Healthequity Inc (HQY) 2018 Q2 法說會逐字稿

Welcome to HealthEquity's Second Quarter 2018 -- 2019 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, Nicole, and good afternoon, everyone.

We wish you a warm September welcome to HealthEquity's Second Quarter Earnings Conference Call.

With me today, we have Jon Kessler, our President and Chief Executive Officer; Steve Neeleman, our Founder and Vice Chair; Darcy Mott, our Executive Vice President and Chief Financial Officer; Ted Bloomberg, our recently announced Executive Vice President and Chief Operating Officer; and Tyson Murdock, our Senior Vice President and Controller.

Before I turn the call over to Jon, I would like to remind those participating with us that there is a copy of today's earnings release and the accompanying financial information posted on our Investor Relations website, which is ir.healthequity.com.

We also will be claiming safe harbor on the forward-looking statements included in today's earnings release and that will also be made during this conference call with you, which include predictions, expectations, estimates or other information that might be considered forward-looking.

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

These forward-looking statements are subject to risk and uncertainties that may cause our actual results to vary or differ materially from the statements made here today.

As a result, we caution you against placing undue reliance on these forward-looking statements, and we encourage you to review the discussion of these factors and of the 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 28, 2018, along with any other subsequent periodic or current reports filed with the SEC.

We may provide updates to the factors affecting these forward-looking statements in light of new information or future events, but we are not obligating ourselves to do so.

There's one other housekeeping item in connection with this earnings conference call and webcast.

After our prepared remarks, we will open up the lines for questions.

However, given the length of our last earnings call, we will be limiting questions to 1 with a follow-up at a time.

You can reenter the queue if you have additional questions that have not been asked.

And please, we ask that there are no 7-part questions, and our goal is to try and keep this earnings call under 1 hour.

With that out of the way, I'll turn the call over to Mr. Jon Kessler.

Thanks, Richard, and thanks, everyone for joining our second quarter fiscal 2019 earnings call.

Joining Darcy and me today is Ted Bloomberg, our newly appointed Chief Operating Officer.

I'll have prepared remarks, Ted will introduce himself, and Darcy will, as always, bring us home with a recap of the financials and guidance.

We are coming to you from Boston, and Steve is also on the call holding down the fort in Draper.

HealthEquity team delivered a standout performance in the second quarter across the key metrics that drive the business.

Revenue of $71.1 million was a record high for quarterly revenue and an increase of 25% year-over-year.

Adjusted EBITDA of $31.8 million, another quarterly record and up an even larger 33% year-over-year, once again generating market expansion.

Custodial assets at the end of the second quarter surpassed $7 billion, up 31% from a year ago, and total HSA members at quarter's end reached 3.6 million, up 23% year-over-year.

Turning to new accounts and sales.

The team added 121,000 new HSAs, and custodial assets grew by a robust $170 million during the second quarter.

HealthEquity continues to grow the share of members investing for the long term.

During the second quarter, custodial invested assets grew 72%, and the number of investing HSA members grew 64% year-over-year.

How do these results compare to the market?

They compare well.

Devenir released its report -- that was an ad lib, for those who don't know.

Devenir released its report on the first half of the year for the HSA market just a couple of weeks ago.

On a midyear-over-year basis, Devenir estimates that 20% growth -- or estimates 20% growth in HSA custodial assets.

So our year-over-year growth of 31% continues to handily outpace the market.

And we continue to gain market share with about 14% of the market's custodial assets according to Devenir.

They expect custodial assets to grow from about $50 billion now to about $75 billion by the end of 2020, and we expect to be a big part of that growth.

Today, we are expanding our reporting to include a metric we call active HSA members.

Before describing the metric, let me explain why we are doing this.

Darcy and I are sometimes asked about HSA that are un- or non-funded.

We see this as an opportunity to explain yet another reason to have and to keep an HSA.

HSAs offer the flexibility of tax-free reimbursements at any time for life for qualified medical expenses incurred at any time from the date the HSA was established and so long as it is open.

This is true even if the account holder has changed jobs or situations and isn't presently in an HSA qualified health plan.

HealthEquity's technology and ecosystem integrations help members build a complete record of their eligible expenses from day 1. But since members can only contribute to HSAs while enrolled in HSA-compatible plan, they may have no balance for an extended period.

Many of these members will be in an HSA plan again especially as HSAs grow in popularity.

So HealthEquity continues to deliver value with access to their record of prior medical expenses, of course, but also by providing them the ability to continue adding to that record for future tax reimbursement, even for expenses incurred in a non-HSA compatible plan.

We can do this with minimal expense because HealthEquity owns its own platform.

And we keep in contact with these members through ongoing education and, of course, access to our health saving specialists.

The active HSA member metric helps us to evaluate unit economics excluding these members.

We define active HSA members as HSA members that are either associated with a partner as of the end of the period or that have held a custodial balance at any point during the previous 12 months.

As of the end of the second quarter, 82% of our HSA members were active HSA members, and the total number of active HSA members grew 19% year-over-year to 2.9 million in Q2.

We hope this additional reporting is helpful and highlights HealthEquity's unparalleled ability to help every member connect health and wealth.

The team has delivered a strong first half of FY '19 as we continue to substantially outpace the market and our largest competitors.

Now the busy season gets going in earnest.

And speaking of busy, allow me to introduce Ted Bloomberg.

Ted joined us last month coming from Financial Engines, TD Ameritrade and Investools.

Ted has a very strong resume, leading organizations utilizing technology and tools to engage consumers to build wealth and achieve retirement goals.

As Chief Operating Officer, Ted leads HealthEquity's technology, operations, service delivery, sales and marketing teams.

COO is a new role in our structure, which I believe will accelerate the development of company leaders and keep them moving forward and fast in the right direction.

Ted, his wife Jamie, who is a physician, and their children have already relocated to Utah and he has hit the ground running.

Ted?

Thank you, Jon, for the kind remarks and introduction.

First of all, I want to thank the entire HealthEquity team for welcoming me and my family into the Purple fold.

As I did my due diligence on HealthEquity, I was very impressed with the leadership team and the service orientation of our team members.

The company is truly committed to helping people manage their healthcare expenses, become educated consumers and connect health and wealth.

I'm honored to be a part of the team, and I look forward to rolling up my sleeves in joining our efforts to serve members, employers, health plans and other partners.

Two of the greatest challenges facing working Americans today are healthcare and retirement.

These challenges are extremely complex and they are intertwined.

I'm hopeful that my experience can be useful to our members and partners facing these challenges in 2 ways.

The first is what we call total engagement which really means helping educate our members on how best to use HSAs and RAs.

Much of my career has been spent helping build and execute multichannel communications, and my recent experience at Financial Engines helped me learn how to do this in a B2B2C way in partnership with employers.

The second is in connecting health and wealth.

Steve, Jon and Darcy have long talked about how HSAs are the most tax-efficient saving and investing vehicles available but they are often thought of and utilized as spending accounts.

The huge initiative here at HealthEquity is to help our members understand and realize the full potential and value of HSAs and how they fit into the retirement puzzle alongside employer-sponsored retirement accounts and other savings vehicles.

My experience in the financial services industry, and specifically in retirement planning, will help inform our strategy here as we seek to ensure that our members have the best chance to achieve a happy and healthy retirement.

I look forward to working with our team members, partners and employers to make HSAs available to all Americans and to help them use these accounts as effectively as possible.

The team has set a high bar with its performance, both historically and in the first half of fiscal 2019.

I'm committed to helping deliver strong results in the back half of this year and beyond.

Now I'll turn the call over to Darcy for comments on the quarter's financial results and our outlook.

Thanks, Ted, and welcome aboard.

I will discuss our results on both a GAAP and a non-GAAP basis.

A reconciliation of non-GAAP results and guidance that we discuss here to their nearest GAAP measurement is provided in the press release that was published earlier today.

Before I review our second quarter financial results of FY '19 and to provide an update of our guidance for the full FY '19, I'd like to first add to Jon's introduction of active HSA members.

With active HSA members, we are introducing a metric that we feel is precise, replicable, relevant to an assessment of unit economics and perhaps one that educates on the many ways consumers use HSAs.

For clarity, neither total nor active HSA members include the approximately 600,000 reimbursement account arrangements administered by HealthEquity or our small but rapidly growing number of 401(k) members.

I would like to also point out that the introduction of this new metric does not have any impact on our revenues, expenses or results of operations in the past or in the future.

It just provides an additional data point by which to evaluate our business and operations.

Now turning to our second quarter financials.

Revenue for the second quarter grew 25% year-over-year to $71.1 million.

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

Service revenue grew 9% year-over-year to $24.9 million in the second quarter.

Consistent with the strategy we have outlined over the last 5 years, service revenue as a percent of total revenue declined to 35% in the quarter, down from 40% of total revenue that are represented in the second quarter last year as the custodial revenue stream has become more predominant.

Service revenue growth was attributable to a 24% year-over-year increase in average HSAs during the quarter, partially offset by a 12% decrease in service revenue per average HSA.

Remember, HSA service fees are paid primarily by employers on behalf of their employees, and so by bringing these down over time, we deliver more value and help our network partners deliver more value to their customers.

It's working, and we're going to keep doing it.

As we indicated last quarter, we expect a decrease in service revenue per HSA to be towards the high end of our historical 5% to 10% guidance for FY '19.

Custodial revenue was $30.7 million in the second quarter, representing an increase of 44% year-over-year.

The driving factors for this growth were a 31% growth in ending total custodial assets and a higher annualized interest rate yield on custodial cash assets of 2.11% during the quarter.

Interchange revenue grew 21% in the second quarter to $15.4 million, compared to $12.8 million in the second quarter last year.

Interchange revenue benefited from the 24% year-over-year increase in average HSAs in the quarter compared to the second quarter last year, with a slight decrease in average spend per HSA member.

Gross profit for the second quarter was $46.6 million compared to $35.8 million in the prior year, increasing the gross margin level to 66% in the quarter from 63% in the second quarter last year.

The higher gross margin was the result of increasing mix to custodial revenue.

We expect that the mix shift will continue over time and will continue to drive gross margin expansion as accounts mature and their balances grow.

Operating expenses were $25 million or 35% of revenue compared to $19.3 million or 34% of revenue in the second quarter last year.

We expect all categories of operating expenses to increase as a percentage of revenue in the second half of FY '19 as we increase our investment in our strategic initiatives.

Income from operations was $21.6 million in the second quarter, an increase of 31% year-over-year and generated an income from operations margin of 30% during the quarter.

We generated net income of $22.5 million for the second quarter of FY '19 compared to $16.9 million in the prior year, an increase of 33%.

Our GAAP diluted EPS for the second quarter of FY '19 was $0.36 per share compared to $0.27 per share for the prior year.

Excluding stock compensation, net of tax and the tax impact of stock option exercises, our non-GAAP net income and net income per share for the second quarter were -- of FY '19 were $21 million and $0.34 per share.

Our non-GAAP adjusted EBITDA for the quarter increased 33% to $31.8 million compared to $23.9 million in the prior year.

Adjusted EBITDA margin in the quarter was 45%, the highest quarterly adjusted EBITDA margin in our history.

For the first 6 months of FY '19, revenue was $141 million, up 26% compared to the first 6 months of last year.

GAAP net income was $45.1 million or $0.72 per diluted share.

Non-GAAP net income was $40 million or $0.64 per diluted share, and adjusted EBITDA was $61.4 million, up 32% from the prior year.

Turning to the balance sheet.

As of July 31, 2018, we have $303 million of cash, cash equivalents and marketable securities with no outstanding debt.

Turning to guidance for fiscal year 2019.

Based on where we ended this first half of FY '19, we are raising our revenue guidance for FY '19 to a range between $279 million and $285 million.

We expect non-GAAP net income to be between $67 million and $71 million, non-GAAP diluted net income per share between $1.05 and $1.11 per share, and adjusted EBITDA between $108 million and $112 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 FY '19 assumes a projected statutory 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, we expect to sustain or slightly increase our year-to-date interest rate yield on custodial cash assets of 2.07% for the full year of FY '19.

Second, as we have done in recent reporting periods, our full year guidance includes a detailed reconciliation of GAAP and non-GAAP metrics.

This includes management's estimates of depreciation and amortization of prior capital expenditures and anticipated stock compensation expenses, but this does not include a forecast for stock option exercises for the remainder of the year.

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

Thank you, Darcy.

Well done.

Darcy, Steve, Ted, myself would like to take a moment to thank HealthEquity team members, our employers, our network ecosystem and depository partners for delivering extremely strong results.

Today, I'd also like to thank you, our shareholders, for your confidence in HealthEquity and its vision.

Together with our Board of Directors, we take stewardship of your investment and currency very, very seriously.

Now we're going to be trying to be more efficient with the call today as Richard said.

With Richard's leadership, our analysts have embraced a 1-question-at-a-time rule, and he's done our best to cajole us to be efficient and concise in our responses.

Let's see how we do.

Operator?

(Operator Instructions) And our first question comes from Anne Samuel from JPMorgan.

I was hoping you could maybe speak to the opportunity from recent legislation around contribution limits for HSAs.

Where do we stand on those bills?

And how should we think about the potential timing of impact to your model if they were to go through?

Steve, you want to take that one for us?

Absolutely.

Anne, thanks for the question.

We've been tracking these very closely over the past couple of months.

The house actually passed 3 bills that we think have very favorable changes to help savings accounts.

You mentioned one part of this, which is to double the amount you can put into the HSA or at least take it to the out-of-pocket maximum.

While we think that would be great, we think that some of the work they're focusing on is even better because it expands the number of people that would actually be eligible in HSAs.

Specifically, there's a lot of folks out there, depends on the study you look at, that currently are in plans that have high enough deductibles to have a health savings account but they don't have the right plan design features.

And so we think that if they can tweak those plan design features, there will be a lot more people that will come into the HSA world and will be able to benefit from health savings accounts.

Where it stands now is, as you know, Congress is just coming out of recess, the Senate's working some of the confirmation hearings and things like that.

The word that we're hearing is, is that if you take the 3 bills that were passed in the house that they've certainly been presented to the other side, they're taking a look at it, but we think there should be some action after the midterms.

Would love it if it was sooner than that, but we think that's kind of what they're thinking--they are looking at some spending bills and things like that to try and attach some of these HSA provisions.

But we're still hopeful.

I mean, it's been a long time since HSAs have received a legislative boost, and yet, we think there's some opportunity here.

And our next question comes from Donald Hooker from KeyBanc.

A question on the guidance.

I think Darcy mentioned, and it looks like the cash yields were up sequentially, which I think is not normal for you guys, right?

I think we normally assume cash yields are stable through the year.

But you sort of alluded to maybe further increases in cash yields through the rest of the year.

Can you maybe elaborate on how we should think about cash yields?

Yes.

Most of our improvement in cash yields that would happen during the year.

Unlike last year, where we had a major change in one of our custodial agreements, it's just about the balance and the allocation amongst our different depositories that maybe have yielded a little bit.

And it's also relative to the timing of when new custodial assets come on board during the quarter.

Our guidance really -- for the remainder of the year, we're giving full year guidance on what we expect that to be.

And so our year-to-date yield, we expect to sustain that or to have a slight increase of that for the full year guidance, which is how we think about that when we give our guidance.

And our next question comes from Greg Peters from Raymond James.

Again, the disclosure around active accounts.

You mentioned the upcoming enrollment season, and I was hoping you could update us on your distribution strategy to the small- and middle-sized employer market, especially in the context of your 124 network partners, and also the private label strategy of one of your competitors who was recently sold to VISTA.

That sounds like a 2-parter, but I'll do my best.

That was one question.

Just a complex question, Jon.

Come on.

I think I just won some money on betting who would try the 2-parter, so I appreciate that.

Let's see.

So your first question, really, I'm going to say is about the sales cycle and so forth.

And as you know, the biggest change that we've had this year in the sales cycle is that we increased the investment that we've made in selling to what we call regional employers, both directly -- and a lot of these are by providing a lot more education and support for the brokers and advisers that serve these folks and also by providing more of a product mix that works for these folks.

So for example, earlier this year, we began selling reimbursement accounts sort of outside of just those that are integrated with our health plans, which is something totally new for us.

And of course, we also have begun selling the product in the returns space.

So I think we have the right general product mix, and we're seeing some good early results.

And that's reflected in the fact that even though it's early in the year, we're already up 200,000 new accounts, and that's pretty good.

So I guess I'd say, so far so good on that one, and obviously, we've got a lot of ways to go.

And the end of the year will sort of be the tale of the tape on this one.

But certainly, if you had told me at the beginning of the year that this is where we'd be, I'd be very pleased in terms of the progress in the sales year.

As far as whether we're seeing changes in competition -- I'm going to try to make your 2-parter a 1-parter.

We're not really seeing any effect of that.

I guess, Greg, the way I would put it is, is that there are different kind of partnerships that make sense for different folks.

There also is the question of what people actually want in the marketplace.

And ultimately these products are principally bought from partnerships with employers, and there are lots of different people who are speaking to those employers, including our now 124 different health plan and administrative partners.

So we'll see if anything changes, and if it does and whatnot, we'll be here to talk about it.

But for the moment, we feel like we've had a pretty strong year, and that includes beginning to wrap up some partnerships that I think ultimately you'll be pretty excited about.

I had another complex second question, but can I just -- on your answer, you talked about the reimbursement accounts.

And do you think that's a necessary component as you target the small- and middle-sized employer market versus the large employer market?

Because it really didn't seem like it was relevant going back years, but maybe you can just clarify for us that.

Well, let's see.

We see RA as -- I mean we've had RA for a long time, and we see it as helping us grow the HSA core by meeting the needs of employers.

And also, frankly, meeting more and more consumers where they are.

Remember, as we've discussed, only 20-odd-percent of consumers are in HSA plans, so it's an opportunity to meet people earlier on the sort of health savings journey.

And so we've added some capabilities, again, such as the ability to serve mutual employers directly on the RA side.

And we may add some others.

But I guess, it's more in the vein of this is something that we've had available for our employers in the larger market, and we felt that if we were going to serve these employers beyond our integrated health plans, we also had to have the ability to serve them on a nonintegrated basis, that is to say, on a direct basis in the RA front.

So I mean, I think it's an important piece of what we offer.

It's been an important piece of what we offer for a long time.

But I would stress that we don't view it as a business where you should be comparing growth rates relative to the HSA business because the market generally won't support that.

And so we've grown at around 6% a year and -- last year, and that's about market-grade growth in the RA business, according to the IHA Group, and so we feel pretty good about that, recognizing what we're trying to do in that business.

And our next question comes from Allen Lutz from Bank of America Merrill Lynch.

You mentioned the 401(k) business is small but rapidly growing.

Can you talk about where you're seeing early success and where it's resonating with clients?

Yes, sure.

Two areas.

Number one is we're developing partnerships that are similar to the partnerships that we've long had in other areas of benefits with record keepers in the 401(k) space.

And were this not his first call, I would have thrown it to Ted unexpectedly right now, and he'd be trying to do this.

I'm just teasing him.

But -- and we're having great conversations in that space.

We already have a number of data sharing agreements up and running and certainly think that, that will be a very interesting channel to explore as both a new way to bring HSAs to market, but also really valuable for consumers who really should be thinking about their overall retirement objectives and thinking about the HSA as part of that.

So first area of partnership is really with existing record keepers and others in the retirement industry.

The second opportunity is, and this is more relevant for the smaller groups and the midsized groups, what we call our regional employers, is offering a sort of standalone solution, where we're both managing the HSA and managing the vendor, staff and so forth from the retirement side so that we can deliver that experience of helping consumers think about this altogether.

And that's also really interesting opportunity, something that we're having a lot of dialogue with our existing HSA employer partners.

As you know, we serve more than 40,000 of them, so lots of opportunity there.

And we'll see how that goes.

But I think in either case, the direction that we want to pull the industry is we want the industry to be thinking about HSAs as long-term savings vehicles for life.

And both of these initiatives kind of help us do that.

We think that they will have kind of -- whatever their success is directly, we also think they're going to have significant indirect effect in helping to kind of get more people thinking about the HSAs as a lifetime savings vehicles.

So that's kind of what we're doing, and as we have more tangible things to report, we'll do so.

And our next question comes from Mohan Naidu from Oppenheimer.

Jon, on the selling season, and as you mentioned, a lot of opportunities that you're pursuing.

If you're going to think about the biggest opportunity in terms of new membership additions, which areas do you see as the most lucrative in the next few years without any legislative action?

Yes, I mean, look, the nice thing about this business is there are a lot of different ways to grow the business.

And so there's one that Ted talked about in his opening remarks, and one of the reasons we were really, really excited to bring him on board and cajole him back to Utah is the opportunity with our existing members.

And this is something that he worked on very directly, both -- not just the financial engines, but back in his Investools days and so forth is really driving individuals down that path of education and savings using all the tools that you have at your disposal, from fancy big data all the way to blocking and tackling and messaging delivered in service interactions.

So the first opportunity we have is to mature those accounts more quickly, and I can't answer your question without starting there.

From a membership growth perspective, look, again, the nice thing is there's multiple ways to do it.

We still have a lot of opportunity to grow our existing membership with existing employers.

We talked a little bit last quarter about the success that we had in fiscal '18 and the beginning of this fiscal year in doing that, particularly with our largest employers.

We've expanded that effort down to the next sort of tranche of employers, and we'll see how we do.

If we do as well as we did last year, we'll be pretty happy given that the group is larger this year.

So that's the next opportunity.

And then lastly, there's the opportunity to grow that footprint.

And I can tell you, it's really exciting.

Though I think it's easy to think of -- as long as we've been talking about health savings, it's easy to think of this as a product where everyone knows about it and everyone's already kind of made up their mind about it.

But the truth is, in a way, that's true.

Everyone knows about it, and everyone's made up their mind about it.

That is to say that people know this is the direction that benefits are heading and should have.

But some people move faster than others, and so we continue to see an opportunity in building our employer nameplates as well as logos as well as our partner logos, both through the traditional channels we've had through our direct expansion, and as we just talked about, by partnering with the retirement side as well as the health plan side.

So I can't prioritize those.

I'm just glad we have all of those opportunities to grow and to meet your expectations for growth.

And your next question comes from Stephanie Demko from Citi.

So this one's actually for Ted.

So congrats on the new role.

Can you give us an update on the consumer-facing education initiative that you've been targeting for the platform?

And if I can slip in a follow up, could you also outline any additional initiative you'd like to tackle in your first year as COO?

Sure.

Thank you for giving me 3 weeks to get my legs under me.

And I'll take your first question in order.

I'm really excited about our opportunity to engage members.

And one of the trends that we saw at Financial Engines, which I think applies here, is that we grow our sponsor and employer base first, and then over time, we learn how better to engage members and how to move them along the journey from spenders to savers, and then, ultimately to investors.

And I think HealthEquity has been able to do that really well, but we're just getting warmed up.

I think we have sort of as we are able to study the data that we have, as we're able to implement sort of better marketing, as we're able to get our -- as Jon alluded to, our member services folks having the right conversations with people, it's going to be really important for us to continue to engage and educate.

And we probably have a lot of runway to do that.

I'd have to -- I don't have any numbers for you because I'm just getting my legs under me, but I'm pretty excited about the opportunity.

And then in terms of other initiatives, I would just echo Jon's sentiment.

I think there are several sales channels that we can pursue, ranging from direct selling to smaller companies all the way up to our enterprise and continuing to partner with our health plans.

And really, those are the kind of 2 areas of focus.

And then the third one, as I alluded to in my opening remarks, is connecting health and wealth.

I think that Jon tried to get me off the hook on answering the record keeper question, but I'll just -- I won't be specific, but I'll just say that I think there are a lot of opportunities in the record-keeping space and in the 401(k) space that we have an opportunity to pursue and think we're well situated to do that.

Those are probably the 3 that I'm excited about.

And our next question comes from Mark Marcon from R.W. Baird.

The first question is, I just really appreciate the extra disclosure around the active HSA members.

But I was just wondering, we can kind of see what it looks like from a percentage basis over a 1-year period.

How would you qualify -- how would you provide perspective or color in terms of the longer-term trends?

And could some of the education efforts actually increase that percentage that are really active?

Well, Mark, as you know, we don't give guidance on account growth, so we're certainly not going to give guidance here.

That having been said, we do see this as a revenue growth opportunity because -- particularly as HSAs become more prominent, there is an increased likelihood that these individuals reengage.

As our member engagement capabilities continue to progress, we'll keep looking at ways to accelerate that opportunity.

I mean, I think the key point to remember about these people is that many of these individuals, it's not that they run away somewhere, it's that they cannot currently contribute.

But just because they can't currently contribute doesn't mean that they're not building value.

They're able to build value by continuing to accumulate eligible expenses, whether they're tracking those on our system, which we allow them to do, or on their own.

That's a real value.

And so, at some level, step one in what you're describing is making sure that our members understand that, and so that's what we're trying to do.

And so I do think there's an opportunity there as well as -- it's like anything else.

The more you study your base of customers, the more you can learn how to provide value to each type of customer.

That's great.

And then with regards to the investments that you're making, we obviously saw a fairly significant step-up on a year-over-year basis in sales and marketing.

And I was wondering how long we should think about the step-up continuing in that respect?

Thanks, Mark.

This is Darcy.

With respect to sales and marketing, specifically, I think, as we alluded to last quarter, we adopted ASC 606 in February.

And so we got a little bit of a pickup for deferral.

And we told people at that time that we were going to use that opportunity to invest a little bit more in some of these initiatives, particularly with respect to direct to employer and some of our channels and what we would continue to spend.

So -- and we'll continue to do that.

So when you look at it on a year-over-year basis, you'll see that comparison.

However, I'd also point out that because of the adoption of ASC 606 that you won't see the hockey stick impacting the fourth quarter that you've seen typically when we -- have reported all those sales expenses for commissions.

And so what I think you'll see is a little bit more smoothing of the sales and marketing expense as a percentage of revenue as we go throughout the full year, but we've reflected that increase in our guidance.

And our last question comes from Steven Halper from Cantor Fitzgerald.

The cash balance continues to grow.

Can you provide an update on what you think your capital deployment opportunities are, and specifically, the acquisition landscape as we sit here today?

Yes, Steve, thanks.

This is Jon.

We absolutely plan to deploy capital.

As you know, we closed the quarter with over $300 million in cash and we plan to deploy it.

We continue to look at the same areas for opportunities.

We've announced a couple of smaller direct portfolio acquisitions, of course, and we'll continue doing those and continue telling you about them.

And we do look at things that you might think of as sort of product fill outs or whatnot.

What we're not going to do, Steve, is -- and this relates a little bit to Greg Peters' earlier question, I've looked and looked and looked, and I can't find share price anywhere in our discounted cash flow model, so -- and we're not going to do things just because share price is there.

And similarly, I haven't seen accumulated cash balance in our discounted cash flow model.

So we're trying to be disciplined, and I suspect that you and others appreciate that and have seen us not jump at things we might've done based on where they're trading or what have you.

So that's kind of -- I guess, that's the color I can give you.

We haven't changed our philosophy on this frankly over the course of the last few years.

And so far, the money we've spent has been rewarding for shareholders, I think, and hopefully, that will be true as we deploy all the capital we have.

And I'm showing no further questions at this time.

I would now like to turn the call back to Jon Kessler for any further remarks.

Well, thank you all very much.

Appreciate you -- we're kind of auditorium style today.

We'll see how that goes next time.

But thanks, everyone, again and, particularly, we do appreciate the confidence the investors have shown in this team, and do take very seriously our obligations to you as we get into our busy season.

We'll talk to everyone again in December.

Hopefully, a little cooler by then, and have an excellent fall.

Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes today's program, and you may all disconnect.

Everyone, have a great day.