Good day, ladies and gentlemen, welcome to the HealthEquity investor conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question- and- answer session, instructions will be given at that time. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. As a reminder, today's conference is being recorded. I would now like to turn the call over to Richard Putnam. Sir, you may begin.
Thank you, Sydney and good morning, everyone. Good early morning, everyone. Welcome to HealthEquity's conference call to discuss our definitive agreement to acquire WageWorks. My name is Richard Putnam, Investor Relations for HealthEquity, by way of introduction, we have Jon Kessler, President and CEO, Dr. Stephen Neeleman, Vice Chairman and Founder of the company, and Darcy Mott, Chairman, Executive Vice President, and CFO. Before I turn the call over to Jon, let me remind you of a couple of things. First, there are copies of today's press release and slide deck that may be referenced during this conference call, they are available on our investor relations website, which is ir.healthequity.com. Second, let me remind you that today's discussion will include forward-looking statements as defined by the SEC. They include predictions, expectations, estimates, or other information that might be considered forward-looking.
In connection with these forward-looking statements, there are many important factors relating to our business, which could affect the forward-looking statements. These forward-looking statements are subject to risks and uncertainties, and may cause our actual results to differ materially from statements made here today. As a result, we caution you against placing undue reliance on these forward-looking statements. We also encourage reviewing the discussions of these factors and other risks that may affect our future results or the market price of our stock, detailed in the press release today and in our latest annual report on form 10-K and the corresponding form 10-Q. We assume no obligation to revise or update these forward-looking statements in light of new information or future events. With that, I'll turn the call over to Mr. Jon Kessler.
Hello, everyone, thank you for joining us. Dawn has not yet broken over the mountains here in Utah, we are ready to discuss HealthEquity's acquisition of WageWorks. I will describe the acquisition, Steve will detail the strategic rationale, and then Darcy will detail the financial rationale. We may reference information in the previously released slides will not turn to them bullet by bullet. HealthEquity, as some of you know, came public five years ago with a promise to deliver a unique combination of growth, visibility, expanded profitability, and sustainable competitive advantage. The team has kept that promise, delivering 36% compound annual revenue growth, nearly 1,600 basis points of adjusted EBITDA expansion, beating adjusted EBITDA consensus for 20 straight quarters, and growing HSA market share year after year.
Our mission, though, is to help American families solve one of their greatest financial worries: paying for healthcare today and in retirement. We call what we do connecting health and wealth, and Health Savings Accounts, or HSAs, are its core. We believe that today's announcement will accelerate the transition to HSAs and position HealthEquity to build on its strategic position in this emerging market. As Steve will detail, by acquiring WageWorks, HealthEquity gains access to more HSA opportunities. WageWorks' robust direct-to-employer and benefits advisory channels complement perfectly HealthEquity's leading health plan and emerging retirement plan channels. WageWorks Consumer-Directed Benefit, or CDB capabilities, are complementary to our HSAs. Together, they create a premier broad solution for these channels, delivered by one company on an end-to-end proprietary service and technology platform.
The transaction doubles our scale, expanding the scope for data-driven investments in member engagement to drive participation, balances, and investing, as well as greater cost efficiency. The addition of complementary capabilities increases our addressable market. As Darcy will detail, we expect to deliver our shareholders sustained growth driven by HSAs and custodial assets to deliver significant and permanent synergies from high-confidence revenue optimization and cost efficiencies, and finally, to deliver rapid deleveraging with strong cash flows, revenue, and profit growth. Here are the specifics of the agreement announced today. HealthEquity has agreed to acquire 100% of the outstanding shares of WageWorks for $51.35 per share in cash. The purchase price represents a 19% premium to WageWorks' closing price on April 29th, immediately prior to HealthEquity's interest becoming public, and a 28% premium to the volume-weighted average price since March 18th, when WageWorks began to file overdue SEC reports.
This agreement is not subject to a financing contingency. The entire purchase price has been underwritten by our lead financing partner, Wells Fargo Bank. The company will continue to be called HealthEquity, reflecting our vision, and corporate headquarters will remain here in Draper, Utah. Closing is subject to regulatory approval and certain other conditions, which we do not expect will be a source of unreasonable delay. We expect to close the transaction by the end of this year. A glance at the key metrics that drive our business demonstrates the potential value creation in this transaction. In their most recent quarters, HealthEquity's ended April 30th, and WageWorks' ended March 31st, 2019, t he two companies reported a total of $205 million in revenues and $71 million in adjusted EBITDA. HealthEquity generated the majority of the adjusted EBITDA on less than half of the revenues. Here is why.
At quarter's end, the two companies had a combined 11.7 million total members. That's a new metric for us, and it reflects the sum of 4.8 million HSA members and 6.9 million participants in complementary benefits: FSA, HRA, COBRA, and commuter benefits. WageWorks accounted for the majority of that total, reflecting its strength in complementary benefits. HealthEquity accounted for 85% of the HSAs. Just 6% of WageWorks' 2,000 largest employer customers presently partner with it for HSAs. In short, the business opportunity lies in helping employers and consumers transition to and take full advantage of the power of HSAs, and nobody is better at doing that than HealthEquity. I don't know if the lawyers like a nobody. That's a little too crazy. All right, we're taking risks. For a little more detail on the strategic rationale behind today's announcement, I'm pleased to welcome Dr. Stephen Neeleman. Steve?
Thank you, Jon. We believe that the acquisition announced today will help the market expand and HealthEquity grow faster, giving us greater market access, more scale, and a larger addressable market. Let me detail each of these points, beginning with market access. Last year, HealthEquity added roughly 20% of the market's 2.9 million net new HSAs, according to Devenir data. That was great news. As we've said before, the team achieved while playing on only part of the field. Organic initiatives in both sales and product will eventually address that, but we want to play in every HSA opportunity now. Acquiring WageWorks takes us a long way there by expanding our channels and filling out our offering to employers. HealthEquity is a leader in partnering with health and retirement plans to deliver solutions to employers. As you know, we ended FY 2019 with 141 network partners, mostly health plans.
A few years ago, our proprietary research showed that employers were looking beyond health plans for HSA partnership. As of today, our retirement plan partnerships represent 12% of the defined contribution plan, record keeper market, a figure we expect to double over the next year with partnerships under development. WageWorks is the next step in building our distribution channel footprint, as it is a leader in partnering directly with employers and benefits advisors who influence employers' decisions. Research conducted for us by IK Group in February found that 2/3 of employers say benefits advisors are influential in selecting an HSA partner. That's up 17% in three years. Separate proprietary research confirms that WageWorks has market-leading awareness levels within this channel. Acquiring WageWorks allows us to offer what employers and benefits advisors want, a market-leading single-source provider of HSAs and complementary CDBs.
IK found that 79% of employers would prefer to partner with a single firm for HSAs and CDBs. More than 50% of RFPs we saw in fiscal 2019 included a request for at least one CDB. Together, HealthEquity and WageWorks manage 4.8 million HSAs, 5 million FSAs and HRAs, 800,000 COBRA, and 1.1 million commuter participants. We believe these are all market-leading figures. Together, we can say yes more often to employers and benefits advisors. This all starts with the company's large existing customer base, 115,000 employer groups, including 2/3 of the Fortune 500. The revenue growth opportunity in delivering our full suite solution to more of this base is very large. More than 95% of the client base does not yet purchase the full suite from either HealthEquity or WageWorks.
We estimate that revenues would increase between 1.7x and 4x with the full suite offering relative to what these clients have today, figures that will only grow with rising HSA penetration and balances. Another reason for today's announcement is greater scale. Now, typically, that's a euphemism for lower unit costs, and Darcy will talk about cost synergies. What we are most excited about is the greater scale for return on HealthEquity's ongoing investments in data-driven engagement. Now with nearly 12 million total members and based on HealthEquity's experience, more than 20% using our applications per month, we believe in the opportunity to drive consumers towards smart spending, confidence, and ultimately healthy savings. With the full suite and with HealthEquity's ability to connect with health and retirement plans, we can truly meet more consumers where they are along the journey to connect health and wealth.
A health FSA, for example, can be the first step for those not yet comfortable with HSA-qualified plans. Run $2,500 a year through it, put the tax savings in a retirement account, and you could retire with enough to fund a couple of lifetime costs under Medicare. Get comfortable, switch to an HSA, and save even more, even faster. Pre-tax spending on essentials like transit and daycare can create funds to save even for families living paycheck to paycheck. As WageWorks says, everybody benefits. The benefits multiply when you put those savings in an HSA or a 401(k). We can help consumers make intelligent COBRA decisions, planning for and dealing with gaps in employer coverage, which an HSA can help fill.
In short, more members, more information, and more opportunity to deliver the right message to the right person at the right moment ultimately fuels our mission and drives the bottom line. Engagement and education are the keys to the HSA market reaching its potential. According to Devenir, 25 million HSAs with $54 billion in custodial assets presently generate about $2 billion in annual HSA revenue. We believe the HSA market has the potential to reach $10 billion in revenue, with accounts more than doubling and assets growing 10x to 20x from current levels. HealthEquity is already positioned to capture an outsized share of that growth. Team Purple, for WageWorks shareholders who may not know HealthEquity, that is our extraordinary team driven by a culture of service, has outgrown the market year after year, and in 2018, added more HSAs and custodial assets than its competitors.
We believe acquiring WageWorks helps us build on that lead. It also expands HealthEquity's addressable market by adding premier HSA complementary services with an existing $3 billion in current market revenues. We're excited about what today's announcement means for our mission of connecting health and wealth and our vision of healthcare being a part of every American financial plan. Every American should have an HSA. Darcy, who's more of a numbers guy, is up next to talk about the financial rationale for the WageWorks acquisition. Darcy?
Thank you, Steve. As Jon and Steve have said, we believe that the acquisition of WageWorks accelerates the transition to HSAs and positions HealthEquity to build on its success in the HSA market. From a financial standpoint, we expect the transaction to generate sustained growth, significant synergies, which I will discuss along with the financing necessary to complete it, and deleveraging. We believe the strategic rationale that Jon and Steve outlined will drive sustained growth in revenue and profitability. The greatest source of this growth will be driven by increased HSA members and custodial assets. We expect greater market access to drive sales to new employers, as well as new partnerships. In turn, we believe that the greater scale in education and engagement is expected to drive greater contributions and balances. In addition, we expect increased revenue opportunities from HSA complementary products.
In addition to the sustained growth opportunities, we have high confidence in our ability to deliver approximately $50 million in annualized ongoing synergies. These include both revenue and cost synergies realized within 24- 36 months of closing. The majority, $27 million, are revenue synergies from custodial and interchange revenue optimization, not requiring new sales. From the cost perspective, we expect to deliver an additional $23 million from scale-driven transaction processing and operating efficiencies. In order to achieve these permanent synergies and to integrate the two companies, we expect to incur material one-time expenses during this period, including process and controls remediation, business integration, vendor rationalization, and retention and severance costs. Based on precedent transactions, we expect these expenses to be in the $80 million-$100 million range over two to three years. Let me turn to management's transaction financing expectations.
We anticipate total cash outlays of approximately $2.3 billion, including the purchase of WageWorks shares that we don't already own, deal costs, and the retirement of existing WageWorks debt. We anticipate funding these outlays with $600 million of cash and $1.7 billion in new debt. HealthEquity has received from Wells Fargo Bank a commitment to finance the new debt. We anticipate that we will rapidly deleverage with predictable cash flows and underlying earnings growth. For our current fiscal year ending January 31, 2020, HealthEquity is maintaining the guidance we provided during our Q1 earnings call a few weeks ago. HealthEquity expects to provide guidance on the future financial impact of the transaction on or before the closing of the transaction. With that, I will turn the call back to Jon.
Thank you, Darcy, and thank you, Steve. Well, the sun's up now. The team's preparation for today has been lengthy and extensive. I'd like to talk about that a little bit before we close. Back in early 2017, we began speaking to investors about proprietary research pointing to the value of more robust distribution beyond HealthEquity's market-leading health plan partner footprint. True to our bullets before cannonball style, HealthEquity added management talent, modestly increased direct sales expenditures and w atch the results, which early on were promising, including a record sales season in calendar 2017.
Research predicted that employers and advisors would increasingly seek out HSA partners beyond health plans and those able to deliver complementary CDBs. In calendar 2018, these predictions began to come true in the data. Employer direct became the fastest- growing HSA channel, according to Devenir. As we discussed earlier, nearly half of the employer HSA RFPs HealthEquity saw included at least one CDB. Last fall, we talked as a board about accelerating through increased internal investment or the acquisition of WageWorks. We put dollars onto both tracks. In December, we asked an outside strategic consulting team to begin conducting public file and proprietary research, forming the foundation of a WageWorks integration strategy, and began discussing the management of leverage.
In March, a month before approaching WageWorks, our board created an integration oversight committee that has met regularly ever since. By May, dedicated integration office leadership was in place. With help from our advisors, management began planning a long-term strategy to remedy the various business and process accounting control issues that WageWorks had identified in public filings. Our integration leader, Melissa Phillips, who is a 12-year Purple veteran, was on hand for diligence meetings with WageWorks, validating and refining the integration plan with the benefit of non-public data. Beginning today, Ted Bloomberg, who will oversee the integration overall, and Melissa can truly plan together with our soon-to-be teammates from WageWorks. Successful integration is essential to achieving the strategic and financial goals of any acquisition and certainly of this one.
We know that there's a tremendous amount of work to be done, and I believe we are as prepared as we can be. While everything we've discussed thus far is exciting, what I'm really most excited about, and I believe what all of us are most excited about, is the growth opportunities our combination will create for high-performing team members of both WageWorks and HealthEquity. There are no guarantees. There will, of course, be dislocation and change. For those who can stay focused on the work to be done, as Ted likes to say, their industry knowledge, skills, and motivation will be valued, and they will be rewarded. Together, we will build a unified team based on a shared purpose, Purple values, and a crystal-clear view of what drives our business. With that, let's go to questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask you please place your line on mute once your question has been stated. Our first question comes from Jamie Stockton with Wells Fargo. Your line is now open.
Hi. Good morning. Thanks for taking my question. I guess maybe to start with, just on the revenue synergies, if I interpret them correctly, it doesn't seem like you guys are really banking on any incremental cross-sell or successful cross-sell when you talk about the $50 million number. Is that correct?
That's correct. That is to say that what we've tried to do is make a distinction between, let's say, short-term synergies that are of high confidence and that are largely within our control, and those are reflected in the $50 million figure. The underlying thesis of the transaction, which is as you suggest, is really the ability to accelerate HSAs, in part, by having a fuller suite of services. You're quite correct. That is to say that the $50 million itself, as Darcy said, does not reflect the impact of cross-selling and the like, which we do expect to be material, but we felt that it was appropriate to break those two out.
Is there, and you may punt on this until a later date, but is there any way that we should think about the magnitude of the benefit of cross-sell that you would anticipate from this, let's say maybe two or three years from now, as far as the growth rate of combined company is concerned?
Well, I think Steve, in his remarks, offered some insight on what that magnitude might be. If you look at the existing customer base of both companies, fewer than 5% of that customer base, weighted however one wants to weight it, are currently utilizing all of the products that both the HSAs and the complementary services that the combined company would have available to it. Those doing that, as Steve said, could result in anywhere from a little under 2x to around 4x increase in the revenue generated from a typical client. By the way, that's before thinking about the fact that in our view, selling and delivering that full suite on an integrated basis, in particular, with the benefit of data-driven engagement, really can help accelerate the penetration of the most profitable component of that, which is the HSA.
I think the potential in that over time is very large. You're right. We're not today going to make forward-looking statements about the next year or two years or so forth. We're going to get on it from day one, because I think it's actually been the plan of both companies for quite some time to do this. Now together, we have all the tools we need to do it, and do it as well as anyone.
Okay. Thank you.
Thanks, Jamie.
Thank you. Our following question comes from the line of Anne Samuel with JP Morgan. Your line is now open.
Hi, guys. Thanks for the question, and congrats on the transaction.
Thank you, Anne.
My question's on the $3 billion expanded market opportunity. You always talk about targeting growth in excess of the HSA market. Hoping maybe you can provide a little bit of detail on the $3 billion expanded market opportunity, how we should think about penetration there, time to maturity, and the industry growth rate there.
Yeah, it's a great question. I think it is first worth noting that this item was the last bullet on Steve's list for a reason. That reason is that what we're not doing is, and sometimes it is important to say what you're not doing. What we're not doing is saying, "Hey, let's get into an adjacent market because, just then we can cross-sell more stuff." Right? While we clearly think that's an opportunity. The reason for providing these services is really because, as we said at the outset, it's about driving the HSAs. That having been said, there is a market, obviously, for the FSAs, HRAs, COBRA, et cetera. We estimate that that market is about $3 billion presently, and since that's where most of WageWorks' revenue comes from, you can get a sense of where they stand in that market.
Certainly, we think that was worth noting. As far as the growth of that market, which I think is sort of the second part of your question, we are assuming that most of the growth of the combined market will come from the HSA side. I think that's a very realistic assumption. There are certain components of the complementary services that we believe we can grow whether or not the market grows. I do think there are significant opportunities there also for takeaway. These are, as the WageWorks team has noted before, there are plenty of subscale players out there, and certainly, we will be bringing together something that really, from our perspective, no one else can deliver in terms of its benefits. There are also a few components where to some extent, you have a substitution effect.
That is that, as Steve discussed in one of his examples, you might start by focusing on an FSA customer and then get comfortable with the idea of an HSA-qualified plan, switch over, and see the benefits. In fact, you might be the ideal candidate for that. I think if you sort of put that all together in a blender, as I've said it on one of these calls many years ago now, what you get is not a margarita, but rather a market. It's early in the morning, I'm not really rolling yet.
But what you get is, I think a safe way to look at it is that the growth that we will see in that market, and I do think we'll see it, or in that sort of area, will largely be driven by selling the full suite, not by sort of running around and selling a particular product. We don't really view these as separate products. We view them as all part of connecting health and wealth, and we're going to manage the business that way.
Great. Thanks very much.
Sure. Thank you.
Thank you. Our next question comes from the line of Greg Peters with Raymond James. Your line is now open.
Great. Good morning. Two questions.
Greg.
First, HealthEquity, it's not like you have abundant layers of management around to help process these transactions. I noted your comments, you sort of recommitted your guidance for this year. Can you talk to me about how you're going to handle the management distractions of putting these two companies together and still hit on your targets?
I think the biggest point I want to make there, Greg, I really appreciate the question, is that we're going to do what we always do in terms of making conservative promises and then attempting to over-deliver. I suspect there aren't many announcements of this type where you talk in detail about what we believe the one-time costs to be, as Darcy did this morning. The reason we've done that is that from our perspective, the first commandment of this kind of a situation is, don't go into it unless you're prepared to expend the resources you need on a one-time basis to get it done right. That is reflected in some of the outside expertise that we brought in to help us lead the integration.
It's also reflected in the fact that we have taken individuals already, and as I say, for several months now, out of their day-to-day leadership roles, backfilled those roles, and have them focused full time on this already. Obviously, we're a number of months away from a would-be close. We do intend to spend on this, and our guidance reflects that. We think also that we're in a fortunate position of the underlying business generating good profits, and that can help pay for that for a little while.
I think one of the messages we heard loud and clear from investors when word of our interest first came out, and we confirmed that was, "If you're going to do this, it's going to be work, do it right." From our perspective, do it right means provide the resources that set people up for success, provide the goals that set them up for success, and so forth. I think together, we have the talent to do that. I've certainly been very favorably impressed by members of the WageWorks team in this regard as well. The point underneath the comment is well taken, and it's one we're very cognizant of as we go forward.
The best thing we can do is not put ourselves in the position where we have to spread people thin, but rather give them all the resources they need and leadership to succeed.
Okay. The follow-up question would be on around the financials. Based on my back-of-the-envelope math, the net debt to pro forma EBITDA is going to be well north of 4x for you guys, which frankly is uncharacteristic for the way I think you guys and your company views your position in the marketplace. Do you have a longer-term target of where you expect the debt levels to go to relative to EBITDA, as we think about your comments about using cash flow to pay down debt?
Well, I think the key to this, I'll start, and Darcy, if you want to add anything, please do. The key to this from our perspective, Greg, is that this is a transaction that will generate rapid deleveraging from two perspectives. The first is that the combined company will have, as do both companies today, very strong and very predictable cash flow, as you know. The second is that the cash flow should, and we believe it will, continue to grow. Looked at from a leverage-type perspective, our view is that to some extent, leverage will take care of itself.
That having been said, I did make a point of mentioning in my comments that this is something that at multiple levels of the company from the board and I and Darcy on up or on down, depending on how you think about it, I'm never quite sure, but that we have been talking extensively about the fact that we will be managing this leverage, and a lso about evaluating market conditions, so forth, and seeing what's out there. We came to the conclusion ultimately that we're well prepared to do it. We wouldn't enter the transaction otherwise. We got very comfortable with the near-term cash flow to the conclusion that leverage will come down very quickly. Darcy, anything to add to that?
No, I think that's exactly the way we look at it. I think, Greg, you know that the way that we've managed the business is to be very conscientious about growth and profitability and managing our finances in a prudent and wise fashion.
Okay. I can't help myself. When you go through the regulatory approvals because you're non-bank custodial and because Wage is a non-bank custodial, are there any extra hurdles that you might have to cross because of those regulatory considerations?
No. As you may know, WageWorks is currently not utilizing its non-bank custodial license. Obviously, we have one. We don't anticipate any incremental regulatory hurdle for that purpose.
Thank you.
Thanks, Greg.
Thanks, Greg.
Thank you. Our following question comes from the line of Mohan Naidu with Oppenheimer. Your line is now open.
Thanks for taking my questions, and congratulations on the acquisition. Jon, maybe this is an extrapolation of what Greg has been asking for the last couple of questions. Can you talk a little bit about what you're thinking about changes in sales and distribution channel as you work towards digesting WageWorks and as go-forward strategy and trying to sell a single platform. What changes do you need to make from sales and marketing and distribution channel-wise?
Well, I think, and I'll invite Steve to elaborate. The key here is what really will happen here from our perspective is that we're accelerating a change that we've already been talking about. That change involves building a much more robust direct to employer and advisor channel, benefits advisor that is, on top of our existing health plan and a really rapidly emerging retirement plan channels. That has a product element of it, as Steve discussed, as well as a sales and marketing element, again, as Steve discussed. One of the motivators from our perspective for pursuing our interest here and for creating that interest was the opportunity to really take that effort to completion very quickly. We will be immediately focused on bringing the sales and marketing teams together, but I think in particular, recognizing that they do bring different strengths to the table.
It's not a case where there's a ton of salespeople overlap or account management overlap. They're different and they have different strengths, and we'll be able to bring all those strengths to the market. That gives us a lot of ways to reach our target audience, which is ultimately the consumer, but where we typically reach through an employer. We feel like we'll have as many ways to reach that employer as anyone, and that seems pretty good. Steve?
Thanks, Jon. Yeah, just a couple of things to add. We've been selling HSAs pretty much longer than anyone. We sold MSAs, then 15 years ago, when the law passed, we started doing HSAs. I think one of the things that we're incredibly passionate about here at HealthEquity is not only teaching benefits advisors and employers about the benefits of HSAs, and ultimately employees, but also sales professionals. You can imagine that back 15 years ago when we were hiring people, nobody knew anything about HSAs, and we were writing the book on it, then we were kind of training and kind of building the plane as we flew it. One of the things we're most excited about is to bring on sales folks that have domain expertise in other areas, in these CDBs, but really help them understand the benefits of HSAs.
Likewise, help our people understand more about CDBs b ecause what we don't envision is this segmented sales force where you have certain people that are experts in commuter and other people that are experts in HSAs. We just don't think that flies b ecause this is a full suite solution we're going to bring on the market. We feel very confident that in this integration, we're going to get everyone up to speed. Our sales professionals, whether they're in the small markets or the big markets, enterprise, continue to sell with our health plan partners, you name it, financial partners, they're all going to be able to sell the full suite. That's going to take some education, but we've been doing it for a long time, and we think we can do it better than anyone in the industry.
That's great. Thanks for all the color. Congratulations again.
I never know what all the congratulations are for. It's like, we appreciate them, but they're not, there's a lot of work to do. We genuinely appreciate it and are humbled by it. The easiest thing to do is write a check. The hardest thing to do-
We have all the confidence, Jon, that you guys will make it work.
Thank you.
Thanks, Mohan.
Thank you. Our following question comes from the line of Mark Marcon with Baird. Your line is now open.
Hey, good morning. I won't say congratulations because you have a lot of work to do, but I do have the confidence that you're going to get it done.
Thanks, Mark.
With regards to the $80 million-$100 million that you're going to end up spending for the integration, what time period would that be over?
Darcy?
We expect that it'll be over the next two to three years.
Two to three years. Okay, great. Then WageWorks isn't utilizing their non-bank custodial. How quickly do you think you could bring those assets over to your platform? Are there any sort of breakup fees that you'd have to pay to BNY Mellon? Or how should we think about the ease of that transition and being able to capture that synergy relatively quickly?
Well, I think that's something we'll discuss with Mellon. Ultimately, you can imagine that this was an area of significant diligence on our part. What's interesting is that from my perspective is the diligence really confirmed what our model does and does well. It's interesting to see, kind of staring in the face, two very different models of how to treat the custody issue and their strengths and weaknesses. The strength of the model that WageWorks has pursued is it's infrastructure light. It doesn't require much in the way of internal development. The compliance requirements as they are fairly modest.
The advantage of what we do is that, first, it just gives us so much more flexibility in terms of being able to deliver a seamless experience to the member, where the member isn't really concerning themselves in any way with which FDIC member institution is holding their funds, but really concerning themselves with what they should be concerned about, which is using their money wisely and learning to save and learning to be competent healthcare consumers. Secondly, that from a custodial revenue and the management of custodial expense perspective, We just have a lot more flexibility within the cash management program that we operate, to run that program in such a way that it produces very healthy yields, and importantly, that it has risk management built into it.
We talked in the last couple of calls, there have been questions about, well, treasury yields are obviously dropping. Isn't that going to impact you? Our answers have been pretty confident in that regard. Obviously, over the long term, these things matter. Really what drives what we do is the health of main street lending. As we looked at it was very clear to us that was a real strength of our model. I don't want to speculate here on precisely how quickly we will do that, but we will do it. If there are one-time expenses that are required to address that, we'll deal with those. It's absolutely an area of opportunity that we focused on in the process and was very much validated in the process.
That seems really clear, Jon. Obviously, I appreciate your intimate knowledge of Wage from its early days. Obviously you live near them, see them every week. In terms of the due diligence, can you talk a little bit about just, Ted's not on this call, how should we think about the ease of keeping the best people at Wage, or how are we thinking about that and your level of confidence in terms of their team? I recognize the sensitivity of a call, but to the extent that you can talk about that.
No, I can a little bit. Look, I think the key, the first point I'd make is that question should be asked of both teams. From our perspective, while of course, as both a legal and technically correct matter, these are not two teams beginning today. We certainly think about assembling them into one team. We will make clear here at HealthEquity that this is not a we win, you lose situation. It's a situation where, as I sort of echoed words that Ted uses in thinking about this in the call, or in the prepared remarks rather, those who remain focused on success and on the goals that matter to the business are going to be the folks that we want to be with us as we go forward. We want them on the bus and in the right seats.
My observation about the team at WageWorks is threefold, and none of this has anything to do, from my perspective, with my experience with the company, which, while great, I have to recognize is now 11 years old. When I hired Edgar, it was in a much different position, and I can't look at him that way or anyone else in the organization, because their careers have progressed over the years. I do have three observations. The first is, the talent level is very high. The company has obviously had some difficulties, but I think it's fair to say that the vast majority of team members have been as much recipients of the challenges of those things rather than creators of them and h ave spent their time over the last X years really building a great company.
We're excited about the opportunity to build on that talent, as much help as we can get is going to be needed. As Steve said with regard to the sales team, but certainly could be applied elsewhere, the number of people who are truly experienced in our industry is relatively small. When you have the opportunity to work with them, that's what you try and do, and that's what we will try and do. That having been said, this won't be career advancing for everybody because there are lots of positions where you don't end up with two of them. Certainly there is a lot of rationalization to be done, and I think that the WageWorks leadership has commented on that themselves over time.
We'll do that, and our promise is we'll do it in the right way, being clear about the relationship to business objectives. That's really my thought. I will say, Edgar and I have always had an excellent relationship at all times. Edgar is a good dude and just a class act. Frankly, I think I can say the same thing about, to the extent that I know them, every member of his leadership team that I know, whether it's Barry May, his Account Management Leader, Jody Dietel, who leads Regulatory Affairs and Compliance. Those are just two examples of folks that I've known for a long time. They're excellent. Then the folks who I never worked with but know are excellent, as far as I can tell. This is not a case of trying to work with people that you didn't get along with.
The people that I didn't get along with, which is as much me as anyone else. I mean, as much my fault as anyone else's. Though I hope my wife's not listening to that because she won't agree with that. They're not there anymore. I think this is a group that's well-positioned to work together with very similar goals.
That's great. Then can you just talk about the terms of the debt?
Darcy, you want to do that?
Yeah. Mark, we'll provide more information on the details of that as we move forward. Generally, we got a commitment letter from Wells. We're working with them, and we have some work to do to build out our syndication with respect to that. We'll provide more details on that as we go.
Any broad guidelines that you can give? I mean, just because we're trying to build out models just to think through, okay, well, it's five or plus, whatever.
Yeah, we'll give you some more details on that as we go.
Okay. Mark?
Yes.
Thank you.
Thanks.
Thank you. Our following question comes from the line of Stephanie Demko with Citi. Your line is open.
Hi, guys. This is Joy Zhang on for Stephanie.
Hey, Joy.
Hey. Can you talk to how Wage's small to mid employer footprint compares to your own, and what sort of overlap is that?
Well, it's interesting. Both companies have a footprint of small to mid-sized employers, but the distribution content there is very different. Again, I think that reflects the opportunity here. In the case of HealthEquity, our small to mid-size group has been brought on board almost entirely, if I can say it that way, through our relationships with our health plans.
One of the things that really got us thinking about not so much a WageWorks transaction, but the overall strategic sort of observation that led to it was, as I mentioned earlier, research that my colleague, Brad Bennion, who's sitting right next to me, launched and championed in the strategy role that showed. This goes back as we said, almost three years now, said that contrary to our initial expectations as a business where we thought the smaller employers would be much more likely to buy this product, kind of as its own thing through the health plans. What we found through the research was that, in fact, that it was more likely that the smaller employers would prefer to buy this product in a kind of a bundle, for lack of a better term, with some of the complimentary services we've described today.
That's reflected in WageWorks distribution, which is more about, into these groups, which is more about building relationships with benefits advisors, benefits brokers, and the like. I will tell you, our market research confirmed that those relationships are excellent. I would say brand is maybe not the right way to think about it. The awareness of the quality of the product within that world is excellent, and we intend to take full advantage of that and to build on it. I guess to sum that up, I'd say that both companies have a good size footprint within the small and mid-market, but acquired very differently. Go forward, we think that we can really use that diversity of distribution as well as our other channels that are emerging around retirement and so forth, to offer something really great for small and mid-sized employers.
Thanks for the color. As a follow-up, given that historically your platform has been completely homegrown, can you talk to how you'll go about managing the data interrelationships in the back end as well as the existing payer integrations?
Yeah. I will say in that regard, one of the advantages from our perspective of partnering with the team at WageWorks is that their platform is also largely homegrown, or I guess people say proprietary. Somehow that sounds better. As the two technology and product leadership organizations begin to talk, it's clear that there are a lot of similarities in design that should help us to deliver ultimately to our clients a seamless suite that really gets the best of both. We'll work through that in a very organized way. This is definitely an area, I'll say, where our leadership as well as our board as we prepared to integrate, have strongly encouraged us to bring additional talent onto the team and into our consulting stable to assure that we could work through the platform integration process in a very, very methodical way.
One element of that, I suspect there are a lot of people at WageWorks who will be happy to hear this, if you think about one of the challenges that they have had to deal is that they have had a number of acquisitions over the years, and the result of that, as they have commented, has been a large number of legacy platforms. The leadership that's come in the last year or so has really ramped up the effort to basically sunset those platforms that are duplicative. That's still a work in progress, and what I can commit is that we will complete that work, and we will complete it in an expedited fashion, recognizing that not just from the perspective of our customers, but also, frankly, from the perspective of our teammates.
Having legacy platforms whose future is uncertain and so forth, it just doesn't create a career-enhancing environment for anyone involved. It doesn't feel good, but more importantly, it's very easy for people to get pigeonholed on knowing how to use that platform and that's it, and that's not the right answer for building a team. I guess that's a way to say we've thought about it both from the perspective of structuring an integration effort, resourcing the integration effort, but also ultimately from the perspective of our goals with regard to the team and culture, as well as what we can deliver to our customers.
That's very helpful. Thank you.
Thank you. Our next question comes from Bob Napoli with William Blair. Your line is open.
Thank you very much.
Bob Napoli, good to talk to you, man.
Good to talk to you, Jon. Kind of an ironic opportunity. I think you're getting a good asset there.
Thank you.
I hope you keep Edgar, because as you said, that team has really stuck together through their challenges.
That's what happens.
One thing, WageWorks obviously has been very focused on building their HSA product, but their penetration rate has been really low. One thing, what is the difference between the HealthEquity HSA product and the WageWorks HSA product? Do you have confidence that you'll be able to cross-sell a better HealthEquity HSA product into that customer base?
We really do. I mean, the difference actually really starts with what you are doing philosophically. I think that the WageWorks product was constructed to be sort of the HSA was one of a set of four or five products. We do not look at the industry that way. We look at the industry, and I think there was a time when that was an appropriate way to look at it, but that time's passed. The way to look at it today is that the HSA is already, and will be more so as the years go on, sort of the core of this broader industry, and the other products will be arrayed around it and will provide real value, but likely arrayed around the HSA.
From our perspective, what really I think should get existing WageWorks clients excited and certainly has been effective for us is really, I think, three points of differentiation. The first is that as we talked about at our Investor Day a couple of weeks ago, the focus of what we do from a technology as well as service perspective on partnership. And what that's about is, we do not just want to have an administrative solution. We want to have an administrative solution that talks to other things that that individual is doing. And that means being able to talk to the health plan and get information that can help that consumer actually understand what's going on with their costs. As we discussed earlier on, we've rolled out the same concept with regard to retirement.
Steve's comment earlier about an FSA, I thought, for those who have been in this industry a long time, I'm not sure many of us, myself included, for the first, I don't know, 15 years I was doing this, really thought about what happens after you save that money in your FSA in the first year. We just thought, great, you saved some money. Have a party. Well, the right answer isn't that. The right answer is, if you're not HSA qualified, let's get that money into your 401(k). You put $2,500 in an FSA, you save $800 in taxes and so forth. You contribute $800 a year incremental to your retirement plan in whatever form, that's a huge difference a nd that requires these things to be talking to each other. And that's something we bring that's, I think, really special.
That's the first point of differentiation. Secondly, from an experience perspective, and the WageWorks team has commented on this, if you look at what they have to offer in the HSA area today, it has sort of a WageWorks veneer, but underneath it, a lot of the service experience and so forth is really being controlled by decisions that the underlying custodian is making, that's Mellon. And there's nothing wrong with those decisions. It's just that they're not really geared towards what the consumer's ultimate objective is, which is to understand how to use this and understand how to grow those balances and save and spend wisely. And so you see that both in the absence of the kind of integration I talked about.
You see it in the approach to investments, where people don't have the kind of advice that they would really need or a focus on investing as part of the long term. As a bank, I think Mellon is a lot more interested in the cash component than in the investment component, and all that kind of stuff. Lastly, I think that this is an area where I want to be thoughtful. Another thing that differentiates us is our Purple sort of focus on being remarkable as a service partner to every one of our members. I believe that that same desire exists on the WageWorks team all around the organization. It's been a very difficult desire, goal to achieve, in part historically, because there have been so many different platforms and so forth.
I think we can really bring that forward and deliver something in that regard that people have not seen to the same degree, and certainly been something that, as we've talked about before, I mean, actually, I think as we have talked about before, Bob, the idea of really meeting every member where you are and delivering remarkable service in moments of need, is something that is a huge part of our culture. It's what makes us feel good in the morning when we do it. Maybe not this early. Although, yeah, actually, this early, 24/7 is a piece of that, too. Conversely, when we're not able to do it hits us right in the gut, and we try to get better.
I think those are all areas that our joint client base will see as truly differentiating, and we feel very comfortable with the idea that we will be very competitive in terms of bringing the full suite to the customer base of both companies.
Thank you. Just a quick follow-up then. Who do you view now with that full product line as your closest competition? Would you view that as WEX, probably? I know Alegeus is out there, and I think Wage has been a big client of Alegeus. Maybe that's something you could take internal, I'm not sure.
Well, look, I think, in WEX case, it's not clear to me whether they intend to continue pursuing a sort of a direct-to-employer type approach or be more of an arms merchant to other competitors on the platform side, since they're playing both sides of that field right now. I think it's fair to say that the company they acquired is a smaller but nonetheless effective competitor to WageWorks, but that has some of the same challenges in terms of what the platform was built for and so forth. Alegeus is definitely more committed to being more of a kind of an arms merchant to the competition rather than competing directly itself. At least that's been true to date. Maybe there'll be changes there. Look, I've said before, our competition comes really from four areas.
The first is banks, the second is health plans themselves in some cases, the third is retirement firms, and the fourth is sort of other, let's say, the admin-oriented firms like the ones you mentioned. Our largest competitors from our perspective are, one's a bank, one's a health plan, and one's a retirement firm. Those being, from our perspective, United through Optum, HSA Bank, that is Webster Bank, and Fidelity on the retirement side. The nice thing about competition, and each one of them comes at it from a different angle. I think the angle we come at it from that's unique relative to those three is, from our perspective, you get the best answer by partnering. We're very happy to partner with others in the retirement industry, knowing that in part, their motive is to compete with Fidelity. Great.
We are extremely happy with the partnerships that we've built over time with banks that recognize that they may not be in the business of acquiring or servicing HSA customers, but what they're really good at is deploying those assets on main street for a return. Of course, we have a very large partnership footprint on the health plan side, and now, of course, we will, going forward, have that kind of footprint among the broker and advisor relationships. I guess that's how we think about it, more so than the software platforms that you mentioned as being competitors. We look at ultimately at the HSA business as being the core of this. We're going to look at our competitors as those folks who are ultimately competing for that business.
Thank you, and good luck. Appreciate it.
Thank you.
Thanks, Bob.
Great to hear from you.
Thank you. Our following question comes from the line of Allen Lutz with Bank of America. Your line is now open. Allen?
Hey, thanks for taking the questions. Can you hear me?
Yes, sir.
Great. Thanks for taking the questions. Steve, you spoke about doubling the scope of partnerships, I think you said over the next 12 months, but I wasn't sure if that was what you said. Does the Wage transaction help with that initiative? If it does or doesn't, how are these other opportunities coming to your doorstep?
Thanks for the question, Allen. Specifically, what I spoke to is doubling our footprint among the defined contribution retirement partners, that's what's in our pipeline. I think to answer your question, clearly, every time we can expand our population of large employers t hat have retirement partners out there, it's a pretty short conversation because they'll say, "Look, we want you to partner with XYZ defined contribution partner." That's kind of the way we built our cadre of health plans in some respects, because we would bring on a large employer, and there was always this kind of push and pull because we may have already been having a conversation with a health plan about partnering with this.
We would bring on one of their employers, then the employer would go to them and say, "Hey, why don't you partner with HealthEquity?" It would become kind of a marriage from that perspective. Yeah, I think that by expanding, I mentioned with this combination, we'd have over 115,000 employers and 2/3 of the Fortune 500, that's pretty remarkable. Th at allow us to expand I think multi-dimensionally, not only with more retirement partners and also more health plan partners from that.
It's interesting in this regard. I think one key point here is actually the client base. In some form, our client base now, as I think Steve mentioned, includes 2/3 of the Fortune 500, and a more economist, nerdy way to think about it that therefore was cut out of our script by people who are less nerdy, it's not a very high bar here. Is that if you look at all of the full-time employees of the customers of these two companies, it's somewhere roughly 1/6 or 1/7, I don't know, one of those two, of the full-time U.S. workforce. Now, 1/7 or 1/6 doesn't sound like a very big number until you put the full-time U.S. workforce next to it.
The reason I mention both of these points, and think about this from the perspective of, for example, our partnership with Vanguard, which is appropriately, is very focused in its retirement business on the large end of the market and extremely competitive there. The opportunity to work together to present that combined product competitively in that marketplace is really fantastic. By the way, I'd say the same thing about a health plan partner like Blue Shield of Michigan or Blue Shield of California, or for that matter, a firm like Optum or Health New England in its own markets. That is to say, the opportunity to go to premier customers that are already going to be customers of ours and not just think about our partnerships as one-way sales channels, but really think about them as two-way, is, to my mind, really interesting and exciting.
I think it's something we can deliver. It's always been true that we could deliver as a partner, market knowledge, market presence, and a feel that you were working with best in class. With this combination, we can also, I think, say credibly, you're working with a partner who is not simply asking for your business, but is prepared to be a business partner to you, and to help you win business. That's the way we've always approached our partnerships, but I think we have material to do that even more so here. I hope some of our partners are listening because that to me is really exciting and something that's different than people are used to, I think, in the way they deal with firms like ours. There's nothing better for a partnership than to help your partner sell business.
Where we can do that, I think we can be really effective long-term partners.
Great. Thank you so much.
Thank you. Our next question comes from the line of Stan Berenshteyn with SunTrust. Your line is now open.
Hey, Stan.
Hi. Hey, how are you? Thanks. Actually asking on behalf of Sandy Draper.
We thought you let him go. We thought maybe you were like the new Sandy.
Yeah, well, I don't know. I think maybe I'm not as good looking. Luckily, I'm on the voice over.
None of us are, Stan. None of us are.
In any case, maybe it's a bit of a loaded question, but can you compare and contrast Wage's go-to-market strategy versus HealthEquity? Maybe specifically, if you can relate that to why Wage didn't have a higher penetration of HSAs, especially since they do have that full suite of employee benefit products.
I actually think you can almost see the difference, we talked about this a little bit a few minutes ago, in the two companies, sort of about HealthEquity or about WageWorks blurbs. Our blurb is about our mission, it's fundamentally about healthcare spending and savings. We make no bones about the fact that the core of our solution is a health savings account, that we believe in that. We have focused, therefore, if you sort of take that, let's just start as a product strategy, then we can talk about go-to-market. We focused on, from a product perspective, delivering- t he administrative ease component is a little bit, from our perspective, table stakes. The real question is, a re you going to engage people and help them do what they want to do and help employers make the transition into HSAs and HSA-qualified plans?
We have offered over the years some of the complimentary services, we've made no bones about the reason we do it is to help further the mission that we have. That's translated to a go-to-market, where our go-to-market strategy has really followed the maturation of the HSA market. Very focused on acquiring- f irst had to get them to listen to us by getting a few employers in, then acquiring partnerships within the healthcare space, because that's where most of the action was in the early days of the market. As that market's evolved, a lot more diverse channel. As we've said elsewhere, now in particular seeing the retirement channel coming to life as it should.
By contrast, the WageWorks blurb is more about we offer a set of consumer-directed benefits, there's this one and this one and this one and this one and this one. I think the former CEO commented, "Our job is no noise and low cost." I got no problem with no cost, no noise is not enough, right? It's a good objective but we actually want to have a little noise. The noise we want to have is people making progress on the journey of health savings. The insight we have is that, you think about it, Steve will offer some of these examples, right? You think about something like COBRA administration. It sounds very pedantic, I think historically it's been viewed that way. The COBRA decision is a very different decision for an individual today than it was 10 years ago, right?
10 years ago, it was, well, here's coverage that you can't afford anyway, and we have to send you these pieces of paper, but good luck, right? Today, that's still true to some extent, to a significant extent. For one thing, it really matters where someone is in their deductible as to whether COBRA makes sense. There's actual level of consultation that can be provided. We think of the broader set of consumer-directed benefits, as I've said, as really complimentary to what is happening in workplace healthcare, in terms of the existence of consumer responsibility, and the role that consumers play within the system. Again, I think you'll see a lot more of that going forward, but today, unlike 10 years ago, right, employers and advisors are extremely receptive to that view.
I don't think they were there 10 years ago, and even five years ago, we would have, as you can imagine, investment bankers are full of all kinds of good ideas, and they'd say, "Well, why don't you go acquire a smaller TPA," as they would refer to a company like WageWorks, and then you have this full suite of offerings and so forth. We would say, "No. First of all, we don't look at it just as having more lights on a Christmas tree. It's about the core of building health savings." Secondly, we don't think that the employer and benefits advisor distribution is really there yet but t hey're there now. The research that Brad and team did showed that, and that's what got us started in thinking about this.
We're pleased that we're able to start out with a real leader in the business, an acknowledged leader in the business. Those are the differences, and that's the way we think about it. Steve, anything to add to that?
I just think that the effort here is to continue to do what we've always done well, which is to educate both internally and then our partners out in the industry, and it'll drive the results. I think that the exciting thing for us is that we're both going to bring expertise to the party, and we all have to be on the same page when we go to market.
Great. Thank you for the color. That's very helpful.
Thank you.
Thank you. Our last question comes from the line of Jamie Stockton from Wells Fargo. Your line is now open.
He's back.
I'll take this offline. Thank you, guys.
Oh, come on.
Just a quick one on the $23 million of cost synergies.
Yes.
You have product overlap. Should people think about that as being mostly just a matter of eliminating some of those duplicative platforms, as opposed to trying to go after, as you've said, you feel like the sales force is very complementary, et cetera?
Yes. As well as G&A type stuff. As someone said earlier, we try not to be too G&A heavy around here, while recognizing that as a modest-sized public company, that G&A is a thing. Those are really the areas where there's opportunity to evaluate. I think it does start with platform duplication, G&A. It's definitely not about reduced sales and marketing spend or the like. There will be changes, as we were just talking about, in terms of how both companies approach it. We are very- i f you look at precedent transactions, that cost synergy number is very conservative. It's not conservative because we're sandbagging. It's conservative because doing this just to take costs out would not be a very good reason to do it as a growth company, and we are a growth company.
It's interesting that even among the relatively short-term synergies, the majority are revenue, and those come from contract optimization and the like. I think your instinct is basically correct. That is to say that it is absolutely full speed ahead, and we're going to give our people in sales, marketing, and I should say, our account executives in both organizations who are going to be extremely important to that effort to present the full suite. We're going to give them all the tools they need to succeed and put the resources out there in the market to be successful.
Okay. Thank you.
Yeah. If I could just close the call, first of all, by thanking everyone for being ready for us at a moment's notice. This is why we don't do earnings calls in the morning. I'm pretty sure it will never happen. I don't think Richard Putnam could take it.
No.
In any event, I did want to say before going to questions. I'm sorry. Now, having gone to questions. I want to take this, what will probably be my last opportunity to thank the team members from both organizations and the army of outside advisors and experts who have put in tremendously long hours over the course of the last few months, and obviously in our case, really going back, well, pushing almost a year now, to get ready to make this successful. I tease the investment bankers, but our advising team from Perella and Wells put us in a position to be successful and to have the WageWorks side engage. Of course, the banking folks from Wells Fargo have put us in a position to enter this thing with strength.
I'll probably never have any other opportunity to really sing the praises of that community, even though I tease and jest. Beyond that, a group of people have worked very hard to get to today, and I can't tell you how much it means to me personally. I know to Ted, Steve, Darcy, that you guys have put in the hours to put us in the position to do this and be successful. I just wanted to say thanks to everyone.
Our attorneys.
Oh, I forgot the attorneys. This would've been a much more spicy call without the attorneys. That's okay because I will say, this is, in that regard, one of the things that our attorneys and also the accountants from both sides have done is have us well prepared to address the issues that we all know are there as we begin integration. That makes me feel real good. Thank you. Thank you for mentioning that, Darcy, and thank you everybody for the work. With that, it's wag and tow, and we look forward to updating you as we go here through the government approvals process. Look forward to talking to everyone over the course of the next weeks and months. Happy July 4th, everybody.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.