HealthEquity Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
December 5, 2023

There are 11 speakers on the call.

Operator

After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the call over to Richard Putnam.

Speaker 1

Thanks, Sanjay. Hello, everyone, and welcome to HealthEquity's Q3 of Fiscal Year 2024 Earnings Conference Call. My name is Richard Putnam. I do Investor Relations for HealthEquity. Joining me today is John Kessler, President and CEO Doctor.

Speaker 1

Steve Neeleman, Vice Chair and Founder of the company and James Lucania, Executive Vice President and CFO. Before I turn the call over to John, I have two important reminders. First, a press release announcing The financial results for our Q3 of fiscal 2024 was issued after the market closed this afternoon. These financial results include the contributions from our wholly owned subsidiaries and accounts that they administer. The press release also includes definitions of certain non GAAP financial measures that we will reference today.

Speaker 1

A copy of today's press release, including reconciliations of these non GAAP measures with the comparable GAAP measures And a recording of this webcast can be found on our Investor Relations website, which is ir. Healthequity.com. 2nd, our comments and responses to your questions today reflect management's view as of today, December 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 forward looking statements made today. These forward looking These statements are subject to risks and uncertainties that may cause our actual results to differ materially from statements made here today.

Speaker 1

We caution against placing undue reliance on these forward looking statements. 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 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. Now over to John.

Speaker 2

Thank you, Richard. The emphasis on the word caution made me feel like you know more than you let on, but I know you know a lot. So hello, everyone, and thank you for joining us and happy holidays. I will discuss performance Against Q3 key metrics and management's view of current conditions. Richard doesn't know anything more than he's letting on, by the way.

Speaker 2

Jim will detail Q3 financial results and then he will provide our raised guidance for fiscal 2024 And an initial outlook for fiscal 2025. And Steve, of course, is here for Q and A. In Q3, the team delivered double digit year over year growth in revenue, which was 15%. Adjusted EBITDA grew double that at 30%. HSA assets grew 12% year over year and HSA members, Again also at fiscal quarter end grew 8%.

Speaker 2

Total accounts grew 5%. HealthEquity ended Q3 with 8,300,000 HSA Members, $22,600,000,000 in HSA assets and $15,300,000 total accounts. Turning to sales, the Team added 163,000 new HSA members in the Q3, which narrowed the year on year gap relative to last year to 4% as we begin to lap the Tora job growth and quit rates from Q1 and Q2. New logo growth driven by a strong performance of our team as well as our expanded network Partner footprint helped HSA growth in Q3 just as it has throughout fiscal 2024 to date. HSA assets ended Q3 at 2 I'm sorry, they ended Q3 $2,400,000,000 higher than a year ago, Reflecting not only account, but also balance growth.

Speaker 2

Sequentially, invested HSA assets declined during the fiscal quarter By $600,000,000 due to negative market action and total assets therefore declined by the same amount. Members continue to invest their HSA balances, however, partially offsetting market declines. Year over year, 12% more of our HSA members became investors, helping to drive up invested assets by 21%. In fact, invested assets now account for nearly 40% of HSA assets. As you know, we believe that our members, our mission And our long term financial performance all benefit from the continued growth of investing in HSAs.

Speaker 2

We also continue to see more members choose enhanced rates for their HSA cash, leading to a higher or longer custodial yield and we believe less cyclicality. While custodial fee growth drove Q3 revenue and margin performance, the team also delivered modest progress on the service line. Service costs actually declined year over year and sequentially despite higher volumes, of course, to help drive modest margin expansion. Interchange revenue grew strongly year over year and on a sequential basis and is now following its pre COVID seasonal pattern as we expected, With strength in Q1, followed by softness in Q2 and especially in Q3, we expect sequential strengthening again in Q4. Our new CFO will detail our raised outlook for fiscal 2024 and preview fiscal 2025 in addition to providing more detail on Q3 results.

Speaker 2

Double digit revenue growth and margin expansion is a pretty good for Sac. However, Jim would be quick to point out that HealthEquity's current trajectory was years in the making. The team Raised the trajectory of HSA growth by adding CVV capabilities at scale through WageWorks. It grew the value of HSA by pioneering affordable and accessible HSA investing and creating the enhanced rates program for HSA cash. It increased market responsiveness and resiliency by integrating with network, client and ecosystem partners at every turn, And it enabled accretive allocation of your capital by uncovering HSA portfolio acquisitions, including Benefit Wallet, which upon completion Will be our largest such transaction ever.

Speaker 2

Today, the team is innovating the value drivers of Tomorrow, applying cloud, API, data science and YesAI technology to HealthEquity's mission to save and improve lives by empowering health With that, I will turn over to Jim. Jim?

Speaker 3

Thank you, John. First, let me say it's been a pleasure to join the HealthEquity team and have the opportunity to meet many of our investors over the past 3 months. The results we're reporting today are directly linked to the commitment our team makes every day to deliver Purple service to our clients and members. I'll highlight our Q3 GAAP and non GAAP financial results. As always, we provide a reconciliation of GAAP measures to non GAAP measures in today's press release.

Speaker 3

3rd quarter revenue increased 15% year over year. Service revenue was $107,500,000 down 1% year over year. Custodial revenue grew 43% to $106,600,000 in the 3rd quarter. The annualized interest rate on HSA cash was 258 basis points for the quarter. Interchange revenue grew 7% to $35,100,000 Gross profit as a percentage of revenue was 64% in the Q3 this year, up from 59% in the Q3 last year.

Speaker 3

Net income for the Q3 was $14,700,000 or $0.17 per share on a GAAP EPS basis. Our non GAAP net income was $52,200,000 or $0.60 per share for the 3rd quarter, up versus $0.38 per share last year. While higher interest rates increased custodial yields and generated additional interest income, they also increased the rate of interest we pay on Adjusted EBITDA for the quarter was $95,600,000 and adjusted EBITDA as a percentage of revenue was 38%, More than 440 basis point improvement over the same quarter last year. For the 1st 9 months of fiscal 2024, Revenue was $737,200,000 up 17% compared to the 1st 9 months of last year. GAAP net income was $29,300,000 or $0.34 per diluted share.

Speaker 3

Non GAAP net income was 100 and $40,500,000 or $1.62 per diluted share, up 69% compared to the same period last year. And adjusted EBITDA was $270,300,000 up 36% from the prior year, Turning to the balance sheet. As of October 31, 2023, cash on hand was $334,000,000 Boosted by $57,000,000 of cash flow generated from operations in Q3 $166,000,000 year to date. The company had $874,000,000 of debt outstanding net of issuance costs. We continue to have a $1,000,000,000 undrawn line of credit available And we anticipate using both cash and drawing on the line of credit in fiscal 2025 in connection with the closing of the Benefit Wallet HSA acquisition.

Speaker 3

These strong results combined with expectations for our Q4 busy season allow us to raise fiscal 2024 guidance as follows: Revenue in a range between $985,000,000 $995,000,000 GAAP net income in a range of $34,000,000 to $39,000,000 for $0.39 to $0.45 per share. We expect non GAAP net income to be between $181,000,000 $188,000,000 resulting in non GAAP diluted net income between $2.08 $2.16 per share based upon an estimated 87,000,000 shares outstanding for the year. We expect adjusted EBITDA to be between $350,000,000 $360,000,000 Our fiscal 2024 revenue increase is primarily based on revised expectations for the average yield on HSA cash to approximately 245 basis points for fiscal 2024. As a reminder, we base custodial yield assumptions embedded in guidance on an analysis of forward looking market indicators such as the secured overnight financing rate, mid duration treasury forward curves and the Fed Funds futures. These are of course subject to change.

Speaker 3

Our guidance also reflects the expectation of higher average interest rates on HealthEquity's variable rate debt versus last year, primarily offset by the reduced amount of variable rate debt outstanding. We assume a projected statutory non non GAAP income tax rate of approximately 25% and a diluted share count of 87,000,000, which now includes common share equivalents as we expect positive GAAP net income this year. As we have discussed, moving to positive GAAP net income impacts our GAAP tax Discrete tax items may also impact the calculated tax rate on a low level of pre tax income. Based on our current full year guidance, we expect the GAAP tax rate for fiscal 2024 slightly below 40%. As we've done in recent reporting periods, our full fiscal 2024 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.

Speaker 3

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. We're also providing the following initial guidance for fiscal year 2025. We expect revenue to be between $1,140,000,000 1.16 $1,000,000,000 We expect margins will expand with adjusted EBITDA growing to approximately 38% to 39% of revenue in fiscal 2025. This initial guidance is based on an estimated average HSA cash yield of about 3%. Based on our outlook of interest rate conditions, Current forward yields for next year and the anticipated migration of the BenefitWallet HSAs in fiscal 2025.

Speaker 3

We expect BenefitWallet ramp up costs will in effect extend our busy season further into the new fiscal year than usual with net positive impacts expected to begin by Q2. A reconciliation of our adjusted EBITDA outlook Our net income outlook for this future period is not available without unreasonable efforts as we're unable to predict the ultimate outcome of certain significant items Before we launch into Q and A, let me give another plug for our Investor Day scheduled for February 22 at our offices in Draper, Utah. We expect to share information about HealthEquity's multi year strategic initiatives to deliver remarkable experience, deepen partner relationships And drive health and financial outcomes and the impact we anticipate these initiatives may have on our business model and financial performance over the next several years. You will see product innovations being shared with our clients and partners as well as a deep dive into our plans to accelerate the transition to enhance rates. We're nearing capacity, so if you want to be there and you do want to be there, you will need to register quickly.

Speaker 3

Please see our IR website or contact Richard.

Operator

Thank you. Our first question today comes from Greg Peters with Raymond James. Please go ahead.

Speaker 4

Good afternoon, John, Steve, Jim and Richard. Hello. I'll kick off the first question with State of the market as it relates to M and A, I know you're working will be working to close BenefitWallet in the first half of next year, But another large competitor of yours, maybe more have commented on the possibility of monetizing their HSA asset through a sale. So can you talk about what your appetite looks like for additional M and A and Maybe just how you view your market players behaving in this environment?

Speaker 2

Yes. I mean, I think, first of all, thank you, Greg, for the question. I think The first point is that I think this reflects a trend that has been going on for a while, which is continued Kind of for lack of better term consolidation of the market around a couple of strong scale players. And we're really pleased to be at the head of that Group at this point and have worked very hard for it over time. And one of the things that We've done over this period is really kind of honed our thinking about how we deploy shareholders' capital when we look at competitive transactions.

Speaker 2

And so we're in a very fortunate position that To the extent that something else is out there and to the extent that one is that you should feel confident that we're going to be able to evaluate it effectively without kind of having to resort to Investment Banker Magic. And that secondly, that and I think Benefit will demonstrate this that we're going to shape transactions in a way That is a win for the seller, but also a win for our shareholders in terms of the timing of accretion and all that kind of thing. So I think that puts us in a good position if transactions kind of start to happen. I think secondly, if you we'll obviously talk about this a little more at the Investor Day, but I think external model suggests that and certainly our forward guidance envisions that the company will Continue to generate significant cash flow from operations and free cash flow generally and that those numbers will only grow. So, as I've said before, this is an ideal place for us to deploy capital in ways that generate real return to earnings and ultimately we believe to our shareholders.

Speaker 2

So we'd be very interested in that. That having been said, I think we also benefit from the fact that we've been beating these bushes for a very long time And we also know where our sometimes why something comes to market, where our competitors might be more challenged and Those things are going to be reflected in our view evaluation. So that's, I guess, my way of saying, Greg, that if you see something happen, I don't know, mid next year, late next year. And to be clear, I don't I have no idea, genuinely. And it's not with us.

Speaker 2

It's not going to be because we didn't take a look at it. It's going to be because we carefully evaluated it, looked at the price and decided not to do that. And we've done that in the past as well. So We're happy to hear those kind of rumors. We think they present great opportunities for our shareholders.

Speaker 2

We're also going to evaluate them carefully.

Speaker 4

That makes sense. I have a follow-up question assuming that Richard the enforcer will permit it.

Speaker 2

Can I ask you I ask you a favor? I'll be the let's do one, but I want to we did get more murmurings Of challenges and it's like Mr. Bigglesworth, but we don't want you to be angry. So Let's do one. We'll go from there.

Speaker 4

One follow-up?

Speaker 5

Yes.

Speaker 4

Perfect. Just you made a comment in your Opening remarks about how the enhanced yield product will give you higher for longer custodial yield. One of the popular questions that as comes inbound is how your custodial yield might perform if interest rates will start To go down, so maybe you can help us explain what you meant by that comment. That's my last question.

Speaker 2

Well, Let me first actually, Jim, why don't you take this one?

Speaker 3

Yes, yes, sure. I can. Yes, so the I mean, obviously, the initial outlook that we provided is based on forward looking expectations of rates and the market has for some time expected rates will come down next year and that's reflected And our outlook and we will have a small headwind, we expect to have a small headwind on our client held funds, The deposits that are really held short term in overnight cash, so that's a small headwind to our yield next year, but we're still seeing the reinvestment rates at significantly higher rates than the cash is maturing

Speaker 4

Okay. But in your comment, you said the enhanced yield Gives it higher for longer. I was just I'm sorry, I've expired my two questions. Thanks.

Speaker 3

I'm guessing

Speaker 2

there might be another one about this topic. So we're happy to go into one. Who's next?

Operator

The next question is from Stan Berenstien with Wells Fargo. Please go ahead.

Speaker 6

Hi. Thanks for taking my questions. Hi. Maybe first on the preliminary guidance, I guess first, how should we think about the benefit wallet assets that are flowing in? Can you give us a sense of the timing of when these tranches are going to come in?

Speaker 6

To what extent are we getting the benefit through the year? And associated with that, maybe I'll layer a couple of more questions in here. You have to pay any fees on those assets moving into your custodial accounts? I will start there.

Speaker 2

Yes. I think I can take this one. So let me start with the second part of your question, Stan. As you recall, in prior transactions, we've had A component where there's a seller, a third party custodian that we have to pay, we had that in the WageWorks transaction, we have that here. That's baked into technically, the way it works in this case is, it's The seller paying the fees and we have agreed as part of, and I think we disclosed this at the time the agreement was signed.

Speaker 2

We have agreed to However, I believe, someone correct me if I'm wrong, dollars 20,000,000 of such fees within the purchase price. So that doesn't impact our Projection of go forward income or the income statement in any way, it's a purchase price accounting issue. And then with regard to the first part of your question, the way to think about this, I think, is that and Jim mentioned this briefly in his Opening remarks is that we will see incremental service expense, Effectively, our busy season extending into the first bit of the fiscal year, As we prepare to bring on these accounts, it would be silly to fully ramp down and then ramp back up again. So there'll be some and even if we were doing that, we would still see incremental costs. So you'll see some incremental service costs.

Speaker 2

And then, in Q2, we should start to kind of net out to a positive here as we begin to onboard these accounts. And so Our guidance kind of reflects that idea that these placements I'm sorry, these transitions will occur kind of in that timeframe and by the second half of the year, We'll be at run rate and as we've discussed elsewhere, this kind of accretes very quickly. So That's helpful for you. And we can't I would say, there's some uncertainty here as there often is, but that's our current expectation.

Speaker 6

That's helpful. Thank you. Maybe just a quick one on services gross margin. Clearly, you're making some progress here. Can you maybe share any updates on the adoption of your text based communications with your members?

Speaker 6

And whether or not that's You're recognizing some tangible improvements on the gross margin side there?

Speaker 2

Yes. Well, Jim talked about the progress on gross margin generally. I think, obviously, if you look at service expense and the like, the ability to kind of Being in a good spot here relative to volume growth speaks to the point that you're making, particularly given that We're also fighting things like wage growth that are headwinds in this area. And so yes, I commented elsewhere that We've made we look at this month over month and what we're really trying to do is ultimately it's not just it's in part The move from voice to chat, but it's also ultimately the move from live to automated In areas where members really get value out of that, and there are clearly a lot of those. And so we continue to see kind of, I would just say, quarter over quarter progress.

Speaker 2

It's not, and we've never suggested it was a magic bullet, but the ultimate opportunity to take significant costs out of Service delivery while delivering actually a better experience for members through digitization. I mean, this is, as I've said elsewhere, is A no brainer in terms of sort of ironic to say this, in terms of the applications for generative alternative AI, it just it Yes, damn, this stuff really works. And so we think that that will continue and we think that what we do is Excellent application for it because precisely because it's not it's always as simple and people's questions aren't always as Formed in exactly the same way and yet you want to be able to generate the right answers.

Speaker 7

Thanks, Dan.

Operator

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

Speaker 2

Hey, Alan.

Speaker 4

A couple on the financial side. So I just want to ask on the 3% custodial yield guide How much of those contracts have already been set? And then, one follow-up related to the financials. Is Benefit Wallet Fully incorporated into the fiscal 2025 guide? And then I have a follow-up.

Speaker 2

That sounds like 3. That's 3.

Speaker 3

Yes. Go ahead. Yes. So as John said, our expectation about the both the ramp up costs, the transition costs, migration costs And then of course the benefit of having the accounts on our platform are built in to the 2025 guide As are the those assets will be invested at market rates, which will Obviously, pull up the average rate earned on HSA yield. So yes, BenefitWallet is a contributor To revenue and to the higher yield that we're going to be guiding to here.

Speaker 2

And then just as to the first part of your question about placements, The math is a little different with enhanced rates now where we can do placements throughout the year. So it's a little less relevant, but a way Think about it is that we will do we do placements mostly when money moves In terms of win rates are cut. So, about a third of that happens in the if you sort of think about that year end bulk, about a third of it's in Fiscal Q4 and I'm sorry, calendar Q4 and then 2 thirds is in kind of in that January period. But I would caution that again, I just want to say I would caution on that last point. Enhanced rates does have a benefit that allows us to draw that out a little bit.

Speaker 2

And so over time, what you'll have to get used to is And I think this will be good is that it's not going to be sitting and waiting for what the rate is on a given day. It's going to matter as much for those kinds of placements.

Operator

Thank you. The next question comes from David Larsen with BTIG, please go ahead.

Speaker 6

Hi, congratulations on an excellent quarter. Can you maybe just talk a little bit About expectations for yield longer term, obviously, I wouldn't ask for guidance for fiscal 20 26. But since it takes 3 years to recontract your book of business, let's say rates hold steady or decline slightly Next year, maybe they decline slightly in fiscal 'twenty six. Could your yield still go up, Which would obviously benefit custodial in fiscal 2026?

Speaker 2

Jim, you want to add this one?

Speaker 3

Simple answer is yes. Obviously, it depends how far rates decline. But yes, I think you said If rates remain stable, then yes, we'd expect the average rate to continue. There are strong tailwinds in that number.

Speaker 2

The key issue is that one of the things that we really do get benefit of if you think about it. I appreciate your point about 3 years, but think about like the duration contracts, You think about what we're going to be replacing next year, those duration contracts next year will be the first ones that we're replacing, right, that are pandemic era. So the stuff that's being repriced is going to be repriced in very favorably. And Beyond that, if I take current market projections about where Rates will be in a year or what have you. As sort of consistent with your question, We will still be placing new money at rates well above our current guide of 3%.

Speaker 2

And so those will continue to be, I think pretty significant tailwinds for yield for quite some time actually. Again, without wanting to give particular guidance, I mean, those are the key factors. And it's what you can replace money at relative to what you had it at before And what you're placing new money at? And both of those appear to be tailwinds for quite a while under Any current reasonable scenario over the course of the next several years.

Speaker 6

Okay, great. And I think Richard will allow me one more maybe. So it was nice to see the interchange revenue up, I think 7% year over year. For service revenue, I think it was down maybe 1% year over year, but I think there's some unusual things Pausing that, when should we expect to see growth in service revenue sort of return to a more normalized rate? What is the driver of that?

Speaker 6

What would you expect sort of that longer term normalized service revenue growth rate to be? Thanks very much.

Speaker 2

Want to hit that one, Jim?

Speaker 3

Yes, sure. I can take that one. Yes, so I think you really hit right on the story for Q3. We've effectively Help serve on that line with revenue slightly down, cost slightly down, the margin slightly up, but there's a lot of Moving parts and stories within that within those headline numbers. So you sort of look at it, and we do look at it by product and you see a price volume mix story occurring there, where price has been a headwind, especially in All right.

Speaker 3

As buyers look at this as a bundle really, they understand we're making Much higher revenue on the custodial cash, and the HSA cash. They understand we're making good margin on the interchange And this is the release valve on price. So we're seeing a little bit of price per unit price headwind. We see the impact of the mix shift, especially towards HSA. As we're growing HSA significantly higher, that's always been the lowest Fixed dollar fee product, as it's got the highest percentage of interchange and custodial revenue attached to it.

Speaker 3

So as our business Mix towards that, we're going to see that pressure on the revenue line and that margin line. And you can call that sort of a half and half Impact price and mix and then being offset by our much higher volumes. So negative price, negative mix, Positive volume, that's out to just about $1,000,000 delta on the revenue line.

Speaker 7

Thanks, David.

Operator

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

Speaker 8

Hi, guys. Congrats on the quarter and thanks for the question. In the past, you've talked about a gradual increase for your deposits going into the enhanced rates product. But with Benefit Wallet, you're going to see kind of a big jump up in that mix. Are you where you want to be now or should we expect that to continue to kind of increase as a percentage of the mix over time?

Speaker 8

Where are you hoping to get with that?

Speaker 2

You should expect it to increase as a percentage of the mix over time. And we If you're willing to make the step out to Salt Lake City or listen in, I think we'll talk more about that so people can get a Clear view of it over time, but we're extremely pleased with a couple of aspects of this program. And one Is that on a voluntary basis, there's a the consumer adoption has been great. I think consumer acceptance of what we're trying to do has been great. I feel like employers who those who pay attention to this understand that The fact that we've done this has really kept us from having to impose other costs on them and also see us Investing in the business.

Speaker 2

I'm extremely pleased with I just don't know how to say it with the any other way with The work that the team has done to educate the best possible partners we can have For this product, I mean, we went into this if the biggest question in our mind was actually What's going to be the receptivity within what is appropriately a very conservative market on the insurance side To a product that has a lot of great attributes for them, but they just haven't had before. And the receptivity has been great. It's been great among very high quality names and the stable there continues to grow. And so We're absolutely looking at options to accelerate, if anything, the shift into this product and we'll talk a little more about that, I'm guessing, At the Investor Day and its impact in the out years.

Operator

That's really helpful then. And I guess as we kind

Speaker 8

of think about, as you get bigger and bigger with this product,

Operator

Is it still right to think of it as kind of a 50 basis point

Speaker 8

to 75 basis point premium to your kind of traditional yield or can that change over time as well?

Speaker 2

I think that's still probably right. I mean, it's I think that's still probably right.

Speaker 7

Thanks, Dan.

Operator

The next question comes from George Hill with Deutsche Bank. Please go ahead.

Speaker 7

Hey, good morning, guys. Good evening. And just a couple of housekeeping questions actually for me. I guess, Number 1, John or Jim, could you guys talk about the expected EBITDA contribution from BenefitWallet in fiscal 2025? And my follow-up is, I know you guys have some lumpiness of cash rolling off to be redeployed as we look out over the next 12 to 18 months, can you just kind of remind us on the big pieces that kind of come off being committed and get recommitted And so we can kind of fine tune our models around the waterfall, thanks for that.

Speaker 7

Thanks.

Speaker 2

Why don't I you want me to take the first half and you take the second half, Jim?

Speaker 3

Sure. Yes, sure.

Speaker 2

Okay. So a way to think about BenefitWallet is that, as I suggested earlier, We're going to get a little bit more than half a year impact. Maybe you could say I don't know, maybe say 2 thirds of your impact, I don't know, somewhere around there, this year. And This product this transaction like prior transactions we've done is, it's going to be highly accretive. So It's certainly we were already anticipating that we would be delivering a nice implied boost in EBITDA margins and I think this has just helped us Accelerate, for lack of better term, where we ultimately felt we would get to, as we have accounts mature And so forth.

Speaker 2

So the way I think about the first question is, and I would encourage some of these on modeling, but I think I remember, George, you asking me several years back whether the company could Return at some point and I think you were being a little bit what's the word I want, you were sort of poking me a little bit Can you guys return to EBITDA margins with a 4 handle? We're offering guidance right now for next year between 38, 39. And so this has sort of accelerated some of that process and that seems like a good thing. Jim, on the second half, do you want to take that one, which was about I think about the timing of asset redeployment?

Speaker 3

Yes, exactly, reinvestments. And yes, you're exactly right. Like the there's sort of a block of wage Bumps in assets that are going to be maturing actually not so much in next fiscal year. We've got a relatively smaller block of assets maturing Q4 of this year and throughout next fiscal year and it will be the following 2 years where some of those lumpier blocks are going to be maturing Being reinvested is a better word to say.

Speaker 1

Thanks, George.

Speaker 2

The way to think about that just is since we deployed the original wage assets in, I'm going to say calendar 2021 no calendar 2020. And The kind of core piece of that is 5 year, right? You'll see a lot of that rollover in the middle of calendar 2025. There's a little out this year, but you get the idea. And we'll roll over well because We all know where we were in 2020.

Operator

The next Question comes from Mark Marcon with Baird. Please go ahead.

Speaker 9

Hey, good afternoon and thanks for taking my question. And let me add my congratulations. Just wondering if you can talk a little bit about you had good new logo sales. I'm wondering if you can talk a little bit more about What you're seeing on the enterprise side, just in terms of both from a competitive perspective, but also in terms of The desire to shift part of the employee population to

Speaker 10

HDHP's,

Speaker 9

Particularly in light of the accelerating healthcare costs that are coming through. And then I've got a follow-up.

Speaker 10

Steve, do you

Speaker 2

want to hit this one?

Speaker 10

Sure. Happy to. Hey, Mark, how are you? I expect you'll be out in February. Absolutely.

Speaker 10

Because we did get our 1st biggest snowstorm in Sweden. Anyway, so kind of in order, yes, I mean, we've talked about in the comments that this we're seeing some good progress On bringing on these new enterprise logos. This has been a lot of work, a lot of time into it. We've not only refined our marketing message and You brought on some great sales team members that are hustling there, but also I think our product suite is continuing to evolve To take care of their needs, I mean, we're doing some really nice things here. So I think the bottom line is, is we're pleased with the progress we've made in the new logos.

Speaker 10

Now I'm continually amazed at and maybe it's just because as you know, Mark, every year, I'll tell you a little fact that this is from the Kaiser study, The average high deductible plan that is HSA qualified in the country is about $4,800 Per family plan and the average non HSA deductible, let's say for a PPO plan It's about $2,900 So as those numbers keep getting closer, it really doesn't make Heck of a lot of sense for people not to opt into the HSA, right? And so we just keep Helping the employers and then in kind of the perfect world, they allow us to then speak directly to their employees About the benefits, tax benefits and everything else around the health savings account. And with the deductibles narrowing like that, It's Bill and Erwin. It's really hard not to argue they should just sign up for it because they're going to basically close that gap on Any contributions they can get from their employer and then also, of course, tax savings, right? So we just keep promoting it and we're seeing some great uptake.

Speaker 10

And Our relationship management team and marketing team are doing a great job delivering that message. And so, it's our work is never complete. There's still employers and sectors that Tend to be slower adopters, which means there's still a lot of fruit in the tree, but we're continuing to do everything we can to check trees. And this is a great time of year and we're making good progress in messaging. So I'd say thumbs up in both cases, Good new logo growth and then also good work with enterprise team and actually good market in bringing on more growth.

Speaker 9

That's fantastic. And then can you just comment a little bit more about the competitive environment? I mean, obviously, there's big players that may get consolidated, Then in addition to that, there's other big players with rates going up. How should we think about Service fees over the next year and things of that nature, obviously, you're gaining more than your fair share Of the market and continue to gain share, but just wondering if you can give us more comments on that.

Speaker 10

Yes, John, how do you want to break that up?

Speaker 2

Why don't you talk about the competition piece and I'll hit the service fee discussion?

Speaker 10

Perfect. Yes. So the competition Has evolved a little bit, partly because there's been some consolidation, as you mentioned. I mean, a lot of these companies that we used to See is pretty good competitors, whether it be Wage or some of the more recent ones we've added, are now part of the HealthEquity family, which is pretty awesome. And so that being said, I mean, we do have some powerful competitors out there, but it's kind of the same Message, if somebody is buying their healthcare services from a large health plan out there that One of our competitors, then that large health plan will push pretty hard.

Speaker 10

We do win in that environment Because I think people know that HealthEquity has got this kind of single focus on empowering healthcare consumers and that's Kind of what's carried us now for 20 years, right, being that kind of independent single focus provider that can really nail the HSAs and the CDBs and with the bundle and things like that. We have the same kind of threat on the retirement side, but That's where I think we more than level of playing field is with our partnerships, right, because we've got some great I mean the health plan partnership list, I think is Pretty storied in HealthEquity Land. You all know that the success we've been able to have and take care of those health plan partners and they bring us a lot of Even a broader footprint than you might get if you're a large health plan and you can kind of fish within your own pond, but we get to Fish and many ponds. And then on the retirement side, we've got some great partners there too. So look, I don't think it's evolved much.

Speaker 10

I'd love to see if John sees it differently, but it's kind of the same thing. It's It has been consolidating and we've been I think up in our game on some of the things we're doing like I mentioned earlier on our product set and things like that.

Speaker 2

Yes. I mean, I love what's going on with the product. There's some really cool stuff that We're talking about with clients and working on and rolling out and that just is No, it's not rocket science, but it's about helping consumers Do the right things with these products and also helping employers understand what's actually going on within their base, not just in finance, but on the health side. Are people Using the free stuff that they're supposed to be using in these plans, preventive, etcetera. So I do think Relative to what our competitors do, or the bulk of our competitors, we do more of it and we do more of it without dictating what the rest of your ecosystem is.

Speaker 2

And that's always been where we succeed and I think we'll continue to succeed. As far as pricing, we are as I think Jim commented in the prepared remarks, but certainly We're always going to be in an environment where the effective custodial yields Continue to expand and obviously balance continue to grow. If you think about it from the employer's perspective or whatnot, One way to the first place you look in terms of sort of a Cost elasticity is you look at the fees that you actually pay. And so we've Done a number of things over time, I think quite successfully to stabilize that. But we have as Jim commented earlier, If you look at the current quarter, right, you've got roughly speaking, you can do the math.

Speaker 2

You've got If you look at total accounts on a unit basis, right, you've got give or take 5% lower year over year, About half of that is mix and half of it is actual fee reduction. The mix stuff will come and go. Will we sell more HRAs versus FFCAs next year? I don't But the fee component is there and we're going to roll with that. So I don't I think we're trying to be, I think, conservative What we're assuming there is certainly realistic because we don't really want to be losing business over fees.

Speaker 2

We want to be treating people fairly on fees, recognizing that Particularly with

Speaker 9

our core product, there's a

Speaker 2

lot of ways to make money. At the same time, I think as you and then I'll stop. As you may recall, In some of our ancillary products where as a result of the Wage is not WageWorks And Sach, we felt like profitability wasn't really there, COBRA being the example. We had a very large project over the course of And it's still the impact of which is still rolling out, and will help us a little bit next year, But nonetheless to raise fees. So we're not afraid to do it.

Speaker 2

We just want to do it where it makes sense. And where it makes sense is in the areas like It makes sense for us to be competitive when it comes to HSAs. Last thing I'd say that gives us some level of stability here, but again, I don't think unit fees are like rising substantially, but the stability is the diversity of our distribution. And what that does is, It produces a client base that has enterprise where things are extremely competitive, as I've said before, because There have they come with assets and therefore, you can underwrite that versus your smaller employers and the like where you can't do that. And so there's going to be more of a fee base.

Speaker 2

And then of course, you have retail. And so That level of diversity of distribution and of account and so forth, that actually also lends to stability in that service fee line. So I guess that's a long way of saying, our guidance reflects a little bit of conservatism there, Consistent with kind of the numbers we're reporting here in terms of price impact, maybe not so much mix impact. But fundamentally, I think you look at it big picture, it's a relatively modest price to pay For the benefits of what we see as ultimately a product that's obviously becoming more profitable and you can see that in terms of what we're Dropping the bottom line.

Speaker 1

Thanks, Mark.

Operator

The next question comes from Jack Wallace with Guggenheim. Please go ahead.

Speaker 2

Hi, Jeff.

Speaker 5

Hey, how's it going? Congrats, Steve Purple. Another great quarter.

Speaker 2

Thank you. I've

Speaker 5

got a couple of Model Monkey questions for you. I just wanted to make sure we're clearing up the yield understanding here. First one on when cash gets deployed, Is it on a 5 year duration or is it 3 year the duration of the book on average?

Speaker 2

Want to hit this one, Jim? Yes.

Speaker 3

I mean, you should the answer is historically, it's been, Yes, all of the above, 3, 4, 5 year contracts, but I think you should generally be modeling 5 year as our baseline investment product.

Speaker 5

Excellent. That's helpful.

Speaker 3

And yes, using 5 year treasury as your baseline read.

Speaker 5

Excellent. And then for the Q4 this year, it looks like there's an implied sequential step down in the daily cash AUM yield. Is that just related to, say, some of the cash that's exposed to the front end of the curve? Or is there something else going on there? Just thinking about also the comment earlier about a third of the AUM that gets repriced,

Speaker 10

to speak in December,

Speaker 5

we think that would have a positive impact versus a negative one.

Speaker 2

Yes. I don't think there's a step down in Q4. I could be wrong. Maybe if Jim, if you have the numbers in front of you, if not.

Speaker 3

Yes. No, there's nothing that stands out. Like you may if You're talking about like the client held fund short end there like we may see some dollars coming down right as the impact of Our statement that we talked about last quarter, but no, we're not assuming any big shifts in the short rate.

Speaker 2

Maybe we can revert to you offline and make sure

Speaker 3

you got

Speaker 2

the math right. To get to 3 next year, the HSA cash rate will be higher in Q4 than it has been year to date. And on CHF, In Q4, I mean, it's you know what short rates are going to be in the rest of Q4. So I don't think there's not a lot going on there. Thank you.

Speaker 1

Thanks, Zach.

Operator

This concludes our question and answer session. I'd like to turn the call back to John Kessler for closing remarks.

Speaker 2

I didn't know we were done. Okay. So, I just wanted to say that I tried to get Jim in his opening remarks to say that Investor Day was going to be better than cash And you wouldn't do it. And I'm kind of bummed out about that. And if you care about making me feel better, then come to our Investor Day.

Speaker 2

And if you can't do that or even if Ken, we'll be at certain unnamed conferences in January, no doubt with Annie and before that we've got a bunch as well as to our clients and partners. We have I'm so pleased at what At the level of partnership we're seeing with our employers and our health plans retirement plans and then the level of partnership on our team right now, We're doing a lot of tough stuff behind the scenes to set the company up for expansion, Not just next year, not just following year, but for many years to come. And, you may not see it all, but it's a ton of work and It doesn't all go perfectly, but it all gets done and it all gets done with people who are working really hard. So I just wanted to spend a minute to say thank you on that.

Operator

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

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Earnings Conference Call
HealthEquity Q3 2024
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