Healthequity Inc (HQY) 2018 Q3 法說會逐字稿

Welcome to HealthEquity's Third Quarter 2019 Earnings Call -- 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, Hayley.

Good afternoon, everyone.

We wish you a happy holidays, and welcome to HealthEquity's Third Quarter Earnings Conference Call.

With me today, we have Jon Kessler, President and CEO; Steve Neeleman, Founder and Vice Chair; Darcy Mott, our Executive Vice President and CFO; and Tyson Murdock, our Senior Vice President and Corporate Controller.

Before I turn the call over to Jon, I have 2 quick reminders.

First, there is a copy of today's earnings release and accompanying financial information posted on our Investor Relations website, which is ir.healthequity.com; and second, we claim safe harbor on forward-looking statements included in today's earnings release, and that will be made during this conference call with you.

Forward-looking statements include noted predictions, expectations, estimates or other information that might be considered forward-looking.

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

These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from statements made today.

As a result, we caution you against placing undue reliance on these forward-looking statements, and we encourage you to review the discussion of these factors and other risks that may affect our future results or 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're not obligating ourselves to do so.

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

Well done, Richard.

Thank you and thanks, everyone else, for joining our third quarter fiscal 2019 earnings call.

I have a few prepared remarks on the quarter, and Steve will then comment on progress in the retirement channel partnerships that we have been building; and Darcy will review the numbers.

The HealthEquity team delivered an encore-worthy performance, I'm not sure I know what that means but it's what it says, in the third quarter across the key metrics that drive the business.

Revenue of $70.5 million and it was an increase of 24% year-over-year.

Adjusted EBITDA of $29.7 million was up an even larger 40% year-over-year, generating significant margin expansion.

Custodial assets at the end of the third quarter surpassed $7.1 billion, up 27% from a year ago even in the face of broad market declines during the period.

Total HSA members at quarter's end reached 3.7 million, up 22% year-over-year, and active HSA members were 3.0 million, up 17% from the third quarter last year.

Turning to sales.

The team opened 119,000 new HSAs in the quarter, 9% more than it did during the same period a year ago.

For the first 3 quarters of fiscal '19, the team has opened more than 333,000 new HSAs, and that excludes portfolio acquisitions, and it's also up 9% year-over-year and a record.

As many of you know, however, our biggest quarter for new accounts is Q4, and we're working hard to deliver a strong one.

Custodial assets grew by $59 million during the quarter, which ended October 31.

As you may recall, this was a period where the value of broad categories of assets fell.

Notwithstanding market volatility though, HealthEquity continues to grow the share of members investing for the long term.

During the third quarter, custodial invested assets grew 53%, and the number of investing HSA members grew 56% year-over-year.

So the team has delivered strong year-to-date results in fiscal '19.

And because we believe HealthEquity is still in the early stages of its growth, we've made some significant investments in leadership talent.

Last quarter, we introduced Ted Bloomberg, HealthEquity's COO; and today, I have the pleasure to announce the addition of Larry Trittschuh as HealthEquity's Chief Security Officer.

Larry is presently Chief Information Security Officer, Americas, for Barclays PLC and previously held senior data security positions at GE and at Synchrony Financial.

He served in the U.S. Air Force and is an Air Force Academy graduate.

HealthEquity is distinguished by its thousands of connections with ecosystem partners, and we've challenged Larry to take an ecosystem approach to privacy and to the security of our members' data, assets and financial transactions.

We'll be upping our investment and making some real innovation headway in this area because it's the right thing to do for members but also as a way to strengthen our ties to the ecosystem that has made HealthEquity the HSA leader.

And speaking of HSA leaders, Steve is now going to take the mic to discuss some of the work our team is doing to connect health and wealth.

Steve?

Thanks, Jon.

Over the past 16 years, we have built our platform to integrate with health plans and other partners to help consumers better save their health -- their HSA dollars.

We are now integrating with retirement partners to expand the help we offer to consumers in this important area.

We call this connecting health and wealth.

During Q3, the team reached key milestones in our strategy to connect health and wealth by launching partnerships with 2 leaders in the employer-sponsored retirement plan business: Nationwide and Vanguard.

In each case, HealthEquity is working with these partners to create a truly unique and differentiated offering for employers, their advisers and ultimately for consumers.

By more fully connecting their retirement plans and HSAs, members can easily access and manage their accounts, intelligently allocate retirement investments across asset class choices and utilize advisory tools to optimize investment objectives.

Our vision from day 1 is that consumers would eventually appreciate the unique power of HSAs for building long-term savings and that HSAs would become widespread and popular as other retirement accounts.

It is no longer in the best-kept secret in employee benefits that HSAs are a superior vehicle compared to other accounts for consumers to spend tax-free dollars in health care needs but more importantly to accumulate long-term retirement savings.

HSAs are unique in their triple tax advantage nature.

Consumers with HSAs avoid taxes on deposits, growth and on health care spending.

For this reason, employers and consumers are beginning to think about how HSAs can be coupled with their 401(k)s, IRAs and other retirement accounts to minimize taxes and to maximize long-term retirement savings.

The challenge of managing health care expenses while saving money for retirement is significant for all Americans.

Our new partners share our vision, and so we expect these retirement partnerships will be important sources of growth for HealthEquity and will help educate consumers about the power of HSAs.

Our product, sales, marketing and operating teams are now working hard to implement these new partnerships and to sell more HSAs so that we can collectively offer thousands of employers and millions of employees be connected to health and wealth solution.

I'll now pass the baton to Darcy to discuss our numbers.

Thanks, Steve.

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

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

Revenue for the third quarter grew 24% year-over-year to $70.5 million.

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

Service revenue grew 9% year-over-year to $25 million in the third quarter.

Consistent with the strategy we have outlined over the last 5 years, service revenue as a percent of total revenue declined to 36% in the quarter, down from 40% of total revenue that it represented in the third quarter last year as the custodial revenue stream has become more predominant.

Service revenue growth was attributable to a 22% year-over-year increase in average HSAs during the quarter, partially offset by an 11% 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 fees down over time, we deliver more value and help our network partners deliver more value to their customers.

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

As we indicated throughout this year, 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 $31.6 million in the third quarter, representing an increase of 43% year-over-year.

The driving factors for this growth were a 29% growth in average custodial assets and a higher annualized interest rate yield on custodial cash assets of 2.14% during the quarter compared to 1.85% in the prior year third quarter.

Interchange revenue grew 18% in the third quarter to $13.9 million compared to $11.7 million in the third quarter last year.

Interchange revenue benefited from the 22% year-over-year increase in average HSAs in the quarter compared to the third quarter last year, with a 4% decrease in average spend per HSA member.

Gross profit for the third quarter was $45.8 million compared to $33.7 million in the prior year, increasing the gross margin level to 65% in the quarter from 59% in the third quarter last year.

The higher gross margin in the third fiscal quarter was the result of lower service costs per HSA and the 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 $26.8 million or 38% of revenue compared to $20.2 million or 36% of revenue in the third quarter last year.

We expect operating expenses to increase as a percentage of revenue in the fourth quarter of FY '19 as we initiate additional investments in some key strategic initiatives during the last quarter of FY '19 and into FY '20.

I will discuss these initiatives in a little more detail in a minute.

Income from operations was $19 million in the third quarter, an increase of 40% year-over-year, and generated an income from operations margin of 27% during the quarter.

We generated net income of $15.7 million for the third quarter of FY '19 compared to $10.5 million in the prior year, an increase of 50%.

Our GAAP diluted EPS for the third quarter of FY '19 was $0.25 per share compared to $0.17 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 per share for the third quarter of FY '19 was $0.28 per share compared to $0.17 per share for the prior year.

Our non-GAAP adjusted EBITDA for the quarter end -- for the quarter increased 40% to $29.7 million compared to $21.2 million in the prior year.

Adjusted EBITDA margin in the quarter was 42%.

For the first 9 months of FY '19, revenue was $211.5 million, up 25% compared to the first 9 months of last year.

GAAP net income was $60.8 million or $0.96 per diluted share.

Non-GAAP net income was $58.7 million or $0.92 per diluted share.

And adjusted EBITDA was $91.1 million, up 35% from the prior year.

Turning to the balance sheet.

As of October 31, 2018, we had $330 million of cash, cash equivalents and marketable securities with no outstanding debt.

Turning to guidance for our fiscal year 2019.

As Jon mentioned earlier, Larry Trittschuh is joining us as our new Chief Security Officer to help guide our continued efforts to make the security of our members' HSA assets and personal health information a top priority.

Included in our guidance for the remainder of FY '19 is our expectations of additional investments in security to support Larry's and his team's efforts plus additional investment in our technology architecture as well as investment to grow and support the recently highlighted 401(k) channel with partners such as Nationwide and Vanguard.

Based on where we ended the first 3 quarters of FY '19 and including the aforementioned investments, we are raising our revenue guidance for FY '19 to a range between $281 million and $285 million.

We expect non-GAAP net income to be between $68 million and $72 million, non-GAAP diluted net income per share between $1.06 and $1.13 per share, and adjusted EBITDA between $110 million and $114 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.

Our outlook for FY '19 also assumes that we are able to realize higher R&D tax credits in this fiscal year than we previously anticipated.

This will reduce our projected effective income tax rate to be approximately 21% for FY '19 only, which is down from the 24% guidance we provided in previous quarters this year.

Before I turn the call back to Jon, I would like to highlight 2 other 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 2.10% 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 in the remainder of the fiscal year.

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

Thanks, Darcy.

As many of you know, financial markets will be taking a pause tomorrow to honor President George H. W. Bush.

I worked in President Bush's administration as a very young economist.

And it's said that everyone loves you when you're dead, but for the record, President Bush had universal respect among Democrats, Republicans and Socialists and independents and all those kind of things and, one in particular, for his contributions to making America a better and more civil place, an example of which is the Americans with Disabilities Act.

In his final months, the President advanced the cause of access to the disabled, a cause of which I am a direct beneficiary; once more along with his service dog, Sully, a 2-year-old yellow Lab, like my son's service dog.

Much is made of what President Bush did to steer us through the end of the Cold War and to end it without a shock, and much should be made of that.

But what I will remember is his understated way of making this a more inclusive society for everybody.

HealthEquity, meanwhile, as we roll into our busy season, will be open tomorrow, as it is, every hour of every day, and our team will be working hard to help our members connect health and wealth.

As we go to Q&A, I do want to acknowledge and thank our research community for the more succinct Q&A session last quarter.

We're going to continue the "one question at a time" rule, with management also trying to answer each question concisely.

And as you all know, since last quarter, we've seen at least one pretty dramatic effort to keep Q&A under control in the White House, and we don't have all the tools they do, but everyone gets to keep their press passes as long as we can stick to one question.

So that will allow everyone to talk, and we appreciate you all living with that rule.

So operator, with that, let's do it.

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

My question is, how should we think about the market opportunity of bundling the health and wealth strategy?

And how many opportunities are there out there, like Vanguard and Nationwide?

Thanks, Anne, and great to talk to you.

I think -- let me answer the second part of your question first.

Both of these organizations and others that we're talking to on this topic, what really excites us is that it's a very -- it's a different approach to the market, and so one that not only has its own set of opportunities but is potentially going to dislodge opportunities that have existed for a long time that we haven't yet capitalized on.

Both of these companies have, as I'm sure you know, large numbers of employer clients that they work with.

Both have carved out particular areas of substance and expertise.

Vanguard obviously focused very heavily on delivering incremental value to investors, both those in group and nongroup plans; and Nationwide, very heavily focused on, for example, some really interesting innovation on the annuity side that they're bringing into the marketplace; and in both organizations, very heavily focused on education, which is a big part of this for us.

So we see, I guess, an analog here to what we have been able to do historically with our 120-odd health plan partners and other partners where we get more than 1 plus 1 makes 2. You really can deliver unique products and we hope to do that with each of these partners.

Steve, anything to add to that?

This reminds me of early days of health -- with health plans.

And I mean, when we first started selling the health plan, this would have been in early 2004, right after HSAs became law.

They were not accustomed to selling health savings account plans.

They were selling more traditional PPO and HMO plans, and it took a kind of monumental effort to get them trained.

So this is not something that all of a sudden, you're going to flip the switch.

However, the good news is that -- here we are in early December, we've got a couple of great deals and we're going to continue to reach out to other partners in the market and we're customizing them, as I mentioned in my comments, so that we can deliver truly unique solutions for each one of these.

And then the goal is to get out with their sales folks and help them compete in the market as they answer RFPs and things like that.

Employers are asking for this marriage of health savings accounts and the retirement plans.

And so I think similar to what we saw now 14 years ago when HSAs became law, employers are going to lead this.

They're going to say, "Hey, great.

I know what I used to have, but now I know what I want to have going forward.

Can you partner" -- in this case, a retirement plan partner, "provide a solution that will benefit my employees?" And then we all need to collectively step up and make it happen.

Kind of belly up to the bar, as they say.

And I'm just thrilled that our sales teams are getting it done, but as important is our operations and marketing teams and things like that to go on and work together with these great new partners.

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

Steve, can you comment on the pending legislation for HSAs?

What's your view on the timing with the House flipping?

And then do you think the components of the bill could change?

And if so, can you shed some light on what you think those changes could be?

Well, we've commented a lot on this over the past -- and clearly, we don't know what's going on in Washington, D.C. I mean, I will point out that it's been many years since there's what I would call formative legislation that have changed HSAs, I mean coming up over a decade now.

And even with control of the administration in both sides of Congress, they didn't get things done that we would have liked.

Now that being said, I was out in D.C., literally 6 days.

Is that the right use of that term, literal?

I was...

What he means is what he said, but without the word literally.

It sounded like the word literally.

But I was there 6 days after the election and spending time with folks.

And the good news is that they completely understand what needs to be done to help more Americans through either legislative actions or regulatory actions.

And so there was a report that came out recently that was presented to the White House from the folks that are really thinking about this, people in Health & Human Services and Department of Labor.

And they've really kind of focused in on these issues that we think need to be changed, specifically HSAs for working seniors.

There's too many seniors right now that are going to work every single day, and they're working for employers that are offering contributions to their HSAs and if they are on Medicare, they can't take the contribution to their HSA.

Similarly, there's too many people out there that are in high deductible plans that, for certain reasons, are not HSA-qualified.

And so even though they're in a high deductible already, they can't make contributions to their HSAs.

And we think that really kind of leads into the ability to provide and expand preventive care.

So these are all things that if you take a look at this choice and competition report that was recently issued, they're all in there.

And whether kind of split Congress, sometimes, it's better for getting deals done, we're not going to opine on that.

Jon spent more time in D.C. than I could, he may have some thoughts.

But the fact is that HSAs have done pretty well over the last 14 years despite having this kind of firm mandate where every single year, there's legislation being passed to enhance it.

It hasn't been the case.

It's been 12 years since a piece of legislation has been passed, and yet they continue to grow, employers continue to embrace them, and employees continue to benefit from them.

Jon, do you have other thoughts on that?

Well said.

Either that or Allen is asleep now.

We've lost Allen.

But, no, that -- he only got one turn -- he only got one question.

It was just the end, it was no -- we love you, Allen.

Our next question comes from Greg Peters of Raymond James.

I want to avoid the Acosta label.

So I'll try to behave.

It's too late, Greg.

I -- this is a challenge, I have to admit, as you know.

Greg, we have an intern standing by, just so you know.

Well, it's quite easy to hit the eject button on my conference call line, I'm sure.

So the first question then -- I'll have the follow-up, would be around your 124 network partners.

And I was just wondering -- I know you put out a presentation just recently, providing a snapshot of your network partners.

And last year, there was noise about one of your competitors providing a white label solution to 2 of your network partners.

So I was wondering, as we approach the critical point in your selling season -- or actually, enrollment season, can you give us an update on your network partnerships and how they're doing through this season?

Yes.

Darcy looks like he wants to say something.

I was chomping at the bit, but do you want to say something?

No, I mean, traditionally, we have announced this in January when we finish the year out and we've established those relationships.

But Greg, we feel -- we honestly feel pretty good about where we are here.

I think it's fair to say that now that people have seen what the particular noise item you were talking about really is and what it isn't, that's not something we're spending a lot of time talking about in the marketplace, to be honest with you.

And not that there may not be other areas that are waters they're applying.

I don't really know, but I have to say it's interesting as you get a number of years under your belt and you have opportunities to really -- we all throw around this word, partner, but when you've been working with some of these firms, health plans and others, long enough, there really is the opportunity to do some interesting things and to feel really strong when you're out there presenting with your partners or trying to help them retain business or vice versa.

And so I actually feel like this season has been, thus far, a very smooth one in terms of the quality of our partner relationships.

And in addition, it's an interesting one.

And obviously, we won't talk about sales here.

We'll wait until we get to January, but it's been an interesting one in terms of both the nature and the variety of partners that have been added.

Steve talked about sort of a whole new set of opportunities on the retirement side, but I think there are other areas, too, that we've looked at.

And we'll continue to explore as the HSA market grows.

There are different ways to help make it easy for this product to get in people's hands, and that's -- and make it useful once it is, and that's really what these partnerships are about.

Great.

My follow-up is...

That's it, yank him.

Go ahead Greg.

Just -- I know this was something you disclosed in last quarter's press release but it's a good time to touch on it, and that's just the difference in the number of HSA members versus active HSA members.

And one's growing faster than the other.

And maybe you could just revisit your commentary around those 2 different numbers and your views.

Yes.

I mean, as a reminder to everyone, we created a new metric which measure -- which we call the active HSA members.

And it's an attempt to isolate the fact that there are members who really are not in a position, as it stands, to contribute to the account because as a practical matter, they're not in a qualified plan.

And you can read back to get the precise definition, but that's what we're trying to do.

And we said at the time that we're going to watch this metric and see how it bounces around a little bit.

It's interesting.

And so that's really what we're doing.

It's -- I mean, we've spent 4 years as a public company and a number as a private one using precisely the same key metrics.

And so for us, I mean, introducing a new metric is kind of a big deal, and we want to give it some time to bump around before we really feel like we can learn something from it.

But what it has done is it really has, I think, appropriately caused us to really put some emphasis on -- some additional emphasis on everything that we can do to keep members who can contribute and use the account, -- contributing and using the account, and that starts with trying to understand where people are, better using data for that purpose, and so that's an area where we're doing work.

But beyond that, I would just say generically, I wouldn't put a ton of effort one way or the other into, and we're certainly not, into this number bouncing around quarter-over-quarter until we've had some time to really understand it.

Darcy, anything to add to that?

No.

Our next question comes from Jamie Stockton of Wells Fargo.

I guess, maybe just on Nationwide and Vanguard, can you talk about how productive you think these relationships can be in 2019 in the selling season?

Will you be fully up and running potentially to add accounts kind of more geared toward FY '20?

And then maybe also, what's the user experience going to be like maybe compared to some of your health plan relationships?

So I'll comment on the first part, and Steve, if you'd like to comment on the second?

Sure.

On the first part, for sales in the current fiscal year, they're not a factor and that's appropriate.

There's time that needs to be spent and is being spent with these relationships, educating sales forces on both sides.

These are -- the products that we're selling with are highly regulated products.

So it's important to get that part of it right.

And so we're -- we think it's appropriate to be cautious there, and I believe our partners do.

And that will have some impact in fiscal '20 as well.

As we saw -- as we rolled out health plan partners and the like, there is always more ramp-up time than you think, and it's appropriate to get it right.

There's nothing that can kill a partnership faster than a bad initial rollout and so -- on the negative side.

So I think -- we think these are important in terms of being part of a strategic, let's call it, additional -- whatever metaphor one wants to use, additional branch, whatever, that we talked about a year ago.

We told you -- we began to tell you you'd see some information on it, and now you are.

But it will take a little time before they really move the needle.

That having been said, the one thing that we are really ready for on day 1 is to be able to articulate the experience and the value of that experience to members.

And so that's sort of, Steve, where you'll comment.

Sure.

So speaking to user experience, thanks Jamie for the question, as Jon mentioned the importance of getting it right.

From kind of day 1, part of the reasons why we integrated with health plans was to get it right on the user experience so that when somebody logs into their health savings account, you can not only manage your account and make payments and things like that, you can see your claims and then ultimately go right into your investments.

And so it does take integration.

We need to build pipes like we have, and we've done this thousands of times on all of these integrations we've talked about in the past.

And so when we think about the user experience, what we want is for people to be able, again, do the basics, log in, have their account adequately funded at the right time, have the money available.

That will all be there, the ability to see claims.

One of the reasons why I think our solution is appealing to some of these retirement companies is because they know how many claim integrations we have with most of the health plans throughout the country.

In that regard, an important point, it's not an either, or.

So we built this in such a way that you're going to get -- as an employer, you're able to offer integration both towards the health side and towards the wealth side, and that's really a neat piece of the puzzle.

Yes, connecting health and wealth.

And so I can see where I can log in and see all that information, but then they have this thing that we talked about called health -- wealth view, which is the ability to see your HSA balance and your retirement account balance on the same website.

And then you kind of start thinking about the messaging to that consumer because in certain cases, the retirement folks, they don't get the mindshare that maybe we get because people aren't paying claims out of their 401(k), right.

People will have a claim come in and willing to pay -- or come to the website.

We can message them and some of the messaging, you might guess, would be, "You haven't captured your employer's match yet either out of your 401(k)," or there are now more employers that are matching HSAs and things like that.

And so it just provides that ability to bring the 401(k) or the 403(b) that oftentimes is kind of something you don't think about for a year or 2, more to the forefront of the mind and then we can start thinking about what's the best way to manage these accounts and make sure they're funded and take care of the needs.

And so Jon, I don't know if you have any other thoughts on UI but -- or user experience, UE, but I think that the most important thing for us is to make sure it's seamless and it works well, and they start to think about this whole HSA retirement holistically versus in 2 separate file cabinet drawers.

And that -- I mean, we try not to ping-pong back and forth, but I'm going to do it here because that last point, Jamie, is really where the power of this is.

It is if we can help consumers think about these products in the same sort of bucket, the end result for consumers is more savings, faster savings and keeping more of what you save.

And so we see our partners, both these 2 and others that are -- we're working with as well, we see our partners really trying to be responsive, for example, on the retirement side to -- as everyone on this call knows, every basis point of expense.

Well, from our perspective, optimizing around the HSA, the k and some of the other tax-advantaged products is really a very substantial next leg.

You can either think about it as the next leg down and the cost of investing, or you can think about it as the next leg up in how much you get to keep of what you put in.

And that's really where the power of this thing is in terms of connecting these products.

And so as we think about user experience, that's really the goal, is to help more consumers think about it that way, and we know the result of that will be higher balances, more consumer education, a greater appreciation for the products.

And ultimately, that's a benefit to our investors as well in the sense -- the extent that, that drops right to the bottom line.

So that's the way we think about it.

Our next question comes from Stephanie Demko of Citi.

So you just mentioned that you're trying to get consumers, Jon, to think about HSAs and 401(k)s in the same bucket.

Does that mean consumer awareness has now progressed to a point where it's no longer kind of the initial barrier you're trying to solve for?

Yes.

I think that as Steve mentioned, there's been some real progress in that regard.

In a funny way, one of the groups, Stephanie, that still needs education is the HR professionals.

And this sort of fact, that these things are looked at separately, is a function of a fault line that exists in benefits, where you have the folks who do the k typically come from finance background and they're within the finance team, right.

The folks who do benefits, health plans, et cetera, think in 1-year increments, and that's not a bad thing.

They have to.

And they have a really hard job of controlling costs and so forth and trying to keep that money in wages instead of assets.

But this is about bringing those 2 groups together, and I think that wouldn't be possible to your -- to the point of your question, if people hadn't, to some extent, begun to get through that initial basic understanding barrier of what an HSA is, what an HSA plan is that it's not just a way to shift cost, that there's this account that if used properly and educated properly can be extremely valuable.

And lastly, I think most importantly perhaps, I mean, you can't talk about this kind of stuff if people aren't feeling confident about their ability to do things like look at their medical bills and see what they're paying for and so forth, that our system has done well and offered for a number of years now.

So I think the building blocks are starting to get there.

Nothing happens as fast as any of us would want it, but this is how things happened when you have something going from brand new to mainstream.

It connects with other things that are mainstream.

It -- the messaging starts to become almost dull, like, "Yes, I knew that." When you're saying, "Yes, I knew that," that means a lot of other people may finally be figuring it out.

And so I mean, I guess, that's kind of the way we think about it.

I hear that, I hear that.

I definitely saw that in benefit selection.

So one quick follow-up before you guys kick me off, but -- so you hired Ted prior to the initiative with consumer education.

Is he just that good?

Or is he going to be diving one level deeper into this health and wealth link?

I think it's kind of interesting.

I mean, as your question suggests, I mean, Ted's background was at Financial Engines and his most recent place and prior to that, at TD Ameritrade, also in investor education.

And so it's kind of interesting to see that applied to our business, and the way that Ted is approaching this is he calls it total engagement.

And what it's really about is using every opportunity we have with a member to kind of educate them a little more.

And what I think he's kind of trying to do is that's something we've talked about for a long time that we do, he's trying to figure out how do we do this as scalably and in as much of a data-driven fashion as possible.

As Steve mentioned, one of the interesting sort of facts here is that people have more interaction with their HSA than with almost any other benefit and really certainly relative to their retirement plan.

So it's not just the opportunity to educate members about the HSA.

It works in reverse, too.

But we're going to have the opportunity to say, "Hey, you haven't -- you, individual, you haven't gotten your full employer match on the k side, but let's go get that sucker." And -- or other messaging that's going on.

And so I think there are benefits in every direction from something like this.

And he's totally engaged.

Good to hear.

Oh, yes.

Ted is -- Ted is engaged.

Ted is listening right now, or perhaps he's really getting work done.

Our next question comes from Sandy Draper of SunTrust.

Probably a question for Jon and maybe also Steve as well.

We got some sort of little bit of conflicting market commentary over the past week or 2. I think it was a Mercer report that came out about benefits that was reasonably positive about employers still looking to really drive and push high deductible plans and HSAs.

But at the UnitedHealthcare Investor Day -- and this was much longer term, but they talked about a plateauing and they didn't see growth in high deductible health plans.

Now I'm just curious, your thoughts on what you're seeing and how.

Obviously, you're not going to comment right now on the selling season.

So going back, what have you seen anecdotally in terms of how employers are looking at high deductible health plans and HSAs?

Yes, I mean, we don't normally comment on acquisition activity.

But if United would like to just give us that bang, if they don't think it's useful, we'll take it off their hands.

Wichmann, if you're listening, you know my number.

I'm getting a look now.

But -- so during this -- it's an interesting season.

The first point that I would make here is -- or that I am going to make is that there is no theory that I have heard as to why these products will not continue to penetrate the market both in terms of the number of individuals who have them, the number of employers who offer them and the way the products are used and, therefore, their balances.

What -- and that's because they do what they're supposed to do.

And the Mercer piece that you're referencing as well as others, what's sort of -- what's very difficult to dispute is that again, these aren't magic bullets for everything that ails health care, but they produce the result that is really effective, which is -- as you know, it's about taking health care cost inflation and making it more like regular inflation at a reasonable controlled level.

So every year, employers aren't effectively eating from wage to pay benefits.

And then from the individual's perspective, providing a very valuable way to save.

And actually, I think it's more likely that what we're going to see is a little bit like if you went to work somewhere today and they didn't offer a retirement plan, a k or a 403(b) or 451, you'd be like, "What do you mean?

Why don't you have that?" And I think that's where -- once people really understand how to use this product, that's the way they're going to look at it.

So that's my basic view of the macro market.

I think there are a couple of reasons that maybe people, aside from whatever their own objectives are, that you do see a little bit of sort of conflicting information.

The first is that we're in a period of extraordinarily tight labor market and -- as everyone here knows.

And there is some truth to the view that when labor markets -- well, I want to say when labor markets get this tight, they haven't been this tight since -- I don't know, after World War II.

So I'm not sure anyone has a real good view of what happens when this happens, but it is true that there is the desire not to do any -- to do -- not to do anything that rocks the boat in any way.

And so I'm sure there is a level of conservatism out there that some folks are feeling, and it's something we talked -- there's always conservatism when you deal with this kind of product because it affects real people.

So maybe it's that we're used to talking about that, and so whether it will ultimately have an effect on the sales season, I don't really know.

But that's one factor that I suspect contributes to this.

The second is really -- and I think we do have to recognize this is that -- I think this is maybe a little bit more specific to HealthEquity but to the broader market is we've had a number of years here where there has not been much market volatility and we've had a significant amount of volatility, obviously, in the last 3, 4, 5, 6 months and -- I don't know, last 8 hours.

And so as a result, I think that may have an effect on people psychologically in terms of the amount of money they put in the accounts and so forth, how they feel, all those kind of things.

I don't know the answer to that.

But that's a possibility.

And I would, in that regard, note that from our perspective, we have -- this is one of the real reasons we do not give guidance on either assets or accounts.

When we had an extraordinary January last year, and I mean, really extraordinary, I can see people just drawing lines and saying, "Oh, you know, well, that's going to happen again, but even more so." I mean, that may be, we don't really know.

But it's definitely, from our perspective, a source of caution.

So I wandered a little bit in answering your question.

I think the big picture is this is a -- I don't really understand the argument for these products plateauing in popularity.

I understand the data that people are trying to look at, but I do understand that, like any good growing market, right, there are going to be periods where conditions are absolutely ideal.

There are going to be periods where conditions are less ideal.

And so you're going to have variation around a mean, but I think the mean is strong growth for years to come.

Jon, I just have one thought.

Yes.

Sandy, thanks for the question.

I mentioned earlier that HSAs have been around now for over 14 years.

It's actually 3 years longer than the iPhone, believe it or not.

And I think one of the reasons why we've always tried to be an innovator and continue to help people understand the value of these fairly complex instruments if you think about the tax-free nature of them and then the growth and how you use them in health care, we can use it for retirement, and all that, is because you've got to refresh the story every once in a while.

And you mentioned the Mercer report, Sandy, that came out, and it's fairly positive.

One of the things in that Mercer report that I don't believe even HR people are really telling the story about yet is the slide that shows that if you have an HSA and you're taking $5,000 out of it a year to pay for your health care and retirement, that $50,000 will last 6 years longer than if you were taking out of your 401(k).

And no one's telling that story.

I don't think -- I think traditionally, people are looking at this as tax-free spend.

We started telling the story.

Mercer's trying to tell it, so yes, I mean, I think that we need to continue to refresh the story that these are the best accounts for tax-free spend today, tax-free spend until you die and then long-term retirement savings.

Not after you die?

Until you die.

Okay.

So after you die, you can pay your funeral expenses.

Really?

Yes.

Learned something new today.

There you go, tax-free spend.

So we'll just refreshed the story to Jon.

I'm just going to stick my family with those.

A big monument, too.

I want something grandiose.

Anyways -- I'm sorry, excuse me.

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

One other thing that was in the news today was basically interest rates and the shape of the curve.

I've got a couple of questions related to that.

One would be, specifically, how are you thinking about -- the service fee declines have been purposeful and they've worked.

How do you think about the rate of decline if, in fact, rates are starting to flatten out?

And then secondly, what sort of impact would that have on the M&A pipeline?

There have been some players that are marginal players in the HSA space that have kept their books because the rates have been going up.

Does that free up opportunities?

I'm going to -- and see, when I'm not sure I know the answer.

I sort of -- I stick Darcy with it?

But, let me say it's interesting we -- you ask about this question.

We were thinking about how the curve inversion story might impact us.

I guess, my first thought is, look, this is the time of year when we are out there beginning to finalize -- that is to say sort of lock in, pull the trigger on, whatever metaphor one wants to use, our end-of-year rate agreements.

That having been said, Darcy and his team have done an incredible job of making that profit a little less dependent on a few weeks' window, which actually really helps us.

It allows us to spread things out a bit and again towards our goal there of stability.

And Darcy, if you'd like to say anything more about that, please do and then I'll come back to the M&A question.

Yes.

I'm probably not going to comment on the yield curve, but as you know, Mark, we went through -- we got down to a gross yield down into the low 150s, and we sustained that.

And then for the past few years, we've seen some pretty steady increases in rates.

And as you know, we ladder our custodial assets out over in a kind of a 3- to 5-year period.

We're generally playing in that space with yields in the 3- to 5-year space so we don't go out to the 10-year and we end up with 2-years when a 3-year contract goes down to a 2-year or whatever.

But we're just mindful of, one, we haven't seen any slacking in demand for funds from our depository relationships, and so it doesn't give us a lot of concern with respect to the near term with respect to whatever the yield curve is doing.

And on M&A front, I guess I -- let's see.

I -- my sense, thus far, is that the prevailing wisdom remains that rates are going to continue to rise from here.

Sometimes, the prevailing wisdom isn't right, but I think among would-be sellers of deposits, which is how they think of themselves, that's the wisdom that is presented to us.

As you quite correctly point out that -- to the extent that wisdom changes, that market will open up again.

And we've been -- what we've said about this without commenting on any particular transaction is that we're always going to be here to be a good acquirer, to be a great steward of customer relationships.

We're not competing with these entities in the ways that other acquirers might, and we're not tied to one health plan or one whatever as others might be.

But at the same time, we're not going to price deals into the market.

And we have a really good -- again, courtesy of Darcy's team, a really strong sense of where the rate of return is on these kinds of activities.

And when it works, it works.

And when it doesn't, there's no reason to do it because ultimately, the goal of these things is to increase return to you, our shareholders.

And Mark, I'd go back to the first part of your question with respect to service revenue.

We've always said that there is an interplay that goes on between interest rates and service fees for an HSA.

That being said, we believe that the driving factor for the reduction of service revenue is more by design than by market conditions, interest rate...

You mean volume by that.

Pardon?

Yes, volume in terms of increasing the number of participants...

Correct.

Well, let's say volume and underwriting for lack of a better...

Correct.

So I mean, in the long term, there was a notion that if interest rates were to rise high enough that you would see more impact on the service fees, but that would, despite your question, that would be somewhat mitigated.

But we're not really seeing that aspect of it so much as just the way that we are pricing our service revenues to our partners has been the reason for the decrease.

Okay, great.

And then just given the call is getting close to the end, you haven't had a chance to talk about or a little -- expand on Larry's role and the investments there.

So just thought I'd throw that out there.

It's not an official follow-up, but if you want to comment, that'd be great.

See, Greg got the bandwagon started and now we've got -- now it's an issue.

We're coming for you, Acosta.

But look, I'm really excited about this.

We've been, in a way, very fortunate in that where we have had cyber issues, including recently, they've been relatively modest.

And the team and our partners have worked very hard to make our members feel like they're well taken care of.

And you can't do that in every case, but we've been very fortunate.

But fortune is not enough.

And in particular, as I said in the earlier comments, I -- what I see here is an opportunity, not so much to say we have better security than anyone else.

If it were up to me, everyone in our industry would have outstanding security.

I do think there is an opportunity to say, one, that we care more about privacy and are prepared to take steps to give users control of data; and two, I think there's an opportunity, as I said in the comment, to use the topic of privacy and security as a way to really strengthen our relationships with whether they are with our clients, employers, our ecosystem partners, our network partners and on and on because really, the right way to address these issues is together.

And so the biggest thing about Larry -- and he's probably listening.

I mean, he's already signed his contract so I can say whatever I want now but -- he can't ask for more money at this point, but -- I suppose he could, actually, so maybe not.

But actually, in all seriousness, what I really, really -- in addition to bona fide with regard to running the organization, I am really excited about the opportunity that Larry brings to us to kind of have a discussion in our ecosystem and our industry about how we approach some of these data privacy and security issues as not just as an industry but as an ecosystem.

As we often say, it's not really our ecosystem.

It's really, at the end of the day, the members' ecosystem.

And so I think there are some really interesting opportunities there to do things that really aren't done anywhere in the benefits area.

And it will be exciting and it's something we're willing to invest in.

I mean, it's not -- it feels like if it's something we do well, then it is almost, by definition, highly scalable.

That is to say that if we do it well, we're doing it well for everybody and for all of our members.

And we're avoiding costs that we can avoid.

So we highlighted it here not just because of the convenience of timing of the announcement, but I think also because it's an area, as we think into fiscal '20, that we feel like it's worth spending on not just defensively but really from the perspective of going on offense and bringing a kind of a different dialogue about this issue to our customers.

Our next question...

I built the guy up now.

Who knows?

He's probably preparing a counteroffer as we speak.

Go ahead, I'm sorry.

Our next question comes from Alex Paris of Barrington Research.

This is Chris Howe sitting in for Alex.

It's getting a little late in the afternoon, but I do have some questions here for you.

I won't have too many follow-ups, I promise.

You can't have too many.

You can have one but not -- no, I'm kidding, go ahead -- but not...

So the Vanguard and Nationwide partnerships, as we look towards fiscal year '20, maybe fiscal year '21, how should we look at the balance between expanding employee participation within these 2 partnerships as opposed to finding new partnerships out there in your goal in reaching every corner of health and wealth?

How should we look at future partnerships versus existing?

We have a lot more partnership building to do, and we have to take care of those who are trusting us early, just as we've done on the health side.

So I guess, my answer is all of the above.

And that, too, is an opportunity from our perspective to deploy capital in a way that's likely to produce high returns.

So I mean, I think the answer is really both.

Ladies and gentlemen, this concludes today's question-and-answer session.

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

I hope some of you -- thank you.

I hope some of you can get a day off tomorrow but not those who are going to visit with us tomorrow.

And so don't not show up just because you're getting a day off.

Like honor by coming to talk to us.

Jon, can I make one last comment?

Yes, sure.

I looked it up and you were right, no funeral expenses, so no monument, just end-of-life expenses.

Okay, the monument is dead.

So the bill could come after you die, you can pay for those.

But you're right, no monument, sorry.

See.

And we look -- did you look it up in the HSA guidebook?

I looked it up and you were right, as you normally are.

I want to make sure that's on the record.

I hope you don't mind that we've been a little jovial today.

It's been a long travel day for us.

So we appreciate you hanging with us and, again, the trust that investors and all of you continue to place in us.

Thank you.

Thank you.

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

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

Everyone, have a great day.