Q2 2026 HealthEquity Inc Earnings Call

Speaker #1: Good afternoon, and welcome to the HealthEquity Second Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal the conference specialist by pressing the STAR key followed by zero.

Operator: Good afternoon and welcome to the HealthEquity Second Quarter 2026 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. Please note this event is being recorded. I would now like to turn the conference over to Richard Putnam. Please go ahead.

Speaker #1: Please note, this event is being recorded. I would now like to turn the conference over to Richard Putnam. Please go ahead.

Speaker #3: Thank you, Gary. I appreciate it. I appreciate you all for seeing us today. Hello, everyone. Thanks for joining us this afternoon. As Gary said, this is the HealthEquity Second Quarter Fiscal Year 2026 Earnings Conference Call.

Richard Putnam: Thank you, Gary. Appreciate it. I appreciate you all seeing us today. Hello, everyone. Thanks for joining us this afternoon. This, as Gary said, this is HealthEquity Second Quarter of Fiscal Year 2026 Earnings Conference Call. My name is Richard Putnam. I do investor relations for HealthEquity. Joining me today is also Scott Cutler, President and CEO, Dr. Steve Neeleman, Vice Chair and Founder of the company, and James Lucania, Executive Vice President and CFO. Before I turn the call over to Scott for prepared remarks, we note that a press release announcing the financial results of our second quarter of fiscal 2026 was issued after the market closed this afternoon. These financial results include certain non-GAAP financial measures that we will reference today. You can find a copy of today's press release on our investor relations website, which is ir.healthequity.com.

Speaker #3: My name is Richard Putnam. I do investor relations for Health Equity. Joining me today is also Scott Cutler, President and CEO; Dr. Stephen Neeleman, Vice Chair and Founder of the Company; and James Lucania, Executive Vice President and CFO.

Speaker #3: Before I turn the call over to Scott Cutler for prepared remarks, we note that a press release announcing the financial results of our second quarter of fiscal 2026 was issued after the market closed this afternoon.

Speaker #3: These financial results include certain non-GAAP financial measures that we will reference today. You can find a copy of today's press release on our Investor Relations website, which is ihr.healthequity.com.

Speaker #3: And it will also include the reconciliation of these non-GAAP measures with comparable GAAP measures. We also note that our comments and responses to your questions today reflect management's view as of today, September 2, 2025, and will contain forward-looking statements as defined by the SEC.

Richard Putnam: It will also include the reconciliation of these non-GAAP measures with comparable GAAP measures. We also note that our comments and responses to your questions today reflect management's view as of today, September 2, 2025, and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates, or other information that might be considered forward-looking. There are many important factors relating to our business, which could affect the forward-looking statements made today. These forward-looking statements are subject to risk and uncertainties that may cause our actual results to differ materially from statements made here today.

Speaker #3: Including predictions, expectations, estimates, or other information that might be considered forward-looking. There are many important factors relating to our business that could affect the forward-looking statements made today.

Speaker #3: These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the statements made here today. We caution against placing undue reliance on these forward-looking statements, and we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock, as detailed in our latest annual report on Form 10-K and any subsequent periodic reports filed with the SEC.

Richard Putnam: We caution against placing undue reliance on these forward-looking statements, and we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock, as detailed in our latest annual report on Form 10-K and any subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information. With that out of the way, let's get on with this. Now over to Scott Cutler.

Speaker #3: We assume no obligation to revise or update these forward-looking statements in light of new information. With that out of the way, let's get on with this. Now, over to Scott Cutler.

Speaker #4: Thanks, Richard. And welcome, everybody. For the last 10 years or so, HealthEquity has traditionally reported our second fiscal quarter on the day after Labor Day.

Scott Cutler: Thanks, Richard, and welcome, everybody. For the last 10 years or so, HealthEquity has traditionally reported our second fiscal quarter the day after Labor Day. For many, this day is the first unofficial day of the fall season, which means getting kids back to school, football, leaves changing colors, and the welcome relief of cooler weather. For Team Purple, it is the start of our busy growth season. Before previewing the preparations we have made for our busy season, I will discuss the key metrics reflecting a strong start to fiscal 2026. Steve will provide details on HSA expanding provisions included in the budget bill passed in July, and Jim will detail Q2 financial results and our raised outlook for fiscal year 2026.

Speaker #4: For many, this day is the first unofficial day of the fall season, which means getting kids back to school, football, leaves changing colors, and the welcome relief of cooler weather.

Speaker #4: For Team Purple, it is the start of our busy growth season. But before previewing the preparations we have made for our busy season, I will discuss the key metrics reflecting a strong start to fiscal 2026.

Speaker #4: Steve will provide details on the HSA expanding provisions included in the budget bill passed in July, and Jim will detail Q2 financial results and our raised outlook for fiscal year '26.

Speaker #4: The team again delivered strong year-over-year growth and margin expansion across our key metrics in Q2, including revenue up 9%, net income up 67%, adjusted EBITDA up 18% to an all-time quarterly company high that also included record gross margin of 71%, and near record adjusted EBITDA margin of 46%.

Scott Cutler: The team again delivered strong year-over-year growth and margin expansion across our key metrics in Q2, including revenue up 9%, net income up 67%, adjusted EBITDA up 18% to an all-time quarterly company high that also included a record gross margin of 71% and near a record adjusted EBITDA margin of 46%. HSAs grew 6%, Consumer-Directed Benefits accounts grew 4%, driving total accounts up 5%, and HSA assets were up 12%. HealthEquity ended Q2 with over 17 million total accounts, including net Consumer-Directed Benefits account growth of 255,000 year-over-year and just under 10 million HSAs, holding over $33 billion in HSA assets. HSA assets increased $3.7 billion year-over-year. The number of our HSA members who invest grew by 10% year-over-year, helping to drive invested assets up 23% to $16.1 billion. HSA cash reached $17 billion. The average balances of our HSA members grew by 6% year-over-year.

Speaker #4: HSAs grew 6%, CDB accounts grew 4%, driving total accounts up 5%, and HSA assets were up 12%. Health Equity ended Q2 with over 17 million total accounts.

Speaker #4: Including net CDB account growth of $255,000 year-over-year and just under $10 million in HSAs, holding over $33 billion in HSA assets. HSA assets increased by $3.7 billion year-over-year, and the number of our HSA members who invest grew by 10% year-over-year, helping to drive invested assets up 23% to $16.1 billion.

Speaker #4: HSA cash reached $17 billion. The average balances of our HSA members grew by 6% year-over-year. From a macro perspective, after accounting for adjustments, the labor market is underperforming relative to expectations and is softer than the pace of hiring in calendar years 2024 and 2023.

Scott Cutler: From a macro perspective, after accounting for adjustments, the labor market is underperforming relative to expectations and softer than the pace of hiring in calendar 2024 and 2023. Despite this macro environment, Team Purple opened 163,000 new HSAs from sales in the quarter. Early indicators of this year's selling season show strong new enterprise wins, as well as retention of our existing clients. We also continue to see signs that more SMB companies are adopting HSA-qualified health plans. Improved data analytics, combined with upsell or cross-sell opportunities, are helping our sales and relationship management teams deliver market-leading tools to help employers manage healthcare costs that continue to grow at two to three times the growth in wages. We are in a unique position to benchmark and recommend the most effective components of health plan plus HSA design, given the size of our data set and our expertise across client engagements.

Speaker #4: Despite this macro environment, Team Purple opened 163,000 new HSAs from sales in the quarter. Early indicators of this year's selling season show strong new enterprise wins as well as retention of our existing clients.

Speaker #4: We also continue to see signs that more SMB companies are adopting HSA-qualified health plans. Improved data analytics, combined with upsell or cross-sell opportunities, are helping our sales and relationship management teams deliver market-leading tools to help employers manage healthcare costs that continue to grow at 2 to 3 times the growth in wages.

Speaker #4: We are in a unique position to benchmark and recommend the most effective components of health plan plus HSA design, given the size of our dataset and our expertise across client engagements.

Speaker #4: Powered by our Analyzer tool and expert consultants, these recommendations can maximize health plan and tax savings for the employer while increasing healthcare affordability for their employees.

Scott Cutler: Powered by our Analyzer tool and expert consultants, these recommendations can maximize health plan and tax savings for the employer while increasing healthcare affordability for their employees. We continue to see better benefits plan cost performance for clients with higher HSA adoption rates within our client base. We are pleased to see a number of clients utilizing health payment accounts, or HPAs, in connection with higher HSA adoption, providing members with an added safety net when first starting their HSA journey. Team Purple also made great progress expanding our member-first secure mobile experience during the quarter while reducing our cost to serve. Since launching our award-winning expedited claims, which uses AI technology to automate claims adjudication, we have processed millions of dollars in reimbursements while driving member satisfaction scores up and reducing processing costs.

Speaker #4: We continue to see better benefits planned cost performance for clients with higher HSA adoption rates within our client base. We are pleased to see a number of clients utilizing health payment accounts, or HPAs, in connection with higher HSA adoption, providing members with an added safety net when first starting their HSA journey.

Speaker #4: Team Purple also made great progress expanding our member-first secure mobile experience during the quarter, while reducing our cost to serve. Since launching our award-winning expedited claims, which uses AI technology to automate claims adjudication, we have processed millions of dollars in reimbursements while driving member satisfaction scores up and reducing processing costs.

Speaker #4: This is just the beginning of our AI journey and a new phase in our service modernization. We expect to further leverage agentic AI in our voice channel to drive greater automation and enhance the member experience.

Scott Cutler: This is just the beginning of our AI journey and a new phase to our service modernization. We expect to further leverage Agentic AI in our voice channel to drive greater automation and enhance the member experience, accelerating service delivery to our members and accurately addressing their needs and questions while reducing call wait time. These expanded AI service capabilities can potentially accelerate our efforts to further drive down our service costs. Over this past year, we have increased our service levels, reduced the fraud impacting our members, and launched expedited claims, which all enhance the members' experience, with 9% fewer teammates this year compared to a year ago. We also celebrated the completion of moving our V5 platform to be 100% cloud-based this quarter, resulting in 92% faster response times, five times more stability to the platform, and an 80% reduction in delays.

Speaker #4: Accelerating service delivery to our members and accurately addressing their needs and questions while reducing call wait times. These expanded AI service capabilities can potentially accelerate our efforts to further drive down our service costs.

Speaker #4: Over this past year, we have increased our service levels, reduced the fraud impacting our members, and launched expedited claims, all of which enhance the members' experience.

Speaker #4: We have 9% fewer teammates this year compared to a year ago. We also celebrated the completion of moving our V5 platform to be 100% cloud-based this quarter, resulting in 92% faster response times, five times more stability to the platform, and an 80% reduction in delays.

Speaker #4: We are very pleased with our team's efforts to drive down successful fraud attacks on our HSA members. Under the direction of Sunil Seshadre, our Chief Security Officer, and his dedicated security and fraud teams, we launched a number of added security measures, including greater adoption of our member-first secure mobile experience app, which now boasts 1.7 million downloads. This has helped reduce direct fraud service costs from $3 million in Q1 to an exit run rate in Q2 near our goal of one basis point of total HSA assets per year.

Scott Cutler: We are very pleased with our team's efforts to drive down successful fraud attacks on our HSA members. Under the direction of Sunil Seshadre, our Chief Security Officer, and his dedicated security and fraud teams, we launched a number of added security measures, including greater adoption of our member-first secure mobile experience app, which now boasts 1.7 million downloads, to reduce direct fraud service costs from $3 million in Q1 to an exit run rate in Q2 near our goal of one basis point of total HSA assets per year. The first phase of additional passkey authentication capabilities was rolled out during the quarter, and we anticipate that many of our members will authenticate through this passkey technology by the end of the year.

Speaker #4: The first phase of additional passkey authentication capabilities was rolled out during the quarter, and we anticipate that many of our members will authenticate through this passkey technology by the end of the year.

Speaker #4: The introduction of passkeys will enhance trust and improve the login and authentication experience across our platforms. This will benefit our members by providing a streamlined login process, eliminating the need to remember passwords.

Scott Cutler: The introduction of passkey will enhance trust and improve the login and authentication experience across our platforms, with the benefit to our members of a streamlined login process and no longer being required to remember passwords. We continue to see lower sequential fraud each month this year as our controls take hold and more of our members move to a secure mobile experience. We are committed to continually updating our defenses as threats evolve. We are optimistic about the actions taken thus far and the continued strengthening and implementation of controls. These experience enhancements are part of HealthEquity's broader strategy shift to consumer experiences to secure our consumer-centric mobile app. As part of the mobile-first strategy, new members who sign up through their employer's open enrollment process will be able to set up their HSA account through the HealthEquity mobile app.

Speaker #4: We continue to see lower sequential fraud each month this year as our controls take hold and more of our members move to a secure mobile experience.

Speaker #4: We are committed to continually updating our defenses as threats evolve. We are optimistic about the actions taken thus far and the continued strengthening and implementation of controls.

Speaker #4: These experience enhancements are part of Health Equity's broader strategy shift to consumer experiences to secure our consumer-centric mobile app. As part of the mobile-first strategy, new members who sign up through their employers' open enrollment process will be able to set up their HSA account through the Health Equity mobile app.

Speaker #4: This process will be faster, seamless, and secured with industry-leading passkey technology. On the legislative front, the budget bill passed in early July delivered a number of wins for HSAs.

Scott Cutler: This process will be faster, seamless, and secured with industry-leading passkey technology. On the legislative front, the budget bill passed in early July delivered a number of wins for HSAs. Dr. Steve Neeleman and our government affairs team did a remarkable job of educating our legislators and their staff about the benefits of HSAs and the growing demand for greater access to them from American families. Thank you, Steve, for your leadership in this effort. Please help us understand what this means for this year and beyond.

Speaker #4: Steve and our government affairs team did a remarkable job of educating our legislators and their staff about the benefits of HSAs and the growing demand for greater access to them from American families.

Speaker #4: Thank you, Steve, for your leadership in this effort. Please help us understand what this means for this year and beyond.

Speaker #2: Thank you, Scott. It has been a busy and exciting time this summer for our team in Washington. The budget bill that was passed and signed into law in July included key provisions that expand the use of HSAs, granting wider access to more American families.

Scott Cutler: Thank you, Scott. It has been a busy and exciting time this summer for our team in Washington. The budget bill that was passed and signed into law in July included key provisions that expand the use of HSAs, granting wider access to more American families. The bill expanded the market for HSA adoption by allowing direct primary care, or DPC, arrangements and the use of low-cost telehealth before consumers meet their deductibles. Both of these provisions have been popular with health plans and employers to provide greater access to lower-cost healthcare for consumers while keeping overall costs for payers in check. Previously, DPC and low-cost telemedicine were both disqualifying plan design elements for HSA eligibility. These provisions provide employers more flexibility in plan design and greater access to affordable healthcare. We expect these changes will help our partners and clients drive greater HSA adoption.

Speaker #2: The bill expanded the market for HSA adoption by allowing direct primary care (DPC) arrangements and the use of low-cost telehealth before consumers meet their deductibles.

Speaker #2: Both of these provisions have been popular with health plans and employers to provide greater access to lower-cost healthcare for consumers while keeping overall costs for payers in check.

Speaker #2: Previously, DPC and low-cost telemedicine were both disqualifying plan design elements for HSA eligibility. These provisions provide employers with more flexibility in plan design and greater access to affordable healthcare.

Speaker #2: We expect these changes will help our partners and clients drive greater HSA adoption. The bill also significantly expands HSA eligibility for individuals and families who purchase health insurance offered on ACA exchanges.

Scott Cutler: The bill also significantly expands HSA eligibility for individuals and families who purchase health insurance offered on ACA exchanges. All individual bronze and catastrophic plans will be allowed to be coupled with HSAs beginning January 1, 2026. There are currently over 7 million people enrolled in bronze health plans. Approximately 90% of these plans are not eligible to open HSAs. This will change in January, and our teams are working hard to capitalize on this opportunity. Furthermore, with subsidies on the exchanges being reduced or going away, higher healthcare trend rates driving up premiums, the added benefit of funding out-of-pocket expenses through an HSA, and the lower cost bronze premiums, this may all lead to more people opting into these plans. We believe HealthEquity is uniquely positioned to deliver with our network partners a streamlined enrollment process that can help bronze plans and enrollees easily enroll in HealthEquity HSAs.

Speaker #2: All individual bronze and catastrophic plans will be allowed to be coupled with HSAs beginning January 1, 2026. There are currently over 7 million people enrolled in bronze health plans; approximately 90% of these plans are not eligible to open HSAs.

Speaker #2: This will change in January, and our teams are working hard to capitalize on this opportunity. Furthermore, with subsidies on the exchanges being reduced or going away, higher healthcare trend rates driving up premiums, the added benefit of funding out-of-pocket expenses through an HSA, and the lower-cost bronze premiums, this may all lead to more people opting into these plans.

Speaker #2: We believe Health Equity is uniquely positioned to deliver, with our network partners, a streamlined enrollment process that can help bronze plan enrollees easily enroll in Health Equity HSAs.

Speaker #2: The benefit from our industry-leading solution. In addition, targeted consumer marketing campaigns in key markets will raise awareness of new eligibility and benefits. HealthEquity is building a redesigned enrollment and onboarding experience for all HSA-qualified individuals, including the new bronze and catastrophic plan consumers.

Scott Cutler: The benefit from our industry-leading solution. In addition, targeted consumer marketing campaigns in key markets will raise awareness of new eligibility and benefits. HealthEquity is building a redesigned enrollment and onboarding experience for all HSA-qualified individuals, including the new bronze and catastrophic plan consumers. This new redesign will provide faster, secure, and mobile responsive experience to sign up for an HSA and a seamless funding process. Because of these changes in the OBBB, we believe these provisions could allow three to four million more American families to have access to the remarkable benefits of HSAs. This is the largest expansion of the regulatory framework for HSAs in the last 20 years. These changes will make it easier for employers to offer and promote HSAs. These provisions are a good down payment by our legislators to help all Americans have personally owned health accounts.

Speaker #2: This new redesign will provide a faster, secure, and mobile-responsive experience to sign up for an HSA in a seamless funding process. Because of these changes in the OBBB, we believe these provisions could allow three to four million more American families to have access to the remarkable benefits of HSAs.

Speaker #2: This is the largest expansion of the regulatory framework for HSAs in the last 20 years. These changes will make it easier for employees to offer and promote HSAs.

Speaker #2: These provisions are a good down payment by our legislators to help all Americans have personally owned health accounts. We will, of course, continue to work hard to educate legislators and regulators on the benefits of HSAs and continue to press for a number of other HSA market-expanding provisions.

Scott Cutler: We will, of course, continue to work hard to educate legislators and regulators on the benefits of HSAs and continue to press for a number of other HSA market expanding provisions. We remain confident that tax-advantaged health accounts like HSAs that help consumers pay for their out-of-pocket costs are popular on both sides of the political aisle, and we will continue to advocate for all Americans to have access to them. Now I'll pass time over to Jim to discuss our financials. Jim.

Speaker #2: We remain confident that tax-advantaged health accounts like HSAs, which help consumers pay for their out-of-pocket costs, are popular on both sides of the political aisle.

Speaker #2: And we will continue to advocate for all Americans to have access to them. Now, I'll pass the time over to Jim to discuss our financials.

Speaker #2: Jim.

Speaker #5: Thanks, Steve. Before I jump into the financial review, I just want to echo Scott and personally thank Steve and our government affairs team for the awesome job they did helping our lawmakers better understand the value of HSA plans and the impact they have in making healthcare for American families more affordable.

James Lucania: Thanks, Steve. Before I jump into the financial review, I just want to echo Scott and personally thank Steve and our government affairs team for the awesome job they did helping our lawmakers better understand the value of HSA plans and the impact they have in making healthcare for American families more affordable. Great job to Steve and the team. Now let's talk about our second quarter fiscal 2026 GAAP and non-GAAP financial results. As always, we provide a reconciliation of GAAP measures to non-GAAP measures in the press release. Second quarter revenue increased 9% year-over-year. Service revenue increased 1% to $117.9 million. Custodial revenue grew 15% to a record $159.9 million in the second quarter. The annualized yield on HSA cash was 3.51% for the quarter as a result of higher replacement rates and continued increase in balances and number of accounts participating in enhanced rates.

Speaker #5: Great job to Steve and the team. Now, let's talk about our second quarter, fiscal 2026, GAAP and non-GAAP financial results. As always, we provide a reconciliation of GAAP measures to non-GAAP measures in the press release.

Speaker #5: Second quarter revenue increased 9% year-over-year. Service revenue increased 1% to $117.9 million. Custodial revenue grew 15% to a record $159.9 million in the second quarter.

Speaker #5: The annualized yield on HSA cash was 3.51% for the quarter. This increase is a result of higher replacement rates and a continued increase in balances and the number of accounts participating in enhanced rates.

Speaker #5: Interchange revenue grew 8% to $48.1 million, notably faster than the 5% total account growth. As members increased both contributions and distributions, there were more payments on-platform versus requesting cash reimbursement for payments made off-platform.

James Lucania: Interchange revenue grew 8% to $48.1 million, notably faster than the 5% total account growth as members increased both contributions and distributions with more payments on platform versus requesting cash reimbursement for payments made off platform. Gross profit of $232.6 million was a record 71% of revenue in the second quarter, up from 68% in the second quarter last year. Service costs declined year-over-year in the quarter, both on a reported basis and excluding fraud and fraud accruals. The second quarter included approximately $1.2 million of fraud reimbursements to members, and we had a net release of our fraud reserve of approximately $1 million in the quarter. As Scott mentioned, we remain on pace to achieve our goal to exit fiscal year 2026 with a run rate of one basis point of total assets in fraud cost per annum.

Speaker #5: Gross profit of $232.6 million was a record 71% of revenue in the second quarter, up from 68% in the second quarter last year. Service costs declined year-over-year in the quarter, both on a reported basis and excluding fraud and fraud accruals.

Speaker #5: The second quarter included approximately $1.2 million in fraud reimbursements to members, and we had a net release of our fraud reserve of approximately $1 million.

Speaker #5: In the quarter, as Scott mentioned, we remain on pace to achieve our goal to exit fiscal year '26 with a run rate of one basis point of total assets in fraud costs per annum.

Speaker #5: We continue to invest in fraud prevention and detection capabilities and drive higher adoption of our secure mobile experience. We believe these efforts will normalize the fraud impact on service costs in the second half of fiscal year '26.

James Lucania: We continue to invest in fraud prevention and detection capabilities and drive higher adoption of our secure mobile experience, and we believe these efforts will normalize fraud impact on service cost in the second half of fiscal year 2026. As Scott mentioned earlier, the actions taken during our first half of this fiscal year to drive efficiency in our operations, we exited the quarter with 9% fewer teammates compared to the prior year and expect to carry those savings into fiscal year 2027. Net income for the second quarter was $59.9 million or $0.68 per share on a GAAP EPS basis. Non-GAAP net income was $94.6 million or $1.08 per share.

Speaker #5: As Scott mentioned earlier, the actions taken during the first half of this fiscal year were aimed at driving efficiency in our operations. We exited the quarter with 9% fewer teammates compared to the prior year and expect to carry those savings into fiscal year '27.

Speaker #5: Net income for the second quarter was $59.9 million, or $68.00 per share, on a GAAP EPS basis. Non-GAAP net income was $94.6 million, or $1.08 per share.

Speaker #5: Adjusted EBITDA for the quarter was $151.1 million, up 18% compared to Q2 last year. Adjusted EBITDA as a percentage of revenue was 46%.

James Lucania: Adjusted EBITDA for the quarter was $151.1 million, up 18% compared to Q2 last year, and adjusted EBITDA as a percentage of revenue was 46%, near an all-time record for us and up compared to 43% in the second quarter last year. Turning to the balance sheet, as of July 31, 2025, cash on hand was $304 million as we generated $200 million of cash flow from operations in the first half of fiscal 2026. We ended the quarter with approximately $1 billion of debt outstanding net of issuance cost after paying down $50 million of the revolver during the quarter. We also repurchased approximately $66 million of our outstanding shares during the quarter, and we have approximately $352 million remaining on our previously announced share repurchase authorizations.

Speaker #5: Near an all-time record for us and up compared to 43% in the second quarter last year. Turning to the balance sheet, as of July 31, 2025, cash on hand was $304 million.

Speaker #5: As we generated $200 million of cash flow from operations in the first half of fiscal '26, we ended the quarter with approximately $1 billion of debt outstanding, net of issuance costs, after paying down $50 million of the revolver during the quarter.

Speaker #5: We also repurchased approximately $66 million of our outstanding shares during the quarter, and we have approximately $352 million remaining on our previously announced share repurchase authorizations.

Speaker #5: One provision in the budget bill that Steve did not discuss is the immediate tax deduction for domestic research and experimental expenses beginning in fiscal year '26.

James Lucania: One provision in the budget bill that Steve did not discuss is the immediate tax deduction for domestic research and experimental expenses beginning in fiscal year 2026. Our initial analysis indicates that accelerating these tax deductions may reduce our federal cash taxes paid over the next two fiscal years by $65 to $75 million. The corporate income tax provisions included under the budget bill will not materially impact our income statement, our earnings per share, or our forward income tax rate guidance, as the accelerated cash tax savings will be captured through deferred taxes on our balance sheet. However, this adds to our increased cash flow from operations to accelerate funding strategic growth and technology initiatives, debt paydowns, and stock repurchases. For the first six months of fiscal 2026, revenue was $656.7 million, up 12% compared to the first six months of last year.

Speaker #5: Our initial analysis indicates that accelerating these tax deductions may reduce our federal cash taxes paid over the next two fiscal years by $65 to $75 million.

Speaker #5: The corporate income tax provisions included under the budget bill will not materially impact our income statement, our earnings per share, or our forward income tax rate guidance, as the accelerated cash tax savings will be captured through deferred taxes on our balance sheet.

Speaker #5: However, this adds to our increased cash flow from operations to accelerate funding for strategic growth and technology initiatives, debt paydowns, and stock repurchases. For the first six months of fiscal '26, revenue was $656.7 million, up 12% compared to the first six months of last year.

Speaker #5: GAAP net income was $113.8 million, or $1.29 per diluted share. Non-GAAP net income was $180.4 million, or $2.05 per diluted share. Adjusted EBITDA was $291.3 million, up 19% from the prior year, resulting in a 44% adjusted EBITDA margin for the first half of this fiscal year.

James Lucania: GAAP net income was $113.8 million or $1.29 per diluted share. Non-GAAP net income was $180.4 million or $2.05 per diluted share, and adjusted EBITDA was $291.3 million, up 19% from the prior year, resulting in 44% adjusted EBITDA margin for the first half of this fiscal year. Before I detail our raised guidance and assumptions, let me give you an update on the interest rate forward contracts that we discussed in June during our Q1 earnings call. As a reminder of what we said in June, we expect that these contracts will have little to no impact on our fiscal year 2026 income statement. They will further de-risk expected interest rate volatility on future HSA cash placement contracts, as we have in essence pulled forward the placement rate.

Speaker #5: Before I detail our raise guidance and assumptions, let me give you an update on the interest rate forward contracts that we discussed in June during our Q1 earnings call.

Speaker #5: As a reminder of what we said in June, we expect that these contracts will have little to no impact on our fiscal year 2026 income statement.

Speaker #5: They will further de-risk expected interest rate volatility on future HSA cash placement contracts, as we have, in essence, pulled forward the placement rate. We have entered into treasury bond forward contracts during the quarter with a notional amount of $1.2 billion.

James Lucania: We have entered into treasury bond forward contracts during the quarter with a notional amount of $1.2 billion tied to basic rate contract maturities between January 2026 and January 2027, with an average rate lock on the five-year treasuries of just over 4%. This obviously does not include the negotiated premium that we receive above the five-year treasury benchmark for both our basic rates and enhanced rates deposits. Historically, we've seen corporate spreads widen as treasury yields decrease. We anticipate doing additional de-risking transactions over the remainder of fiscal year 2026. We expect the average yield on HSA cash will be approximately 3.5% for fiscal 2026. As a reminder, we base custodial yield assumptions embedded in guidance on projected HSA cash deployments and rollovers, a schedule of which is contained in today's release.

Speaker #5: Tied to basic rate contract maturities between January 2026 and January 2027, with an average rate lock on the five-year Treasuries of just over 4%.

Speaker #5: This obviously does not include the negotiated premium that we receive above the five-year Treasury benchmark for both our basic rates and enhanced rates deposits.

Speaker #5: Historically, we've seen corporate spreads widen as Treasury yields decrease. We anticipate doing additional de-risking transactions over the remainder of fiscal year 2026. We expect the average yield on HSA cash will be approximately 3.5% for fiscal 2026.

Speaker #5: As a reminder, we based custodial yield assumptions embedded in guidance on projected HSA cash deployments and rollovers. The schedule of which is contained in today's release.

Speaker #5: We also consider 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 are not perfect predictors of future market conditions.

James Lucania: We also consider 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 are not perfect predictors of future market conditions. Our fiscal 2026 guidance reflects the expected carryforward of the trajectories for revenue and margins the remainder of this year, including increased technology and security investments as we enhance our member-first secure mobile experience, deliver innovative products across the platform, and improve the member experience as we strive to drive our strategy of helping our members better save, spend, and invest for healthcare. We also expect additional investments in sales and marketing efforts that Steve discussed related to bronze plan HSA expansion.

Speaker #5: Our fiscal '26 guidance reflects the expected carry forward of the trajectories for revenue and margins for the remainder of this year. This includes increased technology and security investments as we enhance our member-first secure mobile experience, deliver innovative products across the platform, and improve the member experience. We strive to drive our strategy of helping our members better save, spend, and invest for healthcare.

Speaker #5: We also expect additional investments in sales and marketing efforts that Steve discussed related to the bronze plan HSA expansion. We, of course, will also be lapping last year's fraud impact on service costs in the second half, as we continue to close the tax vectors and help our members secure their assets.

James Lucania: We, of course, will also be lapping last year's fraud impact on service costs in the second half as we continue to close attack vectors and help our members secure their assets. We expect revenue in a range between $1.29 billion and $1.31 billion. GAAP net income in a range of $185 million to $200 million or $2.11 to $2.28 per share. We expect non-GAAP net income to be between $329 million and $344 million or $3.74 to $3.91 per share, based upon an estimated 88 million shares outstanding for the year. Finally, we expect adjusted EBITDA to be between $540 million and $560 million. We continue to invest in protecting our members' assets and data while providing them with a remarkable experience.

Speaker #5: We expect revenue in a range between $1.29 and $1.31 billion. GAAP net income in a range of $185 to $200 million. Or $2.11 to $2.28 per share.

Speaker #5: We expect non-GAAP net income to be between $329 million and $344 million, or $3.74 and $3.91 per share, based upon an estimated 88 million shares outstanding for the year.

Speaker #5: Finally, we expect adjusted EBITDA to be between $540 million and $560 million. We continue to invest in protecting our members' assets and data while providing them with a remarkable experience.

Speaker #5: We're pleased with how we exited Q2 and look to make additional progress in the second half of '26 towards normalizing fraud costs to our target of one basis point on total HSA assets per annum.

James Lucania: We're pleased with how we exited Q2 and look to make additional progress in the second half of 2026 towards normalizing fraud costs to our target of one basis point on total HSA assets per annum. Our guidance includes additional expected share repurchases under the remaining $352 million cumulative repurchase authorizations and potential additional reductions in revolver borrowings during the fiscal year. With continued strong cash flows and available borrowings on our revolver, we will maintain ample capacity for portfolio acquisitions should they become available. We assume a GAAP and a non-GAAP income tax rate of approximately 25% and a diluted share count of 88 million, including common share equivalents.

Speaker #5: Our guidance includes additional expected share repurchases under the remaining $352 million cumulative repurchase authorization and potential additional reductions in revolver borrowings during the fiscal year.

Speaker #5: With continued strong cash flows and available borrowings on our revolver, we will maintain ample capacity for portfolio acquisitions should they become available. We assume a GAAP and a non-GAAP income tax rate of approximately 25%.

Speaker #5: And a diluted share count of 88 million, including common share equivalents. As we've done in previous reporting periods, our fiscal 2026 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.

James Lucania: As we've done in previous reporting periods, our fiscal 2026 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. With that, let's go to the operator for questions.

Speaker #5: 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 #5: With that, let's go to the operator for questions.

Speaker #2: 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 speakerphone, please pick up your handset before pressing the keys.

Operator: 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 speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question is from Brian Tanquillet with Jefferies. Please go ahead.

Speaker #2: To withdraw your question, please press star, then two. Our first question is from Brian Tankulit with Jefferies. Please go ahead.

Speaker #6: Hey, good afternoon, everyone, and congrats on the quarter. Maybe just a follow-up to your comments about the fraud, specifically HSA fraud.

Brian Tanquillet: Hey, good afternoon, guys, and congrats on the quarter. Maybe just a follow-up to your comments about the fraud, kind of like HSA fraud. Are there any milestones that we have to achieve or sticking points you can address here that we're looking at as we think about the next few quarters in terms of that goal?

Speaker #6: Are there any milestones that we have to achieve or sticking points you can address here that we're looking at, you know, as we think about the next few quarters in terms of that goal?

Speaker #3: So I guess what I would say around the experience itself is that we've been driving towards this strategy of a member-first, secure mobile experience.

Scott Cutler: I guess what I would say around the experience itself is that we've been driving towards this strategy of a member-first secure mobile experience. The secure part is really important because, number one, we've been driving our members to an app that we introduced a year ago. We've already started rolling out Passkey, which is a more secure authentication method, but it also provides a better, more seamless experience for our members to be able to get onto the app. As we continue to roll out the app experience over the course of this year, the introduction of Passkey, we think it's going to result in an improved overall experience. As we look at the overall journey, it starts with the app.

Speaker #3: And the secure part is really important because, number one, we've been driving our members to an app that we introduced a year ago. We've already started rolling out passkey, which is a more secure authentication method, but it also provides a better, more seamless experience for our members to be able to get onto the app.

Speaker #3: And so as we continue to roll out the app experience over the course of this year, the introduction of passkey, we think it's going to, you know, result in an improved overall experience.

Speaker #3: And so, as we look at the overall journey, it starts with the app. For us, as we look at the progress that we've made, as we highlighted just here previously, we've been making great progress.

Scott Cutler: For us, as we look at the progress that we've made, as we highlighted just here previously, we've been making great progress under our fraud and security team, both top of funnel and bottom of funnel. We'll continue to make enhancements and improvements to the security and the fraud posture, and we're really pleased with the progress that we've been able to make, where every month so far this year has seen sequential decline in the actual fraud numbers overall. Ultimately, for us, it's about an improved and more secure member experience accessing our platforms. There's no particular milestone that would stand out. It would just be continued progress along our strategy of delivering a member-first secure mobile experience.

Speaker #3: Under our fraud and security team, both top of funnel and bottom of funnel, we'll continue to make enhancements and improvements to the security and the fraud posture.

Speaker #3: And we're really pleased with the progress that we've been able to make, where every month so far this year has seen sequential declines in the actual fraud numbers overall.

Speaker #3: But ultimately for us, it's about an improved and more secure member experience accessing our platforms. So there's no, you know, particular milestone that would stand out.

Speaker #3: It would just be continued progress along our strategy of delivering a member-first secure mobile experience. I appreciate that. And then, if I can throw a follow-up, just as I think about the OBBB, obviously HSA access was not part of the final bill.

Brian Tanquillet: I appreciate that. If I can throw a follow-up, just as I think about the OBBVA, obviously HSA access was not part of the final bill. As we think through the continuing resolution coming up here or other legislative opportunities or catalysts coming up, do you foresee any incremental opportunities to get HSA reform or HSA access improvement included in any of those future legislations?

Speaker #3: As we think down, you know, think through the continuing resolution coming up here, or other legislative opportunities or catalysts coming up, I mean, do you foresee any incremental opportunities to get HSA reform or HSA access improvement included in any of those future legislations?

Speaker #6: Well, let me just speak to the existing opportunity, and then I'll ask Steve to comment on the future. What we're excited about is that what was passed is the largest HSA expansion in decades.

Scott Cutler: Let me just speak to the existing opportunity, and then I'll ask Steve to comment on the future. What we're excited about is that what was passed is the largest HSA expansion for decades. I think what we're being prepared for as we look at more individual families available under catastrophic ACA plans, bronze plans, that we are improving the actual experience. We're redesigning our enrollment and our onboarding experience for these new types of consumers. We're excited about the expansion opportunity. We're going to be leaning into it with an improved experience onboarding flow, as well as marketing dollars to again prepare for a new set of customers that are now HSA eligible. I think we're excited about what was passed, and maybe Steve can give a comment on how he looks at the future.

Speaker #6: And I think what we're being prepared for as we look at more individual families available under catastrophic ACA plans, bronze plans, is that we are improving the actual experience.

Speaker #6: So we're redesigning our enrollment and our onboarding experience for these new types of consumers. So we're excited about the expansion opportunity. We're going to be leaning into it with an improved experience onboarding flow, as well as marketing dollars to, again, prepare for, you know, for a new set of customers that are now HSA eligible.

Speaker #6: So I think we're excited about what was passed. Maybe Steve can give a comment on how he looks at the future.

Speaker #2: Yeah, so Brian, look, we're actually pretty, as we've unpacked this, we're pretty excited about what was passed. I couldn't tell from your question if you thought there wasn't HSA expansion; there clearly was.

Steve Neeleman: Yeah, Brian, look, we're actually pretty, as we've unpacked this, we're pretty excited about what was passed. I couldn't tell from your question if you thought there wasn't HSA expansion. There clearly was.

Speaker #3: I'm a Medicare. Sorry, Steve. Yeah.

Scott Cutler: I meant Medicare. Sorry, Steve.

Speaker #2: Oh, Medicare. Okay, I didn't hear the word "Medicare." Yeah, so, yeah, Medicare wasn't in there. As we've looked at it, it was probably a little bit of a smaller piece.

Steve Neeleman: Oh, Medicare. Okay. I didn't hear the word Medicare. Yeah, Medicare wasn't in there. As we looked at it, it was probably a little bit of a smaller piece. We wanted to get that in there because there's, they say, about 25% of seniors right now that are working, or people that are Medicare eligible are working still. If you kind of have to chop that down, the people that are in that group that actually have an HSA, it's smaller. You know we're going to keep hammering away at that. We do think that there was some interest in that. There were some questions about, do they want to really get into the Medicare question on this bill because it was so strictly tax-focused?

Speaker #2: We wanted to get that in there because there's they say about 25% of seniors right now that are working or people that are Medicare eligible are working still.

Speaker #2: But then, if you kind of have to chop that down, the people that are in that group who actually have an HSA are smaller.

Speaker #2: But you know we're going to keep hammering away at that. We do think that there was some interest in that. There were some questions about whether they want to really get into the Medicare question on this bill because it was so strictly tax-focused.

Speaker #2: They thought once they start, you know, opening up Pandora's box and dealing with Medicare, it could bring in some other questions and attraction and stuff like that.

Steve Neeleman: They thought once they start opening up Pandora's box and dealing with Medicare, it could bring in some other questions and attraction and stuff like that. That said, though, everyone realizes that if you really want to save money for Medicare, because Medicare is a very expensive program, as we know, it's get people that can stay on their employer's plan, which is what would happen, to stay on the plan, and then that saves money for Medicare. If you work for an employer that offers you, I think it's more than 20 employees, that offers you both to stay on the plan and you enroll in Medicare, and then you have expenses, the employer's plan pays first. That's a great way to actually address the cost of Medicare.

Speaker #2: That said, though, everyone realizes that if you really want to save money for Medicare—because Medicare's a very expensive program, as we know—it's to get people who can stay on their employer's plan, which is what would happen, to stay on the plan.

Speaker #2: And then that saves money for Medicare because if you work for an employer that offers you, I think it's more than 20 employees, and offers you both to stay on the plan and you enroll in Medicare, then you have expenses, the employer's plan pays first.

Speaker #2: And so, that's a great way to actually address the cost of Medicare. As we kind of look at the next openings, whether it's another reconciliation bill, probably next year, or whether it's, you know, even some year-end bills that need to go through and things like that, we're going to be looking for every opportunity to expand.

Steve Neeleman: As we kind of look at the next openings, whether it's another reconciliation bill probably next year or whether it's even some year-end bills that need to go through and things like that, we're going to be looking for every opportunity to expand, whether it be Medicare or some of the other provisions. I'm telling you, the ones that went in that I highlighted in my comments, whether it's direct primary care, the telemed stuff, or certainly the bronze plans, we think there's a real opportunity here to go after it. We're thrilled. As Scott said, it's the biggest expansion we've seen in 20 years, and you know we've been at it since day one. We've been following this very closely. Thanks for the question.

Speaker #2: Whether it be Medicare or some of the other provisions, I'm telling you, the ones that went in that I highlighted in my comments—whether it's direct primary care, the telemed stuff, or certainly the bronze plans—we think there's a real opportunity here to go after it.

Speaker #2: And we're thrilled, as Scott said, it's the biggest expansion we've seen in 20 years. And you know we've been at it since day one.

Speaker #2: And so we've been following this very closely. Thanks for the question.

Speaker #3: I'll thank Brian again.

Brian Tanquillet: Thanks, Brian. The next question is from Gregory Peters with Raymond James. Please go ahead.

Speaker #2: The next question is from Greg Peters with Raymond James. Please go ahead.

Speaker #7: Hey, good afternoon, everyone. So I wanted to go back to your comments about how you locked in your rate for the next year. I'm looking at your repricing schedule, and I see that $1.3 billion comes up this year, with the remaining $4.1 billion next year.

Gregory Peters: Hey, good afternoon, everyone. I wanted to go back to your comments about how you locked in your rate for the next year. I'm looking at your repricing schedule, and I think it's $1.3 billion comes up this year, remaining in $4.1 billion next year. Should I think about that 4% relating to all of what comes due next year? Does a 4% lock or 4% plus lock that you referenced relate just to the enhanced yield product, or is that to the traditional FDIC product as well?

Speaker #7: Should I think about that 4% relating to all of what comes due next year? And obviously, does a 4% lock or 4% plus lock that you referenced, does that relate just to the enhanced yield product, or is that to the traditional FDIC product as well?

Speaker #5: Yeah, thanks for the question. So, yeah, it's both. You should think of it as we are locking the repricing of basic rates contracts that are maturing.

James Lucania: Yeah, thanks for the question. It's both. You should think of it as we are locking the repricing of basic rates contracts that are maturing. As we would expect, all of the basic rates contracts that have been maturing, the lion's share of those dollars will roll into enhanced rates at the time of their maturity. As I said in the remarks, they are primarily centralized around January of 2026, so Q4 of 2026, fiscal 2026, and January of 2027, so Q4 of 2027. We are locking specific basic rates maturities in those time periods. As we said, the average across that was about a 4% lock on the five-year treasury. As you said, we earn, if we can roll those to enhanced rates, about a 75 basis point spread on top of that, so effectively locking 4.75% on assets that are yielding currently 1.7% to 2%.

Speaker #5: As we would expect, like all of the basic rates contracts that have been maturing, the lion's share of those dollars will roll into enhanced rates at the time of their maturity.

Speaker #5: But also, as I said in the remarks, they are primarily centralized around January of '26. So Q4 of '26, fiscal '26, and January of '27.

Speaker #5: So Q4 of '27, like we are locking specific basic rates maturities in those in those time periods. And as we said, sort of the average across those the average across that was about a 4% lock on the five-year treasury.

Speaker #5: And as you said, yeah, we earn, if we can roll those to enhanced rates, we earn about a 75 basis point spread on top of that.

Speaker #5: So effectively locking $475 million on assets that are yielding currently 1.7% to 2%.

Speaker #7: Excellent. Thanks for that clarification. As my follow-up question, I just wanted to pivot to the HSA, the net new HSAs, and AUM growth that you posted in the second quarter.

Gregory Peters: Excellent. Thanks for that clarification. As my follow-up question, I just wanted to pivot to the HSA, the net new HSAs and AUM growth that you posted in the second quarter. Just wondering if there's any timing differences. I know, Scott, you called out strong new enterprise wins and retention. Just curious if there's any nuances to the second quarter result you wanted to call out.

Speaker #7: Just wondering if there are any timing differences. I know, Scott, you called out strong new enterprise wins and retention. I'm just curious if there are any nuances to the Q2 result you wanted to call out.

Speaker #3: No, I wouldn't say, you know, I wouldn't say there's any nuance to it. I mean, I think when we look at the 163,000, we are ahead of maybe where we thought we would be, given the macro environment that we've highlighted here for the last couple of quarters.

Scott Cutler: No, I wouldn't say it's, you know, I wouldn't say there's any nuance to it. I mean, I think when we look at the 163,000, we are ahead of maybe where we thought we would be given the macro environment that we've highlighted here for the last couple of quarters. I think when you look at that level relative to historical quarters this year, it looks a lot like fiscal year 2024. In light of the macro, I think we're leaning in aggressively. I'd say that aggressiveness is going to show up obviously in the marketing dollars that we're going to be spending here in Q3 and Q4 to go after the expanded opportunity that we see through the expansion that we just talked about. That's why we're investing also in an improved enrollment experience. I think what we see from our existing client base probably reflects the macro.

Speaker #3: I think when you look at that level relative to historical quarters, this year looks a lot like fiscal year '24. In light of the macro, I think we're leaning in aggressively. You know, I'd say that aggressiveness is going to show up, obviously, in the marketing dollars that we're going to be spending here in Q3 and Q4.

Speaker #3: To go after the expanded opportunity that we see through the expansion that we just talked about, that's why we're investing also in an improved enrollment experience.

Speaker #3: And I think what we see from our existing client base probably reflects the macro. But I would say that we're encouraged by the signs that we've had with our enterprise sales pipeline.

Scott Cutler: I would say that we're encouraged by the signs that we've had with our enterprise sales pipeline and the retention that we've had from our existing customers, certainly coming through some of the challenges last year. I feel good about how we're positioned to end the year or enter the busy season. From here on out, to be honest, Greg, it's simply about our execution against the market opportunity that's going to be available to us. We can go after that within the things that we control, which I think the most important thing is the actual product experience itself and then how we're bringing our partners to the clients that we're trying to win business from.

Speaker #3: And the retention that we've had from our existing customers, certainly coming through some of the challenges last year, makes me feel good about how we're positioned to end the year or enter the busy season.

Speaker #3: So I think from here on out, to be honest, Greg, it's simply about our execution against the market opportunity that's going to be available to us.

Speaker #3: And so you know we can go after that within the things that we control, which I think the most important thing is the actual product experience itself and then how we're bringing our partners to the clients that we're trying to win business from.

Speaker #3: Thanks, Greg.

Gregory Peters: Thanks, Greg.

Speaker #2: Thank you. The next question is from Scott Schoenhaus with KeyBank. Please go ahead. So clearly, the investments in driving app downloads are driving really nice growth margins.

Scott Cutler: Thank you.

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

Allen Lutz: Thank you. Clearly, the investments in driving app downloads are driving really nice gross margins. I think you mentioned 1.7 million members now have downloaded the app, which is in line with the data we track. Where do you see your ceiling here? Can we expect to see 50% or more of your members using the app over the next several years? How should we think about the incremental margin opportunity here as you approach more broader adoption?

Speaker #2: I think you mentioned 1.7 million members now have downloaded the app, which is in line with the data we track. Where do you see your ceiling here?

Speaker #2: I mean, can we expect to see 50% or more of your members using the app over the next several years? And then how should we think about the incremental margin opportunity here as you approach more broader adoption?

Speaker #3: Yeah, I don't see an incremental, necessarily a gross margin improvement from app adoption. What we're really looking for is simply active, engaged members. And so, maybe similar as to how you look at a 90-day active user, those that are actively engaged in the app—that's certainly what our target is.

Scott Cutler: Yeah, I don't see an incremental necessarily a gross margin improvement from app adoption. What we're really looking for is simply active, engaged members. Maybe similar as to you look at a 90-day active user, those that are actively engaged in the app, that's certainly what our target is. Very much in line with the mission of empowering healthcare consumers, we want them to be engaged. We think the best experience that we're going to be providing over time is going to be in the app. We know that accessing any of our platforms is going to be required to download the app and go through the passkey authentication. That's going to be a better experience. What we're really driving is helping that member save, spend, and invest more seamlessly. As I look at it, it's really the improvement in the engagement and the experience.

Speaker #3: Very much in line with the mission of empowering healthcare consumers, we want them to be engaged. So we think the best experience that we're going to be providing over time is going to be in the app.

Speaker #3: We know that accessing any of our platforms is going to be required to download the app and go through the passkey authentication. That's going to be a better experience.

Speaker #3: And then what we're really driving is helping that member save, spend, and invest more seamlessly. So as I look at it, it's really the improvement in the engagement and the experience.

Speaker #3: And so, as you think about actual penetration, you know, just look at the number of account holders that we have. But it's really going to be those that are active, that want access to their account, who are going to have to download the app.

Scott Cutler: As you think about actual penetration, you know, just look at the number of account holders that we have. It's really going to be those that are active that want access to their account are going to have to download the app to be able to access their account. When we think about the penetration rate, it's more going to be more reflective of how many active members there are against that account base.

Speaker #3: To be able to access their account, when we think about the penetration rate, it's going to be more reflective of how many active members there are against that account base.

Speaker #2: That's helpful. And the next question is from George Hill with Deutsche Bank. Please go ahead.

Allen Lutz: That's helpful. I.

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

Speaker #7: Hey, good afternoon, guys, and thanks for taking the question. I guess, Scott, it sounds like you talked about a disconnect between the employer market and employment trends growing slower than expectations.

Allen Lutz: Hey, good afternoon, guys, and thanks for taking the question. Scott, it sounds like you talked about a disconnect between the employer market and employment trends growing slower than expectations. At the same time, you guys kind of outperformed expectations and raised guidance. The two things I'm wondering, if you can throw some numbers around, are can you talk about the order of magnitude by which kind of the employer market or employment seems to be growing slower than you guys expected to see? What's driving the outperformance? I can probably guess the answers there. It's going to be all the Team Purple stuff. I'm really interested in kind of the disconnects here. It's kind of the theme of the question I want to go with, like what you're seeing on the employer side versus the outperformance of you guys. Thank you.

Speaker #7: And at the same time, you guys kind of outperformed expectations and raised guidance. So I guess the two things I'm wondering, if you can throw some numbers around, or can you talk about the order of magnitude by which the employer market or employment seems to be growing slower?

Speaker #7: Then you guys expected to see. And then kind of what's driving the outperformance? I can probably guess the answers there. It's going to be all the team purple stuff.

Speaker #7: But, like, I'm just really interested in kind of the disconnects here. Just kind of the theme of the question I want to go with.

Speaker #7: Like what you're seeing on the employer side versus the outperformance of you guys. Thank you.

Speaker #3: Well, yeah, great. You know, I think, again, we've kind of highlighted just the macro environment overall. And I guess the HSA market is a function of new employment, job growth, and people being able to move between jobs.

Scott Cutler: Yeah, great. I think again, we've kind of highlighted just the macro environment overall. I guess the HSA market is a function of new employment, job growth, people being able to move between jobs. When you look at the labor statistics that are showing employment growth down 40% year to date, year over year through July, I think that would say that the macro environment for job growth has been tough. That being said, I think we've been able to lean into our sales pipeline as well as our relationships with clients and partners to be able to go to market. The 163,000 new HSAs is not a record for us. It's more muted than we would love to see, but we're still actually pleased with the progress that we're making. I'm not sure I see it as a total disconnect because we certainly see and feel the macro.

Speaker #3: And so when you look at the labor statistics that are showing employment growth down 40% year to year to date, year over year through July, you know I think I would say that the macro environment for for job growth is has been tough.

Speaker #3: And so, that being said, I think we've been able to lean into our sales pipeline, as well as our relationships with clients and partners, to be able to go to market.

Speaker #3: Again, the 163,000 new HSAs is not a record for us. It's more muted than we would than we would love to see. But we're still actually pleased with the progress that we're that we're making.

Speaker #3: And so, I'm not sure I see it as a total disconnect because we certainly see and feel the macro. But what we're trying to do to offset that is focus on a great experience, I think also delivering a great service.

Scott Cutler: What we're trying to do to offset that is focus on a great experience. I think also delivering a great service. This has obviously been a big focus of ours for the year. I think one of the things that I'm most proud of is as you look at how we're serving our customers, as you look at NPS or CSAT, we're seeing nice improvement of both of those metrics, which is those members that are contacting us, how well we're serving. We're obviously doing that more efficiently on a year-over-year basis with the use of technology and having a better product experience, which I'm really proud of, which I do think contributes to us in our leadership position. I think as the market leader in this space, I would hope that we would continue to outpace growth of the market overall as the market leader.

Speaker #3: This has obviously been a big focus of ours for the year. And I think one of the things that I'm most proud of is, as you look at how we're serving our customers, as you look at NPS or CSAT, we're seeing nice improvement in both of those metrics, which is, you know, those members that are contacting us, how well we're serving.

Speaker #3: We're obviously doing that more efficiently on a year-over-year basis with the use of technology and having a better product experience, which I'm really proud of. I do think this contributes to our leadership position.

Speaker #3: And then again, I think, as the market leader in this space, I would hope that we would continue to outpace the growth of the market overall as the market leader.

Speaker #3: And I think so far this year, I believe that's what you're seeing.

Scott Cutler: I think so far this year, I believe that's what you're seeing.

Speaker #7: I appreciate it. Thank you.

Allen Lutz: I appreciate it. Thank you.

Speaker #3: Thanks, George.

Gregory Peters: Thanks, George.

Speaker #2: The next question is from Alan Lutz with Bank of America. Please go ahead.

Operator: The next question is from Allen Lutz with Bank of America. Please go ahead.

Speaker #8: Good afternoon. Thanks for taking the question. Scott, I want to follow up on George's question there and the last comment you made about outperforming market growth. You've grown accounts by 7-8% year to date.

Allen Lutz: Good afternoon. Thanks for taking the question. Scott, I want to follow up on George's question there. In the last comment you made about outperforming market growth, you've grown accounts by 7%, 8% year to date. Can you talk about how fast you think the market is growing? Obviously, the market growth rate has evolved over the past several years. As you think about the market's growth rate today, can you talk about your confidence that the market can sustain the growth rates and accounts that we're seeing this year into the next couple of years? I guess whether or not that includes contributions from the OBBB. Just trying to get a sense of what your expectations are on market growth from here. Thanks.

Speaker #8: Can you talk about how fast you think the market is growing? Obviously, the market growth rate has evolved over the past several years.

Speaker #8: As you think about the market's growth rate today, can you talk about your confidence that the market can sustain the growth rates and accounts that we're seeing this year into the next couple of years?

Speaker #8: And I guess whether or not that includes contributions from the OBBB, just trying to get a sense of what your expectations are on market growth from here.

Speaker #8: Thanks.

Speaker #3: Yeah. So, a couple of things. You know, I think where is it that we see the opportunity? Obviously, we talked about the expansion of the market.

Scott Cutler: Yeah. A couple of things. I think where is it that we see the opportunity? Obviously, we talked about expansion of the market that happened as a result of OBBB. We're going to be going after that. We're going to be going after that, as I've said, through marketing, going after maybe a different set of potential members, also through plan partners. We're going to be going after that through marketing, broadly speaking, top of funnel brand recognition, as well as through our traditional channels. I think what we see is that the market is expanding. We'll see over the course of the next several quarters how much that expansion from OBBB shows up in terms of growth in the industry. I think there's a couple of things that are maybe more important even than new accounts.

Speaker #3: That happens as a result of OBBB. We're going to be going after that. We're going to be going after that, as I've said, through marketing, going after maybe a different set of potential, you know, members.

Speaker #3: Also through plan partners. So we're going to be going after that through, you know, marketing broadly speaking, top of funnel, brand recognition, as well as, you know, through our traditional channels.

Speaker #3: So I think what we see is that the market is expanding. We'll see over the course of, you know, over the next several quarters, how much that expansion from OBB shows up in terms of growth in the industry.

Speaker #3: I think there's a couple of things that are maybe more important even than new accounts. And if you look at the industry overall, and you look at contribution levels, you know we have lower participation across the industry for high deductible health plans.

Scott Cutler: If you look at the industry overall and you look at contribution levels, we have lower participation across the industry for high deductible health plans. We're trying to introduce or lower the barrier for people to select high deductible health plans. We're doing a lot to educate our employers in a more difficult market this year to be able to manage their healthcare costs through smart plan design. Our Analyzer product, as an example, we're taking that to market as a really strong value proposition to employers. What ultimately we're trying to do is to get people to contribute at the max that they're allowed. Today in the market, overall, only 4% of members contribute at the max. Large market underpenetrated in terms of those members that participate at the max. Across the market overall, only 8% of members are investors.

Speaker #3: And so we're trying to introduce or lower the barrier for people to select high deductible health plans. We're doing a lot to educate our employers in a more difficult market this year to be able to manage their healthcare costs through smart plan design.

Speaker #3: And so our analyzer product, as an example, we're taking that to market as a really strong value proposition to employers. What ultimately we're trying to do is to get people to contribute at the max.

Speaker #3: That they're allowed today in the market overall, only 4% of members contribute at the max. So, there is a large market underpenetrated in terms of those members that participate at the max.

Speaker #3: Across the market overall, only 8% of members are investors. We see a big opportunity for our members to become investors, and we've seen strong growth from our members to become investors.

Scott Cutler: We see a big opportunity for our members to become investors, and we've seen strong growth from our members to become investors. I think as you look at Allen, us growing the business overall, there's a baseline of the business that comes through account growth. If we can have a more engaged consumer or engaged member, which we think is going to come through that mobile app experience, we're going to help them save, spend, and invest, which should lead to a higher contribution, higher account balances, higher investors, more engaged consumers. I think all of those will drive growth in the industry overall, above just account growth.

Speaker #3: And so, I think as you look at Alan, us growing the business overall, there's a baseline of the business that comes through account growth. But if we can have a more engaged consumer or engaged member, which we think is going to come through that mobile app experience, we're going to help them save, spend, and invest, which should lead to a higher contribution.

Speaker #3: Higher account balances and higher investor engagement lead to more active consumers. I believe all of these factors will drive growth in the industry overall, beyond just account growth.

Speaker #8: Great. Thanks, Scott.

Allen Lutz: Great. Thanks, Scott.

Speaker #3: Thanks, Alan.

Gregory Peters: Thanks, Alan.

Speaker #2: The next question is from Mark Marcon with Baird. Please go ahead.

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

Speaker #7: Good afternoon and thanks for taking my questions and let me add my congratulations. Really great quarter. I was wondering when we take a look at the HSA cash, we've had a couple of quarters where it's you know it's dipped a little bit.

Gregory Peters: Good afternoon, and thanks for taking my questions. Let me add my congratulations. Really great quarter. I was wondering, when we take a look at the HSA cash, we've had a couple of quarters where it's dipped a little bit. At the same time, obviously, HSA investments have been growing significantly. I was wondering, to what extent would you say the dip in HSA cash is due to account holders shifting over to more investment behavior versus just dealing with higher healthcare inflation and therefore dipping into their accounts? How are you thinking about the algorithm for HSA cash growth going forward?

Speaker #7: And at the same time, obviously, HSA investments have been growing significantly. I was wondering to what extent you would say the dip in HSA cash is due to account holders shifting over to more investment behavior?

Speaker #7: Versus, you know, just dealing with higher healthcare inflation and therefore, you know, dipping into their accounts. And how are you thinking about the algorithm for HSA cash growth going forward?

Speaker #3: Yeah, thanks, Mark. I can take that one. So, I mean, the answer is a little bit of all of that. So, obviously, as Scott just said, we want more than 8% of our HSA members to be investors.

James Lucania: Yeah, thanks, Mark. I can take that one. I mean, the answer is a little bit of all of that. Obviously, as Scott just said, we want more than 8% of our HSA members to be investors. Investors are the most engaged with the platform. They have the highest balances. There is certainly a piece of that of HSA members realizing that value and becoming investors. We're growing the number of investors faster than we're growing the number of accounts.

Speaker #3: Investors are the most engaged with the platform. They have the highest balances. So, there is certainly a piece of that of HSA members realizing that value and becoming investors.

Speaker #3: So we're growing the number of investors faster than we're growing the number of accounts.

Speaker #1: And, and there's also a part of that is, is like you said, like there's, there's spending. We have contributions up, we have spending up, the, the, the other side of slightly lower cash balances or, or slower growth in cash balances to put it, to put it better, is that, that interchange continues to grow at faster than the rate of account growth.

Operator: There's also a part of that, like you said, there is spending. We have contributions up, we have spending up. The other side of slightly lower cash balances, or slower growth in cash balances to put it better, is that interchange continues to grow faster than the rate of account growth. As Scott, I think, just summarized, the revenue growth story here is more than just how fast can we grow accounts, how fast do we grow HSA cash. It's all of the lines. We're going to grow accounts, HSA cash, invested balances, and spend through the platform. Not really reading any more into it than that. Of course, the time of the year when cash inflows come in is at our fiscal Q4. It is very, very lumpy. Quarter to quarter views are to be held with a grain of sand.

Speaker #1: So, as Scott, I think, just summarized, the revenue growth story here is more than just how fast we can grow accounts and how fast we grow HSA cash; it's all of the lines.

Speaker #1: We're going to grow accounts, HSA cash, invested balances, and spend through the platform. So, not really reading any more into it than that.

Speaker #1: and then of course the, you know, the time, the time of the year when, when cash inflows, come in is at, is at our, fiscal, fiscal Q4.

Speaker #1: So, it is very, very lumpy. So, sort of quarter to quarter, quarter to quarter views are to be held with a grain of salt.

Speaker #2: Thanks, Mark.

Scott Cutler: Thanks, Mark. The next question is from David Roman with Goldman Sachs. Please go ahead.

Speaker #3: The next question is from David Roman with Goldman Sachs. Please go ahead.

Speaker #4: Thank you. Good afternoon. I appreciate your taking the question. I wanted to pick up on something that you said early in the prepared remarks about how to think through the implications of likely significant increases in premiums that come through next year and the potential benefit that you might see with increased HSA enrollment. Then, how you contrast that with the comments you made around current macroeconomic conditions.

Operator: Thank you. Good afternoon. Appreciate your taking the question. I wanted to pick up on something that you said early in the prepared remarks about how to think through the implications of likely significant increases in premiums that come through next year and the potential benefit that you might see with increased HSA enrollment. How do you contrast that with the comments you made around current macroeconomic conditions? Does that net us out in the same place around this mid-single-digit growth in underlying HSAs? How are you guys thinking about putting these countervailing pieces together?

Speaker #4: Does that kind of net us out in the same place around this mid-single-digit growth in underlying HSAs? How, how, how are you guys thinking about putting these kind of countervailing pieces together?

Speaker #1: Yeah, so in a more, in a more challenging, environment macro, I think a, a, a challenging environment, for most employers is the rising cost of healthcare and healthcare premiums that for, for many employers have a hard time passing that along or bearing all of that.

Scott Cutler: In a more challenging environment, macro, I think a challenging environment for most employers is the rising cost of healthcare and healthcare premiums that for many employers have a hard time passing that along or bearing all of that. When those healthcare costs are going two to three times faster, that's a challenge for anybody running a business and running a P&L. That's where we think our role and the elevation of our message becomes more important. We've been out there having a conversation to be able to say, how is it that you can manage your overall healthcare costs better? It's by having a smart plan design that has an HSA qualified plan associated with it if you're an employer. We have plenty of case studies with employers that by doing that, they've been able to reduce that annual decline to manageable levels.

Speaker #1: You know, when those, when those healthcare costs are going two to three times faster that's a, that's a challenge for, for anybody running a, running a business and running a P&L.

Speaker #1: And that's where we think our role and the elevation of our message becomes more important. So, you know, we've been out there having a conversation to be able to say, well, how is it that you can manage your overall healthcare costs better?

Speaker #1: And it's by having a smart plan design that has an HSA-qualified plan associated with it if you're an employer. We have plenty of case studies with employers that, by doing that, they've been able to, you know, reduce that annual decline to manageable levels.

Speaker #1: I think in a more challenging environment that that value proposition becomes a lot stronger, David, you know, and so I think what we have found at least historically in that in, in more challenging macro times the value proposition for HSAs becomes, becomes stronger.

Scott Cutler: I think in a more challenging environment, that value proposition becomes a lot stronger, David. What we have found, at least historically, in more challenging macro times, the value proposition for HSAs becomes stronger. If you look at this business over a much longer period of time, then you would also look at the macro as this is just kind of like this current moment in time. Our most valuable members are those members that have been with us for a long period of time. This might be just one small layer in the onion for us overall. How is it that we continue to grow this business faster than today's environment? It's actually having all of our cohorts of members become more active and engaged.

Speaker #1: And so, I think if you look at this business over a much longer period of time, then you would also look at the macro, as this is just kind of like this current moment in time.

Speaker #1: Our most valuable members are those members that have been with us for a long period of time. And so, this might be just one small layer in the onion for us overall.

Speaker #1: And so, how is it that we continue to grow this business faster than today’s environment? It’s actually having all of our cohorts, of members, become more active and engaged.

Speaker #1: And I do think if we can actually drive the engagement metric, we'll increase contributions, we'll increase participation, we'll educate our employers more about how this is a valuable product in good times and bad, and then we'll become closer to serving the mission that this company was started for.

Scott Cutler: I do think if we can actually drive the engagement metric, we'll increase contributions, we'll increase participation, we'll educate our employers more about how this is a valuable product in good times and bad, and then we'll become closer to serving the mission that this company was started for. I'm cautious of saying the macro environment has a long-term effect on this business. It doesn't. It's simply how all of our, it's more a reflection of how do all of our cohorts combine over time by engaging on our platform.

Speaker #1: you know, and so again, I'm, I'm cautious of saying the macro environment has a long-term effect on this business. It doesn't. it's simply how all of our, you know, it's more a reflection of how do all of our cohorts, combine over time by engaging on our platform.

Speaker #3: Thanks, David.

Speaker #4: Thank you.

Speaker #3: The next question is from Stephen Valiket with Mizuho Securities. Please go ahead.

Operator: Thank you, David.

Scott Cutler: that's.

Operator: Thank you.

Scott Cutler: The next question is from Steven Valiquette with Mizuho Securities. Please go ahead.

Speaker #5: Thanks. Good afternoon, everybody. Thanks for taking the question here. So, you know, one thing I wanted to touch on a little bit, just to follow up a bit more on the kind of the forward contracts and the hedging you talked about, you know, $1.2 billion notional kind of signed since the last update.

David Larsen: Oh, thanks. Good afternoon, everybody. Thanks for taking the question here. One thing I wanted to touch on a little bit just to follow up a bit more on the forward contracts and the hedging. You talked about $1.2 billion notional kind of signed since the last update. Just wondering, what are the gating factors on signing more of that? As far as just the pace of that, is it more just finding other willing third parties on the other end of the contract, or is there still heavy-duty negotiation on that rate, just over 4%? Just curious to see kind of how the ebb and flow of that goes, if you could provide any color. Thanks.

Speaker #5: Just wondering, what are the gating factors for signing more of that? You know, as far as just the pace of that, is it more about finding other willing third parties on the other end of the contract, or is it more that there's still heavy-duty negotiation on that rate, you know, just over 4%?

Speaker #5: Just curious, you know, kind of how the ebb and flow of that goes. If you could provide any color. Thanks.

Speaker #1: Y-yeah, sure. No, like this is like treasury forward curves is like the most liquid market on earth. So no, there's not a, no counterparty issue.

Operator: Yeah, sure. No, this is like Treasury forward curves, just like the most liquid market on earth, so no, there's not a counterparty issue. It's just sort of like legging into the hedge. We sort of view it as insurance contracts. We've traded $1.2 billion in total across many transactions over the quarter, and as I said in the remarks, you should expect that amount will continue. You know, just sort of dollar cost averaging into the yield is how you should think about how we've executed that program.

Speaker #1: It's just sort of leg, legging into, legging into the hedge. So we sort of view it as, as sort of insurance contracts. We, we've traded 1.2 billion dollars in total across many transactions.

Speaker #1: over the quarter, and, and as I said in the remarks, you should expect that that, that amount will, will continue. you know, just, just sort of dollar cost averaging into the, into the yield is, is how you should think about how, how we've, how we've executed that, that program.

Speaker #5: Okay. Okay. Thanks.

David Larsen: Okay. Thanks.

Speaker #3: The next question is from David Larson with BTIG. Please go ahead.

Scott Cutler: The next question is from David Larsen with BTIG. Please go ahead.

Speaker #6: Hey, congratulations on the nice quarter. Can you talk about the good increase in service growth margin? It looks like your costs were very good, including sales and marketing.

Richard Putnam: Hey, congratulations on the nice quarter. Can you talk about the good increase in service gross margin? It looks like your costs were very good, including sales and marketing. Thanks very much.

Speaker #6: Thanks very much.

Speaker #1: Yeah, so I think, David, and service gross margin. Yeah, you'll note that, obviously, our costs on a year-over-year basis on the service side are growing much slower than revenue.

Scott Cutler: Yeah, so I think, David, on service gross margin, you'll note that obviously our costs on a year-over-year basis on the service side are growing much slower than revenue. I think the effort there is efforts that we have across the board on delivering our service more efficiently in terms of how we're staffing. It also goes to the quality of the service that we're providing. When we have a service that doesn't require our members to call us for difficult reasons, that lowers our cost to serve. We've also been making investments in technologies to become more efficient. On that piece that I'm really excited about, I really feel as though we're at the very beginning of our journey there. We talked a lot about claims automation and using AI in claims automation.

Speaker #1: You know, and I think the effort there is efforts that we have across the board on delivering our service more efficiently in terms of how we're staffing. It also goes to the quality of the service that we're providing.

Speaker #1: You know, when we have a service that doesn't require our members to call us for difficult reasons, that lowers our cost to serve.

Speaker #1: We've also been making investments in technologies to become more efficient, and on that piece, I'm really excited about it. I really feel as though we're at the very beginning of our journey there.

Speaker #1: You know, we talked a lot about claims automation and using AI in claims automation. We just got some awards on HSA Answers, which is leveraging chat on our home page to be able to answer questions.

Scott Cutler: We just got some awards on HSA Answers, which is leveraging chat on our homepage to be able to answer questions. I think we're at the very beginning of our journey of automating other manual and repeatable processes through technology that should, over time, reduce that service cost even further. In many respects, I believe that we're at the beginning of our journey of modernizing the product and modernizing the service experience with AI, and I'm optimistic that we can continue to make improvements there.

Speaker #1: And I think we're at the very beginning of our journey of, of automating other manual and repeatable processes through technology. That should, over time, reduce that, you know, that, that service cost even further.

Speaker #1: So, in many respects, I believe that we're at the beginning of our journey of modernizing the product and modernizing the service experience with AI.

Speaker #1: And so, I'm optimistic that we can continue to make improvements there.

Speaker #6: Great, great. Thanks very much. And then, even though you're performing really well, the stock seems to be trading sort of sideways. I think that maybe there's some concern if, like, let's say interest rates decline by 50 basis points by the end of calendar '25, and let's say 75 basis points or 100 basis points by the end of calendar '26. Can you sort of size what impact that could potentially have on your book, like perhaps on custodial revenue?

Richard Putnam: Great, great. Thanks very much. Even though you're performing really well, the stock seems to be trading sort of sideways. I think that maybe there's some concern if, like, let's say interest rates decline by 50 basis points by the end of calendar 2025, and let's say 75 basis points or 100 basis points by the end of calendar 2026. Can you sort of size what impact that could potentially have on your book, like perhaps on custodial revenue? Would that impact that $4.1 billion? The $4.75 could maybe go to $4 billion on that $4.1 billion for fiscal 2027?

Speaker #6: Would that impact that $4.1 billion, so the $4.75 could maybe go to $4, that $4.1 billion for fiscal '27?

Speaker #1: Y-ye-yeah. I mean, I think that the short answer is we're not going to get into those sort of modeling questions on the call here, but yeah, I mean, obviously, we replace rates to the extent we haven't hedged them.

Operator: Yeah, I mean, I think that the short answer is we're not going to get into those sort of modeling questions on the call here, but yeah, I mean, obviously we replace rates to the extent we haven't hedged them. The placement rates will be done on the day that they're placed. It matters what the five-year treasury is on the day that assets are placed. You can all have your own forecasts on the direction of the five-year treasury like that. It's not what the forward market says the direction of five-year treasuries are today. Again, we're not going to get into all of the speculating cases.

Speaker #1: The placement rates will be done on the day that they're placed. So, it matters what the five-year Treasury is on the day that those assets are placed.

Speaker #1: So, you know, you can all have your own forecasts on the direction of the five-year Treasury. Like, that is not what the forward market says.

Speaker #1: The direction of five-year Treasuries is, today. So, again, we're not going to get into all of the speculating cases. Thanks, David.

Speaker #6: Okay. yep.

Richard Putnam: Okay.

Scott Cutler: Thanks, David.

Richard Putnam: Oh, yep.

Speaker #3: The next question is from Stan Berenstein with Wells Fargo Securities. Please go ahead.

Scott Cutler: The next question is from Stan Berenshteyn with Wells Fargo Securities. Please go ahead.

Speaker #7: Yes, hi. Thanks for taking my questions. First, maybe for Steve, on the HCI opportunity, do you just have any initial expectations as to, you know, the $7 million opportunity that you have in front of you?

Richard Putnam: Yes, hi. Thanks for taking my questions. First, maybe for Steve on the HSA opportunity. Do you just have any initial expectations as to the $7 million opportunity that you have in front of you? You know, how much of that can you conceivably expect to convert into an HSA next year? Any thoughts on that? Related to that, Jim, do you plan to break out the lives that you capture from the ACA plans separately from your regular HSA accounts? Thanks.

Speaker #7: You know, how much of that can you conceivably expect to convert into an HSA next year? Any thoughts on that? And, related to that, Jim, do you plan to break out the lives that you capture from the ACA plans separately from your regular HSA accounts?

Speaker #7: Thanks.

Speaker #8: Y-You wanna answer that first, Jim, and then I'll?

Scott Cutler: You want to answer that first, Jim, and then I'll...

Speaker #1: Yeah, I, I can answer the easy question first is.

Operator: I can answer the easy question first. No, we will not separately break it out. An HSA is an HSA.

Speaker #8: Yeah.

Speaker #1: No. No. We will not separately break it down. And HSA is, is an HSA.

Speaker #8: I thought your answer would be not free.

Scott Cutler: I thought your answer would be not free.

Speaker #1: But,

Speaker #8: So, Stan, on ours, you know, I mean, we think, I mean, and the good news is there's pretty good data out there because there's the public use files. Not only do they show that there are 7 million people in these bronze plans right now, but it also shows how many people are in the silver plans.

Richard Putnam: Stan, on ours, we think the good news is there's pretty good data out there because the public use files not only show that there's 7 million people in these bronze plans right now, it also shows how many people are in the silver plans. We went through them pretty meticulously. As I mentioned in my comments, very few, less than 10% that we could find of the bronze plans that are offered right now in market are currently HSA qualified. If you, let's say they already were, 10% were, you'd give a little bit of a haircut, but then you'd give it a haircut so it's down to households, and then you give a little bit of a haircut based upon households that could actually pay to fund the account.

Speaker #8: But none of the, I mean, we went through them pretty meticulously, and as I mentioned in my comments, the very few, less than 10%, that we could find of the bronze plans that are offered right now in the market are currently HSA qualified.

Speaker #8: And then, if you, you know, let's say they already were at 10%, I mean, you'd get a little bit of a haircut, but then they give it a haircut so it's down to households, and then you get a little bit of a haircut based upon households that could actually pay to fund the account.

Speaker #8: But just in case anyone that's called doesn't realize this, if you've got money to go pay for a bronze plan, you're not typically Medicaid eligible and things like that.

Richard Putnam: Just in case anyone on this call doesn't realize this, if you've got money to go pay for a bronze plan, you're not typically Medicaid eligible and things like that. Otherwise, you're just going to Medicaid. These are a lot of the folks that we live and work with, right? These are everyone from doctors and lawyers that have small practices that need to have coverage. They've got assets to protect. They'd much prefer to be covered through the ACA to Uber drivers, gig workers, things like that. These are people that have assets. The question is, how many of them can we capture? What's the real market? I think in households, as I said, it could be, if you add that to the other expansions with the DPC and the telemedicine, we think it's 3 to 4 million households right out of the gate that we can go after.

Speaker #8: Otherwise, you're just going to Medicaid. I mean, these are a lot of the folks that we live and work with, right? These are everyone from doctors and lawyers that have small practices that need to have coverage.

Speaker #8: They've got assets to protect, and so they'd much prefer to be covered through the ACA. You know, Uber drivers, gig workers, things like that. These are people that have assets.

Speaker #8: And so the question is, how many of them can we capture? What's the real market? I think in households, as I said, it could be, you know, if you add that to the other expansions with the DPC and the telemedicine, we think it's three to four million households right out of the gate that we can go after.

Speaker #8: Now, it's gonna take some work because you need to first educate these people that it's like, "Hey, congratulations. You got a bronze plan. And now, if you have any medical expenses at all, duck down."

Richard Putnam: It's going to take some work because you need to first educate these people that it's like, hey, congratulations, you got a bronze plan. Now, if you have any medical expenses at all, duck on it, run it through the bronze plan. As we've repeated several times on this call, the way we do business is we help people save, spend, and invest for healthcare. Obviously, we'd love to get those dollars accumulating, but the best way to get them to accumulate is to help people understand that if that money touches down in an HSA stand for even like a day and then rolls off to pay for something, they're going to get a 30% to 40% tax savings on that dollar right then. Or let's say savings, 30% to 40% savings on that dollar. It just gives them incredibly more purchasing power to pay for their healthcare.

Speaker #8: Run it through the Bronze Plan. I mean, as we've repeated several times on this call, the way we do business is we help people save, spend, and invest for healthcare.

Speaker #8: And obviously, we love to get those dollars accumulating, but the best way to get them to accumulate is to help people understand that if that money touches down in an HSA, even for just like a day, and then rolls off to pay for something, they're going to get a 30 to 40 percent tax savings on that dollar.

Speaker #8: Right then. Or, or let's say savings—30 to 40 percent savings on that dollar. It just gives them incredibly more purchasing power to pay for their healthcare.

Speaker #8: And it can be for obviously typical healthcare things like meds, surgery, or doctor's visits and things like that. But it can also be for some of the things we've talked about in other settings, where you know people are now pretty interested in, you know, can I go and get a GLP-1 for a good price?

Richard Putnam: It can be for obviously typical healthcare things like meds or surgery or doctor's visits and things like that. It can also be for some of the things we've talked about in other settings where people are now pretty interested in, you know, can I go and get a GLP-1 for a good price? Can I use this money? We are absolutely committed to finding these people, letting them know that yes, you're in an HSA qualified plan. Yes, you can open and fund that account right now, even if it's a little bit later. We're going to continue our marketing efforts because we have our health plan partners who are going to be helping us with this too. We'll be finding these people and getting them to fund it.

Speaker #8: And can I use this money? And so, we're absolutely committed to finding these people, letting them know that, yes, you're in an HSA-qualified plan, yes, you can open and fund that account right now, even if it's a little bit later.

Speaker #8: Yeah, you know, we're gonna continue our marketing efforts because we have our health plan partners that are gonna be helping us with this too. It'll be finding these people and getting them to fund it.

Speaker #8: Health plans, the doctors, and the hospitals are totally aligned with this because they want these people to be able to pay their out-of-pocket expenses as well.

Richard Putnam: Health plans and the doctors and the hospitals are totally aligned with this because they want these people to be able to pay their out-of-pockets as well. We're going to tap every channel we can find. We have the broadest channel in the market to find these folks, get them to open the account and fund it. Now, all that said, I can't give you a number. We're not going to, but I'm telling you, we're talking about several million. We don't know exactly how many millions. We'll find out more American families that now can immediately open an HSA and, doggone it, we've been working on this for 20 years to get this type of expansion. I don't know. We'll be seeing and we'll be watching it and we have resources that we will deploy. We've already deployed them as far as building out our solution.

Speaker #8: So, we're going to tap every channel we can find, and we have the broadest channel in the market to find these folks, get them to open the account, and fund it.

Speaker #8: Now, all that said, I can't give you a number. And you know we're not going to. But I'm telling you, we're talking about several million — we don't know exactly how many millions; we'll find out — more American families that now can immediately open an HSA and duck on it.

Speaker #8: We've been working on this for 20 years to get this type of expansion. So, I don't know. We'll be seeing, and we'll be watching it, and we have resources.

Speaker #8: That we will deploy. We've already deployed them as far as building out our solution, and we're gonna continue getting ready on the marketing spend.

Richard Putnam: We're going to continue getting ready on the marketing spend. If it's successful, we'll spend more and we'll test it. We're going to learn a lot and we're really excited about this opportunity, Stan. Thanks for the question.

Speaker #8: And if it's successful, we'll spend more, and we'll test it. We're going to learn a lot, and we're really excited about this opportunity, Stan.

Speaker #8: Thanks for the question.

Speaker #1: Thanks, Stan. We'll see you tomorrow.

Speaker #8: I appreciate it. Thanks so much.

Scott Cutler: Thanks, Dan. We'll see you tomorrow.

Speaker #3: The next question is from Matthew Inglis with RBC Capital Markets. Please go ahead.

Richard Putnam: Thanks so much.

Scott Cutler: The next question is from Matthew Inglis with RBC Capital Markets. Please go ahead.

Speaker #9: Hey guys, thanks for taking my question. You kind of touched on this before, but on the AI initiatives, you've talked about the expedited claims and the agentic AI voice channel.

Scott Cutler: Hey guys, thanks for taking my question. You kind of touched on this before, but on the AI initiatives, you've talked about the expedited claims and the agentic AI voice channel. Can you talk about the magnitude of the cost benefits from these rollouts? How much of that is maybe already playing into the year-over-year decrease in service costs? Outside of those, what are the other big opportunities remaining for further cost reduction through automation and AI?

Speaker #9: Can you talk about the magnitude of the cost benefits from these rollouts? How much of that is maybe already playing into the year-over-year decrease in service costs?

Speaker #9: And then outside of those, what are the other big opportunities remaining for further cost reduction through automation and AI?

Speaker #1: Yeah, great, great question. So, as I said, I really believe that we're just on the very beginning of our journey with AI.

Scott Cutler: Yeah, great, great question. As I said, I really believe that we're just at the very beginning of our journey on AI. We've already been able to deflect costs through claims automation using AI. We're going to be investing within the framework of our tech and dev spending on APIs and data to unlock further opportunities around AI pretty much in every function of our company. We're looking at AI solutions that can automate any process that is a repeatable process that can be run on data across AI. I think the biggest opportunity that we see is in the service center, because when we look at a lot of the things that some of our members are calling on us on, a lot of those interactions, we can automate and take care of our members instantaneously through AI.

Speaker #1: So we've already been able to deflect costs through claims automation, using AI. We're going to be investing within the framework of our tech and dev spending on APIs and data to unlock further opportunities around AI.

Speaker #1: Pretty much in every function of our company, we're looking at AI solutions that can automate any process that is a repeatable process that can be run on data, across AI.

Speaker #1: I think the biggest opportunity that we see is in the service center. Because when we look at a lot of the things that some of our members are calling on us about, a lot of those interactions we can automate and take care of our members instantaneously through AI.

Speaker #1: And so again, I, I don't think, you know, we're not going to provide guidance on where we think that opportunity is. But again, probably where I see the biggest opportunities within the enterprise really starts in the service center.

Scott Cutler: I don't think we're going to provide guidance on where we think that opportunity is. Probably where I see the biggest opportunities within the enterprise really starts in the service center, expands in terms of us becoming more efficient in our product and development, in terms of our engineers being able to write code faster, more efficiently, and then for us to be able to envision other areas within the company that we can do smarter. I think overall, what should be the net benefit of that? An improved experience, an enhanced experience, a faster experience, and a more efficient cost structure to do so.

Speaker #1: It expands in terms of us becoming more efficient in our product development, in terms of our engineers being able to write code faster and more efficiently, and then for us to be able to envision other areas within the company where we can do smarter.

Speaker #1: So, I think overall, what should be the net benefit of that? An improved experience and enhanced experience, a faster experience, and a more efficient cost structure to do so.

Speaker #1: Thanks, Matt.

Richard Putnam: Thanks, Matt.

Speaker #3: 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: This concludes our question and answer session. I would like to turn the conference back over to Scott Cutler for any closing remarks.

Speaker #1: Well, hey, I want to thank everybody for really engaging in the conversation there. I'm mostly wanting to thank our teammates for these remarkable record results. We are thrilled about the opportunity in front of us.

Operator: I want to thank everybody for a really engaging conversation there. I mostly want to thank our teammates for these remarkable record results. We are thrilled about the opportunity in front of us. We have a lot of execution for the second half of the year and into next year as we reach and influence and help more of our clients and members realize the benefits associated with HSAs. I'm confident and energized to fulfill our mission of saving and improving lives by empowering healthcare consumers. Thank you, everybody, for participating in this conference call.

Speaker #1: We have a lot of execution for the second half of the year and into next year, as we reach, influence, and help more of our clients and members realize the benefits associated with HSAs.

Speaker #1: I'm confident and energized to fulfill our mission of saving and improving lives by empowering healthcare consumers. So thank you, everybody, for participating in this conference call.

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