking to eliminate a non-scalable process. I believe this will help. You can observe this through the increase we typically see at the end of the year, particularly in the fourth quarter, and often in January, February, and the first quarter as we finish up. If we can smooth out that increase or reduce its fluctuations, it would be beneficial and give you a clearer understanding of the overall situation.

So that kind of leads into my follow-up. You're discussing these AI opportunities in your prepared remarks. I see a clear opportunity in card issuance and statement processes. What is your roadmap for cost savings that will enhance your margins beyond just the leverage you are achieving from rates?

So, this is a question I ask Jim a lot. Now he's had, like, six months, so now I can just throw things at him...

I'll tell you the same thing that I say to Jon: we're not going to break down the list. There's a long list.

You tell Jon that?

Yes, certainly, in terms of efficiency opportunities. The goal for both the finance team and the service delivery team is to reduce their unit cost of serving accounts each year. This can be measured in various ways, and you can calculate it yourself by examining our service costs, dividing them by our total accounts, and observing that trend. This is the same trend that our service leaders analyze every month to ensure they are making progress. We're discussing significant initiatives because we can save a lot by eliminating card printing, paper, envelopes, postage, and reissues due to address changes that members forget to update. However, we won't achieve all of this in a single quarter. It reflects our long-term goals for cost efficiency and our service team's focus on improving processes, which is rooted in traditional Lean Six Sigma principles of continuous improvement.

New tool, same height, same weight.

Exactly, yeah.

Thanks, Stephanie.

Hey, thank you, guys.

The next question is from Mark Marcon with Baird. Please go ahead.

Hey, good afternoon. I'll add my congratulations for the quarter.

Thank you.

Hey, I have some questions about the gross margin benefits. If we break it down into scale versus reducing unit costs, would it be accurate to say we're still in the early stages of reducing unit costs? My first question. For my follow-up, could you explain what happened with the interchange gross profit margin? The overall gross margins were great, but that particular one was a bit lower than last year. I’m trying to grasp the full picture.

Yeah. Maybe I'll start with that one.

That's a really good call out.

Yeah, very good call out. Yeah. So interchange, actually Jon sort of talked about that in the commentary. He mentioned that we're in the process of moving to both a new and a single card processor. And so, you're seeing a bit of we're operating on multiple card processors now and not just the service costs of multiple processors, but we have some development costs related to the interchange shift there that hits that line. So, that's what you're seeing. You're seeing a point...

And that will be done, and I think we've mentioned this before, the transition will be completed in August. So, you're going to see a little bit of that, and you'll notice something similar in the second quarter and the early part of the third quarter as we are essentially paying two processors at work.

Yeah.

And then...

I believe there's no defined start and end to our efforts on improving service costs. Continuous improvement means that there's never a moment where I can say, "Well done, you’re finished." We must always strive for greater efficiency. The sales and retention teams also have their roles to play in this. Growing accounts contributes to efficiency, not only by reducing costs but also by working in tandem with our initiatives. I can't quantify how much of our progress is due to growth versus our improvements, as we're focused on achieving both. This includes reducing call center volume through self-service and increasing automation, which complement each other.

I think Mark is driving to his conference tomorrow. So, we're going to see it. Are you driving from Wisconsin to New York? Are you on the Ohio Turnpike?

No. I'm in New York right now.

Okay.

I'm looking forward to seeing you tomorrow.

No, that is a non-denial. Like, that is just...

We'll see you tomorrow.

We'll see you tomorrow.

The next question is from Jack Wallace with Guggenheim. Please go ahead.

Hey, thanks team for taking my questions.

Hey, Wallace.

So, just wanted to circle back on the BenefitWallet transfer and just relative to your expectations coming into the quarter. Just how the account retention fared to the cash AUM of the retained accounts and then the time and cost of transfer? Again, just trying to get a feel for this. It looked like this was slightly better across most metrics, but you tell me. It sounds like this was done in a pretty efficient manner.

We provided guidance in March and have already implemented part of it. We're continuing this process in the coming days and have data available from the other side. If that's the forecast, it seems reasonable. One thing to keep in mind as we progress through the year is that we expect some incremental attrition. It's unclear how much this will impact assets, but we typically anticipate post-account attrition with larger transactions. However, I don’t expect this to resemble the WageWorks situation, which had more time elapsed after the transaction. This is more aligned with our usual portfolio acquisitions, which tend to reduce that risk. It’s something to consider, especially as we approach the December quarter and the January 31 quarter. In short, the aspect where the transaction performed better than we anticipated in our last guidance is the Enhanced Rates penetration. We initially expected about 80% but achieved 85%. That discrepancy can be calculated easily.

That's helpful. And then just to double click into the attrition, your comment there. By my math, we had about 49,000 accounts or so that didn't transfer over. Is it fair to just assume that that will hit the attrition line in the first quarter? Or is there, within that bucket, some to come in the second quarter?

Yeah, a good call out there. Yeah, from when we originally announced, right, that we crossed the benefit year, right? So that BenefitWallet had some attrition before we acquired it. But yeah, we sort of assume...

There were also accounts like that, yes.

Zero balance.

There are accounts with zero balance that we didn't consider because they date back a long time and lack any health claims data. Therefore, it wasn't necessary to include them. Those accounts are not really relevant to our discussion. In the quarter, there are about 40,000 accounts, correct?

Yeah.

The accounts that came over were BenefitWallet accounts, and they are included in the 400,000 that we closed. More than 50% of these cases already had a HealthEquity account on our side.

Yeah, for that member, yeah.

And so, we merged them. We don't charge in...

It's probably also a good place to mention one other thing here. You think I should, but you don't even know what it's going to be.

No.

I should probably mention that in this quarter, we are preparing for the next phase of the platform, which is called SAM. I'm not sure what SAM refers to; it could be something related to Lord of the Rings. Regardless, we are transitioning that business in collaboration with our health plans. Additionally, we've made some adjustments to that platform by removing certain accounts that, for various reasons, do not make sense to transfer at this time. This led to a slight increase in our churn rate, as we had to let go of a few more accounts than expected, which is understandable since they were original accounts.

Yeah, around 70,000 further zero balance accounts we closed.

Outside of that, it was a normal quarter.

Got it. Thank you. Appreciate it.

Thanks, Jack.

You got more than you bargained for on that one.

The next question is from Constantine Davides with JMP. Please go ahead.

Hi, thanks. Good afternoon. Good start to the year in terms of new HSA accounts. And just wondering if you could expand on your comments around a couple of the more recent Blues partners and how they're contributing a bit more this year, just a little more color on that. And then I think you also referenced some small and midsize momentum in terms of new accounts. I'm just wondering if the pipeline composition is a little more skewed to that part of the market this year. Thanks.

I'll address the second part and then invite Steve to share insights about our strategy and our commitment to the Blues. Regarding the pipeline question, we don’t typically guide on pipelines, except during the pandemic, and we prefer to discuss them in general terms. However, I can say that our current pipeline for sales for the rest of the year, when looking at both SMB and enterprise segments for new logos, is at or above where we were a year ago, and in fact, slightly ahead. This is specifically about new logos, which typically make up about a quarter of new accounts each year, with the remainder coming from growth in existing accounts. Steve, would you like to elaborate on our approach to the Blues and its relevance here?

Absolutely. Thanks, Constantine. In general, most of the Blues plans are non-profits, though there are some large for-profit Blue plans. Many of these organizations appreciate having a company like HealthEquity introduce a consumer platform that we describe as an integrated platform. This integration is important when someone opts for a higher deductible plan or any qualified plan that allows for our CDB suite of products, as it makes these options easier to navigate. The platform features integrated enrollment, claims, and investments among other solutions we have offered. It is essential for this process to be seamless, enabling them to compete with larger national plans that traditionally invest more in their solutions. Creating the infrastructure for this integrated experience requires time and building trust, especially when it comes to training sales teams on how to effectively market this offering and compete directly with more recognized carriers in the market. Historically, when the experience was not integrated, it didn't function effectively. Sometimes account managers chose to let things be, thinking if someone ended up with a HSA qualified plan at a local bank or a competitor, there would be less hassle. However, they have learned that by avoiding the introduction of an integrated partner like HealthEquity to reduce noise in the sales process, they actually place themselves at a strategic disadvantage. Our focus is on building partnerships with various Blues organizations across the country. Our presence spans from the East Coast to the West Coast, with strong representation in regions such as the Southeast, Mid-Atlantic, Sunbelt states, and a solid foundation in the Northeast, along with progress in the Northwest. There's no secret formula we've discovered; it's simply a continuation of our approach at HealthEquity over the last 20 years, ensuring the best integrated experience for clients while providing outstanding customer service around the clock. When we offer this to a Blues plan, like Blues Network for their employees, we do the same for non-Blues, vertically integrated plans. Once they personally experience our service, they are more inclined to promote it to their clients. It has taken some time to allocate resources effectively, especially following the WageWorks acquisition, which is approaching its fifth anniversary soon. We are gradually becoming more integrated on a single platform with these plans every day. Jon, do you have anything to add? I want to ensure I’m covering everything.

No, I don't think I could have made that point better.

Thanks, Constantine.

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

There are many people at HealthEquity, along with our partners and clients, who are working extremely hard right now. We are entering a time of year that used to be a bit slow, but those days are over. It’s incredibly busy, and in a very productive way. I am very confident that our long-term shareholders and analysts will recognize that. We also truly appreciate your support. It has been a while since I could sincerely express my thanks during this call, and I’m glad to do it now. That serves as a good way to conclude, at least for me.

Thank you, everyone.

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