Q2 2024 HealthEquity Inc Earnings Call

Hello, everyone and welcome to the conference. Please note today's conference is being recorded and now I'd like to turn the call over to Richard Putnam. Please go ahead.

Thank you Rocco Hello, everyone welcome to health equity second quarter of fiscal year 2024 earnings call.

My name is Richard Putnam Investor Relations for Health equity joining me today on the call is John Kessler, President and CEO Dr.

Dr. Steve Neeleman, Vice Chairman and founder of the company.

Company's CFO Tyson Murdock and soon to be CFO , James Cook County.

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

A press release announcing the financial results for our second quarter of fiscal 2024 was issued after the market close this afternoon.

These financial results include the contributions from our wholly owned subsidiaries and accounts that they administer.

The press release also includes definitions of certain non-GAAP financial measures that we will reference today.

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 helped equity dotcom.

Second our comments and responses to your questions today reflect management's view as of today September five 2023 and will contain forward looking statements as defined by the SEC, which include 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 the actual results to differ materially from statements made here today.

We caution 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 as they are detailed in our latest annual report on Form 10-K, and subsequent periodic reports filed with P. S.

C C.

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

One more note before turning this over to John but Jim now onboard we have rescheduled our Draper Investor day to February 22nd we're hoping for another great year of snow for those who want to ski on the greatest snow on Earth and we hope you all will join us either in person or virtually over to you John .

Okay.

Hi, everyone and thank you for joining us I will discuss Q2 key metrics and managements view of current conditions.

Tyson will touch on Q2 results before detailing our raised guidance for fiscal 'twenty, four and Steve is here for Q&A.

In Q2, the team delivered double digit year over year growth in revenue, which is plus 18% and adjusted EBITDA, which was plus 31% HSA assets grew 13% and HSA members grew 9%.

Total crap accounts grew 3% muted by the previously discussed change in Cobra methodology health.

Health equity ended Q2 with $8 2 million HSA members $23 2 billion in HSA assets.

15 million total accounts.

The team added 156000, new HSA members in its fiscal second quarter, which is healthy but down from the record setting Q2 last year as in Q1 comparison to last year's blistering job growth and high turnover as well as fewer H C transfers from small base were offset by robust.

New logo growth driven by an expanded network partner footprint and HR departments seeking out win wins.

The team also added.

$883 million in HSA assets in Q2, I wanted to say, a whopping 883, but I wasn't allowed to so I didn't say that.

That's compared with 272.

A million dollar increase in the year ago period, which would not be as walking.

Reflecting not only.

Temp gross but also a balanced growth despite inflation average HSA balances at health equity grew both sequentially and year over year in part due to investment.

11% more of our HSA members became investors year over year, helping to drive up invested assets by 23%.

Remarkably invested assets now account for 40% of HSA assets, and we continue to see more members choose enhanced rates for their HSA cash leading to higher for longer custodial yields and we believe less cyclicality in the future.

Interest rates in Q2 also gave a boost to variable rate HSA cash and CDB client held funds.

While custodial fee growth drove Q2 performance. The team also delivered modest progress on service fees, the bulk of which come from ancillary CDB administration products.

Service revenue rose, 3% year over year in line with total accounts service cost grew just 2% year over year and declined sequentially by more than $4 million.

As we discussed last quarter rapid improvement in service tax continues to drive more interactions to chat and automated responses.

The run out of remaining tailwind from the COVID-19 national emergency may obscure a bit the progress that we're making when we get to the second half, but we see the results. We've delivered here in Q2 as well as in the first quarter as evidenced a positive trajectory on service revenue and margin finally interchange revenue.

Which resumed its seasonal pattern as expected with strength in Q1, followed by a more subdued performance in Q2.

We think the HSA market health equity now leads can grow by about 10% annually for years to come.

The steady account growth and faster asset growth.

As accounts mature, which in turn expands margin opportunity.

Team purple can expand its long record of outperformance by doing what it did well in this second quarter.

Before turning the call over I would like to publicly thank Mr. Tyson tie Murdoch for his unwavering service to health equities mission vision and values over the past five and a half years and in particular for focusing his team on a strong finish and a smooth transition over these past few months <unk>.

This act and you would do well to keep an eye out for the opportunity in whatever he chooses to do next.

As Richard noted at the top of the call, Jim Lucania, who will take over as CFO effective tomorrow is with US today, Jim will be active on the conference circuit. This fall beginning tomorrow actually and of course will preside at health equities Investor Day in Utah in February as Richard mentioned.

Excellent.

Alright, Thank you John for those kind comments.

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

Second quarter revenue increased 18% year over year service revenue was $105 7 million up 3% year over year.

The studio revenue grew 51% to $98 9 million in the second quarter and the annualized interest rate yield on HSA cash was 237 basis points.

Revenue grew 4% to $38 9 million.

Gross profit as a percentage of revenue was 62% in the second quarter of this year versus 57% in the year ago period. This is the highest gross margin quarter. Since we acquired wage works four years ago.

Net income for the second quarter was $10 6 million or <unk> 12 per share on a GAAP EPS basis. Our non-GAAP net income was $45 6 million for the second quarter. Our non-GAAP net income per share was 53 per share compared to 33 per share last year.

While higher interest rates increased custodial yields and generated interest income. They also increase the rate of interest we pay on the remaining $287 million term loan a.

So our stated rate of six 9%.

Adjusted EBITDA for the quarter was $88 1 million and adjusted EBITDA as a percentage of revenue was 36% and more than 360 basis point improvement over last year.

First six months of fiscal 'twenty, four revenue was $488 million up 18% compared to the first six months of last year GAAP net income was $14 7 million or 17 cents per diluted share.

non-GAAP net income was $88 4 million or dollar and two cents per diluted share up 74% compared to the same period last year and.

And adjusted EBITDA was $174 7 million up 39% from the prior year, resulting in adjusted EBITDA as a percentage of revenue up 36% for the first half of this fiscal year.

Turning to the balance sheet as of July 31, 2023 cash at quarter end was $290 million boosted by a record $77 million of cash generated from operations in Q2 and $109 million year to date, the company had $874 million of debt outstanding net of issuance costs and we continue to have an undrawn $1 billion.

On a credit available for fiscal 'twenty, four we're raising guidance and now expect the following.

Revenue in a range between $980 and $990 million GAAP net income to be in a range of $19 million to $24 million and we expect non-GAAP net income to be between 171 and $179 million.

Resulting in non-GAAP diluted net income between $1 97, and $2 six per share based upon an estimated 87 million shares outstanding for the year.

We expect adjusted EBITDA to be between 338 and $348 million.

Our five or 5 million midpoint revenue increase was primarily based on revised expectations for the average yield on HSA cash to approximately 240 basis points for fiscal 'twenty four as a reminder, we base interest rate assumptions embedded in guidance on an analysis of forward looking market indicators, such as the secured overnight financing rate.

In mid duration treasury forward curves and fed funds futures.

These are of course subject to change our expectations are tempered somewhat by the anticipated impact of the end of the national emergency period that John referenced in his remarks on service revenue.

Average crediting rates, our HSA members receive on HSA cash remained flat sequentially and the crediting rates. Our HSA members receive are determined in accordance with the Formula described in our custodial agreements with them.

Continue to expect these rates will rise as overall interest rates remain elevated and have included in our guidance at five basis point increase by the end of fiscal 'twenty four.

Our guidance also reflects the expectation of higher average interest rates on health equity is variable rate debt versus last year, partially offset by the reduced amount of variable rate debt outstanding.

And then we assume theyre projected statutory non-GAAP income tax rate of approximately 25% and a diluted share count of $87 million, which now includes common share equivalents as we anticipate positive GAAP net income this year.

As we have discussed moving to positive GAAP net income impacts our GAAP tax rate strangely this year.

<unk> tax items May also impact the calculated tax rate on a low level of pre tax income based on our current full year guidance, we expect roughly a 50% GAAP tax rate for fiscal 2024.

As we've done in recent reporting periods, our full fiscal 2024 guidance includes a reconciliation of non-GAAP to the non-GAAP metrics provided.

A reconciliation of GAAP to non-GAAP metrics provided in earnings release and the definition of all such items is included at the end of the earnings release. In addition, while the amortization of acquired intangibles is being excluded from non-GAAP net income the revenue generated from those acquired intangible assets is not excluded.

My time, serving our members our teammates and investors over the last five and a half years, it's been a real pleasure. We made a lot of progress and I'm confident the team will continue the course, so that drove into my next opportunity and with that we know you have a number of questions. So let's go right to our operator for Q&A. Thank you.

Thank you, Sir if you'd like to ask a question. Please press Star then one.

Your question has already been addressed I like to remove yourself from the queue. Please press Star then two.

Today's first question comes from Greg Peters Raymond James. Please go ahead.

Good afternoon, everyone.

Before I begin with my question.

I'd also like to congratulate you on your servicing health equity certainly helped coupled with some challenging times.

John .

Prepared remarks, you mentioned something about a sustaining a 10% growth that I was I was just curious about your perspective, the macro environment from a competitive standpoint, we're seeing numbers from <unk> and others suggest that some are having some success maybe as much success in growing share as you are while others are not just.

An updated view on how the market looks to you today.

Well.

I think if you if you sort of think about where the market is you.

You have two factors that ultimately drive revenue growth, which is the first thing that as investors we care about.

The first is account growth and the second is asset growth in account growth.

In my view.

If I if I look at it on a multi year basis, what kind of being the high single digits and asset growth will be in the teens and.

Revenue growth is typically somewhere between the two.

I think.

And I don't really see any reason for.

Much change in that view.

If I'm trying to ask the question over multiple years, and then look our job is to outperform the market in terms of.

Assets accounts et cetera, and then.

To do a better job.

Best job, we possibly can and hopefully a better job than others.

Generating both revenue and profitability from doing so.

Alright.

Alright, my detail and my follow up detail question on free cash flow.

Nice improvement.

On a year over year basis, it looks like the gap between adjusted EBITDA and free cash flow is narrowing.

Maybe you can just update us on how you're looking at free cash flow for the balance of this year and you know.

Are there any headwinds that we should be thinking about with free cash flow as we think out beyond this year.

Maybe Tyson would you mind, starting with regard to the sort of balance of this year question anything particular that.

I think the quest the gist of the question is was there some jump forward or the like.

No I mean, I think this is to be expected as the as the custodial revenue increases with the very high margin and cash generation capability, we know.

That it's going to accelerate that cash and as you know as you see the positive GAAP net income come in its overcome by all the amortization from the <unk>.

Wage works in other deals that are in there. So the business is starting to per on on that generation of custodial cash and I would expect that to continue going forward of course, the one theres other things in there like we're going to start to pay taxes. So you got wires going out for taxes, you can see that in there and and other than that.

<unk>.

I think the other thing is better and they're like property plant and equipment purchases.

What we spend on tech.

And things like that.

There isn't a huge changes in there that would cause other things to occur. So it's going to continue to move move up.

And Gregg as far as use of cash.

First of all it's worth noting that if we do nothing over the course of multiple years here and it's not too many.

The free cash flow is basically going to eliminate our leverage.

<unk>.

We're very comfortable with current leverage.

And I don't want anyone to take my statement is suggesting otherwise, but but that's probably not what's going to happen, meaning we probably will.

Want to look at using that cash and what we will want to look at using that cash as we have in recent quarters and.

From my perspective in terms of order of of cash utilization, you know theres portfolio transactions that we like because they are reliable ROI.

Unknown Executive: Hello, everyone, and welcome to the conference. Please note today's conference is being recorded.

And then we've paid down a little bit of our term a I.

I would expect that.

Richard Putnam: I'd now like to turn a call over to Richard Putnam. Please go ahead. Thank you, Rocco.

Our portfolio transactions aren't available or where it makes sense at some point you will continue to do that and then it's worth noting that that within the current envelope we've committed to.

Richard Putnam: Hello, everyone. Welcome to HealthEquity's second quarter of fiscal year 2024 earnings call. My name is Richard Putnam. Invest relations for HealthEquity. Joining me today on the call is Jon Kessler, President and CEO, Dr. Steve Neeleman, Vice Chair and Founder of the company.

Investing in organic innovation and.

You're starting to see pieces of that come through you will see more pieces of it come through.

And and.

Richard Putnam: The company CFO, Tyson Murdock, and it's soon to be CFO, James Lucania.

I think helpful. When we get a question as I am sure. We will later about.

Richard Putnam: Before I turn the call over to Jon, I have two important reminders. A press release announcing the financial results for a second quarter of fiscal 2024 was issued after the market closed this afternoon. These financial results include the contributions from our Holy On subsidiaries and accounts that they administer. The press release also includes definitions of certain non-gap financial measures that we will reference today. A copy of today's press release, including reconciliation of these non-gap measures with comparable gap measures and a recording of this webcast can be found on our investor relations website, which is ir.healthequity.com.

<unk> expense and the like that we're able to do that within the envelope, we haven't ultimately, while bringing T&D expense as a percentage of revenue down overtime.

Got it thank you for the answers.

Thanks, Greg have a safe flight. Thank you Julian.

Yes.

Thank you and our next question today comes from Dan Bernstein with Wells Fargo. Please go ahead.

You can't deny it for my questions.

Hey, Stan.

How's it going.

On a personal.

Not yet not yet.

Although I would like to know about.

We'd like to say on a personal note it's been a pleasure working with you.

Richard Putnam: Second, our comments and responses to your questions today reflect management view as of today, September 5, 2023, and will contain forward-looking statements as defined by the SEC, which include 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 risk and uncertainties that may cause the actual results to differ materially from statements made here today.

Maybe a couple of questions first one on your sales pipeline any changes in the RFP volumes Youre seeing any changes in your win rates or perhaps what employers are looking for.

Yeah, probably the most notable thing we've seen stand this year is.

I mean, let me back up and say generally the commentary I would give on account growth is that on the one hand and similar to what we said in the first quarter on the one hand, you've got.

Yeah.

The sort of less tailwind from a macro perspective, new job creation and so forth.

Richard Putnam: We caution 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, as they are detailed in our latest annual report on Form 10K, 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 then on the other hand, we.

Are seeing higher.

New account Onboarding and then more importantly, the sort of pipeline and start work for Q4.

Fiscal Q4 calendar January build and the source of that Bill is so that's all providing a bit of an offset and.

I think.

When I look at the pipeline what's interesting this year is.

Richard Putnam: One more note before turning this over to John. We have rescheduled our Draper Investor Day to February 22nd. We are hoping for another great year of snow for those who want to ski on the greatest snow on earth, and we hope you all will join us either in person or virtually.

For the first time since the pandemic.

The enterprise pipeline has been very robust.

And I'm not prone to like give answers without data.

One answer that has given us okay people now have the space to make changes that they weren't willing to make.

Jon Kessler: Are you, John? Hi, everyone, and thank you for joining us. I will discuss Q2 key metrics and management view of current conditions, and Tyson will touch on Q2 results before detailing our raised guidance for fiscal 24, and Steve is here for Q&A. In Q2, the team delivered double-digit year-over-year growth in revenue, which was plus 18%, and adjusted EBITDA, which was plus 31%, HSA assets grew 13%, and HSA members grew 9%. Total amount accounts grew 3%, muted by the previously discussed change in Cobra methodology.

That's certainly possible.

But in any event it is worth knowing that noting that I think the biggest thing I would note that as different as the volume of enterprise deals that we are seeing and.

They are turning out not to be just price checks or whatever where we're able to win business away from competitors as well.

Well as regional business.

Got it that's helpful. And then one more on custodial assets can we get an update on the current mix of assets that are enhanced yields and where do you expect that mix will be 12 months from now.

So we've given guidance for the guidance is maybe the wrong word we've said that a C.

Jon Kessler: HealthEquity ended Q2 with 8.2 million HSA members, 23.2 billion in HSA assets, and 15 million total accounts. The team added 156,000 new HSA members in its fiscal second quarter, which is healthy but down from the record setting Q2 last year. As in Q1, comparison to last year's blistering job growth and high turnover, as well as fewer HSA transfers from small banks, were offset by robust new logo growth driven by an expanded network partner footprint, and HR departments speaking out when wins. The team also added $883 million in HSA assets in Q2.

Listen I pay attention.

Richard has given me a face.

This is what I get for being here.

Yeah. So we said that we will hit about 30% by the end of the year and I think we'll end up doing a little better than that.

It is true that.

At this 0.1 of the limiting factors that we're working with is the timing of roll off of our.

Deposit contracts and the like that that are also are barriers as well as appropriate education of consumers. So I.

I guess I would say that in general the enhanced rates program is moving.

At or above the pace, we have discussed and we think that that you know the end result of this is going to be both.

Jon Kessler: I wanted to say a whopping $883, but I wasn't allowed to, so I didn't say that. That's compared to a $272 million increase in the year ago period, which would not be as whopping. Reflecting not only account growth, but also balance growth. Despite inflation, average HSA balances at HealthEquity grew both sequentially and year over year, in part due to investment. 11% more of our HSA members became investors year over year, helping to drive up invested assets by 23%.

A higher for lack bedroom neutral right.

As well as ultimately less cyclicality because of the features that we've been able to.

Design into this product and so I'm I'm really excited about where we're headed with it.

<unk> to have Jim take a look at it and see where he can.

Add and improve and.

We will have more to say about it as we go in the next couple of quarters.

Awesome. Thank you so much.

Thank you Sir you tomorrow.

Jon Kessler: Remarkably, invested assets now account for 40% of HSA assets. We continue to see more members choose enhanced rates for their HSA cash, leading to higher for longer custodial yields, and we believe less cyclicality in the future. Interest rates in Q2 also gave a boost to variable rate HSA cash and CDB client health funds. While custodial fee growth drove Q2 performance, the team also delivered modest progress on service fees, the bulk of which come from Ancillary CDB administration products.

Thank you and our next question today comes from Glen Santangelo with Jefferies. Please go ahead.

Thanks, and good evening.

Hey, just two quick ones for me John I was kind of curious if you can give us any update on the average duration of the portfolio and if that's changing at all with this enhanced rates product because I think as most of US are probably aware I mean, and you are three years ago. Today. The tenure was sitting at $65 70 basis points right, So you're getting ready to do.

Our replacement kind of coming up here in a few months and I was kind of curious if you could help us in any way think about the waterfall and then I just had a follow up on margins.

Jon Kessler: Service revenue rose 3% year over year in line with total accounts. Service costs grew just 2% year over year and declined sequentially by more than 4 million. As we discussed last quarter, rapid improvement in service tech continues to drive more interactions to chat and automated responses. The run out of remaining tailings from the COVID-19 national emergency may obscure a bit the progress that we're making when we get to the second half.

Yes.

I'm going to give you a lot of words that I'm not sure I'm going to answer. The question you asked okay. So let me just let.

Alright.

In general we haven't we have not made any change with regard to the fundamentally with regard to the approach we take to to the duration of our cash portfolio I think that's fundamentally what you're asking.

Jon Kessler: But we see the results we've delivered here in Q2, as well as in the first quarter, as evidence of positive trajectory on service revenue and margin. Finally, interchange revenue, which resumed its seasonal pattern as expected, with strengthened Q1 followed by a more subdued performance in Q2. We think the HSA market health equity now leads can grow by about 10% annually for years to come. Thanks to steady account growth and faster asset growth, as accounts mature, which in turn expands margin opportunity.

That is to say.

And by cash in particular, I mean, our deposit portfolio right we deploy.

The actual contracts that are deployed are four to five year contracts and.

When you kind of swizzle in the fact that there is variable rate cash and theres money above the minimums and whatnot right Youre really talking about duration historically and by duration here I mean liquidity related duration, that's around around three years now.

So.

I think the premise is right. There are a couple of things that that I mean, I think generally the premise that your your question I think suggests that you have line, which is that.

Jon Kessler: Team purple can extend its long record of outperformance by doing what it did well in this second quarter. Before turning the call over, I would like to publicly thank Mr. Tyson Taimerdoch for his unwavering service to health equity's mission, vision, and values over the past five and a half years. And in particular, for focusing his team on a strong finish and a smooth transition over these, for the past few months, Tyson's a class act, and you would do well to keep an eye out for the opportunity in whatever he chooses to do next.

Over the next couple of years here Theres, a lot of cash that will be running out of deposit contracts.

And particularly to the extent well even if it were placed in new deposit contracts, where particularly the extensive place enhanced rate right is going to produce a nice bump here and that will include all of the Covid era cash.

So you think about that and that includes both the.

Richard Putnam: As Richard noted at the top of the call, Jim Lucania, who will take over at CFO Effective Tomorrow, is with us today.

Natural run offs, but also the kind of roughly five year single placement associated with the timing of the wage conversions in calendar 2020 I believe.

Richard Putnam: Jim will be active on the conference circuit this fall, beginning tomorrow actually, and of course will preside at HealthEquity's investor day in Utah in February, as Richard mentioned.

I may have that wrong 20, or 21, one of the two.

But.

So there is a lot of opportunity here, we think it was absolutely the right time to be looking at whether the deposit instruments, we're really serving our needs and those of our members and.

Tyson Murdock: Tyson, thank you, John, for those kind of comments.

Tyson Murdock: Alright, I'll highlight our second quarter gap and non-gap financial results, a reconciliation of gap measures to non-gap measures is found today's pressure release. Second quarter revenue increased 18% year over year. Service revenue was 105.7 million, up 3% year over year. The Stodial revenue grew 51% to 98.9 million in the second quarter, and the annualized interest rate yield on HSA cash was 233 million. Interchange revenue grew 4% to 38.9 million. Gross profit as a percentage of revenue was 62% in the second quarter of this year, versus 57% in the year ago period.

I think we've made the right choice in pursuing this mechanism and look the result is going to be.

Under any reasonable economic scenario or any plausible economic sorry at the moment is going to be that.

It's not just that cyclically, we're going to see higher profits that on a ongoing basis, we're going to see higher profits from the custodial line and that sounds good.

Right.

To use your words, John I mean, you said Theres, a bump comment and I just wanted to make sure I'm correct in thinking there is a bump company. Even if you don't want to size. It today, because when we go back when we look at those.

Tyson Murdock: This is the highest gross margin quarter since we acquired wage works four years ago. Net income for the second quarter was 10.6 million or 12 cents per share on a gap EPS basis. Our non-gap net income was 45.6 million for the second quarter and non-gap net income for share was 53 cents per share compared to 33 cents per share last year. While higher interest rates increase custodial yields and generated interest income may also increase the rate of interest we pay on the remaining 287 million dollar term loan A to a stated rate of 6.9%.

Covid sort of cash rates I mean, it's pretty clear, there's a big bump comment.

Yeah, I mean, as you well know Glenn.

I think people got a little ahead of their skis at the beginning of calendar 'twenty three.

And.

And so I want to be thoughtful about not creating an even.

Bigger.

Yep.

On your skis yard sale, but.

But.

But I think.

Tyson Murdock: Adjusted even for the quarter was 88.1 million and adjusted even as a percentage of revenue was 36% in more than 360 basis point improvement over last year. For the first six months of fiscal 24 revenue was 488 million up 18% compared to the first six months of last year. Gap net income was 14.7 million or 17 cents per divided share and non-gap net income was 88.4 million or dollar and 2 cents per divided share up 74% compared to the same period last year.

The premise is correct and I think it will be possible.

Alright, and maybe Tyson just just one quick one on the margins I mean.

The the EBITDA.

It was up adjusted EBITDA was up 360 basis points year over year.

There were some member and balanced growth and the improvement in the custodial yields obviously and some technology benefits, but I was wondering if you could just real quickly sort of unpack that to help us think about what's really driving that better EBITDA. When you think about those three contributors. Thanks.

Tyson Murdock: And adjusted even it was 174.7 million up 39% from the prior year resulting in adjusted even as a percentage of revenue up 36% for the first half of this fiscal year. Turning to the balance sheet as of July 31st 2023 cash accordant was 290 million boosted by a record 77 million of cash generated from operations in Q2 and 109 million year to date.

Yeah, I mean, it is the custodial revenue, obviously falling down to the model and we view that would drive it like we've talked about if you go back to history.

Way back in and we get to the 40% EBITDA margin in one of the quarters in the middle of the summer like this one.

And so we're moving back towards out of that in there, but I do think that we've been very thoughtful about how we manage the controllable costs and when I say that I mean, something like stock comp, which is which we you know we benchmark just fine with all of our peers, but it does get added back into EBITDA when I'm talking about is what our executives work.

Tyson Murdock: The company had 874 million of debt outstanding that a issuance cost and we continue to have an un drawn $1 billion line of credit available for fiscal 24 we're raising guidance and now expect the following. Revenue and arrange between 980 and 990 million dollars. Gap net income to be in a range of 19 to 24 million dollars and we expect non-gap net income to be between 171 and 179 million dollars resulting in non-gap deleted net income between $1.97 and $2.66 per share based upon an estimated 87 million shares outstanding for the year. We expected adjusted even it to be between 338 and 348 million dollars.

On every single day, and we're very thoughtful about how we build budgets in who we hire and how.

How much we improve compensation and those type of things and so I think that's just a matter of.

The seriousness with which the team takes that and and that's why we were able to raise our EBITDA guidance by five along with the top line normally.

As a percentage of that topline race. So its just being thoughtful about those efficiencies I do think that it's also true that there's efficiencies to be gained there have been gained on the service cost line item and that's again, where a lot of the executives are working on that and I think we've set ourselves up for longer term success, there as well.

Tyson Murdock: Partners. Our five, our five million midpoint revenue increase is primarily based on revised expectations for the average yield on HSA cash to approximately 240 basis points for fiscal 24. As a reminder, we base interest rate assumptions and better than guidance on an analysis before looking market indicators, such as secured overnight financing rate, and mid duration treasury for repairs and Fed funds futures. These are of course subject to change. Our expectations are tempered somewhat by the anticipated impact of the end of the national emergency period that Jon referenced and his remarks on service revenue.

We will start to show and so I think those are some of the things that are sort of showing through on that and.

We'll continue to get the benefit of the enhanced program pushing down through there as well like we've been talking about so that will that will continue for some time.

Awesome, Thanks, and best of luck title.

Thank you Glenn.

Thank you and our next question today comes from Sean Dodge with RBC capital markets. Please go ahead.

Tyson Murdock: Average credit rates are HSA members received on HSA cash remained classed sequentially, and the credit rates are HSA members received are determined in accordance with the formula described in our custodial agreements with them. We continue to expect these rates will rise as overall interest rates remain elevated and have included in our guidance a five basis point increased by the end of fiscal 24. Our guidance also reflects the expectation of higher average interest rates on health equities variable rate that versus last year, partially offset by the reduced amount of variable rate that outstanding.

Yes, thanks, good afternoon.

Maybe just going back to the enhanced.

Product and just to further clarify how those work.

I know John you said, you placed cash and that was for five years, but you've also said but.

They are designed to produce more smoothness in yields over time. So does that mean should we think about these being more like a variable rate product or is that smoothness coming more from the fact that these are layered in over the course of the year not all happening in lumps around the January timeframe and so as these roll.

Tyson Murdock: And then we assume their projected statutory non-gap income tax rate of approximately 25% and a diluted share count of 87 million, which now includes common share equivalent as we anticipate positive gap in income this year. As we have discussed moving the positive gap been income impacts our gap tax rate strangely this year. The street tax settings may also impact the calculated tax rate on a low level of pre tax income. Based on our current full year guidance, we expect roughly a 50% gap tax rate for fiscal 2024.

<unk>.

Kind of on their five year ladder that it's happening more in for a year instead of in January and that's what the smoothness is coming from maybe just that.

Well I'll clarify that.

Answer is there are really three sources of this and we thought quite a bit about this as we work through these products.

First is the second point, you mentioned that is to say.

The fact that that money.

When you do cash.

Alright, well I keep saying that when you do deposits like you strike the deal and you send all the money and that's it here you you do have the ability to layer money in kind of for lack but from dollar cost averaging now and so that does really help and at some point, we're not going to be talking about if we have our way, we're not going to be talking about.

Tyson Murdock: As we have done in recent reporting periods, our full fiscal 2024 guidance includes the reconciliation of bond gap to the non-gap metrics provided in that reconciliation of gap to the non-gap metrics provided learning release. And a definition of all such items is included at the end of the earnings release. In addition, while the amortization of acquired intangibles is being excluded from non-gap income, the revenue generated from those acquired intangible assets is not excluded.

Tremendous uncertainty on this topic, when we announced the December quarter, and the like and I'm sure, you'll all look forward to that as well.

Tyson Murdock: My time serving our members are teammates and investors over the last five and a half years has been a real pleasure. We made a lot of progress and I'm confident the team will continue the course as I've driven to my next opportunity.

The second factor is that the variable cash that we need to maintain liquidity.

Is built into the instrument so in the bank instruments right, yes, they have a man and a max but fundamentally they still work by term deposits and so we have separate passed today about.

Richard Putnam: And with that, we know you have a number of questions, so let's go right to our operator for Q&A. Thank you. Thank you, sir.

Operator: If you'd like to ask a question, please press star than one. If your question has already been addressed, you'd like to remove yourself from Q. Please press star than two.

$500 million or about 4% of our three 5% of our total HSA cash that is in in purely variable rate instruments, and we need to have it there because of that protects us against any liquidity issues and so so.

Greg Peters: Today's first question comes from Greg Peters and Raymond James. Please go ahead. Good afternoon, everyone.

Jon Kessler: I guess before I begin with my question, Tyson, I'd also like to congratulate you on your service and health equity. It's certainly helpful to do some challenging times. John, in your prepare remarks, you mentioned something about a sustaining a 10% growth. And I was just curious about your perspective of the macro environment from a competitive standpoint. You're seeing numbers from deafening or others just in summer having some success, maybe as much success in growing shares.

The liquidity is built into the into the contract and so.

That's very helpful. In terms of eliminating situations, where you have as occurred in March of 2020, very rapid changes in government policy and the like that that produce big changes in and particularly downward and in variable rate and then the third factor which I.

Jon Kessler: You are, while others are not, just an updated view on how the market looks to you today. Well, I think if you sort of think about where the market is, is, you have two factors that ultimately drive revenue growth, which is the first thing that is investors we care about. The first is account growth and the second is asset growth and account growth. In my view, if I look at it on a multi-year basis, we'll kind of be in the high single digits and asset growth will be in the teens and revenue growth is typically somewhere between the two.

Yes, we will get into a little bit more I'm sure. This will be on the agenda, when we get to Investor day.

But is.

Some some stuff that is internal I will just say internal to the contracts that is just really designed to some extent could provide a little bit of trade off between rate and and non cyclicality. We we really recognize that it's not in the interest of our investors nor is it valuable in terms of managing the business.

Four.

People to start thinking about these dollars as anything other than what in the end they really are which is fees.

And.

When when we've been when were fully exposed to deposit products as we have been but we've done everything in our power within that world to try and minimize that cyclicality right theres still particularly when you're close to profound theres quite a bit of it and.

Jon Kessler: I think, and I don't really see any reason for much change in that view based if I'm trying to ask the question over multiple years and then look, our job is to outperform the market in terms of assets, accounts, et cetera. And then to do a better job, the best job we possibly can, and hopefully a better job than others at generating both revenue and profitability from doing so. All right, my detail, my follow-up detail questions on free cash flow.

So.

That's the third factor and again, we'll I'm sure go into details at some point, but take all these together and it's not that there aren't going to be ups and downs. There are okay, but it should be the case as it where we're at.

The more money that goes into these products the higher the neutral rate will be and second the less variability there will be or the less variability there will be with short term changes in FX.

Jon Kessler: Nice improvement on a year-over-year basis. It looks like the gap between adjusted EBITDA on free cash flow is narrowing. Maybe you can just update us on how you're looking at free cash flow through balances this year and are there any headwinds that we should be thinking about with free cash flows we think out beyond this year? Maybe Tyson, would you mind starting with regard to the sort of balance of this year question anything particular that I think the question is, was there some jump forward or the like?

Okay, and then you.

So the goal is to transition, 10% give or take of the deposits to be it sounds like you are tracking at or slightly better than that is that still the way we should be thinking about that over the longer term or are there opportunities out there at some point to start to accelerate how quickly you're trying to cash in and to be.

We enhanced our online unless we tell you otherwise that's the way you should think about it.

Okay. Okay. Thanks again.

Thanks, Sean.

Jon Kessler: No, I mean, I think this is to be expected as the custodial revenue increases with the very high margin and cash generation capability. We know that it's going to accelerate that cash and as you see the positive gap in income come in. It's overcome now all the amortization from the wage works and other deals that are in there. So the business is starting to per on that generation of custodial cash and I'd expect that to continue.

Thank you and our next question today comes from Scott showing house with Stephens. Please go ahead.

Hi, guys can you hear me.

Hi, Scott.

Hi, guys. So congrats.

Congrats on price and there was also a pleasure working with you. Good luck in your next adventure.

Most of my questions have been asked I just wanted to drill on the service fee side.

Much of that was driven the growth driven by <unk>.

Jon Kessler: I'm going forward. Of course, there's other things in there like we're going to start to pay taxes. So you've got buyers going out for taxes. You can see that in there and other than that, I think the other things that are in there like properly planned equipment purchases and just what we spend on tax and things like that there isn't huge changes in there that would cause other things to occur. So it's going to continue to move and move up.

Last quarter about.

Let me raise fees versus the underlying improvement in like commuter et cetera, if you could break out any differentiation.

Okay great.

So if you look at it service fees.

It's particularly if you take the.

If you look at it service fees.

<unk> grew slightly faster than accounts so.

That then then total accounts and it's a little tricky because most service fees come from CDB.

Jon Kessler: Greg, as far as use of cash, first of all, it's worth noting that if we do nothing over the course of multiple years here and it's not too many, the free cash flow is basically going to eliminate our leverage and we're very comfortable with current leverage. I don't but that's probably not what's going to happen, meaning we probably will want to look at using that cash and what we will want to look at using that cash as we have in recent quarters and from my perspective in terms of order of.., of cash utilization.

<unk> and alike.

But.

Okay.

I would say that.

Tom.

The bigger issue here was just was volume driven.

And we are starting to see some of the rate increases that we put out there and talked about in the first quarter start to come through in actual collected revenues and the like but but I think youre going to see a little more of that particularly as we get into the beginning of fiscal 'twenty five.

As a critical factor of course, we also hope that volumes are up as well.

Jon Kessler: There's portfolio transactions that we like because they are reliable ROI. And then we've paid down a little bit of our term A. I would expect that where portfolio transactions aren't available or where it makes sense. At some point, we'll continue to do that. And then it's worth noting that within the current envelope we've committed to investing in organic innovation. And you're starting to see pieces of that come through. You will see more pieces of it come through.

But I think for the moment, what Youre seeing is a little more volume driven.

On the top line.

Yes.

Great that's great color. Thanks, Sean.

And then just on the balance sheet.

$90 million plus of cash anything changing in the M&A environment.

Versus 90 days ago. Thank you Scott.

We commented it 90 days ago that we felt like kind of given the proximity to the deposit prices on the bank side the debt.

Deals werent likely and that's why we went ahead and if you'll recall back at the end of April started to we start we did a partial pay down on our term a.

Jon Kessler: And it's, I think, helpful when we get a question, as I'm sure we will later, about TND expense and the like that we're able to do that within the envelope. We haven't ultimately, while bringing TND expense as a percentage of revenue down over time. Got it. Thank you for the answers. Thanks, Greg. Have a safe flight. Thank you. Do we have? Thank you.

We sort of just did the math and it made sense, but.

I should say Tyson did the math and then he showed it to me and I said no like five times and he kept telling it to me and he was right.

But.

But.

Uh huh.

I think that with a little bit of distance from that.

Stan Bernstein: And our next question today comes from Stan Bernstein with Wells Fargo. He can't tonight. He's going to read my questions. Hey Stan. How's it going? You're not going to be on a personal, not yet, not yet.

We are seeing a little bit of fall you've seen some transactions announced.

Primarily in areas where.

The HSA as a piece of the business, but not the whole of the business and those generally are transactions that we're going to do.

Jon Kessler: Although I'd like to, but I would like to say on a personal note, Tyson has been a pleasure working with you. Maybe a couple of questions. First one on your sales pipeline. Any changes into our fee volumes you're seeing, any changes in your win rates, or perhaps what employers are looking for? Yeah, probably the most notable thing we've seen Stan this year is, let me back up and say generally the commentary I would give on account growth is that on the one hand, similar to what we said in the first quarter.

At this point.

So you've seen a few of those.

<unk> also.

In truth, the fact that things like the move to enhance rates the increased investment that we're making and presumably others, who want to be competitive we will make to all of those factors raise barriers to staying in the market and so I do think that it's possible that over the next while you will see.

One or two of the larger players I don't think the very top of the bracket, but but in.

Jon Kessler: On the one hand, you've got the sort of less tailwind from a macro perspective, new job creation, and so forth. And then on the other hand, we are seeing higher new account onboarding, and then more importantly, the sort of pipeline and start work for fiscal Q4 calendar January build. And the source of that build is, so that's all providing a bit of an offset. And I think when I look at the pipeline, what's interesting this year is, for the first time since the pandemic, the enterprise pipeline has been very robust.

In that area break free and we're pleased to be in a position to be ready to do those transactions.

The nice thing about them is you know is is that.

From a shareholder perspective, we've done a number of these we no we don't.

They need any kind of banker multiple magic to make them work.

As we look at the IRR and if the IRR works, we can do it and from a cash flow and leverage perspective. These portfolio type transactions start cash flowing on day, one and youre not having to walk around with.

Synergies and all of that that we've dealt with in other transactions, but but not in this type. So I guess I would say that that's just a long way to say I think it's incrementally a little bit better.

Jon Kessler: And I'm not prone to give answers without data. One answer that is given is, okay, people now have the space to make changes that they weren't willing to make. That's certainly possible. But in any event, it is worth noting that. I think the biggest thing I would note that's different is the volume of enterprise deals that we are seeing. And, you know, that are turning out not to be just price checks or whatever, where we're able to win business away from competitors, as well as green field business. Got it. That's helpful.

But I think particularly on the smaller transactions.

Just plain old bank transfers that occur.

Lesser still less of those I think.

The small banks got a pretty good scare I think they are still pretty scary.

Thanks, Scott Thank you.

Thanks, and our next question today comes from.

<unk> with Bank of America. Please go ahead.

Yeah.

Good evening and thanks for taking the questions I guess, one for Tyson as we look at the custodial revenue.

Jon Kessler: And then one more on custodial assets. Can we get an update on the current mix of assets that are in enhanced yields? And where do you expect that mix will be 12 months? So, we've given guidance for the guidance, maybe the wrong word. We've said that, I listen, I pay attention. Richard's given me a face. This is what I get for being here. So, we said that we'll hit about 30% by the end of the year, and I think we'll end up doing a little better than that.

Went back and looked at custodial revenue really since the IPO in it.

It goes out basically every quarter.

And in fiscal 'twenty, one did really ever dip, but I guess I wanted to talk about the components.

The about $4 5 million increased sequentially in custodial revenue in the quarter can you just talk about what were some of the drivers of that and then should we see some of those.

<unk> drivers impact revenue going from <unk> to <unk> this year.

Yes, I mean, we get we have some deposits that occur in the middle of the year, what youre smaller Alan So we make adjustments there and as we feed money into enhanced rates as well kind of operating.

Jon Kessler: It is true that at this point, one of the limiting factors that we're working with is the timing of roll-off of our deposit contracts and the like that are also a barrier, as well as appropriate education of consumers. So, I guess I would say that in general, the enhanced rates program is moving at or above the pace we have discussed. And we think that the end result of this is going to be both a higher for lack of bedroom neutral rate, as well as ultimately less cyclicality because of the features that we've been able to design into this product.

We've got to make sure we operate between the mid and the Max or the deposits on the FDIC side, but we can start to you know continue to see dollars into into enhanced rig program, you'll see that start to accelerate as well and so as John said, we're a little ahead of schedule on our goals there too. So that's that part of the steroid story.

We've also continues to do a little bit better on how we monetize client held funds against the rate environment. That's currently available to us.

Make it a little bit of improvement there.

I did credit we got a new we've got our new treasurer.

Jon Kessler: And so, I'm really excited about where we're headed with it. I'm excited to have Jim take a look at it and see where he can add and improve, and we'll have more to say about it as we go in the next couple of quarters. Awesome. Thanks so much. Thank you, sir. See you tomorrow. Thank you.

Treasurer and there he is.

Making improvements and looking for ways to squeeze more times of nickels out of this and I mean, clearly he's doing a good job and so it's kind of all of those things amalgamated together.

Thanks, Paul one thing if youre doing a year on year comparison.

This is what I am doing Richard bidding and I expect to be.

<unk>.

Glen Santangelo: And our next question today comes from Glen Sandhands with Jeffries. Please go ahead. Oh, yeah. Thanks, and good evening. Hey, just two quick ones for me. You know, John, I was kind of curious if you can give us any update on the average duration of portfolio, and if that's changing at all with this enhanced rates product because I think it's most of us are probably aware. I mean, and you are three years ago today, the 10 year was sitting at 65 70 basis points, right?

Expect that to be noticed mostly through literature tells me it's Ed.

I think for a complement something I'm just looking for acknowledged.

Yeah.

Occasional positive reinforcement.

Is that.

In last.

Last year.

Two things happened that I think are youre not going to see this year.

And it happened in tandem one is obviously rates took off variable rates took off from zero. So the variable component was in percentage terms was.

Glen Santangelo: So you're getting ready to do a replacement kind of coming up here in a few months. And I was kind of curious if you could help us in any way think about the waterfall. And then I just had to follow up on margins. Yeah, I'm going to give you a lot of words that I'm not sure are going to answer the question you asked. Okay, so let me just. Let me call right in general, we haven't we have not made any change with regard to the fundamentally with regard to the approach we take to the duration of our cash portfolio.

A big boost that we didn't see coming at the beginning of the year.

And.

What I would say certainly wasn't there.

And then second.

And tied to that we began this effort that the Tyson referenced about.

Generating custodial income from the CDB side of the business and.

Glen Santangelo: I think that's fundamentally what you're asking. Okay, that is to say, you know, and by cash, in particular, I mean our deposit portfolio, right? We deploy, you know, the actual contracts that are deployed are four or five year contracts. And, you know, when you kind of swizzle in the fact that there's variable rate cash and there's money above the minimums and whatnot, right? You know, you're really talking about duration historically and by duration here, I mean liquidity related duration.

That was a lot of work over the course of a couple of years since the way towards transaction, because that's where most of that CDB.

<unk> funds come from and yet there wasn't a real hurry to start it up because marginal rates were you know roughly zero and so.

You won't have that same ramp this year. So if someone's doing a year on year comparison, I think the better way to do that is to look at.

You just you can look at where things are now you can add whatever cash you think you can add to the current pile and take our rate guidance for what it is.

Glen Santangelo: So I think the premise is right. There are a couple of things that that I mean, and I think generally the premise that your question, I think suggests that you have one, which is that over the next couple of years here, there's a lot of cash that will be running out of deposit contracts. And particularly to the extent, well, even if it were placed in a new deposit contract, so it particularly extends place and hence rates, right?

And Youll have a pretty good view of what things are going to be for the rest of the year.

So the rate guidance, obviously implies about 10 basis points higher in the second half and.

And.

So the math is not that market.

Very well done in China.

Finally, now I know.

I can die.

One quick one quick last one so John you talked about new logo growth and expanded network partner footprint is kind of supporting the growth for how the equity and then you talked about a 10% market growth rate I guess as you think about some of the wins you're seeing this year new logo growth.

Glen Santangelo: It's going to produce a nice bump here and that will include, you know, all of the COVID era cash. So, you know, you think about, and that includes both the natural runoffs, but also the kind of roughly five year single placement associated with the timing of the wage conversion, in calendar 2020, I believe. I may have that wrong. 20 or 21, one or the two. So there is a lot of opportunity here.

If I'm if I'm a <unk>.

A prospective customer what is the impetus to change or to switch vendors. This year is there something different that's driving more customers to switch or is it just kind of more of the same. Thanks.

I think now we're getting into the realm of like speculation informed by data, which is the most dangerous kind.

Glen Santangelo: We think it was absolutely the right time to be looking at whether the deposit instruments were really serving our needs and those of our members. And I think we've made the right choice in pursuing this mechanism and look the result is going to be what, under any reasonable economics scenario, or any plausible economics scenario for a moment, is going to be that it's not just that cyclically we're going to see higher profits.

But I think theres two things that are happening and I would invite Steve to comment on this as well.

The first is that debt.

I do think it's probably fair to say that there are some.

Shar departments that are coming out of the pandemic.

And in particular coming out.

Glen Santangelo: It's that on an ongoing basis, we're going to see higher profits from the custodial line and that seems good. Right. I mean, just to use your words, John, I mean, you said there's a bump coming in. I just want to make sure I'm correct in thinking there is a bump company. Even if you don't want to size it today because when we go back from we look at those, you know, those COVID, you know, sort of cash rates.

In a period, where they've already now seen one year of inflation and its impact on the wage side, but they didn't see it as much of an impact on the.

Glen Santangelo: I mean, it's pretty clear there's a big bump coming. Yeah, I mean, you, as you well know, Glenn, when I think people got a little ahead of their skis at the beginning of calendar, 23, man, and maybe, and so I want to be thoughtful about not creating and even, you know, bigger. Yep, yep. You crash on your ski, your hotel, but, but, but, but, I think, but the premise is correct. And, and I think it will be possible.

The benefit side until this year and now theyre seeing it so there's a little more attention being paid to benefit design and do I have the right vendor mix to optimize what I'm trying to do on the benefit side and I think we're a great partner in that environment.

And then I think the second factor is that debt that it's becoming somewhat clear who's in this thing to win it and.

I think there is the number of firms that are really there to do that is somewhat smaller than it was.

But maybe Steve.

Sure.

Hey, Steve Spence Housekeep spends more time in airplanes than I do almost doing anything so your euro qualified as I speak to the what's going on out there.

Glen Santangelo: All right. And maybe Tyson just just one quick one on the margins. I mean, you know, the, the EBITDA, you know, was up, just said EBITDA was up 360 basis points year over year. And I, you know, I know, you know, there was some member in balance growth and, and the improvement in the custodial yields, obviously, and, and some technology benefits, but I was wondering if you could just real quickly sort of unpack that to help us think about what's really driving that better EBITDA, you know, when you think about those three contributors.

Alright.

Thank God that Alan.

If you go back to the history right, we did the wage deal.

Right before Covid.

Everyone and.

Look we took a while.

Got everything lined up integrated and getting the teams working together and regaining frankly trust.

From brokers and consultants and larger quarters and things like that that we could execute.

Glen Santangelo: Thanks. Yeah, I mean, it is the custodial revenue obviously falling down to the model. Let me do that would drive it. And like we've talked about you go back to history and, you know, way back and we get hit 40% even marching one of the quarters in the middle of the summer, like this one. And so we're moving back towards that. Is that moves up, but I do think that we've been very thoughtful about how we've managed the controllable costs and when I say that, I mean, you know, not something like stock comforts, which is, which we, you know, we benchmark.

With the much bigger company now going from 900 health equity units to 3500 teammates after the acquisition.

To really be able to know and I think we've regained a lot of that trust back candidly and.

Whether it's the trust.

HR professionals.

No trends to make a big it's a big deal right to move 510000, or even five or under a thousand.

Are there folks over they have to close the accounts have reopened new ones everything they have to be pretty sure that they are going to the right solution and so I mean, I think the great thing about health equity is in our <unk>.

Glen Santangelo: Just fine with all of our peers, but it does get added back into EBITDA, what I'm talking about is what our executives work on every single day. And we're very thoughtful about how we build budgets and we hire. How much we improve compensation and those type of things. And so I think that's just a matter of, of the seriousness with which the team takes that and, and that's why we're able to raise our EBITDA guidance by five along with the top line.

Services has always been a highly regarded.

We were able to do a lot of these integrations and things like that.

And now I think if you really talk to the market and talk to the consultants talk large employers small enforcement size.

And then of course, all of our health plan partners. They really believe that we're hitting our stride from a service perspective, which makes it a lot easier to.

Glen Santangelo: Normally, you see it, you know, as a percentage of that outline race. So it's just being thoughtful about those efficiencies. I do think that it's also true that there's efficiencies to be gained and have been gained on the service cost line item. And that's again where a lot of the executives are working on that. And I think we've set ourselves up for longer term success there as well. And it will start to show.

To make those kind of changes when you don't need to worry about.

The system is not working and things like that so I think we're very well positioned in and then more macro John already spoke to the fact that.

When you're just trying to hire people and youre dealing with great resignation and great transfer and all the other stuff and now it's a little bit more.

Glen Santangelo: And so I think those are some of the things that are sort of showing through on that. And then we'll continue to get the benefit of the enhanced rate program pushing down through there as well, like we've been talking about. So that will continue for some time. Awesome, thanks, and best of luck, Tyson.

A more of a rhythm.

Glen Santangelo: Thank you, Glenn.

These benefits now is a good time to kind of say all right.

Start looking where we can really drive.

Deeper adoption.

Adoption of health savings accounts and things like that and they know that we're in a proven leader in that space.

Sean Dodge: Thank you, and our next question today comes from Sean Dodge at RBC Capital Markets. Please go ahead. Yeah, thanks. Good afternoon.

Really helping their workforce embraced health savings accounts.

Thanks Alan.

Thank you. Thank you and our next question today comes from George Hill of Deutsche Bank. Please go ahead.

Jon Kessler: Maybe just going back to the enhanced product and just to further clarify how those work. I know, John, you said you placed cash in those for five years, but you've also said before they're designed to produce more smoothness and yield. Over time, so does that mean should we think about these being more like a variable rate policy or is that smoothness coming more from the fact that these are layered in over the course of the year and that not all happening and lumps around the January time frame and so as these role. Kind of on their five year ladders, it's happening more intra year instead of in January, and that's what this movement is coming from, maybe just to clarify that.

Yeah.

Good evening, guys and thanks for taking the question and Tyson I'll Echo.

The positive sentiment and great working with you I guess two quick ones for me and I'll try to keep it brief.

First is you talked about the enterprise pipeline being robust I don't know if there's any way you can quantify that or to throw some numbers around it and kind of what's the strategy to gain share as we go through the upcoming selling season.

And then I'll pause and come back with the second one.

Yes, I got out of the game of giving sales pipeline numbers and I'm not going to get back into it.

That's two two in one day.

Jon Kessler: The answer is there are really three sources of this and we thought quite a bit about this as we work through these products. The first is the second point you mentioned that is to say the fact that money, when you do cash, I'm sorry, let's keep saying that. When you do deposits, you strike the deal and you send all the money and that's it. Here, you do have the ability to layer money in kind of for lack but from dollar cost average in now.

Uh huh.

But but.

But let me say from a strategy perspective briefly.

And this isn't rocket science.

We are the market leader across this bundle.

And.

Where we're good people and we have.

If you were.

We're not going to like throw up NPS numbers and the like but if you if.

Jon Kessler: And so that does really help and at some point we're not going to be talking about if we have our way, we're not going to be talking about tremendous uncertainty on this topic when we announce the December quarter and the like and I'm sure you'll look forward to that as we will. The second factor is that the variable cash that we need to maintain liquidity is built into the instrument. So in the bank instruments, right, yeah, they have a minute of max but fundamentally they still work by term deposits and so we have separate cash today about $500 million or about 4% of our 3.5% of our total HSA cash that is in purely variable rate instruments and we need to have it there because that protects us against any liquidity issues.

If you look where to look at that data you would see that where I think others have been a little more challenged over the last year or two.

Particularly this last year the team just busted his butt and deliberate.

Jon Kessler: And so the liquidity is built into the contract and so that's very helpful in terms of eliminating situations where you have, as it occurred in March of 2020, very rapid changes in government policy and the like that produce big changes and particularly downward in variable rates.

And I'm not using this word likely a remarkable open enrollment season, and if you think about the way enterprise works a lot of those enterprise deals start during the kind of start the sales cycle starts at the end of the prior year and people can do things like they can call. Your call center in January and see how long the wages and see whether people are harried or not.

And all of those kind of things and so those things matter and then lastly, George I'll say on track from a strategy perspective.

<unk>.

Yeah.

We are.

And we are showing our clients, where we are spending.

On the cash you might shape sandwiches on on on the Tech side and people are seeing what we're doing it's not like they're not as you know.

Press releases for features our clients. So that's not we did right but.

Folks who are looking at our roadmap, we're looking what comes out every month or so.

We're looking and Youll see some of this over the course next six months, but.

Jon Kessler: And, you know, then the third factor which I guess we'll get into a little bit more, I'm sure this will be on the agenda when we get to investor day but is some stuff that is internal, I'll just say internal to the contracts that is just really designed to some extent provide a little bit of trade off between rate and non-fickle quality. We really recognize that it's not in the interest of our investors nor is it valuable in terms of managing the business for people to start thinking about these dollars as anything other than what in the end they really are.

But there's really neat and interesting stuff going on and what it basically just conveys is that again back to an earlier comment that.

We're at a place of debt relative to some of our competitors and certainly relative to other segments. We're very fortunate to be in a place where we can invest at a time, we're investing in the infrastructure and the technology and feature function and product actually matters versus a period, where there's not that much new happening.

So I.

I think our enterprise that really gets to pay attention to that whereas the small groups kind of don't.

Jon Kessler: Feeze, right? And when we've been, you know, when we're fully exposed to deposit products as we have been, though we've done everything in our power within that world to try and minimize that cyclicality, right? There's still particularly when you're close to rebound, there's quite a bit of it.

Jon Kessler: And so, you know, that, that's the third factor. And again, we'll, I'm sure going to details at some point, but take all these together. And it's not that there aren't going to be ups and downs there are, okay? But it should be the case, A, that we're at, you know, with the more money that goes into these products, the higher the neutral rate will be. And second, the less variability there will be or, you know, the less variability there will be with short term changes in interest.

They're seeing that and I think youre going to see it to over the course of the next year or so.

Okay. That's helpful and I think I know you weren't going to give me an answer to the pipeline question. So I have a follow up which I also I'm not sure that you'll give me an answer to that given that we talked about kind of the average well I know that the company. Historically has not you guys don't think of yourself as in the business of prognosticating rates. However.

However people in my business are in the business of prognosticating rates.

And given where we are in the rate cycle do you guys have to think about proactively trying to extend duration because I imagine a lot of people in my business. If we're looking out three years, we probably think the next rate move is down versus up. So just kind of like is there anything that you guys are seeing in the rate environment that kind of makes you wanted to.

Jon Kessler: Okay, and then you said, so the goal is to transition 10% give or take a bit of positive to these times that you're tracking at or slightly better than that. Is that still the way we should be thinking about that over the longer term or other opportunities out there at some point to start to accelerate how quickly you transition cash and into the enhanced power? So when I'm last going to tell you otherwise, that's the way you're thinking about it. Okay. Thanks again. Thanks, Sean.

The way that you guys think about how you kind of put that custodial cash to work and duration and timing.

So I'm going to give you an answer that is only slightly different than I've given to this question before but the slight probably relevant.

Unknown Executive: Thank you.

Let me first say the answer we generally give is that from.

From the perspective of the instruments and the duration of the instruments in which we have invested quote unquote.

In the HSA cash world.

Scott Schoenhaus: And our next question today comes from Scott. Showing how smooth Stevens is. Let's go ahead.

We have not as you said exactly as you say, we've not been Prognosticators and we've tried to to.

Scott Schoenhaus: Hi, guys. Can you hear me? Thank you. Hi, Scott. Hi, guys. So congrats and Tyson. It was also a pleasure working with you. Good luck in your next adventure. So I just, most of my questions have been asked. I just wanted to drill on service beef died. How much of that was driven, the growth driven by, I think we talked about quarter about, let me raise fees versus the underlying improvement in my computer, etc.

Generally hold aggregate duration.

Duration for liquidity in that kind of three or four year range.

I will say one of the benefits of the enhanced rates product. One of the features that allows us to have some trade off around this is that we can meet our liquidity needs.

While the instruments in the portfolio are somewhat longer term instruments and so.

So well.

Scott Schoenhaus: If you could break out any differentiation. That would be great. Well, if you look at it, service fees, particularly if you take the, if you look at it, service fees, I believe, grew slightly faster than accounts. So then, then total accounts. And it's a little tricky because most service fees come from CDBs and the like. But I would say that the, the bigger issue here was just was, was volume driven. And we are starting to see some of the rate increases that we put out there and talked about in the first quarter start to come through in actual collected revenues and the like.

Well that wasn't particularly designed with a moment like this one in mind a practical effect of it is to the extent that we're replacing funds.

Whether it's at the end of the last cycle or in this cycle and towards the end of this cycle.

Non buy cycle, I mean year in and so forth.

But.

We're gonna be locking in in that context.

Higher yields on those placements for an extended period of time and.

So I.

I do again, I'd want to be thoughtful and cautious in saying that first of all when managing the company and expenses, we think about neutral rates because like spend.

Spending into eight and honestly, we're not actually at neutral if you think about it.

Scott Schoenhaus: But, but I think you're going to see a little more of that, particularly as we get into the beginning of fiscal 25. As, as a critical factor course, we also hope the volumes are up as well. But, but I think for the moment, what you're seeing is a little more volume driven on the top line. Great. That's great. Call it like shot. And then just on the balance sheet, you know, $290 million plus cash, anything changing in the M&A involvement versus 90 days ago.

But.

I do think there is a practical effect of the way. We're doing this is that it is going to produce.

More benefit from this cycle then.

We've seen from prior cycles or then we would see if we were just using our same deposit instruments that we have in the past.

Thanks, George that was relevant and helpful. Thank you.

Yes, Sir.

And our next question today comes from Mark Smucker, Mark Hahn with Baird. Please go ahead.

Scott Schoenhaus: Thanks. So we commented 90 days ago that we felt like kind of given the proximity to the deposit crisis on the bank side that that deals weren't likely. And that's why we went ahead and if you recall back at the end of April started to. But we started we did a partial paydown on our term A. We sort of just did the math and it made sense. But I should say Tyson did the math and then he showed it to me and I said no like five times and he kept showing it to me and he was right.

This is Jeremy.

Yeah.

Hey, Bruce.

First of all around.

You don't want macaroon or macaroni.

We're really getting into the off Tien tsin aren't we.

We are.

Hey, Tyson, it's been a pleasure working with you.

And in terms of the in terms of serious questions just on B.

On the.

Scott Schoenhaus: But, but. I think that with a little bit of distance from that, we are seeing a little bit of fall. You've seen some transactions announced primarily in areas where the HSA is a piece of the business but not the whole of the business and you know those generally are transactions that we're going to do at this point. But so you've seen a few of those. I think also you know the fact that you know things like the move to enhance rates, the increased investment that we're making and presumably others who want to be competitive will make too.

The yield.

Moving up so much on the cash.

Partially just due to the enhanced yield product is becoming a bigger portion of the overall deal because obviously fed funds doesn't fully explain it. So I just wanted to add 100% clarify that.

Yes.

And I would say during this period to the extent, we had any bank placements than they would have been small we've.

We've talked about before that the bank placement market is very favorable right now.

But Rick.

Yes.

Great and then and then if we take a look at the investments I mean, 23% growth.

In terms of the investments there obviously, there's been an impact with regards to the overall market but.

What are you seeing just in terms of the the the behavior of the holders are they are they starting to chase you know additional yield even through like inner.

Scott Schoenhaus: You know all those factors raise you know barriers to staying in the market and so I do think that it's possible that over the next while you will see one or two of the larger players. I don't think the very top of the bracket but but in that area break free and we're pleased to be in a position to be ready to do those transactions and the nice thing about them as you know is is is that from a shareholder perspective we've done a number of these we know we don't need you know any kind of banker multiple magic to make them work.

Intermediate bond products or anything along that line or are you seeing any sort of movement from that perspective, and how should we think about that.

Yeah. Thank you for asking that question Mark.

We.

Our our portfolio offering does include.

Things like our ultra short bond.

Bond funds that kind of behave in the same manner as money market, but I think don't don't fudge the distinction between insured by the federal government and non insured by the federal government and so.

Scott Schoenhaus: It's we look at the IRR and if the IRR works we can do it and you know from a cash flow and leverage perspective you know these portfolio type transactions. You know start cash flowing on day one and you know you're not having to muck around with you know synergies and all that that that we've dealt with in other transactions but but not in this type. So I guess I would say that's just a what long way to say I think it's incrementally a little bit better but I think particularly on the smaller transactions you know the like just plain old bank transfers that occur little less still less of those I think the small banks got a pretty good scare and I think they're still pretty scared. Thanks Scott.

Stanislav Berenshteyn: Thank you.

As sometimes you see with some of what are our other folks in the marketplace might do I don't think they intend to but its the practical thing.

So so and those funds have been quite popular so.

I do think there is an element of this that is.

Investor that is remember, saying you know what I'd like to get more yield then I can get on cash.

I know I'm not going to do anything with it let me put it in at least today tomorrow I'm willing to give up the clarity of I can swipe my card or whatever and I'll put it in some of these products I think theres some of that.

David Larson: Thanks and our next question today it comes from our loves with Bank of America please go ahead. Good evening and thanks for taking the questions I guess one for Tyson as we look at the custodial revenue and I went back and looked at custodial revenue really since the IPO and it's it goes up basically every quarter only in fiscal 21 did really ever get. But I guess I wanted to talk about the components of the about four and a half million increased sequentially in custodial revenue in the quarter.

I also think that there every day, there's an article in the paper that you can decide what the motivation is but it's like yeah, those 5% CD yields are great but.

But but it still doesn't meet the stock market over the long term and so.

Theres some of that too, but I think it's probably fair to say that there is an element and then that's a win from our perspective in that while sure on that incremental dollar we might earn more if it were sitting in cash that's a customer that's going to be more sticky, we're giving them the product. They want we try to guide them to exactly the product that they're asking for.

Tyson Murdock: Can you just talk about what are some of the drivers that and then should we see some of those sequential drivers impact revenue going from two Q to three Q to here thanks. Yeah I mean we get we have some deposits that occur in the middle of the year which are smaller and so we we make adjustments there and as we feed money into enhanced rate as well kind of operating. We've got to make sure we operate between the minute and the max of the deposit on the FDIC side but we can start to you know continue to feed dollars into into the hand straight program you see that start to accelerate as well and so as John said we're we're a little hell of schedule on.

<unk>.

If theyre getting capital advice from US that's part of the discussion I mean, it's it's.

I just think at the end of the day and it it well or are the rates, we pay on cash or are determined from our formula Nonetheless, it's.

It's probably the availability of those products in part that has allowed not not just us, but the broader industry to kind of keep a lid on on.

Custodial expense and so.

Tyson Murdock: On our goals there to so that's that's part of the sterile story we've also continued to do a little bit better on having monetized client health funds against the rate environment that's currently available to us. And so we make a little bit of improvement there and I did credit we got a new we got a new treasure in there who's making improvements and looking for ways to squeeze more vines and nickels out of this and clearly he's doing a good job.

I guess I sort of think that's a win and that's how I think about it.

Thanks Margaret.

Thanks, Thank you Mark.

And our next question today comes from David Larsen <unk>. Please go ahead.

Hi, Congrats on a good quarter and Tyson It was great working with you I thought you did a great job guiding the company through a very very tough cycle.

Can you, maybe just talk about either John or Tyson.

Tyson Murdock: And so it's kind of all those things are nominated together. Thanks, folks. If you're doing a year on your comparison, this is what I'm doing, Richard's bidding, and I expect to be noted, since I don't mostly do what Richard tells me to do. Two things happened that I think you're not going to see this year, and they happened in tandem. One is obviously rates took off, variable rates took off from zero, so the variable component in percentage terms was a big boost that we didn't see coming at the beginning of the year, where I certainly wasn't there.

The revenue.

Delta on interchange one <unk> versus <unk>, it's obviously down about 13% and just any more clarity around like the Cobra impact and if you could describe what exactly that was that would be very helpful. Thank you.

Tyson you want to hit part a of that.

Yeah on the interchange David I mean, that's just the normal seasonality. So we've got people essentially spending.

They loaded up the HSA accounts in the first part of the year, they're going to spend more and then as we move into the summer.

They're going to spend less as they are not.

They're not at home spending actually and so we always get that seasonality through so you will see a Q1 high point, you'll see a Q2 Q3 softer point and then as we move into Q4, you've got the use it or lose it and you've got kind of the remaining funds on those on those CDB accounts that get used up and so you see a stronger Q4.

Tyson Murdock: And then second, and tied to that, we began this effort that Tyson referenced about generating custodial income from the CDB side of the business. And that was a lot of work over the course of a couple of years, since the wage works transaction, because that's where most of that CDB funds come from. And yet there wasn't a real hurry to start it up, because marginal rates were roughly zero. And so you won't have that same ramp this year.

And that's why you see that and so that seasonality has looked a little funny in history. So it is hard to decipher that because the COVID-19 effect over quarters or in history now.

It doesn't look as it doesn't look as a smooth. It is just that seasonality I explained that's kind of one thing and then John Youre going to have to go over side of it must be.

You're on a roll.

Yes, and on the Cobra side of it. That's just again, we've got we've mentioned in the script a little bit to the legislative effect of that.

And so.

Tyson Murdock: So if someone's doing a year on your comparison, I think the better way to do that is to look at where things are now, you can add whatever tax you think you can add to the current pile and take our rate guidance for what it is. And you'll have a pretty good view of what things are going to be for the rest of the year. So the rate guidance obviously implies about 10 basis points higher in the second half, and so the math is not that hard to do.

With regards to the FSA and Cobra. This has been that's been tough to forecast all the way through having the national emergency legislation out there and and with regards to Cobra. Just the fact that people don't have the optionality to go into Cobra multi year. After after exiting the job that changes how.

We essentially drive revenue off of.

The different communications that we make to them and also just the number of people that sign up given the even the broader.

The broader strength in the economy that maybe wasn't expected so.

Tyson Murdock: Very well done, Sean. Thank you. Finally. Now I'm impressed with you. Thanks, Sean. One quick one, one quick last one. So John, you talked about new logo growth and expanded network partner footprint is kind of supporting the growth for health equity. And then you talked about a 10% market growth rate. I guess as you think about some of the wins you're seeing this year new logo growth. If I'm a perspective customer, what is the impetus to change or to switch vendors this year?

So those are kind of the things that kind of push push those things around.

Okay, Great and then I think what I'm hearing also is that in terms of like the risk of a recession or the risk of a slowdown next year, you're not seeing any of that in terms of demand. In fact, that's kind of the exact opposite there's lots of demand youre summing up a bunch of clients is that right.

Sure.

I mean, I don't I don't know that our clients and the human resources Department are experts at predicting recessions, but.

But I think people are.

Tyson Murdock: Is there something different that's driving more customers to switchers? Or is it just kind of more the same? Thanks. I think and now we're getting into the realm of like speculation informed by data which is the most dangerous kind. But I think there's two things that are happening and I would invite Steve to comment on this as well. The first is that I do think it's probably fair to say that there are some HR departments that are coming out of the pandemic and in particular coming out in a period where they've already now seen one year of inflation and its impact on the wage side, but they didn't see it's much of an impact on the benefit side until this year.

I think it's probably fair to say that.

What's happening out there is that people are anticipating.

Tighter conditions.

That's a recession or not I don't know, but the effective anticipating tighter conditions as they are there is that they are attentive to plan design and win wins and things like that that we talked about earlier on the call. So okay.

But in terms of.

When I look at the account numbers that change as a result of that.

They are a function just of new job ads and alike.

Arcade are moving in tandem with the national data at this point. So I think there is nothing that would surprise you there.

Okay, and then I think he basically renegotiate your contracts every three years with your clients, which I think would imply that the yields of that drive custodial revenue should continue to increase through next year right.

Tyson Murdock: And now they're seeing it so there's a little more attention being paid to benefits design and do I have the right vendor mix to optimize what I'm trying to do on the benefit side and I think we're a great partner in that environment. And then I think the second factor is that it's becoming somewhat clear who's in this thing to win it. And I think there's the number of firms that are really there to do that is somewhat smaller than it was.

Yeah, Hi, I'm.

Back to the answer on that one too.

I think it was Glenn that asked a similar question and just just but just to say.

The R. R. Our duration is three but our bigger contracts the deposit contracts themselves, maybe four or five years. So there is youre going to see quite a few of these come through over the next couple of years.

Tyson Murdock: But maybe Steve, as I say, he spends more time in airplanes than I do almost doing anything. So your qualified desire to speak to what's going on, on up there. I, I, I, John Nell, that Allen, you know, if you just go back to the history, right? We did that wage still right before COVID and COVID hit everyone. And, and look, we, it took us well to get everything lined up and integrated and getting the teams working together and regaining frankly trust from brokers and consultants and large employers and things like that, that we could execute with the much bigger company, you know, going from 900 HealthEquity teammates to 3500 teammates after the acquisition to really be able to nail it.

And also during obviously the last few years has been quite a bit of growth. So you need to if you look at this you need to go back to the your reference year versus dividing today by that number.

Okay, and when you shop.

When you say youll see quite a few of these.

Favorable manner I think is what you were saying right, yes, yes, yeah. Okay. Okay and then just lastly for me your service gross margin.

Tyson Murdock: And I think we've regained a lot of that trust back and whether it's a trust of a HR professional that knows that to trans, to make a big, it's a big deal, right? To move five, 10,000 or even five or 100,000. And there folks over that to close you can also reopen new ones everything they have to be pretty sure that they're going to the right solution. And so, I mean, I think the great thing about HealthEquity is is that our services has always been highly regarded.

Obviously showed some pretty good improvement it got as high as like I think 38% in <unk> of 'twenty two how high can your service gross margin trend to.

We've talked about this in the past.

I don't I'm, not able to make like long run predictions, what I will say is we were.

We're targeting the total margin and particularly as we reduce the cyclicality of the other components.

I think that makes a ton of sense. So.

But I do think we have some room to grow from here I mean.

We ought to be able over time to get this number back into the Thirty's. It may take us a little while but the drivers of that are going to be first of all particularly growth in the CDB businesses that are profitable and then secondly.

The the underlying HSA account growth and then third is going to be surface tech.

Tyson Murdock: We were able to do a lot of these integrations and things like that. And now, I think if you really talk to the market, talk to the consultants, talk to large employers, talk to small employers, midsize. And of course, all of our health partners, they really believe that we're hitting our stride from service perspective, which makes it a lot easier to make those kind of changes when you don't need to worry about just systems not working and things like that.

Where where we can bring costs down and.

We've delivered a little bit of that in this quarter and a little bit of last quarter and how can we do a little of that each quarter and AR at the end of this we'll have a software business I don't know I'm, just kidding that won't be true, but but.

But it is an opportunity.

Great. Thanks, so much appreciate it.

Thanks, David.

And our next question comes from Sandy Draper of Guggenheim. Please go ahead.

Tyson Murdock: So I think we're very well positioned and then more macro and generally spoke to the fact that, you know, when you're just trying to hire people and you're dealing with great resignation and the great transfer and all that other stuff, and now it's a little bit more a little more of a rhythm. The people's benefits now is a good time to kind of say, all right, time to start looking where we can really drive some deeper adoption of health savings accounts and things like that. And they know that we're the proven leader in that space of really helping their workforce embrace health savings account. Thanks, Alan.

Thanks, so much.

Not a lot left to ask so first I'll just say.

Well I'll say that kind of tightened its been a pleasure working with you hopefully you'll get to cross paths at some point in the future.

I guess the.

Jon Kessler: Thank you.

First question.

Just do the simple math of looking at the <unk>.

The cost per account is down a touch.

That's just a one day comparison last quarter to this quarter just trying to think do you have much more visibility and it sort of ties to what you were saying John about the investments is there any notable change in behavior, you're seeing now versus maybe the past couple of years about the desire for people to pay themselves back versus put the money in.

George Hill: And our next question today comes from George, so a Deutsche Bank. Please go ahead. Yeah. Evening guys and thanks for taking the question and Tyson, I'll echo the positive sentiments and great working with you. I guess down to quick ones for me and I'll try to keep it brief. First is you talked about the enterprise pipeline being robust. I don't know if there's any way you can quantify that or throw some numbers around it and kind of what's the strategy to gain share as we go through the upcoming season. And then I'll pause and come back with a second.

And not reimbursed themselves that would be the first question.

Now I have to ask how many they're going to be because.

After after I'm, just glad Greg Greg Greg its already off the line to hear all these like eight partners no I'm kidding, but here goes look I think first of all you know it is worth noting that if you look at total assets for the quarter.

This was actually a record growth period ex Q4s.

Jon Kessler: Yeah, I got out of the game of giving sales pipeline numbers and I'm not going to get back into it. That's two in one day. All right. But let me say from a strategy perspective briefly, this isn't rocket science. We're the market leader across this bundle and we're good people and we have, you know, what if you were, you know, we're not going to like throw up NPS. Yeah. Jefferson, but if you were to look at that data, you would see that where I think others have been a little more challenged over the last year to, particularly this last year, the team just busted its butt and delivered a, you know, and I'm not using this word lightly, a remarkable open enrollment season.

I mean, you're talking about close to $1 billion in an asset growth over the course of a single quarter and that's really good.

Also if I break it down and I think that the the short answer here is going to be that I don't think there has been very much difference other than the the as we talked about in an earlier question.

Jon Kessler: And if you think about the way enterprise works, a lot of those enterprise deals start during the, they kind of start, the sales cycle starts, at the end of the prior year, and people can do things like they can call your call center in January, and see how long the wait is, and see whether people are hairy or not, and all those kind of things. And so those things matter. And then lastly, George, I'll say on a strat from a strategy perspective, we are, and we are showing our clients where we are, spending on the, I'm cashing in my chips here, on the tech side, and people are seeing what we're doing.

Increased interest in investment in no pun intended.

Because if you look at Q2 contributions.

They're up year over year exactly as you would expect.

And it's just that the transfers from cash to investments were way up.

And I think that just reflects.

But ultimately reflects a better market backdrop I mean.

Uh huh.

If I look at the same period, a year ago, the S&P was off 13%.

And.

During this period it was plus about the same number a little bit more and so.

Uh huh.

Hum.

Better market backdrop, and all that kind of stuff, but the underlying contribution behavior, which is I think really the thing you would care about was kind of about the same spend.

Spend was seasonally pretty much what we expected. So I don't think it's any fundamental change in spend behavior.

Okay, Great and then.

It hasn't gotten bored and dropped off maybe a quick one for him you commented on the environment around sales, but CVR our men on the ground in D C anything coming out.

Jon Kessler: It's not like you're not, as you know, you must be press releases for features or clients, that's not what we do. But folks who are looking out our roadmap, who are looking what comes out every month or so, you know, who are looking, and you'll see some of this over the course of the next six months, but, but there's really neat and interesting stuff going on. And what it basically just conveys is, that, again, back to another comment, that, you know, we, we're at a place that relative to some of our competitors, and certainly relative to other segments, we're very fortunate to be in a place where we can invest at a time where investing in the infrastructure, in the technology, in feature function, in product, you know, actually matters versus a period where there's not that much new happening.

<unk> come out of D C, whether it's regarding Medicare potential bigger step ups and potential ability for people to invest or say, even HSA anything new out of D. C or is it really nothing going on there.

Right now thanks.

Thanks, Andy and I think on this very day, there's nothing going on in D C, but they are coming back.

We continue to have some fantastic discussion.

And I think what what kind of is different is that now these are more by bi partisan.

And we're just kind of focusing on what are Americans need an end.

Whether it's loosening up a little bit on some of that.

Qualifying attributes around behind that Brooklyn.

And you're you've been around long enough and thank you for all your support over the years to.

Jon Kessler: And so, I think our, the enterprise that really gets to pay attention to that, you know, where is the small groups? That's kind of don't. They're seeing that, and I think you're going to see it too over the course of the next year or so.

Remember that.

A lot of lack of clarity.

Around things like preventative care right and that was that was actually clarified and the Trump administration that allowed people to start paying for more medications first dollar and things like that and still have either plan that that helped and so that was not only to help that they introduce it but then the vitamin attrition has been very supportive of those in them.

Jon Kessler: Okay, that's helpful. And I think I knew you weren't going to give me an answer to the pipeline question, so I have a follow up, which I also, I'm not sure that you'll give me an answer to the given that we talked about, kind of the average. Well, I know that the company historically is not, you guys don't think of yourself as in the business of prognosticating rates. However, people in my business are in the business of prognosticating rates.

So it also.

So now when you look at a especially the large employers and then clients are offered by health plans.

Jon Kessler: And given where we are in the rate cycle, do you guys ever think about proactively trying to extend duration? Because I imagine a lot of people in my business, if we're looking out three years, we probably think the next rate move is down versus up. So just kind of like, like, is there anything that you guys are seeing in the rate environment that kind of makes you want to change the way that you guys think about how you kind of put that custodial cash to work and duration and timing?

And you look at their benefit design.

Our covering things like high blood pressure meds, diabetic meds and stuff like that is allowed by regulation.

I think that is actually cloud a little bit on the ground that we're trying to do which they.

We all agree that every American needs weird refrigerators, feeling about kind of on that.

Can can work with any plan, obviously with the high deductible plan, we know that as the HSA, but is there are there other mechanisms to try and do that so.

Jon Kessler: Yeah, so I'm going to give you an answer that is only slightly different than I've given to this question before, but the slides probably relevant. You know, let me first say the answer we generally give is that we did, you know, from the perspective of the instruments and the duration of the instruments in which we have invested, quote-unquote, in the HSA cash world. We've not, as you say, exactly as you say, we've not been prognosticators, and we've tried to generally hold aggregate duration for liquidity in that kind of three-four-year range.

I just I'm encouraged by the bipartisan nature of the discussions.

And despite everything that everyone sees when they turn on you know they are given.

News station in how they think it's so torn apart I havent seen that when I've talked to Democrats and Republicans.

And so we are hopeful that will continue and system.

We refer to as HSA or other type of account expansion.

Allowing just more Americans to have the benefits of one of these portable personally on the basketball accounts.

Jon Kessler: I will say one of the benefits of the enhanced rates product, one of the features that allows us to have some trade-off around, this is that we can meet our liquidity needs, while the instruments in the portfolio are somewhat longer-term instruments. And so, while that wasn't particularly designed with a moment like this one in mind, a practical effect of it is to the extent that we're placing funds, whether it's at the end of the last cycle or in this cycle, and toward the end of this cycle, that non-bicycle, I mean year and so forth.

What kind of plan that they have and so that's what we've been focused on not just St. How can we expand that but yeah. I mean, that's you know thanks.

Thanks for the question.

I believe we're continuing to make progress.

And we're hopeful that certainly before the next presidential election.

There will be some building truth continued to expand the benefits. So we will make sure that.

Legislators.

These decisions are made.

You know they start to disseminate that information now can we will pass along but it's just a constant education. Okay. Thanks, Andrew.

Thank you for your musical talents over the years too.

Jon Kessler: So, we're going to be locking in in that context, higher yields on those placements for an extended period of time. And so, I do, again, I want to be thoughtful and cautious in saying that, first of all, when managing the company in expenses, we think about neutral rates because like, you know, spending into a, and, and honestly, we're not actually at neutral yet, if you think about it. But, I do think there is a practical effect of the way we're doing this, is that it is going to produce more benefit from this cycle than we've seen from prior cycles or than we would see if we were just, you know, using our same deposit instruments that we have in the past.

Your music.

Thank you ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Jon Kessler for closing remarks.

So appreciate everyone.

And the kind comments for Tyson.

For all if he takes our teasing really well always has and.

Is gonna be genuinely miss with any organization, but.

Like I think this is not going to be the last time most of you on this call will see.

Mr Murdoch or hear Mr. Murdoch and certainly will not be the last time, I hear or see them and.

We'll see how this this lucania guy does.

But but one way to find out is.

Uh huh.

To book your flight now for February 22.

Mark Marcon: Thanks, George. That was relevant and helpful. Thank you. [inaudible] Hey, Tyson, it's been a pleasure working with you. And in terms of the, in terms of serious questions, just on the yield, you know, moving up so much on the cash, was that partially just due to the enhanced yield product is becoming a bigger portion of the overall deal, because obviously said funds doesn't fully explain it. So I just wanted to 100% clarify that.

2024. This is big time this is.

All.

Blake.

We're talking about.

Rodway quality type stuff.

Actually I have no idea.

Okay.

But.

John can I add.

Yes.

I want to interject one thing on that so look we think we'll have a good winter and.

We would love to.

Not only guide you.

Through our business, but maybe do some mountain guiding and.

Maybe we can bring tightened back.

One of the guys. Okay. That's true.

Okay.

At this time.

I felt to thank guys. Since we're all types of thank you.

He's been a wonderful teammate.

Thank you for everything you've done for how quickly.

Thanks, everybody I really appreciate it thank you.

Tyson Murdock: Yes. In addition, I would say you know, during this period to the extent we had any bank placements and they would have been small. We've talked about before that the bank placement markets are available right now. Great. And then, and then if we take a look at investments, I mean, 23% growth, you know, in terms of the investments there. Obviously, there's been an impact with regards to the overall market, but what are you seeing just in terms of the, the behavior of the, the holders are they, are they starting to chase, you know, additional yield even through like, you know, intermediate bond products or anything along that line.

Yeah.

Alright, that's it we will see you all all in December .

And some of you before then and then of course.

In February .

Thank you.

Hi, Thanks.

Everybody. This concludes today's conference call. Thank you all for attending today's presentation you may now.

You may now disconnect. Your lines you have a wonderful day.

Yeah.

Tyson Murdock: Are you seeing any sort of movement from that perspective and how should we think about. Yeah, thank you for asking that question, Mark. Our portfolio offering does include things like ultra short bond funds that kind of behave in the same manner as money market, but I think don't fuzz the distinction between insured by the federal government and not insured by the federal government. And so as sometimes you see with some of what are our other folks in the world.

Tyson Murdock: And the marketplace might do, I don't think they intend to, but it's the practical fact. So, and those funds have been quite popular. So I do think there's an element of this that is investor, that is member saying, you know what, I'd like to get more yield than I can get on cash. I know I'm not going to do anything with it. Let me put it in, you know, at least today, tomorrow, I'm willing to give up the clarity of, you know, I can swipe my card or whatever.

Tyson Murdock: And I'll put it in some of these products. I think there's some of that. I also think that there, you know, every day there's an article in the paper that's, you know, you can decide what the motivation is, but it's like, yeah, those 5% CD yields are great, but, you know, but, you know, it still doesn't beat the stock market over the long term. And so, there's some of that too. But I think it's probably fair to say that there's an element, and that's a win from our perspective.

Tyson Murdock: In that, well, sure, on that incremental dollar, you know, we might earn more if it were sitting in cash. You know, that's a customer that's going to be more sticky, we're giving them the product they want. We try to guide them to exactly the product that they're asking for. If they're getting capital A advice from us, that's part of the discussion. I mean, I just think at the end of the day, and it, you know, while the rates we pay on cash are determined from a formula, you know, nonetheless.

Tyson Murdock: It's probably the availability of those products in part that has allowed not just us, but the broader industry to kind of keep a lid on custodial expense. And so I guess I sort of think that's a win. That's how I think about it.

Mark Marcon: Thanks, Mark. Thanks. Thank you, Mark.

David Larson: The next question today comes from David Larson at BTIG. Please go ahead.

David Larson: Hi, congrats on a good quarter. And Tyson was great working with you. I thought you did a great job guiding the company through a very, very tough cycle. Can you maybe just talk about either John or Tyson, the revenue delta on interchange, one Q versus two Q. It's obviously down about 13%. And if any more clarity around like the Cobra impact, and if you can describe what exactly that was, that'd be very helpful.

David Larson: Thank you. Tyson, you want to hit part A of that? Yeah, on the interchange day, but I mean, that's just the normal seasonality. So we've got people essentially spending, you know, as they've loaded up the HSA accounts in the first part of the year. They're going to spend more and then as we move into the summer months, you know, they're going to spend less. They're not, they're not the home spending actually.

David Larson: And so we always get that seasonality through. So you'll see a Q1 high point. You'll see a Q2, Q3 software point. And then as we move into Q4, you've got the user will lose it. And you've got kind of the remaining funds on those on those CDB accounts that get used up. And so you see a stronger Q4. And that's why you see that. And so that seasonality with a little funny and history.

David Larson: So it is hard to decipher that because the covert effect over, you know, quarters that are in history now. It doesn't look as smooth as just that seasonality, I explained. So that's kind of one thing. And then John, you're going to have to go over side of it. Go for it. You're on a roll. Yeah, and on the cobra side of it, that's just, again, we've got, we've mentioned in the script, a little bit of a legislative effect of that.

David Larson: And so with regards to death of St. Cobra, this has been, that's been tough to forecast all the way through having the national emergency legislation out there. And, and with regards to Cobra, just the fact that people don't have the optionality to go into Cobra multi-year after executing a job, that changes how we essentially drive revenue off of the different communications that we make to them, and also just the number of people that, that sign up, given the, I think even the broader strength and the economy that maybe wasn't expected. So, so those are kind of the things that kind of push, push those things around.

Jon Kessler: Okay, great. And then I think what I'm hearing also is that in terms of like the risk of a recession or the risk of a slowdown next year, you're not seeing any of that in terms of demand. In fact, it's kind of the exact opposite. There's lots of demand. You're something of a bunch of clients. Is that right? I mean, I don't know that our clients in the human resources department are experts at predicting recessions, but I think people are, I think it's probably fair to say that what's happening out there is that people are anticipating tighter conditions, whether that's a recession or not, I don't know.

Jon Kessler: But the effect of anticipating tighter conditions is there, you know, is that they're attentive to plan design and win-win things like that that we talked about earlier in the call. So, but in terms of, you know, when I look at the account numbers that change as a result of, you know, that are a function just of new job ads and the like, I mean, our data are moving in tandem with the national data at this point. So, I think there's nothing that would surprise you there.

David Larson: Okay. And then I think you basically renegotiate your contract every three years with your clients, which I think would imply that the yields that drive custodial revenue should continue to increase through next year, right? Yeah, and I would refer back to the answer on that one too. I think it was Glenn that had a similar question and just, but just to say our duration is three, but our bigger contract, the deposit contracts themselves, you know, maybe four or five years.

David Larson: So, there's, you're going to see quite a few of these come through over the next couple of years, and also during obviously the last few years have been quite a growth. So, you need to, if you look at this, you need to go back to your reference year versus dividing today by that number. Okay. And when you say you'll see quite a few of these, you're in a favorable manner. I think is what you were saying, right? Yeah, I would. Yes. Yeah. Okay.

Tyson Murdock: And then just lastly, for me, your service gross margin, obviously showed some pretty good improvement. You got as high as like, I think, 38% and 2Q of 22. How high can your service gross margin trend to? You know, we've talked about this in the past. I don't, I'm not able to make like long run predictions. What I will say is, you know, we're targeting the total margin. And particularly as we reduce the cyclicality of the other components, you know, I think that makes a ton of sense.

Tyson Murdock: So, I, but, but I do think we have some room to grow from here. I mean, we ought to be able over time to get this number back into the 30s. It may take us a little while, but the drivers of that are going to be, you know, first of all, particularly growth in the CDB businesses that are profitable. And then secondly, the underlying HSA account growth, and then third is going to be service tech, you know, where, where we can bring costs down.

Tyson Murdock: And we've delivered a little bit of that in this quarter and a little bit of last quarter. And heck, we do a little like each quarter. And the end of this lot of software business. I don't know. I'm just kidding. Be True, but it is an opportunity. Thanks very much.

Unknown Executive: Thank you, David. Thanks very much. Thank you very much. Thanks very much, and not a lot left to ask.

Jon Kessler: First, I'll just say we'll also, Tyson has been a pleasure working with you. Hopefully we'll get to cross-path at some point in the future. I guess the first question, you know, if I just do the simple math of looking at the cash per account, it's down to touch. You know, I know that's just a one day comparison last quarter to this quarter, just trying to think because you have much more visibility and this sort of ties to what you're saying, Jon, about the investments.

Jon Kessler: Is there any notable change in behavior you're seeing now, versus maybe the past couple of years about the desire for people to pay themselves back versus put the money in and not reimburse themselves? That would be the first question. Now I have to ask how many they're going to be, because after I'm just glad Greg's already off the line to hear all these eight partners. I'm kidding, but here goes. Look, I think first of all, you know, it is worth noting that if you look at total assets for the quarter, you know, this was actually a record growth period, XQ4s.

Jon Kessler: I mean, you're talking about close to a billion dollars in asset growth over the course of a single quarter, and that's really good. Also, you know, if I break it down, and I think that the the short answer here is going to be that I don't think there's been very much difference other than the, as we talked about it in earlier question, you know, the increased interest in investment, no pun intended.

Jon Kessler: Because if you look at Q2 contributions, they're up year-over-year exactly if you would expect, and it's just that the transfers from cash to investments were way up. And I think that just reflects, you know, it ultimately reflects a better market backdrop. I mean, you know, if I look at the same period a year ago, the S&P was off 13%, and during this period, you know, it was plus about the same number a little bit more.

Jon Kessler: And so the, you know, the better market backdrop and all that kind of stuff. But the underlying contribution behavior, which is I think really the thing you would care about was kind of about the same spend was seasonally pretty much what we expected. So I don't think it's any fundamental change in spend behavior.

Stephen Neeleman: Okay, great. And then if Steve hasn't gotten bored and dropped off maybe a quick one for him, you commented on the environment around sales. But Steve, you're our man on the ground in D.C. Anything coming out that you're hearing coming out of D.C, whether it's regarding Medicare, potential bigger step-ups and potential abilities for people to invest or save an HSA. Anything new out of D.C, or is that really nothing's going on there right now.

Stephen Neeleman: Thanks. No, thanks. Thanks, Andy. And I think on this very day there's nothing going on in D.C. But there are coming back. You know, we can see it has some fantastic distance. Questions. And I think what kind of a difference is that now these are more bipartisan and we're just kind of focusing on what Americans need and whether it's loosening up a little bit on some of the qualifying attributes around the high level planning.

Stephen Neeleman: And you're even around long enough and thank you for your support over the years to remember that there was a lot of lack of clarity. Around things like preventive care, right? And that was that was actually clarified on the Trump administration. They're allowed people to start paying for more medications for a dollar and things like that and still have a high level plan that that helped. And so that was not only the help that they introduced it, but then the Biden administration has been very supportive of those and then changed it also.

Stephen Neeleman: So now when you look at a, especially the large employers and then plans are offered by health friends, and you look at their benefit design, you know, they are covering things like high blood pressure meds and diabetic meds and stuff like that as allowed by regulation. So I think that is actually ploughed a little bit of the ground that we're trying to do, which say, all right, we all agree that every American needs what we would refer to as a stove, like kind of one that can work with any plan, obviously with the high-vehicle plan.

Stephen Neeleman: And we know that as the HSA, but is there other mechanisms to try and do that? And so look, I just, I'm encouraged by the bipartisan nature of the discussions and despite everything that everyone sees when they turn on, you know, they're given news station and how they think it's so torn apart. I haven't seen that when I've talked to Democrats and Republicans in Congress. And so we are hopeful that we'll continue to see some what we refer to as HSA or other type of account expansion, allowing just more Americans to have the benefits of one of these portable personally on the vegetable accounts in a kind of plan that they haven't.

Stephen Neeleman: So that's what we've been focused on. It's just how can they expand that. But yeah, I mean, let's, you know, thanks for the question. I believe we're continuing to make progress. And, you know, we're hopeful that certainly before the next presidential election, there will be some bills introduced that can continue to expand the benefit. So we will make sure that as legislators make these decisions and they start, you know, they start to disseminate that information out and we will pass along. But it's just a constant educational getting the thanks in it. Thank you for your musical talent over the years too. Thank you.

Jon Kessler: I'm going to conclude the question answer session.

Jon Kessler: I would turn the conference back over to John customer for closing remarks. So I appreciate everyone and the kind comments for Tyson for all the takes are teasing really well, always has. And it's going to be genuinely missed within the organization. But like I think this is not going to be the last time most of you on this call will see Mr. Murdoch or hear Mr. Murdoch. And certainly will have the last time I hear or see him.

Jon Kessler: We'll see how this Lucania guy does. But one way to find out is to book your flights now for February 22, 2024. This is big time. This is all like, I mean, we're talking about Broadway called type stuff.

Jon Kessler: Actually, I have no idea. John, can I? Yes. I want to interject one thing on that. So look, we think we'll have a good winter. And we would love to not only guide you to our business, but maybe do some mountain guiding. And maybe we can bring Tyson back to help us be one of the guys. I felt the same Tyson as well. Tyson, thank you. You've been a wonderful teammate and thank you for everything you've done for HealthEquity. Thanks everybody. I really appreciate it. Thank you.

Unknown Executive: All right, that's it. We'll see you all in December and some of you before then. And then of course in February. Thank you.