Q3 2024 HealthEquity Inc Earnings Call
Hello, and welcome to the health equity third quarter 2024 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw from the queue. Please press Star then two please note. This event is being recorded I would now like to turn the call over to Richard Putnam.
Thanks, Sanjay Hello, everyone and welcome to health equity third quarter of fiscal year 2024 earnings Conference call. My name is Richard Putnam Baidu Investor Relations for health equity.
Joining me today is John Kessler, President and CEO, Dr. Steve Neeleman, Vice chair and founder of the company and James with Kania Executive Vice President and CFO.
Before I turn the call over to John I have two important reminders first a press release announcing the financial results for our third 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.
The press release also includes definitions of certain non-GAAP.
The financial measures that we will reference today, a copy of today's press release, including reconciliations of these non-GAAP measures with the comparable GAAP measures and a recording of this webcast can be found on our Investor Relations website, which is IR dot help equity dot com.
Second our comments and responses to your questions today reflect management's view as of today December five 2023.
And will contain forward looking statements as defined by the SEC, including predictions expectations estimates or other information that might be considered forward looking.
There are many important factors relating to our business, which could affect the forward looking statements made today.
These forward looking statements include statements are subject to risks and uncertainties that may cause our actual results to differ materially from statements made here today.
We caution against placing undue reliance on these forward looking statements. We also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock as detailed in our latest annual report on Form 10-K, and subsequent periodic reports filed with the SEC.
We assume no obligation to revise or update these forward looking statements in light of new information or future events now over to John.
Thank you Richard.
Your emphasis on the word caution made you feel like you.
No more than you, let on but but.
I know you know a lot so.
Hello, everyone.
And thank you for joining us and happy holidays, I will discuss performance against Q3 key metrics.
Managements view of current conditions.
Richard doesn't know anything more than he was letting them by the way.
Jim will detail Q3 financial results.
He will provide our raised guidance for fiscal 'twenty, four and an initial outlook for fiscal 'twenty five I'm. Steve of course is here for Q&A.
Q3, the team delivered double digit year over year growth in revenue, which was plus 15%.
Adjusted EBITDA grew double that.
HSA assets grew 12% year over year and HSA members again also at fiscal quarter end grew 8%.
Total accounts grew 5% health equity ended Q3 with 8 million HSA members $22 6 billion in HSA assets and $15 3 million total accounts.
Turning to sales team added 163000, new HSA members in the third quarter, which narrowed the year on year gap relative to last year at just 4% as we begin to lap the tour of job growth and quit rates from Q1 and Q2.
New logo growth driven by a strong performance of our team as well as our expanded network partner footprint helped H S growth in Q3, just as it has throughout fiscal 'twenty four to date.
HSA assets ended Q3 at two Oh, I'm, sorry, they ended Q3 $2.4 billion higher than a year ago, reflecting not only account, but also balanced growth sequentially invested HSA assets to invest in each of the assets decline during this fiscal quarter by 0.6 billion due to <unk>.
Ergative market action and.
Total assets therefore declined by the same amount members continue to invest their HSA balances, however, partially offsetting market declines year over year, 12% more of our HSA members became investors, helping to drive up invested assets by 21%.
Invested assets now account for nearly 40%.
<unk> HSA assets.
As you know, we believe that our members our mission and our long term financial performance all benefit from the continued growth of investing in HSA we.
Also continue to see more members choose enhanced rates for their HSA cash leading to a higher court longer custodial yield and we believe less cyclicality.
While custodial fee growth drove Q3 revenue and margin performance. The team also delivered modest progress on the service line service costs actually declined year over year and sequentially. Despite higher volumes of course to help drive modest margin expansion interchange.
Interchange revenue grew strongly year over year and on a sequential basis and is now following its pre COVID-19 seasonal pattern as we expected with strengths in Q1, followed by softness in Q2, and especially in Q3, we expect sequential strengthening again in Q4.
Our new CFO will detail our raised outlook for fiscal 'twenty, four and preview fiscal 'twenty five in addition to providing more detail on Q3 results.
You know double digit revenue growth and margin expansion is a pretty good first half.
However, Jim would be quick to point out that health equities current trajectory was years in the making.
The team raised the trajectory of HSA growth by adding seen beach out capabilities at scale through wage works. They grew the value of each essay HSA by pioneer and affordable and accessible HSA investing and creating enhanced rates program per HSA cash.
It increased market responsiveness, and resiliency by integrating with network client and ecosystem partners at every turn.
And it enabled accretive allocation of your capital by uncovering HSA portfolio acquisitions, including benefit wallet, which upon completion will be our largest such transaction ever.
Today the team is innovating the value drivers of tomorrow apply.
Applying cloud API data science, and yes, AI technology to help equities mission to save and improve lives by empowering health care consumers.
With that I will turn it over to Jeff.
Yeah.
Thank you John.
First let me say, it's been a pleasure to join the health equity team and had the opportunity to meet many of our investors over the past three months. The results. We're reporting today are directly linked to the commitment of our team makes every day to deliver purple service to our clients and members.
I'll highlight our third quarter, GAAP and non-GAAP financial results.
As always we provide a reconciliation of GAAP measures to non-GAAP measures in today's press release.
Third quarter revenue increased 15% year over year service revenue was $107.5 million down 1% year over year.
Custodial revenue grew 43% to $106 $6 million in the third quarter the annualized.
Annualized interest rate on HSA cash was 258 basis points for the quarter.
Interchange revenue grew 7% to $35 $1 million.
Gross profit as a percentage of revenue was 64% in the third quarter. This year up from 59% in the third quarter last year.
Net income for the third quarter was $14 $7 million or <unk> 17 per share on a GAAP EPS basis, our non-GAAP net income was $52 $2 million or <unk> 60 per share for the third quarter.
<unk> 38 per share last year.
While higher interest rates increased custodial yields and generated additional interest income. They also increase the rate of interest we pay on the remaining $287 million term loan a to approximately six 7%.
Adjusted EBITDA for the quarter was $95 $6 million and adjusted EBITDA as a percentage of revenue was 38% more than 440 basis point improvement over the same quarter last year.
For the first nine months of fiscal 'twenty, four revenue was $737 $2 million up 17% compared to the first nine months of last year gap.
GAAP net income was $29 $3 million or 34 cents per diluted share.
non-GAAP net income was 104 $145 million or $1.62 per diluted share up 69% compared to the same period last year and adjusted EBITDA was $273 million up 36% from the prior year, resulting in adjusted EBITDA as a percentage of.
Revenue was 37% for the first nine months of this fiscal year.
Turning to the balance sheet as of October 31, 2023 cash on hand was $334 million boosted by $57 million of cash flow generated from operations in Q3 and $166 million year to date.
The company had $874 million of debt outstanding net of issuance costs.
We continue to have a $1 billion Undrawn line of credit available and we anticipate using both cash and drawing on our line of credit in fiscal 2025 in connection with the closing of the benefit wallet HSA acquisition.
These strong results combined with expectations for our Q4 busy season allow us to raise fiscal 'twenty 'twenty four guidance as follows.
Revenue in a range between 985 and $995 million GAAP net income in a range of $34 million to $39 million or 39% to 45 cents per share.
We expect non-GAAP net income to be between 181 and $188 million, resulting in non-GAAP diluted net income.
I mean, $2.08 and $2.16 per share based upon an estimated 87 million shares outstanding for the year.
We expect adjusted EBITDA to be between 350 and $360 million.
Our fiscal 2024 revenue increase is primarily based on our revised expectations for the average yield on HSA cash to approximately 245 basis points for fiscal 'twenty four.
As a reminder, we base custodial yield assumptions embedded in guidance on an analysis of forward looking market indicators, such as the secured overnight financing rate mid duration treasury forward curves and the fed funds futures.
These are of course subject to change.
Our guidance also reflects the expectation of higher average interest rates on health equities variable rate debt versus last year, primarily offset by the reduced amount of variable rate debt outstanding.
We assume a projected statutory non-GAAP income tax rate of approximately 25% and a diluted share count of $87 million, which now includes common share equivalents says we expect positive GAAP net income this year.
As we have discussed moving to positive GAAP net income impacts our GAAP tax rate strangely. This year discrete 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 a GAAP tax rate for fiscal 'twenty four slightly below 40%.
As we've done in recent reporting periods. Our full fiscal 2024 guidance includes a reconciliation of GAAP to the non-GAAP metrics provided in the earnings release and a definition of all such items is included at the end of the earnings release in.
In addition, while the amortization of acquired intangible assets is being excluded from non-GAAP net income the revenue generated from those acquired intangible assets is included.
Yeah.
We're also providing the following initial guidance for fiscal year 2025, we expect revenue to be between 1.14 and $1.16 billion. We expect margins will expand with adjusted EBITDA growing to approximately 38% to 39% of revenue in fiscal 2025.
This initial guidance is based on an estimated average HSA cash yield of about 3% based on our outlook and interest rate conditions.
Forward yields for next year and the anticipated migration of the benefit wallet HSH in fiscal 2020 five.
We expect benefit wallet ramp up costs will in effect extend our busy season further into the new fiscal year. The unusual with net positive impacts expected to begin by Q2.
A reconciliation of our adjusted EBITDA outlook for the fiscal year ending January 31, 2025 to net income is most its most directly comparable GAAP measure is not included because our net income outlook for this future period is not available without unreasonable efforts as we are unable to predict the ultimate outcome of certain significant items.
Excluded from this non-GAAP measure such as depreciation and amortization stock based compensation expense and income tax provision or benefit.
Before we launch into Q&A, let me give another plug for our Investor day scheduled for February 22nd at our offices in Draper, Utah, We expect to share information about health equities multi year strategic initiatives to deliver remarkable experience deepen partner relationships and drive health and financial.
Outcomes and the impacts we anticipate these initiatives may have on our business model and financial performance over the next several years.
You will see product innovations being shared with our clients and partners as well as a deep dive into our plans to accelerate the transition to enhance rates. We're nearing capacity. So if you want to be there and you do want to be there you will need to register quickly. Please see our IR website or contact Richard with that we know you have a number of questions.
So let's go right to our operator to kick off Q&A.
Yeah.
Thank you can I ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys are.
Our first question today comes from Greg Peters with Raymond James. Please go ahead.
Oh, good afternoon, John Steve Jim and Richard.
Hello.
I'll kick off the first question with us state of the market as it relates to M&A.
I know you're working we'll be working to close benefit while in the first half of next year, but another large competitor of yours, maybe more have.
Commented on the possibility of monetizing their HSA asset.
Through a sale so.
Can you talk about what your appetite looks like for additional M&A and maybe just how you view your market players are behaving in this environment.
Yeah.
I think first of all thank you Greg for the question.
I think.
Well the first point is that I think this reflects.
Trend that has been going on for a while.
Which is.
Continued kind of for lack of a better from consolidation in the market around a couple of.
Strong scale players and we're really pleased to be at the head of that group.
At this point and have worked very hard Florida over time.
And one of the things that.
We've done over this period is really kind of honed our thinking about how we deploy shareholder capital when we look at competitive transactions.
And so.
So we're in a very fortunate position that.
To the extent that something else is out there.
And to the extent that one is that you should feel confident that we're going to be able to evaluate it effectively without kind of having to resort to.
Investment banker magic.
And.
That secondly that I think benefit wall demonstrates this that we're gonna shape transactions in a way that is a win for the seller, but also win for our shareholders in terms of the timing of accretion and all that kind of thing.
So.
I think that puts us in a good position, yes transactions.
Can that start to happen.
I think secondly.
If you will obviously talk us a little more in basketball, but I think.
External models suggest that.
Certainly our our forward guidance envisions that the company will continue to generate significant.
Significant cash flow from operations and free cash flow generally.
And.
That those numbers will only grow so.
As I've said before this is an ideal place for us to deploy capital in ways that generate real return.
Now to earnings and ultimately going to our shareholders. So.
We'd be very interested in that.
That having been said I think we also benefit from the fact that we.
Ben.
Beating the bushes for a very long time, and we also know where are you know what sometimes why something comes to market, where our competitors might be more challenged in and those things are going to be reflected in our view evaluation. So that's I guess my way of saying.
Greg that if you see something happen.
I don't know mid next year late next year I want to be clear I don't I have no idea.
Genuinely.
And it's not with us it's not going to be because we didn't take a look at it it's going to be because we carefully evaluated the price and decided not to do that and we've done that in past as well so.
We're happy to hear those kind of rumors we think they present great opportunities for our shareholders. You also evaluate them carefully.
That makes sense I I have a follow up question, assuming that Richard the enforcer will permit it.
Can I ask you if that cash your favorite I'll I'll I'll be the.
Let's do one but I want to we did get get more murmurings of of our of our of our challenges.
It's like Mr. Bagels worth, but we don't want you to be angry so.
Let's do one.
We will go from one follow up.
Yes.
Perfect. Just you made a comment in your opening remarks about how the enhanced yield product.
We'll give you higher for longer custodial yield.
One of the popular questions that as comes inbound is how your custodial yield might perform if interest rates start to go down. So maybe you can help us explain what you meant by that comment that's my last question.
Well.
Let me first Iraqi Jim why don't you take this one.
Yes, yes, sure I can yeah, so that I mean, obviously the the initial outlook that we provided.
Is based on.
Forward looking expectations of rates and the market has for some time expected rate rates will come down next year in that and that is reflected in our out in our outlook and we will have a small headwind.
We expect to have a small headwind on on our client held funds right. The deposits that are that are really held a short term and overnight cash so that that's a small headwind to our yield next year.
But we're still seeing the reinvestment rates.
At significantly higher rates than the casus maturing the cashes maturing at so we are growing average HSA yields in a declining interest rates short term interest rate environment.
Okay, but in your comment you said the enhanced yield.
Is it higher for longer I was just I'm sorry.
Aspired my two questions. Thanks.
[laughter].
I'm guessing I'm guessing there might be another one about this topic. So we're happy to we're happy to go into more.
What was that.
The next question is from Stan Bernstein with Wells Fargo. Please go ahead.
Oh, hi, thanks for taking my questions.
First on the preliminary hi.
On the preliminary guidance I guess first how should we think about the benefit wallet assets that are flowing and can you give us a sense of.
The timing of when these tranches are gonna come in what to what extent are we getting the benefit through the year and associated with that.
Well there are a couple of more questions here do you have to pay any fees on those assets moving into your custodial accounts I'll, let's start there.
Yeah, I think I can take this one so.
We started the second part of your question Stan as you recall in prior transactions we've had.
A component where theres a seller.
Third party custodian that we have to pay.
That in ways, where transaction you'll have that here that's.
That's a baked into.
Technically the way it works in this cases.
It's the seller paying fees and we have agreed as part of.
And I think we disclosed at the time. The agreement was signed we have agreed to cover I believe someone correct me, if I'm wrong $20 million of such fees within the purchase price so that doesn't impact our our projection of go forward income or the.
The income statement in any way it just it's just it's a purchase price accounting issue.
And.
Then with regard to the first part of your question.
What do you think about this I think is that and Jim mentioned this briefly in your opening remarks is that.
We will see incremental service expense.
Effectively our busy season extending into the first a bit of the fiscal year.
As we prepare to bring on these accounts it would be silly to fully ramped down and then ramp back up again, so there'll be some and even if we were doing that we would still see incremental cost. So youll see some incremental service costs and then.
In our Q.
Q2, we should start to kind of net out to a positive here.
As we begin to onboard these accounts and so our guidance kind of reflects that idea that debt but.
Oh.
These placements are.
Sorry, these transitions will occur kind of in that timeframe and by.
By the second half of the year.
We'll be at run rate and as we've discussed elsewhere.
This kind of.
<unk> very quickly so.
That's that's if that's helpful for you or me, we can't I would say that there is some uncertainty here as there often is but that's our current expectation.
Well that's helpful. Thank you maybe just a quick one on services gross margin clearly you're making some progress here can you maybe share any updates on the adoption of your text based communications with their members and whether or not that's you know.
Youre recognizing some tangible improvements on the gross margin side there.
Yeah.
Well.
Yeah, Jim Jim talked about the progress on gross margin generally.
I think obviously, if you look at our service expense and the like the ability to kind of.
Being a good spot year relative to the volume growth speaks to the point that you're making particularly given that you know we're also fighting things like wage growth that are headwinds in this area.
And so yeah.
Comment it elsewhere that.
We've made we look at this month over month and what we're really trying to do is <unk>.
Ultimately, it's not just it's in part the the move from voice to chat, but it's also ultimately the move from.
From live to automated in areas, where members really get value out of that and we're clearly a lot of those in.
So we continue to see kind of I would just say quarter over quarter progress it's not.
And we'd never suggested it was a magic bullet, but the ultimate opportunity to take.
Significant costs out of service delivery, while delivering actually a better experience for members through Digitization in this as I've said elsewhere or is it a no brainer in terms of sort of ironic I'll say this.
In terms of.
The applications for generative alternate AI just yet.
Stan this stuff really works.
So we.
We didn't get that will continue and we think that what we do is actually an excellent application for it because.
Precisely because it's not you know, it's always a simple and people's questions Arent always as you know.
Formed in exactly the same way and yet you want to be able to generate the right answers.
Thanks, Dan.
Thank you. The next question is from Allen Lutz with Bank of America. Please go ahead.
Yeah, Thanks for taking the questions and welcome Jim a couple on the financial side. So I just wanted to ask.
I ask on the 3% custodial yield guide for next year, how much of those contracts have already been set and then one follow up related to the financials is benefit wallet fully incorporated into the fiscal 'twenty Guide and then I have a follow up.
It sounds like yes, that's great.
Yeah, Yeah, yeah, yeah. So yeah, so as John said, our our expectation about the both the ramp up cost the transition cost migration cost and then of course the benefit of having the accounts on our on our platform are built in.
To the 2025 guide.
As our D D.
Those assets will be invested at market rates, which will.
Obviously pulp pull up the average rate the.
The average rates earned on HSA yield so yes benefit while it is a contributor.
Two.
Two revenue into the higher the higher yield that we're that we're going to be a guiding to here.
And then just so the first part of your question about placements.
Yeah.
The math is a little different with enhanced rates now where we can do placements.
Throughout the year, so it's a little less relevant but a way to think about it is that the.
We will do.
Do.
We do placements, mostly when money moves in terms of win rates apart. So.
About a third of that happens and if you sort of think about that in year end bulk about a third of it in the in the.
In fiscal Q4, and the Arabs like calendar Q4, and then.
Two thirds of them kind of in that January grid.
But I would caution that I, just thought I would caution on that.
Last point enhanced rates does have the benefit that allowed us to draw that out a little bit and so.
Over time, what you'll have to get used to us.
And I think this will be good as that.
Not going to be.
Sitting and waiting for what the rate is on a given day and it's going to matter as much for those kinds of placements.
The next question comes from David Larsen with BPI.
Please go ahead.
Hi, congratulations on an excellent quarter.
Can you, maybe just talk a little bit about expectations for yield.
Longer term, obviously I wouldnt ask for guidance for fiscal 'twenty fix but since it takes three years to re contract. Your book of business, let's say rates hold steady or decline slightly next year, maybe they decline slightly in fiscal 'twenty six could your yields are.
Still go up which would obviously benefit custodial in fiscal 'twenty six.
Jimmy why at this one.
Simple and simple answer is yes.
Obviously, it depends on how far rates decline, but yes, I think you said right. If rates remain stable then yes, we would expect the average rate to continue their strong tailwind and matter in that number.
It's the key issue is that one of the things that we really do get benefit out of it do you think about it.
I appreciate your point about three years, but think about like the the duration contracts.
When you think about what where we're going to be replacing next year. Those duration contracts next year will be the first ones that we're replacing right that our pandemic Europe. So the stuff that's being repriced is gonna be reprice them in.
Very favorably and.
Beyond that if I, if I take current market projections about.
Where rates will be in a year or what have you.
As that sort of consistent with your question.
We will still be placing new money at rates well above our current guidance to 3% and so those will continue to be.
I think pretty significant tail.
<unk> four.
Yield for quite some time actually not again without wanting to give particular guidance I mean those are the key factors in.
It's what you can replace money at relative to what you had that before and what you're placing your money out and.
Both of those appear to be tailwind for quite a while under.
Any.
Current reasonable scenario over the course of the next several years.
Okay, Great and I think Richard will allow me one more maybe so it was nice to see the interchange revenue.
I think 7% year over year for service revenue I think it was down maybe 1% year over year, but.
But I think there's some unusual things, causing that when should we expect to see growth in service revenue sort of return to a more normalized rate what is the driver of that and what would you expect sort of that longer term normalized service revenue growth rate to be thanks very much.
Let me hit that one Jim Yes, sure I can take that one yes. So I think you really hit right on the story for Q3, we've effectively.
Held serve on that on that line with that revenue slightly down cost slightly down on.
The margin slightly up but theres a lot of moving parts in stories within that.
Within those those headline numbers. So you sort of look at it and we do look at it by by product and you see a price volume mix story occurring there.
Where where price has been a headwind, especially in in our E.
As buyers look at this as a as a bundle really.
They understand we're making.
A much higher higher revenue on the custodial cash and the HSA cash they understand we're making good.
On the interchange and this is the is the release valve on price. So we're seeing a little bit of price per unit price headwind.
We see the impact of the mix shift, especially towards the HSA as we're growing HSA significantly higher that's always been the.
The lowest.
Fixed dollar fee product.
As it's got the highest percentage of interchange and in custodial revenue attached to it so as our business mix towards that we're going to see we're going to see that pressure on the revenue line and that margin line.
And and you can call that sort of a half and half.
Impacts price and mix off and then being offset by our by our much higher volumes.
So negative price negative mix positive volume that's out to just about $1 million Delta on the revenue line.
Thanks, David.
The next question is from Anne Samuel with Jpmorgan. Please go ahead.
Hi, guys congrats on the quarter and thanks for the question you know in the past you've kind of talked about a gradual increase of your deposits going into being heartbreak product, but you know with benefit wallet, you're going to see kind of a big jump up in that you know that neck.
Are you, where you want it be now or should we expect that to continue to you know kind of increase as a percentage of the mix over time, you know where are you hoping to get with that.
We should expect it to increase as a percentage of the mix overtime and.
We are.
If.
If you're willing to make the slip out salt Lake city or listen in.
I think we will talk more about that so people can get a clear view of it over time, but we're extremely pleased with a couple of aspects of this program and one is that.
Hum.
Is that on a voluntary basis, there's a the consumer adoption has been great.
I think consumer acceptance of what we're trying to do some great I feel like employers, who you know those who pay attention to this understand it.
But the fact that we are.
Done this has really kept us from having to.
Impose other costs on them and also see us reinvesting in the business.
Extremely pleased with I, just don't have to say it with any other way with the work that the team has done to educate.
The best.
Possible partners, we can have for this product.
Went into this.
The biggest question in our mind was actually you know what.
The what's what's gonna be the receptivity within what is appropriately a very conservative market on the insurance side.
So a product that has a lot of great attributes for them, but they just haven't had before and the receptivity has been great.
It's been great among very high quality names and the stable there continues to grow and so where we are.
We're absolutely looking at options to accelerate if anything.
The shift into this product and we'll talk a little more about that I'm guessing at the Investor day and its impact in the out years.
That's really helpful and I guess as we kind of think about like you know as you get bigger and bigger with this product is it still right to think of it as kind of a 50 to 75 basis point premium to your kind of traditional yoga or can that change over time as well.
I think that's still probably right I mean, it's.
Hum.
I think that's probably right.
Yeah.
Thanks, Dan.
The next question comes from George Hill with Deutsche Bank. Please go ahead.
Hey, good morning, guys.
And just a couple of housekeeping questions actually for me I guess number one John or Jim could you guys talk about the expected EBITDA contribution from benefit wallet in.
In fiscal 'twenty five and my follow up is I know you guys have some lumpiness of cash.
Cash rolling off to be redeployed as we look out over the next 12 to 18 months could you just kind of remind us on the big pieces that kind of they kind of come off being committed and get recommitted.
And so we can kind of fine tune our models around the waterfall thanks for that thanks.
Why don't you want me to take the first half and you take the second half Jim sure Yes sure.
Okay.
So a way to think about benefit wallet is that you know as I suggested earlier, we're going to get a little bit more than half a year impact.
Maybe maybe you can say.
I don't know, maybe say two thirds of the earn back on them.
Somewhere around there.
This year and.
This product this transaction like prior transaction that we've done is is.
Going to be highly accretive so.
It's certainly we were already anticipating that we would be delivering.
A nice.
Implied boost in.
EBIT margins and I think this is just helped us accelerate for lack of a better term, where we ultimately felt we would get to.
As we have you know accounts mature and and.
So forth so the way I think about the first question is.
And I would encourage some of them are modeling, but I think you know well.
I remember.
George You asked me several years back.
Whether the company could return at some point and I think you were being a little bit what's the word I want.
You were sort of poking me a little bit.
Can you guys return to EBIT margins with a four handle.
We're offering guidance right now for next year between 38 39 and.
So this is sort of accelerated some of that process and.
That seems like a good thing Jim on the second half do you want to take that one which was about I think about the timing.
Of asset.
Yes, yes, exactly reinvestments in that yeah, you're exactly right.
Is there sort of a block of <unk>.
Wage.
Bump bumps in assets that are that are going to be touring maturing actually not.
So much in next fiscal year.
We've got a relatively smaller block of assets maturing Q4 of this year and throughout.
Next fiscal year and it will be the following two years, where were some of those lumpier lumpier blocks are going to be are going to be maturing.
Be reinvested is a is a better word says.
Thanks, Jordan way to think about the way to think about that just as since we deployed the original wage assets in.
I'm going to say.
Calendar 'twenty one calendar 'twenty.
Hum.
And.
The kind of core piece of that is five year right, you'll see a lot of that rollover in the middle of calendar 'twenty five.
There's a little of it this year, but you get the idea.
And then that rollover well because we all know when we were at one.
Sorry.
The next question comes from Mark Marcon with Baird. Please go ahead.
Hey, good afternoon, and thanks for taking my question and let me add my congratulations.
Just wondering if you can talk a little bit about you know you had good new logo sales wondering if you can talk a little bit more about.
What you're seeing on the enterprise side, just in terms of both from a competitive perspective, but also in terms of.
The desire to shift part of the employee population too.
You know H D hps.
Particularly in light of the accelerating.
You know health care costs that are coming through.
And then I've got a few you want to hit this one.
Sure Happy to you Hey, Mark how are you.
I expect you'll be up.
Out in February.
Absolutely because we did get our first big snowstorm in Sweden.
Anyway to kind of an order yeah, I mean, we talked about in the call.
<unk>.
We're seeing some good progress on bringing on these new enterprise logos and this has been a lot of work, but a lot of time into it we've not only refined our marketing message and brought in some great sales team members that are that are hustling, there, but also I think our product.
So it is continuing to evolve.
Evolved to take care of their needs I mean, we're it's really nice things here. So.
I think the bottom line is we're pleased with the progress we've made in the new and the new logos now I am continually amazed.
And maybe it's just because as you know Mark every year I'll tell you. The fact that I don't know.
This is from the Kaiser study.
The average high deductible plan that is HSA qualified and the country is about 4800 Bucks.
For a family plan and the average non HSA.
Deductible, let's say for a PPO plan as is.
$2900.
So it was those numbers keep getting closer it really doesn't make.
Heck of a lot of sense for people not to opt into the HSA right.
And so we just keep.
But just keep helping employers.
And kind of the perfect world. They allow us to then speak directly to their employees about the benefits tax benefits and everything else around the health savings account and that's.
No that's it.
The electricals narrowing like that.
He built the narrowing its really hard not to argue they should just sign up for it because they're going to basically close that gap.
Any contributions that you can get from their employer and then also of course tax savings right. So we just keep promoting that and we're seeing some great great uptake.
Our relationship management team of American who were doing a great job delivering that message and so.
Our work is never complete there's still employers in sectors that tend to be slower adopters, which means there's.
Still a lot of fruit and tree, but we're continuing to do everything we can to check trees and this is a great 10, a year ago.
We're making good progress with that messaging, so I'd say you know what.
It ends up in both cases the.
Good new logo growth and then also could work with the enterprise team and actually go to market and bring it on.
Greener and more growth.
That's fantastic and then can you just comment a little bit more about the competitive environment I mean, obviously, there's oh yeah.
Consolidated but then in addition to that there's other big players.
With rates going up.
How should we think about you know the service fees.
Over the next year and things of that nature, obviously, youre gaining more than your fair share of the market and continue to gain share, but just wondering if you could give some more comments on that.
Yeah, John how do you want to break that out as to why that's why don't you talk about the competition piece and I'll I'll hit the service fees.
Perfect. Yeah. So the competition has evolved a little bit you know, partly because there has been some consolidation as you mentioned I mean.
A lot of these companies that we used to see as pretty good competitors, whether it be wage or some.
So in the more recent ones. We've added are now part of the health equity families pretty awesome.
So that being said I mean, we do have some.
Powerful competitors out there, but it's kind of the same.
Message if somebody is buying their.
Their health care services from a large health plan out there that is one of our competitors then you know that.
A large health plan will push pretty hard we do win in that environment.
Cause I think people know that help equities got this kind of single focus on paring health care consumers and that's.
Kind of what's carried US now for 20 years, right being that kind of independent.
A single focused provider that can really nail the HSA and the Cds with the bundled things like that.
We have the same competitive threat on the retirement side, but that's where I think we are more than level, playing field as with our partnerships right because we've got.
I mean, the health plan partnership with I think is pretty story and help equity land and you all know that.
Success with being able to have them take care of those health plan partners and they bring us a lot of.
You know, even a broader footprint than you might get if youre, a large health plan and you can kind of fish within your own.
Within your own pond, but we get to fish in many plants and then on the retirement side.
Orders are too so.
I don't think it's evolved much I'd love to see if John sees it differently, but it's kind of the same thing. It's just it has been consolidating and we've been I think upping our game on and.
Some of the things, we're doing like I mentioned earlier around our products and things like that.
Yeah, I mean, I I I love, what's going on with the product, there's some really cool stuff that we're.
We're talking about with clients and working on and rolling out and and you know.
And that just is I mean, no it's not rocket science, but it's.
Is about helping consumers do the right things with these products and also helping employers understand what's actually going on within their base not just in finance, but on the health side. You know are people using the free stuff that they're supposed to be using and plans preventative et cetera.
So I do think relative to what our competitors do.
The bulk of our competitors, we do more of it and we do more of it without dictating what the rest of your ecosystem is and that's always been where we succeed and and I think we'll continue to see.
As far as pricing.
We are we are as I think Jim commented in the prepared remarks, but it certainly.
We're always going to be.
In an environment, where.
The effective custodial yields continue to expand and obviously balance continue grow.
And if you think about it.
Yeah.
The employer's perspective, or whatnot, one way too.
The first place to look in terms of sort of.
A cross elasticity as you look at the fees that you actually pay.
And.
So we've done a number of things over time, I think quite successfully to stabilize that but yeah. We have.
As Jim commented earlier, but if you look at the current quarter right. You've got roughly speaking you can do the math and you got Uh huh.
If you look at total accounts on a unit basis, right and got give or take 5% lower year over year about half of that is mix and half of it is is actual fee reduction the mixed stuff will come and go you know what when we sell more HR as versus <unk> not sure I don't know, but.
The fee component is there and we're gonna roll with that so I don't I think what we're trying to be I think conservative in what we're assuming there is certainly realistic because we don't really want to be losing business overseas, we want to be treating people fairly on fees recognizing that.
Particularly with our core product, there's a lot of ways to make money at the same time I think.
And then I'll stop.
As you may recall.
And some of our ancillary products were there.
As a result of the wage wage is not wage works.
And such we felt like profitability wasn't really their Cobra being an example.
We had a very large project over the course of but still the impact of which is still rolling out.
And we will help us a little bit next year.
But nonetheless to racing so we're not afraid to do it.
Just wanted to make sense and where it makes sense as in areas like that it makes sense for us to be competitive when it comes to HSA last thing I'd say that gives us some level of stability here, but again I I don't think unit fees are like rising substantially.
But the stability is the diversity of our distribution and what that does is it produces a client base that has enterprise where things are extremely competitive as I've said before because there have they come with assets and therefore, you can underwrite that versus your your smaller employers and like where you can't do that.
And and so there's going to be more of a fee base and.
And then of course, you have retail and so.
That level of diversity of distribution and other count and so forth, but that actually also lends to stability in that service line. So I guess, that's a long way of saying.
Our guidance reflects a little bit of conservatism there.
Consistent with with kind of the numbers, we're reporting here in terms of price impact.
Not so much mix impact but.
But fundamentally I think if you look at it big picture.
Relatively modest price to pay for the benefits of of what we see as a.
Ultimately a product that is obviously, becoming more profitable and you can see that in terms of what we're dropping the bottom line.
Thanks Mark.
Yeah.
The next question comes from Jack Wallace with Guggenheim. Please go ahead.
Hi, Jack.
Hey, How's it going congrats team purple another great quarter. Thank.
Thank you I've got a couple of model monkey questions for you I just wanted to make sure we're clearing up the <unk>.
Yield understanding here first one on <unk>.
Cash gets deployed.
Is it on a five year duration or is it three year. It is worth three or the duration of the.
Look on average.
When it hit the cylinder.
Yeah, I mean, you should do.
The answer is historically it's been.
Yes, all of the above three four or five year contracts, but I think you should generally be modeling five year as our.
As our baseline investment product.
Excellent that's all fine.
Using five year Treasury is your baseline right.
Excellent.
Then for the fourth quarter this year it looks like there's a.
The implied sequential step down in the.
Daily.
Cash yield.
Is that just related to.
Some of the cash.
Cash at the close of the front end of the curve.
Or is there something else going on there.
You're thinking about also the comment earlier about a third of the.
That gets.
You repriced so to speak in December I would think that would have a positive impact versus a negative cash I don't think I don't think there's a step down in Q4 I could be wrong.
Maybe if Jim if you have the numbers in front of you if not no no.
Theres nothing nothing that stands out like you.
Talking about the if you're talking about like the client held funds short and they're like we may see some dollars coming down right as the impact of our RF.
Our statement that we talked about last quarter, but now we're not assuming any big shifts in the AR.
In the short rate.
Maybe we can we can revert to you offline about the yeah, you've got the math right.
The to get the get the three next year, the HSA cash rate will be higher in Q4 than it has been year to date and on CHF.
In Q4, I mean, it's.
You know what short rates are gonna be rest of Q4, so I don't.
Theres not a lot going on there.
Thank you.
Thanks Jack.
This concludes our question and answer session I'd like to turn the call back to Jon Kessler for closing remarks.
Well I didn't know we were done.
Wow, Okay. So.
I just wanted to say that I tried to get Jim in his opening remarks to say that investor day was going to be better than caps and you wouldn't do it.
And.
I'm kind of bummed out about that and if you care about making you feel better then come to our Investor day, and if you can't do that or even if you can.
We'll be at certain unnamed conferences in January no doubt with any and before that we've got a bunch of other investor activity happening.
This is a great time to be where we are in the credit for that in my mind really does belong to our team.
As well as to our clients and partners.
We have.
I'm so pleased at what at the level of partnership we're seeing with our employers and our health plan for retirement plans and then the level of partnership on our team right now we're.
We're doing a lot of tough stuff behind the scenes.
Set the company up for expansion not just next year not just following year, but for many years to come.
And.
You may not see it all but it's a ton of work.
And it doesn't all go perfectly but it all gets done and it all gets done with people who are working really hard. So I just wanted to spend a minute and say thank you on that.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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