Q1 2022 Healthequity Inc Earnings Call
Please go ahead Mr Putnam.
Thank you Carmen.
Good afternoon, welcome to health equity first quarter fiscal year 'twenty 'twenty 2 earnings conference call My.
My name is Richard Putnam Investor Relations for health equity and joining me today is Jon Kessler, President and CEO, Dr. Steve Neeleman, Our vice Chairman and founder of the company Tyson Murdock, the company's executive Vice President and CFO and Ted Bloomberg, Our executive Vice President and Chief operating Officer.
Before I turn the call over to Jon I have 2 important reminders first a press release announcing our financial results for the first quarter of fiscal year 2022 was issued after the market closed. This afternoon. The metrics reported in that press release include contributions from our wholly owned subsidiary, which works and accounts.
The 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-GAAP measures with comparable GAAP measures and a recording of this webcast can be found on our Investor Relations website, which is IR.
Dot health equity Dot com.
Our comments and responses to your questions today reflect management's view as of today June 7.2021 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 to date. These forward looking statements are subject to risks and uncertainties that may cause the actual results to differ materially from the statements made here today.
As a result, we caution you against placing undue reliance on these forward looking statements and we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock 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.
At the conclusion of our prepared remarks, we will turn the call over to the operator to provide instructions and to host our Q&A I'll now turn the mic over to our CEO Jon Kessler.
Thank you Richard well done.
Hello, everyone.
Thank you for joining us on this somewhat brisk very late spring afternoon. Today, we are announcing strong results for health equities fiscal first quarter of fiscal year 2022, which ended on April 30th.
And we are also raising guidance for the full 2022 fiscal year.
I will discuss our Q1 results and acquisition activity during the quarter, Ted will review operations and progress on wage works integration and Tyson will review the financial details of the quarter and provide detail on our updated guidance for fiscal 'twenty 2 based on the results that we are reporting today.
Steve Neeleman is here and will join in on the Q&A.
Looking first to the 5 key metrics that drive our business and that we've been reporting on for a long time health equity benefited from the initial economic reopening trends that helped drive year over year growth in HSA members and assets, while commuter and yield headwinds continued to impact total accounts and revenue.
Revenue of $184.2 million fell 3% versus the largely pre pandemic first quarter of last year and that was due to lower year over year custodial yields and commuter revenue, which were partially offset by HSA member growth asset growth and other CDB growth.
Adjusted EBITDA of 59.0 million was similarly down from the first quarter last year of $63 million.
Total accounts ended the quarter at $12.8 million, which does not include the nearly 700000 commuter accounts that remain in suspense.
The same members at quarter's end reached $5.8 million up 9% year over year and HSA assets at quarter's end reached a record 15 billion up an even larger 31% from a year ago, that's a lot of per cent.
As Ted will detail team purple started fiscal 'twenty, 2 with very promising sales results, including a fiscal first quarter record of 115000, New HSA is up 11% from 104000, New HSA is opened in Q1 last year.
To say investments grew by over $770 million in the quarter as members and their employers continue to contribute and invest.
Investing HSA members grew 51% year over year with more of our members connecting health and wealth.
And the average balance of HSA members grew an incredible 20% year over year, and even 4% sequentially from the fiscal year and despite a restart of spending.
In addition to these strong organic results in Q1 health equity reached agreements to put roughly 600 million to work driving additional growth this year and for years to come through the acquisitions of Bloom, a further and the fifth third bank's HSA portfolio.
<unk> is supporting the post pandemic.
Want to talk a little about each of those Loomis supporting the post pandemic reboot of our commuter benefits, helping clients launched hybrid workplace strategies as offices, we opened longer term, we think that loom and commuter benefits in general will really be the tools clients use to shrink employee commuting carbon footprint.
Further and fifth third will enhance health equities market leadership and scale in our core and growing HSA business, adding approximately 0.7 million HSA and to more than 2 billion of custodial assets upon their respective closings later this year.
These figures are of course not included in the numbers that we reported 2 day.
Further we will strengthen the network partner strategy that has helped fuel health equities HSA growth from its very beginning with significant new partners increased commitment to the Blue Cross and Blue Shield system, and new API based platform capabilities to support flexible branding and deeper integration of health equity into our parts.
<unk> offerings.
It will also add VEBA health equities total solution for clients partners and members.
The first quarter in addition to delivering very promising sales and operating results and really.
Important long term acquisition activity delivered evidence of pandemic headwinds beginning to turn in to tailwind.
Healthcare card spend reached pre pandemic levels for the first time during the latter half of Q1 with former lagging formerly lagging categories, such as medical office visits showing strong growth new.
New sales opportunities and RFP volume and the value of client wins, all rose year over year in Q1 in line with new HSA opening growth that we reported 2 day bond.
Bond yields rose and yield curve steepened with both 10 year treasuries in the 10 year versus 3 months spread adding more than 50 basis points during our Q1 and that perhaps portends a rebound in health equities custodial yield in the future.
To fully capitalize on that trend, we are expanding our roster of principal guaranteed partners. What we hear too for called deposit partners to include new insurers as well as banks and credit unions, increasing competition for our managed assets and choice for our HSA members here too for it that's a fancy word.
Leading employers announced plans on finally, leading employers announced plans to reopen their urban offices after labor day, consistent with our assumption of a start to meet a recovery in the second half of the year.
So.
In total in Q1, while pandemic effects still weighed on our financial performance. The team delivered strong sales, we committed to acquisition investments with significant long term growth benefits and there was compelling evidence of headwinds becoming tailwind for growth for fiscal 'twenty, 2 and beyond with that.
That I will turn the call over to Ted to review operations and integration.
Thanks, Jon Good afternoon, everybody as Jon mentioned, our selling season is off to a great start first quarter, New HSA sales were up 11% year over year, and 29% versus the first quarter of fiscal 2020.
We're seeing evidence that business opportunities are returning and that the stalled in deferred deals from last year are coming back to the market.
Rfps, which only represent a portion of our pipeline are up 13% year over year with bundled rfps, meaning more than 1 product up 15% year over year.
In the small and medium sized market our sales opportunities are even more owing both to our marketing efforts and the strong relationships, we have with our distribution partners.
Cross sell activities also continue to bear fruit and 30 enterprise partners have agreed to add new services by 122. So far this year and 13 partners distribution partners have added new health equity services to their shelves.
On the integration front, we have a lot going on.
The team completed another for platform migrations in Q1, and we are on track to complete the migrations and decommission work connected to the way towards platforms by the middle of fiscal 2023, which is ahead of schedule. Despite our recently announced acquisitions and.
And execution on the Cobra subsidy, both of which leverage many of the same talented team members.
While we have migrated 17 of the largest platforms and realized $65 million of synergies to date, there remain a number of small and mid size migrations to complete to realize the remaining $15 million of the $80 million in permanent run rate synergies promised.
As Jon mentioned, we are well positioned to become the leading HSA provider wants to further in fifth third deals are closed planning efforts are underway to achieve $15 million of cost and revenue synergies within 3 years of close on the further transaction and we believe likely more after that.
As we fully integrate our technology platforms.
Additionally, our cross selling pipeline with loom is beginning to fill with promising opportunities.
Last but not least is a huge shout out to the entire organization for the tireless efforts required to execute against the recent Cobra subsidy regulations.
<unk> takes our entire village to support this effort and partner with clients to deliver this subsidy to those that are eligible.
There is still much to do but we have started fiscal 2022 quickly and on the right foot. Thanks to the continued efforts of team purple.
Now I will turn it over to Tyson to review our financial results.
Thank you Ted I will review, our first quarter GAAP and non-GAAP financial results a reconciliation of GAAP measures to non-GAAP measures is found in today's press release for.
First quarter revenue declined 3% as the economic effects of the pandemic impacted service revenue services revenue declined 8% to $102.5 million, representing 56% of total revenue in the quarter.
The decrease was primarily attributable to an over 60% decrease in active commuter accounts, while the growth in HSA and other CDB has helped average accounts increased 1% year over year custodial revenue grew slightly to $47 million in the first quarter compared to $46.9 million in the prior year first quarter as 19% growth in <unk>.
Average HSA cash with yield and 91% growth in average HSA investments, which yield more than offset a 33 basis point decline and the annualized yield on HSA cash.
Annualized interest rate yield was 179 basis points on interest a cash with yield during the first quarter of this year. The shield is a blended rate for all HSA cash with yield during the quarter the.
The HSA assets table of today's press release provides additional details.
Interchange revenue grew 9% to $34.7 million, representing 19% of total revenue in the quarter. The interchange revenue increase was primarily due to a rebound in spend across our platforms in the quarter and growth in average total accounts.
Gross profit was $103.1 million compared to $108.1 million in the first quarter of last year.
Gross margin was 56% in the quarter.
Operating expense expenses were $98.9 million or 54% of revenue, including amortization of acquired intangible assets and merger integration expenses, which together represented 16% of revenue.
Income from operations was $4.3 million compared to $15.1 million in the prior quarter.
Net loss for the quarter was $2.6 million or a loss of <unk> <unk> per share on a GAAP EPS basis compared to net income of $1.8 million or <unk> <unk> per share in the prior year or.
Our non-GAAP net income was $31 million for the first quarter. This year up from $30.8 million a year ago non-GAAP net income per share was <unk> 38 per share compared to <unk> 43 per share last year adjusted EBIT for the quarter decreased 6% to $59 million and adjusted EBITDA margin was 32% while op.
I think through the impact of Covid.
Turning to the balance sheet as of April 32021, we had $737 million of cash and cash equivalents with $972 million of debt outstanding net of issuance costs with no outstanding amounts drawn on our line of credit for <unk>.
Cash balance of course will still include still includes the funding required to close the further and fifth third interest say acquisitions based on where we ended the first quarter and our current view of the economic environment. We are providing the following guidance for fiscal 'twenty 2.
Revenue for fiscal 'twenty, 2 to range between $7.55, and $765 million non.
Non-GAAP net income to be between 122 and $126 million.
<unk> and non-GAAP diluted net income between $1.45, and $1.50 per share based upon estimates and an estimated 84 million shares outstanding for the year and adjusted EBITDA to be between 241 in $247 million.
Today's guidance includes our most recent estimate of service custodial and interchange revenue based on results to date.
Since we have not yet closed on the acquisitions guidance does not include potential revenue from further or from the HSA is from fifth third bank as Jon indicated earlier, we anticipate closing on both of those acquisitions later this year.
Our guidance assumes a yield and interest of cash with a yield of approximately 175 basis points.
As with all of today's guidance, our yield guidance does not factor the pending further if their third interest for acquisitions, including transition of HSA cash and insured assets to help equity principal guaranteed partners and.
Prevailing rates, we also continue to be conservative with our commuter estimates and anticipate some accounts to reactivate in the latter half of the year due to return to work.
Guidance also contemplates estimated revenue from Cobra subsidy efforts and the effect of run rate synergies from wage works that Ted discussed.
The outlook for fiscal 'twenty, 2 assumes a projected statutory income tax rate of approximately 25% and a diluted share count of $84 million.
As we have done in recent reporting periods. Our full year guidance includes a detailed reconciliation of GAAP to the non-GAAP metrics provided in the earnings release and a 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 does not exclude it with that I will turn the call back over to Jon for some closing remarks. Thanks.
Thanks, everybody.
Thanks, Tyson nicely done and Ted So typically at this point in the proceedings I think those responsible for the promising start for the year and Thats purple team members today I'd also like to give thanks for something else, which is the resiliency of teammates over the past 15 months.
Stay safe families are taken care of well deserved bonuses were paid despite not seeing each other in person for more than a year. Our team became a more inclusive and more cohesive bunch better positioned to deliver on health equities for potential for our members our clients our partners and of course for our shareholders.
This is not something leaders do and in fact.
I haven't even put on long pants from 15 months and we all know from the weekend the challenges that some leaders have a chance.
So this is something teams day.
Thank you team purple for this truly remarkable achievements with that let's open the call to questions operator.
Thank you and as a reminder to ask a question simply press star 1 on your telephone to withdraw your question press the pound or hash key again, Thats star 1 to get into queue.
Our first question comes from Greg Peters with Raymond James.
Good afternoon, everyone Hey, Thank you for your comments about paths you know how to paint.
Picture for sure.
<unk>.
All I'm, saying is it seems like my shorts policy has been justified by all have hands attention.
I got it I'm in shorts right now myself. So as you said everyone in Florida should be.
Indeed.
Anyways.
So I guess.
I'd like to spend a second and and have Tyson and John.
Obviously, we'll comment as well talk a little bit more about the service revenue component and I know Tyson you said you gave some comments of why it was where the pressure was but I guess, what I'm interested in is not what happened in the first quarter, but.
What I should think about service revenue, maybe as a percentage of total count per total accounts or.
As the economy, hopefully recovers in the back half of the year should should these numbers begin to improve on a per account basis or is there some competitive pressure out there that will limit the upside to the service revenue on a per total account basis.
I'll go ahead and start non dot com.
Yes.
It comes down to again, the commuter comeback right that's really what's impacting.
Okay.
That service revenue line item and so just matters. When you think about your model and how do you think about the return of when that's going to happen and you know what we just talked about was we see as well as our own business people coming back in that September time frame and really restoring that of course, we're watching that very closely and to date, we really haven't seen that return yet.
Now, but you see it in the news and you see people at golf tournaments, and you see people everywhere. So you know that that's but that's going to that's going to happen and so I think about that when I think about the competitive side of it.
As Ted just outlined we've had.
Having a very successful selling seasoning actually gave quite a few metrics within that.
That dialogue there just to show that and so I don't think there's anything unusual Gregg.
Given our prior conversations of course, there's always the continued effort to increase HSA account and so our pricing on that will come down single digit percentages every single year, we don't disclose that but we certainly are competitive in Maryland from folks have the right number of assets.
And we're able to really underwrite a deal that from an overall bundling approach provides the right amount of revenue and profit then.
And then we'll do it.
And I think I think that's really the only thing that remains the same as far as competition I'll stop there and let's see if Jon has some other ads.
No I think look I'm not sure I have anything really to add but I'll add something anyway, which is just just.
The thing is the commuter rebound is not going to be a light switch.
And we talked about this last quarter that debt.
When we were quizzed, Greg I think by you and others about.
The sort of implied.
Conservatism about our guide on the commuter rebound I mean that remains true.
But it is clearly happening.
As folks are are are returning to cities and so forth and so.
But that's really the biggest factor in the whole discussion.
Okay and then my follow up question will pivot to M&A.
<unk> had a busy.
Year, so far.
And you raised equity.
You've announced some major transactions to spend the capital you've raised some equity.
What's your view of the M&A pipeline is there going to be another should shareholders expect another.
The capital raise for you to fund potential opportunities that you see developing in the marketplace or.
Are your hands for at the moment just processing, what you already announced.
I feel like somewhere the.
And 10, a M and turning of like a 1000 hedge fund managers just twitch.
Huh.
Not to imply that hedge fund managers have antennae, but in any of it.
Ah.
Look I think the big picture here is that.
Youre seeing increasing returns to scale in our business and.
Returns are not going to be evenly share.
And so there is going to continue to be M&A activity.
I think we have demonstrated.
<unk> <unk> <unk> antibody.
For both that we can deliver strong returns from M&A in particular portfolio related M&A.
And that from the perspective of sellers that we.
We are.
A good partner and the fifth third transaction is sort of an example of that where.
I think as folks understood understand certainly was there was some discussion in the public domain about about fifth third talking and working with others, but.
We have I think proven to be a really good partner in navigating their modest twists and turns but a few twists and turns and getting this thing done so.
That to me is is the key to this thing as 1 can we show that we're delivering good returns and 2 can we show that we're a good partner for sellers and that's that's a winning combination that we've got.
I don't know what.
Deals will be concluded in the second third or fourth quarter.
But we do.
Even after this current transaction.
For inside of transactions, we have a little bit of powder left for those kind of things and for that.
Those kind of portfolio type things and.
We won't hesitate to go forward. If we think there is strong return for shareholders. So that's kind of that's kind of where I'm at right now.
Got it thanks for the answers.
Thanks, Greg Sir.
Correct.
Thanks.
Our next question comes from George Hill with Deutsche Bank. Your question. Please.
Thanks, Phil.
Good morning, guys. Thanks for taking the question and Jon I'll say, it's over 90 degrees in New Hampshire, So I'm in shorts too.
Outstanding.
I guess on <unk>.
Afterwards.
Bob.
That I would just focus on 2 questions number 1 is on the selling season and I guess do you see a return to normal happening fast enough that you feel comfortable about the company's ability to take share on an organic basis as we go through the selling season for 2022 starts and part B of my question is I don't know if you have the ability to have interact.
<unk> with the customers of either further or fifth third but talking about maybe net dollar retention, our net client retention would love to hear your thoughts around that.
Yes Ted.
Why don't you.
And then Steve can provide some color around what we're seeing in the sales cycle and beyond beyond the statistics offered earlier and.
Ted I think you are in a great position I'll add something if it's valuable to talk about.
Further our clients since since.
Collectively we've talked to most of them.
Yeah sure I'm I'm happy to kick it off and then turn it back to you 2 gentlemen to add some color commentary. So I think on the on the first part of your question George on the sales.
Sales cycle, we are.
Cautiously optimistic our sales representatives are busy the quality of the finalist meetings that we're holding our high deals that did disappear last year are coming back to the market our relationships with partners are developing but 1 of the.
You've covered us long enough to know we don't.
Really know how the sales cycle is going to turn out until until January of 2022.
And so all the inputs and all the top of the funnel stuff and all of the activity levels are.
Or where we want to be and we feel.
Really well positioned relative to the marketplace.
In those conversations before I turn it over to Steve and Jon I'll, just take a quick shot at the.
The second part of your question, which is the further in fifth third client bases.
We did.
Analytical types, we did a fair amount of market research.
Preparation for these acquisitions, especially the larger 1 further and further has a tremendous reputation in marketplace their clients like working with them their distribution partners like working with them, which is 1 of the things that attracted us so much to the asset.
And so we have high hopes for client and partner retention.
On both sides of the coin I personally.
Jon sat in on <unk>.
Significant portion of both client and.
And distribution partner calls and we're really pleased with what we've heard and and.
And so.
We think we have.
And the further team a great team must deliver great high quality service to their clients for a long time, and so we're pretty bullish about the retention prospects.
But.
Obviously, a lot of work to be done and wood to chop. So I'll turn it over now to Jon and Steve to add some color.
Steve.
Yeah, Hey, George good to hear your voice.
Just kind of.
Tag team off of what Ted said I think what we've noticed this year is just the tone is different and these meetings right.
Rather than people with their hair on fire trying to figure out and get people out of out of the office and all of that and then just really a lot of distraction. There just is a lot better focus and people are making choices.
We want to win them all but.
Like sometimes so leaders will say, it's better almost to get it no we're going a different direction than our putting this on hold for another year because.
It resets the clock and we're pretty confident that when people even if they don't choose health equity they're going to choose this at some point.
I think we've just seen a lot more of this positive intent to make choices move ahead continue.
Continue to offer health savings accounts and other CDB as to their membership base and.
So we just feel that as.
As kind of the proverbial tailwind, whereas last year. It was a headwind people were just distracted and we add a lot of decisions last year and a lot of finalist meetings that you could tell that we werent the top of there.
Mike from your meeting with them. So we're encouraged and I love being on all.
All of these calls and meetings.
As to do with our teams.
Kevin.
Thats all that is.
In terms of.
I think those questions effect from those answered effectively address the question around market share growth.
If I then.
I have just talked about market growth 1 of them.
The items that Ted talked about.
In his prepared remarks is that the growth is the growth that we have seen in lead flow around the SMB and mid sized markets and that is significant and it's several fold what it was last year and thats.
In part due to the efforts that the team has made to sort of build the muscle around direct selling as well as the muscle around marketing and lead generation on the <unk> side into small and mid size now that we have a product to sell.
Sure.
And.
So that's true, but also perhaps reflects some genuine growth in that area of the market, which we really want to see for the market to the market as a whole to outperformance here. So.
Again, consistent with the with the earlier comments I think George the answer is that it's only 1 quarter, but.
But it's a quarter that both in terms of the actual accounts turned in relative to what.
Other competitors reported so forth as well as the <unk>.
Sort of pipeline data is quite pumps.
Very helpful. Jon Thank you.
Thank you Sir.
And our next question is from David Larsen with BT <unk>. Your question. Please.
Hi, Hi.
Hi, congratulations on a good quarter and a good start to the year here.
Can you maybe talk yes can you maybe talk a little bit more about your expectations for custodial revenue.
Seems to me like the yield environment is coming in right in line with where you thought it would just any.
Thoughts around where that might trend going forward theres been talk about rising inflation that potential for the fed to raise interest rates just any more color around that would be very helpful. Thanks. So much.
Sure Let me say in the short term it is important to note that our guide for the year is $1.75.
On the custodial yields and remains 175 and <unk>.
That is despite turning in 179.
With.
With respect to cash.
Yield in Q1 and as.
I believe it was tightened pay with Darcy commented last quarter.
We did expect that that yield will come down a bit over the course of the year as we have multi year agreements that will rollover is sort of part of our ladder.
So.
The the yield headwind broadly is still with us.
Having been said I do think there are a number of things that we're doing in that that are happening out in the marketplace.
Or the economic environment that are promising we clearly the fact that for that.
Yes, I think I think we all tend to look at maybe the last 10 days or whatever are fueling is but we've now gone through both our full fiscal first quarter and in the period.
Where.
Medium and longer term yields are sustaining.
At substantially higher levels 50 to 70 basis points higher than they were.
Let's say 6 months ago, and Additionally, while bank deposit pricing will always lag all of that and should.
Nonetheless over the long term those things tend to fall in the same pattern.
And so so that's encouraging and then internally.
In the comments and Tyson kind of mentioned this as well.
We're.
Taking some steps to assure that the assets that we manage that our guaranteed or are competed for vigorously and even more so than in the past. This has always been a strength for the company. It's always been something that we've tried to do well both for ourselves and for our members and clients that helps us keep these competitive in.
All of that kind of stuff.
And.
And we're going to do more of that and so that's another thing that that as that that kind of headwind turned Dennis.
The tailwind that our goal is to build the biggest possible sales to catch it.
And I don't think that will have an effect. This year, if anything again over the course of the remainder of this year.
Our expectation is that the guidance implies is that yields will still be coming down, but I think over the long term of the business.
This seems like a pretty good thing and I should say lastly.
Having a kind of weathered this.
Period of ultra low yields.
Whether ring I shouldn't say weathered weathering this period of ultra low yields and.
Borrowing from Steve's experience in the airline business and.
And using that using that period to really right size the business and make the cost decisions, we need to make and be efficient and and also continuing to build the platform and so forth right that all kinds, even bigger dividends when you see those yields come back so.
We're looking forward to that.
The point, where we can while it isn't here yet we're looking forward to the point, where we can all seem like we're real smart.
And then but it will be because of the actions we've taken.
Great. Thanks, so much it seems like this might be sort of a floor for yields would you generally agree with that in fiscal <unk>.
Fiscal 'twenty 3 should probably have higher yields would you agree with that generally speaking.
What we've said elsewhere is actually.
Definitely not in the business of giving.
'twenty 3 guidance on anything at this point.
What we've said on that point is that that at least in terms of cash that.
Fiscal.
We are still placing contracts at less than they are rolling over too.
So the implication is that.
In fiscal 'twenty, 3 would be the third year of that activity.
And so the implication is that that we are.
That I don't think I'm in a position to say up.
I am not calling us kessler bottom on this.
But.
But.
And probably that's all I should say because I don't I don't feel like we should be out there will provide 23 guidance as soon as we can but that's about it price and anything to add on that point.
Got it.
Yes.
Thanks, very much congrats on a good quarter. Thank.
Thank you David.
Our next question comes from Donald Hooker with Keybanc. Your question. Please.
Great.
Good afternoon.
I was curious.
I'd love to hear John your thoughts.
1 thing that stuck out to me on the further acquisition, what sort of the ability to private label and I was trying to make heads or tails of that is that is that something thats significant can you talk about like why.
Why 1 would want a private label I think you tried that in the past and it wasn't.
Is there something unique about what further is doing that that makes that a little bit more interesting now.
No. Thank you for asking about that Stan.
I think what you see is is it's interesting in having been around our market for a very very long time.
Our goal is to be.
To meet our partners, where they are with regard to how we distribute when we are distributing to our partners and.
Sure.
There are.
There is.
There are times when partners are very interested in.
Embedding the product more deeply and then there are times when they're more interested in conveying independence and.
Those things kind of come and go for each partner.
At health equity, we have primarily not been a shop that we're using private label, but let's understand its a little more broad than that it's really about about the depth at which we can embed the product into the services of our partners right.
That has not been our thing you got to choose what youre going to do.
And so forth and there are certain elements that will probably never be are saying, we don't we don't sell software we sell a service that software enables that kind of thing but.
What further has done and what through the.
The magic of Apis, we will be doing together is.
I Shouldnt say the magic of it because it's not magic, but it's sometimes it's like ball bearings call API.
And I.
I think that what really gives us the opportunity to do as we migrate is to meet partners, where they are and sometimes partners want to do more.
Kind of embedding them for product label or otherwise and sometimes less.
<unk>.
I, just think Thats a great opportunity. The primary place that this has been utilized as in the health plan segment, right, where you've seen some clients make round trips on this with partners make round trips on this topic, but I think there's opportunity across what we did where.
We can leverage the best of what we do.
As well as our partner as well as doing more than 1 plus 1 makes to with our partners and so I guess I see this is useful from a technology perspective useful certainly competitively to the extent that it's something we couldn't offer there are absolutely partners that would love to have partnered with us, but we just haven't.
This capability and we want to be wherever niche sales so.
That's kind of the idea is and sometimes being wherever in HSA me is means.
Brought on real depth on the CDB side, so we could deal with clients, who want to buy a total solution.
And then sometimes it means partnering in different ways and then sometimes ask here it means being able to be offer whatever level of solution. Our partners want at the point that they want it to help drive our strategy, but also their strategy.
Okay, Great and then maybe.
Yeah go ahead, we need to make 1 comment just real quick it's interest and even among health plans.
Some segments they want to have it more completely brand new high point for the health plan, whereas like for example, large employers tend to say they don't really want the they may have multiple health plans. So it doesn't make sense to have a hilton brand on the HSA or the CDB solution, whereas when you get into smaller businesses and individuals maybe it makes more sense so Jon.
This is Chris auto more flexibility as we partner with these health plans.
Jon said it well.
So intriguing and then maybe real quick can you give us a quick update on your perspective on the employment picture at your employers I think last year, we were worried about unemployment.
Looks like things are raging back is there a tailwind here for you guys what's in your guidance.
Yes.
I mean, our guidance simply reflects the broad macro consensus I mean.
<unk>.
What I would say is net debt that.
Now this is just me putting on my.
It was very low fitting macro economist path.
I think.
The unemployment rate is declining faster than the employment market is healing and the source of that is twofold..1 is you have workers that are never going to reenter the workforce.
And Thats seems pretty clear from the data and or or they will reenter very slowly whenever it is that they absolutely have to or are they price something else or whatever but but theres, probably 3 million workers that that will never for at least heard theres a good chance they will never return to the workforce and that's why the.
Rate is declining faster than jobs our growth.
And then secondly.
There has been some real dislocation in certain industries.
That's a.
That's real and it's going to take some time to heal so.
I guess my point would be we are absolutely following the macro consensus and this is this item absolutely is 1 factor that should help.
For the underlying market heal and if we can take for kind of share. This year that we took last year.
With a heel market that would be absolutely fantastic.
But it's also worth noting I think just the headline doesn't tell the full story, we are still not back at the level of jobs that we had pre pandemic and we're still probably $5.6 million short of that so.
There's still some wood to chop and its kind of gains are going to be harder to get from there.
Thank you for your perspective.
Thanks Todd.
Our next question comes from Stephanie Davis with SBB Leerink.
Hey, guys congrats on the quarter and the transaction Count me in on team sports as well it is very low right.
Could you walk me through the change to your guidance and how should we think about the impact to it and how much of that was offset by yield versus service revenue that you guys remain conservative.
<unk> versus maybe something else some other bucket that conservatism.
Thanks.
For Thai yes.
Yes.
6 patients have any handle every day.
<unk>.
Thanks for the question when I think about the raise on guidance. So really think about we had if you had a reasonable quarter coming out of out of Q1 that was good it was still a pandemic quarter. Obviously, so you still have the.
The issues with commuter or are you still you have to spend coming back and so that's a positive thing <unk> got FSA accounts rolling off based on some of the timing of the legislation pushing those out so some of that spend goes away and then you've got the Cobra effort from there. So it's really a balance among all those all those different items to really push.
That guidance up a little bit.
So we thought perhaps back to where right now we think that we're going to be.
And there's a lot to be learned over the course of the remainder of the year about how the how the business returns from that so.
Those are some of the things that I'm, taking into account as I think about it.
And I don't know Jon you guys have anything to add.
No.
Alright, then thinking about those pockets of upside that you could have I was hoping you could delve a little bit more into the Cobra business.
Kind of early income just seeing on the recent policy change on reimbursement.
Yes.
There were particularly busy so we did actually I mean, the team is as Ted outlined made significant efforts to get in front of our clients' customers to help them be within the regulations and start to 2.
The commitments for the notification efforts that needed to occur and get those out and certainly we will generate.
Revenue during Q2, namely getting those out and then you'll see the after effect of that in the essentially the people who actually uptake Cobra.
But there has been a significant for them that you see the cost you see the revenue that will come in in Q2.
Not necessarily give amounts we had some of that.
Initial guidance from some of that now in this in the uptick of guidance here as well.
And then thank you both.
Thanks Becky.
Thank you. Our next question comes from Sean Dodge with RBC capital markets.
Sean Inc.
Hi, good afternoon.
Maybe going back for the acquisition the fifth third HSA for 149000 accounts holding for $137 million of assets are there any other details you can share with us to help us understand the potential incremental revenue that will add or their monthly account fees similar to health equity how much is investing versus cash and any any difference.
The yields those assets our earnings.
Either at close or next quarter or whatever.
Some point shortly thereafter, we will will reflect this in our guidance and then you'll have it.
And we would sort of encourage you're saying.
But.
But all that having been said I.
Think.
Typically when we acquired portfolios the per account fees are lower.
Then sort of health equity average per account fees for an HSA.
Because thats something that that thing will have relied on more readily and also because in this case certainly because the average balances higher EPS.
If you do the math the average balances for the ounces.
Well over $3000 so.
<unk>.
And then I guess.
So so thats, probably 1 factor I mean, we'll obviously place the assets and so.
We will place from that then.
And then current prevailing yields.
And we'll see how that goes when it's time to do it.
<unk>.
And then the spend the interchange sides pretty typical for our accounts.
That's a little bit of information I guess fundamentally.
I would say Sean that we'll we'll try and it reflect this in our guidance as soon as it closes the challenge of doing so and advanced sort of boils down to.
We don't have closed it.
Got it Okay, and then maybe just quickly on Cobra tightening you said there was a little bit of activity revenue related to some of the notifications in the second quarter.
If we think about the improving employment picture the important recovery.
If it does then.
Impact your view on how many end up actually.
Being in a position, where they would need or opt to take COVID-19 or not.
Cobra India.
We don't think too many people are going to have to take COVID-19.
Yeah.
Yes.
I think I would say early days, but not not by us.
Yeah.
All of us.
Bob.
Yeah.
I mean I'll take a shot at this I mean look I think this is kind of 1 of the unknowns that that has led us.
Factored into our guidance for the remainder of the year.
<unk>.
It's an interesting year with with more than the usual number of moving pieces and.
So.
The real answer is we don't have.
Jon.
When we don't know we try to forecast what we can see and that's what we've tried to do both in terms of costs and revenues and you could someone could mount exactly that argument and say well wait a minute if everyone ask jobs.
And there's something for that.
So we'll look.
1 way or the other this thing is not going to.
B B, all and all of human existence in 1 direction or the other the best thing about it is that some people who need to get take tariff will take care.
And hopefully we have shown our clients that will work our butts off to do that whether the revenue impact for profitability as is material or not.
Got it okay. That's.
That's very helpful. Thanks.
Sure.
Thanks, Jon.
Thank you.
Our next question comes from Mark <unk> with Baird.
Hey, good afternoon, and congrats on the on the on the quarter I'm wondering if you can talk a little bit about with the.
With the increased number of deposit partners to use.
You've talked to how should we think about the typical premium that youre going to get as it relates to the effective yield.
Relative to say 3 to 5 year Jumbo Cds.
Looking now.
Yeah, I mean, it's a.
Little bit hard to know mark because theres not much placement occurring right now.
We're in we're in a season, where theres a lot of talking.
And the rubber meets the road a little later in the year.
But.
Well I guess I will say is that the trick to obtaining a premium period is.
Having.
As Warren having competition for your money and to having a track record of delivering because at the end of the day nothing none of these agreements are real until the money moves and.
And so those are things that help us there are a lot of discussions going on with different parties and.
Unfortunately, I think this is 1 of those where and again, obviously most of the impact would be or all of the impact would be in future years since since most of our placements will occur late in the year.
But but nonetheless.
Something we worked pretty hard at every year end.
And certainly having more places to put that money makes us somewhat more optimistic that we can catch as as much of the benefit of having it as there is.
Okay.
I mean just to.
Just to follow up on that I mean, it does seem you did say that current placements are.
Coming in at an effective yield that's less than what's rolling off.
Sure.
Are you getting the sense, though that.
The bottom and is starting to move up so as we think about not necessarily for the full year for next year, but just in terms of sequentially.
The end of this year, we're probably getting.
Going to be getting closer to the bottom in terms of the effective yield.
The GAAP is clearly narrowed in both directions right. So so I think youre trying to ask if there'd been a narrowing on the other side that is the demand side and the answer is yes.
Okay, Great and then the interchange really picked up nicely.
Can you talk a little bit about just the sequential monthly acceleration that youre seeing there because that that looks I mean, that's where things were really strong.
Relative to expectation. So can you can you talk a little bit about that just the pace of the rebound there.
Yes that was a real that was a real bright spot as we closed every single month, we would see that.
Things were largely normalize just not even a little better in some cases.
For the different places where people spend in particularly in the area of people going into the medical procedures, which was the 1 that was sort of lag.
The 1 that has the most amount of spend to be Trump.
Yes, we saw that and it was very consistent.
As we walk through the quarter and so that was that was nice to see that message was better than what we what we even expected of course the <unk>.
Commuter interchange is clearly still not there.
Yep.
Great.
Just that just add mark here just for others I know you know this very well because we've talked about many times, but but.
Interchange is still has a seasonal component to it and so for example, we will in the first quarter, we benefit from the fact that we.
We have accounts that are ending in this case it from 2 years ago, but nonetheless are ending their grace period right.
<unk>.
And all that kind of thing and that we will not have in future quarters and that'll be reflected in both total accounts as well as interchange so so.
And of course people are topped off their accounts at the beginning of the year and all that so.
We were certainly pleased to see it.
Relative to our.
Kind of pre pandemic levels, we kind of feel like health care spend is kind of back to where it was.
But that's still there's still going to be some seasonality in Q2 and in particular in Q3, but that folks should be thinking about as they model for years.
Great look forward to talking again tomorrow.
I guess benchmarks Mark.
Thank you. Our next question comes from Sandy Draper with <unk> Securities.
Thanks, So much Johnson to bring it up the <unk>. It sounds like there may be a fetzer valve stuck in the cash and the commuter benefits.
Rob.
So a lot of my questions have been asked but maybe just following up on that.
The comment about the stronger spend.
<unk> for the first time in a while we actually saw the.
The cash per account.
Was down sequentially been building is that just because we're starting to see some spend.
Just would love your thoughts on how you see that interchange the interchange revenues growing up should we make sure we're being taken the offset of that is some of that money is going to be coming out of the cash balances. Yeah. It's a really important for sandy thank you for making it.
Look we're thrilled with the aggregate balance growth just thrilled and thrilled that that is a function of not just market growth primarily market growth, but but.
But also.
Growth, meaning net asset value growth, but also people continuing to put more into the accounts than they are taking out.
And it tastes could certainly have been made that we would see in this quarter.
Yes.
Balance declines as people sort of began to spend again, we see that so I think the biggest thing thats happening is is just the continued move towards investing and.
As we've talked about many many many many many times.
While that has a trade off in terms of individual dollars.
So on this quarter. It also has the effect of people attending to put more money in and stick around and that money grows faster and so forth and the aggregate so that.
It's good for the business and I kind of relate it to.
2 a little bit too predictions about the long term business for for the.
For the sector as a whole to achieve its full potential.
More people have to be looking for as long term accounts and.
That's going to be in the investment balances broke records in cash balances and and so so seeing that at this level in this quarter, even in a quarter, where we still have substantial increase in spend.
Yes.
Now on a on a.
Sequential basis seems pretty good.
Got it got.
But it is something but it is as you say it is something that we all have to factor in and certainly we have tried to factor into our thinking about guidance for the book.
Okay, great well I actually don't have a follow up so I'll try to keep the call for an hour.
Thank you.
I'm sure it's Andy Grimshaw.
Yes, I'm wearing shorts.
Mark on is our only maybe non short sky and maybe maybe.
<unk>.
Maybe Peters Peters lineup the reinsurance.
Even though he said he was wearing shorts.
[laughter].
And for <unk> and we.
Go ahead for them.
Okay.
Last question in queue, gentlemen islands lots with Bank of America. Your question. Please.
Mr <unk>.
Hey, Thanks for taking the questions going back to the service revenue.
Yes, we know that the computer segments, causing a big impact there, but historically you look at fiscal 2019 fiscal 2020 sequentially in fiscal 2020 that was down slightly so can you just remind us as we think about.
The service line item heading into the second quarter, what are the puts and takes in a bit from the commuter there.
Thanks for you on that 1.
Yes.
I do think it goes back to just thinking about how we underwrite deals.
And thinking about amount of assets right.
The fees associated to it and then the bundling aspect of it as well.
So.
When you think about HSA and how we price those relative to account balances and a good example is the 1 that Jon just pointed out which was the which was the fifth third deal in the amount of those accounts that were that were bringing yogurt and theres a lot of revenue to be generated off those accounts that increases the size of the sale and so that moves that revenue down into that can still go line item, but for Ya.
Really think about the whole the whole aspect of our custodial and service revenue line items, it's almost starting to feel.
When I think about for deals that we're signing off on is a blend of it because I'm thinking.
So due to that particular customer and that's even more so true when you think about bundling sales together and finding opportunities to have more problems are essentially being able to get better pricing on certain things and the service fee area to increase the amount of margin that we're able to take off of those so I think youll.
Continue to see that a little bit and to the extent that alright.
Jon said over the long term we can get.
Rates to rebound that creates a huge opportunity for us and I think it's not going to be anything thats going to be an extreme amount of a decrease relative to that service revenue line item. We certainly manage it every single day I am saying that each 1 of those deals were thinking about how we negotiate and install and so forth.
Got it thank you.
Thank you and this concludes Q&A I would like to turn the call back to Jon Kessler for his final thoughts.
Well that's.
You've gotten as much thought out of me is youre going to get thanks, everyone look forward to seeing some of you or at least on video shortly.
Maybe soon in person who knows thanks al.
Thank you for participating in today's program. This concludes the conference and you may now disconnect have a great day.
Yes.
[music] zone.
Yes.