Healthequity Inc (HQY) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to HealthEquity's Third Quarter of Fiscal 2018 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, Sandra. Good afternoon, everyone. We welcome those who are joining us for HealthEquity's Fiscal Year 2018 Third Quarter Earnings Conference Call.

With me today, I have Jon Kessler, who's our President and CEO. We also have Dr. Steve Neeleman, who's the Founder and Vice Chairman of our company; and Darcy Mott, who's our Executive Vice President and Chief Financial Officer of HealthEquity. We will be referencing the earnings release and the accompanying financial information that was issued earlier today. You can find a copy posted on our Investor Relations website at ir.healthequity.com.

In the earnings release and during our conference call today, we'll be making forward-looking statements, which include predictions, expectations, estimates or other information that might be considered forward-looking.

Our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the statements made today. As a result, we caution you against placing undue reliance on these forward-looking statements.

In connection with those forward-looking statements, we present some important factors relating to our business, which could affect those forward-looking statements. We encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock, which you can find detailed in our annual report on Form 10-K filed with the SEC on March 30, 2017, and in subsequent periodic or current reports filed with the SEC.

We are not obligating ourselves to revise or update these forward-looking statements in light of new information or future events.

And I know that you didn't tune in just to hear me go through the safe harbor statement. So without further ado, I'll turn the call over to Jon.

And yet you did a fantastic job. Thank you, Richard, and thanks, everyone, for joining us. Happy holidays.

We began the fiscal year with a commitment to outpace market growth and another commitment at the same time to have the chance to grow margins. And the team very much delivered on these commitments in Q3.

During the quarter, the 4 key metrics that drive our business grew at a rate of between 27% and 46%, extending a record-setting year-to-date.

Revenue grew 31% year-over-year to $56.8 million. Adjusted EBITDA grew, and even larger, 46% year-over-year to $21.2 million. HSA members at quarter end topped 3 million for the first time and were up 27% from a year ago, and custodial assets at quarter's end were $5.6 billion, up and even larger 30% from a year ago.

Turning to sales. HealthEquity opened 109,000 new HSAs during the quarter, and that's 23% more than during the third quarter of fiscal 2017. HSA members added $150 million in custodial assets during Q3, and that's 81% more than during the third quarter of fiscal '17.

In addition to those new accounts and assets, we also onboarded another 14,000 HSAs and $55 million in custodial assets from our friends at First Interstate Bank for a total of 123,000 additional HSAs and $205 million in custodial assets in the quarter.

Our members continue to respond to HealthEquity's focus on building health savings. The number of members investing grew 69% year-over-year and invested custodial assets grew at even faster 73% year-over-year, reaching $1 billion for the first time.

Last month, Kiplinger's named HealthEquity best HSA, following similarly favorable reviews from Morningstar and The New York Times and from others. Our members' investments are fully integrated into the HealthEquity's proprietary platform. And as we've discussed in the past, proprietary platform ownership, which is something our largest competitors do not have, means that HealthEquity can offer more, we can keep fees low, and we can retain value for you, our shareholders.

Our team is now in the thick of busy season that coincides with open enrollment and the new plan year many employers start in January. All of our new full-time team members are on board, either in training or on the job. Accounts are opening. Cards are shipping to new members and so forth. And you will see the results of all this along with the successful onboarding of previously announced Alliant Credit Union HSA portfolio acquisition when we report our Q4 results after the first of the year.

This is the point in our call where Steve or one of our executive leaders would ordinarily provide some additional color commentary. Now Steve is here with us for Q&A from an undisclosed location. But -- he told me I couldn't disclose it, and that's why it's undisclosed.

But with the holidays upon us, we're going to give you the gift of time and brevity and jump straight to Darcy, who will review the quarter and year-end financial results in detail and provide our revised outlook. Mr. Mott?

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

I will begin by reviewing our third quarter results, and then I'll update you on our business outlook for the full fiscal year 2018.

Revenue for the third quarter grew 31% year-over-year to $56.8 million. Breaking down the revenue into our 3 components, we continue to see growth in each of service, custodial and interchange revenue during the quarter, with custodial revenue continuing to gain prominence as anticipated.

Service revenue grew 22% year-over-year to $23 million in the third quarter. Service revenue as a percent of total revenue declined to 40% in the quarter, down from 43% of total revenue represented in the third quarter last year as the custodial revenue stream became more predominant. Service revenue growth was attributable to a 27% year-over-year increase in average HSAs during the quarter, partially offset by a 3% decrease in service revenue per average HSA.

On a year-to-date basis, the decrease in service revenue per average HSA was 4% compared to the prior year, which is at the low end of the estimated 5% to 10% decrease we expected as we discussed in our previous guidance.

Custodial revenue was $22.1 million in the third quarter, representing an increase of 48% year-over-year. Custodial revenue growth was fueled by 24% growth in average custodial cash in the quarter -- for the quarter combined with the higher annualized interest rate yield on custodial cash of 1.85% during the quarter compared to 1.57% in the third quarter last year. A 73% year-over-year increase in invested custodial assets also contributed to custodial revenue growth.

Invested assets accounted for 18% of custodial assets at the end of the quarter, the most in the company's history.

Interchange revenue grew 22% in the third quarter to $11.7 million compared to $9.6 million in the third quarter last year. Interchange revenue benefited from the 27% year-over-year increase in average HSA in the quarter compared to the third quarter last year, partially offset by lower spend per average HSA compared to the prior year.

Gross profit grew 30% in the third quarter to $33.7 million compared to $25.9 million in the prior year for a gross margin of 59%.

Operating expenses were $20.2 million or 36% of revenue compared to $16.8 million or 39% of revenue in the third quarter last year.

Income from operations was $13.6 million in the third quarter, an increase of 50% year-over-year and generated an operating margin of 24% during the quarter.

We generated GAAP net income of $10.5 million or $0.17 per diluted share in the third quarter compared to $6 million or $0.10 per diluted share last year. We generated non-GAAP net income of $10.6 million for the third quarter of fiscal 2018. Our non-GAAP net income per diluted share for the third quarter was $0.17 per diluted share.

Our adjusted EBITDA for the quarter increased 46% to $21.2 million compared to $14.5 million in the prior year. Adjusted EBITDA margin in the quarter was 37%, up from 37% in the third quarter last year.

For the first 9 months of fiscal 2018, revenue was up 29% compared to the first 9 months of last year. GAAP net income was $41.5 million compared to $22.3 million last year. Non-GAAP net income was $35 million. Non-GAAP net income per diluted share was $0.57. And adjusted EBITDA was $67.6 million, up 33% from the prior year.

Turning to the balance sheet. As of October 31, 2017, we had $225 million of cash, cash equivalents and marketable securities with no outstanding debt.

Before I turn to our business outlook for the remainder of fiscal 2018, I want to remind you that we now report a non-GAAP net income and non-GAAP net income per diluted share to provide you a clearer comparison to the prior year without the impact on taxes from adopting Accounting Standards Update 2016-09. We have provided a definition of such non-GAAP measures and the reconciliation of each to the most comparable GAAP measures in the earnings release.

Our business outlook for the year ended January 31, 2018, is as follows. We are narrowing our revenue outlook from a range between $223 million to $228 million to a range between $225 million and $228 million. Our net income outlook is narrowing from a range between $41 million and $45 million to a range between $43 million and $45 million. However, we are not making any forecast with respect to additional stock option exercise during the year, which would have the effect of reducing income tax expense and increasing GAAP net income.

Our adjusted EBITDA outlook is narrowing from a range between $79 million and $84 million to a range between $80 million and $83 million. We also expect our non-GAAP net income to be in the range between $39 million and $41 million, and our non-GAAP net income is calculated by adding back to net income all noncash stock-based compensation net of an estimated statutory tax rate of 38% and the impact of excess tax benefits due to the adoption of Accounting Standards Update 2016-09. Our non-GAAP net income outlook results in a non-GAAP net income per diluted share range between $0.64 and $0.66 per diluted share based on an estimated 62 million diluted weighted average shares outstanding.

With that, I'll turn the call back over to Jon for some closing remarks and questions.

A lot of GAAPs in that sense, but they've all had 2 As. As always -- thanks, Darcy, as always.

But the credit for the results that we've discussed today belongs to our fellow HealthEquity team members, in Draper, in Price, in Kansas City and around the nation who are delivering remarkable, what we call, Purple service every hour of every day and to our partners and their teams hard at work during open enrollment season doing the same thing.

And while we wish everyone a happy and restful holiday season, one thing that you all can rest assured about is that during the holidays, we will not be resting, and we'll be working our hardest to get every last member onboarded and get ready for what we expect to be an even better year ahead.

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

(Operator Instructions) Our first question comes from the line of Lisa Gill with JPMorgan.

Do I get extra points if I can guess where Dr. Neeleman is this afternoon?

I think you would get extra points, yes.

So I'm wondering if he is in D.C. because my first question would be around tax reform. And I think as many of us haven't had the chance to read the 700 pages and all the scribble notes on the sidelines, any expectations around any changes in tax reform that will impact HSAs?

I'll get started on this one and then throw to Steve without revealing his location. I think the short answer, Lisa, is that there are obviously some broad stroke potential impacts, I mean, like a lot of companies obviously, the change in corporate tax rates, that kind of thing, that will affect HealthEquity. With regard to the specific items on health care, I think the right way to look at it is on the whole, they only have a substantial impact one way or the other, although there are still some items that are being discussed in conference and so forth, that could have an impact. These bills as written pretty much maintain the status quo as it relates to the law surrounding HSAs and related benefits. And that's generally what we think. Steve, if you'd like to add further or talk about some of the color around the debate back and forth on this as to how we got here at the end with regard to tax reform.

Well, thank you, Lisa, for the question, and I'm not in D.C. But I'm sure that you can keep guessing. Anyway, no, I think Jon's right, there's nothing here that's going to have an immediate impact. I think that it's kind of like Sherlock Holmes used to talk about the dog that didn't bark, and the dog didn't bark on this one was that they didn't do really anything to change the Cadillac Tax, for example. And so our sense is that it will be business as usual. There's still a strong motivation for companies to continue to get more and more of their folks in the consumer-directed plans with HSAs kind of being the all-star of those plans. And that -- right now, that -- by 2020, if they don't do so, there could be some Cadillac Tax ramifications, but there's always been the thought that they might get first down the road anyway. So there won't be, we don't think, really any impacts from this current legislation on the growth with health savings accounts.

Okay, great. And then my second question, this would be for Darcy. Darcy, as I look at the guidance of -- to the metrics that you laid out, EBITDA midpoint stays the same, but you took the $1 million off at the upper end. How do we think about what's changed since last quarter? And as you look out to the fourth quarter, what you're seeing to bring that guidance inward?

As far as the EBITDA is concerned, we're just narrowing it into our midpoint there. We feel pretty confident about that.

Okay. But generally, the midpoint staying the same, right. So you're just saying, hey, we feel confident in the midpoint that we had before, and so we're just narrowing the upper end of that? There's nothing more to really read into that? I just want to make sure I understand that.

That's correct.

And our next question comes from the line of Greg Peters with Raymond James.

I just wanted to follow up on the last question, coming at it from a different way. I think in the previous conference call, you highlighted the fact that the third and fourth quarter results would be affected by higher service delivery costs. And I'm just curious how they manifested themselves in your reported numbers this third quarter and what you're thinking about that specific item as we think about the fourth quarter.

So in our first and second quarters, as you know, Greg, that we talk a lot about the fact that we had spent some more money and intend to spend some more money both in the fraud prevention area and that we hired some additional people to respond to that and so and so forth. And because those people were on board that we expected that it would have a tendency to flatten it out a little bit, but those costs would still be there in the third and fourth quarter. And so far, the year through the first 3 quarters has played out pretty much as we expected in that regard. In the fourth quarter, as you know, what we try to emphasize on our last call, and I would reiterate it now, is that the fourth quarter still will have lower margins overall, particularly with respect to service revenue because we will now have this full gamut of these new service delivery people on board for the full expanse of the fourth quarter, and those costs are incurred before we generate revenues largely. I mean, we will generate some revenues in January, but what we've hired will be there. So we believe that generally speaking, what we are trying to tell last quarter and also this quarter is there will still be a decrease in gross margins in the fourth quarter, and it will be somewhat similar to what we've seen in the past. It may be smooth slightly from the third to fourth quarter. But generally speaking, the bigger picture is yes, that we will expect the same patterns to exist that we've had in the prior years.

Also, Greg, this is Jon, as a reminder, the fourth quarter is also where we incur on the OpEx side of things is where we incur significant sales, variable sales compensation expense as the accounts are onboarded and so forth. So that's a big part of what you always see in the fourth quarter and what we'll see this fourth quarter.

Right. Just circling back on bigger picture issues. And I know in the past, you've talked about Anthem, and you've talked about other competitors in the marketplace. And I think this will be a good opportunity for you to provide us an updated perspective on the competitive posture of the market. And if there is any implications to your business from the CVS announcement or other changes that are going on in the marketplace. I think Optum talked about their relationship with employee retirement. So any color there would be helpful.

I think, generally, the best way to assess competition is ultimately the level of growth you're seeing relative to your competition. And obviously, while a lot of these folks don't report numbers, certainly, those who do, I think you would agree that we've widened the gap a little bit over certainly the first 3 quarters this year. I think if I look at kind of in the marketplace, Greg, my general take is that you are starting to see a little bit of a winnowing of kind of who's really in this and who really isn't and why. And I think the customers, both ultimately at the consumer level but as well as the employer level are kind of starting to see that. And I think some of the activity kind of reflects that. So we've obviously been able to do some M&A on the portfolio side of things, and that's one way to look at that equation. Another is that there are folks who are going to try and be in it and try to be good competitors, and that's okay, too. I'm not surprised to see Optum following some of what we've done in terms of trying to integrate wealth into the equation. As we said last quarter, we absolutely think it's the right thing to do. We think it's good for the industry. I'd love to see them follow us more closely in terms of their approach to the lineup they offer and the costs and so forth, but that's a different issue. With regard to Aetna and CVS, I guess we don't really have any comment at this point that would be much more than speculation. But since you've invited me to do so, we do compete with Aetna's PayFlex platform to some extent. I wouldn't say it's kind of right up there in terms of competitors, but certainly, when we're talking to an employer directly who has Aetna as their sole carrier, it's a relevant factor. We'll have to see what over time this transaction means in terms of what Aetna and CVS are trying to do. I'm not sure anyone fully understands that except as it relates to greater integration between back office, medical and pharmacy benefit services. So I guess my basic view is that as we talked about at the time that the various health insurance mergers were discussed that to some extent, what a lot of this doesn't seem to be about from our perspective is it's not really about helping consumers with the problems that they -- that are front and center to them today. And those problems, as anyone who reads the newspaper knows, are about adapting to a system that increasingly is asking those consumers to manage day-to-day health expenses and to play a role in that. And that is what we're about. And so we kind of feel like at some level, others can pay attention to what they want to pay attention to. And they're -- the problem I described isn't the only problem in the world to solve, but it's the one that we are focused on. And we think the results show that from a competitive perspective, the market believes we're doing a pretty good job at or certainly, relative to others, doing a better job. But it's our mission to do that better and better and better, and the results will tell if we do.

That's excellent color. Just as a follow-up to that answer, Jon. As you point out, the market may be seemingly self-selecting who's the long-term viable solutions for HSAs in the market and versus who isn't. I'm just curious, has there been any change in the M&A pipeline? Or are the smaller banks out there that have the services, that are finally coming to the realization that they may not have the best long-term platform?

Yes. Well, we don't comment on the specifics, as you know. But if I sort of rewind to where we were at this announcement a year ago, I believe I said that the market, at that time, I used some metaphor like ice cold or very cold or something cold. And that was in light of the election results and all of the discussion that came around the election results and so forth. What's clearly happened over the course of the year since then is we've all regained our footing and, to some extent, understand a little better what is coming and so forth. I do think people have -- that, that has started to sort itself out. And so you do see M&A activity, and we do anticipate M&A activity. And we've tried to reflect that in any number of different ways. We're obviously not going to include M&A growth in our guidance. But we do see the market continuing to thaw out and providers that are not likely to make the kind of investments that we've made and expect to continue to make are likely to sort themselves out. And what -- the way we're going to approach those is the way we always do, which is to think about each potential transaction in terms of the incremental return to our shareholders rather than any form of strategery or what have you. And thus far, everything that we've done since the IPO and before, I think if you look at it in isolation, you would find that the return to our shareholders on those expenditures has been very high. And at the same time, we've managed to avoid shareholder dilution, and we're sitting on $225 million of cash as of the close of this quarter. So I feel like that's an area where we're in really good shape, and we'll let the pipeline continue to come to us as opposed to try and beat it into existence. But we certainly feel like there is going to be opportunity here.

And our next question comes from the line of Sandy Draper with SunTrust.

Just one quick housekeeping for Darcy first. I didn't catch, Darcy. Did you give the gross account adds versus the net number? And if you could provide that last couple of quarters. I didn't catch that.

Yes, I think Jon gave that number. It's 109,000 plus the 14,000 from the FIB.

Okay, great. Then the bigger picture question, and Jon or Steve or Darcy, you can answer this on a recent quarter 9-month basis. I'm just trying to get a sense for when you think about the accounts that are coming on, not really short term but longer term, are you seeing a shift towards more than new accounts are coming from existing partners? And so this is really -- the growth we're seeing now is penetration from people you've already signed up on a logo basis, but now, the light bulb's going off. I just know anecdotally, at my firm, the plans keep getting more and more pushed to drive high deductibles. And so that's -- it's pushing there. Or is this still very much of a adding new logo type of situation? Just any type of commentary around that would be really appreciated.

I'll invite Steve to add, but I would say the answer is there's a third bucket, and they're coming from all 3. The third bucket is sort of the takeaway business, if that makes any sense. And I think the answer is they're coming from all 3. We -- I think if we kind of think about the sales season that we're ending here, there's plenty of new logo activity. Obviously, in the middle of the year, most of the growth does come from existing logos at the high end and then from your small and midsized groups that come through the channels. But I think in general, there's both plenty of clearly existing and then new logo activity both in terms of employers as well as our health plan and our channel partners that I think you'll be -- what I think we'll be pleased with. Whether you'll be, we'll see. And then on the takeaway front, one of the hallmarks of this sales season is we are seeing cases that have been in HSAs for a long, long time and really are looking to take that next step forward. And even from some very equipped competitors, I think we'll end up this year with some nice takeaway wins as well. So those -- you got the right buckets, but I don't really see anything in terms of -- the question might suggest that a little less on the new logo and a little more on the growth from the existing logos. I don't really see that. I mean, obviously, in any given year, most of our new accounts come from existing logos for obvious reasons. But I think in terms of the general trend, there's plenty of new runway to keep rolling down.

Right. This is Darcy. Sandy, I would just add to that, that we usually comment this on an annual basis about this split. But I think it's fair to say that in the first 3 quarters, most of that is coming from existing partners.

Right, because it always does.

A lot of the new names are coming on in that fourth quarter when they go through the open enrollment and we brought on new partners.

And our next question comes from the line of Mark Marcon with R.W. Baird.

With regards to just the effective yield that you ended up achieving during this quarter, how should we -- rates are obviously going up. How should we think about the pacing of the effective yield vis-à-vis, say, Fed funds over the next 6 to 12 months?

Well, first of all, I mean we've commented on this quite a bit in the past that that's maybe next week (inaudible)

Yes. It came in a little bit better than what we were looking for.

Yes. I think that our comment last quarter is that we gave full year guidance to be in the 1.80 range and what we came in, in the quarter is consistent with that. And if you played out for the full year, we think that we're kind of in that same range. And so the only guidance we have given, Mark, is for this current fiscal year. With respect to what rate increases mean for next year, we'll comment on that when we comment on next year's guidance. But as we've said in the past, if there is a 25 bp increase, say, in Fed rates or in general rates, ours isn't necessarily geared up at what that Fed rate is. But as rates increase, as you know, we will get the benefit of that throughout our ladder, depending on what's expiring and what we bring on in new. And so we don't get that full impact for the full portfolio. But in any given year, we may get it on 30%, for 20% that's rolling off and maybe some portion that's coming on new. And so we'll see some uplift there, but it's kind of spread out over our duration, which we've said is generally in that 3-year range, give or take.

Great. And then with regards to just the -- your -- you obviously had a strategic push towards increasing the growth of the investment accounts and investments under management. And that's clearly working. In terms of the really rapid growth that we're seeing there now, how would you -- how much of that is just kind of the message coming across as opposed to certain accounts getting up to certain higher balances where they shift a portion? We're just trying to understand if there's any sort of active switch among the lower balance accounts or any sort of behavioral switch there.

That's a good question. I'm not sure that I have the answers sitting in front of me, but I'll give something that's close to it. And we're happy to get back to you on this one. But I think what generally we're seeing is the first point you made, which is this message getting through to a broader audience. And what is interesting is if you look at that audience, it does cut across both income demographics as well as balance demographics. I mean, yes, of course, it's true that some of it is always going to be folks finally getting to a balance where they can begin investing. But I think fundamentally, it's -- what is, I suppose, from a long-term perspective quite heartening to me is that when you look at who is investing, you don't see really substantial income or other economic demographic type concentrations nor do you see above minimum thresholds, a lot of concentration around balance. And what that indicates to me is that there's a long runway for this, and that it's just -- it's still a matter of large numbers of people not yet seeing the HSA as in addition to being a mechanism to spend less today, also being a mechanism to save very effectively for tomorrow. And so that -- the future seems pretty bright there is the way I would put it rather than, okay, you're mining one vein, and then that vein is capped, and that's the end of that.

Great. I mean, any concern at all in terms of potentially -- the average cash balance potentially going down at some point if the behavior shift is too successful?

I mean, that would be a high-class problem to have in the sense that there are always going to be instances where it -- here's the way I would put it, Mark, is you really show who you are at some level when you do have to make trade-offs between immediate profitability and your mission, recognizing that chase the mission and long-run profitability are quite well aligned. And so I sort of think this is an example. And in fact, I was at an event recently where I heard somebody from the industry comment about how they approach this. And essentially, the commentary was, look, we're in the cash business, and that's the way we think about it. And that is not the way we think about it at HealthEquity. We want to give people choices, and we want one of those choices to be -- for them to be able to use -- even if you're totally focused on cash, it's appropriate to use this thing as a long-term savings vehicle. And the data that hold us at the beginning that for the most part, the investing was additive to cash as the investing population has grown, that data hasn't really changed. If anything, those patterns have gotten stronger. So I guess basically, we look at it as the vast majority of it is additive rather than a substitute for their cash balances.

Right. This is Darcy. I would add to that, that from an average cash balance, the decreases that you may see from time to time accrue there is not coming from the investors. The investors have higher average cash balances than the non-investors do. Where you see that impact happening is when you bring on new accounts that have lower average cash balances in their first year that then grow from year to year to year. And so we actually see that the investor population has higher average cash balances than all the other members.

That's what I expected. And then one last one. With -- just with regards to the cadence of the increased service costs. You've mentioned you've got the full slew now, and you've had it -- you're going to have it for the full quarter in the fourth quarter, and then we obviously have the security costs. When we look at this kind of year-over-year increase in terms of the service costs, do you feel like we had kind of a step function and now we're going to leverage that again? Or how should we think about that?

I think that from a step function, I think that the biggest function to look at is to compare how it moved from third quarter last year to fourth quarter. That's probably a bigger impact than looking at what we spent on fraud prevention or whatever, although that's a factor in there. It's -- year-over-year, we will have spent maybe an extra $3 million or something that we, on a run rate, through all the quarters, but we've had some improvements also to offset that a little bit. So on a full year basis, you might be looking at 1% or whatever. But the function that will happen between Q3 and Q4 is still going to be intact. There's going to be more costs relative and less margin in the fourth quarter than there was in the third quarter just like there was last year.

I mean, that's just a function of bringing new people on and setting them up?

Exactly.

I think where maybe, Mark, in part your question is going is recognizing we did have and indicated before we have them that we would have over the course of the first particularly 2 quarters some -- one might think of as sort of one-time expenses in this area, is there leverage on those expenses for the longer term looking out to fiscal '19 and so forth. And I mean, I think the answer in short is yes, and -- but it's something we have to keep working on because I think particularly, as you think about security, we all know that what people expect in terms of security, both in terms of the protection and so forth, but also that protection coming alongside ease-of-use. Those are good investments to make. And they will benefit us from a leverage perspective over a longer term. And that's kind of the way we look at it. So if we're spending money in a given quarter and the reason for spending that is so that people can have greater security on their accounts and we can avoid account takeover or whatever it might be, but at the same time, we're able to deliver a better user experience and certainly something that people would feel good about relative to what they're experiencing at a financial institution or the like much less than a benefits provider or health plan, then that's going to rebound to our benefit for the long term, and there is leverage in those expenses. But I think as Darcy points out, that doesn't mean we won't spend more in the fourth quarter than in the third on service because we always do.

And our next question comes from the line of Donald Hooker with KeyBanc.

I guess, obviously, the exciting data point is the investment assets growing so fast. And I was curious, how much of that is -- I mean, obviously, people are putting more money in investments. But I guess also the stock market and other investments are up. And I'm just curious if that's partially driving that perhaps. Or is there -- I mean, is there a way to kind of parse that out or...

It has an effect, but the bulk of the effect you're seeing is actually increased inflows. And the reason for that is, one, the numbers are bigger. The stock market is now up 16%. But two, but I think more importantly, when you look at how these assets are deployed, as you might expect, there is a preference still among investors to deploy these assets more conservatively. So less S&P 500 and growth tech and so forth and more bond funds, and as I'm sure you are well aware, it hasn't exactly been wine and roses for some of those more conservative investments over the course of the last year, it hasn't been terrible, but they trailed the market significantly. So while it is a little bit hard to parse it all out because, obviously, an individual who've seen growth might put in less or what have you, means that the big picture is the bulk of the growth that we've seen is coming from inflows.

Okay, fair enough. And I guess I'm -- kind of maybe a little bit of an aside question and you may not have this at your fingertips, but I was intrigued on the last quarter call in terms of your workaround telemedicine and kind of providing, using the HSA as a way to sort of educate your members around kind of lower cost uses of health care. And I didn't know if there was maybe updates there, any kind of -- I know it's small numbers, but it is kind of the tip of the spear and was kind of curious if there was any update on those types of initiatives, telemedicine or otherwise.

Thanks, Don. I mean, I think the short answer is this is stuff we continue to do and will occasionally remind about in this setting. As you, I think, have gathered over time, we're not ones for the product press release. So we rather have the results of that stuff show up in financials and then we can talk about it. But I do think we're seeing generally some progress in 2 areas. The first is the one you identified, which again you might conceptually think about as a little bit more clinical in the sense of you're trying to tie money with some very tangible clinically related examples. So at this time of year, it's about the thing that's very -- gets very topical is efforts to use data to help you remind people whether their HSA plan is giving flu shots for free or that kind of thing. That's very topical at this point of the year. But it's also on the financial side where we've talked about some of the health and wealth stuff that we're doing that's -- again, where you see the results of that is very directly in -- you've seen members progress to that point where they're investing or where their cash balances are growing. There are some things that -- they're adopting the behaviors that you want to see adopted for people who are becoming confident health care consumers. So I think we're working on both sides of that particular aisle and seeing progress on both, and we'll try to provide updates as they seem relevant and as well as somewhat entertaining.

And our next question comes from the line of Mohan Naidu with Oppenheimer.

Jon, Steve, just on the legislative changes. I guess, is there still an expectation for any regulatory or administrative changes that could potentially expand the HSA-eligible members in a way instead of being in the tax reform bill?

Yes, this is something we're working on pretty hard. And Steve, if you'd like to comment on some of the discussion around the regulatory stuff, that'll be excellent.

Sure. Yes, thank you for the question. Look, we still are hopeful. There's clearly a lot of work that needs to be done to either help support the current law with subsidies and things like that, that are going to keep [where purchasing changes are -- or should redo] it. And so what we're hearing from our friends in Washington, and we do spend a lot of time there, even though I'm not there right now, is that as we get into the first quarter of 2018, that there's going to be a renewed effort to try and make this kind of solution that people call Obamacare or Affordable Care Act work. And there a lot of Americans that are losing insurance because of the subsidy issues and things like that. So our -- we're certainly there. We're getting some of these bills scored as we go along. We've talked in the past about our efforts around Medicare. We think that allowing seniors, that we mentioned in the past, that about 25% -- 20% of people that turn 65 years old right now are currently working full time to allow these people to continue to make contributions to an HSA even if they're enrolled in Medicare. These types of bills actually score pretty well. And so those were the areas we're focusing on, is how do you expand the pie, how do you get more people that are currently headed towards Medicare or maybe even some Medicaid type arrangements to allow them to have HSAs. We talked in the past about TRICARE. And now I think all of these things are on the table. Now candidly, we're as frustrated as I think anyone is that we haven't seen more progress, but that doesn't mean we've lost hope. It took a while to get health reform passed even in the Obama administration. We think that something's got to give at some point. And the people that have really studied this, know that HSAs are working for consumers. They're working for employers. They're helping employers keep their costs down. And so anything that could help benefit HSAs ought to go into these bills, especially if they're related to health care. It's just on the tax reform law, it was pretty clear that they weren't going to mess with any health care stuff on the tax reform law.

Got it. Maybe just a question on the general market itself. How are you guys seeing the submarkets in here, whether it's the employer by size or geographic region or health plan submarkets? How do you see the adoption in each of these and if there is any inflection point that is coming up in any of these submarkets that could really be a big driver for you guys in the coming years?

Yes, it's a great question, Mohan. I mean, I think first of all, it's worth understanding how much of the growth that you generally see, how much of the new account activity is coming from which sort of channel or submarket. And a way to think about it at its simplest is that market-wide, about 70% of all HSAs that are sold are sold in the context of the employer making a specific decision that's not to the health plan. And then the other 30% are sort of, in one form or another, very directly related to health plan. And we play in both of those channels, obviously. And we want to serve both those channels really well. I think we've commented before, and this is fair, that the -- as particularly as you see more HSA activity happening in kind of the middle and upper middle markets, that tilts the field a little more towards the employer side of things because those are the areas where you have as much employer action, including with their partners in the broker and consultant community. And we saw -- we've seen some of that thus far this year in the current sales cycle. I expect we'll see more of it going forward. And then as far as sort of employer size, I think it's fairly well documented that the growth in this trend has been -- has outpaced in large group versus small group or individual and certainly versus small group. I think it's been -- I mean, that's been pretty pronounced. It's not terribly surprising, one, because that's the way virtually every trend that affects a benefit rolls out over the course of an extended period of time. But also, in this case because there is a little bit of a principal agent issue where a larger self-funded employer feels the impact very, very directly, whereas the impact is much more muted if you are fully insured and there are different layers of pricing at the insurance level and so forth affecting what your broker is seeing and that kind of thing. And so that's where we are today. I think as we see that middle market kind of growth occur, really interesting opportunities for us because a lot more of those employers would likely be employers that will only offer HSA plans out of the chute just because they're little smaller and the gains will be obvious once they really look at it.

And so the real opportunity is there. But our basic view, Mohan, is we want to be -- on the one hand, we want to be true to what we are trying to do as a mission, which is to build health savings and build consumers that are confident health care consumers. And we want to be with those consumers. But on the other hand, there are lots of different paths to that consumer and lots of different ways to serve that consumer well, whether it's partnering with health plan, partnering with an employer, working our butts off for our friends in the consulting community, et cetera. There are a lot of ways to get there. And I think what we've shown thus far is that we're going to explore them all, and we'll obviously put more resource on the ones that work well. But that's where I think we are right now.

Maybe one last one if I can sneak in. I guess BenefitGuard did not get any airtime today. Just want to ping for any quick updates on that one.

Yes, I appreciate you asking. BenefitGuard is going well. What's now HealthEquity Retirement Services has signed up a bunch of new accounts for the first of the year. I mean, obviously, it's still -- it's not terribly material or we'll be telling you about it more. But we're getting the message out there, and importantly, we're learning. And I think frankly, the -- there's a lot of eye-opening going on there on the part of folks who are traditionalists within the retirement community about the real value here. I mean, that's really the part that strikes me, is in these conversations as people are -- as they really, for the first time, maybe stop and think about the power of being able to educate consumers about these things together, you're talking about something very different than you have in the past. It's not about should you put your money in growth or value, which is a little bit esoteric. It's like, hey, if you do this properly and waterfall this properly, you're going to build savings faster. You're going to build more of it. And it's not a question of different kinds of market risk. It's just a question of leveraging the rules as they are. And that part -- being able to help people do that is pretty neat. Again, we're still learning a lot about how the channel works, and we're trying to be really careful and cautious about it. But I'm sure we'll have more to say about it in the future. Thank you for asking.

And our final question comes from the line of Steven Wardell with Chardan Capital Markets.

So you mentioned the account fees being at the decline and being at the low end of the potential range of decline. Can you review that again? And also just tell us what do you think is behind greater or lesser account fee declines? And what's behind the current low rate of account fee decline?

Yes, this is Darcy. As you know, we have guided fairly consistently from our IPO that we expect on any given year for this to be in a 5% to 10% range. The variability -- I mean, last year, it was a little bit higher than that. This year, it's tracking a little bit lower than that range.

But year in and year out, we expect this trend to be continuing. And so we're kind of giving a broad brush over that to say, you might see some years that was a little bit better than that or it's a little bit higher than that. The variability depends on penetration within plans and the renewals of their contracts, et cetera, et cetera. And so we just kind of look at it more as a broad trend that will continue. But in any 1 given year, you may see something a little bit lower like we're seeing this year. We wouldn't read anything extraordinary into that.

Yes. I will just say, if we thought it was truly some ongoing trend, we would have put it in the headlines. It would have been easy to do that. But -- and we did talk about this. But our basic view is we're -- this isn't a number that just shows up. It's actually a number we're kind of trying to manage to at some level, Steve, because another way to look at those declines, is that's a way for us to deliver value to our partners on the employer side to pay most of these fees and on the health plans side in terms of them being able to deliver value of their customers. And in such -- as well as to our consumers, obviously. And to do so while still kind of maintaining, and I think over the long term, growing our unit economics. And so that's kind of the way we look at it. It's not that it just fits out of the machine. It's a number we sort of try to manage to, recognizing that there'll be ups and downs in any given year. But this is part of the value we want to deliver to people. And that's why we've been guiding this way since before the IPO. And I think it's fair to say that with some variation in one direction or the other, we pretty much deliver on it.

Thank you. And that does conclude today's Q&A session. And I'd like to return the call to Mr. Jon Kessler for any closing remarks.

Thank you very much, operator. And I guess I'll just close by wishing everyone a safe and happy holiday season, and we'll talk again after the first of the year. Thank you.

Ladies and gentlemen, thank you for participating in today's call. This does conclude the program, and you may all disconnect. Everyone, have a great day.