Good afternoon, everyone. Welcome to the JP Morgan Healthcare Conference. My name is Anne Samuel, and I'm the Healthcare Technology and Distribution Analyst here at JP Morgan. We're thrilled to have HealthEquity here with us today. With us are CEO Jon Kessler, CFO James Lucania, and Dr. Steve Neeleman. We're excited to have you all. I'm gonna turn it over to Jon for a presentation, and then we'll open up to Q&A.
All right, let's do it. Can I just sit here and do the clicker?
I think you can, yeah.
You're the-
We took the clicker.
Oh, fantastic. Okay, so I... Then I can just wander. Probably not too far. So hi, everybody. Hello. Good afternoon. Thank you. You've made it through to the second day, and the end of the second day, so you're, like, almost done, and here we are. So, I think most folks in this room, I recognize quite a few faces, know HealthEquity. We are the largest manager of health savings in the U.S. , and, as one does, at the outset of this conference, the first thing that we do is we announce our expectations for end-of-year sales. To confuse everyone, we are a January 31st fiscal year-end, so this will be the end of fiscal 2024. And, 2024 was a good sales year for us.
We ended up growing our HSA business on an accounts basis by 9%, on an assets basis by 11%, and we sold 900,000 new accounts, down a little bit from last year, but we had all of these nice people churning through jobs last year, and we had 4 million new jobs created, only 2 million this year. So not quite that level, but a really, really good, really, really solid, well ahead of, I think, what people expected, and the market responded accordingly on Monday when we announced that, and we appreciate that.
If you think about this year's results, we don't have fully yet in hand what the market did, but the market was expected to add about 2 million accounts by the people who expect these things, and I don't really expect anything. I don't know what the hell's going on. Ooh, one of my directors, are you on the comp committee? You're on the comp committee.
I am not yet.
Oh, good. No problem then. Wait, not yet?
Not yet.
I think it was a threat. I am totally in control of the situation, Paul. But in any event, if you think about it, if the market added 2 million accounts, and we grossed $700, let's say $900, let's say we end up netting $700 and change, the implication is that... And then, you know, kind of similar for assets. The implication is that we, at HealthEquity, and by we, I mostly mean they, I'm really the head of the overhead department, but the team... It's funny 'cause it's true. Deputy head of the overhead department on the left. At least he talks good.
You know, we captured about a third of the market, and the reason I mention that here is a third of the market's growth, and the reason I mention that here is to talk about what the implication of that is for the value of our firm. Today, right, we generate about $1 billion in revenue in a $5 billion business, including the HSAs and the ancillary consumer-directed benefits, or CDBs, right? $3.5 billion HSA revenue is $1 billion in $1.5 billion in CDB revenues. I think that adds up to $5 billion, and I think $1 billion divided by $5 billion is 20%, and guess what? We're 20% market share, 21%, something like that. And I only have a master's degree in economics. Actually, I should be careful.
It's technically in public policy economics, which is even more inventing stuff than regular economics. But I can do math, and I know that if you continue to win 30%+ share of the organic market, as we did this year, as we actually did last year also, and as we did the year before, then eventually you're gonna get to 30% market share. That's how it works. And we are in a market that continues to grow. It's growing by accounts, right, in the single digits, and by assets in the double digits, and when you think about it from a revenue perspective, right, you have a market that's...
I think a reasonable view is that this is a market that is, from a revenue perspective, growing in the high single digits, on a interest rate, normalized, all those kind of things, basis, that Jim is gonna talk about. And so if we can continue to do this, we're gonna be in a market that's not $5 billion in revenue, but it's $10 billion in revenue within a decade, if not sooner, and we can be 30% of that. That would be good. That's a good story, and that's the story that you are invested in, and that we are investing in, and that we are focused on. And so how are we gonna keep doing that? Well, that's the next slide. Well, first of all, how do we do it? The answer is, I don't really know.
The answer is that is and has always been, from the founding of the business, on the part of my partner in crime, Mr. Neeleman, Dr. Neeleman, Dr. Mister, he's Dutch, could be Meisterburger, Burgermeister? One of those. In any event, the way we do this is that we have an incredible partnership ecosystem, and we have technology that, more so than ever before, helps us bring the value of that ecosystem to our members and also to bring the value of our members to that ecosystem. And, you know, when we're talking about we, on the provider side, we work with, you know, oh, I'm sorry, on the payer side, we focused very heavily on the Blue systems.
And not only do we have, you know, we now work with almost every Blue. Hi, Mark, I don't know where you are. We're working on them. That's it. But, you know, remember, some of you remember a few years ago, Anthem started selling its own product. Guess what? This year, Anthem was back, selling some HealthEquity. Not bad. Our new partners this year sold 40,000 HSAs. I think it's like ~40,000. I think it was really 45, but I'm not supposed to say that. And this is what we do that our competitors don't. Our competitors do some other things well, but this is why we have gained market share year- after- year- after- year- after- year- after- year, including this year. And what does this mean? So that's all great. It sounds good, right?
What does this mean for our members and clients? What it means is remarkable experience, and I said a few minutes ago that I think we're at a place where technology is allowing us to do more than ever before, and these are a few examples of this, right? We are using. And I mean, you know, a lot of companies are gonna talk about AI or have AI as the header of the slide. That seems a little cheesy, right? But at least for us, it would be, 'cause, like, okay, we're getting there. But what we're using AI and other things for is to do more, to create more value with our partners.
So, you know, frictionless example of that is when as we drive calls to chat and then ultimately drive, you know, calls to more automated formats of other kinds, we're bringing data in that allows us to resolve more at point of, at that point of chat, and not just to resolve more, but to bring more messaging that's valuable to our partners, right? Something that you could never do when you have 200 partners, and every employer has a different ecosystem and so forth, with a person. Like, there's only so much they can digest on that little screen in front of them, but technology can. And this not only saves us money from a service perspective, it makes a better and more differentiated experience.
This, for those who are gonna trek out to our Investor Day shortly, I know I'm not supposed to plug that 'cause Jim's gonna plug it, but one of the amazing things we're doing... How many of you have ever been in a flexible spending account, one of our CDB products? You ever... Not, it doesn't have to be from us. I didn't mean not you, like, you. Like, how do you feel about the whole paper receipt thing?
Hate it.
Hate it, right? So we have a product that is now in market, uses AI, genuinely uses generative AI, not that machine learning stuff that people just wanna call AI now, right? You can put your receipt in from Publix. I like Publix 'cause I'm from Florida, right? And it's got the clam chowder on there, and it's got the sandwich. They make really good subs at Publix. And then it's got your, you know, bottle of NyQuil. And the damn AI is smart. Not only does it know the difference, right? Not only can it tell that off the receipt, it can explain to me, even to me, why, right? Why isn't the clam chowder eligible, and why is the NyQuil eligible? And, like, if I happen to pick up some Kleenex, why they're not eligible, right?
It's incredible what this stuff can do, and this isn't like, you know, it's gonna be available, whatever. We are, we are rolling this out now. We have it with clients right now. You know, we went 120 days from concept to deployment with our partners at Microsoft. Really cool. This year, we launched... This last year, we launched our healthcare chip card and our healthcare stacked chip card. That sounds like, okay, big deal, lots of people have chip cards. There's nothing that... Most banks do, of course. In our business, most people don't, and they certainly don't with stacks. And so what's this gonna mean ultimately? It's gonna mean that for our customers, right, one, we're gonna have...
This is ultimately gonna be mobile, obviously, and it's gonna mean that we can be more flexible about how we brand the card with our healthcare, healthcare partners. It's gonna mean that our end-of-year Open Enrollment experience, where everyone talks about, like, we have service expenses in the fourth quarter 'cause people gotta get those cards in their hands, and then they don't get the cards in their hands, and they gotta call, right? That's gonna be part of... That, that's gonna all go away with Instant Issuance. And again, this isn't like some dream. This is something that we have already rolled into market this year. We'll complete the rollout by the end of fiscal 2025. That is the now almost to be current year. So it, the infrastructure the ecosystem we have not only creates great experience, right?
It allows us to. It propels all the ways we grow. New logos, right? Meaning new employers, where we did very well this year, growing our footprint of members within our employer base, and then, of course, helping our members grow balances, which makes this a more valuable firm and makes the experience more valuable for them. That's what we do. Try to do it well, and I think the numbers support that, and that's where my friend, Mr. Lucania, is gonna talk.
Sure. Hi, everyone. I'm going to actually breeze through the first few slides here. These are just the summaries of our financial results over the last three years. Really, the key takeaway is that the numbers are going up and to the right for all the reasons that Jon illustrated there, and we're gonna continue to move these numbers up and to the right. You've seen this slide before in the past, and we've rolled it forward another year. Really, the takeaway here is our custodial yield, that purple line in the middle. Those two gray lines are interest rates observable out in the marketplace. The purple line is what we earn by investing our customers' deposit or our customers' HSA cash into instruments.
We have two main ways that we invest. One is with our bank partners. That's the legacy way that we've invested client cash. The new way, over the past few years, and the rapidly growing way, is what we call Enhanced Rates. It is a deposit with insurance providers. So this is an insurance-wrapped similar to Stable Value, like you might see in your 401(k) plan. The benefit of that is much more stable returns, much less volatile returns, and interesting for you and for our members, is higher average returns versus the deposit product. And so we've guided to about 2.45% our average yield, the purple line, for this fiscal year that ends at the end of this month, and we've guided preliminary to 3% next year.
You can see that gray bar, the five-year—the gray line at the top is Five-Year Treasuries. That is the benchmark rate for our new investments in enhanced rate product. So we will earn a spread on top of that Five-Year Treasury rate. And you can see that gray line is way above the purple line. So this has been a multi-year tailwind, which increases our custodial revenue line. It will continue to be a tailwind. So we can flip to the next slide. This has got a lot of interest over the last couple of days for our meetings. This is a new disclosure for the company. We've previously just told you the total number. If you looked at our 3Q report, we said we have $14 billion of HSA cash.
This is the same $14 billion of HSA cash. We've taken out $500 million of that HSA cash, which is sitting in floating rate short-term deposits, and this is how the rest of that cash is invested. This is the maturity schedule of that cash. So you see on the front end there, we've got about $2.2 billion. That'll be maturing over the end of this month and next fiscal year. That's yielding currently 3%. So Five-Year Treasury is about close to 4% right now. That will be reinvested at a favorable rate. But look at the next two bars there. This is our COVID-era deposits. The reason that those rates are so low is because rates were zero when they were deposited, so 1.4% and 1.6%, coming off.
You can all take a view of where you think the Five-Year Treasury will be at that point in time, but suffice it to say, it will be higher. And the reason those bars are higher are the results of our past M&A. So WageWorks deal is in that first fiscal 2026 bar. The Further and Fifth Third acquisitions are in that fiscal 2027 bar. That's why you'll see that, that lumpiness. And we are now investing about 80%+ of reinvestments as well as new cash into the enhanced rate product. So what that will effectively do is push these bars out to the right, and should help us smooth that yield rate.
But the purpose of this disclosure is really to get you guys so that we're at a healthcare conference, and we're talking about interest rates. We don't wanna talk about interest rates. We wanna talk about growth in HSA accounts. We wanna talk about growth in HSA balances. That's gonna drive the long-term value of the business. And this yield, what you really need to. The one number you need to figure out is, what do you believe is the long-term neutral Five-Year Treasury rate? And that number certainly will drive a higher custodial yield than we have right now, but that's one number that we each have to figure out, and then we can all talk about market growth and account growth and asset growth. What's this gonna mean?
Obviously, a very high margin business, the custodial revenue, that drops down pretty significantly to EBITDA, and then to cash flow. We've generated $470 million of operating cash flow over the last three years. We generate $166 million year- to- date for the first three quarters. You can now all more precisely model the future custodial revenue, and you will see that number continuing to expand. And finally, just an update on our capital structure. We ended the quarter with $334 million of cash. We are 1.6x levered.
Over on the right, you see how we think of the waterfall of capital allocation, and think of that up high on the bar as high returns to shareholder, bottom of the bar, lower returns to shareholders. Clearly, organic growth we view as the top driver of shareholder value, but portfolio M&A, the second bar, we are going to close the acquisition of BenefitWallet. It will be a multi-stage close, but by the end of our fiscal second quarter, we should have all of those accounts and assets on the platform. So Q3, you will see a true run rate quarter. That deal, of course, will push our leverage up a little bit, and we think of that bottom bar of debt reduction as the one that moves up and down this scale, right?
As we, as we are doing deals and pushing our leverage up, obviously, we wanna reduce that debt, bring our leverage back down. We're happy with where we are now. At 1.6 x leverage, paying down low interest rate debt is not a huge priority, but will be post that acquisition. And then, of course, the one bar that we haven't talked about is return of capital in the middle. Obviously, we're gonna increase our leverage.
It's not gonna be a near-term event, but if we continue to execute on this plan and continue to generate that cash flow, don't have portfolio acquisitions, if we don't have portfolio acquisition opportunities, we'll clearly start to build very large cash balances, and we'll have to talk about returning some of that capital to shareholders in the future.
... So here's the plug. Jon alluded to that, alluded to that plug. February 22nd, at our headquarters in Draper, Utah, we're gonna have our first Investor Day in-
Four years?
Five years. So we're gonna talk a little bit more about the technology that Jon, Jon was discussing there. We can deep dive a little bit more into that, into that maturity schedule as the market digests it a little bit. Talk a little bit more about that enhanced rate transition. I think Steve is gonna host a, a great dinner the night before the Investor Day. We're gonna talk about what's going on in Washington. So some potential tailwinds to to help, to help grow this marketplace a little bit faster. And I think it's gonna be, it's gonna be a great event. I know many of you have already registered, but for those of you who have not, please, please do so, and that's the QR code that will bring you to the registration link.
I think with that, we will open it up for questions. Thanks.
Thanks so much for such a great presentation. If you do have a question, raise your hand, and we'll be sure we get to you. It's a little bit hard to see over here, so I'll just try and keep an eye. But I'll start with the first one, and I'm gonna take instructions, and I'm not gonna ask about rates to start. You know, you have historically, you know, kinda talked about the market maturity of, you know, kind of 50 million-60 million accounts. We're about halfway there right now. Can you, you know, talk about what the key catalysts or drivers are to continued penetration of the market?
Yeah, I mean, I think we're at a place where if you look at the data, you know, in the high end of the market, you know, about 60% of firms offer HSAs. Though many of the firms that offer them, right, they're basically offering a product that is not at the level of the plan itself priced terribly attractively. I think that's you know, they're sort of like: "Oh, I'll offer this to my guys in accounting who want their tax savings, but I'll take some of it, too, by having effectively an expensive plan." And so there's still even within enterprise, there's still plenty of work to do. Steve was just saying I won't mention the hospital. Can I mention the hospital? I guess I can. Can I? No.
Probably not. But we have a client that, a partner of ours and a client that's in Massachusetts and is a general hospital that, like, has never offered HSAs, and now they offer HSAs. So they still, like, employ 80,000 people, and so there's still room for growth in that, but I think the bulk of the new logo growth is now occurring in the middle market and small group market. And then, at the individual penetra- you know, individual level, it really is about, in my view, people understanding that, all of the health plan offerings they have at this point, and most employers, have very similar profiles in terms of their likely out-of-pocket expenditures, or in fact, actual out-of-pocket expenditures.
Some of them are deductible, some are not, and we in the HR department's doing a better job of... as better job as we can, of articulating the value of the HSA plan. Once people are in the HSA plan, they're gonna be in the HSA.
Mm.
And so I think if you sort of take all that together, we see the next decade being one where we don't think that you're gonna have geometric growth, but algebraic is reasonable. And so if we grow, you know, 2 million accounts-ish to 2.5 million accounts a year, within less than 10 years, we'll be at 55 million.
Dr. Neeleman, I don't wanna spoil the surprise for your dinner in February.
Yeah
... but, you know, can you talk a little bit about, you know, what's going on in Washington, and is there anything that's gonna, you know, catalyze growth?
Well, apparently, Speaker Johnson has a spending package in place—which is nice. No, I mean, they did pass out of committee some HSA expansion stuff in the fall. It's expensive, and so we've been working on different ways to try and bring that cost down. I think, look, generally, there's a healthy appetite to get more people the benefits of HSAs, and, you know, one of the challenges is, how do you pay for it? We've come up with, we think, some novel solutions, and we'll have some folks there on the 22nd. Or is it 21st or 22nd? When's the dinner?
21st.
21st is the dinner.
You only find out about the dinner if you register for the conference, though.
Yeah.
That's how it works.
21st. But, we'll have some, we'll have some nice, insight from people that are right there on the streets. And look, the I think we're beyond the old kind of, dictum that, that HSAs are bad for people, right? I mean, everyone understands, that deductibles are challenging, but, one quick- couple facts: the average family PPO deductible in this country is $2,900. The average HSA is higher than that, but not that much higher, you know? It's, like, $4,500. And so the, the, the antidote to all of these high deductibles and out-of-pocket costs are really the health savings account, and people are starting to get that.
And so I think legislators are generally more open to saying: How can we tweak things a little bit to let people have the benefits of this immediate tax-advantaged spending, device that also becomes a long-term savings-
Mm
... device as well? So we'll talk more about it.
Great. Looking forward to it. You know, Jon, you talked about, you know, taking share, and, you know, growing above the market. How much of that is just, you know, from market consolidation? Because, you know, a large portion of the market is still very fragmented, so how much opportunity is there for consolidation?
Yeah, I mean, if you look at the three largest players, ourselves, Optum, and then Fidelity, collectively 50% of the market, which means that there's another 50% out there, and I think, you know, that component will continue to consolidate. It is probably worth noting that, you know, even among the top three, that on an organic basis, Optum has lost share. It just, you know, has done some M&A to get back to break even, basically. I don't wanna poke the bear, but that's the way it is. They're probably not in this room. So, I do think that's a piece of the puzzle, but I also am pleased that we continue to win business from our best competitors.
And the reason we're able to do that boils down to the fact, in my view, that what we're offering and the way we've approached the business is about using the financial power of the HSA to drive what you know, everything else that our clients and partners are trying to do, versus, the HSA is just a, you know, essentially another little account that sort of works like an IRA with its own foibles, and if you buy our walled garden, then this is in the walled garden. I, I think it's just a different approach, and it's a better approach ultimately, not only for HealthEquity and our clients and partners, but ultimately, I think, for healthcare as a whole.
That's helpful. You always have great insight on, you know, the macro backdrop, and when we were sitting here this time last year, everyone had so much angst about employment. So curious, you know, what were conversations like this year with employers, you know, during-
Bless you
... the selling season? And, you know, kind of how are you preparing for next year within your guidance and kind of around macro?
Yeah, I mean, the interesting factor this year has been that there's been a lot less macro talk over the course of the year. Though some, not... But, there's been a lot of talk about the annualized increases in whether you conceptualize it as premium or cost, just annualized increase in healthcare cost. Apparently, everyone else at this conference is doing too good a job. And so, sorry. Nothing. Nothing, it's too late in the day. But, so a lot of the conversation this year has been about that, and I think maybe I'm gonna throw to Steve a little bit since he's in these conversations, too.
I mean, when you talk to firms about what they're looking at this year and what they did look at this year, and look at our enterprises that in particular ended up turning the knobs in the right direction on HSA, kinda talk a little about that.
Well, I think you're right. I mean, I think that when they look at these 6% or 8% or whatever percentage premium increases based upon, you know, the size of the employer, smaller employers are getting hit more than that. You know, the one question is: How do I shave off a couple of percentage points? And there's a few ways to do it. If they go to a higher deductible, obviously their premium is gonna be lower. But then if people have these HSAs, and that's where we've been doing a lot of this engagement stuff, and they're... You know, I think for the first time, Jon, in 20 years, most employers are now saying, "Yeah, we will give you access to our whole population.
You can message them, you can engage with them, you can teach them about the benefits of the HSA, 'cause every dollar that goes into the HSA saves them payroll taxes, right? And people don't always—it's not always intuitive that the money that goes into a 401(k), the employer still has to pay payroll taxes. Money that goes into an HSA, the employer is saving 8% roughly on every dollar that goes in, into the health savings account. So there's multiple ways they can save, not just by having a little bit higher deductible, a little lower premium, but then you also have people that are saving on taxes. And, you know, and we do, we do see better, better utilization for people that are in the health savings account. So yeah, they're just saying: Look, please engage with our people.
Help us not only get more people into these types of plans, but then teach them how to put more money into the account, right? Maybe even help them understand that once they get their match in their 401(k), they should consider now topping off their health savings account, because that's gonna save some bucks on taxes. And then, you know, we're always a believer that if we can help people start to do things like do matching in the account, that's helpful. Or we've talked a lot about incentives. If they do certain preventative care things, you reward them by putting money in the HSA. Some of our employers are doing that.
We think we can do a better job of that, because then you're not only driving down healthcare cost through preventative care, but you're also increasing contributions to the HSA.
You know, Jon, I thought some of the products you talked about before, you know, particularly around, like, AI, and, you know, your ability to kind of comb through the receipts and things like that, is, is really interesting. Are you, you know, leveraging that in your conversations with employers, to kind of say, like: Hey, we have these capabilities, and it's, it's more user-friendly for your employees?
I'll tell you, I'm so looking... Well, I'm looking forward, I shouldn't say that. It's already happening, since the enterprise sales cycle for next year has already begun. But what's so great about this cycle is that we've spent and our, and the clients who are on our advisory board and the like already know this, 'cause they had peeks into that, right? But it's so great to be able to go into new and existing clients, and you know, we've been talking about integration for several years now in one form or another, and to have the whole conversation be about: Here's what's new, here's what's new, here's what's new, here's what's new.
And it's just, you know, you all know that feeling when you, you know, you go in to, you know, pitch something, whatever you're pitching, and, and it's really new, and, you know, it really sings. And so, to offer just one example, you know, we have one example beyond the ones I mentioned earlier. One of the things that we have coming down the pipe this year is, you know, everyone remembers transparency and what happened with transparency and all that kind of business.
One of the things that we're doing this year is using the information that's already in our ecosystem to be able to give our members, you know, very tangible views on, "Here's things you could be doing right now to spend less." And they're not like, "Don't go to McDonald's." They already know that, right? You know, although McDonald's is pretty delicious. But, but, and so, you know, that's the kind of thing that. And, and we're able to do it in, you know, plain human language, thanks to what AI can do. And it'll be so interesting and so cool to see how this next sales cycle pans out, given that so much of what we're talking about is on the innovation side as opposed to the integration side. So looking, really looking forward to it.
I'm just gonna pause and see if there's any questions.
Maybe behind the pillar. I see one. Wait, maybe not. You guys are so shy.
Well, I'll keep asking then.
Yeah.
I am gonna have to ask a little bit about rates.
Go for it.
One thing I do wanna talk about is just Enhanced Rates.
Mm.
You know, that's something that's provided a really nice lift to your yield, and has a, you know, kind of a slightly longer duration than, you know, kind of some of your traditional deposits. So can you talk about maybe how that'll provide stability for your yield going forward?
Yeah, so, so I would say, you used the right word, duration there, and not maturity. So it really the maturity horizon is the same five years. We generally did five-year CDs in the bank market. We're committing the cash for five years with the insurance providers, and the Five-Year Treasury is the benchmark in which those contracts are measured from. But what the insurer can do in building the contract and the repricing mechanism in the contract, is to say, "Hey, let's base this instead of..." You know, it's a fixed rate for five-y ears.
We can say, "Let's build this on a 10-Year Treasury ladder," and sort of repricing more consistently throughout the contract so that the deposit truly is at that four and a half, five-year duration for its entire life, as opposed to I invest for five years, and all of that comes due five years from the placement, and you're really exposed to that repricing on that day and the yield on that day. So I think that's the way that we'll reduce the volatility or the standard deviation in our eventual average custodial yield. And it also will mean higher highs in the rate cycle. It will also mean higher lows in the rate cycle, because we are just...
This is just a product by its design, that the insurer can offer a higher spread to that Five-Year Treasury than the bank can.
That's helpful. And then maybe just, you know, kind of digging in on margins. You know, your guidance for next year implies about 300 basis points of margin expansion. Can you talk about, you know, what's driving that leverage? Is that, you know, kind of entirely yields? Is there some other, you know, components to that? And maybe as we think about beyond next year, what are some of the drivers of leverage?
Yeah, it's a lot... Obviously, it's a lot of yield because we're guiding to, you know, 50 basis points more yield across the balance for next year. But it's not entirely, right? Like, we've talked about on the last few calls, that we feel like we've hit the top of the cycle on tech and dev as a percentage of revenue, just because of all of that focus on integration over the past few years. Now, while those dollars, we're not gonna reduce the total scope of dollars or the head count of the tech and dev department, we're deploying them towards more of the product development side of the house. But you should see revenue growing faster than the tech and dev cost.
So obviously, we're gonna get the leverage from those lines. Sales and marketing, the same. Like, we, we've sort of found a good level here at 8.8% of revenue. G&A, again, should get efficiencies from the higher revenue, so it's not all just a drop-down of the yield story. Yeah, we're gonna start to drive the below-the-gross-profit efficiencies as well.
I think, to just add, you know, also, if you look above the line, some of the things that we've done in prior years are now, you know, you're gonna see the full benefit of. So, for example, you know, it's not very exciting, but we will be done by sometime early in the year in consolidating our various card processing relationships as we move to our chip cards to one. And, you know, that's gonna save us several million dollars in what shows up as interchange expense, not a number that anyone ever really looks at.
Mm-hmm.
But it's, you know, last time I checked, on a, you know, a little more than $1 billion of revenue, $6 million or $7 million of savings is, you know, is-
Pretty good
... 0.6%-0.7% of margin. So that's good. And, yeah, and so, I think, there's some stuff on the above the gross margin line, too, that I think is relevant.
As you do your, you know, kind of budgeting and planning looking forward-
Mm
... how do you think about balancing continued investment in the business versus leverage?
Yeah, I mean, I think that that's what we tried to lay out. I think we are obviously investing in organic growth, and I think there's a limit to that waterfall. I can't... If I triple the size of the sales force, will we materially sell more than 900,000 HSAs? Probably not.
Mm.
Right? So it's investing to that level that we believe is at the frontier of diminishing returns. We absolutely would like to continue doing portfolio acquisitions. Like, we believe that the return is significant. It's higher than our cost of capital. But we're not gonna try and create that demand by paying up for those assets. We'd like to close the deal that we've announced to date. So, but we're gonna continue to pursue those opportunities when they become available, absolutely. So I mean, that's near term, how we thought of using the capital, and we're gonna, like I said, borrow some money to close that deal.
Leverage is gonna tick up a little bit, so we wanna bring that, bring that back down with the cash flow that we're gonna generate. So that, that's really the new- the near-term priority on capital allocation.
That's really helpful. And, you know, I guess you kind of alluded to it a little bit, that you're kind of hoping people focus a little bit more on, you know, market growth versus yields. But is there anything that you're kind of really hoping that investors are gonna take away from your upcoming Investor Day?
... you want me to take this one? You want me to take it?
No, you take it.
I don't know. Look, I think there are three things. The first is, we will, in addition to some of the investment in... You know, you think about when you talk about investing in organic growth, investment in, like, sales and marketing line.
Yeah.
We'll get to see a little bit of where we're investing for around, you know, potential subsequent growth drivers. As we've said many times recently, you should not expect that we're gonna be doing some, you know, horizontal acquisition. I don't think it's the right thing for us, but it's very useful for us to have sufficient capital and sufficient sort of room to deliver this kind of margin expansion and still be making investments in a couple of really interesting areas. And what I...
It's not so much that I want people to, you know, know it's this one and this one, but I want them to understand that within the margins we're presenting, we're also able to genuinely fund an innovation effort around new product that has the opportunity to add meaningfully to top line in the years to come. The second thing I want people to come away from Investor Day with is a real understanding of what and come to their own view, but ultimately, an understanding of what we see as driving our growth in terms of accounts, assets, ultimately revenue, over the next several years.
So that they can, when they do their analysis, you know, really have a view that goes beyond, "Well, you know, Devenir says this," and whoever the scorekeeper is, says this, and you can, you know, maybe do a little better than that, and that's the end of it. Because we think that the more you understand what we have, the more excited you should be about the, the volume growth trajectory of the business.
Then lastly, returning to the subject of the custodial yields, between now and then, we'll see how people digest the new disclosure, and to the extent that they have not successfully gotten to the place where they can calculate our earnings based on any assumption they wanna make about the future yield curve and how much cash we're gonna bring in, we will explain how to do it. And, I'm saying that colloquially, but we'll hammer that in.
The value of that, in my view, to shareholders, is that it should reduce the volatility that you see in our issue, and keep both you and we focused on what really adds value to the firm, which is growing the base of business we have, growing the margins we generate from that business, you know, on a neutral basis. Serving more clients, serving more partners, and ultimately serving more members.
Terrific. Well, thank you so much for sharing your time with us today.
Thank you.
Thank you, everyone, for joining.
Thank you. Thanks, everyone.