Q4 2024 HealthEquity Inc Earnings Call
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Hello, and welcome to the health equity fourth quarter 'twenty 'twenty four earnings conference call, all participants will be in listen only mode.
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I would now like to hand, the call to Richard Putnam. Please go ahead.
Thank you M. J Hello, everyone happy Vernal equinox and welcome to help Equity's fourth quarter fiscal year end in 2024 earnings call Conference call. My name is Richard Putnam Investor Relations for health equity and joining me today is John Kessler, President and CEO.
Hey, Jim James Lucania, Executive Vice President and CFO and Dr. Steve Neeleman, Vice chair and founder of the company before.
Before I turn the call over to John I have a couple of reminders.
A press release announcing the financial results for a full year and fourth quarter of fiscal 2024 was issued after the market close this afternoon.
These financial results include the contributions from our wholly owned subsidiaries in accounts day administered but do not include any impact from benefit wallet Pizza say portfolio acquisition the.
The press release includes definitions of certain non-GAAP financial measures that we will reference today, a copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures and a recording of this webcast can be found on our Investor Relations website, which is IR dot health equity.
Dot com.
Second.
Our comments and responses to your questions today reflect management's view as of today March 19, 2024 and will contain forward looking statements as defined by the SEC, including predictions expectations estimates or other information that might be considered forward thinking.
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 detailed in our latest annual report on Form 10-K, and any 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 with that out of the way, let's turn the call over to Jon Kessler.
John.
Yeah.
Hi, there.
Thank you Richard.
Today is also a baseball a major in addition to being the vernal equinox Baseball's opening day would be a national holiday.
The good news is you do not need the permission of major league baseball to reproduce or account. This call you don't meet anyone's permission. If you can just do it.
So with that thank you for joining us and since we just held our Investor day, Jim and I are going to keep prepared remarks brief and of course, even for your Q&A.
Fiscal 'twenty for the team delivered double digit year over year growth in revenue, 16% and reached the $1 billion in revenue milestone.
<unk> EBITDA grew more than twice as fast at 36% and in sales as we previously reported new logo growth and network partner production drove a record Q4, and a strong year overall members and assets grew 9% and 14% respectively in fiscal 'twenty four and the team.
949000, new HSA from sale.
We ended the fiscal year with $8 7 million HSA members.
In total more than 30% of HSA cash is now an enhanced rate investing members.
And invested assets grew 13% and 28% respectively.
Total HSA assets reached $25 2 billion and total accounts grew 5%, including from organic CDB net growth for the first time since the pandemic began.
Yeah, if you weren't at our Investor day, or if Youre ghazl by the mountain view listen up.
Management aims to continue strong topline growth and competitive outperformance, while doubling non-GAAP net income per share for fiscal 2004 levels over the next three years to do this with focused capital investment on our proprietary health accounts platform and the ecosystem to which he connectors.
Leveraging foundations in the cloud and data science, and an API technology to deliver remarkable experiences deepen partnerships and to drive member outcomes. We call. Those three D. We further leverage our platform through opportunistic HSA portfolio acquisitions, such as benefit wallet the tree.
<unk> of which we expect to complete in Q2.
This three year strategy will we believe not only build shareholder value, but also advanced health equities mission, which is to save and improve lives by empowering health care consumers. It's important stuff now to Jim the detail other important stuff, which is our Q4 and fiscal 'twenty for performance and.
Enhanced guidance for fiscal 'twenty five yeah.
Thank you John.
First I just wanted to thank all of you that joined US for our Investor Day last month Hope you found it informative.
Briefly highlight fourth quarter fiscal year, GAAP and non-GAAP financial results as always we provide a reconciliation of GAAP measures to non-GAAP measures in today's press release.
As a reminder, the results presented here reflect the Reclassifications of our income statement. We described in an 8-K filed on February 21st both for fiscal 'twenty four and the prior year for comparison.
Fourth quarter revenue increased 12% year over year service revenue was $118 6 million down 1% year over year, reflecting the final runoff of national emergency activity.
Total revenue grew 35% to $105 4 million in the fourth quarter the annualized interest rate yield on HSA cash was 268 basis points for the quarter.
Interchange revenue grew 6% to $38 4 million.
Gross profit as a percentage of revenue was 62% in the fourth quarter. This year up from 58% in the fourth quarter last year.
Net income for the fourth quarter was $26 4 million or <unk> 30 per share on a GAAP EPS basis. Our non-GAAP net income was 55 million or <unk> 63 per share versus 37 cents per share last year.
Adjusted EBITDA for the quarter was $98 8 million and adjusted EBITDA as a percentage of revenue was 38% a 620 basis point improvement over the same quarter last year.
For the full fiscal year of 2024 revenue was $999 6 million, which John generously rounded up to $1 billion up 16% compared to last year.
GAAP net income was $55 7 million or <unk> 64 cents per diluted share and non-GAAP net income was $195 5 million or $2.25 per diluted share up, 71% and 65% respectively compared to last year.
Adjusted EBITDA was $369 2 million up 36% from the prior year, resulting in adjusted EBITDA as a percentage of revenue of 37% for this fiscal year.
Turning to the balance sheet as of January 31, 2020 for cash on hand was 404 million boosted by $243 million of cash flow from operations for the full fiscal year.
The company had $875 million of debt outstanding net of issuance cost. We continue to have a $1 billion Undrawn line of credit available, we anticipate using both cash and drawing on the line of credit over the next few months in connection with the closing of the benefit wallet HSA portfolio acquisition.
Today's fiscal 'twenty five guidance reflects the carryforward of stronger than expected Q4 sales and efficiencies from the technology investments, John mentioned offset by slightly higher mix of investments versus cash.
Sei assets.
We expect revenue in a range between 1.14 and $1.16 billion.
GAAP net income in a range of $73 million to $88 million or <unk> 83 to 99 cents per share.
We expect non-GAAP net income to be between 247, and $262 million or $2 79, and $2.96 per share based upon an estimated 89 million shares outstanding for the year.
This is a big deposit towards our goal of doubling non-GAAP net income per share to our $4 50 goal by fiscal 'twenty seven.
Finally, we expect adjusted EBITDA to be between 438 and $458 million.
Our guidance reflects an expectation for an average yield on HSA cash of approximately 300 basis points for fiscal 'twenty five.
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 in mid duration treasury forward curves.
These are of course subject to change and not perfect predictors of future market conditions as John mentioned, we ended fiscal 'twenty four with about 30% of HSA cash and enhance rates and expect that mixed shift from basic rates to continue as over 80% of new deposits flow into enhanced rates.
Our guidance also includes the expected impacts of the benefit wallet HSA portfolio acquisition anticipated to be completed in multiple tranches by the end of Q2.
Cost impacts include interest expense due to an increase in the amount of variable rate debt outstanding and drawdown of corporate cash to fund the acquisition and Onboarding costs beyond normal seasonal cost to serve in Q1 and Q2, we expect full run rate benefit in Q3 and beyond.
We assume a non-GAAP income tax rate of approximately 25% and a diluted share count of $89 million, including common share equivalents based on our current full year guidance. We project the GAAP tax rate for fiscal 2025 at about 28%.
As we've done in recent reporting periods, our full fiscal 'twenty five 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 addition, while the amortization of acquired intangible assets is being excluded from non-GAAP net income.
The revenue generated from those acquired intangible asset is included.
With that we know you have a number of questions. So let's go right to our operator for Q&A.
Thank you do 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.
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Today's first question comes from George Hill with Deutsche Bank. Please go ahead.
Oh, Oh Oh.
George Hill: John I might be in trouble here, because I think you guys called me in the queue faster I can type when I look at the <unk>.
When I look at the custodial revenue.
My model for the quarter it looks like it was down a touch sequentially, while a lot of the kpis that underpin that.
Yes.
Again, I'm, hoping that I'm focusing on my model here could you could you just kind of like.
To break down what kind of like well work.
The metrics that drove the sequential decline.
Custodial revenue, where given the company's strong performance in all of the other kpis I would've expected that to be up.
Yeah. So let me give a partial response and then ask Jim to.
Jim: Later on I I.
I believe George that one of the things that will be important for everyone. This quarter to remember is that we.
We have as we.
As outlined in our 8-K.
Around our Investor day, and discussed at Investor Day.
Made a few changes in how we.
In revenue classification within the three buckets of revenue on our income statement and.
I believe that what you may be looking at is a little bit of an apples to oranges as a result of that.
Because.
One of the things that we've done is I think appropriately so given its growth.
We're treating the.
The revenue that we generate from the service of managing invested assets as what it is which is a service and Conversely, a benefit of doing that is that now the custodial line is more purely.
Two things yes.
It's revenue generated from yield on HSA cash and revenue generated from yield on client held funds and so.
That's a big piece of what you're describing.
Jim you want to elaborate on that or on any other yes.
Yeah, no that's precisely that's precisely what its going to be and so youll.
And for the benefit of everyone on the call that the details of the shifting components in the prior periods will be outlined in the footnote in the 10-K.
Which we'll hope to get on file.
As soon as soon as possible in the next.
In the next few days or so hopefully.
Yeah, and John you've got John Jim you, guys detailed that I should've I shouldn't have to remember that as I was.
Working my way through the model and then I guess, if I could just do a quick follow up I E.
Enhanced rates progress on the Internet enhanced rates product I guess would just love any.
No comments that you have about the selling season as you push forward and continued demand around that.
Yeah, we.
Oh actually Jim do you want to comment on this.
Yes, sorry, you broke up a little bit there, but the question is about progress of moving toward.
Growing the mix yeah, yeah that was it.
Yeah, Yeah. So is that yes, I think what we've outlined nothing has really changed in the strategy, So where we.
We'll get a little bit of a more of a step function bump bump up in that percentage because of the upcoming benefit wallet placements. So getting a big slug of dollars that we can we can more than 80% placed an enhanced rates is the expectation and then the same in the organic the organic growth in the business. He is also being.
You did almost 88 plus percent into the into enhanced rates youre going to see that number come up and we've we've shared a R. R. Our goal is in that same three year time frame, where we're trying to double non-GAAP net income per share. We're also trying to increase the percentage of the mix of of cash HSA cash and enhanced rates from <unk>.
30% up to 60% so it will be nice nice and even.
Quarterly gross no, but we'll that's the objective to get from 30 to 60 in the next three years.
Thanks, Darren for helpful. Robert.
Thank you. The next question is from Stan Bernstein with Wells Fargo. Please go ahead.
Hi, Thanks, Sir Thanks for taking my questions.
Maybe just maybe sticking with that with the enhanced rates looks like annuities are holding up better than five year treasuries. Just curious what kind of spread are you seeing over five year treasuries as youre walking on visa Mastercard product trend.
Yes.
Again, Yeah, I'd also add at Investor day, we outlined our sort of average expected spread.
It's five year T plus 75 basis points on average so you know our some some a little higher some a little lower but these these spreads don't actually change right. When we have when we have a partner we sort of negotiate the AR.
The formula and.
So we're not we're not shopping in the retail market. Each time, we place. These are these assets.
Okay helpful and maybe for the follow up at the Investor Day, There was definitely some excitement over the air.
Chad based communications that Youre pushing forward with our with members I'm just curious what percentage of inbound member comms, our tax base now and how has that changed over same time last year.
Yeah.
Let me first say that I think the long term vision is that the chat is just one mechanism for this kind of stuff there's there's.
And then by long term I don't mean some.
I don't mean, the jetsons I mean over over our strategic horizon here.
The the although I guess now the jetsons will be in the past I don't know, but.
Uh huh.
So so I'm going to answer your question in terms of of of a boat.
Chat and other automated forms of handling calls and so.
That number is.
Still relatively low in terms of true automation, ignoring just IV or type stuff.
But but low might be you know, we're up to kind of 15% to 20% and in addition, we've also in the last couple of months here rolled out similar functionality for our.
Our client service center that handles inbounds from.
Our clients as well as many of our brokers that we deal with and which I frankly did not expect would would be a big hit but.
<unk> has been used rather aggressively so.
And that number has increased from let's let's say roughly 10, roughly 1000 basis points over the last year.
So, 10% and we're going to try and drive it farther and faster than their keys to doing that in our view are.
One is to continue to use the technology for what it's great at which is improving the quality of the dialogue and the main way. We do that is by continuing to train the technology on actual experiences back with our <unk> data as well as with the all of the data in our existing systems.
The second way that we expand this is by and they suggested a moment ago expanding beyond.
The chat format. So we are we actually just went live in the last.
Couple of days here with.
Our sort of first iteration.
Work on the voice side.
I wish I could explain the details of it but I can't.
I do know that it's using a wonderful product from our partner Google.
<unk>.
Who is a customer of ours and also a great partner on this work.
And that it leverages, our existing cloud infrastructure, but.
So.
We think this number can continue to grow and the result in our view can be three things one is obviously lower costs.
But the second is.
Is is not only a better experience for our members and clients, but actually a better experience for our agents to the agents that.
Our part of this ultimately while it obviously reduces the total number.
The agents, who are there can be better pay and really use their skills and then lastly looked at from the perspective of our partner ecosystem. I think we mentioned this on the call on our Investor day.
There are opportunities for both customization and personalization of messaging with.
Items that are of interest to our partners.
It can be as simple as branding, but sometimes.
But I think more importantly, you can get to areas like you're doing more personalization of what you're talking about than any human could ever do.
So.
I feel great about the fact that we kind of stepped out on this a little bit before there was a buzzword called AI or truthfully regenerative AI at least to at least before I, even knew it was generative AI, but.
We're in a great spot and we're leveraging our partners at Microsoft on the infrastructure side and then obviously with this new data on the application side of Google and.
Im doing some really neat stuff. Thanks.
Thanks, Dan.
Thanks.
The next question comes from Glen Sand Tangelo with Jefferies. Please go ahead.
Yeah, Good morning, guys.
Sure.
Yes.
You know obviously a lot of good news to talk about on the custodial revenue side, but I was hoping we could maybe dig in a little bit to the service and interchange revenues now with service revenues being down a little bit relative to the account growth that you had less sure I'm kind of curious if you could talk about the pricing environment in terms of what she saw the.
The selling season, and then on the interchange side I don't know if theres anything related to change healthcare.
And that issue that may have impacted the quarter and I'll stop there. Thanks.
Jim Why don't you hit the first part of Glen's question I'll hit the second part.
Yes, yes, yes, so on the service side.
What youre seeing is it is a couple of things. So yes, certainly certainly the market competition.
<unk> remains the same right nothing has changed there. So we we face competition on on large market Rfps and we're going to continue to face a little bit of pricing had headwinds on a per product average revenue per user on the service line. The other piece Youre seeing is the end.
The national emergency that like like I mentioned it in my comments. So you think of that as you know in <unk>.
<unk> count that we have with the member that's open for several years.
Does it would be extension you might have the 'twenty three 'twenty two into 'twenty, one and a 20 year open we count that as one account.
But we're getting revenue for each of those years, so with all of those national emergency items coming to an end.
In Q4, you don't see the accounts go away, but the revenue per account does go away and in that case.
And then the last piece is just mix shift.
HSA is a low service fee product relative to CDB ease. So as we continue to grow HSA is faster than than C. D. BS we will see blended average revenue per total accounts come down so you have sort of a.
Our multiple headwind there on price.
Aside from all of the pricing impacts service revenue does grow does grow with accounts. So acknowledged that that that's a little more challenging two.
To forecast, but that's we think of sort of service and interchange together.
As as our service revenue streams, they do grow with accounts. The piece, we call service has that little extra extra headwind of pricing pressure and mix shift.
Yeah, and I was with regard to the question on change.
Which I prefer to call Optum.
For reasons that should be obvious, but nonetheless, we'll use change here.
Uh huh.
We have not seen any on the revenue side interchange flow side.
<unk> not seen any impact in the first quarter, thus far.
We certainly took a look at.
Particularly the the.
Last couple of days in February when this kind of started out.
And so so so far I think so good on that front and.
Yeah.
But.
In addition, I.
I will say that since a lot of the kind of public discourse and appropriately. So here has been about the speed with which providers are getting paid and pharmacies are getting paid and therefore being able to give people access to medications and medical services.
We have.
<unk> not had any disruption in the payments that we issue and that includes the fact that we utilize change as our partner for what we call virtual cards. So these are payments to physicians the virtual card systems a change we're not impacted by this incident.
And so.
We continue to be able to pay out get our providers paid and get our members reimbursed and get our pharmacies paid and that seems like a good thing and maybe I'll just as long as you've raised topic I'll say, one other thing about it which is.
That said.
From a security perspective.
Yes.
Jim: While well.
Optum United change have not.
Yeah.
Come forth with much clarity with regard to the sort of underlying vulnerability that was the source of this.
We have theres been a lot of discussion in the intelligence community about cyber intelligence community about what it might be in I suppose one benefit of that is that.
It's it's a it's identified a number of what would've otherwise been zero day vulnerabilities and our team has been very active in.
As those kind of come out in that world and we monitor those both through our own resources and third parties.
As we monitor those.
Those items, we identify whether they are a threat to their own systems and if there are any threats within our own systems, we take action but.
At the end of the day, it's yet another reminder of the fact that.
There is a reason why we spend more on cyber security than we do on marketing.
It's about the right thing to do and it's an appropriate thing to do and if you are going to be a market leader youre going to have to step up to that particularly in an industry, where you have both health and financial data in your system.
Thanks Helane.
Yes.
The a thursday.
The next question comes from Greg Peters with Raymond James. Please go ahead Greg.
Greg Peters: Hey, good afternoon, everyone.
I think this is a good segue. So you just talked about cyber security and it's your focus on that and it's being important.
Wanted to pivot to credit risk.
Not only with your depositary, but also your enhanced yield partners and the reason why is because you're seeing some continuing challenges inside some of the bank companies and then secondly, alright.
There is.
Persistent concern about commercial real estate exposures and when I'm just curious how you how you evaluate your partners both on the depositary enhance yield in the context of these types of external risks that we read about it seems like almost every day.
Yes, you want me to start with that one.
Yes look I mean I think this is this is the purpose of our we have a custodial cash committee.
Speaker Change: Within the company and the Board also provides oversight of the activities of that custodial cash Committee right that this is this is what we do we tried it.
We try to diversify the portfolio.
Our partners that we work with and.
And we do monitor the activity of of each of those partners.
On the on the bank deposit side.
We're not placing these deposits are not treated as mass deposits of health equity into into the member banks, they're treated as many small deposits that are fully FDIC insured by.
Speaker Change: <unk>.
By the federal government. So they add up to you know $2000 here here and there and it's up to a large a large deposit with the with the bank.
And then on the insurance side I think as we've talked about right. We are at the start of this program working with.
Highly rated the Blue is the Blue Chip insurance company partners here.
And we we are a <unk>.
Adding another criteria there of being a small percentage of their of any of our insurance partners balance sheet right. It's not just that diversifying the dollars across our our partners, where we are trying to make sure that we're a very small part of the liabilities are upset insurance company, but but yesterday acknowledged that as we as we mix shift towards <unk>.
More insurance partner, our ability to risk manage.
Becomes a marginally heightened there as we as we don't have the FDIC passer.
Okay. This is probably get you back to John.
Yes, I'm back okay. Thanks, Alright.
Sorry, Greg go ahead.
That's right John did you want to add anything or should I just fall into my follow up question.
[laughter] allow ahead sir.
Alright.
Speaker Change: So benefit wall is.
The integration is underway.
Hmm.
So again, when youre dealing with M&A and you guys had.
Track record. This there's always surprises and uninteresting challenges is there anything popped up on your radar that you want to call out that that has been unusual so far I know you've you sort of identified the expectation of when you expect to transfer everything over but just curious if if it's meeting plans are.
Where theres been some deviations.
I think by and large Gregg so far so good as you know.
And others May not I know you do but.
One of the things we did with this transaction is that we structured it.
Such that we're not acquiring any technology.
Systems or the like and.
That has a number of benefits first of all it significantly reduces the.
The possibility of surprises.
But in addition, it also reduces things like temporary cyber security threat environments, those kind of things.
And it's been a good model for us for smaller transactions.
This will be the largest of.
Not only in fact this will be the largest HSA transfer I believe ever done, but certainly the largest at this site.
And so.
But so far so good we what we will do is.
Once the transaction is complete.
As we do with other transactions, we will give you a precise reporting of accounts assets.
Where precisely the wrong word, but we'll give you a final tally of of accounts and assets, so that you're able to understand the distinction between.
Organic and these kinds of acquisitions.
There was and if you look back we talked about kind of.
Where these numbers might end up but also the agreement itself contemplates.
The possibility of them being slightly higher slightly lower depending on.
Any number of factors and so.
You'll be able to get a pretty pretty clear view of how this thing ends up and.
And then it'll be that but.
So far the team.
Brad.
Mike Rescue Kelly, King and the whole team at health equity as well as benefit wallet.
On the condo team there have done a great job of moving this thing forward.
We're really excited about the fact that we now begin to welcome members as we've begun to do in the last.
A couple of weeks of each of these tranches as getting 10-K 8-K I should say.
Thanks, Greg.
The next question comes from Sean Dodge with RBC capital markets. Please go ahead.
Yes. Thanks.
Maybe just coming out the pricing service fee question in a little bit different way, if we look at revenue per customer.
On one of the last call John you talked about customer fields, so fields being six plus yield.
Fields of inquiry.
How much pushback or skin.
If you had to give up on the fee side, maybe maybe kind of catalyze more by the higher yields and not necessarily from any change in the competitive landscape.
Is there Ben.
Speaker Change: I guess it has been there have been a meaningful shift there and then over the longer run should we think about average revenue per customer outside of cross selling being pretty stable where were lower fees offset higher yields or do you think theres. Some kind of a net game where are yields you don't necessarily have to give all the back end and fees.
Our lower fee.
You know what your questions suggest Shaun is it is an important observation is that there is some.
I'm an economist so I'll say it this way there is some cross elasticity between.
Speaker Change: <unk>.
Between.
Speaker Change: What what's happening with yields and in particular, what's happening with the spot market right and.
Speaker Change: And pricing pressure that.
That's a natural thing and it makes a lot of sense for from the perspective, particularly of larger customers, but I actually think when you look at it.
I've been.
Somewhat underwhelmed I'll say by the extent to which there has been that kind of competitive pricing pressure I think the bigger issue.
Is that.
It's two issues one is that and as it relates to this year and what is more generally is that that is the pace of for lack of a better term mix shift.
As.
As Jim.
Jim put it earlier and that mix shifting towards H S O, which in terms of total revenue per customer is awesome right.
Our total margin per customer, how everyone think batteries awesome per per account.
But but but if I focus solely on service revenues right.
It's a little bit of a downer because.
HSA is tend to have the lowest monthly fees and then there are a few other things now now you've got the fees from investments in there, but but but.
They're going to be lower service fees, whereas Conversely for example, the highest service fee per account product is commuter.
Fantastic.
And as well as Cobra right, but I don't think anyone would say that the Cobra is a big margin maker right. So.
Uh huh.
And it's because you don't have a bunch of other revenue sources, there and so.
I think that's really the biggest factor and so as you model. This I mean, there should be some correlation between the pace of relative growth of HSA versus the rest of our business in terms of accounts right and.
The pressure that you might see on these.
For lack of a better term unit services.
Second point is that I think now for more unique to this year.
Is that as we've reported.
Sure.
We did very very well with with relative to our expectations. This year with our new logo business and particularly with our enterprise and of course enterprise.
Where you get new logos is.
Where youre going to be most competitive, particularly when those logos are coming with existing assets. So the fact that we did well on assets right is in part reflected.
Sort of other side of that coin is that.
Youre going to be more competitive on your HSA piece of that business. So.
That's the thing that's worth considering in particular for this year, but it doesn't move the needle that much I don't I don't know I mean.
Expressed on a on a.
On a.
Service fee for total account basis, maybe it's moved the needle a half percent I don't know and then.
The last point I'd make is a little bit into our strategic planning horizon, So thinking about no.
Beyond fiscal 'twenty five.
It is very much our goal.
Or a goal of ours to grow the non custodial line remember, we think about service revenue as inclusive of interchange and the reason we breakout interchange from the rest of the service revenue is just that its big material right.
But but if you look at that line as a whole.
Or for that matter exclude interchange if you want to rate. Our goal is very much to see that line grow in the way that's going to happen.
As you know several fold. The first is as we talked about it at the Investor day.
It's going to be about the growth of incremental services right as we talked about both both new and then turning that CDB growth from.
Now we've got it to the place where notwithstanding the national emergency type stuff.
It's a.
Black maybe it's a one I don't know its black Lisa Black zero, but it's not a crooked number that will be helpful. But also incremental services around data and analytics and the like that we talked about.
At Investor Day, So over time, we do want this this thing to grow.
We're never going to shy away from the fact that you know the custodial businesses. The component of revenue is and should be.
A growth engine for the business, particularly as balances continue to grow.
And that we're able we've been able to and I think we're going to continue to be able to make it both more productive and less cyclical, but but it's not like we're forgetting about the service revenue, we're going to try and grow this overtime.
Okay.
It's helpful context, Thanks, Sean.
Thanks, Sean.
The next question is from Allen Lutz with Bank of America. Please go ahead, how are we going to.
So how are we going to see Sean Tomorrow, we're going to hear from Sean I think we are.
Is that my imagination.
Sure.
Well, we should be we should be I'm sorry, Sean.
Good afternoon, and thanks for taking the questions. Thanks Alan.
Bird, John or Jim here, the technology and development spend has increased pretty dramatically over the past two years, but.
Look at this past quarter, it was flat year over year and at Investor Day, you talked about a lot of the investments you're making in digital CDB parts cost transparency cyber security. So I guess as we think about this fourth quarter number here and we think about what's embedded in the fiscal 2025 guidance do you expect the technology and development spend.
And to be more flattish or is that going to kind of continue the growth trajectory. It has over the past 24 months. Thanks.
Jim fire away.
Yeah, Yeah sure I can take and can take that yeah. So so no you should definitely not assume that the tech and Dev spend is going to be flat I think what we've talked about in the past and Jeff and John has talked about before.
For my time here is that we are reaching we were reaching the peak last fiscal year of of the spending as a percentage of revenue.
So we're a little above 22% kind of 'twenty two ish percent.
Percent now so we should start seeing more more efficiency.
But no we're going to continue to invest we're going to continue to invest in the business. So the idea is efficiency at the at the margin level not trying to flatten the raw dollars of tech and Dev spend.
Great. Thank you.
Thanks Alan.
Yeah.
Yeah.
M J do we have another question.
Yeah.
Maybe we lost M J could that happen.
Without MTA, we got none.
Yeah, I can't bring up the questions M J asked to do.
[laughter].
I think funding.
This call is a very adventurous so far everybody you know there's a lot of someone's transcribing me, saying this right now aren't they.
Or maybe not.
Navy MJ didn't put me on because she knows how sticky that dar of answering all my questions.
Thank you.
You got US you got us to Miami My hometown, Stephanie got us to within like literally my hometown of.
Well I guess in my case, Miami Beach, which is where we were at work. So that was we were like 50 blocks are something from where I was born can't.
Can't do better than that.
Well congrats on the quarter, but Florida man, John Catherine I have a question when I guess about your recent Investor day versus the last Investor Day, you had there was whaler CDB talk and I'm looking at your CDB line and we're actually seeing account growth. They got this year, So I love I love that but look.
Back and how that industrial logic of Mary agencies, and CDB has played out and we think about the future do you think we get to the same level of accounts, we saw during the wage transaction or where does this whereas that lined out.
Thank you I really appreciate that question actually.
Okay.
But this one yes I do it because you you noticed something that that we as we kind of look at Investor day and.
Things like sometimes things just happen as you go through it in your own quite notice them and this is one of them and.
So.
Here's my thoughts first.
The Corelogic was not.
We are going to like we have.
One and now we're going to have legs to.
Now that that sort of thing it was that acquiring the CDB business.
At scale gave us the opportunity to grow our HSA business in two ways, one by playing on more fields and to buy that we werent able to play on before and two of course by giving US clients cross sell to and all evidence is that that happened and the easiest way to see that is that when you look at HSA.
At either gross HSA openings or net add whatever you want to look at right. When you look at our sales numbers right. Notwithstanding the fact that the HSA market is still growing by the same amount year over year, instead of capturing roughly 20% of that growth as we were pre wage right now we're capturing.
And we will see I know that the Devon year put out there we're going to have our our market announcements like five minutes before this earnings call. So.
I'm guessing maybe they listen to the earnings call and they use some of this information and then a couple of weeks they have their thing, but but they're wonderful people and I said.
But.
But but.
Let's say.
From an account perspective, we're capturing a third of the market and maybe in the aggregate of 30% and so so like.
It works.
That having been said I think.
What I would have would have a did say at the time of the transaction, having some amount of expertise in that business was that the CDB business itself was extraordinarily saddened and it turned out it wasn't and it wasn't primarily as a result of and I don't want to be cheeky about it I mean, it's primarily as a result of.
I don't want a duck responsibility, but its primarily the result of pandemic and even at the outset of the pandemic as Youll recall, we didn't anticipate the level of an steadiness of that business and so.
Obviously theres a commuter component that people talk about but in addition to that there is the fact that that.
The dependent care at which is part of the FSA piece.
When you know kind of disappeared for a while and it's still well below its prior levels and then.
Thanks to some of the recovery legislation right. We got this sort of a brief blue.
Blip in Cobra that then went away and then in addition to that and got the fact that the HCA marketplaces are subsidized and that subsidy. It appears like it's going to continue and so actual cobra uptake relative to you, which is a portion of <unk> revenues kind of came down and so like that's a.
A lot of movement that we were not anticipating having to deal with.
And so as we look at it going forward.
What we want to be doing as I said in an earlier answer is we want to be growing the CDB business, we wanted to taking market share and since the business as a whole is.
I'm Gonna put commuter side, whatever let's assume that's kind of where it is right, but broadly speaking, it's only going to grow at the rate of workforce, which is like what percent.
What we want to be growing at a crooked number that means we're taking market share right and I think we're well positioned to do that we have more scale than anyone else.
We're actually investing in the product because as a result of all of our investments two examples.
Being.
We are having have and these are not future examples they are already happening.
We are rolling out.
We're in the midst of rolling out about halfway through.
Our.
Chip cards, and like people say chip card, what's the big deal.
Well, let's see.
So far no one else has done something where we have a SaaS carved that is also chip cards that will actually also be available on mobile wallet. What does that mean it means that you can have two or three of our products on the same card and there doesn't even have to be a car right. Now. It's also not easy because it turns out that unlike regular chip cards with not as much standardization is the Mastercard and visa.
So people think there is out there in the retail world and so theres some theres some bumping effect, but.
It's a great product second example is.
Through the use of AI, we got to a place where you can take as you saw at Investor Day take a picture of a receipt from publics can have whatever on there. We can tell you what it is and we can approve it right then and that's the biggest pain point with the largest of the CDB products, which is the FSA.
So.
I think it's reasonable to believe that we can get to a place where we're we're at single digit growth in that product.
And.
So that's the plan. We will also look Stephanie we will continue to look carefully at what do we need to own what do we not need to own it.
It's always going to be in the context of at least as far as I'm concerned its going to be in the context of strengthening our core business everything we talked about at Investor day in terms of new product.
The health payment account product, we talked about which is a form of smoothing deductible cost for people who don't.
Do but also don't have the benefits of H saves.
As always going to be in service of two things one is our core product, which is our custodial accounts in the second is the mission of helping people.
Helping empower consumers and in doing so the savings are really saving and improving lives when you listen to what people say so.
That being the case that that's how we that's kind of the framework through which we look at it and I think that's a reasonable view of what you should be expecting from us over time.
We very much are expected to and liked to have gotten to that place quicker than we have.
It's easy for me to blame the pandemic, but we have some responsibility for that too including myself.
No. That's helpful. That's helpful kind of shows it's more it's not that you're not focusing on it. So that's not an area of innovation is much more kind of the focus but what.
What I think is.
If if you if you look at for US, Let me say it this way.
A piece of it.
In order to achieve the three year target that we laid out. This is one of the things that in all likelihood we're going to achieve that is to say to go back to I think it was.
I think it was Allen's question I could be wrong, if I am I apologize, but but regarding service revenue.
One of the things, we're going to have to achieve to get there isn't going to have to grow that service written we can grow service revenue by innovating.
New products and innovating and by growing our CDB states and we can innovate within the CDB space.
And given that again I don't think the hurdle is like Super high but.
But I do think it's probably fair, but it's also true that at the margin. These are not these are not as profitable products right. So is it always going to be the first thing on our priority list.
That's fair.
Thanks can I sneak in one for Jim or is this I mean that was a lot younger demos.
Go for it alright.
This one so you've given us some kind of clarity or custodial revenue if I look at the incremental EBITDA dollars in your guidance compared to your incremental custodial profit there was a pretty big delta in that even compared to prior years.
Which doesn't really square with this whole shifting of R&D dollars as opposed to like adding new head.
Head count so is there anything beyond conservatism to call out there about why there'd be maybe when that conversion rate.
So maybe a little more clarity because I didn't give you guidance on custodial profit profit dollars.
But you haven't given us clarity on.
I couldn't tell you.
How it trends you've given us clarity on what graduating.
And so.
Let me, let me forget version does that change.
One factor that I think one factor that it's important to consider in this whole discussion is the other element of custodial, which is which is the CD the CHF CHF world right.
Custodial revenue from CHS is going to decline this year right well lives because because.
But per if depending on what one believes but for the forward sofa curves kind of plain old forward curve that C. N D. C talks about all day.
We're going to have lower lower short rates later in the year.
And.
That hasnt occurred yet obviously, but that's reflected in our guide and so forth. So that's the one area in which.
That short cash area is the one area, where youll see sensitivity I think that's I'm guessing that that is the biggest source of the variance that you are describing.
Okay.
Thanks, Stephanie.
The next question comes from David Larsen with a T. I D. Please go ahead.
Hey, congratulations on the quarter can you talk a little bit about your care coordination software solution I think it's really interesting how you can compare prices are different providers hospitals for different procedures.
<unk> perfectly with like the needs of high deductible account members might have I think it's hygiene, great with what health plans are trying to accomplish how many plans.
Plans is that deployed to how many plants do not deploy two please.
Any thoughts on like the uptake rate and the impact it can have on total cost trend. Thanks a lot.
So let me, let me say first and we tried to make this distinction that at Investor day. This item is still in beta so.
The deployment today is very limited.
And I I would describe it more as a feature in my mind that across and the reason I say this is what that is as follows.
There are people, who have tried to build businesses out of this as you well know and for the most part they have failed <unk>.
And.
And certainly in the public markets they have not done well.
And.
The way we've approached it is the view that you can get 80% of the benefit with 20% of the stock now that you have the benefits of of ml for the business logic and generative AI for the U S to some extent and so that's what we're really trying to do and we're gonna find do this.
Multiple applications.
And we're not.
I don't really think of it as a unique threat to the businesses that are in that space theyre going to face that one way or the other right and so our approach is to partner. So so for example, this solution is as we said in Investor day is not.
US being able to access some of that logic.
Through API and the like and then and then also access some of the the ml and AI services to kind of make it as good as we can.
So I.
I guess I'll just say one this is something that's in beta too I would look at it is principally as a source of support for competitive differentiation versus it's going to be in the near term its own revenue line and we will I think ultimately have some kind of.
A broad analytics and services business that we'll talk about war and we began to talk about it at Investor day, but but it's early for that and so I think the way I look at it. It was exactly as you said, which is it's it's.
I think it's it's it's just good it's good strong feature and its an ability to deliver something that people want in a way that's easier for them to consume and that's ultimately less extensive than it has been delivered in the past, which as being sudden made more available to you.
Last part of your question, David about sort of the impact on broader health care trend Here's my view.
And.
Again, I will say is as someone who's been part of an observed the battles about all of the massive all the ways that people have they're supposedly going to been trend, which for the most part haven't done swap over the years.
Here's an interesting fact.
When I'm, sorry for the long answer but.
We did keep the earlier comments short the prepared remarks, when you if you look at <unk>.
Health care as a percentage of U S. GDP in 2010 was 17, 2% in the projection wasn't by now it would be 24, it's still 17.
Right now we talked about that but it's true what happened.
What changed it's not the affordable Care Act did a bunch of good things in my view, but it did not do much to bend the cost curve that was not the objective.
Enhanced access.
The biggest change that's occurred over that period of time has been two things one is.
The incremental involvement in.
Of consumers in health care and the second is the reduction in cost of of many of the everyday type pharmaceuticals and procedures that we do in part because consumers are involved in part because.
Of the <unk>.
All of the push towards generics and the like.
Even as obviously there are certain clubs are extensive and.
So the way I look at it is it's not that any of these tools per se bends. The trend is that they all make the involvement of consumers more effective and that in the hole is what has a positive effect on the trend among other things right and so so that's the way we look at it and when I look at our clients who.
Have been most effective and size the hardest to utilize tools effectively over the course of not one year or two years, but five years or 10 years or in the case of I think about one client that we've had now for 17 years.
It's not like special and it doesn't have a you know only a young population and all that kind of stuff by high Tech type situation.
Been successful at holding healthcare inflation, and CPI and not just when CPI was 6%.
Alright were $8 four or whatever it wasn't last year and so.
You can do this and it's not going to be the magic that heals all of health care, but it's absolutely part of the toolbox and our job is to we didn't create this tool, but we can sharpen it and in doing so we sharpen every other tool whether that tool is.
Wellness program transparency type stuff.
Telemedicine whatever it may be generics at what we do sharpens every one of those tools and that's how we help bend the trend, which ultimately make health care more affordable and.
By helping people understand it.
It makes them better use.
David.
Yes.
I feel like Richard is getting really Mad at me now he's getting bad answers.
Answers will wait too long.
The next question comes from Mark Marcon with Baird. Please go ahead.
Got some really long question I'm just kidding.
[laughter].
Hey, just relative to benefit wallet any updates that you can provide there just in terms of the way.
What you expect.
Conduit and had our call.
Is there any reason why you shouldn't.
Be able to achieve the same level of profitability or the same interest rates on the funds that they've achieved is there anything structurally different or is there any portion of the benefit wallet portfolio that isn't coming over to you.
So I think I can give a short answer to this one for the last part of your question. Yes. The answer is well there are two parts. One is the non HSA component of the business. So that they have some msas and the like and they are not part of this transaction.
And they will continue to be managed by a condo.
And then secondly of course as in all transactions.
Speaker Change: There will be some attrition.
In the midst of the transaction and some that are.
Speaker Change: Mine occur shortly thereafter.
That will we will try to account for that and we certainly have tried to account for it in our thinking.
As to the first part of your question I do think it's important to know that I have to admit I have not looked at the transcript of.
Conduits call, but.
I know that.
The executive team there is very entertaining so I'm guessing it was more fun than ours, but.
Speaker Change: The but.
I'd note that.
Like many of our competitors.
The way the conduit.
Let me say it this way our genericize many of our competitors.
The way that they their strategy for deployment of funds is that they are deployed in banks and importantly, they are deployed.
Speaker Change: Short rates, so that means much more variability and so if you look at fiscal let's say around calendar 'twenty three like <unk>.
That was an awesome strategy in calendar 'twenty three and it continues to be an awesome strategy right until it is it would have been a very very difficult strategy and let's say calendar 'twenty. So.
No we deploy on a ladder and we've taken a number of steps to.
To kind of make sure that as smooth as possible. So that will be different I would not I don't know what conduit said.
Also on the head with regard to this but you should think about us as deploying these assets in accordance with.
The latter and process that Jim has described.
Got it.
Great that's really helpful. Thanks.
Thanks Mark.
The next question is from Jack Wallace with Guggenheim. Please go ahead.
Hey, guys I'll keep this quick.
I think this one's gonna be directed at you just wanted to get a high level puts.
Puts and takes net of any of the reclassifications of what could be about a 50 basis point lift of the EBITDA guide for the year.
I'm just wondering if that's mostly some of the benefits from the technology investments that John mentioned earlier, if there's anything else we should be thinking about thank you.
Yes.
Yeah, no nothing new.
Nothing nothing huge right, where we are.
Trying to do is valid.
<unk> role in the.
Being a little bit ahead on on sales a little bit ahead on accounts and trying to factor in.
The comment that I made during the <unk>.
During the discussion about when markets are good you see a little bit of shift towards our towards investment from from cash.
And just.
Small adjustments down down the cost line. So, yes, if 50 basis points I want to call our call within the rounding error there, but just just providing you a little more more precision and with more with more perfect information here.
Got it thank you.
Thanks Jack.
Thank you. This concludes our question and answer session I'd like to turn the call back over to Jon Kessler for closing remarks.
Okay, an hour in five minutes not bad thanks, everyone for joining us we will be releasing our 10-K shortly working hard to get that done for you recognizing that there are some changes this year and I'm sure. It will be a real page Turner. So thanks, all very much.
Thank you all.
The conference has now concluded. Thank you for your participation you may now disconnect your lines and have a nice day.
Okay.
[music].