Q1 2025 HealthEquity Inc Earnings Call
Good afternoon, and welcome to the health equity first quarter 2025 earnings Conference call.
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I would now like to turn the conference over to Richard Putnam. Please go ahead.
Thank you Gary Thank John Hello, everyone and welcome to help the equities first quarter fiscal year 2025 Conference call. My name is Richard Putnam and <unk>.
Mr Relations.
Joining me today are John Kessler, President and CEO, Dr. <unk>, Vice Chairman and founder of the company as Jay.
The vice President and CFO.
Before I turn the call over to John I have a couple of them.
<unk>.
First a press release announcing the financial results for first quarter of fiscal 2025 was issued after the market close this afternoon.
These financial results include the contributions from our wholly owned subsidiary of accounts.
The press release includes definitions of certain non-GAAP financial measures referenced today.
You can find on our Investor Relations website, a copy of today's press release.
Reconciliations of these non-GAAP measures.
GAAP measures and a recording of this webcast.
That website IR <unk> com.
Second our comments and responses to your questions today reflect management's view as of today June 3rd 2024.
It will contain forward looking statements as defined by the FCC predictions.
Predictions expectations estimates or other information that might be considered forward looking.
Many important factors relating to our business, which could affect accordingly.
Today.
These forward looking statements are subject to risk and uncertainties that may cause actual results to differ materially from the statements made here today.
Caution against placing undue reliance on these forward looking statements.
Richie.
To review the discussion of these factors and other risks.
Affect our future results or the market price of our stock as detailed as the latest.
Okay.
Subsequent periodic reports filed with SEC.
I assume no obligation to revise or update these forward looking statements in light of perturbation or future events.
The way it over to Jon Kessler.
Hi, everybody and thank you for joining us for this healthy start to fiscal 2025.
Sure.
One quick detail I will discuss Q1 key metrics and progress against our strategy, Jim will touch on Q1 results and detail our raised guidance for fiscal 'twenty five.
And Steve is here.
Wow.
In Q1 the team delivered.
Again double digit year over year growth across nearly all of health equity metrics, including revenue, which was plus 18% adjusted EBITDA, which was plus 36%.
As much and HSA assets, which was plus 42 persons workload.
HSA members grew 13% from strong HSA sale and that's the wallet each of which I will detail in a moment strong agency growth.
Total accounts up 7%.
We ended Q1 with 60 million total accounts, including 9 million HSA is only $27 billion in HSA.
HSA assets overall worry about.
Great.
Interesting assets overall increased $2 1 billion in the quarter, including $4 billion of organic.
20% more of our HSA members became investors year over year, helping to drive invested assets.
39% and by the way this quarter, our HSA investors gained access to $0 brokerage trading of individual stocks and yes rich.
Returning to HSA growth team purple starting to sell in your off with 194000, new HSA a record for a first quarter and 60000 or 45% more than Q1 last year. So what happened.
First accounts from existing clients and partners grew very nicely, even more so than during the banner macro driven Q1 two years ago.
Particular, we got a boost from the Blues Health plan partners. The joint health equity from further a little more than two years ago and are now more accustomed working with us.
Okay.
Accounts from new logos.
Well, it's mostly small and midsized employers at this time of year.
The positive trend we saw over the course of this blueprint.
Sure.
Beyond the organic HSA as the team transitioned two of the three tranches benefit wallet in Q1, adding approximately 400000, HFC and one 6 billion of HSA assets.
Final benefit wallet transfer occurred last month that was at the beginning of Q2.
And by timely completing what is the largest HSA portfolio transfer ever to our knowledge.
Equities tiny but might be Corp. Dev team. Thank you guys.
<unk> raised our visibility FY 'twenty five results.
It's opened up an opportunity for cross sales and won't be 60, and benefit which is the name for Max enroll deployments into fiscal 'twenty six.
Lane anchor to Windward on custodial yield for years to come that's notable.
DDB accounts decreased 1% compared to Q1 last year preceding the ending of the national emergency in May.
Later last year, excluding that factor, we again delivered positive <unk> growth year over year.
The key metrics support our longer term strategy and the team advanced that multiyear strategy, which you've heard about and which we call <unk>. The first is delivering remarkable experience virtualized our service digitizing paper and plastic are cloud based health accounts platform.
In order to reduce service expense without sacrificing member delight.
Q1 saw service cost as a percentage of revenue for 400 basis points year over year.
We launched more AI driven service that we expanded our claims automation for FSA members that you saw at Investor Day.
We deploy also to select enterprise clients health equities that the counterpart for iOS and Android mobile wallets pretty cool.
Second D is deepening partnerships across the ecosystem to grow sales without sacrificing margin.
And it continued in addition to continued work on the technology backbone of API that we also discussed at Investor day.
In the partnership category.
Insurer partners and capacity in the enhanced rates program that accommodated.
Expected adoption, that's more than 85% of new basketball members H C <unk>.
Right.
Third D is driving member outcomes, new data driven services that give clients and partners insight and gate members.
During Q1, we gained important client and partner feedback. Thank you to our clients and partners to participate in the session why.
On our analyzer transparency, helping you. Thank you.
Other new services in development.
All of this added up for ads.
Two a quarter of investment for the future within the envelope of robust top line margin and cash flow from operations growth in the horizon, which can be you know Jim will now.
Yeah.
John.
I will briefly highlight our first quarter fiscal year, GAAP and non-GAAP financial result, 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 our fiscal year 2024, 10-K, both for fiscal year, 'twenty four and 'twenty five.
First quarter revenue increased 18% year over year service revenue was $118 2 million up 6% year over year, reflecting a higher number of HSA invested HSA assets, partially offset by the runoff of national emergency CEB activity serve.
Service revenue also benefited from a $2 $5 million catch up accrual investment record keeping fees in the quarter that will not be repeated.
Custodial revenue grew 37% to 121 6 million in the first quarter.
Annualized interest rate yield on HSA cash was 293% for the quarter.
Interchange revenue grew 6% to $47 7 million.
Gross profit as a percent revenue was 65% in the first quarter. This year up from 61% in the first quarter last year.
Net income for the first quarter was $28 8 million or <unk> 33 per share on a GAAP EPS basis. Our non-GAAP net income was $70 3 million or <unk> 80 per share versus <unk> 50 per share last year.
GAAP results reflect the impact of the difference in the timing of stock compensation expense from performance stock units granted during the quarter compared to those granted in prior years.
Adjusted EBITDA for the quarter was $117 4 million up 36% compared to Q1 last year and adjusted EBITDA as a percentage of revenue was 41% a 540 basis point improvement over the same quarter last year.
Turning to the balance sheet as of the quarter ended April 32020 for cash on hand was $251 million as we generated $65 million of cash flow from operations and used $199 million of cash for the first two benefit wallet closings in the quarter.
The company had $926 million of debt outstanding net of issuance costs, including $50 million drawn on our line of credit in connection with the benefit wallet HSA portfolio acquisition.
The third and final benefit wallet tranche was funded with an additional $175 million draw from a line of credit subsequent to the quarter end.
Today's fiscal 2025 guidance reflects the carryforward of our strong sales trajectory higher expected custodial revenue and operational efficiencies, resulting from our technology investments, we expect revenue in a range between $1, one six and $1 8 billion.
GAAP net income in a range of $90 million to $105 million or $1, one to $1 one at $1 18 per share.
We expect non-GAAP net income to be between 261 and $276 million or.
Or $2 93.
And $3 10 per share based upon an estimated 89 million shares outstanding for the year.
Finally, we expect adjusted EBITDA to be between 454 $474 million.
The placement of the benefit wallet HSA cash complete we're raising our guidance for an average yield on HSA cash between 3% and 3.05% for fiscal 2025.
As a reminder, we base custodial yield assumptions embedded in guidance on projected a state cash deployment and rollover schedule of which is contained in today's release and analysis to 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.
Our guidance also includes the expected impact of our now completed benefit quality portfolio acquisition on the remainder of the fiscal year, including higher revenue and earnings along with higher net interest expense due to an increase in the amount of variable rate debt outstanding and drawdown of corporate cash to fund the acquisition.
We expect to pay this variable rate debt down with cash from operations over the next several quarters.
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're now we now project a GAAP tax rate for fiscal 2025 about 25% as well.
As we've done in previous reporting periods. Our full fiscal 2025 guidance includes a reconciliation of GAAP to the non-GAAP metrics provided in the earnings release and the definition of all such items is included at the end of the earnings release and.
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.
With that we know you have a number of questions. So let's go right to our operator for Q&A.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad. If you were using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first question today is from Glenn San Angelo with Jefferies. Please go ahead.
Thank you Glenn.
Mike.
Yeah. Thanks for taking my question, Hey, gentlemen, I have a high level question.
Based on the feedback we're getting all the metrics that you reported were obviously up in that and that contributed to the topline and EBITDA being but somewhat pushed back in and make the case that maybe the better results or more.
Acquisition, driven or more rates oriented and so I guess the question is what's the message to investors that may be concerned.
About the level of organic growth and maybe a concern that rates are coming down in the near to intermediate term just would love to get your high level take on how you think about you know the organic growth and the risks that rates come down later this year. Thanks.
How do they how do they get at it so quickly.
Who are these people.
Hum.
If I can.
Hi, Walt.
I'll bet.
I wonder if they might have already interest.
Let's see.
People are saying you can't please everyone.
Speaker Change: Second say.
Respectfully we included.
The benefit wallet transaction in our prior guidance and.
We can talk about others have you.
Theres really want to delve into it.
The details of scarp versus expected and all of that but.
We guided at the end of March.
<unk> already done the first tranche.
By then I believe and the second tranche was on April nine so it would be hard to take you through that.
Somehow came to some different result than we were expecting.
As to.
The broader question of rate sensitivity.
Our performance.
The answer is in my view that the right way to look at this is that the.
The relevant question is what is the long term.
Custodial benefit that we'll receive from a growing sort of corpus.
Accounts and assets and I think what you are.
Okay.
The answer is that the more evidenced.
More evidence comes in that suggests that.
That number is at the very least a lot higher than people thought it was a few years ago.
And in any case.
As Jim has said many times and as the schedules that we provide support.
Irrespective of any within the bounds of Av.
Current economic forecasts.
Any place within those forecasts, we will over the next I don't know.
What what would define the near or medium term ads.
But.
Speaker Change: The next two years whatever three years.
Something like that these we have not yet.
I think it's fair to say, we have not yet reached.
What is the current let's call it non cyclical rate much less the peak rate.
Of course, we will lag from the markets.
And so.
I guess I would characterize that broadly as perhaps.
Investors, who.
Or others, who.
Have to again complete understanding of how this model works now.
And how we engineered it to work over the last several years so.
That's kind of my response to Jim would you add anything to that yes, no no I wouldn't add anything to that.
We keep updating that.
Repricing table.
In this Q right. So just as John said right, where we're repricing.
Placements into one.
Mid 1% range for the next couple of fiscal years. After after this one is over.
Yes.
Yes.
We've guided to where we think we'll be in basic enhanced rate mix.
The spread were earning AUM treasury, so as John said, we're still.
A ways away from neutral at least the current current reasonable ranges of bounds of what neutral might be.
All right well congrats thanks for the thoughts much appreciate it.
Speaker Change: Thank you Ed C Tomorrow.
The next question.
Excuse me. The next question is from Allen Lutz with Bank of America. Please go ahead.
Hey, good afternoon, thanks for taking the questions I think if we back out.
That tranche is.
You grew accounts eight 1%.
In the quarter feedback at those two charges can you kind of talk about how quickly the markets growing as we kind of turned the calendar 2024, and then any changes that youre seeing this year versus last.
Speaker Change: I think if youre going to do that calculation you also have to exclude.
Accounts that were.
They came over with those tranches, but we.
Or whatever the right term is yes. So the number is a little higher than that but.
If I look at the market as a whole.
<unk>.
I think Kevin years last estimate is the market.
Outside is growing.
6%, 8% something like that.
Yes.
So obviously, we're doing a little better than that.
I can say and I would invite Steve to comment on this.
Speaker Change: One of the things we're seeing in the early part of the sales season here as well.
A lot of energy around.
The.
Accounts that.
The accounts that we get from.
Our new small group and alike.
Steve you can congresspeople, our health plans.
And maybe Steve you could comment a little bit about what you think is behind that.
Sure.
Thanks for the question.
Okay.
Constantly look at what the addressable market is with these health plans.
Got it.
As always impressive to me that if you look at our Spanish Okay and partners.
Speaker Change: We just have not.
You know penetrated.
Are your core base very deeply I mean, the bottom line is we have lots of opportunity with them and.
It's a combination of companies.
Companies that haven't fully embraced health savings accounts and they've offered it.
The years is kind of an auction typically that people in the finance department get the tax benefits immediately but it takes a lot longer for people and more broadly speaking to understand that every dollar that goes into an HSA you get kind of like 35% to 40% more spending power and if you are paying with out of pocket out of our regulators.
Speaker Change: Savings account or something like that.
And so we just keep seeing it chug, along and I think when you couple Medicare inflation or medical inflation with with that I mean again.
Lynn.
When you're taking a bite out of every dollar you have to spend because of inflation and you can get by by its back because of our.
Of of having.
Having great tax benefits more spending power I think that's what the messages coming loud and clear and I think that.
Whether we're at 30% market adoption you can look at different studies are 35, and it just depends on how where you dominate or we sell a lot of room to grow and.
You got to understand that most of these health plans that we've only been partnered with probably.
On average just a few years if you take all of the new ones, we received with the further deal.
And then we have a fantastic team that's been working them routines amazing and we didn't call. It from sorry, Collyn furnishing our team that came through that transaction.
And then just the additional ones we've added over the years I mean, we've just had tremendous opportunity and so I think the key is just doing what we're doing day after day getting out in front of the brokers and consultants and then to help fund sales reps and help them account executives and taking our solution.
Speaker Change: <unk> to them and then they realized that by partner health equity they can win more business and they can reach.
<unk> and we have a great partnership.
Wonderful.
Fairly recent client summit, where most of our bluestone showed up and.
Well, we will have be having meetings for their normal whose plans throughout the course of the year and so.
Tremendous opportunity, but it really is interesting to see how much opportunity we have.
Lots of meat left on the bone when it comes to working with these plans.
And then working with employers that they need.
Reasonably priced coverage with great tax benefits.
Great. Thanks, Steve Thanks, Steve.
The next question is from Greg Peters with Raymond James. Please go ahead.
Hey, good afternoon, everyone.
Hi, Greg.
I'll focus my only question on.
Our adjusted EBITDA margin improvement.
Which was at least ahead of or.
Estimates.
I guess, what I'm curious about given the updated guidance is there any sort of seasonality that will flow through the margins as we think about the remaining three quarters because the first quarter was quite strong.
Yeah.
Yes, yes for sure right so.
You know the normal seasonal trends.
The interchange line of course, obviously strong strong to start off the year.
We obviously had that true up that I mentioned in the service revenue line that is not going to occur and I think what youre seeing is great great progress on cost.
A bit of that especially in that tech and Dev line.
We'd like to be we'd like to be moving faster on a few things got some some open roles. So youll see that that line normalized three.
Speaker Change: Throughout the year. So you are seeing a bit of Oh, all of a high number versus what we call a normalized Q1.
Got it thank you and I think.
Speaker Change: <unk> comment I mean, maybe I mentioned is that we.
We did have this.
Accounting item minutes.
Two and a half million dollars so.
Think about revenue at roughly $1 billion just becomes easy.
So it does play a role in what are we guiding to 40 midpoint is 40 something.
And we delivered 41 so.
I think I would expecting version of our broad seasonal pattern that you see where the fourth quarter will be lower but also keep in mind. We're as we said one of the benefits of what we're trying to do from a technology perspective is to flatten out that expense a little bit in <unk>.
He will make a little bit of progress on that this year and there is some upside opportunity.
Thank you I got two answers one question that would be yes.
Well that.
Got it guys have a good afternoon misjudged Ms Stewart Shake Shack last night right yes.
Yes.
I visited in your honor.
Thanks, Greg.
The next question is from George Hill with Deutsche Bank. Please go ahead.
Yeah. Good afternoon, guys and thanks for taking the question I guess first is you guys had a goal to get to 80% of the dollars from the benefit wallet acquisition and maybe even into the enhanced fleets product well I guess I just wanted to ask about your progress on that and then I have a quick follow up.
Sure we.
Follow up then Greg we're going to have to go back to Greg.
Speaker Change: I'm, taking a great follow up.
Okay.
Yeah.
So we did end up around 85% on benefit wallet relative to 80 and that.
That is helpful.
Yes.
It's.
5% on.
60 basis points on buy it's not a huge number in the Grand scheme of things, but it is helpful and.
It's also.
As we commented that what what's enabling that in our view is.
Two things the first is what we're trying to do in terms of articulating the program and so forth and then the second is the strength of the stable of partners.
I really think this is feeling like.
What we did in the early days as.
Ken well relate to.
With regard to where the trick was don't rely on one yep yep.
You had a nice diverse portfolio that you can then have a nice open market.
Sure.
Hum.
I got to give credit to the team of people. We don't name so that the recruiters don't get after them.
They know who they are but that do this work.
Blayne the program itself.
Okay.
And my quick follow up would be is I'm kind of trying to hit on the utilization team that we're all keeping track of hearing health care land and the benefit acquisition, having meaningful impact on interchange revenue and what I'm trying to get to as organic interchange growth and this whole thing is a backwards way of question is are you guys seeing.
<unk> in your HSA book of business, if people are increasingly buying stuff, which you kind of show up in the interchange revenue line, which looks like it could have been a little money this quarter through.
For the acquisition Yeah I.
I think the short answer is let me get to the end of your question you can go back to the beginning we're not seeing I think theres, some sort of hypothesis around <unk>.
<unk> ones are I don't know maybe theres some other thing people could be buying.
Having a huge impact on particularly HSH then.
If you look into the into the thing.
On a unit basis.
<unk> spend this quarter was actually.
It's lower than we might have expected and FSA HRA spend was a bit higher even after factoring in the fact that that spend is going to be high in this quarter for reasons related to seasonality and run out and so forth.
So I just don't we because we get asked this question Richard get passed some version of it often.
Becoming something of a G L P. One expert.
Speaker Change: Yeah.
Okay.
Speaker Change: It doesn't eat anything so that's his solution.
But I.
I guess, Mike in all seriousness I don't I don't see it and then with regard to just the first part of the question which was.
Hi, I think the answer is a little I mean, you had a period of time, where people didn't have access to their accounts and so forth and that may explain why HSA underperform, just a little bit.
But but I think if the if the question is does this quarter either provide you know provide any anything that would.
Speaker Change: Support or address this sort of thesis.
I don't know how to kill this thesis, but I can't find any evidence for it.
The next question is from Stan Bernstein with Wells Fargo Securities. Please go ahead.
Hi, Thanks for taking my questions.
Maybe on digital wallets, if I may John at the Investor Day, you spend you know obviously a lot of time, you and the team talking about the capabilities.
I was just wondering if you could give us a sense of whether the digital wallet rollout have any.
The type of impact that had a member adoption reception and whether it had any.
Help for you in terms of driving client conversions. Thanks.
Speaker Change: Client conversions was certainly helpful.
It's still very early for digital wallet.
And in particular.
The way this is working stand is weak.
We're doing two things at once right thing one is that we're consolidating the various processor agreements we have into one so that's.
Sure.
Those of our 17 odd million members, who are 60 million members who are cardholders.
Speaker Change: Card conversion.
Our conversions are a little more complicated actually three things two we've added we've added ship, which in normal banking world No Big deal at this point in our world a little bit more big deal because.
There is it turns out not standard logic at the merchant level for how to deal with chip, particularly at the pharmacy and so we talked about that last quarter is something we would have to overcome and you did good job and then lastly, mobile putting all of that including stacked hard on mobile.
Ultimately the way this will help us is twofold.
First is <unk>.
And so I think at the moment, it's primary benefit is.
It's an innovation that people can talk about in both new client sales and particularly FSA conversions, where we have an HSA client and we can stack that FSA on top of it and we.
Speaker Change: We don't report FSA sales figures, but but suffice it to say, we're doing well so far this year on our pipeline there.
And I guess, we don't want anybody.
Speaker Change: I think that's one way in which it will help.
The second is ultimately on the expense and members member experience side as we've discussed a lot of these expenses associated with open enrollment are driven by the need to produce cards get them out there and so I want to be clear, we're still going to do all of that this year, we're not forcing any wanted too.
Into a mobile wallet, but.
Eventually we will mobile wallet will be the default and at that point busy.
<unk> will become more like busy week.
And busy week, it's a lot easier to handle and businesses.
Got it very helpful. Maybe just a quick follow up.
So obviously youre talking about digital wallets lots of flexibility and usability there that's opening up on the mobile side I'm. Just curious does this allow you to expand maybe into lifestyle spending accounts and is this something that you have considered thank you.
We have a lifestyle product today and it does okay, I think there's a little bit of.
It's probably safe to say there is more smoke than buyer on the lifestyle accounts.
We have that product does fine.
And.
It's something that is is a stackable on the wallet.
So for those folks.
The way lifestyle works there are some folks who don't really want to use the card for it.
For any number of reasons, but.
But I.
I mean, I I mean, I guess my short answer is sure that having been said our focus in.
And the company broadly and certainly in this regard is really around helping people.
Speaker Change: No.
Is around empowering consumers health care, and there's some significant overlap between lifestyle and health care, but.
Is it growing that LSA category is not a huge focus for us just doesn't it doesn't quite move the needle.
Our view is theres some stuff there, but it's not.
It's not.
It's not enough to build a Thanksgiving dinner.
Speaker Change: Thanks, Kevin.
Thanks, Dan.
The next question is from David Larsen with BTG. Please go ahead.
Hey, congratulations on a great quarter.
Can you talk a little bit about your take rate or your yield sort of by investment category and if you don't want to get too specific I totally understand that but like you have cash you have enhanced rates and then you have what I think of as like your legacy sort of investment accounts.
And I sort of thought but your yield was was lower on invested.
Asset so as more money goes into the enhanced reach products could that potentially pressure your your yield or not in your your yield seems fine, but just any color there would be very helpful. Thank you.
Yes.
Ill take that in pieces so that the.
There is no.
No custodial revenue from the investments any more like that that's the thing we shifted so the custodial line is.
The blend of the HSA cash yield on enhanced rate and basic rates and we've sort of talked about on average we're doing five year Treasury plus call. It 75 on enhanced rates in five year Treasury, plus 10, or so on on basic rates.
Obviously, the key is at the time of placement, so youre going to have a.
The big mix there.
On the investment side, Yes of course, right, where we're earning.
Earning about 30 bips headline rate on invested I think we blend out to 28 basis points or so that is in the service revenue line.
And I don't I tend to not think of it the way that you phrased. The question right, it's not a matter of.
Our members are going to take all of their cash and move it.
The investment account right.
It's a cash account coupled with a brokerage accounts and so as our members continue to save higher balances they become investors. So it's not one or the other right as we grow the cash balance and then they become investors and yes on the marginal dollar we don't.
Considerably less on the next investment dollar, but but that's the right thing for the member to do.
At that point and over the long term I like being being leveraged to.
The U S markets right in that in that investment line and we help help the member grow that account and hopefully they become.
Managed account clients as well and we can actively help them grow grow that balance, but they're not it's not one or the other.
Speaker Change: As a member moves along in its maturity.
That's how they become investors.
Okay, great. Thank you very much.
Thanks, David Thanks, David.
The next question is from Stephanie Davis with Barclays. Please go ahead.
Hey, guys. Thank you for taking my question congrats on the corner.
John do you have to ask this whole mobile wallet call outs, you know how much I take I I hate taking like how is that going to carry on the subway does this mean I don't know actually it just seems that it's finally work Apple wallet we're done.
Yes.
And I will say this.
Thank you for that really belongs to the New York MTA.
It's easy to underestimate the complexity of what they're doing with this product and.
We went through this whole thing where we're.
You know there was some non standard programming in their system and Yada Yada yada.
MTA did a great job of getting there their.
Folks are contractors.
Here in a way that I don't think we all normally expect from the New York City subway.
I.
I do appreciate that and not just because I'm, taking a step way back.
Okay. So let's put this framework in mind, you talked about chip cards and monitor early question answers chip cards.
Thank you art.
Are you glad right away.
As you will hear it ops ouch other card overall, so you can get rid of that cost from your your whole expense algorithm or am I getting ahead of Nike.
I mean, the answer is yes, we will ultimately as I said in the commentary our ultimate aim and I will limit my people, who do open enrollment when we talk about this look at me like John is harder than you think.
You can imagine we get that look okay, but but we think that that's the right answer, particularly when you actually look at it I mean, no people have families are complex so it might be that.
There's the one card that's going to I remember, there's another that's going to get over it.
But why not our view is that ultimately.
The idea that the piece of flash because somehow an advertisement.
Sort of past due date and that ultimately that's going to be mobile is going to be your default, which by the way means you're going to get your card earlier.
Going to be easier to update when you.
When it rolls over.
Yes.
It's there's a lot of good that comes from that.
That having been said Stephanie I think the biggest well it is true that those darn chips are not free.
We do get to amortize them at least.
But.
But over a couple of years anyway.
I think the bigger point is the cost that we incur and the hassles that members and clients incur in this process that goes on from December from.
From roughly the beginning of December through the beginning of January where you're translating from an open enrollment decision that a member made it to the client closing open enrollment and processing their software their vendor processing their stuff.
<unk> data that comes to us to our issuance to card printing the card packaging to EMEA all the Christmas. It's just not you know do you have any of them.
At all not a scalable process. So what we're trying to get rid of that and I think that will help.
Like I said I think the way to get a sense of that as you look at that bump that we had at the end of the year end.
In the fourth quarter and typically in January our I'm, sorry February and first quarter as we wind down.
And.
If we can make that bump kind of go away or be less lumpy that will be a good thing and that gives you a sense of order of magnitude.
So that kind of leads into my follow up you are talking about these AI opportunity in your prepared remarks, you guy like I feel like a pretty obvious card issuing and same day opex or anything like what is your what is the cost savings roadmap that helps your margin beyond China Jesse.
You can leverage that you keep getting from rate.
So this is a question I ask GM of law.
And he had like six months, so now I can just throw things.
At this stage.
The same thing that I'd say to you John.
Is that like were not going to we're not going to parse out the list right. So there's a long list.
Yes of course, some efficiency opportunities.
What is the objective of not just the finance team. The objective of the service delivery teams is to drive down every year their unit cost of service count.
And that's going to come in a number of places and it's math that you guys can do as well right. You can look at our service cost and divided by our total accounts and watched that watch that trend line because that's the same trend line that our service leaders are looking at every month in their results and making sure they're continuing to drive progress there.
We're talking about these big thing because yes, like if we can eliminate card printing completely and paper and envelopes and postage and re issue because the dresses change the new members forgot to tell us that they move right. Yes. There is a large bucket of cost there will it all be removed in one single.
Quarter, It will not right. So as part of this is the long term objective.
Our investments on the cost side.
And the service teams drive to efficiency this is old.
Old School lean six Sigma process improvement continuous improvement work new.
New tools, they might say exactly exactly yes. Thanks Stephanie.
Thank you Jack.
The next question is from Mark Marcon with Baird. Please go ahead.
Hey, good afternoon, and my congratulations.
Great quarter. Thank you.
Hey, with regards to.
I have similar questions just with regards to like trying to disaggregate.
You know the the benefit that you ended up getting in terms of the gross margin if.
If we think about it roughly speaking in terms of scale versus reducing unit costs would it be fair to say that we're still at the really early stages with regards to reducing unit costs. That's one question and then the follow up is can you talk specifically about what happened on the.
Interchange gross profit margin because gross margins were terrific, but that one was a little bit.
Softer than a year ago. So just trying to fully understand that yes, maybe I'll start yeah, I'll start with that one that is.
A really good call out yes, very good yeah, very good color, yes, so interchange actually John talked about that in.
In the commentary.
Yes.
We're in the process of.
Moving to both a new and a single cause.
Card processor.
And so youre seeing a bit of where operating on multiple card processors now and not just the service cost of multiple processors, but we have some development costs related to the interchange.
There that hit that line, so thats, what youre seeing youre seeing and that will be done here I've said this before it will be done with this transition in August so that youre going to see a little bit of that and you're going to see a similar thing in the second quarter and the first month first bid in the third quarter of the same.
Part, where we're basically paying to processors.
Yes.
And then yes.
Yeah Yeah.
Yeah, I think it's not like a.
But there is the start Indiana right like the point of continuous improvement on our service cost side is that there is continuous improvement. So there's not a day, where I say well well done guys. You're done you don't have to try to be more efficient.
So you know.
The sales and retention side of the house has to deliver there part of that right of course growing growing accounts helps us helps us become more efficient and not not just driving down driving down the cost but.
Those work those work hand in hand, so I can't say that we we walk through and say this.
This much is related to us continuing to grow versus this much.
As related to our improvements we're trying we're trying to do both of those things that's driving our calls from the call Center more self service more automation.
He has worked hand in hand.
I think mark is driving to his conference Tomorrow, and we're going to see are you driving from from Wisconsin.
The New York are you on that.
Hi, Mike.
I'm in New York right now.
Okay I'm looking forward to.
No that is the non denial like that again.
How we got here.
No.
I flew this morning. Thank you.
We do have claims [laughter] like no tomorrow.
Laura.
Alright.
The next question is from Jack Wallace with Guggenheim. Please go ahead.
Hey, guys. Thanks for taking my questions.
Hey, there.
So just wanted to circle back on the benefit wallet transfer and just relative to your expectations.
Coming into the quarter.
How do you account retention fared say the cash AUM.
And accounts and then the time and cost to transfer again, just trying to get a feel for this it.
It looked like this was slightly better across most metrics.
But you're telling me it sounded like this was this was done at a pretty efficient manner.
Yeah, I mean, we had the virtue of guiding in March and light.
We had already done part of it we're doing part of in a couple of days and we have data from the other side I'll I'll take that if that yet.
That's the kind of forecast yet.
Yeah. So so.
But I think I think.
That's probably fair I I'd say, the one thing that we want you to be mindful of as you get into the rest of the year.
Is that we would expect to see some incremental attrition here, whether that attrition effects assets very much.
All right, but you know.
It's always the case that we assume.
Speaker Change: In these larger transactions some.
Host account attrition.
That's it.
It's not I don't think it's going to be in the nature of the wage works thing because the way. It works stage. It was already like by the time they already two years. After the transaction right here, it's more of our conventional portfolio acquisition, which really minimized that stuff.
But just something to think about over the remainder of the year, particularly as we get into.
Uh huh.
Of course, as I say that to the.
Jan 31 quarter, but look I guess my short answer is the one item where the transaction really ended up doing better than we are.
At last Guy really is the one I highlighted in the commentary, which is that we had assumed about 80%.
Enhanced rates penetration, we've got 85.
One can calculate the delta on that pretty well.
That's helpful and then just to double click into the attrition.
Your comment there.
By my math, we had about 49000 accounts are so that didn't transfer over.
Is it fair to just assume that that would hit the attrition line in the first quarter or is there you know what.
Within that bucket are starting to come.
Yeah, good call out there yet from when we originally announced that we crossed the benefit year right. So that benefit while it had some attrition before we acquired it but yes, we sort of assume that Theyre also accounts like that yeah.
Zero balance.
Speaker Change: Or do you like that we didn't.
Long ago.
Speaker Change: And they don't have any of the health claims data or the like so that there was no point in bringing those over so there were no. That's really you know those are well that's not really what were talking about yes, we're talking about.
Speaker Change: In the let me just say it this way in the quarter.
Right.
There are about 40000 accounts.
Yes, that's right that we're.
We're benefit wallet accounts that came over so they are in the number in the 400000 that we close right. The bulk of those were.
More than 50% anyway, we're actually cases, where there was already a health equity account.
On that side member and so we merged yet.
Yes.
We don't charge so it looks in our numbers like you might say Oh. The closed accounts are higher like no. They're they're not actually closed accounts. We didn't we didn't net acquired the full analysis because they already exist at all.
Speaker Change: Well, we brought the assets in.
Merged and merged them into the existing health equity account, there's probably also a good place to mention one other thing here I think I said.
You don't know what's going to be.
No problem.
Is also in the quarter, we're getting ready.
For the next wave.
The further platform, which is called Sam I don't know what the Sam is maybe its a lord of the rings thing I don't know, but.
But.
In any event Sam is.
Is leaving us and.
So we're moving that business over in cooperation with our health plans and so we also did a little cleanup on that platform of accounts for some of the same for some of the same reason yes.
We are this doesn't make sense to bring over at this point and so that elevated our churn.
A little actually skew more than walk, which makes sense because it was more original accounts, yes around 70000 further.
<unk> balance accounts, we closed an hour outside of that it was a normal quarter.
Got it thank you I appreciate it.
Thanks, Jack you got more than you bargained for on Advair.
The next question is from Constantine Davis with JMP. Please go ahead.
Hi, Hello, good afternoon.
Good start to the year in terms of new.
HSA accounts and just wondering if you could expand on your comments around a couple of the more recent blues partners in.
How they're contributing a bit more this year, just a little more color on that and then I think you also referenced some small and mid sized momentum in terms of new accounts and just wondering if the pipeline composition is a little more skus skewed to that part of the market. This year. Thanks.
Yeah I'll hit the second part and then invite Steve to maybe just talk broadly about our strategy.
Our commitment to the blues.
And what we've tried to do to make that commitment very clear in minutes choice.
But.
Just on the pipeline question.
We don't.
Other than in the depths of the pandemic, we don't guide pipelines.
We don't tend to like to talk about pipelines.
Other than in a very abstract I think it's fair to say that if.
If you look at our pipeline now for.
<unk> sales for the remainder of the year.
Your vote.
And you segment it.
Both SMB and enterprise.
And these are for new logos to be clear.
Our.
At or ahead of where we were a year ago.
I think they are actually both slightly ahead of where we were a year ago.
Yes.
And.
That's the that's where we are in terms of the pipeline.
Yeah, I would stress that's new logos and you know in any given year, new logos only make up you know give or take a quarter.
Oh of new accounts and the rest come from growth in existing.
Steve do you want to talk a little bit about our whole our whole way, we approached blues, how that's relevant here.
Steve: Absolutely. Thanks, Kirsty, yes, so I mean, just in general you can imagine these most of these claims are or.
Nonprofits there certainly.
Large four profit blue claim that but a lot of these folks.
They just they've always I think loved the idea of being able to have a company like health equity come in and bring US consumer platform that is what we would refer to as an integrated platform, meaning that when somebody decides to go down the road again.
You hired actual planet faces to qualified or.
It would allow for CDB suite of products that it needs to be easy to use knees and so integrated enrollment and then ultimately integrated claims and then integrated investments in.
And just all of these different solutions, we brought to market and it needs to be seamless and by doing that it allows them to compete against some of the big National plans that.
Historically have been able to invest more money in the solution and so you can imagine that in order to create not only the pipes.
All of them together, making this integrated experience, but then also to start training salespeople on.
And why they can take this to market and and really compete when it comes to.
Alright, going head to head with some of the more names carriers that are out there.
It just takes a little time and it takes trust and one of the things that has happened historically is that when it was an unintegrated experience are not integrated.
Steve: It didn't work so well so sometimes.
Doesn't account managers, who are more inclined to say you know what I'll just let this thing kind of lie and if somebody ends up with the HSA qualified plan and they go to their local bank under local credit Union or they ended up with one of our competitors.
Then you know it was kind of in their opinion it was less noise, but what they've also found out is that you know in seeking to try and maybe have a less noise in the sales process because.
Steve: Theyre not introducing an integrated part of like health equity It does put a minute a strategic disadvantage and so.
So that's what we spend our time on we have people.
Throughout the whole country working with these new partnerships.
We've talked about our blues math I mean, it basically goes from the East coast, all the way across the West coast.
We have great representation in the different sectors of the country in southeast.
No.
And kind of the Sun belt states in the northeast has always been a stronghold for us and we've made great strides up in the northwest and so it's just.
I mean, I wish I could say it was like.
The secret Magic code, we figure it out, but it's not it's going back to what we've been doing now for over 20 years of health equity, which is providing what we believe is the best seamless integrated experience.
For people that are going into these types of arrangements and then having the best customer service 24, seven 365, and so when the nice thing is is when we can actually.
Go in and provide that to a blues plan in this case talking about who's network and their employees. We do it also for non blues plans vertically integrated plans.
They actually start to say boy experts myself, then they're willing to go out and sell it to their clients and so.
I think that it did take a little while because of all we had going on with the <unk> acquisition that were coming up actually in our fifth year now in another few months Constantine will be five years into that and then further followed that so it has taken a little bit of time to dedicated resources to it but we're getting more and more integrated in a single class.
Foreign with with all of these plans every day John is there anything else you would add.
To make sure I covered with no I don't.
I don't think that but it made that point better.
Speaker Change: No that's great color thanks for the perspective.
Thank you thanks Constantine.
And they will come also.
This concludes our question and answer session I would like to turn the conference back over to Jon Kessler for any closing remarks.
Yeah.
Aye.
There are a lot of people at health equity at our partners.
And our clients.
Speaker Change: Our working their butts off right now and you know.
We're entering a time of year, where there was a long it used to be a little bit of a lull. This time of year are those days are gone.
It's it's supervision and I think busy.
A very productive way.
Speaker Change: So.
I'm very confident that our long term shareholders and our long term analysts and our long term shareholders and analysts to be.
I appreciate that but but.
We also very much appreciate your support.
It's been a few quarters since I have been able to genuinely say, thank you and have the time for that in this call, but I'm glad I'm able to do it here so.
Yes, that's a great way.
Speaker Change: So at least it's my way.
The conference everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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