Q2 2020 Earnings Call
Welcome to Healthequitys second quarter of fiscal 2020 earnings call. Please note that this event is being recorded go ahead Mr. Putnam.
Thank you Carmen good afternoon, everyone as Kevin mentioned this is our Healthequity second quarter earnings conference call for our fiscal year 2020 by way of introduction, we have John Kessler, President and CEO , Steve Neeleman, Healthequitys founder and Vice chair.
Ted Bloomberg Executive Vice President and COO, and Darcy Mott, our executive Vice President and CFO I would like to remind those that are listening that there is a copy of today's earnings release and accompanying financial information posted on our Investor Relations Web site, which is IR dot Healthequity dot com.
We also claim safe Harbor concerning the forward looking statements included in todays earnings release and that will be made during this conference call, including predictions expectations estimates or other information that might be considered forward looking.
Throughout today's discussion, we will present, some important factors relating to our business, which could affect those forward looking statements.
These forward looking statements are subject to risk and uncertainties that may cause our actual results to differ materially from statements made today.
As a result, we caution you against placing undue reliance on these forward looking statements. We 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.
And that are detailed in our annual report on Form 10-K with the FCC filed in March 2019, along with any other subsequent periodic or current reports filed with the SEC.
We are not obligating ourselves to revise or update these forward looking statements in light of new information or future events.
We also want to remind.
We were on our call today during the Q and eight we asked for one question at a time.
And John has asked to to make sure that it is a good one.
With that I'll turn the call over to Mr. John Kessler.
You ask them they won't do it but if I add.
The idea wallet.
It hasn't worked so far let's try.
Thank you Richard and thank you everyone for joining health equities second quarter fiscal 2020 earnings call and with the special deep Purple welcome those guys don't Sue us to analysts and shareholders of Wageworks, which as you all know I'm sure we acquired on Friday.
On today's call I will speak to Q2 results and our market position with the Wageworks acquisition now complete Ted Bloomberg, our COO will discuss integration and Darcy Mott will detail these results and update guidance.
And then Steve will join us for Kuni, we do have quite a bit to cover and we'll do our best to do it quickly. So that there are time for question and there is no way.
During Q2, which did not include.
Any impact from Wageworks the team delivered record performance against the four key metrics that have driven our business and once again outperformed on year over year measures of profitability and custodial asset growth a top robust revenue and HC member growth.
Revenues of 86.6 million were up 22% year over year, adjusted EBITDA of 40.6 million rose and even larger 28% year over year.
HSC members at July 31 reached $4.2 million up 16% year over year active agency members climbed 13% to $3.3 million and custodial assets reached 8.5 billion growing at 21% year over year, which is more.
Progress was evident in members learning to use HSH is for the long term savings invested assets grew 38% and the number of HSH members investing was up 31% compared to a year ago.
Underlying these key metrics the team achieved several important milestones during the quarter for the first time in health equities history.
Custodial fees accounted for more than half of total revenue.
Which is reducing our dependence on service fees paid by our clients also for the first time gross profits exceeded two thirds of total revenue with gross profit margins of 67% Thats two thirds expanding by more than 190 basis points year over year, adjusted EBITDA margins expanded by more than 200 basis points year over year to 47%. Another record even after expenses made for larger platform investments as we discussed on our Q1 and prior to that Q4 cost.
Turning to sales the team opened up 126000, new HSH is in the quarter up 8% from last year's Q2 production and custodial assets grew by $195 million that 15% more than a year ago period and its despite essentially flat underlying equity markets during the quarter.
These were really tough comps and the team beat them. We attribute this outperformance really to three factors. The first is the rollout of upgraded agents a complementary offerings that employers want to buy from the re say partner. The second is expansion of health equities distribution footprint as direct to employer selling expanded in our retirement plan partnerships really came online and the third is the resilience of the underlying HFSA market as trends driving long term shift to HFSA style health plans and greater use of HSH remain in place.
Q2 also saw some notable regulatory developments that we expect to spur future growth. The IRS clarified expanded the scope of Ace in qualified plans to include plan designs with more coverage for chronic conditions and bipartisan legislation introduced in the house would extend the benefits of HIV assays to all Medicare recipients, which would significantly reduce out of pocket healthcare cost for seniors and especially those in traditional Medicare so that seems like a good thing in a way Q2 previewed what we intend to achieve with the Wageworks acquisition, which is a more complete offering delivered across a wider distribution footprint, leading to outperformance over and above already strong HSH market growth driven by long term secular trends, that's along equation, but it's working.
We call it the new health equity and with Wageworks acquisition closing last Friday today as it turns out is its second full day on the job the new team purple. According to Devon years, just published midyear market report begins as the number one agency administrator by accounts and number two by assets, we intend to build on our lead while bringing our culture of remarkable service to our full product into everything we do.
We introduced had Bloomberg to investors on an earnings call exactly one year ago, and nothing has been the same sense.
But it's been a good that Ted has increased our just just keeping them laughing here Ted has increased the strength the cohesion the focus and the pace of our operating leadership. He has delivered four strong quarters and become a champion of the purple culture. Ted is now at the head of the Wageworks integration.
And thanks to great preparation during diligence a speedy close process strong pre close work by teammates across both legacy companies and most importantly true alignment we are off and running.
Okay.
Thanks, John I wasn't sure where you're going with that for a minute.
It's been a great working with many talented healthequity team members in my a rookie year and now over the past several weeks I've had the pleasure of meeting many of the talented wageworks team members that will join us in building their preferred HFSA and consumer directed benefits partner for employers benefits consultants and health and retirement plan providers.
We're we're investing $80 million to $100 million over the next 24 to 36 months to combine these two companies in a way that suits our clients our partners our members our teammates and our shareholders and most importantly to bring purple to everything we do.
During the integration period, we will report regularly to all of you on progress towards specific integration commitments, we have made to customers partners into the markets.
First specific customer and partner commitments.
We will serve all of our 12 million members with US based benefits experts available every hour of every day.
We will make it easier to do business with us for approximately 115000 employer clients by consolidating two a unified technology platform.
We will continue to invest in securing member data maintaining strong privacy protections and continuing to prioritize data security, we will engage families and educate them on how to optimize their benefits by spending less today and saving more tomorrow.
And we will deliver value driving down costs by offering bundled solutions and making our services easier to administer.
Secondly, our specific financial commitments.
We will deliver at least $50 million in run rate synergies, including both revenue and cost efficiencies that we will convert to free cash flow efficiently to reduce leverage and we will sell our complete solution to clients of all sizes directly in hand in hand with partners to continue to outperform the HPC market growth and extend our market share lead.
We will report quarterly on key integration metrics, including Asia same members and assets, new HFSA and asset growth and active and investing HFSA members.
Total numbers, including both HSC and participants and Fsh HR, a cobra commuter and other consumer directed benefits we will break down. These total members by account type on an annual basis.
We will also report on run rate synergies achieved including both revenue and cost efficiencies against our $50 million objective.
And we will also report on onetime integration spend against the 80 million to $100 million, we expect to invest.
We will also provide insight from the marketplace on progress towards achieving the strategic sales teams that motivated us to embark on this effort.
Some of these updates will be qualitative or anecdotal as the integration of our sale systems and team is may blur the origins of organic growth as we go forward and as we consider streamlining certain operations.
Nevertheless, we will not lose sight of your expectation that this integration will be a significant source of future growth.
While we have just completed our second business day as a combined company I can report that the new health equity has already taken a number of steps forward as John mentioned finance and legal executed. This closing in just over 60 days well ahead of schedule.
During that time, our integration teams completed plans for over a dozen workstreams ranging from platform consolidation to cultural integration to our go to market strategy.
We have identified immediate opportunities for revenue and cost efficiency that have either already been implemented or soon will be giving us a head start on our synergy commitments.
On our first day as a combined entity our relationship executives personally reached out to two so over 2000.
Clients.
Sharing our integration message and over the next 60 days each member of the New Health Equities Executive leadership team will complete a top to bottom assessment of his or her organization aligning leaders teams and resources to achieve the customer financial and strategic goals.
Described.
For the rest of this year sales season.
We will take a buddy selling approach our first joint sales call began an hour after closing was announced on Friday with John in attendance and finally, we have begun to infuse purple into our service experience with our first joint service hurdle. This morning, and the implementation of a bipartisan service escalation team to ensure our partners and clients are well taken care of throughout the transition.
One of the many things that will not happen overnight. However is a brand transition.
We don't consider purple just Dakota paint.
We believe that the real integration progress that our clients partners and team members can see and feel.
Should proceed changes to colors and logos.
We are off to a good start realistic about the challenges, but optimistic about the opportunities ahead I look forward to reporting our progress to you in the quarters to come and I will now turn the call over to Darcy to detail operating results and revised guidance.
Thanks Ted.
I will discuss Healthequitys operating results for our second quarter ended July 30, Onest on both a GAAP and a non-GAAP basis.
A reconciliation of all non-GAAP results and guidance that we discuss here end to their nearest GAAP measurement and the definitions of all reconciling items in all non-GAAP measures is provided in the press release that was published earlier today.
Revenue for the second quarter grew 22% year over year to $86.6 million.
Breaking down the revenue into our three categories. We continue to see growth in each of the service custodial and interchange revenue during the quarter.
Service revenue grew 5% year over year to $26.3 million in the second quarter consistent with the strategy. We have outlined over the last five years service revenue as a percentage of total revenue declined to 30% in the quarter down from 35% of total revenues that are represented in the second quarter last year as the custodial revenue stream has become more predominant service revenue growth was attributable to a 17% year over year increase in average assays during the quarter, partially offset by a 10% decrease in service revenue per average per se.
Remember HSS service fees are paid primarily by employers on behalf of their employees and so by bringing these fees down over time, we deliver more value and help our network partners deliver more value to their customers, it's working and we expect to continue.
As we indicated last quarter, we expect the decrease in service revenue per average HSH to be towards the high end of our historical 5% to 10% guidance for fiscal 2020.
Custodial revenue was $43.6 million in the second quarter, representing an increase of 42% year over year.
The driving factors of this gross growth were a 21% growth in average custodial assets and the higher annualized interest rate yield on custodial cash assets of 2.54% during the quarter up 20% over the period over the prior year.
Custodial revenue in the quarter accounted for 50% of total revenue.
Interchange revenue grew 8% in the second quarter to $16.7 million compared to 15.4 million.
Dollars in the second quarter last year interchange revenue benefited from the 17% year over year increase in average assays in the quarter compared to the second quarter last year offset by lower average spend of $7, 7% per HSN member.
Gross profit for the second quarter was $58.4 million compared to $46.6 million in the prior year.
Increasing the gross margin level to 67.5% in the quarter from 65.5% in the second quarter last year.
The higher gross margin was the result of increasing revenue mix to the custodial revenue.
Operating expenses were $33.6 million or 39% of revenue compared to $25 million or 35% of revenue in the second quarter last year as we started to incur integration related costs and as we increased our investment in the previously discussed strategic initiatives. We expect this trend to continue during the second half of fiscal 2020, as we ramp up the integration activities, Ted just outlined and as we continue to work on our strategic initiatives.
Income from operations was $24.9 million in the second quarter, an increase of 15% year over year and generated an income from operations margin of 29% during the quarter.
We generated net income of $19.4 million for the second quarter fiscal 2020 compared to $22.5 million in the prior year. The decrease primarily attribute primarily due to the integration related costs and a higher effective tax rate this year compared to last year.
Our GAAP diluted EPS for the second quarter of fiscal 2020 was 30 cents per share compared to 36 cents per share in the prior year.
Due to the significance and the change from historical reporting of certain items related to the recently completed acquisition of Wageworks, we have expanded the reconciling items in our GAAP to non-GAAP reconciliations.
We refer you to the definitions of such reconciling items in our press release issued earlier today.
Our non-GAAP net income and net income per share for the second quarter of fiscal 2020 were $29.4 million.45 per share.
Our non-GAAP adjusted EBITDA for the quarter increased 28% to $40.6 million compared to $31.8 million in the prior year adjusted EBITDA margin in the quarter was 47% the highest quarterly adjusted EBITDA margin in our history.
For the six months of fiscal.
For the first six months of fiscal 2020 revenue was $173.7 million up 23% compared to the first six months of last year.
GAAP net income was $61.2 million or 94 cents per diluted share non-GAAP net income was $57.6 million or 89 cents per diluted share and adjusted EBITDA was $79.6 million up 30% from the prior year.
Turning to the balance sheet as of July 31, 2019, we had $815 million of cash and cash equivalents with no outstanding debt. This includes net proceeds of approximately $460 million from the common stock offering we executed in July .
Subsequent to July 30, Onest, we issued $1.25 billion of debt to help fund the acquisition of Wageworks, which was funded and closed on August thirtyth.
Turning to guidance for fiscal year 2020.
As we think about guidance for the remainder of this fiscal year, we recognize that we have more forecast in experience and therefore greater confidence in our visibility to the pre integrated health equity business versus the component added with the acquisition of Wageworks.
We expect this to change over time.
Today, we are providing revised guidance for the Standalone health equity business and estimate.
Estimates, our revenue and adjusted EBITDA margin for the incremental Wageworks component for the remainder of our fiscal year.
Based on where we ended the first half of fiscal 2020, we are raising health equity revenue guidance for fiscal 2020, excluding the wageworks contribution to a range of between 341 and $347 million.
We expect health equity non-GAAP net income excluding the wageworks contribution to be between 76 and $80 million, reflecting the addition of interest expense for our newly issued debt and the non-GAAP definitional changes mentioned above.
This results in non-GAAP diluted net income per share between $1.10 and $1.16 per share.
We are raising guidance on healthequitys adjusted EBITDA, excluding the Wageworks contribution to between 138 and $142 million for fiscal 2020.
Please see the reconciliation of our non-GAAP measures provided in the earnings release to note that guidance on our non-GAAP net income and per share calculations starts with GAAP net income, which reflects interest expense and acquired intangible amortization associated with the wageworks acquisition without including the Wageworks operating results.
These estimates do not include potential synergies.
Our non-GAAP diluted net income per share estimate is based on an estimated diluted weighted average shares outstanding of approximately 69 million shares for the year in other words. It includes the impact of the new shares issued as part of our July equity offering.
Before turning to the contribution from our from Wageworks I would like to highlight four items reflected in the Healthequity Standalone guidance first we expect to sustain our year to date interest rate yield on custodial cash assets of approximately 2.5% for the full year of fiscal 2020.
We will provide additional guidance on the expected custodial revenue to be generated from the Wageworks HSC assets as we diligently pursue efforts to move such assets onto our custodial bank partner network and platform.
Second.
We remind you that.
We have borrowed $1.25 billion as of the closing date of the acquisition with a current variable interest rate of 30 day LIBOR plus 2%.
Which will be included in our income statement beginning in September along with a five year amortization of deferred financing costs of approximately $27 million.
Third our full year guidance includes a detailed reconciliation of GAAP and non-GAAP metrics. We encourage you to review the detailed list of estimated reconciling items included in the earnings release distributed earlier today and note that there are some new items that have been added as a result of the Wageworks acquisition. However, consistent with our prior practice such estimates do not include a forecast for stock option exercises for the remainder of the fiscal year.
Fourth we assumed a statutory income tax rate of approximately 24%.
We expect the Wageworks acquisition to contribute revenue in the range of $170 million to $175 million for the remaining five months of our fiscal year.
We expect revenue contributed from the Wageworks acquisition to generate an approximate 15% adjusted EBITDA margin for the remaining five months of our fiscal year.
This five month period includes the cost intensive benefits enrollment period.
This is a baseline for the business. We have received as we have received it.
Therefore, it excludes any revenue and cost synergies that we may realize this fiscal year as Ted mentioned, we are already working to reduce costs and realize revenue synergies from combined operations.
With more clarity on timing, we will provide an update on these activities when we when we report our third quarter in December .
With that I'll turn the call back over to John for some closing remarks. Thank you.
Before Harman takes us to Q and eight I want to take a moment to thank my remarkable teammates in the new health equity for their work in completing the acquisition for the fast start in integration and mostly for their enthusiastic embrace despite the uncertainties of any situation like this.
Of our vision going forward.
All of that while delivering a record Q2.
In that same vein all of us at Healthequity truly appreciate the support of shareholders for that vision.
Please note that we understand our accountability for seeing that your trust in US is ultimately well rewarded.
With that Carmen will go ahead and take questions.
As a reminder, ladies and gentlemen, if you have a question at this time just press Star then one when your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue.
And our first question is from and same meal with JP Morgan Your line is open.
Hi, guys. Thanks for taking my question.
Our wage rate it looks like the first six months of the year fall a little bit of a revenue decline on a year over year basis, and just wondering how we should think about what the back half guide implies in terms of growth and then what kind of baseline are you targeting for that.
Forward.
Okay. Thanks, and appreciate the question. So as you say if looking at the first six months at Wageworks reported.
Revenues were down about 7% year over year and as as Wageworks said that is.
Primarily due to.
Renewal issues, so lack of renewals I suppose.
Primarily in Apis, and Cobra and within the book of business that Wageworks manages which was previously associated with ATP before ATP exited.
The this consumer directed benefits business.
Our view on what our guidance reflects is that.
In the second half.
That.
There will be a little bit more of a pronounced decline.
And the source of that and you can do the math to get there and the source of that is really threefold. The first is that all the first is when I mentioned that is to say that the 7% climate companies on the first half second is during the first half.
There was still run out of that business and.
That run out produce revenue, but it's pretty much played out now and so.
The company won't see that.
And then lastly course.
Wageworks, Unlike health equity the.
HSH business.
Is very much tied to third party custodians and.
The company's revenue from those products on the custodial side is.
Very much tied to in a very immediate way.
Changes and the overnight fed funds rate and.
As you know one of the things about our model is.
To provide a lot more stability than that and.
So, but but but.
It will.
As Darcy said the guidance does reflect synergies timing et cetera.
So.
On a standalone basis wage would have seen a.
Some revenue loss from the rate cut that occurred I believe in July and presumably from any further rate cuts that might happen. This year and that many expect so those are the three factors that led us to a forecast that assumes.
A little bit more pronounced decline in the company saw in the first half.
That's very helpful. Thanks, and then I guess, maybe just a follow up to that as we think about the the synergy portion you said, it's not included within the guidance but.
Yes, I think you initially had said that you expect some of that to come on pretty quickly. So how should we think about the cadence of some of those synergies being recognized.
Yes, I'll comment and then throw over to Ted a little bit.
So.
As Darcy said.
Sounds like he was heard and Thats. Good we have not assumed in our outlook here any effect from sending any positive effect from synergies over the course, the remainder of the fiscal year Thats consistent with what we said at the time of our.
Of the of the acquisition itself as well as of our subsequent borrowing an equity raise.
That is a conservative assessment.
As Ted mentioned, he's working away at it and the team's working away at it.
I think the issue is really one of of just having a bit more clarity on timing and so forth and we felt like a more prudent approach was to give you guidance about what we know today, but but.
Certainly.
If I sort of look at it Big picture, we have said that.
It will take us between 24, and 36 months to realize at least $50 million of synergies, including both revenue and cost and.
From a planning perspective, there's nothing that's going on that would lead me to believe otherwise Ted anything to add there maybe with regard to more recent developments.
No John I would just echo your sentiments briefly that.
We are already underway on cost synergies, we expect to be able to deliver to you a more fulsome review of the actions that we've taken in our next.
In our third quarter call and we expect the list of sort of actions taken with concrete savings associated with them to be reasonably robust at that time.
Yes fair enough Darcy.
Darcy hand.
And is that.
I mean, we wanted to convey on this call. We just closed this transaction two business days ago, and and we wanted to make sure that we set the current run rate and the expectations of what the businesses producing today.
With without any changes that we have implemented and we will certainly start implementing those changes and just to quantify them, but also get the right timing right is very important to us and so we'll.
We'll make sure and try to do that when we release, our Q3 results and give you some clarity on that.
Great. Thanks, very much guys.
Thank you. Our next question comes from Jamie Stockton with Wells Fargo. Your line is open.
Thanks for taking my questions.
I guess, maybe just a quick follow up on Andy's question.
John This this deal closed I guess, two plus months ago.
Wages numbers are are looking a little rough this year.
Are you any less optimistic about this now than you were when you close a couple of months ago.
Yes, Thanks, Jamie I mean, it's an awkward answer because you are one of those analysts who I'm about to say.
We were we certainly whose numbers we were not taking for granted in our assessment of the deal.
If anyone else that asked that question I realize here, but.
But.
I would say we enter into discussions with wage with a very sober view of where the company was that what its challenges were and what we would need to address.
By and large.
We were pleased that.
That.
Sort of sober approach was reflected ultimately paid for it.
And if anything if I look at.
Where we are today.
Relative to where we were closing the things that you worry about I think the most.
In this period of time are the things that it's really very difficult to really diligence how hard is it going to be to get.
Each product on one platform, how how what's the Esprit de corps of the team.
Our people going to be aligned to the mission that kind of thing and ultimately partner client receptivity and.
Well, obviously, it's still early days on some of those points on others. It's no longer early days, we have a plan to move the platforms together and that plan is being implemented as of today.
We have a plan to.
Really deliver purple service and everything we do and that plan as Ted described as being implemented today.
And I think most importantly to your point.
We have a view as to how the business grows and as I said in the earlier comments at some level.
Health equities Q2 results and as I look to you a little deeper, particularly the sales results are.
Highly validated of of the rationale for this transaction, we're going to have a product that employers want to buy.
Across all size spectrum that they are telling us they want to buy.
And we're going to deliver it with the service they expect from US and I think if we do that.
We're going to look back and see that this was.
Truly transformative in terms of really allowing us when all is said and done to both accelerate the underlying growth of our market, but I think for us specifically.
Really grow our leadership position and cement our position in the market. So I guess.
Im not surprised that there is a lot of work to do we expected there to be a lot of work to do.
I remember talking with you about some of this before we were in the in possession of any.
Proprietary type information.
We kind of had that same conversation and so it's sort of worn out and that's where I think we are.
Okay, that's great.
And then maybe just my follow up.
The trend in interchange revenue on a per account basis. Thank dark you said it was down 7% the kind of uptick in the number of accounts that you're adding.
You know the uptick in the investment balance per account are these all intertwined.
As you know in that people are saving more they're using these as the savings vehicle more incrementally.
Yes, I mean, I think the short answer is yes.
And it's funny when you in our press for this.
We prepped for that question and you just gave the answer.
Active accounts were up 13%.
Spend was only up eight well what else happened answered investment and investments were.
Up 30 30.
Eight and investing members were up 31, or vice versa, I can't remember, but.
And you can see it in the data as people are more ready to stand now I will say or is it more rates. They were say I will say, there's there's some opportunity there because unless you're Maxine out you can do both and so there's some more opportunity for us to to help our members save more in both directions and.
So so weak.
For some more juice, we can squeeze out of that one both for us and for our members.
As I say the short answer is no.
Okay. Thank you have a one thing on the follow ups I mean, I'll, let Andrew I can't tell at no but.
I think we haven't got the Greg Peters, yet have like you know.
Evan Hasan at par, except that we had already is that.
Our next question is from Donald Hooker with Keybanc. Your line is open.
Hi, great Good Hey, good evening.
So in your remarks, John I think you referenced some of the retirement plan partnerships that everyone has been chatting with you about I guess I assume you're referring to the vanguard nationwide principal.
Is there any way to maybe quantify some of them. There is a new but I think they are reasonably large and.
Obviously everyone's watching for data around those those partnerships.
Yes, I can quantify a little bit of the opportunity and I'm going to throw to Ted and have them talk through kind of what we're up to there.
And some of the progress.
Yes, if you look at as I as we said before Don we don't we don't do these kinds of announcements on every deal that we do.
If the other side wants to do and we will.
But.
So if I look across all of our retirement part partner a record keeper partners footprints footprint.
Footprints our record keepers today manage about.
12%, 13% I believe of.
Find contribution assets and by the way, we expect that with what's in the pipeline to grow to about a quarter of the entire record keeper market. So we feel like we're building.
Real formidable footprint among retirement plans and so.
To think about that as a way we can go to market together.
To connect health and welfare pretty good that all sounds great as opportunity.
What I think Ted can talk about a little bit is how we're trying to take advantage of that opportunity with our partners on the one hand carefully in soberly, but also as quickly as possible.
Yes, Thanks, John I think we're.
Highly encourage by the partnerships that we've been able to establish with several.
Record keepers as John alluded to some of whom have been announced publicly and others of whom have not.
We have real deals signed real accounts on the books already which is which is very exciting, but even more exciting is just a great partnerships that we're finding this is a real need for our record keeping partners and they're stepping up to to be able to deliver it to their clients and we're the beneficiary of that.
I think that we are we didn't release a target.
Externally, but internally, we're exceeding the targets that we set for ourselves this year.
We signed up a lot of health plans over the years and typically they are they develop well, but they develop somewhat slowly.
And thus far it appears if you ask our historians at Healthequity that these record keeper partners have borne fruit probably faster.
Then our health plan partnerships have on average.
Which is really exciting but lots of opportunity lots more work to do.
But but really encouraging and in excess of our of our internal.
Targets, thus far.
Okay, Great and then maybe my follow up question I guess also John in your prepared remarks, you alluded to.
Some of the IRS guidelines around I guess, the inclusion of first dollar coverage or chronic diseases and conditions.
I would think thats, a subtle change, but very important I would think long term, maybe I'm wrong, but I would love to hear your view as to how did that how quick that might translate into employers maybe.
Maybe maybe be more friendly and open to this agent say concept.
Yes, I'm going to punt that wanted to Steve Neeleman, who is on with us for the Q and Anna.
As has been banging the drum for this particular change for a long time precisely because over the long term. It is important and the right thing to do Steve you want to speak to that.
Sure. Thanks, Doug So yes, we can assure you that the minute the red came out from Treasury and HHS that that our account executives were on the phone with our largest employers.
Talking about this important change in the bottom line is is that for too long people with chronic illness.
Pretty run of the mill stuff that.
But.
Many of US are a family members have like diabetes snap has been high blood pressure and things like that it's been there's just been a lack of clarity as to whether these dollars could be paid for by the health plan.
And not out of somebody's I'd, just say, obviously from our benefit.
As a company is fantastic if someone can can have this these conditions treated and not have to use their health savings account dollars. Due so are there other.
Account dollars and so we've been on the phone talking about it.
Some of the real large employers.
Start plan design discussions for a January one enrollment even as early as March or April and these these came out towards the end of July mid mid to end of July and so we're talking about it. The other thing that we are able to do is to start to educate our members to ask their employers about adding these types of benefits, but my my expectation is is that it's going to have a long term effect on on the reduction of age assays.
May have come out a little bit late for the large employers to make and they also help us make to plan design changes for this year, but we're all over it we're talking to our folks about it and I think more than anything youre, not only going to be able to see the savings go up in the accounts because of this I think you can see more adoption, but most of all I think it's a great way to address chronic disease in this country as people get older. Most Americans as they get into their sixty's have at least one of these chronic diseases and so we're really excited about it the employers are thrilled that they don't have to.
Wonder about it anymore and make some concern concert offered it and help those are certainly we retool some of their offerings will to make sure that this included.
Great. Thank you so much.
For the mid size and small employers.
The mid size folks in particular.
I think that there will be some effect this year.
Well I mean, it just using ourselves as an example, we're obviously the middle of finalizing our merged benefits for calendar 2000 and.
As a company with just under 20 550000 employees and.
As the Ventas pros like to call people, who do work.
And.
Obviously, both both our companies have a say options today.
But this gives us a lot more flexibility to do the right thing.
Both both financially for the company in terms of plan design and then also for our teammates insurance coverage for a little incremental coverage for where the loan for certain conditions and a little uncertainty. So so I think if we're having that discussion.
I suspect that a lot of firms in that kind of maybe not mega size and so forth, but are having that discussion as well now and and we will see those results. When open enrollment time comes around in a few months and Thats accounts come on for January as to whether there has been a meaningful pickup enrollment this year as a result, certainly over the long term as we commence elsewhere.
Existing HR a plans.
Really don't make as much sense in this context, you're likely to see those.
Turning to data say plans over time.
And many of the existing PEO plans with higher deductibles.
You just look the part to get that to nature safe plan becomes very short and clearly there is a lot more value to the team member in that context. So.
We think it makes sense and right along with the.
Everything else, we're doing so thanks.
Thank you.
Thank you. Our next question comes from Greg Peters with Raymond James Your line is open.
It laid out for you the course is wide open.
Yes, good afternoon.
Single.
Thank you for the call out earlier.
You know I was impressed judging from Darcy in touch performance. They read their scripts flawlessly. So I guess you must be off to a good start.
It means that we had at least five minutes beforehand. So thats.
Can I go back to Darcy his comment about the interest rate or the yield on cash flow you arm I think you said, 2.54%.
Through the end of the second quarter.
Can you give us a perspective of where the current market is and.
How we should think about the pressure from lower rates on this very important metric going forward.
Yes, and we've commented about this before that.
And we reiterate or reiterated our guidance for the full year of being in that 2.5% range.
The way that we ladder out our portfolios and has a longer term view.
And in the current rate environment. It is impacted obviously by the rate decrease that happen.
Not only in July but there's.
A year ago. This time, they were talking about for rate increases and now they are talking about they just did or the first rate increase and who knows how long.
And so longer term.
Interest rates matter that they make today and that will impact. The go forward in the current rate environment, we still believe that.
We will actually see an uptick a little bit and rate above what we currently are yielding.
But we'll we'll see has time, it's there's two variables that the amount of assets that we bring on and how quickly we bring on some of the wage assets onto our platform and how much we grow the assets in this coming season in December and January and then what will the rate environment actually be when we start placing new funds, but in the current environment, we feel pretty good about it.
But.
Decreasing rates will have an impact just like increase in rates had an impact on us as they came up.
Right.
Go ahead go ahead Greg.
Just as a follow up and I'm only allowed one follow up.
With the the current lower rate environment have you seen any competitive change in behavior regarding service fees service revenue. You. You noted in your guidance that you are going to come in the high end of the decline per account service revenue I would anticipate with lower rates that the rate of decline in service revenue would begin to diminish.
Now that may be I mean, as you know.
The thing that the biggest driver of that is incremental volume on contracts, but.
But.
But what is correct is these things are intertwined and one piece of evidence of that is if you look at.
The the let's say the flexible spending account business and wage has a large profile in where you don't have as much of that social component.
Or in their case, and if any of that sale component of.
Fees are more stable right and here you have variability of fees with rates.
And.
So so there is clearly a.
What to.
I go back and Austin, So I can be like all then I can go back as far as price elasticity and.
You hear that on earnings calls lot and.
And.
That having been said Greg.
I think that.
It is it first to two thoughts that I think are relevant first is.
The reason that the company as you know earns a premium too.
Rates out in the marketplace is because we are.
Very reliable in terms of talking to people about what we're going to need and then actually meeting yet so they can build an asset portfolio around the loan portfolio and second.
Because we take on all of the non interest expense expressed as service rate associated with accounts. So so it's one transaction in and out of date or bank and that's it and that's why banks participate our cat program.
And.
So I think.
Those factors haven't fundamentally changed.
And that's a good thing so as far as he said.
We all obviously, we were not in the business of giving forward guidance a year out.
We have set as opposed useful that.
We feel like.
Rates going into next year, if conditions are as they are today by which I mean broadly nothing's happened as our present expected.
Then.
We would expect that we'd be able to pick up next year.
Just as we did this year.
And so forth.
If.
Conditions change or depending on the amount of cash and our ability to predicted and all those kind of factors that may be slightly different but but I think broadly we continue to expect that at least for this period of time that rates will be a positive contributor to margins as well as revenue growth the magnitude of the uptick is still to be seen yet.
Thank you.
Thanks, Matt.
Terrific. Thank you.
Our next question is from Stephanie Demko with Sidoti Your line is open.
Hi, Stephanie.
Hi, guys. Congrats on closing ratio for this current quarter.
Thank you.
So my first question I'd like to share a little bit more about 80 to 100 million investment you're making in consolidating wages candidate wins with your own how much of that could be thought of margin run rate cost like hiring of customer care staff in the U.S. versus one time or is that just cost of closing the location all are out there.
So let me start and then I'll kick over to Ted.
Endorsing they went away as well.
We are trying to remain on therapy thoughtful.
You will see if we look at say as anything we are we are trying to be very careful about tried and setting up. This is our is actually very careful about what we include in onetime costs.
The wages and salaries of our teammates.
For the most part well essentially.
Very very few exceptions, beating our integration met last month.
That's not a onetime expense in my experience when they don't go away.
And so when we talk about that expense, we are really talking about.
The things that need to do that are truly have a onetime nature to meet our commitments that described and so.
That the intent of that is to give you some level of confidence that.
These are truly expenses that.
Our our of a onetime in nature and that it won't require us twisting our words or the business.
To be able to report without them with that Ted that seems like.
You are in a great position to describe the nature of what we're doing in the investments.
Sure. Thanks.
John So I think to answer your question to this sort of biggest one time expense is platform consolidation and organization and integration.
That is going to be.
The process is going to take 18 to 24 months and it's going to require a lot of resources and thats, probably in that $80 million to $100 million, that's probably the single.
Biggest expense to your question about run rate cost there will absolutely be.
Incremental run rate cost associated with things like bringing more calls to the U.S., but those are contemplated in the 50 million, meaning that the 50 million is a net number.
We expect some.
I don't know if the fancy word is dis synergies.
There, but but but those are those are kind of embedded within.
The $50 million synergy target that we have so the you're absolutely right. There will be some ongoing expense associated with some of these investments, but thats, how we plan for it the Darcy add on I don't know if you want to add anything we just.
I made several references to the reconciliation if you look at our our reconciliation to our outlook is provided in the earnings release, you will see approximately $27 million in the current fiscal year of acquisition excuse me excuse me $29 million of integrated related costs.
And those.
Our cost that we expect that we will incur between now and January .
And and then we will report those as a separate line item in our income statement going forward. So you can keep track of how we're doing towards this integration activity.
Alright, that's super helpful guys, I really appreciate that clarity I want to sneak in a housekeeping. One then a follow up not to questions a follow up housekeeping. So.
Great.
Hi, good housekeeping fees for the wage EBITDA as to the thinking for said teens low does that include restatement costs or anything.
Of that nature that would maybe bring it down.
So couple thoughts it's the second half of the year in particular, the last five months, which are the most service intensive.
Obviously, we're being I would say conservative we're being realistic on the revenue side and and as Darcy said, we're not making any.
In this estimate and again keeping in mind, we had to make it without actually running the business. So we Havent for example incorporated in this any estimate of any adjustments, we would make given our view of revenue.
Outside of synergy type items and of course, we have included synergy items. So.
We recognize that it is low and.
Certainly relevant the annualized number.
But I will say on the on the and then have Darcy comment on this on the the.
Audit et cetera costs, we're going to adopt that.
We're going to adopt our convention, which is we are as you know we're backing out integration costs, but but staffing our view is that.
As I said for this kind of stuff that we will not back out is people who like work on an ongoing basis. So.
I mean, theres not contemplated a that theres theres no add back there or.
For for costs associated with running the business right in terms of its accounting.
And.
So, which again I think our costs the company would have incurred.
One way or the other here so.
Perhaps that had some impact as well relative to.
Highly adjusted number that's been reported but.
But.
Those are the main factors there Darcy anything that.
Yes, I mean, we've worked.
So hard on this.
Stephanie and trying to get some clarity to you, but also not putting out something that we don't know at this point in time, and we're going to learn a heck of a lot in the next 60 days as we start closing books with them and figuring out some of the details around this but.
We do believe that.
As their revenues have come down.
This year, even through the second quarter in both first and second quarter year to date. They were the revenues were down and they were frankly in the middle of being acquired and it probably didnt devote as much attention to rightsizing the business for those revenue decreases as they did for evaluating this this opportunity so.
We will we will get after that and we will.
Ill take a look at the business as it as the current revenue that's being produced and we'll make the appropriate decisions to run the business as we see fit so.
Those things are all on the come more so we just if we wanted to set a baseline for you about what it is that we've inherited today and then go from there.
Okay understood Thats helpful. And then for the follow up just thinking on the revenue synergy to this business authorizations and again I know we talked about this before but I think a lot of gen as month waters Zack.
Is there anything that would prevent this from happening like the current environment, creating a longer period of time to negotiate your new custodial contracts or is there just some healthy convert it from there.
Well.
Yes.
On a couple of fronts I mean up until today, we have not really been able to talk with these providers that have been working with with wage and I think we actually have scheduled meetings with them tomorrow.
And so.
We just won we're we're cautious about how fast we can make this transition happen.
We've learned from experience when we've acquired custodial platforms that you can't always just move them on day, one they are sometimes theres can contractual.
Things that you have to overcome and just the sheer volume and the movement of them. So.
Like we said, we'll give you that clarity as soon as we know the appropriate timing what we're seeing from day. One is we're going to get accurate on day. One we're just not sure exactly when the revenue will actually start to.
Materialize and but we will we will clarify that as soon as we can.
All right well. Thank you so much for the questions.
Kevin I will say that these part partners they wanted to do business with us.
Weather is the card networks or some of the banks.
They recognize maybe in a different position.
But but.
Folks are coming to us with here's what we can help you do the card processors et cetera, and so.
What I do feel good about it is that.
We're being approached.
Way.
Out of an abundance of caution we felt that it wasnt appropriate to have these negotiations by the close transaction, maybe that's one of the things that that led the DJ to feel confident that we were pushing this the right way lisco next that close but.
But in any event.
I feel as good if not better about our opportunities there.
Than I did.
On the day to close on the data side and as you know Stephanie we never like to promise something before we're pretty confident that we can deliver it in the timeframe that we define right here that appreciate the conservatism that makes all of our lives easier.
Thank you. Our next question comes from Sandy Draper with Suntrust. Your line is open.
Thanks, very much a lot of my questions have been asked and answered, but maybe just a follow up on the the 80 to 100 million dollar investments.
With this well should I be thinking about this on top of the incremental investment you you guys have already been talking about making in terms of technology weights works. It already has been talking about extra spending is this keeping those levels of higher spending and then an additional $80 million to $100 million or is this sort of 80 to 100 million somewhat encapsulate.
Lease portions of that if that makes sense.
Yes, Dan it's certainly on top of the initiatives that we announced last week.
Our fourth quarter call I believe.
This would be on top of that that 30 million dollar initiative that we talked about.
With respect to wage some of their initiatives.
We're focused heavily on HSBC deployment, and so we believe that some of those can be.
Thought of as band that we have provided that platform and so we'll sort through that but certainly with respect to the ones that we've announced previously this $80 million to $100 million is on top of that and why it was down to is there things got less other things got more so so are we going to.
Spend what we would have spent lets say to launch a commuter benefits product of course not right but.
Conversely.
One of the things we're promising our customers is.
Very high level of security and deployment of.
Really meaningful privacy protections and so we're going to be doing that across our platform and so it's it's a little hard to keep kind of keep track and.
But I think in general the way you should look at it is the TNL that weve guided to is.
Is the TNL that what exists inclusive of those investments.
A period and then there's the wageworks component in their synergies and so.
That's right.
Okay. Thanks that was my question.
Thank you. Our next question comes from Mark Marcon with Baird. Your line is open.
Hi can you hear me.
Yes, Sir.
Great.
First of all thanks for the questions with regards to just.
Thinking through the.
The 15% margin.
Obviously, there is seasonality within the wage business.
How would you translate that 15% to kind of an annualized run rate, where we take into account.
Some of the higher margins that you typically get in the first and second quarter and how we think about a base I recognize it's only been two days since closing so maybe premature, but just trying to get a feel for it.
Yes.
I appreciate that market. So if you look at the $170 million to $175 million of revenue we expect in the.
In the five month period, if you translated that into a full year run rate that would be in the 410 to 420.
Million run rate.
Which is probably I think it's 12% off of their revenue.
Last year.
As far as margin is concerned because this is this five months is the cost intensive heavy part of that to EBITDA margin in the 15, we would view their overall annualized rate to be more in the 20% range of EBITDA, which is which is obviously down from the levels where wages have been previously on their adjusted EBITDA, but that would be kind of where we would expect it to to starting from is the 20% adjusted EBITDA margin, Yes, I mean, it's it's actually pretty simple math Mark I mean, if you take first of all right Mike.
Give or take what I believe 175 as Ive 12 support line so.
That's kind of where you get to Rcs revenue number and.
And then.
If you basically way to think about it is if if as Darcy suggested a few minutes ago.
You change revenue without substantially changing expenses will guess what happens you get less margin.
We don't think Thats, a real baseline that is to say I don't think anyone would operate the business that way nor will we but but it is what we received and so we have to take the actions that Wageworks management would have taken and additionally, we have to take.
As well as continue on the synergy path and so.
I think the good news on this from my perspective is that.
If you look at the longer term here and I don't think you have to get too long.
Two things are clearly true one is that.
There are many opportunities to be more efficient as we grow.
From an opex perspective, I'm going to start there.
And I think in well certainly there will be some displacement in like as a result of that.
In my view, we can do there is enough room to do everything that we need to do to margins to where they need to be and deliver purple and everything we do.
That's pretty clear the second piece of good news in my mind is that from a gross margin perspective, and we said some of this at the time, we announced transaction I think theres sort of this idea in People's heads that.
Wages business is.
Somehow is ultimately a lower margin business than ours.
And.
The truth is that relative to our current average gross margins, which are pretty body.
At least by the by the standards of service business.
The underlying real gross margins in this business are very compelling we just have to have to get back to them and then certainly with synergies and particularly with more conversion of the customer based agencies and the like that can be extremely compelling.
And so.
Well as Darcy says, we we wanted to give you an honest sense of where we're starting and do it in a way where you could replicate the mats. So there's like no black box, but at the same time.
Nobody's thinking that.
That's where we're going to end up here, we're going to end up with a combined business that.
Is highly attractive from both a gross margin and ultimately operating margin perspective, and in our view one that we will continue to grow.
I certainly appreciate that so the follow up.
Just as it relates to the integration plan I just wanted to make sure I heard a few things.
Correctly and.
I understand the sequencing the the $80 million to $100 million in investments.
Is that all integration or is some of that is what you would say is our investments that would be ongoing and is it.
I hear 24 to 36 months for the full integration will be complete.
Correct 80 to 100 million.
Of of what we think of as true one timers and.
With with the results to be completed.
Within 20 436 months the investment itself will probably.
Happened a little quicker than that just takes a little time, though some a little bit to to get to get the results but.
We think of these as one time over and above our Capex program.
Great and then just.
Thank you.
[laughter]. He gave you the hubs man go go ahead go ahead.
Just one quick one measure looking at me like I did the hard work and now Youre, let him back.
Go ahead Mark.
Just wanted to ask just with regards to the sequencing of the integration.
How quickly do you think the custodial assets could potentially come over and in terms of the HSH custodial assets to your platform like whats well, we're going to start talking about it with the parties on the other end of those discussions tomorrow I believe.
I believe cordell be having that meeting about 930 am.
In person so.
Yes.
The reason that we didnt give any clarity on that timing, because we don't know the timing yet but.
We are going to work diligently to make it happen as quickly as we can.
Great. Thank you.
If they would have flown on labor day on Labor day and are they database here already I mean, that's a mark against people what can you do know that.
This will have an answer by the time, we get to our conference right.
[laughter] probably.
Okay plays nicely play.
Hi, Jamie Didnt pull out that car.
Thank you and our last question is from Alan lots with Bank of America. Your line is open Hey, Alan.
Great. Thanks for the questions.
John You said you began the partnership investments, but the the adjusted EBITDA margin in the quarter was 47%.
Can you talk about how much spending you've done to date and then how much you expect in the back half of the year.
Yes, so darcy want to hit this one that I think if I understand the question on what you're asking about is with regard to sort of the standalone wage.
Effectively.
We ended up with.
I think you said a thing of the 30 million as it were.
What we spend the first half what we can say.
Yes.
And the ramp up if you look at our sequential.
We added about $1 million and techno Im just looking at that that technology spend there are some other areas, where we do it we've added about $1 million sequentially. Each quarter. We tried to do more of that as we were going in and we've actually been able to hire more people. So we would expect that that will continue to ramp up throughout the third and fourth quarter on some of those initiatives that we've already started.
Yes, I mean, it's it's we've been very fortunate I mean, Alan I have to admit if we had had known.
At the beginning of the year that some other things we're going to break our way, we probably wouldn't have made such a big deal of this because.
We could have just done it and.
No that wouldn't have been much talk about but as it's turned out that we've been able to make.
Both on the spend side as well the Capex side, we've been able to ramp up investments in this area and offset that to some extent with efficiencies elsewhere in the business.
Well that's been going on I mean, as an example.
One of the items that just just one example of one of the items that we were doing.
It was.
From our perspective, which was important for security as well as.
Long term, making the best use of our member services agents we.
We changed out our telephony platform and it's a project that.
Could have easily taken all year and.
It actually went live.
Also yesterday so.
Or Saturday I should say, thank you for those who stayed over the weekend. So so the team has been really good about I think.
Even while this whole wageworks thing has been going on.
Ashley.
And her team have just been fantastic about kind of keeping our this both our investments going but also.
Trying to be efficient about it and be efficient other things again.
That's helpful and then EBITDA margins for wage come in above 20% for all of 2019 or I guess above 15% for the back half of the year can you talk about where you see the most confidence of things that could drive a higher margin profile than that 15% or what are some of the things that could get you above that threshold.
Yes, probably the biggest is where the biggest items are the ones that have been mentioned here.
That is to say on the revenue side.
The the ability to deploy.
Cash more quickly and move the but whether the HSH than Oneq state cash more quickly is certainly one that's out there and it has huge impact as it all drops bottom line.
The other thing that I would say is that.
From a cost perspective.
That that.
Ted and the team while they have appropriately kept the focus of our team members on.
What we're doing going forward. They have also been very clear that there are cost reduction opportunities and they're as Ted reminded me yesterday, they are getting on it.
Meaning meeting relative to other transactions that he has been involved in it's rare it from his perspective that on day, one you have a really well defined cost plan.
That's that's out there over the course of the next 60 days 90 days 120 days and.
So so there are opportunities on both sides I'd say the revenue side, probably a little more powerful just because it all drops the bottom line immediately.
But their cost opportunities as well.
Great. Thanks, John .
Thank you and there is no more questions in the queue I would like to turn the call back to Mr. Kessler for his final remarks.
Well.
Thanks, everybody.
And we will look forward to the conferences this week as as Darcy said several times.
We know that folks would like more detail and we will provide it on a regular basis.
As we have and other than that thanks to the team for the hard work. Thanks to everybody and now we've got a sale season to close here too so.
We'll have a lot to talk about in that regard in December as well. Thanks all.
And ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect have a wonderful day.