HQY - NASDAQ

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

Thank you, Gary. Appreciate it. Hello everyone. Welcome to HealthEquity's Second 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, one-year anniversary, James, Executive Vice President and CFO. Before I turn the call over to Jon, I have a couple of reminders. First, a press release announcing the financial results for our second quarter of fiscal 2025 was issued after the market closed this afternoon. These financial results include 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 a recording of this webcast. The website is ir.healthequity.com. Second, our comments and responses to your questions today reflect management's view as of today, September 3rd, 2024 and they will contain forward-looking statements, as defined by the SEC, including predictions, expectations, estimates, and other information that might be considered forward-looking. There are many important factors relating to our business which could affect the forward-looking statements made today. These forward-looking statements are subject to risks and uncertainties that may cause the actual results to differ materially from statements made here today. So we caution you against placing undue reliance on these forward-looking statements, and we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock, 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. Well done. Hello everybody. There -- today is the day after Labor Day and that's the unofficial start of fall, and for some that means leaves turning or the start of football season. For us on Team Purple, it also means open enrollment and busy season are right around the corner. And based on the numbers that we are reporting today, we are looking forward to a very busy and very productive busy season. I’ll discuss Q2's momentum and key metrics and progress towards our strategic goals, Jim will touch on Q2 financial results before detailing our raised guidance and a little bit about our share repurchase authorization, and Steve is here for Q&A on the state of market at mid-sales cycle and also on recent developments in our Nation's capital. Let's get to it. In Q2, the team again delivered double-digit year-over-year growth across most key metrics, including revenue plus 23% year-over-year, adjusted EBITDA plus 46%, and HSA assets plus 27%. HSA members grew 15% from strong HSA sales and closing the final tranche of BenefitWallet. Strong HSA growth drove total accounts up 9%. HealthEquity ended Q2 with over 16 million total accounts, including 9 million HSAs, holding $29 billion in HSA assets. HSA assets overall increased $2.2 billion in the quarter and of course, $6.3 billion year-over-year, and we grew the number of our HSA members that invest faster than accounts, in fact, by 24% year-over-year, helping to drive invested assets up 43% year-over-year to over $13 billion. Turning to sales. Team Purple added 187,000 new HSAs from sales in the quarter, 20% more than Q2 of last year, resulting in a record first-half for our sales and relationship management team. And we remain very positive about this year's selling season. Beyond the organic growth in HSAs, we reported in June that the team had transitioned the last of three tranches of BenefitWallet at the start of Q2, adding approximately 216,000 HSAs and $1.0 billion of HSA assets in the second quarter. The timely completion of transferring HSAs and assets for BenefitWallet for which I thank the team and our clients and our partners at BenefitWallet greatly has opened up opportunity for CDB cross-sales into FY’26 and locked-in strong custodial yields on these assets for years to come. That is good. Thank you. CDB account growth turned positive with 1% year-over-year growth in Q2, even though we haven't quite lapped the final runoff of the Extended Life national emergency accounts, which will occur later this year. CDB sales into the plan year beginning January 1 also look very robust. Results this quarter also represent a down payment on the multi-year 3Ds strategy, that's 3Ds we discussed at Investor Day. And each of the Ds represents kind of a transformation within the company. The first D, which is delivering remarkable experiences, is about the digital transformation of service delivery. In Q2, the team delivered flat year-over-year service expense on 9% total account growth. That's really good. A new mobile app launched, continuing our rollout of claims AI and last month, in August I can't believe that's last month. It seems like it was just two days ago. Our card processor migration wrapped up. Thank you, team for that which enables stack cards on major digital wallets and next year instant card issuance, which I'm really excited about. The second D, deepening partnerships is about the digital transformation of sales and our -- and the deepening of our partnerships around the health benefits ecosystem. In addition to record HSA openings and strong CDB results, the team continued work towards scaling partner facing APIs with a new third-party developer portal, it is coming -- it is coming a little later this year, maybe in the third-quarter, I think the third-quarter. The team just try and transcribe that. The team also expanded our stable of blue-chip Enhanced Rates partners speaking of partners to keep up with adoption of Enhanced Rates, especially by new HSA members. The third D, driving member outcomes is about extending HealthEquity's differentiation, as a utilization accelerator not only of health accounts and health savings, but of our partners' health benefits point solutions more broadly, something we've been doing for a long-time and we're now in a position to do even more of. One of those outcomes that doesn't get talked about enough actually though is dignity. And this morning, we announced the formal launch of HPAs, yeah, HPAs or HPAs. HPAs, spelled HPA [Apostrophes] (ph), a no interest and no-fee option for employees to pursue medical care with flexible payment terms. Your credit score should not influence your access to care. This is a way for employers to make that happen. A version of it already was put into law for Medicare Part-D recipients and the commercial market employers should have it and we are bringing it to them and we are really excited about as well. All this adds up to a quarter of investment and promise for the future within the envelope of robust growth in the present in terms of HealthEquity's top-line, its margins and its cash flow from operations, as Jim is about to detail. Jim?

Thank you, Jon. Hi, everyone. I will briefly highlight our fiscal second 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. 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 '24 and fiscal '25 for comparison. Second quarter revenue increased 23% year-over-year. Service revenue was $116.7 million, up 4% year-over-year, reflecting growth in total accounts, HSA investor accounts and invested assets and lower average unit service revenue due to mix shift toward HSAs. Custodial revenue grew 50% to $138.7 million in the second quarter. The annualized interest-rate yield on HSA cash was 3.1% for the quarter, as a result of the BenefitWallet placements and continued mix-shift to enhanced rates. Interchange revenue grew 14% to $44.5 million, notably faster than account growth as members drive more payment activity to card than from cash reimbursement. Gross profit as a percent of revenue was 68% in the second quarter this year, up from 62% in the second quarter last year. Net income for the second quarter was $35.8 million or $0.40 per share on a GAAP EPS basis. Our non-GAAP net income was $76.3 million or $0.86 per share versus $0.53 per share last year. Adjusted EBITDA for the quarter was $128.3 million, up 46% compared to Q2 last year and adjusted EBITDA as a percentage of revenue was 43%, a 650 basis point improvement over the same quarter last year. Turning to the balance sheet. As of quarter end, 31st, 2024, cash on-hand was $327 million as we generated $174 million of cash flow from operations in the first-half of fiscal year '25 and used $200 million of cash for the BenefitWallet acquisition. The company had $1.1 billion of debt outstanding net of issuance costs, including $225 million drawn on our line of credit in connection with the BenefitWallet acquisition. As was reported in an 8-K filing last month, post Q2, we refinanced and consolidated our credit facilities, retiring the Term Loan A and amending and extending the revolving credit facility. The new facility extends maturities to 2029 and provides additional flexibility in terms and conditions commensurate with the company's enhanced scale and credit quality. Today's fiscal 2025 guidance reflects the carryforward of our strong sales trajectory, operational efficiencies resulting from our technology investments and recent changes in interest rates markets. We expect revenue in a range between $1.165 billion and $1.185 billion. GAAP net income in a range of $94 million to $109 million or $1.05 to $1.22 per share. We expect non-GAAP net income to be between $265 million and $280 million or $2.98 and $3.14 per share-based upon an estimated 89 million shares outstanding for the year. Finally, we expect adjusted EBITDA to be between $458 million and $478 million. We expect the average yield on HSA cash will be approximately 3.05% for fiscal 2025. As a reminder, we base custodial yield assumptions embedded in guidance on projected HSA cash deployments and rollovers, the schedule of which is contained in today's release and an 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 impacts 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. Our guidance also includes the commencement of share repurchases as part of the $300 million repurchase authorization announced today. We expect both to return capital to shareholders and reduce revolver borrowings in the remaining two quarters of the fiscal year. With our new revolver and continuing strong cash flows, we will maintain ample capacity for portfolio acquisitions should they become available. 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 have 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 is from Anne Samuel with J.P. Morgan. Please go ahead.

Hi. Thanks for the question, and congrats on a great quarter. I was hoping you could provide a little bit more detail on the launch of your Health Payment Accounts and maybe how to think about how those might contribute to the P&L? And is that going to be part of your selling season this year?

So let me just start with the longer-term and work our way back to the short-term. You know what this product really does is, it is intended to assure that when people, particularly those who are in employer-based health plans, but the product also works for plan sponsored individual plans, if there's demand there. But when folks are going to pay their out-of-pocket expenses, their ability to get care at that point really shouldn't be limited by their credit limit or credit score. It is just not the right answer in our view. And the product gives employers and health plans a very cost-effective way to get to avoid that. And so my view is that this will have relatively broad applicability out there both to people who might be using HSAs or the other health accounts, but also to the broader population, including those that don't. And remember that even at market maturity, right, we don't expect that everyone is going to have an HSA or the like. And so we think that over time, this could be rather significant. And the goal -- the mid-term goal we've said kind of internally is -- and this is -- and in my view, part of sort of establishing this as part of benefits package that standard is we would like to see within the next three years, four years here, one of those in group coverage have access to that. That seems like a highly achievable goal. Now -- so -- that seems fine for the relatively near-term and then go from there. So it's establishing something new that in a way is back to the past. When folks had HMO plans with little choice and whatnot, they typically -- these costs were being covered in the same way. They were just in premiums. And so it is sort of in a way going back to that from a cash flow management perspective. The short-term, with regard to, obviously no impact in fiscal '25, we do anticipate a modest impact in fiscal '26 as observers of our release can see on this topic. There are clients of ours who have been testing out this product, including large ones and with, in my mind, really good response, both in terms of the quantity and also, I think more importantly, the quality of how it's being used. And so we do think there will be a modest impact in 2026, a more significant impact as the thing catches on in '27 and '28. So we'll certainly reflect that as we get to '26 guidance. But this is a good product. I mean we've been thinking about how to do this, Steve, how long does it go back that we've been mucking around with products to solve this problem. 10 years, maybe longer?

Yes, longer. I think 2008 is when we first started thinking about it. We had a large client that wanted them and then the world melted at the end of 2008. So it is been, Jon, I think, 16 years since we've been thinking about it. when I practiced it was heartbreaking to have patients come in and say they were delaying care because they couldn't afford their deductible. And we think the HSA is the best way to fund the deductible, but for people that are just getting started. These were great, too. So little bit of slow – [but are --] (ph).

Thanks for asking.

Perfect. Well, congrats on the lunch.

The next question is from Glen Santangelo with Jefferies. Please go ahead.

Hi, thanks for taking my question. Hey, Jon, I want to focus on the custodial rates a little bit. And as we look out to sort of next year, right, I think you have almost $1.8 billion that needs to be renegotiated at the end of the year which you are replacing 3.7% cash. And so not that I want to -- want you to talk about next year at all. But as I think about the yield curve, like investors are continuously concerned about the decline in rates. So it seems like where you sit right now that your yield on your custodian revenue shouldn't really move that much given that the five years at [364] (ph). And even with the benefit of enhanced rates, you'd obviously get another 75 basis points on top of that. Am I thinking about all that kind of correctly?

I think that I'll put on to Jim. The only part that you lost me a little bit on was the rate at which the rate that, that cash is currently earning that will reflect.

Yes, that's right. Yes. So well, this -- I think that was -- the remainder of this year, yes, you are right, Glenn. Yes. So mid- kind of mid-3s is going to reprice at mid-3s plus a spread. So there's some tailwind to that number heading into next year. But obviously, yes that is dwarfed by the potential tailwind over the next couple of years, about $6.5 billion over the next two fiscal years that's currently priced in the high 1s, right and that you can look at the forward curves as well as we can. If it's 3.5 plus that spread, that's still a great number when we are rolling off at 1.9%.

And Jim, did I miss the split on enhanced rates this quarter? Because I know that number has been climbing every quarter. And should we think about the volatility of rates having any greater or lesser effect based on the continued shift towards enhanced rates?

Yes. No. Yes. We've not provided a number other than we told you our goal is to get 30% at the end of last fiscal year, which we achieved and we guided to trying to get to 60% over our three-year double non-GAAP net income per share objective, and we are well on track there. Obviously, those are going to be a little lumpy. It is not going to be a straight line. It is going to move based on when cash is deployed, but we feel really, really good about that objective to getting to about 60% by the time of our objective and it should increase any extra volatility, right? Like the whole -- one of the benefits of moving to enhanced rates, it should reduce volatility over time.

Yeah, okay thanks very much.

Thank you.

The next question is from Sean Dodge with RBC Capital Markets. Please go ahead.

Yeah, thanks. Good afternoon. Maybe just on the guidance. If we look at [we all] (ph) did in a quarter revenue, EBITDA, EPS wise, all of those came in well ahead of consensus. But the magnitude of the adjustment in the guidance for the full year was less than this Q2 beat or upside that we saw. Are there some one-time items that we should be aware of in Q2 that won't necessarily flow into the back half of the year? Or is there something else that kind of explains this difference between the Q2 upside and the guidance adjustment?

Yes. Thanks for that question. Yes, look I think the first point is that I think the consensus is probably a little bit conservative on the Q2 side. So that sort of quarterly phasing of our prior guidance didn't quite align with our internal expectations. But if we think about it, about $10 million of upside for the year versus our expectations is kind of how we would think about it and then offset by about a $5 million movement in the other direction based on the downward shift in the forward rate curves for the back half of the year. And where does that $5 million come from? It is not really materially driven by the maturity schedule that we just talked -- we talked about on the prior question. It is really driven by the floating rate component of HSA cash, of which there's about $600 million at the end of the quarter, [$800-and-change-million] (ph) of client health funds. These are placed in short-term deposits. And then a little bit of the placement in the back half of the year, there is $2 billion to be placed, replaced in the second half of the year. Obviously, those will be replaced at slightly lower dollars than the 90-day go guide would have hinted. So we think of it sort of in that manner. We are achieving better than our expectations across the three revenue lines to the magnitude of about $10 million and then offset by the $5 million shift in rates.

Okay, very helpful. Thanks again.

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

Hi, thanks for taking my question. Jon, you called out flat services margins on 9% top-line growth within services. Can you just unpack for us the leverage mechanisms there? Is this just a function of automating chat communications? Any stats on progress on that you can give for us? That would be helpful. Thanks.

Yes. I mean, first, it's not flat margins, it's flat cost. Yes.

Yes. Correct.

I mean, I hesitate to say maybe let's not all get so used to. But -- and if you look at this thing called service gross margin, which isn't really a thing for us, but nonetheless, the Jim's giving is phones down. But that number has gone up quite a bit year-over-year. But in any event. So what caused that. The first answer to your question is yes. So broadly speaking, what we have tried to do is to be somewhat ahead of the curve on our investments in particularly digitization where generative AI ultimately plays a role. And as we've said in the past couple of quarters, it is kind of working. And you can see that in things like -- you -- just month-after-month, quarter after quarter, your -- with the people who do -- we don't like this term, but it is a term of our -- in the call in the world to talk about avoidance rates, that is a member whose needs are handled electronically. And look, we're -- we've still got investment to make that will make this better. It is nice to see, for example, they are competing different clouds out there or competing AI. There's Einstein from Salesforce, and there is -- and CCAI from Google, and they each have their place in all of this. But the second thing that, as I look forward Stan, another factor that's kind of also in the vein of digitization that's going to start helping us out as we go into the second half of the year, particularly and then into next year is -- and I mentioned this in my comments, is the fact that we've completed our processor transition, and we are going to have more digital issuance on the cards. Ultimately, we've talked about getting to an instant issuance as a default. The value of that is that it cuts off some of that hump at the end of the year of expense. We won't get there this year, and we never said we would. But at least we've got all the infrastructure in place. And so I think there's a long -- still a very long way to go here, but Again, if I -- the number that I kind of look at is that -- again, terrible term, but when you look at your avoidance rates, they keep going up. And then you look at the satisfaction members we are utilizing these services where we are deploying them. And we are not deploying them where they -- we don't think they'll be satisfactory at this point. And the CSAT and the like remain quite high. So I think this progress is particularly noteworthy in a quarter where we have plenty of stuff to deal with.

Thanks. And maybe just a quick one on the third-party developer platform. Any ideal kind of use cases we can expect emerge from that? Thank you.

Yes. I mean the easiest ones are -- I'll just say are things that we already support today, but just not in a scalable way, right? So balances and recent transactions and the like going out and some other stuff coming in, this is going to help us do that stuff. But I think the more interesting opportunities are over time and not so much over time. Some of them are here right now are, for example API-based enrollment is a really great example where it is -- again, that's why this is about broadening our sales reach is you've got partners where they want to do member enrollment and in some cases, even client enrollment on their side of the fence, and we can offer that as a service through an API debt portal, that is pretty good. So a lot of the things we are looking at here are really about again, the building of the sort of for [lack bedroom] (ph), continuing to build off of what's always been our differentiation, and that's been in partnerships, and the value we can bring to partners just as they bring value up. So those are the kinds of things, I think, that I find particularly near-term, exciting. And I would expect that within some amount of time measured in months rather than years that we'll see the first of those enrollment type API things come online.

Great. Thank you.

Thanks Stan.

The next question is from Allen Lutz with Bank of America.

Good afternoon, and thanks for taking the questions. I want to follow up on Stan's question around the service gross margin. all the commentary on the digitization is helpful here. And obviously, going back to the Investor Day, the commentary there. How should we think about the service gross margin over the course of the remainder of the year? And then I guess, a higher level question, how should we think about the incremental service cost now that you've started to put in these cost mitigation efforts on new members moving forward? Thanks.

I'll give a start. I would just say, there will still be the same seasonality that we always have. We have not gotten rid of that second half hump of expense, as I've said a number of times, really comes down to the fact that you are enrolling new people, but I think, in particular is around the delivery of cards and the like to those individuals. And so we didn't say we would get rid of that this year, and we won't. But -- and the proof of that is that we are starting our ramp up now for that in terms of hiring and the like. But over time, that can have a significant impact. And maybe beyond that, you can -- the question was really about the rest of this year, you can kind of speak to it.

Yes. No, I think that's right. It is going to be hard to keep costs flat in perpetuity, especially because we do absorb real costs, right? And Jon talked about what's the potential future value of digital issuance and instant issuance, right? The postal service in July increased cost by 7.5%, right? So every one of those card mailings now cost 7.5% more than it did last month, right? So it's a -- the potential future value of all these investments is that inflation avoidance, right? And the people in the service center call avoidance doesn't mean no service people. It actually means highly skilled service people handling the most complex calls, not handling the annoying, I lost -- I forgot my password, I lost my card, like all of that can be handled digitally. So I think I'm just going to reiterate what I've said over and over each quarter, our objective every quarter is to drive down the unit cost to serve an account. Now we are doing that at a product level. You guys can see that across the aggregate level, but both of those remain true. We are trying to drive down the cost to serve each account each year. and it is going to be many, many levers to pull to get there. But yes, I think this is a particularly strong quarter and a really, really strong first half, keeping costs as flat as we've done and the team has done an amazing job.

Great. Thanks Jim.

Thanks Allen.

The next question is from Scott Schoenhaus with KeyBanc. Please go ahead.

Hi, guys. Thanks for taking my question. Just curious what drove the investment growth this quarter. Was it from new accounts that you automatically were trying to push towards there? Just kind of want to talk about the dynamics on why you saw such strong investment account growth? And then I have a second question on kind of the job market and all the recent data, but that's my first question.

Sure. On the first question, I think certainly, the rolling over and transition of the benefit wallet accounts, the last tranche was helpful in that it gave us an opportunity to present a set of -- from our perspective, a set of investment options that weren't all available on the prior platform, and that was probably quite helpful. Generally, I think beyond that, as you well know, we -- while we don't give people capital A advice on the allocation as between investments and HSA cash, as we call it, we nonetheless want -- we're not shy about the fact that we think that investing is the right answer for long-term dollars. And so we continue to promote that and one way that we are kind of, for lack of a better-term, we are refining some of the digital outreach strategies that we've used at open enrollment to be used year-round. That's, I guess, why it's been called Engage360, that degrees or days. I'm not sure one or the other maybe [365] (ph).

We take 5 days off days.

But in all seriousness. And getting people at the right moment on this stuff is pretty valuable. So we -- as we've said many times, we think that the people who invest -- the investment is sort of additive to on the average to people's cash balances and their stickier customers, they hang around longer. They are -- and they're doing the right thing for themselves and for the broader mission of the organization. So I think that was helpful. I mean, obviously, there were market gains during the quarter, though less so on July 31 and today, maybe not to but for today. But -- so that played a role as well in terms of the growth there, but not to the number of accounts [indiscernible].

Yes. My follow-up, and that's really helpful, Jon. I appreciate it. My follow-up is what are you seeing right now in the market from the employer front from both HSAs and CDBs, given all the data that suggests we're in the early stage of a softening job market, does your guidance contemplate further softening of the labor market from an asset growth perspective in the back half? Just kind of want to get your thoughts here on all this data that we're getting.

Yes. I'll answer the last part of your question and then ask Steve to comment on real time what's going on in the marketplace. We generally try and take a -- in terms of constructing our guidance, take a kind of macro neutral view. The truth is it's unlikely that any view we would take is going to have much impact on our guide. So it's not that far to do. But that's kind of the way we approach it. I'll just say, generally, the view that we are hearing from clients in terms of their thinking about the macro is that one of the things you have is you have these extraordinarily low churn rates. And that's kind of impacting things in terms of the pace of new hiring and the like. But in any event, Steve, maybe you can talk about how -- what you see in the market this year.

Sure. Thanks, Scott. Not by design, but by having sense, we have our – had our weekly sales huddle this morning. So I got to listen in as I typically do. And I can tell you there's a lot of enthusiasm among our sales team. We had a nice quarter, and we're getting into the second half of the year, which is when we really get after it and they are getting after it, which is exciting. I think that one of the things we've seen, we've been through several cycles now with HealthEquity. I mean, even going back to the 2008 downturn and others. And we do -- we are protected a little bit because when the job market softens, we don't like it. But when it softens, we do have employers that say, look, we need to again kind of take a look at our costs, what's the best and most efficient way to have people get really good benefits by -- but it still save some money for them on their premiums. And also save some money for the employer in premiums and ultimately trend and it all comes back to these consumer-directed plans. CDBs with HSAs being kind of in the [pole] (ph) position. So look, there's a lot of enthusiasm. We continue to expand our distribution partner base. We're doing a really, really good job of integrating all of the new plans that we've been able to bring into the HealthEquity family through the acquisitions and things like that. So I would say, that if you were to ask HealthEquity sales or a team member on the sales team, they would say, look, I'm as excited now as ever have been despite some of the things that you are in redeveloped.

Thank you.

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

Hi. Congratulations on the great quarter. What are the total dollars invested in the enhanced rates product now? And I'm assuming that -- that's in the investment bucket, not the cash bucket, is that correct?

It is the other way around -- it's in the HSA cash bucket because it behaves like cash in the sense that it is a principal guarantee eat in this case by private insurer rather than buying the FDIC. And second, that you can swipe your card and go get, which you can't do with investments. So we have roughly -- if I have this right, a little under $16 billion in HSA cash, are over a little over $6 billion. That's been -- and our goal is to -- see, I was just adding 13% and 29%, that's all I can do. But our goal at the end of this year is to be at 40% of our total being HSA -- in Enhanced Rates.

Our goal is to be 60% by the end of [ 2027] (ph).

Is to be 60% within three years and -- or specifically in FY '27. And sorry my bad – and as Jim said in his commentary, you can kind of interpolate that. I would maybe just add the color that as Jim said in his commentary, since it's a little bit lumpy has, to some extent, as cash contracts expire. As you can see in our sheet there, that's a little forward loaded into fiscal '26. And so I think we'll get -- we'll make more progress in this year and next and the last sprint in '27. So I think we don't release a breakdown every quarter. But suffice it to say, we are very much on track to meet that goal. And maybe, Jim you can clean up I guess.

Yes. No, I think that's right, right? Obviously, we placed a good amount of Enhanced Rates with the BenefitWallet cash coming in. So we got a good head start on our progress towards that goal. Now there's not a whole lot of cash being placed at this part of the year. So the mix doesn't really move that much. And as Jon said, towards the end of the year, we have a bunch of cash being placed towards the end of next year. We'll have a bunch of cash being placed. So it will be quite lumpy, but we feel good about the trajectory to getting to that 60% goal.

Okay. So it would be 60% of the total, which is like $30 billion, so that would be around like...

Of the cash sorry, sorry, no, no. of the cash. HSA cash only is percentage Enhanced Rates, percentage basic rates. And the investments totally separate.

Yes. Okay. And then how much of that $16 billion is short term in nature?

Okay. Yes. So look at -- I encourage you to take a look in the Q, we have a breakdown of that $16.4 billion, I think, is what it is of how it reprice the remainder of this fiscal year as well as the next three fiscal years and then a big there after bucket, there is about $600 million of that cash that is in floating rate investments. So that will be pulled out of the chart. So I think you'll see $15.8 million is the total HSA cash with -- that's outlined in the maturity schedule with interest rates, average interest rates for each of the years. So we've got about $2 billion repricing in the remainder of this current fiscal year. $1.9 billion, I think it was.

Yes.

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

Hi guys. Congrats on the quarter. Thanks for taking my question. Can I be annoying and go back to that guidance question again?

You may. See if you get a better answer.

I was opening. Look, the implied second half margin implies a five-point step down from 2Q levels. And I get what you said, there's this $5 million delta on yield, but you raised your yield guidance. And when I look at that 5-point step down, it's a $30 million profit delta. Is that investments that are just of that scale that I didn't appreciate? Is there some conservatism baked into the numbers? What is getting the margin so much lower than the first half of the year?

Well, I'd say -- let me start with the one. We did not change our HSA yield guidance Right. So we just still --.

We took off the bottom end.

Yes, still 3.05%.

Versus 3% to 3.05%, which I contact –.

Definitely clearly planned this question.

No, look, I think there's a couple of parts. So Jon alluded to -- well, obviously, the yield we are going to take that little bit of downward step with the interest rate curve moving down. I think that's back-end weighted into the year. We talked about on the service side that, yes, this was a fantastic service cost performance quarter like as Jon alluded to, we can't count on that for every quarter into perpetuity. And I think we haven't talked a lot about the below gross profit costs as well. So I'll maybe pre-empt 1 of the questions coming is on the tech and dev spend, right? So that tech and dev spend as a percentage of revenue has come down pretty significantly. And more so than we would like it to be, right? So we have a little bit of timing of projects, okay, that we're pushing out to the back half of the year. But there's also quite some open positions in tech and dev world that we would like to fill, and we are planning to fill in the back half of the year. So we talked about kind of peaking out at 22-ish percent of revenue is where we hit tech and dev last year. We said that's likely to be the high watermark as a percentage of revenue. We're sort of is right now, and that's light, right? So we've got to get -- we're going to get that back to where we think it should be.

I was just going to go and harass more about the tech and dev spend.

That's what I was going to talk about.

Well, so you talked about there's a lot of open positions that you want to go install them. So when I think about the cadence of your second half margin because that's hiring, is that going to be a more stable straight line down? Or is there any big pockets to call out where you're trying to do it in a more rapid fashion, just given that the pretty big step still?

Yes. I'm not -- Stefan, I have to admit, I'm not -- the answer is, I'm not sure. I think that it's probably fair to say that it's -- the fourth quarter is going to see -- there's a little bit of ramp activity. Though look, what I would -- my last finance version of what Jim said is, there's -- we have projects. I mean, as you can tell from some of the other commentary, that are very high-return projects that we want to be moving faster than they're moving, and that's reflected in the fact that T&D spend is a little bit. For the first half is a little bit light, as Jim was saying, and we're going to fix that. It doesn't mean we're going to exactly like make it all up, right? But we're going to get back to where we need to be. And the reason to be there is because of the return on these stats. So whether it's in any event. So I think that's about -- I think that issue alone is about 1/3 of what you're talking about. The second issue, of course, is that above the gross margin line, we're going to have service expense in Q3 and Q4, like we all do right? And that's probably another 1/3 of that. And I'm going to say, then you just -- we took the $5 million that we took off is all drops to the bottom line. So probably that's close enough. She still doesn't believe it. She's like, I don't believe any--.

All right. Thank you guys. You can pay for the call back. [You can going to be call back] (ph).

And I don't know what you're talking about.

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

Well, that was a tough one to follow up on I did exactly -- I mean we've all done to the math.

Then you won’t [technical difficulty].

I mean there's one other possibility in terms of the guidance, which is just conservatism. One thing that I was wondering is you talked about some elements of the guidance going all the way out to fiscal '27 like the 60% on the enhanced yield just given some of the changes that we've seen with regards to yields, is there anything that you're seeing today? And obviously, things can always dramatically change. But anything that you're seeing today that would take you off of your expectation of doubling non-income -- non-GAAP net income by fiscal '27 relative to fiscal '24.

I think there are puts and takes. The short answer is no. That is to say that would remain our view. And what are the puts and takes? It's actually pretty simple. The pluses are the performance of the business. If you look at this quarter, there's -- as Jim likes to say, there's a lot of small green bars, and they obviously add up, right? But a lot of small green bars here, and that's the way you want it. I mean service performed well, interchange performed well. Custodial wasn't the dominant force for once, which is good, but performed just fine, enhanced rates is going fine. We had a few bumps. The team worked through those. So sales greater. So I think that's the good stuff. And then the pace at which we're like everyone else, the pace at which rates come down, will have an impact on the business in terms of -- for lack of a better term, the pace at which revenues go up and margins. So that's a happy problem to have. but it's one we think about. But I think if I look at it, by and large, we're without trying to reiterate multiyear guidance, there's nothing here that would -- I'm going to say everything here that makes us feel like this was a good commitment to make for the business. And by the way, I'll say the other thing not to be -- not to be missed in all of that is, we are doing all this within the envelope of making investments that will grow the business for years beyond that, whether that is something that kind of is very modelable like the transition to enhance rates right, which has a -- forget the short-term impact has a permanent impact to increasing the value of the business or something that's harder to model some of the new product stuff we talked about today, the efforts to grow that service revenue minus service cost thing, et cetera, et cetera, those are all things that are likely to help us well beyond the sort of horizon of that goal. So that's my slightly longer answer.

Great. And then I was just wondering, Steve -- can Steve comment a little bit in terms of what the [chatter] (ph) is on capital held just with regards to. There's various scenarios in terms of how the election could go. But let's take a -- if we have a blue sweep and how do you think that ends up impacting decision-making with regards to potentially switching over to HSAs are expanding high deductible health care accounts.

Sure, Mark. Good to hear your voice. I think we've always taken the approach that HSA should be more bipartisan than maybe people realize. I mean if you go way, way back, 20 years ago or more, 30 years ago, actually back when Jon was in D.C. long time ago. Sorry, Jon. Have to do it here. It was a bipartisan effort. I mean the whole concept of the medical care security account, as I think is what they call it came out of a bipartisan effort. This was back in [indiscernible] days. And fast forward 30 years, we actually have a really nice bipartisan effort that's come forward. And I don't know, if you saw it, Mark, but just during the August recess on the 23rd of August, while people are off playing around and wherever they were the Hamptons. There were fix congressmen bipartisan from all over the country, Pennsylvania, Utah, California, Nebraska that came together and they put together what's called the HOPE Act. You can look it up house bill 93, 94. It was led by Blake Borne here in Utah and then by Jimmy Panetta in California. And we think there is -- it's a great piece of legislation. And I think it kind of answers your question. Can Democrats and Republicans come together and work on legislation that can really help Americans. And so I think that bill is well positioned, whether it's all blue or all red or half blue and half red or however you think about it. Just a note on that, Bill, the way we do the math, there's about 100 million working Americans and about 1/3 of them have access to an HSA, but that means that there's about 2/3 don't. And there's 70 million American families roughly don't have access to health saving account right now. And there's another 70 million Americans that are in Medicare, and they don't have access to an HSA. But the HOPE Act would start to fill some of those gaps. And so keep your eye on that. I think it's one that could move, and we're going to be supportive as we can, but we think there's tremendous opportunity to continue to expand this concept of a personally owned portable investable account like an HSA and some of our other health care accounts. But now there's something out there that is a bipartisan effort.

Great to hear. Thank you so much.

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

Hi, good afternoon guys. Just two quick ones for me. I'll just ask for comments on. Number one is the launch of the share repo -- just does the start of the share repo at all change how you guys think about cap deployment? And does it say anything about the price that you guys are seeing for assets in the market? And then, Jon, maybe just an update on what I'll call like digital wallet, digital card and retail partnerships. And kind of the ability to more seamlessly integrate them into the platform for transactability. Thanks.

Yes, maybe I'll take the first one. Yes. So I would not read into any signal about pricing in the market. I think we are the logical buyer of HSA portfolios that come to market. I think what we've -- Jon and I have been pretty consistent about is we are not going to drive assets to market, right by bidding up the price, right? So I think we are very -- we have a disciplined approach to portfolio M&A as evidenced by the BenefitWallet transaction. I think that was quite accretive to the business, and we will continue to aggressively pursue similar opportunities. So it's not reflective of our lack of desire or pricing being out of whack, right? I think we'll continue to try to add accretive assets to the portfolio, and we have ample capability to do so. So I think of the share repurchases in addition to the strategy that we've been executing.

Yes. And on your first point on your second point, we're not I'll just say this, we're not really waiting for the digitization of the meeting for the virtualization of the plastic there. We've created a number of partnerships out there that basically are designed to just make it easier for people to do what they need to do, whether that's with firms that are in the space of helping providers collect member out-of-pocket that's owed or things like the folks who buy a lot of HSA or FSA eligible stuff at the end of December and the like. And want to do that easily online. And so we think there's a lot more to do there, but those have been helpful, and they either -- they both tend to reduce service cost and they also feed service revenue a little bit. So that's a good thing, and it's something that we'll continue.

Thanks George.

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

Thanks. This is Sid on for Greg. Curious on the -- yes, on the enhanced rate product, just thinking about getting to the 60% allocation or most of the assets moving into that product coming from new HSA assets? Or are you also seeing existing members reallocate assets into that product?

Yes. Great question there. So yes, this year primarily, it is new assets. So that's obviously the bulk of that being the BenefitWallet acquisition, a lion's share of that cash went into enhanced rates. It is new members new clients being added. But you are hitting on the pulse right that is the next phase in order to get to 60%, we will begin migrating members who are in maturing basic rate contracts. We will be presenting the enhanced rate option as the default, as bank contracts mature. So we are not breaking bank contracts to try and move that faster, we are going to operate on the maturity schedule. And that's why it will be -- it will be a little lumpy, but it's also why we're comfortable with the 60% target that we are on pace there.

Something that you said at the Investor Day that's always worth reminding people is that the biggest break on this thing is navigating the maturity of our basic rates agreements. We don't want to be in the position of even where it might be profitable to do so, of breaking these agreements, particularly at a time when bank deposits are thin. And so we just don't think that's a good look to our regulators or it would be partners in the future. So we've chosen to operate that way by and large. And that's – it is not the presentation or the uptake that's going to keep us from getting there. It is just managing that maturity and liquidity. And then I also wanted to say that I wanted to name one of my kids Sid, and my wife wouldn't let me do it, but I still think it's the coolest, it is a solid, it’s not working. So whatever you do with your like Sid, it's going to be solid.

All right. Thank you.

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

Yes. Well, I just wanted to take a second. We thought we might have a chance to do this in the Q&A to again, but to thank the team for something we haven't discussed, which is the response to the -- and I'd say here, both our team and our clients and partners for the response to the cyber incident that we disclosed during the quarter. We were -- I think I personally was truly humbled by the sort of very constructive nature in which folks really focus on supporting members who might need support. And I think this is how it should be done. So that's very much appreciated. And beyond that, go Dolphins. And sitting in Boston, so maybe that wasn't the best idea. But the Dolphins are the strongest September team there is. So it should be good. See you all in a few months. Thank you, everyone.

Thanks, Gary.