Q2 2021 Healthequity Inc Earnings Call

Good afternoon, welcome to Healthequitys second quarter fiscal year 2020 earnings conference call.

My name is Richard partner at your Investor Relations for Healthequity.

Joining me today, as John Kessler, President and CEO.

So Steve Neeleman, Vice chair and founder of the company.

The company's executive Vice President and CFO.

Hi, can Murdoch executive Vice President and new Deputy CFO.

Ted Bloomberg, our Chief operating officer.

Before I turn the call over to John I have three important reminders to provide first.

<unk>, we reported our second quarter earnings after the market close this afternoon, a copy of that todays press release.

And the recording of this webcast can be found on our Investor Relations website, which is IR dot Healthequity dotcom.

Second our tomlinson responses to your questions today reflect management's views as of today September 820 20.

And will include forward looking statements as defined by the FCC, which include predictions expectations estimates and other information that might be considered forward looking.

There are many important factors relating to our business, which could affect the forward looking statements made today.

These forward looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the statements made here today.

As a result, we caution you against placing undue reliance on these forward looking statements and we also encourage you to review the discussion that these factors and other risks that may affect or future results or market price of our stock.

That are detailed in our annual report on form 10-K.

And in subsequent periodic reports filed with the FCC.

We assume no obligation to revise or update these forward looking statements in light of new information for future events.

Third during this call we were reference non-GAAP financial measures that are defined in our press release.

There you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

At the conclusion of her prepared remarks, we'll turn the call over to the operator to provide instructions and to host our QNX.

With that turn call over to our CEO John Kerry.

Thank you Richard nicely done Hello, everyone and thanks first off to a really great effort by our teammates we're able to deliver thanks to their effort, we're able to deliver to you a bit of sort of purple normalcy today Q2 financial results exceeding our expectations faster progress on integration.

And profit margins and further indications of recovering activity and a strong selling season. Despite the ongoing tend to Eric I.

I will discuss Q2 performance versus key metrics, Ted will update on Wageworks integration and Tyson Tyson will be a makers premiere on these calls we'll detailed financial results and Darcy will cover our renewed full year guidance, Steve is here to join in the today.

So turning to key metrics revenue of 176 million is 103%.

Up year over year, reflecting organic growth and of course. The addition of wage works, but tempered by lower custodial yields in our members limited use of commuter benefits and health care cards in the midst of the pandemic.

We estimate that lower commuter benefits utilization in health care card spend reduced revenue by $16 million during the quarter, an absent those impacts that revenue would have risen 122% year over year.

Adjusted EBITDA of 60 million is up 48% year over year, 34% adjusted EBITDA margin is a sequential improvement. Despite the loss of high margin revenue and that reflects the teams realization of efficiencies as Ted will discuss as platform consolidation gets underway in earnest and our rapid response to change.

Circumstances, we believe that the margin results really do speak directly to Healthequitys long term profit potential.

5.4 million H. assays, and 12.5 million total accounts at quarter's end or plus 29% and plus 158% year over year sequential year over year sequentially HSH were up slightly with 108000 newly opened HSH a strong figure as many enrollments occurred during the darkest days of the pandemic.

Hey, just say openings were partially offset by closures in the context of migrating business from legacy Wageworks custodians to health equities platform, a process, which is nearing its completion.

Gross of 0.2 million Fsh Rice and Cobra qualifiers. This offset by the near term loss of 0.5 million commuters excluding the commuters.

CBS or consumer directed benefits are up a accounts are up 4% and total accounts are up 2% sequentially over Q1, reflecting both a strong start to the sales year and the benefit of the extension of regulatory Grace periods.

Laughed and certainly not least HSH assets reached 12.2 billion up 43% year over year 0.7 billion in sequential organic growth is the largest ever outside of a Q4 enrollment period.

And this growth in HFSA assets is also net of approximately 125 million lost in the migration process from legacy Wageworks HPC platforms.

While invested asset values provided a tailwind increased contributions from our employer associated members in response to health equities engagement in education efforts combined with lower spend really drove this remarkable outcome for our members.

The sales pipeline remains robust overall when rates thus far are strong and as we have said RFP is include total solution and cross sell opportunities, making them more valuable as with baseball. It's a unique say, it's an unique sale season.

Team Purple is getting at that's it's improving its batting average and its slugging percentage and that's good.

Healthequity also continues to outpace HFSA competitors. According to Devon years Midyear report market report released last week the agency market as a whole grew accounts by 12% I think it was actually 11.6 and assets by 19% for the year ended June Thirtyth as I just mentioned, we're reporting 29.

Percent account and 43% asset growth year over year as of the end of fiscal Q2 and that of course includes the Wageworks acquisition, but organically, we were up 13% in accounts and 25% and assets and that's better than the market and health equities total solution market leadership and Purple service culture are the reasons for it.

Continued outperformance.

On that positive note and with my quota of one summer Sports Medicine force filled here is Ted with detail on the status of Wageworks integration, it's heighten pace and resulting long term the profit potential.

Yet.

Thank you John we are excited today to report accelerated progress and to raise our goals for merger integration synergies. This is due entirely to our teams remarkable performance. Despite the pandemic and we could not be prouder of their efforts and focus during Q2.

Let me begin with an update on key integration metrics.

Recurring net synergies achieved as of the end of fiscal Q2 surpassed $50 million.

As a reminder, a year ago, we promised we would hit that number within 24 to 36 months.

We have migrated seven duplicate platforms as of the end of Q2 against the goal of 10 migrations by fiscal year end.

You are completed migrations include 5000 clients.

700000 members and 1.2 billion of HSBC assets move with 96% of service fees routine.

We have invested a total of 55 million as of the end of Q2 to achieve these synergies and complete integration.

Migrating all of our business to one go forward operating platform will yield additional synergies excuse me additional efficiencies beyond those already achieved we've said before that we would not report separately on integration efficiencies once that $50 million net synergy target has been reached however plan.

Form consolidation continues to produce efficiencies. So we are today raising our goal from 50 million to 80 million of recurring net synergies from the Wageworks acquisition.

We expect to achieve the additional 30 million within 18 months from today and to get there we will invest at the high end of our previously stated 80 to 100 million dollar onetime integration expense range.

We will continue to report regularly on recurring net synergies achieved and onetime expenses incurred as I have done today until our raised target is Matt.

We believe that integration investment will also drive topline growth for years to come.

John talked about the emergence of total solution sales and our pipeline and wins through Q2.

Beyond sales themselves integration increases the value healthequity can deliver and receive.

For example, the migration of more than 1 billion in HFSA assets year to date from legacy custodians to health equity enables us to deploy our proven member engagement capabilities to help people build HFSA balances and give employers visibility to overall engagement process progress.

As integration continues we will train these engagement resources on F. Assays for example to drive members to use on spend balances and as John mentioned, two Cobra, where we will help our members understand their available choices for staying covered.

Integration means delivering on our commitment to remarkable purple service in everything we do.

Loyalty scores of Wageworks clients have risen throughout Q1 in Q2 in response to the consolidation of all service calls onshore completed as promised in June and the expansion of health equities voice of the client program to these two these clients.

Beyond integration itself, we continue to invest meaningful capital in the future of the health equity platform.

Putting a better client experience and interface capacity for deeper data driven engagement faster innovation through a micro services infrastructure and enhanced security to keep up with emerging threats.

Despite the Pandemics near term economic impact on our business. We have kept integration on course and are continuing to invest for the future.

These decisions have helped keep our team members energized as well.

Measures of team member engagement dramatically increase through the first half of the fiscal year.

Building purple culture, while 97% of US continue to work from home is an everyday challenge and we are fortunate to have leaders in teammates who are making it happen.

Speaking of leaders I have the owner of the first hand off on one of these calls to Tyson Murdoch healthequitys newly minted Deputy CFO Fellow father of three.

Who and follow father, three who will review the quarter's financial result detail Tyson.

Thank you Ted I will review, our second quarter, GAAP and non-GAAP financial results.

Reconciliation of GAAP measures to non-GAAP measures is found in today's press release, our fiscal second quarter financial results. As you know include the operations of Wageworks, which was acquired in Q3 of last year.

Second quarter revenue grew overall inorganically in each of our three categories service revenue grew to 103.8 million, representing 59% of total revenue in the quarter and 295% year over year growth.

The increase is primarily attributable to 159% growth an average total accounts from acquisitions, including Wageworks and new sales as was discussed last quarter service revenue specifically commuter service revenue was impacted by a large majority of our members working from home has offices shutdown and major Youre cities.

As temporary benefit extensions expire and layoffs shift to benefit eligible workers, we are starting to see more cobra qualifying events, which could partially offset commuter headwinds in the second half of this year.

So your revenue grew to 46.9 million in the second quarter, representing 27% of revenue in the quarter and 8% year over year growth increase is primarily attributable to 31% growth in average agency cash.

Yield and 41% growth in average it to stay investments with year over year over year, partially offset by a lower annualized interest rate yield over 210 basis points.

On HSN cash with yield.

This yield is a blended rate for all interest a cash with deal during the quarter. You just say assets payable of today's press release provides additional details as previously mentioned, we have nearly completed migrating agency assets and expect to complete additional migrations by the end of the fiscal year.

Interchange revenue grew to 25.3 million, representing 14% of total revenue in the quarter and 51% year over year growth.

Increase is primarily attributable to growth in average total accounts and an associated more favorable interchange share partially offset by reduced spend across our platforms in the quarter. While we believe it will take some time before we see members reactivate commuter accounts, we are seeing healthcare markets provide more access for consumers as the economy reopens revenue.

We have many of the reimbursement accounts. This is an HR is will accelerate their spend by the end of the year gross profit reached 101.8 million compared to 58.4 million in the second quarter of last year.

Gross margin was 58% in the quarter versus 57% for the first quarter this year and 67% for the second quarter of last year last year's Premerger Q2 was a peak gross margin quarter in our history.

Beyond the change in revenue mix, resulting from the Wageworks acquisition gross margin was impacted in Q2 by the decline and custodial cash yield loss of high margin interchange revenue and covert 19 related expenses.

<unk> expenses were $92.8 million or 53% of revenue, including amortization of acquired intangible assets and merger integration expenses, which together represented 17% of revenue.

Income from operations was $9 million.

We got a net loss for the second quarter, a point 1 million, which equates to zero cents per share on a GAAP EPS basis. Our non-GAAP net income was 30.1 million for the quarter compared to 28.8 million a year ago, and 5% increase non-GAAP net income per share was 0.42 cents per share compared to 44 cents per share last.

Last year adjusted EBITDA for the quarter increased 40, 48% to $60 million and as John mentioned adjusted EBITDA margin was 34% up from 33% reported for the partially coven impacted first quarter. So we increased margin on lower revenue quarter over quarter, while operating through the full impact in program in the second core.

Sure.

For the first six months of fiscal 21 revenue was 366.1 million up 111% compared to the first six months of last year GAAP net income was 1.7 million or two cents per diluted share non-GAAP net income was 60.9 million or 83 cents per diluted share and adjusted EBITDA was 123 million.

Up 55% from the prior year, resulting in 34% margin for the first half of this fiscal year.

On the balance sheet as of July 30, Onest 2020, we had $269 million cash cash equivalents with 1 billion of term eight that outstanding and no outstanding amounts drawn on our line of credit.

287 million dollar equity offering that we completed in July allowed us to reduce our terminate that with a 200 million dollar debt repayment lowering our debt to EBITDA ratio, resulting in a lower interest rates here I will now passed the Mike to Darcy to review our updated guard guidance Darcy.

Thank you Tyson.

As you know due to the uncertainty impact of the pandemic and its economic fallout at the time in June we withdrew guidance for full year fiscal 2021 and provided guidance for the second quarter only.

Fiscal 2021.

Second half results will depend on the pace of reopening and economic recovery. However.

Based upon our second quarter operating results and the economic progress to date, we are resuming guidance for the full year.

Fiscal year 2021.

Specific variables that will impact our performance through the remainder of fiscal year 2021 include.

At our not limited to members access to and spending on healthcare has associated distancing restrictions ease and their use of transit parking and other communities commuter benefits as workplaces, partially or fully reopened.

The modest pace of recovery in employment may negatively impact the number of our average total accounts and Conversely, perhaps spur uptake in Cobra and other benefit continuation products, among current or new Cobra eligible members.

Across these and other variables there exists a wide drain a wide range of possible outcomes for the remainder of fiscal 2021.

Resulting in a wider guidance range and then we would otherwise provide.

Importantly, however, our guidance for fiscal 2021.

Soon that current trends across these and other variables continue through the remainder of the year under these assumptions, we expect healthequity will generate revenue for fiscal 2021 in a range between 720 and $730 million.

We expect our non-GAAP net income to be between 111 and $119 million.

Resulting in non-GAAP diluted net income per share between $1.48 point $1.58 cents per share.

We expect Healthequitys adjusted EBITDA to be between 226 and $236 million for fiscal 2021.

Today's guidance includes the effective having achieved the goal of 50 million in annualized run rate net synergies as of the end of the second quarter and as Ted discussed.

We are creating our estimate for net synergies to $80 million expected to be achieved within the next 18 months.

Realization of synergies are expected to be additive to both topline and bottom line in fiscal year 2021 and beyond.

We expect a yield of approximately 2.5% on HSN cash with yield.

During the full year fiscal 2021.

Our non-GAAP diluted net income per share estimate is based on an estimated diluted weighted average shares outstanding of approximately 75 million shares for the year.

The outlook for fiscal 2021 assumes a projected statutory income tax rate of approximately 25%.

Our guidance includes a detailed reconciliation of GAAP to 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 not included.

With that I'll turn the call back over to John for some closing remarks.

Thank you Darcy and Ted Tyson nicely done you can rate Tyson on Yelp for his debut there.

Not the health equity up just Tyson Yelp I'm sure. There is one and and again I do want to think not only our teammates but also our partner.

And our partners and clients and.

Hundreds of HR professionals, thousands of HR professionals, working and living rooms, and kitchens across the country.

For their resiliency and focus during what was obviously an extremely unusual quarter.

With that let's open the call up two questions operator.

As a reminder, task of question you want me to press Star one on your telephone to withdraw your question press. The banking. Please standby will we compile the Q and a roster.

Our first question comes from the line of an Samuel from JP Morgan. Your line is now open.

Hi, guys congrats on nice quarter.

Thank you Dan.

The question around you spoke to more Cobra qualifying events offsetting commuter in the quarter.

I was wondering maybe what that means about when this backdrop and how you're thinking about that and if that's impacting asset class at all.

Yeah, well, it's a good question. Thank you appreciate it.

Just just as a way of backdrop.

[music].

Cobra generates a pre covance generate pre cove at about 85 million a year and annual run rate.

70% of the fees come from employer contracts, 20% from premiums and about 10% from.

Various activity.

Led by premiums I mean uptake of Cobra, and then 10% from other activities notices and the like so so when the when the pandemic started in March and April.

The job losses really did not have a material impact on Cobra.

We saw shortlived spike in Q ease around may 1st.

But many of those who lost jobs during that period.

It's eligible or were in small businesses that are not required offer Cobra and of course that were also furloughs, which is another way to say temporary benefits extensions.

And of course, our client base skews.

Somewhat large with and also skews towards less effect industries will only 7% of each of our total accounts I should say in expected exposed industry. So what we've seen at the end of July and August as a little different and a little bit of a greater impact as you know the slowdown really starts to resemble as others have commented.

More typical demand driven recession. So our Q. We are Kiwis in late July in into August are roughly 100% up year over year. It sounds like a lot it's not a lot relative to the state of unemployment, but but its but it's material and we've also seen a modest rise.

Over year in the percentage of those key leaders that are up taking.

Qualify benefits.

And then lastly.

You have the regulatory flexibility.

That that the administration has offered in terms of Cobra deadlines that kind of muddied the waters a little bit because.

Employees have an undetermined amount of time to select Cobra. So there maybe people out there who have not uptake who have not uptake and who will ultimately uptake.

So and then lastly said we've.

As employers have looked at this and said they wanted a comprehensive solution that provides the administrative excellence and compliance excellence, but also the things like our state covered in simply covered which are our public and then behind the wall efforts to help make sure that.

Our Cobra members get and stay covered.

We have a very very full cobra sales pipeline.

So that's kind of where Cobra is and we've since we haven't really been through this before we've been somewhat conservative in our thinking about this from a sort of forecast perspective, but.

It is reasonable to believe that we will see some incremental benefit on the Cobra side over the course of the second half year.

As far as what that says about the general employment picture and or the impact more broadly farrar.

Our account business.

I mean, I think it says that that as I said, the beginning comment that this recession is starting to look like a rig regular really not.

Pretty substantial recession, where you have reductions in demand and those reductions in demand produce efforts at cost cutting on the part of employers and we're seeing that.

I do think that.

In terms of our business and other businesses that are based on employment that will provide a little bit more of a headwind perhaps going forward than it did in the second quarter and Thats. Some of that conservatism is built into into our guidance.

But obviously cobra provide some offset to that.

But but in the big picture I think again, what I said this if you'll recall in June on this topic on them given the longer answer that I wanted to is that if we were getting out of the year with unemployment at a rate that was below 10% that we could start thinking about this as a normal recession and we're at 8.4 now so.

Yeah.

I'm thinking about it as a normal recession and.

That will have some negatives that will ultimately turn into positives as the economy.

Continues to recover.

That's really helpful. Thank you and maybe just another 1 million of more positive note.

Can you maybe provide some quarterly comments around how the selling season has been going with.

The combination with lead Gen and how those conversations are going.

Yeah, I guess generally we feel like.

Well first let me say it is as a as Ted points out. This is our first pandemic. So it's very hard for us to make realistic comparisons.

But when we when we ignore that and none the less make year over year comparisons to either the combined pro forma company or our own just experience as individuals in the marketplace. We feel very good about where we are.

We have as we've mentioned elsewhere.

We have significant number of our existing clients that are in cross sell discussions.

To add products or to add to it to get total solution and the total solution message has played very very well from our perspective in terms of both.

As a reason to bring more RFP to us as well as for those are piece to be higher value. So we'll see how it goes and again, it's a little bit hard to benchmark in light of Cove. It I mean as.

There are about.

This this feeling good is notwithstanding the fact that of all of the opportunities. We see about a third are ultimately going to have ultimately been deferred as a result of cove, it but because we're seeing a lot and because we're winning a lot and because.

We're seeing a higher slugging percentage that is when we win these are valuable we're feeling pretty optimistic about where we are as we head into sort of the home stretch of the sale season.

That's great. Thanks, guys.

Thanks, Dan Thank you.

Thank you. Our next question comes on the line of Greg Peters from Raymond James Your line is now open.

Hey, good Hey, good afternoon, everyone. Tyson you did a flawless job reading the script. The only question I have is who wrote it.

Richard I I can we can we can you help me reconcile the account number data DHS Saes, if I go sequentially from year end.

Were 5.344 to 5.38, although at the end of first quarter to 5.38 for.

And then the CDB, we're going downward 7.4 through seven to 7.338 to 7.090. So first on the HSH numbers I mean, you talk about organic growth, but you talk about the success of new accounts, but that the actual numbers not increasing that much and then on CD BS.

It's a downward trend so just trying to get some sense directionally and what's going on there underneath why don't I why don't I started and then I'm going to have a tad help you elaborate a little bit let me start with the the CDB side.

So.

As you say I'm, just going to look at it quarter over quarter.

The main.

Basically we had was we had about 200000 new.

Noninterest say CBS.

Offset by a loss of commuter accounts and the way our system works is that.

Commuter accounts.

Our counted.

If they're not adding value right in a given for a given month I should say.

Then we have not been including them in the account numbers and so.

Obviously, you had a lot of people back in.

Added value at the beginning of March for April right, but.

But but cease doing so once it was clear that they were staying home and so thats what that reflects and so if I take that number out as I as I said in the commentary.

Cdps were actually up 4% quarter over quarter.

We don't we don't control commuter or shutdowns or whatnot, rather people just be safe and report a better number so.

So that's kind of what's going on there.

With regard to H. assays.

We did have a more closures this quarter.

And the reason primarily for that is that the bulk of our migrations occurred during the quarter in process that is nearing completion, and maybe I'll have Ted elaborate a little bit on the numbers as well as his thinking on the causes.

Sure. Thanks, John Thanks, Greg.

The.

With respect to the closures that happened in HSH kind of year to date Theres two things happening one is our standard close rate against the entire book, which is.

Pretty low.

At around 1.5% and that's very consistent with prior years that on top of that.

Year to date, there are probably there have been approximately 90000 migration related closures and that is really a combination of three factors. One is accounts, we didnt migrate.

Which means that they have zero balances there hadn't been active for wireless didn't make sense to migrate them.

Onto the platform.

Second is.

Theres a.

A fair number of duplicative meeting someone had in each of say on a legacy wage platform and legacy Healthequity platform and to.

Crease their convenience and make their life easier we consolidated them, it's one account.

And then the third is with any with any migration or integration you don't expect 100% retention. We had we had some attrition.

It was spurred by the by the migration and those three factors in Q2 were about 60000 accounts totaled.

And about 90000 year to date, so that kind of gives you a sense of sort of whats contributing to.

Sort of more than our usual attrition rate, but I would say that relative to migrations.

We've experienced in the past this is kind of right in line with our expectations.

Got it thanks for that answer the second question would be just around.

The the.

Revenue the cash yields you are getting off of the.

It's just say cash balances I think Tyson you said 210 basis points in the second quarter.

Can you just give us an updated perspective on the cash yield.

Are you still given we're in a.

Easily a recession at this point does that less than the demand by banks for your cash deposits is there's still an expectation that you can get the 75 to 125 basis point.

Spot over the three year jumbo CD rate et cetera.

Darcy you want to start that one and I'll offer any thoughts.

Sure.

So Greg when we gave guidance for Q2.

Based on what we were seeing in what we are getting on yields at that point in time.

We we gave guidance to 210 and Lo and Behold, we came in at 210 for the quarter.

As we go through now as we look out for the remainder of the year.

There is little bit more uncertainty with respect to the.

The rates out there and it's really reliant upon what rates that we.

We are able to place.

New money coming into December and so we've been fairly conservative on our forecast into what that would be.

You know as rates have come down there's there's three different things that kind of impact that overall yield one as we migrate the remainder of the wage assets, which have no yield today on to.

Adding assets onto our our cash you already just say cash with yield.

Those, albeit a lower rate and so, but but they're still better than a zero rate, they're getting today secondly.

The growth in cash balances, which has been.

You know fairly robust at least in the quarter and if that continues and that means more placements, which again would be at lower lower rates and then we've always said theres a certain element.

Of our.

Hey, just say cash with yield that that has a variable rate associated with that and those variable rates of even come down slightly.

In the quarter, so we're being conservative.

With respect to 75 to 125 premium that we've talked about in the past, we'll have to wait and see how how that will play itself out theres lot of things going on between now and the December replacement cycle for those.

So we're trying to be.

Conservative in our forecasting but also acknowledging that there is some uncertainty in what those rates will.

Ultimately be when they pneumonia is placed.

Got it you on any add anything to that I think you covered the whole universe there.

Thank you for your answers gentlemen.

Thanks, Thank you.

Thank you. Our next question comes on the line of Bob Jones from Goldman Sachs. Your line is no offense.

Hey, thanks, Thanks for the questions I guess, maybe and John you started touching on some of this in England your previous responses, but maybe just looking at EBITDA.

Pulls in the quarter and then in guidance clearly in the quarter better than expectations. So maybe just their units you could share.

What kind of contribution maybe the net synergies had to the quarter again, you guys have highlighted you're ahead of schedule well ahead of schedule. There and then if I just look at the kind of year to date EBITDA versus the guidance. It does seem like its calling for the back half at the midpoint to be down around 15 million versus the front half just curious.

So that's kind of some of the thing you already talked about or if theres. Other specific drivers you'd call out as you think about the back half first of Sun has.

Why don't I I'll hit the I'll hit the second quarter and then.

Tyson why don't you talk about the back half of the year, if you wouldn't mind.

As it relates to our guidance, but during the second quarter I mean, if you sort of look at the results.

Relative to the guidance we offered at the end of Q1, we had about 6 million more revenue and and that was good and.

That was generally fairly high margin revenue. So so obviously that played a role in the even beat.

But then.

We be EBITDA by more than that and that really reflects and therefore margin and that really reflects.

The benefits, which are more or less permanent of of the it's not it's really accelerated realization of synergies and increased realization of synergies. So.

Those are good things now as Tyson will say in a minute we are certainly cogs in the fact that.

We've asked our teammates to do extraordinary things and an extraordinary time and.

We've tried to reflect those and or things like bonus pools, and the like and hopefully we have but.

But nonetheless.

Certainly feel like especially given that there are coven related expenses and the like really good effort and I mean, I think if you if you go back Bob too.

The time of the transaction. So if one of the questions was well.

Wageworks does it look like that profitable business and.

Our view was.

It can be if you start to.

On this thing on one platform instead of like 13 and.

And that's what we're doing and the great part is a lot of that synergy is still to come to feed the difference between 50 and 80 is really the difference between.

Starting and finishing the job platform consolidation and so.

We feel pretty good about the general view that we took at the outset that was when all said and done.

You know that the the ancillary side of the agency business, which is what the cdps ours, a profitable business and the fact that we were able to grow those accounts no net of commuter by 4% over quarter. I mean is I think indicative of the opportunity that lies ultimately lives when all the does clears.

Two.

To take market share from others in the seat on the CDB side, because we just have a more complete offering and.

So that's what I'm trying to.

Tyson you want to talk about the second half seasonality.

Perfect Hey, Bob.

Thanks for the question. So what we're really looking forward to you as a strong open enrollment season and given the business models. The one that we that we had another one that we've got acquired and put together with ours and the migrations from the different platforms and centralizing most among platform.

We'll see in these businesses that we that we lean in on expenses related to our servicing and being able to make sure we ever really good servicing season, especially with all the new customers and especially with them being on new platforms 10, I've spent a lot of time and his team thinking about that and investing towards that and so thats. One of the reasons why that's occurring and that you'll see that up in the costs.

Sales side or the other thing is that weve really continuing to invest and you'll see if you watch what we're doing we're actually hiring quite a few people even in light of code and working from home, we're able to trend position people into the business.

And also another another item that we're investing and you'll see on that as well is that we're going to have a 100% virtual open enrollment season. This year and so that's a that's a pretty big investment in marketing.

But the thing about that as it actually leads to a lot of efficiencies going forward. We want it to do this for years and make us more virtual and not have to put people out in the field offices in four years and things like that.

Selling the concept of HSH and so we're going to be able to do that virtually and we got to head start we started to make this investment little early and then as we saw the pandemic kind of leading across the course of the second half of the year, we leaned in a more here to make that make that a successful. So we're looking forward to our marketing team have been successful open enrollment season, and then I'd have to say too.

Just trying to put together guidance and putting out numbers. So that people could follow what we're doing theres a lot of uncertainty out there you've heard that probably and all these different calls but.

When you think about our business and what people are doing with spend and other things.

We want to make sure that were really thoughtful about how we think that plays out and really what we've done as we've taken as you know when we gave guidance for Q2, we took how things were kind of panning out in April and kind of rolled up order that guidance and of course now we've got more information coming off the Q2, we've kind of rolled that run rate into the second half of the year.

Topline as well as in some of the expense areas and Thats, where we were able to land on some guidance that we can provide.

No no I appreciate it I appreciate the thoughts and both of you. Thank you.

Thanks, Paul.

Thank you. Our next question comes on the line of Donald Hooker I'm Keybanc. Your line is now open.

Great I, just maybe you guys.

Referenced this in your previous comment, but a little bit, but I wanted to see if I could expand on this we are in this virtual environment and is there a concern maybe for that people should bear in mind with regards to.

Engaging in a rolling members and agencies you you reference and maybe sentence in your last answer but just as we look forward can you give us a little comfort as to what that enrollment, you're adding members, but getting them to to aggressively invest and appropriately user interest say.

I mean, I think the answer is Don it's really more of an opportunity for us I mean, one way we could have approach. This is to say okay. Good there's not going to be any travel, let's put that savings in our pocket and you know and claim credit for some magic that we had done.

And now that I say this action at the worst plant, but but.

But to actually what we did instead it was.

Looked at the work that Adam Hostettler, and our marketing team have been doing over the last year. So in terms of two years really in terms of training some of the engagement that we do.

In the service experience onto the open enrollment experience and said lets you know our clients are going to be willing to let us do more virtually here and do things that we wouldn't be able to do and then only to let us to its going to see it as a service and so that's what we've done and so we've delivered.

Both standard virtual open enrollment packages that are truly multimedia nature that include both live as well as pre recorded elements and mix them. Together. So that you can be looking at something is pre recorded and then talk to somebody lives that kind of thing as well as as doing some more custom stuff for some of our clients around reaching team members.

Their team members and I, we see it not only as a great opportunity just in terms of the results. This year, but also as a learning opportunity in an environment that is in this respect much free or than it otherwise would be.

To to really figure out a little more about whats effective and what's not in.

Driving people both to enroll as well as sort of setting the table for how they use the accounts themselves and so I think primarily we're looking at it in terms of opportunity more so than risk.

We've never felt like the face to face.

This call them open enrollment meetings, where everyone's there and it sort of like up a benefits parade are terribly effective.

They they can be effective to show who you are on your personality and that kind of thing, but but for one thing. The spouse is often making these decisions isn't necessarily present and for another there's a lot of information being thrown.

People at one moment so.

Our our hope anyway is that we will.

Have a more effective year and our expectation is that we will learn a lot about how to use technology to make the open enrollment experience as effective as possible both for us and for our clients and partners and ultimately further members himself.

Great. Thank you for elaborating on that.

Sir.

Thanks, John.

Thank you. Our next question comes on the line of George Hill from Deutsche Bank. Your line is now from.

Mr. How good is.

Good afternoon, guys and thanks for taking the question Ted and Tyson a fellow father of three here.

John It sounded like some of the synergies that you discussed were revenue synergies as well as cost synergies. So theres got to be more than the I guess the tech component that goes into its I guess could you talk a little bit more about the topline synergy.

And then I guess I ask how we should think about the these $30 million step up in gross versus net is there any that you think needs to be reinvested back in the business or well most of it hit the pre tax line.

Yeah.

I'll start on this one and then I may ask for some help from the team.

First of all on the topline thought if you look at our original estimate of 50 million and synergies. It included about 27 million on the topline.

And that number had really kind of let's say two components.

One.

It was about.

Interchange and particularly interchange rate, which we have achieved entirely.

Notwithstanding the fact people are spending last week. The number was we overachieved on the rate and therefore have achieved the actual number and obviously as spending picks up.

We'll continue to get the benefit of that and.

And then the second.

Revenue and I'm using the term revenue synergy here to mean kind of not like selling more but.

The kinds of things that are normally associated with near term predictable synergies. The second area of synergy that we anticipated was in the migration of assets.

From legacy.

Wageworks custodial partner platforms, where they were not earning interest or where the interest with sub optimal.

Relative to what we can generate on health equity platform and in that area.

It's little bit similar in the sense that.

We've been able to do a little better but the underlying interest rate environment, obviously has deteriorated substantially since then and so.

Not as happy with that one as I would be in you'd sort of expect that.

So.

And of course, some some improvements on the cost side of more than made up for any shortfall there on the interest side. So.

Not quite done yet with the the.

With the migrations, we still have some room to go and a lot of the assets that are yet to be migrated we're earning nothing.

For us in the legacy custodial arrangements so.

Some anything is better than nothing and so so that's kind of the way I think about that one the second half of your question, which was about the remaining.

Incremental synergy and reinvest in the business.

You say.

We used the question, which is let me make it more general question and comment on it.

I think it more general question might be.

Look the business is clearly generating a decent level of profitability, notwithstanding a very difficult revenue environment.

So do you feel like there are opportunities to invest in the business in order to spur topline growth and.

A couple of thoughts there first.

And I'm sure you and others have the same challenge rate since there are so many pieces moving at once with both Cove, it and in integration happening.

It's it's.

That does muddy the picture a little bit and our reaction to that is to be cautious in anything we do.

Just recognizing that the signals are imperfect.

And the fact that time is kind of on our side. These these items will work themselves out and our business is not one where if something was an opportunity this quarter. It will be an opportunity next quarter in the quarter after that.

The second point is that the short answer is yes.

That is to say that that well, we feel like the business we've built.

We will be a strong organic grower.

As this all clears the way.

Nonetheless, it's also in our view an incredible platform with both option value in terms of things like you know rates can go up and and the like but also.

I think opportunity to expand both from a reach perspective as well as from a portfolio product portfolio perspective. So.

So those are things that we are as we're getting a little bit of distance from the pandemic in a little bit of distance from the initial component of integration that we're beginning to explore very seriously and.

Those are areas, where we would reinvest in the business.

And.

Then I would just say lastly, we are again mindful of the fact that there are certain things. This year that won't repeat themselves that have produced deficiency and then certain things that are costs that hopefully won't repeat themselves either.

Obviously, there is no travel happening I'm talking to you from my living in floor.

That would not be typical.

But.

And you are probably listening from your living room, and but but so so travel costs will return in some form.

Perhaps not at the same level as they used to be as we've identified efficiencies, but it's also true that costs were incurring right now.

Not be there either so.

I guess that sort of the way I think about it I guess the big picture answer is that while we will be cautious.

As long as these signals are a little bit.

As long as there are a lot of signals, we're trying to read.

It's also true that we are very definitely looking at this and saying Hey, we're ahead of pace in terms of proving that we've built a profitable business. So let's be ahead of pace and thinking about how those profits will be reinvested beyond repayment of our outstanding debts and that kind of.

John Thats, great Jonathan them in the based Darcy.

I was just add wind our internet for George.

George when you mentioned revenue synergies versus cost synergies I wanted to just clarify that when we spoke in continuing to speak about revenue synergies those are primarily related to uplift that we get from.

Custodial revenue and interchange revenue that are more contractual and.

Moving things on the platforms what it does not include.

Revenue real revenue synergy that you get from cross selling an uplift by selling a bundled product versus a single product before those were not previously nor are they now included in the synergy numbers. So that's.

That would be additive on top of what we've already described here.

I mean from from my perspective as long as the healthcare consumer continues to need help there's going to continue to be opportunity for us and I don't think any of us would look at it and say that the healthcare consumers needs are being fully met.

Thank you thanks George.

Thank you. Our next question comes on line of Sandy Draper function with Securities. Your line is now fan.

Truest Securities theory go higher guys I'll I'll join end is another fellow.

Father of Threeq. So the club is getting bigger.

So I guess about my first question just on the we can meet or accounts I think as he said 500000 debt.

I've been deactivated those don't have to be re so I'm just trying to be clear. They don't have to be re sold at some point when the economy reopens. They just get turned back on or do you actually have to resell to the employer no they're not resold to the employer there they are.

Open there they are open for.

For enrollment and they remain open enrollment we will do member communications around both ways. They can use the accounts, even when they're stuck at home and then of course as employers do return to work, we have some messaging and the like that they can use but.

No they're not to.

Way to think about it is we're still getting.

And monthly enrollment feeds and the like from these employers is just obviously people are not adding value and that's understandable.

Okay, Great that's helpful and my second question.

We obviously did a very nice job on on the margin size mentioned before better than expected. You also mentioned, there's you estimated about $60 million revenue impact from code that.

How should we think about what the.

Incremental degradation of margins wise from that just to think is that business comes back on how much of that can flow through to EBITDA versus you have to start bringing cost back on is that revenue comes back on.

Darcy or Tyson you want to.

Tyson once you at that one.

Sure, but with regards the commuter specifically sandy.

Business, it's a nice high margin business and so the drop of that revenue. There. There is some variable cost in there that of course, we have gone and found and taken out relative to those.

The particular servicing those customers, but in the button the longer and yelling that comes back that that revenue will drop down at a pretty high margin. The other thing I would mention too is that even though that smell part of that business a shutdown people aren't using it when it does come back we've still been selling it as part of the bundle as well so we've been putting new clients.

On there on there too that will also also help margin and the same is true for when you think about 10 coming back as well.

That's just the spend relative to their cost of the processing that that's done by the by that but issuing bank in the processor and so and so that margin again is very high margin that falls to the bottom line. So those are kind of those are those will be some benefits hopefully that will happen when we get turned round as a as an economy.

Okay, Great. That's really helpful. Thanks, Tyson and then maybe though.

The Darcy just let me ask one.

I had one thing, which will Tyson just or so.

Relative to expectations, Yeah, we lost that revenue.

And we came through with some pretty good margin.

The margin related to that lost revenue.

Was offset.

To a fairly significant degree by the efficiencies that we gained through this whole process. So when Ted and quite so we're talking about the acceleration of of just synergies and how much we were able to get done.

That was a great.

Offset to help mitigate that $16 million Lawson rabbit.

Okay, Yes.

Excellent. Thanks, Thanks for that Darcy.

And I guess move out last question.

Probably for John when I think about.

The consumer employee.

Pretty we'd be pretty typical to make a lot of benefit changes around HSC contributions within the course of the year. So we've seen the numbers held up pretty well, but do you have any going back any data from in recessionary periods, where do people tend to change in up.

Following your benefit year, where it's like enrollments like I'm going to I've got a pretty good balance I didn't spend a lot this year.

So next year I'm, just going to I'm going to reduce my number or to once people said it even in recessionary environments. They tend to leave the level of contribution to save.

Yeah, I mean, there's a there's actually.

Let me say the last recession was long enough ago that.

There wasn't a ton of HSC data out there right, but there has been some analytic work on this and the nature of the question that was asked is do people behave with regard to their h. assays in a similar manner that they behave with regard to other savings vehicles during recessions and I mean, the short answer is yes.

And what that means is that.

In general.

What you actually see and this is a little bit counter intuitive is that.

But it's a but it's a very well established pattern is that people actually increase their percentage their income that is generating savings. So although one and obviously you have some people who don't have income right, but among those who are associated with employers obviously in our world. They all have income so.

They will increase in fact, if you look at the the underlying macro data you can see that since so so if you go back to February before the pandemic started the national savings rate was about 8.5% meeting about 8.5% of just disposable income was put in savings and.

In July which I thought I don't think we have the August numbers out yet just I've seen them.

That figure was closer to 12% and.

Getting that just reflects that behavior, we obviously saw that in.

But in the fact that contributions came up over the course second quarter and also that people didn't react to the fact, they weren't spending by not they didn't stop their contributions because they weren't spending.

So I guess my short answer is now that that won't continue forever. It it where as the economy improves I expect that.

You will not see people keep doing that but.

We're going to try and take advantage of it and use it as a teachable moment. During this period of time and hopefully that will benefit us for the long term so.

That's the member side and.

Wasn't sure if you're asking about the employer side as well but.

No problem fixed on the member side that will certainly help thanks, John that's what we see so far and I think pretty it's I don't think it's the case based on the member activity that we see that it's like Oh people said it they're not thinking about it I mean everyone's thinking about their dollars and sense, but I think fortunately they are thinking about how do I put a few more away and were there. Please.

To put them away.

Got it thanks.

Thanks, Andy.

Thank you. Our next question comes from the line as David Larsen from Verity. Your line is now open.

David Hi.

Hi, how are you because it well.

Can you talk.

Can you talk a little bit about the trend in interchange revenue sequentially. It's my understanding that thats tied to medical volume and medical visits and when you look at all of these various charts and you listen I'd like to publicly traded hospitals, they're saying volumes are backup like 80, 595% a pretty covered levels.

The polling in interchange revenue was a little bit more severe than we had been modeling.

Just what's the how I reconcile that I'm going to see a pop back up in interchange revenue was there like a 90 day lag or something like that any thoughts there will be very helpful.

Yeah, I I have seen some of those data and I think.

That really.

Say two things one is I think that you're seeing more spend pull through among procedures that were truly delayed and truly had to happen. So.

Hospitalizations for necessary surgeries and that kind of thing and definitely among the Medicare population.

That's not our world or the spends that you get.

Is a little different here. So let me let me kind of go through a few of the details and hopefully this is helpful.

Let's see if you look at it kind of sequentially.

You had a.

$6.5 million decline in interchange fees and.

Lets break that out fsh already was down the largest about 3 million quarter over quarter and that is definite reflection of the fact that.

This the sort of core spend on doctors' visits and the like.

Which is really where most of those dollars come from.

It has been as well as more I'm, not calling elective, but elective ish type items.

Has been much slower than the stuff that's really necessary.

Basically due to limited access it's also true that seasonally the first quarter is a very strong quarter, because there are folks who elect to money into their fsh solely for a particular procedure and if they got their procedure done in January February or March it's it's like their whole year, they're done.

HSH was down about two point I should say it before I leave fsh.

We're still trailing.

Even into August we're still trailing.

On a month.

A year basis, where we were a year ago, although the trends have improved pretty steadily since the lows in April.

HSH for the quarter it was down about 2.5 million in.

Interchange HSC is.

With a little less affected from the starts and has been quicker to return to pretty much near him I call. It normal as of the ended the quarter.

So so we're we're not quite back to where we would've thought we would be but pretty close and certainly we're back positive on a year over year basis.

So and then commuter.

Has not been good so commuter as about 1 million of interchange per month, and I'm sorry, one.

Generally and.

Obviously was negatively impacted.

During the quarter more so obviously as the quarter ended with some folks sort of spending down their balances on the like.

But but but but we don't really see a change in site there at this point until people.

Really begin to come back to work in a cities.

The computer interchange is gonna be modest so.

That's sort of the detail of it but you.

The Big picture I think relative to what you're seeing from let's say the hospitals or the like is that.

There are high ticket items are.

Things that are truly necessary for lack of a better I'm trying not to use the word voluntary that's not fair, but but or involuntary, but they're truly necessary and they have some urgency to it but that's not where this spend comes from for the most part and so that's why we're not seeing it quite the same degree.

Okay. That's very helpful. And then just one more quick one within service revenue was it was my understanding that the commuter so revenue impact was about 7 million a month, we didn't service line item and if we assume hey, there was like $7 million headwind in fiscal once you, which might do you say all of April.

Then if we say okay. All of May June and July there was a commuter gang of 21 million, assuming it's 7 million a month.

The decline in service revenue was not as severe as I would've expected. It was maybe about 8 million sequentially just any thoughts there would be very helpful.

Yeah.

I'll I'll talk and then asked Tyson to elaborate where I've screwed up or were not.

But.

Commuter generates on the service fee side.

About a 5 million a month in service fees and then another million a month and interchanges I just discussed.

So I'm a little bit less than your than the premise of your question and of that more than 50% is gone, but there is some that does remain and.

That remains either because there is actual activity.

People already passes et cetera, et cetera, but also in some cases, just the nature of the billing arrangement, depending on which of the legacy platforms that was on.

Is such that.

There's some continuation now.

So so that's why it isn't quite as bad as you're suggesting Tyson you want to elaborate on that at all.

I'll just a few things I think you've pretty much now that it is when we think about that and trying to forecast what that looks like and going back and trying to say February and seeing what commuter look quite at that point.

John gave you the numbers on them on a month by month basis, but that's largely fallen off to the tune of you know plus 50 plus percent.

With that kind of that underlying platform that helps us as we go forward. So we've looked at that we looked at the trend in July and we've essentially taking that trend out through the end of the year.

But I mean, you're right to say that of the 16 million, we think we didn't get in the quarter.

The lions share of that as computer.

Okay. Thanks much.

Thanks, Dave.

Thank you. Our next question comes on the line as Stephanie Davis from SVB Leerink. Your line is now open.

Yes.

During the quarter done well congrats to Tyson for taking the feed officially.

For the he's been pretty quiet this call. So I'm going to have the first part of my question just be towards out.

So with the election coming up how should we think about the impact if any of that change administration, how would you hit your lobbying Steve.

Thanks, Stephanie thanks for bringing into the freight here.

Never heard quiet.

Well I'm, John John the Maestro here, so I'm just waiting for inventory, though that you did it in this place. So thank you I'll look I mean I think the good news is is this even predates the acquisition, but certainly the acquisition, let US down. This road that we really do you have a bipartisan effort I mean do you think about the staying on of products we offer.

Yeah.

In many of these predates HSH for example.

So we've had a very aggressive lobbying effort to protect employer sponsored Ben employer sponsored benefits and pre tax benefits were poised for a very long time [noise].

Honestly I think that is.

Independent probably lesson goes we're going to continue that you might have some nuanced approach as a pin on on what would happen the election, but the reality is.

Equal just need help they need to avoid taxes and need to save for retirement say through the current healthcare spending in nursing unit products allows us to do that so we've got a great team.

Both in house, and then outsource team that we use to kind of look after each of these needs and so I guess.

Short answer is definitely is more the saying we need.

Even right now Thankfully Congress is back to work. This week. So they should be thinking right now about a cobra subsidy because if unemployment over 8%. There's a lot of folks stuff there that need help with over subsidies and so we can push into that.

We have been pleased with some of those things.

One of the Cures Act, we think there's more more developments were going after and stuff.

And I really don't I almost think its administration independent you may have different nuances like I said, we're going to keep going after it.

Okay understood that makes sense now on pending gears, a little bit maybe a tyson.

The new revenue growth guidance, it looks like it could reflect utterly marginal decline and organic revenue growth. Despite what's been a relatively healthy year to date performance all things considered.

How much of this is conservative and the outlook as you guys do it independently continuing as opposed to maybe some other puts and takes.

That was outlined before Stephanie the way we looked at this for Q2 guidance when we when we pulled annual guidance into Q2, and we looked at April shook out.

To put that forward. The same thing is true with regards to this quarter on each one of the trends in the line items, we looked at what those what those look like and really the story. There is about is about spin interchanges RIN talking a lot about on this call, which is the right place for people having to be focused.

In that we want to want to be able to see that come back, but we're definitely not going to build in a massive come back in this in the second half of yet until we see is just there's with the with the regulatory changes on extending out that stays out to a longer period of time and some of those other things, which have allowed people to to potentially hold onto that money a little longer than they would have before.

We've got US do some things break free in order to build that in and so I would say that's kind of the one area that you might notice that in as you as you look out and then with regards to custodial, that's that's pretty consistent other than the than the year migrations that we're completing the money we're putting to work I think we've been pretty transparent about that in there in the releases and then.

Our service fee revenue comments that we just answered as well.

I don't know Darcy is there anyway, so that.

No.

All right is that same assumption as well for the synergy target timeline just given its.

A lot slower than what you guys have accomplished so far just some conservatism in a lot of of the well I can maybe speak to that one and then Ted Ted you can elaborate.

The the the work we have to do is a little harder right obviously Q.

By definition, when you find stuff layer on it tends to be a little more work so.

Way to think about it is that.

The timing really boils down to the timing in which we will be completing the process of getting to one platform.

The entire businesses operating on.

No more legacy this that whatever and.

That process will extend out through not this January but next January by virtue of the fact that in some cases it does make sense to to convert people at year end, we're not going to give out the details of the timing because as we found out some of our.

Editors choose to use that information.

To to market against us, but that's okay.

But.

If thats really what that timing reflects is is the amount of time it will take to get that all done will we try and front load of course will trend.

All right. So thanks again to that I kind of went longer than I thought it was going to so maybe there is had anything to add to that.

He's on mute.

Sorry, guys. Thanks.

You have a chance the order of the work and that mixed use a little dose of trying to find timing that accommodates as many of our clients as possible with a dash of typical purple conservatism gets you to that timeline.

My conservatism, yes.

Like I like how Stephanie didn't trust me to like throw the question. She is like screw that I'm going to take control. The question three [laughter] well done.

[laughter].

Thank you. Our next question comes from the line of Mark Mark on from Baird. Your line is now open.

Good afternoon everybody.

Hi, Dan safe outlook.

Of course, and a good all of you are as well and Tyson great job. They just with regard to platform migrations, how many have been accomplished thus far out of out of the wage I'm sorry.

That so yeah sure. It's seven through the end of Q2, which I know.

If you read the press release it says five.

Correct answer is seven.

And we're on track to deliver at least 10 by Europe.

Okay great.

And.

In terms of thinking about.

So turn by yearend.

Is the incremental $30 million and savings all gonna be from those platform migrations or is there anything else that's factored in.

That's the source I had you want to comment beyond that yeah sure I can thanks, John It is absolutely the biggest source not just of those 10, but of the ones that follow.

The significant proportion of that remaining 30 million is from.

Those platform consolidation or a few other payments things.

That are similar in nature, but not in scope to the visa deal that we're working through as well, which we think will be a contributor but.

With that but the big ones are those are the efficiencies we realized from platform.

Great and then can you talk a little bit about this fall selling season, just in terms. What you think the attitude as employers is going to be particularly as it relates to.

Being more aggressive in terms of adopting.

Consumer directed health care benefits as potentially a budget savings tool and.

And how they're going to approach it this year relative to years past, where the unemployment rate was so low that they were afraid of.

Typically you applecart.

Steve why don't you start us off on this one.

Sure Mark Yes, so I mean, this is a little bit like 2000 in I mean.

We we sought in where you had.

I mean, why because a lot easier for.

Someone that leads human resources, where we would soon healthequity Len the people team if they can offer choice right and say look we will give you all these choices and I.

I think that they'd love to do that but the problem of choices is oftentimes you have this weird shift in risk pools, where.

Maybe the healthy people go for the agent saizen than that on helping people sticking to traditional plan. Appreciate your plans hemorrhaging cash and so you know there was a little bit of talked when when unemployment was around 2% that they like well, maybe we'll keep going down. This road of choice, we haven't heard that much at all in last six months.

We are hearing more how do we continue to get the best benefit to the best price for our for our teammates sand Hills equity that are employees and so the bottom line is that our sense is is that when employers ticket step back and say how can you save money on taxes. That's at the age of say does both on the employer in the employee size.

Of course, and then how can we help our our folks say so the short term and avoid taxes for the short term spend on health care and save for the long term, we just know better solution and sure when the economy's racing Hot and you're you're really you can put a job market and maybe an educated.

Target that you want higher is saying you know I really want my fully loaded low deductible plan, maybe you're more inclined Darfur choice, but that.

That's a glimpse a little while so our sense is that more than ever employers are asking us to no I was just really remarkable call. It was on with that.

Very large hospital systems have never offered HSH ever before and now not only are they doing what they're doing like 50 webinars.

There there.

There their employees in particular their doctors and their higher cost people realized this is the richest benefit.

If they do a appropriate plan design with an appropriate contribution you count there was no richer benefit you can offer within interest equipment and so they're getting it and the reason why it's still leaves the savings is because of the tax which is pretty remarkable. So I don't know I'm I remain bullish on it you know I think every.

Every decade, we need a little.

Second the got to make this.

Realized this really is a truly remarkable.

That's great just net.

Yeah, I mean, I'd just add too if it's obviously the folks a question and answers on the age stays on the CB side I think we have a lot to offer in this kind of economy.

For employers first of all well, let's start with the one piece, which Cobra I as I said, Mike in the I think.

Greg Peters referred to a script I didn't even know you could script. These things that's a great idea.

Sorry, those will jump.

But I don't what you're talking about really scripting, but but.

Employers.

Compliance is extremely important it's also important to sort of people well out the door. Those people are going to talk about you and how you serve them and they are potentially your customers are partners and their new role. So so really trying to take care of people well and the way out the door for the same prices not.

Feels like a really good thing and that's that's what we're offering there and that's why we have a robust pipeline. There I think if you look at the other CDB. It's also though.

These are about saving money on stuff that you were going to buy.

Yeah, and especially with LTC available now for the flexible spending accounts and the like.

Theres a lot to offer there and I think as a penny saving device in a time when people are really counting their pennies.

That's that's something we can take more advantage of both in the current cycle and then over time so.

It's a weird cycle markets. It's very again, we have no benchmarks for this this is Ted says this is our first pandemic and so to elect that line. So much I've used twice to it but but.

But but if I look at where we were at the start of this thing and where I see my fellow folks who sell into B to B type environments, and then ultimately to consumers.

We have to feel really good about the demand we have and about how that will play out both this year, but I think also into next year in the following years when we're not talking about epidemic.

Terrific can you can I squeeze one last one in just from a competitive perspective, well since its Peter is only did in a in a b. I mean, there's there's a ton of time.

[laughter] [laughter]. So can you just talk a little bit about the competition just in terms of how you expect them to respond to two dynamics, one you, having a greater level of capabilities and therefore, having more to offer to.

Potential clients and be the interest rates being lower and therefore, they may not have as much flexibility in terms of account seats.

Yeah, I mean, we look let's let's take a step even beyond those questions. We're in a consolidating market and.

Whatever the specific facts of an industry. Our it's often the case that that the downward economic pressure accelerates consolidation and if you look at the Devon year figures that came out last few weeks I don't think they publish publicly published their their lead tables, but.

I can say here that that we are number one and accounts and we are.

Based on the numbers, we've reported today were damn close to being number one in assets.

And.

And so.

We think that there is an opportunity there that doesn't mean that competitors won't play their own games, but but but and we'll talk to that effect, but but absolutely. It's the case that.

If the folks who have been kind of hurt the most and.

Our folks who are the most reliant on net interest margin for their source of income and or profit. So the typically say provider more than 50% of revenue nonprofit revenue comes from net interest margin, which by its definition net interest margin is 100% profit so.

That the absence of net interest margin can kind of your problem and we were I guess some in the vein of sort of like the the Madagascar Penguins another plan per fully executed.

We're we're in a position where we altered our pricing strategy to put less emphasis on balances and more emphasis on.

On employers.

Working with us and partnering with us for the total solution, that's the way to get.

To get competitive season that turns out to have been a well timed a shift and something thats kind of working for us in the current situation.

Others don't have that flexibility either because they don't have those other products or if they do have them, they're essentially just outsource platforms and is now whatever we're all the more all the economics are really going to third party.

And so it's hard to you're not really getting any margin benefit by selling so.

That's that's kind of the underlying dynamic as I said I think we have some competitors that are very solid that will have their own game plans fidelity, it's pretty clear their game plan is to focus on high balance accounts and that's what I would do if I were them too and they're going to be effective at that that's great.

So that gives us a lot of new partners to work with as you know.

Optum and United they'll they'll do their thing.

And we'll have some effectiveness at that and then you know you know where some of the other competitors are so.

But but I I really believe fundamentally that.

This is a market that we will look at over the course of for the next 567 years and that Healthequity will have continued to grow market share steadily in a market that will continue to grow with HSH themselves maturing in terms of balanced growth and with us continuing on the CDB side on the ancillary side to take.

Market share from weaker competitors, who just cannot offer from a capital intensity perspective, the same level of service. We're benefit that we can provide to both members and decline so.

That's that's kind of my rough version.

Appreciate it.

Thank you.

Thank you. Our next question comes on the line of Alan Lowe from Bank of America. Your line is now open.

Thanks for taking the questions I get lots.

How are you.

I think well excellence probably to strong.

Good great.

Before we get stuck in my living room in the areas orange outside so [laughter].

Before we as you guys talked for several years that service fees would decline by about 5% to 10% per year. So now we're about a year into the wage acquisition, how should we think about that line item moving forward.

[noise] Darcy you want to at this one.

Sure.

So when we talked about the 5% to 10% decrease.

That was primarily on an eight per HFSA basis, and so it kind of took into account. The the issue that we had with respect agencies that we were given volume discounts for mortgage assays and that played itself out for for quite some time and it's actually still continues to be true.

And just appear HSH pricing for service revenue, but that's probably still.

The range that we would expect as we've made the wage acquisition, we've kind of transition to looking at this service revenue on a total accounts for total average accounts.

Basis, and so we're monitoring that as we go.

We think overtime that.

That they're actually will.

Flatten out or even actually go up when it's hard to tell exactly because our pricing model now will offer bundled services.

And so the bundle is kind of like well if you buy.

HSN is on a standalone basis, you get this price.

But if you bundle it all together with some fsh isn't some cobra and commuter and what kind of give them a blended price. So we're looking at really how does this service revenue relate to the total offering that we're offering.

And we don't have any specific guidance as to a percentage increase or decrease but we do believe that overtime because we.

Offer all of these services that competitively we have a lot more flexibility.

With respect to our offering into when competitively as John until they get more at Batson and two you know it more extra basis. So.

That's kind of how we look at it from a per.

Total accounts a basis and how will measure going forward.

Thanks, Darcy and then for my follow up there was an article out that Devon your put out last week talking about custodial.

Rates for her vendors, where they were paying out to holders of HSH basically that they decline from mid 25 or mid 20 basis points to below 10 basis points, that's something that you've seen in your book of business and can you kind of elaborate on that.

We reported.

In the quarter that we paid out to I think we report this not 40 in now.

[laughter], we paid out at about 119 basis points in the quarter, which was down a little bit in our case and download from low twentys.

Something like that and.

In our case, where we approach this I think in a somewhat unusual or unique way.

In that the rates, we pay our members are really a function of they're actually outlined in our depository agreements I'm, sorry, our custodial agreements and they're really a function of what our largest competitors are doing and we've committed to follow them and whatever direction. They take.

But we think thats useful in that it.

From our perspective it means that.

We're we're committing to our clients that we will always be in market in this regard and that's the way we've approached it.

And then has resulted in a bit of a decline and that that certainly is helpful from a margin perspective, but.

It's not a huge decline and importantly, we offer our members other options. So for example.

We are.

It's not the only one certainly among relatively few h. say providers that offers a non FDIC.

Option, which we call, you'll plus which is a way for members to get more yield.

It does not come with FDIC coverage because of the way that it works, but it's a nonetheless, it's a very.

Very conservatively invested and and safe product.

And then of course, we notwithstanding the fact that that cash is historically a higher margin.

Upfront to per dollar basis, we encourage our members to invest because investing is ultimately once they reach a certain balance is better for them and and over the long term will generate high returns so.

Thats kind of the way we approach it so so theres some we've seen some of that.

Certainly other competitors have been more aggressive about it as you might expect as their hunting to recover lost margin, but but nonetheless.

We think that that overtime.

Well, we will continue to follow the market in this regard.

Yeah, and I would just add to that Alan that in those surveys I.

I mean, we look at this every single month, because our consulting agreement requires us to to look at what the markets pain, but most everybody.

There might be a few exceptions to this but most everybody pays interest on a tiered pricing schedule. So for the lowest balance accounts no kind of like free checking if you have less than.

A couple of thousand dollars in their account or $1000 you get a very low bips on that.

Revenue.

On that balance, but as you grow your your cash balances the main scale up and which we do and others doing so when we talk about what we're paying out that's a blended rate for all of our portfolio not the lowest rate that we pay at their entry level for it and just say, which sometimes that survey information you pick.

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Thank you but.

Thank you.

Thank you. Our next question comes on the line of the Crown Castle, well <unk> from Guggenheim Securities. Your line is now from.

Yeah. Thank you for taking my question.

I think in the past you've talked about the mix of HSH sales opportunities that also request the consumer directed benefit. So I'm. Just curious if you can give us an update on how that mix has trended throughout this year and in particular, how your win rates have trended among those sales opportunities in particular.

Yeah, those are our juiciest opportunities and we feel the.

I can just tell you are from a win rate perspective or from a you know just feel of the Salesforce perspective.

We feel great about those opportunities.

Don't think the the numbers of change substantially from what we reported earlier in the year in terms of percentages and all that kind of stuff, so I'm not going to add to that but.

The strategic put putting aside all the synergy synergy is sort of how you pay for it and.

That's great, but budgets, but strategic thesis is why you did it and the why we did it was the view that we could that the market was moving and that we could take advantage of the market's moved to thinking about.

HSC and the ancillary benefits as one product and that we could deliver more valuable to cost more value to customers by thinking about that way and by being the leader across all of these sort of both HSH as well as the various subcategories of Ancillaries and.

As I think Tyson commented, even with commuter not being terribly active right now that's still true even in commuter where people see that convenience. So.

We feel real good about the total solution sale and where we are positioned when there is a total solution opportunity.

Both in terms of new cases, and also in terms of the cross sell to our existing customers and it's obviously a great time to be building on existing relationships given covitz. So.

You know that's.

The numbers themselves are substantially the same as they were earlier in the year just on a larger basin.

And.

The feel across all of these kinds of sales, where we have the opportunity to talk about a broader solution is really really good.

Okay, Great and then maybe just a follow up and I. Appreciate the commentary you gave before on consolidation activity in the market I'm curious if you can just give us some color on the timeframe over which you think that activity will take place and in particular, you have a sense for how meaningful those opportunities might be in the near term versus maybe just being an ongoing thing that will play out over time.

Any color there would be helpful. Thank you, yes, sure I mean, I think when in answering the question I was sort of talking about over a multiyear period.

I think I'd, they said that in the answer so.

I think the second part of your question is really more kind of what is the near term consolidated M&A market look like and.

My view is that for the most part first of all that that market's active.

It's active I think primarily with those who are the most challenged in the context to the current rate environment and so we're looking at a number of specific opportunities and obviously going to comment on them individually, but they're they're they're not they're of modest size, we don't really see a lot of movement at that.

Top of the.

Lead tables as it were but when you get to the Middle of League tables, I think thats, where you're going to see more movement and we think we're a great acquirer for a lot of different reasons, not the least of which is that.

We take care customers and for many of these folks these are.

These are their customers in other areas. So.

And we're not going to sell them competing products and all that this is really what we do so.

We we feel like when those transactions are out there they have very good return and the nice thing about.

Turning in a high level of profitability in the quarter. We've just completed is it gives us a little more ammo for that kind of stuff as well as for investing in the business organically when the time is right.

Great. Thank you.

Yes, Sir thank you.

Thank you at this time I'm showing no further questions I would like to turn the call back over to management for closing remarks.

Nice job. She thank you well we've already thank to everyone enough and thank you guys for staying with us I'm imagining a.

Vic honest patio, there and Mark on is probably this lake how somewhere and I don't know it sounds pretty good so.

But we appreciate you guys sticking with us and staying focused despite all that's going on in the World and also really appreciate the same from our investors.

We look forward to speaking with many over the course of the next few days at various conferences. So with that so again, thank you and we'll talk again in a couple of months.

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