HealthEquity Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 5, 2023

There are 14 speakers on the call.

Operator

Day and welcome. I would now like to turn the call over to Richard Putnam for HealthEquity's earnings call. Please go ahead.

Speaker 1

Thank you, Sarah. Hello, everyone. Welcome to HealthEquity's Q1 of fiscal year 2024 earnings conference call. My name is Richard Putnam, Investor Relations for HealthEquity. Joining me today on the call is John Kessler, President and CEO Doctor.

Speaker 1

Steve Neeleman, Vice Chair and Founder of the company and Tyson Murdoch, the company's Executive Vice President and CFO. Before I turn the call over to John, I have 2 important reminders. First, a press release announcing the financial results of our Q1 And accounts they administer. The press release also includes definitions of certain non GAAP financial measures that we will reference today. Copy of today's press release, including reconciliations of these non GAAP measures with comparable GAAP measures And a recording of this webcast can be found on our Investor Relations website, which is ir.

Speaker 1

Healthequity.com. 2nd, Our comments and responses to your questions today reflect management's view as of today, June 5, 2023, 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

Speaker 2

forward looking statements made today.

Speaker 1

These forward looking statements are subject to risks and uncertainties that may cause our actual results to differ 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 annual report on Form 10 ks and subsequent periodic reports filed with the SEC, We assume no obligation to revise or update these forward looking statements in light of new information or future events. At the conclusion of our prepared remarks, we will open up the call to Q and A with the help of our operator, Sarah. One final announcement before we hear from John. Due to some conflicts recently encountered, we are postponing our Investor Day that was planned for July 11 To be at a later to be announced date. Once we have rescheduled the date, we will provide you with the press release and invitation.

Speaker 1

Now, it's John.

Speaker 2

Kevin, you're going to return your cabana ware or no comment? No comment. All right. Hi, everyone, and thank you for joining us for a healthy start to fiscal 2024. I will discuss Q1 key metrics and our view on performance, and Tyson will detail Q1 results As well as our raised guidance for the fiscal year and Steve is here for Q and A.

Speaker 2

In Q1, the team delivered double digit year over year growth in revenue, which was plus 19%, adjusted EBITDA, which was plus 48% And HSA assets, which are plus 10%. HSA members grew 9%, total accounts grew 4%, muted by the previously discussed Change in COBRA methodology. HealthEquity ended Q1 with 15,000,000 total accounts, 8,000,000 HSAs and 22,000,000,000 in HSA That's all kind of round numbers and 10% more of our HSA members became investors year over year. Invested assets Grew 12% despite a dicey market. Team Purple started the selling year off strong with 134,000 New HSAs opened during the quarter.

Speaker 2

That's down 25,000 year over year and we Expected a drop given the comp to last Q1's blistering job growth and turnover rates economy wide, but We're particularly pleased actually that, that was nearly offset by new employer adds, including across the board for HSAs. In addition, at this time last year, we saw transfers of HSAs from banks that were exiting the business. Obviously, this year in given the competition for cash, we did not see that same activity. Enterprise logo wins that will onboard later in the year were up noticeably year over year, driven by an expanded network partner Footprint and employers seeking win wins in anticipation of a tough calendar 2024 benefits renewal. For the full year, We are increasingly confident that increased HSA adoption at the employer level will help to offset lower macro job growth.

Speaker 2

Q1 saw some daylight on CDB growth. Our CDB members grew accounts in the quarter by Excluding COBRA as a whole by 4% and by 1% if you simply exclude the Before mentioned adjustment to COBRA accounting methodology, Health CDBs, FSAs and HRAs were strong as the onboarding of significant new logos Offset some seasonal runoffs, Commuter maintained its slow rebound. Extra ACA exchange subsidies continue to negatively impact COBRA update and therefore And to compensate for that, the team has begun raising fixed fees with good early success, Which is very much needed. While there's much wood to chop on service fees, service costs Actually fell by 40 basis points year over year even as revenue increased despite wage gains for our team members. As we benefited from a much calmer service environment versus a year ago quarter.

Speaker 2

As we discussed last quarter, Rapid improvement in service tech continues to drive more interactions to chat and automated responses, and we believe there is more to come of this over the longer Q1 also provided a preview of what we believe is to come over the longer term with respect to custodial fields, fees as Fields. Fees is like fee fields is fees plus yields. That'd be fields. Good luck with that transcriber. As yields on our Ladder Bank deposit portfolio rose out of the COVID depths and more members Chose enhanced rates for or choose enhanced rates for their HSA cash.

Speaker 2

You saw the strength of our model Over the course of the quarter, as we talked about in March, high short term rates provided a boost to income on CDB client health All of this added up to strong and resilient cash flow from operations, which as Tyson will detail, Led to a return to GAAP profitability in Q1, allowed management to reduce outstanding which allowed management to reduce outstanding outstanding balance on HealthEquity's variable rate term loan A debt and enables us to continue to invest in future growth and innovation. Mr. Murdock will now detail the financial results and outlook.

Speaker 3

Thank you, John. I will highlight our first Quarter GAAP and non GAAP financial results. A reconciliation of GAAP measures to non GAAP measures is found in today's press release. 1st quarter revenue increased 19% year over year. Service revenue was $105,100,000 up 1% year over year And custodial revenue grew 59 percent to $94,400,000 in the Q1.

Speaker 3

The annualized interest rate yield on HSA cash was 232 basis points. Interchange revenue grew 7% to $44,900,000 Gross margin was 60% in the Q1 of this year versus 54% in the year ago period. Net income for the Q1 was $4,100,000 or 0 point 0 $5 per share on a GAAP EPS basis. Our non GAAP net income was $42,800,000 for the yield and generated interest income, they also increased the rate of interest we pay on the remaining $287,000,000 Term Loan A To a stated rate of 6.6 percent. Adjusted EBITDA for the quarter was $86,600,000 and adjusted EBITDA margin was 35%, a more than 700 basis point improvement over last year.

Speaker 3

Turning to the balance sheet. As of April 30, 2023, we used $54,000,000 of cash to reduce our outstanding variable debt, Resulting in a quarter end balance of $226,000,000 of cash and cash equivalents with $873,000,000 of debt outstanding Net of issuance costs, we continue to have an undrawn $1,000,000,000 line of credit available. For fiscal 2024, we're raising guidance and now expect The following revenue in a range between $975,000,000 $985,000,000 GAAP net income to be in the range of $9,000,000 to $2,000,000 We expect non GAAP net income to be between $164,000,000 and $171,000,000 Resulting in non GAAP diluted net income between $1.88 $1.97 per share based upon an estimated 87,000,000 shares outstanding for the year. We expect adjusted EBITDA to be between $333,000,000 $343,000,000 As John mentioned, we are basing fiscal We are raising the expected average yield on HSA cash to approximately 2 35 basis points for fiscal 2024, While the average credit rating or HSA members receive on the average credit rating HSA rates on HSA members receive on HSA cash remained flat sequentially. We continue to bake in a 20 basis point increase by the end of fiscal 2024.

Speaker 3

As a reminder, the crediting rate our HSA members receive are determined in accordance with the formula in our Our guidance also reflects the expectation of higher average interest rates on HealthEquity's variable rate debt versus last year, Partially offset by the reduced amount of variable rate debt outstanding. Our guidance includes a smoother seasonal cadence of revenue and earnings, which were disrupted last We expect that interchange revenue seasonally to be more normalized this year and as suggested earlier, a relatively stable interest environment over the remainder of this year. We assume a projected statutory income tax rate of approximately 25% And a diluted share count of $87,000,000 which now includes common share equivalents as we anticipate positive GAAP net income this year. Moving to positive GAAP net income is going to impact our GAAP tax rate strangely this year. As you know, because of the impact of discrete tax items, the calculated tax rate on a low level of Roughly a 50% GAAP tax rate for fiscal 2024.

Speaker 3

As we've done in recent reporting periods, our full fiscal 2024 guidance includes a reconciliation of GAAP 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 And with that, we now have we know you'll have a number of questions,

Operator

We will now begin the question and answer session. Our first question comes from Glenn Santangelo with Jefferies. Please go ahead.

Speaker 4

Yes. Thanks and good evening and thanks for taking the question. Hey, Tyson, I just had a couple of quick financial questions, if I could, just to sort of help us sort of model this thing more correctly. It says now that you have total HSA assets of $14,100,000,000 Could you give us a sense for how much of that fits in variable and maybe how much of it You're investing in, is it still a third, a third, a third? Is that the right way to think about it?

Speaker 4

And the reason I ask is because we're trying to assess Not only this year, but next year. And I know you don't want to comment on fiscal 2025, but at the current yield curve, it sort of looks like the yield would be even Much more year over year in 2025 versus 2024. And I just want to you don't know if I'm thinking about that math correctly and I'll stop there. Thanks.

Speaker 3

Yes, good question. So the variable interest rate portion of course is getting smaller with the enhanced rate push. We don't need as much of that. So there's not as much impact. And another thing to consider is the fact that obviously the rates last Your accelerated so substantially over the course of the year that the second half was impacted by that on that variable component.

Speaker 3

So people got very Well, how much is that variable component, but based on the size of that amount, it's not very big and it's going to be Obviously, more consistent even though you may see a curve that sort of curves down. So that's kind of one area. The next This is a question that we get. When you think about how the assets run through the model, again, they get more consistent as we move into enhanced rates and That has its own liquidity factors, but you think you're thinking about the FDIC portion, which of course is lumpy Because of the M and A that's occurred over all those years. So think back about the WageWorks acquisition, the further acquisition and those type of things.

Speaker 3

And the fact that as we go through integration processes Those we placed those assets into 5 year contracts and so they have to sit in those 5 year contracts for 5 years. And then that Causes is when you look back over time, you probably get a smaller amount that rolls off in this next year than you might think when you think About maybe what you mentioned, which is the 3rd, a third, a third based on sort of the 3 year duration you might get off of those 5 year placements. So what I'm telling you is that The number is smaller than that third. You have to go back quite back in time even prior to Position to determine sort of what that prior to those big acquisitions to look at what that looks like. And so it will be a smaller number.

Speaker 3

So John, I don't know if you want to make any additional comments to that. Why don't

Speaker 2

we keep going? We'll see what we hear. Thanks, Glenn.

Speaker 4

Thank you very much.

Operator

Our next question comes from I will

Speaker 2

say that was just for other Analyst benefit, that was a one part question. That wasn't a 4 because we're not starting with the 4 parters. At first, I thought Glenn was going to pull, I don't know, some other analysts do those 4, Sorry, I'm sorry, Sarah. I didn't mean to interrupt you.

Operator

No problem. Our next question comes from Stan Vernon Stan with Wells Fargo. Please go ahead.

Speaker 5

Hi, thanks for taking my questions. First, I just want to make sure I call this correctly. You said you're increasing service fees that your employers are paying and it seems like you're early in that. Can you just give us Thoughts on the methodology and how long do you expect until everybody is on board with the new pricing?

Speaker 2

Well, in particular that Comment refers and now Tyson is chuckling at me because we had a small bet about whether anyone

Speaker 3

would ask about this, which I just lost.

Speaker 2

So thank you for that, Dan. But what I was really commenting on there was, In particular, this is several quarters where COBRA has been a bit of a drag for us. And I will say, overall, we were glad to see a black number on CDB and an almost crookedy looking black number on CDB ex COBRA, so that was pretty good. But my comment was focused on COBRA. And there, the real issue is that we now have in place For several more years now, incremental subsidy, sort of sometimes humorously referred to as it's the Affordable Care Act.

Speaker 2

I think that's by the proponents of these things. And they were originally put in place from the pandemic, but they've been extended for a couple of years. And the result of that is lower COBRA uptake. So that doesn't necessarily change the offer rates, but it does Effect what we call activity fees in COBRA. And so naturally, the way we should be making up for that is increasing the service fee component.

Speaker 2

And like all of our products, COBRA is sold both directly and through our channel partners, in particular, in this case, our HealthMed partners. So we want to work with them carefully, but we have Begun to roll out modest fee increases for the service fee component to kind of make up that difference. And I think people understood that that It's kind of coming, because the service the cost of delivering service hasn't fundamentally changed. So It's really focused on COBRA. And again, the idea isn't that this is going to drive some major magic, But we do want the overall CDB growth number from a revenue and so forth perspective to ultimately be a black number.

Speaker 2

It's not going to be the driver of our growth, but we don't want it to be dragging us down.

Speaker 5

Got it. And then Just a quick follow-up and I don't know if you have any money on this, but just back to your prepared remarks, I think you commented that you had more Focus on chat based communications. Can you maybe just give us an update on the adoption of text based communications within your member base? And then Maybe related to that, are you seeing any opportunities to enhance member communication with maybe like generative AI technology that's coming up? Thanks.

Speaker 2

So, I don't think there was money on either of these, but I was there is a there are a number of wagers around, whether The term those two initials that you just mentioned would appear out of my mouth. And I'm going to see if I can like It's more whether I can get through without it more than anything else. Let's find out. But let's say this, in all seriousness, I do think that It's fair to say that for us and others, the advances in these areas have Really accelerated our ability to automate communications on a lot of the more basic queries that we get and Deliver ultimately what from the member's perspective is rated to be a superior experience. So we have seen if you were to look at a chart Text based and then automated text based over the course of the last really 6 or 8 months, It has gone up quite a bit.

Speaker 2

Both have gone up. I believe and I may be off here, but in rough turns right now, one out of every 6 or 7 of our transactions is text based and of those transactions with our members' interactions, Those between 1 out of 3 and almost 1 out of 2 are automated. And so, Yes. The new stuff is helping and I think it's going to help the nature of my commentary is again, if you look at service cost, Service cost fell year over year. Now there are some other things going on as I acknowledged in the script.

Speaker 2

Last year's comp was Let's say last year, Q1 service cost was not good. So that certainly helped. But even if you factor that out, we did very well. And so I think there's a lot more to come here in terms of our ability to both simultaneously improve member

Operator

Our next question comes from Anne Samuel with JPMorgan. Please go ahead.

Speaker 6

Hi, thanks so much for taking my question and congrats on the great results. John, you spoke early in your prepared remarks about strength in new employee adds for HSAs, kind of coming in a little bit better than you had expected. I was just wondering if you could talk a little bit more about that. What are you seeing? Is it labor growth, better enrollment?

Speaker 6

What's driving that?

Speaker 2

So, interesting, our expectation, as I suggested in the prepared remarks was and we've tried to communicate this For quite a while was that when was that we really were benefiting from Both growth in the labor market and turnover in the labor market. And in fact, if you look at last year, sort of the variance year over year with the In Q4, kind of well, maybe included Q4, kind of came down as turnover in the economy kind of came down and Job growth kind of relative to Q1 of last year kind of came down. So now turning to this Q1, I mean the way I look at it is that Basically, if the growth of new logos, meaning at this point in the year, Mostly smaller employers that would be starting in February, March, April, a few holdovers from January that were late, that kind of thing. But those numbers almost offset the reduction in what I would call Kind of purely organic, same employer growth relative to last year. And so that's pretty good when you think about the fact that In the economy as a whole, we're producing jobs at about 55, it's still extraordinary, But we're producing jobs at about 55% of the rate that we did last Q1, this Q1.

Speaker 2

And I don't know what shaking or if you all can hear that shaking, but hopefully it's nothing. Oh, I do know what shaking. It's a big drill. We We got an interesting scene outside. But and also when you consider that turnover, particularly voluntary turnover, has It's declined in the economy as a whole pretty significantly.

Speaker 2

And so we feel pretty good about that. We did have fewer transfers of HSAs from Smaller banks, as you might imagine, folks trying to hang on to those accounts in a period where banks have been trying to hang on to deposits and That accounted for the biggest portion of the delta year over year. So I guess my basic view is that if you look at the full year, We have some level of confidence that new logo growth is going to be sufficient to, If not fully offset, at least significantly offset what we expect to be A reduction in the strength of labor market over the course of the year. And so that was meant to be a statement of confidence and hopefully will be interpreted that way.

Speaker 6

That's great to hear. Thank you.

Speaker 1

Thanks, Ann.

Operator

Our next Question comes from George Hill with Deutsche Bank. Please go ahead.

Speaker 7

Hey, good evening guys and thanks for taking the question. And John, this might be kind of a Dovetail question on Anne's question that was just asked. But I thought I heard you say in your prepared commentary that you're seeing increased HSA adoption At the employer level that will kind of offset job growth. So I guess my question is like are you guys seeing an underlying change The adoption of HSA levels that is kind of different from the historical trend of them growing 3% -ish a year. And we would be interested to hear you talk about what's driving that.

Speaker 7

Like, is there anything change in the underlying adoption rate?

Speaker 2

Yes. It's early in the year, obviously. And but when you look at Our I guess, conceptually, you can think of it as our pipeline, meaning our wins that will onboard later in the year. They have they are also well ahead of last year. And I do think that what's going on underneath that Actually, let me ask, since we have Steve on the line.

Speaker 2

Steve, you're out there. I don't know if there Any employer prospects in your current undisclosed location, but maybe. Can you talk a little bit about what's Driving that activity at the employer level and with our partners.

Speaker 8

Absolutely. And I would have been with you in New York, but I wasn't invited. But anyway, Hey, George. Good to hear your voice, George. Look, I just think that We've talked about this in the past.

Speaker 8

Number 1, we did have a nice large name brand employee that came on in the Q1 with an HRA, Which is health on the C2B stuff. And then more broadly, as we look at employers and what they're looking at towards the end of the year, I think most of the employers are thinking, you know what, costs are up, inflation is up. I think a lot of them are, especially in the midsize are anxiously awaiting to see what's It happened on their health cost claims. Most people on this call that know health care, they realize that hospitals are seeing higher labor costs

Speaker 2

At some point, you're going

Speaker 8

to have to translate this through to higher cost to payers, which ultimately ends up getting paid for by And then if you just kind of wrap in the employers' own wage inflation issues and more broad I think most employers are saying, look, we know HSAs. Look, they read our case studies and they see 3 big brand name companies that are Doing HSAs in kind of novel interesting ways, we've got a case study out there where an employer figured out that you could fund lower income people's accounts more when you fund higher income people's accounts, which drives higher adoption in lower areas where we used to see lower adoption of income people Yes, Pernell starting to come into accounts more. And so that all combined with our kind of our Engage 360 and Max enroll This is where we're getting more and more employers signing up for allowing us to be able to reach out to their people in advance of even open enrollment and talk about these things. I think you're resulting in the fact that we're just executing better. And you never want a recession Be a factor that drives your business because we know it hurts all businesses and we know it does offset with just as John pointed out, Lower overall job growth, but we do think that HSAs because of the cost savings they can bring Employers because of the tax savings and tax savings that brings both employees and employers that it is one of these things that tends to Start to get more interest when you're in a tougher economic environment.

Speaker 8

So that's what we're seeing, George. And we're doing a better job, honestly, than we've ever done Thanks to our marketing and our insights help things and things like that and just getting the word out. I think it's a combination of things. But as far as the new logos are concerned and John spoke We're kind of fingers crossed. We've had some really a really good sales year and we're looking forward to bringing on some of these great new

Speaker 7

That's super helpful. And if I could have what I hope is a very quick follow-up. Just a lot of us on the healthcare side are the growth of the GLP-one drugs that tend to come out of the gate pretty expensive and tend to blow through people's deductibles pretty quick. I was just wondering if you guys are seeing any impact at all On HSA balances or an increase in volatility, the balance is through the GLP-one drugs?

Speaker 2

No, not yet. Okay. Easy answer. Thank you.

Speaker 1

Thanks, George. Thanks, George.

Operator

Our next question comes from Greg Peters with Raymond James. Please go ahead.

Speaker 9

Well, good afternoon, everyone.

Speaker 2

Hi, Greg.

Speaker 9

Steve, I'll invite you to New York if John won't, just in case that matters.

Speaker 2

Thank you. Thank you. Yes. I

Speaker 9

guess, can you comment on the Seasonality in general administration and merger integration related expenses. The reason why I'm asking is they came in a little below where I was certainly thinking and I noticed you didn't change in merger integration guidance for

Speaker 2

the full year. I would

Speaker 9

have thought that would have tapered off through the year, but it seems like you're sticking with that number. So just some detail on that would be helpful.

Speaker 3

Yes. I mean, we're sticking with the number we got to spend it and I think the timing of it's just it's getting so small now that the timing may add some volatility to it, Greg, I would say, so. And then you mentioned G and A as well.

Speaker 9

Yes.

Speaker 3

I want to make sure I understand that question a little bit Maybe just

Speaker 9

I'm sorry, just inside the P and L, there's a line item general administration expense and I'm just You came in a little bit lighter than I was just wondering if there's anything going on inside there or if that's sort of the normalized Expectation that was evident in the Q1?

Speaker 3

Yes. I may go a little bit farther just because you brought that line. Just last year, we had some stock comp forfeiture is right in there. So if you look at last year versus this year, you'll see that it goes up actually. But from a trend line perspective over a long period of time, of course, we're trying to get some of the synergies running through there and things like that from So I think you see some of that as well, but it's pretty small volatility in my mind, if you just look at the longer term Quarter is going back through time.

Speaker 3

So I hope that answered what you were trying to ask.

Speaker 9

I think so. I can take the rest offline. Okay. My other question was just on debt pay down. That's running ahead.

Speaker 9

What's your expectation for the year on that?

Speaker 3

Just we'll take it as we go. I mean, we'll look at what it is. What we did there is we paid off the principal payments for quite some time. So you won't see any Short term portion of that anymore. And so cash accumulation is going to help that.

Speaker 3

And then I'm talking about it next couple of years, we won't have principal payments on We were able to elect it that way, so we thought that was a positive thing to do for the business and just make a bite at it.

Speaker 9

Yes, makes sense. Thanks.

Speaker 1

Thanks, Craig.

Operator

Our next question comes from Sandy Draper with Guggenheim. Please go ahead.

Speaker 10

Thanks very much and congrats on the strong quarter. This is one question about seasonality that applies to two lines. So first off, just trying to make sure sort of that's a little bit earlier. Tyson, when I'm thinking about either Sequentially year over year, the change in account revenue per account, I'm trying to get the dynamics of the stronger strong growth in HSAs, lower price. You're starting to see some uptick And the CDBs at least sequentially, but you're still down by my math about $0.07 So should we be thinking about sort of Flattish or is it the season?

Speaker 10

So are we thinking about a year over year change? And how do we think about seasonality there? And then I wasn't quite Clear what you referenced when you commented about normal seasonality on the interchange. With the way I usually think about it, the Q1 is the highest, Drops down to the next 2 and then steps back up in the 4th quarter, but maybe not the Q1. Is that what you're applying?

Speaker 10

So I just want to make sure I've got the seasonality

Speaker 8

of those 2 Sure. Yes.

Speaker 2

I mean the second part, I think I'll take that, but you already kind

Speaker 3

of gave the answer. We just want to reiterate that that's how that seasonality works. And so you may see From a perspective of a little bit of better growth rate maybe this quarter, okay, that's fine, but it's really just that same seasonality. And what we really are trying to make sure on that seasonality Comment in the script is just that if you look back over time, we had pandemic, we had last year, we had an acquisition even a couple of years ago, right, that plays into that. I just feel like people I want to make sure people understand that the quarters Are a little bit more sequential and that we don't want people to get ahead of themselves.

Speaker 3

The other thing to mention there too is just the impact from the variable Rates that were playing into the second half of last year as well. So that's kind of a longer answer to your question. And so again, just reiterating on top of that, The interchange portion of that's just normalized. And John, you're going to take the first part?

Speaker 2

Yes. I mean, Sandy, the first part of your question was really about I think was about Unit service fees and meaning service fees over total accounts, yes. And I think you've kind of got all the right pieces. The bulk of service fees, as you know, Come from the CDB side of the business. And so, as HSAs grow total accounts, there's a little bit of downward pressure there just From a mix shift perspective, but we seem to be holding our own there pretty good, and I think that's a fair way to look at Full year, I'd probably just leave it there.

Speaker 8

Got it. That's helpful. Thanks.

Speaker 1

Thanks, Andy.

Operator

Our next question comes from David Larson with BTIG. Please go ahead.

Speaker 11

Hi, congratulations on the good quarter. Can you talk a little bit more about your expectations for yield? I think you said it came in at 2 32 bps for the quarter. I think it was 211 bps last quarter. The guide, I think you said is 235.

Speaker 11

Is that accurate? And then Over what period of time will you expect to realize the benefit from the increase in the federal funds rate that has occurred over the past year? Will that take A couple of years and I guess what I'm getting at is why only I think the 3 basis points of incremental yield between now and year end? Thanks.

Speaker 2

Yes. So during the year, during any particular fiscal year, The real variability that we see during the year is around the relatively small portion Of our HSA cash that's in variable instruments. And last year, as you know, Rates shot up throughout the year as that funds rate did and that really explains most of the increase that you saw there Plus the fact that we had good growth in cash and so forth. And so this year, Again, we'll see what really happens. But as you know, our guidance is based on forward curves now.

Speaker 2

And our guidance, If you kind of look at forward curves, you can see we sort of in terms of variable rates kind of peaked up and then swing down. Our basic view is that the result of that is a much smoother situation over the course of the year relative to last year and similar to many prior years. And so our guidance is in that way. So what you said at the outset, yes, is absolutely correct.

Speaker 11

Okay, great. And then can you maybe just Talk a little bit about the interchange revenue. I think it was sort of very, very good pop sequentially. I mean, what are the key drivers there? I mean, Is it commuter revenue?

Speaker 11

Is it health card utilization and general utilization in the hospital and physician office environment? Just any additional color there would be very helpful.

Speaker 8

Yes. I think

Speaker 2

the answer is the commuter does help a little bit because it is outgrowing. But Really a way to look at it is that the growth we saw in interchange kind of mirrors the growth in, for lack Better term, accounts with cards and so on a year over year basis. So that's Our new HSAs and some of our CEVs. So it's really that's pretty much what it is.

Speaker 11

And if I can just squeeze one more in there. The HSA members, it was really flat sequentially. If we adjust for COBRA, What would that have been? And then when do you expect to fully comp the COBRA impact?

Speaker 2

Could you ask that one more time? I'm sorry.

Speaker 11

The number of HSA members Relative to Jan 23, it was up a little bit sequentially, but it looks kind of flat to me actually. Just Is that because of the COBRA impact? And when would you expect to fully comp that? Well, I think what you're referring to is total members.

Speaker 2

HSA let's just say HSA members are up 9%. Total accounts on

Speaker 8

a year over year basis. 2 seconds sequentially.

Speaker 1

And to that point, David, our 4th quarter is when both of our HSAs There isn't a lot of new agency.

Speaker 2

Right. You have 100 and 35 open and some closures. So Your growth is going to be, what, dollars 100,000,000 or $90,000,000 or something. Yes. And that's on the base of $8,000,000 So it's the Q1 is the answer to that question.

Speaker 2

Great.

Speaker 11

Thanks very much.

Speaker 1

Thanks, Steve.

Operator

Our next question comes from Scott Schoenhaus with KeyBanc. Please go ahead.

Speaker 2

Thanks. Congrats guys. Thanks for taking my question. Apologies if I missed it, but did you state where We booked the book of businesses in terms of enhanced rate and did

Speaker 8

you reiterate your 30% target for the end of the year?

Speaker 2

I didn't know that thing had risen to the level of something we reiterate, but yes, it's still our target. Okay. And where are you currently at, John? We're a few 100 basis points shy of that. We're going

Speaker 8

to get there. Great.

Speaker 10

And just Question on the M and

Speaker 2

A environment. I know that it has been kind of more slow than you expected given that these banks want to hold on to these sticky HSA assets. Has anything Changed from 3 months ago when you made those comments? Fundamentally, no. I do think that I think it's a point where because let me back up and say one thing, which is As other analysts have noted, we have a ladder strategy and some of our competitors have A more exposed strategy either by virtue of the way they're structured or otherwise.

Speaker 2

And so, if you're more exposed and I'm not thinking about the small banks, but Maybe some of the other competitors. If you're more exposed to short rates, This might be a time where you're really looking at this because if you think that things are going to get wild and wooly with short rates. And so there's a little bit of Kind of chatter, but fundamentally, I mean, look, the fact that we did a pay down and so forth suggests that we feel like This is a period where we're more accumulating capital than spending it. And I think That's probably fair. And again, it also impacts our new HSA openings in the sense of just Smaller, you know, HSA transfers that occur from smaller banks.

Speaker 8

Thanks for the color.

Speaker 3

Thanks, Scott.

Operator

Our next question comes from Stephanie Davis with SVB Leerink. Please go ahead. Hey, guys. Congrats on the

Speaker 12

quarter and thank you for taking my question. So I hate to be the one to bring up bank But last quarter, we did have a lot of discussions around enduring impacts from some of the events in March And how can maybe create greater demand for your sticky HSA deposits? And the bank turmoil has continued. So I was wondering if you've seen any Greater interest in custodial partnerships from folks at the regional banks or if you're still mostly focused on second story And avoiding the regional bank opportunity.

Speaker 2

So I'm going to say yes to your first question. And on your second question, what we really concern ourselves with is from our And it's not we concern ourselves with the general quality of the institution and it's It's not

Speaker 7

that we're how do I

Speaker 2

say it? It's not that we're I mean, at the end of the day, the FDIC is going to back our members. It's more that we want to have long term relationships. And so, we don't kind of want it to be a 1 and done situation like some SEC colleges and not Florida. Everyone graduates.

Speaker 2

And

Operator

so Am I the college in this question, in Florida?

Speaker 2

Florida is awesome. Everyone knows it. Everyone knows it. They got this huge I could use those two letters that everyone's talking about these days. Florida is killing it.

Speaker 2

Anyway, so we'll move on from there. But the answer to your first question is yes, and the answer to your second question is, We'll look at those things. We don't we're not this isn't a cash deployment season, but we want to build relationships that are going to last With different institutions one way or the other.

Speaker 12

So let's do a follow-up on that then. Is there any other way to get Our granularity on the yield upside, just I mean you had the giant magnitude of the beat. So is it The contract renegotiations came in better than expected, maybe not from regional banks, but something else. Was it floating rate mix? Was it enhanced rate mix?

Speaker 12

And how enduring is this and how much could it be an inter quarter impact?

Speaker 2

I don't think it's a huge inter quarter impact because most of the renegotiations and the like So this the benefit we saw in the Q1 was principally a result of The movement to enhance rates and then the benefit on variable cash, So from a yield perspective. So I would think that this could be a benefit to us at year end. But on the other hand, there's a lot of stuff floating around at year end and year end is a long time away. I will say one of the benefits The enhanced rates program as it matures over the course of multiple years is that we're going to have less of this year end thing. And so you won't we won't all be holding our breath for December January every year and that will be good.

Speaker 12

I'll keep Cordell busy. All right. Thank you. I'll hop back in the queue.

Speaker 2

That's not a name we mentioned because recruiters listen to these things.

Operator

Our next question comes from Mark Marcon with Baird. Please go ahead.

Speaker 13

Hey, good afternoon and congratulations. And Steve, we would be thrilled if

Speaker 8

you were here and you work with us. So we're super glad

Speaker 2

that Sean is right here. I didn't even know I had any authority over where Steve Wynn. That's a new thing to me. In any event, I'm sorry, Mark, go ahead.

Speaker 13

And we're looking forward to seeing you guys tomorrow. But just a very short question and then a little bit of a longer one. The super short question is, on the enhanced yield product, Is the duration structure the same as what you had on your traditional bank partnership agreements?

Speaker 2

So our cash commitment under enhanced rates is a little bit different. It's typically a 5 year cash commitment. However, The reason we can do that is that we are that whereas in the bank products, we have to have Separate products to provide for the liquidity. Here, the liquidity is built in. So the actual average duration, If you want to think about it that way, when you account for the fact that there's a portion that we have we can pull in and out whenever we want It's much closer to our 3 year inside track.

Speaker 13

How sensitive is that portion of the enhanced yield

Speaker 2

It's built in the liquidity component is built into the underlying rate we receive. So again, all of this is designed to produce In addition to a higher yield overall, it's designed to produce smoothness over time. We want to get you all As best as we can out of the business, at least for the short and medium term of being fixed income ounces. Okay, great. And

Speaker 1

then, just wanted some general comments with regards to the competitive environment.

Speaker 13

I mean, you're clearly You continue to gain the most share and continue to grow rapidly. But just wondering, how has that evolved, say, over the last 2 years. What's your perspective, Sean?

Speaker 2

I guess I would generally say that What we're seeing over this period of time is a continuation of trends that we've seen for a long time. If you look at the Devenir information that came out, I think it came out since we last announced. In addition to showing and maybe it was just before, I can't But in addition to showing that we had maintained our number one position In terms of both assets and accounts, it does show a consolidation and that really if you look at it among the 4 or 5 largest players, The growth has principally come from in market share terms has principally come from HealthEquity and Fidelity. And we do compete with each other, obviously, but we also and you can see this in the average balances, we also fish in somewhat different ponds In terms of Fidelity also doing a lot of rollover business and the like as people retire. And so I think that's the main what I've seen is that we're really benefiting at the expense of some other players.

Speaker 2

I guess I would say one other thing, Mark, that isn't it's not something that's always very exciting to talk about on these calls. But As we discussed back in March, the team had a very, very good year from the perspective of execution on service To our clients and to their broker partners and our retirement partners and our health plan partners, at the end of the year. And I think that's helping in terms of new logo wins. I really do when people have a good experience at the end of the year, Like the brokers, they're more likely to send business your way in the next year. And that's very much to the credit of Angeliquell and the service team and Our technology team led by Eli Rosner on the tech side and Merv and Larry on the security and IT side.

Speaker 2

So I just think that plays a role as well.

Speaker 1

Thanks, Mark.

Speaker 13

Terrific. Thank you. Look forward to seeing you tomorrow.

Speaker 2

Yes. Yes, sir.

Speaker 8

Hey, Mark. I'll miss you, man. But next time.

Speaker 2

There's still a red eye, is all I'm saying. I will call your bluff.

Speaker 8

I like seeing Mark when there's snow on the ground and there's no snow back there.

Speaker 2

He's a skier. Who's next?

Operator

Our next question comes from Allen Lutz with Bank of America. Please go ahead.

Speaker 8

Thanks for taking the questions. I guess one for Tyson. You talked about the enhanced rate product Going from 0 to goal of 30% this year, so over 3 years from nothing to 30% of the book. But I'm looking at the custodial cost of goods sold line and that really hasn't moved as a percent of custodial cash Over that time period and I'm looking at the enhanced rates here and they're obviously higher than the core rates that you're paying out to the consumer. So I'm just curious, Is there something going on with the type of consumer that's electing for the enhanced rates?

Speaker 8

Do they have a much smaller Cash portfolio than the average just normal customer. I'm curious what the disconnect is there. Thanks.

Speaker 2

Yes. I'm going to take this one because it's really the answer has much more to do with the marketing and so forth. So there are 2 things going on there. First, Keep in mind that the uptake rate among new account holders is very high. And by definition, new account holders have smaller balances.

Speaker 2

And so, we have not so the impact has been pretty modest in terms If you sort of fold the whole thing into our custodial expense, now that will change over time in relative terms Relative to what would have occurred with cash, but that's really the big answer to your question. So it's not a function perhaps of Like predilection one way or the other, it is a function of the fact that you The product is the people who are most likely to see it are brand new to us and You're making a decision upfront about where you're going to go. And something like, I want to say, 85% to 90% of our New enrollees are choosing enhanced rates. A second point I would make is that people who keep Very large cash balances, the kind that earn relatively high rates, they're typically doing that precisely because They place very high value on the FDIC component of it, right? Otherwise, they would be investing those dollars or putting them in a short term bond fund or what have you.

Speaker 2

And so in a funny way, it's not entirely unreasonable to expect that those folks would stay in FDIC cash.

Speaker 8

Got it. Thank you very much.

Speaker 2

I thought about this question too. We were curious about it over the last few quarters and This is the first time in this forum anyone has asked about it, but that's the answer.

Speaker 1

Thanks, Alan.

Operator

This concludes our question and answer session. I would like to turn the conference back over to John Kessler for any closing remarks.

Speaker 2

So first of all, thanks everyone. I'm sorry if you've already prepurchased CabanaWear, we'll do our best Like Richard, we did get this thing done in under an hour, which is something to celebrate for you as well as for us and particularly for Richard. And I think there's a double standard on the length of answers. Mine were, I think, on average, the shortest. But nonetheless, Thank you all and appreciate the team's work on a great quarter and we will, if not earlier, see everyone

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Earnings Conference Call
HealthEquity Q1 2024
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