Q4 2025 HealthEquity Inc Earnings Call
Good afternoon, and welcome to the health equity fourth quarter 'twenty twenty-five earnings Conference call. Please note. This event is being recorded.
Speaker Change: I would now like to turn the conference over to Richard Putnam. Please go ahead.
Speaker Change: Thank you Gerry loved the classical hold music was great Hello, everyone and welcome to help equity's fourth quarter or fiscal year end 2025 earnings Conference call. My name is Richard Putnam I do Investor Relations for Health equity joining me today is Scott Cutler, President and CEO, Dr. Steve Neeleman, Vice chair and found or the cause.
Speaker Change: James Polk County, our executive Vice President and CFO.
Speaker Change: Before I turn the call over to Scott I have a couple of reminders first a press release announcing the financial results for our fourth quarter and fiscal year end 2025 was issued after the market close this afternoon.
Speaker Change: These financial results include the contributions from our wholly owned subsidiaries and accounts they administer.
Speaker Change: Our press release includes definitions of certain non-GAAP financial measures that we will reference today you can find a copy of today's press release on.
Speaker Change: On our Investor Relations website, including the reconciliations of these non-GAAP measures with comparable GAAP measures and a recording of this webcast that website is IR dot help equity dot com.
Speaker Change: Second our comments and our responses to your questions today reflect management's view as of today March 18th 2025 and will contain forward looking statements as defined by the FCC, which include predictions expectations estimates or other information that might be considered forward looking.
Speaker Change: There are many important factors relating to our business, which could affect the forward looking statements made today.
Speaker Change: <unk> looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the statements made here today.
Speaker Change: We caution against placing undue reliance on these forward looking statements and then we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock as detailed in our and our latest annual report on Form 10-K, and any subsequent periodic reports filed with the FCC, we assume no.
Speaker Change: <unk> to revise or update these forward looking statements in light of new information or future events.
Scott Cutler: Now over to Scott.
Scott Cutler: Thank you Richard Hello, everyone. Welcome to my first official earnings call withheld the equity.
Scott Cutler: I will discuss Q4's momentum across key metrics and for those of you who caught our assist portfolio press released that ton is intended.
Scott Cutler: Jim will detail Q4, and full year financial results as well as our full outlet for fiscal year, 'twenty, six and he's going to join us for Q&A.
Speaker Change: It's been a busy and exhilarating first few months since I was introduced to you in December during the Q3 earnings call.
Speaker Change: A month later I go right in with her team to help close out a record breaking peak season, which included 1 million New HSA is from sales it's proven to be an eventful start to this next chapter with team purple and I'm thrilled to be here in Q4 without missing a beat the team achieved and delivered strong year over year growth.
Speaker Change: Our key metrics, including revenue up 19% adjusted EBITDA up 9% HSA is grew 14% CDB accounts grew 2% driving total accounts up 9% and HSA assets up 27%.
Speaker Change: Although equity ended Q4 with 17 million total accounts, including $9 9 million HSA is holding 32 billion in HSA assets HSA assets increased 6.9 billion year over year. We grew the number of our HSA members, who invest by 23% year over year, helping to draw.
Speaker Change: <unk> invested assets up 44% to $14 7 billion HSA cash reached $17 4 billion. Our HSA members grew their average balances by 12% this year.
Speaker Change: Purple opened 471000, new HSA from sales in the quarter, bringing a total of 1 million new HSA is from sales for the year a milestone achieved for the first time in our history.
Speaker Change: Net CDB accounts grew 200000 quarter over quarter and up 2% year over year, continuing a positive trend.
Our operations team.
Speaker Change: We're also exceptionally busy in Q4 across various initiatives as we served a record number of new HSA members and CDB accounts. While Q4 is always our peak season. We were also active in rolling out the final stages of our new chip enabled stacked benefits card to our millions of members and continue.
Speaker Change: Going to migrate existing clients to our latest platforms like other financial services companies. We also haven't seen increased cyber threats.
Speaker Change: Tax from bad actors.
Speaker Change: Statistically technology techniques and methods. The collection of these activities led to excess service expense, which Jim will detail. Further we continue to believe we will drive down our service costs, while delivering remarkable experiences our customers expect from US our team is committed as ever to exceed these expectations.
Speaker Change: As I began this journey I'm focusing the team on a member first secure mobile experience our members expect seamless and frictionless mobile and digital first experiences to help them save invest and spend against their health care needs. We have made significant progress consolidating platforms in here.
Speaker Change: Got it through acquisitions and moving our platforms to the cloud.
Speaker Change: We are now well positioned to leverage these investments and continue our technological push in mobility and AI and encouraged by many things we have to deliver this year, including our new App experience, which has been downloaded by over 1 million members expedited claims which uses AI technology to automate claims now serves.
Speaker Change: More than 7000 clients and 1 million members in our stat to chip card, which we rolled out this year and serves as the foundation for upcoming digital wallet building on these foundations I'm confident we can more efficiently and effectively deliver against our mission of saving and improving lives by empowering health care consumers.
Speaker Change: As you've heard from US many times before we are addressing the market's appetite for greater health care transparency and affordability. We are excited to see that vision come to fruition through our new assist portfolio announced earlier today.
Speaker Change: Assist is a growing portfolio of owned and partnered solutions designed to help employers and their employees get the most of them their benefits offerings with two immediate offerings in market first analyzer provides real time data on inefficiencies trends and benefit program designed to have employer.
Speaker Change: Yours make smarter benefits decisions next navigators supports more informed employee health care decisions, along with potential awards for making high quality affordable care decisions.
Speaker Change: The third assist offering momentum will nudge employees to get the most of their company's benefits plan through personalized AI driven recommendations.
Speaker Change: Mentum is aimed at increasing healthy behaviors driving down health care costs for both employers and employees and improving employers benefits plan Roy <unk>.
Speaker Change: Momentum is being developed alongside an exclusive set of innovative clients, who share our vision for empowering their workers with greater transparency relevant information and incentives to take positive action together with our core offerings. The Sip portfolio joins a growing menu of technology innovation delivering remarkable.
Speaker Change: <unk> for our clients partners and members, while reducing our cost to serve let's pass it to Jim to give it to.
Speaker Change: To go a bit deeper on their impact to our financials Jim.
Speaker Change: Sure.
Jim: Thanks Scott.
Jim: I'll briefly highlight our fiscal fourth quarter and fiscal year, GAAP and non-GAAP financial result, as always we provide a reconciliation of GAAP measures to non-GAAP measures in today's press release.
Jim: Fourth quarter service revenue increased 19% year over year service revenue was a record $124 $2 million up 5% year over year, reflecting growth in total accounts HSA investor accounts in invested asset.
Jim: Partially offset by lower average unit service revenue as product mix continues to shift toward each state.
Jim: Custodial revenue grew 37% to a record $144 $1 million in the fourth quarter the.
Jim: The annualized yield on HSA cash with three points to 3% for the quarter as a result of higher replacement rates and continued mix shift to enhance rates enhanced rate placements now makes up 49% of our HSA cash placement, putting us well on our way toward our goal of 60% by the end of fiscal 2020.
Jim: <unk>.
Jim: Interchange revenue grew 13% to $43 5 million, notably faster than account growth as members increased contribution and distribution and conduct and conducted morphine on platform versus requesting past reimbursement payment made.
Jim: Gross profit of $189 million was 61% of revenue for the fourth quarter down slightly from 62% in the fourth quarter last year as Scott mentioned in addition to the seasonal factors gross profit during the quarter was reduced by approximately $17 million of additional services.
Jim: I'll encourage you protect members from unreimbursed those impacted by sophisticated fraud activity.
Jim: Its members during our card processor consolidation.
Jim: We continue to invest in our fraud prevention and detection capability and we believe these event driven costs will continue in the first half of FY 'twenty six but normalized towards the end of the year.
Jim: Net income for the fourth quarter was $26 $4 million or 30 cents per share on a GAAP EPS basis, non-GAAP net income was $61.3 million or 69 cents per share.
Jim: Adjusted EBITDA for the quarter was $107 $8 million up 9% compared to Q4 of last year and adjusted EBITDA as a percentage of revenue was 35% compared to 38% in the fourth quarter last year and it was of course impacted by the event driven service cost.
Jim: Okay.
For our full fiscal year 2025 revenue was $1.2 billion up 20% year over year, adjusted EBITDA rose, 28% to $471.8 million adjusted EBITDA margin increased 240 basis points to 39%.
Jim: Turning to the balance sheet as of year end January 31st 2025 cash on hand was $296 million as we generated $340 million of cash flow from operations in FY 'twenty five.
Jim: Company repaid $50 million of revolver revolver borrowings during the year, leaving approximately $1 $1 billion of debt outstanding net of issuance costs.
Jim: Company also repurchased $122 million of its outstanding shares during fiscal 2020, but leaving $178 million remaining on our previously announced $300 million share repurchase authorization.
Jim: Our fiscal 'twenty guidance reflects expected carry forward of a strong sales trajectory into next year technology security investments to reduce fraud and drive operational efficiencies and continued tailwind from current forward interest rate curves.
Jim: We expect revenue in a range between one point to eight and 1.305 billion GAAP net income in the range of 160 board $179 million or $1 85 to $2.01 per share.
Jim: We expect non-GAAP net income to be between 318, and $333 million or $3 seven and $3.74 per share based upon an estimated 89 million shares outstanding for the year.
Jim: Finally, we expect adjusted EBITDA to be between 525 and 545.
Jim: We expect the average yield on HSA cash will average approximately 3.45% during fiscal 'twenty six.
Jim: As a reminder, we based custodial yield assumptions embedded in guidance on projected cash deployment and rollovers scheduled which is contained in today's release as well as the analysis of forward looking market indicators, such as the secured overnight financing rate in mid duration Treasury board cause.
Jim: These are of course subject to change and not perfect predictors of future market condition.
Jim: Seasonally our fourth quarter is usually our highest service cost quarter of the year as our busy Onboarding season peak, we usually see member service costs normalize starting in Q1, we continue to invest in protecting our members assets in data, while providing them a remarkable experience.
Jim: Expect heavier than normal cost in our first two quarters towards that followed by better margin in the later quarters from those investments.
Our guidance includes additional expected share repurchases under the $300 million repurchase authorization and further reductions in revolver borrowings in the fiscal year with continued strong cash flow.
Jim: And available borrowings on our revolver, we will maintain ample capacity for portfolio acquisitions should they become available.
Jim: We assume a non-GAAP income tax rate of approximately 25% and a diluted share count of 89 million, including common share equivalents. We also assume a GAAP tax rate for fiscal 'twenty at about 25%.
Jim: As we've done in previous reporting periods. Our fiscal 2026 guidance include the reconciliation of GAAP to the non-GAAP metrics provided in the earnings release and the definition of all such items is included at the end of the earnings release.
Jim: In addition, while the amortization of acquired intangible asset is being excluded from non-GAAP net income the revenue generated from those acquired intangible assets.
Jim: And with that operator, let's open up the line for questions.
Jim: We will now begin the question and answer session.
Jim: To ask a question you May press Star then one on your telephone keypad.
Jim: If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Speaker Change: Our first question today is from Glenn Santa Angelo with Jefferies. Please go ahead.
Speaker Change: Oh, yeah, Thanks, Scott and thanks for taking the question Hey, Jim I, just want to follow up on these incremental service costs, you're talking about I think I think in your prepared remarks, you said you incurred about an incremental $17 million in four Q and so I'm kind of curious did anything specific happening or is that just the decision you all decided.
Speaker Change: To make on the investment front and then you know just as a follow on to that the cadence throughout fiscal 'twenty. Six you said, its obviously going to be more weighted to the first half are these one time costs or are these costs that are going to be sort of included in the base going forward. If you could just help us think about the cadence through fiscal 'twenty six that'd be helpful.
Speaker Change: Thanks.
Speaker Change: Yeah. Thanks, Thanks, Glenn for the question. So really gets the same topics that we talked about last quarter right. So we have these are sophisticated fraud actor so you're seeing a combination of the cost.
Speaker Change: To reimburse members for fraudulent activity in their accounts as well as the service costs related to our contact centers, taking those calls dealing with those calls are confirming that activity in the accounts. So it's a it's a combination of actual reimbursed.
Speaker Change: And then events as well as the excess cost team to deal with those about so recall, we talked that that was about an 8 million dollar impact for us in Q3.
Speaker Change: So you know, we we obviously plan for a bit of that to continue in Q4, but obviously, we're a where were overly optimistic on our ability to be in front of that so it is a it was more more than we expected in Q4, we're expecting that to continue into our into the first half of the year. So.
Speaker Change: Obviously, we don't we don't sort of guide quarterly, but trying to trying to give you a view that we expect a little bit of of of continuation and trail down into the beginning of the of the year here and sort of the back half being being more normalized like like you would expect on.
Speaker Change: On the service cost side.
Speaker Change: Okay. Thank you.
Gregory Peters: The next question is from Gregory Peters with Raymond James. Please go ahead.
Gregory Peters: Well good afternoon, everyone.
Gregory Peters: I think my question around the earnings guidance, probably the answer might deal with the cyber security issue, we're talking about but when I look at your range for the fiscal year 'twenty six.
Gregory Peters: Yeah, I'm, just curious what what kind of.
Gregory Peters: Lovers, or what kind of issues can pop up that can drive the result towards the bottom end of the range.
Gregory Peters: Thank the consensus numbers are staring towards the top end of the range. So I'm just curious inside your modeling what what what are the factors you're seeing that could lead to result towards the bottom end of the range.
Tim: Tim you want me to take that I'll take it.
Gregory Peters: Go ahead, yeah, Greg Yeah, Greg so.
Speaker Change: Reiterating sort of the trends that are driving the business overall that we just view as payer wins that were very optimistic around you know first of all as it relates to the custodial. The custodial line. We are very confident on the continued penetration of enhanced reads, Jim talked about our long term for.
Speaker Change: Because of getting towards 60% and a couple of years, the new money, that's coming in 85% of new members are going into the enhanced rate product.
Speaker Change: We see upside associated with the maturities you know as you know that are coming off again reminder, in fiscal year 'twenty six that's $2 3 billion at 2.5% and 50 or 27 at $4 1 billion at one 9%.
Speaker Change: So I think when we see the growth from HSA sales that we've had here this year plus those drivers we're confident in terms of some of these things in terms of just business as usual as we go and then so I'm just being powered by the growth that we've had associated with the business I think when you look at then the carry through.
Speaker Change: Of what we're doing more on the margin side and the services side that Jim highlighted I think we've also highlighted a couple of different opportunities. There number one is we look at just the expense base overall.
Speaker Change: We plan on looking at our functional areas too to effectively grow those expenses slower than revenue we.
Speaker Change: We see opportunities associated with our service modernization efforts are there.
Speaker Change: We're going to continue to execute on and and and still find that opportunity to drive margin expansion in the business. Overall. So you know I think again building on the momentum that we have coming out of this year gives us that opportunity to.
Speaker Change: Look at our guide that we're optimistic on for this next year.
Speaker Change: Got it and just a clarification on your answer.
Speaker Change: You May have said this but what was the percentage and enhanced yield at year end.
Speaker Change: 49%.
Speaker Change: Got it. Thank you very much for your answers thanks, Greg.
Speaker Change: The next question comes from Stanbury machine with Wells Fargo Securities. Please go ahead.
Stanbury: Alright, Thanks for taking my questions I really assist initiatives is there any direct monetization associated with any of these products and can you disclose which partners are involved in the partner solutions. Thanks.
Speaker Change: Yeah, I'll I'll take that on first of all as we look at the overall strategy here.
Speaker Change: And I've communicated the focus here is on a member first secure mobile experience, which is maybe slightly different language then you've heard us talk and it is consistent with what we outlined in our three D strategy and I think that's really informed by me coming in where you know today's.
Speaker Change: Tumors expected digital first mobile experience, they expect kind of security as a seamless part of that of that process and and when and when we look at the market opportunity that assist us really going after.
And it's really focused on enrollment adoption and engagement and so analyzer. As an example is a product that's internally developed and we're leveraging the data the insights the integration that we have with plans the insights that we have on reimbursement to.
Speaker Change: To actually help our clients or employers manage and increasing health care costs, it's growing faster than wages and just to give you a couple of stats on that 3% of our HSA members Max their HSA contribution and about 8% of HSA members have invested and so we think there.
Speaker Change: As a significant opportunity to help clients effectively.
Speaker Change: In fact really drive savings in health care costs, while also helping their members maximize the benefits associated with with that product.
Speaker Change: The other product that we announced a navigator. This is in partnership with talent and this is really designed to help on that engagement side.
Speaker Change: And this is really also driven by changes in the regulatory environment, that's requiring transparency for plan providers, helping clients also driving compliance as well as engagement on that we've talked a little bit. This last year around M. H pad, which is in partnership with patient.
Speaker Change: And this is really.
Speaker Change: Meant to drive access to have more HSA clients.
Speaker Change: I.
Speaker Change: Use this product to help drive adoption of our high deductible health plan and then probably the last one that we highlighted which is momentum which again. This is gonna be a product that is leveraging our unique open system. That's connected again with our partners as well as plans and providers.
Speaker Change: That we're going to leverage technology insights data and AI to drive better behaviour give our members better nudges. So that they can make more informed healthcare decisions. So hopefully that gives you a sense of partially the things that we're doing on our own and then the areas where you know, we'll we'll do we'll use.
Speaker Change: Partners.
Speaker Change: Yeah. Thanks, and then maybe just a quick follow up on this you had record member growth. This year is any of this has been a result of better engagement to drive enrollment within your client population does that translate even better conversion rates on the member side. Thanks.
Speaker Change: The growth that we the growth that we saw this year.
Speaker Change: In terms of the AR on the client side came from the small and medium sized businesses and I think that's a lot about you know kind of our effort.
Speaker Change: What we view as the opportunity within the existing client base as I shared on the the opportunity side.
Speaker Change: Our implementing with our sales and relationship management team a lot of a lot of efforts.
You know for example, analyzer has been out there with a number of clients that are just that had been using it already to drive engagement and enrollment and we see that opportunity to kind of like digitize. The sales experience by leveraging data that our clients can use to effectively put together better plan design to drive greater enrollment.
Speaker Change: And so it was kind of the mix of all of the things that we're doing.
Speaker Change: That's driving both an assisted grow through data and insights as well as the efforts that we have on the sales team of engaging our network partners as we are.
Speaker Change: We're going to market.
Speaker Change: Okay I understand.
Speaker Change: The next question is from Anne Samuel with Jpmorgan. Please go ahead.
Anne Samuel: Hi, Thanks, so much for the question you know you've been highlighting a lot more of your technology enhancements recently and with maybe just hoping you could speak to how we should be thinking about you know investment in R&D going forward is this something you plan to ramp as you lean a little bit more of a tech enabled and then or is that you know kind of being reallocated from other areas.
Anne Samuel: Yeah, I think so I would not expect any material change in terms of the percentage of our revenue that we will be spending on.
Anne Samuel: On a product and tech, but I would expect you know given I'm coming in new to the situation and driving this focus on this member first experience for the impact to be more than what we're prioritizing and so as we as we look at our roadmap going into the future the things that we prioritize.
Anne Samuel: <unk> again with that orientation.
Anne Samuel: It is building on some of the great success, we've had on the tech side.
Anne Samuel: Last year. So for example, app downloads, where we have over $1 million, we launched the App. This last this last summer.
Anne Samuel: I would expect us to continue to drive adoption of the App for our members. It's a more engaging experience. It's the digital first experience that they expect and it's also a more trusted and secure way for us to authorize and authenticate users on the platform.
Speaker Change: I really like they have continued to have an investment that we've had on the AI side clay.
Anne Samuel: Claims AI is as we talked about in the past it.
Anne Samuel: It is leveraging again data and insights on reimbursements to automate the reimbursement process for claims and we've had that rolled out with thousands of clients covering I think about it over and over 1 million members and that's a whole way for us to automate the claims.
Anne Samuel: Process and reimbursement process.
Anne Samuel: So so to say and as I as I look at the financial framework for our product and tech.
Anne Samuel: Back to us to become more efficient in that absolute dollars costs and then our priorities are really is just going to be shifting the resource resources around to make sure were delivering against that that that member first.
Anne Samuel: So to your mobile experience that I'm really excited about enhancing.
Anne Samuel: The.
Anne Samuel: Both the effectiveness and the speed with which we're delivering that type of product out to our clients and members.
Speaker Change: Really helpful. Thank you.
Anne Samuel: Like that.
Speaker Change: The next question is from David Roman with Goldman Sachs. Please go ahead.
David Roman: Thank you and good afternoon, everybody I'm I wanted just to pick up on a comment you made earlier regarding.
David Roman: HSA member growth and just make sure we understand the trend and potential implications I think you you made a reference to an increasing percentage of the HSA member growth coming from.
David Roman: Smaller employers.
David Roman: And maybe just talk to us where we are in in that trend and I'll read a position on a go forward basis, given your market share where that those types of companies are critical to the growth rate and then maybe a follow up.
David Roman: Think about capital allocation, you talked a little bit about the balance sheet. The wage works acquisition has I think gone relative you know quite well for the company and maybe you can sort of talk about the M&A environment and any any latest thinking on prioritization of internal versus external investment.
David Roman: Alright so.
David Roman: More than one question that one [laughter] I'll see if I can remember remember that thanks. So on the on the on the HSA growth side again, when we're looking at.
David Roman: Our our opportunity.
David Roman: As we look at the market segments.
David Roman: One amongst our largest clients, we're really looking at again as we talked about leveraging all of the insight for us to be able to drive more adoption and enrollment within our existing client base.
David Roman: On the new logos, while we seek growth on on different sizes of enterprise. We saw more of this last year from that small and medium sized business.
David Roman: Now in terms of that as a as a as a long term trend.
David Roman: I guess, what I would say is that I wouldn't we're not we're not changing our approach other than the fact that we're trying to you know again leveraged technology to put our sales team in a position to be leveraging data that is at the fingertips of our of our clients and our brokers. So that they can drive a more engaged experience for.
David Roman: Sure.
David Roman: For their for their clients as well.
David Roman: I think as you also look at it this was a record year and I, just really want to congratulate our team for doing that surpassing the million new HSA accounts has never been done by anyone before in our industry and so I think as we look at the market share numbers that will probably come out in the coming weeks.
David Roman: We're optimistic.
David Roman: Domestic in terms of the growth that we're seeing in the in the business overall.
David Roman: It relates to the M&A environment I think it was just another question that you had.
David Roman: And David I don't know if that you were just talking about that generally or what is our strategy.
David Roman: Sure I answer that right, Yeah, I was talking more about.
David Roman: Your strategy and how youre thinking about organic investment in the business versus.
David Roman: M&A and then the interplay between the two.
David Roman: Okay. So yeah. So.
David Roman: So on that side from a from an M&A perspective.
David Roman: We're going to have a very high bar for inorganic opportunities for expansion. We've got a great track record at looking at portfolios nonoperating businesses portfolio acquisitions that would still be right down the fairway for us and I think anything outside of that is going to be a very very high bar that really you have to deliver.
David Roman: We're both financial results and be consistent with our with our mission I think we see a much greater opportunity in really all of our focus is going to be around our own execution against growth in the industry and again when you when you take a step back and you look at the penetration the awareness and knowledge of the burner.
David Roman: Of HSA for both clients and with members, that's where we see the most significant opportunity for growth and that's why.
David Roman: The focus on.
David Roman: On our <unk> strategy of deepening our partnerships as an example, using more technology to drive digitize sales experience, creating greater connectivity and creating more products to again drive enrollment drive adoption drive contribution. We think those are the ways to and that we can lean in and <unk>.
David Roman: Troll the destiny of how we continue to grow the business.
Speaker Change: Okay, great. Thanks for taking the questions.
Speaker Change: The next question is from Scott showing house with Keybanc. Please go ahead.
Scott Cutler: Hey team. Thanks for taking my question I, just wanted to drill in more on the cadence of the margin. The gross margins on the services side is this something you know us.
Speaker Change: Is the improvement in the back half of the year driven by an assumption of no less fraud actors or is it more that youll shift more people onto the App and drive down service cost per call can you help us mitigate what's driving the re expansion of margins in the back half of the year. Thanks.
Scott Cutler: Yes.
Scott Cutler: As part of that yeah, Yeah, I can do yeah. The first part yeah. The answer is yes, both of those things right. So.
Scott Cutler: But but for these excess costs that we were talking about.
Scott Cutler: You would've seen US report another significant reduction in service cost per account right in that and that's the North Star of my service and Ops partners.
Scott Cutler: So like that that work has not stopped and and they see you know pretty great results during the air aside from the <unk>.
Scott Cutler: You sort of point of time, our events here. So yes, we are assuming in our guidance that that the steps, we're taking are going to.
Scott Cutler: Dan this.
Scott Cutler: Like fraud and related items around at median exit calls just excess contact.
Scott Cutler: And excess work for our service center, but the day to day performance of that team has been excellent and we're assuming that that that trend continued.
Scott Cutler: Into next year.
Scott Cutler: So it is exactly that right. So we'll sort of get it if we can eliminate these these event driven costs right well, we'll get a service cost reduction there.
Scott Cutler: For free for lack of a better word and then sort of a return return to normal going forward or sort of a you know fraud fraud position is like you were talking about like one basis point on our total assets for our annual fraud is kind of a benchmark for us so.
Scott Cutler: So that's a very very small number.
Scott Cutler: Yeah, I guess you could put it also also strategically is that.
Scott Cutler: As it relates to as we talked about here, our fraud and security posture.
My first hire as CEO was a as our CSO So Nielsen chowdhry.
Scott Cutler: We are prioritizing that member first secure mobile experience, we're investing against that we're prioritizing security and fraud prevention efforts as we as we have in the past and we're going to continue to build a great team in this area.
Scott Cutler: We're enhancing our systems and platform.
And in our apps from a security perspective.
Scott Cutler: I think that the investment there.
Scott Cutler: We should expect to see.
Scott Cutler: It goes those costs associated with fraud moderate Oh as we as we've highlighted I think I think the second thing is that going a little bit deeper into service modernization.
Scott Cutler: As we think about the opportunity we handle millions of calls film based calls from our from our members every single year.
Scott Cutler: A significant percentage of those calls.
Scott Cutler: Our used to authenticate who the member is.
Scott Cutler: Many of those calls are things like what is my account balance change address reset my password and as we and as we look at our ability to automate a lot of those interactions whether or not that would be on the front end or be able to reduce contact drivers.
Scott Cutler: Well, we just see significant opportunity on the overall service cost per account.
Scott Cutler: To be able to use technology to both drive down those call drivers drive down the costs, while also increasing the quality of the experience and the channels that are members sort of expect from us.
Scott Cutler: And that really does get to ultimately over time a lower.
Scott Cutler: Service cost per account.
Scott Cutler: Great. Thank you.
The next question is from Mark Mark Hahn with Baird. Please go ahead.
Mark Hahn: Good afternoon, and thanks for taking my question.
Scott Cutler: With regards to.
Mark Hahn: Two.
Speaker Change: Issues that came up during the third and now the fourth quarter can you talk a little bit about what the member reaction is and what the employer reaction is.
Mark Hahn: And can you let us know.
Mark Hahn: What client retention from an employer perspective.
Mark Hahn: It was over the course of this year.
Speaker Change: Yeah I'll take that.
Speaker Change: Our highest priority is delivering a remarkable experience for our clients and for our members.
Speaker Change: Protecting our our members' accounts is kind of a joint.
Speaker Change: The opportunity in the sense that the members with respect to physical card or their or their passwords, and example need to be protected.
Speaker Change: But we stand behind the service that we provide and the experience that we provide and so you know our our team which is team purple so committed to delivering that remarkable experience, we really do and the team prides itself on how we handle those issues when they when they come up.
Speaker Change: And certainly for a member or a client that has you know something less than remarkable our team does everything that we can do to make sure that we that we make that right.
Speaker Change: How that translates into our business and you know obviously as we as we look at that.
Speaker Change: We want to make sure that we're retaining clients and members and proud to say on top of it.
Speaker Change: A really strong sales momentum.
Speaker Change: Really proud of our retention results, which are in the high nineties in terms of clients that we retain.
Speaker Change: We're in and so that has been unchanged even as we've gone through some of these challenges associated with Q3 and Q4, but I think again continuing to drive differentiation and our service differentiation in our product and then delivering on both of those things.
Speaker Change: I think as that is the promise that we expect from them from our clients and we're certainly seeing a strong trend.
Speaker Change: And in that regard for them.
Speaker Change: That's good to hear thank you.
Mark Hahn: Thanks Mark.
Speaker Change: The next question is from Allen Lutz with Bank of America. Please go ahead.
Allen Lutz: Good afternoon, and thanks for taking the questions I wanted to ask one for Steve last quarter, you talked a lot about just general excitement around expanding access to portable health accounts I think you mentioned the Hope Act.
Allen Lutz: Say modernization and then other things the incoming administration can do can you just give us an update on where things stand today relative to December if anything's moves and then a quick one for Jim do you have insurance for the fraud activity that took place thanks guys.
Speaker Change: I'll start thanks Alan.
Allen Lutz: I think good news is as the.
Allen Lutz: Government remains open for business now so they can keep working on it and its reconciliation go together.
Speaker Change: <unk> said, we think that there are still these three clear pathways.
Speaker Change: Whether it be the reconciliation bill, which we've continued to.
Speaker Change: Discuss different opportunities with the legislators there and we do think that.
Speaker Change: There's a piece of this package that will well for HSA expansion or hope accounts that have been introduced and then also you know we've got to buy personally just actually continues to grow that as you know it was reintroduced in February February 4th.
Speaker Change: In a bipartisan way, it's great to see these legislators coming together and then also these regulatory changes in the last Trump administration. They did some pretty important things that would allow employers to.
Speaker Change: Continue to expand their their HSA offering so we know that what it is.
Speaker Change: The four and a half or financing or a package.
Speaker Change: They're working towards this.
Speaker Change: Reconciliation budget resolution process that we've.
Speaker Change: What we're hearing is is that they're doing everything they can to increase.
Speaker Change: Chris space for this type of expansion or an HSA. They talked about publicly are there several bills that have been introduced beyond hopak, which allows for HSA expansion and we know there's a lot of legislators after that so like this is really important because they're doing this tax package to go through so we remain optimistic and hopeful.
Speaker Change: We won't know until you know it really starts coming out of committee and.
Speaker Change: And probably the next month or two it depends on the timing I mean, there is some folks out there.
It's all put together before.
Speaker Change: Memorial day, but we'll see if that's true, but we do remain hopeful and theirs.
Speaker Change: So theres a lot of talk around there about NIS six tension. So we're gonna keep keep doing everything we can support the effort.
Speaker Change: With both HSA Santo.
Speaker Change: Yeah.
Speaker Change: Yeah, Yeah. Thanks, Steven on the on the insurance question right, there's not really a lot to talk about yet on it but like yes under sort of a general general crime policy.
Speaker Change: We will work with our with our insurers.
Over the next quarter or so to see to see what can be recovered there from those policies.
Speaker Change: Great. Thank you thanks Alan.
Speaker Change: The next question is from David Larsen with B T. I G. Please go ahead.
Speaker Change: It seems to me like you're building exactly what RFK Junior would want a technology platform that can provide nudges and incentives to members to keep them healthy and see quality care at lower cost sites that would obviously be a benefit to the cost of total Medicare longer term so hopefully the Congress.
Speaker Change: Budget office is taking that into account when they're doing their scoring but.
Speaker Change: My question is really related to the fraud activity.
Speaker Change: It sounds like it was one large actor who who did this thing has it been resolved like was where those cost did those include like programmers from an external security firm that fields like sort of breaches in the software did you implement like a dual mobile sort of identive.
Speaker Change: Occasion process for all members. So there so theyre now verified when I when I dial and did you have to pay a ransom.
Speaker Change: Was the F b I contacted them and where the malicious actors arrested so like.
Speaker Change: Basically what's this whole thing resolved.
Speaker Change: So we can expect the margins to get back up to like 65% in the fourth quarter. Your gross margins next a lot.
Speaker Change: Thanks, Thanks, David I'll take that so a couple of things one just want to make sure we're not confusing two things one as it relates to.
Speaker Change: Hum.
Speaker Change: Data itself securing personal.
Speaker Change: Personal information that's not what we're talking about here.
Speaker Change: Where we're talking about fraud and it is not one actor as we as we as you look at the profile of what's happening out there in the market.
Speaker Change: We have continuously taken steps designed to ensure that our platforms our data our systems remain available.
Speaker Change: And secure and at the same time the number of bad actors state actors that are leveraging technologies continue to.
Speaker Change: Continue to.
Speaker Change: Focus on financial services companies like like US. So these things are are tricky in the sense that there's not one bad actor Theres not one single party.
Speaker Change: Involved and so for us as we think about the strategy there for you.
Speaker Change: We have to look at various levels of security in terms of the internal controls.
Speaker Change: The protections that we provide from a network perspective, and application perspective, and identity perspective, and so we think about it holistically in terms of how we have to both protect accounts from being taken over how we have to identify fraud or our fraud that might be happening.
Speaker Change: Two a member or their or their card.
Speaker Change: So.
Speaker Change: That is.
Speaker Change: Largely it gives you a sense of kind of like the scope of the things that we're focused on you know and I think from a from an experience perspective as we look at.
Speaker Change: Different ways to secure the member experience as we make a move towards a stronger mobility introduce even more efforts associated with multi factor authentication.
Speaker Change: We think all of these things combined.
Speaker Change: Help us to be able to stem. The recent trends that we've been seeing on fraud I don't know Jim do you have anything else to add.
Speaker Change: Yeah, No. That's that's the point I think a couple of questions.
Speaker Change: For comments from from the group right like this is not a a cyber security incident right. Like this is this is your good old fashioned account takeover bad actors impersonating, you right and and and.
Speaker Change: Entering your accounts like I'm sure. Many of you have had a had bad credit card payments or bank account transactions that you Didnt recognize this is the type of activity that we're talking about and needs to be that that insurance claim. That's why we're talking about the crime insurance policy not not some sort of cyber cyber security incident.
Speaker Change: So just wanted to make that distinction crystal clear.
Speaker Change: Jim when do you think you'll get back up to a 65% gross margin. Thanks.
Yeah again like we don't we don't provide the quarterly guidance are detailed guidance like that so I think what what we have what we have said is like we're gonna see elevated service costs in the first half of the year and we will we expect to be more back to normal in the back half of the year and we expect to exit exit.
Speaker Change: This year in a really strong and a really strong position and are in the service cost and again, we are not targeting a service margin per se or gross margin per se like what we're trying to do is drive down the unit cost to serve because that that's in our control.
Speaker Change: The you.
Speaker Change: Interchange, it's kind of it's kind of going to be what it's going to be right like with our ability to sell our ability to sell accounts is going to keep growing the interchange line and our ability to keep driving contribution is going to drive the custodial line and mixed towards though those lines drive gross margin higher but you know what we're trying to do.
Speaker Change: Is drive down unit service cost.
Speaker Change: That's like the most tangible controllable above the line expense that we can that we can bend the curve.
Speaker Change: Thanks very much.
Speaker Change: The next question is from Steve Valiquette with Mizuho. Please go ahead.
Speaker Change: Hi team. Thanks for taking the question. This is Sam Hassan of asking for Steve I'm, just wanted to gauge your guys' thoughts on any incremental or high level color on EBIT growth by.
Speaker Change: By segment for 2026, particularly in custodial EBIT. Thanks.
Speaker Change: Yeah again.
Speaker Change: Yeah. So the comment that we get made right. We don't provide any detailed guidance at that level, we don't have segments or or or report EBIT or operating income at that at that level. So we're.
Speaker Change: We're just not going to provide that kind of granularity.
Speaker Change: Understood. Thank you.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Scott Cutler for any closing remarks.
Scott Cutler: Thank you and.
Speaker Change: I just want to thank our team team purple for the great results from this last quarter.
Speaker Change: This is one of those quarters that it was a team effort. It was a team effort for the year our team.
Speaker Change: Is prepared for the years to come we want to thank our shareholders who want to thank each of you for your support I look forward to meeting many of you face to face in the upcoming weeks and months.
Speaker Change: And we will continue to report to you our progress against these objectives. So thank you everybody.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: [music].