HealthEquity, Inc.

Good day, and welcome to the Health Equity First Quarter 2027 Earnings Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note this event is being recorded. I would now like to turn the conference over to Mr. Richard Putnam. Please go ahead, sir.

Thank you, Jack. Hello, everyone. Thank you for joining us this afternoon, HealthEquity's first quarter fiscal 2027 earnings conference call. My name is Richard Putnam. I do investor relations for HealthEquity, and joining me today are Scott Cutler, President and CEO, Dr. Steve Neileman, Vice Chair and Founder of the company, and James Lucania, Executive Vice President and CFO. A press release announcing our first quarter financial results was issued after the market closed this afternoon. and includes certain non-GAAP financial measures that we will reference. You can find a copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures, on our investor relations website, ir.healthequity.com. Our comments and responses to your questions reflect management's view as of today, May 28, 2026. and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates, and other information that might be considered forward-looking. There are many important factors relating to our business which could affect our results. These forward-looking statements are subject to risk and uncertainties that may cause our actual results to differ materially from statements made here today. We caution against placing undue reliance on these forward-looking statements, and we encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock as detailed in our latest annual report on Form 10-K and 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. Let's go over to Scott.

Thank you, Richard, and welcome, everyone. Our first quarter results demonstrate disciplined execution against our mission and the strength of HealthEquity's financial model. We delivered higher profitability, expanded adjusted EBITDA margin to 46%, and are raising our fiscal 2027 guidance. The execution of our strategy alongside accelerating growth is reinforcing confidence in the long-term growth outlook for the business. That confidence is reflected in our raised fiscal 2027 guidance and disciplined capital allocation, including our decision to increase our share repurchase authorization by $1 billion. Healthcare affordability remains among the biggest financial challenges families face, while rising healthcare costs are driving a structural shift among employers that continues to expand the overall market. Against that backdrop, this quarter's results reflect our ability to empower healthcare consumers while driving operational leverage and durable growth across the business. HealthEquity is not simply an administrator. We operate a scaled healthcare financial platform that connects accounts, assets, payments, investing, marketplace, digital engagement, investment advisory capabilities, and service. Our strategy is to make that platform the healthcare financial operating system for members and clients. expanding the value of each relationship while improving efficiency as we scale. In the quarter, we outpaced industry account growth, grew assets, deepened engagement, and applied technology and AI to improve service speed, strengthen security, and lower costs to serve. At a high level, our growth is driven by two forces working together, growth in accounts and assets, and expansion in lifetime value of each member relationships. Together, these support durable compounding as accounts mature. Let me start with account growth. The structural challenge of healthcare affordability continues to support demand for HSAs and healthcare financial solutions. As more costs shift to consumers, employers and members need better ways to prepare for, manage, and pay for healthcare. We believe this dynamic supports long-term category growth. The HSA remains the entry point to a long-duration financial relationship. In the first quarter, total HSA assets grew 19%. New HSAs from sales grew 15%, introducing 172,000 new HSAs to our platform. Importantly, we bent the growth curve with total HSA growth of 8%, outperforming Devonier's reported market growth of 6% for calendar year 2025. We are encouraged by the early momentum in our selling season. client retention remains strong, and we continue to see opportunities to win new clients and expand existing relationships. Our data and analytics capabilities are an important differentiator as clients look for ways to improve adoption, increase contributions, and manage healthcare costs over the long term. While account growth remains an important entry point, it is only one driver of our business. That brings me to engagement. Members are engaging more deeply as they save, spend, and invest. That engagement expands the value of each relationship over time. Marketplace is an emerging driver of engagement. Marketplace is helping more than 10,000 members access health-related programs and products. This month, we expanded into diagnostics and men's health. We expect Marketplace to become an increasingly meaningful contributor to the lifetime value of each member. On investing, HSA investors grew 18%. and invested assets held by our HSA members grew 38%. With only about 10% of HSAs using the full tax benefits of investing industry-wide, this represents a substantial long-term opportunity. As a reminder, investors tend to hold larger balances, exhibit higher engagement, have higher average contributions, and spending over time. Over the past year, we've significantly expanded digital engagement. with mobile monthly active usage increasing by 90% year over year, and in the quarter, over two-thirds of marketplace transactions occur through our mobile app, underscoring our long-term strategy to deliver an engaging, secure, and trusted digital experience that meets members where they are. Together, account growth, asset growth, engagement, marketplace, and investing support a flywheel that expands value per member and strengthens the durability of our revenue engine. The third part of this story is efficiency. We're applying technology and AI to improve the member experience, strengthen security, and lower cost to serve. We view AI as an operational amplifier. In the quarter, AI-driven tools reduced manual handling of member and client service emails by 25%, improving response times and lowering workload. In certain targeted workflows, such as card servicing and claims inquiries, AI-enabled automation reduced manual efforts by more than 90% and accelerated processing times by up to 50%. AI-enabled self-service and automation contributed to more than 50,000 fewer card-related service center contacts. Fraud remained below target, card acceptance improved, and fraud costs declined nearly 90% compared with the first quarter of last year. For members, that means fewer calls and faster access. For clients, less administrative complexity. For health equity, a more scalable operating model. As we scale, revenue driven by assets and transaction activity enhances durability and visibility. As accounts mature, they become more economically meaningful, reducing reliance on new account volumes in any single year. Taken together, these dynamics reflect our evolution beyond administration to a healthcare financial operating system that helps members and clients address healthcare affordability while expanding value per member and improving efficiency over time. With that, I'll turn it over to Jim to walk through our first quarter financial results, the drivers of our margin expansion, and our raised fiscal 2027 outlook.

Thanks, Scott. Hi, everyone. I'll review our first quarter 2027 fiscal year gap and non-gap financial results. Reconciliations of GAAP to non-GAAP measures are included in today's press release. First quarter revenue increased 7% year-over-year. Service revenue was a record $122.9 million, up 3% year-over-year, supported in part by marketplace activity. Custodial revenue grew 11% to a record $174.3 million. Annualized yield on HSA cash was 3.84%. reflecting higher replacement rates, increased participation and enhanced rates, and a one-time breakage fee from a depository partner that exited a custodial cash contract early. Excluding this one-time revenue, our annualized yield on HSA cash would have been 3.78%. Interchange revenue grew 5% to $57.4 million, reflecting higher member spend and transaction activity. Gross profit was a record $256.3 million, or 72% of revenue, compared to 68% in the first quarter last year. Service costs included approximately $0.3 million of fraud reimbursements to members, down from approximately $3.2 million in the first quarter last year, reflecting improved fraud prevention and detection capabilities and higher adoption of our secure mobile tools. Net income was $69.4 million or $0.82 per diluted share on a GAAP basis. Non-GAAP net income was $105.1 million or $1.24 per diluted share. Adjusted EBITDA was $164.5 million, up 17% year-over-year. Adjusted EBITDA was 46% of revenue compared to 42% in the first quarter last year. Turning to the balance sheet, we ended the quarter with $265 million in cash, generated $98 million of operating cash flow, and had approximately $943 million of debt outstanding net of issuance costs. During the quarter, we accelerated our share purchase program, buying approximately $123 million of our outstanding shares. This week, the Board increased our share purchase authorization by $1 billion. We expect to remain an active buyer of our shares while the market continues to, in our opinion, undervalue our consistent revenue growth and margin expansion. Before discussing our raise guidance, I want to briefly address the HSA cash maturity schedule included in today's earnings release. We have $3.2 billion of remaining HSA cash contracts maturing in fiscal 2027, weighted toward the back half of the year. We also have four treasury contracts outstanding that effectively lock in five-year treasury rates at approximately 3.9% net of cost. on $3.5 billion of maturities across fiscal years 2027 through 2029. With current five-year treasury yields higher than our average locked forward rates, we remind you that the purpose of this program is to reduce volatility and narrow the range of potential outcomes tied to movements in the five-year treasury benchmark. Because these forward contracts are tied to future depository contract maturities, we'll have greater visibility into the economics of custodial cash placements into enhanced rates contracts. We'll continue to evaluate additional forward hedges as appropriate. We now expect average yield on HSA cash will be approximately 3.85% during fiscal 2027. As a reminder, our custodial yield assumptions are based on projected HSA cash deployments and rollovers, scheduled which is contained in today's release, as well as analysis of forward-looking market indicators such as the secured overnight financing rate and mid-duration treasury forward curves. These indicators are subject to change and may not accurately predict future market conditions. Our raised fiscal 2027 guidance reflects the expected carry forward of the trajectories for revenue and margins the remainder of this year, including technology and security investments to drive operational efficiencies, marketplace adoption and expansion, and reduced volatility of yield placements this year benefiting from our rate loss programs. For fiscal 2027, we now expect revenue between $1.41 and $1.42 billion. Gap net income of $242 to $248 million, or $2.88 to $2.95 per share. Non-gap net income of $392 to $398 million, or $4.66 and $4.73 per share. based upon an estimated 84 million shares outstanding for the year. Adjusted EBITDA between $625 and $633 million. We continue to invest in protecting our members' assets and data while providing them with a remarkable experience. Our guidance also reflects expected capital allocation activity, including additional share purchases under the expanded authorization and potential reductions in revolver borrowings during the fiscal year. With continued strong cash flows and revolver availability, we expect to maintain ample capacity for portfolio acquisition should attractive opportunities become available. We assume a GAAP and a non-GAAP income tax rate of approximately 25%, and as in prior periods, our fiscal 2027 guidance includes a reconciliation of GAAP to the non-GAAP metrics provided in the earnings release, and definitions of these items are included at the end of the earnings release. In addition, while amortization of acquired intangible assets is being excluded from non-GAAP net income, the revenue generated from those acquired intangible assets is included. And with that, operator, please open the line for questions.

Thank you. We will now begin the question and answer session. Please press star then 1 on your telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. Please limit yourself to one question and one follow-up. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. And our first question for today will come from Stan Berenscheiden with Wells Fargo. Please go ahead.

Yes, hi. Thanks for taking my questions. First on Marketplace, we just love your thoughts on the strategic reinvestment there. Just, I don't know, not to make this a multiple choice question here, but what's the gating function here? for you to start investing in sales and marketing to drive Marketplace? Is it broader app adoption? Is it more products within Marketplace? What's the gating function there? Thank you.

Yeah, there's really no gating function because it's not a channel that's dependent on marketing spend like other e-commerce sites would be. So it actually starts with engagement, Stan. So in driving that, we need to get people into the mobile experience, Marketplace is available in mobile and on the portal experience. We want to drive engagement to our monthly active users and then be able to expose those members to the Marketplace opportunities. And so as we look at where we're at, Q4 was just a proof of concept on Marketplace. Q1 was about scaling the foundations, which included expanding the footprint of how visible it is across the interface, enhanced capabilities around MarTech, which is really just marketing to our existing members, and then adding new programs. We added TRT and diagnostics into the marketplace. And so, again, as we look at how that grows over time, it really is how we are converting our active members that are captive to health equity into into the marketplace experience. And so that really is just, again, driven by, first and foremost, getting them into the digital experience.

Got it. That's helpful. For the follow-up, so maybe on services, it was nice to see progress on services gross margins. Obviously, you have some easy comps there versus last year, but excluding those, can you just update us on the progress you're seeing in AI automation and the efficiencies they're unlocking and maybe how that may progress for the balance of this year? Thank you.

Yeah, we're really pleased with the progress that we've made around improving our service cost per account, which is really the metric that we're driving across our teams. And we're driving that first and foremost by reducing contacts. And reducing contacts is purely a reflection of the quality of the product experience that we're delivering. principally to our members and making sure that those experiences are seamless and that their ability to get a response can be driven by more self-service and automation. And so when we look at the gains that we have experienced over the last year, we're seeing call reductions associated with reduced fraud, call reductions associated with no longer needing your password because you've adopted Passkey, automating journeys like replacing a card, checking a balance, and then increasingly more claims automation. So collectively, the reduction of contacts, the automation of those contacts is what drives efficiencies. And we actually still believe, while we've made great progress year over year, that we have so much more to go. And that opportunity is going to continue to be unlocked by more and more of those journeys and those experiences in self-service, in real time, in a digital experience, as well as just improving the overall quality of the service that we provide. Thanks, Dan.

Thank you. The next question will come from Gregory Peters with Raymond James. Please go ahead.

Paul, good afternoon, everyone. Hey, I wanted to... kind of stick on the AI theme. And, you know, you talked about some of the substantial progress that you've reported as a result of AI adoption. And I was just curious how this might manifest itself like in when I'm looking in your statement of cash flows, looking at the software and capitalized software development costs. Because I guess, Scott, at some point I would anticipate that this investment phase in AI would yield some savings on the expense side in that area or category.

You mean in tech and dev?

Yes.

Yeah, okay. So a couple of things. As we introduce more AI into these journeys, we're obviously seeing the cost reduction associated with that. The offset can be token usage and our use of compute to be able to drive that. Now, while we are seeing that increase of cost associated with token use in our company, we're keeping that within the framework of our percentage of revenue associated with tech and dev, which we believe across all of our lines, sales and marketing, G&A, tech and dev, that we're going to continue to be able to drive operating efficiency even with some of that spend shift happening. So, again, we think of our spend overall within the envelope of tech and dev. And, you know, I think, again, speaking to the opportunity, I highlighted in my remarks that, across journeys that we're automating, we're seeing that manual process or that time to resolve being reduced by 90%. The effort associated with the member getting resolution, being able to be resolved automatically, seamlessly, self-service. So these are significant improvements in the member journey. I'd say the other two areas that I would highlight where we're barely in the first inning. I'd say first pitch is really in client integrations. So that's kind of that second bucket within the service costs. And then in the back office and claims automation, where we have millions of claims over the course of the year, we're still at the very beginning of that journey, introducing AI in those areas. So we're very excited about what we're seeing.

Yeah. I'm going to pivot for my follow-up question just to the balance sheet and capital management initiatives, including the stock repurchase. One of the line items I track and pay attention to is the cash and cash equivalents that you guys are holding at the company quarter to quarter and year to year. And even as the company has grown both with accounts and revenue and and earnings you're not seeing a corresponding increase in the demand or the necessary need to hold on to more cash at the whole hotel level to cover a cost so i was wondering maybe if you could sort of bridge the gap on what the cash requirements are maybe they're coming down because of these improved efficiencies but um that's sort of what i wanted to focus on for my second question thanks for the answers by the way

Yeah, maybe I can take that one. Yeah, like, we're, you know, regulated entities are pretty light at health equity. So, like, there's not this, and we're not a bank, right? So, this requirement, like, massive capital requirement that you'd expect to grow with assets, like, that just doesn't exist in the company as it's currently formed. Like, our trust company has capital requirements, and our registered investment advisor will have some capital requirements, but, um, but yeah, you shouldn't think of it like a financial or an insurance company with this massive, massive regulatory capital that would grow, that would grow significantly with scale. Um, you know, I think in the history of the company is sort of sat with lots of excess cash. Um, and you know, there, there's less of a, a less of a need, less of a need to do so, um, going forward, but, you know, yeah, this is probably the lowest cash number that you've seen in a little bit, but, you know, but just read into that as a function of we haven't had to drive every last dollar of discipline out of the cash, but have the ability to do so. You know, obviously, we purchased more shares than we planned, and that's why we had the flexibility to do that without having to borrow.

Thanks, Greg. The next question will come from Alan Lutz with Bank of America. Please go ahead.

Good afternoon. Good afternoon. Thanks for taking the questions. One for Jim to follow up on Stan's question on the service cost line item here. So it was much better than I think the street expected. And even if you back out about $3 million of fraud from last year, it was still down. The service costs were down about $6 million year over year. is there anything that's one time in the first quarter here? And as we think about the trajectory for the rest of the year, you know, how should we think about taking that $6 million and kind of applying it, you know, as an improvement? Is there anything we should contemplate? as we think about the improvement you're seeing within that line item.

Thanks. Yeah, thanks for that question. Yeah, so if you read the details in the queue, we do highlight one particular area. And whether it's one time or not, we will see. But relative to what we guided to, our medical claim usage utilization for our teammates was way down. and below our expectations. So we have pushed that beat back out into the forecast. So talking to our outside advisor, talking to our contacts at the various payers, this appears to be a phenomenon seen across the market. um and we are not declaring victory on that right i don't have any particular intel that says my my 2800 people are are miraculously much healthier than they were three months ago when we had the last medical claims forecast um so just in the service line alone that was about two million bucks uh of the year-over-year improvement um and and that just feels seasonal to me. So our current expectation is that that cost is going to come back. So we push that beat back out into the forecast. And, you know, hopefully that proves to be conservative. But, you know, this sort of, you know, nothing has changed in the cost assumptions that the actuaries are telling our corporate clients to expect.

Okay.

Really interesting. Us included. Yeah. Ourselves included. Yes.

Okay. Thanks for that, Jim. And then as a follow-up.

And the rest is real beef. The rest is real year-over-year efficiency. Yeah, super strong. Perfect.

And then for my follow-up here, around the marketplace, you mentioned more than 10,000 members utilizing that, which I think could be low millions of revenue. Can you remind us, is that marketplace revenue in the guide as of the update here? Thanks.

Yeah, so Jim, you can speak to the guide in a second.

Yeah, so that current, like that exit rate is reflected in our outlook now. And then Scott can speak to the rest of that question.

Yeah, so when we look at that, yeah, so we've crossed over well over 10,000 actually, but I think when you look at it and you look at it over time, in building that model from a member perspective, it's going to be what member, how many members are transacting in the marketplace, what are they transacting in, do they stay in those programs? And so if you look at the five things that we have in the program today, men's and women's health, metabolic through GLP, Oura Ring, diagnostics, Each of those have a different revenue profile and a fee profile associated with that. And, you know, I think we're still very pleased with what we're seeing at launch and, quite frankly, the week-on-week growth of participating members in the marketplace that we're experiencing. Just last week when we launched diagnostics and men's health, we saw a very rapid uptake in the absence of any marketing rhythm against it, just introducing new tiles into the marketplace, which, again, gives us a significant amount of confidence that even the adoption curve of our early products and marketplaces are being followed by other programs as we add them into the marketplace. Thanks, Alan.

The next question will come from Sean Dodge with BMO Capital Markets. Please go ahead.

Yeah, thanks. Good afternoon. Maybe just on the app downloads now, and, Scott, you talked about the flywheel effect of all this starting to kind of have. With the new app users, when you think about the app and how it mitigates customer service costs and increases engagement and also provides you the conduit for the marketplace, if we add all of those things up, is there a way to kind of quantify, like, How does an app user compare economically, both in terms of kind of like the revenue benefits and the cost benefits? How does an app user compare economically to a non-app user?

Yeah, so it's not exact, but, you know, like right now, there are a few features in the app that allow you to, for example, activate a card with the push of a button, as an example. As the app develops over time, and this is one of our key product priorities, is bringing together all of our products into one single app, powered by AI, powered by personalization, including self-service across all of our different service functions, and be able to do that digitally. And so that will come at a lower cost. because you're able to self-serve a lot of those things. But going to engagement, engagement is a really important part of driving lifetime value. So when you look at two-thirds of our transactions happening on app in the marketplace, that's an example of driving lifetime value. As you look at our ability to drive investors and certainly the significant growth that we had in investors on a year-over-year basis, is really driven by enrollment through the app, ad enrollment, to be able to get you to sign up and become an investor very early on. And as we introduced new experiences in that flow on the app, we saw improvements there. And so I see it as both a service and a revenue benefit, the revenue, again, being more of the engagement flywheel for all of that means. and all of the different areas where we drive lifetime value, and then service being able to introduce AI, self-service, education, and help right into the app experience. And again, when we can do that, it's also part of that flywheel, because if you're going to the app for self-service, then you're actually seeing the other things that we can offer and provide. So that, in a nutshell, is the digital strategy.

Okay, that's great. And then maybe just going back to the marketplace, you said well over 10,000 members now. I know you said there's some variation in terms of what people can participate in, the different programs. Is there anything you can share more specifically around, like, how much revenue is Marketplace contributing now? And then the three initial programs you launched, the Oura Ring, the GLPs, and the HRC, is there one of those in particular you're kind of seeing most traction with?

Yeah, so we're not breaking out Marketplace revenue at this time. And I think it'll be a while before it's material relative to our overall revenue. It will actually show up in service revenue. I think of our three earliest programs, metabolic health through access to weight loss is the most active program. The economics in terms of administrative fee per member, $90 to $100 per member per month participating in that program, that's our most robust program. So you just, you know, do the member math on that as long as they stay on. That's a very active program. I will say, even though it's new, adding in menthol through TRT just in a week, we're seeing actually very significant daily adoption already at a very aggressive growth curve. And that, while not as large of an economic opportunity as maybe more of a longer-term subscription, that will likely be longer lasting than potentially weight loss, and the economics of that are north of $50 per participating member per month. Again, as we develop this over time, we will have other areas in Marketplace. For example, we are part of and will be launching Oura Ring 5 next week, which we're excited about, and we're receiving a per transaction charge associated with that. Diagnostics is another example, a different program, different economics. You're signing up for an annual subscription, and then it's going to be a function of that annual subscription and that renewal. So, again, on a blended basis, what we're looking for is, you know, putting in front of our members very valuable products and programs and services, that are, you know, very much informed by what we know they're already spending dollars on.

Okay, great.

Thanks again. The next question will come from Scott Showhalls with KeyBank. Please go ahead.

Hey, guys. Thanks for taking my question. I want to focus on account growth. Clearly, you're taking market share. Any color from where we stood last quarter on the bronze accounts, what you're seeing in the marketplace, what you're seeing in terms of taking market share in that category and what their contributions are here early on? Thanks.

Yeah, I'd say bronze opportunity is still very early. The market expansion has been real. You've actually seen bronze adoption be significantly higher given expiring subsidies. But that being said, The materiality of bronze right now in terms of both accounts or contribution of revenue is very low. We expect them to come in over time. A portion of our 172,000 new accounts came through the retail channel that we would associate with that bronze opportunity. So that's how we think about it. Relative to the overall market, I think what we are very pleased with is bending the curve in the growth rate of the business overall represented by HSA account growth. So to be able to see quarter-on-quarter acceleration there, if you spent any time looking at the Devonier report, 60% of new account growth in the industry last year came from the top two players. Most other players not really seeing growth. And so it is a winner-take-most situation. in terms of growth and who is capturing that growth in the industry. So we're very pleased with what we see there. I'd say the other factor that we see, and I commented on it, is that we are seeing a very active enterprise sales pipeline, which you will see later on in the year as those, you know, as we finish integration and go into open enrollments. but it's the largest pipeline of enterprise sales that we've seen in years. And I think we're very encouraged by both our win rate and what we're selling to those new clients in terms of the vision of this flywheel and product experience to those prospective new clients.

That's fantastic on the pipeline side. Okay, and then my follow-up is, You know, we're talking about this mix shift on the consumer marketplace. Given this growth that you're seeing and eventually this mix shift, where do you see service gross margins expanding to, given that there's a high degree of incremental margins that flow through from the consumer marketplace?

Thanks. So marketplace has no, you know, real cost of acquisition nor cost to serve, and so most of that flows through. But I think Jim and I repeatedly say there's no such thing as, as service gross margin. Our service costs, which go against all of the things that we do, go against all of revenue, not just service revenue. So just a bit of a clarification associated with how we think about that. But the incremental margin on a marketplace transaction obviously is very, very high because there is no marketing cost of acquisition or cost to serve. Thanks, Scott.

The next question will come from Steven Valliquette with Mizuho Securities. Please go ahead.

Thanks. Good afternoon, everyone. I guess for us, just coming back to the healthcare utilization questions for a moment, I guess, aside from your commentary about the low healthcare utilization trends of the internal health equity employees in the quarter, I guess with more of a growing view in the investment community that we could see just a slowdown in overall U.S. healthcare utilization for the full year, calendar 26 versus calendar 25. Can you just remind us how that would sort of flow through your financials and your guidance, either positive or negative? I think the most visible variable in my view would just be less money flowing out of HSAs to pay medical bills or to be positive. I'm just curious on the other moving parts we should be thinking about.

Yeah, great question. Yeah, I think you're exactly right. Like where are we seeing it a little bit? You can see it in the interchange line right now, right? We grew interchange a little more than 5%. Like that's a little slower than it's been growing. So that's one of those lines where we'll watch it, right? We're not calling us. we're not calling like a big behavior shift, but it may be just as simple as folks went to the doctor a little bit less, and we're seeing, you know, slight downshift in average transaction per account, slight downshift in average ticket size per account, right? So it's a trend that we'll watch, and we've reflected a little bit of interchange conservatism here, in the current outlook versus the last one. But, again, like, our base expectation is that we expect it to snap back to the prior actuarial assumption for the year. And then, yeah, you're right. If folks don't spend money, then the money stays in their accounts if they don't change their savings. So, like, it's probably, you know, a positive to – a little bit of positive to balances and a little bit of positive to investments. Revenue, right, if the dollars are in the market as opposed to being spent at the doctor. Okay. All right. That's helpful. Thank you.

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

Yeah, hi. It's Maxine for George. Thanks for taking the question. While the major competitor is getting acquired by the largest insurer in the U.S., How do you see the competitive environment change post the deal? And have you seen any change in partner conversations or pipeline activity as health plans and employers evaluate the implications of more vertical integration in this space? Thanks.

Yeah, so I think you're speaking to the allegiance acquisition by UnitedHealth. So Allegis is a white-labeled software provider. We do not compete providing white-labeled products. We sell direct into our client base. We'll note that what we will be watching for are those existing clients that may view that tie-up as competitive in terms of sharing data or opportunity. which could be interesting for us. And so we'll track and watch what that movement. But the acquisition itself, we view it as a result of what I just said, as it being a net positive from a health equity perspective in the market.

The next question will come from Destiny Jackson with J.P. Morgan. Please go ahead.

Hi, this is Destiny on for Alexis Govola. Thanks for taking my question. I was excited to hear the additional programs you added to Marketplace, but how are you prioritizing which Marketplace categories to add next? And then as it relates to the GOP cohort, I know it's early, but any color you can give on the behavior of this group, specifically as it relates to retention and program duration? Thanks.

Sure. So we prioritize what we add first informed by what our members are spending their dollars on. So, you know, we have billions of dollars of spend, and so we look at that spend. I think we look at what we're trying to accomplish in the marketplace as a curated set of products and experiences rather than commoditized products, that anybody could spend that would qualify for reimbursement. And as we look at that, we think about it from a category perspective, as I've highlighted, metabolic, men's and women, dermatology, sleep, allergy, diagnostics, wearables. Those are all programs that we could bring in that aren't a large number of SKUs. And then what's also very interesting to us is the growth that we're seeing of merchants, of high-quality brands, selling products that could qualify for an HSA directly or be unlocked for qualification through a letter of medical necessity. And those are some really interesting brands, and we would be expecting to bring in those brands and products into the marketplace overall. So that's kind of like how we think about building out the catalog of marketplace. And then, you know, with respect to your question around cohort performance, It's still very early when you think about it, particularly on the metabolic side. The adoption rate overall, what we're looking at is what is the churn of those subscribing members? How long do they stay into the program? And that's another reason for us to be conservative because we're literally only months into this cohort to truly understand what they're going to perform like. But again, Now that we're, you know, seeing growth, particularly on the metabolic side, of growth week on week, and we've seen week on week growth since we started, we're very pleased with, you know, probably how those cohorts are going to build quite aggressively over time.

Thanks, Destiny.

The next question will come from Mark Marcon with Beard. Please go ahead. Thank you.

Hey, good afternoon. Thanks for taking my questions. Most of my questions have been asked, but I just want to follow up on one element. You know, Scott, you mentioned the pipeline is as big as it's been. I'm wondering, you know, it's pretty early with regards to the marketplace, you know, the mobile first kind of approach. And so what I'm wondering is when you're approaching, you know, enterprises and medium-sized businesses now, What sort of reaction are you getting from those, you know, clients that would make the decision from an employer perspective, you know, in terms of the direction that the company is going in? Obviously, you've been winning share, but I'm just wondering, are they even more excited now? Do you think your win rate is going to be even higher, you know, on a go-forward basis, or how are you thinking about that?

Yeah, great question. Mark, we actually do see our win rate as higher. Our ability to compete and win more large logos in competition is higher than it has been before. And what I would say is that three top areas of focus for new customers, and this is also applied to our existing customer base, but particularly when we're pitching a new customer, it's three things. Number one, show us the mobile experience, and show us the future roadmap of what that mobile experience is going to look like. And when we lay out the vision of our mobile and digital engagement across bringing our products together, AI-enabled, personalized, driving towards health and wellness behaviors, our clients are thrilled and our prospective clients are thrilled with the direction and the vision of that we're painting from a product perspective. Number two is data services. When we look at the integrations that we have with our plan partners, as well as the data that we have across all of our enterprise base, we're able to go in very specifically with data to be able to tell our clients, this is the opportunity for cost savings that you can have, and here are the three or four strategies that you could deploy to go after those cost savings, which quite frankly are much greater than the fees or the administrative fees that you would pay associated with that. And number three is security. Trust and security is at the forefront of every client. We're obviously a financial technology platform. Trust and security is very important. And so, our security team is typically involved in all of those conversations. our roadmap, obviously the great progress that we've made. And also, you know, this is also supported by a white paper from Visa that actually shows that we are best in class in terms of the lowest fraud rates in the industry, six and seven times better than most industry participants, with also card approval rates 10 percentage points higher than others, which just means that a more secure platform and using your card and having that approved more than others. Those are really key features to the quality experience, and those would be the three things that I believe that we're winning on, but we're also differentiated, again, versus the competition.

That's great. Thank you.

Thanks, Mark.

The next question will come from Brian Tanquillit with Jefferies. Please go ahead.

Hey, good afternoon. Congrats on the quarter. Maybe, Scott, as I think about the broader macro backdrop here, are you seeing any change in HSA contribution levels tied to, say, consumer pressure or employment churn, especially as we think about the lower balanced accounts? And then maybe another way I would ask the question is, is the demand for HSA significant? You know, is there a worry that at some point with utilization levels across commercial health care softening or decelerating, does that decrease the demand for HSAs, or is there any sensitivity to serious career thoughts on that one?

Yeah, so, you know, I'll talk first about what is the, you know, dynamic that's driving HSA adoption and a reacceleration of the industry, and maybe Steve can comment on this as well, is really health care affordability. So healthcare affordability is the pressure that enterprises face relative to healthcare costs. And driving high deductible health plan and HSA adoption is, you know, is certainly a way to get after that first point. And I'll give one more and I'll turn it over to Steve. Second is contributions. So if you looked at the industry report last year, we were actually able to drive contributions quite significantly greater than industry growth rate, where contributions grew by 1%. We grew contributions across our book of business at multiples of that. And that's largely because of what we're doing in the digital experience to drive contribution, as well as what happens with the flywheel of spend, which is when you spend, you contribute more. And so I think that, again, speaks to the industry. Maybe, Steve, do you have anything more to add?

I think you did a great job. I mean, Scott's been in the industry so fast, and I think you've nailed it. The only thing I would add is, Brian, that, you know, we've seen these counter-cyclical times where, you know, maybe the economy's a little bit shaky, and then employers are like, we've got to save money, and they all of a sudden wake up and say, why aren't we getting more people in the health savings accounts? We've done some independent research. We've mentioned this before. We looked at our own book of business and interviewed clients. We've got several case studies out there that show that, you know, if clients can go from 30% adoption in HSAs to 60% or 70%, they can save a lot of money per person. But I think that's only half the story. The most important part of the story is the people that go into the HSAs have money put aside. We talk about having personal health care financial security for those people. And ultimately, that saves money because if people avoid care because they don't think they can pay for it, that's horrible for the whole system. It's horrible for affordability. People delay care. And so this concept that we've been preaching now for over 20 years of empowering healthcare consumers, that's right, embedded in our mission, is so critical to this. And so you actually see the opposite. You know, when times get a little tough for people, they kind of finally wake up and they say, what's the best way to provide the most efficient benefit for our people and still take care of medicine, HSA, and And so I think this is a real opportunity for us now in this time where affordability is so critical. Toss her up. I don't know what's going to happen with inflation, but we're really leaning in, and I think we've got a fantastic team to put together. And then I think we'll drive more account growth, and then Scott's done a fantastic job of saying, okay, once we have the account, how do we then help that person better save, spend, and invest for health? I don't know, that brings in the marketplace and these other initiatives. So we're, I think, And we're as bullish on where we are right now as we ever have been in this market. I can tell you that right now.

Awesome. Thank you.

Thanks, Brian.

The next question will come from Peter Wardendroff with Barclays. Please go ahead.

Hey, thanks for the question. I just wanted to clarify on the HSA cash maturity schedule that you guys talked about. It looks like the 2027 cash number that you reported this time is a little bit lower than what was on the last quarter. I'm just kind of curious what's going on there and if that's maybe related to the one-time partner cost that you mentioned earlier. And yeah, just what's driving that dynamic?

Thanks. Yeah, for the current year, it's just one less quarter is in there. So those are amounts that matured, either basic rates renewals, basic to enhanced rate switches. And then, yeah, then the last piece is just organic the organic growth, right? So they're not static pools. So if my members contribute more, the balance goes up. If they withdraw more, the balance goes down. But it's just normal activity. The maturity pull forward was actually not in this current year, but we were able to pull forward sort of future maturity into the current Q1.

Great. And then maybe just on the accelerating repo, I mean, it seems like you guys are pulling some of that forward. I'm curious if there's anything to read through into maybe what private valuations look like and what you're seeing on the M&A front. Yeah, and how you just weigh repo versus maybe M&A. Thanks.

Yeah, so our capital allocation philosophy has not changed and our priorities have really been buying back stock, paying down debt, being prepared for M&A. You know, on the repurchase program itself, you know, given our growing confidence in the long-term cash generation of the business, the accelerating growth that we're seeing, we see our capacity to put more into the repurchase program as being enhanced, and that's obviously reflected by how that program has increased. And at the same time, it does not impact our ability to to finance and to go after the right M&A opportunities as they present themselves. So we've maintained the flexibility to do both while actually being in a really strong position, not adding debt associated with that in a repurchase, but using our cash flow to do so. So that's really our capital allocation philosophy.

Thanks, Peter.

The next question will come from Ryan Halstead with RBC. Please go ahead.

Good afternoon. Thanks for taking the question. I want to go back to the bronze account questioning. So, you know, considering the growth in enrollment in these plans, I'm just curious if you've, you know, had further discussion with your channel partners or other sort of engagement in trying to maybe capture more of that new HSA eligibility earlier, either through, you know, driving education or other ways. I appreciate that.

Sure, yeah, and thanks for the question. Yeah, we've thought a lot about it. You know, one of the, I think, really remarkable things about the health equity model, because we sell to all sizes of employers and I mean, even down to like two life employers all the way up to, you know, obviously some very, very big employers is that we've always kind of thought about HSA growth from an evergreen perspective. And this even makes almost more sense in the case of bronze plans, because even though, you know, there's this big push for people to get their bronze plans and then hopefully sign up for HSAs right around the end of the year when the portals open up and and the exchanges open up, the reality is they can fund those accounts for the course of the year. So we're always kind of thinking about what is the best channel. And so you said the word channel partner, and we were kind of thinking very deeply about that. Many, many of our Blues plans, many of our other vertically integrated plans, plan partners throughout the country, are often, if not the biggest, close to the biggest providers of loans plans. in the market. One of the challenges is people just still don't know. So there is an education perspective to that. Give you just a little bit of perspective. Only 2% of people a year ago that bought on exchanges were in an HSA qualified plan. Now, nationally, it's 30% are in an HSA qualified plan, just because of the ground stuff. There's some markets where it's 50% of people. But you gotta get the word out. And so we work through the channel partners, There's brokers out there that sell a lot of these plans. There's even, you know, there's been a lot of talk about Hikers and stuff like that. I think they're still pretty early. So we're looking at every one of these channels. We have people that are in charge of each of those channels to really push this because, look, we don't really know how these are all going to perform at the end of the day. Maybe there's less funding. That could be even in the sub-channels, like maybe in like an Hikers channel where there is an employer around that the funding will be comparable to what we've seen in our traditional market. So, yes, we are looking at every one of those channels. We do everything we can to get people into these accounts. You know, it's almost like a public good, honestly. It's like a PSA. It's like if you are going to have any medical expenses and you have to pay that higher deductible that comes with the bronze plan, you have to run that through an HSA. And not only that, if you have an HSA, you can start doing things like marketplace and run it through. So, yes, we're all over it. But we also want to temper, like, this enthusiasm because this is a new muscle for not really health equity. Again, we've been doing this for a long time. But it's a new muscle for consumers because they don't even know, right? It went from 2% of people in an HSA-qualified plan a year ago, and now it's 30%. So we're after it, but we're still trying to learn a lot from it.

Very helpful. Thank you.

Thanks, Ryan.

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

Hey, Steve, can you talk a little bit about the regulatory environment and the timing of it? So what happened 1-1-26 through 12-31-26? How does that change in, like, 1-1-27 and going forward? And then just any comments on, like, the stacked card product. When can you stop using plastic or paper cards? Thanks.

I'll take the first half. Do you want to talk about stacked cards? Yes, thanks. Yeah, so, you know, I mean, obviously there's a lot going on in D.C. right now. And we are always looking for these little windows of opportunity to insert like what happened last year. And so, Dave, to start your question, a lot of these changes that happened in the Big Beautiful Build around bronze and things like that really all kind of went into effect on January 1 of 26 with the lobbying passed last July. And so we've been doing a lot of work on implementing those changes We continue to look for opportunities to insert things that were left out of the final bill that did pass the House bill. These are things like letting people roll their HRAs and FSAs into HSAs. That makes a lot of sense. Actually quite low score when they came out of the Congressional Pledge of Office scoring process. And so, you know, that wouldn't cost a lot. There's a lot of people that would be like, yeah, I'd love to convert my FSA or HRA into that. Medicare for working seniors, sorry, HSAs for working seniors. We talk a lot about that. as well. So I think from just the congressional calendar perspective, I think right now the big focus is to try and get this reconciliation 2.0 bill that Republicans have talked a lot about. They were close, backed off. You know, that was the one where the ballroom came out of it and a lot of other stuff. There's no health care stuff in that that we've seen. And then our understanding is if reconciliation gets done 2.0, then there's a lot of legislators who are saying, hey, look, we still have six months of legislating to do, and We've got a lot of people to help, and so we're going to keep looking for those opportunities. Just a little kind of cool fact, you know, one of the bigger kind of expansions of HSAs that happened in 2006, I mean, even prior to the Big Beautiful Bill, was in the lame duck session in 2006, and it was after the House was lost in November. You know, we were pushing hard then, and they had significantly increased the amount of money that people could put in their HSAs. And it was a lame duck session. It was the end of the year. There was a new Congress that was going to be seated. And so they got it done. But all that being said, as we've said all along, we actually think that HSAs are bipartisan more than people appreciate. When you do the surveying out there, Democrats, Republicans, Independents, they all love health savings accounts. So we're going to just keep pushing. And no matter what happens in November, We're not going away, and people are going to keep hearing about why consumers need these accounts. And so thanks for the question, and we're all over it.

On digital card, as you know, David, a few years ago, we moved to a single card processor, which allowed us to offer a stat card, which we've had in the market now for a little over a year. That product today is already we have. what I'll call digital integrations into wallets. A lot of the digital wallets today that are very popular is already integrated. And I think kind of like the next step is digital issuance, where you could issue without plastic. And, you know, as we look at what our single app experience is going to look like and also having wallet and digital wallet integrated into that experience that will be kind of like rolling out into the future. And in that world, it may not be all cards replaced that way because people do like having something to carry with them. A physical card is a strong sense of loyalty. That's why most banks still have physical cards. But again, from a convenience perspective, we think there is an even more efficient way to issue cards for those that just want integration into wallets. And, again, functionally, we already provide that. Thanks, David.

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

Thank you for taking the questions here. Maybe, Scotty, something you mentioned in your prepared remarks around 10% of the tax benefit being fully utilized by members. What are some of the actions that you can take to increase that utilization rate and how do you think we would see that kind of flow through the performance of the business? And then maybe I'll just ask my follow-up here, just giving more time on the call. Jim, can you just help us think through just that putting the pieces together here in the AI investment cycle and the AI benefits. So, for example, is the service margin today depressed, even though it's improving because you're deploying resources from an investment standpoint, such that as you start to see the benefits, we see an even bigger uptick in the margin? How should we think about the handoff there from investment to benefit?

Yeah, so I'll kind of like, again, go back to the strategy and why it matters. An investor is a bigger spender and a bigger contributor. And investment and investment balances are obviously growing significantly for the industry and for health equity. The number of investors we've also been driving. And so that growth in number of investors is which you saw 18% year-on-year, is really, again, driving towards the flywheel of the why, which is, again, bringing you from a contributor to a saver to an investor. And, again, it is virtuous because they actually do hold higher cash balances and they do spend more. The way we're doing that, again, is through the digital experience. And so, really critical at enrollment that we do that. You can also see that flow through a bit because many of those as they're going through that enrollment are also signing up for robo-advisor, which is kind of like automating that investment flow for that member to make it simple and easy. And we're looking at other ways to essentially streamline that how you become an investor and making sure that that fund lineup and our integration on the brokerage side gives you total flexibility to invest wherever you want to as a member. Jim, I think you'll take part two.

Yeah, and as for the, you know, the current sort of deployment of tech, right, like the cost is primarily hitting the tech line. So, you're seeing, like, investment in the product solution that helps drive down service costs. The investment is in one place and the benefit is in another place. Now, as the sort of future state of, like, widespread deployment of AI tools and token-based pricing, like, I do think you're going to start to see that change a bit. you know, currently and probably for some time, like, the primary beneficiaries of these tools are in the technology development realm. But as, you know, my finance team, as marketing teams are starting to use the tools for efficiency within their own departments, I think you're more likely to see us, like, start distributing that cost out. Like, hey, finance or other G&A department, you need to cover your own costs of AI and then offset that with benefits. But we're just not in that world yet. But I do think the world and many of our fellow companies reporting publicly are going to head in that direction too.

Great. Thanks so much. Thanks, David. And this will conclude our question and answer session. I would like to turn the conference back over to Mr. Scott Cutler for any closing remarks. Please go ahead.

Thanks, everybody, for the thoughtful discussion and questions. To close, I hope your takeaway is that our execution and performance continue to translate into strong cash generation, gives us increasing flexibility to invest in the business, return capital to our shareholders. And I think the acceleration and the growth underpins also our decision and confidence to increase our share repurchase authorization by a billion dollars. You're reflecting our confidence in the long-term outlook for health equity. So we really appreciate your interest, your support. Look forward to updating you next quarter. Thanks.

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