Frode Jensen - Executive Vice President and General Counsel Jon Kessler - President and Chief Executive Officer Darcy Mott - Executive Vice President and Chief Financial Officer Matthew Sydney - Executive Vice President of Sales and Marketing Stephen Neeleman - Founder and Vice Chairman.

Peter Costa - Wells Fargo Securities, LLC Lisa Gill - JPMorgan Sandy Draper - SunTrust Robinson Humphrey Randy Reece - Avondale Partners LLC Steven Wardell - Leerink Partners Mark Marcon - Robert W. Baird & Company, Inc..

Good day and welcome to the HealthEquity’s Fourth Quarter and Full-Year 2016 Results Conference Call. Please note this event is being recorded. And I would now like to turn the call over to Frode Jensen, General Counsel. Please go ahead..

Thank you, Ann. Good afternoon and welcome. My name is Frode Jensen and I'm General Counsel of HealthEquity. Please be advised that today's discussion includes forward-looking statements including predictions, expectations, estimates and other information that might be considered forward-looking.

Throughout today's discussion, we will present some important factors relating to our business which could affect those forward-looking statements. Those forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements made today.

As a result, we caution you against placing undue reliance on these forward-looking statements.

We’d encourage you to review the risk factors detailed in our Annual Report on Form 10-K filed with the SEC on March 31, 2015 and any subsequent periodic or current reports for a discussion of these risk factors and other risks that may affect our future results or the market price of our stock.

Finally, we are not obligating ourselves to revise our results or publicly release any updates to these forward-looking statements in light of new information or future events. With that, I will turn the call over to Jon Kessler..

Thank you, Frode, and thanks everyone and welcome from wintry Salt Lake City. I’m joined today by Darcy Mott, our EVP and CFO; by Matt Sydney, our EVP for Sales and Marketing; and by Steve Neeleman, our Founder and Vice Chairman. Darcy, Matt and I will have some prepared remarks and then all four of us will be available to answer questions. Here we go.

HealthEquity delivered another strong year of results in the four key metrics that drive our business, which are revenue, adjusted EBITDA, HSA Members, and assets under management or AUM. For the fiscal year 2016, we recorded revenue of $126.8 million, an increase of 44% compared to fiscal 2015.

Adjusted EBITDA of $40.6 million which grew 61% compared to fiscal 2015 once again outpacing revenue growth. And as we announced in February, HSA membership reached $2.1 million, up 50% year-over-year and AUM reached $3.7 billion, up 56% year-over-year.

As we discussed with you on our call in early February, we had a phenomenal fourth quarter in terms of new accounts and AUM increases. Financial results were equally strong. Q4 revenue of $35.9 million and adjusted EBITDA of $8.9 million were up 44% and 61% respectively year-over-year despite record on boarding activity.

These results set us up for a strong fiscal 2017 which Darcy will talk about in a few minutes. Almost exactly two years ago today, Darcy, Steve and I began speaking to public investors about HealthEquity in advance of our IPO. We setback then that the HSA opportunity, the opportunity on which we uniquely focus as a business was in its early innings.

We said HealthEquity’s addressable market would grow in excess of 20% driven by the fact that HSA-style health plans and HSAs combined with support for consumers to spend and save wisely for healthcare to make a better system for all of us and it happened. According to Devenir, market-wide HSAs grew by more than 20% in each of the last two years.

We also said HealthEquity would outgrow the market through adding network partners, adding new accounts by penetrating existing network partners and growing AUM as existing accounts mature, all of those things also happened. The network partnered base grew from a 197 back then to 513 at the end of fiscal 2016.

Nearly all network partners saw increased penetration such that HSA Members overall grew from 970,000 at the end of fiscal 2014 to $2.14 million at the end of fiscal 2016. AUM grew even faster from $1.6 billion to $3.7 billion over the same period.

We said we would expand the market opportunity by participating in consolidation as banks exited the market and by growing our ecosystem.

And we completed two competitive acquisitions from financial institutions this year and we built an ecosystem that now boasts over 1,400 data connections, increasing the defensibility of HealthEquity’s competitive advantage. So put simply, we’ve tried to deliver on what we said would happen.

And finally, we said we would build on a platform that had already proven it scale and profitability and that too happened. HealthEquity added 330 basis points of adjusted EBITDA margin in fiscal 2015 and another 331 basis points that's one more basis point in fiscal 2016 finishing the year with an adjusted EBITDA margin of 32%.

The thing is two years later; we are still in the early innings of HealthEquity’s opportunity. And there is really no better evidence of this than the results our sales team and our network partners are putting up. To talk about that, here is our Executive Vice President, Matthew Sydney from an undisclosed remote location. Matt, go ahead..

Thank you, Jon and good afternoon everyone. As Jon mentioned, this is a great year for HealthEquity and I want to spend some time this afternoon discussing our strong organic growth throughout fiscal 2016 and the significant runway ahead of us.

First, our robust ecosystem proved a competitive differentiation and has helped to significantly expand our footprint of our network partners. As we announced in February, our number of network partners increased from 51% from 340 to 513 in fiscal 2016.

Our large employer network partners grew by a 163 or 60% and our health plan network partners grew from 70 to 80 health plans. These additions include partners from across a diverse set of industries and locations from one of the nation's premier retailer based in the middle of the country to a leading Wall Street firm.

From a modest-sized health plan in Texas to multiple Blue Cross and Blue Shield plans, all of these partners being very savvy and experienced buyers challenged our thinking. Having had accounts with prior custodians, they were all very aware of the basics of consumerism and were ready to take their programs to the next level.

In fact, most of our new network partners are not entirely new to HSAs. HealthEquity’s experience in delivering the highest level of customer service, our corporate stability and our industry-leading engagement strategies were all core to why these organizations are now partnered with HealthEquity.

This diversity has another important benefit to HealthEquity. Our concentration with anyone network partner remains very low. As of January 31, no network partner accounted for more than 7% of HealthEquity’s HSAs.

Contributing to this is the fact that many HSA members stay and grow their HSAs with HealthEquity even after their affiliation with the network partner ends. To expand the idea of our continued competitive advantage I want to provide some additional commentary on our HSA member and AUM growth.

As Jon noted, HealthEquity grew members, HSA members and AUM by 50% and 56% respectively during FY 2016. According to Devenir during the calendar 2015, our top four competitors grew HSAs by 24% and the top 20 custodians excluding HealthEquity grew HSAs by 26%.

Second, while we’re very pleased with our penetration of the market up to this point there is still a tremendous opportunity ahead of us. By our estimation roughly 72 million Americans under 65 receives health benefits from HealthEquity’s network partners.

Based on that estimate, we remain single-digit penetrated in our current network, nearly two-thirds of our network partners have been with us for less than two years. We see plenty of room to expand with them.

We found that given the stickiness of HSA members adoption almost always trends up over time as our relationship with network partners matures and HSA qualified health plans are made more attractive relative to the other plans in terms of premium, employer contribution to the HSA and other plan design factors.

And of course some large employers have gone to 100% HSA qualified plans where we refer to as full replace. In an effort to drive further penetration within our employer network partners in FY 2017, we recently added highly experienced and consultative account executives focused on this very issue.

These account executives build great relationships with our partners that allow them to better assess their readiness and also provide them with the necessary tools for successful expansion of HSAs.

Our highly experienced account executives leverage client specific, industry-specific and market best practice data to consult and help maximize our network partners programs.

We believe the combination of our customer engagement tools and the addition of these account executives will generate higher penetration levels within our network partners over time.

Ultimately, we’ve demonstrated strong organic growth over the last year and a notable increase in network partners positions us very well for continued growth going forward. I would now like to turn the call over to Darcy Mott, our Executive Vice President and CFO who will review the details of our fourth quarter results and guidance.

Darcy?.

Thanks Matt. Today, I will discuss our results on both a GAAP and a non-GAAP basis. Our non-GAAP operating metrics include adjusted EBITDA and non-GAAP earnings per diluted share.

We define adjusted EBITDA as adjusted earnings before interest, taxes, depreciation, and amortization, non-cash stock-based compensation expense and other certain non-operating items.

Non-GAAP earnings per diluted share is calculated by adding back to net income all stock-based compensation expense net of tax and then dividing the result by diluted weighted average shares outstanding. I'd like to use my time today to review our fiscal 2016 full-year and fourth quarter results and to discuss our initial fiscal 2017 guidance.

Let me start by saying that we closed the M&T Bank HSA portfolio acquisition during our fourth fiscal quarter. However, the custodial transfer was not completed until March 11, 2016. We paid approximately $6.2 million for this acquisition and added approximately 35,000 HSAs and approximately $63 million of AUM.

The acquired intangible assets will be amortized over 15 years. The M&T Bank HSA portfolio acquisition had no impact on our fourth quarter fiscal 2016 or full-year fiscal 2016 financial or operating results. It will be included for approximately half of our first quarter fiscal 2017 results.

As Jon mentioned revenue for fiscal year 2016 was $126.8 million, an increase of 44% compared to fiscal 2015. At HealthEquity, we report revenue in three categories; service revenue, custodial revenue, and interchange revenue. We have revised certain financial statement line items to more accurately describe our operations.

Amounts previously referred to as account fee revenue are now referred to as service revenue. Amounts previously referred to as custodial fee revenue are now referred to as custodial revenue. Amounts previously referred to as card fee revenue are now referred to as interchange revenue.

Amounts previously referred to as account costs are now referred to as service costs. Revenue grew substantially across all three categories during fiscal 2016. Service revenue was 49% of total revenue at $61.6 million representing an increase of 35% compared to fiscal 2015.

Custodial revenue represented 30% of total revenue at $37.8 million this represented an increase of 55% compared to last year and an average cash yield of 1.57% and interchange revenue represented 22% of total revenue at $27.4 million, an increase of 55% compared to last year.

As we announced in February, our investment AUM as a percentage of total AUM at the end of fiscal 2016 represented 11% of our total AUM, which was down from our 14% in third quarter of fiscal 2016, partially due to the inclusion of the Bancorp assets, which have a much lower investment rate.

We plan to target those accounts and assist account holders in transitioning to investment accounts where appropriate. Gross profit for the year of $72.6 million compared to $48 million last year, an increase of 51%. Gross margin for the year increased from 55% a year ago to 57% in fiscal 2016.

Income from operations of $26.1 million during the year increased 55% year-over-year and generated an operating margin of 21% compared to 19% in fiscal 2015. We generated net income of $16.6 million for fiscal 2016 compared to $10.2 million in fiscal 2015.

Our non-GAAP adjusted EBITDA for the year was $40.6 million compared to $25.2 million in fiscal 2015, an increase of 61%. Our GAAP diluted EPS for fiscal 2016 was $0.28 compared to $0.21 a year-ago. Non-GAAP diluted EPS was $0.34 for fiscal 2016 compared to $0.23 for the prior year. We were very pleased with our fourth quarter performance as well.

Revenue of $35.9 million in the quarter increased 44% compared to the fourth quarter of fiscal 2015. Adjusted EBITDA of $8.9 million in the quarter increased 61% year-over-year and GAAP EPS of $0.05 per diluted share compared to $0.02 in the prior year fourth quarter.

Non-GAAP diluted EPS was $0.07 per share compared to $0.04 per share in the prior year. Turning to the balance sheet. As of January 31, 2016 we had $124 million in cash, cash equivalents, and marketable securities and no debt. I want to touch on one last item before discussing our outlook for fiscal 2017.

Service revenue on a per HSA basis decreased by 8% in fiscal 2016 in line with our previous comments. We will trade lower service fees which are typically paid by employers for more HSAs with higher balances.

Service revenue also includes revenue from flexible spending and health reimbursement arrangements, what we call RAs, which are complementary to, but are not growing as rapidly as HSAs. Acquired HSA portfolios typically have lower service revenues per HSA and typically no RAs. Now turning to guidance.

In terms of our initial outlook for the full fiscal year 2017, we expect revenue between $170 million and $174 million, adjusted EBITDA between $56 million and $58 million, and non-GAAP diluted EPS between $0.45 and $0.47 per share.

Our non-GAAP diluted EPS estimate is based on an estimated weighted average share outstanding approximately 51 million shares and is calculated on and after adding back to net income all non-cash stock compensation expense net of tax. We expect total stock compensation net of tax for fiscal 2017 to be between $5 million and $6 million.

The business outlook for the year ended January 31, 2017 assumes a projected effective tax rate of approximately 37%. Now, I would like to turn the call back over to Jon for his closing remarks..

Thanks, Darcy. A few final comments. First, I'd like to invite our analysts, investors, and potential investors to HealthEquity's first-ever Investor Day, which will be held in New York City on June 21. For more information regarding the Investor Day, I’d encourage you to contact our Investor Relations team via our website.

Second, a special announcement. Our mission at HealthEquity is to get every American family in HSA, and also, the support to save and spend wisely and build health savings. We really believe that if this mission were achieved, it would help all of us pay less and get more from a healthcare system that is more responsive to consumers.

We get there, though, one step at a time. And we measure the steps by HealthEquity members, assets under management or AUM. That is to say, our member success at building health savings. In 2006, when HealthEquity became an HSA custodian, we had under $20 million in AUM. It took us seven years to get to $1 billion in 2013.

It took another two years to get to $2 billion in 2015..

And now let's open the call for questions..

Thank you very much. [Operator Instructions] We will take our first question from Peter Costa with Wells Fargo Securities..

Good evening. Congratulations on the quarter. Very nicely done. A couple questions for you. Let's start with where you left off, with the $4 billion in AUM. It looks to me like you got some big transfers in again. It's hard to tell exactly, with the acquisitions that you did, but it looks like there were some transfers in.

Can you talk about that, and then what that means for the Company?.

Sure. Pete and good to hear you.

Is it snowing in Boston like it is here?.

No, it's beautiful up here..

That’s good. We reported the $4 billion because that has been a significant target for the Company for the last couple of years for us to get to that and so when we crossed over the threshold; we thought it meaningful to announce it. We will announce the details of our first quarter AUM increases when we report on our first quarter.

However, we know that your expectation is correct that we did see some rollover activity in the first quarter of this year just like we saw last year, so we’ll report more on the details of that in our first quarter call, but you are correct..

Additionally, as we noted I think in the release and Darcy noted in his comments that the M&T transaction is now complete and we received obviously a nice boost from that..

All right. And so Matthew's comments regarding more full replacement business and going on and more of the members coming in having had HSA’s previously.

Are we – have we hit some kind of a threshold or inflection point at this point where things are going to move much faster going forward?.

Steve, do you want to comment on that one?.

Yes, Pete. As we looked at this closely in the market, I don't think we’ve hit a real inflection point.

I think we are seeing just the large employers that the ones we track the network partners just marching along year-after-year and I think as we look at the interest volume that have been with us for four or five years, they start to get up over 50% adoption if things are lined up with the plan, but its really a function of employers going to put the money into the [indiscernible] HSA both in deposits and premium savings.

Some employers don’t do that, but the ones that are being thoughtful and one that be able to do what’s right for their employees helps them grow their health savings and then also save some money on trend and these are fairly doing it. But I do not think and we continue to [indiscernible] atsome tipping point all of the sudden [indiscernible]..

Okay. In terms of going forward looking sort of the build-up of your revenue for fiscal 2017 in terms of the three line items. How much more pressure do you expect there to be in 2017 on account fees per account.

And it looks like you had a nice bounce back on the interchange fee this quarter relative to the third quarter? Can you talk about is that a steady trend or was there some kind of a movement of business from 3Q into 4Q?.

Yes, Pete, first on the service revenue as I stated in my prepared remarks, we had an 8% decrease if you calculate it on an average HSA basis, but as you know we try to point out there is three elements that really contribute to that, one is just the balance that we do when we go out and win new business and even with our existing partners who are getting increased penetration with more accounts where we believe that will get more custodial revenue in the future and so that has a little bit of a drag on at that service fee per custodial account calculation.

Also as I mentioned, the acquisitions that we did they had lower service revenues per custodial account and we do one because they don't have any RA and secondly because they just had lower account fees.

We saw a little bit of that impact in this year, but those accounts will be on with us for the full-year or next year and we don't have any anticipated price increases for them, we are trying to absorb them into our book has been HealthEquity members and provide the service that we believe we can offer to them.

So that kind of explains what is going on with the service revenue and then factoring in the fact that you know we make those decisions based on overall revenue per account.

With respect to the interchange, on our third quarter call we did mention that we had a little bit less spend than what we had expected and the spend levels came back to what levels that we had previously expected in the fourth quarter. So yes, we did see the revenue come back up in the interchange bucket..

Okay.

And then just the last question, have you had further inquiries from other banks since doing the M&T transaction, doing something similar with other banks?.

Yes, I would say well obviously generally we are not going to comment on M&A related activity. We don’t wait for inquiries.

This is something that we try to have an active dialogue about with competitors who are potential partners and I guess I would generally say that dialogue is as active as ever and hopefully we will have more to say on it as things progress..

Okay. Thank you and great quarter..

Thanks Pete..

We will go next to Lisa Gill with JPMorgan..

Thank you, good afternoon. Darcy, let me start with a question for you, if I look at the general and administrative costs again this quarter were down versus our expectation, down year-over-year. Can you give us an indication as to is that just levering some of that the cost basis so you don’t have as much that you need to spend going forward.

And how do we think about the expenses playing out as we go into the next fiscal year?.

Lisa, thank you.

Can you clarify – are you talking about the revenue or the cost component?.

No the cost component of it..

Okay..

So if I look at your G&A $3.5 million in the fourth quarter, again we are expecting north of $5 million.

I'm just curious is to how do we think about your cost structure as we move throughout the next fiscal year?.

Got it. So overall on OpEx, we expect there will be leverage over time. We’ve demonstrated in the past we’ve had some leverage in sales and marketing. There is a couple of things to go on. If you think that we had 44% increase in revenue and 61% growth in EBITDA, obviously we’re leveraging both in our gross profit margin and our operating margin.

There is a couple of things that go into that OpEx line that kind of takeaway from that. One is stock comp; stock comp is up higher as a percentage than what it has been in the past. And then amortization of capitalized development costs, we capitalize that and then we amortize it over three years.

So we've had a fairly intensive level of kind of increasing our CapEx spend in that regard. And so that’s hitting into that amortization or operating expense line. And then the third item that we’ve had has been just transitioning from a private company to a public company.

Last fiscal year, we had about half of the year and this year we’ve had a full-year of it, plus we’ve crossed over the barrier so we had to become Sox compliant as of January 31, 2016 which we done and so we’re moving in that area. And so that kind of accounts for the increases that you have seen in technology and development and into the G&A line.

But as we continue to grow, we think there is still some leverage opportunity there. It’s just been masked a little bit because of the nature of our increases that we've had in the last two years..

Okay, that’s helpful. And then secondly, I think Steve talked about $72 million members that have high deductible health plans, so you are single-digit penetrated.

Can you or Jon or Steve maybe talk about the progression of bringing those people into your HSA's over time? How do we think about that penetration rate and expanding that penetration rate over the next several years?.

Yes, Lisa, thank you, it’s a great question and it’s always good to hear your voice. I think the important point for everyone to keep in mind is that the rate.

First, the most important point to keep in mind is that I think our industry as a whole in it’s first five, six, seven, eight years of existence when it really was dominated by very conventional financial services firms, really underestimated the magnitude of this transition for real people.

And it sort of thought well, we went from defined benefit pensions to 401(k)s and that sort of seem to workout. So we can probably do this too. And perhaps what they forgot about is the immediacy of healthcare related decisions. And so to some extent that fact is what accounts for our growth.

That is to say that that both through service and through technology, what we try to do is as best we can is to address that fact for our members and for our partners. That having been said, the reason I start the answer that way, is to say that we don't view penetration or uptake as it were as fundamentally a matter of marketing.

So clearly that can help, education can help and support. Right, we view it as the best thing we can do and Matt referenced this in his comments is to take advantage of the leadership role we have in the business and spread best practices.

So given that that we are among the largest players in the business and certainly the largest focused player in the business, we feel like we have unique insight to give about what’s working – working in this case being defined as American families making this transition successfully.

And I think the more we do that, the more we can drive that uptake, but ultimately it's going to be a function of that advice and other factors translating into decisions that employers, health plans and ultimately individuals make about the underlying health plan itself.

And so when an employer decides that it’s comfortable with for example adjusting prices so that the HSA is no a more even playing field with other stuff a little more favorable playing field then you get more adoption.

And so that’s kind of the way we look at it and that’s – so we don’t look at it like well, if we had a partner five years, they should be at X. What we do however get a lot comfort from is the simple fact that we look at this partner by partner over 500 of them now and not without exception, but with rare exception.

They always move in the right direction and so year-after-year we see with given partner, we will see more uptake than we saw the year before. And so that's a good thing.

But it is a little hard to think through some dramatic measure that one could or should take or some dramatic environmental factor that’s going to move that activity beyond the measured pace that it should have measured in this case being roughly 20% market growth..

And Jon, I know I’ve asked this before, but just to that point that the potential push out of the Cadillac tax, is that changing the timeline of any of these discussions moving towards high deductible health plans?.

No, I think the way we have talked about this in the past and certainly this has born itself out as we begin a new sales cycle that is sort of funny.

Whenever we announce the last one, the new ones already well underway, and as we begin that new cycle what we’re seeing is the exact kind of conversations we would have expected based on the underlying economics of HSAs and HSA-style plans. They save people money.

They take the edge of the cost curve so you are not stealing from wages to pay benefits, and they get people engaged which can also have other benefits. And when done right and that’s what people are talking about and that’s kind of what we expected them to be talking about.

So we haven't seen any fundamental change in the volume of RFPs or anything along those lines..

Okay. Great. Thank you..

We will go next to Sandy Draper with SunTrust..

Thanks very much and congrats on the quarter.

I guess maybe first question for Jon and/or Steve, any noticeable change in terms of the competitive landscape in terms of not necessarily a specific competitor, but more or less from the banks, more or less from the HSA's inside of health plans, more or less from other independent HSA providers is there any broad thoughts on that would be great? Thanks..

Matt, would you like to comment on this..

Sure. Sandy thank you for the question. I think the best way to think about this is competition is going to continue to advance. They are going to do their views. They are going to upgrade their services and their products.

A lot these advances are in areas that HealthEquity has pioneered and really from our perspective and sort of although it’s rise with the tide and we are really validating our approach, as we continue to further our service and product announcements as well.

So this year we’ll continue to see obviously market consolidation, but from a dynamic standpoint, we’re going to continue to push and optimize our network partners every day we work on doing.

And so from a competitive standpoint, we see the competition stuff, but I wouldn’t say there is an incredible amount of change there, it’s just – the whole market is getting better and as we continue to do so as well..

Okay. All right. That’s helpful..

I think one thing you see Sandy too, and you see this in the – if you start to look at the data on where growth has been relative to the overall market and where people have underperformed or where they are just kind of rising with the tide.

It feels to us like and certainly this is our objective at some level there is a level of tables stakes that you need to have to play in the part of market we play. And I’d say five years ago that table stakes was 10 years ago was account administration. 10 years ago it was can I legally be a custodian.

Five years ago maybe it was can I effectively manage an account. Well, I think today is beyond that, people are looking for expertise in employee communication, they are looking for robust offerings on the investment side.

And of course from our perspective looking for you to really be able to integrate with the broader benefits offerings, and I think you can do whatever you want on the things that you can control.

But I think the reality is if you don’t have the capacity to offer those things either because you don't own or control your platform or you're not prepared to make the investments to make that happen or you haven’t made those investments and so you are behind the learning curve.

I do think it's tougher and maybe even tougher for people to recognize they’re in that position because a rising tide does list all those.

But I think that’s the underlying factor, is for us to be competitive over time, it’s really about we’ve defined and we will continue to redefine what table stakes mean in this business and I think it’s going to be hard for a lot of folks to keep up with that..

Great, that’s really helpful from both of you guys and that actually leads into my second question now, I’ll jump back in the queue.

I think two quarters ago when you guys mentioned the higher level of investments in the time you said you didn’t really want to go into anything specifically, are you willing to talk about the whether that the new technologies and new enhancements and new anything that you are specifically where that the product R&D money is going or is that still something you want to keep under wraps for competitive reasons? Thanks..

Yes, I appreciate you giving me that option. I noticed that we have some of our competitors on the call and I presume that’s because they have invested in the Company as part of a prudent retirement strategy, but I guess we don't generally have a lot of product discussions on these calls and I prefer not to.

Certainly something will go into at some depth when we have our Investor Day in June..

Okay. I can appreciate that. Thanks Jon and congrats again on the quarter..

Thank you..

We will go next to Steven Wardell with Leerink Partners..

Hey, thanks.

So my first question is what's the latest on what you're hearing from network partners, are they looking for changes in offerings, what are the trends you're seeing from them, do they see greater member engagement?.

Steve, you want to comment on this one?.

Sure, it’s a great question.

I think you nailed at least part of it - hit part of the nail on the head they do want some engagement, as you know Steve there has been a tremendous investment when what we would call the ecosystem of this consumerism and including things like telemedicine and transparency and wellness and second opinion and all this other stuff.

And the challenge is that I think a lot of the network partners and health plan network partners are wondering how they getting the ROI.

And so they are asking about engagement as we’ve pointed out previous discussion, we do have a pretty remarkable engagement level with depending on month between 20% and 30% of our members coming to the website and now we have a use of our mobile app and things like that.

And so we are starting to do some really nice campaigns where well direct people through engagement that come to our portal and to some of these other tools and we feel like our – are aligned because the people do a better job of investing in contributing and then ultimately spending their money their money, that benefits us and benefit the network partners and it absolutely benefits the member and the account holder and obviously benefit some of these other ecosystem partners.

So that’s something we have been quite a bit, pretty exciting stuff and that engagement is a big word and I know a little bit of a buzzword the fact is it comes down to giving people the right information at the right time they have to make better decision and so that’s something that is very important.

Great, thank you. And then building on the discussion around account fees I think there is some concern that some players in this market might be willing to be more competitive on their account fees, lower their account fees.

Are you seeing that in the market and how does that affect HealthEquity if that is happening going forward?.

Yes, so Steve, thank you for that question.

First of all it’s a great question and what would be really great is if our competitors put their fees or any information about their fees in SEC file documents like we do, but as I don't think that’s in the offing it is a little bit difficult to have a detailed discussion on where people are and their account fees I'm going to try anyway.

First of all as Darcy mentioned in his comments, it is worth noting that what we call service fees or one of three pieces of our revenue stream. And when we underwrite a case, we underwrite the whole case. And I think very frankly when our partners look to buy they look at the value of what they are buying.

And as I suggested a few minutes ago and as Steve talked about with the comments on engagement and certainly Matt talked about. We don't perceive today that we have the partners out there who are making decisions based on some difference in modest in service fees.

Of course employers have to care about work most of the once who pay them have to care about them and they should. And of course we have to deliver value, but this wave of price cutting that some people are talking about either we are not seeing it or its not being taken seriously enough for our partners to care about.

What they do care about as we’ve said before is our partners recognize that to the extent that they are able to deliver to us real volume in terms of accounts and assets and so forth, that we have the ability to underwrite that whole set of fees as well as the interchange and that allows us to gain share with our partners in one form or another and that’s a good thing.

But that’s kind of what we're seeing out there in the marketplace perhaps others have a different view about their ability to attract customers with price in the absence of other things they might have, but that’s kind of more or less how we see it.

Darcy, anything to expand on that?.

Yes I think we've historically said Steve that we have modeled this component of our revenue on a unit basis to decrease about 5% over time. Some years are maybe a little bit more than that, sometimes the years are maybe a little bit less than that.

Some of that is as a result also of as we’ve said before, our partners getting to a higher volume and they have a tiered pricing structure that results in a lower price to them. So when they reach that cliff and they go down to a lower price and that is reflected in our model.

But our guidance includes all that assumptions that we’ve made and I think it’s very consistent with what we’ve said in the past..

Great. Thank you..

We’ll go next to Randy Reece with Avondale Partners..

Good afternoon..

Hi, Randy..

If I look at the third and fourth quarter of this year compared with the same period of last year, custodial revenue was 30% to 31% of total revenue in the third and fourth quarter of this year, it was 28% to 27% in the last two quarters, a year-ago that’s a pretty big increase.

And I’m wondering in your guidance for revenue for 2017 do you expect that percentage of revenue coming from custodial revenue to continue to increase?.

Yes, so without getting into specific guidance on revenue line, you are exactly right that over time account fees – I'm getting is the new service revenue as a percentage of total revenue has been coming down and custodial revenue has been going up as interchange. And so we would expect that those trends will continue..

I would surprise that how good that custodial revenue was in the fourth quarter just in relation to the changes in AUM and the number of members.

Was there anything unusual that cause a sequential increase in custodial revenue this quarter other than those factors?.

Well, remember that the Bancorp transaction even though we closed it in October 23, we brought those custodial assets on to our platform in mid-December, but they yielded custodial revenue throughout the fourth quarter for us and so that would been without our installed base that was also a different factor that created that revenue.

I know that when we talked about the timing of Bancorp that we probably could done a better job of helping you guys understand exactly when that revenue would pop in. But that was the thing that happened in the fourth quarter that fueled that.

The other thing that happens with respect to custodial revenue particularly in the fourth quarter is that even though it's only a one-month effect, we had a tremendous increase in custodial cash from Q3 to Q4 notwithstanding the Bancorp transaction.

And that money comes in, generally employers like to get it deposited into their accounts and so we get a lot in the first few days of January, we get some more big increases in mid-month when payrolls hit and also at the end of the month.

So that – but that’s true every fourth quarter that we have that bump in custodial revenue in the fourth quarter due to that phenomenon..

I think this is also speaks to a little bit Randy the sturdiness of our depository relationships and always wanting to be thoughtful about this and never going to pat oneself or one’s team too much on the back.

The fourth quarter is part of the year where one thing that we do all the time really pays off for us and that’s really trying how strong visibility to what cash flows will be like, when they will show up, when they will not show up and so forth and that really takes the whole company because it requires all the way from timing of payroll contributions from given employers to the timing on boarding and so forth.

So it’s really an effort across the business.

And during this period where this is happening daily and the result of that is happier depository partners, because think of that relative to your basic large corporate depositor who just – this isn’t their job every day and they’re not going to provide that kind of visibility and we do and we’ve been doing it for a long, long time.

And so people have kind of grown to count on that and we need to some extent get rewarded for that. So I do think this speaks to the benefit of having a diversity of those relationships and really making at our business every day to connect what we see coming in as deposits to the potential use of those funds by our depository..

Very good. Thank you..

[Operator Instructions] We’ll go next to Mark Marcon with Robert W. Baird..

Good afternoon and congratulations on a great year.

I was wondering if you could talk a little bit more about some of the investments that you are making behind, more account managers that Matt was talking about earlier and what sort of impact you would expect that to have in terms of either more employer network partners or pace with regards to bringing on new accounts?.

Matt, do you want to speak to that?.

Sure. Mark, thank you for the question.

And so Mark to the heart of the answer I think its in our focus on the account executive function as I mentioned in my prepared notes was it's really for us to begin to help our network partners, the new ones and the obviously the ones that they ramp quite some time is really to bring best practice to the table to help them if their health plan network partner to win in the market and be more successful, or that employer partner to help them optimize their program really sort of putting them in a position by providing information and education to the employers themselves around what's working? What works for companies that are like theirs? What works for companies that might be in the same region to help them better plan for the future for both activities and changes, and we feel this is the best approach to do so..

Got it.

And how would you compare the pipeline that you are looking at this year relative to last year given the strong success that you are seeing and obviously the increased adoption I imagine its significantly larger?.

Darcy can you take that?.

Sure, Mark, our pipeline continues to grow. This is what these folks do all day, every day and obviously there are very good at it and they intend to continue to get better at it every day and that’s we work at. We don’t rest on our laurels.

There is certainly a lot of opportunity out in the marketplace and as I've mentioned in the prior response to a question, the competition continues to get better and we continue to get better.

And so putting our best foot forward on a daily basis is really critical to us and it’s taken that pipeline year-over-year continuing to grow it to ensure that we are successful..

One thing in that regard that really helps us out and that maybe doesn’t get terribly a lot of attention, but I think we may have mentioned this on our prior calls that – if you look across our organization, the area of the organization with the highest retention rate across the entire company is sales.

Our average retention rate within our sales organization is longer than the lifetime of some current public companies that will – it’s only five or six years, but it’s long. And look that’s not for lack of being prepared when there's non-performance to take action because we do. Matt certainly does.

But it mostly reflects the fact that people have done well and then they have taken lessons learned and then they do better and then they take those lessons and then they do better the next year.

And it’s an incredible luxury that we have that is that we’re dealing with the team and we just met with the sales team a week or two ago and we are dealing with the team that knows each other, that knows what we do.

And if you compare that to some of the other companies whether in the SaaS space or benefits type space or even some of the folks that have try to build up a sales force in this area within financial services, it takes some time to get to really know how to do this.

And so we view those as valuable assets and when they win, we win and vice versa and so that’s again just been a real luxury that we've all had that helps us improve every year..

Great. And two more questions if I may.

One would be expectations around the effective yield, and then secondly any commentary you can give with regards to client and account retention?.

Yes, on the yields, a year-ago our average yield was 152, this year it was 157, as Jon mentioned we placed nearly a $1 billion of cash AUM in our fourth quarter and we’ve said in the past that we would expect that those yields going forward to be consistent in that range for the last two years.

With respect to retention, the way that we look at retention is from year-to-year how many accounts that were opened last January are still open this January, and for the last three years that numbers been 97.4%, 98.3%, 97.7%. So we are right in that 97%, 98% range each year on retention..

Fantastic. Thank you. End of Q&A.

And with no further questions in the queue that does conclude today’s conference. We thank you for your participation..

Thanks everybody..

Thank you..

Thank you..