Q3 2020 Earnings Call
Thank you do well good afternoon, everyone and welcome to Healthequitys third quarter earnings conference call for fiscal 2020 year.
With me today, we have John Kessler, President and CEO , Steve Neeleman, Healthequity founder and Vice chair.
And with Merck Who's our executive VP and COO.
Darcy Mott, our executive Vice President and CFO .
Before I turn the call over to John I'd like to remind those listening here today that there is a copy of todays earnings release and accompanying financial information posted on our Investor Relations website, which is IR dark healthequity dot com.
We also claimed safe harbor concerning the forward looking statements included in todays earnings release, and there will be made during this conference call including predictions.
Expectations estimates for other information that might be considered forward looking.
Throughout todays discussion, we will present, some important factors relating to our business, which could affect those forward looking statements. These forward looking statements are subject to risks and uncertainties.
<unk> actual results could differ materially from statements made today.
As a result, we caution you against placing undue reliance on these forward looking statements.
Courage you to review the discussion of these factors and other risks that may affect our future results are market price for stock.
I'd say, our which are detailed in our annual report on Form 10-K filed with the FCC in March of 2019.
Along with any subsequent periodic recurrent reports filed with the FCC.
We're not obligated ourselves to revise or update these forward looking statements in light of new information or future events.
I know the way, we'll now turn the call over to Mr. John Cooper.
Thank you Richard It just gets better every time and thanks all of you for joining US. This is the first quarter in which our operating results will reflect the acquisition Wageworks completed on August Thirtyth and I'm pleased to say it was a good one today's results and improved full year outlook speak first to help equities continued leadership of the growing.
Actually market second to our fast start on integrating wageworks answered to the multiple opportunities we have.
For a gross profits I'll start with comments on key metrics and performance in the market Ted will update on the Wageworks integration and then Dorsey will offer thoughts on the financial results and revised guidance as well as our path to profitability and Steve will join Us for Tonight.
Yeah, We got rose across key metrics was strong as one would expect post acquisition during Q3 revenue and adjusted EBITDA grew 223% and 87% percent respectively year over year.
Hey, just say members reached five point Onemillion and agency assets 10.5 billion wouldn't be at quarter's end up 37% and 48% respectively year over year total accounts, which include age you say accounts and consumer directed benefit were CDB accounts reached 12.5 million less.
She held equity at Wageworks, both performed well Healthequity again delivered strong year over year revenue actually member growth of 21, and 17%, respectively, and even stronger 24% year over year growth on both agency assets and adjusted EBITDA legacy Wageworks perform in both September and October .
The $35 million Romano top end of the revenue range. We previously discussed and the team delivered early wins in both service improvement and efficiency.
The sales and relationship management teams, excluding acquisition impacts added 141000, new agencies next 18% more than a tough comp from a year ago interesting members added $260 million in agency assets, which is more than four times a year ago performance.
That's pretty good invested assets and the number of age you say members investing grew 45% and 29% compared to last year again, excluding acquisition.
He actually market remains strong and so does our position in it the Kaiser family Foundation annual benefits Survey released in September found that the percentage of workers enrolled at each say qualified plans has now reached 23%, which is its highest level ever and have a large firms in a quarter of small ones now offer age they qualify play.
Yes.
Seven years meet your market report projects sustained growth in agency assets and confirms Healthequity is number one market share by accounts. Another survey released this quarter by city shows the new health equity to be a market leader not only in HSH, but every complementary CDB category survey does not include.
Fsh, HR A's Cobra and commuter benefits.
So the team delivered strong and profitable operating and sales growth this quarter and we believe the market evidence points to more opportunity.
Hi, this is going to update all the wageworks integration, which to US is about CZ that opportunity and building on the market leadership. The team has a team.
And taken away.
Thank you John .
A moment I'll describe the state of any of our integration by referencing the goals, we laid out in September but before I do I would like to thank all of our team members who are working so hard on this integration the progress we've made to date and our confidence going forward are entirely due to their tremendous efforts they have in short.
Made an incredibly fast start on achieving our goals of time way Im clear reporting achieving synergies, bringing purple to everything we do and ultimately growing the business for our end to end H. I say centric solution.
First time when clear reporting.
The team has subsumed wageworks operations into Healthequitys accounting policies. For example, monies held by Wageworks for payment of benefits under in Kuwait employer sponsored cdps or what we call client helps funds have been separated from the company's assets and liabilities.
Timely filed 10-Q will include all the data Healthequity has traditionally provided plus new operating metrics such as CDB participants total accounts a breakdown of H. I say assets into those still held by legacy Wageworks partners and by health equity and client held funds metrics.
Second cost and revenue synergies.
The team has achieved approximately 15 million of run rate synergies net of dis synergies.
Cost synergies had to date have come from day, one elimination of redundant executive roles rationalizing and flattening the entire organization and the successful negotiation of certain service agreements.
Efforts to realize promised revenue synergies are off to a strong start as well with the management team focused on the trip.
Two healthequity is custodial platform.
Katrina and optimize operations.
Based on the steps already taken management now expects to meet its $50 million net synergy commitment on a run rate basis by the end of fiscal 2021 earlier than originally announced with additional efficiencies to follow as redundant operating platforms, our sunset and revenue optimization.
Fully realized.
Third investments for our customers, which start with bringing purple service to everything we do.
90 days ago, the team began bringing offshore legacy Wageworks service calls back home to the U.S. a process, we expect to complete in the second quarter.
Ways works members and clients have begun to notice the change.
Also immediately after closing the acquisition.
Its equity service teams engaged with practice leaders of the National health benefit consulting firms many of whom had expressed concern about their service experience with wageworks.
Together, we resolved over 20000, then outstanding service cases for our shared employer clients and we are now running at 98% of case resolutions within agreed upon SL base.
We believe that the trust the team is building with employers and influential advisors will only strengthen as our platform investments come fully online.
As you know, we have committed $80 million to $100 million and one time expenses to enhance service security engagement and value and consult consolidate our platforms and achieve our synergy goals approximately 18 million of that spend occurred during this quarter.
Fourth and most importantly is growing the business by taking to market and end to end HSC centric solution that our clients and partners demand.
As we discussed in September closing the acquisition earlier than expected created the opportunity to begin influencing sales results. During the closing days of this sale season.
The team is seizing on that opportunity our largest private sector employer client relationship was successfully renewed in a competitive situation, where the bundle of HSH and complimentary CDP services.
Also the team succeeded in adding help.
Did provider list of one of the nations largest benefits consult.
With a partner appraising, both our new found Brad.
And our established service culture.
On the other end of the client spectrum.
The team launched phone based outreach to smaller healthequity clients in urban areas to promote wageworks market, leading commuter benefits and the some.
The result.
Several dozen new bundle clients already onboard and.
Operator, I think was losing Ted do you still have him or not.
I'm showing his line is still connected.
Why do we do this.
Since we did lose 10 and Steve there hopefully.
They're not in their bathing suits or whatnot.
Let me, let me just close out Ted's remarks, and then throated Darcy integration is about building our position market leadership.
And we're off to a really good start is really the way to put what 10 cents on the four points you made for our shareholders. We've committed to the end result is going to be more opportunities delivered consistent profit growth of the kind that you expect from us and so.
That is really where darcy is going to take from here. So let me throw to you Darcy.
Thanks, John .
I will discuss Healthequitys third quarter ended October 31st results on both the gap any non-GAAP basis.
A reconciliation of non-GAAP results and guidance that we discuss here to their nearest GAAP measurement is provided in the press release, there was published earlier today.
Our fiscal third quarter financial results include two months of operations subsequent to closing the Wageworks acquisition on August Thirtyth.
So wageworks acquisition Diversifies, our revenue growth opportunity, reducing the overall impact of interest rate variability on total revenue.
In Q3 revenue grew overall and organically in each of our three categories.
Service revenue grew to $87.6 million rising from 30% of revenue in the second quarter, 256% in the third quarter.
This is primarily attributable to the acquired 6.8 million CDB and 757000 agencies and 16% organic HSH growth.
Healthequity Standalone service revenue per HSH decreased 9% in the quarter.
We are suspending the guidance provided since our IPO of service revenue per agent say declining 5% to 10% per year.
While we continue to focus incentives on clients and network partners that remiss mortgage assays and interest the assets. We expect that service revenue growth will be tied more closely to total account growth going forward.
Custodial revenue of $47 million in the third quarter increased 49% year over year attributable to growth in HSC assets any higher year over year annualized interest rate yield of 2.48% on HSH cash assets because so many.
Studied by health equity during the quarter.
Custodial share of total revenue declined to 30% from 50% in Q2.
Going forward, we have multiple paths to earn additional custodial revenue continuing to grow balances transitioning all accounts to help equity custody.
And earning more just interest on client held funds.
Agency at the table of today's press release includes additional detail to help you with these opportunities.
Interchange revenue grew 62% in the third quarter $222.5 million driven by the increase in average total accounts, including from Wageworks.
Our large base. The total accounts offers multiple opportunities to grow interchange revenue going forward.
Gross profit grew to $96 million compared to $45.8 million in the prior year.
Gross margin remained high at 61% despite the change in revenue mix, resulting from the Wageworks acquisition.
Operating expenses were $86.1 million were 55% of revenue.
Resulting income from operations was $9.9 million or 6% of revenue.
Operating income excluding $17.7 million of integration expenses and $13 million in acquired intangibles amortization was $40.6 million or 26% of revenue.
We had a net loss in the third quarter of $21.3 million or three cents per share on a GAAP basis, reflecting additional expenses in interest.
Position costs merger integration expenses and amortization of acquired intangible assets.
Our non-GAAP net income was $32.8 million compared to $20 million in a 65% increase.
non-GAAP net income per share grew to 47 cents compared to 31 cents per share last year.
Our adjusted EBITDA for the quarter increased 87% to $55.5 million and adjusted EBITDA margin was 35%.
We now have multiple avenues for margin expansion engaging our members to grow interest assets will remain a powerful driver of margins.
More than four fold increase in inorganic HSC asset growth over the year ago period, John mentioned is encouraging.
I just had reported cost efficiency efforts are ahead of schedule.
Reducing platform redundancy over the next few years will also improve margins.
These opportunities potentially reduce the impact of variability in custodial cash yield.
As a reminder, help equities federally insured cash placement program is structured to prioritize rates stability and the development of diverse mutually beneficial long term depository partner relationships.
We continue to expect a 2.5% interest rate yield on Healthequity Custodied HSH cash assets for the full year of fiscal 2020.
However, recent feedback leave us a bit more cautious with respect to new cash placements, we will be making beginning around year end.
Including digits, a cab cash growth depository contract renewals and the transition of legacy Wageworks agency assets to the health equity platform.
National average jumbo CD rates across three to five year durations have fallen by 25 to 30 basis points over the past several months.
According to FDIC data.
Under President conditions, we would expect yields on Healthequity custodied cash overall, two declined slightly as new cash placements occur.
Turning to the balance sheet as of October 30, 129 team, we had $174 million of cash and cash equivalents with 1.2 billion of term a debt outstanding none of issuance costs and no outstanding amounts drawn on our credit line.
Turning to guidance for fiscal 2000 fiscal year 2020.
Based on where we ended the first nine months of fiscal 2020, we are raising health equity revenue guidance for fiscal 2020 to a range between 520 in $526 million.
We expect our non-GAAP net income to be between 101 and $105 million.
Resulting in non-GAAP diluted net income per share between 1.46, $1.46 cents and $1.52.
For sure.
We are raising guidance on health equities, adjusted EBITDA to between 182 and $186 million for fiscal 2000, Tony.
Please see our reconciliation of our non-GAAP measures provided in the earnings release to note that guidance on our non-GAAP net income and Pershare calculations include interest expense and acquired intangible.
Amortization associated with the acquisition without including the Wageworks business.
These estimates include achieved run rate synergies discussed today.
Our net non-GAAP diluted net income per share estimate is based on an estimated diluted weighted average shares outstanding of approximately 69 million shares for the year.
The outlook for fiscal 2020 assumes it projected statutory income tax rate of approximately 24%.
Ted mentioned, we are already working to trim costs and realize synergies from our combined operations.
However, the fourth quarter of Wageworks business as a similar seasonality as health equity.
We usually see a ramp up of costs going into the fourth quarter and preparing for it and onboarding of new accounts.
We're off to a good start to achieving the outline synergy that said discussed earlier.
These synergies will be additive to both top both the top and bottom line for fiscal 2020 and beyond.
As we have done in recent reporting periods. Our full year guidance includes a detailed reconciliation of GAAP and non-GAAP metrics.
This concludes managements estimates of depreciation and amortization of prior capital expenditures and anticipated stock compensation expense, but that does not include a forecast of stop stock option exercises for the remainder of the fiscal year.
With that I'll turn the call back over to John for some closing remarks.
Thanks, Darcy and.
I did want to say a little bit of the thanks to Darcy and Tyson Murdoch's finance team in Draper in Tempe in Dallas, MTO and elsewhere. It's due to their hard work that we are able to deliver the first combined quarter.
In two you in a clear and timely way and it is a good quarter to be delivering we are meeting our commitments. We delivered strong results. We are raising our outlook, we're delivering synergies faster we've reported strong sales and we are bringing a unique story to the market.
And a great time to do it all headwinds don't low one so interest rates come to mind as a challenge, but we have multiple paths to grow profits going forward and we thank you for being part of that journey.
With that I will close and ask the operator next question.
Thank you to ask a question you wanted to press star one on your telephone.
Withdraw your question pest upon key please standby we compile the kendavis there.
Our first question comes from an Sammy along with JP Morgan. Your line is now open.
Yeah.
Hi, guys. Thanks for taking the question congrats on the great quarter. Thank you.
My first question is really around the synergies, but hoping maybe you could parse out what came on sooner than you expected now do you think you can achieve your target you know earlier than expected 20 436 months.
Yes.
I'll comment generally and then ask either docs your tenant they'd like to add.
In general what we're seeing is that on the cost side weve for at least on cost cost side, we've been able to make more progress I think sooner than we expected and I think that just generally were look reflects the level of teamwork across.
Lexi Healthequity legs, Wageworks and really embracing a process and the fact that you're very very candidly that Ted and.
Our integration team and manage it effectively it also reflects level of diligence that was done in this regard and so so the cost side I think is something that we feel real pleased about where we are and as Ted said I think.
Not only will be able to get there but.
Once we get there we can stop talking about synergies, but we'll still be talking about business efficiency and I think there'll be more to do.
On the revenue side.
I think the biggest things that we've been able to do our first.
Vault something that it sounds very technical but is.
Really important which is.
We've been able to separate out.
On the Wageworks side of legacy.
What we refer to as client held funds in country in the CDD benefits from the company's operating cash and that's as as Ted commented, that's consistent with health equities accounting policies and approach. We think it's the right way to approach. It we think it gives our clients greater stability and certainly makes our financials much clearer, but also.
Allowed us to focus immediately on optimizing those funds to generate some revenue and thats something thats really helped us out in the current quarter.
As well as some of our agreements with third parties I think looking forward, what we really look forward to his first of all beginning the process of migrating HSH raised from the legacy custodial partners that Wageworks had to health equity and starts you mentioned, we provided some information that helps in that regard.
Then secondly, completing what have already been very fruitful discussions with.
Different partners that help us really leverage our size and scale.
To increase up for example interchange revenue with our partner or partners. So.
We feel like folks are competing for our business and thats, good and that'll help us too. So so thats, where we are and that's where we're headed and I think the net result of that as as Ted said is.
We're going to get to the point of.
Achieving.
Our our $50 million target much sooner than we thought and of course, it'll take a little time to realize it in full but but we'll get there.
Darcy and you can get to that.
No I think.
Well, primarily the things that when she asked what what came a little bit faster, we talked about getting access to the decline held funds quickly and we have made that transition quickly.
And then on the expense side I think we went through the very concerted effort to try to get captors. Many those if you could since possible.
I don't given that the interruption the mill the call I don't know, we have Ted and Steve with US on the audio now do we.
Yeah, John we're here, but nothing to add to your answer. Thank you. Thank you. Thank you see that we told you that roller skating Miami Beach was not going to be the way to do this and we're teasing guys or not.
They are on their out of Miami Beach, They maybe roller skating.
Okay. Thanks again.
Thanks very helpful.
Thank you. Our next question comes from Alex Paris with Barrington Research. Your line is now open Alex.
Hi, This is Chris how sitting in for Alex Good afternoon, everyone.
Hey, I'm actually rollerblading right now so [laughter].
Our brave around I guess.
Following up on the previous question just about the synergies you're ahead of schedule.
Towards the 50 million.
I would assume there's a part of the synergistic opportunity that's not yet realized and not yet quantifiable can you comment on.
Perhaps maybe some additional upside that we may see as you continue to effectively integrate wageworks.
Into the business, yes, the biggest component of that thank you for the question is really the whole point of this thing which is to give us more add backs on selling our service and to winning worthy I've asked yet and all of the synergies we talked about are in the nature of what I guess and the Portland.
People refer to as bankable synergies that is stuff that is somewhat within our control in that we can work on as quickly as possible, but but the real goal of all of this is.
To advance the agency market by getting us more at bats, and winning more of the raising our batting average and Ted reported.
I think some of that is already happening obviously it is early days and.
So forth but.
That's that's really where I think ultimately this transaction and broadly speaking the strategy that that predated it at the company are really going to Sean.
And that is that in terms of our ability to continue to outpace the market to continue to add onto both topline and then of course opportunities to drive synergies as well as by the way drive benefits to our customers.
Although it's not directly related you when I look at the the growth in the asset base. This quarter I mean, that's our member saving more money and they're doing that by taking advantage of the things we have on our platform.
It really help them learn how to use and actually the way should be used you'll get the most out of every dollar et cetera. So.
Thats, where the thing really shines over the long term and of course those are not things we attempted to quantify.
But rather the benefit that we hope to be.
Not just the icing, but the cake for our shareholders as well as for our members implants.
That's great and then just one last question as it relates to wage works.
Since we're on the topic of the cost side and how that's going ahead of expectations, how should we think of wage work.
Margin potential expansion.
I know previously you had mentioned.
20% historical margins do you think we get north of 20% as we roll into calendar year 20 in the fiscal year 21, or how should we think about the different opportunities that you see that side of the business sorry.
Yes, we commented as you said last quarter that we expected that we inherited kind of a 20% EBITDA margin business.
Overtime.
It's a separate reporting for wage specifically and to be honest with you. The blending of the synergies that we achieved along with the wage business what kind of.
Merged together, along with health equity performance, but overall long term on margins, we expect that.
We will be able to get.
Margin expansion, if you talked about the timing of that will be.
Dependent on how quickly we can.
Make some of these changes would also have absorbed into the marketplace and to grow the business and so we do believe that long terms of.
The acquisition is a opportunity for us to grow margins, albeit we recognized in the short term that the combined margins are lifted healthequity was reporting before but.
We believe that together with wage and with the opportunities for synergy that we will get margin expansion.
That's all very helpful and I appreciate the color and good quarter and Theres. Some oncoming traffic ahead, and I'm rollerblading, so I'll have to jump back into queue.
Thanks, Chris speculative.
All right. Thank you.
Thank you.
Next question comes from Jamie Stockton with Wells Fargo. Your line is now open.
Thanks, maybe just following up on on the wage business on the profitability and I think maybe Darcy you mentioned something in your remarks about this but.
I do my math right had kind of mid Twentys EBITDA margin as far as the contribution during the quarter.
You know.
Is that maybe high because it wasnt, reflecting a lot of the work that happens during open enrollment and kind of your previous commentary implies.
A much lower profitability number.
In the fourth quarter.
Well, yes, you're correct in EMEA and so just as I also mentioned in my comments is the same seasonality that we have always experienced that health equity and this was reflected in our guidance is also true for wage.
There's a lot of onboarding costs to get Expensed in.
The fourth quarter before the accounts actually arrive on scene and so we would expect a similar performance with respect to margins in the fourth quarter on seasonality as we have always experience at Healthequity and so.
You're correct in that.
Margins between third quarter, and fourth quarter decreased because of that factor primarily.
Okay and then my other question. It's just on the yield commentary I guess I'm curious how much of that as you kind of look forward the next year.
Is you know related to your kind of legacy cash.
And what you would be putting to work on what's happening with the yield environment.
Versus the notion that you are going to have.
More cash on the on the wage side.
Some of which you are going to be able to.
Get control of and put to work.
Maybe have a shorter duration some of which you don't have control and if you could just give some color on how much of the wage cashes impacting your commentary that'd be great.
Yes, most of our commentary was surrounding our legacy Healthequity cash business and we're trying to give you a flavor I think when we talked in our.
Well in well third quarter end today, we've guided separate why 20, we expect our.
Legacy yields to be in the 250 range and as you know those have come down slightly from the second to third to fourth quarter in that in that guidance.
But very slightly.
With respect to.
The the future rate as you know, we latter things out.
We've said that there has been since we talked.
For a month ago about a 25 to 30 bips decreased in the kind of three to five year rates, because we ladder, we don't get full impact of that but we will get some portion of that impact so.
We're really talking about on the health equity.
Interest rate environment.
From what we said in September we thought there would be.
To slightly up now we're seeing is going to be slightly down because of this impact with respect to the.
Facility utilization or the revenue derived from the.
The wage.
Just a assets it's really dependent on.
The timing of when we're able to move those assets onto our depository network and the interest rates it will be prevalent at that point in time, and so we haven't built any preconceived idea into that with respect to future rates. It is it's really relied almost on the timing of when we actually get those.
Assets onboard.
Okay. Thank you.
Thanks, Jamie.
Thank you. Our next question comes from Greg Peters with Raymond James Your line is now open.
Hi, Good afternoon. Thanks for taking my question. This is mark has been for Greg.
The Marcos know he knows about rollerblading and all that stuff.
I bet I'm guessing marcoses has morning units art.
Go ahead, Mark it's good to talk to you you know John .
I was hoping we could we could talk about the base business for a and if my math is right. I think you guys got indexes of 100 basis points of adjusted EBITDA margin improvement in the quarter. So I was hoping you guys could maybe comment on what's driving to leverage there on the legacy Healthequity side.
No.
It's overtime is good and more and more difficult and we'll get more difficult to separate out.
At the EBITDA level.
Healthequity versus the wage versus the synergy business. So it kind of all gets blended together is as we're managing the business as one company and not as separate distinct entities and so.
Whatever calculations, we do.
On an individual basis can be skewed by by that but that being said.
We believe that we have a profitable growth engine to generate EBITDA and.
I know theres been some concern that hey, we had higher margins than what wage, but we think that collectively together over the long term time that we will grow those EBITDA margins even further.
There will be gone.
Hiccups, along the way as you're trying to transition through that integration when you blend together.
But but we are optimistic and we feel that the base business has always been a driver of profitability because.
Ultimately as our members save more dollars then that generates additional revenue and additional profitability as we scale to.
Deliver that service.
One factor that's just worth noting is is that that was very strong growth in both total an average assets over the course the quarter and.
It is you know ultimately our model.
Is about.
We believe every family should happen each day and.
The more families that have them and the nor families that know how to integrate them into their overall financial planning to have more secure future when it comes to healthcare as well as more secure president.
A lot of the benefit of that kind of dropped to two to us shows up as revenue and then drops.
Straight the bottom line and so.
Relatively modest improvements in growth in assets you have a very very significant impact ultimately on the bottom line and you saw some of that in the Lexias equity business. This quarter and certainly it's the point of of everything we do is moving towards that direction. So so hopefully we'll see more.
Great and then I'll do the waste side the revenue it seems like it's running better than the annualized 420 million you guys mentioned previously I guess can you can you give us some comments on the revenue there and an update on the ATP side of the business.
Yeah.
I'll just comment were generally and then asked had some comment on.
ATP and more generally is that the topic of that kind of activity.
So so if you kind of break it out.
And ignore synergies and the like we're running right at the as Darcy said I think right at the top end of.
Where we expected to be I think we'll start news Ted you said that Red top end, where we expected to be.
So I wouldn't say, we're running above our expectations, but I think we're in a good place and would look its two months in but I think the the lesson probably to be gain from that is and this this gets into the question about enrollment and so forth is that though we've never been through an annual enrollment with wage.
Well actually I have but thats another story.
But but nonetheless.
But we haven't and so we're going to be conservative in our guidance so forth.
That we have seen a level of stability in the book of business that certainly pleases us.
Ted you want to comment on that a little more detail or on it on anything with regard to the legacy 80 people exit.
Sure. Thanks. So this is a huge area of focus for us and it's a really important plays for us to kind of deploy our purple service culture.
We've thrown a lot of resources are wrapping our arms around the legacy ATP client.
And we're seeing what we'd hope to see which is some stabilization.
In in the book as John alluded to.
We're and so were it is a lot of effort to kind of service remediate, we're bringing some calls onshore more quickly than.
Then.
We have for the rest of the book simply the kind of address and service challenges and we're being rewarded thereby I'm happy clients. So I would say that we're we're getting our arms around the business and we've stabilized that and now we have to kind of complete the integration of the book of business, which had never been done previously so that's where we are now feel fill and probably better about it.
Than we did 60 days ago, but a lot more work to do.
Great. Thank you and John just one last comment for you I just want to you know that I'm really count you to perhaps persuade Greg let me.
Release, you off of my duties to go to Carnival next year. So [laughter] good luck with that Mark of.
Non deal Roadshow, perhaps [laughter], thanks, guys congrats.
Thank you Sir our next question comes from Sandy Draper with Suntrust. Your line is now open.
Thanks, very much question, probably for John or Steve more around the market.
No you referenced John a couple of surveys.
The one thing I did notice in the Kaiser survey.
Is it more employers for the first time.
We're reintroducing Pts.
Just curious in the.
Conversely, it can be patent sale season have you noticed that is just an offering or are.
Employers promoting ppls again thanks.
I think the short HVOR I mean, two thoughts one is as with all of these surveys it's very sometimes.
We're all dancing on the head of again, a little bit, but I think where what that what that finding is consistent with is the idea that employers want to offer options and.
Whether it's an option to NHL MAU or an option to an agent say style plan from our perspective, that's a good thing, particularly I think about it post wageworks. We now have a great product for people, who are not yet ready to be in a safe plan, but want to.
Spend their health your dollars pretax and Thats.
Flood spending account product and and.
We're by by the measures of the study that I cited and I think by others were.
Either the largest or damn close to it player in that business and we intend to use that scale to make that a really great product. So.
I think that the main take away it and consistent with other research out there is that employers do want to give people options recognizing that people have different levels of comfort with.
In particular with.
The sort of co pay versus.
Versus out of pockets now that having been said what's interesting. If you look at the data one step further is that.
With greater clarity with regard to pricing as we kind of get into this over the course of years, what you see with a lot of these plans is the co pay and the and that and the out of pocket cost for drug and they're not very different in many cases, the copays higher that's part of the plant Thats part of the way unplanned work.
And so I suspect overtime, you had the distinction between that that plus the inclusion of more preventive items in the age of say plans will we booked blur the distinction between a PEO and an HSH plan a traditional each say plan overtime and.
Ultimately that's good to because it gives more people the opportunity set so so I think thats, how I would explain the result, you described Steve anything to add to that.
No I think you're right I think that employers like you have choice, but the nice thing is is that when the choices balanced more employees to gauge of sake, which has been our experience.
Networks wells for us.
Great. Thanks, I'll stick to one question.
Thank you Andy.
Thank you. Our next question comes from Donald Hooker with Keybanc. Your line is now open.
Great. Thank you for thank you and good good afternoon.
One of the here how one of the here.
Maybe a little bit more on those retirement planning relationships past couple of quarters you. All it seemed very optimistic there are there any numbers you can share with us in terms of.
Traction there or is that more still more maybe a more of a next year phenomena.
Well I think we'll probably have a little more to say when we're done with the sales cycle. Don I mean, one thing I would say as we said.
In September or perhaps.
When we.
Announced the agreement to acquire Wageworks that we pointed out our place in the retirement channel and we expressed the objective of getting roughly doubling expressed in terms of their members.
The coverage of our retirement plan relationships and while we don't make a habit of announcing relationships. One after the other we've done that in some cases for various reasons, whether those are health plan on retirement or for that matter employer relationships I am I tell you that plan is well underway.
We won some new relationships and then with regard to the existing relationships.
Early days of course, but we're learning a lot in the current said sales season, and obviously have made some sales you see that in the numbers to date and.
And we expect that to continue I suspect will have a little more to say about this once the that we're talking about the end of the current sales season, but.
It's something that we think just makes a ton a sense.
It's not the only way to look at an HFSA, but it's a way to look at it and I think particularly what's good about it is not really trading off you know it's not just it's not just helping the three or 4%, who you know like really get this intuitively and we aggregate some funds and done it up you were able to help.
Every bought meet every body, where they are and that's really been selling point with our partners to date has been it's instead of a solution that really kind of just ends up focusing on a small group of people because no. The before when kayser linked now we can really introduce everyone's again.
Benefits no matter, where they kind of stand on that health savings journey.
Okay, maybe one follow up on the on the Wageworks.
Try to the business.
You had communicated and mentioned on this call as well thats sort of attrition from the ATP. The acquired ATP I think the Cobra Fsh businesses that we acquired a few years ago.
Where are you now.
How much more you sort of see that sort of returning.
Looking at a couple of quarters and when can sort of Wageworks do you think realistically stabilize and returned to a rather growth profile.
Well, we said last quarter that.
The rough baseline that we provided was sort of the baseline where we bought the business was we did say we thought we bought at the time that there was some risk that we would see incremental attrition on a net basis.
Going into next year, and frankly, what we feel more confident about that at the moment as Ted suggested and I suggested I guess Darcy even suggested.
Even darcy we.
We have never been through this cycle and so we're going to remain cautious about it and our Q4 guidance to some extent our implicit Q4 guidance certainly reflects that level of caution but.
Look at if the question would be where do I mean is that date sooner in my mind today than it was 60 days ago. When we I guess now 90 days ago, and we closed the transaction. The answer is absolutely and that reflects as Ted said the work of the teams to really hop on this and take advantage of everything that we had learned during delay.
Engines, and then stuff, we didnt know and and just get to work.
When clients you moving forward they tend to want to stick with you when they see you doing nothing they don't and I think it's fair to say that.
The team on on both the relationship side in the service side is moving forward.
Something that that May have got lost in the difficulties that Ted was having on the phone, but maybe it's worth mentioning year is.
And on violating my rule about joining on the answers, but only because we had a little phone difficulty.
Is we had at the beginning of September within.
Legacy book of business, we had 20000 outstanding cases surface escalations from employers that the team as a whole both legacy health equity Lexie Wageworks hopped on got cleaned up and now is operating at where they should be.
Which is it at 98% service level on the timeliness of resolving every employer question and.
That's a pretty good thing to have accomplished in a month or two but I think more importantly to your question it signals to the clients and their advisors that things are going to be different and they're going to be better and that in fact.
What's you're going to get out of all this is a darker shades.
And Thats a good thing.
Thank you very much thanks Don.
Thank you. Our next question comes from Georgetown with Deutsche Bank. Your line is now open.
Hey, good afternoon, guys and thanks for your question question. How are you guys welcome.
Thank you.
I guess John in Jersey, another follow up question, Rick do you guys you've done a good job I guess mitigating the downward pressure on the results as rates have declined.
I guess can you provide any commentary on what your visibility looks like so if we were to continue to see modest declines how long could you guys hold the current rate of return and then.
Got it help us all we get into into an environment, where rates begin to increase would you guys have a faster potential to kind of influx to the upside or kinda or reinvest the reinvest our balances so.
So it kind of maximize positive change right.
Perfect.
Yes, Thanks for your question George.
We have.
Kind of had a custodial cash management policy in place for.
Going back to pre IPO days.
And.
As you know it we ladder it out.
We don't try to achieve the current rate environment to get to read squeeze every ounce of interest and we cannot about what we're trying to do is provide as much stability and visibility into the rate environment that we can and that.
Policy has worked very well for a month for us and we will continue with that policy. So what that produces is.
As we saw.
We've seen both rising and decreasing rate environments and in both of those what it does is provides us.
Ability to.
Expand our depository relationships to fairly significant we have.
So as you know in double digits of depository relationships and.
Provides us the flexibility when it comes on placed funds is to be as flexible as possible. So.
We will just continue that same path, we're not saying that that yields won't decrease as as rates.
If rates go down and we'll get that over our duration period in the same will happen if rates go up we get those benefits over our derision period. So that we will continue to manage is that just as we have in the past.
Okay, and maybe if I kind of a quick follow up John you guys had the chance to close wage.
We are what I would call definitely before opening enrollment season, but probably during the peak of kind of selling season into the employer sponsored space kind of just any feedback that you guys and your sales teams. We're hearing from a plan sponsors around the acquisition the integration kind of what what they were looking for and the combined organization would be interesting color.
I'm going to throw that wanted to see.
Hey, George good to hear voice I think that as we've talked to people really what you're seeking is just the full bundle. They want the full solution and it's pretty remarkable that if you look at the two books of business it kind of 90% of our business prior to acquisition on the legacy of equity side was able to say 90%.
The wage business prior to acquisition was what we would call CBB nominees to say consumer directed benefits and so as we've gone out to the market not only talk to.
The employers themselves that our health plan partners and also just the whole myriad of Vince the consultants and brokers I think the key thing they want to simplicity and they want one partner and so for us to build off for the full bundle independent of what what they want is the most exciting form and then obviously when we can when we can start to.
Add additional products into our staff there is there's benefits to pricing and scale in service and just a bunch of other stuff. So I think that's the thing that's resonated the most is.
Can you do more for us I remind since we've we've been out this for a while I'll remind the group on the phone that.
I think of 12 years ago.
Shortly before John joined US we started getting that requests I mean, we had RFP used from employers and health plan sand can you do more than just state you say since we started dabbling with it felt like we needed to say, yes to things like flexible spending accounts nature, A's, but it's pretty need to be with our new wage legacy wage.
Sisters, and brothers and having us having them teaches about all these new accounts that they are doing and has done and and just been able to say yes.
A lot more often I think is a tremendous solution for not only are salespeople that are account executives are managing our legacy 45000 employees on the Healthequity site.
Does that answer your question.
No it doesn't I'll kick myself, the two for now and how that can you give thanks.
Thank you.
Thank you. Our next question comes from Alan lots with Bank of America. Your line is now open.
Hi, everyone and thank you for the questions.
For core Healthequity, how would you compare this selling season versus where you where this time last year.
That is a great question Alan Thank you for asking it.
Genuinely out because we were reminiscing a little bit in the minutes before the call about this topic.
We do this December call typically from.
Room here in New York the that.
One of our.
Longtime board members.
No longer on the board generously lets us use and.
And we were in the same year ago and.
A year ago at this point as you will recall and certainly others may.
We were somewhat concerned about where the sales process was and we telegraphed wrap that and we we the basis for our concern at the time really was about.
The feedback from employers that was hey, the economy is pretty good you know really good and we all got tax cut and everyone knows it. So we don't want to rock the boat in any way shape or form and so we're just going to light we benefits alone. We got a lot of that kind of discussion now in the end, we did a little better than we thought.
And the consumer absolutely came through in terms of of.
Cash coming into the accounts, but we had those real concerns and you heard those reflected at the same time Allen in our competitors Mena. So I recall, there was little joke on this call a year ago, where.
The folks over at United Health Group and expressed the view that the future was going to be something else and we said well if they want to sell their business. You know we got we got a place to call I got my number right here.
By the way that number still available but but.
But.
Someone commented.
One of your brothers on this call commented to me earlier earlier in the day that.
Ed on whether I don't was Investor day, or recent call that United did last couple of days you know now they are back to featuring Optumhealth back and I think that's those are so there was some years ago. There was some of that not pessimism certainly some concern about the pace of growth and obviously.
We've had a strong first three quarters in terms of the actual reported.
Both results and account adds an asset ads.
And we're going to try and continue that momentum men into the fourth along with having a truly unique story as you just discussed and so.
I guess the short version is.
That.
We've had a good year, so far we do not take it for granted.
But we're going to try and finished strong as well.
That's helpful. I guess following directly up on that what do you think has caused the change in sort of posturing or thoughts by the industry by employers.
On a just say is I mean, you look at your growth in the quarter, 8% year over year, which is really strong. The sequential growth was really strong is it new employers coming sort of outside of the normal selling season is it increase in compliance for employers. You currently have where are you seeing this strength coming from and then can.
We expect to see that continue into fiscal 21, thanks, well well, obviously I'm not sure. There has been much change except in one area, which is which is that that last year in particular as I said a moment ago the.
The economy was just going Crazy and we also were on the heels of large corporate tax cut and I think there was a real reticence on the part of employers to do anything other than just say benefits only going up a few percent next year turn the page.
And.
Sometimes that can sound good but unfortunately it also differs changes that ultimately have real value to consumers, but but it's what happens sometimes I think that's probably the biggest change I'm not as we said last year, we didnt agree with the sentiment that there was some.
Fundamental slowdown in the market in terms of employers offering and in fact, then when Kaiser came out with their information. It turned out we write about that that is a say you know that offer rates continue to grow steadily year after year, we'd still like to see more of the small route market follow the large group because of in small group.
World There is a little bit of always a little bit of a tendency to lag in part because of the way small group insurance is priced but but.
I think that's the only real change in the real World I do think in the in sort of the industry chatter. However.
I think that a couple of things have occurred one is very candidly is the waitress acquisition I think.
Shine some additional light on this industry and showed us the we have a lot of choices about what we can do and what we chose to do.
Executing on strategy, we've been working on for a couple of years. Before then was do something that would give us more backed in the market where it was a vote on our part with up with your dollars that as our shareholders dollars and with with our fee that was this market is going to continue to grow for a long time, and we're going to be here and.
And so let's do think strengthen that versus say, okay. What's the next thing that makes any sense and I suspect that has had some impact particularly of last few months on the chatter within the broker community and so forth about.
I don't want to say the will revolves around us, but I, but certainly we've heard a lot about it now.
Thanks, John .
Thank you it's Alan.
Thank you. Our next question comes from Robert Jones with Goldman Sachs. Your line is now open.
Robert Welcome.
Great great. Thanks for thanks for taking my questions. Appreciate it I guess just to go back to following up on actually that previous question around the guidance clearly strong progress in the quarter and throughout the year from the kind of legacy business, excluding wage and clearly the new guidance Tonight.
Incorporates everything I'm just curious if you could parse out at all or was there any upside as you thought about the full year.
Coming from the legacy business as opposed to just incorporating wage and then the synergy pull forward that you guys discussed.
Well, there's Darcy I'll start and then Jonathan filling the thesis.
No you're you're relatively new that but I'm sure you know that we first of all take a very conservative approach to guidance.
Historically for the legacy legacy Healthequity business. There are really three drivers, particularly going into the ended the year that really will drive results one of his.
The interest rate environment, which we've talked about secondly is the growth in cash assets, particularly.
And.
Customers also grow rapidly they don't have as much revenue impact as the cash assets do.
And then thirdly accounts in John just tend to talked about what's happening in the account environment vis-a-vis comparison to last year.
We are typically conservative on the on the forecasting of cash growth and in that are that is reflected in our guidance.
Additionally, in this year because of the acquisition.
The wage account growth factor.
Plays into that and as John said, because this is new for us.
We've been reasonably cautious about what that account growth will be come January and.
While we're working to make that as robust as possible we're.
Reasonably cautious about what that is for this fiscal year.
When we report our.
Fourth quarter results will will tell everybody exactly how that went and so.
Cautious in that regard and then the fifth factor that is factory in here is is the synergy issue.
Both on a revenue and on an EBITDA basis.
And we've talked a lot about the synergies.
Were as we've said, we're very confident in achieving our synergy targets and having achieved those by taking actions, but the realization of those obviously takes time and so do we actually reflect the synergy result into a particular quarter requires real worked in order to do that so.
Once again, we were conservative in that regard about the realization of those that we get in a particular number.
I would say I'm not I'm not sure Theres really much Abbott as pretty complete answer I I.
I think your question specifically related to the core business.
Starting to its particularly when you think forward he gets very difficult to segregate.
And frankly, we don't want to be segregating.
Of the too.
But.
A couple areas I think are worth highlighting that maybe certainly are reflected in our guidance, but maybe aren't aren't dumped to stick off the page.
When as you know when you do a transaction like this you have hopes about areas, where you're going to be able to do the same job for a larger book of business.
More or less the same level of resource and therefore generate effectively in margin expansion cost centers.
Deal, we were I feel really good about what I'm see from the team in terms of our ability to do that and ultimately by the way I think it it's a tremendous benefit for everyone involved everyone ends up with a better job every one ends up with.
Better outcome all in all when you can operate more efficiently whether it's ultimately that they are on our team or elsewhere.
But I think you see it and by the way. This is before we really get into the business of actually closing down some of the legacy just duplicative operating platforms that exists that will take some time as we've always said.
But that two will be better for everyone in terms of the service, we're able to deliver costs and then and then obviously.
Ultimately people's career advancement and so.
I think one area that really does stick out whether it's the core business or the wage business is little bit hard for me to tell but is that the component of this that is we're going to able to operate and see real benefits over time in terms of operating cost leverage as well as.
Gross margin.
Got a little works and if we get to baseline we only into quarter two months not three that kind of thing, but it's very clear to me that those things are going to happen and then the second point as I say another thing that you sort of hope will occur and then you have to sort of see if it does is you have partners that you work with and you are.
Able to bring a more volume and you need to see how they respond to that and I've been really pleased thus far with the vigor with which our partners of all kinds have responded too.
The way that head and our team as well as our vendor management team has approached.
In each of our different partners.
Both existing and would be new I think if I look at it whether we're talking about harden networks or.
Our party issuing partner or the banks on the depository side or folks, who who do processing for people recognize this is going to be a market leading story and they want to be a part of it and particularly those who have experience working with us in one way or the other.
That that know how we operate are willing to sacrifice some amount of margin for the fact that we consistently trying to over deliver.
At rather than over promise in a process, where we're trying to attract their business or what have you and.
So those are two things that maybe don't shoot off the page per se, but where they really do show up is in the Overachievement on EBITDA and then the dramatic improvement in our EBITDA guidance.
That.
Is there for this year now rates sort of headwind in the other direction that balance that out.
They are going to be times in our business when rates are a tailwind and a headwind as I said earlier everything is not going up low in the same direction at once.
And that's probably that level of diversity is a good thing.
But those are the things that really Sheila.
I mean.
Those those are really helpful perspective, I really appreciate it.
Thank you.
Thanks, Bob.
Thank you. Our next question comes from Mark Mark on with Baird. Your line is now open.
Hey, good afternoon, everybody Hi, [laughter].
Two questions. If I may one is fairly short one which is just which of the consumer directed benefits within the wage portfolio, where you. The most excited about that you're hearing the most about.
In terms of joint selling book for this year and then going into next year and then the second question would just basically be.
Fund placement the asset transfer within wage and or Youre.
Under your portfolio, where you can get your effective.
Yield.
Close to what they've been doing with some would be in white.
Well try that second question first RC sure. So there's two components of fund placement as you said Mark there is yes, but we now call client help us which used to be on the wage balance sheet, which has been removed from our balance sheet.
And those we are in the process of monetizing those already.
I think that we've got a little bit of.
Yield expansion there, but we have the process already in place in the first 90 days that we've been together to make that happen with respect to the HSC assets.
We've talked.
We're all about.
Getting those transferred and and those are in different depositories today.
And as we've said before we have contact with each of them and we're working through that process in.
We want to get that done as quickly as we can but.
It's a little bit more challenging because.
It's very complicated.
Just move in Asia say off of a platform.
In two you have employer relationships you have.
Individual relationships et cetera et cetera. So.
As we do that.
Then we will go through our normal process.
Of replacing those will those cash deposits.
Two of our depository network.
Yeah with regard to the first question.
See ongoing weakness in the second there people on this call who I have literally been missionaries that would not be meat, but when it comes to.
Helping.
American families kind of make ends meet I think it's fair to say that we have a team of almost 3000 missionaries and what really ultimately is it yes, I think me and I believe our team really juice is that we now have so many more tools.
To help people do that and so by go through the Cds.
The commuter product that we have as an example is there is nothing else like it theres nothing else close to it and I can't tell you. How many I was I was at a very fancy event with all kind of Ceos and whatnot last week and unlike theres always like fancy Pant Ceos and then.
And that was a product where like half of them used and Oh, yes. This is incredibly convenient I seemed like 60 Bucks a great part is so is there assistant and sodas Bank teller.
Right and it made the 60 Bucks may not mean as much to them, but I need to hell of a lot on a monthly basis to a lot of other people and taking that money in making that part of long term savings is a big deal and look at Cobra and today on this isn't going to happen immediately mark okay, but.
We now play a significant role in the way that Americans transition jobs.
And we can make that a better process.
Right healthcare should not be the source of friction as as someone suggested earlier in the weak on the campaign trail right in changing jobs. It does it need to be people are scared for reasons. They don't need to be this can be done right and we can help people do it right and that's a different things.
From just we send them the forms and those the check the box we collect their dollars than we make money on Cobra.
There's more to it than that and that comes not only at no cost to our clients. It makes things better for our clients.
And so we're excited about that and then as I said earlier, the flexible spending accounts and the HR A's no they're kind of.
Steve might say being a doctor, though I'm not sure dr. supposed to put it this way, they're kind of a gateway drug to the HFSA.
And that's the way, we think they can be used and and so were.
We're particularly excited about there is given our scale the things that people don't like about those products as they can be obtained in the button to run and given our scale. One of the things were asking for from our business partners is if you want to work with us going forward, we need your commitment to innovation, we need you to help us make this easier in ways that we cannot do ourselves.
So.
I guess, that's the kind of a long answer, but it's a way to say that ultimately what's exciting to us beyond the ability to offer simplicity to our clients and to their advisors and brokers and the like is the ability to do what really motivates our people which is to.
Deliver excellent service, while helping families connect health and well and make ends meet that's the stuff, we really like to and so so that's why we felt this was a good bit first place and and why it has proven to be somewhat.
Excellent. Thank you.
Thanks Mark.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to John Kessler for closing remarks.
Well.
Thanks, everyone for joining us a half hour earlier unusual that seems to have worked well.
Thanks, Ken Steve for joining us up from an undisclosed location on roller skates or something like that and.
We'll be we'll look forward to.
Our usual schedule of providing some updates on sales activity after the new year.
And then providing our fourth quarter results in March so thanks, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.