Healthequity, Inc. Q3 FY2025 Earnings Call

Good afternoon, and welcome to the HealthEquity Third Quarter 2025 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Richard Putnam. Please go ahead. Thank you, Nick. Hello, everyone. Welcome to HealthEquity's third quarter of fiscal year 2025 earnings conference call. My name is Richard Putnam, Investor Relations for HealthEquity. And 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; Scott Cutler, recently appointed successor President and CEO beginning in January. Before I turn the call over to Jon, I have a couple of reminders. First, a press release announcing the financial results for our third quarter of fiscal 2025 was issued after the market closes this afternoon. These financial results include the contributions of our wholly-owned subsidiaries and accounts they administer. The press release includes definitions of certain non-GAAP financial measures that we will reference here today where 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 a recording of this webcast. The website is ir.healthequity.com. Second, our comments and responses to your questions today reflect the management's view as of today, December 9th, 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 that 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 our latest annual report on Form 10-K and in 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. Now over to Mr. Jon Kessler.

Thank you, Richard. Great job as always. Hi everyone, and happy holidays. I will briefly cover the momentum and key metrics from Q3 before passing it over to the team. Steve will talk about the post-election paths to health account expansion, which you might not be interested in. Jim will go over the Q3 financial results, raise our FY '25 guidance, and give a preview for FY '26. I know that's probably not your focus either. And we are fortunate to have Scott Cutler with us for a brief introduction. Let’s dive in. In Q3, our team achieved double-digit year-over-year growth across most key metrics, including revenue growth of 21%, adjusted EBITDA up 24%, and HSA assets increasing by 33%. We saw HSA members grow by 15%, contributing to an 8% rise in total accounts. HealthEquity finished Q3 with 16.5 million total accounts, which includes 9.5 million HSAs that hold $30 billion in HSA assets. Notably, HSA assets jumped by $7.4 billion year-over-year, and we had 21% growth in the number of our HSA members who invest, leading to a 58% increase in invested assets to $13.6 billion. Subtracting that from $30 billion leaves us with HSA cash reaching $16.4 billion. With sales and digital member education fully operational, I wanted to say we are firing on all cylinders, but there was a legal issue with that phrasing, so I won't. Honestly, I'm not even sure what the legal concern was. Anyway, Team Purple opened 186,000 new HSAs organically in the quarter, which is 14% more than last Q3. Our HSA members added $0.5 billion in assets compared to a $0.6 billion decline in Q3, a typically lighter quarter. The average HSA balance has grown by double digits over the past 12 months, which is wonderful for our members and aligns with our mission. Net CDBs increased by $0.1 million quarter-over-quarter but remained flat year-over-year, highlighting the impact of the runoff from national emergency accounts. This will be the last time I mention this, not only because this is my last earnings call but because we will no longer be comparing against those figures. We are facing a significant year-over-year comparison for new HSA sales in Q4. Last year's Q4 was exceptional. However, the performance over the first three quarters of fiscal '25 gives us a strong chance to set a new full-year record for new HSAs, which would be fantastic. Our operations teams were also quite active in Q3, finalizing the last wave of single card processor consolidation while addressing a sophisticated and persistent fraud threat. These fraudulent activities resulted in increased one-time service expenses, which Jim will elaborate on, as well as seasonal spending for new partner and client implementations, along with hiring, training, and testing for a successful open enrollment season that is now well underway. You can feel confident that the trend of reducing service costs through outstanding digital experiences continues, with AI taking over more member contacts and claims interactions, and mobile wallet integration replacing the need for physical cards. If you have a HealthEquity card not in your mobile wallet, it’s time to make that change. Have you done yours, Jim?

Not yet.

Because you don't spend any yet.

No.

Okay. All right. We need to work on that. Richard, have you done it? Steve? Steve's done it.

Absolutely.

I know Steve has done.

Only for male PFSA.

Okay, all right. I've done it. It’s awesome. You should do it too. Speaking of busy. It's election day behind us. Steve and the advocacy team are now supporting multiple efforts to expand Americans' access to personal portable health accounts. Let's hear about it. Steve Neeleman?

Thank you, Jon, as always, fantastic kickoff, man. We’re going to miss it. Anyway. We now see three approaches to expanding access to personal, portable health accounts. These include bipartisan legislation, budget reconciliation by the Republican majority, and rulemaking by the new administration. The Bipartisan HOPE Act, formerly known as H.R. 9394 would enable all Americans with ACA-qualified health insurance that isn't HSA compatible, including all Medicare recipients, to save and invest tax-free for medical expenses and it encourages employers to contribute to the savings of low and middle-class income employees. Introduced in August by three Democrats and three Republicans, the HOPE Act now has the endorsement of the House Problem Solvers Caucus, which includes 32 Democrats and 27 Republicans. HOPE has also been endorsed by diverse interests, including the American Benefits Council, whose members include 430 of the nation's largest employers, a few labor organizations, and the U.S. Chamber of Commerce, which is the country's largest business organization. Another path is budget reconciliation. This has been used by Democratic and Republican majorities in recent years to pass wide-ranging tax and spending bills because it is not subject to filibuster. And the next Congress is likely to produce multiple reconciliation bills. Also, the HSA Modernization Act and the Bipartisan HSA Improvement Act, which were both passed by the House Ways and Means Committee in the current Congress, are examples of HSA expansion that the majority can attach to a reconciliation bill. These two bills would expand HSA access to working seniors on Medicare. It would also include expansion to VA beneficiaries and Americans with Indian health service coverage. It would also provide for HSA funding from unspent FSAs and HRAs. It would raise annual HSA contribution limits as well as making spending from HSAs more flexible and consumer-friendly. And finally, the incoming administration can use its rule-making authority within existing HSA law to expand access to the accounts. For example, by further expanding the wellness and preventative care that HSA compatible plans may cover outside of the required deductible or recognizing the actual value of insurer contributions to HSAs offered with plans on the ACA exchanges and also approving HSA compatible plan designs in Medicare Advantage. These are all ways that they can do that. The administration may also expand HSA eligibility to wellness and fitness expenses. Finally, Americans with access that have HSAs make healthcare more affordable and exhibit more of the healthy behaviors that reduce healthcare costs. Moreover, personally owned, portable and investable health accounts are widely popular among young and old, liberal and conservative. So we are quite optimistic about legislative and regulatory action to expand access and we'll continue to support it through advocacy, expert advice, and credible research. I'll now turn the time over to Jim for our results and guidance. Jim, take it away.

Yes. Thanks, Steve. Thanks, Jon. I will briefly highlight our fiscal third quarter 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 '24 and '25 for comparison. Third quarter revenue increased 21% year-over-year. Service revenue was $119.2 million, up 4% year-over-year, reflecting growth in total accounts, HSA investor accounts and invested assets and lower average unit service revenue as product mix continues to shift toward lower headline fee HSAs. Custodial revenue grew 41% to $141 million in the third quarter. The annualized yield on HSA cash was 3.17% for the quarter as a result of higher replacement rates and continued mix-shift to enhance rates. Interchange revenue grew 15% to $40.3 million, again, notably faster than account growth as members increased contributions and distributions and conducted more payments on HealthEquity's card and platform versus requesting cash reimbursement for payments made off platform. Gross profit of $197 million was 66% of revenue in the third quarter of this year, up from 64% in the third quarter last year. As Jon mentioned, in addition to seasonal factors, gross profit during the quarter was reduced by approximately $8 million of excess service costs incurred to protect members from and reimburse those impacted by sophisticated fraud activity and to assist members during the final and largest phase of our card processor consolidation. While the seasonal ramp-up continues as a result of the sales success as Jon discussed, we believe these event-driven costs are largely behind us and expect only modest carryover into Q4. Net income for the third quarter was $5.7 million or $0.06 per share on a GAAP EPS basis and included the $30 million one-time settlement of the WageWorks Lease Termination Lawsuit that we disclosed on Form 8-K in November. Non-GAAP net income was $69.4 million or $0.78 per share versus $0.60 per share last year, which excludes that one-time cost. Adjusted EBITDA for the quarter was $118.2 million, up 24% compared to Q3 last year and adjusted EBITDA as a percentage of revenue was 39%, up from 38% in the third quarter last year, but of course, was impacted by the event-driven service costs I referenced earlier. Turning to the balance sheet. As of quarter-end, October 31, 2024, cash on hand was $322 million as we generated $264 million of cash flow from operations in the first nine months of fiscal year '25. The company repaid $25 million of revolver borrowings during the quarter, leaving approximately $1.1 billion of debt outstanding net of issuance costs. The company also repurchased $60 million of its outstanding shares during the quarter under the previously announced $300 million authorization, leaving $240 million remaining. Today's fiscal '25 guidance reflects the carry forward of our strong sales trajectory, operational efficiencies resulting from our technology investments, and current forward interest rate curves. We expect revenue in a range between $1.185 billion and $1.195 billion. GAAP net income in a range of $88 million to $96 million or $0.99 to $1.08 per share and includes the $30 million settlement mentioned earlier. We expect non-GAAP net income to be between $274 million and $281 million or $3.08 and $3.16 per share based upon an estimated 89 million shares outstanding for the year. Finally, we expect adjusted EBITDA to be between $470 million and $480 million. We now expect the average yield on HSA cash will be approximately 3.1% for fiscal '25. 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 as well as 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. Seasonally, our fourth quarter is usually our highest service-cost quarter of the year, as our busy onboarding season peaks. Our guidance also includes additional expected share repurchases under the $300 million repurchase authorization. We expect both to return capital to shareholders and reduce revolver borrowings in the remaining quarter of the fiscal year. With continued strong cash flows and available borrowings on our revolver, we will maintain ample capacity for portfolio acquisitions should they become available. 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 '25 at about 20%. 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 the 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. We're also providing the following initial guidance for fiscal year 2026. We expect revenue to be between $1.275 billion and $1.295 billion. We expect margins will expand with adjusted EBITDA growing to approximately 41.5% to 42.5% of revenue in fiscal '26. This initial guidance is based on an average HSA cash yield range of 3.4% to 3.5%. Based on our outlook of interest rate conditions, current forward interest rate curves for the year ahead and the continued mix shift for basic rates from basic rates to enhanced rates. The reconciliation of our adjusted EBITDA outlook for the fiscal year ending January 31, 2026 to net income, its most directly comparable GAAP measure is not included because our net income outlook for this future period is not available without unreasonable efforts, and we're unable to predict the ultimate outcome of certain significant items excluded from this non-GAAP measure such as stock-based compensation expense and income tax provision or benefit.

I feel like all these introductions are for people who are interested. This is the closest any of us will get to hosting the Oscars. So, thanks, Jim. It is now genuinely my pleasure to introduce Scott Cutler, who will succeed me as President and CEO on January 6th. Since Scott is currently focused on ensuring a smooth transition at StockX, we are very grateful that he is here today to introduce himself to you. Scott?

Thanks, Jon. Thanks, everybody. Great to join Team Purple. I am humbled, honored, thrilled to be joining HealthEquity this time, certainly filling some big sneakers from Jon in this transition. Pun intended, Jon. I'm excited about three things in joining Team Purple right now. First, I am inspired by the mission of the company which was infused into every conversation throughout this process to save and improve lives by empowering healthcare consumers. I'm excited to work alongside Steve fulfilling this mission. Second, I'm excited to be joining the leading company in this space and continue to strive to deliver outperformance in the market. Third, I'm excited to be joining the team in this next stage of growth at a time when the future holds so much opportunity for tech innovation. My career journey has been defined by digital and technology transformation across various industries and HealthEquity will be the next chapter in that journey. I'm looking forward to continuing to drive our tech-enabled 3D strategy. The first D, delivering remarkable experiences. This is using data science and technology to digitize our remarkable purple service and education while securing members' assets and information. Second is deepening partnerships, using more advanced technologies to connect and extend the competitive advantage of our intelligent integrated ecosystem with our network partners. And third, driving member outcomes by combining proprietary technology, data science, and integrated partnerships to empower members to make better health and financial decisions. I really want to thank Jon, Steve, and Team Purple for welcoming me and their support in this transition process. I'm excited to be working with the team to deliver on our commitments to partners, clients, and members, to our investors, to each of you. I look forward to meeting many of you in upcoming conferences and reporting to you our progress towards our outlined objectives.

Thanks, Scott, and a nice start on the puns. Well done. The company may continue. Let's go to Q&A. Operator?

And our first question today will come from Gregory Peters with Raymond James. Please proceed.

Well, good afternoon, everyone.

Good afternoon. Let's have it. Let us have it, man. Come on.

Let you have it. Well, I have one question in seven parts. Jon, that will give you an opportunity to give me, along with, I'm sure a number of the other sell-side analysts a hard time for the remainder of the hour. Welcome aboard, Scott. My one question in several parts is the big picture is the revenue guidance on fiscal year '26. If I'm not mistaken, it's probably a little bit below consensus and reflects high single-digit year-over-year growth. So maybe you could give us some color on the several parts that are comprising the fiscal year '26 guidance.

You want to take this one first?

Sure. Well, yes, I think on the main part, like the key part of the guide is our expectation on the custodial yield, right, 3.4% to 3.5%. I think it's the logical build. You have the refresh of our RHSA cash maturity schedule. You see what's maturing. You see where the five year is today and a reasonable premium to that placed in a combo of enhanced and basic rates. So the pickup on those maturing assets is not as big. So call it sort of roughly $4 billion being replaced in the next year for round numbers at today's rates, and you're rolling off roughly 3.2% average rates. So I think you can do that math and comfortably get inside our range there. And I think on the other main line, like we are significantly outperforming in the interchange line, big step up in spends per account, right? Remember that we consider that a service revenue. You'd expect it to normally grow with account growth ex-COBRA, which doesn't have a card. But this year, we're really outperforming that. And so I think it's sort of prudent for us to be cautious about future contributions and spend in that line. We're seeing contributions up. We're seeing spend up. We're seeing average ticket up. We're seeing usage of the card versus reimbursements up, and I think it's sort of reasonable to expect that to dial back down in the forward year. And then don't forget, we've had tremendous, tremendous market action this year that you can't just annualize and roll forward into the next year. So bringing all of those drivers back into expected normalized growth, I think will come out to something close to what we just guided you to.

Yes, and I would just add just conceptually, we always talk about outgrowing the market and then outgrowing our top line on bottom line. And I think here, what we've tried to do is we always do with this first guide. We've only been doing the first guide for what, three years?

Third year.

We began this during COVID, and we continually face the challenge of guiding based on our observations. Jim has pointed out, and I believe this is especially relevant this year, that we need to be cautious with our projections. We won't commit to decisions that we can't fulfill or which I won't be available to address. What I mean is that the yield is straightforward, and we've provided the data from Q3 that allows you to calculate it. If you do the math, you should have a good understanding of our range. If anyone has questions about it, we can discuss it further. This brings us to two key factors that Jim highlighted, with possibly a third: the actual average cash. Over the past year, we've seen some fluctuations, particularly regarding cash allocated towards investments. Currently, the market is strong, which has led to some unexpected cash flow compared to our expectations. This was particularly evident earlier this year, but it seems to have stabilized somewhat toward the end of last quarter. Given this uncertainty, we prefer to wait before issuing our first solid guidance. The second point Jim raised is interchange, which has performed exceptionally well through the first three quarters. Various factors contribute to this success, and our team has worked diligently, but we prefer to observe how January performs as part of the fourth quarter before making further predictions. Additionally, I would mention total account growth, which allows you to make your own assessments. I believe this will help you arrive at a reasonable projection for fiscal '26.

Thanks, Greg.

Was that one part of the multi-part or was that the multi-part? I think it was that was the multi-part.

Thanks for the answer. Good luck, Jon.

Thank you.

Our next question today will come from Stan Berenshteyn with Wells Fargo. Please go ahead.

All right. Thanks for taking my questions. Jon, of course, wishing you best in retirement. I just want to say your insights and jovial flair that you brought to the earnings calls will be missed. I do have the two follow-up questions actually on what Jim just discussed. Well, first, as it relates to the custodial revenue. As we think about next year, I believe there are some WageWork assets there, and I'm just curious, is the pacing of the reset for fiscal year '26 assets in any way different than what we've seen this past year? And the follow-up is, I'll just throw in right now. The follow-up is, if we think about interchange revenue, you just touched on that. It wasn't surprising to see, I guess, a sequential decrease in revenue, 10% quarter-on-quarter, but gross margin went up, I think, over 400 basis points. Could you just talk about what drove the significant increase in the gross margin line? Thanks.

Sure. Let me address the first part. There are some WageWorks assets that will be replaced more in the middle of 2026 compared to a typical year. In 2025, we experienced a significant amount of BenefitWallet cash inflow, making this year somewhat atypical for placements as well. However, we are actively taking advantage of the upcoming $3.5 billion in maturities over the next couple of years. We’ve already started pulling forward some of those repricings, treating these market opportunities as a hedge without needing to engage in formal hedging through our banking partners. We plan to continue utilizing these market chances, which means we can expect to see some of those maturities pulled forward and reinvested earlier than their scheduled dates. This approach helps mitigate our risks. We’ve mentioned before that we have $7 billion maturing in the next two fiscal years in substantial amounts, which represents one of our significant market risks. While the yield on the invested corpus is relatively consistent, predicting the five-year treasury yield 24 months from now is quite uncertain, akin to a clue you might find in a Scooby-Doo mystery.

Yes.

Not the last clue. Definitely not the last clue. All I know is that whatever I forecast the rate to be or the forward curve forecasts the rate to be, it's going to be wrong. To the extent we can pull some of that forward, we will, but we are going to keep pushing that transition to enhanced rates forward over time. Yes, I would like to reach that finish line as quickly as possible. And sorry.

You want me to take the second part?

Yes, sure. The gross margin.

Yes, fundamentally, the primary factor driving the higher gross margin overall is the shift towards HSAs. We've been highlighting this for some time, and it has remained consistent. Focusing on this quarter, as both of us noted in the text, there were some unexpected factors, which is why we provide guidance in the way we do, as we've mentioned before, there’s essentially only one trend to consider. The significant development is that two things are happening simultaneously: HSAs are outpacing the rest of the business, and their value is increasing. This is due to enhanced rates and the transition out of the COVID period, among other factors. This process still has a way to go. Initially, we anticipated that we could raise EBITDA margins into the 40s, and our guidance for fiscal '26 reflects that expectation.

Thanks, Jon.

And your next question will come from Glen Santangelo with Jefferies. Please go ahead.

All right, guys. Thanks for taking my question. And Jon, good luck in retirement. I did want to ask you and Steve about this HOPE Act. I mean, essentially, could you give us a sense for maybe how big the TAM is for HSA accounts today? And then, Steve, based on your understanding of the HOPE Act, how much do you think that TAM expands? And then, Jon, I don't know if you've had any conversations with anyone on the Hill. I don't know how you sort of handicap the likelihood of this moving forward or how you expect this to sort of play out in the new administration in 2025. Thanks.

Steve, why don’t you get started on this one?

Thanks, Glen. Over the past 20 years, we've developed a solid understanding of the future growth of the HSA market. We believe that, at maturity, the number of accounts will reach around 60 to 65 million, which aligns with figures for employer-sponsored retirement accounts. However, with over 120 million households in the U.S., we've investigated who could benefit from personal, portable accounts. For example, a friend of mine, a former military helicopter pilot, was unable to take advantage of an HSA when transitioning to civilian life at age 45 because he had access to military coverage. This highlights a significant gap, as individuals in government plans are often disqualified. We anticipate that the total addressable market could potentially increase by 40 to 45 million households, especially benefiting those on Medicare, Medicaid, TriCare, and Indian Health Services, as well as individuals in various union plans that do not offer high deductible options. Many people enrolling in exchanges also find they cannot access HSAs due to plan structures. Overall, we foresee the total addressable market for these personally owned, portable investable accounts growing from 60 to 65 million to over 100 million. Jon, would you like to add anything? We can discuss some of the developments we're observing.

Why don’t you comment on that? Go ahead.

We were very excited during the August recess when six legislators came together to introduce the bill they have been working on for a couple of years. They engaged with the industry to figure out how to get more people covered, as out-of-pocket expenses can be significant. For a family on a PPO plan that isn’t HSA qualified, the average deductible is around $3,000, which is a considerable amount for an American family with a median household income of about $70,000. The average deductible for someone on a high-deductible HSA qualified plan is about $5,000, making both figures substantial for families. Legislators recognize the high costs of out-of-pocket expenses and have been exploring solutions. When the House members introduced the bill in August, we were pleased, and since then, we’ve seen support grow. There are now over 20 bipartisan legislators backing this initiative, with a solid mix of Republicans and Democrats. The Problem Solvers Caucus, comprising about 60 legislators, also showed strong bipartisan support. Given the current balance in Congress, where we have a near 50-50 split, it’s encouraging to see a significant block of legislators working towards actionable solutions. Additionally, various groups, such as the American Benefits Council and some labor organizations, have expressed their support, indicating a positive momentum. The next steps involve seeing how to move forward, particularly with the new Congress coming in January, and identifying a bill that could benefit millions of Americans without straining the budget. We believe the HOPE Act aligns well with these goals and should undergo the necessary scoring process, which we expect to be favorable compared to other HSA expansion proposals, due to the structure of the HOPE account. Hopefully, that gives you an overview, and I’m open to more questions.

Richard doesn't want me to talk anymore about this, but I'm going to.

Someone wants to close.

I want to highlight something different. You're right, this is definitely selling through the club. What Steve mentioned earlier points to the challenges people face with out-of-pocket expenses, which every commercial plan in the U.S. and Medicare have. When individuals don’t have access to the right accounts, for every dollar spent out of pocket, it often feels like they need to earn two just to cover taxes like federal, state, payroll, and social security taxes. The burden of out-of-pocket expenses without proper account access seems unjust because people have to earn significantly more to meet those costs. It’s baffling that we haven’t provided people with this access, and the time to act is now. This emotional concern about the consequences of inaction, combined with Steve's practical approach on implementation, has motivated me to express positive views about this last quarter and leads me to believe that the current quarter will be even better.

Thanks, Glen.

And your next question today will come from Allen Lutz with Bank of America. Please go ahead.

Good afternoon. Thanks for taking the questions. Jon, going to miss the one-liner. So congrats on the retirement. One question for Steve. Going back to the potential Medicare expansion. Can you remind us just how that could theoretically work for HealthEquity? How should we think about your exposure to employers with Medicare populations as well as your exposure to health plan populations that have access to Medicare? Trying to understand how is the selling process to this type of population different or the same relative to your current customer base? Thanks.

Hi, thanks, Allen. That’s a great question. We receive inquiries every day at our service center regarding individuals who are 65 and unintentionally enrolled in Medicare Part A, believing they needed to do so to maintain their Medicare rates. However, it turns out they didn’t need to enroll and are now contributing to an HSA while being dual enrolled, making them ineligible. We can help remedy that situation quickly. They could potentially redirect those funds into a HOPE account, or with the expansion of HSAs that will pass through the House Ways and Means Committee next year, we can assist working seniors on Medicare. That measure was included in the recent legislative package. We're confident we can scale our efforts efficiently to support these individuals. Regarding broader distribution, HealthEquity is fortunate to partner with a large number of health plan partners in the United States, including many hospital systems and system-owned health plans, primarily nonprofit organizations that serve substantial Medicare populations. If you ask our health plan partners about their fastest growing segments, Medicare, particularly Medicare Advantage, is often among the top. We plan to utilize our existing distribution channels, which are excellent, to present our capability to offer more commercial products, including HOPE accounts and expanded Medicare HSAs. Our team is keenly focused on these opportunities, and while we need to be prudent with our spending until the legislation is finalized, there’s significant strategic thinking happening around this area.

Thanks, Steve, and thanks, Allen.

And your next question today will come from Anne Samuel with JPMorgan. Please go ahead.

Hi, guys. Thanks for taking the question. I was hoping I know you're not providing guidance at this point, but was hoping maybe you could just speak qualitatively to how your selling season wrapped up. And was there anything notably different this year versus prior years? Thanks.

Yes. First, I want to note that this is the first time in over 50 earnings calls that I’ve commented on a future sales number, albeit indirectly. This reflects our belief that, if you had asked us at the beginning of the year about our year-on-year sales comparison, we would have said it was challenging. To be in a position to surpass that and potentially exceed our record from two years ago is quite an achievement. Within sales, I would highlight a couple of points. The primary opportunity this year relates to margin growth, driven by our success in enhancing the value of Health Savings Accounts (HSAs), which is now tangible, as well as the related products that are gaining traction in the market. This allowed us to be aggressive with HSA pricing, particularly in the upper middle market and with our distribution partners, like brokers, who have been excellent allies. Conversely, in areas where we have lower margins, such as some of our Consumer Directed Benefits (CDB) products, we maintained our pricing and in some instances, raised prices. Our goal is to offer what we believe is a sustainable business that aligns with our mission over the long term. This focus has led to increased activity. Last year, we faced some softness in the middle market while the enterprise segment performed well; this year, however, we experienced a boost in upper middle and middle market activities, which is encouraging. The enterprise segment is perhaps not as strong as last year, as competitors are vying for an edge. We will remain firm in areas that don't align with our standalone business model. Overall, we are adjusting our pricing and other offerings to enhance profitability. Finally, we are pleased to engage with our clients about our new product pipeline, aiming to generate some revenue from these initiatives in the next fiscal cycle, especially with some strong clients who are expected to yield good results.

Early adopters.

Yes, that’s not good. Look, that's, I think really valuable and is useful for us this year, but I think will be even more so next year.

Thanks, Anne.

And your next question today will come from George Hill with Deutsche Bank. Please go ahead.

Excuse me, guys.

You got to watch out this operator.

Excuse me, guys.

You got a lot of shot. This operator. He's like you talk and that's it.

Good job.

Yes.

Nick is on this. So if it doesn't come out at the beginning, it isn't coming out apparently.

Yes, but Jon, did you guys change the whole music? Like that's not really my core question, but it sounded like the waiting music for the call chart changed. I thought you guys used to do a Spanish guitar thing.

I mean, it's interesting you mention this because I personally have lobbied for Snoopy for a long time and, there's a company I won’t name them but that is oftentimes affiliated with Snoopy that is now one of our enhanced rates partners. And, maybe we can get that for next quarter.

Okay. Well, Jon, first of all, I will wish you well. I'll say, Scott, welcome aboard. And I hope that you keep the flavor of this call the same and I might pepper you with an ever-the-junk question every call and again. And if there's a pair of strange love dunks laying around in StockX on your way out the door, I'm a size 9.5. Two quick questions.

He's writing that down, George, 9.5.

I like it. Like I said 9.5. My question, Jim, as it relates to the $8 million impact that you cited related to the fraud impact, so am I just reading the financials right that you guys basically absorbed that reported gross profit numbers in the quarter, some numbers effectively would have been higher? And then, Jon and Steve, on the expansion into the Medicare space, one of the things I think about when I look at that space is I assume you guys are talking about the traditional Medicare A plus B business and not the MA business as a lot of those guys kind of offer a lot of their own cards. So the question would be, do you see this as something supplemental? Is it something that would be portable in addition to those benefits that tend to expire at year-end, or is there an opportunity to work with the carriers to provide something that looks enhanced? Because I'm sure that you guys know what's going on depending on legislation better than I do. And I'll drop it right there. Thank you.

Why don't you take the first, Jim, I'll take the second.

Yes, and well done sneaking in two questions there.

Yes, that was good.

Let me clarify that the $8 million in excess service costs was higher than we expected and was included in our numbers. This increase is not only due to the fraud activities we discussed but also because of an elevated number of member contacts. While some of this was related to fraud, a significant portion was due to our largest wave of card migrations, where we introduced new chip and mobile wallet-ready cards in numerous locations. We should have anticipated the additional volume that came with such a large operational project, but we did not. To summarize, the $8 million in excess service costs pertains to both of these factors.

Yes. Regarding your second question, I believe you are touching on an interesting aspect that connects back to distribution. In my opinion, one key advantage of having the stack card infrastructure fully operational is that, for example, if you have a Medicare Advantage product that includes $200 of out-of-pocket assistance, we can now integrate that with a HOPE account. In this scenario, the $200 could potentially increase to $300 if it is contributed to the HOPE account, since it’s not just a generic fund. I see opportunities within Medicare Advantage and traditional Medicare for products like these, and we are working to establish the infrastructure necessary to support both.

Thanks, George.

And your next question today will come from Mark Marcon with Baird. Please go ahead.

Hi, good afternoon, everyone. Jon, we will definitely miss you. Wishing you all the best in your retirement. Scott, welcome to the team. I've heard great things about you from colleagues who have previously worked with you. I'm looking forward to collaborating with you. I have a question regarding the guidance. Jim or Jon, could you elaborate on your expectations for the 2026 guidance concerning account growth? Are there any changes we should be aware of? It appears the selling season went quite well, so I'm curious about what might alter that trend. How is client retention holding up? Has there been any negative impact from fraud activity? Any insights you can provide on what will drive HSA growth for next year would be appreciated.

Yes. Starting with HSA retention, we are optimistic about our position as we head into fiscal '26. There are no significant concerns. On the CDB side, we have seen the effects of recent price increases working through the system. For fiscal '26, we may experience some healthy churn, which is often a normal occurrence. While there could be some effect on retention or sales, we believe it will not significantly impact our overall results. Our team has been dedicated, and I expect that when we review account totals for '26, we will be pleased. However, we are prepared for some attrition on the CDB side due to the price increases.

Thanks, Mark.

And your next question today will come from David Roman with Goldman Sachs. Please go ahead.

Thank you. Good afternoon, everyone. Jon, I'm sorry, I won't have an opportunity to work with you more, but appreciate all your help as we've gotten up to speed here and look forward to following the stock going forward and seeing whatever it is you do next. Maybe as I just kind of transition here, I know there’s a lot of questions about the '26 guidance, excuse me. But maybe you can talk through a little bit more detail how we should think about capital allocation, both internal and external as you roll forward here. You've obviously done some acquisitions like the WageWorks one and a few others over time that have paid benefits here to the company. You've seen a big year here of increases in operating expenses across technology and development as well as sales and marketing. So how should we think about kind of your resource prioritization and how that fits into the growth rates you’ve laid out here for '26 and beyond?

I mean, I’ll just say first and then throw to Jim that your question reminded me of something that we could have stressed, which is our fiscal '26 does not assume M&A activity because that isn't how we do it.

Yes.

Either large ball, small ball, whatever size ball, but that doesn’t mean we won't try, so.

Yes, exactly. We have often discussed that our sales and marketing expenses aim to stay around 8% of our revenue, and this year we have been slightly below that. Regarding technology and development, we've previously mentioned that we consider 22% to be the upper limit, and our spending is currently below that. Last quarter, we expressed a desire to increase our spending in that area, but it takes time to allocate resources and initiate projects, so we shouldn’t anticipate significant changes in that regard moving forward. In terms of capital allocation, as mentioned, we are currently returning capital to shareholders and have an authorization in place. We are also reducing our revolver debt, as we had borrowed over two hundred million dollars to fund the BenefitWallet acquisition, and we plan to pay that down gradually with excess cash flow. Our revolver serves as a useful resource for financing future acquisitions of a similar scale, should they arise. Our leverage profile continues to improve each quarter as we increase the revenue denominator in our leverage ratio. This positions us well for larger opportunities if they present themselves. I believe that acquisitions related to our HSA portfolio offer some of the best returns on investment available, and we are focused on funding the business within our outlined cost structure for sales, marketing, technology, and development, while also enhancing our EBITDA margins. Overall, these factors contribute positively to our story.

Thanks, David.

Your next question will come from David Larsen with BTIG. Please go ahead.

I was hoping Scott Cutler could talk a little bit about what you sort of most proud of with what you did at StockX and maybe what do you think you can bring to HealthEquity related to those accomplishments. Thanks so much.

Oh, great, a StockX question. I love that. No, I mean as I stated in my prepared remarks, I think what's excited me about my career journey has really been about leveraging technology and applying it to both different markets and different problems from financial services to consumer e-commerce. And I'll have to figure out a way to get George those sneakers. But I think what really gets me excited about the opportunity here is really just the continued use of technology, and we’re probably in the most exciting time to be able to leverage technologies around data and AI, particularly for the member and the client, the partner experience. And so, I, for one, am really excited about the platform, the strength of HealthEquity's market position, and also equally excited about the continued use of technology to make that service more widely available and a better service. I mean that in a nutshell is kind of what I was most proud about in lots of the different chapters of my career and certainly what I hope to be able to bring here. And so I'm excited about that.

And your next question today will come from Steven Valiquette with Mizuho Securities. Please go ahead.

Great. Thanks. Good afternoon, everyone. Jon, congratulations on your retirement. And Scott, welcome to the company as CEO. My questions are primarily focused on confirming the dollar amount of HSA cash custodial asset contracts that you're pricing each fiscal year. In your previous slide deck, you mentioned $3.4 billion for fiscal '26, but the 10-Q indicates it decreased slightly. However, fiscal '27 appears to have increased a bit. The yields seem relatively stable. My main question is to understand how much of the $3.2 billion that is scheduled to reprice in fiscal '26 will occur early in the year compared to later in the year. This will help clarify how much is included in the fiscal '26 guidance you've provided. Additionally, when you mentioned earlier about accelerating some of these repricings, I assume some of that may pertain to the fiscal '27 maturities, unless I'm mistaken. Can you confirm whether any of that is included in the fiscal '26 guidance or if it would be considered additional upside compared to your current outlook for FY '26?

Thank you for the question. It's good to clarify. In a typical year, very little of the HSA cash matures early on; most of it comes later in the year. As you mentioned, in '26 we have some legacy WageWorks cash that was allocated five years ago, and that will mature in the middle of the year. We are considering pulling forward maturities that are around six to nine months or a year out for repricing, but it will be more challenging to modify contracts that are over two years out. However, we expect all these actions to be reflected in our current guidance.

If you think about it, when considering the cost of moving something up six months, we need to evaluate the present value of that hedge. If we can secure a better deal, we will act on it; otherwise, we won't. We've made some assumptions that certain revenues might come in a bit sooner, but likely at some reduced price. I wouldn’t expect significant fluctuations on this matter. Our long-term goal is to enhance stability in this area, as it essentially reflects a fee. If we can achieve that by adjusting the timeline, that's our objective, not just to gain a few extra dollars.

Your next question - sorry, go ahead.

No go ahead.

And your next question today will come from Sean Dodge with RBC Capital Markets. Please go ahead.

Hi, good afternoon. This is Thomas Keller on for Sean. I guess first, welcome, Scott, and congratulations again on your retirement, Jon. So I'll switch gears a bit here and do a quick check in on the commuter offering. Where do we stand relative to the pre-pandemic levels there? And how should we be thinking about that business in fiscal '26 and beyond? Thanks.

It has been pretty stable at around 60% to maybe 65% of its pre-pandemic revenue base. There is some growth, but it's not significant. We hope to see federal employees returning to work, which would be positive. However, the impact is not substantial either way. It's a strong business, particularly in terms of service margin, and that's about what I would expect.

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

Okay. Well, that is a wrap for this B-plus comedian, and I'm going to say I'm leaving the stage here, but I do not want to do so without everyone here understanding the team that has over-delivered again and again and again and that team is stronger and deeper than it's ever been before. And with Scott and Steve, it has leaders who are intensely committed to team success and at the same time, both of these individuals, in my observation, in one case over a long time and the other case over a medium time are genuinely personally humble about their role in that and their role being serving leadership. It’s really a remarkable combination that I believe as a shareholder is going to serve this company very, very well. So to the whole team, all Team Purple, I really want to just end by saying thank you not for what you've done, but for what it is that I believe in my heart is going to be done in pursuit of our mission as well as if I can say so in pursuit of value for us, we shareholders. Is it us or we?

Us.

And with that, I think the best way to conclude is by expressing my gratitude to the team. Thank you all, and have fun.

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