HealthEquity, Inc.

quarter fiscal year 2023 earnings conference call. My name is Richard Putnam, and I do investor relations here for HealthEquity. Joining me today, we have John Kessler, who's our president and CEO, Dr. Steve Nieleman, who's our vice chair and founder of the company, and Tyson Murdock, the company's executive vice president and CFO. Before I turn the call over to John, I have two important reminders. First, A press release announcing our financial results for the second quarter of fiscal year 2023 was issued after the market closed this afternoon. The financial results in the press release include contributions from our wholly owned subsidiary WageWorks and the accounts it administers. The press release also includes definitions of certain non-GAAP financial measures that we will reference here today. A copy of today's press release including The reconciliation of those non-GAAP measures with comparable GAAP measures and a recording of this webcast can be found on our investor relations websites, which is ir.healthequity.com. Second, our comments and responses to your questions today reflect management's view as of today, September 6, 2022. 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 statements made here today. We caution you against placing undue reliance on these forward-looking statements, and we also encourage you to review the discussion of these factors as well as other risk factors that may affect our future results or the market price of our stock, and they are 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. And at the conclusion of our prepared remarks, we will open up the call for Q&A with the help of our operator. So let's get started by turning this over to our CEO, John Kessler.

Thank you, Richard, and thanks, everyone, for joining us this afternoon. Today we are announcing solid results for health equity's fiscal 2023 second quarter on the back of strong performance in our core HSA business, and we're also raising our full-year outlook. I will discuss Q2 operating results, and Tyson will review the financial results in detail and provide updated guidance. And then Steve is here for Q&A. Let's start with the five key metrics that drive our business. As always, revenue of $206.1 million grew 9% versus the second quarter last year, driven by strong organic and acquisitive growth in HSA members and assets, and that was notwithstanding non-recurring regulatory drivers of CDB service fees in the year-ago period. Excluding these non-recurring factors, revenue grew 15% year over year. Adjusted EBITDA of $67.0 million grew 2% versus the second quarter of last year, weighed down by the absence of those regulatory drivers and the timing of synergies from the further acquisition. Total accounts grew to $14.5 million, up 11% compared to Q2 last year. HSA members reached $7.5 million, up 26% year over year. And HealthEquity's HSA members grew their assets to a record $20.5 billion at quarter's end, which is up an even larger 33% from a year ago. Team Purple continued its strong FY23 sales effort, adding 196,000 HSAs, which is 9% more than we added in the second quarter of last year. Organic account growth of 12% over the past year is, we believe, well ahead of the market. Looking forward to year end, we are particularly excited about pipeline growth from network partners, conversion of enterprise cross-sell opportunities, and enterprise uptake of MaxEnroll, which is our package of virtual education and live support for clients' employees considering stepping up to an HSA-qualified health plan and an HSA during this open enrollment season. Despite volatile market conditions, HSA invested assets grew $111 million in a quarter, HSA investing members grew 28%, and the average balance of our HSA members overall grew 5% year over year. Custodial revenue growth was very strong. On top of the small favorable impact of in-quarter increases in the overnight Fed funds rate, robust adoption by HSA members of health equities enhanced rates offering in Q2 puts us on track to meet or exceed our target of having 20% of HSA cash in enhanced rates by the end of the fiscal year. Both macro conditions and the team's efforts are, we believe, creating the opportunity for years of custodial growth to come. Robust card fee growth suggests that inflationary pressures in the broader economy have not put a dent in consumption of medical and other covered services by consumers to date. As you may recall, card fees in the year-ago period were high due to the timing of pandemic extended runoffs, particularly FSAs and HRAs. We're, of course, carefully monitoring for signs of inflation or a COVID resurgence crimping member spend beyond the usual seasonality that we see in Q3. Today's results and the guidance Tyson will detail in a moment would be even stronger, but for softness in CDB administration services. As you know, health equity offers CDB services to increase core HSA opportunities, and indeed, cross-selling and bundled selling have helped drive record HSA sales, as I discussed a moment ago. However, service fees from CDBs themselves declined through the first half of fiscal 23 versus the same period in fiscal 22, primarily due to one-time COBRA subsidy-driven income in the year-ago period and greater-than-expected CDB fee attrition from the now-completed WageWorks platform migrations. Service costs declined sequentially in Q2 as promised, and we believe there is more opportunity in efficiencies as well as commuters' slow but steady recovery. As pandemic and WageWorks integration impacts finally recede, we believe that CDBs can bring net unit growth and a larger contribution of growth profits alongside the great things that are happening in the HSA core. With that, I will turn it over to Tyson to review the financial details and give us some guidance.

Thank you, John. I'll review our second quarter GAAP and non-GAAP financial results, a reconciliation of GAAP measures to non-GAAP measures as found in today's press release. Second quarter revenue increased 9% year-over-year with lower service revenue more than offset by robust custodial and interchange growth. Service revenue was $103 million down $6.1 million or 6% year-over-year. Last year's second quarter included approximately $10 million of non-recurring revenue attributed to the COBRA subsidy. Excluding the non-recurring subsidy impact, Q2 service revenue grew approximately 4%, primarily from strong HSA growth and an uptick in commuters returning to work, offsetting about $5 million of FSA and COBRA revenue attrition that John mentioned. Custodial revenue grew 34% to $65.6 million in the second quarter, benefiting from 30% growth in average HSA cash and 37% growth in average HSA investments, combined with an uptick in the annualized yield on HSA cash. The annualized interest rate yield on HSA cash was 180 basis points during the second quarter of this year and 175 basis points year-to-date compared to 177 and 178 respectively for last year. This yield is a blended rate for all HSA cash during the quarter and represents a better than expected yield due to rate hikes in June and July impacting the variable rate portion of our HSA cash combined with higher enhanced rate balances in the quarter. Interchange revenue grew 20% to $37.5 million compared to $31.1 million in the same quarter last year. As John mentioned, interchange revenue in the year-ago period benefited from accelerated spend as FSA rollover extensions expired Year-over-year growth in Q2 benefited from growth in average total accounts with cards and increased spend per account. Gross profit was $117.8 million compared to $112 million in the second quarter of last year. Gross margin was 57% in the second quarter of this year versus 59% in the year-ago period. And service cost decreased fixedly and sequentially as we executed on our commitment to address our overstaffing and member services as we discussed with you approximately 90 days ago. However, we have work to do to bring our expectations of service costs in line with revenue in future periods. This includes realizing additional efficiency from the integration work and managing the impact of inflation on service costs. In addition, we are committed to delivering the 15 million of synergies connected to the further integration, the bulk of which is associated with the exit of the transition services agreement and the consolidation of the platform expected to be realized in fiscal 24 and 25. Operating expenses were 120.2 million or 58% of revenue, including amortization of acquired intangible assets and merger integration expenses, which together represented 15% of revenue. Loss from operations was 2.4 million. Net loss for the second quarter was 10.7 million or a loss of 13 cents per share on a GAAP EPS basis compared to a net loss of 3.8 million or 5 cents per share in the prior year. Our non-GAAP net income was $28.1 million for the second quarter this year compared to $33.4 million a year ago. Non-GAAP net income per share was $0.33 per share compared to $0.40 per share last year. Adjusted EBITDA for the quarter was $67 million and adjusted EBITDA margin was 33%. For the first six months of fiscal 23, revenue was $411.8 million, up 10% compared to the first six months of last year. Gap net loss was $24.3 million, or $0.29 per diluted share. Non-gap net income was $50.8 million, or $0.60 per diluted share. And adjusted EBITDA was $125.4 million, up 1% from the prior year, resulting in 30% adjusted EBITDA margin for the first half of this fiscal year. Turning to the balance sheet, as of July 31st, 2022, we had $177 million of cash and cash equivalents with $928 million of debt outstanding net of issuance costs. This includes $346 million of variable rate debt. There are no outstanding amounts drawn on our $1 billion line of credit. We are providing the following revision to our guidance for fiscal 23. We are increasing our revenue estimates for fiscal 23 to range between $834 and $844 million. We are maintaining non-GAAP net income to be between $103 and $111 million, reflecting increased interest expense, offsetting the benefit of higher operating income. This results in non-GAAP diluted net income between $1.23 and $1.32 per share, based upon an estimated 84 million shares outstanding for the year. we are raising our adjusted EBITDA estimate to be between $252 and $262 million. Today's guidance includes our most recent estimate of service, custodial, and interchange revenue and expense based on results today. On service revenue, today's guidance reflects the continued solid performance of core HSA offsetting the full year impact of the roughly $5 million per quarter of CDB service the attrition observed in the first half. We remain cautious on increased commuter uptake Based on the strong sales outlook John discussed and continuing labor market tightness, today's guidance assumes incremental service costs during peak season comparable to those experienced in prior years. On custodial revenue, today's guidance assumes a full year yield on HSA cash of at least 180 basis points, pointing to a stronger second half based upon current conditions. As in the past, our guidance does not assume further increases in the overnight funds rate or other changes in macroeconomic policy for the remainder of the fiscal year. Additional rate hikes would have only a modest impact this year, but would have a much greater impact on fiscal 24 and beyond as we roll over fixed rate contracts and place new HSA cash from growth at the end of the fiscal year. In the same vein, today's guidance reflects additional interest expense on health equities variable rate debt for the second half of fiscal 2023 based on current conditions but not further rate hikes. On interchange, we want to remind you that Q3 has historically been our weakest interchange revenue quarter. We expect the normal sequential decline in spending Q3 with a rebound in Q4 due to use or lose spending and January growth. Finally, we assume a projected statutory income tax rate of approximately 25% and a diluted share count of $84 million in our calculation of non-GAAP net income and earnings per share. As we've 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 intangibles 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.