Q2 2022 Healthequity Inc Earnings Call

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Welcome I would now like to hand, the conference over to your Speaker today, Richard Putnam. Please go ahead.

Thank you may and good afternoon, welcome to health equity second quarter fiscal year 2022 earnings conference call.

My name is Richard Putnam, I do Investor Relations here for health equity and joining me today is John Kessler, our president and CEO, Dr. Steve Neeleman, Our Vice chair and founder of the company Tyson Murdock, the company's EVP, and CFO and Ted Bloomberg EVP and CFO.

Before I turn the call over to John I have two important reminders first a press release announcing our financial results for the second quarter of fiscal year 2022 was issued after the market closed. This afternoon. The metrics reported in the press release include contributions from our wholly owned subsidiary wage works.

And the account is administers the press release also includes the definition of certain non-GAAP financial measures that we will reference here today.

Copy of today's press release, including the reconciliation of these non-GAAP measures with comparable GAAP measures.

And a recording of the webcast can be found on 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 September eight 2021.

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

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

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.

And they are detailed in our latest annual report on Form 10-K.

And in subsequent periodic reports that we file 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 a Q&A with that I'll turn the call over to our CEO Jon Kessler.

Thank you Richard gets better every time.

Hello, everyone and thanks for joining us. This afternoon today, we have good news to report we are announcing strong results for health equity second quarter of fiscal 'twenty. Two ended July 31, and.

And we are reaffirming guidance for the fiscal 'twenty two full year I will discuss our Q2 results and pending acquisitions, Ted will review operations and integration progress and Tyson will review the financial details of the quarter and provide updated guidance for fiscal 'twenty two.

Steve is here to join us for Q&A.

As always let's start with the five key metrics that drive our business. The team delivered strong year over year growth in HSA members and assets, while commuter yield headwinds continue to impact revenue.

Revenue of $190.0 million grew 7% versus the second quarter of last year due to improving year over year HSA member asset and other CDB growth along with onetime Cobra subsidy revenue that hit largely in Q2 and that was all partially offset of course by lower custodial yields and commuter benefit utilization, which remains well below pre pandemic.

Revenue levels.

Adjusted EBITDA of $70.0 million grew similarly sequentially and up from the.

In the second quarter of last year of 62.1 million total accounts ended the quarter at $14.0 million, which does not include the nearly 700000 commuter accounts that went into suspense since the beginning of the pandemic HSA members at quarter's end reached 6.0 million up 11% year over year and HSA asked.

At quarter's end reached a record $20.0 billion up a larger 27% from a year ago.

The team delivered very strong first half sales results, including a fiscal second quarter record of 180000, New HSA is up 67% from 108000 opened in Q2 last year to date. This fiscal year, we have welcomed 295000, new HSA members up 38% year over year.

More than in the same period in any year of our history.

Sei assets grew by $458 million during the quarter with most of that growth ending up in investments as members and their employers continue to contribute and invest investing HSA members and in fact grew 42% year over year with more of our members connecting health and wealth.

The average balance of HSA members grew a robust I think it was incredible last quarter now its robust <unk>.

The 14% year over year.

Even during a quarter where member spend increased.

Interchange revenue by 23% year over year, So people were spending and still contributing CDB. CDB accounts continued also continued to grow as well even without a commuter rebound.

The strong organic results in Q2 do not include the acquisitions of further or fifth third banks HSA portfolio, which have not yet closed we believe that further and fifth third transaction will enhance health equities market leadership and scale in our core and growing HSA business, adding approximately 0.7 million HSA.

And $2 billion of custodial assets upon their closing there.

Their closings in total later this year.

Further we will also strengthen the network partner strategy that has helped fuel health equities HSA growth from the start with significant new partners increased commitment to the Blue Cross Blue Shield system, New API based platform capabilities to support flexible branding and deeper integration of health equity into partner offerings. There truly are exciting things.

As was reported in this morning's 8-K filing the further agreement has been amended moving the target date for clothes for the bulk of the business day November and creating a separate closing process, where these <unk> 3 billion of Veeva assets. This provides veeva fiduciary time for review before transfer while protecting deal.

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Fifth third portfolio trance for will occur shortly.

We are pleased with the results we're reporting today in light of the pandemic continuing impact commuter revenue remains well under 50% of pre pandemic levels with the Delta variant, leading many employers to pushback returned to office plans as you all know card spend plateaued in Q2, which we also see as an effect of the Delta vary. These.

Winds will eventually abate of course and the team has the opportunity for a strong second half capitalizing on our great sales start to the year I will now turn the call to Ted to review operations and integration Mr. Bloomberg.

Thanks, John as John mentioned, we're pleased to report that second quarter, New HSA sales were up 67% year over year and 56% sequentially from the first quarter this year.

As you know, we recently promoted Steve Lindsey a 15 year health equity veteran to the position of executive Vice President of sales and relationship management. Steve has led the teams responsible for successful cross selling efforts.

Expanding our partner relationships, including launching a record keeper partnership effort and delivering high quality service to enterprise clients, making them want to do more business with us in fact, Steve and his team recently forged a partnership with health care Services Corporation, better known as H C. S C.

To bring health equities total health solution bundle to Hcs's, Bluecross and Blueshield licensees in five states.

Factoring in the further acquisition, we will soon be working together with approximately two thirds of Blue Cross Blue Shield licensees to connect health and wealth, Steve is purple through and through has demonstrated his capabilities and we look forward to benefiting from his impact in this expanded role.

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As we move into open enrollment with our clients and partners, we are optimistic as employers and employees reengage with their benefit programs the marketing and engagement programs. We have built our working our clients. We have spoken with are overwhelmingly supportive of deploying them and we believe we can successfully educate our members in <unk>.

Aspect of members on the benefits, we help their employer offering.

We are also excited about fifth third and further we expect to complete the close in migration of fifth third before the end of Q3.

They have been an exceptional partner supporting the transition and referring new business to us already.

With respect to further we've gotten to know their team and couldnt be more impressed.

<unk> efforts are underway to achieve $15 million of cost and revenue synergies within three years of close and growth opportunities with their existing clients and health plan relationships are exciting.

The wage works integration effort is winding down with another platform migration completed in $5 million of additional synergies achieved in Q2.

While we have completed 18 migrations and achieved $70 million of run rate synergies to date, there remain a number of small to mid sized migrations to complete to achieve the remaining $10 million of the promised $80 million of permanent run rate synergies.

During Q2, we also completed the rationalization of our post wage works physical footprint.

Team's stellar performance over the past 18 months working from home has ease the process of concentrating future in office work to just two locations Draper, Utah and Irving, Texas, along with our creative space for our OSM luminaries in Seattle.

I'd also like to offer kudos to the entire organization for their tireless efforts to execute against the recent Cobra subsidy regulations, our Q2 financial results reflect the realization of that concerted effort.

We're now shifting our focus to deliver a successful busy season, and we are highly optimistic that the investments. We've made in self service technology training staffing and simplifying our platform will help us deliver purple during our busiest time of year earlier.

Early returns are positive as we are meeting or exceeding service levels across the business. While there is still much to do the first half of fiscal 'twenty. Two has yielded record new HSA sale strong integration synergies and successful scalable operational results. Thanks to the continued efforts from team purple now.

I will turn it over to Tyson to review financial results and guidance.

Thank you Ted.

I'll review, our second quarter, GAAP and non-GAAP financial results a reconciliation of GAAP measures to non-GAAP measures. It's found in today's press release.

Second quarter revenue grew 7% as John indicated with each of our revenue components posting year over year gains.

Service revenue grew 5% to $111.0 million, representing 58% of total revenue in the quarter.

Second quarter growth in service revenue is primarily attributable to 8% growth in average total accounts driven by growth in Cobra, partially offset by commuter account in suspense from the impact of the pandemic.

There remains an opportunity to provide additional Cobra services in the second half of fiscal 'twenty to most of the upfront work in nearly all of the subsidiary revenue was recognized in Q2.

Just on your revenue grew 4% to $56.0 million in the second quarter compared to $55.0 million in the prior second quarter, 18% growth in average HSA cash with yield at 88% growth in average HSA investments with yields more than offset a 33 basis point decline and the annualized yield on intrastate cash.

The annualized interest rate yield was 177 basis points on HSA cash with yield during the second quarter of this year.

This yield is a blended rate for all HSA cash with yield during the quarter. The HSA asset table of today's press release provides additional details interchange revenue grew 23% to $32.0 million, representing 16% of total revenue in the quarter.

The interchange revenue increase was primarily primarily due to a rebound in our spend across our platforms in the quarter and growth in average total accounts.

Gross profit was $112 million compared to $109.0 million in the second quarter of last year and gross margin was 59% in the quarter.

Operating expenses were $120.0 million or 60% of revenue amortization of acquired intangible assets and merger integration expenses together represented 19% of revenue.

Net loss for the second quarter was $11.0 million or a loss of <unk> <unk> per share on a GAAP EPS basis. Our non-GAAP net income was $37.0 million for the second quarter of this year up from $31.0 million a year ago non-GAAP net income per share was <unk> 40 per share compared to 42 cents per share last year.

Adjusted EBITDA for the quarter grew 9% to $70.0 million and adjusted EBITDA margin was 35% higher than higher than prior trends due to the Cobra subsidy revenue in the quarter.

For the first six months of fiscal 'twenty, two revenue was $376.0 million up 2% compared to the first six months of last year GAAP.

Net loss was $10.0 million or <unk> <unk> per diluted share non-GAAP net income was $68.0 million or <unk> 78 per diluted share.

And adjusted EBITDA was $129.0 million up 1% from the prior year, resulting in 33% adjusted EBITDA margin for the first half of this fiscal year turning to the balance sheet as of July 31, we had $754 million of cash and cash equivalent with $974 million of debt outstanding net of issuance.

Costs with no outstanding amounts drawn on our line of credit the cash balance of course still includes the funding required to close the further in fifth third HSA acquisitions.

As you know we routinely have on file with the SEC a shelf registration statement on form S. Three to assure you we have access to the capital markets as needed our existing shelf registration expired yesterday, which means you will see a new S. Three soon.

Based on where we ended the second quarter and our current view of the economic environment. We are maintaining guidance for fiscal 'twenty. Two that we previously provided which includes revenue for fiscal 'twenty two to range between 755% and $765 million non.

Non-GAAP net income to be between $248 million, resulting in non-GAAP diluted net income between $46.0, and $51.0 per share based upon an estimated 84 million shares outstanding for the year and adjusted EBITDA between 241 in $247 million today.

Guidance includes our most recent estimate of service custodial and interchange revenue based on results to date compared to last quarter. Our guidance includes a more conservative outlook for commuter revenue and interchange for the remainder of this year due to the Delta variant search offset by the addition of fifth third bank revenue expected in Q4.

We now expect to close the further acquisition in Q4. This year guidance does not include any potential impact from the further acquisition, except for the associated preparatory merger and integration expenses incurred through July 31.2021.

Our full year GAAP net loss and loss per share guidance includes the impact of these year to date merger and integration spend merger and integration expenses.

Our guidance assumes a rate on HSA cash with yield of approximately 175 basis points unchanged from prior periods, our yield guidance does not factor the pending further asset migration to help equity depository insurance partners other than prevailing rates guidance also includes the benefit of run rate synergies achieved from wage works that Ted.

Mentioned.

The outlook for fiscal 'twenty, two assumes a projected statutory income income tax rate of approximately 25% and a diluted share count of $84 million, but we don't provide quarterly guidance, let me speak for a moment about seasonality during Q2 the company benefited from incremental revenue connected to the administration of Cobra subsidies included in the pandemic stimulus legislation.

Patients.

As you know the stimulus plan subsidies ran from April to September however, the bulk of revenue related to upfront notification and administration of the subsidies were earned in our second quarter guidance reflects our expectation of a little additional Cobra subsidy revenue in Q3 and of course, none in Q4.

Pre pandemic, we also have the seasonal interchange pattern, where Q1 and Q4 were seasonally higher with Q through Q3 being the lowest quarter for interchange revenue.

As John mentioned, we have seen a plateau of spending excluding commuter and expect to return to the pre tax pre pandemic seasonal revenue patterns for interchange again, excluding commuter services.

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.

Not excluded.

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

Thanks, Tyson I mean, the story of this call I think is around improved efficiency as Tyson mentioned as well as of course sales performance.

In Q2 and for the entire first half and.

These are both team sports and in this case, particularly thinking about sales. The team includes everyone health equity our network partners or clients.

And their benefits advisors and I wanted to say a brief thank you to that group.

Who have worked very hard with us.

Over this period of time, where there's a lot of uncertainty to really produce a good.

Good results.

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

Absolutely at this time I would like to remind everyone to ask a question you will need to press star one on your telephone to withdraw.

Your question, perhaps the counties. Please standby, while we compile the Q&A roster.

Your first question comes from the line of Greg Peters of Raymond James Your line is open.

Good afternoon, everyone at health equity.

Yeah well.

Thank you for the call.

And I.

I guess I'm supposed to ask one question with one follow up is that the rules you didn't really.

I mean, youre in Florida, I don't think anyone following any of the rules anyway. So.

But yes exactly.

Well I'm going to try and be.

Respectful of my peers I'll stick to one question one follow up.

So, let's let's start.

Focus on custodial revenue and I.

I think many are focused on are paying attention to what are the three year Jumbo CD rate is really hasn't moved much and more importantly, the data coming out of the banking industry suggests there's just not a lot of new loan demand and so I thought I'd just unit.

Provide you the opportunity to talk about your perspective on your debt.

Cash yield that youre going to be able to generate.

Beyond just this year.

Youre depository partners.

Well why don't we at Tyson why don't you start with just a discussion of where we are on our guidance from a guidance perspective for this year and how we're thinking about the remainder of this year and all.

Buying a little bit on our longer term strategy.

Yeah, So hey, Greg So 177 bps for Q2, and then of course, the guide of one of $76.0

That includes.

We stayed there even though rates have come down obviously like you've just mentioned because we are confident in our ability to place.

He is getting a little closer to make those play instruments were watching that very closely and we feel like we've created some demand having more depository partners and of course some of our other partners that we work with and so.

We feel good about the guidance that we had before and now.

So, yes, and so we're thinking about.

Going forward, well, obviously I'm not going to offer multi year guidance here right. I mean, one of the things that is I think making us feel decent about it.

Fundamentally that our business model, which you know going back to the first time, we met.

We talked about the fact that.

One of the nice things about our model of being not attached to a particular bank or a particular insurance company or a particular investment firm or what have you is that we have a lot of flexibility to pivot and do what's best for our members and then for us in terms of being able to deliver them value and keep other fees down and so.

What I see there is a couple of things happening first of all.

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As we get into kind of placement season here.

Uh huh.

We are.

As we do from the bank perspective, playing the field.

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And that seems to be going about as expected.

Obviously, the banking sector is going to be in our view.

Long term challenge, but nonetheless.

In terms of basically.

Not just the loan demand, but effectively being pushed to buy treasuries by.

The cumulative effect of various government regulations.

That's that's.

That's very helpful.

What I also see happening here is.

And you talked about this a little bit the last couple of calls is I see a mix shift occurring within our cash assets between the.

The products that we offer as you know we offer our FDIC deposit product and we also offer in.

An enhanced rates product that we've historically called yield plus that's an annuity product that generates higher as the name implies higher rates for our members in high rates for us.

With further acquisition.

We will be bringing on a material amount of the further transaction includes enhanced rates type business.

On the HSA side and.

That will be.

From my perspective that serving as a catalyst for us to more effectively educate our members about their options as well as to really do on that side of the house. What we've tried to do on the deposit side, which as you know have multiple partners.

Work effectively with our partners have telegraph, our needs and build long term relationships and a way to think about that whole thing is it's going to provide some stability underneath this number.

We.

And so so we will I.

I think that provide guidance pretty shortly here either either in December as we did last year or in January February as we did the prior year I am not sure yet, but but we will provide we will provide some guidance very quickly about 2023 fiscal year end.

What I would have people kind of just keep in mind is is that.

The increase due to the mix shift opportunity within the cash component is something that is actually potentially quite helpful to us and I think we are uniquely positioned to do among competitors because we're not pushing prop.

Money market funds, we're not trying to satisfy our own Treasury officer and.

Or that kind of thing.

And we have the flexibility to move money, where it is most useful.

Yes that makes sense.

As my my follow up and it's going to be a pivot but [laughter].

You know the investment community as you I'm sure you are not will not be surprised by you know theres a lot of speculation going into your earnings print regarding just what's going on with high deductible health plan adoption. This year in the industry and with new HSA A's and.

There were some out there, suggesting that the the growth and just the industry adoption for high deductible health plans and HSA is just isn't what it used to be.

Maybe you could speak in.

On your opinion on what the industry outlook is for this beyond just this year and I know you spoke optimistically about the outlook and your strong second quarter results. So I'm not trying to diminish that I'm just curious about your perspective for the industry outlook.

Well I guess my basic perspective is that there's a.

What I see is a a divergence of providers between those that have scale and scope and can really meet the needs in terms of both both the potential distribution partners as well as ultimately employers members.

And those were more limited and.

If you look at what's been printed out there in terms of.

Our results now as well as other results that have been printed you can kind of see that and so.

That's what I see.

And so so I think when folks look at this thing.

Sure.

Obviously the.

The ultimate market answer is going to be somewhere between.

The winners and everyone else and our job is to be one of the winners and so so I think I feel good about where we ended up in the first half of this year in that regard.

We'll see what others have to say.

Devin you and others as they print, but certainly relative to the Prince you've seen that that feels like it's the case.

Just on that point.

I'd say in terms of both accounts ane asset so.

That seems pretty good on the account side, though you used to talk about how the industry and we used to observe how the industry used to generate give or take 3 million new accounts per year.

Kind of reset last year with Covid.

When you think about this year and next year.

We can get back to that $3 million account per year industry sort of run rate or is it going to be.

It feels like it's going to be a loss.

That's just the final question.

I note that you've gone full forward on this one but.

Youre welcome.

Native welcome.

But but.

Look I don't have the answer and I think nobody does.

We'll go through the year and find out what I do know is that the.

Growth of this market is going to be is going to occur over a long period of time, we were about $30 million accounts into a $60 million account market in my view and I've had that view in good times and bad times and what have you and.

The fundamental factors that lead us to that place haven't changed.

<unk> care has fads.

But.

The idea of leaving people out in the cold in terms of their ability to spend tax efficiently and save for their retirement does not seem like thats going to be one of the fabs and so I think there are R. R.

We're going to have plenty of growth opportunity going forward and our job is to capture the most of it.

Got it thanks for the answers.

Thanks, Matt Thanks, Greg.

Your next question comes from the line of Anne Samuel of Jpmorgan. Your line is open.

Hey, Thanks for taking the question.

Was hoping maybe you could provide some incremental color on the incremental conservatism around computer and interchange and then maybe as we think about the commuter business.

Is there any offset from bloom.

As commuter start to think about getting to work in different ways.

Tyson.

Yeah, Hey, How're you doing.

So I. So thanks for the question and what I would say about that is like you I'm watching by watching closely how this is playing out and as we looked at commuter over that second half based on what we had kind of thought about 90 days ago and watched the delta kind of rear its ugly head year and saw the news and looked at our.

Business and when we were going to come back with that other businesses and how they were going to come back and also just monitoring results as we see people start to utilize.

The cards and so on and so forth. It just felt better for us to be more conservative in the second half of the year.

Given those kind of.

News themes and I think every single day that goes by it's sort of even makes it a little bit more.

In my mind, feeling like it's going to be conservative come back as far as getting people back into the office I think the same is true on the interchange side and we wanted to temper that because again I think we're in another situation, where you see case counts rising of course I'm looking at the same chart that youre looking at and those are rising and when people are doing something different message.

Still with us and so bringing in that conservatism and kind of making you pointed out.

It was important to kind of protect that second half of the year and then your other the other question you asked on there as well was just about womb and and we feel good about what that team is doing.

In some ways they have such a similar impact with people when they get back in the office, there's more utilization of that platform. There's more interest in it but it creates a lot of really great conversations around the commuter benefits that are already integrated in there and again I think if you think about long term versus quarter to quarter. This is going to be something that really helps us are without peer.

At a time so.

So I'd kind of leave it at that John any other comments.

So I think that makes sense.

Well I'll just say, we don't know what's going to happen in the second half of the year, we feel good about having been perhaps less sanguine than others. We're not that we were expecting delta but back in June when everything looked pretty rosy. We were we were cautious in.

We got some criticism for that.

I think as it turns out that caution in terms of the pace of commuter.

Rollback was warranted.

And look.

I don't have a crystal ball on this so we try to guide what we see in.

And if we can deliver better results of course, we will just as we did this quarter.

Okay very helpful. Thank you.

Thanks, Dan.

Your next question comes from the line of George Hill of Deutsche Bank. Your line is open.

Hey, George in your question.

Hey, John how has it gone I'd say, John I'm going to lead the witness here a little bit which is we look at a tough rate environment.

The Delta variant slowing commuter and interchange expectations I guess I would ask any changes on how you guys think about cap deployment.

[laughter] I don't know, where you're leading me to that's my kids I don't know George what do you think.

I'm, a former banker I'll tell you something.

[laughter] well at least its former that's good.

Look I think.

As is obvious from our activity the M&A.

Pipeline feels.

There are a lot of opportunities there we're going to focus on going forward I think is.

Stuff that we spend that in the near term here would be stuff that looks a little like fifth third where its portfolio acquisition cash flows immediately that kind of thing I think that's the right thing to be doing in this environment.

Aye.

And none of those things are going to go.

Go Crazy, but I think the right the right way to think about it is that.

The capital that we have.

There are going to be we've been saying this for years and it's been true rights like yes, we're generating cash and yes. There are good ways to use it.

That generate very strong return to our shareholders and very predictable return and I think that.

That that's likely to be what we're going to do and there does seem to be a decent pipeline for those things and so.

That's that's kind of where it will be I don't see us.

Looking at this environment, we have today and doing anything that's in the nature of strategic pivot or what have you.

With further we decided to.

No I think we decided to to.

Both sort of double down on our view about the opportunities within our health plan partners and then also we have a view that from a technology perspective, the ability to do more API work more gray label work more product integration is going to be good not only in health plan channels, but elsewhere and.

That makes perfect sense to me and.

But that's.

That to me is a modest pivot, we're not going to do any big pivots anytime soon.

Yes.

You saw it exactly where I was leading you that I think that the more direct question would have just been like do you see more opportunity in the businesses. You're currently in or is there a chance to take greater share of wallet with the clients you serve with new offerings, but I think you gave me the answer pretty clearly thank you. Yeah. I mean, I think we have plenty of wallet share opportunity within the products. We have from a cross sell perspective and that was helpful.

And this quarter its been helpful for the last year.

And that's probably let's go and get the wallet share we can with our existing products and one nice thing about that and maybe in a further question Ted will have a chance to elaborate on this is we're really honing our skills in that area.

And so so if there are other opportunities later down the line great.

Okay I'll hop back in thank you.

Thanks George.

Your next question comes from the line of Donald Hooker of Keybanc. Your line is open.

Great. Good afternoon. Thank you for the question here, so sorry, if I missed this but you talked about the Cobra subsidy is benefiting the quarter did you size them or was that the entirety of the sort of upside to your expectations.

Thanks Mohit.

Yes, I think the way to look at that Don. Thanks for the question is just when you saw US go through through guidance increases over the course of the spring. So you saw us raise for Cobra and boom.

Early on and then it's a.

It started materialized a little bit more in there and so that was the way that we sort of sort of messaged that but we didn't go out and specifically size the increase.

But those things kind of played out like we expected and it was.

Probably a little better and that was good so a lot of hard work by the team to get it done in and to do it right and so I think you've covered a lot of things in our business as well about what we're capable of doing.

Super and maybe one quick follow up you guys commented.

Going into the enrollment season here you had some learnings from last year from the Covid environment around self service training and technology and whatnot are there one or two things you would highlight to us that could be sort of some give us some room for optimism.

Benefits enrollment season from what you learned last year.

Yeah, Terry why don't you take that one.

I had a feeling that picture is coming from John.

Yeah, I would say there is two or three things that give me great optimism. The first one is that.

Is the way that we do.

Virtual education and.

And open enrollment support in previous years, we were constrained a little bit by how physically proximal we could get to our members and prospective members.

And it was fairly inefficient.

One of the great things that.

Covid helped us with and that we were on top of was moving to a virtual model, where we can serve more people help more people create more content.

B with the families when they want to engage with the content like we don't have to show up at work. We can we can create content on demand and support that with <unk>.

Team members, where if you want to sit down with your spouse and go through your benefits. We're there to support that effort and the results that we saw last year.

We're really.

Cause for optimism and we're off to an equally.

Good if not better start this year, so I think the pivot to virtual open enrollment and the way we were able to support that and the way our clients kind of jumped on board with partnering with us to support that is as one big cause for optimism I think secondly cause for optimism is maybe a little bit less sexy on the revenue side, but equally important which is we don't have 'twenty two.

Platforms anymore.

That really helps right I mean, we've done a lot of work over the last two years. We've done 18 migration that doesn't mean, yet we've sunset 18 platforms, because some of those migrations or multi step, but we're serving far fewer platforms.

With far more robust and capable.

Cross training far better awareness of what both our clients and members are asking us for and it's helping us service people more effectively and without stuff.

Stuff kind of falling through the cracks I think that puts us in a better position to have a successful busy season. So those would be the two two points I would make one on the growth side and then one on both the cost containment and service side that are that are exciting from my chair John I know, if you have anything to add there.

I think if you take all that together and throw in the discussion that we've had over the last few quarters here.

With regard to technology investments in.

Both API based infrastructure and.

Also from a data perspective, I mean, I think it's not very obvious from the results in recent quarters with all the noise around COVID-19 and other factors.

But.

Underneath the covers what we're trying to do is the way. We look at this is we are in the market.

From a secular perspective is going to have decent growth and certainly steady growth and we're going to outperform the way, we can turn that into spectacular outperformance, particularly from a margin perspective.

That is growing revenue and serving people efficiently is.

By maintaining our roots as a true technology company and Youre going to see.

Those who watch closely very closely are already seen investments in that area.

And youre going to see more in terms of.

Both both people and.

<unk> functionality and so forth as we begin to integrate further.

There is a lot of opportunity to apply technology to a market that is.

Going to be there for us we feel very confident about that and that were already able to outperform.

Make that even better.

And in open enrollment is just kind of one great example of that.

Well look forward to a luck with that thanks, so much. Thank you.

Thanks, Don.

Sure.

Your next question comes from the line of Sean Dodge of RBC capital markets. Your line is open.

Mr. Doug Farrell.

For sure.

For taking the questions.

I guess first just a quick clarification on the guidance is there a revenue contribution from fifth third in this round that was not included in last quarter's guidance.

Nice and you wont have that one.

Yes, there is actually.

So we've included that that was.

Talked about.

That is essentially sort of the offset in there to kind of maintain guidance. So you do have that inorganic growth located in there, but it's but it's relatively small.

Hey, guys I, just like a couple of million dollars.

Yes.

We haven't put a number out there yes, I mean, so how do you kind of number out but it's think of it. This way we won't get but a couple of months of it and it's not a huge number either way.

Okay Fair enough and then and then another quick one on the further and fifth there is I think you said about 700000 HSA is between the two is this if I could.

Net estimate or do you have a sense of the net contribution with the quality HSA that this'll bring I mean net of a kind of duplicative here about the counts.

Tricia and stuff, but the migration that I think they saw with wage works.

I think the answer to that is roughly yes.

There are.

Think about particularly with further where we are.

Less because we're not in both cases, we're not closed yet and in the case of further.

Because of antitrust.

Trustmark on stuff there is a little bit of probably information that we're missing that that makes that imperfect, but order of magnitude. The answer is yes.

Okay, Alright, great Thats all for me thanks.

Your next question comes from the line of David Larsen of <unk>. Your line is open.

Hi can you talk about your EBITDA margin expectations going forward.

Longer term and the medium term and then also maybe your costs overall.

Like as a percentage of revenue on a year over year basis.

Sales and marketing and tech and development and G&A.

All up.

<unk>.

And then also obviously up sequentially. So just any any thoughts there and like the $80 million in cost synergies, that's a really big number.

That's like one quarter's worth of full adjusted EBITA, So just any thoughts.

Thoughts on what your expectations are for EBITDA margin expansion going forward would be very helpful. Thank you.

Tyson why don't you hit this one.

I could preview but go ahead.

Sounds good.

We continue to talk about internally and externally is that we will continue to grow revenue.

At a steady clip.

In the double digits as account growth occurs and obviously asset growth is another another counter to that and then growing EBITDA margin, even a little bit more quickly than that and so thats getting to the efficiencies and John was mentioning earlier and that's really about how we service our clients for our biggest cost line.

And so you think about the virtualization of enrollment you think about self service opportunities.

Think about the consolidation of the platforms, which as you mentioned that relates largely to the cost synergy that's occurring is that we consolidate those platforms everything around those platforms. Because it was located in that synergy related to particularly service, but all other aspects that you think about.

Sales and marketing technology and G&A.

Or are there are efficiency opportunities I think even beyond.

That synergy estimate as we've said before and then I think just to kind of hit into the operating parts of the operating expenses and your question was broad so im trying to make sure. It took a couple of us growing notes here, but let me know if I missed something here of course on the technology side.

There's large investments that are occurring that are capitalized but of course, then the amortization starts to occur on that Theres also the talent that we have within technology and you're paying for that so you've got the related stock comp in there as well to get the right talent into the doors, we merged platforms and as we try to get down to essentially single platform, which again increases benefit.

<unk> and then if I talked a little bit about sales and marketing I think this has been something that really under the tutelage of pad and other leaders. We've really made a lot of progress here and built out dysfunction of the company over the last particularly three years to really do this in a way that allows our users to learn more quicker easier.

About HSA growth I think.

Quarter of growth in HSA is as you know it can be a little bit of a testament to that and then we will see how we do when we go through enrollment season. So I think that investments worth that of course within technology, you've got security. That's a big focus of the company as we mature and get larger you know to make sure that we've got the appropriate security in place and so I think all.

Those things you are seeing are just really investments for that long term future. When you think about where we're going to be over the years.

Move towards that Tam I guess I'll stop there, but I, probably didn't hit everything David but.

You can I just ask another question John maybe maybe maybe just one thing that may not be obvious is unless you you look down below is that.

Is the effect of stock comp expense on.

On a on an unadjusted basis on each of these expense items, particularly the opex items and.

We David as we I think discussed.

But over the last few years here, we've gone from.

Options to Rs use and then in the case of our senior most executives Prs use based on relative DSR and I think as investors, that's what people want us to do.

But.

The practical effect.

Is as you probably know is that from an accounting perspective, you get additional expense without any additional burn and so so that has had I think in percentage terms some effect.

It's not immaterial on.

On these as kind of the accounting of that is spelled out.

So maybe offline if we want to detail some of that we can but.

That's something that's in these numbers that matters.

Okay, Great no. That's very helpful. Thank you very much and then just any color around the health card spend would be great and are you seeing volumes come back up both on the inpatient side and on the ambulatory side.

Ah.

So I'll start and then throw to Tyson.

We said last quarter that we felt like.

Looking at spend that spend for the first quarter of our fiscal year had kind of reached back to pre pandemic levels.

And that was true.

Things were a little more well, maybe I'll just answer but things are a little more patchy in the second quarter.

Quarter in the sense that we had we had good months and then <unk>.

<unk>.

As we got towards the end of the quarter and you saw a little more potentially back from Delta.

A little bit soft or not not anything like the pandemic period of time.

But a little bit softer and I think that's consistent with.

What other folks have reported in terms of utilization and the like I don't know that to be true that's expected to be true.

We did take a little bit off the table for the second half of the year and thinking about this just because like we don't know whats going to happen but.

But overall.

We're kind of.

So I think it's within a couple of times in the prepared remarks, we kind of feel like we've we've plateaued.

Plateaued at this level and then just we just have to think about it.

Do you as you forecast remainder of the year that pre pandemic seasonally the first and fourth quarters are our strongest and the second and particularly the third quarter is our weakest just because of people spending patterns and so on.

Those are other factors that are out there.

Great. Thanks, very much congrats on a good quarter.

Thank you thanks.

Your next question comes from the line of Scott Shanghai of Stephens. Your line is open.

Sure.

Thanks for Hey, Thanks for taking my questions.

So my first question is on the new HSA member growth it looks like it's the largest new member adds in any Q going back in my model in recent years.

Can you provide us on any color where this is coming from is it more on the cross selling opportunities that youre executing on on the wage works client base any color would be great. Thanks.

So I wanted to take this one.

Sure. Thanks for the question I think it's really three things I think the first one is some deals that were stock last year getting unstuck.

Which which helps I think SEC.

Place would be sort of general channel.

Performance are the record keeper channel is really.

Showing some growth for us, but we're also doing very well with our health plans and with our benefits advisors and brokers and consultants. So I think thats another place.

We're winning.

I think the.

For the third one is just really good net hiring from existing clients.

Our clients are experiencing an economic recovery and therefore.

Adding team members in those team members open HSA is which is super helpful. And then we continue to have as you alluded to a strong trunk.

Strong cross sell here as well, especially in the in the enterprise and the enterprise space, meaning our largest clients I would say those four things.

That's great.

My follow up question is around that last cross sell opportunity, particularly on the wage work side.

I believe when you guys.

Wired wage less than 3% of their clients had an HSA account.

Or is that today and then.

How has COVID-19 impacting the this cross selling opportunity for the HSA business given the current impaired commuter market.

Thank you.

Yes, Im happy to take that one John Thanks, Alright.

I think it's a cross wind COVID-19 across from a cross sell perspective on the one hand, I think we're the beneficiary of some vendor and partner consolidation.

That might come from an overtaxed people department and.

And so I think we're winning some cross sell deals and pulling some cross sell deals through the pipeline faster because vendor consolidation is attractive to overburden.

Our departments I think on the flip side, we're seeing a.

A little bit.

Little bit of paralysis, saying, yes, we want to go with you guys, but we just can't make a move this year, which we actually think sets us up well.

In the future and with respect to cross I don't have that number we can try to follow up with you.

What percentage of wage works clients legacy lasers clients offer an HSA, but I would just highlight two things. The first one is our cross sell is an HSA AUM.

We're actually experiencing a lot of other consumer directed benefits.

Account cross sell into legacy health equity base and then.

And then that HSA cross sell into the wage base and I would say that I think the biggest opportunity remaining that we haven't quite cracked the code on sort of that below the enterprise space.

Cross sell.

Meaning our top several hundred clients a few thousand clients below that space.

I think that we're sort of just revving up the engine there. So to me that's one of the places one of the reasons for optimism.

Yeah.

Thanks very much.

Your next question comes from it comes from the line of Alan Much of Bank of America. Your line is open.

Yeah. Thanks, Thanks for taking my questions Hey, John.

Going back to the service revenue there was a nice step up sequentially I guess outside.

Outside of Cobra, and then outside of adding new accounts is there anything that increased sequentially in there that we should think about.

Tyson will hit this one.

I mean I think sequentially.

Specifically, stating that there's I would be pretty consistent when you think about.

Other things.

Commuter interchange obviously interchange we called out is more stabilized commuters pretty flat sequentially. If you will other than maybe the card swipes, it's starting to happen with the users that are already in there, but thats pretty small.

And so it's really just that big big Cobra piece of revenue that causes that to be.

Kind of an anomaly for the year relative to so much is smoothing out the rest of the quarters and so I would call it at that.

I tried to kind of pick that apart, even a little bit more.

Like I said Hfcs are largely set at the beginning of the year. Obviously, we had a good Q2, so that adds a lot, but most of the HSA is going to come in in season right.

If you're talking about Q2 is pretty big so anyway.

I would say that's about it.

I don't know Jonathan you thought you'd have.

Just I think you have all the right factors Alan I mean, the big picture is that debt.

In terms of the wins that are out there is big.

Biggest picture is we have a bundled strategy and our bundle strategy is about.

While that may produce a slight headwind to per unit service fees.

It's a boon to margin profit total revenue whatever you want to think about and apropos of Ted last answer looking more specifically at this period. This year basically look at the first half you've got.

If you just divide service fees by total account.

You Youre down 5% year over year, but what's going on there you got on the one hand, you've got.

The the commuter accounts that are insistent that really hurt because they are from a servicing perspective, our highest.

Sure.

Per account.

And then on the.

Outside Cobra subsidy someone else.

And both of those things are going to abate over time.

And.

It will be we'll be right back, where we started which is by and large our basic view of.

Service fees is that they are pretty steady.

With the effective.

In total with things like bundling and mix shifts and so forth that may happen from time to time, having an impact.

That's great and then.

On the selling season is there any way to quantify how the selling season is going maybe versus.

Fiscal 'twenty, one and fiscal 'twenty is it reasonable to expect account growth.

To be in terms of new account adds to be at similar levels or.

Whatever you can provide there thanks.

Yes, we're trying to I mean, I will say on we're trying to get out of the business of which we got a new during the pandemic. So that people could really understand what's going on.

We started providing some pipeline information and you'll note we didn't do it here I think I promised last quarter that we would try and get out of this business and so we are.

And so so.

Let me not do that.

I could and I'm sure you'd like it but.

But.

I think here's the way I'd look at it is if you look at the first half of the year, we opened 295000 HSA A's and.

Grew CDB business by about 3%.

How we will do in the implication would be if you.

Sort of follow out prior years that.

Yes.

We've talked about already on this call that we're going to do better when all is said and done this year than in prior years.

And that's a great implication, but we have to deliver on it and delivery on it involves I think in practice three factors. The first is is kind.

Kind of running through the finish line in terms of sales, particularly with our health plan partners that get the sales later in the year with smaller customers and so forth.

And in that regard.

The point, Ted made about adding HCC.

It was kind of nice it's a new partner to work with.

This will be the first year, so it won't be crazy, but it's but it's all new and Thats really good.

That's the second thing we have to do is.

Execute on open enrollment and that's also Ted talked about that and I think we're very well positioned to do that this year.

Open enrollment really delivered for us last year, when all was said and done.

<unk>.

Things were looking a lot less.

Great prior to open enrollment and so.

We've kind of double down on that and we'll see how it goes but obviously.

I think we have all the right like soldiers and tendons and I have a strategic board in my head.

On the field.

And then lastly macroeconomic matter.

The hiring that occurred.

Among benefits eligible over the course of the first.

Particularly the first half of the year. It was definitely helpful certainly relative to last year.

And so that helps to when our clients expand that means more business for us and <unk>.

We've seen some of that and so.

We'll see how the second half goes in total.

But.

Those are the factors that will really matter. The first two we control the third we don't and so we'll work on the ones we control.

Makes sense. Thank you.

Yes, Sir.

Your next question comes from the line of Stephanie Davis of SBB Leerink. Your line is open.

For a minute I thought we weren't going to hear from you I couldn't believe me well this is actually <unk> Zhang on for Stephanie.

Okay.

Yeah mine.

Come on come on.

Hey.

Well. Thank you for taking my question.

Got it in guidance.

Other positives for a lower interest rate environment and that your competitive landscape is becoming more favorable with that in mind, how should we think about the cadence as portfolio acquisitions going forward can we expect a continuation of that pieces two acquisitions within five months like you've done with <unk>.

Darren.

And can you talk about what the pipeline looks like for a potential target.

Yes, I mean, we don't operate with any particular cadence as you know, we don't want to price stuff into the market that isn't there and people elect who will you promise so I guess.

Bob.

And I will say that further as a little bit different in the sense that it has also a technology element and a strong strong panel element that that kind of.

Make it a larger transaction along with the VEBA product and the of course, the ability to really scale out our enhanced rates product.

So that problem, but I think if I look at like the fifth third type transactions.

We'd love to be doing those kinds of things at that size or below all day, and what I expect that youll see from us over the course of the next couple of quarters are.

In particular, I think what youre going to see is we're going to chime in.

I think we're going to try and do everything we can to position the company to be able to do those and one of the things that's I think remarkable and.

We will.

I comment that Ted elaborate on a little bit in the call.

In the prepared remarks, I should say.

Yeah, we.

I'm going to focus on fifth third for a second and fifth third will be closed pretty shortly here and.

Close means that the migration happen in that transaction. So oh, yes, we're still doing wage works and we're working to gear up further and those are real transactions involving people and processes and so forth, but oh by the way, there's a well oiled machine there that is serving new customers working with a new partner to make their customers have.

You're making them happy bringing them on board doing it in a compliant way.

And Thats I think.

In terms of our opportunities to outperform the market.

If we can outperform organically and then oh by the way have a steady stream of these over the long term that really bodes well in terms of our ability to generate.

Ultimately to generate cash flow that reflects the value of the shares so.

I guess without committing to a cadence my answer is that we are certainly going to try and set the company up to continue to do these things.

As they materialize in your premise that is.

In a low for long environment, there should be more of them is right and our ability both through cross sell and through a broader product set and through enhanced rates so forth to really capitalize on these transactions.

For long environment is I think better than anyone else in the market.

That's very helpful color.

One more follow up from me.

On your connecting health and wealth strategy given that one of your competitors just expanded into the retiree retiree reimbursement arrangements market can you provide some color on if you're a current product suite includes that offering.

I know you want to expand again.

It does.

Wasn't I was I have to admit I'm not sure what the point of the press release was but.

We read the same press release.

I mean I don't know.

It's probably a good argument for doing fewer rather than more press releases, which we have tried to embrace.

But but but maybe the answer is yes.

And.

There are these are typically HRA accounts.

There are some other flavors, obviously, the VEBA business that will be picking up with further is sort of a form of those accounts as well.

And.

And those are out there I don't know that there a particular.

No.

Magic area of market wide growth, what I do know is that.

What we want to be there to do is to provide total solutions to our clients and to our partners. So that our partners aren't running around looking for one firm here and one from there and whatnot and and and having those capabilities really helps do that.

And there's a lot of thing thank you very much.

Yes ma'am.

Your next question comes from the line I know Marc.

I note the non denial on the idea that Stephanie is in the handling so.

Take that for what it Martin.

[laughter].

Hey.

Obviously, you had a great quarter in terms of HSA ads.

I'm wondering if you can talk a little bit about what youre seeing in terms of the competitive environment on the whole.

There is obviously, one large competitor out there that.

Some people focus on but on the flip side. There is it's a fragmented market and theres a lot of players that probably arent being super aggressive. So when you when you think about the entire competitive environment how would you.

Got it out in terms of.

For this coming selling season and going into.

Next year.

I have a follow up.

Yeah, I think it's I think I would go and I'm going to ask if he would like to elaborate where Steve for that matter.

Since since both of them spend plenty of time out there.

Kind of in hand to hand combat.

Okay, I think the big picture is around.

Scale and scope.

And.

What I think of as our most significant competitors.

Obviously fidelity, we've talked about and then UNH in terms of the.

Upsized, they're great competitors, but you know what the.

The implication of that is that there are great companies that also want to partner with us so.

They're good companies, but no vanguard is a great company and <unk> is a great company and.

And ADP is a great company and those are all companies that are partnered with us and we don't it doesn't just happen to be honest, we don't have to carry all the freight and that's always been a bit of our secret sauce, and that's the secret sauce and.

When you look at what we're doing from technology perspective, and even from a people perspective, if you look at the.

The move to bring Steve Steve Lindsey and the sales leadership I mean, that's our strategy.

It's a strategic calculation on our part about the value of having both the ability to go out and meet our clients wherever they are whether that's directly with their broker with.

There wont.

With with a health plan partner with retirement partner with the Ben Admin partner.

<unk> partner I guess.

So I just think it's a winning formula to have somebody in the industry that does that and where that somebody.

Ted.

Anything else you'd add to that.

No you said you made the point John about district distributing through channels that I was going to but I think Steve Neeleman you lead the league.

And the executives at finalist meetings would you would you care to offer any commentary on what you're seeing out there.

Sure.

Yeah.

I wish we could be in person I will tell you that that.

Final space remotely.

The best situation, but I think we're working through it but I think the short of it is the more things change more they stay the same I mean, we know about <unk>.

M&A selling within their footprint, we know about fidelity kind of trying to connect the oral in case, we've heard that for a long time, but I think with the announcement that we made today about ICSC.

We really do have the broadest.

Kind of channel partnerships in the country and I think that for companies that don't have their own solution, which most large health plans don't I mean, the biggest do but the most large ones and small ones mid sized ones that everyone's Don.

And they can help equity because they know that we're gonna help them compete and the reason why they choose us as it will tell you. This is that they think that aligned with health equity they have a better chance to win and retain business and so we're just double down on that strategy. We do some direct sales, but we do a lot of channel sells and so I don't think it changed that much honestly in the last four to five years.

That's great and then.

You've had a lot of time to think about further and I'm wondering if you could add.

Add some additional comments with regards to just the technology and the <unk>.

Panel partnership that Youre going to gain with further.

Looked at it even more.

And to further appreciation of what it brings to the table.

Ted once you start this one.

Sure first of all I'll point out that whenever you are talking about further you inadvertently use the word further you just did it and I do at 17 times, a day definitely happens, but I think that the.

Punch line is we're incredibly excited about the distribution relationships that they have.

And these are some of the nation's vast and most effective most forward thinking health plans and we look forward to continuing to grow and develop the partnerships with them starting on we're doing as much planning as we can while bound obviously by the data sharing rules that are in place to ensure that we remain competitors until we close.

We're really excited about that I think from a technology perspective.

For me, it's a little bit less about technology, and a little bit about meeting the health plan partners, where they are John used the terms I hadn't heard you used before.

Which is gray labeling right, which is which I'm interpreting him Jimmy it's not quite white labeling it's lots of different choices about how health plans want to go to market with HSA and I think not only this further have technology that we'll be able to avail ourselves of relatively quickly, but they also have expertise in doing which we're really excited about.

And we think we have a lot to learn from them in terms of how.

Which of those buttons with pressing which those buttons matters.

Sometimes it can be a co brand sometimes it can be getting all the way into the entire communication stream that the health plan deploys.

And it's really trying to meet those health plan partners, where they are.

To make there.

To help them take HSA is another consumer directed benefits market as effectively as possible I think that's what we're most excited about and then the last point I would make before I turn it over to Jonathan.

Thing to add is.

One of the things that constraints to growth.

Astro <unk> companies is talent.

And and so you want to find.

Tumor directed benefit experienced talented capable people wherever you can and that's one of the things. We're really excited about with respect to the further acquisition because we think that it's.

Nearly 400 people, who can who can help contribute right away and and you know and understand the industry and have been successful in the industry and I think that's another.

Huge opportunity for us.

From a.

From a closing further perspective, and if you can.

Candidly I, just can't wait to close it and get on with it.

John anything you'd add.

No that was awesome. Thank you.

Thanks for taking the question.

Yes, Sir.

There are no further question at this time I will now turn the call over to Jon Kessler for closing remarks.

Hi, everyone. Thank you stay safe stay sane.

It's going to get better.

We're all getting through this our team is doing a good job of getting through it.

Are you pleased with today's results and we're hoping to deliver more of them to you over the next quarter. Thank.

Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

[music].

[music].

[music].

Welcome I would now like to hand, the conference over to your Speaker today, Richard Putnam. Please go ahead.

Thank you may and good afternoon, welcome to health equity second quarter fiscal year 2022 earnings conference call.

My name is Richard Putnam, I do Investor Relations here for health equity and joining me today is John Kessler, our president and CEO, Dr. Steve Neeleman, Our Vice chair and founder of the company Tyson Murdock, the company's EVP, and CFO and Ted Bloomberg EVP and CFO.

Before I turn the call over to John I have two important reminders first a press release announcing our financial results for the second quarter of fiscal year 2022 was issued after the market closed. This afternoon. The metrics reported in the press release include contributions from our wholly owned subsidiary wage works.

And the account as ministers. The press release also includes a definition of certain non-GAAP financial measures that we will reference here today.

Copy of today's press release, including the reconciliation of these non-GAAP measures with comparable GAAP measures and a recording of the webcast can be found on 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 September eight 2021.

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

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

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.

And they are detailed in our latest annual report on Form 10-K.

And in subsequent periodic reports that we file 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 a Q&A with that I'll turn the call over to our CEO Jon Kessler.

Thank you Richard gets better every time.

Hello, everyone and thanks for joining us. This afternoon today, we have good news to report we are announcing strong results for health equity second quarter of fiscal 'twenty. Two ended July 31, and.

And we are reaffirming guidance for the fiscal 'twenty two full year I will discuss our Q2 results and pending acquisitions, Ted will review operations and integration progress and Tyson will review the financial details of the quarter and provide updated guidance for fiscal 'twenty two.

Steve is here to join us for Q&A.

As always let's start with the five key metrics that drive our business. The team delivered strong year over year growth in HSA members and assets, while commuter you'll headwinds continue to impact revenue.

Revenue of $190.0 million grew 7% versus the second quarter of last year due to improving year over year, HSA member Asia, and other CDB growth along with onetime Cobra subsidy revenue that hit largely in Q2 and that was all partially offset of course by lower custodial yields and commuter benefit utilization, which remains well below pre pandemic.

Revenue levels.

Adjusted EBITDA of $70.0 million grew similarly sequentially and up from.

In the second quarter of last year of 68.0 money.

Total accounts ended the quarter at $14.0 million, which does not include the nearly 700000 commuter accounts that went into suspension at the beginning of the pandemic HSA members at quarter's end reached 6.0 million up 11% year over year and HSA assets at quarter's end reached a record $20.0 billion up a larger <unk>.

7% from a year ago.

The team delivered a very strong first half sales results, including a fiscal second quarter record of 180000, New HSA is up 67% from 108000 opened in Q2 last year to date. This fiscal year, we have welcomed 295000, new HSA members up 38% year over year.

And more than in the same period in any year of our history HSA assets grew by $458 million during the quarter with most of that growth ending up in investments as members and their employers continue to contribute and invest investing HSA members and in fact grew 42% year over year with more of our members connecting health and wealth.

The average balance of HSA members grew a robust.

It was incredible last quarter now its robust 14% year over year.

Even during a quarter where member spend increased.

Interchange revenue by 23% year over year, So people were spending and still contributing CDB. CDB accounts continued also continued to grow as well even without a commuter rebound.

Our strong organic results in Q2 do not include the acquisitions or further or fifth third banks HSA portfolio, which have not yet closed we believe that further and fifth third transaction will enhance health equities market leadership and scale in our core and growing HSA business, adding approximately 0.7 million HSA.

And $2 billion of custodial assets upon their closing their their closings in total later this year.

Further we will also strengthen the network partner strategy that has helped fuel health equities HSA growth from the start with significant new partners increased commitment to the Blue Cross and Blue Shield system, New API based platform capabilities to support flexible branding and deeper integration of health equity into partner offerings. There truly are exciting things.

On the left as was reported in this morning's 8-K filing. The further agreement has been amended moving the target date for clothes for the bulk of the business to November and creating a separate closing process, where these euro point 3 billion would be the assets. This provides veeva fiduciaries time for review before transfer while protecting deal.

Al you through an earn out structure negotiated with the sellers.

Fifth third portfolio transfer will occur shortly.

We are pleased with the results we're reporting today in light of the pandemic continuing impact commuter revenue remains well under 50% of pre pandemic levels with the Delta variant, leading many employers to pushback return to office plans as you all know card spend plateaued in Q2, which we also see as an effect of the Delta vary these hedge.

Lindsay will eventually a beta of course and the team has the opportunity for a strong second half capitalizing on our great sales start to the year I will now turn the call to Ted to review operations and integration Mr. Bloomberg.

Thanks, John as John mentioned, we're pleased to report that second quarter, New HSA sales were up 67% year over year and 56% sequentially from the first quarter this year.

As you know, we recently promoted Steve Lindsey a 15 year health equity veteran to the position of executive Vice President of sales and relationship management. Steve has led the teams responsible for successful cross selling efforts.

Expanding our partner relationships, including launching a record keeper partnership effort and delivering high quality service to enterprise clients, making them want to do more business with us in fact, Steve and his team recently forged a partnership with health care Services Corporation, better known as H C. S C.

To bring health equities total health solution bundle to Hcs's, Bluecross and Blueshield licensees in five states factor.

Factoring in the further acquisition, we will soon be working together with approximately two thirds of Blue Cross Blue Shield licensees to connect health and wealth, Steve is purple through and through has demonstrated his capabilities and we look forward to benefiting from his impact in this expanded role.

As we move into open enrollment with our clients and partners. We are optimistic as employers and employees reengage with their benefit programs marketing and engagement programs. We have built our working our clients. We have spoken with are overwhelmingly supportive of deploying them and we believe we can successfully educate our.

Our members and prospective members on the benefits we help their employer offered.

We are also excited about fifth third and further we expect to complete the close in migration of fifth third before the end of Q3.

I have been an exceptional partner supporting the transition and referring new business to us already.

With respect to further we've gotten to know their team and couldn't be more impressed planning efforts are underway to achieve 15 million of cost and revenue synergies within three years of close and growth opportunities with their existing clients and health plan relationships are exciting.

The wage works integration effort is winding down with another platform migration completed and $5 million of additional synergies achieved in Q2.

While we have completed 18 migrations and achieved $70 million of run rate synergies to date, there remain a number of small to mid size migrations to complete to achieve the remaining $10 million of the promised $80 million of permanent run rate synergies.

During Q2, we also completed the rationalization of our post wage works physical footprint.

The team's stellar performance over the past 18 months working from home has eased a process of concentrating future in office work to just two locations Draper, Utah and Irving, Texas, along with our creative space for our OSM luminaries in Seattle.

I'd also like to offer kudos to the entire organization for their tireless efforts to execute against the recent Cobra subsidy regulations, our Q2 financial results reflect the realization of that concerted effort.

We're now shifting our focus to deliver a successful busy season, and we are highly optimistic that the investments. We've made in self service technology training staffing and simplifying our platform will help us deliver purple during our busiest time of year.

Early returns are positive as we are meeting or exceeding service levels across the business. While there is still much to do the first half of fiscal 'twenty. Two has yielded record new HSA sale strong integration synergies and successful scalable operational results. Thanks to the continued efforts from team Purple now I'll.

I'll turn it over to Tyson to review financial results and guidance.

Thank you Ted.

I'll review, our second quarter, GAAP and non-GAAP financial results a reconciliation of GAAP measures to non-GAAP measures. It's found in today's press release.

Second quarter revenue grew 7% as John indicated with each of our revenue components posting year over year gains.

Service revenue grew 5% to $111.0 million, representing 58% of total revenue in the quarter.

Second quarter growth in service revenue is primarily attributable to 8% growth in average total accounts driven by growth in Cobra, partially offset by commuter account in suspense from the impact of the pandemic.

While there remains an opportunity to provide additional Cobra services in the second half of fiscal 'twenty to most of the upfront work in nearly all of the subsidiary revenue was recognized in Q2.

Just on the revenue grew 4% to $56.0 million in the second quarter compared to $55.0 million in the prior second quarter, 18% growth in average HSA cash with yoga, 88% growth in average HSA investments, which yield more than offset a 33 basis point decline and the annualized yield on intrastate cash.

The annualized interest rate yield was 177 basis points on HSA cash with yield during the second quarter of this year. The shield is a blended rate for all HSA cash with yield during the quarter. The HSA assets table of today's press release provides additional details interchange revenue grew 23% to $32.0 million representing <unk>.

16% of total revenue in the quarter.

The interchange revenue increase was primarily primarily due to a rebound in our spend across our platforms in the quarter and growth in average total accounts.

Gross profit was $112 million compared to 101.8 million in the second quarter of last year and gross margin was 59% in the quarter.

Operating expenses were $120.0 million or 60% of revenue amortization of acquired intangible assets of merger integration expenses together represented 19% of revenue.

Net loss for the second quarter was $11.0 million or a loss of <unk> <unk> per share on a GAAP EPS basis. Our non-GAAP net income was $37.0 million for the second quarter of this year up from $31.0 million a year ago non-GAAP net income per share was <unk> 40 per share compared to <unk> <unk> per share last year.

Adjusted EBITDA for the quarter grew 9% to $70.0 million and.

EBITDA margin was 35% higher than higher than prior trends due to the Cobra subsidy revenue in the quarter.

For the first six months of fiscal 'twenty, two revenue was $376.0 million up 2% compared to the first six months of last year GAAP.

Net loss was $10.0 million or <unk> <unk> per diluted share non-GAAP net income was $68.0 million or <unk> 78 per diluted share.

And adjusted EBITDA was $129.0 million up 1% from the prior year, resulting in 33% adjusted EBITDA margin for the first half of this fiscal year turning to the balance sheet as of July 31, we had $754 million of cash and cash equivalent.

With $974 million of debt outstanding net of issuance costs with no outstanding amounts drawn on our line of credit.

Cash balance of course still includes the funding required to close the further in fifth third HSA acquisitions.

As you know we routinely have on file with the SEC a shelf registration statement on form S. Three to assure you we have access to the capital markets as needed our existing shelf registration expired yesterday, which means you will see a new S. Three soon.

Based on where we ended the second quarter and our current view of the economic environment. We are maintaining guidance for fiscal 'twenty. Two that we previously provided which includes revenue for fiscal 'twenty two to range between 755% and $765 million non-GAAP net income to be between $248 million, resulting.

And non-GAAP diluted net income between $46.0, and $51.0 per share based upon an estimated 84 million shares outstanding for the year and adjusted EBITDA between 241 in $247 million. Today's guidance includes our most recent estimate of service custodial and interchange revenue based on results to date.

Compared to last quarter, our guidance includes a more conservative outlook for commuter revenue and interchange for the remainder of this year due to the Delta variant search offset by the addition of fifth third bank revenue expected in Q4.

We now expect to close the further acquisition in Q4. This year guidance does not include any potential impact from the further acquisition, except for the associated preparatory merger and integration expenses incurred through July 31.2021.

Our full year GAAP net loss and loss per share guidance includes the impact of these year to date merger and integration spend merger and integration expenses.

Our guidance assumes a rate on HSA cash with yield of approximately 175 basis points unchanged from prior periods, our yield guidance does not factor the pending further asset migration to help equity depository and insurance partners other than prevailing rates guidance also includes the benefit of run rate synergies achieved from wage were expected.

<unk>.

The outlook for fiscal 'twenty, two assumes a projected statutory income income tax rate of approximately 25% and a diluted share count of $84 million, but we don't provide quarterly guidance, let me speak for a moment about seasonality during Q2 the company benefited from incremental revenue connected to the administration of Cobra subsidies included in the pandemic stimulus legislation.

<unk> as you know the stimulus plan subsidies ran from April to September However, the bulk of revenue related to upfront notification and administration of the subsidies were earned in our second quarter guidance reflects our expectation of a little additional Cobra subsidy revenue in Q3 and of course, none in Q4.

Pre pandemic, we also have the seasonal interchange pattern, where Q1 and Q4 were seasonally higher with Q through Q3 being the lowest quarter for interchange revenue as John mentioned, we have seen a plateau of spending excluding commuter and expect to return to the pre pre pandemic seasonal revenue patterns for interchange again, excluding commuter service.

<unk>.

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.

Excluded.

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

Thanks, Tyson, let me the story of this call I think is.

<unk> improved efficiency as Tyson mentioned as well as of course sales performance.

In Q2 and for the entire first half and.

These are both teen sports and in this case.

Particularly thinking about sales the team includes everyone health equity our network partners or clients.

And their benefits advisors and I wanted to say, thank you to that group.

Who have worked very hard with us.

Over this period of time, where there's a lot of uncertainty to really produce good.

Good results.

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

Absolutely at this time I would like to remind everyone to ask a question you will need to press star one on your telephone to withdraw.

All your question, perhaps the county, please standby, while we compile the Q&A roster.

Your first question comes from the line of Greg Peters of Raymond James Your line is open.

Good afternoon, everyone at health equity.

Hey, Dan.

Yeah Paul.

Thank you for the call.

And I.

I guess I'm supposed to ask one question with one follow up is that the rules you didn't really it.

I mean, youre in Florida, I don't think anyone following any of the wells anyway. So.

But yes exactly.

Well I'm going to try and be.

Respectful of my peers I'll stick to one question one follow up.

So, let's let's start.

Focus on custodial revenue and.

I think many are focused on are paying attention to what are the three year jumbo CD rate is it really hasn't moved much and more importantly.

The data coming out of the banking industry suggests there's just not a lot of new loan demand.

So I thought I'd just.

It provides you the opportunity to talk about your perspective on.

You're there.

Cash yield that youre going to be able to generate.

Beyond just this year.

Depository partners.

Well why don't we at Tyson why don't you start with just a discussion of where we are on the guidance from a guidance perspective for this year and how we're thinking about the remainder of this year and I'll I'll opine, a little bit on our longer term strategy.

Yeah, So hey, Greg.

So 177 bps for Q2, and then of course, the guide of one of $76.0 and that includes <unk>.

We stayed there even though rates have come down obviously like you've just mentioned because we are confident in our ability to place.

Excuse me is getting a little closer and make those point of instruments were watching that very closely and we feel like we've created some demand having more depository partners and of course some of our other partners that we work with and so.

Feel good about the guidance that we had before and now.

So, yes, and so we're thinking about.

Going forward, well, obviously I'm not going to offer multi year guidance here.

I mean, one of the things that is I think making us feel decent about.

Fundamentally that our business model, which going back to the first time, we met.

We talked about the fact that.

One of the nice things about our model being not attached to a particular bank or a particular insurance company or a particular investment firm or what have you is that we have a lot of flexibility to pivot and do what's best for our members and then for us in terms of being able to deliver them value and keep other fees down and so.

What I see there is a couple of things happening first of all.

<unk>.

As we get into kind of placement season here.

We are.

As we do from the bank perspective, playing field.

Sure.

And that seems to be going about as expected.

Yes.

Obviously, the banking sector is going to be in our view.

Long term challenge, but nonetheless.

In terms of basically.

Not just the loan demand, but effectively being pushed to buy treasuries by.

The cumulative effect of various government regulations.

That's that's.

That's a helpful.

However, what I also see happening here is and we've talked about this a little bit. The last couple of calls is I see a mix shift occurring within our cash assets between.

The products that we offer as you know we offer our FDIC deposit product and we also offer and.

An enhanced rates product that we've historically called yield plus that's an annuity product that generates higher as the name implies high rates of our members in high rates for us.

With further acquisition.

We will be bringing on a material amount of the further transaction includes enhanced rates type type business.

On the <unk> side and <unk>.

That will be.

From my perspective that serving as a catalyst for us to more effectively educate our members about their options as well as to really do on that side of the house. What we've tried to do on the deposit side, which is you have multiple partners work effectively with our partners have telegraph our needs build long term.

Chips and a way to think about that whole thing is it's going to provide some stability underneath this number.

And so so we will I think provide guidance pretty shortly here either either in December as we did last year or or or in January February as we did the prior year I'm not sure yet, but but we will provide we will provide some guidance very quickly about 2023, our fiscal year end.

What I would have people kind of just keep in mind is is that.

The increase due to the mix shift opportunity within the cash component is something that is actually potentially quite helpful to us and I think we are uniquely positioned to do among competitors because we're not pushing prop.

Money market funds, we're not trying to satisfy our own Treasury officer and.

Or that kind of thing.

And we have the flexibility to move money, where it's most useful.

Yes that makes sense.

As my follow up and it's going to be a pivot.

<unk>.

Yeah.

You know the investment community as you I'm sure you are not will not be surprised by there's a lot of speculation going into your earnings print regarding just what's going on with high deductible health plan adoption. This year in the industry and with new HSA and.

There were some out there, suggesting that the growth and just the industry adoption for high deductible health plans and HSA is just isn't what it used to be.

Maybe you could speak and.

On your opinion on what the industry outlook is for this beyond just this year and I know you spoke optimistically about the outlook.

Strong second quarter results, so I'm not trying to diminish that I'm just curious about your perspective for the industry outlook.

Well I guess my my basic perspective is that there's a.

What I see is a a divergence of providers between those that have scale and scope and can really meet the needs in terms of both both the potential distribution partners as well as ultimately employers members.

Those were more limited and.

I think if you look at what's been printed out there in terms of of our results now as well as other results that have been credit you can kind of see that and so.

That's what I see.

And so so I think when folks look at this thing.

Obviously the.

The ultimate market answer is going to be somewhere between.

The winners and everyone else.

And our job is to be one of the winners and so so I think I feel good about where we ended up in the first half of this year in that regard.

We will see what others have to say.

Devon year, and others as they print, but certainly relative to the Prince you've seen that that feels like a prediction.

Just on that point.

And I should say in terms of both accounts an asset so.

That seems pretty good on the account side, though you used to talk about how the industry and we used to observe how the industry used to generate give or take 3 million new accounts per year.

And a reset last year with Covid.

When you think about this year and next year.

Think we can get back to that $3 million account per year industry sort of run rate or is it going to be.

It feels like it's going to be a loss.

That's just the final question.

I I note that you've gone full floridian on this one but.

Youre welcome.

As a native welcome.

But but.

Look I don't have the answer and I think nobody does and will will go through the year and find out what I do know is that the.

Growth of this market is going to be is going to occur over a long period of time, where about $30 million accounts into a $60 million account market in my view and I've had that view in good times and bad times and what have you and.

The fundamental factors that lead us to that place haven't changed.

Health care has that.

But.

The idea of leaving people out in the cold in terms of their ability to spend tax efficiently and save for their retirement does not seem like that is going to be one of the fabs.

So I think there are R. R.

We're going to have plenty of growth opportunity going forward and our job is to capture the most of it.

Got it thanks for the answers.

Thanks, Matt Thanks, Greg.

Your next question comes from the line of Anne Samuel of Jpmorgan. Your line is open.

Hey, Thanks for taking the question I was hoping maybe you could provide some incremental color on the incremental conservatism around computer and interchange and then maybe as we think about the commuter business.

Is there any offset from bloom.

As commuter start to think about getting to work in different ways.

Tyson.

Yeah, Hey, How're you doing.

So I. So thanks for the question and what I would say about that is like you I'm watching by watching closely how this is playing out and as we looked at commuter over that second half based on what we had kind of thought about.

90 days ago, and watch the Delta kind of rear its ugly head here and saw the news and looked at our own business and where we're going to come back with that other businesses and how they were going to come back and also just monitoring results as we see people start to utilize the.

Cards, and so on and so forth. It just felt better for us to be more conservative in the second half of the year.

Given that given those kind of.

News themes and I think every single day that goes by it's sort of even makes it a little bit more.

In my mind.

Is gonna be conservative come back, but as far as getting people back into the office I think the same is true on the interchange side and we wanted to temper that because again I think we are in another situation, where you see case counts rising of course I'm looking at the same chart since Youre looking at and those are rising and when people are doing something different this is still with us and so.

Bringing that conservatism and kind of making you pointed out.

It was important to kind of protect that second half of the year and then your other the other question you asked on there as well was just about loom and and we feel good about what that team is doing.

In some ways they have a similar impact with people when they get back in the office, there's more utilization of that platform. There's more interest in it but it creates a lot of really great conversations around the commuter benefits that are already integrated in there and again I think if you think about long term versus quarter to quarter. This is going to be something that really helps us are without peer.

At a time.

So I'd kind of leave it at that John any other comments.

I think that makes sense.

Well I'll just say, we don't know what's going to happen in the second half of the year, we feel good about having been perhaps less sanguine than others were not that were expecting delta, but back in June when everything look pretty rosy. We were we were cautious in.

<unk> got some criticism for that.

I think as it turns out that caution in terms of the pace of commuter.

Rollback was warranted.

And look.

I don't have a crystal ball on this so we try to guide what we see in.

And if we can deliver better results of course, we will just as we did this quarter.

Great very helpful. Thank you.

Thanks, Dan.

Your next question comes from the line of George Hill of Deutsche Bank. Your line is open.

Hey, George for the question.

Hey, John Hows, It got John I'm going to lead the witness here, a little bit which is we look at a tough rate environment.

The Delta variant slowing commuter and interchange expectations I guess I would ask any changes in how you guys think about cap deployment.

[laughter] I don't know, where you're leading me to that's my concern.

George what do you think.

Ah.

John did I have with me I'm, a former banker I'll sell you something.

[laughter] well at <unk>.

Its former that's good.

Look I think.

As is obvious from our activity the M&A.

Pipeline.

Feels like.

There are a lot of opportunities there we're going to focus on going forward I think is.

Stuff that at least in the near term here would be stuff that looks a little like fifth third where its portfolio acquisition and cash flows immediately that kind of thing I think that's the right thing to be doing in this environment.

And none of those things are going to go.

Go Crazy, but I think the right the right way to think about it is that.

The capital that we have.

There are going to be and we've been saying this for years and it's been true right. It's like yes, we're generating cash and yes. There are good ways to use it.

That generate very strong return to our shareholders and very predictable return and I think that.

That that's likely to be what we're going to do and there does seem to be a decent pipeline for those things and so.

That's that's kind of where it will be I don't see us.

Looking at this environment, we have today and doing anything that's in the nature of strategic pivot or what have you.

Meet with further we decided to.

No I think we decided to to.

Both sort of double down on our view about the opportunities within our health plan partners and then also we have a view that from a technology perspective, the ability to do more API work more gray label work more product integration is going to be good not only in health plan channels, but elsewhere.

That makes perfect sense to me and.

But thats.

That to me is a modest pivot, we're not going to do any big pivots anytime soon.

Yeah, I think you saw exactly where I was leading you that I think that the more direct question would have just been like do you see more opportunity in the businesses. You are currently in or is there a chance to take greater share of wallet with the clients you serve with new offerings, but I think you gave me the answer pretty clearly thank you yes.

We have plenty of wallet share opportunity within the products, we have from a cross sell perspective and that was helpful. In this quarter its been helpful for the last year.

And that's probably let's go and get the wallet share we can with our existing products and one nice thing about that and maybe in a further question Ted will have a chance to elaborate on this is we're really honing our skills in that area.

And so so if there are other opportunities later down the line great.

Okay I'll hop back in thank you.

Thanks George.

Your next question comes from the line of Donald Hooker of Keybanc. Your line is open.

Great. Good afternoon. Thank you for the question here, So I'm sorry, if I missed this but you talked about the Cobra subsidy is benefiting the quarter did you size them or was that the entirety of the sort of upside to your expectations.

Thanks, I'm going to hit that.

I think the way to look at that.

Thanks for the question is just when you saw US go through through guidance increases over the course of the spring. So you saw us raise for Cobra and one of them.

Early on and then it's.

It started materialized a little bit more in there and so that was the way that we sort of sort of messaged that but we didn't go out and specifically size the increase.

But those things kind of played out like we expected and it was.

Probably a little better and that was good so a lot of hard work by the team to get it done in and to do it right and so I think it puts a lot of things in our business as well about what we're capable of doing.

Super and maybe one quick follow up you guys commented.

Going into the enrollment season here you had some learnings from last year from the Covid environment around self service training and technology and whatnot are there one or two things you would highlight to us that could be sort of some give us some room for optimism.

Benefits enrollment season from what you learned last year.

Yes, so once you take that one.

I had a feeling that picture is coming from John.

Yeah, I would say there is two or three things that give me great optimism. The first one is that.

Is the way that we do.

Virtual education and.

And open enrollment support in previous years, we were constrained a little bit by how physically proximal we could get to our members and prospective members.

And it was fairly inefficient.

And I think one of the great things that.

Covid helped us with and that we were on top of was moving to a virtual model, where we can serve more people help more people create more content.

B with the families when they want to engage with the content like we don't have to show up at work. We can we can create content on demand and support that with <unk>.

Team members, where if you want to sit down with your spouse and go through your benefits. We're there to support that effort and the results that we saw last year.

We're really.

Cause for optimism and we're off to an equally.

Good if not better start this year, so I think the pivot to virtual open enrollment and the way we were able to support that and the way our clients kind of jumped onboard was partnering with us to support that is is one big cause for optimism I think secondary cause for optimism is maybe a little bit less sexy on the revenue side, but equally important which is we don't have 'twenty two.

Platforms anymore.

It really helps.

We've done a lot of work over the last two years.

18 migration now that doesn't mean, yet we sunset 18 platforms, because some of those migrations or multi step, but we're serving far fewer platforms.

With far more robust and capable.

Cross training far better awareness of what both our clients and members are asking us for and it's helping us service people more effectively and without stuffed.

Stuff kind of falling through the cracks I think that puts us in a better position to have a successful busy season. So those would be the two two points I would make one on the growth side and then one on both the cost containment and service side that are that are exciting from my chair I don't know if you have anything to add there.

I think if you take all that together and throw in the discussion that we've had over the last few quarters here.

With regard to technology investments in.

Both API based infrastructure.

And.

Also from a data perspective, I mean, I think it's not very obvious from the results in recent quarters with all the noise around COVID-19 and other factors.

But.

Underneath the covers what we're trying to do is the way. We look at this is we are in the market.

From a secular perspective is going to have decent growth and certainly steady growth and we're going to outperform the way, we can turn that into spectacular outperformance, particularly from a margin perspective.

That is growing revenue and serving people efficiently is.

By maintaining our roots as a true technology company and Youre going to see.

Those who watch closely very closely have already seen investments in that area.

And youre going to see more in terms of.

Both both people and.

<unk> functionality and so forth as we begin to integrate further.

There is a lot of opportunity to apply technology to a market that is.

Going to be there for us we feel very confident about that on that were already able to outperform to kind of make that even better.

Open enrollment is just kind of one great example of that.

Well look forward to good luck with that thanks, so much. Thank you.

Don.

Sure.

Your next question comes from the line of Sean Dodge of RBC capital markets. Your line is open.

Mr. Doug.

Krishna Thanks for taking the questions.

I guess first just a quick clarification on the guidance is there a revenue contribution from fifth third in this round that was not included in last quarter's guidance.

Thanks, Neal I hit that one.

Yes, there is actually.

So we have included that that was when you talked about.

That is essentially sort of the offset in there to kind of maintain guidance. So you do have that inorganic growth located in there, but it's but it's relatively small.

Hey, guys, just a couple of million dollars.

We haven't put a number out there.

So how do you put a number out but it's think of it this way we won't get but a couple of months of it and it's not a huge number either way.

Okay Fair enough and then and then another kind of quick one on the further and fifth there is I think you said about 700000 HSA is between the two is this like a net estimate or do you have a sense of the net contribution was the quality HSA that this'll bring I mean net of a kind of duplicative here about the accounts.

Nutrition stuck with the migration that I think they saw with wage works.

Yeah.

I think the answer to that is roughly yes.

There are I want to think about particularly with further where we are.

Less because we're not in both cases, we're not closed yet and in the case of further.

Because of.

Antitrust mall concept theres, a little bit of probably information that we're missing that that makes that imperfect, but order of magnitude. The answer is yes.

Okay, Alright, great Thats all for me thanks.

Thanks.

Your next question comes from the line of David Larsen of <unk>. Your line is helpful.

Hi can you talk about your EBITDA margin expectations going forward.

Longer term and the medium term and then also maybe your costs overall, it looks like as a percentage of revenue on a year over year basis.

Sales and marketing and tech and development and G&A.

Are all up.

Sure.

And then also obviously up sequentially. So just any any thoughts there and like the $80 million in cost synergies that's it.

Really big number.

That's like one quarter's worth of full adjusted EBITDA. So just any.

Thoughts on what your expectations are for EBITDA margin expansion going forward would be very helpful. Thank you.

That Tyson why don't you hit this one.

I could preview but go ahead.

Sounds good.

We continue to talk about internally and externally is that we will continue to grow revenue.

At a steady clip.

In the double digits as account growth occurs and obviously asset growth is another another counter to that and then growing EBITDA margin.

And a little bit more quickly than that and so thats getting to the efficiencies and John was mentioning earlier and that's really about how we service our clients for our biggest costs lie.

Do you think about the virtualization of enrollment you think about.

Self service opportunities you think about the consolidation of the platforms such as you mentioned and that relates largely to the cost synergy that's occurring is that we consolidate those platforms everything around those platforms. This was located in that synergy.

Related to particularly service, but all other aspects of it and then you think about like you said sales and marketing technology and G&A.

There are there are efficiency opportunities I think even beyond.

That synergy estimate as we've said before.

And then I think just to kind of hit into the operating parts of the operating expenses and your question was brought some trying to make sure. It took a couple of holes growing notes here, but let me know if I missed something here of course on the technology side.

There is large investments that are occurring that are capitalized but of course in the amortization starts to occur.

On that Theres also the talent that we have within technology and you're paying for that so you've got the related stock comp in there as well you get the right talent into the doors, we merged platforms and as we try to get down to essentially single platform, which again, increasing that efficiency and then if I talked a little bit about sales and marketing I think this has been something that really under the.

But due to wage and other leaders, we've really made a lot of progress here and built out dysfunction of the company over the last particularly three years to really do this in a way that.

Allows our users to learn more quicker easier about HSA growth I think.

Quarter of growth in HSA as it can be a little bit of a testament to that and then we'll see how we do when we go through an enrollment season. So I think that investments worth that of course within technology, you've got security. That's a big focus of the company as we mature you get larger you know to make sure that we've got the appropriate security in place and so I think all of them.

As things Youre seeing are just really investments for that long term future. When you think about where we're going to be over the years and as we move towards that Tam I guess I'll stop there.

Probably didn't hit everything David but.

Can I just ask another question or John can maybe add maybe maybe just one thing that may not be obvious is unless you you look down below is that.

Is the effect of stock comp expense on.

On an unadjusted basis on each of these expense items, particularly the opex items in.

David as we I think discussed.

But over the last few years here, we've gone from.

Options to Rs use and then in the case of our senior most executives Prs use based on relative DSR and I think as investors, that's what people want us to do.

But.

The practical effect.

Is.

As you probably know is that from an accounting perspective, you get.

Additional expense without any additional burn and so so that has had I think in percentage terms some effect.

That's not immaterial on.

On these as kind of the accounting of that is spooled out.

So maybe offline if we want to detail some of that we can but.

That's something that's in these numbers that matters.

Okay, Great. That's very helpful. Thank you very much and then just any color around the health card spend would be great and are you seeing volumes come back up both on the inpatient side and on the ambulatory side.

Ah.

So I'll start and then throw to Tyson, we said last quarter that we felt like.

Looking at spend that spend for the first quarter of our fiscal year had kind of reached back to pre pandemic levels.

And that was true.

Things were a little more well, maybe I'll just answer but things are a little more patchy in the second quarter.

Quarter in the sense that we had we had good months and then.

<unk>.

As we got towards the end of the quarter and you saw a little more potentially it back from Delta.

A little bit soft or not not anything like the pandemic period of time.

But a little bit softer and I think thats consistent with.

What other folks have reported in terms of utilization and the like I don't know that to be true, but expect it to be true.

And we did take a little bit off the table for the second half of the year and thinking about this just because like we don't know whats going to happen but.

But overall.

We're kind of.

So I think it's within a couple of times in the prepared remarks, we kind of feel like we've we've plateaued at this level and then just we just have to think about it.

Do you is your forecast for remainder of the year that pre pandemic seasonally the first and fourth quarters are our strongest and the second and particularly the third quarters are our weakest just because of people spending patterns and so.

Those are other factors that are out there.

Great. Thanks, very much congrats on a good quarter. Thank.

Thank you thanks.

Your next question comes from the line of Scott Schonhaus of Stephens. Your line is open.

Yeah.

Thanks for Hey, Thanks for taking my questions.

So my first question is on the new HSA member growth it looks like it's the largest new member adds in any two Q going back in my model in recent years.

Can you provide us on any color where this is coming from is it more on the cross selling opportunities that youre executing on on the wage works client base any color would be great. Thanks.

So I wanted to take this one.

Sure. Thanks for the question I think it's really three things I think the first one is some deals that were stock last year getting unstuck.

Which which helps I think SEC.

Place would be sort of general channel.

Performance are the record keeper channel is really.

Showing some growth for us, but we're also doing very well with our health plans and with our benefits advisors and brokers and consultants. So I think thats another place.

We're winning.

I think the.

Therefore, the third one is just really good net hiring from existing clients.

Our clients are experiencing an economic recovery and therefore.

Adding team members in those team members open HSA is which is super helpful. And then we continue to have as you alluded to a strong shrunk.

Strong cross sell here as well, especially in the in the enterprise and the enterprise space, meaning our largest clients I would say those four things.

That's great.

My follow up question is around that last cross sell opportunity, particularly on the wage works side.

I believe when you guys acquired wage less than 3% of their clients had an HSA account.

Or is that today and then.

How has COVID-19 impacting the cross selling opportunity for the HSA business given the current impaired commuter market.

Thank you.

Yes, Im happy to take that one John Thanks, Alright.

I think it's a cross wind COVID-19 across run from a cross sell perspective on the one hand, I think we're the beneficiary of some vendor and partner consolidation.

That might come from an overtaxed people department and.

And so I think we're winning some cross sell deals and pulling some cross sell deals through the pipeline faster because vendor consolidation is attractive to overburden.

Our departments I think on the flip side, we're seeing a.

A little bit.

Little bit of paralysis, saying, yes, we want to go with you guys, but we just can't make a move this year, which we actually I think sets us up well.

In the future and with respect to cross I don't have that number you can try to follow up with you.

What percentage of wage works clients legacy lasers clients offer NH.

And HSA, but I would just highlight two things. The first one is our cross sell is an HSA on.

Actually experiencing a lot of other consumer directed benefits.

Account cross sell into legacy health equity base and then.

And then that HSA cross sell into the wage base and I would say that I think the biggest opportunity remaining that we haven't quite cracked the code on sort of that below the enterprise space.

Cross sell.

Meaning our top several hundred clients.

Few thousand clients below that space.

Think that we're sort of just revving up the engine there. So to me that's one of the places one of the reasons for optimism.

Thanks very much.

Your next question comes from comes from the line of Alan <unk> of Bank of America. Your line is open.

Hey, Thanks for taking my questions, Hey, John going back to the service revenue there was a nice step up sequentially I guess.

Outside of Cobra, and then outside of adding new accounts is there anything that increased sequentially in there that we should think about.

Tyson will hit this one.

I mean, I think sequentially Youre, specifically, stating that there is.

I would be pretty consistent when you think about.

Other things.

Commuter interchange obviously interchange we called out is more stabilized commuters pretty flat sequentially. If you will other than maybe the card swipes starting to happen with that users that already in there, but thats pretty small.

And so it's really just that big Big Cobra piece of revenue that kind of causes that to be.

Kind of an anomaly for the year relative to so much is smoothing out the rest of the quarters.

So I would call it at that but I tried to kind of pick that apart, even a little bit more.

Like I said Hfcs are largely set at the beginning of the year. Obviously, we had a good Q2, so that adds in a lot, but most of the HSA is going to come in in season right.

I still figure out Q2 is pretty big so anyway.

I would say that's about it.

Jonathan you thought you'd have.

And then just I think you have all the right factors Alan I mean, the big picture is that debt.

In terms of the wins that are out there is <unk>.

Biggest picture is we have a bundled strategy and our bundle strategy is about.

While that may produce a slight headwind to per unit service fees.

It's a boon to margin profit total revenue whatever you want to think about and apropos of Ted last answer looking more specifically at this period. This year basically look at the first half you've got.

Uh huh.

If you just divide service fees like total account.

You Youre down 5% year over year, but what's going on there on the one hand, you've got.

The the commuter accounts that are insistent that really hurt because they are from a servicing perspective, our highest.

Uh huh.

Per account.

And then on the.

Other side Cobra subsidy someone else.

And both of those things are going to abate over time.

And.

It will be we'll be right back, where we started which is by and large our basic view of.

Service fees is that they are pretty steady.

With the effective in.

In total with things like bundling and mix shifts and so forth that may happen from time to time.

Yes.

That's great and then.

On the selling season is there any way to quantify how the selling season is going maybe versus.

Fiscal 'twenty, one and fiscal 'twenty is it reasonable to expect account growth.

To be in terms of new account add to be at similar levels or.

Whatever you can provide there thanks, yes.

Yes, we're trying to I mean, I will say that when we're trying to get out of the business of which we got a new during the pandemic. So that people that really understand what's going on.

We started providing some pipeline information and you'll note we didn't do it here I think I promised last quarter that we would try and get out of this business and so we are.

And so so.

Let me not do that.

I could.

I'm sure you'd like it but.

But.

I think here's the way I'd look at it is if you look at the first half of the year, we opened 295000 HSA and.

Grew CDB business by about 3%.

How we will do in the implication would be if you sort of follow out prior years that.

As we've talked about already on this call.

That we're going to do better when all is said and done this year than in prior years.

And that's a great implication, but we have to deliver on it and delivery on it involves I think in practice three factors. The first is is.

Kind of running through the finish line in terms of sales, particularly with our health plan.

<unk> that get the sales later in the year with smaller customers and so forth.

And in that regard.

The point, Ted made about adding herc.

It was kind of nice it's a new partner to work with.

This will be the first year, so it won't be crazy, but it's but it's all new and Thats really good.

The second thing we have to do is.

Execute on open enrollment and Thats also Ted talked about that and I think we're very well positioned to do that this year.

We open enrollment really delivered for us last year, when all was said and done and.

Things were looking a lot less.

Great prior to open enrollment.

So we've kind of doubled down on that and we'll see how it goes but obviously.

I think we have all the right like soldiers and tendons and I have a strategic board in my head.

On the field.

And then lastly macroeconomic matters.

The hiring that occurred.

Among benefits eligible over the course of the first.

Particularly the first half of the year. It was definitely helpful certainly relative to last year.

And so that helps to.

Our clients expand that means more business for us and we've seen some of that and so.

We'll see how the second half goes in total but.

Those are the factors that will really matter. The first two we control the third we don't and so we'll work on the ones we control.

Makes sense. Thank you.

Yes, Sir.

Your next question comes from the line of Stephanie Davis.

<unk> Leerink your line is open.

For a minute I thought we weren't going to hear from you I couldn't believe me well this is definitely Zhang on for Stephanie.

Okay.

Anyway.

Come on come on me.

Thank you for taking my question.

I mean guidance.

One of the positives for a lower interest rate environment that you are competitive landscape is becoming more favorable.

That in mind, how should we think about the.

Portfolio acquisitions going forward can we expect a continuation of that pieces two acquisitions within five months like game downloads are there any thought there.

And can you talk about what the pipeline looks like for a potential target.

Yes, I mean, we don't operate with any particular cadence as you know, we don't want a price stuff into the market that isn't there and people are like Oh, well you promise so I guess.

But.

And I will say that further as a little bit different in the sense that it has also a technology element and a strong strong channel element that kind of.

Make it a larger transaction along with the product and of course, the ability to really scale out our enhanced rates product.

And so so that problem, but I think if I look at like the fifth third type transactions.

We'd love to be doing those kinds of things at that size or below all day, and what I expect that youll see from us over the course of the next couple of quarters or in.

In particular, I think what youre going to see is we're going to try and.

<unk>.

I think we're going to try and do everything we can to position the company to be able to do those I mean, one of the things Thats.

I think remarkable and.

We will.

I comment that Ted elaborated on a little bit in the call.

In the prepared remarks, I should say.

Yes.

<unk>.

I'm going to focus on fifth third for a second fifth third will be closed pretty shortly here and.

Close means that the migration happen in that transaction. So oh, yes, we're still doing wage works and we're working to gear up further and those are real transactions involving people and processes and so forth, but oh by the way, there's a well oiled machine there that is serving new customers working with a new partner to make their customers happy.

Making them happy bringing them on board doing it in a compliant way.

And Thats I think.

In terms of our opportunities to outperform the market.

If we can outperform organically and then oh by the way have a steady stream of these over the long term that really bodes well in terms of our ability to generate.

Ultimately to generate cash flow that reflects in the value of the shares so.

I guess without committing to a cadence my answer is that we are certainly going to try and set the company up to continue to do these things.

As they materialize in your premise that is.

In a low for long environment, there should be more of them is right and our ability both through cross sell and through a broader product set and through enhanced rates so forth to really capitalize on these transactions.

For long environment is I think better than anyone else in the market.

That's very helpful color.

One more follow up from me.

On your connecting health and wealth strategy given that one of your competitors just expanded into the retiree retiree reimbursement arrangements market can you provide some color on if your current product suite includes that offering or if there's an area you want to expand again.

It does.

I was I have to do that I'm not sure what the point of the press release was but.

We read the same press release.

I mean, I don't know if its.

Probably a good argument for doing fewer rather than more press releases, which we have tried to embrace.

But but but.

The answer is yes.

And.

There are these are typically HRA accounts.

There are some other flavors, obviously, the VEBA business that will be picking up with further is sort of a form of those accounts as well.

And.

And those are out there I don't know that there a particular.

No.

Magic area of market wide growth, what I do know is that.

What we want to be there to do is to provide total solutions to our clients and to our partners. So that our partners aren't running around looking for one firm here and one from there and whatnot and and and having those capabilities really helps do that.

That makes a lot of sense. Thank you very much.

Yes ma'am.

Your next question comes from the line I know Mark.

I note the non denial on the idea that Stephanie is in the hands and so forth.

Take that for what it Mark.

[laughter].

Hey.

You had a great quarter in terms of HSA ads.

Wondering if you can talk a little bit about what youre seeing in terms of the competitive environment.

On the whole.

There is obviously, one large competitor out there that.

Some people focus on but on the flip side. There is it's a fragmented market and theres a lot of players that probably arent being super aggressive. So when you when you think about the entire competitive environment how would you.

It out in terms of.

For this coming selling season and going into.

Next year.

And I have a follow up.

Yeah, I think it's I think I would go and I'm going to ask Ted if he would like to elaborate where Steve for that matter.

Since since both of them spend plenty of time out there.

Kind of in hand to hand combat.

Okay, I think the big picture is around scale.

Scale and scope.

Hum.

What I think of as our most significant competitors.

Obviously fidelity we've talked about.

And then UNH in terms of.

Upsized, they're great competitors, but you know what the.

The implication of that is that there are great companies that also want to partner with us so.

They're good companies, but no vanguard is a great company and <unk> is a great company and.

And <unk> is a great company and those are all companies that are partnered with us and we don't it doesn't just have to be so we don't have to carry all the freight and that's always been a bit of our secret sauce, and that's the secret sauce and.

When you look at what we're doing from a technology perspective, and even from a people perspective, if you look at that.

The move to bring Steve Steve Lindsey and the sales leadership I mean, that's our strategy.

It is a strategic calculation on our part about the value of having both the ability to go out and meet our clients wherever they are whether that's directly with their broker with.

Sure.

With a health plan partner with retirement partner, where the Ben admin partner.

Roll partner, I guess and so.

So I just think it's a winning formula to have somebody in the industry that does that and where that somebody.

Ted.

Anything else you'd add to that.

No you said you made the point John about.

Distributing through channels that I was going to but I think Steve Neeleman you lead the league.

And the executives at finalist meetings would you could you care to offer any commentary on what youre seeing out there.

Sure.

Yeah.

I wish we could be in person I will tell you that that.

Final space remotely.

The best situation, but I think we're working through it but I think the short of it is the more things change more they stay the same I mean, we know about UNH selling within their footprint, we know about fidelity kind of trying to connect the 400 case, we've heard that for a long time, but I think with the announcement that we made today about ICSC.

I mean, we really do have the broadest.

Kind of channel partnerships in the country and I think that for companies that don't have their own solution, which most large health plans don't I mean, the biggest do but the most large ones and small ones midsized ones that everyone's Don.

They can be help equity because they know that we're gonna help them compete and the reason why they choose us as it will tell you. This is they think that aligned with health equity they have a better chance to win and retain business and so we're just double down on that strategy. We do some direct sales, but we do a lot of channel sells and so I don't think it's changed that much honestly in the last four to five years.

That's great and then you've.

<unk> had a lot of time to think about further and I'm wondering if you could.

Add some additional comments with regards to just the technology and the <unk>.

Channel partnership that Youre going to gain with further.

As you looked at it even more.

Getting to further appreciation of what it brings to the table.

Ted once you start this one.

Sure first of all I will point out that whenever you are talking about further you inadvertently use the word further you just did it and I do at 17 times, a day definitely happens, but I think that the punch line is we're incredibly excited about the distribution relationships that they have.

And these are some of the nation's vast and most effective most forward thinking health plans and we look forward to continuing to grow and develop partnerships with them starting on we're doing as much planning as we can while bound obviously by the data sharing rules that are in place to ensure that we remain competitors until we close.

We're really excited.

Excited about that I think from a technology perspective.

For me, it's a little bit less about technology, and a little bit about meeting the health plan partners, where they are.

John used the terms I hadn't heard of us before.

Which is great labeling right wishes, which I'm interpreting him Jimmy it's not quite white labeling it's lots of different choices about how health plans want to go to market with HSA and I think not only this further have technology that we'll be able to avail ourselves of relatively quickly, but they also have expertise in doing which we're really excited about.

And we think we have a lot to learn from them in terms of how.

Which of those buttons with pressing which those buttons matters.

Sometimes it can be a co brand sometimes it can be getting all the way into the entire communication stream that the health plan deploys.

And it's really trying to meet those health plan partners, where they are to.

To make there.

To help them take HSA is another consumer directed benefits market as effectively as possible I think that's what we're most excited about and then the last point I would make before I turn it over to Jonathan.

That is.

One of the things that constraints to growth.

Fast growing companies is talent.

And so you want to find.

Tumor directed benefit experienced talented capable people wherever you can and that's one of the things. We're really excited about with respect to the further acquisition because we think that it.

Yearly.

400 people, who can who can help contribute.

Right away and and and understand the industry and have been successful in the industry and I think that's another.

Huge opportunity for us.

From a.

From a closing further perspective, and if you can.

Candidly I just.

To close it and get on with it.

John anything you'd add.

No that was awesome. Thank you.

Thanks for taking the question.

Yes, Sir.

There are no further question at this time I will now turn the call over to Jon Kessler for closing remarks.

Hi, everyone. Thank you stay safe stay sane.

It's going to get better.

We're all getting through this our team is doing a good job of getting through it.

Youre pleased with today's results and we're hoping to deliver more of them to you over the next quarter. Thank.

Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.