Q4 2021 Healthequity Inc Earnings Call

Please go ahead Mr Putnam.

Good afternoon, and welcome to health equity.

What he's fiscal 2020 earnings Conference call 2021 earnings Conference call. My name is Richard Putnam Investor Relations for Health equity and joining me today is Jon Kessler, President and CEO, Dr. Steve Neeleman, Vice chair and founder of the company.

Darcy Mott, the company's executive Vice President and CFO.

Tyson Murdock executive Vice President and Deputy CFO, and Ted Bloomberg, Our executive Vice President and Chief operating Officer.

Before I turn the call over to Jon I have two important reminders first.

A press release announcing our financial results was issued after the market close this afternoon.

The metrics reported in the press release include the contributions from our wholly owned subsidiary wage works and accounts. It administers press release also includes definitions of certain non-GAAP financial measures that we will reference today, a copy of today's press release, including reconciliations of these non.

Non-GAAP measures and comparable GAAP measures.

And a recording of our webcast can be found at our Investor Relations website, which is IR dot health equity Dot com.

Second our comments and responses to your questions today reflect management's view as of today March 15th.

For 2021 and will contain forward looking statements as defined by the SEC, including predictions expectations estimates or other information that might be considered forward looking.

There are many important factors relating to our business, which could affect the forward looking statements made today and 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 then we also encourage you to review the discussion of these factors and other risks that may affect our future.

Future results or the market price of our stock that are detailed in our latest annual report on form 10-K, and subsequent periodic reports filed with the SEC.

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

And at the conclusion of our prepared remarks.

We will turn the call over to our operator to provide instructions and to host our Q&A.

I'll now turn the call over to our CEO Jon Kessler.

Thank you Richard and in deference to my mother's favorite TV shows you our buy American Idol.

Hello, everyone and thank you for joining us this afternoon today we.

We are announcing strong results for health equities fiscal fourth quarter and for the full fiscal 2021, which ended on January 31st and we're providing guidance for fiscal 'twenty two.

After briefly touching on our fiscal 'twenty one results I will after I do that Ted will review.

<unk> operations and touch on the recent lunar acquisition.

Darcy and Tyson will tag team the financial results details of fiscal 'twenty, one and guidance for fiscal 'twenty two based on the results. We're reporting today and Steve is here to join us for Q&A.

Fiscal 'twenty, one revenue of $734 million is up 38%.

Year over year, and along with adjusted EBITDA of $241 million.

He is both a record due largely to our wage works acquisition last fiscal year.

As reported last month, we ended FY 'twenty, one with $12 8 million total accounts and our $5 8 million health equity HSA members ended FY 'twenty.

With $14 3 billion in HSA assets.

We were pleased with that growth in results, but we hadn't yet seen how those compared to the market.

Devin year, our score keeper of sorts reported a January addendum to its 2020 year end report that estimates of market wide growth of 6% year over year in HSA.

One compared to our 11% organic growth and 22% market wide HSA asset growth compared to our 26% organic HSA asset growth.

Note the organic numbers exclude losses from the wage where to acquisition and migration.

But either way those are good.

The market and that's what we promised to do.

<unk> can you to hold number one market share of HSA with 19% and were in second place in HSA assets at 16%.

Now, let's look for.

While the pandemic remains with us and could result in conditions, we are not anticipating.

The health equity team is committed to beating fiscal 'twenty.

We can mine results for that I've, just reviewed demonstrating the strategic value of our total solution strategy.

Last month, we talked about headwinds felt in fiscal 'twenty, one that might be turning into tailwind for fiscal 'twenty two.

And Ted in addition to touching on our sales results.

Which.

'twenty will touch on our sales results, which are an example of that we think so far this year.

But we're also starting to see other.

Tailwind evidence as well.

For example, we've seen a reversal in bond yields as indicated by the 10 year Treasury moving from around 0.9% at the start of January.

I'll tell to above one 5% this week.

Treasury yields are not directly related to yields that our depository partners provide theres a high long term correlation.

Particularly between five and 10 year treasuries five year Jumbo Cds.

With our HSA cash assets already cash assets cash assets cash assets.

This year already placed for fiscal 'twenty, two we don't expect that we'll see much of an impact for this year's yields, but we think a steepening yield curve does bode well for next year and beyond.

We're also seeing more opportunities in M&A, and we think we're well positioned to opportunity to mystically attract.

Both portfolio acquisitions and to expand.

Assets capabilities to serve our partners our clients and our members for example, we.

We announced the acquisition of Loom last week Lumens of SaaS based technology company that provides a commuter solution beyond monthly passes.

And then employers are looking for as they need help returning their teams to work safely.

<unk> flexible platform supports tailored policy and incentives for the post pandemic hybrid workplace and helps employers to thoughtfully approach green initiatives to reduce the carbon footprint of community.

We welcome our two new teammates as as a Ted will say our luminaries in Seattle and we're excited about.

How they will help our partners clients members return to work.

And finally.

From a headwinds perspective the.

The government passed a third stimulus bill in the last week or so that among other benefits provides for Cobra subsidies for six months and increases more precisely doubles the depend.

And didn't care FSA spending limits for the 'twenty one.

Calendar year.

Both of these provide relief to families who have been impacted by the pandemic and its effect on access to healthcare.

And also indicate that legislators and regulators are listening when we talk about opportunities to do the right thing.

I'll.

I'll now turn the call over to Ted to review operations.

Thanks, Jon Hello, everybody. We are very pleased with the operating results that we delivered in Q4 and for all of fiscal 'twenty, one, especially given the very challenging circumstances COVID-19 presented.

We were able to make tremendous.

This progress on integrating wage works and we found efficiencies that allowed us to raise our synergy target from 50 million to $80 million with $60 million of run rate synergies achieved through the end of FY 'twenty one.

We on Shored remember phone calls, we completed 13 migrations with a heavy focus on HSA, we saw that our.

Our member and client experience scores improve we unified our brand released the first version of our integrated platform to strong reviews on both portal and mobile and net our service level commitments. During this years did you see.

There is more work to be done however, we're targeting another six migration.

This year, along with integration work to support our newest acquisition of them.

We intend to roll out the next iteration of our integrated platform with features that our clients members and partners are excited about.

As I mentioned in February our sales results for year to date remain ahead of where they were last year.

We believe this performance can be attributed to market receptiveness of our total solution.

The work, we've done building strong distribution partnerships and the incredible work our Onboarding teams did making new clients feel the purple Love This December and January.

We hope to see this positive trend continue as unemployment.

Bottoms out Americans get vaccinated and clients and members returned to work and Reengage with their benefit solutions.

Speaking of returning to work, let me share a little bit about our newest teammates for luminaries in Seattle. We are so excited to acquire loan to help us drive our commuter benefit beyond monthly.

The transit passes and help solve real back to work challenges for our clients.

Post Covid environment will look very different with employers wanting to deliver flexible benefits and incent employee behaviors to manage tight parking solutions and make better use of alternative transit.

<unk> can also.

Ill companies take basic ESG steps as they have a proven track record of lowering drive alone rates and reducing car trips.

We believe in that mission and we believe that loom will fulfill our commitment to continuously innovate our services to meet the evolving needs of our clients large and small.

Also we also see opportunity as legislative and regulatory relief is extended to our members and clients through the passing of a 100% Cobra subsidy that will help Americans day covered.

We will shortly rollout plans to help our clients fulfill their obligations and help our members find the coverage that is right for them.

While.

A significant operational undertaking to pull this off it is our obligation to serve our clients and members in this capacity.

There is a lot going on and I would like to thank say thank you.

To our over 3000 teammates who are working so hard on behalf of our members clients and partners.

<unk> to deliver all of the work I referenced above and purple fashion in challenging circumstances, now I will turn it over to Darcy to talk about our results.

Thank you Ted.

I will review, our fourth quarter, GAAP and non-GAAP financial results they.

A reconciliation of GAAP measures.

<unk> to non-GAAP measures is found in today's press release.

Our fiscal fourth quarter financial results. As you know include the operations of wage works, which was acquired in August of 2019 and included five months, including the full for fourth quarter of fiscal year 2020.

Fourth quarter revenue declined 6% as the economic effects of the pandemic impacted each of our three categories.

Service revenue declined 9% to $111 $3 million, representing 59% of total revenue in the quarter.

The decrease is primarily attributable to.

For a 5% decline in CDB accounts at year end, including net and over 50% decrease in commuter.

While the growth in HSA has helped average total accounts remained flat year over year.

Custodial revenue decreased 2% to $48 $6 million.

In the fourth quarter, representing 26% of revenue in the quarter the.

The decline was primarily due to a 31 basis point decline in.

And the annualized yield on HSA cash with yield assets, partially offset by year over year growth of 16% and average HSA cash.

Cash with yield and 66% growth in average HSA investments with yield.

The annualized interest rate yield was 197% on HSA cash with yield during the fourth quarter of this year.

This yield is a blended rate for all HSA cash with yield during the quarter.

The.

C assets table.

Today's press release provides additional details.

As previously mentioned, we have migrated 97% of the HSA assets to the health equity custodial platform.

Interchange revenue declined 5% to $28 $3 million.

CHF, 15% of total revenue in the quarter.

The interchange revenue decline was primarily due to reduced spend across our platforms in the quarter.

Gross profit was $109 million compared to $113 $7 million in the fourth quarter of last year.

Gross.

Presenting for Gen was 54% in the quarter.

Operating expenses were $108 million or 54% of revenue, including amortization of acquired intangible assets and merger integration expenses, which together represented 17% of revenue.

Income from operations was $1 million compared to $14 $5 million in the prior year.

Net income for the fourth quarter was $5 $4 million or <unk> <unk> per share on a GAAP EPS basis compared to a loss of <unk> 2 million or a loss of zero cents per share.

Share in the prior year.

Our non-GAAP net income was $33 $3 million for the quarter compared to $28 $4 million a year ago, a 17% increase.

Non-GAAP net income per share was 42 cents per share compared to <unk> 40 per share last year.

Adjusted EBITDA for the quarter decreased 8% to $56 $6 million and adjusted EBITDA margin was 30% while operating through the impact of Covid for the.

For fiscal year revenue was $733 $6 million, resulting in gross profit of four.

$415 $3 million or a gross profit margin of 57 per cent.

Income from operations was $35 $7 million and adjusted EBITDA was $248 million.

Turning to the balance sheet as of January 31, 2021, we.

We had $329 million of cash and cash equivalents with $987 million of debt outstanding net of issuance cost with no outstanding amounts drawn on our line of credit.

The cash balance of course does not include the roughly $460 million of additional cash.

From our equity offering a few weeks ago, nor the outflow of funds used in the acquisition.

Since I will be turning the CFO range over to Tyson in a couple of weeks I will turn the time over to him to provide the guidance for his first fiscal year of responsibility.

Thanks, Darcy, it's been a pleasure serving with Darcy and we're all glad you're sticking around to help us with other areas of the company going forward.

She makes everyone better when he was around.

Okay based on where we ended fiscal 'twenty, one and our current view of the economic environment now expected for fiscal 'twenty, two we expect to generate revenue from fiscal 'twenty two in.

For a range between $750 million and $760 million.

Our non-GAAP net income to be between $115 million from $119 million, resulting in non-GAAP net income between $1 37, and $1 42 per share based upon an estimated 84 million.

Shares outstanding for the year.

We expect health equities adjusted EBITDA to be between 240 and $246 million for fiscal 'twenty two.

This guidance includes our most recent estimate of service custodial and interchange revenue based on early fiscal 'twenty two results as well as modest revenue expectations from the acquisition.

Position of Bloom.

And Cobra uptake based on the recent stimulus bill weighted towards the latter part of the year.

Guidance also assumes a yield on HSA cash with a yield of approximately 175 basis points as well as the effect of approximately $60 million of achieved run rate synergies had discussed which.

It will be fully realized in fiscal 'twenty two.

The outlook for fiscal 'twenty, two assumes a projected statutory income tax rate of approximately 25%.

As we've done in recent reporting periods. Our full year guidance includes a detailed reconciliation of GAAP to the non-GAAP metrics credit 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 intangibles is being excluded from non-GAAP net income the revenue generated from those acquired intangible assets is not executed with that I'll turn the call back over to Jon for some closing remarks. Thanks.

Thanks, Tyson well done plus one two pads thanks to the team.

<unk> for a very special.

Year under very unique circumstances.

And.

Also to Tysons, Thanks to my friend Darcy Mott.

None of you would ever heard of health equity and Purple culture, certainly would not be a strong and stable without Darcy and his 14 years.

Years of service to our team and our mission.

Darcy joined a small team of less than 100 team members here.

<unk> equity had a handful of health plan relationships 20000, HSA members and all of $20 million of HSA assets.

He is remarkable.

In the true sense for the work his wisdom and financial talents turn the company profitable.

Prepared it for our IPO grew it to where we stand here.

But darcy is a complicated got.

Outwardly mild mannered drives fastest car the law that's true.

He is a finance guy through and through but he <unk>.

Out of the CFO role and signing up to continue to work just as hard at health equities mission, but for less money.

Well I don't know.

But I think we've got a great bargain and all of US truly look forward to continuing to work with Darcy for as long as we can keep them.

Thank you my friend.

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

Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone if for your question has been answered or you wish to remove yourself from the queue. Please press the.

Keith.

Again to ask a question please press star one it.

And we have a question from Greg Peters of Raymond James Your line is open.

Good afternoon, everyone.

And Darcy I guess.

You're kind of be giving up your responsibilities.

But I guess remember the next best round of golf is right around the corner I think it's Ben Hogan that said the most important shot in golf as the next one is it looks like you're going to have a lot of opportunities going forward.

Yes.

Sure.

So, let's let's I guess I'm only allowed to ask one question and one part.

So with that.

You raised the capital.

You announced the one transaction we've been hearing in the marketplace about increased interest.

Cash from others, who are well capitalized well funded about interest in doing M&A in this space. So the question for you or you Jon in your management team is do you feel like the multiples for deals is moving up and do you feel like the competition for these deals.

Well thats increased to the point, where maybe some of them will not be as attractive as they once it might've been.

Well.

I guess I would say.

The way, we look at for moving back into our plan with regard to the.

The capital that we've raised.

And the capital of the business is generated by the way.

You know really is to deploy from an M&A perspective in two areas. The first is and I think the primary of deployment is around competitive and portfolio type acquisitions and I'll come back to that the second is in areas, where we can expand our capability Lubes and example of that I think your question is kind.

About the first.

I do think that there are lots of people who are interested in our market and.

That should say something to those who are.

I think that.

Well to the extent anyone thinks they wont be growth year, that's a strong evidenced from the opposite direction.

Hum.

That having been said our competitive advantage when we look at the transactions that work for us Greg.

Is that I think nobody knows how.

No one knows this business better than us and no one knows how to generate cash.

Synergies broadly speaking better than us.

And we've done it time and time and time again from portfolio acquisitions and on the cost side certainly have already done it.

With wage works if you think about it is in part a product extension type acquisition.

So.

I think we have some real advantages in terms of deploying capital for <unk>.

Return I don't doubt that there are other people, who will deploy capital what I think our investors are interested in is when we deploy it are we deploying it to generate a high return for them and I have every confidence that.

We're going to.

Identify what we have identified and we will successfully pursued.

Pursue transaction activity that helps us grow take advantage of our scale et cetera, and do what we do well.

To generate return for you. So that's kind of how I feel that.

Thanks for the answer.

Thank you Sir.

And your next.

Question is from Robert Jones of Goldman Sachs. Your line is open.

Great. Thanks.

Jon Thanks for taking the question.

I guess the question is really just hoping to learn a little bit more about loom I guess, just within that a little bit more around.

The type of offerings specifically.

The customer overlap cross sell opportunity and then anything you'd be willing to share on just how the economic model is set up with the offering will be helpful. But just in general a little bit more on Luna would be great.

Ted why don't I throw this one day you that alright.

That's great we were doing rock pay percentage.

For scissors for who would get the loom question and I won.

Thanks for the question, we're enormously excited about here's the way, we think about it operationally and then I'll turn it back over to Jon to see if he has anything to add strategically.

Our commuter business is by and large monthly transit passes today for transit passengers and for capacity.

When we.

Studied the landscape throughout the last year as we watched what happened to the commuter business during during Covid, we realized that the need the day.

Needs that are critical employers.

And are most.

Kind of challenging and thoughtful business partners had.

For a more holistic.

<unk> someone that can help them.

Expand the commuter benefit to include.

Daily parking to include alternative modes of transportation to include making sure there are.

Junior analysts at Goldman Sachs get home safely if they stay late at night with the connected Uber Lyft right all.

Those types of benefits with sort of where the next generation.

Commuter benefit was heading for the most discerning clients and so then we started going out in the marketplace to figure out whether it made more sense for us to build that those incremental capabilities or to acquire them and we found this amazing company that that was like minded about.

What the demand we're in the marketplace had already signed up.

Some of them are sort of forward thinking and critically discerning.

Enterprises in the U S as their clients and had worked for those clients to build a model that would work and we just felt really good net rooms, where the puck is going on commuter.

Yeah.

And that's sort of kind of how we intend to deploy it. We do think there are cross sell opportunities, but really just kind of broadening the commuter value proposition within our own computer base for.

There is no league tables like there are with HSA, but we believe we're the largest for near the largest.

Commuter provider in the U.

And we think this is we have an opportunity to take this awesome kind of incremental solutions for those partners and help them.

Kind of in a post COVID-19 environment, So let that sort of the operational answer Jon if you want to add let's touch on any of the strategic stuff on top.

No I think I think that was well put.

I'm not sure I would add much to that except to say Robert the debt.

We felt like well I guess two things one is we felt like.

Over the next.

Really the remainder of this year, it's almost as though we are for.

From a member's perspective reintroducing.

Our commuter business now members still have accounts and so forth and there's not much work for them to do but they are busy and at the same time, we know that our customers are reintroducing for lack of a better term members to work.

And it's.

It's funny to think about this way but.

For a lot of people.

That's that's that's a big channel and.

From our perspective, the combination of Loon and our existing commuter benefits product.

Really.

Is the best way to do that.

The best way to reintroduce people.

To work from a commuting perspective, there are lots of other issues.

He's out there, but on this one we have the best solution and we have the ability to take that to thousands and thousands of clients over time.

And that's a really attractive thing so.

And we will serve us well broadly so when we talk when I talk to beginning of the conversation about.

Tailwind the headwinds the other.

The way around.

Headwinds to tailwind I always forget.

Yeah.

Yeah.

Commuter is something where it will be great to have tailwind again, and I think <unk> really lets us make the most of those sales.

Makes sense. Thanks.

And your next.

Next question is from charge kill of Deutsche Bank. Your line is open.

Hey, good afternoon, guys and thanks for taking the question I guess, Jon what I wanted to ask you is that should we think of loom.

As the right playbook for deals that might happen in the health care space and I might even ask you what you think of.

The loom of health care and talk a little bit more about where you see the M&A white space on the health care side of the business.

Well first of all if I've got a loom of health care I'm not going to announce it here.

So so I'm not going to answer that but and you knew I was going to say that but I do think that there are elements of this debt.

Have a very attractive from a playbook perspective.

Luna is is not a large company.

It is not bringing with it a bunch of sort of legacy revenue et cetera.

And it's a company that has had too.

You know kind of.

Let's say.

I must say liver dive at the right answer probably is innovate.

We're not ever get off the ground.

Faced with some very very new challenges and so they've had to come up with some very very new solutions.

And.

So I from from a kind of a the right way to bring in new talent in the right way.

Debt or bring in.

If we're going to do build or buy.

<unk> type things as we add capabilities on the health side exam.

Exactly how I'd want to do it I think in general.

The white space on health care.

In my mind continues.

To be around the consumers roll in for the financial side of the health care. So so that basically you know we have not yet cracked the code on helping.

Helping consumers truly understand everything that's going on with their health care finance and.

Making that a process that people that is not stress, causing and so.

While that may not be the most interesting thing if you're a managed care organization or the most interesting thing if you're a health care provider or the most interesting thing if you're a pharma, it's really interesting to us and I think that.

Reflects the fact that we occupy a very unique position within health care and one that.

We will continue to try and use to drive change in the system. So.

Yes, Mike that's a long way to say, yes, I think it's the kind of playbook, we hope to follow in health care.

And.

Yes, I do think there are opportunities in healthcare and.

And they are likely to be centered around.

The continued effort that we have to connect health and wealth.

Assure that consumers when consumers understand the money side. They just make the system better we see that over and over and over and over again, and so where theres more opportunity there, we're going to be ready to do it.

I'll say, Jon that's helpful. If I could have a quick follow up I guess, one thing I would ask about is the selling season. This upcoming we've started to hear from some benefits consultants, while there wasn't a lot of movement in calendar 'twenty calendar 'twenty, one seems to be off for the Bang would love any up to the minute comments you'd be willing to provide around kind of sale of selling season in rfps.

PS.

This is going to make Greg and Marco very jealous because they didn't get a second thing. So I'm not sure I can do that are part b, but but the Ted.

Ted if you wouldn't mind, maybe commenting on what we're seeing kind of from a sales funnel perspective and also.

In our channel checks with the consultants and.

So for sure.

Sure and I think what we find echoes your channel checks as well right, which is we've seen one other reasons why as I've as I've stated our results year to date are ahead of last year to date is in part because some of those slipped rfps became closed sales in the early part of this year.

So I would say our findings are pretty consistent.

With what Youre hearing from your benefits consultant connections and we certainly hope it continues for thus far we do feel a little wind at our back early from a volume perspective.

That's helpful. I appreciate it and Jon I guess technically you didn't answer the first one so maybe thats my first question.

[laughter] you didn't answer the second one either I did.

Thank you Greg it's okay. It's okay, Greg I didn't I didn't just to let you.

Well Patrick.

Hey, Jay next.

Question is from standard.

Your line is open.

Open.

Thanks very much.

Darcy I know youre still going to be hanging around.

But I'm glad.

It's been great working with you so just wanted to share that.

I think this is all for your question Jon I think this is one question not sure if it goes to Darcy or if it goes.

<unk>, you, Jon or maybe the Tyson, but I'm gonna try to wrap it up when I think about sort of.

The puts and takes around.

Impacts to cash flow over the next couple of years outside of like where rates go and what accounts you win.

I think about one you have got I think it's 26.

$6 million year projections of merger integration costs.

Pretty sure that ends at the end of this year. Then you have got two meter is still down 50%.

I think we all probably don't ever believe it's going all the way back up but could you remind us where <unk> was and sort of to think about what that lift looks like.

And then Tyson you talked about.

Cobra being a lift at the end of this year is there a potentiality that maybe going into next year. The year out did that drops off I'm just trying to think about those puts and takes and as we think about sort of day, a baseline normalized EBITDA or cash flow number I'm just thinking about.

Those three buckets. So I think that's one question, but that's my best attempt to bringing it into one.

Well done Tyson.

Sure.

That's a pretty wholesale question.

I'll start with the one that was just a number in there I mean, we've talked about.

We have been talking about the last call that computer was about 75.

It was a 75 run rate revenue business.

Product and there was a profitable.

So profitable.

Down over 50%, so that's kind of answered part of my question.

You talked about essentially I'll call them tier ones that are for EBITDA free cash flow metric.

Certainly.

Really in the long term as Jon pointed out.

And we continue to point out the rates are one of the largest drivers of that and so even with things like for like a cobra lift middle of the middle to latter part of this year.

Around what we need to do as far as per worker notifications and.

Please we may get from that people are able to use that effectively.

That will that would kind of be within the year, but the rate is really the thing that's going to drive that long term margin also.

The other thing I'd say is just the interchange and sort of normalizing that I talked about that before as well, we're starting to see that normalize.

Somebody know.

Still not quite like pre COVID-19 levels, and we still have this Q1.

Normalized quarter to debt through before the comps sort of change relative to those pandemic quarters and I guess the last thing I'll say is I have never come out of a pandemic. So I'm not sure what the timing will be as far as how everything kind.

Is it back together, but its certainly like seeing some of those rate indicators go up because that means a lot to our business given the amount of assets that we're able to generate.

In this last season.

Great and just in that that $26 million just to confirm that does thats. The last of the merger integration expenses.

Sorry that was the other point there, yes that.

It comes in and were committed debt, where it will be on budget and that will be done relative to the wage works acquisition at the end of the year and kept on track.

That happened operationally and we're tracking it.

Great. Thanks.

And your next question is from Donald Hooker of Keybanc. Your line is open.

That is a not great great. Good afternoon good afternoon.

Yeah. So I guess, maybe just a follow up there on sandy's question on cash flow.

You look into next year just to own our models here, obviously the balance sheet is much better now with the equity offering.

But just to Qunar models in terms.

So I'll just kind of keep it to that what I was kind of a sort of assumptions around.

Capex because it's been obviously, we only have one year with the two companies together.

Are there any investments you need to make in the room.

That might elevate that in the near term.

Yes, so I'll comment on generally and then generally.

Cap throw too.

Tyson to talk through kind of what we're expecting from a capex perspective this year.

The things that are driving capex for us.

Primarily around.

The investment that Ted and his team are overseen.

And then in the.

The conversion of our platform to a true API driven micro services environment the value of doing that well, let me back up the way we are paying for it in the sense of generating sort of bankable return for lack of a better.

<unk>.

Is.

That it's making our development activity.

Per faster and.

With less hours.

And.

And therefore less costs and you can see that to some extent in.

What we've released over the last quarter.

With plum sort of.

One or around one I guess.

And the fact that we've committed to over a dozen new release items over the course of this year.

That's what that's about and now.

That will be something that will pay dividends for us for a long time forward, though not just in.

The cost savings, but also when we do transactions and room as an example.

We.

Well I think we will have a little bit of spend on loom in the short term.

We think that we can get this done a lot more effectively today.

We could have gotten.

That come two years ago, and that'll be a great. If assuming we can do it that'll be a great lesson and it'll impact what else we're willing to do because we can integrate more effectively with what we already have.

<unk>.

Uh huh.

That's really the bulk of where our investment is going beyond areas like security and so forth that.

But we all know.

Continue to have to be <unk>.

Have to be keeping up with the Big Boys no matter, how you wanted to find big boys on that one.

And you want to speak a little bit so where are we directionally, where we see capex this year relative to last.

Yes, I mean, it has gone up a little bit and it's gonna be notable for.

10% of revenue approximately in that area and all the things that Jon outlined are true, we're going to and those investments are in technology are really the thing that's driving that.

So we've got our foot on the gas there to make those improvements and and also tracking what we think the returns will be as well for that so excited to get.

Got done and really upgrade our technology.

Great. That's all I had and be well Darcy. Thank you.

Thank you. Thank you.

And your next question is from Stephanie Davis of <unk> Leerink. Your line is open.

Thank you you asked me color on.

Question.

Darcy, obviously is very well deserved.

Net.

Since youre transitioning from the CFO seat.

And about my guidance question, so not a bad time for new [laughter].

Yeah.

You are getting.

And used to it.

[laughter] from that press release for it sounds like you guys are executing well on wage energies there was $20 million more coming this year, but profitability doesn't look a little bit soft in the guidance is this a function of the expectations for a strong selling season.

<unk> talked about in the remarks with that cost kind of offsetting.

<unk> the wage savings is it some of the investments you've talked about before or is there really anything else to call out maybe some conservatism in the the back to work assumptions.

Yeah.

Yeah, I think yeah, sure Stuffy, where I would go with this is it's really you go back to the rates right.

And.

Setting generate big.

A big part of our profitability is when those rates start to improve and of course, you now see what Darcy announced they were close to 200 bps for the quarter, but it'll be 175 bps for the annual period and you have seen that as you've tracked closely you've seen that come due.

Where we are of course, the decline in interest rates and so when I think about that that's really one other things that tempur.

Tempers that margin improvement now.

I think the commuter come back.

If we get some of that.

Those dollars back up to that 75 million I think helps us potentially do that.

Or that's not included in there because I just haven't seen that happen and it's something that I, if I were to.

I think it's going to have an average.

Maybe on the latter half of the year and when I see some movement. There will of course talk about that and that's that's been a that's one of the things Thats tempered down a lot I mean loom won't really add anything from a from margin perspective, its a startup with.

Revenue in and really its reinvesting that back into the business and so you don't you don't get much there and so those are kind of the top.

Three things that I would think really is the reason why.

We're kind of where we're at and I think you've got a good end of the year end and being consistent with that and what we're trying.

Minimum wishes, it's pretty good and gives us a good basis from off of.

All right understood and then one quick follow up Jon.

I need to hear how you definitively know that Darcy drive for the fastest car and a lot very important thank you.

He has taken me Ana.

If it's let's put it this way if it's not the fastest car on the lot. The fastest car is very well here.

I'm pretty sure that everyone and by the way it's not the first this is you used to have the fastest one and he got a faster one. So again, you know were tough but for those who are concerned.

The environment I believe it's a hybrid of some sort. So so it's not one of them Tesla. It's a some kind of other car that's a hybrid of some sort so he's he's run and fast, but he's running clean.

Thank you Ricardo.

He cars up you know he carves up Provo Canyon, you know how it is.

About the ease of dragster, what's that target.

Moving onto allows us.

Yeah.

There may be bigger cars, but I don't think there are faster.

Okay.

Operator.

Your next question.

It's from David Lawrence.

<unk> Your line is open.

I missed for large congratulations.

Hi, congratulations on a good quarter can you talk a little bit about how loom is price.

Like I mean does the revenue coming from loom depend on people actually commuting.

Question for work or is it more of a subscription sort of model and let's say half of your customers want to purchase loom.

Sort of revenue run rate could you get to let's say five years from now kind of bring you up to $75 million five years from now just any color around that would be very helpful. Thanks.

I'll give this one a shot and then ask Ted to to add to it.

Maybe he'll add the coherent part.

Looms primary business is a ah.

A subscription type business, so more so somewhat similar too.

For the core of Cobra, where it's dependent on the number of team.

Team members or employees, you have as opposed to who's who's driving or what have you and that's because the solution has something to offer for kind of everybody. So you know one item for example that that Ted hasn't touched on is I didn't touch on this conversation is that.

This is.

Is the opportunity to help employers to the extent that we see for example.

Work from home cost reimbursement mandates coming out.

No room have some capabilities in that area that again, it's sort of like the theory is it's.

Yeah.

Being there for every commute or no <unk> at all.

And so.

That's how how long was priced and so it does provide in the broader commuter business some stability related to variability and commuting I don't know that I have done the calculation you asked for and so I would not want to do it on the fly.

But I will say.

That.

Uh huh.

What I think is I'll say, one other thing, which is I think what's particularly interesting also about Luna is that because we are it is that it can make a meaningful contribution to the return of this commuter business I mean, one thing I Might've said in response to Greg's question.

That is.

One thing I like about this transaction from the perspective of our shareholders as I am absolutely certain that it will yield.

Or a certain as I can be that it will yield material return expressed in terms of IRR return on invested capital or what have you.

<unk> for our shareholders I'm certain of that whether whether the percentage will be big in the numbers loan has to be seen but but the IRR is going to work here and I think one reason for that is your comment suggests is that.

There are a lot of clients, who really never had.

Think about these issues and about about our never thought about commuter benefits because most of their people were either driving solo are driving an carpools or whatever but you know now with returned to work some of the examples Ted offered there are things to think about and.

And then with ESG and all of that I mean nobody.

Had to stick anyone wants the outcome of the pandemic to be that we all abandon alternative commute modes and everyone drives to work alone. So.

There's that too I think about you know for example, Luna has a solution for.

For closed loop carpool reservation, so that if let's say you have a staggered work schedules.

I don't think.

Want to do Carpooling only with people on your work schedule. That's the kind of thing that you can do with lumen. So I.

I think those are really neat and other kinds of things that folks who are out there in Hungary, and really focus do and.

We're happy to bring that solution to a much larger audience.

Sure.

Okay, great. Thanks, very much and then just one more quick one with the synergies from wage you're going to be I think 80 million by the end of fiscal 'twenty two.

Should we expect to see a pretty sizable increase in adjusted EBITDA in fiscal 'twenty three assuming that.

There is some improvement in yield and at a minimum commuter doesn't get worse.

Because there is like for them.

Modest adjusted EBITDA growth from 'twenty, one 'twenty two so I mean, we're not we're not giving we're not giving guidance here, but I would sure hope so.

Okay.

Thanks very much.

And your next question is from Mark Marcon of Baird. Your line is open.

Hey, good afternoon, and Darcy congratulate Mark it's been truly a pleasure.

You know working with you since the IPO and.

You will.

Alright, just but.

It's it's been fantastic and hope we can stay in contact.

Thank you Mark Thank you.

Yeah, I mean, what you've done has been remarkable.

Thought Jon said, it incredibly well, but it's.

It really is something.

Questions.

On <unk> I'm just wondering.

As you're thinking about it first of all how much of a contribution will it make for this year.

Any sort of parameters that you can give us in terms of our revenue expectation in EBIT.

<unk> margin expectation, just any sort of frame.

Framing of just the current size I know, it's small and then strategically what I'm wondering is.

To what extent is there an opportunity to sell it as a standalone being additive to your existing client base and to what extent will it end up helping you in rfps.

From a.

Commuter perspective, but also.

Two two greater differentiate all of your CDB.

You know offerings on a holistic manner, where you're really showing hey, we're really being forward thinking in terms of.

Being comprehensive and holistic.

With regards to our solutions and thinking about.

Areas that are going to be important in the future.

Ted why don't you take the second half of that question and then and then we'll come back to Tyson for the first.

Sure. Thanks, we have high hopes for loons ability.

Two a.

We added to our existing many thousands of commuter clients not not all of them there will be certain types of clients that will lend themselves more to a more comprehensive solution like loom is offering but that's definitely one of our deal hypotheses in and we're pretty excited about.

And then.

I would concur with your implied assessment, which is debt in the RFP processes were.

Deepening our distribution relationships being able to offer something as part of the benefits package that really no. One else can we think will help right exactly.

How much it'll help in HSA sale, we don't know right, but we think it will get us into more conversations it will make our RFP responses stand out a little bit.

Our preliminary conversations with both clients and prospective clients have definitely been a lot of sort of I'm intrigued tell me more which has been excited and we're just.

Getting warmed up Luna team.

They are exceptional theyre thoughtful go to market people.

And they have some great ideas and we have some great ideas and we're looking forward for putting it together and we feel pretty optimistic about it I'll turn it over to Tyson to answer your economic crisis.

Net market.

Small and it doesn't drive margin.

And but there's upside right I think if you take a look at their website and you see what kind of clients and partnerships. They have you know if they've but there's a good market check there on who their true they're working with and I think.

I think there's a there's a nice opportunity there to support us.

It's buying back through.

Get into doing the commuter business back through because it's going to I think it's going to sink up nicely with that because of the way the cards integrate in those type of things, but but it's small from a revenue perspective to begin with.

I will say one other thing about this and not to pile on here, but you.

Sawyer.

And the team or.

And of course, Scott Nathan.

And welcome season is from guys colloquially it's an accomplished team.

So it did real and his team did real stuff at Microsoft.

And then really saw this area as an area that they felt passionate about.

And what.

Our comp its really underneath it has a passion for engagement and using the employee relationship as.

A way to drive engagement, so theyre actually underneath the covers a lot of a lot of talent commonalities and a lot of sort of philosophical commonalities among our teams focus on engagement.

Use of technology to <unk>.

The engagement the opportunity to do well while doing good.

And so it really felt like a good fit and as sort of the first of this type of transaction that we've ever done.

As a public company.

Like something we could do.

That would work for investors and.

That gives us a lot of room to grow and explore and be successful together.

Terrific. Thank you.

Thank you next question is from Sean <unk> of RBC capital markets. Your line is open.

Thanks, Good afternoon.

Hi, Jon.

Hi, everyone.

Just like you said a couple of times now rates are one of the bigger kind of long term swing factors for margins and Jon you said.

Accurately noted the ryzen in 10 years that we've seen you said youll probably don't impact.

<unk> much this year, but but but maybe could should.

Jon said future years can you just walk us through how quake and to what extent do these moves typically flow through to you all and I know it takes some time to effect. The instruments you benchmark day minute I guess, how often are you, placing new cash is it only annually and then you you elaborate in three or four years. So every year you you've got some rolling off too that it is being redeployed.

Should this but I guess, maybe just a quick reeducation just given how.

Maybe for the first time in a while there isn't going to be encouraged about on the kind of the rate outlook.

Darcy you why don't you take this one.

Sure.

I'd be happy to.

We generally ladder things in most.

Placements occur in that kind of December time December January time frame, so when Tyson guided that R. R.

For 175, it's because most of the money that we anticipate this year is already.

We have a depository and grid agreements in place.

To take care of that.

Because of the.

The wage migration this past year, we did enter into some newer contracts are more mid year than we normally would and so when those start rolling off in the future there might be a little bit more mid year movement.

But on the other hand, we're always looking for opportunities.

Of our plays.

Getting yield enhancement and so some of these contracts.

You do have some ability to moving between them.

Contracts because they have means of Max's et cetera. So if the rate environment starts increasing that would be helpful. But as we said on the call most of that benefit will come.

For two moving to next year based on placements that were due in December and January because that makes sense.

Yes that makes sense. Thank you.

Oh I'm sorry next question, that's coming from all of them. That's all bank of America.

Your line is open.

Thanks for taking the questions I guess to follow up there you know the the two year Treasury is only at about 15 basis points and a five year has backed up I think is kind of what you were mentioning the top of the call to almost a percent or about 85 basis points. So there's a big spread between the two year and the five.

Year, I guess, when you kind of talk about the optimism that you had is that just based off of the treasury curve movement being a potential precursor to improvements in Cds or are you actually having more positive conversations with depository institutions about where he can place rates.

Yes.

We are well.

This is a little bit of a quiet period in terms of our conversations because.

Not using that term and its legal sense, but because we've done a lot of placement over the course of December and January.

But I will say during that period.

As we got into January.

Did did firm up quite a bit.

And the and so what we're talking about now is really to some extent, we're previewing with our now I believe it's 20 partners.

Uh huh.

Uh huh.

What what our needs are going to be for next year and.

So there's been a ton of interest in that.

I think that interest is bounded primarily by.

Questions on the part of different depository partners about what loan volume is going to be.

And.

And in.

<unk>.

Where at what duration that loan is volume is going to come from so so I can't say there aren't questions, but I.

I do think that the conversations are certainly relative to what we were seeing when we were having the same conversations last March.

April that was tough.

This is better so.

You know obviously a ways to go this year, but the fact that we're talking about reflation and that we're seeing evidence of reflation that we've seen you know about 50% of the jobs lost have come back.

March is.

<unk> are all good things broadly for this company and for our opportunity on placement.

Okay, Great and then.

<unk> revenue increase.

About $10 million.

As you know since we spoke a few weeks ago I guess what is that.

You can break out sort of where that improvement is coming from is it related to Cobra for bloom more confidence on the reopening just if you could kind of bucket that for us. Thanks.

Yeah, Tyson I don't think were going to bucket it but I don't want to break it out too much of a Tyson why don't you give some color on it.

Yeah, I mean, we're we started on.

Any way you we.

Promised we grow top line growth, if we have the opportunity here post COVID-19.

Because we raised that we thought we did right and I think you did mentioned the things that we're talking about I mean, there is certainly still the key for challenges that we face. We know revenue was still down every category in Q4 for Q4, So we're still.

This is a new COVID-19 quarters, we still have that Q1, it will be sort of in a similar a similar vein.

That's right we get we will work through Cobra were going to you know.

Over the last part of the year, we're going to get something from that.

Certainly Luna provides a little bit like I said before though it's small but I think the upside on that is there is potential.

Still and.

It's not something that we necessarily have to wait for for excuse me like the rest of our business for maybe they'd get into latter half of the yearly free gifts.

Upside from that.

And then I think that I.

I think overall again, that's sort of that mixing that bag up with.

We're thinking about.

Things like.

An increase in commuter maybe in the last part of the year, a little bit right, but not very much. We just you know you see some of the I'm watching the news like everybody else from.

Looking forward to get infection, aided and maybe that changes the way people move around a little bit relative to what we've been seeing which just hasnt.

It Hasnt Hasnt moved at this point so it has those things.

Got it thank you.

Thank you there are no further questions at this time I would like to turn the conference over time for closing remarks.

Yeah. Thanks, everyone again for joining US. Please I know things are getting better, but let's all just stay safe and sane.

One more.

Darcy.

Darcy is a dodgers fans and while I'm not sure I'm is keen on bleeding blue as purple I would note this which is that I believe it's the case that the.

Highest batting percentage among any dodger Brooklyn.

Or.

Comments Angeles is Willie Keeler.

352, maybe three six.

So Darcy is not only an interest to taller than Willie Keeler, but.

On that.

You know he is leaving this role I believe I may be wrong about this but I.

<unk> loves batting a thousand in terms of meeting your earnings expectations on a quarterly basis.

And as I suggested earlier remarks.

That kind of stability and ability to look around corners and to make promises that you can deliver on is something that debt.

Yes.

I believe <unk> unique and strong contribution to our culture and though he will not be in this role.

That part of his legacy is going I want to assure you that that part of his legacy will be part of purple culture going forward to the extent that anyone on this call has anything to say about it. So we look forward to.

As Damian, beating in a quarter and a quarter after that and the quarter after that.

And with that thank you guys very much.

Thank you Jon.

Yeah.

Okay evening Bye bye everybody.

Yes.

And we will go ahead. This concludes today's conference.

For media.

Thank you everyone.

Yeah.

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