Welcome to HealthEquity's first quarter fiscal 2020 earnings call. Please note that this event is being recorded. Go ahead, Mr. Putnam.
Thank you, Jimmy. Good afternoon, everyone. Welcome to HealthEquity's first quarter earnings conference call. With me today, we have Jon Kessler, President and CEO, Steve Neeleman, Founder and Vice Chair, and Darcy Mott, our Executive Vice President and CFO. Before I turn the call over to Jon, I would like to remind those that are listening that there is a copy of today's earnings release and accompanying financial information posted on our investor relations website, which is ir.healthequity.com. We also claim Safe Harbor concerning the forward-looking statements included in today's earnings release that will be made during this conference call. They include predictions, expectations, estimates, and other information that might be considered forward-looking.
These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from statements made today. As a result, we caution you against placing undue reliance on these forward-looking statements. We encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock, detailed in our annual report on Form 10-K filed with the SEC in March 2019, along with any other subsequent, periodic, or current reports filed with the SEC. We are not obligating ourselves to revise or update these forward-looking statements in light of new information or future events. With all that out of the way, I'll turn the call over to Mr. Jon Kessler.
Thank you, Richard, and thanks to everyone for joining us on a lovely late spring day out here in Utah for our first quarter 2020 earnings call. I will speak to Q1 operating results of key performance metrics. Our celebrity spokesman, Darcy Mott, will provide a more detailed review of our financial results and update our guidance. He's our CFO as well. Steve Neeleman will join us during the Q&A. Looking first to the four key metrics that drive our business, HealthEquity continued the trend of outperformance on year-over-year measures of profitability and custodial assets on top of robust revenue and HSA member growth. Revenues of $87.1 million were up 25% year-over-year. Adjusted EBITDA of $38.9 million was up an even larger 31% year-over-year.
HSA members at quarter's end reached 4.1 million, up 17% year-over-year, and custodial assets at quarter's end grew to $8.3 billion, up an even larger 21% from a year ago. Custodial, interchange, and service fees all exceeded our expectations. Strong gross margins resulted from a team effort to finish the annual busy season as well as it began in Q4. Adjusted EBITDA margins expanded by more than 230 basis points year-over-year to 45%, and all of that occurred notwithstanding the ramping up of the investment program that Steve detailed on our last call. The sales team also got off to a strong start. HealthEquity opened 89,000 new HSAs in the quarter. Custodial assets increased by $223 million, or more than three times the growth seen in the comparable period a year ago, and that was the result of increased contributions as well as market gains.
Invested assets grew 42% compared to last year. The number of HSA members investing was up 32%. Although there was no portfolio acquisition activity in Q1, the pipeline of smaller portfolio acquisitions regained some health with the softening of the macro interest rate environment, and we hope to have good results over the rest of the year. We believe that HealthEquity continues to substantially outpace the market, our largest competitors, and all of this adds up to a terrific start to FY 2020. What enabled this outperformance? We often describe HSAs as being at the intersection of four established industries: managed care, banking, retirement, and benefits administration. Firms in each of these industries have chosen to partner with HealthEquity as part of a complete solution.
Our focus on partnership, the proprietary technology that enables it, and our Purple Service Culture are what makes HealthEquity unique relative to our largest competitors. One, a health insurer, another, a bank, and a third, an asset manager. With our partners, HealthEquity has the tools and the incentive to meet every member and employer where they are today, establish trust, and help them take the next steps in connecting health and wealth. Q1 featured a number of interesting examples of the power of technology-enabled partnership and Purple. That's a lot of Ps. The team went live with the first integrated 401(k) HSA clients under our new retirement record keeper partnerships.
We saw strong year-over-year renewals and wins among employer clients associated with our health plan partners, and we grew custodial margins despite the softer rate environment, and that's thanks in part to the strength of our relationships with a dozen depository partners. The investment in consumer-directed benefits, or CDB capabilities, that Steve has talked about in the past also saw promising early results during the quarter. HealthEquity grew its FSA HRA business by 4% year-over-year, which we believe is ahead of the market and was essentially all taken from competitors, and sold its first COBRA clients in partnership with benefits brokers and advisors seeking a single HSA-centric consumer-directed solution for their clients and members. To achieve our investment goals faster and to go further, HealthEquity also during the quarter proposed to acquire WageWorks. A leading provider of FSA/HRA, COBRA, commuter benefits, and other CDB services to employers.
Prior to making the proposal, HealthEquity acquired approximately 1.6 million shares of WageWorks common stock, or about 4% of the company, through open market purchases. We continue to evaluate this and other alternatives to accelerate our progress in connecting health and wealth. Let's return to the strong performance during the quarter, upon which Darcy is here to shine a brighter light. Darcy?
Thanks, Jon. I will discuss our results on both a GAAP and a non-GAAP basis. A reconciliation of non-GAAP results that we discuss here to their nearest GAAP measurement is provided in the press release that was published earlier today. I will first review our first quarter financial results of fiscal 2020, then I'll provide an update to our guidance for the full fiscal 2020. Revenue for the first quarter grew 25% year-over-year to $87.1 million. Breaking down the revenue into our three categories, we continue to see growth in each of service, custodial, and interchange revenue during the quarter. Service revenue grew 8% year-over-year to $26.8 million in the first quarter.
Consistent with the strategy we have outlined over the last five years, service revenue as a percent of total revenue declined to 31% in the quarter, down from 36% of total revenue that it represented in the first quarter last year, as custodial revenue has become more predominant. Service revenue growth was attributable to a 17% year-over-year increase in average HSAs during the quarter, partially offset by an 8% decrease in service revenue per average HSA. Remember, HSA service fees are paid primarily by employers on behalf of their employees. By bringing these down over time, we deliver more value to our employer and network partners. As we indicated last quarter, we expect the decrease in service revenue per HSA to be towards the high end of our historical 5%-10% guidance for fiscal 2020.
Custodial revenue was $42 million in the first quarter, representing an increase of 48% year-over-year. The increase was the result of a 21% growth in average custodial assets and a higher annualized interest rate yield on average custodial cash assets of 2.53% during the quarter, compared to 2.04% in Q1 last year. We expect that the yield on custodial cash assets for fiscal 2020 will be in the range consistent with our first quarter, approximately 2.5%. Interchange revenue grew 10% in the first quarter to $18.3 million, compared to $16.6 million in the first quarter last year. Interchange revenue benefited from the 17% year-over-year increase in average HSAs in the quarter compared to the first quarter last year, offset by a decrease in spend per average HSA.
Gross profit for the first quarter was $57.8 million, compared to $44.9 million in the prior year, increasing the gross margin level to 66% in the quarter from 63% in the first quarter last year. The higher gross margin was the result of increasing mix to custodial revenue and a higher yield on custodial cash assets. Operating expenses were $30.1 million, or 35% of revenue, compared to $23.8 million, or 34% of revenue in the first quarter last year. Income from operations was $27.7 million in the first quarter, generating an income from operations margin of 32% during the quarter. We expect that as the investments in sales, technology, and development that were discussed in our March fourth quarter conference call continue to ramp up through the year, operating margins will be lower through the rest of fiscal 2020.
We generated net income of $41.8 million for the first quarter of fiscal 2020, compared to $22.6 million in the prior year. Net income included $17.9 million net of tax of unrealized gain on the equity investment in WageWorks that Jon mentioned earlier. Our GAAP diluted EPS for the first quarter of fiscal 2020 was $0.65 per share, compared to $0.36 for the prior year. Excluding stock compensation net of tax, the tax impact of stock option exercises, and the equity investment adjustment, our non-GAAP net income and net income per share for the first quarter of fiscal 2020 were $26.2 million and $0.41 per share. Our non-GAAP adjusted EBITDA for the quarter increased 31% to $38.9 million, compared to $29.6 million in the prior year. Adjusted EBITDA margin in the quarter was 45%.
Turning to the balance sheet, as of April 30, 2019, we had $329 million of cash and cash equivalents, with no outstanding debt. Turning to guidance for fiscal 2020, based on where we ended the first quarter of fiscal 2020, we are raising our revenue guidance for fiscal 2020 to a range between $339 million and $345 million. We expect non-GAAP net income to be between $83 million and $87 million, non-GAAP diluted net income per share between $1.28 and $1.34 per share, and adjusted EBITDA between $135 million and $140 million.
Our non-GAAP diluted net income per share estimate is based on an estimated diluted weighted average shares outstanding of approximately 65 million shares for the year. The non-GAAP outlook for fiscal 2020 includes a projected statutory income tax rate of approximately 24%. Before I turn the call back to Jon, I would like to highlight two items reflected in our guidance.
First, now that all of this year's custodial cash deposits are placed in interest rate contracts, we expect our interest rate yield for the fiscal 2020 on the custodial cash assets to be in the range of what we reported in this quarter, approximately 2.5%. Second, as we have done in recent reporting periods, our full year guidance includes a detailed reconciliation of GAAP and non-GAAP metrics. This includes management's estimates of depreciation and amortization of prior capital expenditures and anticipated stock compensation expenses. This does not include a forecast of stock option exercises for the remainder of the fiscal year, and excludes any additional mark-to-market adjustments for our equity investment. With that, I'll turn the call back over to Jon for some closing remarks.
Thanks to Team Purple and our partners for a quarter in which you stayed focused and once again exceeded expectations. I want to close by mentioning that on June 19th, we will briefly celebrate five years as a public company by ringing the Nasdaq opening bell, then we turn our focus forward. We'll host an Investor Day from 10:00 A.M. through 1:00 P.M., again, also on the 19th at the Nasdaq market site in Times Square. If you would like to join us and have not done so already, please get in touch with Richard through our investor relations site. The entire HealthEquity leadership team, Steve, Ted, Darcy, and I, we all hope to see all of you there. With that, let's take some questions.
Ladies and gentlemen, on the phone lines, if you'd like to ask a question, please hit star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may hit the pound key. We ask that you please mute your line once you've asked your question to prevent any background noise from coming through. Again, that is star then one, if you'd like to ask a question. Our first question comes from Jamie Stockton with Wells Fargo. Your line is now open.
Yeah. Thanks for taking my question. I guess maybe the first one on the yield, because I know there'll be a lot of focus there. Darcy, the yield curve is obviously a little inverted right now, or at least part of it. Can you talk about, as we kind of think about the cash that you're likely to put to work next year, would you guys come in from a duration standpoint or a maturity standpoint on how long you're putting the cash to work to maybe enhance the yield that you would be getting versus the historical kind of three-year-ish timeframe you've used?
If you did that, do you think you could get the same kind of, let's say, premium over where a comparable treasury is with a jumbo CD, or would the partners not be willing to give you the same level of premium for a shorter duration?
Good question, Jamie. We've talked about this before. Our approach to the placement of funds and the duration and the yields has been fairly consistent. We don't actually try to maximize the yield necessarily. What we're trying to do is deliver consistency and predictability and to manage the laddering off of custodial assets. As you know, every year, we roll some of the expiring contracts into new contracts, and we bring new depository agreements on every year. Generally, we follow this practice of, at the beginning of the year, we're generally at about a three-year duration, and then it works its way down to closer to two years throughout the year, and then we kind of bump it back up into a three-year duration. We're managing that. At the same time, we're managing expirations that will happen in any given year.
We don't want to be caught in one year with a whole bunch of expirations and be limited to whatever the rates are at that particular point in time. We have a great deal of confidence that that strategy has worked well for us in the past. It gives us a great deal of predictability, not only for it to tell you what we expect to do on a revenue basis, but also on yields and on duration. I would also add that as we go through this process, we have a great deal of confidence in the guidance that we give today because we have contracts in place that will cover capacity for the remainder of this year. Going into January, we'll add some more capacity and we'll roll some contracts.
Given the contracts that we'll roll and given the current rate environment, if it remained even flat with what our rate environment is today, we would still see an uplift going into 2021 as a result of new placements this next year. We're confident in that approach. We like it. We like the laddering effect that it does, and it's very easy for us to manage through that.
Okay. That's great. Maybe just as my follow-up, on the investments that you guys are making this year from a growth standpoint, I think you kind of quantified it as $30 million, half of that capital investments, half of it expenses this year.
How does the WageWorks situation impact that? Or has it impacted it at all? Because presumably some of those investments were probably going into solutions that might ultimately end up being duplicative. I think maybe you made the offer there kind of after probably you've made the plans for those investments. If you could just talk about that'd be great.
Yeah. Thanks, Jamie. This is Jon. Good to talk to you. As far as what we've done to date, the offer to acquire WageWorks has not affected either the pace or the nature of our investments at all. That's by design. We want our teams to be working in where we want them to be working, also very candidly, one way or the other, we will learn a lot. We are learning a lot from the investments we're making and the activities in market. To date, there's been no real impact, and I would not expect until, and unless there were a transaction more definitively, that there would be any impact. We're going to continue with our investment program.
Okay. Thank you.
Thank you. Our next question comes from Sandy Draper, SunTrust. Your line is now open.
Thanks very much. Good afternoon.
Hey, Sandy.
I guess the first question, I'm not sure how much you can answer. It's around the WageWorks situation. I know there's no maybe specific update, but are there sort of next steps, or are you just waiting to hear back? Is there any conversation going on? Just any type of update as to sort of what the next steps are and at what point it's an investment and you figure out what to do with the stock? Just that would be helpful.
Well, it's probably useful to just reiterate the steps that have occurred to date. We made our proposal on April 11th. There was evidence that the proposal had entered the public domain, and both companies responded quickly to that by issuing confirmatory press releases on the evening of the 29th or the morning of the 30th, I can't remember. We've indicated here that prior to April 11th, prior to making the proposal, that we had built up this position. I guess I would say that was one piece, but by no means the only piece of an effort over the course of a number of months, to approach our overall strategic objectives, the ones that we've talked about on this call and others, in a very thoughtful way. So we'll have to see what happens.
I don't have really anything else to update you on in terms of the company's response or potential next steps or what have you. I will say, apropos of the last part of your question, that in making the investment that we made, we answered two questions, and I think our board was very thoughtful and deliberate in approaching its role in approving this process. The first question was, did the investment support our strategic objectives? We concluded that it did. The second question, and here I have to admit, I felt much more empathy for the kind of work that you do and Jamie does, covering the company, for example. We had to make an assessment of whether it was a good investment. Went through that very carefully and the board concluded that it was. That was the basis on which we made the investment.
At what point we would do something else, I think at this point it's better to not speculate. That's how we got here, and that's exactly where we are.
Okay. That's helpful. I guess maybe just to follow up and more operational, interesting to hear, I think you said you got your first 401(k) joint. I wasn't clear that you maybe also did some I wasn't sure if it's commuter benefits or COBRA. I'm just trying to get the update on what parts of the platform are fully operational, which are sort of coming down the pipe over maybe the next 12 months- 18 months, and just get an update in terms of that product strategy, that'd be great.
Thank you for the question. The way we're approaching it is to get in market as quickly as we can and learn. We were very pleased to have not only our first sales with our 401(k) partnerships, but actually to be in market with product operating with our 401(k) partners. Does the product today have every feature that it eventually will? I don't think so because we will learn what customers really like, what's valuable, what helps them grow savings, et cetera, and we'll make adjustments. By the same token, we also in this quarter, made our first sales of COBRA product. There too, we are pleased to be not just in market from a selling perspective and learning, but in market from a product perspective and learning. As we outlined, this is going to be a multi-year process for us.
We think that the way to do that is sort of, and this is where the technology people roll their eyes, but in a more agile product approach. Where we're in market, we learn things, we make adjustments, et cetera, as opposed to in 18 months We'll deploy something, and then we'll see how it does. I'd also add there, during the quarter, that we also saw we don't usually give quarter-on-quarter estimates in our HRA/FSA business, but we thought it was useful to do so here, since we did indicate that that's also an area where we're investing to improve our capabilities, along with some other areas. We did see some uplift from that during the quarter as well.
That seemed like a good thing, and I guess the major lesson I draw from all of that is, at the very least, I think we can take the view that the process of feedback and iteration that needs to occur for an effort like this to be successful over the course of multiple years is underway.
Great. Thanks so much, Jon.
Thank you. Our next question comes from Greg Peters with Raymond James. Your line is now open.
Hey, Greg.
Good afternoon. I'm in the spirit of my reputation, apparently. I'm going to try and load up several questions into my two-question allocation.
We loosen the reins just a little bit, here we go.
Why are you referring to Darcy as your celebrity spokesman? I think that's what investors really want to know.
Well, thank you for the first of your two questions, Greg. The reason for that, as you may know, or as others may know, I don't know how closely you read the sports pages, but Darcy is now a sports celebrity, and I'll encourage folks who are not aware of that to watch more ESPN.
Right.
He's done a fantastic job of representing the company in his sporting endeavors.
In the spirit of that answer, I know you started to answer this question.
I actually think, in fact, as I recall, I think a member of Raymond James leadership may also have joined the Senior PGA Tour.
Yeah.
But I know-
In the spirit of that, just can you circle back, talk about Vanguard, Principal, Nationwide, and give us sort of an update on those initiatives. I know you started to answer some of it in your prior answer.
Yeah. I'll just say Darcy has not joined the PGA Tour. In case anyone is new to our calls and doesn't realize we're kidding. He did shoot well and under intense pressure. In any event, look, we're really pleased with this from two perspectives. First of all, looking at the pipeline, we were just talking about this this morning as we did our weekly sales update. We have good, strong cases in the pipeline from each of the three partnerships that have been publicly announced, as well as from others where we followed our more typical approach of not doing product and partnership announcements, and our partners have been comfortable with that. That's a really good thing at this point in the year, as you can imagine.
We're particularly pleased with, if you look at those partnerships and you look at one of our sort of thesis here is that you're going to be able to have, in the context of the retirement plan, you're going to be able to have, and our partners are going to be more willing to have really thoughtful long-term discussions with the employees that are the beneficiaries of the plans. I've been particularly pleased with the level of engagement between our teams that do research on this. We had a great experience a few weeks ago, Greg, where a number of us happened to all be together at an event that we all contribute to that supports some of the deep research behind some of these saving strategies and the logic behind them.
It was just great to see all of these firms really working together to try and, obviously some of them compete, but really working together to try and understand how we can get employees of their customers and ours as quickly as possible to the place where they're really using HSAs as they were intended, as long-term savings vehicles, and either growing their savings faster or meaningfully reducing the cost of investing. That's kind of where we are. It's still early days, but we certainly feel good about what we're seeing from a pipeline perspective as well as actually this early seeing customers in revenue operation is pretty good.
Thank you for that answer, Jon. I wanted to follow up just around the HSA members. You have.
Well, that was two now. Now you're on two.
Come on. You can't count the first one as a real question. I mean.
Go ahead. We might go Elon on you, but probably not.
The HSA members. I'm looking at the total number increased 17%. The actives only increased 13%. What I was particularly struck by is the sequential change in actives versus the sequential change in HSA members. The sequential change in actives is only up 4%, compared with something different in the HSA members. Maybe you could provide us an update on why these pieces are moving differently.
Yeah, I can actually, although now I wish I'd held you to two questions. No, kidding. The first quarter, as you know, is one where we see a lot of different things occurring with both. It's the quarter where oftentimes you'll see, if you lost folks or they're moving on, it's where you see the accounts close. It's also the quarter where you see HSA assets come on from folks that you've won. What we saw in this year's first quarter was, we didn't see as many, you can see this in the year-on-year comparisons. We didn't see as many new HSAs come in. Those that we saw come in, as well as those that remain, saw really substantial growth in assets. That was reflected in both market growth, but much more so in terms of contributions and rollovers from the takeaway.
Just a slightly different flavor of things. I think if you put it all together, the basic picture from our perspective, we won't know what the market grew this year for quite a while, because it'll be a while before this kind of a comparison can be reported. We feel pretty good that we continue to outpace the market and certainly, when we think about, as you well know, our basic model, which is, we're going to grow revenues in HSA, we're going to try and grow earnings and assets even faster. You really just saw more of that seems like a good thing.
Okay. Thank you for your answers.
I think we got your HSA in the first quarter last year, though, Greg.
Yeah
That probably played a huge role. If you had put another $200 million in, we couldn't be making these positive comparisons.
By the way, I'm one of the leading reasons why your interchange is down.
It's okay. As we've said many times, as Darcy always says, we're happy to help you save for a lifetime. When you spend it only gives us the revenue once. It's good for you and good for us.
Thank you. The next question comes from Donald Hooker with KeyBanc. Your line is now open.
Greg, good afternoon. Maybe, I guess, while we have you on in a public forum here, if you can maybe just talk about your thinking around sort of potential revenue cost synergies from WageWorks and kind of what your thinking is in making that proposal, and what is the right debt ratio for HealthEquity over time? Obviously, you guys have carried a cash-rich balance sheet for a long time. How comfortable would you be taking the debt ratio up?
Okay. On the first part of that question, we have not commented, I think, publicly on synergies. I think that's probably for the best. I think we probably think it's better to just hold off on that until we feel like we have all of the facts together and can give you something we feel comfortable with. I'm going to hold off on that, other than to say what we said in the release, which is that, obviously, in making the proposal, we felt that there were significant short-term synergies, but also to remind everyone that the objective of this, from our perspective, and it's the same objective of our overall strategy, which is to grow our HSA market share and to continue to help Americans move down that journey of connecting health and wealth. That's why we're doing it, not because of cost savings or whatever.
That's sort of the first part of your question. I think on the second part, or I say that's why we proposed it. On the second part of your question, I think the right way to answer that is to speak generally to how we as an organization, and I would include our board, since we've had active board dialogue on this topic for a long time, as we should, how we think about debt. Then you can apply it to this situation. First of all, we recognize that this is a business that has, and hope you recognize, and know you do, Don, that this is a business that has highly predictable and stable cash flow. That's a good prerequisite for a decision to put the shareholders' money at risk by borrowing money from somebody else.
Secondly, I think it would generally be the case that were we to incur debt, in this or any other context, it's likely to be for assets that have similarly stable and predictable free cash flow. Again, reinforcing the view that, if we use debt, we're going to use it responsibly, and we're going to use it for things where we can have a high degree of comfort with regard to the free cash flow that's there to service it. The last point I would make here is that we are comforted to some extent. Well, not the last point. The next point I'd make is that we're comforted to some extent by the fact that the company has a very strong track record of over-delivering on its promises and has clearly shown an ability to forecast.
By the company, I really mean the people, many of whom are in this room with me, who have been doing our forecasting for years, in some cases more than a decade. So that gives us a lot of confidence that makes sense. That having been said, as I think this is one of these Old Testament deals, "Pride goeth before the fall." So that's something, we are absolutely mindful in all cases of the fact that any leverage reduces our margin for error on behalf of the shareholders and reduces our ability to take other actions that might be beneficial for the shareholders down the road. So, those are the principles that we've used in thinking about debt in the past. We have never identified, and frankly, don't believe in the idea that there is some kind of ideal debt ratio for the company.
That at some level depends on the attractiveness of what you're spending the money on relative to the attributes we just talked about. So, those are the principles that we would apply here and have generally applied as we thought about other things we might do.
Then maybe just real quick one, the interchange fee. You've done a good job explaining why services fees per member are declining due to your strategic pricing strategy and tiered pricing. The interchange fees per member, would that continue to be declining? Can you just talk about sort of your thinking there going forward?
Yeah. On a per HSA basis, that has been occurring on a regular basis. The rate or the yield that we get off of interchange is relatively constant. We do see some seasonality as we've talked about in the past, about spend patterns, whether it's in an HSA or in an RA, that we see usually our first quarter actually has a spend higher. It starts coming down, and then it builds back up towards the end of the year. We would like to think that a lot of this is because people are becoming educated about not spending, or spending more wisely on with their HSA dollars. Frankly, I think that it's somewhat a function of how much money they have to spend, what kind of bills they have. It's not a rate issue.
We've talked about the growth in number of accounts, et cetera. It really comes down to the spend per HSA.
Yeah. I would ask Steve to speak to this. I mean, one thing, without going crazy on it, We have an annual, what we call Key Partner Summit. It's not like super fancy. There's no-
Celebrities.
Celebrity. Well, were you there?
No. No, I was elsewhere.
Right. Our celebrity wasn't there. That's true. You were actually out selling, though. That's good.
That's right.
Celebritizing. In any event, it's not fancy, but we really think of it as a learning experience. One of the things we do is we ask our clients to present on not just their experience with HealthEquity, but more broadly, their experience in managing a health plan, which is really what they're doing, using all of the tools that are available to them well beyond HealthEquity. One of the things, and Steve, I thought you could elaborate on this a little bit, is we heard this year a number of examples of folks who are really having a significant amount of success at keeping their overall spending very much under control, and implicit in that, keeping not just I mean total spend, not just what the company spends, and implicit in that, keeping members' out-of-pocket spending under control.
You want to speak to that at all?
Sure. Yeah. There used to be research studies that they would publish every year that would show that as a percentage in a population goes towards health savings accounts, that really spend starts to go down. In fact, the general rule of thumb was if you can get more than 50% of your population, and you have a large enough population that it's real numbers into an HSA type plan, that your overall trend over what it was when you were in a traditional plan would be cut by about 50%. They don't tend to publish those studies anymore because I think it's almost become self-evident.
As we met with our key partners last month, it was remarkable to hear not only that they were having that exact experience, where they would talk about in their presentations, "Yeah, we're now over 50%, and our trend is half what it used to be." Also that they just have almost a fervor to try and educate people to help them understand the importance of saving money in their health savings accounts. I think where we've seen the change, and I think part of it's because we've tried to be a leader talking about how HSAs can be used as long-term investment vehicles, is that rather than leading with an employer and saying, "Hey, you need to do HSAs and all your people need to do them because you're going to see your trend go down." We've led with a different message, decidedly.
It's if we can educate people that this is better for them, better for their families long term, they're going to need the money as they age, and this is the best device to put it in because of the tax attributes, that that will benefit the employee, a member to us. Almost consequently, it benefits the employer. It's kind of neat to see it just being realized and them saying, "Look, help us in our educational efforts." It's little stuff, and we talk about this all the time, but just making a shift from a name brand drug to a generic. Making an extra call and going a couple blocks down the street if you do need to get a radiology study, a MRI or something like that, and saving a couple thousand dollars.
They're still getting the care they need, it's just they're spending less, which leads to this perhaps part of the trend on the spending down. It's great for us, because then we can help manage that money, and we'll make the money over the next 12 months.
I do think there are some opportunities here for us, where we can have real win-wins that also increase the revenue line, and the one that really comes to mind is, when people do have incidents, a lot of people, as we've talked about, they still think of these like flexible spending accounts, and one way they think about them that way is, well, I made my election at open enrollment, and that's the end of it. As we all know, with an HSA, you're not tied to that number. When people have incidents during the year that cause individuals a spike in those expenses, running those extra dollars through the HSA that year can meaningfully reduce that unanticipated expense.
That's one of a number of areas that Ted and the team are working on in terms of really continuing to tighten up what we're doing on the engagement front. It's something we pay attention to, and there's a little bit of sort of cross currents in terms of some of it's good, some of it's not as good. This commentary should give you a feel for the depth of that.
Thank you very much.
Thanks for the question.
Thank you. Our next question comes from Mohan Naidu with Oppenheimer. Your line is now open.
Thank you very much for taking my questions.
Thanks, Mohan.
Hi, Jon. Two questions for me. One, on the technology investments. Can you update us on where you are in the cycle and what we should expect to see through the year? The second one may be for Steve.
Sure.
Just what your thoughts are on Medicare for All, as unlikely that seems to be, but curious about your views and potential implications of such an event on your business.
I'll take the first question very briefly. It's obviously early in this cycle. We said in the commentary at the beginning of this call that the investment program we described is beginning to ramp up. As our guidance implies, there's a little more ramp to come over the course of the rest of the year. We'll see how that goes. It's early, but we've tried to focus, as you can tell by some of the other commentary, on investing where we can get things into the hands, whether they're of our own people for efficiency's sake or security's sake, or of the market, and learn stuff quickly. That's the way we're trying to order things. Steve, on MFA, you want to talk about that?
Of course, this is something that we spent a lot of time. We talked earlier this year and at the end of last year that we were planning to spend more time in Washington, D.C., and we've done so. We've really taken the time to spend educating on both sides of the aisle, Mohan. I think what we're hearing is that, sure, there's I think a minority of the party, of the Democratic Party in this case, that really believes that Medicare for All could happen in the near term. That being said, Medicare is not what it used to be. It's not like, what's the old phrase? It's not like your father's Oldsmobile or whatever.
A recent study came out from the American Medical Association that said that if a patient is on Medicare today and they get cancer, and that happens to be when most patients get cancer, is when they get older, that they would have to spend over $10,000 a year out of pocket above and beyond the cost of what would be reimbursed through Medicare. The easy answer is these folks should be spending that money out of a health savings account, because if they're paying for it out of their 401(k), they're probably going to have to take close to $14,000, $15,000 out of their 401(k) to pay their $10,000 or $11,000 cancer bill. We don't know exactly where this will go.
We do know that from the folks that have been there the longest, not maybe the newest voices there, but the ones that have been there the longest, they say they just don't think it's going to happen in the short term. We will be spending some time talking a little bit about this during our Investor Day. The bottom line is that we remain hopeful that no matter where the trade winds lead us out in D.C., that at the end of the day, there's a health savings account to help whatever plan someone's in, whether it's in Medicare, whether it's in traditional care, whether it's in Medicaid, TRICARE, you name it. Every American should have a health savings account because every American, independent of what plan you're in, is going to have out-of-pocket spending. That's been our position on it.
Thanks, Steve. That's great color. I'll keep it to that.
Thank you.
Thank you. Our next question comes from Stephanie Demko with Citi. Your line is now open.
Hey, guys. Thank you for taking my questions.
Thank you.
Just a quick one. When we think about the different end markets that you guys participate in, you did talk about how WageWorks has kind of helped your competitive dynamic in the mid-employer market. Could you just walk us through those win rates and compare it maybe to the upmarket or with payers, and how we should view the comparative sizing of each opportunity?
I'll try. What I would generally say is that historically, HealthEquity, it's not as much win rates, it's really where we've been on the field. Historically, we've been on the field with our enterprise customers, and then obviously with our network partners. We've relied pretty much exclusively on our network partners to be on the field outside of the enterprise, with the regional and even in some ways commercial space. That's really what's changed over the course of, as we sort of dipped our toe in, and certainly it's an area where we identified previously that whether it's through the proposed transaction or other means, we intend to increase our sort of shelf space, for lack of a better term, with these employers and with the brokers and advisors who really, in many ways, are the key to their decision-making.
That's what we're going to do one way or the other. One measure of all of that is if you look at our RFP activity last year, this gets to your question, almost half, 49%, of the RFPs we received included at least one of these non-HSA services as a request, meaning the other CDBs. I'm not saying we didn't win any of those because obviously in some cases, we offer those products, and we're able to meet needs, and in others, the partner or client sort of satisficed and said, "You can do what you do well," and so forth. There are a lot that we didn't. We just feel like there's the part of this that is having a footprint and a part of it that is having the right product for that footprint that kind of go together.
Again, whether ultimately our proposal is successful or we get there through other means, we're going to get there because we concluded that that's something that will really help us down the road that we're really trying to help consumers walk. That's kind of where we are. I think that's probably the best I can do in terms of trying to give you some color around it. It is material, and I think we even saw that in the first quarter. If you look at the wins that we got for some of the services that I described, and virtually all of them were in connection with a core service that we offer. In other words, people weren't buying standalone COBRA from us.
I suppose a few did, but for the most part, it was recognition that the future of this is an HSA-centric business, where we're really helping people learn how to spend less today, save today, and put that money away in the most efficient way that's available to them for the future. We're meeting them where they are, whether that's as someone who's in a traditional co-pay type plan, with an FSA where they can save money and put it in a 401(k), or whether that's someone who's in an HSA plan, where they can spend less today and save more for tomorrow.
No, that's super helpful. Thank you, Jon.
Sure.
Just a quick follow-up on that. You guys do have some HRA and FSA capabilities, correct?
Yes, we do.
What are the plus and takes when you try to fit your own platform?
Well, I think probably, those are probably best talked about in the context of where we're in market. I think what's fair to say, generally, is that what we've added this year is the ability to serve customers who are not connected to our health plan partners. Historically, we really built the platform for that purpose. That's new capability. That doesn't mean we can't be doing more, and it doesn't mean we can't be doing it at scale. While we're pleased with the progress we're making there, and certainly, it's not a tiny business at this point. We've talked about elsewhere the number of accounts and all that. As part of our core HSA offering, it's something that we've indicated, again, whether it's through this transaction or otherwise, we'll continue to invest in.
I think that at some level, the core of that investment is these products are ultimately about helping consumers use these sort of tax benefits to save money right now. As we've talked about elsewhere, we need to complete that circuit. It has to be about making that part easy and then about, well, what do you do with that money, right? If it just disappears, it hasn't really done anyone any good.
Got it, yeah.
It really helps when you complete the circle. That's kind of where I think we really feel like, ultimately, the investment will need to go. It's not just getting parity from our perspective, it's taking this industry in a place that it hasn't been before.
Understood. Thank you, Jon. That's really helpful.
Thank you. I kind of wandered there, but got to the right place at the end. Maybe.
Thank you. Our next question comes from Allen Lutz with Bank of America. Your line is now open.
Hi, Allen.
Hey, everyone. Thanks for taking the questions. Can you talk about how the current selling season is progressing versus last year? Where are you guys winning more? Where are you winning less? How is this tracking versus your expectations? Secondarily, is there anything that you can say specifically about the 401(k) contract win?
Go ahead with the first part and I'll.
Yeah. Let me start with the first part, Allen.
Yeah.
Good to hear your voice. Yeah, no. Look, we remain excited about this season. We talked a little bit about it in the last call, that we were already starting to get RFPs and things like that, and we think the team's doing a great job. We've announced wins already on the COBRA market, which we talked about, which was excited to stand that up and start selling COBRA. We've announced these partnerships, Jon will comment a little bit, on the record keeping side, and we've even announced some wins there. As our practice, we don't do any names or logos or anything like that. We're excited to see it working. In fact, on the sales call today, they talked specifically about reps that are starting to even have repeat wins of working with record keepers.
We think that's a great thing to see happen in really a relatively short period of time since these partnerships have been signed and announced. I think that what our salespeople are doing is they're realizing that, in the past, they could rely a lot on these health plan partners. What we've tried to do is subdivide the team and have part of the team continue to focus on the health plan channels and the different channels we've dedicated to. The other half is doing more direct sales. That's the other part that is exciting for us to actually see this inside sales function or direct sales that we've invested in adding over a dozen new sales folks since last year in that effort. We're pleased. We're pleased to see them out working hard, to announce wins, and to be very busy.
Everyone knows that there's nothing happier than a busy salesperson. We're happy to be supporting them in those efforts.
Yeah, it's early in the cycle, Allen, as you know. It's hard to be too concrete. I guess, a couple basic thought, I think is, look, we're off to a good start. It's a similar start to the one we were off to last year. We ended up finishing last year reasonably strong, the fourth quarter was a little weaker than we wanted it to be, as you know. If we can, as they say in NBA Finals lingo, play four strong quarters here, we should be in pretty good shape. That's the way we're thinking about it. Everything we see in terms of the pipeline size, RFP volume, the nature of RFPs, the performance of new partnerships, all tells us we have that opportunity. That's what we're trying to execute on right now.
Great. Darcy, you said that operating margins will be lower through the rest of the year. Can you give us a sense of the cadence and the relative size of the step down for the last three quarters?
Yeah, I think it'll be ratable through the three quarters. We continue to ramp up. On the initiatives that we're spending money on, the biggest challenge is just bringing people on board, getting them up to speed, and having them being productive. I think that will continue through all the quarters throughout the remainder of the year. If you look at our overall guidance and just take a midpoint of EBITDA, I think we continue to be true to what we said, that we'll be in the range of where we were last year. It's not going to be where we were in the fourth quarter. I think that you're going to see that ratchet down each quarter throughout the year.
Great. Thank you.
Thank you. I am showing no further questions in the queue at this time. I'd like to turn the call back to Jon Kessler for any closing remarks.
Yeah, thanks. I just want to say a little more strongly thank you to the team, and that includes our partners. I think this is probably the largest amount by which we have ever raised revenue guidance in a quarter that we've done here. I'm looking to Darcy to shake his head up and down. That's not happening because we're clever and some chess game associated with investors. It's happening because we watch what our team members are doing, and I think about the concerns we expressed in December, the increasing optimism that we expressed in March, and now in June, we feel very optimistic about where we are as a business and where the team is focused and so forth. The credit for that, to the extent there is credit, really goes to the team and the work. Thank you, everybody.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program, and you may all disconnect. Everyone, have a great day.
Thank you.