Thank you for standing by. I'd now like to turn the call over to Mr. Richard Putnam.
Thank you, Valerie. Good afternoon, and welcome to HealthEquity's fiscal year 2022 earnings conference call. My name is Richard Putnam, investor relations for HealthEquity, and joining me today is Jon Kessler, President and Chief Executive Officer; Dr. Steve Neeleman, Vice Chair and founder of the company; Tyson Murdock, Executive Vice President and Chief Financial Officer; and Ted Bloomberg, Executive Vice President and Chief Operating Officer. Before I turn the call over to Jon, I have two important reminders. First, a press release announcing our financial results for fiscal year 2022 was issued after the market closed this afternoon. The financial results reported in the press release include the contributions from our wholly owned subsidiary, WageWorks, and accounts it administers. The press release also includes definition of certain Non-GAAP financial measures that we will reference today, including recent definitional changes to those measures.
A copy of today's press release, including reconciliations of these Non-GAAP measures to comparable GAAP measures, and a recording of this webcast can be found on our investor relations website, which is ir.healthequity.com. Second, our comments and responses to your questions today reflect management's view as of today, March 22nd, 2022, and we will talk about forward-looking statements as defined by the SEC, including predictions, expectations, estimates, or other information that might be considered forward-looking. There are many important factors relating to our business which could affect the forward-looking statements made today. These forward-looking statements are subject to risk and uncertainties that may cause our future results to differ materially from statements made here today.
We caution you against placing undue reliance on these forward-looking statements, and we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock, detailed in our latest annual report on Form 10-K and subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future results. At the conclusion of our prepared remarks, we will turn the call over to Valerie to provide some instructions, and she will also host our Q&A. With that, turn the mic over to our Chief Executive Officer, Jon Kessler.
Gets better every time, Richard. Hello, everyone, and thank you for joining us all together in person, the whole crew here for the first time in a long time, which is really cool. Today, we're announcing results for HealthEquity's fiscal fourth quarter and for fiscal 2022, ended January 31st, and we're providing guidance for fiscal 2023. I will discuss the FY 2022 results, with Ted reporting on Q4 operational milestones. Tyson will provide financial details of fiscal 2022 and provide our fiscal 2023 guidance based on the results we're reporting today. Then Steve will join us for Q&A. Starting, as we always do, with our five key metrics. Fiscal 2022 revenue of $757 million is up 3% year-over-year, tempered by rate headwinds and the effects of the pandemic.
Adjusted EBITDA of $236 million and adjusted EBITDA margin of 31%, both down slightly from FY 2021, reflecting the pandemic's impact on high margin custodial, commuter, and interchange revenues during the year. Record HSA sales and portfolio acquisitions helped HSA members grow to 7.2 million. HSA members ended FY 2022 with $19.6 billion in HSA assets, and we ended FY 2022 with 14.4 million total accounts. Beyond the key metrics, allow me to speak for a moment on FY 2022 highlights and opportunities for us to improve. Leading the highlights is the growth of the HSA core. Continued double-digit balance growth. HSA members up 25%. Custodial assets up 37%. HSAs with investments up 37%. Invested custodial assets up 58%. Member-driven growth, client-driven growth, partner-driven growth, portfolio-driven growth.
This is delivery on the team's mission to connect health and wealth, and it's progress towards our vision of HSAs being as ubiquitous as retirement accounts, and we also believe it is a significant, durable contribution to the value of our enterprise. However, ancillary consumer-directed benefits delivered uneven performance in fiscal 2022. CDBs, as you know, are services within our total solution for employers, including FSA, COBRA, and commuter benefits administration. As Ted will discuss, the total solution bundle drove record HSA opportunities in FY 2022, but pandemic macro and regulatory factors and platform migration weighed on our CDB results and net growth. Now, many of these challenges are behind us. Fast HSA growth is reducing our exposure to standalone CDB performance, and we're exploring ways to accelerate that process. As a final note, the team launched innovations that we believe over the longer term are game changers in fiscal 2022.
Enhanced Rates are raising custodial yields on HSA cash, customer-facing APIs, deepening product integration with network partners, and Prospect Boost, part of our Engage 360 platform, spurring new HSA adoption among our clients' employees. We've added technology leadership, including our new Chief Technology Officer, Elimelech Rosner, arrived this week, to drive these future innovations.
I will now turn the call over to Ted to talk about Q4 operational milestones. Mr. Bloomberg.
Thank you, Jon. Good afternoon, everybody. It is my pleasure to report the attainment of several key integration milestones. The WageWorks integration is substantially complete, with 20+ migrations behind us and $80 million of annual run rate synergies achieved, well beyond our initial goal of $50 million. Moreover, our hypothesis proved correct. We are a better partner to our clients, health and retirement plans, and other benefit administration partners when we offer the total solution bundle. We were able to prove it through increased HSA sales. Team Purple, our partners, and our clients helped HSA members open 918,000 new accounts in fiscal 2022. That's 34% more HSAs than sold a year ago and 27% more than our previous fiscal year record. Cross-sales and bundled total solution sales grew 19% year-over-year.
I could not be prouder of our integration efforts, to which every member of Team Purple has contributed over the past years. We continue to leverage our scale and proprietary platform and generate additional cross-sell opportunities from the HSA portfolios purchased from Fifth Third Bank early in fiscal 2022, and just this month, from Health Savings Administrators. Both of these migrations are complete. Integration of Further is underway with an early focus on deepening relationships with our partners among Blue Cross Blue Shield plans. As noted when Further closed, we now partner with a great majority of the Blue Cross Blue Shield licensees. We will fully complete the carve-out of this business from the seller this year. Finally, I'd like to say a bit about service delivery during the just completed peak season.
We entered Q4 concerned about our Purple teammates on the front lines of service due to the combined impacts of record growth and platform migrations I just discussed, increased team turnover and absenteeism from the then-pending federal contractor vaccine mandate, and the Omicron variant delivering the highest infection rates of the COVID-19 pandemic across our workforce. What investors see as seasonally lower Q4 margins, we experience as remotely hiring, training, and equipping roughly 1,500 new internal and external team members to help meet the peak season needs of our members and clients. Members, many of whom are new to HealthEquity, gave us high marks even on peak days. Clients experienced longer resolution times, and serving their disparate needs was challenging for new team members. We avoided the worst-case scenarios regarding team member attrition.
While the peak is now behind us, we've had more to do in Q1 than in other years, and more peak season staffing and other costs to wind down. We've adopted a conservative, Purple approach to this process, prioritizing service. Tyson will discuss the implications for seasonality and margins in a moment. I'd like to conclude with a huge thank you to our teammates who have worked so hard, as well as our broker, consultant, and network partners who worked tirelessly with us to serve both our clients and members. Now I will turn it over to Tyson to talk about our financial results and outlook.
Thank you, Ted. I will review our fourth quarter GAAP and Non-GAAP financial results. A reconciliation of GAAP measures to Non-GAAP measures is found in today's press release. Fourth quarter revenue increased 8% even as the economic effects of the pandemic negatively impacted each of our three revenue categories and include the benefit of Further. Service revenue increased 1% to $112.5 million, representing 55% of total revenue in the quarter. Strong growth in HSAs helped average total accounts grow 13% year-over-year, while CDBs grew 2% year-over-year, benefiting from acquired and new open enrollment accounts that start in January. Custodial revenue grew 20% to $58.1 million in the fourth quarter, representing 29% of total revenue in the quarter.
The 25 basis point year-over-year decline in the annualized yield on HSA cash with yield assets was offset by 33% year-over-year growth of average HSA cash with yield and 60% growth in average HSA investments with yield in the quarter. The annualized interest rate yield for Q4 was 172 basis points on HSA cash with yield and 175 for the year. This yield is a blended rate for all HSA cash with yields. The HSA assets table in today's press release provides additional details. As previously mentioned, we will not be breaking out HSA assets without yield going forward. Interchange revenue grew 16% to $32.8 million, representing 16% of total revenue in the quarter.
The interchange revenue increase was primarily due to HSA spend associated with 25% year-over-year growth in HSAs. Gross profit was $105.3 million, compared to $100.9 million in the fourth quarter of last year, and gross margin was 52% in the quarter and 56% for the year. Service costs were higher in the quarter as we ramped up to welcome over 900,000 new HSA members from this year's selling season, and from the Further, Fifth Third, and Health Savings Administrators acquisitions, an additional 827,000 new HSA members. Operating expenses were $132.5 million, or 65% of revenue, including amortization of acquired intangible assets and merger integration expenses, which together represented 24% of revenue.
The loss from operations was $27.3 million, compared to a loss of $1.6 million in the prior year, including exiting out of a superfluous sports asset contract inherited from WageWorks. Net loss for the fourth quarter was $32.8 million, or $0.39 per share on a GAAP EPS basis, compared to net income of $5.4 million or $0.07 per share in the prior year. Our Non-GAAP net income was $17 million for the quarter, compared to $34.6 million a year ago. Non-GAAP net income per share was $0.20 per share, compared to $0.44 Per share last year. Adjusted EBITDA for the quarter decreased 11% to $50.4 million, and adjusted EBITDA margin was 25%. Fourth quarter adjusted EBITDA margins were impacted by service cost ramp, as Ted discussed.
For the full fiscal year, revenue was $756.6 million, resulting in gross profit of $423.7 million or a gross profit margin of 56%. Loss from operations was $24.2 million, and adjusted EBITDA was $236 million, or 31% margin. Turning to the balance sheet. As of January 31st, 2022, we had $225 million of cash and cash equivalents, with $930 million of debt outstanding net of issuance costs, which is a $56 million reduction in debt from fiscal 2021. The company's $1 billion line of credit remained undrawn at fiscal year-end. The year-end cash balance, of course, includes roughly $60 million used in the Health Savings Administrators acquisition, which closed on March 1st and will be reflected in Q1 of fiscal 2023.
Based on where we ended fiscal 2022, we now expect the following for fiscal 2023. We expect to generate revenue for fiscal 2023 in a range between $820 million and $830 million. We expect our Non-GAAP net income to be between $102 million and $110 million, resulting in Non-GAAP diluted net income per share between $1.21 and $1.30, based upon an estimated 84 million shares outstanding for the year. We expect HealthEquity's adjusted EBITDA to be between $245 million and $255 million for fiscal 2023. Today's guidance includes our most recent estimate of service, custodial, and interchange revenue based on a successful fiscal 2022 selling season and early fiscal 2023 results. Guidance assumes a yield on HSA cash with yield of approximately 160 basis points.
This includes the benefit to the yield from Wednesday's decision by Fed officials to raise the benchmark Fed funds rate. Importantly, as is our practice, today's guidance does not factor in further changes into monetary policy, such as widely expected additional Fed rate hikes or increases from the recent placement rates of our HSA cash. These would have a positive impact on revenue and income. As you know, however, most of our HSA custodial cash is deployed in multiyear fixed rates or fixed rate instruments. Between 5%-10% of HSA cash plus CDB client health funds are deployed in variable rate instruments tied to LIBOR. Policy-driven rate increases this year will provide a greater lift in fiscal 2024 and beyond.
We have assumed a measure of continued mix shift from deposit products to our Enhanced Rates offering over the course of fiscal 2023 and our guidance. Our term loan A is also connected to LIBOR, and interest expense associated with it will increase with future Fed rate hikes. Our revenue guidance assumes that revenues from commuter benefits will remain depressed, with only very gradual and modest improvements throughout the year. Guidance assumes no new variant impact that may cause further disruptions. With respect to healthcare spend and its impact on interchange revenue, we assume per account spend at about fiscal 2022 levels, with healthcare services remaining broadly open to our members. We assume the normal roll-off of prior year FSAs in the first half of fiscal 2023 as normal grace and runoff periods close for calendar year Flexible Spending Accounts.
We assume no additional COBRA subsidies in fiscal 2023, such as what we benefited from in fiscal 2022, and that with full employment, COBRA uptake rates will remain subdued. Our guidance reflects the effects on depreciation and amortization expense of increased capitalized technology and development spend in recent years, as can be seen in our fiscal 2022 and historical statements of cash flow. As you know, we don't provide quarterly guidance. However, I wanna highlight that we expect results to differ seasonally from past years. Specifically, we expect to deliver a smaller share of full-year profits in Q1, and conversely, a larger share in the second half than historical patterns would suggest.
This is because we will incur $5 million-$7 million of expense primarily in Q1 due to maintained elevated servicing capacity in Q1 in response to record sales volume, portfolio acquisitions, platform migration, activity, and pandemic-related attrition and other risks. To be clear, these expenses are reflected in our full year guidance. The outlook for fiscal 2023 assumes a projected statutory income tax rate of approximately 25%. As we have done in recent reporting periods, our full year guidance includes a detailed reconciliation of GAAP to Non-GAAP metrics provided in the earnings release, and a definition of all such items is included at the end of the earnings release. In addition, while the amortization of acquired intangible assets is being excluded from Non-GAAP net income, the revenue generated from those acquired intangible assets is not excluded.
With that, I'll turn the call back over to Jon for some closing remarks. Jon?
Thanks, Tyson. Yeah, I wanna just put an exclamation point on comments that both Ted and Tyson made regarding the peak season activity that we've gone through over the last three or four months and are now kind of starting to wind down. This has been a really unusual season with a combination of record sales, an incredible effort on completing substantially the WageWorks platform migrations for CDBs. All done within the midst of Omicron and illnesses and trying to keep our team members safe and healthy and happy and retained. It was pulled off. That's no one person who's responsible for that, but I do wanna take a moment to thank both our team and our partners.
Thank you to our partners for being patient and reasonable with us and our team for its determination to be Purple and do Purple, notwithstanding the challenges that we faced during this period. Thank you to everyone. With that, let's open the call up to questions. Valerie.
Our first question comes from Anne Samuel of JP Morgan. Your line is open.
Hey, guys. Thanks for taking the question.
Hi, Anne.
I was hoping maybe you could provide a little bit more color on, you know, on the EBITDA guide. What are the headwinds and tailwinds embedded within that guidance?
Tyson?
Yeah. You know, just pointed out in script, right, the $5 million-$7 million that's gonna come in in Q1. That is definitely embedded within guidance, and that really, again, relates to the fact that we had portfolio acquisition going on, record sales. We were completing all the migrations of the CDBs. We had the vax mandate and the increasing attrition over that period of time. There were a lot of factors going into that. That just runs over into the current year, and that hasn't been the case, Anne, in other years. I wanted to point that out specifically related to that, you know, $5 million-$7 million.
If you think about, you know, the puts and takes for the rest of the year, of course, we haven't built in our guidance the Fed rate increases that you hear about every single morning when you turn the television on. So you hear about those. Those aren't baked in. We baked in the 25 basis points. And as you know, we would get a tailwind from increasing rates on that variable portion of our portfolio, which is, you know, around $1 billion, just under. And so you can kind of do the math on a basis point increase like that. So that, of course, would be a tailwind into that guidance, but not included in the guidance.
I think the other factor that you'd wanna take into account, and we've said this a lot of times before, so I'm kind of being repetitive, is that we don't have the COBRA subsidy in this current year. That was a $10 million revenue upside in the prior year as a comparable to this year. You have to take that into account as well. I think I'll stop there, Jon. Do you have anything else to add? Yeah.
I would just add, I mean, I think this. You know this of course, Anne, but it may not be obvious to everybody because we're at a moment of relative optimism with regard to rates. That being the case, when you look at fiscal 2022-23, fiscal 2023 compared to 2022, right? Rates are still a headwind in our fiscal 2023 guidance. Of course, all of that, you know, kind of drops down to the bottom line. You know, way to look at it is that now you've got $13 billion of cash and what's now looking like 15 basis points rather than 20 basis points, right? You know, you can do the math.
That's, you know, a high teens to approaching $20 million headwind in fiscal 2023 relative to 2022. Fortunately, we said this back in December, and it's become more true since. It seems pretty clear that that is turning around and that our cash balances continue to grow. That one is, I think, going forward, gonna be a nice tailwind for us.
That's really helpful. Then, you know, maybe if I could just ask one follow-up to that. You know, now that WageWorks is fully integrated, you've captured all the synergies from that, how should we be thinking about what kind of normalized margin expansion should look like, going forward?
You wanna start with this one?
Sure. Yeah. I think it goes back to, of course, the reason why we bought that was the CDBs and the cross-sell and the bundle, right? Being able to do that increased, obviously, our new sales this year, we, you know, believe. But I would look to margin expansion on the backs of how the custodial rates improve over time and also just the inherent change that we've made in the way that we place assets in the Enhanced Rates products. We're continuing to work our way through that. We have, you know, 10%+ , you know, in those programs now. We were able to put, you know, acquisition cash in there in most cases. We'll continue to do that as we get the opportunity.
Yeah, I think that's right.
That's great. Thank you.
Thanks, Anne.
Thank you. Our next question comes from Greg Peters of Raymond James. Your line is open.
Good afternoon, Team Purple.
Hello.
Glad to hear that you're all in person. We wish you
We're back to the one-part rule, though, Greg. We're back to, like, the old rules are back in place.
No, I didn't hear that in the.
I'm kidding.
No, no. I think you're just.
It was an open office.
I think you're messing with me, Jon. I just think you're using that rule for me, Jon, let's be honest.
It's very possible.
Yeah.
Go ahead.
I know you covered some of this in the script, but I wanted to focus on two areas of expenses that are in the income statement. Just look at the annual number, and I'm looking at specifically sales and marketing and technology development as a percentage of total revenue.
Yeah
Just watching the trends of both of those numbers in the income statement, they've been certainly up for fiscal year 2022 versus 2021. Technology and development is up a lot. It seems like you're forecasting that those numbers as a percentage of total revenue might be up again in 2023 versus 2022. I don't wanna put words in your mouth. Can you talk to us about what's going on in both of those line items and, you know, what you're thinking about for 2023?
Yeah. Why don't I start?
That's great.
Two thoughts. First of all, as you know, you know, we're gonna base T&D expense on the opportunity for return. If you look at what we've talked about from an innovation perspective, I sort of see that return as having been there and continuing to be there. From a sort of quantitative perspective, though, the thing that is really driving the observation you make is really increased CapEx flowing through the income statement. This is where I maybe will turn to Tyson to kind of walk you through it, 'cause we talked about this a little bit before, and then maybe I'll come back and talk about sales and marketing.
Sure. I mean, a good place to go to look at this, Greg, is in the cash flow statement in the investing section in capitalized development line item. It flows nicely with how you know we've been investing. You can see, you know, back when we were a much smaller company, what that number was in there. Then, you know, as we added the WageWorks acquisition, it essentially doubled over that period of time, and then it went up again last year as we made additional efforts on our platforms and really made some vast improvements there. That has come up over time. Of course, then that had to amortize through the technology and development line items, so you have that investment going through because of that.
I think that's probably the biggest thing that's rolling through there. Like Jon said, we're not gonna do stuff like that unless we can think we can get a higher ROI on it.
Yeah. On sales and marketing expense, the biggest thing is frankly that we're just a bigger company. Particularly as I think about it going forward, right? With the discussion, you may recall from the last both the February call and then back in December, you know, really putting the pedal to the metal in terms of driving sales through our partners, right? There's expense there that's just expense. That's what it is. You know, that's been a big piece of the puzzle there. I'm almost tempted to go try and find the recordings of prior earnings calls where it probably wasn't you, but somebody was like, "Why aren't you spending enough on sales and marketing expense?" You know.
Of course, there's the record sales that have come from it. I think that's kinda where we are. I would not expect, without wishing to make any particular forward-looking statement in this regard, or whatnot, you know, just kinda thinking about it, I don't see that sales and marketing trend line kinda really continuing very far. T&D, it's gonna be a function. I mean, in both cases, it's a function of what the return is, of course. But in T&D, I think we still have some whatever the term is that runs through the snake when you're eating it in terms of the amortizing. You don't eat the snake.
The bubble.
It's the snake eating the-
The bubble.
Right. Whatever it is that runs through the snake. Your observation's probably right there, but that's kinda how we're thinking about it. We're certainly not-
Well, you're not married to any control, at least.
You know how to paint a picture, that's for sure.
I have a voice for radio or face for radio.
That's gonna leave a mark for the rest of the day. I guess this is all embedded in the stock-based compensation guidance you offered for the-
Yes
For the fiscal year 2023. The number is a lot larger for the projected number for fiscal year 2023 than for 2022. I was, you know, getting into the pieces of what's causing that to be higher. You know, sales and marketing is sort of running at its sort of steady state, maybe up a little bit. Tech and development's up, but it was up last year. What's moving the number higher for fiscal year 2023 versus what you reported for 2022?
You wanna start on
Yeah.
Comp?
I mean, one of the things is the way that we're paying people, and that is with, you know, performance RSUs. When we value those using the simulations, they actually value a lot higher amount. You value that amount, and then it runs through at that amount. You don't ever change it, right? That aligns our interest with investors' interest because we want the stock to go up, obviously, 'cause it's gonna perform. Its performance is based on the stock increase. That is one reason why that happens with leadership comp and o f course, you know, if you're just going back through history, we have a lot more people. You go back 2.5 years, three years now, we've had less than 1,000 people, and now we're, you know, 3,500 people.
That's a pretty big increase. Not everyone gets equity, but a lot of people do. That makes an increase.
Yeah. I mean, I just wanted to highlight. Let me first say, this is a topic that we're talking about because we know that it's not so much that we're talking about the percentage increases. We sort of look at this in terms of things like burn rates and the like, and we know that those have been in reasonable ranges. Like, we can't just pat ourselves on the back on that topic and move on. This is definitely a topic of conversation. Keeping it under, you know, under control is the three factors that I would highlight. One, you know, the ones Tyson mentioned in particular, I mean, just to think about myself, as you know, Greg, others may not, I mean, my compensation is 100% PRSU.
They are valued at the time they're granted. It doesn't matter if they're ever earned. It doesn't matter what the price is when they're earned. That's it. You know, I don't understand why the accountants do it that way, but that's the way they do it, and I can't argue with that. It increases the price of those things by some large amount. The other additional point I want to make here is that, as I mentioned earlier, we are also doing some significant, let me say, adding both bench strength and forward strength within our technology organization as we do more and more work and are seeing more return from the work in tech transformation.
We have in our fiscal 2023 guidance reflected some of those anticipated expenses. Those hires, as you know, tend to be equity heavy, that's just kinda what happens. You know, that's a piece of the puzzle that's relevant to all of this, and that probably accounts for, actually, a fairly material component. Those two factors alone are probably the bulk of the delta here.
Got it. Well, I don't wanna overstay my welcome and then Richard calling me later, so I'm gonna stop there, and thank you for your answers.
He, he's never called you. Has he?
Oh, come on.
Thanks, Greg.
I get a call every once in a while.
Richard's the enforcer. He just does stuff. We have plausible deniability, Jon Poindexter of this operation. Okay.
Thanks, guys.
Thanks. Maybe I'll call him.
Thank you. Our next question comes from George Hill of Deutsche Bank. Your line is open.
Hey, George.
Hey, good afternoon, guys. Good afternoon, Jon and team. Thanks for taking the question. It's funny, Jon. I have a list of, like, 15 questions in front of me. I feel like I have to pick two or three. I'm gonna go to, on the last call, Steve talked about the opening a bit of the middle market. I guess one thing I wanted to ask you about the middle market and what you're seeing about the return of labor in general is the HSA mix and the people who are coming back to market. Given the strength that you saw in the sales in the sales going into what I'll call calendar 2022, fiscal 2023, do you feel like the mix continues to improve?
Like, are the number of people who are coming in and adopting HSAs greater than what the prior, I guess, what I'd call the prior cohort looks like? I have kinda two housekeeping questions for Tyson.
Ted, why don't you take this one? 'Cause I think this is really about what we're, you know, doing technologically and what the market is asking us to do as new clients come in around driving HSA adoption.
Yeah. I would make a couple points. I think it's a little early in this year's sales cycle to be able to tell you exactly how it's shaking out, the split between HSA and, you know, FSA, HRA-type plans. You know, our sacred obligation to the marketplace is to meet people where they are, right? Bring them into the family, and then convince them of the value of HSAs over time, which is what we continue to do. I think our sales season's off to, you know, an early but very solid start for this year. It's, you know, there's nothing appreciably obvious to us about the mix of HSA, non-HSA that feels different than previous years.
I think where the real opportunity is what Jon alluded to in his comments, which is we're getting better and better at talking to our existing clients about how to design their plans and how to talk to their employees about how to adopt them and how to maximize the benefit, right? What, you know, what the market is asking us for is, "Hey, help us, you know, help us leverage our benefits as a competitive differentiator. Help us have people actually use the benefits." We're seeing that, you know, in our marketing department's done a wonderful job driving things like, you know, high 90s% retention in HSA plans, right? You know, that's just great to see, and it's a couple of percentage points higher than it is historically.
That's the way you grow, is you start by keeping the people you have.
Right. Exactly. You know, I would say no insightful comment on what this mix of sales is this early in the year, but a lot of both opportunity and progress in driving HSA growth through existing clients, just in partnership with our clients, and that's been working really well.
Yeah. I'll say, Ted, I feel like, as I listen to you answer the question, I realize I kind of asked my question terribly. The thing I wanted to ask simplistically was, we're all seeing this demand and this focus on employee retention given how tight the labor market is. You guys had a very strong sales season heading into calendar 2022. As everybody's focused on benefits as a source of retention, it seems the answer from your selling season was HSAs are the answer as opposed to a richer benefit design in other ways are the answer. That's more of a statement than a question. I guess maybe just the feedback on, you know, why are employers saying, yes, HSAs are the answer to employee retention or at least part of the answer to employee retention?
It's the benefit design is kind of what I was trying to get at. I'm sorry.
Yeah. I mean, what it kind of comes back to is something we've talked about before, which is that the delta, the sort of richness of an HSA-qualified health plan versus the richness of what's now a typical PPO plan, they're just not that different. In many cases, they're deliberately, in terms of actuarial value, identical. You may recall, we talked about some market research on this topic that was either last call or must've been back in December. Then what you have is a little bit of, from the employer's perspective, you can effectively by focusing on doing what you need to do to have those plans be HSA qualified. I think that's particularly true in mid-market, where you're like, why wouldn't you do that?
You're giving a better benefit with the same actuarial value, more or less. Then I would add one other factor, which is part of the wave that Ted's comments are trying to surf, and that is more and more people have had these at other employers. One of the practical impacts of the current labor situation is that while labor markets are very tight, there's also a lot of movement. As people move, if they've figured out what an HSA is and how it works, they don't wanna not have one. That too has put pressure on benefits departments to kinda like go this route and to conceive of it less as something, you know, many years of, something I have to do and something my people are making me do.
You know, that's part of the overall process of driving us to this outcome that we see, which is it's not that everyone in the world will have an HSA, right? That's parenthetically, everyone doesn't have a 401(k), right? But we are, you know, part of the world of getting to that level of prevalence is the shift from like, the HSA is good, I do wish I didn't have to have that health plan, to you know what? The health plans are all pretty similar. I want that HSA. That helps me.
Okay. That, that's helpful. Jon, I just say that in the context of, I think we've heard some concerns where if employers were gonna work harder to retain employees, was the HSA going to be a beneficiary or a victim of that trend?
Yeah.
It seems like it's a beneficiary.
Yeah.
Tyson, two quick housekeeping questions.
It certainly has been a victim.
Right. Two quick housekeeping questions. On the non-COVID subsidy benefit in 2022, you talked about a $10 million benefit last year. Can you talk about what the margin profile on that is? The other housekeeping question is, I thought you said the most recent rate hike was explicitly included in the fiscal 2023 guidance. I guess, can you flesh any more color out around what is explicitly included in the guidance from the most recent hike? I will be quiet.
With the COBRA subsidy, I don't think we've ever talked about what the margin is.
Yeah, we said $10 million-$12 million.
We said 10-
We didn't talk about the margin.
Yeah, we said $10 million-$12 million of revenue, but we haven't necessarily.
It's at the average.
That the average, I would say, is probably out of it.
It wasn't super profitable. It wasn't like.
It was hard work. Yep.
It was a lot of work.
Yeah. The second question was how-
I don't think it was profitable for Ted's hair.
Yeah. The 25 basis points, I mean, if you think about that's really something that only affects the variable contracts that we have. You know, we won't place real money again, big money until next January. That's really an impact on next year that kinda gets, you know, banked, and we think about what we can negotiate rates at then. The variable component is, you know, a little less than $1 billion, so 25 basis points on that, you know, a couple of million, you know, $2.5 million annualized, something like that. We raised the bottom up guidance, and that was where we landed.
Yeah.
Great.
$2 million.
Thanks, George.
George will be picked on now. Peter, you're off the hook.
Thank you. Our next question comes from Scott Schoenhaus of Stephens. Your line is open.
Close. Close enough. Hey, guys. I want to touch back on your last quarter commentary. You mentioned that Fifth Third and Further were running at adjusted EBITDA margins that were dilutive. I believe you even quantified it around 20%. That's a steep discount to your historical adjusted EBITDA margins. Can you talk to us about how you're improving that throughout the year, what your guidance implies, when these books of business can be repriced at higher yields, all the moving parts on those two recent acquisitions? Thanks.
Yeah. It's really Further, I think, that we made that comment about, not Fifth Third Bank. Maybe Ted, I'll let you sort of speak to the state of integration of Further.
Sure. I would just portfolio acquisitions like Fifth Third typically tend to have a really nice margin profile relatively immediately, which is the distinction Jon's making. Further is similar to Wage. We bought a business that has a lower margin profile than we have, that we have now or than we had at the time with respect to Wage. You know, the act of synergizing that business, the act of combining the business, the act of sort of, you know, investing less, sunsetting platforms, and then migrating the business, we expect those businesses to ultimately perform at our margin profile. You know, in some cases, it could take, you know, two and a half years, like in the case of Wage.
With Further, we expect it to take around that amount of time, but for slightly different reasons, which is we're gonna go a little slower. Our expectation is we continue to expand the margin of the Further asset that we bought until it gets to roughly the HealthEquity margin.
Great. That's baked into your guidance for fiscal 2023?
Correct.
Okay. My second question is, did I hear you right, you're not gonna be breaking out the HSA investments versus cash going forward?
No. We were just saying during the period of the WageWorks. Thank you for asking this question, because I can imagine we'd be dealing with that one for, like, the next 10 days. No. All we were saying was in prior periods, we have broken out for a period after the WageWorks acquisition, we broke out cash without yield, and I think also investments.
Yes.
without yield.
Yeah.
What that actually was, as some of you will recall, is that WageWorks had some HSAs that were on, effectively third-party platforms where they were not earning those things. That's all done now. There's no point in breaking out any cash without yield or investments without yield because effectively there aren't any. That's really all. We'll continue to break out cash and investments as we always have.
Got it. I guess a follow-up there is, you know, as the stock market comes in and interest rates are set to expand, does your sales strategy shift from pushing more people towards HSA investments versus cash during this period?
No. Well, let me back up and say, when it comes to our members, the strategy that we have, and I think, Ted, you used this phrase earlier, is we wanna meet our members where they are. We feel like from an industry perspective, if you look at our major competitors, we are uniquely positioned to meet every member where they are, whether they're a spender, a saver, an investor, you know, a fat cat like, you know, Putnam over here, or completely superfluous like myself. How do you know they're superfluous? My point in all that is to say that we don't take a view per se that is based on wherever yields are.
We're gonna try and push our members from A to B because they have a way of changing over long periods of time, and our responsibility to our members from our perspective is to help them think about long-term. We have always been of the view and will remain of the view that the more people that learn how to use an HSA, what that's likely to do is it's gonna increase the percentage of our members who invest, and it should increase invested assets, though, of course, that's subject to some market volatility. We'll continue to drive those numbers, continue to report on them, continue to celebrate that as a success for our members. Ultimately, we think that if you take the long view, no matter what the relative yields are, that it's the right answer.
Because when people understand about how to use one of these products, they are not only better like investors, they end up having more cash in their account on average, and you see that in our own mature accounts, right? They end up also being stickier customers, right? They're more likely to stick with us as they spin off of a given employer or that kind of thing. Like, this has been a winning strategy for us this whole time, and nothing about, you know, current conditions in terms of the relative yields between cash and investments is gonna change that strategy.
Very helpful. Thank you very much.
Thanks, Scott.
Thank you. Our next question comes from David Larsen of BTIG. Your line is open.
Hi, Evan. Congratulations. Hi. Congrats on a good quarter. Can you just remind me how much revenue contribution is there from Further and Fifth Third in the fiscal 2023 guide? What is Benefit Concepts again? Thanks.
I don't know what Benefit Concepts is. That's not one of ours. Maybe talking about Health Savings Administrators. HSA Administrators. Yeah. That's probably what it is. I've heard of a company called that, but it's not affiliated with us. So just to get a feel for it, I'm gonna focus on Further and refer you back to the numbers at the time of the acquisition. I think at the time of the acquisition, we said that Further would produce about $60 million in run rate revenue. We, as you may recall, ultimately carved out the Veeva component. Let's say that's roughly $5 million, so call it $55 million.
That's what it's contributing in fiscal 2023 exactly as we said it would in fiscal 2023. The other transactions are much smaller. You know, they are, you know, they're single-digit contributors. I would note that in the case of Further, right, Further contributed about, what was it? $14 million or something, like some number in the mid-teens in the fourth quarter. Of course, Fifth Third Bank was closed earlier last year, so it contributed over the course of the last half of the year and so forth. It's not like they weren't in fiscal 2022 either. But the net difference for Further between Q4 and/or between fiscal 2022 and fiscal 2023 is the difference between, I don't know, roughly $12 million, $13 million, $14 million, and $55 million.
Okay. Great. Thanks. In terms of the accounts that generate earnings or yield based on LIBOR, are you gonna increase that portion in 2023 or over the next couple of years? I mean, it just seems like you're locked into you know these seemingly low rates. Like, why not take more risk?
Well, you actually just answered your own question. I'm being a little flip with you, David. I'm sorry. Look, I mean, a way to think about it that has been pointed out in our prep here is, you know, we have maintained a very consistent, extremely consistent, quote-unquote, investment policy here. It's probably a little bit of a misnomer, but that's probably you know, if we were managing a pension fund, that would be a way to think about it. That policy is that we will maintain, on average, our funds in durations of between three and five years, and we have typically hugged closer to that three year.
Within that, we will have, at any given time, somewhere between 5%-10% of those funds, either liquid or where our contracts give us the ability to be liquid with no penalty. We've maintained that since the beginning. At various times, people have asked us. I know Darcy Mott is listening to this call somewhere and probably getting a massage or something like that, and as we know he likes. At various times we will get asked, depending on what the current macro environment, you know, why don't you either come in in duration, which is effectively what you're asking, or go out in duration, right? Be a different version of that.
We've maintained this view and maintained it consistently because what we're really trying to do is manage to, not so much to like optimization on a quarter by quarter basis, but rather to have a smooth kinda sine wave over time. I think that really paid dividends, no pun intended, over the last cycle. You know, the pandemic turned what was effectively a 2.5% yield environment into, you know, something that looked like it could potentially be a 0% yield environment almost overnight. Yet this company managed to, you know, at the beginning of the pandemic, I remember us like I'm almost sitting on my living room floor like "Where's a phone? We don't have a phone in this house." Which we didn't and still don't.
you know, saying, "Look, we think, but we really don't know, is that this is gonna bottom out around 150 basis points for us, and it's gonna take a while to do that. It's gonna take a couple years." Well, here we are, you know, kind of giving guidance for our third year, and we're bottoming out at a little better than that, right? That tells me that the approach that we've taken here, which is not to turn every HealthEquity investor into purely a rate speculator, right, is the right approach. Anyway, that's the reason we do it that way.
Okay, great. Thanks very much. Appreciate it.
Thanks, David.
Yes, sir.
Thank you. Our next question comes from Mark Marcon of Baird. Your line is open.
Hey, Mark.
Good afternoon.
Hey, everybody. Good afternoon, and thanks for taking my questions. One, you know, things are just starting to open up a little bit. Are you seeing any sort of improvement in terms of the take-up rate with commuter? And any sort of change in terms of the expectations in terms of how commuter could end up performing in fiscal 2023 relative to what you commented during the last conference call?
I mean, I think the short answer is no. Meaning that, I don't think today's situation is fundamentally different than the situation that we observed and expected to see a month ago. We've talked about before, you can look at things like NYC transit ridership and stuff like that that are good indicators. But, you know, we're also like, we've been burned on this, well, at least twice. We're, as we said, I think when we introduced fiscal 2023 guidance, or actually maybe even when we revised in Q4, actually, now that I think about it, we're gonna. We're not gonna assume nothing, right? That would just be silly.
We're assuming, as I think you said in the comments, Tyson, you know, a very gradual, modest improvement over time, and we'll see what happens and revise accordingly. I mean, would you add? You look at these numbers all the time, so.
Yeah. I just think that now that we've got, kinda got the year-over-year comp behind us for the prior pre-pandemic timeframe, we're in a nice place that it's not gonna have that big of an impact, and hopefully it gradually increases and sorta gives us a little bit of a tailwind, but I'm not gonna bank on it. I mean, I open the paper every morning and there's another article on commute in Midtown. People wanna go there, but people don't wanna necessarily commute in and work there, right? So, you know, you see that still. How to run businesses now is very interesting to think about how people are gonna do it.
One thing that Ted's team has done and is, I don't wanna go crazy on this 'cause it's only 4% of our revenue. But that is to say commuter, that Ted's teams have done is they've altered the way the business runs so that. Well, I can't say that we're not, in that regard, either vulnerable, negative or have positive upside, you know, in terms of ridership and whatnot, but far less so in terms of vulnerability than we were at the start of the pandemic. You know, start of the pandemic, if people didn't show up for a month, that was it. Like, we didn't get paid. It didn't matter if they were still calling us and trying to return their passes and whatever, we didn't get paid.
If they didn't order a pass, we didn't get paid, and we only had monthly passes. That's not true anymore. As a result of that, for example, you know, one reason that we, you know, that the quarter we just reported was, you know, a little bit better than our expectations, you know, one small reason was that when Omicron hit in January, we didn't really see a big dip in revenue, even though if you look at the data, there absolutely was a dip in ridership, was we put some stabilizers in there that recognized the work that we actually do on behalf of our members and clients and so forth during those kinds of periods.
That's made that business a little more stable, and we'll be glad to be, you know, beneficiaries of it growing, even if it grows apace.
Great. Then one inflation related question, and it relates to two different areas. Specifically, you mentioned, you know, you've got the increased service costs, which, you know, are due to the strong sales season and making sure that everybody's implemented correctly and the challenges in terms of still some people working from home. Are you seeing any sort of pressure with regards to your Team Purple just in terms of recruiting and retention from a wage inflation perspective? That's one element. Then on the flip side, when we take a look at the monthly per account service fees, does the wage inflation reduce some of the pricing pressure that's, you know, some of your competitors have put in place on that monthly fee? Is there even the potential to raise prices?
I'll let Ted comment on the pricing point. I'm gonna comment on the first point. This is reflected in our guidance. I don't know. Well, you can decide if we were thoughtful or not, but we certainly spent a lot of time in the current cycle thinking about how to help our team members deal with what amounts to, you know, at least at the moment, 7% annualized inflation. I'm not sure that we'll maintain that whatever, but like, that's the current reality. Recognizing that, you know, that's the trouble with inflation. Wages don't tend to keep up with it. Again, all of this is reflected in our guidance.
You know, we essentially if you are a team member and you were in good standing, you absolutely got a salary increase this year. If you were an hourly team member, you have opportunities to earn more. In addition, we also try to do things, and again, all this reflected in our guidance, to protect our team members' actual real take-home pay. We froze annual increases in our own health plan, you know, stuff like that. I guess I would say in general, one of the nice things, and I don't think we ever take this for granted, or we try not to.
One of the nice things about working in this environment is, people aren't just here for the money. That meaning that by and large, they're not gonna move for an extra $5, but they also wanna be treated fairly and with respect. When Ted and Tyson earlier talked about some of the things that we tried to do during open season, or open season, that's a different thing. That's hunting. Get Scott Cutler in here doing open season. But some elk. But during our peak season, you know, it was still a very difficult peak season for people, but we, you know.
You're not hearing stories from HealthEquity, and maybe there is one, and so maybe I'm, you know, whistling past the whatever here. Bosses yelling at people to come in who are sick 'cause they got COVID, you know, work anyway. You can work from your closet. I think that the answer here goes hand in hand with some of the discussion about how we've tried to manage our busy season. In any event, that's kind of my answer on the first question. Maybe, Ted, you can hit the flip side of it, which essentially is there opportunity to raise prices?
Yeah. On the pricing side, I would just start by saying we've invested a lot in our pricing capability and analytics and awareness of what the market is offering us in terms of opportunity over the course of the last year. There are definitely, you know, there's not an across the board, like everyone's raising prices 20%, hop in type of environment, but there are certainly opportunities. There are certainly deal sizes and market segments where there's an opportunity to raise prices or to be less, you know, forthcoming on the work we're willing to do for a certain price. We are pursuing those aggressively for all the reasons that you might expect. You know, I mean, you know, a silly example, but our paper cost has doubled, right?
You wouldn't think of us as a paper cost type people, but we still send a few hundred thousand paper statements, and we have to get paid for that, right? The cost doubled. There's just, you know, things like that we are just getting smarter about and studying. I wouldn't say it's like some tidal wave of price increases. I would say it's selective and pinpointed, and we're doing it in partnership with our distribution partners and our sales teams to make sure we stay competitive, we keep growing, and we keep winning.
Terrific. Thank you.
Thanks, Mark.
Thanks, Mark.
Sorry about Wisconsin.
Thank you.
In Milwaukee, too. Brutal, Les.
Yeah, that was tough.
Wonk wonk.
Thank you. Our next question comes from Allen Lutz of Bank of America. Your line is open.
Hey, Allen.
Hey, guys. Thanks for taking the question. I guess going to the service fee line, if you exclude the $10 million impact from COBRA last year, I guess how are you thinking about the service fee per account this year? There's obviously a lot of moving pieces, but I think it's fair to assume at least a nominal increase in commuter coming back, a nominal uplift in FSAs, and then kind of a nominal uplift in HSAs. That would kind of suggest that the service fee per account could go up a little bit. Historically, you guys have been, you know, you've talked about the 5% and 10% decline. I guess where are we with all that? Is there a chance for that service fee per account to inch up this year?
Yeah. I mean, I'll comment a little bit on it, and then Tyson, you can as well. I mean, what you got right is that you really have to think about the mix shift, the mixes themselves, because for example, commuter is our highest service fee type, right? Because that's mostly what it is. Commuter is, you know, if we inch up in commuter, that is, I think, net helpful in that regard. Unfortunately, it's already a small piece of the business, and we're not anticipating that business obviously within our guidance, you know, growing substantially. It's more kinda inching up. You know, FSAs are kinda next.
HRAs, HSAs, COBRA are the lowest on a per unit basis. I just wanted to give the mix shift out, the mix outline or something. Tyson, why don't you talk about what we're thinking about for this year?
Well, I mean, Allen, I know we talked about this before too, but when I'm signing deals and I'm thinking about, you know, how we're gonna serve somebody and the various components of that deal, and they're buying multiple accounts, and then we are considering, you know, if they're bringing in an HSA, the amount of assets. You know, a lot of that feels like how I think about the service fee. I would say, you know, I think you're thinking about it right. You actually outlined it kinda like I would when you started the question.
you know, we will have still probably a little bit of a decline in HSA as we compete, maybe less because of it, because of some inflation and just the opportunity to have a little bit more strength there, given where we're at in the market. I think we grew really well compared to some of our competitors. That gives us some confidence. It's really about collecting assets at the end of the day and putting yield rate against it and making that line item the biggest line item in the long run. To me, if I have to give up a little bit in fee to do that, you know, I will. That's kinda-
I think for FY 2023, essentially all of our account growth is HSA, right?
Yeah.
I sort of interpreted your question a little bit about what about going forward. The answer will be, you know, as you should have, I think, heard from my initial comments, we expect the CDB side to grow, and that will help us on an average fee basis. That would be very helpful. I think for fiscal 2023, it is worth noting that, you know, essentially all of that total account growth is HSA. There, the fees are the most pressured for good reasons, because you're working on underwriting the combination of service fee, custodial balance and then the interchange.
That kinda leads me into my second question around kind of the interchange per account. Last year was another sort of weird year where
Yeah.
Interchange, kinda, you know, peaked in 2Q and then got weaker. I guess as you think about the contribution of that business on a per account basis, you know, just trying to understand kinda what's embedded in guidance and kinda what you're seeing, I guess, across HSAs and FSAs today.
You want to hit this one?
Sure, yeah. I mean, I think what I would say is, given the volatility that we have experienced here over the COVID year, I've tried to be, you know, really measured about what we put in so that we can make sure that we exceed it. You know, that's how I would think about it. I would like to think that this year will be smoother, given just the way people are kind of working their way through this. I do think that when you think back through when Omicron was kind of at a height and in the, you know, first part of the year, I mean, we see that has an impact on things. It actually really has an impact. We're not gonna forecast any pandemic-related things, and I specifically mentioned that.
We're trying to get back to a more normalized place, but just really trying to make sure that we think we've got the seasonality nailed on that, where it's, you know, heavier of course in the January, February, March timeframe 'cause people get their FSAs topped up and their HSAs. Then as they have use it or lose it in the last half of the year, it gets a little heavier too, but it gets lighter in the middle parts of the summer. You know, we kinda look at it and see if we can build a forecast to match that.
I would say the thing that I wish that I had been saying for the last, you know, 8+ years so that it'd be like, remember this, is like, the third quarter is to pick this point up, the third quarter is going to be the weakest quarter for interchange. It always is, right? And obviously in this last year, relative to a much stronger second quarter than one would normally have, you know, it surprised us, and you know that, right? I just think that's, as you quarterize this, as you quarterize an answer that's kinda roughly, you know, flat on a per account basis, it's, you know, just keep in mind that seasonality.
That is, that last year, exactly as you said, the second quarter's overstated. The third quarter is probably, you know, understated, but it's still not the. It is seasonally the weakest quarter.
Great. Thank you.
Thanks, Allen.
Thank you. Our next question comes from Stephanie Davis with SVB Leerink. Your line is open.
Hi, Stephanie.
Hey guys, this is Joy Zhang, for Stephanie. Thank you for taking the question.
Uh-oh. What's happened to her? What have you done to her?
Every time she's never on the call.
It's the whole thing's a little suspicious.
I guess my first question is an econ question for you, Jon. You guys mentioned that you're not baking in any further Fed rate hikes in your guidance, but in terms of us trying to model custodial revenues going forward, do you see anything fundamentally different in this current rising rate environment versus what we saw from 2016- 2019? Or can we expect a similar type of cadence we've seen in the past?
I guess here's how I think about it. The reason we do not include this in our guidance is not just because it makes our lives easier, but also because it's turned out that people are remarkably bad at predicting the actions of the Fed, including and in particular, Fed futures markets are terrible predictors of. There have been various studies that have shown that it's basically a roll of the dice. I think that that's a reflection of the fact that, you know, I'm hoping they're not listening and assuming they're not listening, that, you know, there are policy factors that tend to be at play. Also, you know, these are ultimately human beings who are trying to make decisions.
I guess my thought is that if you go back to the last rate cycle, what I think we would all hope is that this cycle will be longer. Meaning that what we're doing is returning to a level of normality versus an upcycle and then a downcycle. You know, I think that's probably the biggest potential difference here is that just as we got to kind of a place where people were feeling normal and, you know, a little bit of wobbliness towards the end of 2019, but whatever, still in the range of normal, boom, we got the pandemic. I think that's probably the biggest thing as you think about it, is that over the next year or two, right?
There's no reason to believe, but also, you know, other than that, whatever we believe is probably wrong, that the cycles won't be different. What I think we're all hopeful will be the case is that, we are beginning the process of returning to truly normal monetary policy, where the normal rate of interest, which is another way to say the normal Fed funds rate, you know, will be in the 2s% rather than 0%, and also not in the 4s% or 5s%, which would be maybe not a good thing for anyone. So that's the main thing that I would think about.
That's super helpful. As a follow-up, maybe on the Enhanced Rates product side. Can you give us some color on how you're incentivizing folks to move over to the new product? If it's purely a function of new accounts. Can you give us a sense of how much of the benefit from this shift is baked into the guidance?
I'll answer the first part and then encourage Tyson to answer the second part. But on the first part, we don't, you know, as I think Ted commented on an earlier call, we can't run special campaigns and whatnot. The rates that we provide to our members are Enhanced Rates, as the name suggests, but they are determined by a formula that's in our custodial agreement, right? That's based on what others are doing. We don't have the leeway to like say, you know, we're running a special to come in. Here's a, you know, like you'll see sometimes banks do, you know, that here's a 100 basis points for a year. But in the fine print, you know, minimums, batteries sold separately.
Our main incentive, quote-unquote, “is around education.” That's where we have focused pretty much all of our energy is making sure that our members are aware of this option. You know, in practice, the greatest awareness is going to be among newer accounts because those are the people who are most not only are they most likely to be coming into our systems, but they're also, you know, in practice having to make a choice. Whereas for anyone else, you're battling inertia. That's the piece of it. That does reflect our thinking and our guide about, you know, how much kind of seeps into this product over time, and that's where Tyson's part of the question comes in.
Yeah. As I mentioned before too, I mean, the way to get chunks of this is through the portfolio acquisitions like the one we just closed, Health Savings Administrators. That's a great way for us to get assets into these types of accounts. You got to remember that the majority of accounts are $500, right, on an average of $2,700. So someone isn't necessarily going to go in and make a move that takes a little bit of time to move it over there without, you know, it's just that's not going to be a very fast move to do it one by one, even though we will message that. We'll take the opportunities. I would say there's very little, if any, built into moving people over, and that's more upside in my mind. It's more about getting the chunks.
Then I would say, you know, of course, in January, we'll get a lot of funds in and we'll place them in Enhanced Rates. So whatever the rates are there, you know, that will be what they are. But we haven't built in a bunch of upside in January relative to Fed rate increases, even on those Enhanced Rate products. We've kind of done it as it stands today. I would call it upside on getting people over there, upside for half of a January month or a little more, and that's kind of where it's at with regards to guidance. Very helpful. Thank you.
Thanks, Joy.
Thank you. Our next question comes from Glen Santangelo of Jefferies. Your line is open.
Thanks for taking my question. Hey, guys. I just want to follow up on this rate question one more time because I think it's so important, and we get a lot of questions on it. You know, I understand, you know, we don't wanna forecast interest rates going forward, but I just wanna make sure I'm thinking about this correctly, particularly as it relates to the forward rate curve. I think, Jon, you said that the average duration of the portfolio now is just a little bit over three years. Am I thinking about it correctly that next January, you know, you'll ultimately reinvest almost a third of the portfolio? If we look at the short end of the curve here, it's up 80-100 basis points in the last two months alone.
If nothing changes, theoretically, right, you're gonna be investing almost a third of the portfolio 80 basis points-100 basis points higher, right? Which it would have a pretty dramatic impact on your, on your yield curve, right, as we go into fiscal 2024, if nothing else were to change from where we are today, right? All of a sudden, that $20 million headwind this year, you know, could be a significant tailwind next year, again, if nothing changed. I just wanna make sure I'm thinking about that correctly.
Yeah. The only point I would make is that you're reinvesting. In at the beginning of fiscal 2024, right, on average, you will be investing dollars that we put in, you know, at the beginning of fiscal 2021, which is another way to or end of fiscal 2020, which is a way to say, like, just before the pandemic. Do I think.
Okay.
It's not when we were at the peak of the rate last rate cycle, right? In other words, you're from that perspective, but the implication would be, yes, there will be some-
Right.
You're still like, it's also what you're replacing. Does that make sense?
Right. I get it. You're saying we just gotta do the three-year look back, right? The big year becomes fiscal 2025 when we look back to fiscal 2022, right? That the step-up's much greater. Again, assuming where we are now.
I will say, even notwithstanding my point, you would still see a step-up, right?
Yep.
In part, that is because of the Enhanced Rates issue, and in part it's just because there would still be a step-up, right?
Yep.
Based on your assumptions, right? You know.
Maybe I just had a quick follow-up for Tyson on the margin side of the business. If we were to normalize the $5 million-$7 million in costs that are coming in Q1 and we were to back that out for a second, it almost assumes like you're assuming flat margins sort of year-over-year. Is the right way to think about the cadence in fiscal 2023, that margins will be down in Q1 sort of year-over-year, but then sort of flattish for the following 9 months or 3 quarters? Is that generally the right way to think about the cadence or no?
Yeah, I think that's right. I mean, I think I'd also just think about, you know, we'll be merging out of Q1 into Q2, so Q2 may have a little bit of that, you know, in there too. But for the most part, you've got it exactly right. You know, one other thing I was gonna mention really quick, just back to the last question, is just, you know, the rates we get versus the Fed rates are not. They're not actually connected, right? It's a negotiated rate, just to make that clear. So there's not a direct connection. The Fed raises a rate, we still go out and negotiate a rate. We do that with our Enhanced Rate partners. We do that with our FDIC and partners. But there's not a direct connection to that as well, right?
I just wanted to make that point.
Right. I think we should be looking at Treasury rates, right? Not the Fed funds, 'cause the Fed funds only impacts-
Yes.
the variable rate.
Yes.
That's right.
No, you really need to be looking at the CD rates.
Yeah, I mean, I understand what he's trying to do.
Yeah, yeah. Okay.
Under your assumptions, I mean, I'm with you. I mean, it's. Look, what you can tell from our answers is, again, if forward rate curves were always right, rates would always be rising. Okay. That's why they're not. You know, I just don't think anyone really believes that forward rate curves are a good reflection of what rates will be at the end of, you know, at the end of that curve. They just aren't. We just have to be thoughtful about that and kinda reel that in a little bit. That all having been said, this.
You know, a way to think about it, just big picture, outside of timing for a moment, is we manage today $13 billion of cash and give or take, and that pile is growing larger every year and by a substantial amount. Every hundred basis points on that is. You know, I don't have to. I mean, I got a master's degree, you know, but I don't need it for that to do that math.
Yep, yep.
There is real embedded profitability in the business. Some of that obviously does, as we've talked about before, right? You know, maybe of that, of every, you know, dollar that shows up on the top, ultimately $0.25 ends up showing up as expense either or, you know, as like more pressure on service fees, as Tyson was suggesting, or, you know, ultimately over time. There's a lot of embedded profitability in the business on the basis of now in fiscal 2023 being at what is clearly gonna be the trough of our custodial yield curve.
Yep. Perfect. I got it. Thanks for the answers. Appreciate it.
Thank you.
Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Jon Kessler for any closing remarks.
Thanks, everybody. As I said at the beginning, we're excited to be together here in person. It also kind of reminds us a little bit. We're seeing faces that I haven't seen, well, maybe I haven't seen forever or ever, but lots that I haven't seen in two-plus years and, you know, kind of reminds you of all the work people have been doing. I know that our investors have been doing that work too, and our sell side folks have been doing that work too. Thank you guys for all of that. Hopefully, you know, I'm sure there will be, you know, a few more scary days because that's how these things seem to work with the pandemic.
It seems like, you know, brighter days ahead for all of us in that regard, and that's a good thing. Thanks, everybody.
Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may all disconnect. Have a great day.