Richard Putnam - Investor Relations Jon Kessler - President and Chief Executive Officer Steve Neeleman - Vice Chairman and Founder Darcy Mott - Chief Financial Officer.

Peter Costa - Wells Fargo Securities Stephanie Davis - JPMorgan Greg Peters - Raymond James Sandy Draper - SunTrust Robinson Humphrey Mark Marcon - RW Baird Randy Reece - Avondale Partners.

Welcome to HealthEquity’s Third Quarter of Fiscal 2017 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Richard Putnam, Investor Relations. Go ahead, Mr. Putnam..

Thank you, Latif. Good afternoon and welcome to HealthEquity’s third quarter earnings conference call. My name is Richard Putnam, Investor Relations for HealthEquity. With me today, we have Jon Kessler, President and CEO; Dr.

Steve Neeleman, Vice Chairman and Founder of the company; and Darcy Mott, our Chief Financial Officer participating with us on the call today. Before I turn the call over to Jon, I would like to remind you of a couple of things.

First, a copy of today’s earnings release and accompanying financial information can be accessed on our Investor Relations website, ir.healthequity.com.

And secondly, we remind those listening to our call that today’s discussion will include forward-looking statements, including predictions, expectations, estimates or 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. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from statements made here today.

As a result, we caution you against placing undue reliance on these forward-looking statements and we encourage you to review the discussion of these factors and other risks that may affect our future results or market price of our stock that are detailed in our annual report on Form 10-K filed with the SEC on March 31, 2016, along with any subsequent periodic or current reports.

Finally, we are not obligating ourselves to revise or update these forward-looking statements in light of new information or future events. With those reminders out of the way, I will turn the call over to Mr. Jon Kessler..

Thanks, Richard. Thanks everyone for joining us. I have a few hopefully pithy remarks about our third quarter operating results and then we will turn the call over to Steve and Darcy. We will have a brief wrap up and then we will open the lines for questions.

So, turning to said pithy comments, HealthEquity continued to deliver strong results for the third quarter and year-to-date of fiscal ‘17, with substantial growth during the third quarter in the four key metrics of our business, which as I am sure everyone listening knows, our revenue, adjusted EBITDA, HSA membership and assets under management or AUM.

The pace of revenue growth remains strong, with revenues up 42% year-over-year in the third quarter to $43.4 million. Adjusted EBITDA outgrew revenue as margins widened, increasing 47% year-over-year to $14.5 million or 34% of revenue compared to 32% in the prior year’s third quarter.

And likewise, HSA Members grew 48% year-over-year to $2.4 million versus 45% year-over-year growth in the comparable period a year ago. And total AUM grew 59% year-over-year to $4.3 billion at the end of the quarter versus 47% year-over-year growth in the year ago period. Over the last 12 months, HealthEquity has grown AUM by $1.6 billion.

So, the top line continue to show significant growth on a much larger base and profitability accelerated as did HSA and AUM growth as the team continues to build the base of a strong profitable business for the long-term. Now, I would like to turn the call over to Steve to speak about our third quarter sales activities and industry trends.

I will address thoughts on the impacts to our business of the 2016 elections in my closing remarks. I give you, Dr. Steve Neeleman..

first, the percentage of employees that are now enrolled in HSA qualified plans has reached a new high of 19%, up from 14% just 2 years ago. Also, more firms are offering HSAs than ever before. The percentage of all firms offering HSA qualified plans rose to 24% this year.

HSA qualified coverage is also found to cost less and employees get the majority of these savings. The average cost for family coverage in an HSA qualified plan is now a whopping $2,757 per year less than a traditional PPO plan. This analysis represents the sum of premiums paid by employers and their employees.

59% of the savings goes to employees who pay $1,639 less per year in premiums for HSA qualified plans versus traditional PPO plans. Employer contributions to HSAs, on top of the premium savings, make HSA qualified plans an even better value for consumers.

The Kaiser study found that in 2016, employers who contribute to their employees’ HSAs will deposit an average of $1,617 during the year. That’s up $205 from last year. Kaiser found that even among those not yet adopting HSAs the trend is in our direction, as evidenced by higher deductibles in traditional plans.

84% of those members in traditional PPO plans now have general deductibles. That’s up from 69% 10 years ago. And among those with an aggregate family deductible, the average deductible is now $2,147, having more than doubled in 10 years. I will add that, that’s pretty close to the level that they would need to have in HSA.

On top of lower insurance premiums and higher employer contributions to their employees’ HSAs, the ability for employees to spend and save tax free from an HSA represents an even larger source of real long-term savings.

What I draw from our own experience in HealthEquity and from research such as that in the Kaiser survey, is that HSAs are becoming the new normal as employers and employees work to control healthcare costs.

While HSA plans do have higher deductibles and there is much work to be done to help consumers make smart healthcare spending and saving decisions, we have always maintained that HSAs are actually the antidote for rising healthcare costs. The data continues to bear this out.

For this reason, we remain committed to our mission to build health savings for all Americans. I will now turn the time over to Darcy to review our financial numbers for the quarter..

Thanks, Steve. I will discuss our results on both a GAAP and a non-GAAP basis. A reconciliation of non-GAAP results that we discuss here to their nearest GAAP measurement are provided in the press release that was published earlier today.

We will first review our third quarter and year-to-date financial results for fiscal 2017 and then I will update our guidance for the full fiscal year 2017. We had another strong quarter adding to our first half. Overall, our revenue for the third quarter grew 42% to year-over-year to $43.4 million.

Breaking down the revenue into our three components, we continue to see growth in each of service, custodial and the interchange revenue during the quarter and the first 9 months of the year. Service revenue grew 24% year-over-year to $18.8 million in the third quarter.

Service revenue as a percentage of total revenue declined to 43% in the quarter, down from 50% of total revenue that it represented in the third quarter of last year as custodial and interchange revenue streams became more predominant.

Service revenue growth was attributable to a 49% year-over-year increase in average HSAs during the quarter partially offset by a 17% decrease in service revenue per average HSA. We continued to expect the year-over-year decrease for the full year FY ‘17 to be around 15% level as previously guided.

We also expect that future service revenue per HSA decreases will return to a more historical annual levels in the 5% to 10% range as the factors that impacted this year play themselves out. Custodial revenue was $15 million in the third quarter, representing an increase of 64% year-over-year.

The driving factor for this growth was a 59% growth in total AUM. The $600 million of growth in total AUM during the first nine months of FY ‘17 was fueled by acquisitions, HSA rollovers and AUM transfers in addition to our strong organic growth.

Our annualized interest yield on cash AUM was 1.57% in the third quarter of fiscal 2017 compared to 1.55% in the prior year. Interchange revenue for the third quarter was $9.6 million, representing an increase of 55% year-over-year.

Interchange revenue benefited from the 49% year-over-year growth in average HSAs in the quarter compared to the third quarter last year. Interchange is our most seasonal revenue line.

Interchange revenue typically flatten or declined sequentially from the first quarter to the third quarter as an increasing number of HSA members meet their deductibles for the year and therefore defer spending out of their HSA for medical expenses.

The benefit of the deferred spending means more AUM remains in the account, which helps to drive up custodial revenue. Gross profit for the third quarter was $25.9 million compared to $17.7 million in the prior year, for a gross margin level of 60% in the quarter versus 58% in the prior year.

Gross margin growth is directly attributable to two factors. First, as we have discussed before, rising gross margins are the result of increasing mix from custodial and interchange revenue. The mix shift will continue to drive gross margin expansion as accounts mature and their balances grow.

Second, our service delivery organization continues to find ways to scale our operation while continuing to deliver the high quality purple service for which HealthEquity is known. Operating expenses were $16.8 million or 39% of revenue compared to $11.4 million or 37% of revenue in the third quarter last year.

Increases, as a percentage of revenue incurred – occurred in the amortization of acquired intangible assets due to the Bancorp and M&T Bank portfolio acquisitions and in general and administrative expenses as we prepare to comply with the DOL rule changes by April 1, 2017.

Income from operations was $9 million in the third quarter, an increase of 43% year-over-year and generated an operating margin of 21%. We generated net income of $6 million for the third quarter compared to $4.1 million in the prior year.

Our GAAP diluted EPS for the third quarter of fiscal 2017 was $0.10 per share compared to $0.07 per share for the prior year. Our non-GAAP adjusted EBITDA for third quarter increased 47% to $14.5 million compared to $9.9 million in the prior year. Adjusted EBITDA margin in the quarter was 34% compared to 32% last year.

Year-to-date results for the first nine months include; revenue growth of 45% compared to last year, gross profit was up 52% as the revenue mix continues to increase in favor of custodial and interchange revenue streams, income from operations grew by 61% as we continue to scale our business model, operating margins were 27% compared to 24% last year.

Turning to the balance sheet, as of October 31, 2016, we had $166 million of cash, cash equivalents and marketable securities with no outstanding debt. We generated $31 million of cash flow from operations during the first nine months of FY ‘17 compared to $19 million in the first nine months of FY ‘16, a 65% year-over-year increase.

Turning to our outlook for the full fiscal year 2017, we are reiterating our guidance that we provided at the end of the second quarter. We are just finishing up open enrollment and employer level implementation around the country and are now starting to open the bulk of our HSAs for the year.

This activity will culminate in January, our busiest operating month of the year.

Based on our very early indicators and our year-to-date results that we have reported today, we are reaffirming guidance that we provided in the second quarter and expect full year revenue between $174 million and $178 million, net income between $23 million and $25 million, GAAP diluted EPS between $0.38 and $0.42 per share, resulting in adjusted EBITDA between $59 million and $62 million.

Our GAAP diluted EPS estimate is based on the estimated diluted weighted average shares outstanding of approximately 60 million shares for the year. The outlook for the full fiscal year presumes a projected effective income tax rate of approximately 36%.

Before turning the call back to Jon, let me set expectations for the timing of announcements of results and future guidance over the next several months. In January, we will provide preliminary information on FY ‘17 network partner growth in conjunction with JPMorgan’s Healthcare Conference.

In the first few weeks of February, after the fiscal year is over, we will provide final FY ‘17 HSA member and AUM totals. In March, we expect to provide initial FY ‘18 guidance alongside with the announcement of our fourth quarter and full fiscal 2017 operating results. With that, I will turn the call back over to Jon for some closing remarks..

Thank you, Darcy and thank you, Steve. Before opening up the call, let me try to address the question most frequently asked of us since the November 8 elections, which is what might the changes in Washington mean to HSAs and for HealthEquity and its investors. And I’ll address it as follows.

If the Clinton healthcare agenda would have been about showing up what hasn’t performed to expectations in Obama Care, the Trump and Republican Congress’ agenda is about encouraging what is working in workplace health benefits and in the States. And as is clear from the research Steve described, HSAs are working.

So we expect to see HSAs promoted in the executive branch and/or through legislation throughout the Trump administration. Plausible areas for action include the following. First, making more insurance plans HSA eligible so that more Americans can open HSAs.

For example, according to the Kaiser survey Steve discussed, 9% of working Americans and their families or roughly 14 million people are in Health Reimbursement Arrangements or HRA plans that are similar to, but research shows less effective than HSAs.

This was because they aren’t portable, they aren’t investable and they aren’t truly owned by consumers. Millions more, in fact over 70% of those with private coverage are in higher deductible PPO or HMO plans as Steve noted, that don’t today, meet the definition of HSA qualified.

Deductibles and other consumer out of pocket costs in these plans have all increased dramatically in recent years. So enabling more consumers to open HSA would both provide immediate relief to higher costs and align incentives among consumers and the broader healthcare system to fight higher costs longer-term.

Second, increasing the amount can be – that can be constructed annually to an HSA, as speaker Ryan has proposed, would allow HSAs to function more effectively as long-term self funding for healthcare. Consumers could contribute more in years with lower health spend and enough every year to build up funds for retirement healthcare.

Third, enabling consumers to spend HSA dollars on items such as dependent care or individual insurance premiums between jobs. HSA dollars can already be used for COBRA premiums, but COBRA is often far more expensive than individual insurance plans, as many of us know.

Fourth, enabling HSA plans as an option under traditional medical care and/or Medicare Advantage, something which we believe, as we have discussed on these calls in the past, holds great promise to reduce entitlement costs while expanding choice for the millions of Americans on Medicare and the roughly 10,000 baby boomers who join Medicare everyday.

And fifth, removing dodges [ph] that prevent consumers from opening or using HSAs as intended or make the transition to HSAs more challenging.

For example, many Americans over 65 now remain in the workforce, yet those with HSA qualified insurance at work are unwittingly denied the same employer HSA dollars their younger coworkers get and cannot contribute to HSAs themselves, because they are also automatically enrolled in Medicare Part A.

As another example, workers transitioning to HSA plans cannot receive employer dollars or make HSA contributions themselves during FSA or HRA rollover periods. Beyond these five points, broader healthcare policy changes, as passed by the President-elect and Republican majority in Congress could also grow the HSA market.

For example, ACA mandates on what insurance plans can be sold to small groups and in the individual marketplace and the workings of premium subsidies have contributed to rising premiums and led some to buy a level insurance they didn’t want.

Republican proposals would roll back federal mandates returning to the states the power to define what is or is not acceptable minimum coverage and repurpose insurance subsidies tied to federal mandates as consumer tax credits in some proposals, specific to opening HSAs.

As we have long said, when consumers have more choice, they tend to choose HSA qualified plans. As another example, Republican governors have experimented with HSA style approaches within Medicaid, including in Indiana, the home state of Vice President-elect, Mike Pence.

While we have not decided what, if any will HealthEquity might play in these type programs, removing barriers to them in Washington could further promote the HSA concept. We believe that these changes would accelerate HSA market growth potentially quite significantly in the medium-term. In the short-term, I would offer the following comments.

The remainder of our fiscal 2016, as you can tell by the reaffirmed guidance that Darcy gave, will not, we believe, have any material impact from the election, either to our fourth quarter or to full 2017 fiscal year results. Our selling season was over prior to the election.

Employers, plan providers and consumers have largely made decisions about their health plan benefits for this open enrollment season and so forth. As you know, the results of the open enrollment process this year will largely dictate our fiscal 2018 revenue performance.

The transparency of our business and the simplicity of our business model provides good visibility outside of M&A activity. We will have a very good idea in March when we report our year end results what revenue to expect for fiscal 2018.

We expect that any changes to rules and laws that govern healthcare plans and the HSA business will take some time to develop and implement and we don’t expect that Washington has suddenly learned how to work together very quickly or overnight. And of course, firms and consumers may take time to digest any changes.

As we get a better feel for how fast and what direction changes will be made to the rules and regulations, of course, we expect to have ample time to forecast them into our models and to update the guidance we provide to reflect their benefits to our business.

Finally, I would like to say this, something I would have said irrespective of the outcome of the election.

The ubiquitous vision that we have described many times of every American family having an HSA and the support to save and spend wisely, may have become a little clearer to the marketplace and investors in the HSA industry over the last few weeks, but it has not fundamentally changed for us.

We believe today and have believed for a long, long time that every American family should and ultimately, will have an HSA alongside affordable health coverage and that like 401(k)s, IRAs and other retirement plans, HSAs will become a key part of overall financial planning for consumers.

As Steve noted, this trend is driven by economics by what’s working and the politics are just adapting to that, something which is certainly a positive for us, but not the other way around. The overall vision, where we believe this industry will go, is likely to remain intact whatever the results of any particular election cycle.

We continue to be very optimistic about our position in this industry and our ability to outpace its aggressive growth. So, there is certainly a lot to accomplish over the final weeks of the fiscal year.

We are very thankful for the dedication of the now more than 800 HealthEquity team members as well as hardworking professionals from HealthEquity’s clients, network and ecosystem partners and our support providers across the country. Thank you everyone for your hard work as we prepare for our most successful open enrollment season ever.

With that, operator, let’s take some questions..

Thank you, sir. [Operator Instructions] Our first question comes from the line of Peter Costa of Wells Fargo Securities. Your line is open..

Thank you, guys and good quarter. And Jon thanks for the rundown of your views on the election and how it impacts you in the future and then realistically in the near term.

Can you go through a couple other thoughts for me in terms of the election? What have you seen in terms of changes, in terms of your phone ringing from – has there been more accounts asking you recently about HSAs? Has there been more members calling in to talk about HSAs? What are you seeing in terms of the changes since the election as being the most relevant? And then can you tell me, how many accounts do you have or HSA accounts do you have with exchange plans today? There is some risk there and I am kind of curious if there are any HSA exchange plans that you have and how many they would be?.

Sure. I will try and answer the first part and then I will give you a general sense of the second and if need be, we can certainly follow-up. On the first point, let me address it at a couple of levels. At the consumer level, it’s absolutely true that in the aftermath of the election, we did see some noticeable call volume.

In many cases, from individuals who had HSAs and thought that there had – there would have already been changes in laws that would allow them to either contribute more or other favorable things and so we are kind of asking questions. So, we did see that.

It wasn’t extraordinary, but it’s clear that the consumer reaction, among our membership, has been – this is likely to – whatever their broader reaction of the election has been, this is likely to make this account that they have with us more valuable.

I think if you kind of go upstream to the employers’ health plans and then I will talk a little bit about the enterprise employers, I think when we say broadly, I think without wanting to speak for the entire health plan community, certainly the discussions that we have had since the election have, in a way, been reminiscent of the conversations that we had in the early years of HSAs, where people were really convinced that at that time that this was going to be a very rapid trend and we try to do what we always do, which is say look these things take time, but I think people are sort of now, as a result of the election, are circling right back to those same thoughts and perhaps, instead of spending all their time on the intricacies of value-based payment or whatever it might have been are thinking of once again how do we sort of the consumer I had a conversation this morning with a leader from a multi-state plan that is a partner of ours about exactly this topic and she had been assigned specifically by the CEO of that entity to kind of work through this and really dust off some of their thinking about really how do we help consumers manage this transition, which is likely to accelerate post-election and was pleased that she was turning to us for advice on that and that will be part of that process.

So I think that’s, that.

And then lastly, I would say with regards to the enterprise employers, generally, I would say, in particular for those that are already planning for the 1/1/18 cycle, that is the one that’s now 13 months away, we did see – we have seen over the last month that there is sort of a little bit of a kick in the pants to get decisions made yet – kind of yes, we are doing this, this is happening and let’s go.

Now, I don’t want to overstate all of that, but certainly, the discussions have all been in the direction of, oh, this isn’t entirely what we expected election wise, but one of the results is that – is confirmatory with regard to the trend towards HSAs.

And then with regard to your second question, broadly, which was about exchange, we have both employers who are part of exchanges and access in their members’ accesses through the exchange as well as employers who carve us out of their exchange and then we, of course, have circumstances where there is an exchange that we work directly with.

And I think mirroring broader trends those still make up a relatively modest share of our total employer base, certainly I would guess less than 5%. If and when the private exchange concept takes off, something that hasn’t really happened yet, then I expect that percentage will grow.

So look, I think what’s basically happened there in our view is that and as the general rule, the exchanges the private exchange concept has sort of evolved into a broader enrollment and eligibility platform, where consumers do have choice in health plans. Sometimes, it’s simply choice in health plan design.

Sometimes, it’s same design, multiple plans and more tools to navigate that along with various ancillary benefits and the like. But I don’t see it being a fundamental change from where we were a year ago in that concept..

And I just wanted to follow-up, as you pointed out, some of the old climate [ph] around HSA has come back, but then also some of the negative thoughts have come out in terms of HSAs being something for the wealthy people.

We have seen some – a few articles like that recently being brought back up again, is there anything you are doing with the industry to try to fight that back or in Washington to make sure people understand how HSAs are truly used today and can be used by everybody today?.

There are certainly a lot of activities that as an industry, we try to do to put facts forward about how HSAs were used. And I think one of the most astonishing and simple facts is that it turns out and this will surprise no one that health expense is not terribly well correlated with wealth.

That is to say that whether you are a family of five, earning $60,000 a year or a family of two earning $300,000 a year, you will tend to have these expenses and they will be of a similar level, all sort of in the grand scheme of things.

And what an HSA really does is, it reduces the fixed cost and then on the premium side and then of course gives you a tool to really reduce the marginal costs.

And I think in particular, something people don’t realize is that our highest marginal tax rates, if you sort of add everything in are actually on people in the middle income because they pay not only income tax at the federal and state level, but also social security Medicare on the last dollar of their income.

So our highest marginal tax rates are on these individuals and therefore, they get a lot of the highest savings from HSA. So we feel like the facts are there and we can’t prevent people from making whatever political points they want to make, positive or negative. But our focus is on the facts.

And yes, I mean absolutely we are active as our others in Washington and around the country trying to articulate the benefits that we see with our members everyday..

I will stop there. Thank you very much..

Thanks Peter..

Thank you. Our next question comes from Stephanie Davis of JPMorgan. Your line is open..

Hey guys. Thanks for taking my question..

Thanks Stephanie..

I have also got a – I have got one follow-up to your election impact summary, so given you talked about the need for greater consumer awareness at your recent Investor Day, is it possible to identify or kind of quantify any impact you would get from greater consumer awareness with the new administration and talk about HSA so much?.

Yes. I think we will have a little better sense of that as the time goes on. One of our areas of – and you can probably tell by our remarks here, we are what, 3.5 weeks, 4 weeks out from the election and there are lots of other things people are digesting as you well know.

But I think as we get a little farther on, we will see what that impact is beginning with, I think the enrollment data that we are starting to see roll in and that will be reflected in our Q4 results.

I think that will be useful and informative as to whether the sort of greater use of the term and greater awareness has led more individuals to sign up. And I don’t really want to comment about that at this point because the sample is relatively small and we will have a lot more data over the next few weeks.

But I think that will be a very – that would be the first real relevant indicator from our perspective as to how to quantify this and express it in terms of the actual growth we see versus the expectations that either you had or that we have..

Understandable.

And one follow-up to that, beyond the greater volume of inbound calls, do you seen any big shifts in the nature of customer questions versus the prior year until recent inbound calls?.

I think, what is – I will say is that people are at the consumer level are really becoming more focused on the ways that they can use these accounts to financial benefit. And I suspect that’s just a bit of a repetition of the message of the HSAs and taxes and so forth versus my employer gave me some money, let’s spend it.

So I do think, like any aspect of ongoing education, there are teachable moments out there.

And I suppose the renewed focus on this area, that’s come in the wake of the election, again I would be cautious to say a lot of people, folks and a lot of things and the elections you know, but it is a little bit of a teachable moment and I suspect it has a certainly the evidence from what we see in the field has kind of pushed the dialogue forward a little bit in terms of people’s understanding of how to benefit from these accounts, which in turn, I think not only affects enrollment from our perspective, but also affects our other two revenue streams that now make up majority of our revenue.

People who understand how to benefit from these will use the accounts more transactionally and will also in the end, save more in the accounts. So that’s where the real excitement is from my perspective..

Thank you for taking my questions..

Thank you..

Thank you. Our next question comes from the line of Greg Peters of Raymond James. Your line is open..

Good afternoon team. Congratulations on the quarter..

Thank you, Greg..

Just I have a number of questions I will limit it to just a couple..

Are you going to decide halfway in how many or how does that….

Well, it depends I guess it will depend on your answers, right. So it’s sort of a debate type of answer.

Let’s – trying to gauge like the performance of your M&A from earlier this year, I think in the second quarter you said M&T and Bancorp added about 195,000 accounts through the second quarter results and should we be asking you if that number has grown from the second quarter or should we be asking you how that number has changed to the third quarter to get a sense of performance or is that to shorter period of time?.

I am going to say you just did. And rather than giving you yes or no is whether you should ask..

Yes..

Here is what we think about it and then Darcy, please feel free to elaborate. We – while we track each of these portfolios at kind of a micro level, as they age, so we can look at the performance of a portfolio we acquired 7 years or 8 years ago.

What becomes somewhat challenging very quickly is you sort of start to get in the game of, did a new employer joined because of this acquisition or because of sales. And we don’t, at a sales level, want to draw those distinctions.

So what you shouldn’t expect from us is that we are going to on an ongoing basis say, well now M&T is up to this number of accounts or what have you. It just starts to put too much kind of pressure on that piece and I just don’t think it’s that productive for the business.

That having been said, I will make the following general comments on performance. And no, I don’t think it’s too early. First of all, in both cases what we have seen is that the presence of the company in some new geographies and with some new partners has had an immediate and I think positive impact in terms of new accounts and so forth.

So I think about even something as basic as looking at some territories, I think about the South Central U.S.

where we didn’t have a strong footprint and Bancorp did, as an example and where we have a new health plan down there this year that’s going gangbusters, that’s not one we acquired, the relationship in the [indiscernible] acquisition, but kind of – and certainly was related to that, strengthened their confidence in going with us and allowed us to put more feet on the street.

And similarly with M&T, we are seeing more activity in the M&T service territory, upstate New York, etcetera, where we already had feet on the street and then so forth. So I think that’s pretty good. And then, secondly obviously, at the level of individual accounts and the individual groups, those have largely been retained as expected.

And what we expect is as those individual accounts age, their balances will grow and they already have begun to do that. And as those groups add members, of course, they will add.

So, I think generally our view is that, to-date, these things are doing what we expected them to do and certainly contributed to some of the scale improvements we saw in the first few quarters immediately afterwards in terms of service costs.

Darcy, if you would like to add to that please feel free?.

Yes. And as you know, Greg, once the acquisitions are done, we don’t give individual disclosure on particular portfolios.

And for the reasons that Jon gave, it also – what happens frequently with these is as an individual HAS moves its sponsorship, they may move from an M&T product or they may move from a Bancorp product into a HealthEquity product as they maybe change employers or whatever.

And so then, it becomes kind of difficult to track them and attach them to that prior portfolio.

What I would say though, that historically, for the ones that we have had for longer periods of time, the acquisitions that we did earlier is notwithstanding that tracking mechanism, that generally those portfolios, the number of accounts maybe slower than what our traditional HealthEquity growth is, because they don’t have the mechanism for getting further penetration of new employers or health plans.

But generally, we see that their AUM dollars will grow over time, because to the extent that they are savers and then those balances will also grow. So, that’s just a general observation of what we expect when we do these portfolio acquisitions..

Excellent color. As a follow-up, I know going before the election and then certainly after the election, there has been some emphasis on HSAs and I am just curious if there has been any tangible change in the competitive posturing of the marketplace from other providers of HSAs? And then I have just one small technical question after this..

Steve, you want to hit that one, if you are....

Sure. Yes, hi, Greg. I think it’s honestly too early. As you know, all of our competitors that are doing their job are heads down right now in implementation and fulfillment. And so I don’t think you are going to see that type of competitive behavior really start to exhibit itself until early in the first quarter as we start getting out on the road.

There is a little bit of sales activity that happens kind of in this natural gap that happens between open enrollment that’s being completed mid-November through kind of mid-December before people start checking out. But you even got a holiday in the middle of that. So, I think it’s too early. Look, our competitors – we have strong competitors.

We have said that all along. And I think our growth, as I mentioned in my remarks, to kind of be growing twice what our competitors are, I mean, speaks a lot to the network partner relationships we have built and our team’s ability to execute, but it keeps us thinking everyday.

And so I am sure that there is going to be more competitors that are excited about this market and that’s good. And we hope they continue to elevate their game as we do, because as we have said all along, the one thing that hurts the market is when competitors don’t do their job and people get a bad taste in their mouth about HSAs.

We are still in that employer market that Kaiser mentioned. We are showing only 19% penetration and that’s just for people in HSA qualified plans. We think probably around 75% of those folks actually have accounts.

And so you are really talking about a minority of folks that are in these yet, and that doesn’t include any Medicare, any Medicaid, even people in TRICARE, for example, or disqualified from having HSAs. And we think there is a great opportunity to start opening it up these other channels with where these are heading.

And I think the administration change may help a little bit, but we think a lot of what’s helping is either just working for folks, right. It’s working. We don’t have to artificially prop up HSAs anymore. They are working..

Right, right. And then the small technical question, Darcy and I know you hit this in your prepared remarks about the tax rate. I noticed in the balance sheet, there was some movement among some of the values for the deferred tax asset.

Could you talk a little bit about what was going on in there and if there is any implications on future expectations?.

Yes. Without knowing exactly what you are referring to, I will say that as we proceed through the year, the biggest changes that occur is that in a stock option exercises perspective as we have stock options that are being exercised for which we get some tax benefit and it may, in fact, move us into a loss position at some point in time.

And so the way those are accounted for on a deferred tax basis, it maybe reflected in the lines where that deferred tax benefit is recorded. So, that’s what’s been happening throughout this year.

When we started out the year, it builds up over time and some of that is related to the stock price increase that we have experienced and then the exercises of some stock options throughout the year..

Right. And the tax rate in the third quarter, just to cover that ground again, was a little bit lower than what you are expecting.

And can you just circle back to your comments about that?.

Yes. That was related to R&D credits. And so the R&D credits were made, I believe, they are made permanent and then we took the – we got some benefit from that in the third quarter..

And so we shouldn’t expect that going forward, those type – that type of downward volatility is that right?.

Correct..

Perfect. Thank you, everyone for your answers..

Thank you..

Thank you. Our next question comes from Sandy Draper of SunTrust Robinson Humphrey. Your line is open..

Thanks so much. Just want to maybe little bit of a follow-up in terms of competitive environments probably for Steve and not as much in terms of changes that have happened post with the election or what you expect there, but clearly, you guys continue to gain share a lot faster in the market.

On one hand, I feel like a lot of what you guys do really well is the service level for the actual user, but that user is not who is actually making the decision and got HealthEquity.

So, just is anything changing or what are the two or three key reasons you think people, big employers or plans are choosing HealthEquity? And has that changed at all over the last 2 or 3 years? Thanks..

Yes. I will offer some couple of thoughts and Jon, I am sure you have got some too. So, it really depends on segment size. I mean, as you get into the smaller employers kind of loosely defined, below 1,000 or a couple of thousand employees.

I mean, we have got – we have had some great success because of our health plan partnerships, because that’s where those employers tend to kind of go with the offering that is put in front of them by their health plans.

As you go upstream, Sandy and the employers become a little bit more discriminating and we see this in their purchase of other services. They are much more likely employers with thousands of employees are much more likely to say they want to pick their own PBM. They are much more likely to say they want to pick their own disease management company.

In that case, they are asking for account services that we provide that and this word comes up a lot in the RFPs that are integrated and this allows – and we talked a lot about our ecosystem, the ability to plug in to the health plan they want to use with enrollment provider they want to use or to even plug into some of these other ancillary benefits like a telemedicine or transparencies wellness providers.

And so, I think that has been the thing that’s really evolved over the last 2 or 3 years, where they become more discriminating and asking for this integrated user experience, because they know that they don’t wanted to be clunky and they wanted to work well.

And then, I think we spent a lot of time in the last couple of years thinking about how to educate these members at the right time, in the right way with the right information, so you are not burdening them with kind of the typical overload of info. And so they like our approach with that too. Jon, it sounds like you may have some thoughts as well..

Yes, it’s interesting, I mean, this is – thanks for the question, Sandy. This is the time of the year where we are looking through our win-loss interviews.

And like a lot of firms, we pride ourselves on the amount of win-loss analysis that we do, having third-parties talk to folks who have either chosen us or not chosen us and really to try and get a sense of where we can improve.

And it’s interesting that as you pointed out, a huge part of that conversation is about service, but in particular, it is about the fact that our model lends itself to a high level of service delivery and a high quality of service delivery at every level of what for lack of a better term, I would call the partnership or distribution chain.

So of course, there is the individual and I think it’s fair to say we have a strong reputation for quality of what we deliver to our members every hour of every day of the year. But that’s really, as you plan kind of that where it ends it just where it begins.

There is service to HR professionals in smaller firms and regional HR professionals in larger firms who have day-to-day questions and/or issues that come up as they are just trying to do their job and/or need education themselves. There is service to those at a more strategic level.

There is service to the advisors, brokers, consultants, nationally, both national firms, regional firms and local firms. There is service to the – our health plan partners and their sales teams, which as you know, are large and complex and have a lot to do and a lot on their plates.

And of course, there is support to the more strategic product type activities of our health plans.

And at every one of those levels, what we try – have tried to do is recognize that, there is a support that we can offer that will ultimately benefit our investors and our organization and those members by getting more people in front of us and greater understanding of what we do.

And the fact that we have both technology and human beings at every level of that chain, right, really is something that has set us apart from our competitors.

And it’s probably something that isn’t as exciting to talk about in the context of investments and Power Points and whatever, but it really is something that I think this company recognized very early on was necessary.

And then if you look across our competitive universe, there are people who do pieces of that very well, but I don’t think there is anyone who does every piece of it very well and/or as even is attentive to every piece of it. And I think we are attentive.

We will decide how well we are doing it and as we get assessments and keep improving, but it’s certainly something we are attentive to and I think really does matter, particularly as we get into more of a mainstream buyer where it’s not about – always about the features and flash where we have always had leadership role, but it’s also about hey, who is here to help me..

Great, that’s really helpful commentary Steve and Jon. I appreciate it..

Thank you..

Thank you. Our next question comes from Mark Marcon of RW Baird. Your line is open..

Good afternoon Jon, Steve and Darcy. Congratulations on the terrific quarter and obviously everything going in the right direction in terms of policy changes coming up.

I am wondering, with regards to the policy changes, which will eventually materialize, what are you doing with regards to the sales team in advance of that, in order to take advantage of the opportunity, obviously with Matt’s departure, I am not sure if that slows things down or not, but just wondering how you are addressing that and how we should think about sales and marketing expense going forward and how you are going to attack that opportunity?.

I will kind of address it more generally and then defer to Darcy for any specific comments on sales and marketing expense. And Steve, please feel free to chime in, since of course in the interim, Steve is really leading the sales organization. It’s an opportunity for education. This is what it boils down to education, education, education, education.

So the fact that we are now being asked by our partners and prospects and so forth, just like our members, hey, what does this mean, what’s coming down the pipe, what do you think is happening in Washington, I mean we are the first to say that we don’t claim to have some insight as to what might be going on in some back room.

In fact, I think the best insight we can offer is there is no back room. What’s going on is exactly what you are reading as far as we can tell. But I think we do have the benefit of experience in this area and it’s yet – as much as it’s about the specifics of any particular policy move or whatnot, it’s also an opportunity to educate.

And actually I will give you a real example. So Steve and I happen to be talking with one of our partners about the changes in Washington and an example that we used in the earlier prepared comments, about making it easier to use, I would say dollars, when you are between jobs was raised as something that’s been talked about.

And so in the middle of the kind of conversation, Steve sort of poked and said actually, here is some stuff you can already do. And I have to admit, I have only been doing this for what, 11 years, and I didn’t know this. And certainly, the partner didn’t know it.

And so therefore I suspected very few of our members who are in the situation knew it that for example, if you are collecting unemployment, you can use an HSA to pay individual premiums. Now, that’s a small example.

The point being that talking about this stuff that’s going on in Washington, the way we look at it generally is, it is an opportunity to up our game as far as education, to be an expert and being an expert is what helps us sell and that’s what our people are doing in the field today when they are talking about this.

Steve, anything to add there?.

No. I think Darcy, you can provide some color perhaps on the spend. We have continued to invest in our sales team and a very important job right now is to replace Matt. And we are doing the actual search and we are thrilled with the list of candidates we are reviewing and so once we get that in place that will help us to continue to accelerate.

I will say though that Matt left a great legacy of very strong leaders. As you know, we have a fairly complex sales organization where we have people that are working channels, people that are direct selling to channels and to employers and then our marketing team and their efforts.

And so I think right now, our job has been to keep that team engaged with all the resources they need to finish this year strong and then to already get it running started and next year, as we bring on our new sales leader.

And we have made very thoughtful expansions of the team where in the model, we have always done, certainly under Jon’s tenure, which is to expand where we have B-check. And so we have continued to do that.

And I think that, rest assured, we are not going to be caught sleeping with all of this activity in the market, especially in the opportunities in DC or wherever, because we sell in many respects, we have been helping lead this charge with work we have been doing, both commercially and back with our friends in Washington.

But Darcy, do you want to comment a little bit on the spend, I mean I don’t know how, which one to do on that..

Well, I think it’s fair to say that if you look at the percentage of revenues that we spend on sales and marketing has been in this 10%, 11% range for a while. And we have often said that we try to spend our sales and marketing dollars wisely where we can actually get results.

That being said, if we found an opportunity to go after something because of the wider spread acceptance, we think that we actually have those channels pretty well covered and expansion within our footprint, our health plans and employers, we are ready to take those as they come to us. But – so I don’t think that we have any dramatic changes there.

But I will say that, you will recall a year ago, in our third quarter, we expanded our account executive team fairly significantly and have done that as they have continued through this year now.

And the objective of that was to have people, as Steve said where we have had people in the streets, particularly with respect to a health plan and to be able to take advantage of those opportunities, the account executives are focused primarily on our existing employers. And what can we do with them.

And so we think that as employers become more engaged in this and want to drive increased penetration that we do already have some of those people in place to build upon that. And as the employer channel grows, I think that you will see that we will add some more resources there.

But we don’t anticipate any dramatic changes in total, but just deploying those resources as effectively as we possibly can..

Great. And then I have just had a couple more, with regards to the monthly account fees, Darcy, you have mentioned in your prepared comments that you anticipated basically going back to the historical kind of declines of 5% to 10%.

How confident are you in that and what would drive that, particularly in light of an increased effective yield, which make competitive activity a little bit – obviously, as people are looking at the overall economics of having an account, there is trade-offs and you might anticipate some trade-off there, wouldn’t you?.

Yes, there maybe. We haven’t seen the rate increases. They are speculated to happen. Those rate increases, while they don’t – we will see how they play out. And so you may have competitors or even ourselves as they feel like we are making a little bit more money at the facility or so where it can be more competitive on the account fee.

But what we are talking about in the returns is more into the 5% to 10% range is kind of like in the tiered pricing, the removal of the acquisition impact where they had lower account fees and year-over-year comparisons that with the tendency to drive that a little bit lower and then the RA factor that will play itself out as RAs become less of a significant portion of our overall service revenue, because the HSAs are growing so much more rapidly.

But you are right, we will see what the competitive marketplace out in that, but as we have always said, we will compete aggressively for HSAs..

Great.

And then can you talk a little bit about the composition of the new partners, the new employer partners? I mean, your carrier partners that you had come in during the selling season so that when we think about the enrollments, like are there any characteristics, were they slightly bigger, slightly larger employers, what did you see out there in terms of the composition?.

Yes, this is Jon. I am going to say generally consistent with what we have seen in the past in terms of the performance of new partners. And in general, my preference would be to defer commenting too much on that until we actually start talking about the results of the sales cycle..

Okay.

And then with regards to where the rates will go to, can you just talk a little bit, Darcy, how you are thinking about structuring the duration in the near term given that it seems like rates are going up?.

Yes. So, we are obviously looking at this. We will bring on a lot of AUM in the fourth quarter. We will see what the rates do. I mean, rates have improved from where they have been.

And so we have always said that we will get rate increase benefits in the contracts that we entered into for new money that we bring on board in our fourth quarter and into the first quarter as we get rollovers. And so we are prepared with both existing and some new partners to have capacity.

We are confident we can place all of the money that we will have be coming in at very competitive rates. When we have talked about our duration before, we have said that we will place money generally in the 3 to 5-year timeframe for duration for our fixed contracts or floating contracts obviously, they just float.

And so there is not a duration attached to those. But our duration has been – because we are getting close to the end of the fiscal year, that’s gone from like the 3-year down – 3-year duration down closer to a 2-year duration. So, we will probably take that duration backup to a little bit higher, 3 – in that 3 to 4 range.

And so we would expect that over time that we will get some benefit of that as our duration comes up, especially as rates increase..

But I will just add to that and say, generally, what we manage is for and I think Mark, you understand this, it’s more of a reminder for others, what we are managing for here is consistency. If the result of that management is that we have deferred some income growth to the future, so be it.

But – so, I mean, what Darcy’s point is a good example of that, we have kind of – as there has been – have been some firming of rates prior to the election, so forth, we generally took that opportunity to real it in a little bit and we just think that’s probably appropriate actually getting to a point where we were underneath our sort of averages.

So, we will come out, of course, for the reason Darcy discussed and we are going to be deploying cash quite a bit very shortly. But what I don’t think people should expect is that the way we look at this is yes, there is an extra base – set of basis points, so let’s go out farther on the curve. It’s more great.

This gives us more flexibility and obviously some of that will drop to the bottom line in the short-term. But a lot of it is, look, this is good flexibility for us to have in the business that, as a general rule, is very profitable and we think that the best thing as a growing business we can do is retain options and flexibility..

And so consistent with what we have done, we have no intent of changing our – what we kind of view as a balanced approach and how we layer out our deposits. We don’t want to hold load of them expiring necessarily at the same time. We try to layer them out on a consistent basis that we can manage..

Great.

Just as a follow-up to that, your incremental dollars, what sort of effective yields are you getting on the paper that you are deploying?.

The only rate that we deploy is what we report in our quarterlies..

That means he is not telling you..

I got it. I got it..

Good try..

Thanks..

Thank you. Our next question comes from the line of Randy Reece of Avondale Partners. Your line is open..

Yes, good evening. I have three questions.

Number one, I was wondering what you could tell me about the HSA store, the link that we found onsite that takes us to a place where we can purchase things with our HSA account and I was wondering what kind of incentive you get for having that link and if that is something that is going to be a meaningful piece of the business sometime in the long-term?.

In short, we do get some benefit from that. It’s modest. It’s something that, I guess our basic view, Randy, is that, like a lot of things we do, we are trying to respond to the needs of our members.

And so one of the things that members have said is hey, sometimes, it can be confusing as to what’s eligible and what’s not and it’s not so much they are looking for particular bargain. It’s that the real benefit of that particular service is, it kind of sorts out what is and isn’t eligible.

And I think that maybe particularly useful to the extent that we see the inclusion in – the reintroduction in HSA qualified spend of over – various over-the-counter nonprescription items that, for a while, we are in and then they went out with the ACA and now, they will likely come back in I think.

So, that’s kind of the way we look at it is, it’s an education device as much as anything else, but it’s one of a number of things that we are experimenting with that, in our cautious way that we do things, to try and really grow the value of the ecosystem.

I mean, we are doing some similar things in the telemedicine area that we have talked about and in some other areas where, yes, there is some revenue produced from them and to the extent that they are really effective, that revenue piece can grow and can help us be incredibly competitive, because we think we have some advantages in how we point people to these things, but it’s small at this point..

We have also noticed a significant expansion in the number of investment options that are available to those who invest and is that an important evolution of your strategy there?.

Well, thank you for asking. You are on it. What’s actually happening is this is something that we began prior to the publication of the fiduciary rule or more properly, the DOL conflict rules as it’s known. But that I think – but certainly that brought focus to the activity.

What we are actually doing is we are reducing significantly the cost of investing for our members.

And the way we are doing that is – and I know there are probably some who are listening – for whom this may bring a tear or two, but I am sorry, is that we, through our subsidiary, HealthEquity Advisors, that is the regulated investment advisor, we evaluated every fund we offer and identified what we believe is a fantastic lineup of very low cost funds, including where they are available, institutional class shares, the same prices that the truly big boys get, that we are now able to bring to our members.

And we kind of previewed this, I believe it was early this year or late last year, with an individual index investor product that we launched and now we are kind of rolling that out.

So what’s actually going to happen is that you are seeing an expansion and then you are going to see a contraction because at the same time, we will be eliminating from our fund lineup those funds that are not compliant with our approach to addressing the fiduciary rule and most of those are higher cost funds and in general, higher cost than actively managed.

So the result of all this for our members is going to be that kind of, if you look at it in terms of overall expense ratio for funds on average is that the savings to our members is going to be roughly half of what they would be spending in those fund ratios.

And I think that’s – without fundamentally affecting at all what we generate income in that area and providing greater transparency and so I think that’s – I mean the nice thing about having your own onboard investment advisor is that’s clearly working for the members and so forth is you spot opportunities and you execute them.

So even there, while there is some question as to whether the fiduciary rule will be maintained in Trump administration or whether HSAs might get exempted and so on and so forth and then we think there are some good arguments for that on a technical level, for some administrators, this is something we were totally prepared for.

And I think the team – our members should and I believe do, based on the feedback we have gotten, feel really good about this as an example where we are working in their interest. And I do think this is going to be significant long-term. In the short-term obviously as you know the percentage of funds that are invested is still pretty modest.

And the percent of members who invest is even more modest, but those numbers grow every month. And they will continue to grow as we are more effective in educating members about the long-term benefits they have saved. So we do think it’s really important that we are set up right to grow sustainably in that area..

Alright.

I have one last question, the technology and development expense took a step up this quarter, was that related to any particular event and what kind of trend should we expect beyond here?.

Darcy, you want to hit that one?.

Yes. In the technology and development expense line, there is a couple factors that play into that. One is on-boarding of new people. We did onboard a couple of new teams to get a jumpstart a little bit on some initiatives and so there is some element of that.

But a big portion of development activity is actually getting capitalized up and then they get spread out over time. So what’s happening is that as capitalized development projects increase, then the amortization will kick in. And so that’s the – what you have probably seen in Q3 particularly.

Overall, we don’t – just like in sales and marketing, we don’t expect anything over dramatic changes in percentages or whatever. The impact that we have talked about in the past is, is just this impact of amortization as we go through capitalized software development, which we cap up and then we amortize it over generally a 3-year to 5-year period.

So that’s probably what you are seeing in particular, with respect to the third quarter..

Very good. Thank you very much..

Thank you..

Ladies and gentlemen, at this time, I would like to turn the call back over to management for any closing remarks..

Thanks everybody. We appreciate it. Happy holidays. We hope you will, as certainly our team will both in Draper and now in Price, Utah will spend time with families and Merry Christmas and Happy Hanukkah. We will see it after the first of the year..

Thank you, sir. Thank you, ladies and gentlemen. That does conclude your program. You may disconnect your lines at this time. Have a wonderful day..