HQY - NASDAQ

Hello and welcome to the HealthEquity's Third Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the call over to Richard Putnam.

Thanks MJ. Hello, everyone and welcome to HealthEquity's third quarter of fiscal year 2024 earnings conference call. My name is Richard Putnam. I do Investor Relations for HealthEquity. Joining me today is Jon Kessler, President and CEO; Dr. Steve Neeleman, Vice Chair and Founder of the company; and James Lucania, Executive Vice President and CFO. Before I turn the call over to Jon, I have two important reminders. First, a press release announcing the financial results for our third quarter of fiscal 2024 was issued after the market closed this afternoon. These financial results include the contributions from our wholly owned subsidiaries and accounts that they administer. The press release also includes definitions of certain non-GAAP financial measures that we will reference today. A copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures and a recording of this webcast can be found on our Investor Relations website, which is ir.healthequity.com. Second, our comments and responses to your questions today reflect management's view as of today, December 5, 2023, and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates or other information that might be considered forward-looking. There are many important factors relating to our business, which could affect the forward-looking statements made today. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from statements made here today. We caution against placing undue reliance on these forward-looking statements. We also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock as detailed in our latest annual report on Form 10-K and subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future events. Now, over to Jon.

Thank you, Richard. Your emphasis on the word caution, maybe you feel like you know more than you let on, but I know you know a lot. So hello, everyone, and thank you for joining us and happy holidays. I will discuss performance against Q3 key metrics and management's view of current conditions, Richard doesn't know anything more than he's letting on, by the way. Jim will detail Q3 financial results, and then he will provide our raised guidance for fiscal 2024 and an initial outlook for fiscal 2025. And Steve, of course, is here for Q&A. In Q3, the team delivered double-digit year-over-year growth in revenue, which was plus 15%. Adjusted EBITDA grew double that at 30%. HSA assets grew 12% year-over-year and HSA members again also at fiscal quarter end grew 8%. Total accounts grew 5%. HealthEquity ended Q3 with 8.3 million HSA members, $22.6 billion in HSA assets and 15.3 million total accounts. Turning to sales. The team added 163,000 new HSA members in the third quarter, which narrowed the year-on-year gap relative to last year to 4% as we begin to lap the [indiscernible] job growth and quit rates from Q1 and Q2. New logo growth driven by a strong performance of our team as well as our expanded network partner footprint helped HSA growth in Q3, just as it has throughout fiscal 2024 to date. HSA assets ended Q3 at 2 -- sorry -- they ended Q3 $2.4 billion higher than a year ago, reflecting not only account, but also balanced growth. Sequentially, invested asset invested HSA assets declined during the fiscal quarter by $0.6 billion due to negative market action and total assets, therefore, declined by the same amount. Members continue to invest their HSA balances, however, partially offsetting market declines. Year-over-year, 12% more of our HSA members became investors, helping to drive up invested assets by 21%. In fact, invested assets now account for nearly 40% of HSA assets. As you know, we believe that our members, our mission and our long-term financial performance all benefit from the continued growth of investing in HSAs. We also continue to see more members choose enhanced rates for their HSA cash, leading to a higher or longer custodial yield and we believe, less cyclicality. While custodial fee growth drove Q3 revenue and margin performance, the team also delivered modest progress on the service line. Service costs actually declined year-over-year and sequentially despite higher volumes, of course, to help drive modest margin expansion. Interchange revenue grew strongly year-over-year and on a sequential basis and is now following its pre-COVID seasonal pattern as we expected, with strength in Q1, followed by a softness in Q2 and especially in Q3. We expect sequential strengthening again in Q4. Our new CFO will detail our raised outlook for fiscal 2024 and preview fiscal 2025 in addition to providing more detail on Q3 results. Double-digit revenue growth and margin expansion is a pretty good first half. However, Jim would be quick to point out that HealthEquity's current trajectory is years in the making. The team raised the trajectory of HSA growth by adding CV capabilities at scale through WageWorks, it grew the value of each HSA by pioneering affordable and accessible HSA investing and creating the enhanced rates program for HSA cash. It increased market responsiveness and resiliency by integrating with network, client and ecosystem partners at a return, and it enabled accretive allocation of your capital by uncovering HSA portfolio acquisitions, including BenefitWallet, which upon completion will be our largest such transaction ever. Today, the team is innovating the value drivers of tomorrow, applying cloud, API, data science and SAI technology to HealthEquity's mission to save and improve lives by empowering healthcare consumers. With that, I will turn it over to Jim. Jim?

Thank you, Jon. First, let me say, it's been a pleasure to join the HealthEquity team and have the opportunity to meet many of our investors over the past three months. The results we're reporting today are directly linked to the commitment our team makes every day to deliver Purple service to our clients and members. I'll highlight our third quarter GAAP and non-GAAP financial results. As always, we provide a reconciliation of GAAP measures to non-GAAP measures in today's press release. Third quarter revenue increased 15% year-over-year. Service revenue was $107.5 million, down 1% year-over-year. Custodial revenue grew 43% to $106.6 million in the third quarter. The annualized interest rate on HSA cash was 258 basis points for the quarter. Interchange revenue grew 7% to $35.1 million. Gross profit as a percentage of revenue was 64% in the third quarter this year, up from 59% in the third quarter last year. Net income for the third quarter was $14.7 million or $0.17 per share on a GAAP EPS basis. Our non-GAAP net income was $52.2 million or $0.60 per share for the third quarter, up versus $0.38 per share last year. While higher interest rates, increased custodial yields and generated additional interest income, they also increased the rate of interest we pay on the remaining $287 million term loan A to approximately 6.7%. Adjusted EBITDA for the quarter was $95.6 million, and adjusted EBITDA as a percentage of revenue was 38%, more than 440 basis point improvement over the same quarter last year. For the first nine months of fiscal 2024, revenue was $737.2 million, up 17% compared to the first nine months of last year. GAAP net income was $29.3 million or $0.34 per diluted share. Non-GAAP net income was $140.5 million or $1.62 per diluted share, up 69% compared to the same period last year. And adjusted EBITDA was $270.3 million, up 36% from the prior year, resulting in adjusted EBITDA as a percentage of revenue of 37% for the first nine months of this fiscal year. Turning to the balance sheet. As of October 31, 2023, cash on hand was $334 million, boosted by $57 million of cash flow generated from operations in Q3 and $166 million year-to-date. The company had $874 million of debt outstanding net of issuance costs. We continue to have a $1 billion undrawn line of credit available, and we anticipate using both cash and drawing on the line of credit in fiscal 2025 in connection with the closing of the BenefitWallet HSA acquisition. These strong results, combined with expectations for our Q4 busy season, allow us to raise fiscal 2024 guidance as follows: revenue in a range between $985 million and $995 million; GAAP net income in the range of $34 million to $39 million or $0.39 to $0.45 per share. We expect non-GAAP net income to be between $181 million and $188 million, resulting in non-GAAP diluted net income between $2.08 and $2.16 per share based upon an estimated 87 million shares outstanding for the year. We expect adjusted EBITDA to be between $350 million and $360 million. Our fiscal 2024 revenue increase is primarily based on revised expectations for the average yield on HSA cash to approximately 245 basis points for fiscal 2024. As a reminder, we based custodial yield assumptions embedded in guidance on an analysis of forward-looking market indicators such as the secured overnight financing rate, mid duration treasury forward curves and the Fed funds futures. These are, of course, subject to change. Our guidance also reflects the expectation of higher average interest rates on HealthEquity's variable rate debt versus last year, primarily offset by the reduced amount of variable rate debt outstanding. We assume a projected statutory non-GAAP income tax rate of approximately 25% and a diluted share count of $87 million, which now includes common share equivalents as we expect positive GAAP net income this year. As we have discussed, moving to positive GAAP net income impacts our GAAP tax rate strangely this year. Discrete tax items may also impact the calculated tax rate on a low level of pretax income. Based on our current full year guidance, we expect the GAAP tax rate for fiscal 2024 slightly below 40%. As we have done in recent reporting periods, our full fiscal 2024 guidance includes a reconciliation of GAAP to the non-GAAP metrics provided in the earnings release and a definition of all such items is included at the end of the earnings release. In addition, while the amortization of acquired intangible assets is being excluded from non-GAAP net income, the revenue generated from those acquired intangible assets is included. We're also providing the following initial guidance for fiscal year 2025. We expect revenue to be between $1.14 billion and $1.16 billion. We expect margins will expand with adjusted EBITDA growing to approximately 38% to 39% of revenue in fiscal 2025. This initial guidance is based on an estimated average HSA cash yield of about 3%. Based on our outlook of interest rate conditions, current forward yields for next year and the anticipated migration of the BenefitWallet HSAs in fiscal 2025. We expect BenefitWallet ramp-up costs will, in effect, extend our busy season further into the new fiscal year than usual with net positive impacts expected to begin by Q2. A reconciliation of our adjusted EBITDA outlook for the fiscal year ending January 31, 2025, to net income is most -- its most directly comparable GAAP measure is not included because our net income outlook for this future period is not available without unreasonable efforts as we're unable to predict the ultimate outcome of certain significant items excluded from this non-GAAP measure, such as depreciation and amortization, stock-based compensation expense and income tax provision or benefit. Before we launch into Q&A, let me give another plug for our Investor Day scheduled for February 22 at our offices in Draper, Utah. We expect to share information about HealthEquity's multiyear strategic initiatives to deliver remarkable experience, deepen partner relationships and drive health and financial outcomes and the impacts we anticipate these initiatives may have on our business model and financial performance over the next several years. You will see product innovations being shared with our clients and partners as well as a deep dive into our plans to accelerate the transition to enhance rates. We're nearing capacity, so if you want to be there and you do want to be there. You will need to register quickly. Please see our IR website or contact Richard. With that, we know you have a number of questions. So let's go right to our operator to kick off Q&A.

Thank you. [Operator Instructions] Our first question today comes from Greg Peters with Raymond James. Please go ahead.

Good afternoon, Jon, Steve, Jim and Richard.

Hello.

I'll kick off the first question with the state of the market as it relates to M&A. I know you're working -- will be working to close BenefitWallet in the first half of next year. But another large competitor of yours maybe more have commented on the possibility of monetizing their HSA asset through a sale. So, can you talk about what your appetite looks like for additional M&A? And maybe just how you view your market players behaving in this environment?

Yeah. I mean, I think -- first of all, thank you, Greg, for the question. I think the first point is that I think this reflects a trend that has been going on for a while, which is a continued kind of for lack a better from consolidation of the market around a couple of strong scale players. And we're really pleased to be at the head of that group at this point and work very hard for it over time. And one of the things that we've done over this period is really kind of honed our thinking about how we deploy shareholders' capital when we look at competitive transactions. And so, we're in a very fortunate position that -- to the extent that something else is out there. And to the extent that -- one is that you should feel confident that we're going to be able to evaluate it effectively without kind of having to resort to investment banker magic. And that -- secondly, that -- and I think BenefitWallet demonstrates this that we're going to shape transactions in a way that is a win for the seller, but also a win for our shareholders in terms of the timing of accretion and all that kind of thing. So, I think that puts us in a good position if transactions kind of start to happen. I think, secondly, if you -- we will obviously talk about us a little more at the Investor Day, but I think the external models suggest that -- and certainly our forward guidance envisions that the company will continue to generate significant cash flow from operations and free cash flow generally and that those numbers will only grow. So, as I've said before, this is an ideal place for us to deploy capital in ways that generate real return to earnings. And ultimately, we believe to our shareholders. So, we'd be very interested in that. That having been said, I think we also benefit from the fact that we've been beating these bushes for a very long time, and we also know where our -- sometimes why something comes to market where our competitors might be more challenged and those things are going to be reflected in our view of valuation. So that's, I guess, my way of saying, Greg, that if you see something happen, I don't know, mid next year, late next year, and to be clear, I don't -- I have no idea genuinely. And it's not with us. It's not going to be because we didn't take a look at it. It's going to be because we carefully evaluate it and look at the price and decide not to that, and we've done that in the past as well. So, we're happy to hear those kind of rumors. We think they present great opportunities for our shareholders. We're also going to evaluate them carefully.

That makes sense. I have a follow-up question, assuming that Richard, the enforcer will permit it.

Can I ask you a favor? I'll be the -- let's do one, but I want to -- we did get more murmurings of challenges. And it's like Mr. Bigel's [ph] worth, we don't want you to be angry. So, let's do one. We'll go from...

One follow-up?

Yeah.

Perfect. Just you made a comment in your opening remarks about how the enhanced yield product will give you a higher for longer custodial yield. One of the popular questions that comes inbound is how your custodial yield might perform if interest rates will start to go down. So, maybe you can help us explain what you meant by that comment. That's my last question.

Well, let me first -- well, actually, Jim, why don't you take this one?

Yes, sure. I can. Yes. So, I mean, obviously, the initial outlook that we provided is based on forward-looking expectations of rates and the market has, for some time, expected rates will come down next year, and that's reflected in our outlook. And we will have a small headwind. We expect to have a small headwind on our client-held funds, right, the deposits that are really held short-term and overnight cash. So that's a small headwind to our yield next year, but we're still seeing the reinvestment rates at significantly higher rates than the cash is maturing at. So, we are growing average HSA yields in a declining interest rate -- short-term interest rate environment.

Okay. But in your comment, you said the enhanced yield gives it higher for longer. I was just -- I'm sorry -- I've expired my two questions. Thanks.

I'm guessing there might be another one about this topic. So, we're happy to go into more. Who's next?

The next question is from Stan Berenshteyn with Wells Fargo. Please go ahead.

Hi, thanks for taking my questions. Maybe first on the preliminary -- hi. On the preliminary guidance, I guess, first, how should we think about the BenefitWallet assets that are flowing in? Can you give us a sense of the timing of when these tranches are going to come in? To what extent are we getting the benefit through the year? And associated with that, maybe I'll layer a couple of more questions in here. Do you have to pay any fees on those assets moving into your custodial accounts let's start there.

Yeah. I think I can take this one. So, let me start with the second part of your question, Stan. As you recall, in prior transactions, we've had a component where there's a seller -- a third-party custodian that we have to pay. We had that in the WageWorks transaction. We have that here. That's baked into -- technically the way it works in this case is, it's the seller paying the fees, and we have agreed as part of -- and I think we disclosed this at the time the agreement was signed. We have agreed to cover, I believe, someone correct me if I'm wrong, $20 million of such fees within the purchase price. So that doesn't impact our projection of go-forward income or the income statement in any way, it's just -- it's a purchase price accounting issue. And then with regard to the first part of your question, the way to think about this, I think, is that -- and Jim mentioned this briefly in his opening remarks, is that we will see incremental service expense effectively our busy season extending into the first bit of the fiscal year as we prepare to bring on these accounts, it would be silly to fully ramp down and then ramp back up again. So, there'll be some -- and even if we were doing that, we would still see incremental costs. So, you'll see some incremental service costs. And then in Q2, we should start to kind of net out to a positive here as we begin to onboard these accounts. And so, our guidance kind of reflects that idea that these placements -- sorry -- these transitions will occur kind of in that timeframe. And by the second half of the year, we'll be at run rate. And as we've discussed elsewhere, this kind of accretes very quickly. So, if that's helpful for you. We can't -- I would say there's some uncertainty here as there often is, but that's our current expectation.

That's helpful. Thank you. Maybe just a quick one on services gross margin. Clearly, you're making some progress here. Can you maybe share any updates on the adoption of your tech-based communications with your members and whether or not that's -- you're recognizing some tangible improvements on the gross margin side there?

Yeah. Well, Jim talked about the progress on gross margin generally. I think, obviously, if you look at service expense and the like, the ability to kind of be in a good spot here relative to volume growth speaks to the point that you're making, particularly given that we're also fighting things like wage growth, there are headwinds in this area. And so, yeah, I commented elsewhere that we've made -- we look at this month-over-month. And what we're really trying to do is ultimately, it's not just -- it's in part the move from voice to chat, but it's also ultimately the move from live to automated in areas where members really get value out of that. And there are clearly a lot of those. And so, we continue to see kind of, I would just say, quarter-over-quarter progress. It's not -- and we've never suggested it was the magic bullet, but the ultimate opportunity to take significant costs out of service delivery while delivering actually a better experience for members through digitization. I mean this is, as I've said, elsewhere, is a no-brainer in terms of sort of ironic to say this in terms of the applications for generative AI, just damp this stuff really works. And so, we think that, that will continue. And we think that what we do is actually an excellent application for it because precisely because it's not -- it's always as simple and people's questions aren't always as formed in exactly the same way. And yet, we want to be able to generate the right answers.

Thanks Stan.

Thank you. The next question is from Allen Lutz with Bank of America. Please go ahead.

Hey, Allen.

Thanks for taking the questions and welcome, Jim. A couple on the financial side. So, I just want to ask on the 3% custodial yield guide for next year, how much of those contracts have already been set? And then, one follow-up related to the financials. Is BenefitWallet fully incorporated into the fiscal 2025 guide? And then I have a follow-up.

That sounds like three, that's three.

Yeah. So, as Jon said, our expectation about the -- both the ramp-up cost, the transition cost, migration costs and then, of course, the benefit of having the accounts on our platform are built in to the 2025 guide. As our -- those assets will be invested at market rates, which will obviously pull up the average rate earned on HSA yield. So yes, BenefitWallet is a contributor to revenue and to the higher yield that we're going to be guiding to here.

And then just to the first part of your question about placements, the math is a little different with enhanced rates now, where we can do placements throughout the year. So, it's a little less relevant, but a way to think about it is that we will do -- we do placements mostly when money moves in terms of when rates are cut. So about a third of that happens in the -- if you sort of think about that year-end bulk, about a third of it's in fiscal Q4 and say calendar Q4 and then two-third is kind of in that change rate period. But I would caution that -- just I would caution on that last point, enhanced rates does have the benefit that allows us to draw that out a little bit. And so, over time, what you'll have to get used to is -- and I think this will be good is that it's not going to be sitting and waiting for what the rate is on a given day, that's going to matter as much for those kinds of placements.

Thank you. The next question comes from David Larsen with BTIG. Please go ahead.

Hi. Congratulations on an excellent quarter. Can you maybe just talk a little bit about expectations for yield longer term? Obviously, I wouldn't ask for guidance for fiscal 2026. But since it takes three years to recontract your book of business, let's say, rates hold steady or decline slightly next year, maybe they declined slightly in fiscal 2026. Could your yield still go up, which would obviously benefit custodial in fiscal 2026?

Jim, do you want to hit this one?

Simple answer is yes. Obviously, it depends how far rates decline. But yeah, I think you said if rates remain stable, then yes, we'd expect the average rate to continue. There are strong tailwinds in that number.

Okay.

The key issue is that one of the things that we really do get benefit of if you think about it. I appreciate your point about three years, but think about like the duration contracts, you think about what we're going to be replacing next year, those duration contracts next year will be the first ones that we're replacing, right, that are pandemic era. So the stuff that's being repriced is going to be repriced in very favorably. And beyond that, if I take current market projections about where rates will be in a year or what have you as sort of consistent with your question, we will still be placing new money at rates well above our current guide of 3%. And so, those will continue to be, I think, pretty significant tailwinds for yield for quite some time actually. Again, without wanting to give particular guidance, I mean those are the key factors, and it's what you can replace money at relative to what you had at that before and what you're placing new money at. And both of those appear to be tailwinds for quite a while under any current reasonable scenario over the course of the next several years.

Okay. Great. And I think Richard will allow me one more maybe. So, it was nice to see the interchange revenue up, I think, 7% year-over-year. For service revenue, I think it was down maybe 1% year-over-year, but I think there's some unusual things causing that. When should we expect to see growth in service revenue sort of return to a more normalized rate? What is the driver of that? And what would you expect sort of that longer term normalized service revenue growth rate to be? Thanks very much.

You want to hit that one, Jim?

Yeah. Sure. I can take that one. Yeah. So I think -- yeah, you really hit right on the story for Q3. We've effectively held serve on that line with revenue slightly down, cost slightly down, the margin is slightly up, but there's a lot of moving parts and stories within that within those headline numbers. So, if you sort of look at it, and we do look at it by product and you see a price volume mix story occurring there where price has been a headwind, especially in RA as buyers look at this as a bundle, really. They understand we're making a much higher revenue on the custodial cash and the HSA cash. They understand we're making good margin on the interchange, and this is the release valve on price. So, we're seeing a little bit of price per unit price headwind. We see the impact of the mix shift, especially towards HSAs. We're growing HSA significantly higher. That's always been the lowest fixed dollar fee product as it's got the highest percentage of interchange and custodial revenue attached to it. So as our business mix towards that, we're going to see that pressure on the revenue line and that margin line. And you can call that sort of the half-and-half impact price and mix and then being offset by our much higher volumes. So negative price, negative mix, positive volume, that's out to just about $1 million delta on the revenue line.

Thanks David.

The next question is from Anne Samuel with JP Morgan. Please go ahead.

Hi, guys. Congrats on the quarter, and thanks for the question. In the past, you've kind of talked about a gradual increase for your deposits going into the enhanced rates product, but with BenefitWallet, you're going to see kind of a big jump up in that mix. Are you where you want to be now? Or should we expect that to continue to kind of increase as a percentage of the mix over time? Where are you hoping to get with that?

You should expect it to increase as a percentage of the mix over time. And we -- if you're willing to make the step out of Salt Lake City or listen in, I think we'll talk more about that, so people can get a clear view of it over time. But we're extremely pleased with a couple of aspects of this program. And one is that is that on a voluntary basis, there's -- the consumer adoption has been great. I think consumer acceptance of what we're trying to do has been great. I feel like employers who -- those who pay attention to this, understand that the fact that we've done this has really kept us from having to impose other costs on them and also see us reinvest in the business. I'm extremely pleased with -- I just don't have to say it with the -- any other way with the work that the team has done to educate the best possible partners we can have for this product. I mean, we went into this with the biggest question in our mind was actually -- what's going to be the receptivity within -- what is appropriately a very conservative market on the insurance side to a product that has a lot of great attributes for them, but they just haven't had before. And the receptivity has been great. It's been great among very high-quality NIMs and the stable there continues to grow. And so, we're absolutely looking at options to accelerate, if anything, the shift into this product, and we'll talk a little more about that. I'm guessing at the Investor Day and its impact in the out years.

That's really helpful then. And I guess, as we kind of think about as you get bigger and bigger with this product, is it still right to think of it as kind of a 50 to 75 basis point premium to your kind of traditional yield? Or can that change over time as well?

I think that's still probably right. And it's -- I think that's still probably right answer.

Thanks Anne.

The next question comes from George Hill with Deutsche Bank. Please go ahead.

Hey, good evening guys.

Hey, George.

Good evening. And just a couple of housekeeping questions actually for me. I guess, number one, Jon or Jim, could you guys talk about the expected EBITDA contribution from BenefitWallet in fiscal 2025. And my follow-up is, I know you guys have some lumpiness of cash rolling off to be redeployed as we look out over the next 12 to 18 months. Can you just kind of remind us on the big pieces that kind of come off being committed and get recommitted and so, we can kind of fine tune our models around the waterfall effect of that. Thanks.

Why don't I -- do you want me to take the first half and you take the second half, Jim?

Sure. Yeah, sure.

Okay. So, a way to think about BenefitWallet is that as I suggested earlier, we're going to get a little bit more than half a year impact. Maybe you could say, I don't know, maybe say two-thirds of your impact, I don't know somewhere around there this year. And this product -- this transaction like prior transaction that we've done is going to be highly accretive. So, it's certainly -- we were already anticipating that we would be delivering a nice implied boost in EBITDA margins. And I think this has just helped us accelerate for lack of a better term, where we ultimately felt we would get to as we have accounts mature and so forth. So, the way I think about the first question is -- and I would encourage some of do modeling, but I think -- I remember, George, you asking me several years back, whether the company could return at some point, and I think you were being a little bit let the word I want. You were sort of poking me a little bit, saying can you guys return to EBITDA margins with a poor handle, we're offering guidance right now for next year between 38, 39. And so this has sort of accelerated some of that process, and that seems like a good thing. Jim, on the second half. Do you want to take that one, which was about -- I think, about the timing of asset we deployed.

Yeah, exactly reinvestments. And yeah, you're exactly right. Like the -- there's sort of a block of wage bumps in assets that are going to be maturing actually not so much in next fiscal year. We've got a relatively smaller block of assets maturing Q4 of this year and throughout next fiscal year, and it will be the following two years where some of those lumpier blocks are going to be maturing. We're being reinvested is a better word to say.

Thanks George.

The way to think about that, is since we deployed the original wage assets in, I'm going to say, calendar 2021, no, calendar 2020. And the kind of core piece of that is five-year, right? You'll see a lot of that roll over in the middle of calendar 2025. There's a little of it this year, but you get the idea. And the rollover well because we all know where we were in 2020. Sorry.

The next question comes from Mark Marcon with Baird. Please go ahead.

Hey, good afternoon, and thanks for taking my question, and let me add my congratulations. Just wondering if you can talk a little bit about you had good new logo sales. I'm wondering if you can talk a little bit more about what you're seeing on the enterprise side just in terms of both from a competitive perspective, but also in terms of the desire to shift part of the employee population to HDHPs, particularly in light of the accelerating healthcare costs that are coming through. And then I've got a follow up.

Do you want to hit this one?

Sure. Happy to. Hey, Mark. How are you? I expect you'll be out in February.

Absolutely.

Because we did get our first biggest snowstorm as we can. Anyway, so kind of an order, yeah, I mean, we've talked about in the comments that this -- we're seeing some good progress on bringing on these new enterprise logos. And this has been a lot of work, a lot of time into it. We've not only refined our marketing message and brought on some great sales team members that are hustling there, but also I think our product suite is continuing to have evolved to take care of their needs. I mean we're doing some really nice things there. So, I think the bottom line is we're pleased with the progress we've made in the new logos. Now I'm continually amazed -- and maybe it's just because, as you know, Mark, every year, I tell a little fact that this is from the Kaiser study, the average high deductible plan that is HSA qualified in the country is about $4,800 per family plan. And the average non-HSA deductible, let's say, for a PPO plan is about $2,900. So, as those numbers keep getting closer, it really doesn't make a heck of a lot of sense for people not to opt into the HSA, right? And so, we just keep helping employers and then in kind of the perfect world, they allow us to then speak directly to their employees about the benefits, tax benefits and everything else around the health savings account. And with the deductibles narrowing like that [indiscernible], it's really hard not to argue they should just set up for because they're going to basically close that gap on any contributions they can get from their employer and then also, of course, tax savings, right? So, we just keep promoting it, and we're seeing some great uptake in our relationship management team are marketing are doing a great job delivering that message. And so, our work is never complete. There are still employers and sectors that tend to be slower adopters, which means there's still a lot of fruit and tree, but we're continuing to do everything we can to check trees, and this is a great time of year and we're making good progress with messaging. So, I'd say thumbs up in both cases, good new logo growth and then also good work with enterprise team and actually the market and bringing on more growth.

That's fantastic. And then, can you just comment a little bit more about the competitive environment? I mean, obviously, that may get consolidated. But then in addition to that, there's other big players with rates going up, how should we think about service fees over the next year and things of that nature. Obviously, you're gaining more than your fair share of the market and continue to gain share. But just wondering if you can give us some more comments on that.

Yeah, Jon, how do you want to break that up?

Why don't you talk about the competition piece, and I'll hit the service fee discussion.

Perfect. Yeah. So, the competition has evolved a little bit, partly because there's been some consolidation, as you mentioned. I mean, a lot of these companies that we used to see is pretty good competitors, whether it be wage or some of the more recent ones we've added are now part of the HealthEquity family, which is pretty awesome. And so that being said, I mean, we do have some powerful competitors out there, but it's kind of the same message. If somebody is buying their healthcare services from a large health plan out there that is one of our competitors, then that large health plan will push pretty hard. We do win in that environment because I think people know that HealthEquity has got this kind of single focus on the parent healthcare consumers, and that's kind of what's carried us now for 20 years, right, being that kind of independent, single focused provider that can really nail the HSAs and the CDBs and with the bundle and things like that. We have the same competitive threat on the retirement side. But that's where I think we -- more the level of playing field is with our partnerships, right? Because we've got great -- I mean, the health plan partnership with, I think, is pretty storied in HealthEquity land, and you all know that the success we've been able to have and take care of those health plan partners and they bring us a lot of even a broader footprint than you might get if you're a large health plan and you can kind of fish within your own pond, but we get to fish in many plants. And then on the retirement side, we've got our partners there, too. So look, I don't think it's evolved much I'd love to see if Jon sees it differently, but it's kind of the same thing. It's just that it has been consolidating, and we've been, I think, up in our game on some of the things we're doing, like I mentioned earlier around our product settings like that.

Yeah. I mean, I love what's going on with the product. There's some really cool stuff that we're talking about with clients and working on and rolling out and that just is -- I mean, it's not rocket science, but is about helping consumers do the right things with these products and also helping employers understand what's actually going on within their base, not just in finance, but on the health side, are people using the free stuff that they're supposed to be using in these plans preventive, et cetera. So, I do think relative to what our competitors do or the bulk of our competitors, we do more of it, and we do more of it without dictating what the rest of your ecosystem is. And that's always been where we succeed, and I think we'll continue to see. As far as pricing -- we are -- as I think Jim commented in the prepared remarks, but certainly, we're always going to be in an environment where the effective custodial yields continue to expand, and obviously, balance continue to grow. If you think about it from the employer's perspective or whatnot, one way to the first place you look in terms of sort of across elasticity is you look at the fees that you actually pay. And so, we've done a number of things over time. I can quite successfully to stabilize that. But we have -- as Jim commented earlier, right, if you look at the current quarter, right, you've got roughly speaking, you can do the math, you've got on -- if you look at total accounts on a unit basis, right, you've got, give or take, 5% lower year-over-year. About half of that is mix and half of it is actual fee reduction. The mix stuff will come and go. Will we sell more HRAs versus FFCAs next year, I don't know. But the fee component is there, and we're going to roll with that. So, I don't -- I think we're trying to be, I think, conservative in what we're assuming there is certainly realistic, because we don't really want to be losing business over fees. We want to be treating people fairly on fees, recognizing that, particularly with our core product. There's a lot of ways to make money. At the same time, I think as you then I'll stop, as you may recall, in some of our ancillary products, where as a result of the wage is not WageWorks and such, we felt like profitability wasn't really there. COBRA being the example. We had a very large project over the course of -- but still the impact of which is still rolling out and will help us a little bit next year, but nonetheless, to raise fees. So, we're not afraid to do it. We just want to do what makes sense. And where it makes sense is in areas like that, it makes sense for us to be competitive when it comes to HSA. Last thing I'd say that gives us some level of stability here. But again, I don't think unit fees are like rising substantially. The stability is the diversity of our distribution. And what that does is it produces a client base that has enterprise where things are extremely competitive, as I've said before, because they come with assets and therefore, you can underwrite that versus your smaller employers and the like, where you can't do that. And so, there's going to be more of a fee base. And then, of course, you have retail. And so that level of diversity of distribution and of account and so forth, that actually also lends to stability in that service line. So, I guess that's a long way of saying our guidance reflects a little bit of conservatism there, consistent with kind of the numbers we're reporting here in terms of price impact, maybe not so much mix impact. But fundamentally, I think if you look at a big picture, it's a relatively modest price to pay for the benefits of what we see as ultimately a product that's obviously becoming more profitable, and you can see that in terms of what we're tapping the bottom line.

Thanks Mark.

The next question comes from Jack Wallace with Guggenheim. Please go ahead.

Hi, Jack.

Hey, how's it going? Congrats team Purple, another great quarter.

Thank you.

I've got a couple of model monkey questions for you. I just wanted to make sure we're clearing up the yield understanding here. First one on when cash gets deployed, is it on a five-year duration? Or is it three years or three years the duration to the book on average?

You want to hit this one, Jim?

Yeah. I mean, you should -- the answer is historically, it's been, yes, all of the above, 3, 4, 5-year contracts, but I think you should generally be modeling five years as our baseline investment product.

Thanks. That's helpful.

Using five-year treasury as your baseline REIT.

Excellent. And then for the fourth quarter this year, it looks like there's an implied sequential step down in the daily cash AUM yield. Is that just related to some of the cash that's exposed to the front end of the curve? Or is there something else going on there? Just thinking about also the comment earlier about a third of the AUM that gets repriced, so to speak, in December. I would think that would have a positive impact versus a negative.

Yeah. I don't think there's a step down in Q4, I could be wrong. Maybe if, Jim, if you have the numbers in front of you, it's not.

No. Yeah, no. There's nothing that stands out. Like you may -- you're talking about the you're talking about like the client-held funds short and there, like we may see some dollars coming down, right, as the impact of our treatment that we talked about last quarter. But no, we're not assuming any big shifts in the short rate.

Maybe we can revert to you offline and make sure you've got right math. But to get the three next year, the HSA cash rate will be higher in Q4 than it has been year-to-date. And on CHF, in Q4, I mean, it's -- you know what short rates are going to be in the rest of Q4. So, I don't -- there's not a lot in on there.

Thank you.

Thanks Jack.

I didn't know we were done. Wow. Okay. So, I just wanted to say that I tried to get Jim in his opening remarks to say that Investor Day was going to be better than cap [ph] and he wouldn't do it. And I'm trying to bump doubt about that. And if you care about making you feel better than come to our Investor Day. And if you can't do that or even if you can, we'll be at certain unnamed conferences in January, no doubt with any. And before that, we've got a bunch of other investment activity happening. This is a great time to be where we are, and the credit for that, in my mind, really does belong to our team, as well as to our clients and partners. We have -- I'm so pleased at what -- at the level of partnership we're seeing with our employers and our health plan retirement plans and then the level of partnership on our team right now. We're doing a lot of tough stuff behind the scenes to set the company up for expansion, not just next year, not just following the year, but for many years to come. And you may not see it all, but it's a ton of work. And it doesn't all go perfectly, but it all gets done, and it all gets done with people who are working really hard. So I just want to spend a minute to say thank you on that.

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