Good day, and thank you for standing by. Welcome to the HealthEquity Year-End Sales Metrics Conference Call. At this time, all participants are on a listen-only mode. After the speakers' presentations, there'll be a Q&A session. To ask a question during that session, you'll need to press star one on your telephone. If you require any assistance during the call, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Richard Putnam. Sir, the floor is yours.
Thank you, Chris. We appreciate it, and welcome, everybody. We appreciate you taking time this afternoon to be with us. My name is Richard Putnam. I do investor relations here for HealthEquity. 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, our 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 sales metrics for fiscal year 2022 was issued after the market closed this afternoon. The metrics reported in this press release include contributions from our wholly owned subsidiary of WageWorks and accounts it administers. The press release also includes definitions of certain non-GAAP financial measures that we will reference here today.
A copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures and a recording of this webcast, can be found on our investor relations website, which is ir.healthequity.com. Second, our comments and responses to your questions today reflect management's view as of today, February 22, 2022, and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates, and other information that might be considered forward-looking. There are many important factors relating to our business which could affect the forward-looking statements made here today. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the 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 events. At the conclusion of our prepared remarks, the operator will provide instructions on how to do our Q&A. With that out of the way, I'll turn the call over to our Chief Executive Officer, Jon Kessler.
Thank you, Richard. Appreciate that. Hello, everyone, and thank you for joining us this afternoon. We have a few brief remarks from me on sales results and Tyson on our revised business outlook, but we wanna reserve the bulk of today's call to answering your questions. Steve and Ted will join us for that purpose. February first began our fiscal 2023, and we have entered fiscal 2023 with the benefit of record sales, record HSA and asset growth. Team Purple, our partners and our clients, helped HSA members open 918,000 new accounts in fiscal 2022. That's 34% more new HSAs sold than a year ago and 27% more than our previous fiscal year record set before the COVID-19 pandemic began.
HealthEquity ended fiscal 2022 with 7.2 million HSAs, up 25% year-over-year and up 12% excluding the 740,000 acquired HSAs from Fifth Third and Further. Our HSA members experienced another strong year of balance growth in FY 2022, as average HSA balances grew 10% despite January stock market volatility. Overall, HealthEquity members ended FY 2022 with $19.6 billion in HSA assets, up $5.3 billion or 37% from a year ago. That included $2.8 billion of organic growth as well. Our member education and engagement efforts produced strong contributions and 37% growth in investing HSA members. The percentage of HSA members who invest reached 6.3% at fiscal year-end, and HSA invested assets, again, despite January's volatility, grew 58% year-over-year.
At the end of the fiscal year, made up 34% of total HSA assets. These are very positive trends for the long-term value of HealthEquity. More members using the full power of HSAs drive our profitability. Wins from cross-sell and from competitive takeaways spur outperformance atop a still-growing HSA market. These results speak to the return on our investment in integration to a total solution and a single proprietary platform which drives cross-sell, and in the engagement infrastructure and capabilities of that platform, which drive members to action. We believe that HealthEquity once again took market share this year, but we'll have more to say about that as various sources update their estimates of HSA market size and growth.
Our ability to offer clients a total solution at scale, including ancillary consumer-directed benefit or CDB accounts, was a major driver of HSA growth in fiscal 2022. However, CDB enrollment itself in terms of growth was modest. Net CDBs grew 2% versus a year ago to 7.2 million. We're essentially flat year-over-year, excluding CDBs acquired with Further. New CDB sales were offset by discontinuation of certain CDB offerings as we consolidated platforms, migration-related attrition, and roughly 650,000 commuter accounts still in suspense due to continuing full-time work from home. We enter FY 2023 and this year's selling season with 185 network partners made up of health plans, retirement plan record keepers, and benefits administrators with whom we actively go to market.
HealthEquity grew the number of its network partners from 174 in fiscal 2021 and from 165 in fiscal 2020. Beyond adding partners, we improved the quality of partner relationships and deepened our commitment to technology integration, examples of which you've seen from us over the last few months. Now I'd like to turn the call over to Tyson to talk about our revised outlook for fiscal 2022 and to give a first look at fiscal 2023. Tyson.
Thank you, Jon. We are today raising our outlook for the fiscal year ended January 31, 2022 as follows. Revenue in the range of $754 million-$756 million versus our prior guidance of $750 million-$755 million. Non-GAAP net income in the range of $108 million-$110 million within the range of our prior guidance of $108 million-$112 million. Non-GAAP diluted EPS in the range of $1.30-$1.33 versus our prior guidance of $1.30-$1.35, and adjusted EBITDA in the range of $232 million-$235 million versus our prior guidance of $230 million-$235 million.
The revised outlook implies adjusted EBITDA margin for the full FY 2022 at about 31% EBITDA margins. This is a remarkable achievement given the loss of high margin commuter service revenue, healthcare interchange revenue, and lower yields on HSA cash during FY 2022 compared to the year ago period. Given the expected financial results for FY 2022 and the sales results released today, we have sufficient confidence to provide early guidance for FY 2023 revenue, which we expect to be in the range of $815 million-$830 million. I'd like to take a moment to describe key assumptions underlying this guidance, including those related to the unusual circumstances of the pandemic. Today's guidance assumes an average yield on HSA cash at or above 155 basis points.
Importantly, as is our practice, today's guidance does not factor in widely anticipated changes in monetary policy, namely Fed rate hikes or increases from current term placement rates for HSA cash, which would have a positive impact on rev. As you know, however, most of our HSA custodial cash is deployed in multiyear fixed rate instruments. Between five to ten percent of HSA cash plus CDB client held funds are deployed in variable rate interest rate instruments tied to LIBOR. Policy driven rate increases this year will provide a greater lift in fiscal 2024 and beyond. The uptake of our members into our Enhanced Rates offering has helped in this year's placement, and we have assumed a measure of continued mix shift during fiscal 2023 in our guidance.
As you know, we have been less than successful at predicting the impact on our business performance of the pandemic's twists and turns and regulatory responses. Our revenue guidance assumes that revenues from commuter benefits will remain depressed with only very gradual and modest improvement throughout the year. Guidance assumes no new variant impact that may cause further disruptions. With respect to health care spend and its impact on interchange revenue, we assume per account spend at about fiscal 2022 levels, with health care services remaining broadly open to our members. We assume the normal roll-off of prior FSAs in the Q1 of fiscal 2023 as normal grace and runoff periods close for calendar year FSAs.
Finally, 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.
As expected, the Further business acquired on November first will contribute about $60 million to revenues, with adjusted EBITDA contribution running at about 20%. We are already finding ways to improve profitability in this business and expect synergies to be realized over the next few years to align margins with our overall business. Today's estimates also assume completion of the HSA Administrators acquisition in Q1. Based on these factors and assumptions, we expect adjusted EBITDA margins during fiscal 2023 will be at comparable levels to today's revised guidance for fiscal 2022, even with the revenue outlook prudently accounting for the effect of the pandemic's persistence. We will report our Q4 earnings in the third week of March. With more information in hand, we look forward to providing additional fiscal 2023 guidance at that time.
With that, I'll turn the call back over to Jon.
Thanks, Tyson. Before going to questions, I'd like to just briefly say that today's call is about reporting record sales and to some extent, raising our outlook and providing a first look at what we hope will be a very successful fiscal 2023. The end of record sales is the busiest open enrollment season during this last quarter that we've ever had. That's the deepest part of Purple is remarkable service to our members, to our clients, to our partners, and to each other.
I just wanted to take a moment to thank all of our team members, all of whom, whether they're brand new to our organization or veterans, really have given it their all in a very interesting and difficult period, to make sure that we are making a difference and to say that we are. As a direct result of their hard work and that of our partners and clients. HealthEquity closed the year setting new highs for network partners, for employers, for HSA members, for HSA assets, and most importantly, there are 14 million families who are able to do something positive about healthcare and making ends meet in our country because of your work. Thank you. With that, let's open up the call for questions, operator.
Thank you, sir. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. Stand by as we compile the Q&A roster. Our first question comes from Anne Samuel of JP Morgan. Your line is open.
Hi, guys. Congrats on the terrific results. I was hoping maybe to talk a little bit about. You said that you saw, you know, your strongest selling season that you've seen so far. You know, how much of that would you attribute maybe to a little bit of catch up from last year? How much of that is coming from your ability to, you know, bundle new products or, you know, bundle more products together than you've been able to do in the past?
Ted, why don't you take this one?
Thanks, Jon. Thanks, Anne, for the question. We had a feeling this one was coming, so we're prepared. I think there's four primary reasons why we had such a great sales season. I think the first one is the one you mentioned, which is the bundle that we were able to deploy to the market when we bought an integrated WageWorks to start is paying off for us, right? It gets us more at bats. It gets us more seats at the table. It makes us more useful to our partners, our brokers and consultants, et cetera. It's working. The second one is we've invested more in deepening our relationships with critical partners, be they health plans, retirement record keepers or brokers and consultants.
We've really spent the last couple of years, under Steve Lindsay's leadership, understanding what they need from us and how delivering that will help us get what we need from them. I think we're seeing some really significant advances in our partner relationships, which are putting us on more shelves. I think third is we're getting better at talking to consumers. You know, we've invested pretty heavily in marketing communications capabilities, and we know how to talk to sort of end users, employees, consumers, whatever word you wanna use, be they working at companies that offer HDHP plans, but they've never had one before, or whether they can't get their healthcare through work, so they get it some other way. That's been a huge area of growth for us as well.
The fourth one, which is really important, is we have great employers. Last year, those employers struggled with the pandemic along with everybody else. This year, kudos to our employer clients. They had a tremendous year. When our employers grow, we grow along with them. When they hire more people, they bring us along for the ride. I think those four variables were what we think contributed to our sort of significant growth year over year in sales.
That's great to hear. And then just, you know, on the yield, how much of your assets are within the Enhanced Rates product now to kinda get to that 1.5% or 1.55% yield? How should we think about that progression in the future and how that will impact your yields of the future?
Tyson?
Yeah. We're moving into about 10% in Enhanced Rates, and I would plan to add about that much over the next couple of years here and then see kinda where we wanna be from a diversification perspective, you know, at that point.
That's helpful. Thank you.
Thank you. Our next question comes from Allen Lutz of Bank of America. Your line is open.
Thanks for taking the questions. Tyson, I think last quarter you mentioned that FSA card spend slowed in the Q3 and you expected it to slow in the Q4. I guess, what have you observed during November, December? Has that improved in January and February as those accounts sort of roll over?
Yeah. We still saw, Allen, thanks for the question. We still saw softness in the quarter as, you know, more so as expected after the revision. You know, January timeframe, January through, you know, the early Q1 and Q4 are the heavier spend periods for that. I certainly think that Omicron played a part in that with regards to medical spend is what we were seeing where the, you know, transaction amounts were maybe higher but less transactions, so people had to do what they had to do. We did see that. Again, as we built forward, you know, guidance, we've been, you know, a little bit cautious about that just because I think that we got the pandemic behind us, but I'm kinda done trying to forecast that.
Got it. Kind of a broader question on the CDB business. You mentioned that FSA, it seems like there's some conservatism there. COBRA, you know, there was a benefit in fiscal 2022 that probably won't repeat. Commuter, it sounded like there isn't gonna be a material uptick. I guess what's embedded in fiscal 2023 guidance versus fiscal 2022 in those three businesses? Is there an assumption that that's gonna stay relatively flat year-over-year? Is the assumption maybe it declines slightly? Directionally, can you help us out where that's going? Thanks.
Yeah. The first thing I'd say is absolutely the COBRA subsidy will not take place again. We've talked about that. It's, you know, about $10 million in the middle part of the year there. That won't happen again. Now with the legislation behind us and employment, you know, hot, that also has an impact on that service line as well. Less people use COBRA when there's more employment. You know, I've thought about how to potentially build a little bit of that in. I would say just overall from a perspective of the CDB businesses, you know, it's all about the bundle and the sale of HSAs, and that's, I think, what's been playing out.
I just talked about. You know, the way I think about it is those are not necessarily going to be the growth areas. We're just going to hold serve there, kind of like what we did, maybe hopefully a little better than this last year. I would kind of think about it that way.
Great. Thank you.
Thank you. Next we have Gregory Peters of Raymond James. Your line is open.
Great. Good afternoon, everyone.
Hello.
I feel kind of liberated that I don't have to hold my questions to just one question. Thank you, Richard. It's a glorious day to be a sell-side analyst covering HealthEquity.
We didn't even have to get in a truck and blockade something for it, you know?
Well, you know, depending on your answers, be careful what you wish for. No, I'm just teasing. I guess one of the things, and I know you were talking about yields on cash assets. I know you had a presentation out earlier this year, and it was on slide 12 where you talked about just 10% of the HSA cash earning an Enhanced Rates product in fiscal year 2022. Then you also said there was a bullet point that says, "Improving rates on bank term deposits." I guess what I'm trying to get at is, what do you mean by that?
Because as I understand it, and I'm not a bank analyst, but from what I gather, banks have been really under a lot of pressure because they've had a huge inflow of deposits and not a lot of opportunities to invest. Maybe 10%-12% of their earning assets are just squeaking by with, like, 12 basis points -13 basis points. Maybe that's wrong or right, but either way, I'm just curious what you mean by improving rates on bank term deposits.
I'll take this one and then invite Tyson to add if he'd like. A couple thoughts. If I just sort of put the question in context, what we've tried to do over the course of the pandemic period is ultimately to create more competition for our members' deposits or our members' cash, said differently. In the olden times, that would have been pretty much exclusively among FDIC member institutions. You'll recall a couple years ago, we were able to expand to include credit unions that are insured by NCUA. Now this year we've added insurance-backed products under the banner of Enhanced Rates.
The general point here is that the result of all of that is that there's just more competition for those funds. I think that has actually helped us out a bit relative to sort of the depth of the post-COVID period, where you know that is to say, if I look at the last few months, we have seen a little bit firming in the rates on which we place cash in FDIC deposits. Also because of that competition, we're able to, as you said, we were able to grow from essentially almost nothing at the beginning of the year to about 10% of total HSA cash at the end, the portion of our HSA cash that is in Enhanced Rates products.
That product, again, it has the virtue of, as its name suggests, better rates for our members and better rates for us, but also allows us to not have to go as sort of far into the demand on the cash deposit side of things. I think that's been somewhat helpful. I guess I would say I think I would agree with the premise of your question, which is that if I'm solely looking at the deposit market, there are factors that are structural in nature that will cause the improvement in that market from the perspective of a depositor to lag things like treasury rates and all that sort of thing.
That's what you see in every upturn and certainly this time around. That's also why we're at the edge of that and doing our best to get the best deal we can for our members and for us, and then also providing more competition through the Enhanced Rates product and which will only grow over time. That's kind of the plan. Tyson, anything to add to that?
Nothing to add. That was good.
Just a point of clarification. I know in the past you've mentioned that, you know, your depository partners have asked in the past or expressed interest in you extending the duration of your contracts instead of going for, like, an average of three years to extend it out to four or five years. You're not suggesting that you're going to extend durations of those contracts? Or maybe you're a substantial size that you can now. I don't know what the right answer is, but that's why I'm asking.
No, I think with regard to deposit agreements. Well, I should back up and say our policy has always been or has been for a very long time, too, that as far as duration goes, we will stick to between three and five years average duration. In practice with our deposit products, we've always hugged kind of the three-year side of that, and that's still true today. With Enhanced Rates, it's a little bit different because you can build some of those adjustment mechanisms into the agreement so that your actual duration and the interest rate risk associated with that are slightly different. You're still talking about within that 3-5 year range.
We haven't altered in any way our basic approach, which is to kind of stick to our policy. It's worked in terms of sort of on the one hand, for lack of a better term, cushioning things when you see very rapid declines in interest rates as you saw at the beginning of 2020. The flip side of that is it takes you some time to get up, but we're very happy to feel comfortable that in fiscal 2023 this is the end of that three-year cycle, and we'll be on the upswing from here, we certainly hope.
Got it. Thanks for the clarification. My second topic and the last question,
Wait, are there subs to the subs? I didn't know that. That was one A and B.
Well, you know, I reserve the right to ask a follow-up or maybe five. But I'll stick with the sec-
Your new nickname is Helen.
I'll stick with two topics, Jon. All right. The second topic would be one of the things we track is the interchange revenue per total account. Obviously, the last couple of years have been pretty tough on that metric for a number of reasons, including, you know, the lower utilization, what's happened with the commuter business, et cetera. You haven't announced it, you know, you've given us big picture numbers, but it looks like your interchange revenue per total account could be up in fiscal year 2022, or at least it's stabilized, perhaps. I don't want to put words in your mouth, but I guess what I'm looking at is it feels like maybe in your guidance that you factored in sort of that starting to improve, albeit at a very minimal pace going forward.
Again, any color you can provide around that metric would be helpful.
Tyson, you want to start on this one?
Yeah. I mean, I think if you're looking at the overall year, you're right. I mean, the middle part of the year was pretty strong and appeared to be sort of a comeback when you thought about interchange. I think the growth rate was 23% or something like that in Q2. Then of course, you know, surprises coming down the backside of the year and was, you know, on with what we revised to for Q4, so kind of down. I would say that, you know, I am being measured about how I forecast interchange coming out.
I mean, especially after coming through the month of January, and it just again, once again, you kind of get people in lockdown and it's all around you, and it does have an impact when you're watching it day to day. But as I think about the forward, I would say you know, as I said in our comments, you know, I'm thinking that we're kind of normalizing into this year. I think you used the words, you know, coming back through and and similar words that I used in the script there that just talked about that, you know, kind of making progress.
I would say too, you know, commuter again is a small part of our revenue and the interchange is much, much smaller as well, but it is an indicator of what people are actually doing. I almost see it as an indicator more than anything else. You sort of see that, you know, very slowly kind of stepping back up. In January, you know, comes back off again. Anyway, just there's some volatility there that's tough to forecast.
Got it. Well, thank you for opening the floodgates and for your answers.
Well done.
Thanks for your questions.
Thank you. Up next we have Stephanie Davis of SVB. Your line is open.
Hey, guys. Congrats on the strong selling season.
Thank you.
Thank you.
I know I just asked you a bunch of questions last week, so I'm just going to lead this to one question and one follow-up. The first one's for Jon because I have to reframe my thoughts on kind of your new account sales. Historically, when I remember modeling out the net new HSA membership, you always historically said that it topped up on organic basis kind of around a little bit sub 400,000 for the Q4. It was just kind of the cadence of how your model worked.
Yes.
You had a lot of headwinds and still on organic basis it looked pretty healthy this Q4. Is there anything about the combined HealthEquity WageWorks that maybe changes that Q4 capacity?
Well, I think, Stephanie, the way I would look at it is that, and Ted mentioned this in his earlier response. I do think that, particularly in Q4, you know, we obviously had a strong selling season, but it's also true that our clients in particular had a strong hiring season, very strong. As a result of that, you know, that certainly was a very helpful tailwind in Q4 in particular. Just as it was a headwind, brutally so in Q2 and Q3 of the prior year, right? I think a way to look at it might be to take the last two years as a whole and kinda like average them out.
If you look at that and compare that to what was going on pre-WageWorks, right? That kinda tells you what the impact of having that total solution really is. I mean, it's not that complicated in the sense that what we said at the time was that we were, you know, there were shots on goal that we just weren't getting. We weren't getting them principally from, you know, the broker side of things and the middle market because they wanted to buy a total solution, and either we or our partners pretty much were just selling an HSA and didn't have the like stuff around it. That made things harder for them, and that's what they told us, which is why we embarked on that odyssey.
You know, you'll recall the language about, you know, figuring we were selling like 20% of the market, and like, that was great until you got to 20% market share, and then you're not growing market share. I don't know what % of the market we will have ended up selling this year, but 'cause I don't have market data. I think that's probably a good way to frame it, is in fiscal 2021, we had obviously some truly unusual headwinds. Those were somewhat offset in fiscal 2022.
if you take those two together and kinda average them and compare that to what was going on before then, you can see that there's a fairly significant delta, and that's precisely the delta that we would've expected as a result of having greater access. You know, that's sort of the way I look at it going forward.
Averaging those two out, I mean, you do still get too low double-digit growth. Is that-
Yes.
Is that a safe way to look at your net new HSA member growth going forward? Should we take a
Um-
Take a more conservative cut given some market dynamics?
Well, I think the market's gonna give us, again, to your point, it depends what the market gives us. Let's say that the market gives us 7% account growth or whatever it is. We should continue to outperform that. I don't think what you're saying is entirely unreasonable, but I also think it requires us to consistently outperform. I don't think it's like it's not crazy. I'm not gonna give you a number to put in the model, but I think you're in the ballpark, and you're thinking about the right things.
You know, I'll take the ballpark. I'll do that.
Yeah.
I'll hop off it. Thank you, guys.
Thanks, Stephanie.
Thanks, Stephanie.
Thank you.
You know, if I could just say one thing before we leave that one and invite Steve Neeleman to comment too. I mean, one of the things that we saw this cycle was strength in areas where people have, you know, said, "Hey, our HSA is really penetrating," particularly the middle market and the sort of higher end of smaller employers. Steve, you've talked a lot about and worked a lot on helping clients and brokers and others really understand how to use an HSA. Maybe you could comment a little bit about what we saw there and what we worked with our partners and some stuff we worked with our partners on that topic. That does kind of go to Stephanie's question about what the market can deliver and what we can deliver.
Yeah. I mean, Stephanie, if you recall, you know, and I think a lot of the consulting firms and stuff like that, either because of COVID or just, you know, this HSAs have been around for 18 years now, and I think a lot of them quit publishing these kinda detailed reports. The last time we looked at this, and I think this is true with our own book, you know, you kinda saw really high adoption among the largest employers in the country, and then quite high adoption for HSAs in the smaller, the tiny employers, right?
It was that kinda mid-market that had enough folks working for them, had enough market leverage where maybe they could negotiate for different types of benefit options, and yet they weren't as strategic as the big ones, like some of the ones we've named in the past, that we work with, that were saying, "Look, we strategically wanna go to a consumer-directed plan, and we're gonna have a whole team of people to do that." Mid-market doesn't have that kind of luxury. The small employers were kinda doing it because they just needed the lowest price premium, right? That mid-market is now starting to come alive. You know, when we see our people out there in market and with the WageWorks merger and acquisition, we've really expanded our footprint.
Now it's not just working the channel that's been so great for us for so many years, which is the HealthONE channel, but we're also able to get in front of a lot of the consulting firms and broker firms throughout the country and talk to them about what they need. And then, you know, obviously, that was the feedback they gave to us. "Well, we need the whole bundle." Because if you're a mid-market employer, I mean, in HealthEquity, sometimes we think we're so big, we're effectively a mid-market employer, right? 3,500 teammates, and so in certain settings, we would not be considered to be a large employer. We wouldn't. In fact, even on our own account management team, they sometimes make that break point around 5,000, where they really dedicate a lot of resources to it.
Yet we have a lot of sophisticated needs. Our ability to come to the market with a full bundle and be able to really help those employers through some of the things that Ted talked about is effectively direct-to-consumer marketing, right? It's just the consumers within our clients doing a better job of educating them, taking that message back to the employers is what really has, I think, helped that mid-market start to take off. When we started down this pathway of WageWorks, we looked at it, and that was the segment that we were not reaching. We were reaching the large ones because of our efforts with the big consulting firms, and we were getting a lot of the smaller ones because of all of our channel partners.
It's that mid-market, and so we're pretty thrilled with the effort and also the results. We're also pretty excited that we're coming up with a scalable way to educate those folks and get them to start to choose the health savings account, which is great.
Thanks, Steve. I appreciate you adding that.
Thank you. Our next question comes from David Larsen of BTIG. Your line is open.
Hi. How much revenue is Fifth Third and Further going to be adding in fiscal 2023, please? Thank you.
Tyson?
You said oh, Further and Fifth Third. Okay. Yep. You got Fifth Third at about, you know, $6 million. I said on the call, you know, Further was $60 million annual run rate. We got, you know, about a fourth of that in the Q4, so 45, something like that.
Okay, great. Then let's say the Fed raises interest rates by 100 basis points in calendar 2022, is it fair to assume that you're gonna get 100 basis points of incremental yield in your fiscal 2024? Would that be about $100 million of custodial revenue lift, all of which would flow through to EBITDA?
No. Tyson, do you want to start on this one?
Yeah. The answer is no. I mean, again, it goes back to deposits and also how, you know, obviously you got the Enhanced Rates program playing in there as well. You think about that three to five-year ladder and those deposits rolling off from three+ years ago that are at, you know, much higher rates than the average rate now. Even if we place them at a higher rate due to a Fed increase of, like you said, 100 basis points, we'd still be placing some of those at lower rates. They would still be, you know, essentially a headwind relative to what they were placed at before. They may be higher than that average, but they're still a headwind relative to what they were placed at before. It moves a little slower than that.
It moves, as Jon was saying before in the call, a little slow, you know, up maybe a little bit slower than it came down over the past three years if you look at the rate of change from three years ago to now and kind of the declines of those average annual rates. It will, you know, move back up as we utilize the new placements at those, again, higher rates based on where Fed comes out next January. Having an impact on that placement of about, you know, a third of our assets is sort of what we've said. Now we've got Enhanced Rates playing into it, so maybe it's a little less because there's some competition in there. But, you know, it's essentially a third of the assets rolling over.
That get placed, and then we do that in the subsequent year as well. More than what you're kind of outlining there, but I would go back and look at history as to how that kind of comes up and goes down.
That's really helpful.
Yeah. I mean, the way we used to answer this question at the time of our IPO, and I think the answer still kind of holds, is the way to think about it is let's say you had exactly, as you say, you know, a 100 basis point increase. What you would see is two things. First of all, that increase would show up in our deposit placements over the course of, you know, give or take three years, maybe three and a half, as contracts rolled over relative to where they are, right?
Over time, a portion of that would likely flow, and I think in the past we've said, you know, maybe it's 25% would flow back to our members and clients, either in, you know, direct deposit data, as it were, where our competitors raised the rates they paid and/or you saw the benefit in terms of increased service fee competition or the like. But nonetheless, I mean, the point you're making is that over an extended period of time, you know, 100 basis points ends up, given our current amount of cash, equaling something, you know. If you just wanna think about it as, you know, 75 basis points on existing cash, that's still, you know, I don't know, $80 million -$90 million. It's not chump change.
It's just the part of your question that was, "Oh, that all happens in fiscal 2024." No, that would take time to occur, and there would be some offset on either the cost, the custodial expense side or in greater service fee competition. We've historically said, and I think we've seen that offset is, you know, over time in the nature of about a quarter of the total raise.
Okay, great. Thanks very much. Congrats on a good guide.
Thank you.
Thanks.
Thank you. Our next question comes from Sean Dodge of RBC Capital Markets. Your line is open.
Hey, good afternoon. This is Thomas Keller on for Sean. Thanks for taking the questions.
Hey, Thomas.
Hey. Maybe staying on deposits, is there any way to parse out the contribution to HSAs from the employers versus what employees are contributing? Has there been any sort of shift in that trend or employers maybe raising a contribution to incentivize adoption or anything like that?
It's been remarkably steady actually through, you know, different economic climates and job climates. The average annual employer contribution among those employers who contribute has remained very steady. You've seen this in our stuff, but also in third-party data that are out there. The percentage of employers who contribute has remained steady, which we're particularly pleased about given, you know, that you're seeing a penetration into, as Steve Neeleman was discussing, you know, segments of the market that are, you know, beyond the enterprise. Individual contributions as well have remained steady, even at times where individual spending less.
You know, think about second and Q3 of last year or of 2020, I should say, of calendar 2020, where I mean, obviously had significant reductions in spending. You still have people contributing. The same has been true during periods of market volatility, not dissimilar to what you see in the 401(k) markets where people, you know, will set those contributions and think about it in a little bit longer term, and they won't stop contributing just because because of their. There's some short-term volatility in assets or whatnot.
I think, you know, through this entire period where we've had, you know, more volatility on the CDB side of the business as a result of the pandemic's twists and turns, the HSA business, broadly speaking, has continued to grow and, you know, outside of changes in custodial yields, which, you know, for better or worse, at least we can predict them before they show up, has been, you know, remarkably steady. These are just aspects of that behavior that's been steady. Maybe I'll add one other point, which is the one thing that has changed a little bit is the nature of employer contributions. Historically, your contributions were basic. The rationale for the employer contribution sort of boiled down to getting people started, et cetera.
Today, there are two rationales that really govern the whole thing. The first is, employers have incentive programs, and so they will have incremental dollars available for members, who do certain things, right? Typically, those are, you know, various healthy behaviors or what have you. We're able to administer that, you know, on a seamless basis for employers, and that's good. The second is employers are trying to some extent, assure that people use these plans properly.
They don't want people to just go in for the lower premium, and so they're effectively giving a portion of that premium back to the member or, you know, essentially saying, "Okay, you get this lower premium, it could be even lower, except that we're effectively forcing some savings here." I think that's a positive thing for employers to do. It's something we encourage. You don't wanna be in the circumstance where people come in just for the premium, you know, don't use the HSA, and then the plan is just a truly high deductible plan. That's not a great answer. I guess the big picture to your question is it's been remarkably steady over the course of both months and years during pretty different type situations.
All right. Very helpful. Thanks. General one on policy. I know you all are pretty active at the federal level. How critical of a role do you see policy playing over time? Are there any changes that are necessary for the industry to sustain its 2.5 million -3 million new HSAs per year?
Steve, you wanna hit this one?
Yeah. No, great question. Look, I mean, clearly, if we could get some policy changes, not unlike what happened with 401(k)s when they were doing some different accounting procedures and things like that seemed to accelerate those away from more of the kind of the defined benefit plans towards the defined contribution. I think it could certainly accelerate the market. As far as kind of maintaining this 2 million -3 million new HSAs, I mean, at some point, obviously, if we continue to, let's say, 3 million per year, then you're gonna keep cutting into those that those 100 million households that have available, have the the ability to have an HSA. It's those in commercial insurance, right?
Last time we looked at the numbers, we're what, 31 million HSAs out of about 100 million households that could have them, and yet there's another 100 million, 130 million Americans that don't have access to them. As much as we're happy with the growth right now, and as much as we believe there's still a lot of room to grow within those 70 million households in the commercial insurance that don't have an HSA, we will never rest until we can expand to other populations. I mean, it's just, it's unfair that vets that have been working for 20 years for the military, they go out into the private sector, their employer wants to give them money into an HSA, and they're ineligible because they're still covered with a TRICARE benefit that makes them ineligible.
It's just not fair. Same thing with folks that live on Indian reservations, Indian Health Service plans and things like that. Same thing with people that have VA benefits. We continue to chip away at that. I can tell you we've had many discussions about some of the thoughts that we think can get us there, and get us there being defined as kinda effectively decoupling the health savings account from the high deductible plan. That would allow us to go into a lot of union populations within that kinda 70 million households that don't have HSAs right now, even though they're in commercial insurance. I always
Jon always teases me because one of the largest employers in the state of Utah is a religious organization, and they are not able to have HSAs because they're still on a grandfathered plan going all the way back to Obamacare, pre-Obamacare. As long as they don't change their benefit, they don't have to incorporate some of the things that, you know, people could debate whether they should or not into their plan. But that disallows their people, you know, tens of thousands of workers from having an HSA. We're gonna keep beating that down. I don't.
Jon, I think it's fair to say that we don't see in the next five-10 years the need to have significant regulatory changes in order to maintain the market, and correct me if I'm wrong, Jon, but I think if we wanna accelerate the market, doggone it, we gotta do this. More than just accelerating the market, we gotta do it to help more Americans 'cause it's not really fair right now that the person in your next cubicle can take an HSA from their employer and a contribution, and you can't because you went and served in the military. Just makes no sense at all.
I just wanna say something about, like, profit in his own country or something like that to Steve when we talk about that Utah situation. The problem is there's a prophet in the country that is higher ranking than me. That's the problem. There actually is a prophet in this country. We all got that problem, isn't it? Yeah. Anyway, I mean, I think you kinda get the picture. There are opportunities to expand things like Steve was mentioning, plus Medicare, and then there are opportunities to accelerate, to simplify and make more existing commercial plans eligible, you know, because if, you know, if most people have relative to what was the case when these plans started, you know, most people have significant out-of-pocket expenses now, and everyone will in Medicare and does in Medicare.
You know, giving people a tax-efficient way to handle those seems to make a ton of sense. We have some very specific ideas, but we're also cognizant of the current atmosphere in Washington, which is poisonous, is probably a nice word for it. We're not gonna howl at the moon on this stuff. We try to, you know, when things are like that, we use that time to quietly educate and, you know, take feedback very seriously and, you know, try and improve our ideas on that basis and look at the research. When the time's right to get something done, then we can push on it, and we'll always only do what we think is right. We're not just doing stuff to serve the company's interest.
If that's all it does, you know, we can pass on that. There's plenty of stuff we can do that also serves the interests of people who are out there working hard. That's kinda the way we approach it.
Okay, great. That's all for me. Thanks again, and congrats on the selling season.
Thank you.
Thank you. We have Mark Marcon of Baird. Your line is open.
Hey, good afternoon. Let me add my congratulations on the strong selling season. We had a couple of your competitors that ended up, you know, giving some data, and it seems like you have grown stronger than others, so we'll see what Devenir ends up coming out with, but it looks like you're gaining share. Wondering, when we take a look at the HSAs that you ended up adding over the year from sales as well as from over the quarter, what percentage of that incremental bump ended up coming from, you know, your current employers just hiring more versus, you know, new accounts that you ended up signing?
It's a little bit difficult to break it out only because, particularly in the health plan side of things, you get some back and forth there. Particularly when you look at the Q4, you know, that's when you get both new employers and new members from employers, and those members can be either new hires or new people into HSAs.
Sure.
If you look at the Q4 outperformance, I think it's probably fair to say that that outperformance is more about like, I'm gonna say sustainable adds, whereas it might be the case that some of the outperformance we saw in the earlier quarters of the year relative to, say, two years ago, the pre-pandemic, again, however many years it's been since the pandemic started, you know, that's probably a little more of the hiring effect that you were seeing again, particularly in the Q3.
I don't have a precise answer for you, Mark, but I think it's fair to say that hiring thing kind of helps, but it's also true that in the same bucket you have all of the work that our marketing team has done and our account executive and sales, and I should say our service delivery manager have done to present to clients tools that, I mean, at this point, electronic open enrollment has become the norm, and we're hoping it stays that way, because it's certainly more efficient. But really what it does is it allows us to personalize, and that's been very helpful. I think that's
I don't have an exact number for you, but as I said earlier, I think we'll, you know, if you wanna look at a trend that is, like, economics neutral or macro neutral, I think you can probably average the last two years and.
Okay. Going back to the earlier comments with regards to, you know, the middle market and your penetration there, can you give us a sense for, like, what percentage of the HSAs are coming from employers that would typically be considered to be large employers or enterprise-wide versus enterprise-size versus the mid-market? What inning are we in in terms of penetrating the mid-market and the upper small market?
I think we're in about the fifth or sixth inning on the employer market, where you've got the majority, but not by much, of large employers who at least offer an HSA and your opportunity in some cases there are reasons they're not offering it, so they you know they might you know ultimately not get there. Like Steve's example, it'll take the waning of time or whatever or he's gonna have to advance in his piety. Broadly speaking, I think the large employers are in their like fifth or sixth inning.
I think the middle market and you can define middle market pretty broadly to be, let's say everything that's not within the fully insured small groups. I think you're still in the third inning, maybe, or fourth inning, maybe, I guess. I definitely got a good chunk out of it this year. Then, you know, small market's a wild card. As Steve said, it's a little bit of a, what's the word? a dumbbell. What's the thing with the two ends? In that-
Barbell-
Some folks who adopted high deductible plans 'cause, like, that was the only choice. Those are some of the folks we're trying to get to with something that Ted mentioned about working with our partners to speak to consumers directly, whose employers might not even be touching the issue of an HSA partner, but they've got a high deductible plan. That's been particularly successful in some of the small employers that are professional fields. There's sort of.
That's kind of one, and then the other end is the folks who have been, I think, historically steered away from these plans because they were lower commission, and then some of that's being corrected now with the way commissions are being paid. We're still early there too. But again, I think the way Steve put it is right, which is you got about 30 million accounts today. Our view is that at kind of true market maturity, you're looking at about 60 million accounts, so we're halfway there. If we grow between 2 and 3 million accounts over the course of the remainder of this decade, we'll pretty much be there by the end of the decade.
Great. Then just with regards to kind of the initial thoughts with regards to next year, how should we think about the monthly service fees? I know that, you know, there's obviously a bundle that's occurring and everything like that, but just, you gave us how we should think about the average yield, and obviously that's the primary, you know, focus and obviously interchange is, you know, isn't changing. Just wondering as we factor different things into the model, how should we think about that monthly fee?
Steve?
Mark, you're talking about from an overall perspective, and now we're starting to get some history with, you know, breaking out service fee relative to number of total accounts. You can sort of start doing that, you know, and looking back and seeing year-over-year. But
Yep.
What I would say is that, you know, I mean, it's still about bundling that, right? I guess the best thing that I've kinda shared with people to help them understand it is just the level of the fees. You know, you've got commuter as the highest revenue and then, you know, FSA and then you got HSA and then you've got HRA. They're kinda down through as far as the amount of revenue that they generate per month per account. COBRA is sort of unique in there in that it does it by number of employees in the business. Of course, there's the element of the 2% premium that's in there too.
You know, basically putting all those things together is what we're trying to sell from an offering perspective. I think to get a little more pointed to your question, there is, of course, always that underlying opportunity for us to win in the market when we can go find a customer that we can underwrite that has a significant amount of assets, and therefore, we can offer a service fee table that essentially has a much lower dollar HSA service fee on it, and so therefore, you know, essentially mining the revenue off of those assets, and then widening the margin with an FSA or an associated HRA with that HSA.
Great. With the middle market accounts that you're penetrating, you're typically selling more of a bundled offering just because that's what their natural proclivity is for anyways, right?
Yes.
Yeah. I would say that's true. I mean, that's what Ted and Steve are on here. I mean, that's what we're trying to do, is make sure that we can get the opportunity to have someone where we already have a relationship that's in middle market and move it forward, move the ball forward on the field with regards to the number of accounts that they're utilizing from us.
Great. Just with the new employers that you ended up taking on, what percentage of those were companies that, you know, were brand new to taking on an HSA or a CDB offering versus, you know, competitive wins? 'Cause it seems like you're winning more. I just wanted to confirm.
Yeah. It's interesting. Over time, that percentage of takeaways has grown. What's tricky about it is very often takeaway means that they had a program, but, like, they weren't real serious about it, so they didn't have too many members. I'm speaking specifically to HSA here. I think I commented last year that, or two years ago I should say, that we had reached the point where looking at enterprise, right? That we had as many takeaway wins as greenfield wins. Now that's probably come down a little bit since then because one of the effects of the pandemic has been whoever you have, like, you just everyone's a little stickier.
We're all stuck in the mud a little bit, for better or worse. I think particularly where you see a lot of the greenfield, and we were talking about a case this morning on sales huddle, I won't say what the client is because then they're gonna wanna, like, really get a deal here. I'm teasing. They're gonna get a good deal. It's a, you know, it's a 4,500-person group, so that's not small exactly. It's a greenfield HSA opportunity. Certainly as you get smaller, that's where you're seeing more of the greenfield activity.
Great. Thank you.
I guess I'd say one more thing there, which is this. This has something to do with the balance growth that we're seeing. I mean, we of course focus on and the major contributors there, you know, involve engagement and people actually growing their contributions and whatnot. It's also kinda helpful when you get brownfield or takeover business that comes with mature accounts. I mean, those aren't starting out at $300. That's one of the reasons that we could grow accounts, you know, on an organic basis 12%, right, and still grow balance as 10%. That was the fact that.
If you had gone back a few years ago, I would have said, and you may recall this discussion, Mark, we would have said, "Look, as long as you have double-digit account growth, you're never gonna have double-digit balance growth because the accounts start out so small." That's less true today, in part because of the sort of, opportunities for takeaway.
I appreciate that. Congratulations.
Thanks, Mark.
Thank you.
Thank you. I see no further questions in the queue. I will turn the conference back over to Jon Kessler for a final comment.
Somehow Mark Marcon always ends up to get the last question. He's like the last guy on The Price Is Right. You get there's a strategic advantage there. I don't know how that works. In any event, thank you all. We particularly wanted to just spend a minute thanking both our analysts and our long-term investors who kinda stuck with us after what was a very difficult announcement for us in December. We hope that folks appreciate the visibility we've tried to provide both in January and now. We will look forward to an uneventful announcement of the Q4 final results when we speak again in almost exactly a month.
To the extent we have greater visibility, we will expand on our fiscal 2023 guidance, and it'll be good fun. Until then, again, thanks everybody. Stay safe, and stay sane.
This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day.