Q3 2022 Healthequity Inc Earnings Call

Yeah.

Okay.

Okay.

Please go ahead Mr Putnam.

Thank you Jasmine and good afternoon, welcome to health equity third quarter fiscal year 2022 earnings call. My name is Richard Putnam Baidu Investor Relations here for health equity.

Joining me today is John Kessler, President and CEO, Dr. Steve Neeleman, our vice chairman and founder of the company.

Murdoch, the company's executive Vice President and CFO, and Ted Bloomberg, Our executive Vice President and Chief operating Officer.

Before I turn the call over to John I have two important reminders first a press release announcing our financial results for the third quarter of fiscal year 2022 was issued right. After the market close this afternoon.

The metrics reported in the press release include the contributions from our wholly owned subsidiary wage works.

And the accounts and accounts that administers the press release also includes definitions of certain non-GAAP financial measures that we will reference here today.

A copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures and a recording of this webcast can be found on our Investor Relations website, which is IR dot health equity Dot com.

Second our comments and responses to your questions today reflect management's view as of today December six 2021.

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

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

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

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 that are detailed in our latest annual report on Form 10-K, and subsequent periodic reports filed with the SEC.

We assume no obligation to revise or update these forward looking statements in light of new information or future events and Thats. The conclusion of our prepared remarks, we will turn the call over to the operator to provide instructions and to host our Q&A now.

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

Thank you Richard and Hello, everyone and thank you for joining US today, we are reporting results for health equity fiscal third quarter, which ended on October 31.

Core HSA sales account asset.

Counts and assets continued the strong growth pattern that we've seen throughout fiscal 'twenty, two while ancillary consumer directed benefits or CDB administration slowed and weighed on operating performance I will dive into both aspect or aspects of Q3 results and Tyson will review the financial detail.

As of the quarter and provide updated guidance for the full fiscal year 2022, Steve and Ted will join US as we take time for your questions.

Let's start with the five key metrics that drive health equities business Q3 revenue of 180, <unk> zero million was up slightly from $179 4 million in the third quarter of last year.

Adjusted EBITDA of $61 1 million was flat year over year $13 3 million total accounts at quarter's end with plus 6% versus a year ago and as in recent periods total accounts exclude commuter accounts in suspense.

HSA members at quarter's end reached $6 2 million up 14% from a year ago, including 11% organic growth plus new HSA members from the transition of fifth Third's portfolio, just before the end of the quarter and HSA assets at quarter's end reached $16 4 billion.

32% from a year ago, including 28% organic growth and approximately $490 million in fifth third assets transition.

Spurred by total solution Cross sales HSA captured has captured a greater share of HSA growth during both during the pandemic impacted fiscal 'twenty one than ever before and has now delivered record organic HSA openings and asset growth during the first three quarters of fiscal 'twenty two team purple.

The Liberty of fiscal third quarter record of 151000, New HSA is up 45% from 104000, New HSA is opened in Q3 of last year.

Three quarters of fiscal 'twenty two the team has welcomed 446000, new HSA members across its diverse sales channels at 41% more than in the same period in fiscal 'twenty, one and 29% more than during the same period in the pre pandemic fiscal 'twenty.

The migration of fifth third banks HSA is added another 160000 HSA is on top of the strong sales results and Asa HSA assets grew a total of nearly $1 billion.

During the quarter and that includes assets of course transferred from Pittsburgh.

Investing HSA members at quarter's end were up a remarkable 43% with 74% growth in investments invested assets from a year ago health equity members average HSA account balance grew a robust.

Robust, 16% evidence that members continue to catch the vision of long term health savings and to connect health and wealth.

Health equities organic and total year over year, HSA and HSA asset growth in Q3 compare very favorably to the most recent industry data Devon year estimate, 6% account and 26% asset growth market wide for the year ended June 30th Health equity delivered 14% account and 32%.

Asset growth year over year in Q3 comparison with Q3 reports from publicly traded HSA peers tell the same story, saying that the team continues to make market share to take market share as we have done every year for more than a decade now.

Our formula for doing this as you know is simple it's a total HSA solution at scale bundling the services that our clients want proprietary technology, delivering the ecosystem connectivity that our partners demand and purple service and education that our members dessert.

As you know health equity acquired wage works market, leading CDB capabilities and client footprint two years ago to drive core HSA growth and that is precisely what's happened. However, Cds have proven more sensitive to near term external factors than we expected. We believe that most of these factors will recede as the pandemic.

This effect on the economy continues to wane.

But Q3 results from administration of FSA, and Cobra and commuter accounts were particularly impacted and resulted in lower than expected interchange and service revenue, leading overall revenue down $5 million to $10 million versus our expectations as implied in prior guidance, let me speak about each of these.

Interchange was the biggest surprise year over year interchange revenue grew just 8% in Q3 down from 23% growth in Q2.

FSA spend on our debit cards and platform in Q3 slowed more than what we anticipated from seasonal factors and the final user lose deadline for calendar 2020, and 2019 FSA.

Movement from here, it's going to depend on the choices of members during open enrollment and on enrollments from new sales that we've made this year, we anticipate that members who did not add to their balances for calendar 'twenty. One we'll do so for calendar 'twenty, two which leaves us cautiously optimistic as we head into the new fiscal year.

Service fees from Cobra administration experienced a similar reversal after Q2 games.

In addition to the end of onetime revenue from administration of the federal Cobra subsidy, which we did expect and didn't discussed with you last quarter Cobra uptake itself fell off more than we expected when the subsidy and tight.

Tight labor markets and high current conditions led to more Cobra eligibility and that's accounts, but not necessarily additional feet.

Commuter accounts and fees had a small uptick sequentially for the first time since the start of the pandemic and that is good and welcome but with employers taking only very candidate steps towards returning to office Q3 commuter fees were still lower even than in the year ago period.

And finally, we.

Our decision to walk away from certain legacy CDB administrative engagements for one off services that our go forward platform will not support will ultimately help streamline and simplify the business, but hurt short term service revenue Nonetheless.

So.

Scale CDB capabilities, our spring core HSA growth, which is strong in its own right.

And the team looks forward to turning the page on CDB integration and the pandemic various impacts on revenue.

We're going to do that first and foremost by focusing even more on the expanding revenue generation capabilities around our fast growing high margin hsa's with sales execution through portfolio M&A and some product innovation I already mentioned the record sales results in the transition of fifth Third's HSA portfolio completed in Q3.

After the quarter ended we announced the closing of our acquisition of the HSA business further which brings visit approximately 580000, HSA and $1 9 billion in HSA assets. Further as you know expands our HSA partnership footprint and commitment to with and commitment to the Bluecross Blueshield Association and its health plans.

And as technology to help partners embed health equity more deeply into their product in fact, youre going to see you should expect to see real examples of deeper integration with health equity HSH with partners in the coming quarters. This morning, we announced an agreement to acquire a portfolio of $1 3 billion in HSA assets from health.

Savings administrators, a leader in marketing HSA to individual investors and to small employers.

I'm pleased to report that initial number uptake of our innovative enhanced rates offering is beating our expectations, which will support custodial yields going forward and the inherent profitability of HSH.

FY 'twenty three will be the third year of the downward custodial yield cycle that began around the onset of the pandemic and of which we're all familiar but we're cautiously optimistic that it will be the last.

While tightly focusing on the HSA core we are streamlining elsewhere migration of business from duplicative legacy CDB platforms acquired with wage works will be completed substantially in sport and entirely in the new year I mentioned earlier the decision to discontinue one off services that won't help us growth and we've also agreed with.

Further sellers to terminate our agreement to buy the VEBA accounts, which was an ancillary and several component of the overall further acquisition and that frees up $45 million of corporate cash our core growth opportunities.

I'll now turn the call over to Tyson for additional detail on Q3 and year to date operating performance and updated guidance for the current fiscal year Mr. Murdoch.

Thank you John I will review, our third quarter, GAAP and non-GAAP financial results. A reconciliation of GAAP measures to non-GAAP measures is found in today's press release third quarter revenue as John indicated was up less than 1% year over year with service revenue declines, partially offsetting growth in custodial and interchange revenue.

Service revenue declined 2% to $102 8 million, representing 57% of the total revenue in the quarter.

Service revenue in the third quarter was aided by 10% growth in average HSA accounts offset by CDP service revenue declines in FSA commuter and Cobra services.

Lower CDP revenue.

And continued success in our bundling and cross selling efforts led to lower service revenue per account.

Custodial revenues grew 1% to $49 million in the third quarter compared to $48 5 million in the prior year second quarter.

16% growth in average HSA cash with yield more than offset a 36 basis point decline in the yield on HSA cash from the comparable quarter of last year.

The annualized interest rate yield was 172 basis points on HSA cash with yield during the third quarter of this year the shield because the blended rate for all interested cast with deal during the quarter.

As John mentioned, our HSA members continue to invest their balances, which resulted in an 81% growth in average HSA investments with yield the HSA asset table of today's press release provides additional details.

Interchange revenue grew 8% to $28 2 million, representing 16% of total revenue in the quarter as John indicated earlier FSA spend decreased as 2019, and 2020 rollover FSA accounts were depleted and close faster than we expected.

Gross profit was $103 3 million compared to $104 6 million in the third quarter of last year gross margin was 57% in the quarter operating expenses were $103 7 million or 58% of revenue amortization of inquired intangible assets of merger integration expenses together represented 18% of revenue.

Net loss for the third quarter was $5 million or a loss of <unk> <unk> per share on a GAAP EPS basis. Our non-GAAP net income was $29 million for the third quarter of this year compared to $32 2 million a year ago.

Non-GAAP net income per share was <unk> 35 per share compared to <unk> 41 per share last year adjusted EBITDA for the quarter was $61 1 million and adjusted EBITDA margin was 34% compared to $61 1 million and 34% margin in the same quarter last year. The consistency of those numbers is an indication of the health equities team.

<unk> focus on improving the efficiency of our operations and carefully managing costs towards the ongoing profitability of the business.

For the first nine months of fiscal 'twenty, two revenue was $553 $3 million up 1% compared to the first nine months of last year GAAP net loss was $11 5 million or 14.

<unk> <unk> loss per diluted share non-GAAP net income was $93 2 million or $1 12 per diluted share and adjusted EBITDA was $185 6 million up 1% from the prior year, resulting in 34% adjusted EBITDA margin for the first three quarters of this fiscal year turning.

Turning to the balance sheet as of October 31, 2021, we had $649 million of cash and cash equivalents were $930 million of debt outstanding net of issuance costs with no outstanding amounts drawn on our line of credit.

Cash balance of course still includes $455 million of cash that was used to close but further acquisition on November one.

As a result of the sale of unsecured debt and a reduction in rollover rollover of secured debt during fiscal 'twenty two the tenor of our outstanding debt has been dramatically extended reducing risk and giving us the flexibility to invest in growth opportunities. The new debt will obviously increase interest expense interest expense by about $4 million a quarter.

Based on where we ended the third quarter and our current view of the economic environment. We are revising our guidance for fiscal 'twenty. Two to include revenue for fiscal 'twenty two to range between $750 $755 million non-GAAP net income to be between $108 million to $112 million, resulting in non-GAAP diluted net income.

Between $1 30, and $1 35 per share based upon an estimated 83 million shares outstanding for the year.

And adjusted EBITDA to be between 230 and $235 million.

Today's guidance includes our most recent estimate of service custodial and interchange revenue based on results to date. Our guidance includes a more conservative outlook for service and interchange revenue to reflect fewer commuter and FSA accounts and lower balances through calendar 2022 and to reflect continued conservative spend patterns that we saw in Q3.

For the remainder of this year.

Guidance also includes the addition of further which closed at the beginning of Q4 and also reflects a ramp up and service costs associated with Onboarding, new clients and members portable further and health equity as a whole our guidance assumes a rate interest of cash with yields of approximately 175 basis points for the full fiscal year 2002.

Two year and include the migration of further assets to health equity depository and insurance partners at prevailing rates.

Guidance also includes the benefit of $75 million of run rate synergies achieved from wage works to date.

As we finalize the placement of HSA cash assets into depository contracts, we will be able to provide initial interest rate guidance for fiscal year 2023.

This outlook also includes certain costs that we expect to incur as a result of president <unk> executive order on ensuring adequate COVID-19 safety protocols for federal contractors referred to as a federal contractor mandate as you may know the federal contractor mandate theres more stringent than the wider osha mandated by federal contractor mandate brings what.

The significant cost of compliance assurance and for recruitment and training our team members to replace those who can either provide proof of vaccination nor eligibility for exemption under the President's order.

The outlook for fiscal 'twenty, two assumes a projected statutory income tax rate of approximately 25% and a diluted share count of $83 million as we have had fewer equity Award awards exercised this year than expected as we've 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.

The definition of all such items is included at the end of the earnings release. In addition, while the amortization of acquired intangible assets is being excluded from non-GAAP net income the revenue generated from those acquired intangible assets theres not excluded with that I will turn the call back over to John for some closing remarks.

Thank you.

We've always tried to humanize these calls with plain talk and today's results are mixed.

What and I mean that it's.

It's not quite literally like a blender.

Sure.

Our core HSA outcomes were very strong and the various written in capital letters, So thats why im saying it like that.

But also because it's true.

Our ancillary CDB services performance was not quite sure where.

We're taking action on both results to deliver long term growth profitability and visibility that we know you'd likely expect.

Truly welcome your tough questions.

On our results and on our plant, let's get to it operator.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Please standby, we compile the Q&A roster.

And our first question comes from Anne Samuel.

J P. Morgan your line is now open.

I think I am happy holidays happy holidays, and thanks, so much for taking the question.

You guys went a little faster and there was a ton of detail. So I was hoping maybe you could just circle back and provide a little bit more color on what happened with the interchange.

And then you said you expect the dynamic to shift in your cautiously optimistic for next year. So what are the dynamics that are happening there. Thanks.

Basically you want us to get started on this one.

Yeah, Yeah. Thanks for the question Yeah the <unk>.

There are change.

Revenue in the interchange spend was the leading laggard again on the HSA side, we have a lot more accounts I feel really good about what we've done there and especially with even interchange there but on the FSA side, we've seen a decline in those 2019 and 2020 accounts more quickly than we had thought and so not only does that affect <unk>.

This fee, but it also affects the interchange because theres less of a balanced program to spend and we saw the spend in the <unk>.

Revenue related to interchange increasing pretty dramatically in Q2, Q1 timeframe and so the thought was that that would persist more so than it did and so as we saw that come down in the months during Q3 that really had us.

That put us in a place where we needed to shift Q4 as well because Q4. Obviously is there is a higher spend quarter. When you think about December user of January when the accounts are our replenished and so that's really one of the biggest challenges there on the interchange side.

John any more thoughts to add on that.

No I think I think you hit it.

Great that's really helpful. Thank you.

Thank you. Thank you actually I will I will add one thing which is to say if the cautiously optimistic part as it was.

What you're really way to summarize what we what we just said is that.

We had very strong impact, particularly in Q2 that were in part. The fact that you had this sort of unique situation, where you were running off two years of balances and.

And.

So the third quarter is kind of what remains and then into December is what remains and of course January and part of the year, but as we look into the new fiscal year that will be impacted by People's decisions that are being made now with regard to elections and well while we're looking at early returns on that and we'll have more to say when we provide.

Our fiscal 'twenty three outlook later.

We're optimistic that we're optimistic that we're going to see some snapback there relative to the elections that people were making were not making back at the kind of.

During some of the darker days of the pandemic.

Ago, and so forth. So so that's why we that's the cautiously optimistic point.

That's great. Thanks, guys.

Thank you.

Next question comes from Greg Peters from Raymond James Your line is now open.

Good afternoon meters.

Yes, some title town.

Yeah.

Well Unfortunately, the stocks getting beat up in the aftermarket and I know you just covered some of the reasons.

For.

The mixed results.

Maybe you could spend a minute and just.

Talk to us about custodial revenue in the outlook for.

That line item the three year Jumbo CD rate just hasnt budged at all.

And it doesn't seem like there's a lot of new loan demand and so I'm just.

Just begs the question and your comment you said you think this might finally trough out next year, but I have to wonder about that.

Second part of the question and this will be the only thing is just you spent a lot of money on further.

<unk>.

Where I guess.

Trying to see where the positive impact of that is.

And the results going forward. So that's my question Sir.

Okay, that's great.

Why don't how about I'll hit the first one on rates and Tyson why don't you.

And Ted if you'd like to add into the second one on further.

So with regard to rates.

Both patient and I commented a little bit on our thinking forward if you recall Gregg.

When this cycle began we pointed out that we have three years worth of.

<unk>.

Sort of ladder and the benefit of having that ladder is made it gave us time and so we have notwithstanding the fact that.

This quarter sort of an example of that notwithstanding the fact that that were 35 basis points down in terms of.

<unk>.

Yields are custodial revenues of course were actually higher and.

Our overall EBITDA was flat year over year.

Yes.

And so fiscal 'twenty three will be the third year of that cycle. We've commented previously that.

Our historical lows in terms of the rates we received.

Are the lowest that we've ever gotten to 150 basis points out of 152. After the 2008 crisis after kind of our our ladder had unwound there.

<unk>.

And.

We're kind of heading into that same territory and we've commented elsewhere that.

That's likely where we would be.

But I think what we're adding that commentary today is that we feel much more comfortable than for example, we did three months ago that that's the bottom and again, we don't we're not perfect predictors any better than anyone else, but I want to tell you why because first of all he's not because.

We have some magic ball or we're baking into our thinking.

Four.

Right.

Overnight rate hikes, so what happened as you know, we do not bake those things into our thinking.

It's really because of.

Exactly what we've said over the last couple of quarters, which is that.

The introduction of our enhanced <unk> product has done.

Doing two things for us.

The first is itself generate higher yields and higher spreads and second of all it just creates more competition for money and effectively reduces our need to place.

Two the marginal bank if that makes any sense.

And it's.

It's for those reasons that we think we're in a better position from a sort of what the terms of our placements are going to be going into.

Yes.

Both going into fiscal 'twenty, three and then at the end of fiscal 'twenty three 'twenty four.

That we're feeling quite a bit more.

Sure footed.

And optimistic that we can meet the promises that we have more or less making you over the course of time with regard to the likely shape of these yields.

That's kind of that's the basis for our thinking we're not looking at I want to be clear, we're not looking out there and saying well.

Economists that says that theyre going to be for rate increases next year or whatever they say and so that's going to make it all better that that that would be nice from the perspective of our business, but what we're really looking at is we're looking at the offers that we're getting from our banks as we go into play as we are into placement season.

Obviously, we have some wood to chop there and we're but we're also looking at the fact that competing against those offers in fact is the uptake from our members of our enhanced Revpar and.

And that's again, both has has Canadian life enhanced rates.

And also again just reduces our need to to hit the marginal bid and then that helps us out quite a bit. So hopefully that was helpful and the second question was.

Further and Tyson once you start there.

Yeah, I was going to make one other comment on the rates thing as well Greg I think this is important to know.

When you think about contracts and placements were making earlier in the year versus now those rates are higher whether youre talking about FDIC or even an enhanced rates program. They are higher now than they were then so there is that turned out.

Working against that average in the hydro placements from two or three years ago of course by for FDIC, but but those those are different now they are higher so I want you to know that and then on the further on the further business. This is this is again, an HSA centric business right. The blues plans are going to be very important to how our ability.

You'd be able to penetrate those plans like we've done with other health plans is really one of the ideas that I think will work very well for us over time.

The thing with further is it really gave us the jump on enhanced rates because a big part of the assets that we place got us to scale there and scale is what matters. When you think about how to put together a program like that is hard to do without scale and so Davis to scale. There. So there is obviously not just the <unk>.

Yield associated with those particular assets, but the impact that it has on the inherent profitability of the overall health equity business in the long run and I think that's a very important part of that further deal.

When I think about its impact.

On the immediate quarter and right now it doesn't have as much impact because it's going through its Q4 enrollment busy season. So of course margins are at a low point for that business. So I can't put a bunch of margin in there for Q4 off the revenue.

But we talked about earlier in the year of 60.

$60 million revenue run rate.

For that business on a 20% EBITDA margin.

Business, and then $15 million in synergies I think we talked about over the long term and so from a starting point of the Q4 seasonal starting point, that's not great. When you do the math on the numbers you can see that specialty basis remain in guidance.

But over time I think there's a lot of opportunity for us to create a lot of efficiencies for that businesses business, whether it's in the technology side.

It's Ron it's carved out of a much larger organization I think we have a lot of a lot.

A lot of ways to think about how to run an HSA type business relative to how thats been run and so there is that opportunity for us I don't know if Ted do you want to comment.

Any more comments on that.

No I think you have it the only thing I would add relative to the numbers and the tightening just alluded to is we did announce today that we're not completing the.

The VEBA.

Portion of the transaction, which is.

Easiest way to think about it rough numbers is 10% of the transaction.

That should kind of help you get a sense of what we're aiming for for next year, but again early days haven't even completed our monthly close on further yet.

But sure patients long term optimism that similar to what we did with mortgage we're going to be able to take this business.

Integrated grow it realized from synergies from it and expand margin over time.

Ted can I just ask a clarification on what you just said is it.

The cancellation is 10%. So if you use $60 million and $20 million of EBITDA I should take 10% off both of those numbers as we think about further going forward for the cancellation is that right.

Yes, I think the VEBA.

<unk> business was about 10% of the business Greg.

We're paying about 10% less than we were and we had publicly announced you are paying and that's what we said today in any case I think that's a that's a.

<unk>.

With the asterisk that Q4 is always a relatively low margin quarter for both our business further.

Got it thank you for the answers.

Okay.

And thank you.

Our next question comes from Sean Dodge from RBC capital markets. Your line is now open.

Yeah.

Well, thank you Sean.

Hello.

So Jon I guess going back to your comments around enhanced rates product can you give us a sense of that the yield differential you can earn on that versus the more traditional FDIC ensured placements and then just maybe a quick kind of education and mechanically how that rollout looks is that something that you've got to get the employers too.

Sign off on and then the employees to opt into and so I guess, maybe some idea of what the.

Yes.

Timeline or the ramp look like.

Hands right.

Yeah.

The spread there.

It does depend a little bit, but let's just say.

Comment that elsewhere.

The benefit of enhanced rates adoption.

In current terms is kind of in the.

50 to 75 basis point neighborhood.

In terms of the adoption approach and I'd say, a little bit of that gets eaten up by.

By the fact that you're also paying enhanced rates to members.

But.

Yes.

In terms of the adoption process.

The answer depends a little bit and this will be a multi year process we're still.

Very much at the beginning of it but but very encouraged by what we're seeing.

Tyson mentioned with regard to the further business.

Further came over with a material amount of this already baked in and so that.

That just came over and that did help us in terms of.

If you think back.

One were to think back to the earliest days of our business and.

Negotiating with one bank with very little assets in all of it kind of on the come.

Didn't have to do that here, because we had money to start with.

But it is a.

Process Thats going to take time and ultimately.

It's the remember that.

Elect into the enhanced rates product.

But there are a couple of ways that can happen one is.

That that is their initial election sort of for lack of a better term unless they take a different action if it's the default.

If they're new.

Or it can happen when they come onto our site or what have you there they can be presented with that option and elect to it.

But of course, we.

So.

Are we this is something where our employers have some flexibility as well so.

But I think what youre going to see over the course of the next few years is that a larger and larger percentage of our for lack of a better term new cash needs are getting soaked up by the.

The election of both new money and existing money into enhanced rates, it's a good crop.

And.

It's it's.

It had some tradeoffs, but it's but it's a very good product for our members in a very good product for us and allows us to keep other costs low and.

And deliver outstanding service so I.

I hope that that's kind of helpful.

It's like a way to think about it is that it.

The pace of adoption is going to reflect sort of a soaking up of our new cash needs over the course of time.

Okay.

That's very helpful. Thank you.

Yes.

And thank you and our next question comes from George Hill from Deutsche Bank. Your line is now open.

Yeah. Good evening, guys John Tyson, Thanks for taking the question.

I have a couple I'll try to keep them real quick.

Tyson I guess the first one was could you detail how much CDB revenue that you guys walked away from both in the quarter.

And then on an annualized basis, and then I guess my two quick follow ups, which would be for both John enticing would be.

John do you have any feedback yet on what the adoption of HD Hp's looked like at the end of this open enrollment season going into the next calendar year, and then tightened to the degree to which you are willing to talk about it.

Were you able to frame, how we should think about the big headwinds in tailwind for fiscal 'twenty three as you see them right now I'm not going to ask you for guidance, but if you could just kind of flesh out how you see the big moving pieces I think that'd be super helpful.

Why don't we start with your last question and we'll work our way backwards Tyson.

Yes.

That's a good question to some pulling some up here I think when you think about what headwinds really do become tailwind or vice versa. I mean, we've been talking about I won't I won't regurgitate everything you just said about enhanced rate, but really.

Really that shift that mix shift is the biggest tailwind that we see.

When you think about balances continued to grow if you look at the outsized balance growth that we had relevant relative to market and just the acquired assets that we get as well. So we're really positioning ourselves to have a lot more assets in a better way to place them and that is really going to be the long term and that like I said before I mean, the profitability of the business in <unk>.

The mine has changed inherently we're positioning ourselves to take advantage of what I see.

And the news. This morning, if the rates are going to shift up and they will eventually and we've already sort of seen that as we've competed those rates against the various.

Partners that we work with and so we're expecting those those rates to eventually rise and it sounds like they may be slowing a bit sooner.

When I think about that.

Real headwinds for the business.

I think that employment can cut both ways. When you think about how you think about how Cobra is utilized versus how you think about that.

Mr. FSA isn't utilized and so you get the kind of swirled waters of the Cds, which.

Not necessarily the growth area of the business, but what it does do is it really helps us to cross sell and so the deals that I sign now are always.

For the most part multiple deals with multiple types of accounts supporting HSA growth where we.

We're able to provide something to HR benefit offices to where they are not managing multiple vendors and that's really powerful for Ted Cynthia on the sales team.

And then.

Other kind of headwinds that we have.

Just trying to manage through how we think about.

What the report the pandemic does to spend and how people spend in and really kind of even if it goes back to the first question how are we sort of.

But there are some places where we maybe don't want a particular <unk>.

Clients, where it's not profitable and where it doesn't necessarily work for the platforms that we're going to go forward on and those are very very small relative to our overall base of revenue, but those are decisions that now at the end of the long wage works at.

Integration now that we're making and we feel like we're making the business business healthier as a result of that.

You mentioned a couple of other ones you know obviously, you've got the child care accounts that are a headwind in those type of things but.

But those are some of the things that I think with think of kind of those two regarding the first and the last question.

I'll kind of hit them.

I'll hit that middle one in a way it builds on not very.

Very much so builds on Tysons, the first part of Tysons answer.

When I look at.

Our sales over the first three quarters and HSA openings over the first three quarters.

And look at the source of those.

What I see is a market that is.

Covering from a tough year last year.

You see more evidence of how tough last year was in the reports that have come out which are sort of backward looking from Kaiser and others.

But.

But what I am, particularly enthusiastic about in that regard is.

In a tough it turns out looking backwards in a tough year, we took more market share than anyone ever has before and we have or anyone has as far as I know before.

And now this year I mean, we'll see what the total market ends up looking like and what all the enrollment numbers that come in for the next couple of weeks here look like but.

But.

As I've always said the best indicator of my next quarter sales as my last quarter sits and.

My last quarter sales were really good.

So in terms of consumer enrollment as well as overall and so and so.

I guess my General view George is.

We try to manage as you know we try to manage the business towards the long term opportunity in the long term opportunity is the same one that you and I and Darcy and Steve talked about.

I think Tyson was just agreement around the back end.

But.

But but.

That we talked about many men heat what's now many years ago I mean, it's almost a decade ago, which is easy counts are going to steadily grow.

We're going to end up when we're done with about as many HSA says there are <unk> out there.

<unk> are going to start small, but over time, they're going to grow and you can see that happening.

And as a result of that.

You end up with a business that has sustainably high margins and has a good long runway to them and we are some steps that we take to make sure that we're in position to see that growth turned out to be tough. One. So obviously you saw that in this quarter with respect to.

With Tyson call it some of the CBD swirl.

But we're going to keep taking those steps and whether that.

Building enhanced rates or solidifying our footprint in the blue system with further whether it's what we've done today with the.

HSA administrators to kind of build on some of the momentum that our individual product is hot and smoke and very small group products.

For some of the kind of more investment oriented small groups of doctors.

Lawyers and the like.

Yes.

Hey, administrators as focused or or whatnot.

We're going to keep doing the things that position us to take market share in HSA, so that as that market expands.

Revenue terms in asset turns and count terms, we're going to look up and if we keep doing that year over year, we're going to be just fine and our shareholders. Our long term shareholders going to be just fine and norm and perhaps.

More importantly than all of whether we're fine and our shareholders are fine. We're gonna have done a lot of it but a lot of people in terms of connecting health and wealth.

That's kind of the way I look at it I know that sounds like a little bit of bladder, but it actually reflects my view of both next year and the year after that and the year after that.

Kevin I appreciate all the commentary thank you.

Thank you.

And thank you.

And our next question comes from Donald Hooker.

From Keybanc. Your line is now open.

Hey, good afternoon.

So I guess you guys are really seeing it.

Just amazing growth in the percentage of HSA assets invested and that's always been a.

Difficult to model and is there. Some reason is that it almost feels like that's accelerating a little bit and I was wondering can you can you talk a little bit about trends or are you doing anything different to drive.

Your HSA members to invest more into stocks and bonds or how should we think about that going forward.

We've worked on this for a long time in pet I think this is a great. One for you to hit in terms of what the.

Our product and education teams have done over the course of the last couple of years to really accelerate this trend and drive the industry and distraction.

Sure happy to jump in and I think it's this topic for sure but it's also <unk>.

All of the various ways that you can as a as an employee of one of our clients optimize your benefits and we're investing heavily in getting you to do that right educating U and multichannel ways, both with marketing in the actual product itself and then in member services.

When you call just kind of sharing with you what the next best thing for you to be doing whether it's your spend your FSA dollars genome. So you don't lose them or hey, we noticed you've built up a little.

<unk> cash in your in your HSA why don't you start thinking about investing or we noticed you are not contributing as much as it should be one should contribute more education has been a huge operational focus for us and I think one of the places that it has really shown up in that you just identified is in the percentage of members.

Vesting, we're seeing in other places too.

The number of members that are raising their contributions and the number of members that are spending through their FSA. So it's I think we're kind of in the middle innings here.

We've got a pretty strong program over the last couple of years, but there's still a lot more of that that we can do across the board, but notably in this industry.

So I guess my follow up and this is probably impossible to answer but I'll ask it anyhow.

See if there's is there a way to think about is there a sort of a natural threshold there.

I guess any kind of updates I know in the past we've talked about this but maybe any updated thoughts as theres. Some what is the typical.

Natural thresholds sort of cash in.

What's.

The typical my dog wants to chime in a little dog on this.

We've talked about this a little bit before it.

And I think you see the same concept also when you look at the most mature accounts.

Typically.

What youll see is people will buildup enough.

Cash.

Liquid liquid asset.

To be able to handle kind of their near term expenses and so it's important to note that even among our Max contributors like.

They are also spenders.

By the way one of the reason that you haven't seen really any drop off in HSA spend by interchange that is even as balances have grown commented on that a little bit of a script.

Uh huh.

So.

People tend to buildup.

Enough cash to let's say cover their annual deductible or some number maybe maybe for some folks at their annual out of pocket maximum. So if you look at our longer term accounts that.

<unk> done that what Youll see is that that cash balance kinda tops off somewhere between three and $5000 and okay.

And then they continue to grow the investing side and it's not like there's a switch flipped or whatever but.

That's kind of I think a way to think about the typical behavior of an investor.

Is that when you look at and you can see this even in the further.

Sorry, Bob.

HSA administrative business, that's been very focused on individual investors and the very small group of folks who were like totally onto this right where you see.

Average total balance of 15 to 20 Grand of which.

Give or take three quarters as is.

<unk> invested and one quarter is cash.

And so I think thats.

Kind of where you'd expect it to end up.

Okay. Thank.

Thank you.

Thank you.

And our next question comes from Scott <unk> from Stephens. Your line is now open.

Hey, John Hey, John Tyson and Richard Happy holidays.

So right.

Right.

I understand the moving parts around the more conservative guidance. So just wanted to continue this conversation on <unk>.

HSA, what's driving the organic growth rate there.

Where are you seeing that sales strength from.

You talk about where you are in terms of the cross selling opportunities on the wage legacy customers. I believe there was 70000 employer clients and roughly 20 million employees that they touch so.

I guess.

What's driving the <unk>.

The organic growth, where you're seeing the sales strength from and where do you stand on the wage legacy acquisition.

Great.

Steve why don't I ask you or Steve to start in terms of.

Kind of what you see out in the market Youre out there.

For those who don't know Steve Neeleman. He will go anywhere for a deal.

You call them up this afternoon, and you say I need you in Charleston, Tomorrow morning, you'll figure out way to get there.

So I'm going to start with Steve Neeleman, and then Ted maybe you can comment on that on the cross sell metrics.

Thanks, Sean and thanks Scott.

Right.

Obviously last year was a tough year, just with Covid and everyone kind of hitting the pause button. We've been really encouraged I think it's been you've seen it in the numbers I mean.

I mean, it's amazing when I look at these numbers, we just reported.

There were some acquisitions in there, but still see $960 million during the quarter of <unk>.

Growth.

A 14% account growth and so we think these are great leading indicators.

And I can tell you in the RFP.

<unk>.

We felt really good about.

The season started shaping up towards the end.

Some of the larger employers who are still in pause mode a little bit.

Beginning of the year when Covid was still really raging and if you think about the sales cycle for the real big ones.

This was kind of priority, everyone getting vaccinated things like that and yet the small groups. We're still closing a lot of deals right now and then if you were to.

We're not gonna much overdue this by the way, but if you were to ever listened in on one of our self help you would you would get a lot of energy and theirs and people, saying that they really do feel like especially in the small and midsized businesses that are still I mean, one of the questions that was.

Asked earlier was how do we finish up our open enrollment season, we haven't yet I mean this is a very busy time.

For for groups that are still rolling people in and so a lot of energy I think it's been I think it's pretty well illustrated in our in our numbers, we reported that the HSA as you're growing and.

There are some mixed results on the Cds largely because some are rolling off but I can tell you every time.

We bring on an employer and they have a bundle of Cdb's, then and we start to do our education and really start to bring people over to the light of a retained value account that doesn't go away when they change your appointment they can take it to mean retirement all the great things about HSA.

We will see initially the CDB start to go down, but the HSA is really start going up and so I think thats one of the reasons why you're seeing some of the some.

Some of the.

Fsh and things like that coming down, but a lot of energy Scott I guess is the way I would classify that Ted how would you add to that since it's all kind of.

Part of your world as well.

Yeah, Thanks, Steve and thank you for putting your shoulder behind our sales efforts like you do.

And getting on more planes than most people.

I think the answer specifically the cross sell question here.

We're very pleased with our cross sell progress thus far and.

And we don't really break out the metrics, but I think a couple of things we've shared in the past and I would just reiterate our.

Number one our close rate and a cross sell opportunity versus de novo opportunities two to three axes, Hi, Bill.

Because the client knows us and they're accustomed to our service and that goes both directions, whether depending no matter, which legacy.

Client base.

Employer was a part of.

And then the second is last year the vast majority of our cross sell you can imagine why do you Rob banks, because thats, where the money is we focused all of our cross sell efforts on enterprise.

To get started and Thats, where we saw some early wins and what I've been most encouraged by this year is that we're starting to see that cross sell capability to send down.

Into employers into small to medium sized players and Steve alluded to a place where we had a lot of success. This year and it's hard to draw a straight line between cross sell and that success. There's lots of reasons for that successful cross sell is certainly one of them. So I think.

We're getting this was our second selling season being able to offer.

Kind of a credible bundle and we're getting better at being able to do it and we look forward to more progress and I think the last point I would make is that there is still a ton of white space for us we have.

Hundreds of our top 500 enterprise clients only have one product with us right and thousands of our.

Our small to medium size clients only have one product so the opportunity should should nourish us for a long time.

We just have to continue to mature market and thus far we're experiencing a trajectory that I think makes sense.

Politically piling on I think make one other point here, which is that Ted talked about cross sell white space I think again looking both now and long term.

I really could not have asked for realistically a better outcome in terms of how the competitive landscape is shaping up.

Our largest competitors are.

The largest health plan in the United States, which has its kind of walled garden and.

The largest investment retirement plan, managing United States, which has its wildcard.

And.

There are things that are good about walled garden, but the nice thing about us is if.

If you're an employer, we're going to work with you whomever we are not part of their lock in strategy, but even better.

If you are a partner of ours right.

You know that or Youre looking at both of those and Youre trying to compete and that means you want to work with the basket you can and NASA.

And.

I think not only is it the case that <unk>.

Competitively the market is shaping up for that lane to be our lane and to be a very largely.

But also from a technology perspective, and I alluded to this in the comments and you'll see a little more of this in the next few quarters.

But.

The technology is continuing to evolve in such a way and our platform is continuing to evolve in such a way that we can embed the HSA deeper and deeper and deeper into our partners' products.

And or in the language of API.

<unk> can be consumed in so many different ways and thats true in the individual market. It's true in small group. It's true in large group, it's truly in retirement, it's really help them. So.

It's too bad so.

And in other channels that we haven't even thought of yet as HSA has continued to mature and sort of penetrate touched so.

I think that's another thing that has begun to help us in this cycle, but that will be a big help her as we kind of continue to try and sustained market share growth year after year after year over the next number of years.

Thank you.

Yes.

And thank you.

And our next question comes from David Larsen from BT AIG.

Your line is now open to Washington.

Hi, congratulations on the growth in a number of HSA accounts.

Great.

A couple of quick ones. Most of my questions are already asked and answered with the interchange revenue.

What's the Delta variant one of the reasons why like utilization may have been a bit lower than expected.

And then do you have any thoughts on Ami crime is that can have an impact or not do you think just.

Any color there would be helpful.

Yeah, I'll take a shot at this one and Tyson if he'd like to add to it.

I think the main challenge that we had with Delta is it made it very difficult for us to interpret results that we were seeing.

So for.

For example, when we saw.

Very strong results.

In July which was the last month of the second quarter and for the most part after.

Yes.

Your account runoff that occurred.

And.

During while Delta was going.

And really our aging we felt very confident about where spend trends.

And.

It turned out that that was a bit of a false signal in the sense that that.

That wasn't followed up as this quarter began in Q <unk>.

So I think that that could not give you too complex or an answer.

It's just another factor that creates variability and difficulty in interpretation, particularly for CTV spend.

What I would note though.

Is <unk>.

HSA interchange during the quarter was rock solid and Thats one of the reasons why the interchange notwithstanding these challenges that we talked about was still up 8% year over year.

And so.

That isn't to say HSA interchange was up substantially more than that and so.

I think.

That's an interesting dynamic that we need to continue to look at and so but I will but it is fair to say that as we enter Q4.

Certainly, we don't know any better than anyone else what the effect of AUM across is going to be.

I'm not sure why they skipped new but they did.

And.

And.

And it may have some impact.

But I think fundamentally what we've tried to do is take what we have learned over the course of the pandemic and reflect that in a reasonable forecast for interchange for Q4, we will see what we get we'll learn and we'll refine.

But we're also taking the lessons that.

Our HSA spenders are clearly more resilient to changes in economic conditions as well as.

Less likely to be impacted by sort of in the weeds regulatory items, then our FSA vendors and.

Also that.

Ceb's vendors, but but also that.

Our HSA spenders can also.

Can top up their balances whenever they need to do that kind of thing, whereas our FSA spenders are effectively if they didn't pop up their balance last December and November during annual enrollment for most firms. They can't do it until now and it won't have a fact until January and so those are those are lessons that really reflect the point that.

That I made in the earlier in the initial commentary it is we're going to spend our money growing where we.

We know the growth is and where we know we can deliver profitability and visibility to you and we're going to deliver to our clients what they need in order to buy those HSA, but.

That's one way, we can reduce uncertainty by growing that core faster than standpoint.

Okay, great. Thanks very much.

Yes, Sir.

Thank you.

Our next question comes from Glenn Engel from Jefferies. Your line is now well come back.

Yes. Thanks.

Thanks for taking my questions, it's good to be back.

So I just wanted to follow up gentlemen on some comments that you made it kind of sounds like the effects of the pandemic or greater than maybe what you would've thought are lasting longer to use your words on the CDB business.

And I heard your comments on Cobra, maybe fell off more than expected in the FSA business.

Could you maybe put some numbers around the CDB shortfall, because if I hear you correctly. It sounds like your HSA business is trending ahead of schedule just listening to some of the comments to some of the previous questions and so maybe what I put it in context of the.

$75 million revenue shortfall or I think I calculated I don't know 11 $12 million $11 million shortfall in EBITDA relative to the guidance. It sounds like it's much bigger than that maybe being offset by some of the benefit in HSA.

Well I'll ask Tyson to add on but.

The key point to make here is essentially all of the delta between our current outlook now current outlook and our outlook at the end of Q2.

As a result of these.

These factors in CTV.

And.

Ah.

And the HSA business has performed as you say about either at or slightly ahead of where we would have expected it to me.

I think particularly as we go forward, we're feeling as I commented earlier.

Sure footed on the rate side of things.

<unk>.

But but.

But by and large.

I mean, I think the key point is that the.

The Delta that you just described really boils down to.

The various CDP factors Tyson.

Would you like to add to that.

Yes, I mean, you did some math there so I'll just I'll just go back to that.

I think that's.

Youre right. The CDB conversation that we've had and again the largest portion of that was really related to interchange softness that we saw and then a little bit on service fee from the fall off of those 2019 2020 FSA accounts.

Obviously commuter still coming down year over year, but sequentially up just slightly so you. So you have that in there and then and then the other big piece of that math there is bolting on that further business in Q4.

It really doesn't provide a lot of margin, but much more.

Provided the revenue, but not the margin, particularly in the seasonal Q4 enrollment period. So that's why you get the differential between between the two pieces of math that you've done there.

I apologize, maybe just one follow up and I'm, sorry, if I missed this but the consolidated custodial yield in the quarter did you give that.

So we have 172 and 175 guidance for the year right 172 versus 175. So if we look at three year CD rates sitting at about one and a half right and the benefits from your enhanced rates program.

Being 50 to 75 basis points, where you're kind of trying to flag that maybe as we exit fiscal 'twenty, two and head into 'twenty three that this this should be the bottom in terms of your.

Your lateral strategy.

But John let me comment go ahead.

I was just going to say as I commented before.

And I'll say it again I think it's really important is that when I think about where we replace replacing things.

A year ago versus now because we do have assets come forward in our quarter, all goes and places them. So we know the rates those rates are higher for FDIC and then.

We got a very good rate pullet placement, where we get our placement.

Remember first with the further assets and also sort of the real kickoff of our we'd already started doing enhanced rates, but the real kick off but it wasn't as busy as we merge those further assets in there and so those were higher rates than they were at the first part of the year. So that's part of that is good negotiation on the part of our Treasury team and Theyre doing that continuing those rates.

Against each other the other is that there starts to be a little bit of light at the end of the tunnel.

You see this morning talking about moving up the ratio that's pretty exciting I wish it was in December versus March.

What it is right it's still a long term view on those rates coming up on assets helps from not only next year being will be lower still because we placed at higher rates two or three years ago, but again youre starting to turn that corner and as John said too, we're not going to be below sort of those all time lows that we saw.

You know as part of the last recession, but it takes multiple years to kind of turn that around based on the way to be better helps going down it slip it's slow going up but it also increases again like I said the inherent profitability.

<unk> ability to have enhanced rates and how that works has been improved based on how we're doing that.

Okay. Thanks for taking the questions.

Yes, I mean, Glenn just one other thing on this tower, one and amtech and point of emphasis on this topic.

When we talk with investors as you do.

They would love it if we would give them a forward rate curve or the like.

And the reason, we don't do that as you well know.

Is it would be like asking another firm.

Could you please tell us what your price what price youre going to offer to customers this year and next year.

And we're not going to do that.

But.

<unk>.

That having been said.

We've heard a ton of speculation on this I sort of go back to Greg's initial question.

And over the course of the last year or two as you know.

<unk> markets have.

Kind of stuck where they are and so forth.

And.

Hi.

To my mind again, I think about I don't have to talk about Oh, it's going to get better later as Tyson said it is getting better now.

Right.

And it's getting better in part as a function of market conditions, improving and in part as a function of the team taking action in bringing innovation to this thing.

And.

That's what we do here and whether it's about rates or about HSA growth or about.

Cleaning up what to me is some variability that doesn't help us in cloud story.

That's what we'll keep them.

Okay. Thank you.

Yes, Sir.

Yeah.

And thank you.

I like how you say in the end of each one.

It's very.

Confidence building.

Okay, great great.

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

Thanks for taking the questions.

Going back to the interchange tightened I think you've talked about.

FSA wind down for 2019 and 2020 vintages.

Basically, causing a shortfall in interchange, but I guess if there.

Theres more accounts that are closing does that mean that the customers are spending more so interchange with theoretically be higher.

And then a question too.

I guess, if we're looking forward from this level here.

Across the commuter Cobra FSA, I mean, what would need to happen for things to deteriorate from this level here and I guess just expectations on what to think about.

It is embedded in <unk>. Thanks.

Yes, I think I think that's a good question because I think where we saw that spend but I would have suspected that maybe it would have hung over a little bit longer was in that Q2 time period and you saw that that spend down if you will and therefore that increase was part of that.

The other REIT on it's hard it's hard to get a reading on it right because I think the other read on it was that year over year. It was a bounce back from pandemic and people who are out doing more.

So blending those two things together and then coming up with the second half forecast proved to be.

Difficult right and so we saw that we still grew interchange, but it just we didn't get the tailwind like we thought because of those so we saw those accounts go away maybe a few more go away, but I think where I'm optimistic is now kind of the enrollment season, where we go into January and people are re enrolled into these accounts and their top to begin and maybe we get.

Some more normalization if you will over the next year be a little easier to forecast.

Okay, and then a follow up on Glenn's question about the implied <unk> guide.

It seems based on my math that organic growth.

<unk> <unk> 22 versus <unk> 21.

It is going to decline somewhere in the range of 25%.

So just can you kind of clarify whether or not that's accurate and then b.

And I know that you are spending more on technology.

What else is embedded within.

That decline.

Well I think the I think the one thing and they're.

Not doing the math quickly, but all I.

I Trust, you've done some math to kind of get directional on that but the thing that would drive that the most is just the fact that we're putting acquisitions in the business that are acquisitions that we think we can improve margin on but when we buy them. They don't necessarily have the types of margins that.

We have and so that's the job is to improve those to synergize them to get them onto a single platform single serve as a single processor.

All the different things with their operational team does to improve the margin related to that I do like the I do like the deals that are portfolio acquisitions, because those come in without people they come in with just assets and yield and obviously a higher margin.

So.

You get some of that playing through into that and then again you go back to the CDB businesses and the easy low hanging fruits to talk about there is the the commuter business and the fact that.

There's tens of millions of dollars of missing high margin revenue on our one of our highest service fee line items.

And that commuter business and so I'd like to see that come back because that will create a nice tailwind in and we did see a turning point and that is insignificant turning point, but at least it went sort of the other way and started to come back. So those are the kind of the two things that I think are in there when the other one that's really there to I guess you made me think think of some other things going on visa I know <unk> talked about these things.

But you think about the custodial revenue and the margins generated by that and the 36 basis points of decline at that yield year on year and it kind of makes it within all of these comments that that is fundamentally how this business is going to produce profits and when that rate starts to turn around we will start to produce profits and I think that.

Again, we're getting to a point, where that's starting to happen.

Got it thank you very much.

Yeah.

The Q.

And our next question comes from Stephanie Davis from SD <unk> Leerink. Your line is now open.

Thank you and thank you guys for taking my question.

Yes ma'am.

It has been a really long your Tyson so talk to me about your learnings from that.

Do you have any changes to your guidance philosophy, and how should we think about your forward views then on PDP account recovery.

Is this going to be kind of the.

Levels that assumption for step forward spend patterns remaining began commuter basically zero without any problems.

Returns or is there any thought towards improvement.

The fourth quarter.

Yes.

Yes, I think I think I'd go back to there are a lot of cross wins and you see that even in.

A lot of articles, we read about the fed trying to get this straight.

There are cross winds, it's difficult to come up with forecast, particularly for CDP not so again HSA. If you think about that.

When I think about forecasting to stone youll yield on interest that we can do that and we can do that we can see what we think enhanced rates will do for that revenue stream and we can get a pretty good idea of being able to tell you. What we think that has to within a very immaterial amount.

The same is true when you think about HSA service fees, because they stick around and so you don't have this ebb and flow of those.

Annual decisions that get made so.

To me the answer to getting forecast, even more accurate as to grow the HSA business larger than these other services that we have which is exactly what we're doing with acquisitions exactly what the organic business is doing as well. So I mean my learning from that.

Ted and I talk about the team that's what the team wants to do and that's the mission and it will solve some of these issues that we've had with some of this world.

Given the pandemic and everything else, it's tough to tough to kind of get there. So yes, I have learned a lot.

Over the last year.

Would it then be safe to say youre going to focus most of the guidance on the HSA side of the World and then kind of visa.

With that run rate for GDP.

Unpredictable tw, there's more upside.

Well I think there's when you think about CB and of course, we've talked about some of the things returning but it's really just that commuter segment, it's 4% of revenue right.

Enough for us to talk a lot about here, but it's something that I think helps us sell HSA. So I think I can say, you're probably right I'd like to focus more on how we think about HSA growth and forecasting that and fundamentally that's what we're trying to do.

Okay, and if I can sneak in a quick one just on EBITDA for the fourth your guidance is there a way to tease out the deal related impact to that fourth quarter number.

And how long should it take to turn around the acquired margins.

Is this something where this can be one quarter I'm looking at improvement or is talking EBITDA, how we should think about run rate.

Well, there's two things that happened with <unk> I mean, it's really the fact that.

That further to further business that we have.

Doesn't drive margin if any in Q4 relative to the revenue numbers, we put out there which is $12 million.

Centrally on something less than $1 million of EBITDA, and that's because they've got the costs going into the season.

But when you think about that business in Q1 Q2 timeframe. When we think about right sizing yet for example for the fact that we won't have the Veeva services in there. So we know there is theres. Some theres some costs in there associated to that part of the business that we can take out and just the ability and all of the learnings you've had from the wage business somehow.

To create efficiencies within the business and we're going to be able to do those never seen as much in wage because of some of the degradation of some of the CBD, but they certainly are there and we've been able to make those improvements and I think that kind of gives us.

A base to build off of.

Sides of the same thing is true for that for the business.

Okay Super helpful. Thank you.

Thanks, Stephanie.

And thank you and our next question comes from Mark <unk> from Baird. Your line is now open.

Hey, good afternoon, and thanks for taking my questions.

Wondering with regards to the.

The rate discussion as we think about next year.

John When you were talking you were answering Peter's question.

You mentioned, the 152 bps and kind of a lull.

<unk>.

I'm wondering how do we think about that relative to the enhanced right.

Program because it.

It sounds like you know one way of interpreting things would be hey, we're going to stay steady in terms of the effective yield for 23, another way to interpret things would be.

We still comes down a little bit because we're still rolling off.

Vestments from two to three years ago.

However, you could.

Provide some sort of help in terms of thinking about that.

Because that's obviously going to be important in terms of setting 23 expectations.

Yeah, I can or.

What we've said in the past and I would repeat here is that the 23 will be will still be a down cycle part of the down cycle.

It feels like.

It's forever.

But but we started this process in our fiscal 'twenty, one 'twenty two and 'twenty two.

And so it will be the third year of that cycle.

So I think when all is said and done and the smoke clears.

What we are our expectation remains that we will lose.

Still have a headwind from.

From a yield perspective, but.

As was the case this year that headwind will be smaller than it was then.

And it was in.

In the prior year.

<unk>.

And then I think what I tried to add to that is.

I think we're kind of.

Particularly with the benefit of the fact that the underlying sort of competitive dynamics in the deposit product market are improving and the fact that the enhanced rates uptake means that we don't have to necessarily go to the.

The end of the rope in terms of what banks are offering we can we can be a little more selective.

That.

You know that we can kind of see that being the end and we kind of nowhere that end is going to be which is.

As I comment then repeated somewhere.

You know kind of.

Nir and perhaps better than the.

The lows that we saw the last in the last of the post 2008 through so.

I guess, that's the way I would interpret I wasn't trying to suggest that.

We're going to do 175 next year.

Or that we're going to improve from that but I think for folks who have modeled this stock for a long time, if you have.

Knowing.

With a relative with a greater degree of confidence.

There we think.

The sort of end of that cycle is and where we think it is in time as well as in rates. It seems like a pretty valuable thing.

That absolutely is valuable and.

And then can you just tell us what the most recent placements were in terms of the effective yield that you were getting for those.

Yes, we've been asked this question before as you know and we don't comment on it because it effectively reveals.

The price, we're willing to take and we would rather let banks compete for that price but.

But I will say.

It's.

If I think about it is in terms of.

Premium too.

Someone mentioned earlier, the three or five year CD.

That premium which which.

Was.

Both the market was low in the premium is at the low end of our historical ranges.

Earlier in the year and at the end of last year.

That premium has improved a bit over the course of the year and even though the underlying market hasnt changed very much and.

And again I think that reflects.

A greater competition for all kinds of money and perhaps a view.

On the part of the banks are what's going to happen going forward I don't know about that.

So it's gotten a little better and that should give you enough that you can kind of interplay.

That's great and then there was an earlier question, which I didn't get the answer too on just on how you're thinking about HTH piece for this.

Enrollment season for a lot of companies that have gone through it what what are you seeing in terms of that shift.

Yes.

We'll talk about this a little more in January when we get to the JP Morgan conference and all of that but but.

As I said earlier on the call I think.

To some extent the Q3 results are an indicator of their because they do reflect firms.

<unk> that have earlier plan year cycles and alike.

The September enrollment on <unk> and.

And those were really good.

And my General view of the market if I sort of go back a year. The question was well is the market's going to grow by something closer to $3 million or something less than 2 million like it did in the pandemic period.

<unk>.

I was arguing that well first of all I was technology that I know, but second of all arguing that the broad forces that are leading to market growth.

<unk> are much more.

About say endemic in the pandemic.

But they're much more.

They are they are long lasting indicators in nature and they continue so.

Yes on that basis, I'm kind of taken the view that we're seeing what looks like a more normal enrollment cycle. This year certainly.

The fact of high employment is a net help her in that regard.

But.

In the sense that there's just more people.

Not as many still we're still not back to pre everyone knows we're still not back to pre pandemic employment levels on the whole, but we're getting closer.

<unk>.

And the more people that join the Labor force, we join the Labor force extremely helpful in that regard.

But.

I guess my basic view markets.

Look at it and say, we said all over time that that the market's going to grow at.

Our rate of <unk> 3 million accounts from here and has for a long long time and then we had this exception in calendar 2020.

I think this year is going to look a lot more like a.

Prior reality than than like that et cetera.

That's really helpful and then the last one for me.

With regards to at the enterprise level.

You know you've been gaining share on the whole how would you describe the competitive dynamics at the enterprise level currently in.

Do you anticipate continuing your great track record of gaining share.

Even at the largest enterprises.

Yeah, Ted do you want to hit this one.

Sure.

I think that as you would expect in any industry. It looks like ours. The competition intensifies first at the enterprise level and we're no different and we see that.

I think that our competitors are.

This has been an interesting year from enterprise sales perspective.

In large part because of the high number of stay with you come right.

Sure Matt.

Jenny.

People benefits teams are continuing to be sort of burdened by return to office, Covid management et cetera, and so.

They've been sort of less willing to make a decision.

But despite that I think we've more than held our own in the enterprise space among those.

Those.

Pieces of business those cases that have.

That have moved and then.

Probably similar to other people in the industry, our retention rates have been very high indeed.

Dated by the fact that some people are just housekeeping.

And so I don't think we've seen anything unexpected we haven't seen anything.

Crazier shocking.

From an enterprise competition perspective theres not.

Someone hasn't come out with the iPhone 17, and we're still trying to sell the iPhone 12.

It is sort of proceeding at pace with what we would expect.

Price competition is.

Higher on the enterprise space in the mid market small market and that's one of the reasons why that's been.

We're trying to put our chips, where we expect the best return and so to a large extent that's in that.

Small market mid market space, but with our value proposition and our brand.

And our reputation for service we continue to.

For former outperform in the enterprise space.

Even though it's been an interesting year, there nothing crazy competitive wise, Steve I don't know if you have anything to add there if you've seen anything worth mentioning.

No I think that's right one of the things we're really excited about is with the further acquisition.

Got it another 10 blues plans that we're going to be working with.

I think our team is getting a lot better.

Working through these health plan partnerships not just to go after the small and mid sized businesses, but also to go after the large employers.

A lot of the further plans plus our base plans.

20 health once we are blues plans that we brought to the table plus a bunch of other tpa some large health plans throughout the country.

They also bring us to a lot of enterprise type of employers and so there's always been this push pull on our business I mean going back like.

Oh Man 15 years in fact, John you remember when we first started working together in 2009 I was always talking about.

Your fantastic work with the enterprise employers and you were talking about.

Equities fantastic work with the health plans and now we're really starting to see those forces converge, where we've got this national footprint. We've got the full bundle and we have the ability to not only deliver full bundled solution to the health plans, but to their largest and most important clients and.

So John John I guess, we both got our wish we have a full stable of health plans and.

And a full stable of large enterprise employers so its coming together nicely.

I was kind of I was having.

I don't want you to think I spend a lot of time on this but.

I have to admit them.

An internet site.

Right.

Moments, where I'm trying to distract myself I look at what has.

Sort of unusual maps and I think they call. It in that point I don't think I can say that yet.

And.

And.

So so yesterdays.

Thing from that.

<unk> was the largest employer by state and what I'm getting at is what's the enterprise.

And first of all the point the chart was trying to make was that there was one employer that is the largest employer in a lot of state and they happened to be a client of ours, and that's great and they're a private sector employer and so forth.

But what was actually really interesting was.

Essentially all of the states in which they were not the large simpler.

Employer was not.

Some fortune 500 company.

Wasn't Amazon.

It was a health system a hospital system in something like 30 of the other states and credit.

And that's a market, where we do real well.

So for us.

You know when we think about enterprise, it's worth remembering that we're looking at number of employees and.

And those kinds of factors not just you know.

Whereas other firms might be looking at size of the I T bucket and so I.

I think particularly when you look at it that way Steve's comment about the.

The relationships with more blues plans comes into focus because those are local relationships to start on that.

<unk>.

Or and it's not just blueprints and then think about Providence health care in in.

In the northwest or.

St Luke's in Idaho or.

Or Presbyterian in new Mexico or.

Santa Clara and in Virginia. These are huge local employers that are also effectively our partners in other ways and so so that helps us in the enterprise market.

That's that's very helpful. Thank you so much.

Thanks Mark.

Yeah.

And thank you.

And I'm showing no further questions I would now like to turn the call back over to Jon Kessler for closing remarks.

Guys. Thank you for your good questions and tough questions and.

And for going through this with us really happy holidays to everybody.

As Tyson mentioned in cat alluded to on this call.

These are.

Very unusual times for us at health equity and for our team because.

Not only is it an unusual holiday with some joy at the fact that things are returning to normal but also some trepidation with AUM of crown and all that.

But we are.

As many employers are working through that.

So it's a small number of federal contractors are working through the federal contractors mandate and.

Far be it from us too.

Grouse about the difficulties of doing that.

Given the importance of the past.

And no matter, how one feels without these mandates it's our job to comply with the law and we are doing that.

And I wanted to just take a moment to.

Both Frank.

Thank our team members who have kind.

Kind of work through this from the perspective of what we're thinking about it and dealing with the compliance side of it and also.

Very candidly.

Our.

Both wish well those who have made a different decision, but thank our team members for helping us get ahead of that as much as we can.

In Q4 and have the team prepared to deliver the best possible service, we can under what is a really unusual circumstance for us.

Care about this a lot we're not going to ignore it.

Can't ignore the impact on our team.

Of losing some people due to the mandate.

And we're not going to so.

I think it's a special area of banks for companies like ours, everyone. In the health care sector is affected in the same way as you all know from so many of our partners are affected in the same way and.

Certainly our friends in the federal government, where our clients are affected in the same way.

So very much appreciate all the work that every member of our team is doing to keep the wheels, turning as we go through a most unusual busy season for us.

Happy holidays see everyone soon.

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

Okay.

[music].

Yeah.

[music].

[music].

Please go ahead Mr Putnam.

Thank you Josh and good afternoon, welcome to health equity third quarter fiscal year 2022 earnings call. My name is Richard Putnam Baidu Investor Relations here for health equity joining me today is John Kessler, President and CEO, Dr. Steve Neeleman, Our vice Chairman and founder of the company Tyson Murdock the companies.

Executive Vice President and CFO, and Ted Bloomberg, Our executive Vice President and Chief operating Officer.

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

Press release announcing our financial results for the third quarter of fiscal year 2022 was issued right. After the market closed this afternoon the.

The metrics reported in the press release include the contributions from our wholly owned subsidiary wage works.

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

A copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures and a recording of this webcast can be found on our Investor Relations website, which is IR dot health equity Dot com.

Second our comments and responses to your questions today reflect management's view as of today December six 2021.

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

There are many important factors relating to our business, which could affect the forward looking statements made today. These forward looking statements are subject to risks and uncertainties that may cause.

Actual results could differ materially from statements made here today.

We caution.

You against placing undue reliance on these forward looking statements. We also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock that are detailed in our latest annual report on Form 10-K, and subsequent periodic reports filed with the SEC.

We assume no obligation to revise or update these forward looking statements in light of new information or future events and that's the conclusion of our prepared remarks, we will turn the call over to the operator to provide instructions and the host our Q&A now.

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

Okay.

Thank you Richard and Hello, everyone and thank you for joining US today, we are reporting results for health equities fiscal third quarter, which ended on October 31.

Core HSA sales account asset.

Count and assets continued the strong growth pattern that we've seen throughout fiscal 2000 chip, while ancillary consumer directed benefits or CDB administration slowed and weighed on operating performance I will dive into both aspect or aspects of Q3 results and Tyson will review the financial.

As of the quarter and provide updated guidance for the full fiscal year 2022, Steve and Ted will join US as we take time for your questions.

Let's start with the five key metrics that drive health equities business Q3 revenue of 180.0 million was up slightly from $179 4 million in the third quarter of last year.

Adjusted EBITDA of $61 1 million was flat year over year $13 3 million total accounts at quarter's end were plus 6% versus a year ago and as in recent periods total accounts exclude commuter accounts neutral stance.

HSA members at quarter's end reached $6 2 million up 14% from a year ago, including 11% organic growth plus new HSA members from the transition of fifth Third's portfolio, just before the end of the quarter and HSA assets at quarter's end reached 16 4 billion up 32%.

From a year ago include 28% organic growth and approximately $490 million in fifth third assets transition.

Whereby total solution cross sales HSA captured as captured a greater share of HSA growth during both during the pandemic impact in fiscal 'twenty, one than ever before and has now delivered record organic HSA openings and asset growth during the first three quarters of fiscal 2002 <unk>.

<unk> delivered a fiscal third quarter record of 151000, New HSA is up 45% from 104000, New HSA is opened in Q3 of last year.

Three quarters of fiscal 'twenty two the team has welcomed 446000, new HSA members across its diverse sales channels at 41% more than in the same period in fiscal 'twenty, one and 29% more than during the same period in the pre pandemic fiscal 'twenty. The migration of fifth third bank HSA A's added.

Another 160000 HSA is on top of the strong sales results in Asia HSA assets grew a total of nearly $1 billion during the quarter and that includes assets of course transferred from fifth third.

Investing HSA members at quarter's end were up a remarkable 43% with 74% growth in investments invested assets from a year ago health equity members average HSA account balance grew a robust.

Robust 16%.

Evidenced that members continue to catch the vision of long term health savings and to connect health and wealth.

Health equities organic and total year over year, HSA and HSA asset growth in Q3 compare very favorably to the most recent industry data Devon year estimate, 6% account and 26% asset growth market wide for the year ended June 30th Health equity delivered 14% account and 32.

Percent asset growth year over year in Q3 comparison with Q3 reports from publicly traded HSA peers tell the same story.

And that the team continues to make market share.

Take market share as we have done every year for more than a decade now our formula for doing this as you know is simple. It's a total HSA solution at scale bundling of services that our clients want proprietary technology, delivering the ecosystem connectivity that our partners demand and purple service and education that our member.

<unk> dessert.

As you know health equity acquired wage works market, leading CDB capabilities and client footprint two years ago to drive core HSA growth and that is precisely what has happened. However, Cds have proven more sensitive to near term external factors than we expected. We believe that most of these factors will recede as the pandemic.

In fact on the economy continues to wane.

But Q3 results from administration of Fsa's Cobra and commuter accounts were particularly impacted and resulted in lower than expected interchange and service revenue, leading overall revenue down $5 million to $10 million versus our expectations as implied in prior guidance. Let me speak about each of these interchange was the biggest.

The price year over year interchange revenue grew just 8% in Q3 down from 23% growth in future.

FFA spend on our debit cards and platform in Q3 slowed more than what we anticipated from seasonal factors and the final user lose deadline for calendar 2020, and 2019 FSA.

<unk> from here, it's going to depend on the choices of members during open enrollment and on enrollments from new sales that we've made this year, we anticipate that members who did not add to their balances for calendar 'twenty. One we will do so for calendar 'twenty, two which leaves us cautiously optimistic as we head into the new fiscal year.

Service fees from Cobra administration experienced a similar reversal after Q2 games.

In addition to the end of onetime revenue from administration of the federal Cobra subsidy, which we did expect and didn't discussed with you last quarter Cobra uptake itself fell off more than we expected when the subsidy and tax.

Tight labor markets and high churn conditions led to more Cobra eligibility and that's accounts, but not necessarily additional feet.

Commuter accounts and fees had a small uptick sequentially for the first time since the start of the pandemic and that is good and welcome but with employers taking only very candidate steps towards returning to office Q3 commuter fees were still lower even than in the year ago period.

And finally our.

Our decision to walk away from certain legacy CDB administrative engagements for one off services that our go forward platform will not support will ultimately help streamline and simplify the business, but hurt short term service revenue Nonetheless.

So.

Scale CDB capabilities, our spring core HSA growth, which is strong in its own right.

And the team looks forward to turning the page on CEB integration and the pandemic various impacts on revenue.

We're going to do that first and foremost by focusing even more on the expanding revenue generation capabilities around our fast growing high margin Hsa's grew sales execution through portfolio M&A and through product innovation I already mentioned the record sales results in the transition of fifth Third's HSA portfolio completed in Q3.

After the quarter ended we announced the closing of our acquisition of the HSA business, a further which brings visit approximately 580000, HSA and $1 9 billion in HSA assets. Further as you know expands our HSA partnership footprint and commitment to with and commitment to the Bluecross Blueshield Association and its health plans.

And as technology to help partners embed health equity more deeply into their products in fact, youre going to see you should expect to see real examples of deeper integration of health equity HSA with partners in the coming quarters. This morning, we announced an agreement to acquire a portfolio of one 3 billion in HSA assets from health.

Administrators, a leader in marketing HSA to individual investors and to small employers.

I'm pleased to report that initial number uptake of our innovative enhanced rates offering is beating our expectations, which will support custodial yields going forward and the inherent profitability of HSA.

Why 23 will be the third year of the downward custodial yield cycle that began around the onset of the pandemic and of which you're all familiar but we're cautiously optimistic that it will be the last.

While tightly focusing on the HSA core we are streamlining elsewhere migration of business from people that duplicative legacy CDB platforms acquired with wage works will be completed substantially infor and entirely an engineer I mentioned earlier the decision to discontinue one off services that won't help us grow and we've also agreed with.

Further sellers to terminate our agreement to buy the VEBA accounts, which was an ancillary and several component of the overall further acquisition that frees up $45 million of corporate cash our core growth opportunities.

I'll now turn the call over to Tyson for additional detail on Q3 and year to date operating performance and updated guidance for the current fiscal year Mr. Murdoch.

Thank you John I will review, our third quarter, GAAP and non-GAAP financial results. A reconciliation of GAAP measures to non-GAAP measures is found in today's press release third quarter revenue as John indicated was up less than 1% year over year with service revenue declines, partially offsetting growth in custodial and interchange revenue.

Service revenue declined 2% to one or $2 8 million, representing 57% of the total revenue in the quarter.

Service revenue in the third quarter was aided by a 10% growth in average HSA accounts offset by CDP service revenue declines in FSA commuter and Cobra services.

Lower CDP revenue.

And continued success in our bundling and cross selling efforts led to lower service revenue per account.

Custodial revenues grew 1% to $49 million in the third quarter compared to $48 5 million in the prior year second quarter.

16% growth in average interest bearing cash with yield more than offset a 36 basis point decline in the yield on interest bearing cash from the comparable quarter of last year.

The annualized interest rate yield was 172 basis points on intrastate cast with yield during the third quarter of this year. This yoga is a blended rate for all interested cast with deal during the quarter.

As John mentioned, our HSA members continue to invest their balances, which resulted in an 81% growth in average HSA investments which yield.

The asset table of today's press release provides additional details.

Interchange revenue grew 8% to $28 2 million, representing 16% of total revenue in the quarter as John indicated earlier FSA spend decreased as 2019, and 2020 rollover FSA accounts were depleted and close faster than we expected.

Gross profit was $103 3 million compared to $104 6 million in the third quarter of last year gross margin was 57% in the quarter operating expenses were $103 7 million or 58% of revenue amortization of inquired intangible assets of merger integration expenses together represented 18% of revenue.

Net loss for the third quarter was $5 million or a loss of <unk> <unk> per share on a GAAP EPS basis. Our non-GAAP net income was $29 million for the third quarter of this year compared to $32 2 million a year ago.

Non-GAAP net income per share was <unk> 35 per share compared to 41 per share last year adjusted EBITDA for the quarter was $61 1 million and adjusted EBITDA margin was 34% compared to $61 1 million and 34% margin in the same quarter last year. The consistency of those numbers is an indication of the health equities team.

<unk> focus on improving the efficiency of our operations and carefully managing costs towards the ongoing profitability of the business.

For the first nine months of fiscal 'twenty, two revenue was $553 3 million up 1% compared to the first nine months of last year GAAP net loss was $11 5 million or 14.

<unk> <unk> loss per diluted share non-GAAP net income was $93 2 million or $1 12 per diluted share and adjusted EBITDA was $185 6 million up 1% from the prior year, resulting in 34% adjusted EBITDA margin for the first three quarters of this fiscal year.

Turning to the balance sheet as of October 31, 2021, we had $649 million of cash and cash equivalents were $930 million of debt outstanding net of issuance costs with no outstanding amounts drawn on our line of credit.

Cash balance of course still includes $455 million of cash that was used to close but further acquisition on November one.

As a result of the sale of unsecured debt and a reduction in rollover rollover of secured debt during fiscal 'twenty two the tenor of our outstanding debt has been dramatically expanded reducing risk and giving us the flexibility to invest in growth opportunities for new debt will obviously increase interest expense interest expense by about $4 million a quarter.

Based on where we ended the third quarter and our current view of the economic environment. We are revising our guidance for fiscal 'twenty. Two to include revenue for fiscal 'twenty two to range between 750750 $5 million non-GAAP net income to be between 108 and $112 million, resulting in non-GAAP diluted net income.

Between $1 30, and $1 35 per share based upon an estimated 83 million shares outstanding for the year.

And adjusted EBITDA to be between 230 and $235 million.

Today's guidance includes our most recent estimate of service custodial and interchange revenue based on results to date. Our guidance includes a more conservative outlook for service and interchange revenue to reflect fewer commuter and FSA accounts and lower balances through calendar 2022 and to reflect continued conservative spend patterns that we saw in Q3.

For the remainder of this year.

Guidance also includes the addition of further which closed at the beginning of Q4 and also reflects a ramp up in service cost associated with Onboarding, new clients and members will further and health equity as a whole our guidance assumes a rate interest of cash with yields of approximately 175 basis points for the full fiscal year 2002.

Two year and includes the migration of further assets to health equity depository and insurance partners at prevailing rates.

Guidance also includes the benefit of $75 million of run rate synergies achieved from wage works to date.

As we finalize the placement of HSA cash assets into depository contracts, we will be able to provide initial interest rate guidance for fiscal year 2023.

This outlook also includes certain costs out that we expect to incur as a result of president items executive order on ensuring adequate COVID-19 safety protocols for federal contractors referred to as a federal contractor mandate as you may know the federal contractor mandate is more stringent than the wider osha mandated a federal contractor mandate brings what.

The significant cost of compliance assurance for recruitment and training our team members to replace those who can either provide proof of vaccination nor eligibility for exemption under the President's order.

The outlook for fiscal 'twenty, two assumes a projected statutory income tax rate of approximately 25% and a diluted share count of $83 million as we had.

Fewer equity Award awards exercised this year than expected.

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 the definition of all such items is included at the end of the earnings release. In addition, while the amortization of acquired intangible assets are being excluded from non-GAAP net income the revenue generated from those acquired intangible assets there's not.

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

Thank you.

We've always tried to humanize these calls with plains.

Today's results are our mix and then what and I mean that.

It's not quite literally like a blender.

The truth.

Our core HCA outcomes were very strong and so there is written in capital letters, So thats why im saying it like that.

But also because it's true.

Our ancillary CDB services performance was not very strong.

Taking action on both results to deliver long term growth profitability and visibility that we know you rightly expect.

Truly welcome your tough questions.

Our results and our plan, let's get to it operator.

Thank you as a reminder to ask a question you'll need to press star one on your telephone.

Joe Your question press the pound key.

Please standby, we compile the Q&A roster.

And our first question comes from Anne Samuel from Jpmorgan. Your line is now open.

Okay, I'm happy holidays happy holidays, and thanks, so much for taking the question.

You guys went a little fast there and there was that kind of detail. So I was hoping maybe you could just circle back and provide a little bit more color on what happened with the interchange.

And then you said you expect the dynamic to shifting your cautiously optimistic for next year. So what are the dynamics that are happening there. Thanks.

Patient you want us to get started on this one.

Yeah, Yeah. Thanks for the question Yeah the interchange.

Revenue in the interchange spend was.

Leading laggard again on the HSA side, we have a lot more accounts I feel really good about what we've done there and especially with even interchange there but on the FSA side, we've seen a decline in those 2019 and 2020 accounts more quickly than we had thought and so not only does that affect service fee, but it also affects the interchange because theres less of a.

Balanced for them to spend and we saw the spend in <unk>.

Revenue related to interchange increasing pretty dramatically in Q2 Q1 timeframe.

So the thought was that that would persist more so than it did and so as we saw that come down into months during Q3 that really had us.

That put us in a place where we needed to shift to Q4 as well because Q4. Obviously is there is a higher spend quarter. When you think about December user over January when the accounts are our replenished and so that's really one of the biggest challenges there on the interchange side.

John any more thoughts to add on that.

No I think I think you hit it.

Great that's really helpful. Thank you.

Well actually I will I will add one thing which is to say the cautiously optimistic part as it was.

What what's your really way to summarize what we what we just said is that.

We had very strong impact, particularly in Q2 that were in part. The fact that you had this sort of unique situation, where you were running off two years of of balances and.

And so the third quarter is kind of what remains and then in the December is what remains and of course January and part of the year, but as we look into the new fiscal year that will be impacted by People's decisions that are being made now with regard to elections and well while we're looking at early returns on that.

We'll have more to say when we provide our fiscal 'twenty three outlook later.

We're optimistic that we're.

We're optimistic that we're going to see some snapback there relative to the elections that people were making were not making back at the kind of.

During some of the darker days of the pandemic a year ago.

And so forth. So that's why we that's the cautiously optimistic point.

That's great. Thanks, guys.

Thank you and our next.

Next question comes from Greg Peters from Raymond James Your line is now open.

Good afternoon meters.

Yes, some title town.

Yeah.

Unfortunately, the stocks getting beat up in the aftermarket and I know you just covered some of the reasons.

For the.

The mixed results.

Maybe you could spend a minute and just.

Talk to us about custodial revenue in the outlook for.

That line item is the three year Jumbo CD rate just hasnt budged at all.

And it doesn't seem like there's a lot of new loan demand and so I'm just it just begs the question and your comment you said you think this might finally trough out next year, but I have to wonder about that.

Second part of the question and this will be the only thing is just you spent a lot of money on further.

<unk>.

Where I guess.

Trying to see where the positive impact of that is.

And the results going forward. So that's my question Sir.

Okay, that's great.

Why don't how about I'll hit the first one on rates and Tyson why don't you.

And Ted if you'd like to add into the second one on further.

So with regard to rates.

Both patient and I commented a little bit on our on our thinking forward if you recall Gregg.

When this cycle began we pointed out that we have three years worth of.

<unk>.

Sort of ladder and the benefit of having that ladder is made it gave us time and so we have notwithstanding the fact that I mean.

In this quarter as sort of an example of that notwithstanding the fact that that were 35 basis points down in terms of.

<unk>.

Yields are custodial revenues of course were actually higher and.

Our our overall EBITDA was flat year over year.

Yes.

And so fiscal 'twenty three will be the third year of that cycle. We've commented previously that.

Our historical lows in terms of the rates we received.

Our.

The lowest that we've ever gotten to a 150 basis points out of 152. After the 2008 crisis after kind of our our ladder had unwound there.

And.

And.

We're kind of heading into that same territory and we've commented elsewhere that.

Likely where we would be.

But I think what we're adding that commentary today is that we feel much more comfortable than for example, we did three months ago that that's the bottom end.

We don't we're not perfect predictors of any better than anyone else, but I want to tell you why because first of all he's not because.

We have some magic ball or we're baking into our thinking.

Right.

For overnight rate hikes, so what happened as you know, we do not take those things into our thinking.

It's really because of.

Exactly what we've said over the last couple of quarters, which is that.

The introduction of our enhanced rates product has done is doing two things for us first.

First is itself generate higher yields and higher spreads and second of all it just creates more competition for money and effectively reduces our need to place.

Two the marginal bank if that makes any sense.

<unk>.

It's for those reasons that we think we're in a better position from a sort of what the terms of our placements are going to be going into.

Both going into fiscal 'twenty, three and then at the end of fiscal 'twenty three 'twenty four.

We're feeling quite a bit more.

Sure footed and optimistic that we can meet the promises that we have more or less Macy's over the course of time with regard to the likely shape of these yields.

So that's kind of that's the basis for our thinking we're not looking at I want to be clear, we're not looking out there and saying well.

Economists that says that theyre going to be for rate increases next year or whatever they say and so that's going to make it all better that that that would be nice from the perspective of our business, but what we're really looking at is we're looking at the offers that we're getting from our banks as we go into play we're in a place in season.

Obviously, we have some wood to chop there and we're but we're also looking at the fact that competing against those offers and in fact is the uptake from our members of our enhanced right Scott and Ann.

That's again, both has has as its name implies enhanced rates and also again just reduces our need to to hit the marginal bid.

That helps us out quite a bit so hopefully that was helpful and the second question was about.

Further and Tyson once you start there.

Yeah, I was going to make one other comment on the rates thing as well Greg I think this is important to know.

When you think about contracts.

Once we were making earlier in the year versus now those rates are higher whether youre talking about FDIC or even an enhanced rates program that they are higher now than they were then so there is that turn now we're still working against that average in the hydro placements from two or three years ago of course right for FDIC, but those those are different now they are higher so.

Why isn't all that and then on the further on the further business. This is this is again, an HSA centric business right. The blues plans are going to be very important.

Our ability to be able to penetrate those plans like we've done with other health plans is really one of the ideas that I think will work very well for us over time.

The other thing with further is it really gave us the jump on enhanced rates because a big part of the assets that we place got us to scale there and scale is what matters. When you think about how to put together a program like that is hard to do without scale and so Davis the scale. There. So there is obviously not just the <unk>.

Yield associated with those particular assets, but the impact that it has on the inherent profitability of the overall health equity business in the long run and I think that's a very important part of that further deal.

When I think about its impact on the immediate quarter and right now it doesn't have as much impact because it's going through its Q4 enrollment busy season. So of course margins are at a low point for that business. So I can't put a bunch of margin in there for Q4 off the revenue.

But we talked about earlier in the year of 60.

$60 million revenue run rate.

For that business on a 20% EBITDA margin.

Business, and then $15 million in synergies I think we talked about over the long term and so from a starting point of the Q4 seasonal starting point, that's not great. When you do the math on the numbers you can see that specialty basis, we made in guidance.

But over time I think there's a lot of opportunity for us to create a lot of efficiencies for that businesses business, whether it's in the technology side.

It's Ron it's carved out of a much larger organization I think we have a lot of a lot of ways to think about how to run an HSA type business relative to how thats been run and so there is that opportunity for us I don't know Ted you want to comment.

Any more comments on that.

No I think you have it the only thing I would add relative to the numbers that you just alluded to is we did announce today that we.

We're not competing.

The VEBA.

Portion of the transaction, which as you know.

Easiest way to think about it rough numbers is 10% of the transaction. So that should kind of help you get a sense of what we're aiming for for next year.

But again early days haven't even completed our monthly close on further yet.

But I sure Tyson long term optimism that similar to what we're doing we're hedged we're going to be able to take this business.

Integrated grow it realized from synergies from it and expand margin over time.

Ted can I just ask a clarification on what you just said is it.

The cancellation is 10%. So if you use $60 million and $20 million of EBITDA I should take 10% off both of those numbers as we think about further going forward for the cancellation is that right.

Yes, I think the VEBA.

<unk> business was about 10% of the business Greg.

We're paying about 10% less than we were.

Publicly announced you are paying and that's what we said today in any case I think that that's a reasonable.

Estimate.

The asterisk that Q4 is always a relatively low margin quarter for both our business for the abuse.

Got it thank you for the answers.

Yes.

And thank you.

And our next question comes from Sean Dodge from RBC capital markets. Your line is now open.

Well, thank you Sean.

Hello.

So Jon I guess going back to your comments around the enhanced rates product can you give us a sense of that the yield differential you can earn on on that versus the more traditional FDIC ensured placements and then just maybe a quick kind of education and mechanically how is that rollout looks is that something that you've got to get the employers.

To sign off on and then the employees to opt into and so I guess, maybe some idea of what the.

The timeline of the ramp look like.

Great.

Yeah.

The spread there.

Is it does depend a little bit, but let's just say we comment that elsewhere.

The benefit of enhanced rates adoption in current terms is kind of in the <unk>.

50% to 75 basis point neighborhood.

In terms of the adoption approach and I'd say, a little bit of that gets eaten up by.

By the fact that you are also paying enhanced rates to the members.

But.

Yeah.

Uh huh.

Yes.

In terms of the adoption process.

The answer depends a little bit and this will be a multi year process we're still.

Very much at the beginning of it but but very encouraged by what we're seeing.

Tyson mentioned with regard to the further business.

Further came over.

With a material amount of this already baked in and so.

That just came over and that did help us in terms of.

If you think that.

One way to think back to the earliest days of our business and.

Negotiating with one bank with very little assets in all of it kind of AUM to come we didn't have to do that here because we had money to start with.

Yes.

But it is <unk>.

<unk>, that's going to take time and ultimately.

It's the remember that.

Elect into the enhanced rates product.

But there are a couple of ways that can happen one is.

That that is their initial election sort of for lack of a better term unless they take a different action if it's the default.

If they're new.

Or it can happen when they come onto our site or what have you there they can be presented with that option and elect to it.

And but of course, we.

Are we this is something where our employers have some flexibility as well so.

But I think what youre going to see over the course of the next few years is that a larger and larger percentage of our for lack of a better term new cash needs are getting soaked up by the.

The election of both new money and existing money into enhanced rates, it's a good crop.

<unk>.

It's it's.

It had some tradeoffs, but it's but it's a very good product for the members in a very good product for us and allows us to keep other costs low and.

And deliver outstanding service so I.

I hope that that's kind of helpful.

It's like a way to think about it is that it.

The pace of adoption is going to reflect sort of a soaking up of our new cash needs over the course of time.

Okay.

That's very helpful. Thank you.

Yes.

And thank you and our next question comes from George Hill from Deutsche Bank. Your line is now open.

Yeah. Good evening, guys John Tyson, Thanks for taking the question.

I have a couple I'll try to keep them real quick.

Tyson I guess the first one was could you detail how much CDB revenue that you guys walked away from both in the quarter.

And then on an annualized basis, and then I guess my two quick follow ups, which would be for both John enticing would be.

John do you have any feedback yet on what the adoption of HD Hp's looked like at the end of this open enrollment season going into the next calendar year, and then pricing to the degree to which you are willing to talk about it.

Were you able to frame, how we should think about the big headwinds in tailwind for fiscal 'twenty three as you see it right now I'm not going to ask you for guidance, but if you could just kind of flush out how you see the big moving pieces I think that'd be super helpful.

Well why don't we start with your last question and we'll work our way backwards Tyson.

Yeah.

That's a good question to some pulling some up here I think when you think about what headwinds really do become tailwind or vice versa. I mean, we've been talking about I won't I won't regurgitate everything you've just said about enhanced rate, but really.

Really that shift that mix shift is the biggest tailwind that we see.

When you think about balances continue to grow if you look at the outsized balance growth that we had relevant relative to market and just the acquired assets that we get as well. So we're really positioning ourselves to have a lot more assets in a better way to place them and that is really going to be the long term and that like I said before I mean, the profitability of the business in <unk>.

I might've missed change inherently we're positioning ourselves to take advantage of what I see.

And the news. This morning, if the rates are going to shift up and they will eventually and we've already sort of seen that as we've competed those rates against the various.

Partners that we work with and so we're expecting those those rates to eventually rise and it sounds like they may be slowing a bit sooner.

Sooner.

When I think about the real headwinds for the business.

I think that employment can cut both ways. When you think about how you think about how <unk> utilized versus how you think about that.

FSA isn't utilized and so you get the kind of swirled waters of the CDB, which that's not necessarily the growth area of the business, but what it does do is it really helps us to cross sell and so the deals that I signed now are always true.

For the most part multiple deals with multiple types of accounts supporting HSA growth, where we're able to provide something to HR benefit offices to where they are not managing multiple vendors and that's really powerful for tad since the end of the sales team.

And then the.

Other kind of headwinds that we have.

Just trying to manage through how we think about.

What the report the pandemic does to spend and how people spend in and really kind of even to go back to the first question. How are we sort of you know.

So there are some places where we maybe don't want in particular.

Clients, where it's not profitable and where it doesn't necessarily work for the platforms that we're going to go forward on and and those are very very small relative to our overall base of revenue, but those are decisions that now at the end of the long wage works.

Integration now that we're making and we feel like we're making the business business healthier as a result of that.

You mentioned a couple of other ones you know obviously you got the child care accounts that are a headwind in those type of things but.

But those are some of the things that I think with think of it on kind of those two the first and the last question.

Well I'll kind of hit them.

I'll hit that middle one in a way it builds on.

Very much so builds on Tysons, the first part of Tysons answer.

Sure.

When I look at.

Our sales over the first three quarters and HSA openings over the first three quarters.

And look at the source of those.

What I see is a market that is.

Covering from a tough year last year.

You see more evidence of how tough last year was in the reports that have come out which are sort of backward looking from Kaiser and others.

But.

But what I am, particularly enthusiastic about in that regard is.

In a tough it turns out looking backwards in a tough year, we took more market share than anyone ever has before and we have or anyone has as far as I know before.

And now this year I mean, we'll see what the total market ends up looking like and what.

All of the enrollment numbers that come in for the next couple of weeks here look like but.

But.

As I've always said the best indicator of my next quarter sales as my last quarter sits and.

My last quarter sales were really good.

And so in terms of consumer enrollment as well as overall and so and so.

I guess my General view George.

We try to manage as you know we try to manage the business towards the long term opportunity in the long term opportunity is the same one that you and I and Darcy and Steve talked about.

I think Tyson was just a gleam in our ILEC and when Ted but.

But but but.

That we talked about many many heat what's now many years ago I mean, it's almost a decade ago, which is easy counts are going to steadily grow.

We're going to end up when we're done with about as many HSA says there are <unk> out there their balances are going to start small, but over time, they're going to grow and you can see that happening.

As a result of that.

You end up with a business that has sustainably high margins and has a good long runway to it.

We are some steps that we take to make sure that we're in position to see that growth turned out to be tough. One. So obviously you saw that in this quarter with respect to.

Tyson call it some of the CBB swirl.

But we're going to keep taking those steps and whether that's <unk>.

Building enhanced rates or solidifying our footprint in the blue system with further whether it's what we've done today with the.

HSA administrators to kind of build on some of the momentum that our individual product has had in small and very small group products.

For some of the kind of more investment oriented small groups of doctors and lawyers and the like.

With HC administrators as focused or or whatnot.

We're going to keep doing the things that position us to take market share in HSA, so that as that market expands in revenue terms in asset terms and count terms, we're going to look up and if we keep doing that year over year, we're going to be just fine and our shareholders. Our long term shareholders going to be just fine and more.

And perhaps more importantly than all whether we're fine or our shareholders are fine. We're gonna have done a lot with a lot of people in terms of connecting health and wealth. So.

That's kind of the way I look at it I know that sounds like a little bit of bladder, but it actually reflects my view of both next year and the year after that and the year after that.

Yes, Ken I appreciate all the commentary thank you.

Thank you.

And thank you.

And our next question comes from Donald Hooker.

From Keybanc. Your line is now open.

Hum.

Hey, good afternoon.

So I guess you guys are really seeing it.

Just amazing growth in the percentage of HSA assets invested and that's always been a.

Difficult to model and is there. Some reason is that it almost feels like that's accelerating a little bit and I was wondering can you can you talk a little bit about trends or are you doing anything different to drive.

Your HSA members to invest more into stocks and bonds or how should we think about that going forward.

We've worked on this for a long time in pet I think this is a great. One for you to hit in terms of what the.

Our product and education teams have done over the course of the last couple of years to really accelerate this trend and drive the industry and extraction.

Sure happy to jump in and I think it's this topic for sure but it's also.

All of the various ways that you can as a as an employee of one of our clients optimize your benefits and we're investing heavily in getting you to do that right educating U and multichannel ways, both with marketing in the actual product itself and then in member <unk>.

Services when you call just kind of sharing with you what the next best thing for you to be doing whether its you spend your FSA dollars genome. So you don't lose them or hey, we noticed you've built up a little.

Cash in your in your HSA why don't you start thinking about investing.

Or we noticed youre not contributing as much as it should be one should contribute more education has been a huge operational focus for us and I think one of the places that it's really showing up in that you just identified is in the percentage of members.

Vesting, we're seeing in other places too.

And the number of members that are raising their contributions and the number of members that are spending through their MSA. So it's I think we're kind of in the middle innings here.

We built a pretty strong program over the last couple of years, but theres still a lot more that we can do across the board, but notably in this industry.

So I guess my follow up and this is probably impossible to answer but I'll ask it anyhow.

See if there's is there a way to think about is there a sort of a natural threshold there.

I guess any kind of updates I know in the past we've talked about this but maybe any updated thoughts as theres. Some what is the typical sort.

Natural threshold, yeah sort of cash in.

What's.

The typical.

My dog wants to chime in a little bit on this but.

We've talked about this a little bit before it.

And I think you see the same concept also when you look at the most mature accounts.

Typically.

What youll see is people will build up enough.

Cash.

Liquid liquid asset.

To be able to handle kind of their near term expenses and so it's important to note that even among our Max contributors like.

They are also spenders.

By the way one of the reason that you haven't seen really any drop off in HSA spend by interchange that is even as balances have grown commented on that a little bit of a script.

Uh huh.

So.

People tend to buildup.

Enough cash to let's say cover their annual deductible or some number maybe maybe for some folks at their annual out of pocket maximum. So if you look at our longer term accounts that.

Kind of done that what youll see is that that cash balance kind of tops off somewhere between 3% and $5000 and okay.

And then they continue to grow the investing side and it's not like there's a switch lift or whatever but.

That's kind of I think a way to think about the typical behavior of an investor.

Is that when you look at and you can see this even in the further.

Sorry.

HSA administrators business, that's been very focused on individual investors in these very small group of folks who were like totally on to this right where you see.

Your average total balance of 15 to 20 Grand of which.

Give or take three quarters as is.

<unk> invested and one quarter is cash.

Yes.

And so I think thats.

Kind of where you would expect it to end up.

Okay. Thank.

Thank you.

Thank you.

And our next question comes from Scott <unk> from Stephens. Your line is now open.

Hey, John Hey, John Tyson and Richard Happy holidays.

So right.

Right.

I understand the moving parts around the more conservative guidance. So just wanted to continue this conversation on <unk>.

HSA, what's driving the organic growth rate there.

Where are you seeing the sales strength from.

Can you talk about where you are in terms of the cross selling opportunities on the wage legacy customers. I believe there was 70000 employer clients and roughly $20 million employees that they touch so.

I guess.

What's driving the.

The organic growth, where you're seeing the sales strength from and where do you stand on the wage legacy acquisition.

Great.

Steve why don't I ask you or Steve to start in terms of.

Kind of what you see out in the market Youre out there.

For those who don't know Steve Neeleman. He will go anywhere for the deal.

You call them up this afternoon, and you say I need you in Charleston, Tomorrow morning, you'll figure out way to get there.

So I'm going to start with Steve Neeleman and then Ted maybe you can comment on the on the cross sell metrics.

Thanks, Sean and thanks Scott.

Right.

Obviously last year was a tough year, just with Covid, Netherlands kind of hitting the pause button. We've been really encouraged I think it's been you've seen it in the numbers.

It's amazing when I look at these numbers, we just reported.

There were some acquisitions in there, but still see $960 million during the quarter of <unk>.

Growth in kind of a 14% account growth and so.

We think these are great leading indicators.

And I can tell you in the RFP.

<unk>.

We felt really good about.

Where the season started shaping up towards the end.

Some of the larger employers who are still in pause mode, a little bit at the very beginning of the year. When Covid was still really raging. If you think about the sales cycle for the real big ones.

This was kind of prior to everyone getting vaccinated things like that.

Small groups, we're still closing a lot of deals right now and then.

You were to win.

We're not gonna, let Trevor do this by the way, but if you were to ever listen I'll have ourselves.

You would you would get a lot of energy and.

People, saying that they really do feel like especially in the small and midsized businesses that are still.

One of the questions that was.

Asked earlier was how do we finish up our open enrollment season, we haven't yet I mean this is a very busy time.

For for groups that are still rolling people in and so a lot of energy I think it's been I think it's pretty well illustrated in our in our numbers we reported that the.

The HSA as you're growing and.

There are some mixed results on the Cds largely because some are rolling off but I can tell you every time.

We bring on an employer than they have.

<unk> four <unk>, then and we start to do our education and and really start to bring people over to the light of a retained value account that doesn't go away when they change employment. They can take it to mean retirement all the great things about HSA is.

Sometimes we will see initially the CDB start to go down, but the HSA is really start going up and so I think thats one of the reasons why you're seeing some of the same.

Some of the.

Fsh and things like that coming down, but a lot of energy Scott I guess is the way I would classify that Ted how would you add to that since it's all kind of.

Part of your world as well.

Yeah, Thanks, Steve and thank you for putting your shoulder behind our sales efforts like you do.

And getting on more planes than most people.

I think the answer specifically the cross sell question here's.

We're very pleased with our cross sell progress thus far and.

And we don't really break out the metrics, but I think a couple of things we've shared in the past and I would just reiterate our.

Number one our close rate and a cross sell opportunity versus de novo opportunities two to three axes hi.

The client knows us and they're accustomed to our service and that goes both directions, whether depending no matter, which legacy.

<unk> base.

Employer was a part of.

And then the second is last year, the vast majority of our cross sell you can imagine why do you.

Rob banks, because thats, where the money is we focused all of our cross sell efforts on enterprise.

To get started and Thats, where we saw some early wins and what I've been most encouraged by this year is that we're starting to see that cross sell capability to send down.

Into employers into small to medium sized employers and Steve alluded to a place where we had a lot of success. This year, it's hard to draw a straight line between cross sell and that success. There's lots of reasons for that success with cross sell is certainly one of them. So I think.

We're getting this was our second selling season being able to offer.

Kind of a credible bundle and we're getting better at being able to do it and we look forward to more progress and I think the last point I would make is that there is still a ton of white space for us we have.

Hundreds of our top 500 enterprise clients only have one product with us right and thousands of our.

Our small to medium size clients only have one product so the opportunity should should nourish us for a long time.

We just have to continue to mature market and thus far were experienced trajectory.

Okay.

And the way they keep piling on I think make one other point here, which is that Ted talked about cross sell white space I think again looking both now and long term.

I really could not have asked for realistically a better outcome in terms of how the competitive white space is shaping up.

Our largest competitors are the largest health plan in the United States, which has its kind of.

Walled garden and.

The largest investment retirement plan, managing United States, which has its wildcard.

And.

There are things that are good about walled garden, but the nice thing about us is.

If you're an employer, we're going to work with you whomever we are not part of their lock in strategy, but even better.

If you are a partner of ours right.

You know that or Youre.

Youre looking at both of those and Youre trying to compete and that means you want to work with the best you can and NASA.

And.

I think not only is it the case that competitively the market is shaping up for that lag to be our lane and to be a very largely.

But also from a technology perspective, and I alluded to this in the comments and you'll see a little more of this in the next few quarters.

But.

The technology is continuing to evolve in such a way and our platform is continuing to evolve in such a way that we can embed the HSA deeper and deeper and deeper into our partners' products.

And or in the language of API HSA is can be consumed in so many different ways and that's true in the individual market. It's true in small group. It's true in large group, it's truly an environment its really help them. So.

<unk> been adding so.

And in other channels that we haven't even thought of yet as HSA is continue to mature and sort of penetrate touched so.

Bob.

I think that's another thing that has begun to help us in this cycle, but that will be a big help her as we kind of continue to try and sustained market share growth year after year after year over the next number of years.

Thank you.

Yes.

And thank you.

And our next question comes from David Larsen from BT AIG.

Your line is now open to Washington.

Hi, congratulations on the growth in a number of HSA accounts.

That's great just a couple of quick ones. Most of my questions have already been asked and answered with the interchange revenue.

What's the Delta variant one of the reasons why like utilization may have been a bit lower than expected and then do you have any thoughts on army crime is that can have an impact or not do you think just.

Any color there would be helpful.

Yeah, I'll I'll take a shot at this one and Tyson if you'd like to add to it.

I think the main challenge that we had with Delta is it made it very difficult for us to interpret results that we were seeing.

So for.

For example, when we saw.

Very strong results.

In July which was the last month of the second quarter.

And for the most part after.

Your account runoff it occurred.

And.

During while Delta was going.

And really raging we.

Well very confident about where spend trends.

And.

It turned out that that was a bit of a false signal in the sense that that.

That wasn't followed up as this quarter began in Q3.

So I think that that could not give you too complex or an answer.

It's just another factor that creates variability and difficulty in interpretation, particularly for CDB spent.

What I would note though.

Is <unk>.

HSA interchange during the quarter was rock solid and Thats one of the reasons why the interchange notwithstanding these challenges that we've talked about was still up 8% year over year.

And so.

That isn't to say HSA interchange was up substantially more than that and so.

I think.

That's an interesting dynamic that we need to continue to look at and so but I will but it is fair to say that as we enter Q4.

Certainly, we don't know any better than anyone else what the effect of Amazon is going to be.

I'm not sure why they skipped new but they did.

And.

And.

And it may have some impact.

But I think fundamentally what we've tried to do is take what we have learned over the course of the pandemic and reflect that in a reasonable forecast for interchange for Q4, we will see what we get we'll learn and we'll refine.

But we're also taking the lessons that.

Our HSA spenders are clearly more resilient to changes in economic conditions as well as.

Less likely to be impacted by sort of in the weeds regulatory items, then our FSA vendors and.

Also that.

Ceb's vendors, but but also that.

Our HSA spenders can also.

Can top up their balances whenever they need to do that kind of thing, whereas our FSA spenders are effectively if they didn't pop up their balance last December and November during annual enrollment for most firms. They can't do it until now and it won't have a fact until January and so those are those are lessons that really reflect the point that.

That I made in the earlier in the initial commentary that is we're going to spend our money growing where we know the growth is and where we know we can deliver profitability and visibility to you and we're going to deliver to our clients what they need in order to buy those HSA, but that's.

That's one way, we can reduce uncertainty by growing that core faster than the employee.

Okay, great. Thanks very much.

Yes, Sir.

Thank you Anna.

Next question comes from Glenn Engel.

From Jefferies. Your line is now well come back.

Yes. Thanks.

Thanks for taking my questions, it's good to be back.

So I just wanted to follow up gentlemen on some comments that you made it kind of sounds like the.

The effects of the pandemic or greater than maybe what you would've thought are lasting longer to use your words on the CVP business.

And I heard your comments on Cobra, maybe fell off more than we expect in the FSA business.

Could you maybe put some numbers around the CDB shortfall, because if I hear you correctly. It sounds like your HSA business is trending ahead of schedule just some of the comments to some of the previous questions and so maybe what I put it in context of the.

$75 million revenue shortfall or I think I calculated I don't know, what 11 $12 million $11 million shortfall in EBITDA relative to the guidance. It sounds like it's much bigger than that maybe being offset by some of the benefit in HSA.

Well I'll ask Tyson to add on but I mean, I think the key point to make here is essentially all of the delta between our current outlook now current outlook and our outlook at the end of Q2.

As a result of these.

These factors and CDB.

And.

And the HSA business has performed as you say about either at or slightly ahead of where we would've expected it to me.

I think particularly as we go forward, we're feeling as I commented earlier.

Sure footed on the rate side of things.

But but.

But by and large.

I think the key point is that the.

The Delta that you just described really boils down to.

The various CEB factors Tyson.

Would you like to add to that.

Yes, I mean, you did some math there so I'll just I'll just go back to that.

I think that's exactly right. The CDB conversation that we've had and again the largest portion of that was really related to interchange softness that we saw and then a little bit on service fee from the fall off of those 2019 2020 FSA accounts.

Obviously commuter still coming down year over year, but sequentially up just slightly so you have that in there and then and then the other kind of big piece of that math. There is bolting on that further business in Q4.

Really doesn't provide a lot of margin, but much more.

Provided the revenue, but not the margin, particularly in the seasonal Q4 enrollment period. So that's why you get the differential between between the two pieces of math that you've done that.

I apologize, maybe just one follow up and I'm, sorry, if I missed this but the consolidated custodial yield in the quarter did you give that.

<unk> hundred 72 and.

175 guidance for the year right 172 versus 175, so if we look at three year CD rates sitting at about one and a half right and the benefits from your enhanced rates program being 50 to 75 basis points, where you're kind of trying to flag that maybe as we exit fiscal 'twenty, two and head into 'twenty three that this.

This should be the bottom in terms of your.

Your lateral strategy.

John Let me comment go ahead.

Go ahead I was just going to say no as I commented before.

And I'll say it again, so I think it's really important.

When I think about where we replaced.

Placing things.

A year ago versus now because we do have assets come forward in our quarter, all goes and places them. So we know the rates those rates are higher for FDIC and then I think we got a very good rate pullet placement when we get our placement on November 1st with the further assets and also sort of the real kickoff of our we'd already started doing enhanced rates, but the real.

Kick off but it wasn't as weak as we merge those further assets in there and so those were higher rates than they were at the first part of the year. So that's part of that is good negotiation on the part of our Treasury team and Theyre doing that continuing those rates against each other the other is that there starts to be a little bit of light at the end of the tunnel and <unk>.

Paul This morning talking about moving up.

Ratio, that's pretty exciting I wish it was in December versus March but it is what it is right. It's still a long term view on those rates coming up on assets helps from not only next year being will be lower still because we placed at higher rates, two or three years ago, but again youre starting to turn that corner and as John said.

We're not going to be below sort of those all time lows that we saw.

As part of the last recession, but it takes multiple years to kind of turn that around based on the way to be better helps going down.

It's slow going up but it also increases again like I said.

Heron profitability from enhanced rates and how that works.

<unk> has been approved based on how we're doing that.

Okay. Thanks for taking the questions.

Yes, I mean, Glenn just one other thing on this tower one.

Point of emphasis on this topic.

When we talk with investors as you do.

They would love it if we would give them a forward rate curve or the like.

And the reason, we don't do that as you well know.

Is it would be like asking another firm.

Could you please tell us what your price what price youre going to offer to customers this year and next year.

And we're not going to do that.

But.

<unk>.

That having been said.

We've heard a ton of speculation on this I sort of go back to Greg's initial question.

And over the course of the last year or two as you know.

CD markets have kind of stuck where they are and so forth.

And.

Hi.

To my mind again, I think about I don't have to talk about Oh, it's going to get better later as Tyson said it is getting better now.

Right.

And it's getting better in part as a function of market conditions, improving and in.

In part as a function of the team taking action in bringing innovation to this thing and.

That's what we do here and whether it's about rates or about HSA growth or about.

Cleaning up what to me is some variability that doesn't help us in cloud story.

That's what we'll keep them.

Okay. Thank you.

Yes, Sir.

And thank you.

I like how you say in the end of each one.

It's very common.

Confidence building.

Okay, great great.

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

Thanks for taking the questions.

Going back to the interchange type I think you talked about.

S. A wind down for 2019 and 2020 vintages.

Basically, causing a shortfall on interchange, but I guess, if theres more accounts that are closing does that mean that.

The customers are spending more so interchange with theoretically be higher.

Thats question, one and question two I guess, if we're looking forward from this level here.

Across the commuter Cobra FSA, I mean, what would need to happen for things to deteriorate from this level here and I guess just expectations on what to think about.

It is embedded in <unk>. Thanks.

Yes.

I think that's a good question because I think where we saw that spend but I would have suspected that maybe it would've hung over on a little bit longer wasn't that Q2 time period and you saw.

That spend down if you will and therefore that increase was part of that.

I think the other read on it it's hard it's hard to get a reading on it right because I think the other read on it was that year over year. It was a bounce back from pandemic and people are out doing more.

So blending those two things together and then coming up with the second half forecast proved to be.

Difficult right. So we saw that we still grew interchange, but it just we didn't get the tailwind like we thought because of those so we saw those accounts go away maybe a few more go away, but I think where I'm optimistic is now kind of the enrollment season, where we go into January and people are re enrolled into these accounts and they're they're tough to begin and maybe Reid.

Get some more normalization if you will over the next year be a little easier to forecast.

Okay, and then a follow up on Glenn's question about the implied <unk> guide.

It seems based on my math that organic growth.

<unk> <unk> 22 versus <unk> 21.

It is going to decline somewhere in the range of 25%.

So just can you kind of clarify whether or not that's accurate and then b.

I know that you are spending more on technology, but what else is embedded within.

That decline thanks.

Well I think the I think the one thing and then I don't know.

Not doing the math quickly, but I'll trust.

I Trust, you've done some math to kind of get directional on that but the thing that would drive that the most is just the fact that we're putting acquisitions in the business that are acquisitions that we think we can improve margin on but when we buy them. They don't necessarily have the types of margins that.

We have and so that's the job is to improve those to synergize them to get them onto a single platform single serve as a single processor.

All the different things with their operational team does to improve the margin related to that I do like the I do like the deals that are portfolio acquisitions, because those come in without people they come in with just assets and yield and obviously higher margin.

So.

You get some of that playing through into that and then again you go back to the CVD businesses and the easy low hanging fruits to talk about there is the is the commuter business and the fact that.

There's tens of millions of dollars of missing high margin revenue on our one of our highest service fee line items.

And that commuter business and so I'd like to see that come back because that will create a nice tailwind in and we did see a turning point and that is insignificant turning point, but at least it went sort of the other way and started to come back. So those are kind of a few things that I think are in there and the other one that's really there are two I guess you made me.

I think of some other things that visa I know Alan you talked about these things before but you think about the custodial revenue and the margin generated by that and the 36 basis points of decline at that yield year on year, and it's kind of mixed within all of these comments that that is fundamentally how this business is going to produce profits and.

When that rate starts to turnaround.

I'll start to produce profits and I think that that again, we're getting to a point, where that's starting to happen.

Yeah.

Got it thank you very much.

Yeah.

In Q.

And our next question comes from Stephanie Davis from SD <unk> Leerink. Your line is now open.

Thank you and thank you guys for taking my question.

Yes ma'am.

It has been a really long your Tyson so talk to me about your learnings from that.

Do you have any changes to your guidance philosophy, and how should we think about your forward views then on PDP account recovery.

Is this going to be kind of the.

Is that was that assumption for step forward spend patterns remaining began commuter basically zero doubt that goes until it returns or is there.

Any thought towards improvement.

Go ahead, it looks like in fourth quarter.

Yes.

Yes, I think I think I'd go back to there are a lot of cross wins and you see that even in.

A lot of articles you read about the fed.

Trying to get this straight.

There are cross winds, it's difficult to come up with forecast, particularly on the proceeding is not I mean again HSA. If you think about that.

When I think about forecasting custodial yield on interest that we can do that and we can do that we can see what we think enhanced rates will do for that revenue stream and we can get a pretty good idea of being able to tell you. What we think that has to within a very immaterial amount.

The same is true when you think about HSA service fees, because they stick around and so you don't have this ebb and flow of those in some of these annual decisions that get made so.

To me the answer to getting forecast, even more accurate as to grow the HSA business larger than these other services that we have which is exactly what we're doing with acquisitions and exactly what the organic business is doing as well and so I think my learning from that.

What I cannot talk about to the team that's what the team wants to do and that's the mission and it will solve some of these issues that we've had with some of this world.

But given the pandemic and everything else, it's tough to tough to kind of get there. So yes, I have learned a lot.

Over the last year.

Where did that would be safe to say youre going to focus most of the guidance on the HSA side of the World and then kind of visa Martha levels that run rate for GDP. Since it's so unpredictable he didn't think there's more upside.

Well I think there's no when you think about CB and of course, we've talked about some of the things returning but it's really just that commuter segment and six 4% of revenue right.

Enough for us to talk a lot about here, but it's something that I think helps us sell HSA is so I think I can say, you're probably right I'd like to focus more on how we think about HSA growth and forecasting that and fundamentally that's what we're trying to do.

Okay, and if I can sneak in a quick one just on EBITDA for the fourth your guidance is there a way to tease out the deal related impact to that fourth quarter number.

And how long should it take to turn around the acquired margin.

Is this something where this can be one quarter and we'll see an improvement or is for Q EBITDA, how we should think about run rate.

Well Theres two things that happened with <unk> I mean, it's really the fact that.

That further to further business that we have.

Doesn't drive margin if any in Q4 relative to the revenue numbers, we put out there which is $12 million.

Centrally on something less than $1 million of EBITDA, and that's because they've got the costs going into the season.

But when you think about that business in a Q1 Q2 timeframe. When we think about right sizing. It for example for the fact that we won't have the Veeva services in there. So we know there is theres. Some theres some costs in there associated to that part of the business that we can take out and just the ability and all the learnings you've had from the wage business somehow.

To create efficiencies within the business and we're going to be able to do that you haven't seen as much in wage because of some of the degradation of some of these Cds, but they certainly are there and you've been able to make those improvements and I think that kind of gives us.

A base to build off of.

So I'd say the same thing is true for that for the business.

Okay Super helpful. Thank you.

Thanks, Stephanie.

And thank you and our next question comes from Mark <unk> from Baird. Your line is now open.

Hey, good afternoon, and thanks for taking my questions.

Wondering with regards to the.

The rate discussion as we think about next year.

John When you were talking you were answering Peter's question.

You mentioned, the 152 bps and kind of a lull.

<unk>.

I'm wondering how do we think about that relative to the enhanced right.

Program because it.

It sounds like one way of interpreting things would be hey, we're going to stay steady in terms of the effective yield for 23, another way to interpret things would be.

We still comes down a little bit because of <unk>.

Still rolling off.

<unk> from two to three years ago.

However, you could.

Provide some sort of help in terms of thinking about that.

Because that's obviously going to be important in terms of setting twenty-three expectations.

Yeah, I can or what we said in the past and I would repeat here is that the 23 will be will still be a down cycle part of the down cycle.

It feels like.

It's forever.

But but we started this process in our fiscal 'twenty, one 'twenty two and 'twenty.

And so it will be the third year of that cycle.

So I think when all is said and done and the smoke clears.

We are our expectation remains that we will lose.

Still have a headwind from.

From a yield perspective, but.

As was the case this year that headwind will be smaller than it was then.

And it was.

In the prior year.

<unk>.

And then I think what I tried to add to that.

I think we're kind of.

Particularly with the benefit of the fact that the underlying sort of competitive dynamics in the deposit product market are improving and the fact that we.

Enhanced rates uptake means that we don't have to necessarily go to the the.

The end of the rope in terms of what banks are offering.

We can be a little more selective.

That.

That we can kind of see that being the end and we kind of nowhere that end is going to be which is.

As I commented that we repeat it somewhere.

Kind of.

Year end, perhaps better than the lows.

The lows that we saw the last in the last of the <unk>.

<unk> 2008 through so I guess, that's the way I would interpret I wasn't trying to suggest.

We're going to do 175 next year.

<unk>.

Or that we're going to improve from that but I think for folks who are modeled this stock for a long time, if you have.

Knowing.

With a relative where the greater degree of.

Confidence.

There we think.

The sort of end of that cycle is and where we think it is in time as well as in rates. It seems like a pretty valuable thing.

That absolutely is valuable and.

And then can you just tell us what the most recent placements were in terms of the effective yield that you were getting for those.

Yes, we've been asked this question before as you know and we don't comment on it because it effectively reveals.

The price, we're willing to take and we would rather let banks compete for that price but.

But I will say it's.

It's.

If I think about it is in terms of.

Premium too.

Someone mentioned earlier, the three or five year CD.

That premium which which.

Was.

Hum.

Both the market was low in the premium is at the low end of our historical ranges.

Earlier in the year and at the end of last year.

That premium has improved a bit over the course of the year.

Even though the underlying market hasnt changed very much and.

And again I think that reflects.

A greater competition for all kinds of money and perhaps a view.

On the part of the banks are what's going to happen going forward I don't I don't know about that.

So it's gotten a little better and that should give you enough that you can kind of interplay.

That's great and then there was an earlier question, which I didn't get the answer to it.

On how youre thinking about HTH piece for this.

Enrolment season.

So a lot of companies that have gone through it.

Are you seeing in terms of that shift.

Yeah, well, we'll talk about this a little more in January when we get to the JP Morgan conference and all of that but but.

As I said earlier on in the call I think.

To some extent the Q3 results are an indicator of their because they do reflect.

Firms that have earlier plan year cycles and alike.

The September enrollments on the low end.

And those were really good.

And my General view of the market, if I sort of go back a year. The question was well as the market's going to grow by something closer to $3 million or something less than 2 million like it did in the pandemic period and.

I was arguing that well first of all I was technology that I know, but second of all arguing that the broad forces that are leading to market growth.

Or are you know much more.

About say endemic when the pandemic.

But theyre much more.

They are they are long lasting and Takeda in nature and they continue so I.

I guess on that basis Im kind of taken the view that.

We're seeing what looks like a more normal enrollment cycle this year certainly.

The fact of high employment is a net help her in that regard.

But.

In the sense that there's just more people.

Not as many still we're still not back to pre everyone knows we're still not back to pre pandemic employment levels on the whole, but we're getting closer and.

And the more people that joined the Labor Force, we join the Labor force extremely helpful in that regard.

But.

I guess my basic fee markets by sort of look at it and say, we said all over time that that the market's going to grow.

At a rate of <unk> 3 million accounts are here and has for a long long time and then we had this exception in calendar 2020.

I think this year is going to look a lot more like a.

Prior reality than like that et cetera.

That's really helpful and then the last one for me.

Just with regards to at the enterprise level.

You know you've been gaining share on the whole how would you describe the competitive dynamics at the enterprise level currently in.

Do you anticipate continuing youre, a great track record of gaining share.

Even at the largest enterprises.

Yeah, Ted do you want to hit this one.

Sure.

I think that as you would expect in any industry. It looks like ours. The competition intensifies first at the enterprise level and we're no different and we see that.

I think that our competitors are.

This has been an interesting year from enterprise sales perspective.

In large part because there's a high number of stay with you.

Right.

Many.

People benefits teams are continuing to be a sort of burdened by return to office Covid management et cetera, and so.

<unk> been sort of less willing to make a decision.

But despite that I think we've more than held our own in the enterprise space among those.

Those.

Pieces of business cases that have.

That have moved and then <unk>.

Probably similar to other people in the industry our retention rates have been very high we indicated by the fact that some people are just housekeeping.

And so I don't think we've seen anything unexpected we haven't seen anything.

Crazier shocking.

From an enterprise competition perspective, there is not.

Someone hasn't come out with the iPhone 17, and we're still trying to sell the iPhone 12.

It is sort of proceeding at pace with what we would expect.

Price competition is.

Higher in the enterprise space and in the mid market small market and that's one of the reasons why.

We're trying to put our chips, where we expect the best return and so to a large extent that's in that.

Small market mid market space, but with our value proposition and our brand.

And our reputation for service we continue to perform.

Performer outperform in the enterprise space.

Even though it's been an interesting year, there nothing crazy competitive wise, Steve I don't know if you have anything to add there if you see anything worth mentioning.

No I think that's right one of the things we're really excited about is with the further acquisition. We've got another 10 blues plans that we're going to be working with and I think our team is getting a lot better.

Working through these health plan partnerships not just to go after the small and mid sized businesses, but also to go after the large employers because a lot of the further plans plus our base.

Plans are under 20 health points, we are blues plans that we brought to the table plus a bunch of other tpa some large health plans throughout the country.

They also bring us to a lot of enterprise type of employers and so there's always been this push pull on our business I mean going back like.

Oh Man 15 years in fact, John you remember when we first started working together in 2009 I was always talking about your fantastic work with the enterprise employers and you were talking about health.

Health equities fantastic work with the health plans and now we're really starting to see those forces converge, where we've got this national footprint. We've got the full bundle and we have the ability to not only deliver a full bundled solution to the health plans, but to their largest and most important clients.

So John John I guess, we both got our wish we have a full stable of health plans.

And a full stable of large enterprise employers so its coming together nicely.

I was kind of I was having a.

I don't want you to think I spend a lot of time on this but.

I have to admit them others.

Internet site.

Mike.

Moments, where I'm trying to distract myself I look at what has.

Sort of unusual maps and I think they call. It in that point I don't think I can say that.

And.

And.

So so yesterdays.

Thing from that site was the largest employer by state and what I'm getting at is what's the enterprise and first of all the point. The chart was trying to make was that theres. One employer that is the largest employer in a lot of state and they happened to be a client of ours and that's great.

Private sector employer and so forth.

But what was actually a really interesting was.

Essentially all of the states in which they were not the large simpler.

The large employer was not.

Some fortune 500 company.

Yes.

It wasn't Amazon.

Okay.

It was a health system a hospital system.

In something like 30 of the other states in credit.

And that's a market, where we do real well.

For us.

So when we think about enterprise, it's worth remembering that we're looking at number of employees and.

And those kind of factors not just.

Whereas other firms might be looking at size of the budget and so.

I think particularly when you look at it that way Steve's comment about the.

The relationship with more blues plans comes into focus because those are local relationships to start on that.

And.

And it's not just briefly when I think about Providence health care in in.

In the northwest or.

St Luke's in Idaho or.

Or Presbyterian in new Mexico or.

Santa Clara and in Virginia and visa.

Our huge local employers that are also effectively our partners in other ways and so.

So that helps us in the enterprise market.

That's that's very helpful. Thank you so much.

Thanks Mark.

And thank you.

And I am showing no further questions I would now like to turn the call back over to Jon Kessler for closing remarks.

Guys. Thank you for your good questions and tough questions and.

And for going through this with us really happy holidays to everybody.

As Tyson mentioned in cat alluded to on this call.

These are.

Very unusual times for us at health equity and for our team because.

Not only is it an unusual holiday with some joy at the fact that things are returning to normal but also some trepidation with AUM accounting all of that but we are.

As many employers are working through.

As a small number of federal contractors are working through the federal contractors mandate and.

Far be it from us too.

Grouse about the difficulties of doing that.

Given the importance of the past.

And no matter, how one feels without these mandates it's our job to comply with the law and we are doing that.

Wanted to just take a moment to.

Both tank.

Thank our team members, who have kind of worked through this from the perspective of what we're thinking about it and dealing with the compliance side of it and also.

Very candidly.

Are both wish well those who have made a different decision, but thank our team members for helping US get ahead of that as much as we can in Q4 and have the team prepared to deliver the best possible service. We can under what is a really unusual circumstance for us.

We care about this a lot we're not going to ignore it.

Can't ignore the impact on our team.

Of of losing.

Moving some people due to the mandate.

And we're not going to so.

I think it's a special area of banks for companies like ours every one in the health care sector is affected in the same way as you all know.

So many of our partners are affected in the same way and.

Certainly our friends in the federal government, where our clients are affected in the same way.

So very much appreciate all the work that every member of our team is doing to keep the wheels, turning as we go through a most unusual business using fourth.

Happy holidays see everyone soon.

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