Full Year 2022 Healthequity Inc Corporate Sales Call
Good day and thank you for standing by welcome to the L. 40 year end sales metrics conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
Ask a question during that session, you'll need to press star one on your telephone.
If you require any assistance during the call. Please press star Zero I would now like to hand, the conference over to your speak today, Mr. Richard Putnam, Sir the floor is yours.
Thank you Chris we appreciate it and welcome everybody. We appreciate you taking time this afternoon to be with US My name is Richard Putnam I do Investor Relations here for health equity.
Joining me today is John Kessler, President and CEO , Dr. Steve Neeleman, Vice chair and founder of the company tightened Murdoch 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 sales metrics for fiscal year 'twenty 'twenty. Two was issued after the market closed. This afternoon. The metrics reported in this press release include contributions from our wholly owned subsidiary of wage works and accounts.
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 February 22022.
And will contain forward looking statements as defined by the SEC, including predictions expectations estimates and other information that might be considered forward looking.
There are many important factors relating to our business, which could affect the forward looking statements made here today. These forward looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the 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 detailed in our latest annual report on Form 10-K , and subsequent periodic reports filed with the SEC, we assume no.
Or obligation to revise or update these forward looking statements in light of new information or future events.
And at the conclusion of our prepared remarks, the operator will provide instructions on how to do our Q&A.
With that out of the way I'll turn the call over to our CEO Jon Kessler.
You may check appreciate that Hello, everyone and thank you for joining us this afternoon.
We have a few brief remarks from me on sales results and Tyson on our revised business outlook, but we want to reserve the bulk up todays call to answering your questions and so schemes and Ted will join us for that purpose.
February 1st began our fiscal 'twenty, three and we have entered fiscal 'twenty three.
With the benefit of record sales record HSA and asset growth.
Purple our partners and our clients helped HSA members open 918000, new accounts in fiscal 'twenty, two that's 34% more new HSA sold than a year ago, and 27% more than our previous fiscal year record set before the COVID-19 pandemic began.
Health equity ended fiscal 'twenty, two with $7 2 million HSA up 25% year over year and up 12%. Excluding the 740000 acquired HSA is from fifth third and fourth.
Our HSA members experienced another strong year of balanced growth in FY 'twenty, two and average HSA balances grew 10% despite January stock market volatility.
Overall health equity interest say membered members.
Members ended FY 'twenty, two with 19.6 billion in HSA assets up $5 3 billion or 37% from a year ago that included $2 8 billion of organic growth as well.
Member education, and engagement efforts produced strong contributions and 37% growth and investing HSA members.
Percentage of HSA members, who invest reached six 3% at fiscal year end and HSA invested assets again, despite january's volatility we've seen.
The 8% year over year and at the end of the year are made at the end of the fiscal year made up 34% of total HSA assets.
These are very positive trends for the long term value to health equity.
More members using the full power of HSA is drive our profitability wins from cross sell and from competitive takeaways spur outperformance atopic still growing HSA market.
These results speak to the return on our investment in integration to a total solution and single proprietary platform, which drives cross sell and an engagement infrastructure and capabilities of that platform, which drive members to action.
We believe that health equity once again took market share this year, but we'll have more to say about that at various sources update their estimates and HSA market size.
Our ability to offer clients a total solution at scale, including ancillary consumer directed benefits or CDB accounts was a major driver of agency growth in fiscal 'twenty. Two however, CDB enrollment enrollment itself in terms of growth was modest net cdb's grew 2% versus a year ago to seven.
Point $2 million.
And were essentially flat year over year, excluding C D DS acquired with birth.
New CDB sales were offset by discontinuation of certain CDB offerings as we consolidated platforms.
Grayson.
Related attrition and roughly 650000 commuter accounts still in suspense due to continuing full time work from home.
We enter FY 'twenty three and this year's selling season with 185 network partners made up with health plans and retirement plan record keepers and benefits administrators with.
If we go to market health equity grew the number of its network partners from 174 in fiscal 'twenty, one and from 165 in fiscal 'twenty and beyond adding partners, we improved the quality of partner relationships deepened our commitment to technology integration examples of which you've seen from us over the last few months.
Now I'd like to turn the call over to Tyson to talk about our revised outlook for fiscal 'twenty, two and to give a first look at fiscal 'twenty three.
Thank you John we are today, raising our outlook for the fiscal year ended January 31, 2022 as follows revenue in the range of $754 million to $756 million versus our prior guidance of 750 and $755 million non-GAAP net income in the range of 108.
110 million within the range of our prior guidance of 101 hundred $12 million.
non-GAAP diluted EPS in the range of $1 30 to $1 33 versus our prior guidance of $1 30 to $1 35, and adjusted EBITDA in the range of $2 32 to $2 $35 million versus our prior guidance of $230 million to $235 million.
Our revised outlook implies adjusted EBITDA margin for the full fiscal 'twenty two at about 31% EBIT margins. This is a remarkable achievement given the loss of high margin commuter service revenue healthcare interchange revenue and lower yields on HSA cash during fiscal 'twenty, two compared to the year ago period.
Given the expected financial results for fiscal 'twenty, two and the sales results released today, we have sufficient confidence to provide early guidance for fiscal 'twenty three revenue, which we expect to be in the range of 815 million to $830 million I'd.
I'd like to take a moment to describe key assumptions underlying this guidance, including those related to the unusual circumstances of the pandemic.
Today's guidance assumes an average yield on HSA cash at or above 155 basis points.
Fortunately as is our practice today's guidance does not factor in widely anticipated changes in monetary policy, namely fed rate hikes or increases from current term placement rates for HSA cash, which would have a positive impact on rate.
As you know however, most of our HSA custodial cash is deployed and multi year fixed rate instruments.
Between 5% to 10% of HSA cash plus CDB client held funds are deployed in variable rate interest rate instruments tied to LIBOR policy driven rate increases this year will provide in greater lift in fiscal 'twenty four and beyond the uptake of our members into our enhanced offering has helped in this year's placement and we have assumed a measure of continued mixed.
During fiscal 'twenty, three and our guidance.
As you know we have been less than successful at predicting the impact on our business performance of the pandemic twists and turns and regulatory responses.
Our revenue guidance assumes that revenues from commuter benefits will remain depressed with only very gradual and modest improvement throughout the year.
Guidance assumes no new variant impact that may cause further disruptions with respect to health care spend and its impact on interchange revenue, we assume per account spend out about fiscal 'twenty two levels with health care services remaining broadly open to our message.
We assumed a normal roll off of prior FSA is in the first quarter of fiscal 'twenty, three as normal Grace and run off periods close for calendar year FSA and finally, we assume no additional cobra subsidies in fiscal 'twenty three such as what we benefited from in fiscal 'twenty, two and that with full employment Cobra uptake rates will remain subdued.
As expected the further business acquired on November one we will contribute about $60 million in revenues with adjusted EBITDA contribution running at about 20%.
We are we are already finding ways to improve profitability in this business and expect synergies to be realized over the next few years to widen margins with our overall business. Today's estimates also assume completion of the HSA administrators acquisition in Q1.
Based on these factors and assumptions, we expect adjusted EBITDA margins during fiscal Q3 will be at comparable levels to today's revised guidance for fiscal 'twenty two.
With the revenue outlook prudently accounting for the effects of the pandemic persistence.
And we will report our Q4 earnings in the third week of March and with more information in hand, we look forward to providing additional fiscal 'twenty three guidance at that time and with that I'll turn the call back over to John .
Thanks, Tyson before going to questions.
I'd like to just briefly say that today's call it's about reporting record sales.
To some extent raising our outlook and providing a first look at what we hope will be a very successful fiscal 'twenty three but.
The end of our record sales is the busiest open enrollment season.
This last quarter.
Ever had and that's the deepest part of Purple is a remarkable service to our members to our clients to our partners and to each other and I guess.
Just wanted to take a moment to thank.
All of our team members, all of whom whether they're brand new to our organization or veterans.
It really has given us at all in a very very interesting and difficult period.
To make sure that.
We are making a difference and to say that we are as a direct result of their hard work and that of our partners and clients health equity closed the year setting new highs for network partners for employers for HSA members for HSA assets and most importantly, there are 14 million families who were able to do something positive about health.
Care and making ends meet in our country because of your work. So thank you with that let's open up the call for questions operator.
Thank you Sir.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.
Standby as we compile the Q&A roster.
Our first question comes from Anne Samuel of Jpmorgan. Your line is open.
Hey, guys congrats on the on the terrific results.
I was hoping maybe talk a little bit about you said that you thought you know your strongest selling season that you've seen so far.
How much of that would you attribute maybe to a little bit of catch up from last year and then how much of that is coming from your ability to bundle new products or bundle more products. Together, then you've been able to do in the past.
Ted why don't you take this one.
Thanks, John Thanks, Ann for the question.
We had a feeling this one was coming so we are prepared.
There are four primary reasons why we had such.
A great sale season, So I think the first one is the one you mentioned, which is the bundle that we were able to deploy to the market. When we bought and integrated way towards just started is paying off for US right. It gets us more at bats, it gets us more seats at the table it makes us more useful.
To our partners, our brokers and consultants et cetera, and so.
It's working.
Second one is we've invested more in deepening our relationships with critical partners be the health plans retirement record keepers for brokers and consultants and we've really spent the last couple of years.
Under Steve Lindsey leadership understanding what they need from us and how delivering that will help us get what we need from them and I think we're seeing some really significant advances in our partner relationships, which are putting us on more shelves I.
I think third is we're getting better at talking to consumers.
We've invested pretty heavily in marketing communications capabilities, and we know how to talk to.
To sort of end users employees consumers whatever word you want to use bofa working at companies that offer HC HP.
Plans, but they've never had one before or whether they can't get their health care. She works they get it some other way that's been a huge area of growth for us as well and the fourth one which is really important is we have great employers and last year those employers struggled with the pandemic along with everybody else in this year.
<unk> kudos to our to our employer clients they had a tremendous year. So when our employers grow we grow along with that when they hire more people.
Can you bring us along to the right. So I think.
Those four.
Variables.
What we think contributed to our significant growth year for you.
That's great to hear and then just you know on the on the yield how much of your assets are within the enhanced rate product now to kind of get to that one and a half or 1.55% yield and then how should we think about that progression in the future and how that will impact your yields in the future.
Thanks, Dan.
Yeah, Yeah, we were moving into about 10% and enhanced rates and and we would plan to add about that much over the next couple of years here and then see kind of where we want to be from a diversification perspective at that point.
That's helpful. Thank you.
Thank you.
Our next question comes from Allen Lutz of Bank of America. Your line is open.
Thanks for taking the questions Tyson I think last quarter, you mentioned that as I say card spend slowed in the third quarter and you expect it to slow in the fourth quarter I guess, what have you observed during November December and then has that improved in January and February as those accounts sort of all over.
Yes, we still saw Alan Thanks for the question, we still saw softness in the quarter as more so as expected after the revision.
January time frame January through the air.
Early season, one in Q4, the heavier spend periods for that so I certainly think that probably played a part in that with regards to medical spend is what we were seeing where that.
<unk> action amounts or maybe higher but less transactions. So people had to do what they had to do and so we did see that and so again as we built forward guidance, we've been a little bit cautious about that just because I think that where we got pandemic behind us, but I'm kind of done trying to forecast that.
Got it and then kind of a broader question on CBB business. So you mentioned that FSA. It seems like there's some conservatism there cobra.
There was a benefit in fiscal 'twenty, two that probably won't repeat and then commuter it sounded like there was in <unk>.
There isn't going to be a material uptick, but I guess, what's embedded in fiscal 'twenty three guidance versus fiscal 'twenty. Two in those three businesses is there an assumption that that's going to stay relatively flat year over year is the assumption, maybe a decline slightly or directionally can you help us out where that's going thanks.
Yeah. The first thing I'd say is absolutely the Cobra subsidy will not take place again, so we've talked about that it's about 10 million bucks in the middle part of the year. There so that that won't happen again now with the legislation behind us and employment.
Hot.
That also has an impact on that service line as well less people use Cobra when theres more employment and so I've thought about how to potentially build a little bit of bad in and then I would say just overall from a perspective of the CDB businesses.
All about the bundle and the sale of HSA and that's I think what's been playing out I just talked about and so.
The way I think about it is those are not necessarily going to be the growth areas.
We're just going to hold serve there kind of like what we did maybe hopefully a little better than this last year and I would kind of I would kind of think about it that way.
Great. Thank you.
Thanks, Sean.
Thank you.
And next we have Greg Peters of Raymond James.
Your line is open.
Great Good afternoon, everyone.
Hello.
<unk> kind of elaborated that I don't have to hold my questions to just one question.
So.
Thank you Richard.
It's a glorious day to be a sell side analyst covering health equity.
We didn't even have to get in the truck and blockade something for it.
[laughter] well, depending on your answers be careful what you wish for.
Hi, just choosing.
So.
I guess.
One of the one of the things and I know you were talking about yields on cash assets and I know you had a presentation out earlier this year and it was on slide 12 for us.
<unk> talked about just 10% of the HSA cash, earning and enhanced rate product in fiscal year 'twenty. Two but then you also said there was a bullet point that says improving rates on bank term deposits.
And so I guess, what I'm trying to get at is what do you mean by that because as I understand it and I'm not a bank analyst but.
From what I gather banks have been really under a lot of pressure because they've had a huge inflow of deposits and not a lot of opportunities to invest so maybe 10 to 11, 12% that they're earning assets or are just squeaking by with like 12% to 13 basis points. So.
Maybe that's wrong or right, but either way I am just curious what you mean by improving rates on bank term deposits.
Yeah, I'll I'll take this one and then invite Jason to add if you'd like but.
So a couple of thoughts.
Just sort of put the question in context.
What we've tried to do over the course of the pandemic period is ultimately to create more competition.
For our members deposits or our members cash said differently and.
In the olden times that would've been pretty much exclusively among FDIC member institutions, you'll recall a couple of years ago, we were able to expand to include credit unions that are insured by NCQA.
And.
Now.
This year.
We've added.
<unk> back products under the banner of enhanced rates so.
The general point here is that.
The results of all of that is that there's just more and more competitors for those funds and I think that has actually helped us out a bit relative to sort of the depth of the post COVID-19 period.
That is to say if I look at the last few months.
We have seen a little bit.
A firming in the rates on which we place.
Cash in FDIC deposits, but also because of that competition, we're able to.
As you said, we were able to grow from essentially almost nothing at the beginning of the year to about 10% of total assets at the total HSA cash at the end the portion of <unk>.
HSA cash that is an enhanced rates products and.
And that product again has the virtue of is it seemed suggests.
Better rates for our members and better rates for us, but also provides.
Laos us to not have to go and.
As far into the demand on the cash deposit side of things and I think that's that's been somewhat helpful.
I guess.
I would say I I think I would agree with the premise of your question, which is that if I'm solely looking at the deposit market.
There are factors that are structural in nature.
That will cause the improvement in that market from the perspective of a depositor.
To lag things like treasury rates, and all that sort of thing and that's what you see in every upturn and certainly this time around.
But but that's also why we are.
But we're sort of at the at the edge of that and doing our best to get the best deal. We can for our members and for US and then and then also provided more competition through the enhanced rates product and which will only grow over time. So so that's kind of the plan Tyson anything to add to that.
Nothing to add that was good.
Just a point of clarification I know in the past you've mentioned that.
Youre Depository partners have asked in the past been expressed interest and you're extending the duration of your contracts instead of going for like an average of three years to extend it out to four or five years youre not suggesting that you are going to to do extend duration, so those contracts or maybe.
<unk>.
Substantial size that you can now I don't I don't know what the right answer is but that's why I'm asking.
No I think with regard to deposit agreements Ah.
Ah we're.
Well I should back up and say our policy has always been to where it's been for a very very long time too.
That as far as duration goes.
We will stick to between three and five years average duration and in practice with our deposit products, we've always hub.
Kind of the the three year side of that and that's still true today.
With the enhanced rates.
It's a little bit different because you have you can build some of those adjustment mechanisms into the agreement so that.
Your your.
Your actual duration and.
The interest rate risk associated with that are slightly different but but it's still you're still talking about within that three to five year range.
So we're not we're.
We're not getting we haven't altered in any way our basic approach, which is to kind of stick to our policy.
Its work in terms of sort of on the one hand.
For lack of a better term cushioning things when you see very rapid declines in interest rates as you saw at the beginning of 2020 and the flip side of that is it takes you some time to get up but where we're very happy to feel comfortable that.
In fiscal 'twenty three.
This is the end of that three year cycle and will.
We'll be on the upswing from here, we certainly helps.
Got it thanks for the clarification my second topic and then the last question.
Where are their subs to the subs I didn't know that.
One hour.
Power.
I reserve the right to ask a follow up or maybe five.
Yeah.
I'll stick with the SEC.
With.
I'll stick with two topics John Alright, so the second topic would be.
One of the things we track is the interchange revenue per total account.
And obviously the last couple of years have been pretty.
Tough on that metric.
For a number of reasons, including.
The lower utilization, what's happened with this the commuter business et cetera.
And.
You haven't announced it you know you have given us a big picture numbers, but it looks like your interchange revenue per total account could be up in fiscal year, 'twenty, two or at least stabilize perhaps.
Don't want to put words in your mouth, but I.
I guess, what I'm looking at is it feels like maybe in your guidance that you <unk>.
Factored in sort of that starting to improve albeit at a very minimal pace going forward, but again any color you can provide around that metric would be helpful.
Tyson you want to start on this one.
Yeah, I mean, I think if youre looking at the overall year Youre right I mean, the middle part of the year was pretty strong and appear to be sort of a comeback. When you thought about interchange I think the growth rate was 23% or something like that in Q2, and then of course.
Prices coming down the backside of the year.
<unk>.
On with what we revised two for Q4, so kind of down, but I would say that.
I am being measured about how I forecast interchange coming out I mean, especially after coming through the month of January and it just.
Then once again, you kind of get people in locked down and it's all around you and it does have it does have an impact when youre watching it day to day, and so but as I think about the forward I would say.
As I've said in this.
In our comments.
I'm thinking that we're kind of normalizing into this year and I think you used the words.
Coming back through and.
And similar words that I used in the script. There that you just talked about that kind of making progress and I would say too commuter again is a small part of our revenue in the interchange is much much smaller as well, but it is a it is an indicator of what people are actually doing and so I almost see it as an indicator more than anything else and you sort of see that various.
Slowly kind of stepping back up and then in January comes back off again, so anyway. There is some volatility there that's tough to forecast.
Got it well thank you for opening the floodgates in for your answers.
Well done thank you for your questions.
Thank you.
And up next we have Stephanie Davis of <unk>.
The peak.
Your line is open.
Hey, guys congrats on the strong foundation.
Thank you.
So I know I just ask you a bunch of questions last week. So I'm just going to leave this to one question and one follow up.
The first one for John .
I have to reframe my thoughts on kind of your new account sales.
Storage really when I remember modeling out the net new HSA membership you always historically said that it popped up on organic basis.
Have a round.
A little bit sub 400000 for the fourth quarter. It was just a kind of the cadence of how your model works, yes, but you had a lot of headwinds and still on organic basis.
Healthy this fourth quarter. So is there anything about the combined health equity waves that maybe changes that that fourth quarter capacity.
Well I think Stephen the way I would look at it as that.
Yeah.
I would take I think and Ted had mentioned this in his earlier response I do think that.
Particularly in Q4.
We obviously had a strong selling season, but it's also it's also true that our clients in particular had a strong hiring seems very strong and.
And.
As a result of that.
Certainly was a very helpful tailwind in Q4 in particular.
So.
Just as it was a headwind brutally so in Qs two and three of the prior year right and so I think a way to look at it might be to take the last two years on as a whole and kind of like average amount and if you look at that and compare that to what was going on.
Pre wage rate that kind of tells you what the impact of having that total solution really is and I mean it is not.
It's not that complicated in the sense that what we said at the time was that we were there were shots on goal that we just weren't getting.
And we weren't getting them principally from the broker side of things and the middle market.
Because they wanted to buy a total solution than either we or our partners.
We're just selling an HSA and didn't have bill like stuff around it and so.
And that made things harder for them and that's what they told US which is why we embarked on that Odyssey and so.
Youll recall the language about.
Figuring we were selling like 20% of the market and like that was great until you got the 20% market share and then youre not growing market share. So I don't know what percent of the market. We will have ended up selling this year, but.
I don't have market data, but.
I think that's probably a good way to frame it as is.
In fiscal 'twenty, one we had obviously some truly unusual headwinds.
Those were somewhat offset in fiscal 'twenty two.
And but if you take those two together and kind of averaging.
And compare that to what was going on before then.
Can see that there's a fairly significant delta and that's precisely the delta that we would have expected as a result of having greater access and so that's sort of the way I look at it going forward.
So averaging those two out I mean, you can still get to low double digit growth is that yes is that a safe way to look at your net new HSA member growth going forward or should we take them.
Taking a more conservative given some market dynamics.
I think the market is going to give us.
To your point it depends what the market gives us but.
But let's say that the market gives us.
7% account growth or whatever it is.
We should continue to outperform that and.
And so I don't think I don't think what you are saying is entirely unreasonable, but I also think it requires us to consistently outperform and so.
<unk>.
But I don't think it's like it's not crazy.
So I'm not going to give you a number to put in the model, but I think you're in the ballpark and youre thinking about things.
Take the ballpark I'll do that.
Yes.
Yes.
Thanks, Stephanie.
Can you just say one thing before we leave that one and by Steve Neeleman to comment too.
One of the things that we saw this cycle with strength in areas, where people have said hey, our HSA is really penetrating, particularly the middle market and the sort of higher end of smaller employers and Steve.
You've talked a lot about.
And worked a lot on helping clients and brokers and others really understand how to use an HSA. So maybe you could comment a little bit about what we saw there and what we worked with our partners and some stuff. We've worked with our partners on that topic with that that does kind of go to Stephanie's question about what the market can deliver and what we can do it.
Yeah, I mean, Stephanie if you if you recall.
And I think a lot of the consulting firms and stuff like that either because of COVID-19 or just.
<unk> been around for 18 years, now and I think a lot of them quick publishing these kind of detailed reports, but the last time, we looked at this and I think this is true with our own book.
You kind of saw really high adoption among the largest employers in the country.
Then quite high adoption for HSA is in the smaller tiny employers right. There was that kind of mid market that had enough.
Folks working for him that enough market leverage maybe they can negotiate for different types of benefit options and yet they werent as strategic as the big ones like some of the ones we've named in the past.
Work with it.
Look we strategically want to go to a consumer directed plan and we're going to have a whole team of people that do that mid market doesn't have that.
That kind of luxury and small employers, we're kind of doing it because they just need to lowest price premium right.
That mid market is now starting to come alive and.
When we see our people out there in market and with with the wage merger and acquisition, we've really expanded our footprint. So now it's not just working the channel. It's been so great for us for so many years, which is the health plan channel, but we're also able to get in front of a lot of the consulting firms and broker.
Sure the country and talk to them about what they need and then obviously that was the feedback they gave to us what we need the full bundle because if you're a mid market employer and health equity, sometimes we think we're so big room effectively mid market employer right 3500 teammates and.
In certain settings, we would not be considered to be a large employer. We wouldnt in fact, even in our own account management team. They sometimes make that breakpoint around 5000, where they really dedicated a lot of resources to it and yet we have a lot of sophisticated needs and so our ability to come to the market with a full bundle.
And be able to really help those employers through some of the things that Ted talked about.
It's effectively direct to consumer marketing right. It's just the consumers within our clients doing a better job of educating them taking that message back to the employers is what really has I think helped that mid market start to take off and when we started down this pathway of wage we looked at it and that was the segment that we were not reaching.
We were reaching a larger large ones because of our efforts with the big consulting firms and we're getting a lot of the smaller ones because of all of our channel partners.
But it's that mid market and so we're pretty thrilled with the effort and also the results and we're also pretty excited that we're coming up with a scalable way to educate them.
As folks and get them to start to.
Choose to help savings accounts, which is great.
Thanks, Steve I appreciate you adding that.
Okay.
Thank you.
Our next question comes from David Larsen of <unk>.
Your line is open.
Hi, how much revenue is fifth.
And the third and further going to be adding in.
Fiscal 2023, please thank you.
Thanks, guys.
Further in fifth third Okay, Yep, So you've got fifth third at about.
And I've said on the call further was $60 million annual run rate. So we got about a fourth of that in the fourth quarter. So 45, something like that.
Okay, Great and then lets say the fed raises interest rates by 100 basis points in calendar 'twenty. Two is it fair to assume that youre going to get 100 basis points of incremental yield in your fiscal 'twenty four and would that be about 100 million of custodial revenue lift all of which would flow through to EBITDA.
But Tyson do you want to start on this one.
Yes. The answer the answer is no I mean again it goes back to <unk>.
Deposits and also how you know obviously, you've got the enhanced rates program playing in there as well, but you think about that three to five year ladder and those deposits rolling off.
From three plus years ago, better at much higher rates than the average right now so even if we place them at a higher rate due to a fed increase of like you said 100 basis points, we'd still be placing some of those at lower rates and so they they would still be.
Essentially.
May be higher than the average, but they are still a headwind relative to what they replace that before and so it moves a little slower than that so it moves as John was saying before in the call. It moves a little slower moves it moves up or maybe a little bit slower than it came down over the past three years. If you look at the rate of change from them.
Three years ago to now and kind of the declines are those average rates and then it will move back up with re utilized the new placements at those again higher rates based on where the fed comes out next January so having any impact on that placement of about.
A third of our assets is sort of what we've said now we've gotten enhanced rates planning to us. So maybe it's a little less because there is some competition in there but.
Essentially a third of the assets rolling over so that get placed and then we do that.
In the subsequent years as well so.
More than what's your kind of outlining there, but I would go back and look at history as to how that how that kind of comes up and goes down.
Yes, I mean that was really helpful answer. This question the way we used to answer this question at a time.
Of our IPO and then because these are still kind of holds at some.
The way to think about it is lets say you add exactly as you say 100 basis point increase what you would see US is two things first of all that increase would show up in our deposit placements over the course of give or take three years.
Maybe three and a half.
As contracts rolled over relative to where they are right and.
And over time, a portion of that would likely flow and I think in the past. We've said you know maybe it's 25% would flow back to our members and clients either in direct deposit beta as it were where our competitors raised the rates they paid and.
Hum.
And <unk> you saw the benefit in terms of increased servicing competition or the like.
But nonetheless, I mean, the point, you're making is that over an extended period of time, a 100 basis points ends up and given our current amount of cash equaling.
Something.
You just want to think about it is 75 basis points on existing cash that's still.
I don't know $80 million to $90 million, it's not chump change, it's just that the.
Part of your question that was only that all happens in fiscal 'twenty four now that would take time to occur and there would be some offset on the on either the cost the custodial expense side or were in greater service fee competition, and we've historically said and I think we've seen that that offset as you know over time is in the nature of about a quarter.
Of the total base.
Okay, great. Thanks, very much congrats on a good guide.
Thank you.
Thanks.
Thank you.
Our next question comes from Sean Dodge of RBC capital markets. Your line is open.
Hey, Good afternoon. This is Thomas Keller on for Sean Thanks for taking the questions Thomas.
So maybe staying on deposits are there any way to parse out the contribution to HSA is from employers versus what employees are contributing.
But any sort of shift in that trend or employers, maybe raising a contribution incentivize adoption.
Adoption or anything like that.
It's been remarkably steady actually through different economic climates and jobs climate.
The average annual employer contribution.
Among those employers who contribute has remained very steady and you've seen this in our in our stuff, but also in third party data that are out there.
And.
Uh huh.
And the percentage of employers who contribute has remained steady, which we're particularly pleased about given.
But you're seeing penetration into as Steve Neeleman was.
Cussing segments of the market that are beyond the enterprise.
And then individual contributions as well have remained steady even at times, where.
Where individuals are spending less so you didn't think about second and third quarter of last year or up 2020, I should say a calendar 2020, where you obviously had significant reductions in spending.
Yeah, you still have people can see it creating the same has been true during periods of market volatility not dissimilar to what you see in a four one K markets, where people will set those contributions and think about it a little bit longer term and they won't stop contributing just because.
Because of there is some short term volatility in assets or whatnot.
So so I think through this entire period.
We've had more volatility on the CBD side of the business as a result of the pandemic twists and turns.
The HSA business broadly speaking has continued to grow and outside of changes in custodial yields which for better or worse at least we can predict them.
Before they show up as has been remarkably steady and these are just aspects of that behavior. That's been steady maybe I'll add one other point, which is the the one thing that has changed a little bit is the nature of employer contributions. So historically you had.
Your contributions were base the rationale for the employer contribution sort of boiled down to.
Getting people started et cetera et cetera. Today, there are two rationales that really govern the whole thing the first is.
Employers have incentive programs and so they will have incremental dollars available for members, who do certain things right. Typically those are various healthy behaviors or what have you and so we're able to administer that you don't want a seamless basis for employers in that so that's good and then the second is employers are trying to some extent.
<unk>.
Sure that.
People use these plans properly they they don't want people to just go in for the lower premium and so they're effective we giving a portion of that premium back to the member essentially saying, Okay. You get this lower premium it could be even lower except that we're effectively forcing some savings here and I think that's a positive thing for employers to do it.
We encourage I think if you don't want to be in the circumstance where people come in just for the premium don't use the HSA and then then then the plan is just a truly high deductible plan, that's not the right answer so.
But I guess the big picture to your question is it's it's.
<unk> been remarkably steady over the course of both months and years during pretty different different type type situations.
All right very helpful. Thanks, and then general one on policy I know you all are pretty active at the federal level.
Critical a royalty fee policy playing over time are there are there any changes that are necessary for the industry to sustain it.
Five 3 million new HSA sprayer.
Steve you want to hit this one.
Yeah, Great question.
Look I mean, clearly if we could get some policy changes not unlike what happened with 401 case when they were doing some different accounting procedures and things like that seem to accelerate those away from more of the.
Kind of the defined benefit plans towards refining contribution I think it gets.
Certainly accelerate the market.
Or is it kind of maintaining this $2 million to $3 million Uhm I mean at some point obviously if.
If we continue to.
Let's say $3 million.
Per year, then you're going to keep cutting into those that those 100 million households have available have you.
The ability to have an HSA as those in commercial insurance right.
I mean look at the numbers were 31 million HSA is out of about 100 million households, there could have been and yet. There is there is another $100 million 130 million Americans that don't have access to them and so as much as.
As much as we're happy with the growth right now and as much as we believe there is still a lot of room to grow within those 70 million households in the commercial insurance that don't have an HSA we.
We will never rest until we can expand to other populations.
It's unfair that that's that have been working for 20 years.
Four.
The military they go out into the private sector of their employer wants to give them money to an HSA and they are ineligible.
Does there still covered with the choice of benefit that makes them eligible. It's just not fair same thing with folks that we have on Indian reservations Indian Health service plans and things like that same thing with people that have VA benefits.
So we continue to chip away at that I can tell you. We've had many many discussions about some of the thoughts that we think can get us there, which would get us there being defined as effectively decoupling. The health savings account from the high deductible plan that would allow us to go into a lot of union populations within that kind of $70 million.
Folks that don't have 70 million households that don't have HSA as we're now even though they are in commercial insurance.
John always teases me because one of the largest employers in the state of Utah.
Is it religious organization and they are not able to have HSA is because they are still in a grandfathered plan.
Going all the way back to Obama care pre Obamacare as long as they don't change their benefit.
They don't have to incorporate some of the things that you know.
People can debate, whether they should or not.
But that disallowance there are people.
Tens of thousands.
Workers from having an HSA and so we're going to keep beating that down.
John I think it's fair to say that we don't see in the next five to 10 years the need.
To have significant regulatory changes in order to maintain the market and correct me if I'm wrong, but I think if we want to accelerate the market Doug on it we got to do this but more than just accelerated market, we're going to do it to help more Americans.
It's not really fair right now, but the person in your next cubicle.
Can take an HSA from their employer and a contribution and you can't because you wouldn't served in the military just makes no sense at all.
I just wanted to say something about like profit in its own country or something like that but when we talk about that.
<unk> situation, but.
The problem is there is a profit in the country is higher ranking in meat. That's the problem you're actually getting the product in those countries. That's what we all got that problem isn't it.
But.
Any event I mean, I think you can kind of get the picture there are.
Unity is to expand.
So like Steve was mentioning plus Medicare and then there are opportunities to accelerate to simplify and make more existing commercial plans eligible because it now.
Most people have.
Relative to what was the case when these plants started.
Most people have significant out of pocket expenses, now and everyone will in Medicare and doesn't Medicare and so.
Giving people a tax efficient way to handle those seems to make a ton of sense.
We have some very specific ideas, but we're also cognizant of the current atmosphere in Washington, which is poisonous is probably a nice word for it and so.
We're not going to.
How with the Moon on this stuff we try to plan.
When things are like that and use that time to quietly educate and take feedback very seriously and.
Try and improve our ideas on that basis and look at the research and then when the Time's right to get something done and you can push on it and we will we'll always only do what we think is right.
We're not just doing stuff to serve the company's interest if that's all it does we can pass on that there's plenty of stuff. We can do that also serves the interest of of people who are out there working hard so.
That's kind of where we approach.
Okay, Great. That's all from me, Thanks, again and congrats on the phone.
Thank you.
Thank you.
We have mark Mccollum.
Baird Your line is open.
Hey, Good afternoon, let me add my congratulations on the strong selling season.
We had a couple of your competitors that ended up giving some some data and it seems like you have grown stronger than others. So we'll see what Devon year ends up coming out with but it looks like youre gaining share rendering when we take a look at the HSA is that you ended up adding over the year from sales as well as from.
Over the quarter.
What percentage of that incremental bump ended up coming from.
Current employers just hiring more versus.
New accounts that you ended up signing.
It's a little bit difficult to break it out only because.
Particularly in the health plan side of things you get some.
You get some back and forth there but.
Particularly when you look at the fourth quarter.
That's when you get.
Both new employers and new members from employers and those members can be either new hires or new people in to HSA.
Sure. So if you look at the fourth quarter outperformance.
I think it's probably fair to say that.
But that outperformance is more about.
It's more about like.
When I say sustainable ads, whereas it might be the case that some of the outperformance we saw in the earlier quarters of the year.
Relative to say two years ago.
The prepay debt or however, many years, it's been since the pandemic started.
That's probably a little more of the higher and the fact that you were seeing again, particularly in the third quarter. So I don't have a precise answer for you Mark, but I think it's fair to say that.
That hiring thing kind of helps but it's also true that in the same bucket you have all of the work that.
Marketing team has done and our account executives and sales.
I should say our service delivery manager has done to presents clients tools that I mean at this point electronic open enrollment has become the norm and we're hoping it stays that way because it's certainly more efficient, but really what it does is allows us to personalize and that's been very very helpful. So I think thats.
I don't have an exact number for you, but as I said earlier I think.
Do you want to look at a trend that is like.
Economics neutral or macro neutral I think you can probably averaged the last few years.
Okay.
Going back to the earlier comments with regards to the middle market.
And on your penetration there can you give us a sense for like what percentage of the HSA A's are coming from.
Employers that are that would typically be considered to be large employers or enterprise wide versus enterprise size.
Is the mid market what inning are we in in terms of penetrating the midmarket and.
In the upper small market I think we're in about the fifth or sixth inning on the upper market, where you've got.
The majority, but not by much larger employers, who at least offer an HSA and your opportunity set.
Some places are there reasons and not offering it so they'd say they might ultimately not yet there but.
But.
Like like Steve's example.
I'll take the waning of time or whatever.
We're.
Gonna have to advance in his.
Please.
Piety, but.
Uh huh.
But broadly speaking I think the large employers are in there like fifth or sixth inning.
I think the.
The middle market and then you can define middle market pretty broadly.
Let's say everything thats not within the fully insured small groups I think you are in the still in the third inning maybe.
And then maybe I guess.
We definitely got a good chunk out of it this year and then.
Small markets a wildcard as Steve said, it's a little bit of a.
What's the word a dumbbell, what's the thing with the two ends.
And that.
Barbell from folks who adopt bar Bell, who adopted thank you who adopted H high deductible plans because that was the only choice.
And there those are some of the folks we're trying to get to its something that Ted mentioned about working with our partners to speak to consumers directly.
Employers might not even be touching the issue.
And HSA partner, but they've got a high deductible plan.
And that's been particularly successful in some of the small employers that are professional fields.
And then.
And then there is sort of so so that's kind of one and then the other end as the folks who have been historically been steered away from these plans because they were lower commissions.
And then some of that's been corrected now with the way that the commissions are being paid and so we're still early there too, but again I think I think the way to put it is right, which is you got about 30 million accounts today.
We our view is that it at kind of a true market maturity, you're looking at about 60 million accounts. So we're halfway there and if we grow between two and $3 million accounts over the course of the.
The remainder of this decade will pretty much do that by the end of the decade.
Great and then just with regards to kind of the initial thoughts with regards to next year.
How should we think about the.
About the monthly service fees.
And I know that there's obviously a bundle that's occurring and everything like that but just you gave us how we should think about the average yield in <unk> and obviously, that's that's the primary focus.
Focus.
Obviously interchange as you know.
Isn't changing.
Just wondering.
As we.
Factor different things into the model, how should we think about that.
That monthly fee.
Thanks.
Yes, Mark you're talking about from a overall perspective now.
Now, we're starting to get some history with them.
Breaking out of service to be relative to number of total accounts. So you can sort of start doing that doing that and looking back and seeing year over year, but yes, what I would say is that we can I mean, it's still about bundling that right. So I guess, the best thing that I kind of shared with people to help them understand it is just the level of the fees and so you've got commute.
<unk> is the highest revenue.
And then <unk>.
And then you got.
HSA and then you've got HRA, they're kind of down through as far as the amount of revenue that they generate per month per account and then Cobra is sort of unique in there and then it does it by number of employees in the business and that of course, there is the element of the of the 2% premium thats in there too so.
Basically putting all those things together is what we're trying to sell from an offering perspective.
I think to get a little more pointed towards your question. There is of course always that underlying.
Opportunity for us to win in the market when we can go find a.
A customer that we can underwrite to have this thing can figure amount of assets and therefore, we can offer.
Must be.
A table that essentially has a much lower dollar HSA service fee on it and so therefore SL.
Essentially mining in the revenue off of those assets.
And then widening the margin with an FSA or an associated HRA HSA.
Great and then with the with the middle market accounts that Youre penetrating you are typically selling more of a bundled offering just because that's what their natural proclivity is for anyways right.
Yes, I'd say, that's true I mean, that's where we always wanted I mean, thats, what Ted and Steve are on here I mean, that's what we're trying to do is make sure that we can we can get the opportunity to have someone we already have a relationship that's in middle market and move it forward moves the ball forward on the field with regards to a number of accounts that theyre utilizing from us.
Great and just.
With the new employers that you ended up taking on what what percentage of those were where companies that.
Were brand new to taking on an HSA or a CDP offering versus.
Competitive wins, because it seems like you're winning more but.
But I just wanted to come yes.
It's interesting over time that percentage of takeaways has grown.
But whats tricky about it is is very often takeaway means that they had a program, but like they weren't real serious about it leading up to the members.
And so so and I'm speaking specifically to HSA here, so, but I think I commented last year that two.
Two years ago, I should say that we had reached the point where looking at enterprise right that we had as many takeaway wins as greenfield wins.
Probably.
Come down a little bit since then because one of the effects of the pandemic has been.
Whoever you have like just.
Everyone's a little stickier, we're all stuck in them out a little bit for better or worse.
But I think particularly where you see a lot of the Greenfield and we were talking about case this morning on cell subtle.
Well, let's say with the client is because then they're going to want to really get a deal here, but I'm thinking that they're going to get a good deal but its up.
<unk> 4500 person group, so that's not small exactly.
Lots of Greenfield HSA opportunity and so and certainly as you get smaller.
That's that's where youre seeing more of the greenfield activity.
Great. Thank you and I guess I'd say, one more thing there which is this this has something to do with.
The balance growth that we're seeing I mean, we of course focus on in the major contributors there.
<unk> engagement and people actually growing their contributions and whatnot, but but it's also kind of helpful. When you get when you get brownfield or takeaway business that comes with mature accounts I mean, those aren't starting out at $300 and that's one of the reasons that we could grow accounts.
On an organic basis, 12% right and still grow balances 10%.
Was that the fact that that's a pretty if you had gone back a few years ago I would've said and you may recall. This discussion Mark we would have said look as long as you have double digit.
Count growth Youre never going to have double digit balance growth because the accounts start out so small.
That's less true today in part because of the sort of opportunities, particularly.
I appreciate that congratulations.
Thanks Martin.
Thank you.
Thank you.
And I see no further questions in the queue I will turn the conference back over to John Kessler for final comments.
Well somehow mark Mark can always ends up to get the last question do you feel like the last time the prices right you get nutrition strategic advantage, though I don't know how that works, but but in any event. Thank you all we particularly wanted to just spend a minute thinking.
Both our analysts and our long term investors, who kind of stuck with us after what was a very difficult.
Announcement for Us in December .
We hope that folks appreciate the visibility we've tried to provide both in January and now and.
We will look forward to and uneventful announcement of the fourth quarter. When we all our final results when we speak again in almost exactly a month and.
To the extent, we have greater visibility, we will expand on our fiscal 'twenty three guidance.
And it'll be good fun.
Until then again, thanks, everybody stay safe.
<unk>.
This concludes today's conference call. Thank you all for participating you may now disconnect have a pleasant day.
Hum.
[music].
Okay.
[music].
Yeah.
Yeah.
Thanks very much.
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