Healthequity Inc (HQY) 2017 Q4 法說會逐字稿

Welcome to HealthEquity's Fourth Quarter and Fiscal Year-end 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, Valerie.

Good afternoon, and welcome to HealthEquity's 2018 Fiscal Year-end Earnings Conference Call.

My name is Richard Putnam, Investor Relations for HealthEquity.

And with me today, we have Jon Kessler, our President and CEO; Dr. Steve Neeleman, our Vice Chairman and Founder of the company; and Darcy Mott, our Executive Vice President and CFO.

Earlier today, we reported in a press release our fourth quarter and fiscal year 2018 year-end financial results, a copy of which can be accessed on our Investor Relations website at ir.healthequity.com.

It's my duty to also let you know that our call today will include forward-looking statements, including predictions, expectations, estimates or other information that might be considered forward-looking.

During today's discussion, we'll present some important factors relating to our business which could affect those forward-looking statements.

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.

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 detailed in our annual report on Form 10-K filed with the SEC on March 31, 2017, along with any subsequent periodic or current reports, including fiscal years 2018 10-K that will be filed by the end of the month.

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

With the introductions and preliminary cautions out of the way, I'll turn the call over to Mr. Jon Kessler.

(inaudible) Thanks, Richard, and thanks everyone for joining us on today's call.

I have a few prepared remarks about our operating results, and then we'll turn the call over to Steve to talk about sales and Darcy to discuss both financial results and guidance before we open up for questions.

So a year ago at the beginning of fiscal 2018, we made 2 commitments to you: first, that we would outpace the market's growth; and second, that we would grow our bottom line faster than the top line.

HealthEquity made good on both of those commitments in fiscal 2018.

We reported on growth in custodial assets and HSAs for the fiscal year 2018 last month, which were 35% growth in custodial assets, 24% growth in HSAs.

As Steve will discuss in a moment, according to independent sources, HealthEquity handily outpaced the market.

The company saw revenue growth of 29% year-over-year in fiscal 2018 to $229.5 million.

And revenue growth, combined with scaling in our business, in turn resulted in adjusted EBITDA margin expansion.

Adjusted EBITDA grew 35% year-over-year in fiscal 2018 to $84.7 million.

Adjusted EBITDA margin in fiscal year 2018 was 37% compared to 35% in fiscal '17.

Q4 results were equally encouraging, if not better.

Q4 revenues of $60.4 million were up 2% -- were up 29% year-over-year, that's better than 2%.

Adjusted EBITDA of $17.1 million was up 45%, and adjusted EBITDA margin rose more than 300 basis points year-over-year to 28%.

So the top line continued to show significant growth on a much larger base, and profitability continued to outpace revenue growth.

I want to affirm our commitment to continue to outpace the market and gain market share as measured by HSAs and custodial assets and to have the opportunity to grow our bottom line faster than our top.

The above results were achieved while strengthening the balance sheet.

HealthEquity's cash and equivalents grew from about $100 million in the reported quarter right after our IPO 3.5 years ago, to $240 million at January 31, 2018.

The message our shareholders should take from this is that everyone at HealthEquity is very serious about the commitments that we make to you, that we make to our members, that we make to our clients and to our partners.

I'm extremely grateful for the talented Purple team that continues to build the base of a strong, profitable business for the long term.

Now I'd like to turn the call over to Steve to report on sales performance and provide a few insights on industry trends.

Steve?

Thank you, Jon.

In February, we reported sales results for fiscal 2018.

As John mentioned, HSA members grew 24% or nearly 657,000 accounts during the year.

Custodial assets grew 35% or nearly $1.74 billion.

A few weeks later, Devenir released its annual estimate of HSA market growth and competitive positioning.

According to Devenir's figures, there is no doubt that HealthEquity handily outgrew the broader market.

A closer look at Devenir's report tells even more about HealthEquity's growth this past year.

According to Devenir, HealthEquity grew custodial asset market share from 12% to 13% during calendar year 2017.

In raw numbers, HealthEquity grew both custodial assets and accounts more than any other company.

Still, we think we can do more.

The new sales year is already well underway, and our focus is connecting health and wealth.

Our hard-working and dedicated group of HSA experts are in full swing developing relationships, building their sales pipelines and already enrolling business for fiscal 2019.

The sales initiatives that we outlined last year produced great results.

Our enterprise group was able to increase HSA adoption among some of our largest employer partners from 24% to 35%.

This is evidence that HSAs are good for employers and employees and that our focus on plan design and education is working with these groups.

We also continue to see significant growth among our 124 health plan administrator network partners.

They're committed to helping their clients obtain quality, sustainable health insurance, and HSAs are a key component to their efforts.

Additionally, we continue to expand our sales force that is targeting regional and midsized employers through direct sales efforts.

We expect to see similar results within this group that we have seen with our enterprise group.

Another area of sales where we are seeing notable success is helping our members understand the importance of contributing more money to their HSAs and to ultimately investing these dollars as what we call savvy investors.

Similar to the work we do in educating employers on the benefits of offering HSAs and properly structuring their plan designs to promote more adoption, HealthEquity team members also take seriously our commitment to lead the industry in empowering our members to properly fund their HSAs and to begin investing at the appropriate time.

This education paid big dividends during our last fiscal year as the number of investing members increased by 85%.

HealthEquity's HSA investment platform has been lauded by MorningStar and Kiplinger as the best in the nation due to our fund choice, low expense ratios and consumer technology.

When more of our members embrace the benefits of increasing contributions to their HSAs in investing, this saves taxes for employers and employees, builds a nation of health savers and drives our economic engine.

I will now turn the time over to Darcy to review our financial numbers for the fourth quarter and year-end and to provide guidance for the year ahead.

Darcy?

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 is provided in the press release that was published earlier today.

I will first review our fourth quarter and year-end results of fiscal 2018 and then I'll provide guidance for fiscal 2019.

Revenue for the fourth quarter grew 29% year-over-year to $60.4 million.

Breaking down the revenues into our 3 components, we continue to see growth in each of service, custodial and interchange revenue during the quarter and full year.

Service revenue grew 13% year-over-year to $23.4 million in the fourth quarter.

Service revenue as a percent of total revenue declined to 39% in the quarter, down from 44% in total revenue, better represented in the fourth quarter last year as custodial revenue became more predominant.

Service revenue growth was attributable to a 27% year-over-year increase in average HSAs during the quarter, partially offset by an 11% decrease in service revenue per average HSA.

As we indicated last quarter, we expect service revenue per HSA declines to be towards the upper range of the 5% to 10% range in fiscal year 2019.

As discussed on our last several earnings calls, the expected decline in service revenue per account was offset by growth in custodial revenue per account as our average custodial asset balances and custodial cash yield increased during fiscal year 2018.

This resulted in total revenue per account growth of 2% compared to fiscal year 2017.

Custodial revenue was $24.5 million in the fourth quarter, representing an increase of 52% year-over-year.

The driving factors for this increase was 35% growth in ending total custodial assets and a higher annualized interest rate yield on custodial cash assets of 1.9% during the quarter compared to 1.59% for the fourth quarter last year.

Interchange revenue grew 25% in the fourth quarter to $12.6 million compared to $10.1 million in the fourth quarter last year.

Interchange revenue benefited from the 27% year-over-year increase in average HSAs in the quarter compared to the fourth quarter last year.

Gross profit for the fourth quarter was $31.6 million compared to $24.2 million in the prior year with a gross margin consistent with the fourth quarter last year.

Operating expenses were $23.2 million or 38% of revenue compared to $18 million or 39% of revenue in the fourth quarter last year.

Income from operations was $8.4 million in the fourth quarter, an increase of 36% year-over-year and generated an income from operations margin of 14% during the quarter.

We generated net income of $5.9 million for the fourth quarter of fiscal 2018 compared to $4.1 million in the prior year.

Our GAAP diluted EPS for the fourth quarter of fiscal 2018 was $0.09 per share compared to $0.07 for the prior year.

Our non-GAAP adjusted EBITDA for the quarter increased 45% to $17.1 million compared to $11.8 million in the prior year.

Adjusted EBITDA margin in the quarter was 28%.

Excluding stock compensation expenses net of tax and the tax impact of stock option exercises, our non-GAAP net income and net income per share for the fourth quarter of fiscal year 2018 was $6.7 million and $0.11 per share.

Full year results for fiscal 2018 included: revenue grew 29% to $229.5 million; gross profit was 59% compared to 60% last year, consistent with our investment in fraud prevention activities this past year; income from operations grew by 32% as we continued to scale our business model; operating margins were 24% compared to 23% last year; adjusted EBITDA grew 35% year-over-year to $84.7 million, growing our adjusted EBITDA margin to 37% compared to 35% last year; non-GAAP net income and net income per share were $42.1 million and $0.68 per share.

Turning to the balance sheet.

As of January 31, 2018, we had $240 million of cash, cash equivalents and marketable securities with no outstanding debt.

We generated $82 million of cash flow from operations during fiscal year 2018 compared to $46 million during fiscal year '17, a 79% year-over-year increase.

Turning to guidance for fiscal 2019.

We will adopt the new revenue standard ASU 2014-09, Revenue from Contracts with Customers, in the first quarter of fiscal year 2019.

It is not expected to have a material impact on the company's revenue.

Sales and marketing expense will be impacted as we capitalize incremental contract acquisition costs, namely sales commissions, and amortize these costs over the economic life of the contractual relationship with the member.

Based on where we ended the year, we are raising our revenue guidance for fiscal year 2019 from between $274 million and $280 million that we initially provided last month to between $276 million and $282 million.

We expect non-GAAP net income to be between $63 million and $67 million, non-GAAP diluted net income per share between $0.98 and $1.04 per share, and adjusted EBITDA between $106 million and $111 million.

Our non-GAAP diluted net income per share estimate is based on an estimated diluted weighted average shares outstanding of approximately 64 million shares for the year.

The outlook for fiscal year 2019 assumes a projected effective income tax rate of approximately 24%.

Before I turn the call back to Jon, I would like to highlight 2 items reflected in our guidance.

First, now that we have almost all of the new custodial transfers completed, we are narrowing our interest rate guidance on the custodial cash assets to be approximately 2% for the year -- for the fiscal year.

Second, as we have done in recent reporting periods, our full year guidance includes a detailed reconciliation of GAAP and non-GAAP metrics at the end of today's press release.

This includes management's estimates of income taxes, depreciation and amortization, and anticipated stock compensation expenses.

But this does not include a forecast for stock option exercises during the fiscal year.

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

Thanks, Darcy.

And thank you, Steve.

Before we go to questions, you've heard from Darcy about the financial results that exceeded earlier expectations and from Steve about market-leading growth.

And I'd like to take a moment to thank the HealthEquity team and our partners for the highly successful fiscal 2018 open enrollment season just concluded that really made all that possible.

During Q4, the team spoke to more of our members and prospective members, handled more transactions and provided more education than it has ever done before in the company's history.

And I daresay the team did it in Purple style.

Service metrics such as the speed with which we answered calls or chats or what have you, were extraordinary for our busy season, genuinely extraordinary.

Members, clients and partners told us that the quality of their interactions with HealthEquity was very high, whether we were talking about simple phone calls or complex, multimonth implementation projects.

And rapid growth in custodial assets, particularly in January, is evidence of the high value attached to the education that we and our partners provide together to drive our members to connect health and wealth.

So I wanted to simply say thank you again.

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

(Operator Instructions) Our first question comes from Jamie Stockton of Wells Fargo.

I guess, maybe the first one, just on the Devenir report since it obviously got a lot of attention.

The account growth slowed.

There was some data in there that indicated that maybe some players in the industry were cleaning up accounts that had never been funded, and that is what caused kind of a slowdown in 2017.

Could you just go through your thoughts on maybe how the numbers shook out and then what's going on in the marketplace?

Yes, a couple thoughts.

I think the first is if you look at assets, Devenir's been doing this for about 9, 10 years now, 7, 8 or something like that.

And over the last 4 or 5 years, assets have grown between roughly 22% and 25% each year, 20% and 25%.

Account growth has been all over the place and is clearly a noisier figure, as you referenced.

But we have -- we said, when this was published and have said in other contexts that people are going to look for, and I understand why, all sorts of evidence from individual data points.

But the reality is that this is a market that's driven by economics, that is growing at -- you can't say a modest pace.

You have to say a very good pace and growing steadily.

And in our view, the economic factors that drive that growth very much remain in place.

And so that's kind of the way we look at it.

We would -- we try not to get too excited about so and so didn't do this on their spreadsheet or what have you, and that's not the game we're playing, and I don't think that's the game that our long-term investors are playing.

So that's kind of the way we look at it, Jamie, if that's reasonable.

If not, we're happy to answer more questions about it.

No, that's great.

And maybe I'll just throw one more in there.

The service gross margin Darcy I think said in his prepared remarks, you guys have made a lot of investment in fraud prevention, and I'm sure some other things.

Can you just talk about how you expect that to trend from here?

Are we going to see continued kind of ramping up of investments?

Or will there be some leverage on that line?

No.

So I think we first mentioned this maybe in our first quarter earnings call earlier in the year that when you make comparisons to the prior year that we expected that we were going to put some more resources into that in the first half of the year and then we thought that they would smooth out for the full year, and that's exactly what they did.

By the time we got to the fourth quarter, we kind of felt like our margin in the fourth quarter was better than what it was in the fourth quarter last year.

And so we think that we kind of got through that.

That being said, we continue to invest those resources.

But the impact on the margin, we think that we will just bear that as we go forward.

So that kind of onetime hiccup that we had maybe in Q1, Q2 and Q3, we think we've got through that, we've scaled appropriately.

And so we don't see that being a negative on our margins going forward.

Our next question comes from Anne Samuel of JPMorgan.

I want to touch on -- on the top line guidance, what gives you the confidence here to raise your top line guidance versus where we stood just a month ago?

And how should we be thinking about the drivers of continued market share capture going forward?

Yes, I'll do the, certainly, the first part.

Jon can do the second part.

On the first part, I think that as we mentioned is, as we go through a transition from a Q4 to a Q1, our service revenue per account is on a tiered pricing basis.

And so depending on the level that everybody got to, and those new accounts, they come on board and then we see what it looks like they're going to be on the first quarter going forward.

And so we gave guidance that we thought we'd be towards the end, the top end of that 5% to 10% that we've guided to.

And we came in, but it was slightly better than what we had thought before.

And the second thing is that we have now solidified all of our custodial relationships and our depository agreements and the rates that we're going to get for those.

And so those give us a lot better -- when we talk about visibility into the next year's revenues, we have a great deal of visibility because of our recurring nature.

We have the assets in the house.

We now have the custodial agreements in place.

And we have a pretty good view of what those service revenues per accounts are going to be.

And so being a cautionary company as we are, we were a little cautious, more cautious a month ago.

As we've now digested that and have closed the books out and looked at what we've got looking forward then, that's why we are able to raise the revenue guidance at this point.

Great.

And then just following up on the earlier question on margin.

Just how should we be thinking about the cadence of margins as we move throughout the year?

And then also, as your custodial business kind of grows at a faster clip, how should we be thinking about the mix shift impact to margin?

Well, we've always said that, as this mix shift happens, that the margins will increase, and we've generally given guidance more on the EBITDA line than we have on the gross profit margin line, that we'll grow that more rapidly than what the overall revenue growth is.

The one thing that we're a little cautious about always is that bringing on new accounts brings on less profitable accounts.

And so that has an impact to actually reduce the overall gross margin.

But as people begin to say, then we get more custodial assets.

Then we grow that revenue a little bit -- that revenue line a little bit more rapidly.

And so it's a tug and pull that happens on the gross profit margin line.

Over a longer period of time, if you look at them on a year-by-year basis, we have increased those gross profit margins pretty consistently year-over-year.

Except for this year, we were slightly down by about 1%.

And we think that we've weathered through that and that the trend will generally be in the upward direction.

But in any one given quarter or even for the year, we expect that trend to manifest itself.

Now within the seasonality of a fiscal year, we do believe that we will continue to see those -- our gross profit margins will, in the first and second quarters, will -- then in the third quarter, they'll start to decrease a little bit.

And in the fourth quarter, we'll still have a significant decrease on a quarterly basis of our margin as compared to the first 3 quarters because of all of the onboarding expenses or costs that we incur in the fourth quarter.

We ramp up our member service delivery and all of our implementation teams before any of those accounts show up in January.

So we expect that, that trend will be very similar.

Our next question comes from Donald Hooker of KeyBanc.

I guess, interested in the M&A market.

I guess you had a few acquisitions over the past 6 months.

And was curious about, I think you had -- I sort of induced from your comments last quarter and the quarter before that, it seemed like there was some thawing of that market, maybe some opening up of new opportunities.

Can you kind of qualitatively give us a sense of what that might look like for the next fiscal year?

Sure.

I'd say we think about the last 6 months exactly as you described.

We've taken, without wanting to or in any way commenting on any current discussions, we have taken some steps to make it easier for even more of the banks and credit unions and the like to partner with us, learn a little bit from what we've done to date, that I think certainly will help us to be winners in this thing as these opportunities come available.

A couple of examples.

One is that we're taking steps right now to assure that while I have you go back up, I'd say one key issue that you're seeing is that as there's sort of a clear path to rate increases and healthier lending activity, the potential sellers here have an interest in participating in our deposit program, that is, becoming part of self-equity, those transaction.

And so we've taken some steps, one, to open our deposit program to credit unions and something we've never had before, and I don't think anyone in our industry has ever done, other than individual CUs themselves.

And second, to, on the bank side of things, we've taken some steps to further automate the process that we used to run the program so that we can accept somewhat smaller depository agreements that would allow some of these institutions to credibly participate.

And so again, I think that's us trying to take, basically being responsive to what potential sellers are interested in, and trying to be the best acquirer in the market.

And we've certainly done, on a total number of deals basis, more of it than anyone else.

And I daresay, if you look at the performance of the portfolio, as Darcy does with this team every quarter, the performance of the portfolios that we've acquired has just been outstanding.

And so Don, we'll continue to look at these kind of sort of incremental opportunities as they come.

And in addition, I guess lastly, it's worth pointing out that we do -- while we are not going to take the view that somehow we're a roll up and so these are the same things as a sale, what is true is it's pretty clear that the business is more than funding what it's spending on these transactions.

So I consider these to be a very, very good deal for our shareholders, and we'll continue to pursue -- we'll continue to beat the bushes, find these opportunities and then where they're there, we'll continue to present ourselves as a fantastic acquirer and try to get them all.

Got you.

Maybe a follow-up, kind of a higher level question, would love to hear your kind of view.

I guess, the math rate you say is clearly -- is positive for the consumer and the employer and everyone.

I get that.

I constantly hear anecdotes of, however, consumers are poorly educated in terms of how to spend their money and visibility to prices and whatnot.

Can you may be give us an update in terms of what HealthEquity is doing to help educate your members in terms of how to better consume health care?

Well, very much appreciate the question.

And the way I would -- the way we think about it is, that in order for this market to function effectively, you have to have consumers feeling comfortable in it.

And it doesn't mean that every consumer has to be an expert any more than any of us are experts on the marginal cost and so forth of things we buy.

It does mean though that consumers have to be -- have to have support.

They have to understand what's going on.

They have to have rights.

And they have to have people who they can partner with.

And that's really where we want to be.

So we focus -- in fact, just last week, we had an extensive training session to help our sales team talk about this with our clients.

We're focusing more than ever on helping consumers understand the long-term sort of health-wealth connectivity of their accounts, how to allocate dollars among their HSA, their 401(k) and so forth, to get the most out of it in the long term.

And at the same time, we work at a transactional level with consumers in really the nuts and bolts of this, which are, as you know, about things like understanding.

What was this medical bill for?

And if I don't agree with it, can you help me with that?

So we think we're in a unique spot to do this because people -- we're one of the few entities in the sort of less-for-less, say for a lack of a better term, health benefits ecosystem that is unabashedly aligned in terms of its own interests with that of the consumer.

We're not providing insurance.

We're not your employer, et cetera, et cetera.

And your relationship with us is quite literally a trust relationship.

And so we feel like we're in a great position to lead that kind of education, Don.

There are things that we, as you know, and it's worth repeating here, where we think that it's appropriate for others to lead and for us to do a great job of promoting and integrating.

So you talked about price transparency, something you mentioned, or the like where we think that others are working very hard to get the sort of technology of that right and to deal with the commercial issues that certain types of transparency raise.

What we can do is, we speak with 1/4 of our members almost every month -- almost every -- I'm sorry, we see, we have about 1/4 of our members visiting our applications every month and speak with about 7% or 8% of them a month.

And so we have tremendous opportunity to point people to savings opportunities that are available to them.

And the more you do that, the more confident people get.

The more confident they are, the stronger signals they're sending to the supply side, which in turn produces more efficient markets, lower prices, more customer-centric services, and it's a really powerful force for good, in our view, ultimately, in terms of making a better health-care system for everybody.

Our next question comes from Mohan Naidu of Oppenheimer.

Jon, I think along the same lines, I think Steve made a comment that the enterprise group is seeing the benefit from the plan design and education.

I just want to explore that a little bit.

Are there still enterprise clients who are not offering an HSA-eligible plan or a well-designed plan that can be [compared to] against traditional plans.

Where are they falling short?

Want to speak to this, Steve?

Sure.

I can give you a nice monologue on this, Mohan, but let me just kind of cut to the chase.

We've always said that when it comes to consumer behavior, the plan design is king, right.

And consumers are pretty smart.

And they're going to vote with their wallet.

And then educational efforts are kind of queen.

And then other elements may be like the court jester, right.

But reality is, is that if you don't have the right (inaudible) -- the nice thing is, we have now hundreds of these large enterprise employers.

And so we can start to benchmark those that are having success and success being defined as, number one, people enrolling in these plans; number two, contributing appropriately; number three, investing.

And then satisfaction, right.

The ones that have people year after year keep coming back even when they're giving them the choice if they want to go back to the old plan.

And so when you take those elements, and then you benchmark it, then you can go to the ones that are seeking to have those types of results and say what do I need to do?

And maybe as easy as -- sometimes an enterprise employer think they're doing their employees a favor by giving them a very discounted, high deductible plan but not making a contribution in the account.

What that leads to may be the wrong behavior because someone may say, well, I'm not going to put any money on my HSA this year.

I'm just going to take a lower premium, and then next thing you know, they have a medical event that comes up and they haven't been putting money in their HSA.

And that behavior even costs the employer some tax savings because by giving somebody more take-home pay and not an HSA contribution, you're actually causing more taxes, right, on their take-home pay, both for the employer and the employee.

And so what we do is we benchmark it.

And we say that we think that the rules of thumb are this, and this, part of this is proprietary.

But we say we think this is going to give you the best results, and then let's see how we did.

And frankly, if we're having a conversation with a large employer, and they're not that interested in it, then we're not going to bug them about it.

But if they're interested in moving the needle, then we'll spend more time with them and help them fine-tune their plan design and then start educating, and there's a lot of different things that they're doing with these employers to get the word out.

And Jon spoke to this.

But when we think about educating the consumers, we just want to make sure that our message is timely, that it's personal and that it's relevant.

Because if we can hit those 3 buckets -- make it timely, personal and relevant -- then we're not wasting their time, and we're not wasting our time.

We're not wasting our money.

And I think it's more meaningful.

But look, we grew up with HSAs, right.

I mean, we were one of the first companies that were doing it.

And so the market's evolving, and we feel like we always have to be a leader in that type of education and using all the tools at our disposal.

And trust me, we're making investments to get better at this as we mature.

I'll just add one more thing to this, and that is that technology is ultimately a huge piece of the educational discussion.

In that, I'll use a simple example.

I'm guessing that no one who can hear the sound of my voice now that's ever been polled by a benefits professional from their workforce that if you choose to sign up for the non-HSA plan, you are effectively forfeiting, depending on who you are, how much you're contributing, your tax bracket and so forth, between 5 figures and 6 figures of retirement purchasing power.

In other words, just a simple statement, right.

You're losing $50,000, $100,000 over time in purchase power by this choice.

And some go, well, why don't you just tell them that?

And that's -- there's some value to that in truth, and that's sort of the top end is educating the educators, right.

But the other place to make that same point is when you have a member who has begun to build up a little bit of a balance and has chosen -- for example, has never taken a look at investment options, that means that member's probably not really thinking about this as a long-term account.

And so transactionally, there's an opportunity there from a technology perspective to identify the right message, the right media and the right moment to drive that consumer down that road, right.

We're not talking about creating new money that -- out of magic.

We're not talking about some elixir.

We're talking about being smart with the tools in front of you.

And again, I think that, that, on the one hand, the sort of package we're trying to deliver to our members in terms of what the education can do for them is a very attractive one.

And then secondly we -- I think, and this goes back to having proprietary platform and all that, where we're really investing and will continue to invest is improving the technology of delivering the right message at the right moment in the right medium, and the result of that is driving people towards more contributions, I mean, you saw some benefits to that in the last quarter, obviously.

But it's something that we expect to be part our competitive advantage for many, many years to come and that we will continue to invest in because we genuinely believe that this is a win.

Thanks for the great insights, guys.

And I guess, maybe in extrapolating that, if you think about segmenting the market, where do you see the biggest greenfield opportunity for you guys, whether it's the size of the employers, their client types, if any color that you can provide there, that will be great.

Two comments there.

The first one is, at the consumer level, every consumer can be a health saver.

Even if you have no money to save.

You can spend less on health care on net by using these accounts right and making smart decisions.

Every consumer can be a health saver, right.

So at the consumer level, the trick is to meet individual consumers where they are, right.

But to recognize that wherever they are, they can be doing more.

When I look at how we reach consumers, which is your question about employers and the like, the key point to make is that, historically -- and we talked about this at the beginning of last year, and certainly, it's an area of increased investment this year because it's worked.

Historically, HealthEquity really did -- it sold in 2 ways.

It sold directly through larger employers, and it sold through partnerships with health plans.

And our assumption in the early days of the company was that that's how -- that, that smaller employers and midsized employers would basically end up buying these products through the health plans.

And the good news is, is we kept testing our assumptions with market research and the like, and we found out over time, as the market grew, that's not what was happening.

And so we weren't on the field for a large segment of the market that was growing through direct sales to employers that were below our enterprise threshold.

We just weren't even on the field, weren't taking shots on goal or whatever metaphor one wants to use.

And so that's something we began to change.

We talked about a little bit in fiscal '17.

We began to change in fiscal '18 and we are pushing forward with in fiscal '19.

And we feel like one of the things that allows us to feel confident back to the question you asked earlier about the ability to sustain market growth and market capture is the fact that, as of today, we are playing on more of the field than we ever have, and at the same time, we're also trying to open new channels, working with financial advisers and the like on the retirement side with HealthEquity retirement services.

We're doing that because it's a new group of people that want to talk about health savings and want to talk about connecting health and wealth, and we want to be there for them.

So those are areas of opportunity.

I still come back to the notion though that we can't forget that every consumer can be a health saver and can benefit from what we have to offer them.

Our next question comes from Steve Halper of Cantor Fitzgerald.

Regarding the commissions that you'll be capitalizing in fiscal '19, what's the earnings impact on that, the income statement?

The amount of -- the earnings impact of -- there's a reconciliation of what we -- we'll show as amortization.

And that is about -- it's under $3 million.

Our next question comes from Sandy Draper of SunTrust.

I'm actually going to be asking the same question that Steve just asked I just want to make sure I'm clear.

The guidance that you gave, Darcy, does not reflect the new accounting standard?

It does.

It does.

Okay, great.

So that was an even shorter answer.

And then, maybe -- and it was sort of addressed, Jon and Steve, in the answer to Mohan's question, but one of the things that's always surprised me a little bit, when I look at the industry stats around high-deductible health plan adoption is that large employers are -- have a higher level of adoptions than small employers.

I would think intuitively, small employers, hey, we can't afford to pay PPOs, we're going to push every -- we're going to go high deductible only.

Just as you interact more with, as you're starting to move more towards the smaller end and that end of the market, do you have any thoughts on why that is, and what changes it?

Are they maybe just -- they're less sophisticated, they don't quite understand it?

I'm just trying to understand that dynamic and at what point is that a drag, as you're going into that market versus the big opportunity because you can help educate it?

Yes, I'll comment a little on that (inaudible) elaborate.

First point, going to an HSA-style plan is not ultimately about the net value or the cost of the benefits package to the employer.

It's about the value that the employee gets out of it.

So Google has figured out that it can offer more benefits to its team members for the same amount of money, right, by going towards HSAs.

And they have no interest in offering skinny benefits, for reasons that I'm sure we would all see as obvious, as products of Google.

I guess we're all the products -- we're the products.

And so you see, the part of the answer to your original question is simply the fact that, I think as you say, there's an education to do that these larger groups have figured out more quickly that is, this is not really fundamentally a question of how much am I as an employer going to spend in benefits, right.

But how smartly am I going to spend it?

And how much incentive am I going to provide for my members to spend it smartly?

And how much support am I going to give to them to do that and ultimately to get the most out of it from a tax efficiency perspective?

So there is an element of that education that needs to occur beyond larger groups.

I think the biggest challenge that we and others face in the true small group market really boils down to the fact that, in particularly when you're talking about fully insured business, the incentive for any individual company to take actions that really help control spend is somewhat limited because they're part of a larger pool.

And the incentive for the sellers of insurance as well as the advisers and so forth is also somewhat mixed, depending on how they're being paid for their services and so forth in terms of the value of health plan they want to provide as opposed to the total value of benefits.

But we're getting there.

I mean, if you look at last year, one of the reasons that we had strong performance in the quarters -- the sort of middle quarters of the year, what that's all about is smaller groups coming on.

And so I feel like we're starting to crack that nut a little bit.

And certainly, we're spending more time than ever with advisers to those smaller groups who -- it may have taken a while, but they've got it, and they've got, in particular, that, if you think about this both in terms of immediate health care as well as long-term wealth building, you are doing your employees, your customers if you're in the advice business, a tremendous disservice by not really encouraging them to begin to build savings in an HSA and to adopt an HSA-qualified plan.

Hey Sandy, just a couple notes -- I agree with what Jon said, just a couple notes to break it down, the data.

So if you look at the Kaiser study, and that may be what you're referring to.

They define their small firms as firms with up to 200 employees.

So basically, 3 employees up to 199.

And you're right, their penetration is about 23% on average.

And then the larger firms or every firm bigger than that, obviously, there's a lot more market segments in that.

And again, in their study, they see a 30% adoption among firms with more than 200 employees.

And so clearly, when you get down below 100, those firms tend to be all in.

They're either all in or they're all out, right.

If you're working for your brother-in-law, you're both going to have a health savings account or you're both not going to have one.

That's kind of the way it works in the really small businesses because they really can only support one plan design.

But I think that, as we get into this space, let's call it that the firms that maybe are below what we normally targeted, which as you know, prior to this more direct initiative, we were really not targeting firms below 5,000 employees.

And we'd get some -- a lot of it from our health plans, but we wouldn't sell directly.

But I think as we get in there, a lot of the same rules will apply.

We talked about good plan design, good education.

These are the same smart people that work for large firms.

They just need the right offering with the right types of educational materials and to make sure they have the right plan design in place.

And so I don't think it's going to change that much.

I just think there's maybe a definitional issue when you look at the Kaiser data.

And I don't think there's a lot of other really good studies that show the difference between small and large firms, but I don't know if that's helpful or not.

Our next question come from Mark Marcon of R.W. Baird.

I've got a slew of questions.

We (inaudible), Mark.

Steve or Jon, can you talk a little bit about the legislation that's out there?

You've got a couple of new bills, H.R. 5138 and 5324 that are out there or that have been newly proposed.

And then there's been some recent passage.

Can you just talk a little bit about what you anticipate the impact of the recently passed legislation's going to be?

And what do you think the prospects are for further legislation?

Steve?

Sure, so there's different flavors out there.

The ones that we support, we try to boil it down because there's a lot of different things you can do to kind of 3 big initiatives: Number one, we think this notion of expanding HSA first dollar coverage, so just for everyone that's -- make sure we're on the same page here, this is what can the plan pay first dollar that does not have to come out of the health savings account or that you don't have to wait to hit your deductible until the plan pays.

And so the first element of this is this chronic disease management concept, CDMA.

And we think that if there's more clear definition of things like diabetic meds, asthma meds, that haven't really been commented on, can be paid for by the health plan, that you'll see more large employers that are concerned about those at-risk populations, these are people with chronic disease, incorporate that in their plan design, it goes back to what we said -- what I said earlier, to plan design scheme, that's an element of plan design, and if they can go to their people and say, don't worry about having to pay a couple hundred dollars a month for your diabetic meds out of your HSA because we're covering them for you.

Don't worry about paying for your asthma meds.

Don't worry about paying for your osteoporosis meds, that we think that cannot only drive adoption within existing employers that offer health savings accounts, because that would be another educational point put out, hey, we just added this element to our plan design.

You may not have considered this choice in the past.

Now this is a benefit.

Go after it.

The other thing is, there's employers out there that say that's one of the reasons why they've never offered HSAs is because they don't want to do a disservice when it comes to these people.

So we would rank that right at the top of the list.

Clearly, doubling the amount you can put in the HSA to make it more equitable with what people are having to come out-of-pocket in some cases, so we're very supportive of making the amount you can put into your health savings account equal to your out-of-pocket maximum.

We think there's a lot of support out there for that.

And then, as we've said on previous calls, that with 10,000 people a day becoming Medicare eligible, and there's this confusion as to whether they should enroll in Medicare or not in order to preserve the ability to continue to contribute to their HSA.

Let's just remove the confusion and just say if you end up in Medicare, fine.

But if you're still working, you still want to make contributions to your HSA, have at it.

The law supports that.

We think that all 3 of those could help not only -- it'd benefit people.

That's the first thing we think it would certainly benefit the industry, and so we're very supportive of that and would encourage you to maybe Google #HSAStrong, for a very nice blog by Mr. Kessler.

And also, this is the first time, Mark, that we've never done anything where we're sort of actively commenting on a legislative process in terms of -- in this way.

Certainly it's the first time I've done it as CEO here and I -- we chose to do it because these 3 things make just oodles of sense.

I don't care what side of the aisle or up or down or in the balcony or wherever you're sitting, I mean, let's give people the tools they need to respond to health costs today and to build health savings for the future and, like, we're, this is -- these items would benefit our members tremendously, would benefit prospective members tremendously.

I mean, obviously, there's some benefit to us an organization, of course.

But this field, both sensible and doable, and we're going to stay at this until this stuff gets done.

Because it's time to get the common sense stuff done, and that's what we try to do.

That's great.

And hard to imagine who would oppose it.

With regards to the expansion of your solutions, you've got your FSAs and 401(k)s on the front page of your website now.

What -- how much of a contribution have you seen from that?

Or what sort of growth are you seeing there in terms of that expansion of solutions?

So I will say our -- what we call RA business, which is our FSA HRA admin business, grew at, about 6% year-over-year in terms of members, which is basically where the market for that stuff is between 0 and 6. And so one thing you can take from that, and obviously, our retirement business grew in percentage terms, well, a lot, because it started very small.

But -- and it's still very small.

What I think is -- so what you should take from that is that the way we're approaching this is as follows: We view the RA business as really being about the commitment that we have to helping people at whatever place they are on sort of the health savings journey.

We're not looking at it like, oh, this is some augmenter to growth.

If anything, in percentage terms, it has a way of slowing growth because there's no way we can grow -- or I say, it'd be very difficult, unless we were really putting a ton of energy into it to grow that product at the same rates as the HSA product has historically.

We're not a small player in that business, but obviously, we're not the largest.

And so but we do view it as a way to make good on that commitment, because let's say you're at an employer that doesn't have HSAs.

We can still help you.

We can help you use that flex account more effectively and get every dollar out of that thing and have a good user experience.

And we can use some of the same educational technology we talked about on the HSA side over here to help people do what they're trying to do, which is figure out how much they should put in and then get that money out of there with minimum hassle.

And that's how we look at that.

We look at retirement a little differently.

What we're trying to do in retirement is, as I said at the beginning, is to connect health and wealth.

And we think that, the more that we do that, what will happen as a result is that people will genuinely begin to rethink how they're allocating their retirement dollars.

That will bring more dollars into the HSA.

That's obviously good for us from a growth perspective.

It's also, in our view, is really the way the market should ultimately be looked at.

I don't really believe that it makes sense for all of these products to be in their own little silos, benefits companies do this, banks do this, investment firms do this, da da da.

These are, ultimately, if you can teach consumers to use all of these products in an efficient way, you can put a lot more money in their pocket, a lot more purchasing power in their pocket.

So we do look at them a little differently.

Certainly, the RA business has always been a material contributor to overall revenue.

But not a huge contributor in terms of sort of net growth.

And the retirement business is sort of just getting started.

But we're very happy to have them and be learning from them because, ultimately, we think that's the best way help the consumer.

And if we're the best at helping that consumer, then we're going to have a lot of opportunity to continue to do that.

Great.

And then a couple of short questions.

First, just on the growth of the investment AUM.

I mean, you're growing that very rapidly.

How should we think about that over the next couple of years in terms of that growth rate that we're seeing in terms of that investment AUM?

And then, on the flipside of that, how do we think about inactive accounts?

How do we count those?

And then, a short one for Darcy.

On the guidance, is the only change relative to 606 -- does the capital -- the capitalization of the commissions.

And how long is that being capitalized for?

In other words, is it being amortized over 5 years, 7 years, 10 years?

Why don't you take that one first because in a way I think it feeds into the response to the first question?

Right.

So yes, we have estimated that the life of an HSA, which we use the same life for the amortization of our intangible assets when we buy a portfolio, so it's no different than when we acquire one through the sales process.

So we give it a 15-year life, and that's what it'll be amortized over.

And is that the only difference in the guidance, from 606?

Correct.

Yes, that's correct.

So we -- that's that number that's less than $3 million that will be amortized in this fiscal year.

So the first part of your question, I think had two sub-parts.

The first of which was about, sort of the growth...

Rapid growth on the investment side.

And I think there -- I mean, I'll tell you.

It's kind of -- to me, it's kind of funny.

I've heard others in the industry as well as commentators say well that's bad, because on the marginal dollar, HealthEquity doesn't make as much money on an investment as it does in cash.

People who run businesses that way don't get to run businesses very long.

I really -- at least they shouldn't.

Maybe they do.

I don't know.

But it's ultimately, in our view, it really doesn't take a lot of foresight to come to the conclusion that educating our members about the opportunities to invest, encouraging them within the bounds of proprietary and appropriate uses of investment, advise to invest, giving them the tools to invest, giving them advice even if they have very small balances at very low cost, it -- this is a no-brainer.

And the reason it's a no-brainer gets to the second part of your question, which is the accounts themselves are stickier.

They remain with you longer, right.

They are more active, however one wants to define active.

And they're just more useful, when all is said and done, when members begin to use them both as short-term vehicles to as an alternative to paying higher premiums and managing short-term cost and long-term vehicles to build incredibly tax efficient savings.

And when members are doing that, they are hanging around for a long, long, long time, in our experience.

And so to us, that's really the key to avoiding some of the issues that we've heard from others about, I don't know, I don't know whether it was never funded or -- I don't really know what the hell is going on with some of these folks, and I don't really want to comment on it, other than to say, what we're focused on is, on the front end, leading the market in terms of opening new accounts, something we certainly did last year.

And then, as our account members grow and mature, moving them up the path of health savings so that they are using this product in a vibrant way.

And I think if we do that, we'll not only be just fine but will have done something really positive for American families that are trying to deal with savings.

And that's kind of the way we think about it.

And I hope that helps in answering your question.

It does.

But would you expect -- it seems like you would expect continued acceleration -- in terms of the investment AUM.

Because I mean you're, that's what you've been trying to do, and you're getting really good traction.

That would be wonderful.

I mean, I, honestly, I think the more that our members -- this is by the way, what we were reporting on this comment on this point, long before anyone cared about it.

And the reason we were doing it, you'll recall from the time of our IPO, we reported on this percentage of our members investing, and how much.

So why are you doing this?

It's not really that material.

And our answer was it's not material now, but it will be material soon.

And it's something that we managed to and we believe is important.

If conversely, we've heard people say, I'm sure you have, well, the real thing about this is, in fact I think some people in our industry who took this position (inaudible) this is really a transactional account.

It's not [right].

That's not a winning business.

It just isn't.

It's not a winning business for the consumer ultimately, and it's not a winning business in terms of differentiating yourself in the marketplace.

So let's focus on the long term of health care as well as the long term of financial -- of the sort of financial side of this, and let's help people do those right and if the result of that is that we see continued growth there that outpaces the growth in either cash or other kinds of investments or outpaces account growth, that's exactly what we want to see.

Our next question comes from Steven Wardell of Chardan.

So can you tell us about where you are in your selling season for fiscal 2019?

So which segments are you -- is your sales team talking to?

And what are you hearing from them that now looks different from prior years?

Well, it's early, obviously.

Steve, do you want to comment on some of the early themes?

Yes, so we continue to spend a lot of time with new large employers that are either currently with HSAs, they're kind of an HSA starter option with some of our competitors, or they have never had them before.

And so those are a piece that have come out pretty early in the season.

Continuing to see (inaudible) of interest among health plans out there.

And as you know, we added quite a few of these health plans/administrator partners last year, and yet there's a lot more that are either out there looking to make a change.

And so I think now, HSA has been -- we're about 14 years into this, we have a lot that have gone to a couple other rounds and we've seen them in the past and now they're looking for best-in-class.

And so there's that.

And I think -- and then the other work that we're heavily involved with right now which is kind of loose from what we talked about earlier, is our account executive teams, they're all out meeting with their large employers, and in fact, we were at a conference last week.

It was a great event here in New York City with 3 of our large employers, and they were just talking about their HSA journey and what they want to do to accelerate it.

And these were diverse employers, professional services, financial services, the big health system from the Midwest, all talking about their different aspects of the journey and to be in that room and to -- I was able to moderate that panel and to look out in the audience and see a bunch of our current partners but a lot of prospects that were there.

They filled up the room trying to learn about how can we this work.

And so look -- if Bill Otten, our Head of Sales were here, or Gary Robinson, our Head of Marketing, I think they would concur that there's a lot of activity going on out there, a lot of interest, and you never really know how it's going to end up until it ends up.

But we're pleased, and we continue to make big investments in those areas that we've talked about.

I'm showing no further questions at this time.

I'd like to turn the call back over to Jon Kessler for any closing remarks.

We are genuinely appreciative of the support from those who spoke from the analyst community and from investors over the course of the quarter and beyond that.

We're going to be here for the long term, making the donuts and hopefully delivering this kind of results quarter after quarter as best we can.

And as long as we do that, we feel confident that you'll stick with us, and that really gives us a lot of energy.

So thank you, and we'll talk to some of you soon and talk to everyone again in a couple of months when it's a little sunnier.

Thank you.

#HSAStrong.

And #HSAStrong.

That's a good point.

See you later.

Thanks all.

Thank you.

Ladies and gentlemen, this does conclude today's conference.

Thank you for your participation.

You may all disconnect.