HQY - NASDAQ

Good afternoon, and welcome to the HealthEquity First Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Richard Putnam. Please go ahead.

Thank you, Gary. Very fine job. Hello, everyone, and welcome to HealthEquity's first quarter of fiscal year 2025 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 a couple of reminders, as we usually do. First, a press release announcing the financial results for our first quarter of fiscal 2025 was issued after the market closed this afternoon. These financial results included the contributions from our wholly-owned subsidiaries and accounts they administer. The press release includes definitions of certain non-GAAP financial measures that we will reference today. You can find on our Investor Relations website a copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures, and the recording of this webcast; that website is ir.healthequity.com. Second, our comments and responses to your questions today reflect management's view as of today, June 3, 2024, 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, and we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock as detailed in the latest annual report on Form 10-K, any subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information for future events. With that out of the way, it's over to Jon Kessler.

Hi, everybody, and thank you for joining us for this healthy start to fiscal 2025. That was Richard Putnam, you may not want to quit your day job. I will discuss Q1 key metrics and progress against our strategy. Jim will touch on Q1 results and detail our raised guidance for fiscal '25, and Steve is here for today. So, here we go. Wow! In Q1, the team delivered again, double-digit year-over-year growth across nearly all of HealthEquity's key metrics, including revenue, which was plus 18%; adjusted EBITDA, which was plus 36%, that's two times as much; and HSA Assets, which was plus 22% -- which were plus 22%. HSA members grew 13% from strong HSA sales and BenefitWallet, each of which I will detail in a moment. Strong HSA growth drove total accounts up 7%. HealthEquity ended Q1 with 16 million total accounts, including 9 million HSAs, holding $27 billion in HSA Assets. HSA Assets overall -- I worry about how this can translate to [written thing] (ph). HSA Assets overall increased $2.1 billion in the quarter, including $0.4 billion of organic growth. 20% more of our HSA members became investors year-over-year, helping to drive invested assets up 39%. And by the way, this quarter, our HSA investors gained access to $0 brokerage trading of individual stocks and ETFs. Returning to HSA growth, Team Purple started the selling year off with 194,000 new HSAs, a record for a first quarter and 60,000 or 45% more than Q1 last year. So, what happened? First, accounts from existing clients and partners grew very nicely, even more so than during the banner macro-driven Q1 two years ago. In particular, we got a boost from the Blues health plan partners that joined HealthEquity from further a little more than two years ago and are now more accustomed to working with us. Second, accounts from new logos, that's in quotes, mostly small and midsized employers at this time of year, continued the positive trend that we saw over the course of fiscal '24. Beyond the organic HSAs, the team transitioned two of the three tranches of BenefitWallet in Q1, adding approximately 400,000 HSAs and $1.6 billion of HSA Assets. The final BenefitWallet transfer occurred last month that was at the beginning of Q2. And by timely completing what is the largest HSA portfolio transfer ever to our knowledge, HealthEquity's tiny but mighty core dev team, thank you guys, has raised our visibility to FY '25 results, has opened up opportunity for CDB cross sales, [Enroll360 and BENEFIT] (ph), which is the new name for MaxEnroll, deployments into fiscal '26 and laid an anchor to win word on custodial yield for years to come, [that's notable] (ph). CDB accounts decreased 1% compared to Q1 last year, preceding the ending of the national emergency in May and account run-off later last year. Excluding that factor, we again delivered positive CDB growth year-over-year. The key metrics support our longer-term strategy and the team advanced that multiyear strategy, which you've heard about and which we call 3Ds. The first D is delivering remarkable experience. Virtualizing our service, digitizing paper and plastic on our cloud-based health accounts platform in order to reduce service expense without sacrificing member delight. Q1 saw service cost as a percentage of revenue fall 400 basis points year-over-year. We launched more AI-driven service tech. We expanded our claims automation for FSA members that you saw at Investor Day. We deployed also to select enterprise clients HealthEquity's stacked account card for iOS and Android mobile wallets. Pretty cool. The second D is deepening partnerships across the ecosystem to grow sales without sacrificing margins. And in continued -- in addition to continued work on the technology backbone of APIs that we also discussed at Investor Day, in the partnership category, we added insurer partners and capacity in the Enhanced Rates program that accommodated greater than expected adoption, as more than 85% of new BenefitWallet members' HSA cash is in Enhanced Rates. The third D is driving member outcomes through new data-driven services that give clients and partners insight and engage members to act. During Q1, we gained important client and partner feedback. Thank you to our clients and partners who participated in these sessions live on our analyzer, transparency, health payment account and other new services in development. All of this added up -- or adds up to a quarter of investment for the future within the envelope of robust top-line margin and cash flow from operations growth in the present, which conveniently enough Jim will now detail. Jim?

John. I will briefly highlight our first quarter fiscal year GAAP and non-GAAP financial results. As always, we provide a reconciliation of GAAP measures to non-GAAP measures in today's press release. As a reminder, the results presented here reflect the reclassifications of our income statement we described in our fiscal year 2024 10-K, both for fiscal year '24 and '25 for comparison. First quarter revenue increased 18% year-over-year. Service revenue was $118.2 million, up 6% year-over-year, reflecting a higher number of HSAs and invested HSA Assets, partially offset by the runoff of National Emergency CDB activity. Service revenue also benefited from a $2.5 million catch-up accrual of investment record keeping fees in the quarter that will not be repeated in subsequent. Custodial revenue grew 37% to $121.6 million in the first quarter. The annualized interest rate yield on HSA cash was 2.93% for the quarter. Interchange revenue grew 6% to $47.7 million. Gross profit as a percent of revenue was 65% in the first quarter this year, up from 61% in the first quarter last year. Net income for the first quarter was $28.8 million or $0.33 per share on a GAAP EPS basis. Our non-GAAP net income was $70.3 million or $0.80 per share versus $0.50 per share last year. GAAP results reflect the impact of a difference in the timing of stock compensation expense from performance stock units granted during the quarter compared to those granted in prior years. Adjusted EBITDA for the quarter was $117.4 million, up 36% compared to Q1 last year. And adjusted EBITDA as a percentage of revenue was 41%, a 540 basis point improvement over the same quarter last year. Turning to the balance sheet. As of the quarter-end April 30, 2024, cash on hand was $251 million, as we generated $65 million of cash flow from operations and used $199 million of cash for the first two BenefitWallet closings in the quarter. The company had $926 million of debt outstanding, net of issuance costs, including $50 million drawn on our line of credit in connection with the BenefitWallet HSA portfolio acquisition. The third and final BenefitWallet tranche was funded with an additional $175 million draw on the line of credit subsequent to the quarter-end. Today's fiscal 2025 guidance reflects the carry forward of our strong sales trajectory, higher expected custodial revenue and operational efficiencies resulting from our technology investments. We expect revenue in a range between $1.16 billion and $1.18 billion. GAAP net income in a range of $90 million to $105 million, or $1.01 to $1.18 per share. We expect non-GAAP net income to be between $261 million and $276 million, or $2.93 and $3.10 per share based upon an estimated 89 million shares outstanding for the year. Finally, we expect adjusted EBITDA to be between $454 million and $474 million. With the placement of the BenefitWallet HSA cash complete, we're raising our guidance for an average yield on HSA cash between 3% and 3.05% for fiscal 2025. As a reminder, we base custodial yield assumptions embedded in guidance on projected HAS cash deployments and rollovers, a schedule of which is contained in today's release and analysis of forward-looking market indicators such as the secured overnight financing rate and mid-duration treasury forward curves. These are, of course, subject to change and not perfect predictors of future market conditions. Our guidance also includes the expected impact of our now completed BenefitWallet HSA portfolio acquisition on the remainder of the fiscal year, including higher revenue and earnings along with higher net interest expense due to an increase in the amount of variable rate debt outstanding and drawdown of corporate cash to fund the acquisition. We expect to pay this variable rate debt down with cash from operations over the next several quarters. We assume a non-GAAP income tax rate of approximately 25% and a diluted share count of 89 million, including common share equivalents. Based on our current full year guidance, we now project a GAAP tax rate for fiscal 2025 at about 25% as well. As we've done in previous reporting periods, our full fiscal 2025 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. With that, we know you have a number of questions. So, let's go right to our operator for Q&A.

We will now begin the question-and-answer session. [Operator Instructions] Our first question today is from Glen Santangelo with Jefferies. Please go ahead.

Hi, thanks for taking my...

Hi, Glen.

Yeah, thanks for taking my question. Hey, Jon, I have a high-level question. Based on the feedback we're getting, all the metrics that you reported were obviously up and that contributed to the top-line and EBITDA beat. But some would push back and make the case that maybe the better results are more acquisition-driven or more rates-oriented. And so, I guess the question to you is what's the message to investors that may be concerned about the level of organic growth and may be concerned that rates are coming down in the near to intermediate terms? Just would love to get your high-level take on how you think about the organic growth and the risk that rates come down later this year. Thanks.

Wait, how do they get at it so quickly, Glen? Who are these people?

I can probably tell you, but I won't.

I'll bet. I wonder if they might have a reading interest. Let's see. Let me first say, you can't please everyone. Second, say, respectfully, we included the BenefitWallet transaction in our prior guidance. And we can talk about if others have -- if others really want to delve into it, the details of thought versus expected and all of that. But we guided at the end of March, we had already done the first tranche by then I believe and the second tranche was on April 9. So, it would be hard to take the view that we somehow came to some different result than we were expecting. As to the broader question of the rate sensitivity of our performance, the answer is, in my view, that the right way to look at this is that the relevant question is what is the long-term custodial benefit that we'll receive from a growing sort of corpus of accounts and assets. And I think what you -- the answer is that the more evidence comes in that suggests that, that number is at the very least a lot higher than people thought it was a few years ago. And in any case, as Jim has said many times and as the schedules that we provide support, irrespective of any -- within the bounds of current economic forecasts, any place within those forecasts, we will over the next -- I don't know what one defines the near or medium term as, but the next two years, whatever, three years, maybe something like that, these -- we have not yet -- I think it's fair to say we have not yet reached what is the current, let's call it, non-cyclical rate, much less the peak rate, which, of course, will lag from the market's peak. And so, I guess, I would characterize that broadly as perhaps investors who or others who have to gain a complete understanding of how this model works now and how we've engineered it to work over the last several years. So that's kind of my response. Jim, would you add anything to that?

Yeah. No, I wouldn't add anything to that, right? Like we keep updating that repricing table, which is in this Q, right? So, just as Jon said, right, we're repricing placements in the one -- mid-1% range for the next couple of fiscal years after this one is over. And based where we've guided to where we think we'll be in basic Enhanced Rate mix, you can impute the spread we're earning over treasury. So, as Jon said, yeah, we're still a ways away from neutral, at least in current reasonable ranges of bounds of what neutral might be.

All right. Well, congrats. Thanks for the thoughts. Much appreciated.

Thanks, Glen.

Thank you. See you tomorrow.

The next question -- excuse me. The next question is from Allen Lutz with Bank of America. Please go ahead.

Hey, good afternoon, and thanks for taking the questions. I think if we backout BenefitWallet tranches, you grew accounts 8.1% in the quarter, if we backout those two tranches. Can you kind of talk about how quickly the market is growing as we kind of turn the calendar to 2024? And then, any changes that you're seeing this year versus last? Thanks.

Lutz, I think if you're going to do that calculation, you also have to exclude accounts that were -- that came over with those tranches, but that we de-dupped, or whatever the right term is. So, the number is a little higher than that. But if I look at the market as a whole, I think Devenir's last estimate is the market on the account side is growing around 6% to 8%, something like that, 6%. So, obviously, we're doing a little better than that. I got to say, and I would invite Steve to comment on this, one of the things we're seeing in the early part of the sales season here is a lot of energy around the accounts that we get from a new small group and the like, and maybe Steve, you can comment -- particularly from our health plans, and maybe Steve, you could comment a little bit about what you think is behind that.

Sure. Hey, Allen, thanks for the question. We just constantly look at what the addressable market is with these health plans and it is always impressive to me that if you look at our span of health plan partners, we just have not penetrated their core base very deeply. I mean, the bottom line is, is we have lots of opportunity with them. And I think it's a combination of companies that haven't fully embraced health savings accounts and we have offered it over the years as kind of an option. Typically the people in the finance department get the tax benefits immediately, but takes a little longer for people, more broadly speaking, to understand that every dollar that goes into an HAS, you get kind of like 35% to 40% more spending power than if you are paying those out of pockets out of the regular savings account or something like that. And so, we just keep seeing it chug along. And I think when you couple Medicare inflation -- or medical inflation with that, I mean, again, when you're taking a bite out of every dollar you have to spend because inflation, and you can get five bites back because of having great tax benefits and more spending power. I think that's what the message is coming loud and clear. And I think that whether we're at 30% market adoption, you can look at different studies, or 35%, and it just kind of depends on how -- what used to be the denominator, we still have a lot of room to grow. And you got to understand that most of these health plans that we've only been partnered with are probably on average just a few years if you take all of the new ones we received with the Further deal and we just have a fantastic team that's been working them. Further team is amazing and we didn't call for -- sorry, Jon, I just called them Further team, our team that came through that transaction, and then just the additional ones we've added over the years, I mean, we've just had tremendous opportunity. So, I think the key is just doing what we're doing day after day, getting out in front of the brokers, the consultants and then the health plan sales reps and health plan account executives and taking our solution to them. And then, they realize that by partnering with HealthEquity, they can win more business and they can retain more business. And we have a great partnership. We have wonderful -- just fairly recent client summit where most of our Blues plans showed up and we have meetings with our non-Blues plans for the course of the year. And so, tremendous opportunity. But it really is interesting to see how much opportunity we have, lots of meat left on the bone when it comes to working with these plans and then working with the employers that need reasonably priced coverage with great tax benefits.

Great. Thanks, Steve.

Thanks, Steve.

The next question is from Greg Peters with Raymond James. Please go ahead.

Good afternoon, everyone.

Hi. Hey, Greg.

I'll focus my only question on your adjusted EBITDA margin improvement, which was at least ahead of our estimates. And I guess what I'm curious about given the updated guidance, is there any sort of seasonality that will flow through the margins as we think about the remaining three quarters? Because the first quarter was quite strong.

Yes, for sure, right. So I think you know that the normal seasonal trends of the interchange line, of course, obviously strong to start off the year. We, obviously, had that true-up that I mentioned in the service revenue line that's not going to occur. I think what you're seeing is great progress on costs, but a bit of that especially in that second dev line. We'd like to be moving faster on a few things, got some open roles, so you'll see that line normalize throughout the year. So, you are seeing a bit of a high number versus what we call a normalized Q1.

Got it. Thanks.

I think we've commented -- maybe the only other thing I'd mentioned is that we did have this accounting item that's $2.5 million. So, when I think about revenue at roughly $1 billion, the math becomes easy. So, it does play a role. And I mean, what are we guiding to midpoint is 40-point-something of guide and we delivered 41%. So, I think I would expect a version of our broad seasonal pattern that you see where the fourth quarter will be substantially lower, but also keep in mind, as we've said, one of the benefits of what we're trying to do from a technology perspective is to flatten out that pump in expense a little bit, and maybe we'll make a little bit of progress on that this year and there's some upside opportunities there.

Thank you.

Greg got two answers with one question.

Yeah, that was two with one question. Well done.

Got it, guys. Have a good afternoon.

Missed you at Shake Shack last night, Greg.

Yes.

I visited in your honor.

Thanks, Greg.

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

Yeah. Good afternoon, guys, and thanks for taking the question. I guess, first is, you guys had a goal to get to 80% of dollars from the BenefitWallet acquisition into the Enhanced Rates product. And I guess I just wanted to ask about your progress on that. And then, I have a quick follow-up.

Sure. Wait, follow-up? Then Greg -- we're going to have to go back to Greg for follow-up.

I'm taking Greg's follow-up.

So, we did end up around 85% on BenefitWallet relative to 80%, and that is helpful. I mean, it's 5% on -- 60 basis points on [5%] (ph), it's not a huge number in the grand scheme of things, but it's helpful. And I think it's also -- look, as we commented, what's enabling that in our view is two things. The first is what we're trying to do in terms of articulating the program and so forth. And then, the second is the strength of the stable of partners that -- I really think this is feeling like what we did in the early days that Steve can well relate to, with regard to banks, where the trick was don't rely on one. You have a nice diverse portfolio that you can then -- you have a nice open market and so forth. And I think I got to give credit to a team of people we don't name so that the recruiters don't get after them, but they know who they are that do this work both to explain the program and so forth.

Okay. Thanks, Jon. And my quick follow-up would be is -- I'm kind of trying to hit on the utilization theme that we're all keeping track of here in healthcare land. And did the BenefitWallet acquisition having meaningful impact on interchange revenue? And what I'm trying to get to is organic interchange growth. And this whole thing is a backwards way of question is, are you guys seeing utilization in your HSA book of business of people increasingly buying stuff, which should kind of show up in the interchange revenue line, which looked like it could have been a little muddied this quarter through the acquisition? Thank you.

Yeah. I think the short answer is -- let me get to the end of your question and go back to the beginning. We're not seeing -- I think there's a sort of hypothesis around GLP-1s or I don't know maybe there's some other thing people could be buying, having a huge impact on particularly HSA spend. Actually, if you look into the thing, on a unit basis, HSA spend this quarter was actually a bit lower than we might have expected and FSA/HRA spend was a bit higher even after factoring in the fact that, that spend is going to be high in this quarter for reasons related to seasonality and run outs and so forth. So, I just don't -- because we get asked this question, apparently Richard gets asked some version of it often, becoming something of a GLP-1 expert, and -- you're not...

I'm not taking...

Richard doesn't eat anything, so that's his solution. But, I guess, my -- in all seriousness, I don't see it. And then, with regard to just the first part of the question, which was BenefitWallet, I think the answer is a little. I mean, you had a period of time where people didn't have access to their accounts and so forth. And that may explain why HSA underperformed just a little bit. And [indiscernible] little bit. But I think if the question is, does this quarter either provide anything that would support or address this sort of thesis, I don't know how to kill this thesis, but I can't find any evidence for it.

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

Hi. Thanks for taking my questions. Maybe on digital wallets, if I may. Jon, at the Investor Day, you spent obviously a lot of time, you and the team, talking about the capabilities. I was just wondering if you could give us a sense of whether the digital wallet rollout had any -- the type of impact it had on member adoption, reception and whether it had any help for you in terms of driving client conversions? Thanks.

Client conversions was certainly helpful. It's still very early for digital wallet. And in particular, it's -- the way this is working, Stan, is we're doing kind of two things at once, right? Thing one is that we're consolidating the various processor agreements we have into one. So that's for those of our 17-odd million members who are -- 16 million members who are cardholders, that's a card conversion. Our card conversions are a little more complicated. Actually three things. Two, we've added chip, which in normal banking world, no big deal at this point. In our world, a little bit more big deal, because, there is -- it turns out not standard logic at the merchant level for how to deal with chip, particularly at the pharmacy. And so, we talked about that last quarter as something we would have to overcome and we did a good job. And then lastly, mobile, putting all of that including stacked card on mobile. I think ultimately the way this will help us is two-fold. First is -- and I -- so I think at the moment its primary benefit is it's an innovation that people can talk about in both new client sales and particularly FSA conversions, where we have an HSA client and we stack that FSA on top of it. And we don't report FSA sales figures, but suffice it to say, we're doing well so far this year on our pipeline there. And -- I guess we don't report any pipeline. But -- so I think that's one way in which it will help. The second is, ultimately on the expense and member experience side is, we've discussed a lot of these expenses associated with open enrollment are driven by the need to produce cards, get them out there and so forth. Now, I want to be clear, we're still going to do all of that this year. We're not forcing anyone into mobile wallet. But, eventually, we will -- mobile wallet will be the default. And at that point, busy season will become more like busy week, and busy week is a lot easier to handle than busy season.

Got it. Very helpful. Maybe just a quick follow-up. So obviously, you're talking about digital wallet, lots of flexibility, usability there that's opening up on the mobile side. I'm just curious, does this allow you to expand maybe into lifestyle spending accounts? And is this something that you have considered? Thank you.

We have a lifestyle product today and it does okay. I think there's a little bit of -- it's probably safe to say there's more smoke than fire on the lifestyle accounts. But we have that product. It does fine, and it's something that is stackable on the wallet. So, for those folks -- the way lifestyle works, there are some folks who don't really want to use a card for it for a number of reasons, but -- I mean, I guess my short answer is sure. That having been said, our focus in the company broadly and certainly in this regard is really around helping people -- is around empowering consumers with healthcare. And there's some significant overlap between lifestyle and healthcare. But growing that LSA category is not a huge focus for us. It doesn't quite move the needle. And I think our view is there's some stuff there, but it's not enough to fill the Thanksgiving dinner -- that Thanksgiving table.

Thanks, Dan.

The next question is from David Larsen with BTIG. Please go ahead.

Hey, congratulations on a great quarter. Can you talk a little bit about your take rate or your yield sort of by investment category? And if you don't want to get too specific, I totally understand that. But like you have cash, you have Enhanced Rates, and then you have what I think of as like your legacy sort of investment accounts. And I sort of thought that your yield was lower on invested assets. So, as more money goes into the Enhanced Rates products, could that potentially pressure your yield or not? And your yield seems fine, but just any color there would be very helpful. Thank you.

Yeah. I'll kind of take that in pieces, so that the -- there's no custodial revenue from the investments anymore, like that's the thing we shifted. So, the custodial line is the blend of the HSA cash yield on Enhanced Rates and basic rates. And we've sort of talked about on average, we're doing five-year treasury plus, call it 75 on Enhanced Rates and five-year treasury plus 10 or so on basic rates. And obviously, the T is at the time of placement, so you're going to have a big mix there. On the investment side, yes, of course, right, we're earning about 30 bps headline rate on invested, I think we blend out to 28 basis points or so, that is in the service revenue line. And I don't -- I tend to not think of it the way that you phrased the question, right? It's not a matter of our members are going to take all of their cash and move it into the investment account, right? It's a cash account coupled with a brokerage account. And so, as our members continue to save higher balances, they become investors. So, it's not one or the other, right? It's, we grow the cash balance and then they become investors. And yes, like on the marginal dollar, we earn considerably less on the next investment dollar, but that's the right thing for the member to do at that point. And over the long term, I like being leveraged to the US markets, right, in that investment line, and we help the member grow that account and hopefully they become managed account clients as well and we can actively help them grow that balance. But they're not -- it's not one or the other, right? It's as a member moves along in its maturity, that's how they become investors.

Okay, great. Thank you very much.

Thanks, David.

Thanks, David.

The next question is from Stephanie Davis with Barclays. Please go ahead.

Hey, guys. Thank you for taking my question. Congrats on the quarter. Jon, I have to ask, this whole mobile wallet call out, you know how much I take -- I hate taking my HealthEquity card on the subway. Does this mean, I'm done, I can actually just use it?

It works now.

It finally works? Apple Wallet? We're done?

Yes.

Okay.

And I will say, the thank you for that really belongs to New York MTA. It's easy to underestimate the complexity of what they're doing with this product, and we went through this whole thing where there was some non-standard programming in their system and yada, yada, yada, and MTA did a great job of getting their folks, their contractors, in gear in a way that I don't think we all normally expect from the New York City subway. But I do appreciate that and not just because I'm taking the subway back to my hotel.

Okay. So, let's put this framework in mind. You talked about chip cards in one of your early question answers. Chip cards ain't cheap issue.

That's right.

Are you going to find a way to have users opt out of a card overall so you can get rid of that cost from your whole expense algorithm? Or am I getting ahead of my skis?

The answer is yes. We will ultimately -- as I said in the commentary, our ultimate aim and -- I will admit my people who do open enrollment when we talk about this look at me like, "Jon, that's harder than you think." You can imagine that we get that look at case point. But we think that that's the right answer, particularly when you actually look at it -- I mean, people have -- families are complex. So, it might be that there's the one card that's going to our member, there's another that's going to the step kid over here. But why not -- our view is that ultimately the idea that the piece of plastic is somehow an advertisement is sort of past its due date and that ultimately that's going to be -- mobile is going to be your default, which by the way means you're going to get your card earlier. It's going to be easier to update when it rolls over. It just it's -- there's a lot of good that comes from that. That having been said, Stephanie, I think the biggest -- while it is true that those darn chips are not free, we do get to amortize them at least, but I think -- but over a couple of years anyway. But I think the bigger point is the cost that we incur and the hassles that members and clients incur in this process that goes on from December -- from roughly the beginning of December through the beginning of January where you're translating from an open enrollment decision that a member made to the client closing open enrollment and processing their stuff or their vendor processing their stuff, to data that comes to us to card issuance, to card printing, to card packaging, to the mail at Christmas time, it's just not...

Get rid of it all.

Not a scalable process. So, we're trying to get rid of that. And I think that will help -- as I said, the way to get a sense of that is you look at that bump that we have at the end of the year and in the fourth quarter and typically in January -- or I'm sorry, February and first quarter as we wind down. And if we can make that bump kind of go away or be less bumpy, that will be a good thing and that gives you a sense of order of magnitude.

So that kind of leads into my follow-up. You're talking about these AI opportunities in prepared remarks. You've got like I see like a pretty obvious card issuance and statement thing opportunity. Like, what is your -- what is the cost savings roadmap that helps your margin beyond -- just the leverage that you keep getting from rates?

So, this is a question I ask Jim a lot. Now he's had, like, six months, so now I can just throw things at him...

I'll tell you the same thing that I say to Jon, right, is that we're -- like, we're not going to parse out the list, right? So, there's a long list...

You tell Jon that?

Yes, of course, of efficiency opportunities. But what is the objective of not just the finance team, the objective of the service delivery team is to drive down every year their unit cost to serve accounts, and that's going to come in a number of places and it's math that you guys can do as well, right? You can look at our service costs and divide it by our total accounts and watch that trendline, because that's the same trendline that our service leaders are looking at every month in their results and making sure they're continuing to drive progress there. We're talking about these big things, because yes, like if we can eliminate card printing completely and paper and envelopes and postage and reissue, because the address has changed and members forgot to tell us that they've moved, right? Yes, there's a large bucket of cost there. Will it all be removed in one single quarter? It will not, right? So, it's part of -- this is the long-term objective of our investments on the cost side and the service team's drive to efficiency, right? Like this is old school, Lean Six Sigma process improvement, continuous improvement work.

New tool, same height, same weight.

Exactly, yeah.

Thanks, Stephanie.

Hey, thank you, guys.

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

Hey, good afternoon. I'll add my congratulations for the quarter.

Thank you.

Hey, with regards to -- I had similar questions just with regards to like trying to disaggregate the benefit that you ended up getting in terms of the gross margin, if we think about it roughly speaking in terms of scale versus reducing unit costs, would it be fair to say that we're still at the really early stages with regards to reducing unit costs? That's one question. And then, the follow-up is, can you talk specifically about what happened on the interchange gross profit margin? Because gross margins were terrific, but that one was a little bit softer than the year ago. So, just trying to fully understand that.

Yeah. Maybe I'll start with that one.

That's a really good call out.

Yeah, very good call out. Yeah. So interchange, actually Jon sort of talked about that in the commentary. He mentioned that...

[indiscernible]

Yeah, that we're in the process of moving to both a new and a single card processor. And so, you're seeing a bit of we're operating on multiple card processors now and not just the service costs of multiple processors, but we have some development costs related to the interchange shift there that hits that line. So, that's what you're seeing. You're seeing a point...

And that's going to -- will be done -- and I think we've said this before, will be done with this transition in August. So that -- you're going to see a little bit of that and you're going to see a similar thing in the second quarter and the first bit of the third quarter of the same thought where we're basically paying two processors at work.

Yeah.

And then...

Yeah, the other side on the -- like, yeah, I think it's not like a there's a start and the end, right? Like, the point of continuous improvement on our service cost side is that there's continuous improvement. So, like there's not a day where I say, well done guys, you're done. You don't have to try to be more efficient. So, we -- the sales and retention side of the house has to deliver their part of that, right? Of course, growing accounts helps become more efficient and not just driving down the cost, but those work hand in hand. So, I can't say that we walk through and say, this much is related to us continuing to grow versus this much is related to our improvements. We're trying to do both of those things, right? It's driving out calls from the call center, more self-service, more automation, these work hand in hand.

I think Mark is driving to his conference tomorrow. So, we're going to see it. Are you driving from Wisconsin to New York? Are you on the Ohio Turnpike?

No. I'm in New York right now.

Okay.

I'm looking forward to seeing you tomorrow.

No, that is a non-denial. Like, that is just...

Yeah, you're not saying how you got here.

[indiscernible]

I flew this morning. Thank you.

All right, okay.

We do have planes.

We'll see you tomorrow morning.

We'll see you tomorrow.

All right.

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

Hey, thanks team for taking my questions.

Hey, Wallace.

Hey there. So, just wanted to circle back on the BenefitWallet transfer and just relative to your expectations coming into the quarter. Just how the account retention fared to the cash AUM of the retained accounts and then the time and cost of transfer? Again, just trying to get a feel for this. It looked like this was slightly better across most metrics, but you tell me. It sounds like this was done in a pretty efficient manner.

Yeah. I mean, we had the virtue of guiding in March and like we'd already done part of it. We're doing part of it in a couple of days and we have data from the other side. I'll take that. If that's -- I mean, that's the kind of forecast, I mean, even I can do that. So -- but I think that's probably fair. I'd say the one thing that we want you to be mindful of as you get into the rest of the year is that we would expect to see some incremental attrition here. Whether that attrition affects assets very much? Don't know, right? But it's always the case that we assume in these larger transactions some post account attrition. It's not -- I don't think it's going to be in the nature of the WageWorks thing, because in the WageWorks case, it was already like by the time they -- it was already two years after the transaction, right? Here, it's more of our conventional portfolio acquisition, which really minimizes that stuff. But just something to think about over the remainder of the year, particularly as we get into the December quarter as -- actually, the Jan 31 quarter. But look, I guess my short answer is the one item where the transaction really ended up doing better than we expected at last guide, really is the one I highlighted in the commentary, which is that we had assumed about 80% Enhanced Rates penetration. We got 85%. I mean, you can -- one can calculate the delta on that pretty readily.

That's helpful. And then just to double click into the attrition, your comment there. By my math, we had about 49,000 accounts or so that didn't transfer over. Is it fair to just assume that that will hit the attrition line in the first quarter? Or is there, within that bucket, some to come in the second quarter?

Yeah, a good call out there. Yeah, from when we originally announced, right, that we crossed the benefit year, right? So that BenefitWallet had some attrition before we acquired it. But yeah, we sort of assume...

There were also accounts like that -- yeah...

Yeah.

I think that's right. That were BenefitWallet accounts that came over, so they're in the number in the 400,000 that we closed, right, the bulk of those were -- well, more than 50% anyway, were actually cases where there was already a HealthEquity account on our side...

Yeah, for that member, yeah.

And so, we merged them. We don't charge in...

Yeah. So, it looks in our numbers like you might say, oh, like, the closed accounts are higher. Like, no, they're not actually closed accounts. We didn't net acquire the full amounts because they already existed on the platform. But we brought the assets in and just merged them into the existing HealthEquity account.

It's probably also a good place to mention one other thing here. You think I should -- you don't even know what it's going to be.

No.

I should probably. It's also in the quarter, we're getting ready for the next wave of the further platform, which is called [SAM] (ph). I don't know what SAM is. Maybe it's a Lord of the Rings thing, I don't know. But in any event, SAM is leaving us. And so, we're moving that business over in cooperation with our health plans. And so, we also did a little cleanup on that platform of accounts that for some of the same reason, in -- we are -- this doesn't make sense to bring over at this point. And so that elevated our churn a little actually a few more than [indiscernible], which made sense because there was more original accounts.

Yeah, around 70,000 further zero balance accounts we closed.

Outside of that, it was a normal quarter.

Got it. Thank you. Appreciate it.

Thanks, Jack.

You got more than you bargained for on that one.

The next question is from Constantine Davides with JMP. Please go ahead.

Hi, thanks. Good afternoon. Good start to the year in terms of new HSA accounts. And just wondering if you could expand on your comments around a couple of the more recent Blues partners and how they're contributing a bit more this year, just a little more color on that. And then I think you also referenced some small and midsize momentum in terms of new accounts. I'm just wondering if the pipeline composition is a little more skewed to that part of the market this year. Thanks.

Yeah. I'll hit the second part and then invite Steve to maybe just talk broadly about our strategy and our commitment to the Blues and what we've tried to do to make that commitment very clear and then its choice. But just on the pipeline question, while we don't -- other than in the test of the pandemic, we don't guide pipelines, and we don't tend to like to talk about pipelines other than in the very abstract. I think it's fair to say that, if you look at our pipeline now, for sales for the remainder of the year and you're both -- and you segment it, both SMB and enterprise are -- these are for new logos to be clear, are at or ahead of where we were a year ago. I think they're actually both slightly ahead of where we were a year ago. And that's -- so that's where we are in terms of the pipeline. Again, I'd stress that's new logos. And in any given year, new logos only make up, give or take, a quarter of new accounts, the rest come from growth in existing. But Steve, do you want to talk a little bit about our whole way we approach the Blues and how that's relevant here?

Absolutely. Thanks, Constantine. Yeah, so I mean, just in general, you can imagine these -- most of the Blues plans are non-profits. They're certainly large for-profit Blue plan. But a lot of these folks, they just -- they've always I think love the idea of being able to have a company like HealthEquity come in and bring this consumer platform that is what we would refer to as an integrated platform, meaning that when somebody decides to go down the road of either a higher deductible plan, let's say, just a qualified or anything that would allow for our CDB suite of products that it needs to be easy to use these, and so, integrated enrollment and then ultimately integrated claims and then integrated investments and just all of these different solutions we brought to market. And it needs to be seamless. And by doing that, it allows them to compete against some of the big national plans that historically have been able to invest more money in the solution. And so, you can imagine that in order to create not only the pipes and plug along together making this integrated experience, but then also to start training salespeople on why they can take this to market and really compete when it comes to going head to head with some of the more named carriers that are out there, it just takes a little time and it takes some trust. And one of the things that's happened historically is that when it was an unintegrated experience or unintegrated, it didn't work so well. So, sometimes those account managers were more inclined to say, you know what, I'll just let this thing kind of lie. And if somebody ends up with a HSA qualified plan and they go to their local bank or their local credit union or they ended up with one of our competitors, then it's kind of in their opinion, there was less noise. But what they've also found out is that in seeking to try maybe have a little less noise in the sales process, because they're not introducing an integrated partner like HealthEquity, it does put them in a strategic disadvantage. And so, that's what we spend our time on. We have people throughout the whole country working these Blues partnerships. And we've talked about our Blues map. I mean, it basically goes from the East Coast all the way across to the West Coast. We have great representation in the different sectors of the country, the Southeast, the Mid Atlantic in kind of the Sunbelt states, and the Northeast has always been a stronghold for us and we've even made great strides up in the Northwest. And so, it's just -- I mean, I wish I could say it was like some secret magic code we figured out, but it's not. It's going back to what we've been doing now for over 20 years at HealthEquity, which is providing what we believe is the best seamless integrated experience for people that are going into these types of arrangements and then having the best customer service 24/7, 365. And so, when -- and the nice thing is when we can actually go in and provide that to a Blues plan, in this case talking about Blues Network and their employees, we do it also for non-Blues plans, vertically integrated plans. When they actually start to say, boy, I experienced myself, then they're willing to go out and sell it to the clients. And so, I think that it did take a little while because of all we had going on with the WageWorks acquisition that -- we're coming up actually on our fifth year now. In another few months, Constantine, we will be five years into that and then further follow that. So, it has taken a little bit of time to dedicate resources to it, but we're getting more and more integrated in single platform with all of these plans every day. Jon, is there anything else you would add? I mean, I want to make sure I'm covering what you're...

No, I don't think I could have made that point better.

No, that's great color. Thanks for the perspective.

Thank you.

Thanks, Constantine.

And welcome also.

This concludes our question-and-answer session. I would like to turn the conference back over to Jon Kessler for any closing remarks.

Yeah, I -- there are a lot of people at HealthEquity, at our partners, at our clients that are working their butts off right now. And I mean, it's -- we're entering a time of year where there was a long -- there used to be a little bit of a lull this time of year. Those days are gone. It's super busy, and I think busy in a very productive way. And so, I'm very confident that our long-term shareholders and our long-term analysts and our long-term shareholders and analysts to-be appreciate that. But we also very much appreciate your support. It's been a few quarters since I've been able to genuinely say thank you and have the time for that in this call, but I'm glad I'm able to do it here. So, I guess that's a great way to close or at least it's my way to close.

Thank you, everyone.