Q3 2021 Healthequity Inc Earnings Call
Thank you good afternoon, and welcome everybody to Healthequity third quarter of fiscal year 2021 earnings Conference call. My name is Richard Putnam Investor Relations for Healthequity. Joining me today is John Kessler, President and CEO.
Dr., Steve Neeleman, Vice chair and founder of the company.
For CE, Mark the Companys SVP and CFO.
Hi, son Murdoch.
Our E B P and deputy CFO.
And Ted Bloomberg, Ari VP and Chief operating officer.
Before I turn the call over to Jon I have two important reminders first the press.
Press release announcing our third quarter earnings, including definitions of certain non-GAAP financial measures that we will reference today was issued after the market close this afternoon.
Copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures and the recording of this webcast can be found on our Investor Relations website, which is <unk> dot healthequity dot com.
Second our comments and responses to your questions today reflect management's view as of today December 720, 20 and will contain forward looking statements as defined by the FCC, including predictions expectations estimates or other information that might be considered for lucky.
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 risk and uncertainties that may cause the actual results to differ materially from statements made here today.
As a result, we caution you against placing undue reliance on these forward looking statements.
We also encourage you to review the discussion of these factors and other risks the.
May affect our future results for the market price of our stock detailed in our latest annual report on form 10-K, and subsequent periodic reports filed with the FTC.
We assume no obligation to revise or update these forward looking statements in light of new information or for or future events.
And at the conclusion of our prepared remarks, we will turn the call over to Jimmy our operator to provide instructions and to host for today.
With that I'll now turn the Mike over to our CEO John Kessler.
Thanks, Richard Hi, everyone I've got a whole script here, but I'll just start by saying covert the tough backdrop, but the team is really firing on all cylinders right now to deliver the the the profitable and growing invisible business. The that you all expect for me during the fiscal third quarter teaching purple delivered sequentially improved financial results.
The exceeded our expectations given the difficult backdrop of the pandemic more progress on integration and strong sales driven by our total solution strategy, we're raising our full year outlook and feel confident enough to offer a very early look at key drivers for fiscal 22.
I'm going to discuss Q3 performance, including key metrics our perspective on it for 21 sales heading into January and the Wageworks integration Steve's going to offer a perspective on what the outgoing and incoming administration and Congress can do to support health care consumers Tysons kind of detailed financial results and then Darcy will cover our revised guidance we've got cash.
Here with us for Q anyway. So we've got a full of basketball team out of the full starting team plus I'm kind of like the six man as you might expect.
Let's start on wages as well as we always do with key metrics revenue of $179 million is up 14% year over year, reflecting organic growth and the lapping of wage works in August which was tempered by the Pandemics continued impact on custodial yields and our members use of commuter benefits and health care cards during the pandemic.
We estimate that lower commuter benefits utilization and health care card spend them on their own excluding interest rate created about $10 million of headwind during the quarter adjust.
Adjusted EBITDA of 61 million is up 10% year over year and adjusted EBITDA margin of 34% was steady sequentially. Despite the beginning of the enrollment season ramp.
As I will discuss in a moment. We believe there is more to come overtime 5.5 million H. assays at quarter's end, our plus 9% year over year, plus 11% organically that is excluding the impact of migration related closures that we talked about last quarter.
104000 newly opened HSH is we believe a solid figure given the dearth of newly hired benefits eligibles throughout the economy. During the quarter 12.5 million total accounts were flat year over year with growth in HSC, EPS and Cobra offsetting the decline of about 0.6 mill.
In in commuter accounts that are currently in for spend.
Last but definitely not least agency assets reached 12.4 billion up 19% year over year and up 229 million sequentially.
While investment asset values provided some tailwind continued contribution for members in response to Healthequity is engagement and education efforts. We believe really is what drove this growth.
As you know Q4, and particularly January will truly revealed the results of sales activity enough why 21, and I don't want to minimize the growth challenges that we face as many HR departments have pushed off initiatives. Some really do remain in crisis mode and of course work from home the drags on for nearly all of us the.
That having been an additionally, new hiring by our clients, which normally provides the base of new account growth is flow all the having been said the team is excited we are preparing for what we believe will be our busiest january ever and here are a few of the reasons. Why we are excited first relationship executive managing Healthequity is 500 largest employer.
The clients achieved the 97% retention rate net why 21, and that's despite all of our platform migration activity because platform migration has proven to be less the source of attrition and more an opportunity to demonstrate the clients. What remarkable purpose me Im sorry, what remarkable service means and purple in action.
The enterprise sales team appears to have delivered its best performance in several years driven by impressive win rates in cross selling to existing clients, but helped along to buy some strong new logo wins in for.
Fact, Thanksgiving week was the first since the summer that the enterprise team Didnt have a win that's pretty late so thats. Good we've talked previously about the growth in bundled RFP is from our total solution strategy. It's translated into steady growth in the average number of Healthequity services used by managed clients over the course of the fight 21 that seemed to.
And in the third quarter began appearing in our mid sized commercial clients and with 12 of our network partners, having added Healthequity services to what is already on the shelf. So far this year, we hope to extend the trend to our smaller employers and halfway 22, and finally open enrollment interactions with members and importantly, prospective members have already more than.
Doubled year over year as clients have embraced the 100% virtual open enrolment tool set the Ted mentioned last quarter and this includes live and on demand content interactive tools, social media and of course 24 seven lives support.
For our members and prospective members during open enrollment the team continues to close and implement F Y 21 business and the enterprise a new partner sales pipeline for F. 22 is already starting to take shape with some nice wins for employer for employers with benefit years, beginning in March and April already signed.
So that's the key metrics and sales, let's talk about integration progress on integration also continues as of the end of the third quarter Healthequity had achieved approximately 55 million of ongoing annual synergies against $63 million of cumulative one time integration expense Thats, a pretty good return and the team is on track to achieve a true.
Total of $80 million of ongoing annual synergies against cumulative onetime expenses of approximately 100 million by the end of fiscal 2002 as legacy platforms or retire indeed, the team reached its F. Y 21 goal of 10 platform migrations with more ONTAP before fiscal year end see that indeed really has the the strength of note.
The 97% of all Healthequity HSH and HFSA assets are now on the Healthequity custodial platform in.
In Q4, we'll deliver the for the first installment of Healthequitys unified portal experience to our clients and then a dozen major new portal features over the next 12 months.
With change of foot in Washington, We think most Americans want practical steps to control the pandemic and help families manage its fallout Steve is here to describe some of the opportunities for HSH and cdps to contribute that Congress is considering the.
Thank you Jon.
Last year before the pandemic.
Approximately 82000 of our current and potential members attended Healthequity open enrollment of Vince.
Including in person and live online session.
This year over 350000 have attended our live and on demand events with life support.
We think Americans are starting to understand that h. assays and other consumer directed benefit of counts are part of the solution to health care affordability and long term savings through this pandemic and beyond and there is evidenced the Congress and the incoming administration may come to the same conclusion for.
For example, we have been reported since the pandemic began the consumer spending in healthcare is down year over year consumers have billions of dollars in EPS assays with use or lose provisions.
Many have been unable or unwilling to get carried during the pandemic and under current rules and the most cases the must use their funds by the end of the year to avoid forfeitures the.
This means consumers and the health care system could lose billions of dollars.
As the access to Karen truce consumers will need that money the.
The returned this week of shelter in place orders in California, and elsewhere worsened the problem.
Regulators can and the our view should immediately extend the use or lose period for expiring essays through the pandemic emergency period similar to the extension that was passed for pain for Telehealth services.
In high deductible plans during the pandemic extending the use or lose deadline for fsh EPS would have little or no cost the taxpayers as unused assets day funds revert to sponsoring employers are not the treasury.
We believe these rules should apply not only to health care, if assays, but for child care F. assays as well because Americans have not been able to go to work and therefore the.
They should not lose the funds they of set aside for the child care growth.
Rules around how childcare fsh can be used during the pandemic emergency period should also be relaxed to allow consumers have more flexibility to keep working and take care of their kids also incredibly well, we must all you sanitizers masks and other ppt to prevent the spread of COVID-19, yeah.
Cost of isn't Fsh are HSH qualified without a doctor's authorization doctors now she's advice apparently isn't.
The net for the tax net.
H or 80 for 50 sponsored by three Republicans in three Democrats would change the US. However, this is a common sense measure that shouldn't require an active Congress we.
We need the help unemployed Americans pay for their health care premiums until they are unable to get back to work.
During the global financial crisis in 2008 Congress acted quickly to make coker premiums more affordable.
We agree with many in Congress, who side signed onto the support doing so during the pandemic emergency period.
Now turning to HSH, the Commonwealth Fund and the employer benefits Research Institute estimate at 7.7 American workers lost the employer sponsored coverage at the start of the pandemic coverage under the AC exchanges or Cobra costs money here.
Hey, just days are part of the solution to affordability since they can be used to pay these premiums on a pre tax basis, but since none of US anticipated. This crisis Congress and the regulators should act permit catch of contributions to fund these costs by extending the HSH contribution deadline for tax years.
2019, 2000, 22021 until the end of the pandemic emergency period Congress can also expand consumers the ability to use HSH EPS for AC a qualifying insurance premiums by dropping the current requirement links this ability to eligibility for unemployment insurance, which is.
We all know has run out for many Americans.
Finally, there are many consumers who can't make use of HSH because they weren't in a qualified it you say plan prepaying the debt.
Or are unable to choose the qualified each of say plan now.
With out of pocket costs, continuing to rise and deductibles across all planned types generally higher than each of say minimum deductibles any health plan coverage should allow consumers to use the nature of say the pay for their out of pocket healthcare expenses on the tax free basis the.
Democrats and Republicans, who proposed widening h. of say eligibility to include more of these plans we should fix this issue now for the future by permanently, allowing the individuals with any AC a qualifying coverage the.
Okay, or tri care traditional Medicare Medicare advantage, Medicaid health care sharing ministries for Indian tribal health services to make and order received contributions to the nature say.
You can call us naive, but we believe that the nearly 50 50 results in November in the house the Senate and then the presidential election.
Create an environment, where moderate voices could.
Could have more sway and practical measures have of greater chance for adoption.
Our teams in Washington are engaged and working hard to make this happen.
I will now of life Tyson walk us through the numbers Tyson.
Thank you Steve.
The review, our third quarter, GAAP and non-GAAP financial results a reconciliation of GAAP measures to non-GAAP measures is found in today's press release.
For fiscal third quarter financial results. As you know include the operations of wage works, which was acquired in August of last year.
Well, we of officially lapped the acquisition keep in mind. The Q3 last year had two months of wage works and the results of this year reflects combined results for the full quarter.
Third quarter revenue grew overall and organically in each of our three categories service revenue grew to $104.6 million, representing 58% of total revenue in the quarter and 19% year over year growth. The increase is primarily attributable to 21% growth in average total accounts, including those from the wage rates not the acquisition and new sales.
Custodial revenue grew to $48.5 million in the third quarter, representing 27% of revenue in the quarter and 3% your for your growth. Despite the 35 basis point decline in annualized yield on interest the cash with yield assets.
Average interest rate cash with yield grew 21% an average age of say investments with yields grew 57% year over year revenue.
The annualized interest rate yield was 208 basis points on interest the cash with yield.
This yield is the blended rate for all interested cash with the yield during the quarter. The agency assets tables of today's press release provides additional details.
As previously mentioned, we have migrated 97% of the agency assets to the Healthequity Healthequity custodial platform.
The change revenue grew to 26.2 million, representing 15% of total revenue in the quarter and 17% year over year growth.
Priest as part of the increase is primarily attributable to growth in average total accounts and the negotiated more favorable interchange share price.
For the offset by reduced spend across our platforms in the quarter.
Gross profit reached $104.6 million compared to $96 million in the third quarter of last year gross margin was steady sequentially at 58% in the quarter.
Operating expenses were $93.1 million or 52% of revenue, including amortization of acquired intangible assets and merger integration expenses, which together represent 15% of revenue.
Income from operations was $11.5 million compared to $9.9 million in the part of your net income for the third quarter was 1.8 million for two cents per share.
On a GAAP EPS basis, compared to a loss of $21.3 million or most of the 30 cents per share.
The prior year.
Our non-GAAP net income was 32.2 million for the quarter compared to $30.3 million a year ago, the 6% increase non.
Non-GAAP net income per share of was 41 cents per share compared to 43 cents per share last year.
Adjusted EBITDA for the quarter increased 10% to $61.1 million and adjusted EBITDA margin was steady sequentially of 34%, while operating to the impact of profit.
For the first nine months of fiscal 21 revenue was 545 45.4 million of 65 per cent compared to the first nine months of last year GAAP net income was $3.5 million or five cents per diluted share non-GAAP net income was $93.1 million or $1.25 per diluted share.
And the adjusted EBITDA was $184.1 million of 36% from the prior year, resulting in 34% margin for the first nine months of the fiscal year.
On the balance sheet as of October 31 of 2020, we had $299 million cash and cash equivalents with $1 billion of term debt outstanding and no outstanding balance drawn on the line of credit I will now pass the Mighty Darcy to review our updated guidance Darcy.
Thank you Tyson.
As you know our results and guidance for EPS, why 21 remain sensitive to the COVID-19 pandemic and the timing of economic recovery.
As Tyson just discussed we continue to see improving economic trends that remain cautious about the impact of a surge in co of it and how quickly employers we'll open the doors to their businesses.
Especially in large cities.
Based upon our third quarter operating results and the economic progress to date, we are increasing our guidance for full fiscal year 2021.
Specific variables will impact our performance through the remainder of fiscal year 2021 include but are not limited to members access to and spending on health care and their use of transit parking and other commuter benefits.
The modest pace of recovery in employment may negatively impact the average number of our average total accounts and Conversely, perhaps for uptake and Cobra and other benefit continuation products across.
The cross these and other variables there exists a wide range wide range of plausible outcomes for the remainder of fiscal 2021.
Importantly, however, our guidance for fiscal 2021 assumes the 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 of between 725 and $731 million.
We expect our non-GAAP net income to be between 116 and $121 million.
Resulting in non-GAAP diluted net income per share of between $1.55 and the dollar 61 per share.
We expect health equities, the adjusted EBITDA to be between 232 and $238 million for 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%.
Today's guidance includes the effect of having achieved approximately $55 million in annualized run rate net synergies.
As of the end of the third quarter.
With estimated net synergies of $80 million expected to be achieved by the end of the F Y 22.
Given the current interest rate environment and recent discussions with our depository partners, we are maintaining our yield guidance of approximately 2.05% on HSN cash with yield during full year fiscal 2021.
We also feel confident to provide the yield outlook at this time for F y 22.
Based on anticipated, new HSH cash expiring rate contracts and current market rates, we expect our yield.
For Hs the cash with the yield to be between 1.70% and 1.80 per cent for F y 22.
Our above guidance include the detailed reconciliation of GAAP to the non-GAAP metrics is 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 Jon for some closing remarks.
Thanks, Darcy before we go to Q and eight I'd like to just take a moment to thank our 3000 plus team members, who are continuing as as I'm sure everyone listening on this call to work in living rooms and kitchens.
And for years.
The case.
And the flow of corner of the floor behind the Christmas trees electronic of Bush.
And have been doing so for months and months and at the same time as I said at the outset have made I think tremendous progress towards delivering.
Our members of towards helping our members collect connect sales and wells, but I think also towards delivering the kind of business that you shareholders want to see from us. So again, thank you to the team and with that operator I take it away.
Okay.
Thank you as a reminder to ask the question you'll need to press Star then one on your Touchtone telephone to withdraw your question thing the queue. Please press the pound key please standby the we can pile of the queue of day roster.
The first question comes from and Samuel with JP Morgan. Your line is now open.
Hi, Jon Thanks for taking the question.
You spoke about strong cross selling I was hoping maybe you could provide a little bit more color. There and then what's the overlap look like between existing wage customers on top of 20 customers.
Ted why don't you give.
Give a little color on the cross sell activity and what we're seeing.
Only the non mute the.
All right well he won't I will you can still hear me the cancer.
Jon can you hear me I keep hearing of now we can hear you. There you go alright, good I had a great answer and no one heard of except my.
I work, which is the corner of my bedroom.
Okay I got to practice so yeah, let me you know we're.
We are really pleased with the quality of conversations that we're having with.
Our existing enterprise clients and the.
Kind of a pace with which they are.
Excited to hear more about buying services from us and I think you heard kind of some high level remarks, Jon and will probably get zapped by type of thing if I go into too much detail for basically what we're seeing is much higher.
Close rate on sales opportunities.
And our cross all of which isn't a surprise I think we were surprised a little bit of the magnitude of how successful we can be.
Adding new products to our existing clients were seeing quarter over quarter. The average number of products used by our enterprise clients March upward and I think more importantly than anything else, we have kind of done some math on the size of the opportunity when we look at our top 500.
Net against 1500 client at the products. The don't currently holds today and we feel like the opportunity will persist for quite some time for us to kind of.
Continue to make progress there so I want to Tyson jump in if you want to get a little more specific but I think that the for the punch line is we see a significant success, we see the numbers the.
The penetration of our products that going up but we also see a.
A lot of runway.
And.
And probably years worth of.
Cross sell opportunity to come in terms of overlap.
No I don't think we would share specific numbers, but I think what we're finding in this low anecdotal is there were places where our overlap saved us a little.
Meaning that like the if if if and enterprise was the client of both legacy Healthequity and legacy wage works.
The opportunity to say, it's all of that's going to come under Healthequity service model and having the answer would be yes, probably helped inform that 97% retention rate, which Jon alluded to earlier because people are kind of like okay. We had some problems with.
Service as long as you guys are going to address that were fine and thus far we've been able to do so so I don't think we reveal the exact the exact overlap statistics for I think that it's been a good guy for us.
In terms of in terms of consolidating services for price.
That's really helpful. Thanks, guys.
Thanks Sam.
Okay.
Thank you and the next question comes from Greg Peters with Raymond James Your line is now open.
Hi, good afternoon, Tim Purple.
Hello, Hi.
I guess.
I'll be the bearer of.
The market news.
Last I checked.
Aftermarket after hours the stock is down about 5% and I know you don't get hung up on daily oral the movements, but I guess in that in that in that performance. So the is aftermarket I guess I'm looking at a couple of things that might.
Might be Spooking, some investors on first of all the guidance for.
For the full of year.
If you look at it you know it.
Not that we have the.
Our estimates are the final arbiter of what the street looks like it does look like the implied fourth quarter guide might be a little bit lighter than where the street is.
And then secondly, you know the.
The HSH balances I think you said in the press release on the added $46 million of new cash in the quarter.
I'm just I'm trying to reconcile that number I mean, you of 5.5 million pounds. That's you know what $8 I count in the quarter and that's all they can add when the about the the maximum number of the dollar contributions are substantially higher and that I don't understand that and then I'll have one other area that I don't understand to follow up with.
Yes.
So why don't you throw that went out and so we can hit them all at the same time.
Oh, okay.
Then just the the the accounts the actual account numbers the CDB.
Obviously the rate is that the rate of deceleration sequentially is beginning to moderate but still we're seeing the CDB account numbers declined sequentially and I think you are your previous guidance for the suggestion would be that that would stabilize and growth in the fourth quarter and then the HSH numbers.
You throw in the growth numbers, but if you take out the net.
With the it's not as strong. So just this is that each of discussion that we always have every quarter. It seems like about you know the accounts of your closing at the same time of year opening new accounts.
I'll take a couple of those and then I'm and I'm going to throw the the guidance question over to Darcy.
But the.
Let me kind of.
And as you might imagine I'm not really.
No I don't I don't try I try not to look at after hours much let's talk about it.
Weather in whatever direction to go.
But.
If I look at I'm going to just take your questions from end to beginning in if I Miss something please tell me on accounts on H. assays in particular.
The net growth in Asia sales approach to 100000, we had 104000 gross new so I'm not sure.
The where you are there but.
Wasn't quite 100, k., but it was getting up there so for a third quarter thats not shabby.
And as I said in my prepared remarks of.
One of the issues that is challenging for us in this environment is the normally there is the sort of base of of accounts that we will see in any given quarter the happening because our basically because of employment growth as our clients are hiring people and.
And obviously there was if you think about the timing of hiring and then the person becomes the benefits eligible the month or two later.
This quarter did not represent a period, where there was a lot of hiring going on there may have been some retiring at the mid.
But you know that and I know it so.
You can judge whether you think that number is good or bad, but it's it's there isn't a huge difference between the open in the.
And the net increase numbers in addition.
On on Cds, the primary issue that we're battling there is can either so.
We had about 100000 more commuter accounts in suspense this quarter than last and that was roughly made up by the increase in HSH day in and some more modest increases elsewhere.
So.
That's that's where we are.
With regard to the assets side of things. The answer is that people took the 170 million and turned it into the best.
And the best mid market growth during the quarter actually wasn't that helpful. Given the timing of beginning in the end.
And the Tyson goes for the math, if anyone would really liked but.
But the big reason is because they deposited cash in the turns into investments to the tune of $179 million.
So that seems kind of okay. That's what we want people to do over the long term. That's how you grow your balances and that's how they become sticky account holders.
So by and large.
Ken It's as I commented at the beginning Cove, its not a great backdrop for us.
But our job is to control the things we can control and what we can control is building a more profitable and growing business. So that as those headwinds turn to tailwinds that we can do more as far as guidance and the implications for Q4.
I'm going to throw that one to Darcy and have him get a start on it and if I want to add something.
Yes.
He might be on mute, though.
[laughter].
Every one of them now.
Can you hear me all right now we can do for you.
Hi, tap the mute button, but it didn't take.
For the on mute button.
So the midpoint of our guidance, Greg we didn't play like the $183 million.
We think there's possibly some upside in there, but we're also cautious it's up from what we just did in this quarter.
We'll see how the spend the comes back that's of variable for us and and how of much Steve talked about getting relief on the people being able to spend their FSC dollars and so.
You know, we're cautiously optimistic about that but thats kind of where the midpoint of our guidance comes from.
That we gave.
I mean, I would just add Greg we had the same exact discussion I don't think it was you that asked the question, but last quarter, where.
People were kind of doing the math and dividing by the rest of the year and so forth and.
We they were like Oh, you know you're going to have.
And and I understand why people do that.
But.
Given our approach to guidance and given some of the uncertainty as you can imagine why.
We're going to want to be conservative that's how we run that's how we roll that's how we've always role and so.
But but then we tried over deliver and certainly I think for the quarter relative broadly speaking to the analyst expectations, we were able to do so and certainly in certain areas relative to our own expectations fields.
Got it well I realize I'm Maxalt my one question and follow up but it's true sincerely appreciate the answers thanks for the guidance on custodial revenue.
Yes, Sir.
Thank you. Our next question comes from other T. Jones with Goldman Sachs. Your line is now open.
Oh, great. Thanks for the questions Hey, how are you Jon I guess, maybe it's a follow up there on.
On the guidance I know you just touched on on the revenue side, but I think similar question on the implied EBITDA guide for Fourq, you looks to be down a bit.
Compared to what you've been doing the might be a similar answer but just curious if there was anything worth calling out there as far as what might be driving the.
The sequential EBITDA or at least the expectation for sequential EBITDA, maybe be a little bit lower than than some were expecting.
Darcy you want to just one.
Sure.
I mean, historically, we've always and you go back and look our history, even pre merger of post merger Q4 has a lot of the expenditures getting ready for our January enrollment that will come in and so we've we've been hiring people of we've been training them, we've been getting in on the phone.
The second and those expenses will hit in both in service delivery and in some of our.
Operating expenses in Q4, and so what we're most pleased about actually is that.
As we've gone through this transition and migration that we've we've done of what we feel is a pretty good job of maintaining.
EBITDA margin.
With the efficiencies and the the benefits that we got from synergies despite.
You could argue $20 million of revenue impact per quarter from co of it and so and to be able to get margin out of that and still you know get through all of these shortfalls in the revenue that we've had with respect to of the commuter business, we've talked about in the spend in interchange.
That's what's factored into all of that and the flows down to.
For two the EBITDA line also notwithstanding the fact that we're striving to get more efficient and to maintain margin as best we can.
No. That's that's Super helpful. And then maybe if I can just ask one follow up I was kind of curious on some of the Steve's comments around the potential for extending the use it or lose the clause with CF assays.
Not being as familiar with it just was wondering if maybe you could share a little bit more of what actually does need to happen for that to come to fruition does the need an act of Congress is enough to employers and then probably the most importantly, the what would that mean to the model for for Healthequity, If we find ourselves somehow going into next year with the larger.
You know assets say balances than we would have otherwise expected the C.
Well I'll I'll take that one and then ask of Steve wants to comment further.
The is as you may recall, the regulators felt they had the authority to extend.
Some other deadlines as they approached earlier in the year and example, being the.
Deadline, the people had to enroll in Cobra.
Which has been extended to the end of the quarantine period, but.
I'm sorry, the end of the pandemic more discrete but.
But but now I'm thinking most people at the time did not think we would still be here at this point in the year and yet we are so from our perspective.
This is something that the regulators can do it certainly something thats being talked about actively.
Whether they can get their act together or it requires an act of Congress to get their act together that's to some extent the above our pay grade.
But.
I think similar to some of those other actions. The practical effect is really is I think the reason to do it from the public policy perspective is it leaves the billions of dollars in the healthcare system that will otherwise come out of the system and.
And leaves for those in consumers hands that will otherwise come out of them. So that's good for us of course, it's good for us in the sense that people have more money to spend and so forth, but we just think it's and we're working our butts off to make sure people know this and that they don't assume that's going to occur and instead.
Spend the dollars, where they can but but as you know and particularly with the new shutdowns. There are people who are just don't have access to a spending those dollars usefully and so so this this seems like a very common sense thing to do we are hopeful that it does get done because it's the right thing to do and would there be some benefits in terms of people.
Having more money in those accounts to spend as much as they can get backout outside what not of course that would be.
They're not making kind of sense.
Robert the only thing I'd add Jon I got it right I mean.
Coal, but you know the when they issued this notice 20 2029 in the spring. They just kind of setting the language. We think it will be back the normal in the fall. So we're going to give we're going to extend the deadline for the 2019 plan years, because you had the finishing the spring right. The didn't have time to to use for grace period, the simple extend the two.
2019 through the end of the year the otherwise we're going to go back to normal because we think it will be back at normal then we're not back at normal and so the we do think that the regulators can connect on this and we think they will I mean, we know that.
One of the book, the outgoing administration and the and demonstration of very pro consumer which is what this is all about is helping the consumer zone. So I think we're in a good spot or is that theres a bunch of momentum I can tell you. There's all kinds of sponsors even signing on letters and things like that and it's a wide group of people everyone from American benefits Council the DFL sales.
Oh no.
The on the National Education Association of we're all asking for this leniency not on the around around.
Around when you can use your office $8 in the you Richard dollars and things like that but also for.
The things like over extension so were pushing hard.
Yes makes sense. Thanks, so much.
Thank you.
Thank you. Our next question comes from George Hill with Deutsche Bank. Your line is now open.
Good evening.
Hey, good evening guys in no things are not back to normally it Steve.
I kind of have three questions all of them all at the same time as well I guess my first one is darcy.
On the rate guidance for calendar 21 of the 170 to 180 basis points as we think about the calendar year do we expect that to be a linear.
Kind of progression down towards the low end or do we expect to be kind of the flatline number as we go through the year and then John and Steve I guess two questions for you guys on the strategic side. One is in the most recent benefit selling season as a result of Covance you guys for like you saw any new trends that are important for worth calling out and then the other one is United appears to be stepping up their focus on health care for.
The answer in banking did you guys see anything different competitively out of them in this most recent kind of end of the selling season. Thanks.
Yeah, I'll take the second half and then.
If you don't mind, Steve I'm going to throw back to you in terms of the.
Employer trends.
The first of all.
On the competitive side.
Yeah, I was actually really pleased to see in.
In the United Investor Day them talk about this and says I recall.
George It was the the last year of the year before when somebody asked me if it was in December as well when someone said well they didn't mentioned it or they threw it off and I said, great. They've got a number if they want to sell their business. So.
You know to my mind, it validates that there's a lot of growth opportunity here.
Given all the irons in the fire for United in the regulated and non regulated segments of the business. So.
But.
I think probably the main way, we see that is in M&A activity.
The they've always been the competitive for different assets.
It depends on the asset and so forth.
As an example, I think it's.
It's been widely reported all the I've never seen the press release on it but but it has occurred the to.
They acquired.
Platform called connector care, that's a little more fsh HRG focused and I think that's to to try and match what we've done in broadening the offering so.
That seems like.
From my perspective, if you're in the market with no competitors that's not so good.
But the.
They're a good competitor and and so that's that's the main thing we've seen we haven't really seen any particularly different behavior in the actual like offering of products or pricing or that kind of thing.
Steve you want to touch on the question about the.
I suppose Ted if you have anything touch on the question of imply.
Employer behavior during the selling season.
Yeah, I think Ted spoke to a lot of this the generally employers for under a lot of dress and they just want simplicity and I think that's one of the reasons why.
The bundled product has done so well because it just gives them less.
Meetings less.
Partners to have to manage and and frankly, we can help me out on pricing when the all together and then I think George and of course Uh Huh.
The financing what are your first question for you Chris.
Darcy.
Yes go ahead sorry.
Yeah. So George you ask about the the linear the of the yield.
We always start out the year based on the placements that we do in December and January and and usually we're pretty good on that about it being linear until we get to the end of year. In this case that is generally true it'll start a little bit higher in the first part of the year.
The the Delta that will occur this year that maybe you won't see as much as in prior years in August.
When we started.
When we did the acquisition and we're starting to build capacity for wage then we had some contracts that that will get reset kind of more in the late in the Q Q3, and Q4 earlier than they normally would so there may be a little bit of a.
Decremented will happen kind of in the second half of the year and then.
And then we always have a resetting.
In the December January in the fourth quarter, So, it's probably a little less linear than we would normally expect but the.
You know kind of go in chunks of quarter by quarter throughout the year, if that makes any sense.
That doesn't I appreciate the color. Thank you.
Thank you. Our next question comes from Sean Dodge with RBC capital markets. Your line is now open.
Thanks, John Good afternoon.
So maybe on the open enrollment. This is the is the furniture, you've approached that a 100% virtually Jon you mentioned the doubling in the number of of interactions that are taking place. Thus far you have any better sense now how effective those virtual interactions are.
Being are going to be and converting people versus your kind of more traditional in person approach.
Ted you want to start on that one.
Sure as my mute button off.
Moving on hear me, Okay, excellent I'm, Luckily I'm not being evaluated on mute button management.
We're really bullish about of virtual always for a couple of reasons that like.
Like the share of the first one is my view is often standing around grouping of running at of benefits fair and for those of you going and the benefits for you know that doesn't get hit very hard oftentimes people just wander through its and it is difficult to have meaningful conversations.
A bunch of your of your colleagues.
Our model this year.
Is the.
His virtual but with live 20 for by seven online support and that adds value in a couple of ways. The first one is I can tell you for sure that I'm not the benefits decision maker in my household of would be.
The Doctor lumber and when she is now able to watch the webinars and attend because it's it's virtual and then second if we have a question we can chat it into the into the chat box in one of our talented purple member services agents can answer it on the spot and we're really bullish about that model.
We've gotten tremendous feedback from.
Employers that their folks are more engaged we're seeing the ER visits to our various learn sites up significantly, but unfortunately, we won't know exactly how that translates into new accounts until mid to late January but I think the you think about the whole funnel the at the top couple of EPS in the funnel.
We're pretty positive on Steve Steve I don't know if you have any and the other thing anything to add on that.
Well I mean, we have a little bit of a proxy.
In our tech sector businesses were a little more out of out there for the last couple of years and I would say generally Ted the when we've been able to engage people this way.
Fortunately in previous years.
It was more limited because the kind of the the thing the had been doing for 40 years of.
I'm sitting in the the cafeteria and talk to US, which is total indications of drives me crazy, but for the for if you think about had some of our employers I'm not going to name of for obvious reasons that are more tacky and have been doing this for the last couple of years, we do of higher penetration adoption rates within those populations approaching 60% some cases, whereas the ones and.
I've had less and so it could be selection bias right yeah. The morteki they get the stuff faster and all that stuff that I've seen I hope I hope the Dell what's happened in other sectors is now happening more broadband net that's what I would but I tend to be an optimist.
And that's why for example amount of gas as Ted told me earlier today.
You are okay for your your point on efficiency I know you increased your marketing spend a little bit here, just just to kind of get the momentum of.
If this works like you've taken we look ahead of next year.
How big of the cost saver or.
The efficiency contributor could this be if you say, maybe not 100% this little bit, but something closer than you had been in the past.
Sure I can take that I think couple of different answers the for the first one is it's a it's a moderate.
The savings I mean, it's probably a seven digit number but not a massive seven digit number.
But we're trying to reinvest that back into the quality of the experience and the interaction and working really hard to show the types of results the Steve just alluded to.
Some of our early adopters to other clients some of that we get.
More partnerships through more access and the.
Thats been working pretty well.
One example is to be able to communicate.
Thoughtfully with both existing account holders at an employer and also prospective account holders that an employer and we've been able to demonstrate the effectiveness of that so we've been able to partner with our employers to drive.
The drive that further and.
And so we think that there is there are some modest cost efficiencies.
We're excited to take but what we're mostly trying to do is reinvest those into a better experience of people can engage more.
The more fully.
Yeah, I mean, I think that last points really that's really important at the end of the day the purpose of of.
Pushing towards virtual education is not to save money here it's to growth.
Grow the business and that's really what ray matter.
Got it okay understood. Thanks again thanks.
Thank you.
Okay.
Thank you. Our next question comes from Sandy Draper maturing Securities. Your line is now open.
Hi, Thanks, very much and just the maybe the first one of her two different numbers I heard Darcy mentioned, maybe about 20 million of revenue impact from code you can look at it that way, but I thought of her Jon say something about 10 million. This quarter, if I remember correctly I think it was 60 million last.
Of course, I'm, just trying to one sort of the out of.
The the thing about advantage of the 10 is ex is ex interest rate impact. The 20 income is inclusive of interest rate impact.
Okay, Okay got it that helps.
And then and with a net 10 is that comparable with the 16 last quarter. So we should think about there actually was a little bit of of the sequential improvement, but the guidance may reflect with spiking. The there may be of do we may see some reversal of that.
Yeah, I want to make sure yes for that correctly, so Darcy will take that one.
Yeah, that's correct, the 10, and the 16 or similar numbers or Sandy that's correct.
Okay. Its great for difficult we want to be when we're talking about this impact we do want to be careful about it.
We're trying to give you as accurate as we can a sense of of where the business would be in a more normal environment and that's why we've kind of provided the detail of of the impact with regard to commuter and most of that either number of most of that number is commuter.
Got it and then spend spend came back a little bit obviously, but the frankly not as far back as we would like it to.
We got some benefits and other areas.
Commuter obviously has not sort of is where it is.
Got it that's helpful. Then my of my follow up is.
I can't remember, what if you've given guidance of when you think the the integration expenses sort of wind down obviously.
It's working that the the model's working you're you're you're converting on a on.
On the technology platforms, the customer like like <unk>. So, it's clearly money well spent but just trying to think about in terms of longer term cash flow when that number winds down.
Yes, the very important question I can take this one.
We have committed I think you'll recall sandy from the the actually at the beginning I think we said that we would have these expenses running through fiscal 2003, but but with the acceleration of synergies.
It's also true that that we are confident that.
This this sort of carve out for integration expense is going to end in fiscal 2002, and the fiscal 22 number in terms of aggregate you can sort of do the math to get up to 100 million will be.
Substantially lower than the fiscal 21, we are starting to wind this down.
And.
The the the primary expenses in fiscal 2002.
They are really around the actual kind of shutting down of platforms and the remaining.
Migrations and that kind of thing whereas in.
And then what's what's going to be left after that or with that where the timing is a little uncertain, but we're going to operate as though we're going to get it done in 22 is the fiscal 22 is there some sort of residual.
Shareholder litigation related stuff and real estate stuff from from the wage side of.
Is it that the timing of which is a little bit out of our hands, but are have been included in the number that we quoted in terms of cost all along and.
If we can get those done in 22, great if not.
We'll think about how we want to talk about those on the income statement, but there is not going to be in the onetime integration adjustment on the income statement after fiscal 2002.
Great that's really helpful. Thanks.
Yes, Sir.
Thank you and the next question comes from Stephanie Davis with SBB. The rank. Your line is now open.
Hi, guys. Congrats on the credit I. Thank you for taking my questions. Thank you.
Yes.
Strategic question for you you guys have done a range.
We've been talking about the assets out of the market you talked about competitor of buying the plot.
Where are you on your M&A priorities.
And how how narrowly focused are we on the idea of buying books of business as opposed to maybe adjacent fees.
It's a really good question. Thank you for asking let me for say that the industry.
Investors should understand that one of the things that has occurred this quarter in practices that weve added more gunpowder to the the depot or whatever the right metaphor is you can show how much I know about done kind of I don't know, we keep gunpowder right.
I had a gun like stuff that.
Not anymore.
From Miami everyone's kind of guy, but not anymore.
And.
So.
And so what we're looking at.
The only $300 million of cash on the on the balance sheet, obviously, we're adding cash every quarter.
And.
You know the ratio of the debt ratio is now well under control and I think importantly, not mean, there aren't that many businesses out there that I'm aware of the you know take some of these these body blows with with with the Cove. It and are delivering not just profits, but good profits I mean, we didn't I know I'm, referring a little bit, but there are a lot of companies out.
There that that some of their profit is like well you know employees the.
Where the health plan is the has got a surplus and we're taking that into income we didn't do that we rebated that to our.
Our employees in Q3.
And I shouldn't even say employees, our teammates in Q3 and.
So bottom line is that's all of the say that I think the the opportunity. We have is substantial the the the the question that you're asking is how we're thinking about deployment of that ammo or gunpowder or whatever.
And.
Let me say first that.
Our primary focus remains.
On a competitive assets.
We are looking at those very carefully. So for example, the item I reference in earlier question.
About the.
An asset that that you an h. bought I mean, that's not an asset we need it and.
An asset that we would have had the look at that in terms of what does it add to the growth opportunity the business and they they were looking at it a little differently in terms of being an alternative to the two of bye.
Two of build.
So you know that.
That's something that we're not going to do and even with the portfolio assets, we have a model and we follow it and when it works it works.
So I guess I would say generally we remain focused on.
For significant deployment, we remain focused on competitive assets, particularly those that create real growth channels, where there's relationships with third parties that we can see growing the business, where the employer business is relatively young so that there can be growth there that kind of thing.
We are looking at Adjacencies, but but we look at adjacent sees from the following perspective, one is in terms of strengthening the core income.
For the <unk> in the same way that we look at wage right. So so ultimately.
Ultimately our mission is to help consumers connect health of wealth and as Steve commented you know.
Everyone's kind of got to hide the what we used to call. The high deductible everyone's got one of those now and so.
Really we look at it in terms of how to serve that population.
Well.
In any number different way. So we're not we're not thinking about like well, there's one leg of the stool and then we need another leg of the school stool and then secondly, I would say with.
With regard to adjacent fees.
<unk>.
Well, we're comfortable with the idea that there may be some kind of tuck in items that make a ton of sense of we're.
We're not throwing out the build option in those areas because as you know asset prices are what they are they're pretty some of their their well elevated and there, particularly elevated and some.
Some of these private market environment. So.
We're not we're certainly not shying away from from Oh, the opportunity to build or partner in some of these areas too. So I guess, that's a long way to say our primary focus remains competitive assets, it's going to be competitive assets, where we think we can really create value for our shareholders with the purchase and we have a well developed.
Modeled the use that we're going to use it and then we are looking at adjacent fees, but their adjacent sees that feeds the core and were.
Just as happy to build or partner as we are to buy something in those areas.
We're exploring that was the Jason fees, a little day, I mean, you probably haven't better view than we do and the benefit of I know whatever I said I was going to be assets.
Good day, [laughter] chocolate, putting I would still get the same day.
Jon you can go ahead, I'm, sorry gun thing for a while I still would be like all right cool so the day.
[laughter] thought on.
Even though the best the NAND is right I mean, you're and you're selling season. So yes, what sort of adjacent these are the weapon to consolidate under one vendor.
It's really interesting we just completed some research on this topic and I'm not going to tell you all about it because some of the fight takes the are ones that we want to remain proprietary but what I will say is that.
What's really interesting to me is and I think and I think hopeful for the business is that.
The employers.
It's two things one is the the drive it's essentially Theres a drive obviously for simplicity, along the lines that Steve talked about of.
And in addition to that.
Employers want they don't just one engagements they want effective engagement.
And I think that we're beginning to see a little bit of a discernment between like okay. There's engagement on stuff people expect assets employers to deliver and then there is engagement on stuff that maybe they go elsewhere for and we're not the natural place and one thing people expect of their employers is the financial side of health care REIT.
They are buying their health insurance from employers.
And they expect their employers to provide assistance in helping them navigate the financial side and so I see that as a really interesting positive trend and kind of maybe points the way a little bit to where we think about the product adjacent adjacent cease being and importantly that thought is not limit.
The to their people in HSH right employers have begun to do the math and they recognize at this point that the only distinction between in HSC plan and a comparable P.P.O. plan is planned design, it's not out of pocket exposure, maybe a little different right, but you know they want to get to the place.
Where people are comfortable managing their portion of the cost responsibility for care and they know they are not there yet and they know that the solutions that are out there are not you know don't don't fully cut the mustard and they continue to want to see more in that area.
Understood the bell Thanks, Jon Smith keeping.
Well the lack of those chello shots of this year, it's gone so [laughter].
[laughter] I break out the worst the inside [laughter].
Could be trouble.
Thank you. Our next question comes from Jon Hocking with Keybanc. Your line is now open.
Great Great. Good afternoon, Don for the question Hey, Good afternoon, good afternoon, Hey.
Hey, one one area that hasn't been touched on the you guys are and it does the fact European now.
Yes negatively in the near term the positive in the long term it gets the shift the investment.
It's hard to discern the trend there, but clearly it because I know you're trading off EM.
The accounts in your cleaning up your ATM share account base.
But it looks like the percentage of 18 days with investments the certainly up very sizably for several quarters in a row now I'm just trying to think about how are you is there a way to think about what that trend might look like going forward because obviously in.
In the near term I would maybe hurt your PML level. The long term I would say it helps you, but near term just want to make sure.
Kind of couple of how to think about that.
Yeah, I mean, I'll I'll answer and then all of a invite.
Darcy or Tyson to speak further.
But but you have it exactly right.
The invested assets.
[music].
Kim of whether its assets for account holders with investments grew by 50% year over year of one or the other and.
And continue to grow although there is still a very small percentage of total.
Account holders and for Greg's question from before we are seeing and frankly, we want to see in our members invest so.
So I guess, we don't spend a lot of time thinking about the short term impact of that to the income statement in for.
I think we spend no time thinking about it.
We we think about the long term and the long term is investors are great customers and they're great. When they're doing the right thing by themselves you know the there are people, who given their risk preferences and so forth you know shouldn't be investing and we have some great product options for them but of.
But but for most people given the long term nature of of this product a long.
The long term opportunities with the product they should be investing so that's that's kind of our overall mindset about it.
Darcy or Tyson add anything to that.
Yeah, I like the I've, just one thing and then Tyson can jump in.
You know when we went public.
The percentage of H. assays that were investors was 2% and that was pretty much a industry wide.
Statistic that was true for not only us but for everybody out there and I think that you know.
The other people may have paid attention to this but I think that the efforts of healthequity of actually growing the so that we are now up over 5% and you go well that's still not that much but you know what every month I look at that number went on when we close the books I look at that number and it grows every single month and you're right the for.
First thing the has to happen is that they did it and they actually becoming the investor once they become an investor then they start treating their HSH instead of as the spending the count as and into a savings account and the long term retirement savings account. So it takes a long time, but it's what we've been about and we'll continue to do.
And the personnel will will follow accordingly, and we're in this for the long haul and people should have more than $3000 in their agency. They just should we should have more than $5000. They should have way more than that.
Because they will pay for their health care expenses for the rest of their life.
In retirement, when they'll have significant health care expenses, then you should be able to pay for those tax free instead of pulling that money out of your K I mean, ive pontificated on that numerous times, but.
Yes, we're going to stick that of course, and and the and it will.
The accounts growth and the assets grow much faster than the other.
Cash balances do.
Yes, the only two cents I would add is just when you see someone start to utilize investments and I was talking to someone this morning about that they really were trying to do and so when I think about this based on my background I think about the since it is a little bit of an investment because you don't aren't as much revenue from the so maybe it's like the offering free shipping or prime but you know.
So when people do that's the theres sort of the in there sort of hooked into this right and they get it and by the time they've gone for the next 25 years of their life. They are going to have the significant amount of dollars of here to fend off the net and ethnic or whatever it might be if the great savings tool to really of trees treat the stuff create stability for one.
In the financial where.
Super Thank you for the commentary.
Thank you. Our next question comes of Marc Mcconnell with Baird. Your line is now open.
Hey, good afternoon, everybody and thanks for taking my question Tom the Sir.
I'm wondering can you talk a little bit about how you're thinking about calendar 21, you know I know what the normal cadence is in terms of of giving guidance.
Giving guidance and the and fully appreciate the rate commentary, but just as we're in the middle of the sales season, you know what are some of the general things that people should think about and consider.
With regards to how the selling seasons going on you mentioned the cross selling is going well how should we think about like new logos. How should we think about the differences between large enterprises versus some of the smaller employers that are out there and also just from an.
An asset composition how.
How should we think about that trend, where where people are you know getting it and shifting more and more of the assets to investments as opposed to cash you know how how would that end up impacting the cash balances as we go through the year.
There was a lot in there Darcy you want to take a shot at this one.
Yeah, I'll start with the last part and then maybe Tyson can gear up a little bit and talk about what we're thinking and Jon.
Some of the things we've talked about of what we expect.
With respect to relationships and so on so forth going into calendar.
21.
I know, we have a list of some of those things.
And so with respect to the cash balances.
I would note the mark that notwithstanding the fact that the investment balances have the continued to grow.
People are moving money from cash but.
In spite of that.
Our cash balances are still growing and you know that's a just a.
Tribute to the model of what this is all about people, even investors still maintaining the cash balance and the they get there by contributing more than they spend and they can grow into a certain whatever balance they feel like they they want to maintain and cash and then put the rest of it into investments and so.
We're very encouraged.
By by both items, one the amount of people that are getting the and moving money into investments and starting to investment to invest but also we still continue to have positive growth.
In our cash balances and and.
That comes from contributions of comes from and then putting a little bit more aside.
Every year the when they go through open enrollment generally the have the opportunity to to tell their employer, how much to take out of their paychecks starting in January and we we see a big uplift in January and then it moves for throughout the year. So that's that's how we really view.
This movement.
How accurately we can always predict about the movement from cash to investments.
We obviously grow our investments a little bit faster than the cash but.
We still anticipate cash balances will grow.
Hey, Mark I'm, just kind of side since that was the long question and I want to make sure I give you a more direct answers or a second part of the Darcy you didn't touch on.
No he headed and I fully appreciate the that the cash is continuing to grow and but we obviously want the investments to grow out of.
Faster rate because that proves the long term value. So fully appreciate both the parts.
I think I think that the other question the I was referring to a little bit and Jon maybe you even want to talk about this longer term, we're not giving up why 22 guidance, obviously, but there are some things that the that we think about going for we think that we're going to still grow accounts, we think that we're going to still grow assets as we talked about and the.
At some time, we think that some of this pandemic will be over we don't know exactly when.
But when it does the maybe the vaccine and and people start coming back to work and that we see a little bit more.
What we would call normality in our.
In our business right.
Yeah, I mean look I guess, the this is where we I think.
Philosophically Mark.
If it's funny I mean, we've had this pandemic, but if you look at what we said we were going to be focused on a year ago and what we are focused on it's exactly the same things.
And in truth, if you look at what we said we'd be focused on.
At the time of the wage works acquisition or for that matter at the time of the IPO, It's exactly the same thing and.
And that's because we have the same belief in the long term opportunity in the business.
And so what we are trying to do is rather than the.
There, obviously things we could do in that I, maybe others are maybe they're not to.
To try and chase around anything even we could be spending all day and night.
Trying to figure out.
Well you know what should we do with our commuter business well. The answer is we should be ready when people are ready to come back to work and if it turns out that at the end, 5% less come back to work. Okay. Fine then we'll deal with that but for the moment. The answer is we should be ready when 95% of them are ready to come back to work.
Right and and similarly with regard to rates you know we were there was a lot of discussion well you know is there some change in the model et cetera et cetera. The answer is we should be focused on helping people grow their balances and on building strong relationships and diverse relationships with the places we can deploy those deposits.
Right and that's what we've been doing and the result of that I'm kind of actually funny as some of you know the Steve and his brother, David have a history of the airline business and.
One thing that I've heard from David in the past is that.
If you can make money as an airline when oil prices are skyrocketing than you can do really of if you can break. Even then you can do real well when they're not and I always feel that way about our business. If we can deliver we turned in 34% EBITDA margins last quarter and that was despite a really missing effectively.
As we talked about on the question $20 million of of very high margin revenue.
And if we can be a good strong profitable business with improving customer metrics and all of those kinds of things in an environment. Like this that we can be a great business in a better environment and some people will.
We'll dig that and some people will want to bet on what the next quarter is or isn't going to be like with regard to the pandemic I, that's not a bad I know how to make so I'm not making it.
I appreciate thank you.
Thank you.
Thank you and the next question comes from the Allen lots with Bank of America. Your line is now the Alan.
Hey, Jon Thanks for taking the questions I guess, given the lack of spending year to date. The is the for Q guide assume an elevated fsh spend versus normal years or is there a headwind expected from lockdown yeah.
Yes. So we were very this is an area we were somewhat cautious honestly I don't we.
And I'll, probably should of just thrown the Tyson, but I since I started I'll just keep going.
The.
Especially seeing the you know the the shutdown activity that's occurring and whatnot.
We we just don't know the answer normally what we would expect is as we've talked about elsewhere people got to use the balances and notwithstanding the possibility of some relief along the line Steve talked about.
One that message may not get to everybody into.
Folks shouldn't be waiting around and hoping it happens and as I said, we're doing our best there, but we do recognize that as of as of today any way those of us in the the the of the Golden state and and perhaps elsewhere.
Got the making just the casual trips to the Doctor's office, we're just not and.
And so.
We've been somewhat cautious about that in our guidance and so I think that's appropriate. So so that's kind of my answer Tyson do you want to elaborate on that at all now I guess I wouldn't say one of the thing I'm, sorry, and then I'll sort of obviously in January People's balances will get topped up just because they have contributions there in the.
For years that contribute at the beginning of the year and in the case of essays and the like the balance of all the sales easier. So we are anticipating increase spending in January but but nonetheless, we are remaining somewhat cautious relative to typical trends in light of and certainly relative to what's remaining in people's accounts for the current year in light of the current environment and the surgeon.
In cases, and so forth.
I mean, you're right. How do you think that's one of the that was the last one that was going to add its just the January obviously and when you think about that.
There is a large amount of spend that occurs there and the of course, it's because people just topped up and they have use it or lose it. So you know I.
I think the way that this works out people have that muscle memory. The do that that's the as you lose the but still no given the.
Unprecedented nature of the year, there's always a little bit of caution built in there about how that will play out and whether of will look like the past historically.
Thanks, Tyson and then going back to the 10 million commuter headwind a couple of questions what percentage of the cost of that business are variable and then I know the you're obviously not guiding to it for just conceptually what type of incremental margin.
Would that business have if and when it comes back.
Yes, the thank you for asking that.
The the it's actually interesting set so that just first of all the because of the 10 million includes commuter and then some health care spend but the the commuter is the biggest component of it and.
The answer is surprisingly that.
It's a business where there is a material fixed cost component and relative to our average gross margins, let's say you know the incremental gross margins in this business are pretty high.
And so.
It it it's I mean, they're not quite as high as the as custodial, but but quite certainly a majority of those dollars and a good majority flows down.
On the flip side as they come back you know will flow down to the bottom line Tyson you want elaborate on that at all.
Yeah, I just wanted to make sure we definitely don't provide those numbers because we don't want to create a segment in that business and for you know effects.
Of the matter is we sort of of sit with our teammates across the board and we gain of fishing by that so that's the important thing. So that's why were we wouldn't necessarily throw out numbers, particularly for that but I would say that as that business has declined and I think we you know we share the little bit of the size of that relative of the business you know.
The revenue perspective is about 10% or whatever it has come down significantly and we've we've taken costs out of the compound relative to that decline and as Jon said I think this is the place where we want to we want to but the business is still a good business. So it generates cash flow, we want to be in a position for when the market comes back that the.
We are the ones they are ready to take on the business of the comes through and I do think another positive is just that it's not a.
It's not like we haven't been able to sell this as part of the bundle, even though people aren't utilizing it how many still need to have this as part of the offering that you have for their employees. So I think there has been some success in selling this and so there's there's potentially some upside of people come back to the fact that we've actually have more customers. We will have we.
We will have computer because of that.
Great. Thank you both.
Thank you and Im showing no further questions in the queue at this time I'd like to turn the call back the John Kessler of for any closing remarks.
Thanks, everyone have a safe and happy, but mostly safe holiday.
Thanks, everybody for you by.
Ladies and gentlemen, this concludes today's conference for today. Thank you for your participation you may now disconnect.
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