Healthequity Inc (HQY) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to the HealthEquity first quarter 2016 financial results conference call. Please note this event is being recorded. And I would now like to turn the conference over to Mr. Frode Jensen, General Counsel. Please go ahead, Mr. Jensen.

Thank you very much. Good afternoon, and welcome. My name is Frode Jensen and I am the General Counsel of HealthEquity. Please be advised that today's discussion includes forward-looking statements including predictions, expectations, estimates or other information that might be considered forward-looking.

Throughout today's discussion, we will present some important factors relating to our business which could affect these forward-looking statements. These forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements made today. As a result, we would caution you against placing undue reliance on these forward-looking statements. We encourage you to review the risk factors detailed in our annual report on Form 10-K filed with the SEC in March of this year, and any subsequent periodic or current reports for a discussion of these factors and other risks that may affect our future results or the market price of our stock.

Finally, we are not obligating ourselves to revise our results or publicly release any updates to these forward-looking statements in light of new information or future events. With that, I am now turning the call over to Jon Kessler. Jon?

Thanks, Frode, and thanks, everyone, for joining us today. FY16 is off to a solid start. During the first quarter, the Company saw continued momentum across the four key metrics that drive our business which are revenue, adjusted EBITDA, HSA membership, and assets under management, or AUM.

Revenue of $29.9 million grew 48% compared to the first quarter of FY15. Adjusted EBITDA of $10.8 million grew at an even faster rate of 59% compared to the year ago period. HSA membership reached 1.5 million, up 46% year-over-year and AUM reached $2.5 billion, up 50% year-over-year. Based on the first quarter performance, we are raising our full year outlook for both revenue and EBITDA, which Darcy will detail in his remarks.

Before I turn it over to Steve, please allow me to make three summary observations on the results of the first quarter. First, HealthEquity continued to gather momentum. Year-over-year growth in revenue, HSA membership and AUM accelerated during the quarter compared to the quarter period a year ago. Second, the business continued to gain operating leverage with year-over-year adjusted EBITDA growth, again, exceeding top line growth on a percentage basis.

Adjusted EBITDA margin for the quarter of 36% compared to 34% for the first quarter of FY15. And, third, the team extended its record of strong starts to sale cycle. HealthEquity added 53,000 new HSA members during the first quarter compared to 43,000 in the year ago period, and AUM growth of $182 million during the quarter was 141% higher compared to the year ago period as HSA members transferred more assets from competitors to HealthEquity during the first quarter than in any prior period.

Finally, I'd like to spotlight the growth in long-term investing by our HSA members. HealthEquity exists to build health savings. While cash AUM grew 48% year-over-year in the first quarter, investment AUM grew an even faster 63% reaching $346 million. And while overall HSA membership grew 46% year-over-year, the number of our HSA members who invest grew 60%, reaching nearly 36,000.

HSA members with investments have nine times the balance of those with cash only, have higher cash balances, have generally higher annual contributions. Additionally, these members' invested balance have historically generated higher returns than cash, and a significant number of our HSA members with investments opt to purchase, or their employers opt to provide, online investment advice from HealthEquity Advisors, our registered investment advisory affiliate.

All of these factors result in additional high-margin custodial revenue for HealthEquity, and we believe that the growing popularity of HSAs as long-term savings vehicles is a significant source of embedded value in our fast-growing HSA membership base. The rapid growth of investing among our HSA membership speaks to the power of HealthEquity and its platform as a force for consumer engagement more broadly, a force, the potential of which we believe we have just begun to tap. To elaborate further on what we've accomplished in terms of engagement for investments and beyond, I'd like to turn the call over to our founder, Dr. Stephen Neeleman. Steve?

Thank you, Jon. As we've explained in previous calls, HealthEquity has a unique engagement asset with our members that we are just beginning to monetize. Our members logged onto the HealthEquity platform 14 million times in FY15. During an average month, 28% of all members logged on, and 13% contacted our member education specialists.

We want to use every contact and everything we know about each member to drive better health saving and spending decisions, greater use of the tools and content offered by our network and ecosystem partners, and to lift our business. Jon spoke about the rapid growth of investing among our HSA members. To drive this behavior, HealthEquity implemented proprietary logic that identifies HSA members who are most likely to benefit from investing.

We then engage these members across multiple touch points including in our member service center, on our website and mobile app, through email alerts, and in on-site member education settings. We have also previously described engagement efforts to drive the use of our ecosystem including telemedicine, wellness, cost and quality transparency. In doing so, we are leveraging the over 1,300 data pipes HealthEquity has built with our network and ecosystem partners.

I'd like to share a few more examples of our team's success in this area using data from the 12-month period ending April 30, 2015. First, we engage members likely to benefit from our Yield Plus offering and HealthEquity Advisor tools. Enrollment in these products jumped by over 450% and 200%, respectively.

We engage members likely to contribute more to their HSAs and saw their average monthly contributions increase by 18%. And then by targeting consumers enrolled in individual HSA-style plans of one of our large health plan network partners we reduced the cost of acquiring new HSA members with funded accounts by over 70%.

By continuing to build on the profitable foundation of consumer engagement and messaging, we can accelerate our work to help members build their health savings and to better serve our network and ecosystem partners, and to drive improved economics for HealthEquity. I would now like to turn the time over to Darcy Mott, our Executive Vice President and CFO, who will review the details of our first quarter results. Darcy?

Thanks, Steve. Today I will discuss our results on both a GAAP and a non-GAAP basis. Our non-GAAP operating metrics include adjusted EBITDA and non-GAAP earnings per diluted share. We define adjusted EBITDA as adjusted earnings before interest, taxes, depreciation and amortization, non-cash stock-based compensation expense, and other certain non-operating items.

Non-GAAP earnings per diluted share is calculated by adding back to net income all stock-based compensation expense net of tax and then dividing the result by diluted weighted average shares outstanding. I'd like to spend my time on the call today reviewing the financial results for the first quarter of FY16 and discuss our outlook for the rest of the fiscal year. As Jon mentioned, revenue for the first quarter of FY16 was $29.9 million, an increase of 48% compared to the first quarter of FY15.

As we've mentioned previously, we report our revenue in three categories, account fees, custodial fees, and card fees. Revenue grew substantially across all three categories in the quarter. Account fee revenue was 48% of total revenue in the quarter at $14.4 million, representing an increase of 39% compared to Q1 of 2015. Custodial fee revenue for the quarter represented 28% of total revenue at $8.4 million.

This represented an increase of 55% compared to the year ago period. Card fee revenue represented 23% of total revenue in the quarter at $6.8 million, an increase of 59% compared to last year. Jon also highlighted that our investment AUM as a percentage of total AUM continued to increase. At the end of the first quarter of FY16, investment AUM represented 14% of our total AUM, and compared favorably to 12% at the end of the same quarter in FY15.

Gross profit for the quarter was $17.9 million compared to $11.5 million last year, an increase of 56%. Gross margin for the quarter increased from 57% a year ago to 60% in the first quarter of FY16. Income from operations of $8 million during the quarter increased 45% year-over-year and generated an operating margin of 27%, unchanged from a year ago. We generated net income of $5 million for the first quarter compared to $2.7 million in the year ago period.

Our non-GAAP adjusted EBITDA for the quarter was $10.8 million compared to $6.8 million in the same period last year. Our GAAP EPS for the quarter was $0.09 per diluted share compared to $0.08 a year ago. On a non-GAAP basis, earnings per diluted share was $0.10 for the first quarter of FY16 compared to $0.06 in the prior year. Turning to the balance sheet, as of April 30, 2015, we had $115 million in cash, cash equivalents, and marketable securities and no debt.

As many of you know, subsequent to the end of the quarter, on May 11, we closed our public offering of 4.4 million shares of common stock at a price of $25.90 per share. In the offering, HealthEquity sold 972,500 shares and selling stockholders sold 3.5 million shares. As a result of the offering, HealthEquity added net proceeds of approximately $23.5 million, and now has approximately 56.7 million common shares outstanding.

Now turning to guidance. We are raising our outlook for FY16. We now expect revenue between $119 million and $123 million, adjusted EBITDA between $36 million and $38 million, and non-GAAP earnings per diluted share between $0.28 and $0.30 per share.

Our non-GAAP earnings per diluted share is based on an estimated 60 million diluted weighted average shares outstanding, giving effect to the recently completed public offering and is calculated by adding back to net income all non-cash stock compensation expense net of tax. We expect total stock compensation net of tax for FY16 to be between $3.5 million and $4 million. Now let me turn the call back to Jon for some closing remarks.

Thanks, Darcy. So we're obviously feeling very confident about the start that we've had to the year.

And I'd like to close by pointing out that that confidence is a function of the hard work of our fellow team members here in Draper and around the country, of our employer and health plan network partners, of our ecosystem partners, and, of course, of our HSA members themselves who are slowly but steadily building health savings, using our platform, making smart health care financial decisions, and getting more comfortable in the world in which we live with regard to consumer-directed healthcare. We look forward to continuing to delivering results and continuing to invest in the business, and with that, I'll shut up and open the floor for questions.

(Operator Instructions)

Lisa Gill with JPMorgan.

Good afternoon, and thank you for all the detail. I just had a couple of follow-up questions. First, Jon, can you talk about -- in the quarter, you talked about transfer of assets. Was that all business that you've won or do you continue to win business post that January 31 timeframe?

Lisa, it's a little of both. Primarily this is our rollovers and the like represent business that was won in the period that ended in January, but it often takes time for other custodians to get the money over.

In addition, we saw some large rollovers, so those are individuals moving themselves money as their employer opens an account with us and the like. Whether that was from the prior period or from the new period, it's a little bit of both. But, obviously, the sales cycle that we had in the last fiscal year had an extraordinary impact and you're still seeing that impact in the first quarter in terms of transfers.

And then I was wondering if there's any update on your ecosystem partners out in the marketplace, has there been anything notable that you've added to your ecosystem since the last earnings call?

Well, we continue to add across a number of areas, Lisa. Certainly, there have been a number of additions this year in remote health, telehealth, which has grown in popularity and certainly is something that employers and health plans are talking about this year. And, as well, there are a number of new solutions in that area.

So that's one area I would highlight where we have kind of filled out the roster, as it were, of ecosystem partners. And certainly another is around different models of wellness-related engagement where there are just a lot more players and our ability to quickly build pipes across multiple players really gives us some real advantages. And that sort of showed itself in this quarter with -- as new players have popped up or have gained the interest of our network partners we've been able to respond pretty quickly.

Great. And then my last question just would be -- I know we've asked this over the last several quarters, and that's around M&A -- you talked initially when you took the Company public around opportunities for some M&A activity.

Do you maybe just want to give us an update as to how you see the competitive market right now? And do you see potential targets out in the marketplace? Has pricing changed at all? Any color would be really helpful.

Yes, thanks for the question, Lisa. I think in short we recognize that in order to continue pushing the envelope as far as the growth of the business, we're going to need to continue to invest in the business. We're fortunate to have both, on the balance sheet and in the income statement itself, the capacity to do that. Obviously, M&A is a big piece of that.

The way we look at it is there are really two kinds of M&A that we are looking at. The first is competitive M&A. And there, we're going to look at opportunities primarily as ways to bring high and fairly predictable IRR to our shareholders, and where there are deals to be done to deliver that result we're going to do them. And that's what we've said for a while.

Obviously, the implication being that we haven't seen anything that quite gets there for us. The second type of M&A that we look at is really around the growth of the business in terms of capability. And there our focus, as we've said before, is on targets that really help us do more with our ecosystem than we can do today. And so that's where we are going to continue to look and that's where you should expect to see us continue to do transaction activity. We'll get there.

We are by nature somewhat conservative people, and as a result, there are certainly probably things that we could pursue that we're not going to pursue because the business models are not really yet compatible with what we try to deliver to our investors, which is consistent and growing revenue profitability. But we will get there.

We appreciate that. Thanks, Jon.

Thank you, Lisa.

Peter Costa with Wells Fargo.

Hi, guys. Congratulations on a good quarter. I'd like to get into a little more details about -- your revenue per HSA has been very consistent for a while now. And yet the makeup of that revenue per account has changed. In this quarter, the account fees were a little bit weaker, whereas the card fees and the custodial fees were very strong. Can you explain to us structurally why that happened this quarter and how we should think about that?

Darcy?

Sure, thanks, Pete. So year-over-year Q1 compared to Q1 of the prior year, our account fees in total per custodial account were down about 6%. As we've mentioned previously, there's a couple reasons for that.

As we brought on new partners as of our January quarter, some of those -- and even the existing partners that had tier levels where they may have decreased their account rate, which will happen over the normal course, but additionally, sometimes we will bring on a new contract and where that employer is able to guarantee us a significant amount of AUM via their contributions then we've been able to give them a little bit lower rate on the account fee which, obviously, has an impact on the custodial fee.

So there's more AUM. So that's a little bit of the trade-off that we deal with, and that's the reason for the decrease on a per unit basis in the account fees year-over-year.

So the way I think should think about it is because employers are incentivizing people to use HSAs more by contributing more money into their HSAs that's creating the dynamic where the account fee is a little lower and the AUM is a little higher based on how you sell the products to those employers?

Correct.

Great. Okay, and then can you tell us -- you didn't update us on the tax rate going forward. It was 38.6% before. Is that still the number you're targeting at this point on tax rate?

Yes, I think that we're still targeting that. We got a little bit benefit for some R&D credit in the first quarter, so it was a little bit less than that, but I think for the year we're going to be in that 38% to 38.6% range.

Okay. And then, yield on average cash AUM -- what was that number? I didn't see that.

It was 1.56% for the quarter.

1.56%?

Yes, on cash.

Just a little bit more on Lisa's question about where those assets are coming from that are being transferred to you, you talked about it being the biggest you've ever seen this quarter and you talked about that last quarter, as well. Is that net assets coming to you or is that just the transfers in are much larger? And I know you retain many accounts, but I wanted to understand whether it's just because HSA balances in general are growing or because you are taking share from others?

Yes, so we had a total increase in AUM of $182 million. And I would say that a significant portion, in the $90 million range, was transfers that have occurred. Some of those were accounts -- we actually got the accounts in January, and so, say, if they were a rollover and these individuals had dollars in another HSA then we would do the bulk transfer and roll their existing balances in and we happened to get that in the first quarter.

So it's a significant enough amount that we highlighted it in the first quarter. But these are coming from some of our competitors who have had these HSA assets before and now they have come to us via the bulk transfers, and that's about half of what the increase was for the quarter.

Was it clear whether they were coming more from your network partners who are health plans or more from your network partners who are employers?

I don't think we've thought about it in terms of that distribution. (multiple speakers) I guess it is probably a little bit more on the employer side. The reason we like these is -- and I can't resist calling it the work of our, the team that does this. Transferring an HSA is not simple.

We offer some modest incentives and thank yous to the members for doing it. And that works to our advantage in some respect in that the accounts are very sticky, but the effort in terms of both our team and the members themselves, as well as the employers involved is material.

And so the fact that we saw this kind of number, we really think that this is fantastic because if you think about it, as we've discussed before, a typical new HSA will have only $700, $800 in it in the first year. But when you see more new HSAs with transfer dollars in them, that's a good thing, that increases the early profitability of the accounts.

It's also worth noting, though, that as much transfer activity we had, we also had an extraordinary quarter in terms of contributions, meaning just members contributing into the accounts. And so, look, across the board from an AUM perspective it was a good quarter for savings. That's the way to look at it.

Okay. And then just the last question, in terms of the marketplace out there, what are your thoughts on private exchanges? We've seen an exchange company buy a portal company. Can you talk about what you see going on with private exchanges and your outlook there, and how you are approaching that market?

Yes, as a reminder, for those who may be new to this subject as it relates to HealthEquity, our basic strategy with regard to the private exchanges is to partner very closely with our health plans. I think during the quarter, we announced a partnership, for example, with Array Health with regard to some of the captive exchanges that a number of Blues plans and others are doing.

But our general strategy is to partner with our health plans because they have as strong an interest as anyone in having us right along with them into the exchanges. And what I guess I would say is thus far there's far more talk about the private exchanges than there is real switching activity. And I think I said this last quarter that -- and it remains true -- that we did not see -- I'm struggling to name one -- maybe there is one of our employer network partners who went from a traditional plan offering to a straight private exchange type offering.

So I think it's still really early days for the exchange concept. I see numbers quoted out there that clearly include lots of other stuff in what they are counting, but ultimately we see this as a favorable trend. Basically because people voting with their own money are more likely to adopt HSA-style plans, and every data point that I've seen over and over again shows exactly that result from both the private and the public exchanges. So ultimately we think it's going to be a favorable trend, but we cautioned at the time of our IPO that the level of print on this one was way ahead of the level of action and we still believe that.

Great. Thank you very much.

Sandy Draper with SunTrust Robinson Humphrey.

Thanks very much. Also congratulations on a very strong quarter. A lot of my questions have actually just been asked. Maybe just a little bit more commentary, Steve, on the idea of marketing to people around the investments.

When you're talking to folks, what are they really responding to? Are they just thinking about that near term, hey, I can make a little bit more money here, or are people really understanding, do you think, the long, long-term benefits of building a long-term health savings account?

Thanks, Sandy. We've taken kind of a layering approach. It is amazing how many people -- even among our members -- that still think these are kind of use it or lose it. So initially we just have to help them understand that they should put more money in these because it's going to stick around. Let's face it.

FSAs were around for so long, and people were so used to this money disappearing. And even if it kind of hung around in like an HRA, it wasn't really their money. So the initial education is just to start targeting people. But what we can do is we can target people based upon balance, and if they've got enough money in there and they are starting to figure out, yes, this is an accumulating account, then we layer in messaging that says you probably have enough money to start to invest.

Click here and then at that point they can start to invest that money. And the remarkable thing is that once they start to invest they start to even put even more money into their accounts which is pretty exciting. So it's kind of this layered approach, first, help them understand that this money is persistent and that it can grow, and then all of a sudden you start to see them really kind of catch fire.

I would only add -- this is Jon. Our platform -- and I'm using the term platform to describe the technology, as well as the people providing expertise to our members -- our platform was built to engage. And whether that engagement is, as one example, promoting utilization of a telemedicine service, or whether that engagement is about promoting the opportunities for our members to grow their balances through investment or what have you, the bedrock from a technology perspective is still there, which is about using data to try and understand who might be receptive to messaging.

And then about using multimodal communication, whether it's someone we're talking to on the phone, someone who is visiting the website, or some other mode, using those modes to push those messages, whether, again, you're talking about words or video or what have you. And really it is about iterating to get to the best response. And that's kind of where we believe there's a little bit of incremental improvement we can do period after period and hopefully we will get better at that. But there is still a long way to go here, obviously.

The numbers of investors are still small, but we talk about it every quarter, in part, to signal that it's important to us. It's important to our mission. It's important to our profitability and certainly something that's very, very positive for our members and that their employers and health plans recognize, as well.

Great. That's really helpful commentary. Maybe, second question. In looking at the guidance raise, which is always encouraging, any specific -- when you guys think about what came in better that gave you the confidence? Obviously, the quarter was good, but what were the delta points that made you decide to raise guidance?

I think that the biggest single factor was the AUM growth. We've talked for some time that the HSA growth would outpace the AUM growth just because new accounts have lower balances. But because we had such a big increase of this $90 million rollover in the first quarter, that money stays there for the entire year.

So that's one thing that kind of really moved the needle for us. We're encouraged by the growth, albeit, we know that first, second and third quarter account growth -- we're very pleased with the year-over-year numbers, but January, from an account perspective, is really the big quarter. But it's really that AUM growth that was so significant in the quarter, Sandy.

Great. Thanks, Darcy. And then maybe one last question, probably for Jon, on a macro level. I've heard a little bit of chatter coming out of DC about the potential for some people wanting to maybe get the Cadillac tax repealed. That may be sort of separate from anything around ObamaCare.

One, first question, have you guys heard any of that chatter? And then, second, if that does come to fruition, how much of an issue, if any, would that be in terms of how you think employers are thinking about high deductible plans in HSAs? Thanks.

Well, there are a number of bills in Congress, primarily sponsored by Democrats, that would roll back various elements of the funding for healthcare reform. And Cadillac tax is no exception. I'll resist the opportunity to poke fun at what seems like an ironic thing. I guess I didn't resist it.

But suffice it to say that I think that the way that employers are looking at this is very much the way that they have looked at every element of healthcare reform legislation as its day has come, which is, I think employers are probably -- and health plans -- are probably a little bit slow to reckon with this is coming. Certainly, the earlier you plan, the easier it is to deal with. And some of that is based on, will it really happen, won't it really happen?

And then, typically, these things do really happen and then employers take action. So I guess our basic view, Sandy, is that the growth that we are seeing today, which is of the same magnitude as market growth over the past number of years, doesn't really represent acceleration in the context of the Cadillac tax. It really represents activity that's a precursor to that.

So if the tax were some other version of a cap on the total value of employer-sponsored health insurance, which most of these bills include, were to go into place, clearly, that would in all likelihood result in some market acceleration -- again, that's more with regard to the market than specific to us or not -- but our view is what we're seeing today is really more about the basic economics of HSA plans. They do what they're supposed to do, which is they are not magic, but they are very effective at reducing the rate of healthcare inflation to a manageable level.

They provide individuals with more choices, as well as long-term savings opportunities. So that's really what's driving things today. If we do see the Cadillac tax implemented, for those who have the unfortunate experience of dealing with the alternative minimum tax, it will be very similar in that it's kind of a drip-drip-drip with new employers subject to the tax each and every year. And that will have its effect over time, but I think we're not quite there yet and we will all watch Washington and see what it does.

Thanks, Jon, appreciate the comments.

Mark Marcon with Baird.

Good afternoon. Let me add my congratulations. With regards to the guidance, I was wondering, could you give us a sense for some of the inputs that we should factor in, whether it's the account fees or how much -- what we should think about in terms of the cash AUM, effective yield, et cetera?

Yes, so, my comments on the account fees -- we expect that that trend should continue for the remainder of the year.

At the same rate, Darcy?

Yes, year-over-year from quarter to quarter I think seeing that 5% to 6% decrease compared to the prior year, just in the rate. But bear in mind that that volume far outweighs the effect of the rate decrease on the account fees themselves. On the interest rates, last year, for the full year we did 1.52%. We came in at 1.56%. We expect to be in that range, probably towards the upper part of that range, just as we go forward.

Okay. Obviously, we saw the big rollover in terms of the AUM. For the next few quarters, how should we think about the AUM growth given we're past that big seasonal jump?

Yes, I think that the first quarter for that delta for the bulk transfers is characteristic of the first quarter. I would not expect that to occur so much in the second and third quarter. And then we'll see what happens in the fourth quarter. As you know, the fourth quarter is a big quarter for us, both with respect to accounts and then into new AUM. So I would expect that the normal growth you would see in AUM in the second and third quarter will kind of be more consistent with past performance.

Great. And then with regards to the network partnerships, can you talk a little bit about that just in terms of what you are seeing in terms of adding -- obviously, the fourth quarter was the big quarter for this, but were there any notable employer adds or health plan adds during this past quarter, or a building of the pipeline towards that?

Yes, this is Jon. As I think you know, Mark, and it's good to talk to you, by the way, we don't do new network partner win type announcements. The reason we don't do them is really because realistically the announcement is the easy part. The work is usually after that, and in addition, sometimes that information isn't known to the employees or team members of the partner.

So we tend to confine those to the end of the first quarter. That having been said, I guess what I would say is, what you can draw from what is, albeit, a small sample in a first quarter is, and the fact that we had a better first quarter than last year or than any first quarter before it, is that the pipeline is filling nicely.

We're -- consistent with that increase, we are seeing more RFP activity than we have seen in prior years at both the employer network partner level and then particularly within health plans as they do their thing. So I guess what I would say is -- without getting too far into it -- that our view is that the sales cycle has started healthily, that the data that we've presented, as well as data that we haven't presented, suggests to us that we are off to a good start towards our best sales cycle ever. And it's early days but, obviously, we will keep it up and keep reporting on results as they come.

That's great to hear. And with regards to the strong growth, can you give us a feel for the organization just in terms of the areas that you focused on in terms of internally growing the organization? Obviously, your call center is growing. But how is that all progressing because you have had just such a strong rate of growth?

Yes, we've been very fortunate over the years in that, from a cultural preservation and strengthening perspective we focus very heavily on developing our internal talent wherever we can. The bulk of our new positions are filled by people who already work here or people who are referred by people who already work here. And that's a metric we report on to our team members and talk about quite a bit because it relates directly to individual's career planning.

So that has been quite helpful to us, particularly as we've looked over this period to fill, let's say, more experience-oriented positions within our operations organization, within our technology organization, within our service organization, and even in the overhead departments like Darcy and mine. So I guess our view is that recruiting has gone nicely.

We've tried to approach the business over the years from the perspective that the people you know the best are the ones who are already here and you can invest in them far more effectively. And so that's always been our priority, but I think that's what we will continue to do. And then, of course, as our capabilities expand, we will, obviously, continue to look externally.

But that's been a real help to us. It's made the growth a lot more manageable than it might otherwise be, both in member services, of course, but really throughout the organization.

That's great to hear. Thank you.

Alex Paris with Barrington Research.

Hey, guys, this is actually Joe filling in for Alex.

Hey, Joe.

Jon, how are you doing? Let me just start with the competition. Just to get your insight. Last quarter you talked about the competitive environment, but I think it was mostly around the Webster acquisition and JPMorgan's business. Maybe just on the smaller side, curious what you're seeing from maybe some of the smaller players in the space -- any update on that would be helpful?

The honest truth, Joe, it's not a hell of a lot. It may be that you don't see any one of them in enough volume that it really gets attention. Certainly, as the small group level, that's where some of your take-aways are coming from. People's sort of initial foray was, I'll do this with my local bank and then the health plan partners with us and comes in and says, you know what, we've really got a better solution that's going to work for everybody and people move over, or alternatively, they start to want to think about investments seriously, and we have wonderful capabilities there.

But I can't really pinpoint anything in the smaller providers that is really sticking out in terms of either any moves that really matter. I guess that's my short answer.

Yes, no, that's fine. I appreciate that. Let me just jump back to the AUM and the AUM growth.

Your commentary around the way you message or the way you target them, either be it like a Web portal link or some sort of targeting messaging, or some conversation with your member services. I'm curious which -- maybe it's all three and maybe it's equally -- but I'm just curious, any one versus the other driving the growth?

The answer is all three, but those are three good ones. If you want to really do something and you spend some time focused on it, you may actually figure out how to message people to do something. So it's really a combination of a couple things. The first is really giving them the information.

Historically, I think, what folks would do, and I think many of our competitors still do this, is they just assume that people will move the money over, but sometimes people will just spend it down. And that's not a good answer for anybody including the member. So the first thing is, for example, providing transfer forms in the welcome kits, that kind of thing to make it real easy.

The second thing is when a member calls, let's say, their first time calling member services, maybe it's a card activation, maybe it's something else. You message, and if they haven't done a transfer yet, you message them about that. And then, of course, it's also the login is an outstanding opportunity where you can have a really data-driven message about the benefits.

And then lastly, I'd say, we try to provide financial incentives. So we have a program where we will reward members who transfer funds -- subject to certain limitations -- with additional interest up to $25. That sort of can pay their closing fee somewhere else, if someone's charging a closing fee. And so when you sort of combine education and incentive it's amazing what you can do, and, look, I think this is really a good thing just for the industry.

The last thing we want is people building up savings. As we've talked about before, it's a sort of a slow and steady wins the race, and then you build up your savings and your employer makes a change, and you just say, I'll just spend that money down. That's not what anyone wants. It's not good for the member, it is not good for the employer, it is not good for us as a business.

We thought this is a great thing to focus on for this last open enrollment season and the team within our operations organization that really was heads down on it did a really nice job and that was reflected in the results.

All right. That's it. Thanks, Jon. Good quarter.

Thank you.

(Operator Instructions) Steven Wardell with Leerink Partners.

Hey, guys. Congratulations on the good quarter.

Thank you, Steve.

And how would you describe what is behind the high rate of HSA member growth this quarter and what's driving it? If it's competitive wins, what's driving competitive wins? And if it is an increase in adoption of HSAs at client, what's driving that? What else is behind it?

Steve, I think the answer to both -- and I'm not like a big bragger here, but I'm going to do it for a second, at least I don't think I am, maybe I just did. But we have an extraordinarily strong platform for helping people with this journey towards the HSA from a more conventional arrangement where they just pay their co-pays and their deductibles and they don't even think about it. And towards thinking about healthcare expenses in a little more of a long-term way.

That includes technology, it includes service. It includes connectivity, as we've talked about, with different parties, so that we can provide information that's relevant to an individual, help them make the right decisions at the right time. I think that platform and its advantages help us in both the areas you mentioned.

Certainly, it is the case that, in terms of competitive wins, that is the source of competitive wins. It is a better mousetrap. But I also think that as our employer partners and as individuals look at the platform that it also makes them more comfortable in doing the things that they need to do -- the decisions that they have to make to move individuals in this direction.

So things like plan pricing. And the reason I say that is this is the time of year, for example, when we do our executive interviews with some of our largest partners around their open enrollment experience, their experience with our account management team. Time after time what we hear about is, really, is about the quality of the experience that the members are having, and that relative to the expectations that were there before the employer embarked on this particular journey.

So, look, I guess my answer is that whether you want to think about it in terms of wins outright or about employers and health plans and individuals making decisions that cause underlying market growth, I think having a platform that allows people to get there, kind of provide them a safe home within the HSA environment really helps. And so we think it is feeding both of those things. Steve, anything to add to that?

I just think it's really the result of 12 years of pushing hard on the flywheel. We are now starting to have some relationships with some of these larger health plans that are starting to mature. And it takes two or three or four years, and we've seen this with the ones that we brought on five or six years ago.

And it just takes a lot of work to get their internal folks trained on the better solution, get the sales people, the account managers, our own team working in lock-step, and as we've talked about in previous investment presentations, kind of that leverage that comes when you've got people on both sides of the network partnership continuum working together, there become some synergies and a better transfer of knowledge, a more efficient transfer of knowledge. And I think that's why -- and, again, I have spoken to this in the past -- that's why you see year-over-year growth within a given network partner accelerate, as well.

All that having been said, Steve, there's plenty of work we can do to improve. We can help our health plans more strongly influence the consumer experience, which is something that is clearly very important to them at this point given the retailization that is occurring in healthcare.

It's an area that we can work together to do more with, have an even more integrated experience with them with regard to our employers. Obviously there's more we can do to help educate members about all different aspects of this thing. And then lastly, with our ecosystem partners, I think we can continue to do work to more effectively drive the right people to the right tool at the right time.

Certainly, something that they're very interested in whether -- whatever sort of tool or solution or content they might be providing. We look at it like we're happy with where we've been and where we are, but we're far more excited about where we're going in terms of the growth of this opportunity for us, for our shareholders, our team members and, of course, all of our partners.

Great. Thank you.

Randy Reece with Avondale Partners.

Good afternoon.

Good afternoon, Randy.

I have two questions. First of all, it seemed that with the upside in revenue gross profit you took the occasion to invest some internally, but I don't know if the variances in expenses versus my expectations were different than your plan or just mine is apprehension. So I was particularly noting the ongoing technology and development investment which seems to be moving at a pretty fast pace. Are you stepping up spending in that area or is this pretty much in line with where you were expecting?

Yes, I think that we have intentionally planned on keeping ahead of the game and investing in technology, so we've continued to add in that area. Are you referring primarily to the Q1 or are you asking a guidance question?

I'm looking as much at the Q1 result as the updated guidance where you had a little more revenue upside than you had earnings -- change in earnings expectation?

Yes. And that's exactly right. The areas that we will continue to look at -- we're mindful of the position we're in and we want to make sure that we are putting money into the right initiatives that will make it even a better member experience and a partner experience, and so as we have the opportunity to do that we will.

My second question regards to the AHIP Institute that was here in town last week, heard a lot of discussion about the rising importance of consumerization as people termed it and of empowering the insured with more and more information and how difficult that was going to be. I was wondering if you had -- your organization had any take-aways from the conference?

We had exactly that take away. It was I'm going to say extraordinarily validating of the opportunity that we have to go farther in this area and to do more to help the consumer get the right information at the right time, get the right tool at the right time at. And doing that really requires from our perspective two things. First of all, it, obviously, requires some credibility with the consumer and so forth, but second, it requires you to know each consumer and individualize the message.

And so as we look at areas where there are opportunities for investment this is definitely one where we feel like we're already doing a lot, but there's a lot more opportunity because, frankly, there's a lot more content. Ultimately, consumers will decide which of that content is truly useful, which of those tools are useful. Those decisions won't ultimately be made by health plan executives or hospital executives. Consumers will vote with their feet.

But our job is to understand those consumers and understand our consumers better than anybody, as Steve said, and to present them with useful information and useful packaging, and the better we do that, the more opportunities we're going to have to work together with our various forms of partners. So we left with exactly the impression you did, Randy. And also we think this is just beginning.

We're really still in a very early days of the retailization of healthcare -- of health insurance, certainly in health benefits. I think this is trend that is going to be with us for a long, long time. It's going to have profound impacts on a lot of businesses, and those that get ahead of it and can really master it will have real opportunities and invest, and those that don't, we will not be as happy. And we intend to be happy and to make you happy.

Thank you very much.

That's my pitch. That last bit -- we intend to be happy and make you happy. That's our business plan actually. (laughter)

Luke Bodin with Raymond James.

Hi, thanks. Just a quick question from a broad level. I think you had made, in your opening comments, remarks that you had been achieving some good reductions in acquisition costs of accounts. Maybe just a little bit more detail on where you are seeing the scale as you add new members? Is it just on the technology side, capacity of your member services, or just higher profitable accounts?

First of all, we wish Greg safe travels. We're getting moment by moment updates. Please tell him hello for us. And then secondly, historically, what we've seen is a lot of leverage to operating expense and you see that in declining cost of customer acquisition, as well as overall unit expense on the OpEx side.

But I think also what we're seeing is, we're also seeing a scale in a number of other areas, as well. We've gotten better at maximizing, for example, our card fee dollars per account. That's a function of putting in incremental technology that helps us move more transactions over the card rails and attract more transactions, things like some of the things Steve was talking about earlier, or that I was talking about, about getting people to transfer their money, as well as, of course, account balances themselves.

So, look, I think the answer is a little bit of everything. It's not our particular goal to spend less, for example, on member services. Our motto is, you take the call and we'll worry about the next one, because we really feel like at some level that's a rare education and sales opportunity. It is our goal to see as many of those calls be value-added calls, and where things can be done electronically or otherwise more efficiently for the member, where that's what the member wants that's what we're going to do.

But those are the areas where we've seen real leverage and where we certainly expect over the near-medium term we think that will continue for us. The sales channels are efficient, they're doing what they're supposed to do. OpEx is efficient, it's doing what it is supposed to do. And then broadly speaking, we fine tune the model period after period to try and get the most and spend the least, while still spending everything we can to produce a great experience for our members.

Okay. And then just one other follow-up here. Considering just the growth in the investment side of the assets, is there any -- maybe you can discuss just the difference in profitability or margin between what we would expect from investments versus cash holdings?

Yes. As you've seen, on our cash AUM, we've yielded in this 1.52% to 1.56% range and then our net interest margin is in the 1.25% to 1.30% range. Remember, this is on a lot of cash balances that when they first come in they maybe have less than $2,000. As they become investors, as we've tried to point out, investors are savers.

One, they have higher cash balances which we continue to get those types of yields on, and then we get additive -- we were getting 30 BPS to 40 BPS on invested dollars. So we look at it as investments as being additive to our total revenue base, not really taking away from the yields that we would get on the cash portion because they're going to have significant cash balances also.

Most people who become savers, they actually keep a higher cash balance just in case of an emergency or whatever, and then they add their investment portfolio on top of that. Jon, do you want to add to that?

A simple point that sometimes when you focus on this as a comparable to a retirement business that gets forgotten. I don't care if you're a spender or you are a saver, everyone's got medical bills. And people use our platform to pay those bills, to track their expenses, et cetera. And sometimes that is with their HSA, sometimes it's with a linked account, et cetera. But the stickiness of what we do really isn't dependent on whether you are a saver or a spender.

And so that's one of the nice things about our model is the ability to collect multiple revenue streams, and then even within revenue streams, kind of multiple layers, cash, custodial fees, and then investment-related custodial fees, as well as, in some cases, advisory revenues from the same member as that member matures.

And as we look at our older account cohorts they are extraordinarily profitable accounts because they have been through that maturity process, or at least have been farther through it. And, again, that's a lot of the embedded value in the base that we grow so rapidly year after year here is that eventually those accounts will mature. And as they do, they will become more profitable for us, as well as, frankly, for their members themselves. So that's kind of the model here at HealthEquity and what we're certainly planning on and investing towards and that's kind of how it works.

Okay. Thanks for the answers, guys.

Thank you.

And with no further questions in the queue, that does conclude today's conference. Thank you for your participation.