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spk08: Good afternoon. Welcome to HealthEquity's first quarter fiscal year 2022 earnings conference call. My name is Richard Putnam, Investor Relations for HealthEquity, and joining me today is John Kessler, President and CEO, Dr. Steve Neileman, our Vice Chair and Founder of the company, Tyson Murdoch, the company's Executive Vice President and CFO, and Ted Bloomberg, our Executive Vice President and Chief Operating Officer. Before I turn the call over to John, I have two important reminders. A press release announcing our financial results for the first quarter of fiscal year 2022 was issued after the market closed this afternoon. The metrics reported in that press release include contributions from our wholly owned subsidiary WedgeWorks and accounts it administers. The press release also includes definitions of certain non-GAAP financial measures that we will reference today. A copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures, and a recording of this webcast can be found on our investor relations website, which is ir.healthequity.com. Second, our comments and responses to your questions today reflect management's view as of today, June 7, 2021. and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates, or other information that might be considered forward-looking. There are many important factors relating to our business which could affect the forward-looking statements made today. These forward-looking statements are subject to risk and uncertainties that may cause the actual results to differ materially from the statements made here today. As a result, we caution you against placing undue reliance on these forward-looking statements, and we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock detailed in our latest annual report on Form 10-K and subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future events. At the conclusion of our prepared remarks, we will turn the call over to the operator to provide instructions and to host our Q&A. I'll now turn the mic over to our CEO, John Kessler.
spk07: Thank you, Richard. Well done. Hello, everyone, and thank you for joining us on this somewhat brisk, very late spring afternoon. Today, we are announcing strong results for health equity's fiscal first quarter of fiscal year 2022, which ended on April 30th. And we are also raising guidance for the full 2022 fiscal year. I will discuss our Q1 results and acquisition activity during the quarter. Ted will review operations and progress on wage works integration. And Tyson will review the financial details of the quarter and provide detail on our updated guidance for fiscal 22 based on the results that we are reporting today. Steve Nealman is here and will join in on the Q&A. Looking first to the five key metrics that drive our business and that we've been reporting on for a long time, health equity benefited from the initial economic reopening trends that helped drive year-over-year growth in HSA members and in assets, while commuter and yield headwinds continue to impact total accounts and revenue. Revenue of $184.2 million fell 3% versus the largely pre-pandemic first quarter of last year, and that was due to lower year-over-year custodial yields and commuter revenue, which were partially offset by HSA member growth, asset growth, and other CDB growth. Adjusted EBITDA of $59.0 million was similarly down from the first quarter last year of $63 million. Total accounts ended the quarter at $12.8 million, which does not include the nearly 700,000 commuter accounts that remain in suspense. HSA members at quarter's end reached $5.8 million, up 9% year over year, and HSA assets at quarter's end reached a record $15 billion, up an even larger 31% from a year ago. That's a lot of percent. As Ted will detail, Team Purple started fiscal 22 with very promising sales results, including a fiscal first quarter record of 115,000 new HSAs, up 11% from 104,000 new HSAs opened in Q1 last year. HSA investments grew by over $770 million in the quarter as members and their employers continue to contribute and invest. Investing HSA members grew 51% year over year, with more of our members connecting health and wealth. And the average balance of HSA members grew an incredible 20% year over year, and even 4% sequentially from the fiscal year end, despite a restart of spending. In addition to these strong organic results, in Q1, health equity reached agreements to put roughly $600 million to work, driving additional growth this year and for years to come through the acquisitions of Loom, a further, and a fifth third bank's HSA portfolio. Loom is supporting the post-pandemic, so I want to talk a little about each of those. Loom is supporting the post-pandemic reboot of our commuter benefits, helping clients launch hybrid workplace strategies as offices reopen. Longer term, we think that Loom and commuter benefits in general will really be the tools clients use to shrink employee commuting's carbon footprint. Further, and fifth-third, we'll enhance health equity's market leadership and scale in our core and growing HSA business. adding approximately 0.7 million HSAs and more than 2 billion of custodial assets upon their respective closings later this year. These figures are, of course, not included in the numbers that we reported today. Further, we'll strengthen the network partner strategy that has helped fuel health equity's HSA growth from its very beginning. With significant new partners, increased commitment to the Blue Cross and Blue Shield system, and new API-based platform capabilities, to support flexible branding and deeper integration of HealthEquity into our partners' offerings. It will also add VBA to HealthEquity's total solution for clients, partners, and members. The first quarter, in addition to delivering very promising sales and operating results and really important long-term acquisition activity, delivered evidence of pandemic headwinds beginning to turn into tailwinds. Healthcare card spend reached pre-pandemic levels for the first time during the latter half of Q1 with formerly lagging categories such as medical office visits showing strong growth. New sales opportunities and RFP volume and the value of client wins all rose year over year in Q1 in line with new HSA opening growth that we reported today. Bond yields rose and yield curve steepened with both 10-year treasuries and the 10-year versus three-month spread adding more than 50 basis points during our Q1, and that perhaps portends a rebound in health equities custodial yield in the future. To fully capitalize on that trend, we are expanding our roster of principal guaranteed partners, what we heretofore called deposit partners, to include new insurers as well as banks and credit unions, increasing competition for our managed assets and choice for our HSA members. heretofore, that's a fancy word. Leading employers announced plans. Oh, and finally, leading employers announced plans to reopen their urban offices after Labor Day, consistent with our assumption of a start to commuter recovery in the second half of the year. So in total, in Q1, while pandemic effects still weighed on our financial performance, the team delivered strong sales. We committed to acquisition investments with significant long-term growth benefits. and there was compelling evidence of headwinds becoming tailwinds to growth for fiscal 22 and beyond. With that, I will turn the call over to Ted to review operations and integration.
spk14: Ted. Thanks, John. Good afternoon, everybody. As John mentioned, our selling season is off to a great start. First quarter new HSA sales were up 11% year over year and 29% versus the first quarter of fiscal 2020. we're seeing evidence that business opportunities are returning and that the stalled and deferred deals from last year are coming back to the market. RFPs, which only represent a portion of our pipeline, are up 13% year over year, with bundled RFPs, meaning more than one product, up 15% year over year. In the small and medium sized market, our sales opportunities are up even more, owing both to our marketing efforts and the strong relationships we have with our distribution partners. Cross-style activities also continue to bear fruit, as 30 enterprise partners have agreed to add new services by 1-1-22 so far this year, and 13 distribution partners have added new health equity services to their shelves. On the integration front, we have a lot going on. The team completed another four platform migrations in Q1, and we are on track to complete the migrations and decommission work connected to the WageWorks platforms by the middle of fiscal 2023, which is ahead of schedule despite our recently announced acquisitions and execution on the COBRA subsidy, both of which leverage many of the same talented team members. While we have migrated 17 of the largest platforms and realized $65 million of synergies to date, there remain a number of small and midsize migrations to complete to realize the remaining $15 million of the $80 million in permanent run rate synergies promised. As John mentioned, we are well positioned to become the leading HSA provider once the further and fifth-third deals are closed. Planning efforts are underway to achieve $15 million of cost and revenue synergies within three years of close on the further transaction, and we believe likely more after that as we fully integrate our technology platforms. Additionally, our cross-selling pipeline with Loom is beginning to fill with promising opportunities. Last but not least is a huge shout out to the entire organization for the tireless efforts required to execute against the recent COBRA subsidy regulations. It takes our entire village to support this effort and partner with clients to deliver this subsidy to those that are eligible. There is still much to do, but we have started fiscal 2022 quickly and on the right foot thanks to the continued efforts of Team Purple. Now I will turn it over to Tyson to review our financial results.
spk09: Thank you, Ted. I will review our first quarter GAAP and non-GAAP financial results. A reconciliation of GAAP measures to non-GAAP measures is found in today's press release. First quarter revenue declined 3% as the economic effects of the pandemic impacted service revenue. Service revenue declined 8% to $102.5 million, representing 56% of total revenue in the quarter. The decrease is primarily attributable to an over 60% decrease in active commuter accounts. While the growth in HSAs and other CDBs helped, average accounts increased 1% year over year. Custodial revenue grew slightly to $47 million in the first quarter compared to $46.9 million in the prior year first quarter, as 19% growth in average HSA cash with yield and 91% growth in average HSA investments with yield more than offset a 33 basis point decline in the annualized yield on HSA cash. The annualized interest rate yield was 179 basis points on HSA cash with yield during the first quarter of this year. This yield is a blended rate for all HSA cash with yield during the quarter. The HSA assets table of today's press release provides additional details. Interchange revenue grew 9% to $34.7 million, representing 19% of total revenue in the quarter. The interchange revenue increase was primarily due to a rebound in spend across our platforms in the quarter, and growth in average total accounts. Gross profit was 103.1 million compared to 108.1 million in the first quarter of last year. Gross margin was 56% in the quarter. Operating expenses were 98.9 million, or 54% of revenue, including amortization of acquired intangible assets and merger integration expenses, which together represented 16% of revenue. Income from operations was $4.3 million compared to $15.1 million in the prior quarter. Net loss for the quarter was $2.6 million or a loss of $0.03 per share on a GAAP EPS basis compared to net income of $1.8 million or $0.03 per share in the prior year. Our non-GAAP net income was $31 million for the first quarter of this year, up from $30.8 million a year ago. Non-GAAP net income per share was $0.38 per share compared to $0.43 per share last year. Adjusted EBITDA for the quarter decreased 6% to $59 million, and adjusted EBITDA margin was 32% while operating through the impact of COVID. Turning to the balance sheet, as of April 30, 2021, we had $737 million of cash and cash equivalents, with $972 million of debt outstanding net of issuance costs, with no outstanding amounts drawn on our line of credits. The cash balance, of course, will still include the funding required to close the further and fifth third HSA acquisitions. Based on where we ended the first quarter and our current view of the economic environment, we are providing the following guidance for fiscal 22. Revenue for fiscal 22 to range between $755 and $765 million. Non-GAAP net income to be between $122 and $126 million. resulting in non-GAAP diluted net income between $1.45 and $1.50 per share based upon an estimated 84 million shares outstanding for the year, and adjusted EBITDA to be between $241 and $247 million. Today's guidance includes our most recent estimate of service, custodial, and interchange revenue based on results to date. Since we have not yet closed on the acquisitions, guidance does not include potential revenue from further or from the HSAs from Fifth Third Bank. As John indicated earlier, we anticipate closing on both those acquisitions later this year. Our guidance assumes a yield on HSA cash with yield of approximately 175 basis points. As with all of today's guidance, our yield guidance does not factor the pending further or Fifth Third HSA acquisitions, including transition of HSA cash and insured assets to health equity principal guaranteed partners at the then prevailing rates. We also continue to be conservative with our commuter estimates and anticipate some accounts to reactivate in the latter half of the year due to return to work. Guidance also contemplates estimated revenue from COBRA subsidy efforts and the effect of run rate synergies from wage works that Ted discussed. The outlook for fiscal 22 assumes a projected statutory income tax rate of approximately 25% and a diluted share count of 84 million. As we have done in recent reporting periods, our full year guidance includes a detailed 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 not excluded. With that, I'll turn the call back over to John for some closing remarks.
spk00: Thanks.
spk07: Thanks, everybody. Thanks, Tyson. Nicely done, and Ted. So typically at this point in the proceedings, I thank those responsible for the promising start to the year, and that's Purple Team members. Today, I'd also like to give thanks for something else, which is the resiliency of teammates over the past 15 months. You stayed safe. Families are taken care of. Well-deserved bonuses were paid. And despite not seeing each other in person for more than a year, our team became a more inclusive and more cohesive bunch. better position to deliver on health equity's full potential for our members, our clients, our partners, and, of course, our shareholders. This is not something leaders do. And, in fact, I haven't even put on long pants in 15 months, and we all know from the weekend the challenges that some leaders have with pants. So this is something teams do. Thank you, Team Purple, for this truly remarkable achievement. With that, let's open the call to questions. Operator.
spk01: Thank you. And as a reminder, to ask a question, simply press star 1 on your telephone. To withdraw your question, press the pound or hash key. Again, that is star 1 to get in the queue. Our first question comes from Greg Peters with Raymond James.
spk03: Good afternoon, everyone. Hey, thank you for your comments about pants. You know how to paint a picture for sure.
spk07: I mean, I... All I'm saying is it seems like my shorts policy has been justified by all the pants attention.
spk03: I got it. I'm in shorts right now myself. As everyone in Florida should be. Indeed. Anyways, so I guess I'd like to spend a second and have Tyson and John, you obviously will comment as well, talk a little bit more about the service revenue issue. component and I know Tyson you said you gave some comments of why it was where the pressure was but I guess what I'm interested in is not what happened in the first quarter but what I should think about service revenue yet maybe as a percentage of total count per total accounts or as the economy hopefully recovers in the back half of the year should these numbers begin to improve on a per account basis or Is there some competitive pressure out there that will limit the upside to the service revenue on a per total account basis?
spk09: I'll go ahead and start, Tom. Yeah, I mean, it really comes down to, again, the commuter comeback, right? That's really what's impacting us. that service revenue line item. And so it just matters when you think about your model and how you think about the return of when that's going to happen. And you know, what we just talked about was we see as well as our own business, people coming back in that September timeframe and really restoring that. And of course we're watching that very closely. And today we really haven't seen that return yet now, but you see it in the news and you see people at golf tournaments and you see people everywhere. So you know that that's, that that's going to happen. And so I think about that. When I think about the competitive side of it, as Ted just outlined, we've had and are having a very successful selling seasoning. I actually gave quite a few metrics within that dialogue there to show that. And so I don't think there's anything unusual, Greg, given our prior conversation's Of course, there's always the continued effort to increase HSA count, and so our pricing on that will come down single-digit percentages every single year. We don't disclose that, but we certainly are competitive in there when folks have the right number of assets and we're able to really underwrite a deal that, from an overall bundling approach, provides the right amount of revenue and profits. then we'll do it. And I think that's really the only thing that remains the same as far as competition. I'll stop there and let's see if John has some other ads.
spk07: No, I mean, look, I'm not sure I have anything real to add, but I'll add something anyway, which is just the thing is the commuter rebound is not going to be a light switch. And we talked about this last quarter that when we were quizzed, Greg, I think by you and others, about, you know, the sort of implied conservatism about our guide on the commuter rebound. I mean, that remains true. But it is clearly happening as, you know, folks are returning to cities and so forth. But that's really the biggest factor in the whole discussion.
spk03: Okay, and then my follow-up question will pivot to M&A. You've had a busy year so far, and you raised equity. You've announced some major transactions to spend the capital you've raised in equity. What's your view of the M&A pipeline? Is there going to be another – should shareholders expect another – capital raise for you to fund potential opportunities that you see developing in the marketplace? Or are your hands full at the moment just processing what you've already announced?
spk07: I feel like somewhere the antennae of like a thousand hedge fund managers just twitch. Not to imply that hedge fund managers have antennae, but in any event. Look, I think the big picture here is that you're seeing increasing returns to scale in our business. And those returns are not going to be evenly shared. And so there is going to continue to be M&A activity. And I think we've demonstrated better than anybody, both, that we can deliver strong returns from M&A in particular portfolio-related M&A, and that from the perspective of sellers, that we are a good partner. And the Fifth Third transaction is sort of an example of that, where I think as folks understand, certainly there was some discussion in the public domain about Fifth Third talking and working with others, but we have I think proven to be a really good partner in, in navigating, you know, they're modest twists and turns, but a few twists and turns in, in getting this thing done. So, um, that to me is, is the key to this thing is one, you know, can we show that we're delivering good returns and two, um, can we show that we're a good partner for sellers? And that's, that's a winning combination that we've got. Um, I don't know what, um, uh, deals will be concluded in the second, third or fourth quarter. Um, um, but, We do, even after this current transaction, current set of transactions, you know, we have a little bit of powder left for those kind of things and for those kind of portfolio type things. And we won't hesitate to go forward if we think there's strong return for shareholders. So that's kind of where I'm at right now. Got it. Thanks for the answers.
spk08: Thanks, Greg.
spk07: Thanks, Greg.
spk03: Thanks, Greg.
spk01: Thanks. Our next question comes from George Hale with Deutsche Bank. Your question, please. Mr. Hale.
spk11: Good morning, guys. Thanks for taking the question. And, John, I'll say it's over 90 degrees in New Hampshire, so I'm in shorts, too.
spk07: Outstanding.
spk11: Are they on backwards? I don't know about that. I wanted to focus on two questions. Number one is on the selling season, and I guess, Do you see a return to normal happening fast enough that you feel comfortable about the company's ability to take share on an organic basis as we go through the selling season for 2022 starts? And part B of my question is, I don't know if you have the ability to have interactions with the customers of either further or fifth third, but talking about maybe net dollar retention or net client retention, would love to hear your thoughts around that.
spk07: Yeah. Ted, why don't you start and then Steve can provide some color around what we're seeing in the sales cycle and beyond the statistics offered earlier. And Ted, I think you're in a great position, and I'll add something if it's valuable, to talk about the further clients since collectively we've talked to most of them.
spk14: Yeah, sure. I'm happy to kick it off and then turn it back to you two gentlemen to add some color commentary. So I think on the On the first part of your question, George, on the sales cycle, we are cautiously optimistic. Our sales representatives are busy. The quality of the finalist meetings that we're holding are high. Deals that did disappear last year are coming back to the market. Our relationships with partners are developing. But, you know, one of the, you know, you've covered us long enough to know, we don't really know how the sales cycle is going to turn out until January of 2022. And so all the inputs and all the top of the funnel stuff and all the activity levels are where we want to be and we feel really well positioned relative to the marketplace in those conversations. Before I turn it over to Steve and John, I'll just take a quick shot at the The second part of your question, which is the further and fifth-third client bases, we're analytical types. We did a fair amount of market research in preparation for these acquisitions, especially the larger one, Further. And Further has a tremendous reputation in the marketplace. Their clients like working with them. Their distribution partners like working with them, which is one of the things that attracted us so much to the asset. And so we have high hopes for client and partner retention on both sides of the coin. I personally, as did John, sat in on, you know, significant portion of both client and distribution partner calls, and we were really pleased with what we've heard. And so, you know, we think we have – you know, in the further team, a great team that's delivered great high quality service to their clients for a long time. And, and so we're pretty bullish about the retention prospects, you know, but obviously a lot of work to be done and wood to chop. So I'll turn it over now to John and Steve to add some color.
spk05: Steve.
spk13: Yeah. Hey, George. Good to hear your voice. You know, I would just kind of tag team off of what Ted said. I think what we've noticed this year is just the tone is different in these meetings, right? You've, rather than people with their hair on fire trying to figure out how to get people out of, you know, out of the office and all of that and just really a lot of distraction, there just is a lot better focus and people are making choices. And, you know, we want to win them all, but like sometimes sales leaders will say it's better almost to get a, you know, no, we're going in a different direction than we're putting this on hold for another year because, you kind of reset the clock and we're pretty confident that when people, even if they don't choose health equity, they're going to choose us at some point. And I think we've just seen a lot more of this positive intent to make choices, move ahead, you know, continue to offer health savings accounts and other CDBs to their membership base. And so we just feel that as kind of the proverbial tailwind, whereas last year it was a headwind. People were just distracted and we had a lot of no decisions last year and a lot of finalist meetings that you could tell that we weren't the top of their, their, their mind when we were meeting with them. So we're encouraged and you know, I love being on all of these calls and meetings that I'm asked to do with our teams.
spk07: The only thing I'd add to all that is, is in terms of, I think those questions affect those answers effectively address the question around market share growth. If I then, sort of just talk about market growth, one of the items that Ted talked about in his prepared remarks is that the growth is the growth that we have seen in lead flow around the SMB and midsize markets. And that is to a significant, and it's several fold what it was last year. And that's in part due to the efforts that the team has made to sort of build the muscle around direct selling as well as the muscle around marketing and lead generation on the B2B side into small and mid-sized now that we have a product to sell. So that's true, but it also perhaps reflects some genuine growth in that area of the market, which we really want to see for the market as a whole to outperform this year. Again, consistent with the earlier comments, I think, George, the answer is that it's only one quarter, but it's a quarter that both in terms of the actual accounts turned in relative to what other competitors reported, as well as the sort of pipeline-y data is quite promising.
spk11: Very helpful, John. Thank you.
spk07: Thank you, sir.
spk01: Our next question is from David Larson with BTIG. Your question, please.
spk12: Hi. Congratulations on a good quarter and a good start to the year here. Can you maybe talk a little bit more about your expectations for custodial revenue? It seems to me like the yield environment is coming in right in line with where you thought it would. Just any thoughts around where that might trend going forward? There's been talk about you know, rising inflation, the potential for the Fed to raise interest rates. Just any more color on that would be very helpful. Thanks so much.
spk07: Sure. Let me say in the short term, it is important to note that our guide for the year is 175 on custodial yields and remains 175. And that is despite turning in 179 with respect to cash with yield in Q1. And As I believe it was Tyson, maybe it was Darcy commented last quarter, we did expect that that yield will come down a bit over the course of the year as we have multi-year agreements that will roll over as sort of part of our ladder. So, you know, the yield headwind broadly is still with us. That having been said, I do think there are a number of things both that we're doing and that are happening out in the marketplace that or in the economic environment that are promising. Clearly, the fact that it's not – I think we all tend to look at maybe the last 10 days or whatever our feeling is, but we've now gone through both our full fiscal first quarter and the period since where medium and longer-term yields are sustaining at substantially higher levels, 50, 60 basis points higher than they were – let's say six months ago. And additionally, you know, while bank deposits pricing will always lag all of that and should, nonetheless, over the long term, those things tend to fall in the same pattern. And so that's encouraging. And then internally, as I offered in the comments, and Tyson kind of mentioned this as well, we're taking some steps to assure that The assets that we manage that are guaranteed are competed for vigorously, and even more so than in the past. This has always been a strength of the company. It's always been something that we try to do well both for ourselves and for our members and clients. It helps us keep fees competitive and all that kind of stuff. And we're going to do more of that. And so that's another thing that, you know, as that kind of, headwind turns into a toe wind that, you know, our goal is to build the biggest possible sale to catch it. And I don't think that will have an effect this year. If anything, again, over the course of the remainder of this year, our expectation is that the guidance implies is that yields will still be coming down. But I think, you know, over the long term of the business, this seems like a pretty good thing. And I should say, lastly, that that you know, having kind of weathered this period of ultra low yields or weathering, I shouldn't say weathered, weathering this period of ultra low yields and, you know, kind of borrowing from Steve's experience in the airline business and using that period to really right-size the business and make the cost decisions we need to make and be efficient and also, you know, continuing to build the platform and so forth, right, that all pays even bigger dividends when you see those yields come back. So we're looking forward to the point where we can, while it isn't here yet, we're looking forward to the point where we can all seem like we're real smart then, but it'll be because of the actions we've taken now.
spk12: Great. Thanks so much. It seems like this might be sort of a floor for yields. Would you generally agree with that in fiscal terms? Fiscal 23 should probably have higher yields. Would you agree with that, generally speaking?
spk07: What we've said elsewhere is, and I say we're definitely not in the business of giving fiscal 23 guidance on anything at this point. What we've said on that point is that, at least in terms of cash, that we are still placing contracts at less than they are rolling over to. Right. So the implication is that and fiscal 23 would be the third year of that activity. And so the implication is that that we're you know, that I don't think I'm in a position to say, oh, you know, I'm not calling a Kessler bottom on this. But but and probably that's all I should say, because I don't I don't feel like we should be. out there. We'll provide 23 guidance as soon as we can, but that's about it. Tyson, anything to add on that point? No, you got it.
spk12: Thanks very much. Congrats on a good quarter. Thank you.
spk01: Our next question comes from Donald Hooker with KeyBank. Your question, please.
spk15: Great. Good afternoon. I was curious. I'd love to hear, John, your thoughts I would do one thing that stuck out to me on the further acquisition was sort of the ability to private label. And I was trying to make heads or tails of that. Is that, is that something that's significant? Can you talk about like why, why one would want a private label? I think had you tried that in the past and it wasn't, um, is there something unique about what further is doing that, that makes that a little bit more interesting now?
spk07: Yeah. Thank you for asking about this, Don. Um, I think what you see is it's interesting, and having been around our market for a very, very long time, our goal is to meet our partners where they are with regard to how we distribute, when we're distributing to our partners. And, you know, there are – there's – you know, there are times when partners are very interested in, you know, kind of embedding the product more deeply, and then there are times when they're more interested in conveying independence. And, you know, those things kind of come and go for each partner. At HealthEquity, we have primarily not been a shop that, and we're using private label, but let's understand it's a little more broad than that. It's really about the depth at which we can embed the product into the services of our partners, right? You know, we have that that has not been our thing, you got to choose what you're going to do, you know, and so forth. And, and there are certain elements that will probably never be our thing. We don't, we don't sell software, we sell a service that software enables that kind of thing. But, but what Herder has done, and what through the, the magic of API's we will be doing together is I shouldn't say the magic of APIs. It's not magic, but it's sometimes, you know, it's like ball bearings. It's all APIs. And I think that what it really gives us the opportunity to do as we migrate is to meet partners where they are. And sometimes partners want to do more, you know, kind of embedding of the product, label or otherwise, and sometimes less. And I just think that's a great opportunity. The primary place that this has been utilized is in the health plan segment. where you've seen some clients make round trips on this or partners make round trips on this topic. But I think there's opportunity across what we do where we can leverage the best of what we do as well as doing more than one plus one makes two with our partners. And so I guess I see this as useful from a technology perspective, useful certainly competitively to the extent that it's something we couldn't offer. There are absolutely – partners that we would love to have partnered with us, but we just haven't had this capability and we want to be wherever an HSA is. So that's kind of the idea is, and, you know, sometimes being wherever an HSA is means, you know, we brought on, you know, real depth on the CDB side so we could deal with clients who want to buy a total solution, you know, and then sometimes it means partnering in different ways. And then sometimes as here, it means being able to offer whatever level of solution our partners want at the point that they want it to help drive our strategy, but also their strategy. Go ahead, Steve.
spk13: I was just going to make one comment. Just real quick, it's interesting. Even among health plans, some segments, they want to have it more completely branded for the health plan, whereas, for example, large employers tend to say they don't really want the – they may have multiple health plans, so it doesn't make sense to have a health plans brand on the HSA or the CDB solution. Whereas when you get into smaller businesses and individuals, maybe it makes more sense. So to John's point, this just creates optimal flexibility as we partner with these health plans. So John said it well.
spk15: It's intriguing. And then maybe real quick, can you give us a quick update on your perspective on the employment picture at your employers? I think last year we were worried about unemployment. It seems like things are raging back. Is there a tailwind here for you guys? What's in your guidance?
spk07: Yeah, I think, I mean, our guidance simply reflects the broad macro consensus. I mean, what I would say is that, you know, just now this is just me putting on my very ill-fitting macro economist hat. I think, you know, the unemployment rate is declining faster than the employment market is healing. And the source of that is twofold. One is you have workers that are never going to reenter the workforce. And that seems pretty clear from the data. Or they will reenter very slowly whenever it is that they absolutely have to or they try something else or whatever. But there's probably, you know, 3 million workers that will never or at least there's a good chance they will never return to the workforce. And that's why the unemployment rate is declining faster than jobs are growing. And then secondly, there has been some real dislocation in certain industries that's real and it's going to take some time to heal. So I guess my point would be we are absolutely following the macro consensus, and this item absolutely is one factor that should help the underlying market heal. And if we can take the kind of share this year that we took last year, with a healed market, that would be absolutely fantastic. But it's also worth noting, I think, just that the headline doesn't tell the full story. We are still not back at the level of jobs that we had pre-pandemic, and we're still probably five, six million short of that. So there's still some wood to chop, and gains are going to be harder to get from here.
spk15: Thank you for your perspective. Thanks, Don.
spk01: Our next question comes from Stephanie Davies with SVV Learing.
spk10: Hey, guys. Congrats on the quarter and the transactions, and count me in on team shorts as well. It is very warm over here. Could you walk me through the change year guidance and how should we think about looms impact to it and how much of that was offset by yields versus service revenues as you guys remain conservative on commuter sales? versus maybe something else, some other bucket of conservatism. Tyson?
spk09: Or Ty? Yeah. Yeah. Thanks, Stephanie. How are you?
spk00: Hey.
spk09: You got me. No, thanks for the question. When I think about the raise on guidance, I really think about, you know, we had a reasonable quarter coming out of Q1. That was good. It was still a pandemic quarter, obviously, so you still have the issues with commuter. You still, you know, you have spend coming back, and so that's a positive thing. You've got FSA accounts rolling off based on some of the timing of the legislation pushing those out, so some of that spend goes away. And then you've got the COBRA efforts in there. So it's really a balance among all those different items to really push that guidance up a little bit. And so we thought that's exactly where right now we think that we're going to be. And there's a lot to be learned over the course of the remainder of the year about how the business returns from that. So those are some of the things that I'm taking into account as I think about it. And I don't know, John, Ted, if you guys have anything to add.
spk10: All right, then thinking about those pockets of upside that you could have, I was hoping you could delve a little bit more into the COBRA business and any kind of early inclinations you're seeing on the recent policy change around reimbursement.
spk09: Yeah, you know, there we're particularly busy. And so we did actually, I mean, the team, as Ted outlined, made significant efforts to get in front of our clients' customers to help them be within the regulations and start to get all the commitments for the notification efforts that needed to occur and get those out. And certainly we will generate revenue during Q2, namely getting those out. And then you'll see the after effect of that and potentially the people who actually uptake COBRA. But there has been a significant effort in that. You see the cost. You see the revenue that will come in in Q2. I'm not necessarily going to give amounts. We had some of that, you know, in the initial guidance and some of that now in the uptick of guidance here as well.
spk10: Understood. Thank you both.
spk05: Thanks, Stephanie.
spk01: Thank you. Our next question comes from Sean Dodge with RBC Capital Markets.
spk05: Thanks. Hi. Good afternoon. Maybe going back to the acquisition, the fifth-third HSA, so 149,000 accounts holding $477 million of assets. Are there any other details you can share with us to help us understand the potential incremental revenue that will add? Are there monthly account fees similar to health equity? How much is invested versus cash? Any difference in the yields those assets are earning?
spk07: Yeah, I mean, a couple things. I mean, first of all, let me say we'll – either at close or next quarter or whatever, at some point shortly thereafter, we will reflect this in our guidance and then you'll have it. And we would sort of encourage you to do the same. But all that having been said, I think typically when we acquire portfolios, the per account fees are lower than sort of health equity average per account fees for an HSA. because that's something that they will have relied on more readily, and also because, in this case certainly, because the average balance is higher. I mean, if you do the math, the average balance in these accounts is well over $3,000. So that's probably one factor. I mean, we'll obviously place the assets, and so we'll place them at then current prevailing yields. and we'll see how that goes when it's time to do it. And then the spend, you know, the interchange side is pretty typical for our account. So, you know, that's a little bit of information. I guess fundamentally I would say, Sean, that we'll try and reflect this in our guidance as soon as it closes. The challenge of doing so in advance sort of boils down to we don't know the close date.
spk05: Got it. Okay, and then maybe just quickly on COBRA, Tyson, you said there was a little bit of activity, revenue related to some of the notifications in the second quarter. If we think about the improving employment picture, the employment recovery, does that impact your view on how many end up actually being in a position where they would need or opt to take COVID, or not COVID, COBRA in the latter half of the year? We don't think too many people are going to opt to take COVID.
spk07: I think it was suggested very early days, but not by us. Or not by all of us. I mean, I'll take a shot at this. I mean, look, I think this is kind of one of the unknowns that has led us, you know, that's factored into our guidance for the remainder of the year. And it's an interesting year with more than the usual number of moving pieces. And so, you know, the real answer is we don't know. And when we don't know, we try to forecast what we can see. And that's what we've tried to do both in terms of costs and revenues. And, you know, someone could mount exactly that argument and say, well, wait a minute, if everyone has jobs, then they're, you know. And there's some truth to that. So... Look, one way or the other, this thing is not going to be the be-all, end-all of human existence in one direction or the other. The best thing about it is that some people who need to get taken care of will get taken care of. And hopefully we have shown our clients that we'll work our butts off to do that, whether the revenue impact or profitability is material or not.
spk05: Got it. Okay. That's very helpful. Thanks. Thanks, John.
spk01: Thank you. Our next question comes from Mark Marcon with Baird.
spk02: Hey, good afternoon and congrats on the quarter. Wondering if you can talk a little bit about, you know, with the increased number of deposit partners that you've talked to, how should we think about the typical premium that you're going to get as it relates to the effective yield? relative to, say, three- to five-year jumbo CDs. How's that looking now?
spk07: Yeah, I mean, it's a little bit hard to know, Mark, because there's not much placement occurring right now. We're in a season where there's a lot of talking, and the rubber meets the road a little later in the year. But what I guess I will say is that the trick to obtaining a premium period is having – you know, is one, having competition for your money, and two, having a track record of delivering, because at the end of the day, you know, none of these agreements are real until the money moves. And so, you know, those are things that help us. There are a lot of discussions going on with different parties, and unfortunately, I think this is one of those where, and again, obviously, most of the impact would be, or all the impact would be in future years, since since most of our placements will occur late in the year. But nonetheless, it's something we work pretty hard at every year, and certainly having more places to put that money makes us somewhat more optimistic that we can catch as much of the benefit of having it as there is. Okay.
spk02: I mean, just to... I mean, just to follow up on that, I mean, it does seem, you did say that current placements are, you know, coming in at an effective yield that's less than what's rolling off. Are you getting the sense, though, that that bottom end is starting to move up? So as we think about, not necessarily for the whole year for next year, but just in terms of sequentially, that by the end of this year, we're probably getting we're going to be getting closer to the bottom in terms of the effective yield. I mean, the gap is clearly narrowed in both directions, right?
spk07: So I think you're trying to ask, has there been a narrowing on the other side, that is the demand side? And the answer is yes. Okay, great.
spk02: And then interchange really picked up nicely. Can you talk a little bit about this, the sequential monthly acceleration that you're seeing there? Because that looks, I mean, that's where things were really strong. relative to expectations. So can you talk a little bit about that, just the pace of the rebound there?
spk09: Yeah, that was a real bright spot. As we closed every single month, we would see that things were largely normalized, if not even a little better in some cases, relative to the different places where people spend, and particularly in the area of people going and getting medical procedures, which was the one that was sort of lagged and the one that has you know, the most amount of spend to be tracked. Yep, we saw that and it was very consistent. We walked through the quarter and so that was nice to see that. Nice to see it was better than what we even expected. Of course, the commuter interchange is clearly, you know, still not there. Yep.
spk07: Great. I would just add, Mark, here, just for others, I know you know this very well because we've talked about it many times, but but that interchange still has a seasonal component to it. And so, for example, you know, we will, you know, in the first quarter we benefit from the fact that we have accounts that are ending, in this case they're from two years ago, but nonetheless are ending their grace period, right, where, you know, and all that kind of thing that we will not have in future quarters. And that will be reflected in both total accounts as well as interchange. So, So, you know, and of course people have topped off their accounts at the beginning of the year and all that. So we were certainly pleased to see it. And I think relative to our, you know, kind of pre-pandemic levels, we kind of feel like healthcare spend is kind of back to where it was. But that's still, there's still going to be some seasonality in Q2 and in particular in Q3 that, you know, folks should be thinking about as they model the full year.
spk02: Great. Look forward to talking again tomorrow. Thanks, Mark. Thanks, Mark.
spk01: Thank you. Our next question comes from Sandy Draper with Tourist Securities.
spk06: Thanks so much, John, since you're bringing up the 80s. It sounds like there may be a Fetzer valve that's stuck in the commuter benefits.
spk00: Okay.
spk06: So a lot of my questions have been asked, but maybe just following up on that, the comment about the stronger spend, it didn't notice for the first time in a while we actually saw the cash per account was down sequentially, been building. Is that just because we're starting to see some spend? And just would love these thoughts on how you see, you know, that interchange of if the interchange revenue is going up, should we, make sure we're taking the offset of that and some of that money is going to be coming out of the cash balances. Yeah, it's a really important point, Sandy.
spk07: Thank you for making it. Look, we're thrilled with the aggregate balance growth, just thrilled, and thrilled that that is a function of not just market growth, primarily market growth, but also of growth, meaning net asset value growth. but also of people continuing to put more into the accounts than they're taking out. And, you know, a case could certainly have been made that we would see in this quarter, you know, balanced declines as people sort of began to spend again. We didn't see that. So I think what's the biggest thing that's happening is just the continued move towards investing. And as we've talked about many, many, many, many, many times, while that has a tradeoff in terms of individual dollars, as we saw in this quarter, it also has the effect of people tending to put more money in and stick around, and that money grows faster and so forth in the aggregate. So that's good for the business. And I kind of relate it a little bit to predictions about the long term of the business for the sector as a whole to achieve its full potential more people have to be looking at these as long-term accounts. And that's going to mean the investment balances grow quicker than the cash balances. And, and so, so seeing that at this level in this quarter, even in a quarter where we still had, you know, substantial increase in spend on a, on a, on a sequential basis seems pretty good. Got it. But it is something, but it is, as you say, it is something that, that, You know, we all have to factor in, and certainly we have tried to factor into our thinking about guidance for the full year.
spk06: Okay, great. Well, I actually don't have a follow-up, so I'll try to keep the call to an hour. I know you're wearing shorts. I'm sure Sandy's wearing shorts.
spk07: Yes, I'm wearing shorts. Marcon is our only maybe non-shorts guy. And maybe, maybe, I mean, maybe Peter's. Peter's might not be wearing shorts, even though he said he was wearing shorts.
spk00: Okay.
spk01: We have a last question in queue. Gentlemen, Alan Lutz with Bank of America. Your question, please. Mr. Lutz.
spk04: Hey, thanks for taking the questions. Going back to the service revenue, I guess we know that the commuter segment is causing a big impact there, but Historically, you look at fiscal 2019, fiscal 2020, sequentially in fiscal 2020, that was down slightly. So can you just remind us, as we think about, you know, the service line item heading into the second quarter, what are the puts and takes in addition to commuter there? Tyson, you want to hit that one? Yep.
spk09: I do think it goes back to just thinking about how we underwrite deals and thinking about amount of assets, right? The fees associated to it and then the bundling aspect of it as well. And so there, you know, when you think about HSAs and how we price those relative to account balances and a good example is the one that John just pointed out, which was the, which was the fifth third deal and the amount of those accounts that were, that were bringing over. And there's a lot of revenue to be generated off those accounts that increases the size of the sale. And so that moves that revenue down into that custodial line item. But if you really think about the whole, the whole aspect of our, of our custodial and service revenue line items, it's almost starting to feel when I think about the deals I'm signing off on as a, as a blend of it, because I'm thinking to that particular customer that, And that's even more so true when you think about bundling sales together and finding opportunities to have more profit there, essentially being able to give better pricing on certain things in the service fee area to increase the amount of margin that we're able to take off of those. So I think you'll continue to see that a little bit. And to the extent that, like John said, over the long term, we can get rates to rebound, that creates a huge opportunity for us. And I think it's not going to be anything that's going to be an extreme amount of a decrease relative to that service revenue line item. We certainly manage it every single day. I'm signing each one of those deals. We're thinking about how we negotiate them and so on and so forth.
spk04: Got it. Thank you.
spk01: Thank you. And this concludes Q&A. I would like to turn the call back to John Kessler for his final thoughts.
spk07: Well, you've gotten as much thought out of me as you're going to get. Thanks, everyone. Look forward to seeing some of you, or at least on video shortly, and maybe soon in person. Who knows? Thanks, all.
spk01: Thank you for participating in today's program. This concludes the conference, and you may now disconnect. Have a great day.
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