Q2 2025 HealthEquity Inc Earnings Call

Speaker Change: Good afternoon and welcome to the health equity second quarter 2025 earnings conference call. All participants will be in listen only mode. Should you need assistance please signal a conference specialist by pressing the star key followed by zero.

Operator: of Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded.

Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two.

Richard Putnam: I would now like to turn the conference over to Richard Putnam. Please go ahead.

Speaker Change: Please note this event is being recorded.

Jon Kessler: Thank you, Gary. Appreciate it.

Speaker Change: I would now let's turn on the conference over to Richard Putnam, please go ahead.

Richard Putnam: Hello everyone. Welcome to HealthEquity second quarter of fiscal year 2025 earnings conference call. My name is Richard Putnam. I do invest relations for HealthEquity.

Richard Putnam: Thank you Gary, appreciate it. Hello everyone. Welcome to Health Equity Second Quarter of fiscal year 2025 earnings conference call. My name is Richard Putnam. I do invest relations for Health Equity.

Richard Putnam: Joining me today is Jon Kessler, President and CEO, Dr. Steve Neeleman, Vice Chair and Founder of the company, and James Lucania, one year anniversary, James, Executive Vice President and CFO.

Richard Putnam: Joining me today is Jon Kessler, president of CEO, Dr. Steve Neilliman, Vice Chair and founder of the company in James Lucania, one year anniversary James, Executive Vice President in CFO. Before I turn the call over to Jon, I have a couple of reminders.

Richard Putnam: Before I turn the call over to Jon, I have a couple of reminders. First, the press release announcing the financial results for our second quarter of fiscal 2025 was issued after the market closes afternoon. These financial results include contributions from our Holy Ones subsidiaries and accounts they administer. The press release includes definitions of certain non-GAAP financial measures that we will reference today. You can find on our investor relations website a copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures and a recording of this webcast. Website is ir.healthequity.com.

Richard Putnam: A press release announcing the financial results for a second quarter of fiscal 2025 was issued after the market closed this afternoon. These financial results include contributions from our wholly owned subsidiaries and accounts they administer.

Richard Putnam: The press release includes definitions of certain non-gap financial measures that we will reference today. You can find on our Investor Relations website a copy of today's press release.

Richard Putnam: including reconciliations of these non-gap measures with comparable gap measures and a recording of this webcast.

Richard Putnam: Second, our comments and responses to your questions today reflect management's view as of today, September 3, 2024. And they will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates, and other information that might be considered forward-looking. There are many important factors relating to our business which could affect the forward-looking statements made 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.

Richard Putnam: Website is IR. Health Equity.com

Richard Putnam: Second, our comments and responses to your questions today reflect management's view as of today, September 3, 2024.

Richard Putnam: and they will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates, and other information that might be considered forward-looking.

Richard Putnam: There are many important factors relating to our business which could affect the forward-looking statements made today.

Richard Putnam: These forward-looking statements are subject to risk an uncertainties that may cause the actual results to differ materially from statements made here today.

Richard Putnam: So we caution you against placing undue reliance on these forward-looking statements, and we also encourage you to review the discussion of these factors and other risks that are that may affect our future results or the market price of our stock, as detailed in our latest annual report on Form 10-K and subsequent periodic reports filed with the SEC. Assume no obligation to revise or update these forward-looking statements in light of new information or future events.

Richard Putnam: So we've cautioned you against placing undue reliance on these four-liquins 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 has detailed...

Richard Putnam: in our latest annual report on Form 10K and subsequent periodic reports filed with the SEC.

Jon: We are a soon-no obligation to revise or update these forward-looking statements in light of new information or future events. Now, over to Jon.

Jon Kessler: Now, over to John.

Jon Kessler: Thank you, Richard. Well done.

Jon Kessler: Hello, everybody. Today is the day after Labor Day, and that's the unofficial start of fall, and for some, that means leaves turning or the start of football season for us on Team Purple. It also means open enrollment and busy season are right around the corner. Based on the numbers that we're reporting today, we're looking forward to a very busy and very productive busy season. I will discuss Q2's momentum and key metrics and progress towards our strategic goals. Jim will touch on Q2 financial results before detailing our raised guidance and a little bit about our share repurchase authorization.

Jon: Thank you, Richard. Well done.

Jon: Hello everybody.

Jon: Today is the day after Labor Day and that's the unofficial start of fall and for some.

Jon: That means leave's turning or the start of football season.

Jon: for us on team purple. It also means opening enrollment and busy season are right around the quarter. Based on the numbers that we're reporting today, we're looking forward to a very busy and very productive.

Jon: Busy Season. I will discuss Q2's momentum and key metrics and progress towards our strategic goals. Jim will touch on Q2 financial results before detailing our raised guidance.

Jon Kessler: And Steve is here for Q&A on the state of the market at mid-sales cycle and also on recent developments in our nation's capital.

Jon: and a little bit about our share, repurchase authorization, and Steve is here for Q&A on the state of the market at Mid-Sale Cycle, and also on recent developments in our nation's capital.

Jon Kessler: Let's get to it. In Q2, the team again delivered double-digit year-over-year growth across most key metrics, including revenue, plus 23% year-over-year; adjusted EBITDA, plus 46%; in HSA assets, plus 27%. HSA members grew 15% from strong HSA sales and closing the final tranche of Benefit Wallet. Strong HSA growth drove total accounts up 9%. HealthEquity ended Q2 with over 16 million total accounts, including 9 million HSAs, holding $29 billion in HSA assets. HSA assets overall increased $2.2 billion in the quarter, and of course $6.3 billion year-over-year. And we grew the number of our HSA members that invest faster than accounts; in fact, by 24% year-over-year, helping to drive invested assets up 43% year-over-year to over $13 billion.

Speaker Change: Let's get to it!

Jim: In Q2, the team again delivered double-digit year-over-year growth across most metrics, including revenue plus 23% year-over-year, adjusted EBITDA plus 46% and HSA assets plus 27%.

Jim: HSA members grew 15% from strong HSA sales and closing the final launch of benefit wallet.

Jim: Strong HSA growth drove total accounts up 9%, health equity ended Q2 with over 16 million total accounts including 9 million HSAs, holding $29 billion in HSA assets.

Jim: HSA assets over all increased 2.2 billion in the quarter and at 4.6.3 billion year over year.

Speaker Change: and we grew the number of our HSA members that invest faster than accounts. In fact, by 24% you over year helping to drive invested assets up 43% you over year to over $13 billion.

Jon Kessler: Turning the sales team purple added 187,000 new HSAs from sales in the quarter, 20% more than Q2 of last year, resulting in a record first half for our sales and relationship management team, and we remain very positive about this year's selling season. Beyond the organic growth in HSAs, we reported in June that the team had transitioned the last of three tranches of benefit wallet at the start of Q2, adding approximately 216,000 HSAs and 1.0 billion of HSA assets in the second quarter. The timely completion of transferring HSAs and assets from Benefit Wallet for which I think the team and our clients and our partners at Benefit Wallet greatly has opened up opportunity for CDB cross sales into FY26 and locked in strong custodial yields on these assets for years to come.

Speaker Change: Turning the sales, Team Purple added 187,000 new HSAs from sales in the quarter, 20% more than Q2 of last year, resulting in a record first half for our sales and relationship management team.

Speaker Change: and we remain very positive about this year's selling season. Beyond the organic growth,

Speaker Change: In HSAs, we reported in June that the team had transitioned the last of three trenches of Benfic Wallet at the start of Q2, adding approximately 216,000 HSAs and 1.0 billion of HSA assets in the second quarter.

Speaker Change: The timely completion of Transferri HSA's in assets for benefit wallet, for which I thank the team and our clients and our partners at benefit wallet greatly has opened up opportunity for CDB cross sales into FY26 and locked in strong custodial yields.

Jon Kessler: That is good. Thank you. CDB account growth turned positive with 1% year-over-year growth in Q2, even though we haven't quite laughed the final runoff of the extended life national emergency accounts, which will occur later this year. CDB sales into the plan year beginning January 1 also look very robust.

Speaker Change: on these assets for years to come. That is good. Thank you.

Speaker Change: CDB account growth turned positive with 1% year over year growth in Q2. Even though we have a quite last, the final run off of the extended life national emergency accounts, which will occur later this year. CDB sales into the plan you're beginning January 1 also look very robust.

Jon Kessler: Results this quarter also represent a down payment on the multi-year 3D strategy that's 3Ds, we discussed at Investor Day, and each of the Ds represents kind of a transformation within the company. The first D which is delivering remarkable experiences is about the digital transformation of service delivery. In Q2, the team delivered year-over-year service expense on 9% total account growth. That's really good. A new mobile app launched, continuing our rollout of claims AI, and last month, in August, I can't believe that's last month. It seems like it was just two days ago. Our card processor migration ramped up.

Speaker Change: Results this quarter also represent a down payment on the multi-year 3D's strategy that's 3D's.

Speaker Change: We discussed at investor day and each of these represents kind of a transformation within the company. The first D, which is delivering remarkable experiences, is about the digital transformation of service delivery.

Speaker Change: In Q2, the team delivered flat year-over-year service expense on 9% total account growth. That's really good. A new mobile app launched, continuing our rollout of claims AI, and last month, in August, I can't believe that's last month.

Speaker Change: It seems like it was just two days ago

Jon Kessler: Thank you team for that, which enables stat cards on major digital wallets and next year instant card issuance, which I'm really excited about.

Speaker Change: Our card processor migration ramped up, thank you team for that, which enable stat cards on major digital wallets and next year, Innskin card issuance, which I'm really excited about.

Jon Kessler: The second D deepening partnerships is about the digital transformation of sales and the deepening of our partnerships around the health benefits. Co-System. In addition to record HSA openings and strong CDB results, the team continued work toward scaling partner-facing APIs with a new third-party developer portal. It's coming; it's coming a little later this year, maybe in the third quarter, I think the third quarter. The team just try and transcribe that. The team also expanded our stable of blue chip enhanced rates partner, speaking of partners, to keep up with adoption of enhanced rates, especially by new HSA members.

Speaker Change: The second deepening partnerships is about the digital transformation of sales and the deepening of our partnerships around the health benefit ecosystem.

Speaker Change: In addition to record HSA openings and strong CDB results, the team continued work towards scaling partner facing APIs with a new third-party developer portal. It's coming a little later this year. Maybe in the third quarter. I think the third quarter.

Speaker Change: the team just trying to transcribe that. The team also expanded our stable of blue chip enhanced race partners speaking of partners to keep up with adoption of enhanced rates especially by new HSA members.

Jon Kessler: The third D driving member outcomes is about extending health equities differentiation as a utilization accelerator, not only of health accounts and health savings, but of our partners' health benefits point solutions more broadly, something we've been doing for a long time, and we're now in a position to do even more of.

Speaker Change: The Third D Driving Member Outcomes

Speaker Change: is about extending health equity's differentiation as a utilization accelerator, not only of health accounts and health savings, but of our partners' health benefits point solutions more broadly, something we've been doing for a long time and we're now in a position to do even more of.

Jon Kessler: One of those outcomes that doesn't get talked about enough, actually, though, is dignity. And this morning we announced the formal launch of HPAs, yeah, HPAs or HPAs, HPAs, spelled HPA across the S. A no interest and no fee option for employees to pursue medical care with flexible payment terms. Your credit score should not influence your access to care; this is a way for employers to make that happen. A version of it already was put into law for Medicare Part D recipients, and the commercial market employers should have it, and we're bringing it to them, and we're really excited about it.

Speaker Change: One of those outcomes that doesn't get talked about enough, actually, though, is dignity. In this morning, we announced the formal launch of H-Paze, yeah, H-Paze, H-Paze.

Speaker Change: Spell HPA, fast-fliess.

Speaker Change: A no interest and no the option for employees to pursue medical care with flexible payment terms. Your credit score should not influence your access to care. This is a way for employers to make that happen. A version of it already was put into law for Medicare Park de-recipients and the commercial market employers should have it and we're bringing it to them and we're really excited that is.

Jon Kessler: All this adds up to a quarter of investment and promise for the future within the envelope of robust growth in the present in terms of health equities, top line, its margins, and its cash flow from operations, as Jim is about to detail.

Speaker Change: All this adds up to a quarter of investment and promise for the future within the envelope of robust growth in the present in terms of health equities top line, its margins, and its cash flow from operations, as Jim is about to detail. Jim, thank you, Jon.

James Lucania: Jim, thank you, John.

James Lucania: Hi, everyone. I will briefly highlight our fiscal second quarter gap and non-gap 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 our fiscal year 2024-10K, both for fiscal 24 and fiscal 25 for comparison. Second quarter revenue increased 23% year over year. Service revenue was $116.7 million, up 4% year over year. Reflecting growth in total accounts, HSA investor accounts, and invested assets and lower average unit service revenue due to mixed shift toward HSAs.

Jim: Hi everyone, I will briefly highlight our fiscal second quarter gap and non-gap financial results. As always, we provide a reconciliation of gap measures to non-gap measures in today's press release.

Jim: As a reminder, the results presented here reflect the reclassifications of our income statement we've described in our fiscal year 2024-10K.

Jim: Both for fiscal 24 and fiscal 25 for comparison.

Jim: 2nd quarter revenue increased 23% year over year.

Jim: Service Revenue was 116.7 million dollars, up 4% year a year, reflecting growth in total accounts, HSA Investor accounts and invested assets and lower average unit service revenue due to mixed shift toward HSAs.

James Lucania: Custodial revenue grew 50% to $138.7 million in the second quarter. The annualized interest rate yield on HSA cash was 3.1% for the quarter as a result that the benefit wallet placements and continued mixed shift to enhanced rates. Interchange revenue grew 14% to $44.5 million, notably faster than account growth, as members drive more payment activity to card than from cash reimbursement. Growth profit as a percent of revenue was 68% in the second quarter this year, up from 62% in the second quarter last. last year. Net income for the second quarter was $35.8 million, or $0.40 per share on a GAAP EPS basis.

Jim: Castodial revenue grew 50% to 138.7 million dollars in the second quarter.

Jim: The annualized interest rate yield on HSA cash was 3.1% for the quarter as a result of the benefit while at placements and continued mixed shift to enhance rates.

Jim: Interchains revenue grew 14% to 44.5 million dollars, notably faster than account growth as members drive more payment activity to card than from cash reimbursement.

Speaker Change: and I think it's a good idea to do this.

Speaker Change: Rose Profit as a percent of revenue was 68% in the second quarter this year, up from 62% in the second quarter last year.

Speaker Change: Net income for the second quarter was $35.8 million, or 40 cents per share on a GAPEPS basis.

James Lucania: Our non-GAAP net income was $76.3 million, or $86 per share, versus $0.53 per share last year. Adjusted EBITDA for the quarter was $128.3 million, up 46% compared to Q2 last year, and adjusted EBITDA as a percentage of revenue was 43%, a 650 basis point improvement over the same quarter last year. Turning to the balance sheet, as of quarter end July 31st, 2024, cash on hand was $327 million, as we generated $174 million of cash flow from operations in the first half of fiscal year 25 and used $200 million of cash for the benefit wallet acquisition.

Speaker Change: Our non-gap net income was $76.3 million or $86 per share versus $53 per share last year.

Speaker Change: A justed EBITDAF of the quarter was $128.3 million, up 46% compared to Q2 last year, and a justed EBITDAF as a percentage of revenue was 43%. A 650 basis point improvement over the same quarter last year.

Speaker Change: Turning to the balance sheet, as of quarter-end July 31, 2024 cash on hand was $327 million. As we generated $174 million of cash flow from operations in the first half of fiscal year 25, and used $200 million of cash for the benefit wallet acquisition.

James Lucania: The company had $1.1 billion of debt outstanding net insurance costs, including $225 million drawn on our line of credit in connection with the benefit wallet acquisition. As was reported, in an 8-K filing last month, post Q2, we refinanced and consolidated our credit facilities, retiring the Term Loan A and amending and extending the revolving credit facility. The new facility extends maturities to 2029 and provides additional flexibility in terms and conditions commensurate with the company's enhanced scale and credit quality.

Speaker Change: The company had $1.1 billion of debt outstanding net-efficient costs, including $225 million drawn on our line of credit in connection with the benefit wallet acquisition.

Speaker Change: As was reported.

Speaker Change: In an 8K filing last month, post Q2, we refinanced and consolidated our credit facilities, retiring the term Lone and amending and extending the revolving credit facility.

Speaker Change: The new facility extends maturities to 2029 and provides additional flexibility in terms and conditions commensurate with the company's enhanced scale and credit quality.

James Lucania: Today's fiscal 2025 guidance reflects the carry forward of our strong sales trajectory, operational efficiencies resulting from our technology investments, and recent changes in interest rates markets. We expect revenue in a range between $1.165 and $1.185 billion. Gap net income in a range of $94 to $109 million, or $1.50 to $1.22 per share. We expect non-GAAP net income to be between $265 and $280 million, or $2.98 and $3.14 per share, based upon an estimated 89 million shares outstanding for the year. Finally, we expect adjusted EBITDA to be between $458 and $478 million. We expect the average yield on HSA cash will be approximately 3.05 percent for fiscal 25.

Speaker Change: Today's fiscal 2025 guidance reflects the carry forward of our strong sales trajectory, operational efficiencies resulting from our technology investments and recent changes in interest rates markets.

Speaker Change: We expect revenue in a range between $1.165 and $1.185 billion.

Speaker Change: Gap net income in a range of 94 to $109 million or $1.5 to $1.22 per share.

Speaker Change: We expect non-gap net income to be between $265 and $280 million, work $298 and $314 per share. Based upon an estimated $89 million share is outstanding for the year.

Speaker Change: Finally, we expect adjusted EBITDA to be between 458 and 478 million dollars.

Speaker Change: We expect the average yield on HSA cash will be approximately 3.05% for fiscal 25.

James Lucania: As a reminder, we base custodial yield assumptions embedded in guidance on projected HSA cash deployments and rollovers; the schedule of which is contained in today's release. An analysis of forward-looking market indicators such as the secured overnight financing rate and 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 impacts of our now completed benefit wallet HSA 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 draw down a corporate cash to fund the acquisition.

Speaker Change: As a reminder, we base custodial yield assumptions embedded in guidance on projected HSA cash deployments and rollovers, the schedule of which is contained in today's release.

Speaker Change: and analysis of forward-looking market indicators such as the secured overnight financing rate and mid-duration treasury forward curves. These are of course subject to change and not perfect predictors of future market conditions.

Speaker Change: Our guidance also includes the expected impacts of our now completed benefit wallet HSA 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 draw down a corporate cash to fund the acquisition.

James Lucania: Our guidance also includes the commencement of share repurchases as part of the $300 million repurchase authorization announced today. We expect both to return capital to shareholders and reduce revolver borrowings in the remaining two quarters of the fiscal year. With our new revolver and continuing strong cash flows, we will maintain ample capacity for portfolio acquisitions should they become available. We assume a non-gap 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 now project a gap tax rate for fiscal 2025 at about 25% as well.

Speaker Change: Our guidance also includes the commencement of share repurchases as part of the $300 million repurchase authorization announced today.

Speaker Change: We expect both to return capital to shareholders and reduce revolver borrowings in the remaining two quarters of the fiscal year.

Speaker Change: With our new revolver and continuing strong cash flows, we'll maintain ample capacity for portfolio acquisitions, should they become available.

Speaker Change: We assume a non-gap income tax rate of approximately 25% and a deluded share count of 89 million, including common share equivalents.

Speaker Change: Based on our current full year guidance, we now project a gap tax rate for fiscal 2025 at about 25% as well.

James Lucania: As we have 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 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 assets is included.

Speaker Change: As we have done in previous reporting periods our full fiscal 2025 guidance includes a reconciliation of gap to the non-gap metrics provided in the earnings release and a definition of all such items is included at the end of the earnings release.

Speaker Change: In addition, while the amortization of acquired intangible assets is being excluded from non-gap net income, the revenue generated from those acquired intangible assets is included.

Operator: 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 are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two.

Speaker Change: With that, we know you have a number of questions, so let's go right to our operator for Q&A.

Speaker Change: We will now begin the question or answer session.

Speaker Change: To ask a question, you may press star, then one on your telephone keypad.

Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.

Operator: At this time, we will pause momentarily to assemble our roster.

Speaker Change: To withdraw your question, please press star then too. At this time, we will pause momentarily to assemble our roster.

Speaker Change: The End

Anne Samuel: Our first question is from Anne Samuel with JP Morgan. Please go ahead.

Speaker Change: Our first question is from Anne Samuel with JP Morgan. Please go ahead.

Jon Kessler: Hi. Thanks for the question, and congrats on a great quarter. I was hoping you could provide a little bit more detail on the launch of your health payment accounts and maybe how to think about how those might contribute to the P&L and is that going to be part of your selling season this year?

Anne Samuel: Hi, thanks for the question and congrats on a great quarter. I was hoping you could provide a little bit more detail on the launch of your help payment accounts and maybe how to think about how those might contribute to the P&L and is that going to be part of your selling season this year?

Jon Kessler: Let me just start with the longer term and work our way back to the short term. What this product really does is intended to assure that when people, particularly those who are in employer-based health plans, but the product also works for planned sponsored individual plans if there's demand. But when folks are going to pay their out-of-pocket expenses, their ability to get care at that point really shouldn't be limited by their credit limit or credit score. It's just not the right answer in our view. The product gives employers and health plans a very cost-effective way to get to avoid that.

Speaker Change: Don't add

Speaker Change: Let me just start with the longer term and work our way back to the short term.

Speaker Change: You know, what this product really does is intended to...

Speaker Change: A sure that when people, particularly those who are in employer-based health plans, but the product also works for.

Speaker Change: Um...

Speaker Change: Lara

Speaker Change: Plant Sponsor, individual plants if there's demand.

Operator: of Earnings Conference Call. All participants will be in listen only mode. Should you need assistance please signal a conference specialist by pressing the star key followed by zero.

Speaker Change: But when folks are going to pay their out-of-pocket expenses, you know.

Speaker Change: You know, their ability to get care at that point really shouldn't be limited by their credit limit for credit score. It's just not the right answer in our view.

Operator: After today's presentation there will be an opportunity to ask questions. To ask a question you may press star then one on your telephone keypad. To withdraw your question please press star then two.

Speaker Change: The product gives employers and health plans a very cost effective way to get to avoid that. And so my view is that this will have relatively broad applicability.

Jon Kessler: My view is that this will have relatively broad applicability out there both to people who might be using HSAs or the other health accounts, but also to the broader population, including those that don't. And remember that even at market maturity, we don't expect that everyone's going to have an HSA.

Operator: Please note this event is being recorded.

Operator: I would now like to turn the conference over to Richard Putnam. Please go ahead. Thank you Gary. Appreciate it.

Richard Putnam: Hello everyone. Welcome to HealthEquity second quarter of fiscal year 2025 earnings conference call. My name is Richard Putnam. I do invest relations for HealthEquity. Joining me today is Jon Kessler, President and CEO, Dr. Steve Neeleman, Vice Chair and Founder of the Company and James Lucania, one year anniversary James, Executive Vice President and CFO.

Speaker Change: Out there, both to people who might be using HSAs or the other health accounts, but also to the broader population, including those that don't. And remember that even at market maturity, we don't expect that everyone's going to have an HSA or the like.

Jon Kessler: like. And so we think that, over time, you know, this could be rather significant. And the goal, the mid turn goal we've set, you know, kind of internally is, and this is, in my view, part of sort of establishing this as part of the benefits package that's standard, is, you know, we'd like to see within the next three, four years here, one percent of those in group coverage have access to this. That seems like a highly achievable goal. Now, so, you know, that seems fine for the relative.

Speaker Change: and so we think that that over time, you know, this could be rather significant. The mid-term goal we've set.

Richard Putnam: Before I turn the call over to Jon, I have a couple of reminders. First, the press release announcing the financial results for our second quarter of fiscal 2025 was issued after the market closes afternoon. These financial results include contributions from our Holy Ones subsidiaries and accounts they administer. The press release includes definitions of certain non-GAAP financial measures that we will reference today. You can find on our investor relations website a copy of today's press release including reconciliation of these non-GAAP measures with comparable gap measures and a recording of this webcast. Website is ir.healthequity.com.

Speaker Change: Now, kind of internally is, and this is, and in my view, part of sort of establishing this as part of the benefits package that's standard.

Speaker Change: is, you know, we'd like to see within the next three, four years here, 1% of those in group coverage have access to this. That seems like a highly achievable goal.

Speaker Change: Um...

Speaker Change: Now, so, you know...

Jon Kessler: When your term and then go from there, so it's establishing something new that in a way is back to the past, when folks had, you know, HMO plans with little choice and whatnot. They typically, these costs were being covered in the same way. They were just in premiums. And so, you know, it's sort of in a way going back to that from a cash flow management perspective. The short term, with regard to obviously no impact in fiscal 25, we do anticipate a modest impact in fiscal 26, as observers of our release can see on this topic.

Speaker Change: That seems fine for the relative when your term and then go from there. So it's establishing something new that in a way is back to the past when folks had HMO plans with little choice and whatnot. They typically, these costs were being covered in the same way they were just in premiums.

Richard Putnam: Second, our comments and responses to your questions today reflect management's view as of today, September 3, 2024. And they will contain forward-looking statements as defined by the SEC, including predictions, expectations, expectations, estimates and other information that that might be considered forward-looking. There are many important factors relating to our business which could affect the forward-looking statements made today. These forward-looking statements are subject to risk and uncertainties that may cause the actual results to differ materially from statements made here today.

Speaker Change: and so, you know, it's sort of in a way going back to that from a cash momentum perspective.

Speaker Change: The short-term with regard to obviously no impact in fiscal 25.

Speaker Change: We do anticipate a modest impact in fiscal 26 as observers of our release can see.

Jon Kessler: There are clients of ours who have been testing out this product, including our twins, and with, in my mind, really good response both in terms of the quantity and also, I think, more importantly, the quality of how it's being used. And so, we do think there'll be a modest impact in 26, more significant impact as the thing catches on in 27 and 28. So, we'll certainly reflect that as we get to 26 guidance, but this is a good product. I mean, we've been thinking about how to do this.

Speaker Change: On this topic, there are clients of ours who have been testing out this product, including large ones, and with in my mind, really good response, both in terms of.

Richard Putnam: So, we caution you against placing undue reliance on these forward-looking statements and we also encourage you to review the discussion of these factors and other risks that are.., that may affect our future results or the market price of our stock has detailed in our latest annual report on form 10K and subsequent periodic reports filed with the SEC.

Speaker Change: The quantity and also I think more importantly the quality of how it's being used And so we do think there'll be a modest impact in 26 More significant impact as the thing catches on in 27 and 28

Speaker Change: So we'll certainly reflect that as we get to 26 guidance but this is a good product and we've been thinking about how to do this

Steve Neeleman: She's Steve, how long does it go back that we've been mucking around with products to solve this problem? 10 years? Maybe longer? Yeah, longer. I think 2008 is when we first started thinking about it. We had a large client that wanted them, and then the world melted at the end of 2008. So, it's been, John, I think, 16 years since we've been thinking about it.

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

Steve: She's Steve, how long does it go back that we've been muckin' around with products to solve this problem ten years?

Speaker Change: Maybe longer? Yeah, longer. I think 2008 is when we first started thinking about a real large client that wanted him and then the world melted at the end of 2008. So it's been, so I think, 16 years since we've been thinking about it.

Jon Kessler: Now, over to John. Thank you, Richard. Well done.

Jon Kessler: Hello, everybody. Today is the day after Labor Day and that's the unofficial start of fall and for some, that means leaves turning or the start of football season for us on Team Purple. It also means open enrollment and busy season are right around the corner. Based on the numbers that we're reporting today, we're looking forward to a very busy and very productive busy season. I will discuss Q2's momentum in key metrics and progress towards our strategic goals.

Steve Neeleman: And, you know, when I practiced, it was heartbreaking to have patients come in and say they were delaying care because they couldn't afford their deductible. And we think the HSA is the best way to fund the deductible that for people who are just getting started. These work great too.

Speaker Change: Now, when I practiced it...

Speaker Change: It was heartbreaking to have patients come in and say they were delaying care because it couldn't afford and they're deductible and

Speaker Change: and we think the HSA is the best way to fund the deductible that for people who are just getting started.

Unknown Executive: So, we'll start. Yep, exactly.

Speaker Change: These work great too, so we're a little bit of a game. Yep, definitely.

Unknown Executive: Thanks for that. Perfect.

Unknown Executive: Welcome.

Unknown Executive: Welcome to watch.

Glen Santangelo: The next question is from Glenn Santangelo with Jefferies.

Jon Kessler: Jim will touch on Q2 financial results before detailing our raised guidance and a little bit about our share repurchase authorization and Steve is here for Q&A on the state of the market at mid-sales cycle and also on recent developments in our nation's capital. Overall, let's get to it. In Q2, the team again delivered double digit year-over-year growth across most key metrics, including revenue plus 23% year-over-year, adjusted EBITDA plus 46% in HSA assets plus 27%.

Speaker Change: Thanks for watching, welcome to Drop in the Watch!

Jon Kessler: Please go ahead. Yeah, thanks for taking my question.

Speaker Change: The next question is from Glen Santander, or with Jefferies, please go ahead.

Glen Santangelo: Hey, John, I want to focus on the custodial rates a little bit. You know, as we look out to sort of next year, right? I think you have almost 1.8 billion that needs to be renegotiated at the end of the year, which you replace in 3.7 percent cash.

Glen Santander: Oh yeah, thanks for taking my question. Hey Jon, I want to focus on the custodial.

Speaker Change: Rape's a little bit, you know, as we look out.

Glen Santander: It's a sort of next year, right? I think you have almost 1.8 billion that needs to be renegotiated the end of the year, which you're replacing 3.7% cash. And so, nothing I want to want you to talk about next year at all, but as I think about

James Lucania: And so, not that I want to want you to talk about next year at all. But as I think about, you know, the yield curve, like investors are, you know, continuously, you know, concerned about the decline in rates. And so, it seems like where you sit right now that your yield on your custodial revenue shouldn't really move that much given that the five years of 364. And even with the benefit of enhanced rates, you'd obviously get another 75 basis points on top of that. I might be thinking about all that kind of correctly. I think that I'll punt to Jim. The only part that you lost me a little bit on was the rate at which the rate that that cash is currently earning that we're going to play.

Speaker Change: You know, the yield curve like investors are, you know, continuously, you know, concerned about the decline and rates and so.

Jon Kessler: HSA members grew 15% from strong HSA sales and closing the final tranche of benefit wallet, strong HSA growth drove total accounts up 9%, HealthEquity ended Q2 with over 16 million total accounts, including 9 million HSAs, holding $29 billion in HSA assets. HSA assets overall increased $2.2 billion in the quarter and, of course, $6.3 billion year-over-year, and we grew the number of our HSA members that invest faster than accounts, in fact, by 24% year-over-year, helping to drive invested assets up 43% year-over-year to over $13 billion.

Speaker Change: It seems like where you sit right now, that your yield on your custodial revenue shouldn't really move that much, given that the five years of $364 and even with the benefit of enhanced rates, you'd obviously get another 75 basis points on top and out of my thinking about all that kind of correctly.

Speaker Change: I think that I'll put on to Jim, the only part that you lost me a little bit on was the rate at that cash is currently earning.

James Lucania: Yeah, that's right. Yeah, yeah, so I think that was the remainder of this year. Yeah, you're right, Glen, yeah. So mid kind of mid threes is going to reprise at mid threes plus a spread. You know, so there's some tailwind to that number and heading into next year. But obviously, yes, that that is dwarfed by the potential tailwind of the next couple of years, you know, about six and a half billion over the next two fiscal years. That's currently priced in the high ones. Right. And that, you know, you can look at the forward curves as as well as we can, you know, if it's three and a half plus that spread, that's that's still a great that's still a great number when we're rolling off at 1.9%.

Jim: Yeah, that's right. Yeah, yeah, so well this I think that was the this the remainder of this year. Yeah, you're right Glenn. Yeah, so mid kind of mid three is going to reprise at mid three's plus a spread, you know, so there's there's some some tailwind to that number and heading into next year, but obviously, yeah, that that

Jon Kessler: Turning to sales, Team Purple added 187,000 new HSAs from sales in the quarter, 20% more than Q2 of last year, resulting in a record first half for our sales and relationship management team, and we remain very positive about this year's selling season. Beyond the organic growth in HSAs, we reported in June that the team had transitioned. The last of three tranches of benefit wallet at the start of Q2 adding approximately 216,000 HSAs and 1.0 billion of HSA assets in the second quarter.

Jim: is dwarfed by the potential tailwind of the next couple of years, you know, about six and a half billion over the next two fiscal year. That's currently priced in the high ones.

Glenn: Right, and that, you know, you can look at the forward curves as well as we can, you know, if it's three and a half plus that spread.

Glenn: That's still a great number when we're rolling off at 1.9%. And Jim, did I miss the split on enhanced rates this quarter? Because I know that number has been climbing every quarter. And should we think about the volatility of rates having any greater or lesser effect?

James Lucania: And Jim, did I miss the split on enhanced rates is quarter because I know that number's been climbing every quarter, and should we think about the volatility of rates having any greater or lesser effect based on the continued shift towards enhanced rates. Yeah, no, yeah, we have not, we've not provided a number other than, you know, we told you our goal is to get to 30% at the end of last fiscal year, which we achieved. And we guided to trying to get to 60% over our three-year double non-GAAP net income per share objective, and we're well on track there.

Jon Kessler: The timely completion of transferring HSAs and assets from benefit wallet, for which I thank the team and our clients and our partners at benefit wallet greatly, has opened up opportunity for CDB cross sales into FY26, and locked in strong custodial yields on these assets for years to come. That is good. Thank you. CDB account growth turned positive, with 1% year-over-year growth in Q2. Even though we haven't quite laughed, the final runoff of the extended life national emergency accounts, which will occur later this year.

Speaker Change: based on the continued shift towards enhanced rates.

Jim: Yeah, no!

Jim: No, yeah, we have not provided a number other than, you know, we told you our goal is to get to 30% at the end of last fiscal year which we achieved.

Speaker Change: and we guided to trying to get to 60% over our three-year double non-gap net-income per share objective and we're well on track. There, obviously, those are going to be a little lumpy. It's not going to be a straight line. It's going to move based on when cash is deployed, but we feel really good about that objective to getting to about 60% by the time of our objective.

James Lucania: Obviously, those are going to be those are going to be little little lumpy. It's not going to be a straight line. It's going to it's going to move based on when cash when cash is deployed. But, but we feel really, really good about that objective to getting to about 60% by the time of our objective. And no, they create any extra volatility, right? Like the whole, the whole one of the benefits of moving to enhanced rates, it should reduce volatility over time. Yeah, okay.

Jon Kessler: CDB sales into the plan year beginning January 1 also look very robust. Results this quarter also represent a down payment on the multi-year 3D strategy, that's 3Ds, we discussed at investor day, and each of the Ds represents kind of a transformation within the company. The first D which is delivering remarkable experiences is about the digital transformation of service delivery. In Q2, the team delivered year-over-year service expense on 9% total account growth.

Speaker Change: And though that's interesting to create any extra volatility, right, like the whole one of the benefits of moving to enhance rates, it should reduce volatility over time.

Unknown Executive: Thanks very much. Thank you.

Sean Dodge: The next question is from Sean Dodge with RBC Capital Markets. Please go ahead.

Speaker Change: Thank you very much. The next question is from Sean Dodge with RBC Capital Markets. Please go ahead.

James Lucania: Yeah, thanks.

James Lucania: I Good afternoon. Maybe just on the guidance, if we look at we all did in the quarter revenue, even to EPS wise, all of those came in well, I had a consensus. But the magnitude of the adjustment in the guidance for the four year was a lot less than this Q2. Beater or upside that we saw. Are there some one-time items that we should be aware of in Q2 that won't necessarily flow into the back half of the year, or where there's something else that kind of explains this difference between the Q2 upside and the guidance adjustment.

Jon Kessler: That's really good. A new mobile app launched, continuing our rollout of claims AI, and last month, in August, I can't believe that's last month. It seems like it was just two days ago. Our card processor migration ramped up. Thank you team for that, which enables stat cards on major digital wallets and next year instant card issuance, which I'm really excited about. The second D deepening partnerships is about the digital transformation of sales and the deepening of our partnerships around the health benefits.

Sean Dodge: Yeah, thanks. Good afternoon. Maybe just on the guidance. If we look at, we all did in the quarter revenue, EBITDA, EPSY, all of those came in well ahead of consensus.

Speaker Change: It would be the main issue of the adjustment in the guidance for the four years of a lot less than

Speaker Change: Then this Q2

Speaker Change: Peter or upside that we saw are there some one-time items that we should be aware of in Q2 that won't necessarily flow into the back half of the year or there's something else that kind of explains this difference between the Q2 upside and the guidance that Joss might.

James Lucania: Yeah, yeah, thanks for that for that question. Yeah, look, I think the first point is that I think the consensus is probably a little bit conservative on the Q2 side. So that sort of quarterly phasing of our prior guidance didn't quite align with our internal expectations. But if we think about it, about 10 million of upside for the year versus our expectations is kind of how we would think about it. And then offset by about a $5 million movement in the other direction based on the downward shift in the forward rate curves for the back half of the year.

Jon Kessler: Co-System. In addition to record HSA openings and strong CDB results, the team continued work towards scaling partner facing APIs with a new third party developer portal, it's coming, it's coming a little later this year, maybe in the third quarter, I think the third quarter. The team just try and transcribe that. The team also expanded our stable of blue chip enhanced rates partner speaking of partners to keep up with adoption of enhanced rates, especially by new HSA members.

Speaker Change: Yep, yeah thanks for that question.

Joss: Yeah, look, I think the first point is that I think

Joss: The consensus is probably...

Speaker Change: A little bit conservative on the Q2 side, so that's sort of quarterly phasing.

Speaker Change: of our prior guidance, did quite a line with our internal expectations. You know, but if we think about it,

Speaker Change: About 10 million of upside for the year versus our expectations is kind of how we would think about it. And then offset by about a $5 million dollar.

Jon Kessler: The third D, driving member outcomes is about extending health equities differentiation as a utilization accelerator, not only of health accounts and health savings, but of our partners' health benefits point solutions more broadly, something we've been doing for a long time, and we're now in a position to do even more of. One of those outcomes that doesn't get talked about enough actually though is dignity. And this morning, we announced the formal launch of HPAs, yeah, HPAs or HPAs, HPAs, spelled HPA across the S. A no interest and no fee option for employees to pursue medical care with flexible payment terms.

Speaker Change: Movement in the other direction based on the downward shift.

James Lucania: And where does that $5 million come from? It's not really materially driven by the maturity schedule that we just talked about on the prior question. It's really driven by the floating rate component of HSA cash, of which there was about 600 million at the end of the quarter. 800 and change million of client health funds. These are placed in short-term deposits. And then a little bit of the placement in the back half of the year, there's 2 billion to be placed replaced in the second half of the year. Obviously, those will be replaced that slightly lower dollars than the 90 day ago guide would have hinted.

Speaker Change: in the forward break curves for the back half of the year. And where does that 5 million come from? It's not really materially driven by the maturity schedule that we just talked about on the prior question. It's really driven by the floating rate.

Speaker Change: Components of HSA cash, of which there was about 600 million at the end of the quarter, 800 and change million of client help funds. These are placed in short-term deposits.

Jon Kessler: Your credit score should not influence your access to care. This is a way for employers to make that happen. A version of it already was put into law for Medicare Part D recipients and the commercial market employers should have it and we're bringing it to them and we're really excited about it. All this adds up to a quarter of investment and promise for the future within the envelope of robust growth in the present in terms of health equities top line, its margins, in its cash flow from operations, as Jim is about to detail.

Speaker Change: and then a little bit of the placement in the back half of the year, there's 2 billion 2B placed.

Speaker Change: Replace in the second half of the year, obviously those will be replaced at slightly lower dollars than the 90-day ago guide.

James Lucania: So we think of it sort of in that in that manner where we're achieving better than our expectations across the three revenue lines to the magnitude of about 10 million bucks. And then offset by the $5 million shift in rate. Thanks.

Speaker Change: would have hinted. So we think of it sort of in that manner where we're achieving better than our expectations across the three revenue lines.

Speaker Change: to the magnitude of about 10 million bucks and an offset by the $5 million shift in rates.

James Lucania: Jim, thank you, John.

Unknown Executive: Okay, very helpful. Thank you again.

James Lucania: Hi everyone, I will briefly highlight our fiscal second quarter gap and non-gap financial results. As always, we provide a reconciliation of gap measures to non-gap 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 2024-10K, both for fiscal 24 and fiscal 25 for comparison. Second quarter revenue increased 23% year-over-year. Service revenue was $116.7 million, up 4% year-over-year.

Stanislav Berenshteyn: The next question is from Stan Berenshteyn with Wells Fargo. Please go ahead.

Speaker Change: Okay, very helpful. Thank you again.

Speaker Change: The next question is from Stan Burntstein with Wells Fargo, please go ahead.

Jon Kessler: Alright, thanks for seeing my questions. Jon, you clothe out flat services margins on 9% top line growth within services. Can you just unpack for us the leverage mechanisms there?

Stan Burntstein: Hi, thanks for taking my questions

Stan Burntstein: John, you called out flat services margins on 9% top-line growth with services. Can you just unpack for us the leverage mechanisms there? Is this just a function of...

Jon Kessler: Is this just a function of automating chat communications? Any stats on progress on that you can give for us? That'd be helpful. Thanks. Yeah, I mean, first it's not flat margins. It's flat cost. Yeah.

Speaker Change: Automating Chat Communications.

Speaker Change: Um, any stats on progress or not you can give for us that be helpful. Thanks. Yeah, I mean, first it's it's not flat margins. It's flat caught off. Yeah.

Jon Kessler: I mean, I hesitate to say maybe let's not all get so used to. But, you know, and if you look at, you know, this, this thing called service grows margin, which isn't really a thing for us, but nonetheless, Jim's giving his thumbs down. But you know, that number has, you know, gone quite a bit year by year. But in any event, so what caused that? The first answer is the first answer to your question is yes. So broadly speaking, what we have tried to do is to be somewhat ahead of the curve on our investments in, you know, particularly, you know, digitization, where we're gender, they are ultimately plays a role.

Speaker Change: I mean, I hesitate to say, maybe let's not all get so used to, but if you look at, you know, this thing called service grows margin, which isn't.

James Lucania: Reflecting growth in total accounts, HSA investor accounts and invested assets and lower average unit service revenue due to mixed shift toward HSAs. Costodial revenue grew 50% to $138.7 million in the second quarter. The annualized interest rate yield on HSA cash was 3.1% for the quarter as a result that the benefit wallet placements and continued mixed shift to enhance rates. Interchange revenue grew 14% to $44.5 million, notably faster than account growth, as members drive more payment activity to card than from cash reimbursement.

James: Really a thing for us, but nonetheless, the James giving his thumbs down, but you know, that number has gone quite a bit, you're a beer.

Speaker Change: But in any event, so what caused that?

Speaker Change: The first answer is the first answer to your questions, yes.

Speaker Change: So, broadly speaking, what we have tried to do is to be somewhat ahead of a curve on...

Speaker Change: are investments in, you know, particularly, you know, digitization where we're gender-they-i ultimately plays a role.

Jon Kessler: And as we've said in the past couple of quarters, it's kind of working, and you can see that in things like you're, you know, you just, just, you know, month after month, quarter after quarter, you know, you're with the people who do, we don't like this term, but it is a term of art. You know, in the call center world, we'll talk about avoidance rates. You know, that's, you know, a member whose needs are handled electronically. And look, we're, we've still got investment to make that will make this better. It's, it's nice to see, for example, you know, there are, they're competing different, you know, clouds out there are competing AIs, there's Einstein from Salesforce, and there's, you know, and CCAI from Google, and they, they have their place in all of this.

James Lucania: Growth profit as a percent of revenue was 68% in the second quarter this year, up from 62% in the second quarter last, last year. Net income for the second quarter was $35.8 million, or $0.40 per share on a gap EPS basis. Our non-gap net income was $76.3 million, or $86 per share, versus $0.53 per share last year. Adjusted EBITDA for the quarter was $128.3 million, up 46% compared to Q2 last year, and adjusted EBITDA as a percentage of revenue was 43%, a 650 basis point improvement over the same quarter last year.

Speaker Change: and as we've said in the past couple of quarters, it's kind of working and you can see that in.

Speaker Change: Things like your, you know, just, just, you know, month after month, quarter after quarter, you know, you're, what the people who do, we don't like this term, but it is a term of art you do in the call center world, we'll talk about avoidance rates.

Speaker Change: You know, that's a member whose needs are handled electronically and we've still got investment to make that will make this better.

Speaker Change: It's nice to see, for example, you know, they're competing, you know, clouds out there, competing AI, there's Einstein from Salesforce and there's

James Lucania: Turning to the balance sheet, as of quarter end July 31st, 2024, cash on hand was $327 million, as we generated $174 million of cash flow from operations in the first half of fiscal year 25, and used $200 million of cash for the benefit wallet acquisition. The company had $1.1 billion of debt outstanding net insurance costs, including $225 million drawn on our line of credit in connection with the benefit wallet acquisition. As was reported, in an 8K filing last month, post Q2, we refinanced and consolidated our credit facilities, retiring the term loan A and amending and extending the revolving credit facility. The new facility extends maturities to 2029 and provides additional flexibility in terms and conditions commensurate with the company's enhanced scale and credit quality.

Speaker Change: and CCAI from Google and they each have their place in all of this.

Jon Kessler: But the second thing that, you know, as I look forward, Stan, another factor that's kind of also in the vein of digitization, it's going to start helping us out as we go into the second half of the year, particularly. And then in the next year is, and I mentioned this in my comments, is the fact that we've completed our processor transition, and we're going to have more digital issuance on the cards. Ultimately, we've talked about getting to an instant issuance as a default. The value of that is that it cuts off some of that, you know, hump at the end of the year of expense.

Speaker Change: but the second thing that, you know, as I look forward, Stan, another factor that's kind of also in the vein of digitization.

Stan Burntstein: that's going to start helping us out as we go into the second half of the year, particularly, and then in the next year is...

Stan Burntstein: and I mentioned this in the comments.

Stan Burntstein: The

Stan Burntstein: Um...

Stan Burntstein: Fact that we've completed our process or transition, and we're going to have more digital issue in some of the cards.

Stan Burntstein: Ultimately, we've talked about getting to an instant issuance as a default.

Stan Burntstein: The value of that is that it cuts off some of that hump at the end of the year of expense. We won't get there this year and we never said we would, but at least we've got all the infrastructure in place.

Jon Kessler: We won't get there this year, and we never said we would, but at least we've got all the infrastructure in place.

Jon Kessler: And so I think there's a long, still a very long way to go here. But again, if I, you know, the number that I kind of look at or is that terrible term, but, you know, you look at your avoidance rates, they keep going up. And then you look at the satisfaction of members who are utilizing these services where we are deploying them, and we're not deploying them where they, you know, don't think they'll be satisfactory at this point. And the CSATs and the like remain quite high. So I think this progress is particularly noteworthy in a quarter where we had plenty of stuff.

Speaker Change: I think there's a long way to go here, but again, if I, you know, the number that I kind of look at or is that, it's a terrible term, but

James Lucania: Today's fiscal 2025 guidance reflects the carry forward of our strong sales trajectory, operational efficiencies resulting from our technology investments, and recent changes in interest rates markets. We expect revenue in a range between $1.165 and $1.185 billion. Gap net income in a range of $94 to $109 million, or $1.5 to $1.22 per share. We expect non-gap net income to be between $265 and $280 million, or $2.98 and $3.14 per share based upon an estimated $89 million shares outstanding.

Speaker Change: You know, you look at your avoidance rates, they keep going up, and then you look at the satisfaction of members.

Speaker Change: who are utilizing the services where we are deploying them, and we're not deploying them where.

Speaker Change: They, you know, we don't think they'll be satisfactory at this point and the C-Sats and the like remain quite high so I think this this progress is particularly know where the in a quarter where we have plenty of stuff to deal with.

Jon Kessler: to deal with. Thanks.

Jon Kessler: Let me just a quick one on the third party developer platform. Any ideal kind of use cases we can expect to emerge from that? Thank you. Yeah, I mean, the easiest ones are, I'll just say, are things that we already support today, but just not in a scalable way. Right? So, you know, balances and recent transactions and the like going out and some other stuff coming in.

Speaker Change: Thanks. Let me just a quick one on the third party developer platform. Any idea what kind of use cases we can expect emerge from that?

James Lucania: Finally, we expect adjusted EBITDA to be between $458 and $478 million. We expect the average yield on HSA cash will be approximately 3.05% for fiscal 25. As a reminder, we base custodial yield assumptions embedded in guidance on projected HSA cash deployments and rollovers, the schedule of which is contained in today's release. An analysis of forward looking market indicators such as the secured overnight financing rate and mid-duration treasury forward curves. These are of course subject to change and not perfect predictors of future market conditions.

Speaker Change: Yeah, I mean the easiest ones are, I'll just say, or things.

Speaker Change: that we already support today, but just not in a scalable way, right? So, you know, balances and recent transactions and the light going out and some other stuff coming in. You know, this is going to help us do that stuff, but I think the more interesting opportunities.

Jon Kessler: You know, this is going to help us do that stuff, but I think the more interesting opportunities, you know, are over time and not so much over time. Some of them are here right now are, for example, API-based enrollment is a really great example where it's, again, that's why this is about broadening our sales reach is you've got partners where they want to do member enrollment. And in some cases, even client enrollment on their side of the fence. And we can offer that as a service, you know, through an API debt portal. That's pretty good.

Speaker Change: You know, are over time and not so much over time, some of them are here right now, our, for example, um...

Speaker Change: API-based enrollment is a really great example where it's, again, that's why this is about broadening our sales reach.

Speaker Change: You've got partners where they want to do membrane rolement and in some cases you've been client enrollment on their side of the fence and we can offer that as a service.

James Lucania: Our guidance also includes the expected impacts of our now completed benefit wallet HSA 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 draw down a corporate cash to fund the acquisition. Our guidance also includes the commencement of share repurchases as part of the $300 million repurchase authorization announced today.

Jon Kessler: So a lot of the things we're looking at here are really about, again, the building of, you know, the sort of the lack bedroom, you know, continuing to build off of what's always been our differentiation, and that's been in partnerships. And the value we can bring to partners, just as they bring value to us.

Speaker Change: So a lot of the things we're looking at here are really about, again, the building of the sort of the gap that's here.

Speaker Change: Continuing to build off of what's always been our differentiation and that's been in partnerships. And the value we can bring to partners just as they bring value up.

James Lucania: We expect both to return capital to shareholders and reduce revolver borrowings in the remaining two quarters of the fiscal year. With our new revolver and continuing strong cash flows, we will maintain ample capacity for portfolio acquisitions should they become available. We assume a non-gap 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 now project a gap tax rate for fiscal 2025 at about 25% as well.

Unknown Executive: So, those are the kinds of things I think that I find particularly near-term exciting. And I would expect that, you know, within some amount of time measured in months rather than years, that we'll see the first of those enrollment type API things come online. Great.

Speaker Change: Those are the kinds of things I think that I find particularly near-term exciting and I would expect that, you know, within some amount of time measurement months rather than years that we'll see the first of those enrollment type API things come online.

Unknown Executive: Thank you. Thanks, Stan.

Alan Lutz: The next question is from Alan Lutz with Bank of America. Please go ahead. Good afternoon, and thanks for taking the questions.

Speaker Change: Great, thank you.

Speaker Change: Thanks Dan. The next question is from Alan Letts with Bank of America. Please go ahead.

James Lucania: I want to follow up on Stan's question around the service gross margin. All the commentary on the digitalization is helpful here. And obviously, you know, going back to the investor, the commentary there.

Alan Letts: Good afternoon, and thanks for taking the questions. I want to follow up on Stan's question around the service gross margin. All the commentary on the digitization is helpful here, and obviously, you know, it's going back to the investor aid, the commentary there.

James Lucania: As we have done in previous reporting periods, our full fiscal 2025 guidance includes a reconciliation of gap to the non-gap 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-gap net income, the revenue generated from those acquired and intangible assets is included.

James Lucania: How should we think about the service gross margin over the course of the remainder of the year. And then I guess a higher level question. How should we think about the incremental service cost now that you started to put in these cost mitigation efforts on new members moving forward.

Speaker Change: How should we think about the service gross margin over the course of the remainder of the year? And then I guess a higher level question, how should we think about the incremental service costs? Now that you've started to put in these cost mitigation efforts on new members moving forward. Thanks.

Operator: 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 than one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. To assemble our roster.

James Lucania: Thanks. I'll give a start. You can start off. I would just say that there will still be the same seasonality that we always have. We have not gotten rid of that. That, you know, second half hump of expense, which, as I've said a number of times, really comes down to the fact that you're enrolling new people, but I think in particular is around the delivery of cards and the like to those individuals. And so, you know, we didn't say we'd get rid of that this year, and we won't. But, and the proof of that is that we're starting, you know, our ramp up now for that in terms of hiring and the like.

Speaker Change: We don't, I'll give a story. You can start over. I was just a, there will still be the same seasonality that we always have. We have not gotten rid of that.

Speaker Change: that, you know, second half pump of expense.

Speaker Change: which, as I've said, a number of times really comes down to the fact that you're enrolling new people, but I think in particular is around the delivery of carts and the like to those individuals. And so, you know, we didn't say we would get ready to that this year and we won't. But, and the proof of that is that we're starting, you know, our ramp up now for that in terms of hiring and the like.

Anne Samuel: Our first question is from Anne Samuel with J.P. Morgan. Please go ahead. Hi, thanks for the question and congrats on a great quarter.

James Lucania: But over time, that can have a significant impact. And maybe beyond that, you can. The question was really about the rest of this year. You can kind of speak to it. Yeah, no, I think that's, I think that's right. It's going to be hard to keep costs flat in perpetuity, especially because we do absorb, absorb real costs, right. And John talked about what's the potential future value of digital and issuance and instant issuance, right. The postal service in July increased cost by seven and a half percent. Right. So, every one of those card mailings now costs seven and a half percent more than it did last last month.

Speaker Change: But over time, that can have a significant impact and maybe beyond that, the question was really about the rest of this year.

Jon Kessler: I was hoping you could provide a little bit more detail on the launch of your health payment accounts and maybe how to think about how those might contribute to the P&L and is that going to be part of your selling season this year? Let me just start with the longer term and work our way back to the short term. What this product really does is intended to assure that when people, particularly those who are in employer-based health plans, but the product also works for plan-sponsored individual plans, if there's demand there.

Speaker Change: Yeah, I think that's right. It's going to be hard to keep.

Speaker Change: Cosphlact in perpetuity, especially because we do absorb real costs, right? And Jon talked about what's the potential future value of digital issuance and instant issuance, right? The Postal Service in July increased cost by 7.5%.

Jon: Right? So, every one of those card maillings now costs 7.5% more than it did last month. So, the potential future value of all these investments is that...

James Lucania: Right. So, the potential future value of all these investments is that inflation avoidance, right. And the people in the service center call avoidance doesn't mean. No Service People. It actually means highly skilled service people handling the most complex calls, not handling the annoying, I lost, I forgot my password, I lost my card. Like all of that, all of that can be handled digitally. So I think I'm just going to reiterate what I've said over and over each quarter. Our objective every quarter is to drive down the unit cost to serve an account. Now, we're doing that at a product level.

Speaker Change: Inflation of Oedens, right, and the people in the service center call of Oedens doesn't mean

Jon Kessler: But when folks are going to pay their out of pocket expenses, their ability to get care at that point really shouldn't be limited by their credit limit or credit score. It's just not the right answer in our view. The product gives employers and health plans a very cost effective way to get to avoid that. My view is that this will have relatively broad applicability out there, both to people who might be using HSAs or the other health accounts but also to the broader population including those that don't.

Speaker Change: No service people, it actually means...

Speaker Change: Highly skilled service people handling the most complex calls, not handling the annoying, I forgot my password, I lost my card, all that, all that can be handled digitally.

Speaker Change: I'm just going to reiterate what I've said over and over each quarter, our objective, every quarter, is to drive down the unit cost to serve an account.

James Lucania: You guys can see that across the aggregate level, but both of those remain true. We're trying to drive down the cost to serve each account each year. And it's going to be many, many, many levers to pull to get there.

Speaker Change: Now, we're doing that at a product level. You guys can see that across the aggregate level, but both of those remain true. We're trying to drive down the cost to serve each account.

James Lucania: But, but yeah, I think this is a particularly strong quarter in a really, really strong first half keeping, keeping cost as flat as flat as we've done in the team, the team has done, done an amazing job.

Speaker Change: Each year. And it's going to be many, many, many levers to pull to get there. But yeah, I think this is a particularly strong quarter and a really, really strong first half keeping cost as flat as flat as we've done. And the team has done an amazing job.

Jon Kessler: And remember that even at market maturity, we don't expect that everyone's going to have an HSA, and so we think that over time, you know, this could be rather significant and the mid turn goal we've set, you know, kind of internally, is, and this is, and in my view, part of sort of establishing this as part of the benefits package that's standard, is, you know, we'd like to see within the next three, four years here, 1% of those in group coverage have access to this. That seems like a highly achievable goal.

Unknown Executive: Great.

Unknown Executive: Thanks, Jim. Excellent.

Scott Schoenhaus: The next question is from Scott Schoenhaus with KeyBank. Please go ahead.

James: Good, thanks, James.

James: Thanks for watching!

Speaker Change: The next question is from Scott Showin' House with Keybank. Please go ahead.

Jon Kessler: Hey guys, thanks for taking my question. Just curious what drove the investment growth in this quarter? Was it from new accounts that you automatically were trying to push towards there? Just kind of want to talk about the dynamics on why you saw such a strong investment account growth?

Speaker Change: Hey guys, thanks for taking my question, just curious what drill the investment growth in this quarter was it from New Accounts that you automatically were trying to push towards there, just kind of want to talk about that dynamics on.

Jon Kessler: And then I have a second question on kind of the job market and all the recent data.

Speaker Change: White saw such strong investment account growth and then second question on kind of the job market and all the recent data, but that's my first question.

Jon Kessler: Now, so, you know, that seems fine for the relative, when your term and then go from there, so it's establishing something new that in a way is back to the past, when folks had, you know, HMO plans with little choice and whatnot, they typically, these costs were being covered in the same way, they were just in premiums. And, and so, you know, it's sort of in a way going back to that from a cash flow management perspective.

Jon Kessler: Sure. On the first question, I think certainly the rolling over transition of the benefit wallet account for the last tranche was helpful and that it gave us an opportunity to present a set of, from our perspective, a set of investment options that weren't all, weren't all available on the prior platform. And that was probably quite helpful. Generally, I think beyond that, as you well know, while we don't give people capital A advice on the allocation as between investments and HSA cash, as we call it, we nonetheless want, we're not shy about the fact that we think that investing is the right answer for long-term dollars.

Speaker Change: Sure, on the first question, I think certainly the rolling over in transition of the benefit wall of the count for the last tronch.

Speaker Change: It was helpful and that it gave us an opportunity to present a set of, from our perspective, a set of investment options that weren't all available on the prior platform and that was probably quite helpful.

Jon Kessler: The short term, with regard to obviously no impact in fiscal 25, we do anticipate a modest impact in fiscal 26 as observers of our release can see on this topic. There are clients of ours who have been testing out this product, including large ones. And with, with, in my mind, really good response, both in terms of the quantity and also, I think more importantly, the quality of how it's being used. And so, we, we do think there'll be a modest impact in 26, more significant impact as the thing catches on in 27 and 28.

Speaker Change: I think beyond that, you know, if you well know,

Speaker Change: We don't give people capital A advice on the allocation.

Speaker Change: as between investments and HSA cash, as we call it, we nonetheless want, you know, we're not shy about the fact that we think that investing is the right answer for long-term dollars.

Jon Kessler: And so, we continue to promote that, and one way that we are kind of, for lack of a better term, we're refining some of the digital outweigh strategies that we've used at open enrollment to be used year-round.

Speaker Change: and so on.

Speaker Change: and we continue to promote that and...

Speaker Change: You know, one way that we are, you know, kind of, for lack of a better term.

Jon Kessler: So, we'll, we'll certainly reflect that as we get to 26 guidance, but this is a good product. I mean, we've been thinking about how to do this. Steve, how long does it go back that we've been mucking around with products to solve this problem ten years? Maybe longer? Yeah, longer. I think 2008 is when we first started thinking about it, we had a large client that wanted them and then the world melted at the end of 2008.

Speaker Change: We're refining some of the digital outreach strategies that we've used at opening enrollment to be used year-round. That's, I guess, why I had to call the gauge 3-16.

Jon Kessler: That's why it's called the Gage 360.

Jon Kessler: That degrees are days, not sure, one or the other, maybe three, six, or five days off. Getting people at the right moment on this stuff is pretty valuable. As we've said many times, we think that the people who invest, the investment is sort of additive to, on the average, people's cash balances. And there's stickier customers; they hang around longer. They are, and they're doing the right thing for themselves and for the broader mission of the organization. So I think that was helpful. I mean, obviously, there were market gains during the quarter, though less so on July 31st and today, maybe not today.

Speaker Change: And I said degrees are days, I'm not sure it's one of the other, maybe 360, which is five days off, yeah, but, um, but, um,

Speaker Change: In all seriousness, and you know, getting people at the right moment on this stuff is pretty valuable, so we, you know, as we've said many times, we think that.

Jon Kessler: So, it's been, John, I think 16 years since we've been thinking about it. And, you know, when I practiced, it was heartbreaking to have patients come in and say they were delaying care because it couldn't afford their deductible. And, and we think the HSA is the best way to fund the deductible, but for people who are just getting started, these work great too. So, we'll start. Yep, exactly. Thanks for asking. We'll come across them a lot.

Speaker Change: The people who invest in the investment is sort of additive to, you know, on the average people's cash balances and the stick to your customers, they hang around longer, they are, and they're doing the right thing for themselves and for the broader mission of the organization. So...

Speaker Change: I think that was helpful. Obviously, they were marked against during the quarter, though less so on July 31st than today. Maybe not today. But so that played a role as well in terms of the growth there, but not to the number of it.

Glen Santangelo: The next question is from Glenn Santangelo with Jeffries. Please go ahead. Oh, yeah. Thanks for taking my question. Hey, John, I want to focus on the custodial rates a little bit. You know, as we look out to sort of next year, right? I think you have almost 1.8 billion that needs to be renegotiated at the end of the year, which you replace in 3.7% cash. And so, nothing I want to want you to talk about next year at all, but as I think about, you know, the yield curve like investors are, you know, continuously, you know, concerned about the decline and rates.

Jon Kessler: But so that played a role as well in terms of the growth there, but not to the numbers.

Glen Santangelo: And so, it seems like where you sit right now that you're yield on your custodial revenue shouldn't really move that much given that the five years of 364. And even with the benefit of enhanced rates, you'd obviously get another 75 basis points on top of that. I might thinking about all that kind of correctly. I think that I'll put a punch to Jim, the only part that you lost me a little bit on was the rate that that cash is currently earning.

Unknown Executive: Yeah, my follow-up, and that's really helpful, John. I appreciate it.

Jon Kessler: My follow-up is in, you know, what are you seeing right now in the market from the employer front from both HSAs and CEDs, given all the data that suggests we're in the early stage of a softening job market? Because your guidance contemplates further softening of the labor market from an asset growth perspective in the back half, just kind of get, want to get your thoughts here on all the data that we're getting. Yeah, I'll answer the last part of your question, and then ask Steve to comment on, you know, real time what's going on in the marketplace.

Speaker Change: Thank you for watching.

Speaker Change: Yeah, my follow-up and that's really helpful, Jon, appreciate it. My follow-up is in, you know, what are you seeing right now in the market from the employer front from both HSAs?

Speaker Change: and CEDs, given all the data that suggests we're in the early stage of a softening job market, because your guidance contemplates further softening of the labor market from an asset growth perspective in the back half. Just kind of get one of your thoughts here on all the data that we're getting.

Speaker Change: Yeah, I'll answer the last part of your question and then ask Steve to comment on real time what's going on in the marketplace.

Steve Neeleman: We generally try and take a, you know, in terms of constructing our guidance, take a kind of macro-neutral view. The truth is it's unlikely that any view we would take is going to have much impact on our guide, so it's not that hard to do, but, you know, that's kind of the way we approach it. You know, I'll just say, you know, generally, the view that we're hearing from clients in terms of their thinking about the macro is that, you know, one of the things you have is you have these extraordinarily low turn rates, and that's kind of impacting things in terms of the pace of new hiring and the like. But in any event, Steve, maybe you can talk about how, what you see in the market this year.

Steve: We generally try and take a, you know, in terms of constructing our guidance, take a kind of macro-neutral view.

Steve: The truth is it's unlikely that any view we would take is going to have much impact on our guide.

Glen Santangelo: Yeah, that's right. Yeah, yeah, so I think that was the remainder of this year. Yeah, you're right, Glen, yeah. So mid kind of mid-3s is going to reprise at mid-3s plus a spread. So there's some tailwind to that number heading into next year, but obviously, yes, that is dwarfed by the potential tailwind of the next couple of years, about six and a half billion over the next two fiscal years. That's currently priced in the high ones and that you can look at the forward curves as well as we can.

Steve: So...

Steve: It's not that hard to do, but that's kind of the way we approach it.

Steve: I'll just say generally the view that we're hearing from clients in terms of their thinking about the macro is that one of the things you have is you have these extraordinary low turn rates and that's kind of...

Steve: Impacting things in terms of the pace of new hiring and the like, but in any event Steve, maybe you can talk about what you see in the market this year.

Steve Neeleman: Sure. Thanks, Scott. You know, not by design, but by happenstance, we have our pattern weekly cell subtle this morning, so I got to listen in as I typically do, and, you know, there, I can tell you there's a lot of enthusiasm among our, our cells team. We had a nice quarter, and we're getting into the second half of the year, which is when, you know, we really get after it, and they're getting after it, which is exciting. I mean, you know, I think that one of the things we've seen, we've been through several cycles now: health equity, I mean, even going back to the 2008 downturn and others, and, you know, we do, we are protect a little bit because when the job markets often, you know, we don't like it.

Glen Santangelo: And if it's three and a half plus that spread, that's still a great number when we're rolling off at 1.9%. And Jim, did I miss the split on enhanced rates this quarter because I know that number's been climbing every quarter and should we think about the volatility of rates having any greater or lesser effect based on the continued shift towards enhanced rates? Yeah, no, yeah, we have not provided a number other than, you know, we told you our goal is to get to 30% at the end of last fiscal year, which we achieved.

Steve: Sure, thanks Scott. You know, not by design, but by having stands we have our how-to-weekly cell-tuttle this morning. So I got to listen to this, I typically do.

Speaker Change: You know, I can tell you there's a lot of enthusiasm among our ourselves team. We have a nice quarter and...

Speaker Change: We're getting into the second half of the year, which is when we really get after it and they're getting after it, which is exciting.

Speaker Change: I think that one of the things we've seen, we've been through several cycles now, health equity. I mean, even going back to the 2008.

Speaker Change: Down Turn, and others, and...

Glen Santangelo: And we guided to trying to get to 60% over our three-year double non-gap net income per share objective and we're well on track. There, obviously, those are going to be a little lumpy. It's not going to be a straight line. It's going to move based on when cash is deployed. But we feel really good about that objective to getting to about 60% by the time of our objective. I know that if they create any extra volatility, right, like the whole the whole one of the benefits of moving to enhanced rates, it should reduce volatility over time. Yeah, okay. Thanks very much. Thank you.

Speaker Change: You know, we do, we are a project a little bit because when the job market's softens, you know, we don't like it, but when it's softens we do have employers that say, look, we need to, again, kind of, take a look at our...

Steve Neeleman: But when it went softens, we do have employers that say, look, we need to again, kind of take a look at our, our costs, what's the best and most efficient way to have people get really good benefits by, but still save some money for them on their premiums and also save some money for the employer and premiums and ultimately trend. And it all comes back to these consumer directed plans, CDVs with HSAs being kind of in a poll position. So, look, there's a lot of enthusiasm. We continue to expand our distribution partner base. We're doing a really, really good job of integrating all of the new plans that we've been able to bring into the health equity family through the acquisitions and things like that.

Speaker Change: are our costs, what's the best and most efficient way to have people get really good benefits by, but still, say so many for them on their premiums and also say so many for the employer on premiums and ultimately trend and it all comes back to these consumer drifted plans.

Speaker Change: CDVs with HSA's being kind of in the pull position. So I look, there's a lot of enthusiasm. We continue to expand our distribution partner base. We're doing a really, really good job of integrating all of the new plans that...

Sean Dodge: The next question is from Sean Dodge with RBC capital markets. Please go ahead. Yeah, thanks.

Steve Neeleman: So, I would say that if you were to ask health equity cells or a team member on the cell team, they would say, look, I'm as excited now as ever have been, despite some of the, you know, things that you're in redevelopment.

Speaker Change: We've been able to bring into the health equity family to the excistions and things like that. So I would say that if you were to ask health equity cells or a team member on a cell team, they would say, look, I'm a success now. I've ever had been despite some of the things that you're in redevelopment.

Unknown Executive: Good afternoon. Maybe just on on the guidance, if we look at what you all did in the quarter revenue, EBITDA, EPS wise, all of those came in well ahead of consensus. But the magnitude of the adjustment in the guidance for the four years, a lot less than this Q2 beater or upside that we saw. Are there some one time items that we should be aware of in Q2 that won't necessarily flow into the back half of the year?

Unknown Executive: Thank you.

David Larson: The next question is from David Larson with BTIG. Please go ahead.

Speaker Change: Thank you.

James Lucania: Hi, congratulations on the great quarter. What are the total dollars invested in the enhanced rates product now? And I'm assuming that that's in the investment bucket, not the cash bucket, is that correct?

Speaker Change: The next question is from David Larson with BTIG, please go ahead.

David Larson: Hi, congratulations on the great quarter. What are the total dollars invested in the enhanced rates of products now? And I'm assuming that that's in the investment bucket, not the cash bucket, is that correct?

Unknown Executive: Or is there something else that kind of explains this difference between the Q2 upside and the guidance adjustment? Yeah, thanks for that question. Yeah, look, I think the first point is that I think the consensus is probably a little bit conservative on the Q2 side. So that sort of quarterly phasing of our prior guidance didn't quite align with our internal expectations. But if we think about it, about 10 million of upside for the year versus our expectations is kind of how we would think about it.

James Lucania: The other way around, it's in the HSA cash bucket because it behaves like cash in the sense that it is a principal guarantee, in this case, by private insurer, rather than by the FKFC, and second, that you can swipe your card and go get it, which you can't do with investments. So, we have, roughly, since my FIF, I have this right, a little under 16 billion in an HSA cash, over, a little over, a little over, is left in a billion, that's good. And our goal is to see how it's starting 13 and 29. That's all I could do.

Speaker Change: The other way around, it's in the HSA cash bucket because it behaves like cash in the sense that it is...

Speaker Change: Principal Guaranteed, in this case, by private intro, rather than by the FKFC, I'm in second that you can swipe your card and go get, which you can't do with investments.

Speaker Change #100: So, we have roughly, this is my, if I have this right, the 116 billion in nature sake action. Our over, little over, little over, little over 60 billion in that's good.

Unknown Executive: And then offset by about a $5 million movement in the other direction based on the downward shift in the forward rate curves for the back half of the year. And where does that $5 million come from? It's not really materially driven by the maturity schedule that we just talked about on the prior question. It's really driven by the floating rate component of HSA cash, of which there was about $600 million at the end of the quarter, $800 and change million of client-help funds.

Speaker Change #101: and our goal is to see how we're starting 13 and 29, that's all I could do for some time.

James Lucania: But our goal at the end of this year is to be at 40 percent of our total being in enhanced rates. Our goal is to be 60 by the end of the total.

Speaker Change #101: Um...

Speaker Change #101: Our goal at the end of this year is to be at 40% of

Speaker Change #101: of our total being in enhanced rates.

James Lucania: I'm sorry, thank you. It's to be 60 percent within three years, or specifically in FI27, and sorry, my bad. And as Jim said in his commentary, you can kind of interpolate that. I would maybe just add the color that, as Jim said in his commentary, since it's a little bit lumpy as, to some extent, as cash contracts expire. As you can see, in our sheet there, that's a little forward-loaded into fiscal 26. And so, I think we'll make more progress in this year and next, and the last sprint in 27. So, we don't release a breakdown every quarter, but suffice it to say we're very much on track to meet that goal.

Speaker Change #102: Our goal is to reach 60 by the end of the tour. I'm sorry. Thank you. It's to be 60% within three years.

Unknown Executive: These are placed in short-term deposits. And then a little bit of the placement in the back half of the year, there's $2 billion to be placed in the second half of the year. Obviously those will be replaced at slightly lower dollars than the 90-day ago guide would have hinted. So we think of it sort of in that manner where we're achieving better than our expectations across the three revenue lines to the magnitude of about $10 million bucks and an offset by the $5 million shift in rate. Thanks. Okay, very helpful.

Unknown Executive: Thank you again.

Speaker Change #102: and or specifically in F-27, you know, and sorry about that. And as Jim said in his commentary,

Speaker Change #103: You can kind of interpolate that. I would, you know, maybe just at the color of that.

Jim: As Jim said in his commentary, it's a little bit lumpy as to some extent as cash contracts expire. You can see in our sheet there, that's a little forward-loaded.

Jim: in the fiscal 26th.

Jim: and so I think we'll get.

Speaker Change #104: You know, we'll make more progress in this year and next.

Speaker Change #104: and the last sprint in 2007. We don't release a breakdown every quarter, but suffice it to say we're very much on track to meet that goal. It may be Jim Newman.

James Lucania: Maybe Jim, you can clean up like this. Yeah, no, I think that's right. Obviously, we placed a good amount in enhanced rates with the benefit wallet cash coming in. So, we got a good head start on our progress towards that goal. Now, there's not a whole lot of cash being placed at this part of the year, so the mix doesn't really move that much. And as John said, towards the end of the year, we have a bunch of cash being placed. Towards the end of next year, we'll have a bunch of cash being placed, so it'll be quite lumpy, but we feel good about the trajectory to getting to that 60 percent goal.

Stanislav Berenshteyn: The next question is from Stan Berenshteyn with Wells Fargo. Please go ahead. Alright, thanks for saying my questions. Jon, you clothe out flat services margins on 9% top line growth within services. Can you just unpack for us the leverage mechanisms there? Is this just a function of automating chat communications? Any stats on progress on that you can give for us? That'd be helpful. Thanks. Yeah, I mean, first, it's not flat margins. It's flat cost. Yeah.

Jim Newman: and I think that's right, right obviously we are.

Jim Newman: We placed a good amount in enhanced rates with the benefit wallet cash coming in, so we got a good head start on our progress towards that goal. You know, now there's not a whole lot of cash being placed at this part of the year, so the mix doesn't really move that much. And as Jon said, as the towards the end of the year we have...

Jon Kessler: I mean, I hesitate to say, maybe let's not all get so used to. But, you know, and if you look at, you know, this thing called service grows margin, which isn't really a thing for us, but nonetheless, the Jim's giving his thumbs down. But, you know, that number has, you know, gone quite a bit. You're here. But in any event, so what caused that? The first answer is the first answer to your question is yes.

Jon: a bunch of cash being placed towards the end of next year. We'll have a bunch of cash being placed, so it'll be quite lumpy, but we feel good about the trajectory to getting to that, getting to that, that's a 60% goal.

James Lucania: Okay, so it would be 60 percent of the total, which is like 30 billion, so that would be around like the cash, sorry, sorry, no, no, of the cash. HSA cash only is percentage-enhanced rates, percentage-basic rates, and the investment totally separate. Yep, okay.

Speaker Change #106: Okay, so it would be 60% of the total, which is like 30 billion, so that would be around like- Of the cash, sorry, sorry, no, no, of the cash. HSA cash only is percentage and hand-straights, percentage-basic rates, and the investment totally separate.

James Lucania: And then, how much of that 16 billion is short-term in nature? Okay, yeah, so look at, I encourage you to take a look in the, in the queue, we have a breakdown of that 16 point. Four billion, I think, is what it is of how it reprises the remainder of this fiscal year, as well as the next three fiscal years, and then a big thereafter bucket. There is about 600 million of that cash that is in floating rate investments, so that, that will be pulled out of the charts. I think you'll see 15.8 is the total HSA cash that's outlined in a maturity schedule with interest rates, average interest rates for each of the years.

Speaker Change #107: Yep, okay, and then how much of that 16 billion is short-term in nature? Uh, okay, yeah, so look at me, I encourage you to take a look in the queue, we have a breakdown of that 16 point.

Jon Kessler: So broadly speaking, what we have tried to do is to be somewhat ahead of the curve on our investments in, you know, particularly, you know, digitization, where we're gender, they are ultimately plays a role. And as we've said in the past couple of quarters, it's kind of working. And you can see that in things like your, you know, you just, you know, month after month, quarter after quarter, you know, you're with the people who do, we don't like this term, but it is a term of art.

Speaker Change #108: For Billion, I think is what it is of how it reprises the remainder of this fiscal year, as well as the next three fiscal years and then a big thereafter bucket, there is about 600 million of that cash that is in floating rate.

Speaker Change #109: Investment. So that will be pulled out of the charts. I think you'll see 15.8 is the total HSA cash that's outlined in the maturity schedule with interest rates.

Jon Kessler: You know, in the call center world, we'll talk about avoidance rates. You know, that's, you know, a member whose, whose needs are handled electronically. And look, we're, we've still got investment to make that will make this better. It's nice to see, for example, you know, there are, they're competing different, you know, clouds out there or competing AIs. There's Einstein from Salesforce. And there's, you know, and CCAI from Google. And they, they have their place in all of this.

James Lucania: So we've got about 2 billion reprising in the remainder of this current fiscal year.

Speaker Change #109: Average interest rates for each of the years. So we've got about 2 billion repricing in the remainder of this current fiscal year.

Stephanie Davis: The next question is from Stephanie Davis with Barclays. Please go ahead.

Speaker Change #110: Thanks very much.

Speaker Change #110: Thank you Steve, 1.9 I think it works, yep

James Lucania: Hey guys and guests in the query. Thanks for taking my question.

Speaker Change #111: The next question is from Stephanie Davis with Barclays, please go ahead.

James Lucania: Can I be annoying and go back to that guidance question again? You may. See if you get a better answer. Here's open. Look, the implied second half margin implies a five-point step down from two key levels. And I get what you said. There's this five million delta on yield. But you raised your yield guidance. And when I look at that five point step down, it's a $30 million profit delta. Is that investments that are just of that scale that I didn't appreciate? Is there some conservatism baked in the numbers? What is getting the margin so much lower than the first out the year?

Speaker Change #112: Hey guys, I'm Jonathan the Korean thanks for taking my question. Can I get annoying and go back to like guidance question again?

Jon Kessler: But the second thing that, you know, as I look forward, Stan, another factor that's kind of also in the vein of digitization, it's going to start helping us out as we go into the second half of the year, particularly. And then in the next year is, and I mentioned this in my comments is the fact that we've completed our processor transition and we're going to have more digital issuance on the cards.

Speaker Change #113: You may, see if you get a battery answer? I think there's opening. Look, the implied second half margin implies a 5. stepped-down from 2Q levels and I get what you said there's this 5 million delta on the old.

Speaker Change #114: But you raised your yield guidance, and when I look at that 5.7-down, it's a 30 million dollar profit delta.

Speaker Change #115: Is that?

Speaker Change #116: Investments that are just about scale that I didn't appreciate. Is there something that there is in baking as a number? What is what is getting the margin so much lower than the first half of the year? Well, let me start with the one. We did not change our HSA yield.

Jon Kessler: Ultimately, we've talked about getting to an instant issuance as a default. The value of that is, is that it cuts off some of that, you know, hump at the end of the year of expense. We won't get there this year and we never said we would, but, but at least we've got all the infrastructure in place. And so I think there's a long still a very long way to go here. But again, if I, you know, the number that I kind of look at or is that terrible term, but, you know, you look at your avoidance rates, they keep going up, and then you look at the satisfaction of members who are utilizing these services where we are deploying them. And we're not deploying them where they, you know, we don't think they'll be satisfactory at this point. And the CSATs and the like remain quite high.

James Lucania: Well, I'd say let me start with the one. We did not change our HSA yield guidance. Right. So it's. We just still three points. We took off the bottom. Yeah, still three point still 3.05 versus the rate is 3.05, which I think are right. Definitely plan this question. Yeah. No, look, and I think there's a couple parts. So John alluded to, well, obviously, the yield. We are going to take that little bit of downward step with the interest rate curve moving down. I think that's back end weighted into the into the year. We talked about on the service side that yes, this was a fantastic service cost performance quarter, like, and John alluded to.

Speaker Change #116: Guidance.

Speaker Change #117: So it's still three points, we took off the bottom, yeah, still three points, still three point 05

Speaker Change #117: versus the Rita 3.05 which I've got her, all right. Definitely clearly planned this question. No, look and I think there's a couple of parts. So Jon alluded to, well obviously the yield.

Speaker Change #118: We are going to take that little bit of downward step with the interest rate curve moving down.

Speaker Change #119: I think that's back and waited into the year. We talked about on the service side that, yes, this was a fantastic.

James Lucania: So I think this progress is particularly noteworthy in a quarter where we have plenty of stuff. Thanks.

James Lucania: We can't count on that for every quarter into perpetuity. And I think we haven't talked a lot about the below gross profit cost as well. So I'll maybe preempt one of the questions coming is on the tech and dev spend. Right. So that tech and dev spend as percentage of revenue has come down pretty significantly. And more so than then we would like it to be. Right. So we have a little bit of timing of projects. Okay. That we're pushing out to the back half of the year. But you know, there's also quite quite some open positions in the tech and dev world that we would like to fill, and we are planning to fill in the back half of the year.

Unknown Executive: Let me just a quick one on the third party developer platform.

Jon: Service Cost Performance Quarter, like, and Jon alluded to, we can't count on that for every quarter into its perpetuity, and I think we haven't talked a lot about the...

Jon Kessler: Any ideal kind of use cases we can expect emerge from that? Thank you. Yeah, I mean, the easiest ones are, I'll just say are things that we already support today, but just not in a scalable way. Right? So, you know, balances and recent transactions and the like going out and some other stuff coming in.

Speaker Change #120: the below-growth profit costs as well, so I'll maybe pre-empt one of the questions coming is on the Tech-and-Dev spend, right? So that Tech-and-Dev spend as percentage revenue has come down pretty significantly and

Jon Kessler: You know, this is going to help us do that stuff, but I think the more interesting opportunities, you know, are over time and not so much over time. Some of them are here right now are, for example, API based enrollment is a really great example where it's, again, that's why this is about broadening our sales reach is you've got partners where they want to do member enrollment. And in some cases, even client enrollment on their side of the fence.

Speaker Change #121: More so than than we would like it to be.

Speaker Change #122: Right, so we have a little bit of timing of projects, okay, that we're pushing out to the back half of the year, but, you know, there's also quite quite some open positions in the tech and tech and dev world that we would like to fill and we are planning to fill.

James Lucania: So we talked about kind of peeking out at 22 ish percent of revenue is where we hit tech and dev last year. We said that's likely to be the high watermark as a percentage of revenue. We're sort of 20 ish right now, and that that's light. Right. So we've got to get, we're going to get that back to where to where we think where we think it should be.

Speaker Change #122: in the back half of the year. So we talked about kind of peeking out at that 22-ish percent of revenue is where we hit Tech and Dev last year. We said that's likely to be the high water mark as a percentage of revenue. We're sort of 20-ish right now and that's light.

Jon Kessler: And we can offer that as a service, you know, through an API debt portal. That's pretty good. So a lot of the things we're looking at here are really about, again, the building of, you know, the sort of the lack bedroom, you know, continuing to build off of what's always been our differentiation. And that's been in partnerships and the value we can bring to partners just as they bring value to us.

Speaker Change #123: Right, so we've got to get that back to where we think it should be.

James Lucania: So I was just going to go and harass more about the tech and dev spend. Well, so you talk about there's a lot of positions that you want to go install. So when I think about the cadence of your second half margin because that's hiring, is that going to be a more stable straight line down? Or are there any big pockets to call out where you're trying to do it in a more rapid fashion? Just giving that pretty big step still. Yeah, I'm not; I have to admit I'm not. The answer is I'm not true.

Speaker Change #124: So, what am I doing? Look into the lighting. I don't know how to go in.

Speaker Change #125: I was just going to go and harass more about the Tech & Dead stand.

Jon Kessler: So, those are the kinds of things I think that I find particularly near term. And I would expect that, you know, within some amount of time measured in months rather than years that we'll see the first of those enrollment type API things come online.

Unknown Executive: Great. Thank you.

Speaker Change #126: Well, you talk about there's a lot of stuff.

Speaker Change #127: and Physicians, we want to go and solve them. So, what I think about the cadence of your second half margin, because that's hiring, is that going to be a more stable, straight line down, or is there any big pockets to call out where you're trying to do it in a more rapid fashion?

Alan Lutz: Thanks, Dan. The next question is from Alan Lutz with Bank of America. Please go ahead. Good afternoon and thanks for taking the questions. I want to follow up on Stan's question around the service gross margin. All the commentary on the digitization is helpful here. And obviously, you know, going back to the investor A, the commentary there. How should we think about the service gross margin over the course of the remainder of the year? And then I guess a higher level question. How should we think about the incremental service cost now that you started to put in these cost mitigation efforts on new members moving forward? Thanks.

Speaker Change #128: Just give it up a pretty big step, so.

Speaker Change #129: Yeah, I'm not stepping up, I have to admit, I'm not, the answer is I'm not true.

James Lucania: I think that it's probably fair to say that it's, it's the fourth quarter is going to, you know, there's a little bit of ramp activity. What I would, my less financing version of what Jim said is, there's, we have projects, I mean, you can tell from some of the other commentary that are very high return projects that we want to be moving faster than they're moving. And that's reflected in the fact that that TND spend is a little bit, you know, for the first half is a little bit like, as Jim was saying, and we're going to fix that.

Speaker Change #129: I think.

Speaker Change #130: that it's probably fair to say that it's the...

Speaker Change #131: The fourth order is going to see there's a little bit of ramp activity, so what I would, my last fancy version of what James said is, there's...

Speaker Change #132: We have projects, and I mean, if you can tell from some of the other commentary, that are very high return projects that...

Speaker Change #133: We want to be moving faster than they're moving.

James Lucania: Yeah, we don't, I'll give a start. Yeah, you can start off. I was just a, there will still be the same seasonality that we always have. We have not gotten rid of that. That, you know, second half hump of expense, which as I've said a number of times really comes down to the fact that you're enrolling new people, but I think in particular is around the delivery of cards and the like to those individuals.

Speaker Change #133: and that reflected in the fact that

Speaker Change #133: That T&D spend is a little bit, you know, for the first half is a little bit light, as Jim was saying, and we're going to fix that. It doesn't mean we're going to exactly like make it all up. But we're going to get back to where we need to be. And the reason to be there is because the return of these things.

James Lucania: It doesn't mean we're going to exactly like make it all up. Yeah. But we're going to get back to where we need to be, and the reason to be there is because the return on these things. So, you know, whether it's in any event, so I think that's about, I think that issue alone is about a third of what you're talking about. The second issue, of course, is that above the gross margin line, we're going to have service expense in Q3 and Q4 like we always do. Right. And, you know, that's probably another third of that, you know, and I'm going to say, you know, then you just, we took the 5 million that we took off is all drops the bottom line.

Speaker Change #134: So, you know, whether it's in any event. So, I think that, I think that issue alone is about a third of what you're talking about. The second issue of course is that above the gross margin line, we're going to have service expense in Q3 and Q4, like we always do.

James Lucania: And so, you know, we didn't say we'd get rid of that this year and we won't. But and the proof of that is that we're starting, you know, our ramp up now for that in terms of hiring and the like. But over time, that can have a significant impact and maybe beyond that, you can, the question was really about the rest of this year. You can kind of speak to it. Yeah, yeah, no, I think that's, I think that's right.

Speaker Change #134: and that's probably another third of that, you know, end.

Speaker Change #135: I'm going to say, you know, then you just took the 5 million that we took off is all drops the bottom line. So, you know, probably that's close enough.

James Lucania: It's going to be hard to keep costs flat in perpetuity, especially because we do absorb, absorb real costs, right. And John talked about what's the potential future value of digital and issuance and instant issuance, right. The postal service in July increased cost by seven and a half percent, right. So every one of those card mailings now cost seven and a half percent more than it did last last month, right. So it's the potential future value of all these investments is that inflation avoidance, right.

James Lucania: So, you know, probably that's close enough. All right.

James Lucania: Thank you guys for walking through. Thank you.

Unknown Executive: She still doesn't believe it. She's like, "I don't believe it." You just wait for the call back. It's not going to be fun. I don't know what you're talking about.

Speaker Change #136: Alright, thank you guys for walking me there.

Mark Marcon: The next question is from Mark Marcon with Baird. Please go ahead.

Speaker Change #136: The next question is from Mark Marcon with Beard. Please go ahead.

Jon Kessler: Well, that was a tough one to follow up on. Yeah. I did exactly. I mean, we've all gone through the matter. Yeah.

Mark Marcon: Well, that was a tough one to follow up on, I did exactly, I mean, we've all gone to do it more to you. I mean, there's one other possibility in terms of the guidance, which is this conservatism.

James Lucania: And the people in the service center call avoidance doesn't mean, and no service people. It actually means highly skilled service people handling the most complex calls, not handling the annoying, I lost, I forgot my password, I lost my card, like all that, all that can be handled digitally. So, I think I'm just going to reiterate what I've said over and over each quarter. Our objective every quarter is to drive down the unit cost to serve an account.

Jon Kessler: Oh, I mean, I mean, there's, there's one other possibility in terms of the guidance, which is this, you know, conservatism. One, one thing that I was wondering is, you know, you talked about, you know, some elements of the guidance going all the way out to fiscal 27, like the 60% on the enhanced yield. This given, you know, some of the changes that we've seen with regards to yields. Is there anything that you're seeing today? And obviously, things can always dramatically change. But anything that you're seeing today that would, that would take you off of your expectation of doubling non-income non non-GAAP net income by fiscal 27 relative to fiscal 24.

Mark Marcon: Um...

Mark Marcon: One thing that I was wondering is, you know, you talked about, you know, some elements of the guidance going all the way out to fiscal 27 like this.

Speaker Change #138: 60% on the enhanced yield

Speaker Change #139: This given some of the changes that we've seen with regards to yields, is there anything that you're seeing today? And obviously things can always dramatically change. But anything that you're seeing today that would take you off of your expectation of doubling non-gap net income.

James Lucania: Now, we're doing that at a product level, you guys can see that across the aggregate level, but both of those remain true. We're trying to drive down the cost to serve each account each year. And it's going to be many, many, many levers to pull to get there. But, but yeah, I think we're, this is a particularly strong quarter in a really, really strong first half, keeping, keeping costs as flat as we've done. And the team, the team has done, done an amazing job.

James Lucania: Great. Thanks, Jim.

Speaker Change #139: by fiscal 27 relative to fiscal 24.

Jon Kessler: I think there are puts and takes, yet the short answer is no. That is, that would remain our view. And, you know, what are the puts and takes? It's actually pretty simple. The, the, the, the, the, the, the pluses are the performance of the business. You know, if you look at this quarter, you know, there's a, as Jim likes to say, there's a lot of small green bars. And they obviously add up, right? But a lot of small green bars here. And that's the way you want it. We service performed well; you know, interchange performed well. Custodial, you know, wasn't the dominant force for once, which is good.

Speaker Change #140: I think there are puts in takes, the short answer is no, that that is today that would remain our view and, um, um, and, um,

Speaker Change #141: You know, what are the puts in takes?

Scott Schoenhaus: Excellent. The next question is from Scott Showhouse with Keybank. Please go ahead. Hey guys, thanks for taking my question. Just curious, what drove the investment growth in this quarter? Was it from new accounts that you automatically were trying to push towards there? Just kind of want to talk about the dynamics on why you saw such a strong investment account growth? And then I have a second question on kind of the job market and all the recent data.

Speaker Change #142: It's actually pretty simple, the pluses are the performance of the business.

Speaker Change #142: If you look at this quarter, there's Jim likes to say there's a lot of smoke green bars, and they obviously add up, but a lot of smoke green bars here, and that's the way you want it. We've serviced, performed well.

Jim Newman: Interchange performed well, custodial wasn't the dominant force for once, which is good. But performed just fine, enhanced rates is going fine. You know, we had a few bumps, the team worked through those.

Jon Kessler: But, but perform just fine. Enhanced rates is going fine. You know, we had a few bumps. The team worked through those. So sales, trading are good. So, so I think that's the good stuff. And then, you know, the pace at which, you know, we're like everyone else. The pace at which rates come down, you know, we'll have an impact on the business in terms of, for lack of a better term, the pace at which revenues go up. And margins. So, you know, that's a happy problem to have. But it's, it's one we think about. But I think, you know, if I look at it by and large, you know, we're, we're without trying to reiterate multi-year guidance.

Scott Schoenhaus: Yeah, but that's my first question. Sure. On the first question, I think certainly the rolling over and transition of the benefit wallet accounts, the last tranche was helpful and that it gave us an opportunity to present a set of, from our perspective, a set of investment options that weren't all, weren't all available on the prior platform. And that was probably quite helpful. Generally, I think beyond that, as you well know, while we don't give people capital A advice on the allocation as between investments and HSA cash, as we call it, we nonetheless want, we're not shy about the fact that we think that investing is the right answer for long-term dollars.

Speaker Change #143: So, sales, trading are good, so I think that's the good stuff and then you know the pace at which

Speaker Change #143: We're like everyone else, the pace at which rates come down, we'll have an impact on the business.

Speaker Change #143: in terms of for lack of a better term, the pace at which revenues go up and margins. So, you know, that's a happy problem to have, but it's one we think about. But I think, you know, if I look at it by and large, you know, we're...

Jon Kessler: There's nothing here that would, there's, I'm going to say everything here that makes us feel like this was a good commitment to make for the business.

Speaker Change #143: We're trying to reiterate multi-year guidance. There's nothing here that would, I'm going to say everything here that makes us feel like this was a good commitment to make for the business. And by the way, I'll say, you know, the other thing not to be, you're not to be missed in all of that is...

Jon Kessler: And, by the way, I'll say, you know, the other thing not to be, you not to be missed in all of that is. We're doing all this within the envelope of making investments that will grow the business for years beyond that, whether that is something that kind of is very modelable like the transition to enhance rates, right? Which has a, you know, forget the short term impact has a, you know, a permanent impact from increasing the value of business, or something that's harder to model some of the new product stuff we talked about today, you know, the efforts to grow that, you know, service revenue minus service costs thing, et cetera, et cetera, you know, those are all things that are likely to help us well beyond the, the sort of horizon of that goal, so that's my slightly longer answer.

Scott Schoenhaus: And so we continue to promote that and one way that we are kind of for lack of a better term, we're refining some of the digital outweigh strategies that we've used at open enrollment to be used year-round. That's, I guess, why it's called a gauge 360. That degrees are days. I'm not sure it's one of the other. Maybe three, six or five days off. But in all seriousness, and getting people at the right moment on this stuff is pretty valuable.

Speaker Change #143: We're doing all this within the envelope of making investments that will grow the business for years beyond that, whether that is something that kind of is very modulable like the transition to enhance rates, right, which has a, you know, forget the, the short term impact has a, you know, a permanent impact from some recent value business.

Speaker Change #143: or something that's harder to model. Some of the new products stuff we talked about today, you know, the efforts to grow that, you know, service revenue minus service cost thing. It's that for Tetra, you know, those are all things that are...

Scott Schoenhaus: As we've said many times, we think that the people who invest, the investment is sort of additive on the average, to people's cash balances, and the stickier customers, they hang around longer, and they're doing the right thing for themselves and for the broader mission of the organization. So I think that was helpful. I mean, obviously, there were market gains during the quarter, though less so on July 31st than today. Maybe not today.

Speaker Change #143: likely to help us well beyond the sort of horizon of that goal.

Steve Neeleman: Great, and then I was just wondering, Steve, can Steve comment a little bit in terms of what, you know, the chatter is on Capitol Hill, just with regards to, you know, there's various scenarios in terms of how the election could go, but let's take a, if, if we have a blue sweep, and how do you think that ends up impacting decision making with regards to potentially switching over. To HSAs are expanding, you know, high deductible health care accounts. Sure, Mark, could you hear your voice? You know, I think we've always taken the approach that HSAs should be more bipartisan than maybe people realize.

Speaker Change #143: That's my slightly longer answer.

Speaker Change #143: Great. And then, just wondering, Steve, can Steve comment a little bit in terms of what, you know, the chatter is on Capitol Hill, just what's the guard state. You know, there's various scenarios in terms of how the election could go. But let's take a...

Scott Schoenhaus: But so that played a role as well in terms of the growth there, but not to the numbers. Yeah, my follow up, and that's really helpful, John, I appreciate it. My follow up is in, you know, what are you seeing right now in the market from the employer front from both HSAs and CEDs, given all the data that suggests we're in the early stage of a softening job market. There's your guidance contemplates further softening of the labor market from an asset growth perspective in the back half just kind of get want to get your thoughts here on all the data that we're getting.

Speaker Change #144: If we have a blue sweep and how do you think that ends up impacting decision-making with regards to potentially switching over to HSAs or expanding?

Steve: You know, high deductible health care accounts.

Steve: Sure, Mark, good to hear you boys.

Steve: You know, I think we've always taken the approach that HSA should be more bipartisan than maybe people realize. I mean, if you go way, way back.

Steve Neeleman: I mean, if you go way, way back, you know, 20 years ago or more, 30 years ago, actually back when John was in DC, a long time ago. Sorry, John. Sorry, John, I had to do it to you. You know, it wasn't a bipartisan effort. I mean, the whole concept of a medical care security account is the things that it all that came out of the bipartisan effort. This was back in Tom Dachel days, and fast forward 30 years. We actually have a really nice bipartisan effort that's come forward. And I don't know if you saw it, Mark, but just during the August recess on the 23rd of August, while people were off playing around in wherever they were, the Hamptons, you know, they were fixed congressmen bipartisan from all over the country.

Scott Schoenhaus: Yeah, I'll answer the last part of your question and then and then ask Steve to comment on you know real time what's going on in the marketplace. We generally try and take a you know in terms of constructing our guidance, take a kind of macro neutral view. The truth is it's unlikely that any view we would take is going to have much impact on our guide. So it's not that hard to do, but you know that that's kind of the way we approach it.

Steve: 20 years ago, for more 30 years ago, actually, back when Jon was in DC, long time ago. All right, Jon. Sorry, Jon.

Speaker Change #145: had to do it to you know it was by partisan effort. I mean the whole concept of a medical care security account is the things that they called it became out of the bipartisan effort. This was back in Tom Daxel Bayes.

Mark Marcon: Fast forward 30 years. We actually have a really nice bipartisan effort that's come forward. And I don't know if you saw it, Mark, but just during the August recess on the 23rd of August.

Scott Schoenhaus: You know, I'll just say generally the view that we're hearing from clients in terms of their thinking about the macro is that, you know, one of the things you have is you have these extraordinarily low turn rates and that's kind of impacting things in terms of the pace of new hiring and the like.

Speaker Change #146: Well, people were off playing around in wherever they were at the Hampton. You know, they were fixed.

Steve Neeleman: Pennsylvania, Utah, California, and Nebraska that came together and they put together what's called the Hope Act. You can look it up. House Bill 93 94. It was led by Blake Moore here in Utah and then by Jimmy Panetta in California. And, you know, we think there's a great piece of legislation, and I think it kind of answers your question. Can can Democrats and Republicans come together and work on legislation that can really help Americans? And, you know, I think that bill is well positioned, whether it's all blue or all red or half blue and half red or however you think about it.

Speaker Change #147: Congressman, by partisan from all over the country, Pennsylvania, Utah, California, and Nebraska that came together and they put together what's called the Hope Act. You can look it up, it's House Bill 9394.

Jon Kessler: But in any event, Steve, maybe you can talk about how what you see in the market this year.

Steve Neeleman: Sure. Thanks Scott. You know, not by design, but by having said we have our pattern weekly sell subtle this morning. So I got to listen in as I typically do and you know there. I can tell you there's a lot of enthusiasm among our ourselves team. We had a nice quarter and we're getting into the second half of the year, which is when. You know, we really get after it and and they're getting after it, which is exciting.

Speaker Change #148: It was led by Blake Moore here in Utah, and then by Jimmy Panetta in California. And you know what, we think there's a great piece of legislation, and I think it kind of answers your question.

Speaker Change #148: and Democrats and Republicans come together and work on legislation that can really help Americans and so I think that bill is well positioned, whether it's all blue or...

Unknown Executive: You know, I think that one of the things we've seen, we've been through several cycles now with health equity, I mean, even going back to the 2008 downturn and others. And, you know, we do we are protect a little bit because when the job markets often, you know, we don't like it. But when it when it's often as we do have employers that say, look, we need to again, kind of take a look at our costs.

Steve Neeleman: I just note on that bill, you know, the way we do the math, there's about a hundred million working Americans, and about a third of them have access to an HSA. But that means that there's about, you know, two thirds of don't. There's 70 million American families roughly don't have access to health savings car right now. And there's another 70 million Americans that are in Medicare, and they don't have access to an HSA. But the Hope Act would start to fill some of those gaps. And so keep your eye on that. I think it's one that could move and, you know, we're going to be supportive as we can.

Speaker Change #149: All red or half blue and half red, or however you think about it, just a note on that bill, you know, the way we do the math, there's about 100 million working Americans in about a third of them have access to an HSA but that means that there's...

Speaker Change #149: Here's about, you know, two thirds of don't.

Speaker Change #149: There's 70 million American families, roughly don't have access to health savings current now, and there's another 70 million Americans that are in Medicare.

Unknown Executive: What's the best and most efficient way to have people get really good benefits by but still save some money for them on their premiums and also save some money for the employer and premiums and ultimately trend. And, and it all comes back to these consumer directed plans, CDVs with HSAs being kind of in a pole position. So, so I look, there's a lot of enthusiasm. We continue to expand our distribution partner base.

Speaker Change #149: and they don't have access to an HSA, but the help-ax would start to fill some of those gaps. So keep your eye on that. I think it's one that could move and we're going to be supportive as we can, but we think there's tremendous opportunity to continue to expand this concept of a personal and portable and bestable account.

Steve Neeleman: But we think there's tremendous opportunity to continue to expand this concept of a personally owned portable and best school account. Like an HSA and some of our other healthcare accounts, but now there's something out there that is a bipartisan effort. Great to hear. Thank you so much. Thank you, Mark.

Speaker Change #149: Like an HSA and some of our other healthcare accounts, but now there's something out there that is a bipartisan effort.

Unknown Executive: We're doing a really, really good job of integrating all of the new plans that we've been able to bring into the health equity family through the team member on the self team. They would say, look, I'm a success now. It's ever have been despite some of the, you know, things that you're in redevelopment. Thank you.

Speaker Change #150: Great to hear. Thank you so much.

George Hill: The next question is from George Hill with Deutsche Bank. Please go ahead.

Mark Marcon: Thank you, Mark.

George Hill: Hey, good afternoon, guys. Just two quick ones for me. I'll just ask for comments on number one: the launch of the Sherry Poe. Just the start of the Sherry Poe. I'll change how you get there.

Speaker Change #151: The next question is from George Hill with Deutsche Bank. Please go ahead.

George Hill: Hey, good afternoon guys. I just two quick ones for me. I'll just ask for comments on number one is the launch of the shared repo. I just, just, just, just the start of the shared repo at all. I'll change how you guys think about cap deployment and just say anything about the price that you guys are seeing for assets in the market.

James Lucania: I'll take about cap deployment and just say anything about the price that you guys are seeing for assets in the market.

Jon Kessler: And then, John, maybe just an update on what I'll call like digital wallet, digital cards, and retail partnerships and kind of the ability to more seamlessly integrate them into the platform for transactability. Thanks.

David Larson: The next question is from David Larson with BTIG. Please go ahead. Hi, congratulations on the great quarter. What are the total dollars invested in the enhanced rates product now? And I'm assuming that that's in the investment bucket, not the cash bucket, is that correct?

Jon: and then Jon may be just an update on what I call like digital, digital card and retail partnerships and kind of the ability to more seamlessly integrate them into the platform for transveculability. Thanks.

James Lucania: Yeah, maybe I'll take I'll take the first one. Yeah, so no, I would not read into any signal about pricing in the market. I think we are; we are the logical buyer of HSA portfolios that come to market. I think where what we've, John and I have been pretty consistent about is we are not going to drive assets to market. Right? By by by bidding up the price, right? So I think we're, we're very, we have a disciplined approach to portfolio M&A, as evidenced by it by the benefit wallet transaction. I think that was quite quite a creative to the business and we will continue to aggressively pursue similar similar opportunities.

Jon: Yeah, maybe I'll take the first one. Yeah, so I would not read into any signal about pricing in the market.

James Lucania: The other way around it's in the HSA cash bucket because it behaves like cash in the sense that it is a principal guarantee, in this case, by private insurer rather than by the FKFC, and second, that you can swipe your card and go get it, which you can't do with investments. So, we have, roughly, this is my profile, I have this right, the little under 16 billion in the HSA cash, over a little over, over 16 billion, that's good.

Speaker Change #153: We are the logical buyer of HSA portfolios that come to market, I think what we've done and I have been pretty consistent about is we are not going to drive assets to market.

Speaker Change #153: by bidding up the price.

Speaker Change #153: So I think we're very, we have a discipline approach to portfolio M&A as evidenced by the benefit wallet transaction. I think that was quite a creative to the business and we will continue to aggressively pursue.

James Lucania: And our goal is to establish that in 13 and 29, that's all I could do. But our goal at the end of this year is to be at 40% of our total being in enhanced rates. Our goal is to be 60 by the end of 12, sorry, thank you. It's to be 60% within three years, or specifically in FY27, sorry, my bad. And as Jim said in his commentary, you can kind of interpolate that.

James Lucania: So it's not, not reflective of our lack of desire or pricing being out of work. I think we will continue to try to add a creative assets to the portfolio, and we have ample capability to do so. So I think of the share of purchases as in addition to the strategy that we've been executing.

Speaker Change #154: Similar, similar opportunity, so it's not reflective of, um,

Speaker Change #154: Our lack of desire or pricing being out of whack, I think we will continue to try to add a creative asset to the portfolio and we have the ample capability to do so.

Speaker Change #154: So I think of the share of purchases as in addition to the strategy that we've been executing.

Jon Kessler: Yeah, and on your first point or on your second point, we're not, I'll just say this: we're not really waiting for the digitization of the meeting for the virtualization of the plastic there. We've created a number of partnerships out there that basically are designed to just make it easier for people to do what they need to do. Whether that's with firms that are in the space of helping providers collect a member out of pocket that's owed or, you know, things like the folks who buy a lot of, you know, HSA or FSA eligible stuff at the end of December on the like, and you don't want to do that easily online.

Speaker Change #155: Yeah, and on your first point, or on your second point, we're not, I'll just say this, we're not really waiting for the digitization of the meeting for the virtualization of the plastic there.

James Lucania: I would maybe just add the color that as Jim said in his commentary, since it's a little bit lumpy as, to some extent, as cash contracts expire. You can see in our sheet there, that's a little forward-loaded in the fiscal 26. And so, I think we'll get, we'll make more progress in this year and next, and the last sprint in 27. So, I think we don't release a breakdown every quarter, but suffice it to say we're very much on track to meet that goal.

Speaker Change #155: We created a number of...

Speaker Change #155: Partnerships out there that basically are designed to just make it easier for people.

Speaker Change #155: to do what they need to do, whether that's with...

Speaker Change #155: firms that are in the space of helping providers collect a member out of pocket that's owed or things like the folks who buy a lot of...

Speaker Change #155: [inaudible]

Jon Kessler: And so we think there's a lot more to do there, but, you know, those have been helpful, and they either they both tend to reduce service cost, and they also feed service revenue a little bit. So that's a good thing. And it's something that will continue.

James Lucania: Maybe Jim, you can clean up like this. Yeah, no, I think that's right. Right, obviously we placed a good amount in enhanced rates with the benefit wallet cash coming in. So, we got a good head start on our progress towards that goal. Now, there's not a whole lot of cash being placed at this part of the year. So, the mix doesn't really move that much. And as John said, towards the end of the year, we have a bunch of cash being placed, towards the end of next year.

Speaker Change #155: You know, want to do that easily online and so we think there's a lot more to do there, but you know, those have been helpful and they either, they both tend to reduce service cost and they also feed service revenue a little bit. So that's a good thing and it's something that will continue.

Greg Peters: Thanks, George. The next question is from Greg Peters with Raymond James.

George Hill: Thanks, George.

Unknown Executive: Please go ahead. Yeah, thanks.

George Hill: The next question is from Greg Peters with the Raymond James, please go ahead.

Unknown Executive: This is sit on for Greg. I'm just curious on the, hey, yeah, on the enhanced rate product just thinking about getting to the 60% allocation. Are both the assets moving into that product coming from new HSA assets? Are you also seeing existing members reallocate assets into that product? Yeah, great, great, great question there. So yes, this here primarily it is new assets. So that's obviously the bulk of that being the benefit wallet acquisition; a lion share of that cash went into enhanced rates. It is new members, new clients being added, but you are hitting on the polls, right?

James Lucania: We'll have a bunch of cash being placed. So, it'll be quite lumpy, but we feel good about the trajectory to getting to that 60 percent goal. Okay, so it would be 60 percent of the total, which is like 30 billion, so that would be around like of the cash. Sorry, sorry, no, no, of the cash. HSA cash only is percentage enhanced rates percentage basic rates and the investment totally, totally separate. Yep.

Speaker Change #156: Yeah, thanks, this is a sit-on for Greg, I'm curious on this.

Speaker Change #157: Hey, yeah. On the enhanced rate product, just thinking about getting to the 60% allocation, or both the assets moving into that product coming from new HSA assets, or you're also seeing existing members reallocate assets into that product.

Speaker Change #158: Yeah, great, great question there. So yes, this year primarily it is new assets.

Speaker Change #158: So, that's obviously the bulk of that being the benefit wallet acquisition, a lion share of that cash went into enhanced rates.

James Lucania: Okay, and then how much of that 16 billion is short term in nature? Okay, yeah, so look at, I encourage you to take a look in the, in the queue, we have a breakdown of that 16 point. Four billion, I think, is what it is of how it reprises the remainder of this fiscal year, as well as the next three fiscal years and then a big thereafter bucket. There is about 600 million of that cash that is in floating rate investments.

Speaker Change #159: It is new members.

Unknown Executive: That is the next phase in order to get to 60%; we will begin migrating members who are in maturing basic rate contracts. We will be presenting the enhanced rate option as the default as bank contracts mature, so we're not breaking bank contracts to try and move that faster. We're going to operate on the maturity schedule, and that, and that's why it'll be a little lumpy. But that it's also why we're comfortable with the 60% target that we're on pace there. Something that you said at the investor day that's always worth reminding people is that the biggest break on this thing is navigating the maturity of our basic rates agreements.

Speaker Change #160: New clients being at it, but you are hitting on the pulse, right? That is...

Speaker Change #160: The next phase in order to get to 60%, we will begin migrating.

Speaker Change #160: Members who are in maturing.

Speaker Change #160: Basic Reade Contracts.

Speaker Change #160: will be presenting the enhanced rate option as the default, as bank.

James Lucania: So, that, that will be pulled out of the charts. I think you'll see 15.8 is the total HSA cash with, that's outlined in a maturity schedule with interest rates, average interest rates for each of the years. So, we've got about 2 billion reprising in the remainder of this current fiscal year.

Speaker Change #160: Contracts mature, so we're not.

Speaker Change #160: Breaking Bank contracts to try and move that faster, we're going to operate on the maturity schedule, and that's why it'll be a little lumpy, but it's also why we're comfortable with the 60% target that we're on pace there.

Speaker Change #161: Something that you said at the investor day that's always worth reminding people is...

Speaker Change #162: But the biggest break on this thing is...

Stephanie Davis: The next question is from Stephanie Davis with Barclays. Please go ahead. Hey guys, you guys from The Courier. Thanks for taking my question. Can I be annoying and go back to that guidance question again? You may. See if you get a better answer. Here's open. Look, the implied second half margin implies a five point step down from two key levels. And I get what you said, there's this five million delta on yield.

James Lucania: We don't want to be in the position of even where it might be profitable to do so of breaking these agreements, particularly at a time when bank deposits are a thing. And so we just don't think that's a good look to our regulators or to be partners in the future. So we've chosen to operate that way, by and large. And that's it's not the presentation or the uptake that's going to keep us from getting there. It's just managing that maturity and liquidity.

Speaker Change #162: Navigating the maturity of our basic rates agreements, we don't want to be in the position of

Speaker Change #162: of even where it might be profitable to do so.

Speaker Change #163: of breaking these agreements, particularly at a time when, you know, bank deposits are things.

Speaker Change #163: and so we just don't think that's a good look to our regulators or to would be partners in the future.

Speaker Change #163: So we've chosen to operate that way by large and it's not the presentation or the uptake that's going to keep us from getting there. It's just managing that maturity and liquidity.

Stephanie Davis: But you raised your yield guidance. And when I look at that five point step down, it's a 30 million dollar profit delta. Is that investments that are just of that scale that I didn't appreciate? Is there some conservatism baked in the numbers? What is.

Unknown Executive: And then I also wanted to say that I wanted to name one of my kids, Sid, and my wife wouldn't let me do it, but I still think it's the coolest. Sid is a solid. So whatever you do with your likes, it's going to be solid. All right, thank you.

Speaker Change #164: And then I also wanted to say that I wanted to name one of my kids' sit and my wife wouldn't let me do it, but I still think it's the coolest I thought I was gonna sit, it's a solid thing So whatever you do with your life's sit, it's gonna be solid

James Lucania: What is getting the margin so much lower than the first half of the year? Well, I'd say let me start with the one we did not change our HSA yield guidance. Right. So it's we just still three points. We took off the bottom. Yeah, still three point still 3.05 versus the rate is 3.05, which I think are right. Definitely plan this question. Yeah, I think no looking. I think there's a couple parts.

Operator: This concludes our question and answer session.

Speaker Change #165: Alright, thank you.

Jon Kessler: I would like to turn the conference back over to John Tesla for any closing remarks.

Speaker Change #165: This concludes our question and answer session. I would like to turn the conference back over to Jon Kessler for any closing remarks.

Jon Kessler: Yeah, well, I just wanted to take a second. We thought we might have a chance to do this in the Q&A to again, but to thank the team for something we haven't discussed, which is the response to the, and I'd say here both our team and our clients and partners for the response to the cyber incident that we disclosed during the quarter. I personally was truly humbled by the sort of very constructive nature in which folks really focused on supporting members who might need support. And I think, you know, this is how it should be done.

Jon Kessler: Yeah, um...

Jon Kessler: Well, I just wanted to take a second, we thought we might have a chance to do this in the Q&A to...

James Lucania: So John alluded to well, obviously the yield. We are going to take that that little bit of downward step with the with the interest rate curve moving down. I think that's back end weighted in into the into the year. We talked about on the service side that yes, this was a fantastic service cost performance quarter. And John alluded to we can't count on that for every quarter into into perpetuity. And I think we haven't talked a lot about the the below gross profit costs as well.

Speaker Change #167: Again, but to thank the team for something we haven't discussed.

Speaker Change #167: which is the response to the net say here both our team and our clients and partners for the response to the cyber incident that we disclose during the quarter.

Speaker Change #167: I personally was truly humbled by the sort of very constructive nature in which folks really focused on supporting members who might need support and I think you know.

Jon Kessler: So that's very much appreciated.

Jon Kessler: And beyond that, Fodolfins and sitting in Boston. So maybe that wasn't the best idea, but, you know, the Dolphins are the strongest September team there is. So it should be good.

Speaker Change #168: This is how it should be done so that's very much appreciated and beyond that, go to offense and sitting in Boston, so maybe that wasn't the best idea, but it's offensive to the strongest September team there it should be good.

James Lucania: So I'll maybe preempt one of the questions coming is on the tech and dev spend. Right. So that tech and dev spend as percentage of revenue has come down pretty significantly. And more so than than we would like it to be. Right. So we have a little bit of timing of projects. Okay. That we're pushing out to the back half of the year. But you know, there's also there's also quite quite some open positions in in the tech and tech and dev world that we would like to fill and we are planning to fill in the back half of the year.

Operator: See all in a few months. Thank you, everyone.

Operator: Thank you, Gary.

Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Speaker Change #168: See you all in a few months. Thank you everyone. Thanks, Gary.

Speaker Change #169: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

James Lucania: So we talked about kind of peaking out at at 22 ish percent of revenue is where we hit tech and dev last year. We said that's that's likely to be the high watermark as a percentage of revenue. We're sort of 20 ish right now. And that that's light. Right. So we've got to get we're going to get that back to where to where we think where we think it should be. I was just going to go and harass more about the tech and dev spend.

James Lucania: So that's what I was going to talk about. Well, so you talk about there's a lot of positions that you want to go install them. So when I think about the cadence of your second half margin because that's hiring. Is that going to be a more stable straight line down or is there any big pockets to call out where you're trying to do it in a more rapid fashion. Just giving that pretty big step still.

James Lucania: Yeah, I'm not, I have to admit I'm not, the answer is I'm not true. I think that it's probably fair to say that it's the fourth quarter is going to, you know, there's a little bit of ramp activity. What I would, my less financing version of what Jim said is, there's, we have projects, I mean, you could tell from some of the other commentary, that are very high return projects that we want to be moving faster than they're moving.

James Lucania: And that's reflected in the fact that, that T&D spend is a little bit, you know, for the first half is a little bit like, as Jim was saying. And we're going to fix that. It doesn't mean we're going to exactly like make it all up. But we're going to get back to where we need to be. And the reason to be there is because the return on these things. So, you know, whether it's in any event.

James Lucania: So I think that's about, I think that issue alone is about a third of what you're talking about. The second issue, of course, is that above the gross margin line, we're going to have service expense in Q3 and Q4, like we always do. Right? And, you know, that's probably another third of that. You know, and I'm going to say, you know, then you just, we took the five million that we took off is all drops the bottom line. So, you know, probably that's close enough. All right.

Unknown Executive: Thank you guys for walking through. Thank you.

Unknown Executive: She still doesn't believe it. She's like, I don't believe it. You just wait for the call back. It's not going to be fun. I don't know what you're talking about.

Mark Marcon: The next question is from Mark Marcon with Baird. Please go ahead. Well, that was a tough one to follow up on. Yeah. I did exactly. I mean, we've all gone to the map. Oh, I mean, I mean, there's one other possibility in terms of the guidance, which is this, you know, conservatism. One thing that I was wondering is, you know, you talked about, you know, some elements of the guidance going all the way out to fiscal 27, like the 60% on the enhanced yield. This given, you know, some of the changes that we've seen with regards to yields. Is there anything that you're seeing today? And obviously, things can, can always dramatically change.

Jon Kessler: But anything that you're seeing today that would, that would take you off of your expectation of doubling non-income non-gap net income by fiscal 27 relative to fiscal 24. I think there are puts and takes, yet the short answer is no. That is, that would remain our view. And, you know, what are the puts and takes? It's actually pretty simple. The, the, the, the, the pluses are the performance of the business. You know, if you look at this quarter, you know, there's a, as Jim likes to say, there's a lot of small green bars, and they obviously add up, right?

Jon Kessler: But a lot of small green bars here, and that's the way you want it. I mean, service performed well, you know, interchange performed well, custodial, you know, wasn't the dominant force for once, which is good. But, but performed just fine, enhanced rates is going fine. You know, we had a few bumps. The team worked through those. So sales trading are good. So, so I think that's the good stuff. And then, you know, the pace at which, you know, we're like everyone else.

Jon Kessler: The pace at which rates come down, you know, we'll have an impact on the business in terms of, for lack of a better term, the pace at which revenues go up and margins. So, you know, that's a happy problem to have. But it's, it's one we think about. But I think, you know, if I look at it by and large, you know, we're, we're without trying to reiterate multi-year guidance. There's nothing here that would, there's, I'm going to say everything here that makes us feel like this was a good commitment to make for the business. And, by the way, I'll say, you know, the other thing not to be, not to be missed in all of that is.

Jon Kessler: We're doing all this within the envelope of making investments that will grow the business for years beyond that, whether that is something that kind of is very modelable, like the transition to enhance rates, right, which has a, you know, forget the the short term impact has a, you know, a permanent impact from increasing the value of business, or something that's harder to model some of the new product stuff we talked about today, you know, the efforts to grow that, you know, service revenue minus service cost thing, et cetera, et cetera, you know, those are all things that are likely to help us well beyond the, the sort of horizon of that goal, so that's my slightly longer answer.

Steve Neeleman: Great, and then I was just wondering Steve can, can Steve comment a little bit in terms of what, you know, the chatter is on Capitol Hill, just with regards to, you know, there's various scenarios in terms of how the election could go, but let's take a, if we have a blue sweep, and how do you think that ends up impacting decision making with regards to potentially switching over to HSAs or expanding, you know, high deductible healthcare accounts? Sure, Mark, could you hear your voice?

Steve Neeleman: You know, I think we've always taken the approach that HSAs should be more bipartisan than maybe people realize. I mean, if you go way, way back, you know, 20 years ago, or more, 30 years ago actually back when John was in DC, long time ago. Sorry, John. I had to do it to you. You know, it wasn't bipartisan effort. I mean, the whole concept of a medical care security account is the things that it all that came out of the bipartisan effort.

Steve Neeleman: This was back in Tom Dachel days, and fast forward 30 years, we actually have a really nice bipartisan effort that's come forward. And I don't know if you saw it, Mark, but just during the August recess on the 23rd of August, while people were off playing around in wherever they were, the Hamptons, you know, they were fixed congressmen by partisan from all over the country, Pennsylvania, Utah, California, Nebraska. That came together, and they put together what's called the hope act.

Steve Neeleman: You can look it up. House Bill 93 94. It was led by Blake Moore here in Utah, and then by Jimmy Panetta in California. And, you know, we think there's a great piece of legislation. And I think it kind of answers your question. Can can Democrats and Republicans come together and work on legislation that can really help Americans? And, you know, and so I think that bill is well positioned, whether it's all blue or all red or half blue and half red, or however you think about it, just a note on that bill.

Steve Neeleman: You know, the way we do the math, there's about a hundred million working Americans, and about a third of them have access to an HSA. But that means that there's about, you know, two thirds of don't. There's 70 million American families, roughly don't have access to health savings car right now. And there's another 70 million Americans that are in Medicare, and they don't have access to an HSA. But the hope act would start to fill some of those gaps.

Steve Neeleman: And so keep your eye on that. I think it's one that could move. And, you know, we're going to be supportive as we can, but we think there's tremendous opportunity to continue to expand this concept of a personally own portable and best school account, like in HSA, and some of our other health care accounts, but now there's something out there that is a bipartisan effort.

Mark Marcon: Great to hear. Thank you so much. Thank you, Mark.

George Hill: The next question is from George Hill with Deutsche Bank. Please go ahead. Hey, good afternoon, guys. Just two quick ones for me. I'll just ask for comments on. Number one is the launch of the Sherry Poe. Just the start of the Sherry Poe. I'll change how you get there.

James Lucania: I'll take about cap deployment and just say anything about the price that you guys are seeing for assets in the market.

James Lucania: And then, Jon, maybe just an update on what I'll call like digital wallet, digital cards and retail partnerships and kind of the ability to more seamlessly integrate them into the platform for transactability. Thanks. Yeah, maybe I'll take I'll take the first one. Yeah, so no, I would not read into any signal about pricing in the market. I think we are, we are the logical buyer of HSA portfolios that come to market.

James Lucania: I think we're what we've, Jon and I have been pretty consistent about is we are not going to drive assets to market right by. By bidding up the price, right? So I think we're, we're very, we have a disciplined approach to portfolio M&A as evidence by the benefit wallet transaction. I think that was quite, quite accretive to the business. And we will continue to aggressively pursue similar, similar opportunities. So it's not reflective of our lack of desire or pricing being out of whack right now.

James Lucania: But I think we will continue to try to add accretive assets to the portfolio and we have ample capability to do so. So I think of the share of purchases as in addition to the strategy that we've been executing.

Jon Kessler: Yeah, and on your first point or on your second point, we're not, I'll just say this, we're not really waiting for the digitization of the meeting for the virtualization of the plastic there. We've created a number of partnerships out there that basically are designed to just make it easier for people to do what they need to do. Whether that's with firms that are in the space of helping providers collect a member out of pocket that's owed or, you know, things like the folks who buy a lot of, you know, HSA or FSA eligible stuff at the end of December on the like and you don't want to do that easily online.

Jon Kessler: And so we think there's a lot more to do there, but, you know, those have been helpful and they either they both tend to reduce service cost and they also feed service revenue a little bit. So that's a good thing and it's something that will continue. Thanks, George.

Greg Peters: The next question is from Greg Peters with Raymond James. Please go ahead. Yeah, thanks.

Greg Peters: This is a sit-on for Greg. I'm just curious on the, hey, yeah, on the enhanced rate product just thinking about getting to the 60% allocation are both the assets moving into that product coming from new HSA assets are you also seeing existing members real reallocate assets into that product? Yeah, yeah, great, great, great question there. So yes, this here primarily it is new assets. So that's obviously the bulk of that being the benefit wallet acquisition, a lion share of that of that cash went into enhanced rates.

Greg Peters: It is new members, new clients being added, but but you are hitting on the polls, right? That is the next phase in order to get to 60%. We will begin migrating members who are in maturing basic rate contracts. We will be presenting the enhanced rate option as the default as bank contracts mature. So we're not breaking bank contracts to try and move that faster. We're going to operate on the on the maturity schedule and that and that's why it'll be.

Greg Peters: It will be a little lumpy, but it's also why we're comfortable with the 60% target that we're on pace there. Something that you said at the investor day that's always worth reminding people is that the biggest break on this thing is navigating the maturity of our basic rates agreements. We don't want to be in the position of even where it might be profitable to do so of breaking these agreements, particularly at a time when bank deposits are a thing.

Greg Peters: And so we just don't think that's a good look to our regulators or to be partners in the future. So we've chosen to operate that way by and large and that's it's not the presentation or the update that's going to keep us from getting there. It's just managing that maturity and liquidity.

Greg Peters: And then I also wanted to say that I wanted to name one of my kids, Sid and my wife wouldn't let me do it, but I still think it's the coolest. Sid is a solid. So whatever you do with your likes, it's going to be solid.

Unknown Executive: All right, thank you.

Operator: This concludes our question and answer session.

Jon Kessler: I would like to turn the conference back over to John Tesla for any closing remarks. Yeah, well, I just wanted to take a second. We thought we might have a chance to do this in the Q&A to, again, but to thank the team for something we haven't discussed, which is the response to the, and I'd say here both our team and our clients and partners for the response to the cyber incident that we disclosed during the quarter.

Jon Kessler: I personally was truly humbled by the sort of very constructive nature in which folks really focused on supporting members who might need support. And I think, you know, this is how it should be done. So that's very much appreciated.

Jon Kessler: And beyond that, go dolphins and sitting in Boston. So maybe that wasn't the best idea, but, you know, the dolphins are the strongest September team there is. So it should be good.

Operator: See all in a few months. Thank you, everyone. Thank you, Gary.

Operator: The conference is now concluded. Thank you for attending today's presentation.

You may now disconnect.