HealthEquity Q4 2025 Earnings Call Transcript

Quartr
Provided by Quartr
March 18, 2025

Key Takeaways

  • Record HSA sales: Team Purple opened 1,000,000 new HSAs in FY25, the first time in company history, driving total accounts to 17 million.
  • Strong Q4 growth: Revenue rose 19% YoY, adjusted EBITDA increased 9%, HSAs grew 14%, and HSA assets climbed 27% to $32 billion.
  • Elevated service costs: Q4 gross profit was reduced by $17 million of extra service costs from sophisticated fraud attacks and card processor consolidation, with similar expenses expected in H1 FY26.
  • Assist portfolio launch: Introduced Analyzer, Navigator, and Momentum solutions to help employers optimize benefits design and nudge employees toward high-value care and healthy behaviors.
  • Robust FY26 outlook: Guidance calls for $1.28–1.305 billion in revenue, $525–545 million in adjusted EBITDA, and $3.57–3.74 in non-GAAP EPS, supported by continued share repurchases.
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Earnings Conference Call
HealthEquity Q4 2025
00:00 / 00:00

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Operator

Good afternoon, and welcome to the HealthEquity Fourth Quarter twenty twenty five Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Richard Putnam. Please go ahead.

Richard Putnam
Richard Putnam
Investor Relations at HealthEquity

Thank you, Gary. Love the classical hold music. It was great. Hello, everyone, and welcome to HealthEquity's fourth quarter fiscal year end twenty twenty five earnings conference call. My name is Richard Putnam.

Richard Putnam
Richard Putnam
Investor Relations at HealthEquity

I do Investor Relations for HealthEquity. Joining me today is Scott Cutler, President and CEO Doctor. Steve Neeleman, Vice Chair and Founder of the company James Lucania, Executive Vice President and CFO. Before I turn the call over to Scott, I have a couple of reminders. First, a press release announcing the financial results for our fourth quarter and fiscal year end 2025 was issued after the market closed this afternoon.

Richard Putnam
Richard Putnam
Investor Relations at HealthEquity

These financial results include the contributions from our wholly owned subsidiaries and accounts they administer. The press release includes definitions of certain non GAAP financial measures that we will reference today. You can find a copy of today's press release on our Investor Relations website, including the reconciliations of these non GAAP measures with comparable GAAP measures and a recording of this webcast. That website is ir.healthequity.com. Second, our comments and our responses to your questions today reflect management's view as of today, 03/18/2025, and will contain forward looking statements as defined by the SEC, which include predictions, expectations, estimates or other information that might be considered forward looking.

Richard Putnam
Richard Putnam
Investor Relations at HealthEquity

There are many important factors relating to our business, which could affect the forward looking statements made today. These forward looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the statements made here today. We caution against placing undue reliance on these forward looking statements, and then we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock as detailed in our latest annual report on Form 10 K and any subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward looking statements in light of new information or future events. Now over to Scott.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Thank you, Richard. Hello, everyone. Welcome to my first official earnings call with HealthEquity. I will discuss Q4's momentum across key metrics. And for those of you who caught our Assist portfolio press release, that pun is intended.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Jim will detail Q4 and full year financial results as well as our full outlook for fiscal year twenty twenty six. And Steve is going to join us for Q and A. It's been a busy and exhilarating first few months since I was introduced to you in December during the Q3 earnings call. A month later, I dove right in with our team to help close out our record breaking peak season, which included 1,000,000 new HSAs from sales. It's proven to be an eventful start to this next chapter with Team Purple, and I'm thrilled to be here.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

In Q4, without missing a beat, the team achieved and delivered strong year over year growth across our key metrics, including revenue up 19%, adjusted EBITDA up 9%, HSAs grew 14%, CDB accounts grew 2%, driving total accounts up 9% and HSA assets up 27%. HealthEquity ended Q4 with 17,000,000 total accounts, including 9,900,000 HSAs holding $32,000,000,000 in HSA assets. HSA assets increased $6,900,000,000 year over year. We grew the number of our HSA members who invest by 23% year over year, helping to drive invested assets up 44% to $14,700,000,000 HSA cash reached $17,400,000,000 Our HSA members grew their average balances by 12% this year. Team Purple opened 471,000 new HSAs from sales in the quarter, bringing a total of 1,000,000 new HSAs from sales for the year, a milestone achieved for the first time in our history.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Net CDB accounts grew $200,000 quarter over quarter and up 2% year over year continuing a positive trend. Our operations team were also exceptionally busy in Q4 across various initiatives, as we served a record number of new HSA members and CDB accounts. While Q4 is always our peak season, we were also active in rolling out the final stages of our new chip enabled stacked benefits card to our millions of members and continuing to migrate existing clients to our latest platforms. Like other financial services companies, we also have seen increased cyber threats and fraud attacks from bad actors using sophisticated technology, techniques and methods. The collection of these activities led to excess service expense, which Jim will detail further.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

We continue to believe we will drive down our service costs, while delivering the remarkable experiences our customers expect from us. Our team is committed as ever to exceed these expectations. As I have begun this journey, I'm focusing the team on a member first secure mobile experience. Our members expect seamless and frictionless mobile and digital first experiences to help them save, invest and spend against their healthcare needs. We have made significant progress consolidating platforms inherited through acquisitions and moving our platforms to the cloud.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

We are now well positioned to leverage these investments and continue our technological push in mobility and AI. I'm encouraged by many things we have delivered this year, including a new app experience, which has been downloaded by over 1,000,000 members expedited claims, which uses AI technology to automate claims now serves more than 7,000 clients and 1,000,000 members and a stacked chip card, which we rolled out this year and serves as the foundation for our upcoming digital wallet. Building on these foundations, I'm confident we can more efficiently and effectively deliver against our mission of saving and improving lives by empowering healthcare consumers. As you've heard from us many times before, we are addressing the market's appetite for greater healthcare transparency and affordability. We are excited to see that vision come to fruition through our new Assist portfolio announced earlier today.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Assist is a growing portfolio of owned and partnered solutions designed to help employers and their employees get the most from their benefits offerings with two immediate offerings in market. First, Analyzer provides real time data on inefficiencies, trends and benefit program design to help employers make smarter benefits decisions. Next, Navigator supports more informed employee healthcare decisions along with potential rewards for making high quality affordable care decisions. The third assist offering Momentum will nudge employees to get the most of their company's benefits plan through personalized AI driven recommendations. Momentum is aimed at increasing healthy behaviors, driving down healthcare costs for both employers and employees and improving employers benefits plan ROI.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Momentum is being developed alongside an exclusive set of innovative clients who share our vision for empowering their workers with greater transparency, relevant information and incentives to take positive action. Together with our core offerings, the Assist portfolio joins a growing menu of technology innovations delivering remarkable experiences for our clients, partners and members, while reducing our cost to serve. Let's toss it to Jim to give a bit to go a bit deeper on their impact to our financials. Jim?

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

Thanks, Scott. I'll briefly highlight our fiscal fourth quarter and fiscal year GAAP and non GAAP financial results. As always, we provide a reconciliation of GAAP measures to non GAAP measures in today's press release. Fourth quarter service revenue increased 19% year over year. Service revenue was a record $124,200,000 up 5% year over year, reflecting growth in total accounts, HSA and investor accounts and invested assets, partially offset by lower average unit service revenue as product mix continues to shift toward HSA.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

Custodial revenue grew 37% to a record $144,100,000 in the fourth quarter. The annualized yield on HSA cash was 3.23% for the quarter as a result of higher replacement rates and continued mix shifts to enhance rates. Enhance rate placements now make up 49% of our HSA cash placements, putting us well on our way toward our goal of 60% by the end of fiscal twenty twenty seven. Interchange revenue grew 13% to $43,500,000 notably faster than account growth as members increased contributions and distribution and conducted more payments on platform versus requesting cash reimbursement for payments made off platform. Gross profit of $189,000,000 was 61% of revenue for the fourth quarter, down slightly from 62% in the fourth quarter last year. As Scott mentioned, in addition to seasonal factors, gross profit during the quarter was reduced by approximately $17,000,000 of additional service costs, encouraged to protect members from and reimburse those impacted by sophisticated fraud activity and to assist members during our card processor consolidation. We continue to invest in our fraud prevention and detection capabilities, and we believe these event driven costs will continue in the first half of FY twenty twenty six, but normalize towards the end of the year. Net income for the fourth quarter was $26,400,000 or $0.3 per share on a GAAP EPS basis.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

Non GAAP net income was $61,300,000 or $0.69 per share. Adjusted EBITDA for the quarter was $107,800,000 up 9% compared to Q4 last year and adjusted EBITDA as a percentage of revenue was 35% compared to 38% in the fourth quarter last year and was of course impacted by the event driven service costs referenced earlier. For our full fiscal year 2025, revenue was $1,200,000,000 up 20% year over year. Adjusted EBITDA rose 28% to $471,800,000 Adjusted EBITDA margin increased two forty basis points to 39%. Turning to the balance sheet as of year end, 01/31/2025, cash on hand was $296,000,000 as we generated $340,000,000 of cash flow from operations in FY 2025.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

The company repaid $50,000,000 of revolver borrowings during the year, leaving approximately $1,100,000,000 of debt outstanding net of issuance costs. The company also repurchased $122,000,000 of its outstanding shares during fiscal twenty twenty five, leaving $178,000,000 remaining on our previously announced $300,000,000 share repurchase authorization. Our fiscal twenty twenty six guidance reflects the expected carry forward of our strong sales trajectory into next year, technology and security investments to reduce fraud and drive operational efficiencies and continued tailwinds from current forward interest rate curves. We expect revenue in a range between $1,280,000,000 and $1,305,000,000 GAAP net income in a range of $164,000,000 to $179,000,000 or $1.85 to $2.01 per share. We expect non GAAP net income to be between $318,000,000 and $333,000,000 or $3.57 and $3.74 per share based upon an estimated 89,000,000 shares outstanding for the year.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

Finally, we expect adjusted EBITDA to be between $525,000,000 and $545,000,000 We expect the average yield on HSA cash will average approximately 3.45 during fiscal twenty twenty six. As a reminder, we base custodial yield assumptions embedded in guidance on projected HSA cash deployment and rollovers, the schedule of which is contained in today's release, as well as analysis of forward looking market indicators such as the secured overnight financing rate and mid duration treasury forward curves. These are of course subject to change and not perfect predictors of future market conditions. Seasonally, our fourth quarter is usually our highest service cost quarter of the year as our busy onboarding season peaks. We usually see member service costs normalize starting in Q1.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

We continue to invest in protecting our members' assets and data, while providing them a remarkable experience. We expect heavier than normal costs in our first two quarters towards that effort, followed by better margins in the later quarters from those investments. Our guidance includes additional expected share repurchases under the $300,000,000 repurchase authorization and further reductions in revolver borrowings in the fiscal year. With continued strong cash flows and available borrowings on our revolver, we will maintain ample capacity for portfolio acquisition should they become available. We assume a non GAAP income tax rate of approximately 25% and a diluted share count of $89,000,000 including common share equivalents.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

We also assume a GAAP tax rate for fiscal twenty twenty six at about 25%. As we've done in previous reporting periods, our fiscal twenty twenty six guidance includes a reconciliation of GAAP to the non GAAP metrics provided in the earnings release and a definition of all such items is included at the end of the earnings release. In addition, while the amortization of acquired intangible assets is being excluded from non GAAP net income, the revenue generated from those acquired intangible assets is included. And with that operator, let's open up the line for questions.

Operator

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

Glen Santangelo
Glen Santangelo
Managing Director at Jefferies Financial Group

Yes. Thanks, Scott and Jim. Thanks for taking the question. Hey, Jim, I just want to follow-up on these incremental service costs you're talking about. I think in your prepared remarks, you said you incurred about an incremental $17,000,000 in 4Q.

Glen Santangelo
Glen Santangelo
Managing Director at Jefferies Financial Group

And so I'm kind of curious, did anything specific happen or is that just the decision you all decided to make on the investment front? And then just as a follow on to that, the cadence throughout fiscal 'twenty six, you said it's obviously going to be more weighted to the first half. Are these one time costs or are these costs that are going to be sort of included in the base going forward? If you could just help us think about the cadence through fiscal twenty twenty six, that would be helpful. Thanks.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

Yes. Thanks Glenn for the question. So really it's the same topics that we talked about last quarter, right. So we have these sophisticated fraud actors. So you're seeing a combination of the cost to reimburse members for fraudulent activity in their accounts as well as the service costs related to our contact centers, taking those calls, dealing with those calls, confirming bad activity in the account.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

So it's a combination of actual reimbursement events as well as the excess cost to deal with those events. So recall we talked that was about an $8,000,000 impact for us in Q3. So we obviously plan for a bit of that to continue in Q4, but obviously we're overly optimistic on our ability to be in front of that. So it was more than we expected in Q4. We're expecting that to continue into the first half of the year.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

So obviously we don't sort of guide quarterly, but trying to give you a view that we expect a little bit of continuation and trail down into the beginning of the year here and sort of the back half being more normalized like you would expect on the service cost side.

Glen Santangelo
Glen Santangelo
Managing Director at Jefferies Financial Group

Okay. Thank you.

Operator

The next question is from Gregory Peters with Raymond James. Please go ahead.

C. Gregory Peters
C. Gregory Peters
Managing Director - Insurance at Raymond James

Well, good afternoon, everyone. I think my question around the earnings guidance, probably the answer might deal with the cybersecurity issue you're talking about. But when I look at your range for the fiscal year 2026, I'm just curious what kind of levers or what kind of issues can pop up that can drive the result towards the bottom end of the range? I think the consensus numbers are steering towards the top end of the range. So I'm just curious inside your modeling, what are the factors you're seeing that could lead to result towards the bottom end of the range?

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Jim, you want me to take that? I'll take it.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

Yes. Go ahead.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Yes, Greg. So reiterating sort of the trends that are driving the business overall that we just view as tailwinds that we're very optimistic around. First of all, as it relates to the custodial line, we are very confident on the continued penetration of enhanced rates. Jim talked about our long term focus of getting towards 60% in a couple of years. The new money that's coming in, 85% of new members are going into the Enhance rate product.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

We see upside associated with the maturities that are coming off. Again, reminder, fiscal year twenty twenty six, that's $2,300,000,000 at 2.5% and fiscal year twenty twenty seven billion dollars at $4,100,000,000 at 1.9%. So I think when we see the growth from HSA sales that we've had here this year plus those drivers, we're confident in terms of some of these things in terms of just business as usual as we go and then some just being powered by the growth that we've had associated with the business. I think when you look at then the carry through of what we're doing more on the margin side and the services side that Jim highlighted, I think we've also highlighted a couple of different opportunities there. Number one, as we look at just the expense base overall, we plan on looking at our functional areas to effectively grow those expenses slower than revenue.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

We see opportunities associated with our service modernization efforts that we're going to continue to execute on and still find that opportunity to drive margin expansion in the business overall. So I think again, building on the momentum that we have coming out of this year gives us that opportunity to look at our guide that we're optimistic on for this next year.

C. Gregory Peters
C. Gregory Peters
Managing Director - Insurance at Raymond James

Got it. Just a clarification on your answer. And you may have said this, but what was the percentage in enhanced yield at year end? 49%. Got it. Thank you very much for your answers.

Richard Putnam
Richard Putnam
Investor Relations at HealthEquity

Thanks, Craig.

Operator

The next question comes from Stan Berenchein with Wells Fargo Securities. Please go ahead.

Stan Berenshteyn
Stan Berenshteyn
Equity Research Analyst at Wells Fargo

Hi, thanks for taking my questions. On the Assist initiative, is there any direct monetization associated with any of these products? And can you disclose which partners are involved in the partner solutions? Thanks.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Yes, I'll take that on. First of all, as we look at the overall strategy here, and I've communicated the focus here is on a member first secure mobile experience, which is maybe slightly different language than you've heard us talk. And it is consistent with what we've outlined in our three d strategy. And I think that's really informed by me coming in where today's consumers expect a digital first mobile experience. They expect kind of security as a seamless part of that process.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

And when we look at the market opportunity that Assist is really going after, Stan, it's really focused on enrollment, adoption and engagement. And so Analyzer as an example, as a product that's internally developed and we're leveraging the data, the insights, the integration that we have with plans, the insights that we have on reimbursement, to actually help our clients or employers manage an increasing healthcare cost that's growing faster than wages. And just to give you a couple of stats on that, 3% of our HSA members maxed their HSA contribution and about 8% of HSA members have invested. And so we think there's a significant opportunity to help clients effectively drive savings in healthcare costs, while also helping their members maximize the benefits associated with that product. The other product that we announced Navigator, this is in partnership with Talon and this is really designed to help on that engagement side.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

And this is really also driven by changes in the regulatory environment that's requiring transparency for plan providers, helping clients also driving compliance as well as engagement on that. We talked a little bit this last year around HPE, which is in partnership with Patient. And this is really meant to drive access to have more HSA clients use this product to help drive adoption of a high deductible health plan. And then probably the last one that we highlighted, which is momentum, which again, this is going to be a product that is leveraging our unique open system that's connected again with our partners as well as plans and providers that we're going to leverage technology insights, data and AI to drive better behavior, give our members better nudges so that they can make more informed healthcare decisions. So hopefully that gives you a sense of partially the things that we're doing on our own and in the areas where we'll use partners.

Stan Berenshteyn
Stan Berenshteyn
Equity Research Analyst at Wells Fargo

Yes. Thanks. Maybe just a quick follow-up on this. You had record member growth this year. Has any of this been a result of better engagement to drive enrollment within your client population?

Stan Berenshteyn
Stan Berenshteyn
Equity Research Analyst at Wells Fargo

Does that translate in better conversion rates on the member side? Thanks.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

The growth that we saw this year in terms of the on the client side came from the small and medium sized businesses. And I think that's a lot about kind of our effort. I think what we view is the opportunity within the existing client base as I shared on the opportunity side. We are implementing with our sales and relationship management team, a lot of efforts. For example, Analyzer has been out there with a number of clients that have been using it already to drive engagement and enrollment.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

And we see that opportunity to kind of like digitize the sales experience by leveraging data that our clients can use to effectively put together better plan design to drive greater enrollment. And so it's kind of the mix of all of the things that we're doing that's driving both an assisted growth through data and insights as well as the efforts that we have on the sales team of engaging our network partners as we're going to market.

Richard Putnam
Richard Putnam
Investor Relations at HealthEquity

Thanks, Dan.

Operator

The next question is from Ann Samuel with JPMorgan. Please go ahead.

Anne Samuel
Anne Samuel
Executive Director at JP Morgan

Hi, thanks so much for the question. You've been highlighting a lot more of your technology enhancements recently. And was maybe just hoping you could speak to how we should be thinking about investment in R and D going forward. Is this something you plan to ramp as you lean a little bit more to tech enablement or is that kind of being reallocated from other areas?

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Yes, thanks. So I would not expect any material change in terms of the percentage of our revenue that we will be spending on product and tech. But I would expect given I'm coming in new to the situation and driving this focus on this Member First experience for the impact to be more in what we're prioritizing. And so as we look at our roadmap going into the future, the things that we prioritized again with that orientation is building on some of the great success we've had on the tech side this last year. So for example, app downloads where we have over 1,000,000, we launched the app this last summer.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

I would expect us to continue to drive adoption of the app for our members. It's a more engaging experience. It's the digital first experience that they expect. And it's also a more trusted and secure way for us to authorize and authenticate users on the platform. I really like the continued investment that we've had on the AI side.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Claims AI, as we talked about in the past, is leveraging again data and insights on reimbursements to automate the reimbursement process for claims. And we've had that rolled out with thousands of clients covering, I think, about over a million members. And that's a whole way for us to automate the claims process and reimbursement process. So Anne, as I look at the financial framework for our product and tech, I would expect us to become more efficient in that absolute dollars cost. And then our priorities, really is just going to be shifting the resources around to make sure we're delivering against that member first, secure mobile experience that I'm really excited about enhancing both the effectiveness and the speed with which we're delivering that type of product out to our clients and members.

Anne Samuel
Anne Samuel
Executive Director at JP Morgan

Really helpful. Thank you.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Thanks, Dan.

Operator

The next question is from David Roman with Goldman Sachs. Please go ahead.

David Roman
David Roman
Managing Director at Goldman Sachs

Thank you and good afternoon, everybody. I wanted just to pick up on a comment you made earlier regarding HSA member growth and just make sure we understand the trend and potential implications. I think you made a reference to an increasing percentage of the HSA member growth coming from smaller employers. And maybe just talk to us where we are in that trend? And are we at a position on a go forward basis given your market share where that those types of companies are critical to the growth rate?

David Roman
David Roman
Managing Director at Goldman Sachs

And then maybe a follow-up, as you think about capital allocation, you talked a little bit about the balance sheet. The WageWorks acquisition has I think gone quite well for the company. Maybe you could sort of talk about the M and A environment and any latest thinking on prioritization of internal versus external investment?

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

All right. So more than one question in that one. I'll see if I can remember that. Thanks. So on the HSA growth side, again, when we're looking at our opportunity, as we look at the market segments, one amongst our largest clients, we're really looking at, again, as we talked about leveraging all of the insight for us to be able to drive more adoption and enrollment within our existing client base.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

On the new logos, while we see growth on different sizes of enterprise, we saw more of this last year from that small and medium sized business. In terms of that as a long term trend, I guess what I would say is that I wouldn't we're not changing our approach, other than the fact that we're trying to, again, leverage technology to put our sales team in a position to be leveraging data that is at the fingertips of our clients and our brokers, so that they can drive a more engaged experience for their clients as well. I think as you also look at this was a record year and I just really want to congratulate our team for doing that. Surpassing the million new HSA accounts has never been done by anyone before in our industry. And so, I think as we look at the market share numbers that will probably come out in the coming weeks, we're optimistic in terms of the growth that we're seeing in the business overall.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

As it relates to the M and A environment, I think was just another question that you had. And David, I don't know if you were just talking about that generally or what is our strategy? Make sure I answered that right.

David Roman
David Roman
Managing Director at Goldman Sachs

Yes. I was talking more about your strategy and how you're thinking about organic investment in the business versus M and A and then the interplay between the two.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Okay. So on that side, from an M and A perspective, we're going to have a very high bar for inorganic opportunities for expansion. We've got a great track record at looking at portfolios, non operating businesses, portfolio acquisitions that would still be right down the fairway for us. And I think anything outside of that is going to be a very, very high bar that really you have to deliver both financial results and be consistent with our mission. I think we see a much greater opportunity and really all of our focus is going to be around our own execution against growth in the industry.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

And again, when you take a step back and you look at the penetration, the awareness, the knowledge of the benefit of HSAs for both clients and with members, that's where we see the most significant opportunity for growth. And that's why the focus on our three d strategy of deepening our partnerships as an example, using more technology to drive a digitized sales experience, creating greater connectivity and creating more products to again drive enrollment, drive adoption, drive contribution. We think those are the ways to that we can lean in and control the destiny of how we continue to grow the business.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

Great. Thanks for

David Roman
David Roman
Managing Director at Goldman Sachs

taking the questions.

Operator

The next question is from Scott Schoonhaus with KeyBanc. Please go ahead.

Scott Schoenhaus
Scott Schoenhaus
Managing Director at KeyBanc Capital Markets

Hey, team. Thanks for taking my question. I just wanted to drill in more on the cadence of the margin, the gross margins on the services side. Is this something is the improvement in the back half of the year driven by an assumption of less fraud actors? Or is it more that you'll shift more people onto the app and drive down service cost per call?

Scott Schoenhaus
Scott Schoenhaus
Managing Director at KeyBanc Capital Markets

Can you help us like mitigate what's driving the re expansion of margins in the back half of the year? Thanks.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Do you have any questions as part of that?

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

Yes, I can do it. Yes, the first part.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

Yes, the answer is yes, both of those things, right? So, but for these excess costs that we were talking about, you would have seen us report another significant reduction in service cost per account, right. And that's the North Star of my service and ops partners. So like that work has not stopped. And they achieved pretty great results during the year aside from these sort of point of time events here.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

So yes, we are assuming in our guidance that the steps we're taking are going to stem this like fraud and related items around it, meaning excess calls, just excess contact and excess work for our service center. But the day to day performance of that team has been excellent, and we're assuming that that trend continues into next year. So it's exactly that, right. So we'll sort of get if we can eliminate these events driven costs, right, we'll get a service cost reduction there for free, for lack of a better word, and then sort of return to normal going forward. And our sort of fraud position is like you're talking about like one basis point on our total assets for annual fraud is kind of a benchmark for us. So that's a very, very small number.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Yes. I guess I was speaking to it also strategically is that as it relates to as we talked about here our fraud and security posture, my first hire as CEO was a is our CISO, Sunil Seshadri. We are prioritizing that Member First secure mobile experience. We're investing against that. We're prioritizing security and fraud prevention efforts as we have in the past. And we're going to continue to build a great team in this area as we're enhancing our systems and platform and our apps from a security perspective.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

So I think that the investment there, we should expect to see those costs associated with fraud moderate as we've highlighted. I think the second thing is that going a little bit deeper into service modernization, as we think about the opportunity, we handle millions of calls, phone based calls from our members every single year. A significant percentage of those calls are used to authenticate who the member is. Many of those calls are things like what is my account balance, change address, reset my password. And as we look at our ability to automate a lot of those interactions, whether or not that be on the front end or be able to reduce contact drivers as well, we just see significant opportunity on the overall service cost per account to be able to use technology to both drive down those call drivers, drive down the cost, while also increasing the quality of the experience and the channels that our members sort of expect from us.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

And that really does get to ultimately over time a lower service cost per account.

Scott Schoenhaus
Scott Schoenhaus
Managing Director at KeyBanc Capital Markets

Great. Thank you.

Operator

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

Mark Marcon
Senior Research Analyst at Baird

Good afternoon and thanks for taking my question. With regards to these issues that came up during the third and now the fourth quarter, Can you talk a little bit about what the member reaction is and what the employer reaction is? And can you let us know what client retention from an employer perspective was over the course of this year?

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Yes, I'll take that. Our highest priority is delivering a remarkable experience for our clients and for our members. Protecting our members' accounts is kind of a joint opportunity in the sense that the members with respect to physical card or their passwords, an example, need to be protected. But we stand behind the service that we provide and the experience that we provide. And so our team, which is Team Purple, so committed to delivering that remarkable experience.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

We really do and the team prides itself on how we handle those issues when they come up. And certainly for a member or a client that has something less than remarkable, our team does everything that we can do to make sure that we make that right. How that translates into our business, obviously, as we look at that, we want to make sure that we're retaining clients and members and proud to say on top of really strong sales momentum, we're really proud of our retention results, which are in the high 90s in terms of clients that we retain. And so that has been unchanged, even as we've gone through some of these challenges associated with Q3 and Q4. But I think, again, continuing to drive differentiation in our service, differentiation in our product, and then delivering on both of those things, I think is the promise that we expect from our clients and we're certainly seeing a strong trend in that regard for them.

Mark Marcon
Senior Research Analyst at Baird

That's good to hear. Thank you.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Thanks, Mark.

Operator

The next question is from Alan Lutz with Bank of America. Please go ahead.

Allen Lutz
Allen Lutz
Senior Equity Research Analyst at Bank of America Merrill Lynch

Good afternoon and thanks for taking the questions. I wanted to ask one for Steve. Last quarter, you talked a lot about just general excitement around expanding access to portable health accounts. I think you mentioned the Hope Act, HSA modernization and then other things the incoming administration can do. Can you just give us an update on where things stand today relative to December, if anything moves?

Allen Lutz
Allen Lutz
Senior Equity Research Analyst at Bank of America Merrill Lynch

And then a quick one for Jim. Do you have insurance for the fraud activity that took place? Thanks guys.

Stephen D. Neeleman
Stephen D. Neeleman
Founder & Vice Chairman at HealthEquity

I'll start. Thanks, Alan. I think good news is the government remains open for business now, so they can keep working on getting its reconciliation built together. And as we said, we think that there are still these three clear pathways, whether it be the reconciliation bill, which we've continued to discuss different opportunities with the legislators there. And we do think that there's a piece of this package that will allow for HSA expansion or HOPE accounts that have been introduced.

Stephen D. Neeleman
Stephen D. Neeleman
Founder & Vice Chairman at HealthEquity

And then also, we've got the bipartisan legislation that continues to grow that as you know, that it was reintroduced in February, February fourth, in a bipartisan way. It's great to see these legislators coming together. And then also these regulatory changes in the last Trump administration, they did some pretty important things that would allow employers to continue to expand their HSA offering. And so we know that it's a $4,500,000,000,000 or $5,000,000,000,000 package. They're working towards this reconciliation budget resolution process, but we've and what we're hearing is, is that they're doing everything they can to create some space for this type of expansion in HSAs.

Stephen D. Neeleman
Stephen D. Neeleman
Founder & Vice Chairman at HealthEquity

I mean, that's what we've talked about publicly. There's several bills that have been introduced beyond the HOPE Act, which allows for HSA expansion. And we know there's a lot of legislators out there that feel like this is really important as they're doing this tax package that goes through. So we remain optimistic and hopeful. We won't know until it really starts coming out of committee in probably the next month or two.

Stephen D. Neeleman
Stephen D. Neeleman
Founder & Vice Chairman at HealthEquity

It depends on the timing. There's some folks out there that think they can get this all put together before Memorial Day, but we'll see if that's true. But we do remain helpful and there's a lot of talk around there about HSA expansion. So we're going to keep doing everything we can to support the effort with both HSAs and HOPE.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

Yes. And on the Yes. Thanks, Steven. On the insurance question, right, there's not really a lot to talk about yet on it, but like yes, under sort of a general crime policy, We will work with our insurers over the next quarter or so to see what can be recovered there from those policies.

Allen Lutz
Allen Lutz
Senior Equity Research Analyst at Bank of America Merrill Lynch

Great. Thank you.

Richard Putnam
Richard Putnam
Investor Relations at HealthEquity

Thanks, Alan.

Operator

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

David Larsen
Managing Director at BTIG

Hi. It seems to me like you're building exactly what RFK Jr. Would want, a technology platform that can provide nudges and incentives to members to keep them healthy and seek quality care at lower cost sites that would obviously be a benefit to the cost of total Medicare longer term. So hopefully, the Congress budget office is taking that into account when they're doing their scoring. But my question is really related to the fraud activity.

David Larsen
Managing Director at BTIG

It sounds like it was one large actor who did this thing. Has it been resolved? Like were those costs do those include like programmers from an external security firm that fields, like sort of breaches in the software? Did you implement like a dual mobile sort of identification process for all members, so they're now verified when they dial in? Did you have to pay a ransom?

David Larsen
Managing Director at BTIG

Was the FBI contacted and were the malicious actors arrested? So like basically was this whole thing resolved, so we can expect the margins to get back up to like 65% in the fourth quarter of your gross margin? Thanks a lot.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Thanks David. I'll take that. So a couple of things. One, just want to make sure we're not confusing two things. One, as it relates to data itself securing personal information, that's not what we're talking about here.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

We're talking about fraud and it is not one actor. As you look at the profile of what's happening out there in the market, we have continuously taken steps designed to ensure that our platforms, our data, our systems remain available and secure. And at the same time, the number of bad actors, state actors that are leveraging technologies continue to focus on financial services companies like us. So these things are tricky in the sense that there's not one bad actor, there's not one single party involved. And so for us, as we think about the strategy, therefore, we have to look at various levels of security in terms of the internal controls, the protections that we provide from a network perspective, an application perspective, an identity perspective.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

And so we think about it holistically in terms of how we have to both protect accounts from being taken over, how we have to identify fraud or fraud that might be happening to a member or their card. And so, that is largely it gives you a sense of kind of like the scope of the things that we're focused on. And I think from an experience perspective, as we look at different ways to secure the member experience as we make a move towards a stronger mobility, introduce even more efforts associated with multi factor authentication. We think all of these things combined help us to be able to stem the recent trends that we've been seeing on fraud. I don't know, Jim, do you have anything else to add?

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

Yes. No, that's the core point. I think a couple of questions sort of comments from the group, right. Like this is not a cybersecurity incident, right. Like this is your good old fashioned account takeover, bad actors impersonating you, right, and entering your accounts.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

Like I'm sure many of you have had bad credit card payments or bank account transactions that you didn't recognize. This is the type of activity that we're talking about and vis a vis that insurance claim. That's why we're talking about the the crime insurance policy, not some sort of cyber security incident. So just want to make that distinction crystal clear.

David Larsen
Managing Director at BTIG

Jim, when do you think you'll get back up to a 65% gross margin? Thanks.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

Yes. Again, like we don't provide the quarterly guidance or detailed guidance like that. So I think what we have said is like we're going to see elevated service costs in the first half of the year. And we will we expect to be more back to normal in the back half of the year and we expect to exit this year in a really strong position in the service cost. And again, we are not targeting a service margin per se or gross margin per se, like what we're trying to do is drive down the unit cost to serve because that's in our control.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

The interchange, it's kind of going to be what it's going to be, right, like with our ability to sell. Our ability to sell accounts is going to keep growing the interchange line. And our ability to keep driving contributions is going to drive the custodial line. And mix towards those lines drive gross margin higher. But what we're trying to do is drive down unit service costs, because that's like the most tangible controllable above the line expense that we can bend the curve in.

David Larsen
Managing Director at BTIG

Thanks very much.

Operator

The next question is from Steve Valenteke with Mizuho. Please go ahead.

Sam Hasanov
Equity Research Associate at Mizuho Securities

Hi, team. Thanks for taking the question. This is Sam Hassanov asking for Steve. Just wanted to gauge your guys' thoughts on any incremental or high level color on EBIT growth by segment for 2026, particularly in custodial EBIT? Thanks.

James Lucania
James Lucania
CFO & Executive VP at HealthEquity

Yes. Again, you want to further specific yes, so the comment that we just made, right, we don't provide any detailed guidance at that level. We don't have segments or report EBIT or operating income at that level. So we're just not going to provide that kind of granularity.

Sam Hasanov
Equity Research Associate at Mizuho Securities

Understood. Thank you.

Operator

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

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

Thank you. And I just want to thank our team, Team Purple for the great results from this last quarter. This is one of those quarters that it was a team effort. It was a team effort for the year. Our team is prepared for the years to come.

Scott Cutler
Scott Cutler
President, CEO & Director at HealthEquity

We want to thank our shareholders. We want to thank each of you for your support. I look forward to meeting many of you face to face in the upcoming weeks and months, and we'll continue to report to you our progress against these objectives. So thank you, everybody.

Operator

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

Executives
    • Richard Putnam
      Richard Putnam
      Investor Relations
    • Scott Cutler
      Scott Cutler
      President, CEO & Director
    • James Lucania
      James Lucania
      CFO & Executive VP
    • Stephen D. Neeleman
      Stephen D. Neeleman
      Founder & Vice Chairman
Analysts
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