Healthequity Inc (HQY) 2015 Q3 法說會逐字稿

Good day, and welcome to the Healthequity third quarter 2016 financial results conference call. Please note that this event is being recorded. I'd now like to turn the conference over to Frode Jensen, General Counsel, please go ahead.

Thank you, Shannon. Good afternoon and welcome. My name is Frode Jensen, I'm 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 those forward-looking statements.

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

We encourage you to review the Risk Factors detailed in our Annual Report on form 10K filed with the SEC on March 31, 2015, and our 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'll turn the call over to Jon.

Thank you, Frode, and thanks everyone for joining us on today's call.

Healthequity continues to build momentum as reflected in third quarter results across the four key metrics that drive our business. They are revenue, adjusted EBITDA, HSA members and Assets Under Management or AUM.

Revenue of $30.6 million grew 40% compared to the third quarter of FY15. Adjusted EBITDA of $9.9 million grew 62% compared to the third quarter of FY15, again out pacing revenue growth. HSA membership reached 1.6 million, up 45% year-over-year, and AUM reached $2.7 billion up 47% year-over-year.

Sales results also speak to Healthequity's momentum. Fiscal year-to-date, Healthequity has opened almost 200,000 new accounts, 27% more than during the same period in FY15. During Q3 specifically, the Company opened an even greater 37% more accounts than during the same period in FY15.

To put these numbers into perspective, according to the most recent market research, the number of accounts Healthequity opened between February and October 2015 exceeds the number of HSAs managed by all but the ten largest HSA custodians in their entire operating history.

Fiscal year-to-date, Healthequity has grown AUM $331 million, 57% more than during the same period in fiscal 2015. Again for perspective, according to Devenir, Healthequity's AUM growth just between February and October 2015 exceeds the AUM in total of all but a dozen other HSA custodians and as I say in their total operating history.

Q4 is of course Healthequity's most important in terms of new sales. Roughly 2/3 of our annual new HSAs are opened in Q4, but the Q3 and year-to-date results say that momentum is with us.

Before turning it over to Darcy to discuss our results in detail -- I'm sorry, before turning it over to Steve and then to Darcy, during Healthequity's IPO process, we said that we would be able to acquire HSA portfolios from banks and other legacy competitors with high and predictable return to shareholders equity.

Approximately six weeks ago, we announced the acquisition of most of the HSA portfolio of Bancorp. I'm pleased to report that as of today, December 7, all of Bancorp's network partners have agreed to assignment of their partnerships to Healthequity.

All Bancorp account holders have been welcomed to Healthequity membership, and all of their cash accounts have been transitioned to and are open at Healthequity. The additional accounts and Assets Under Management will be reflected in our Fourth Quarter results.

Now, how's Healthequity doing relative to competitors? To answer that question, I'd like to turn the call over to our Founder and Vice Chairman, Dr. Stephen Neeleman to provide a little additional color on the market. Steve?

Thank you, Jon. As Jon mentioned, Healthequity's revenue, accounts and AUM grew 40%, 45% and 47% respectively year-over-year in our latest fiscal quarter. Recent industry data allows us to put this in market context.

As we mentioned in our last earnings call, Devenir analysts, Devenir reported in August that industry-wide, HSA accounts and AUM grew 23% and 25% respectively during the year-ended June 30. In September, the Kaiser family foundation reported that 15% of covered workers are enrolled in HSA-qualified plans up from 11% in 2013 and 14% a year ago.

In October, AEF reported that 19.7 million Americans have HSA qualified plans, up 13% year-over-year overall and up 22% among insurers that reported its census both this year and last.

And in November, Towers Watson and the national business group on health, reported that large employers continue to aggressively move their employees to HSAs to both control costs and to help their employees save for retirement. These efforts seem to be working for these employers, as year-over-year cost trends, while still a major concern, have remained quoting the survey at historically low levels.

This study also found that employers are accelerating their communication efforts with nearly 2/3 of their employers reporting that they will begin offering year around communications next year about the importance of increasing contributions to their HSAs.

While other industry studies may vary, taken together, these data points suggest that HSA market growth remains robust at or above 20% annually but Healthequity's growth is roughly twice industry growth. We believe the drivers of this growth include our purple customer focused culture, our wide and deep footprint of health plan and employer network partners, and our technology platform that leverages hundreds of ecosystem partnerships to help HSA members build health savings.

The market data also speaks to Healthequity's distribution strategy and the opportunities from the Bancorp portfolio. The [AEF] study found that large employers are the fastest growing segment for HSA qualified plan enrollment. This segment is right in our sweet spot.

AEF also analyzed HSA plan enrollment on a state by state basis and found high market concentration in the Northeast corridor. This is where Bancorp's HSA membership is also concentrated.

Overall the Bancorp acquisition will increase Healthequity's HSA portfolio in 12 states by 20% or more and in three states by 50% or more. So we are excited to grow together with our new employer and health plan partners in new places.

I would now like to turn the call over to Darcy Mott, our Executive Vice President and CFO, who will review the details of our Third Quarter results and guidance. 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 pro forma 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. Pro forma 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 third quarter financial results and discussing our outlook for the remainder of the fiscal year. I should note that the Bancorp portfolio acquisition had no impact on our third quarter financial or operating results.

As Jon mentioned earlier, revenue for the third quarter of FY16 was $30.6 million, an increase of 40% compared to the third quarter of FY15. As we've mentioned previously, we report our revenue in three categories, account fees, custodial fees and card fees. Revenue growth continued to show strength in all three categories.

Account fee revenue was 49% of total revenue at $15 million, representing an increase of 36% compared to Q3 of 2015. Custodial fee revenue represented 30% of total revenue at $9.1 million. This represented an increase of 48% compared to the year ago period. And card fee revenue represented 20% of total revenue in the quarter, at $6.2 million, an increase of 44% compared to last year.

Our investment AUM as a percentage of total AUM at the end of the third quarter of FY16 represented 14% of our total AUM, which was consistent with last quarter and the year ago quarter. Gross profit for the quarter was $17.7 million compared to $12.2 million last year, an increase of 45%.

Gross margin for the quarter increased from 56% a year ago to 58% in the third quarter of FY16. Income from operations of $6.3 million during the quarter increased 47% year-over-year and generated an operating margin of 21% compared to 20% in the third quarter of FY15. We generated net income of $4.1 million for the third quarter compared to $3 million in the year ago period.

Our non-GAAP adjusted EBITDA for the quarter was $9.9 million compared to $6.1 million in the same period last year. Our GAAP EPS for the quarter was $0.07 per diluted share compared to $0.05 a year ago. On a pro forma non-GAAP basis, earnings per diluted share was $0.08 for the third quarter of FY16 compared to $0.06 in the prior year.

Sequentially, from the second quarter of FY16 to the third quarter of FY16, as expected, we incurred decreases in gross profit, gross margin, income from operations, net income, adjusted EBITDA, GAAP EPS and pro forma non-GAAP EPS, all a result of the seasonality of our business and the actions we told you we would take during our second quarter earnings call. These actions included accelerated card replacement activities and accelerated technology and development expenses into the third quarter of FY16.

Turning to the balance sheet. As of October 31, 2015, we had $125 million in cash, cash equivalents, and marketable securities and no debt outstanding.

Before discussing guidance, I want to provide some additional details on our acquisition of Bancorp's HSA portfolio which we announced on October 23rd. We ultimately purchased approximately 160,000 accounts totaling approximately $390 million in cash AUM deposits.

The adjusted purchase price of approximately $34 million was an all-cash transaction. The purchase price will be amortized over 15 years or $2.3 million annually.

As of today, we have completed the transfer of the acquired HSAs on to our platform and the custodial cash AUM into our custodial depository network. To give you a perspective of the impact we expect the Bancorp portfolio acquisition will have on our future annual operating results, we expect annual revenue of approximately $10 million from this acquisition.

On a per account basis, revenues will be below our book of business average due to lower account fees and historical card spend, partially offset by higher custodial fees. Nonetheless, we expect gross margins similar to those generated on our overall book of business.

We expect the Bancorp portfolio acquisition to be breakeven in FY16 and to be approximately 5% accretive on an EPS basis in FY17 and approximately 8% on an adjusted EBITDA basis in FY17. After today, the Bancorp HSAs will be incorporated into the Healthequity platform and will not be reported separately.

Now turning to guidance. We are once again raising our revenue outlook for FY16 from our previous range of $120 million to $124 million to a range of $124 million to $126 million.

We are increasing our adjusted EBITDA outlook for FY16 from our previous range of $36 million to $38 million to a range from $37 million to $39 million. Our pro forma non-GAAP earnings per diluted share is increasing from our previous range of $0.28 to $0.30 per share to a range of $0.30 to $0.32 per share.

Our pro forma non-GAAP earnings per diluted share is based on an estimated 59 million diluted weighted average shares outstanding 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.

The business outlook for the year ended January 31, 2016, assumes a projected effective tax rate of approximately 37%. Our guidance increase is the result of timely integration of the Bancorp portfolio and separately, increased confidence due to our year-to-date momentum discussed earlier by Jon.

Despite our year-to-date success, please remember that our fourth quarter is Healthequity's most important quarter in terms of new HSAs and AUM growth and will have the most significant impact on future operating results. Now I'd like to turn the call back over to Jon for some closing remarks.

Thank you, Darcy. So this is the busiest time of year for us as it is for many health benefits professionals.

Healthequity's leadership team, Steve, myself, and Darcy, would like to thank for their current efforts not only our fellow team members at Healthequity but also the hard working human resources and health insurance professionals we partner with among our employer and health plan network partners, ecosystems partners, and vendors who support us.

Happy Holidays to all. Now let me open the call up for questions.

Thank you.

(Operator Instructions)

The first question comes from Lisa Gill with JPMorgan.

Good afternoon and thanks for taking my question. Let me start, Jon, you left off talking a little bit about this time of the year and the selling season.

Can you talk about your ecosystem and how beneficial you believe that is and your differentiation in the marketplace? And I guess second to that, maybe just talk about the current competitive landscape. We hear things in the marketplace where other HSA banks are using their spread to then go do loans and they're doing some things around coming in with lower fees and I'm just curious as to what you're seeing in the market?

Sure, thanks, Lisa. First of all good to hear your voice and thank you for the question.

With regard to the sort of first question which was really about the effect of our ecosystem and so forth on our market position and market strength, as Steve said in his comments here and we've said elsewhere, we really think ultimately that Healthequity has been able to distinguish itself by first its commitment to providing an extraordinary level of service what we call remarkable or purple.

Second, by its broad network of relationships, and third by technology that really allows us and our members to leverage those relationships. And so obviously, those last two pieces speak to what you've said and we absolutely believe that that's a big reason why we are able to offer value to our partner's members that's unmatched out there and why you're seeing us grow at rates well in excess of the market growth.

So we don't intend to sit still with that. We continue to evolve both by adding new ecosystem partners and new functionality. And some of it which we've talked about on the calls here over the course of the last year. But it's important and very important to our continued progress. And I think if you look at our competitors, particularly our largest competitors, this is really not something that they are able to duplicate either because business realities restrict them from building the diverse ecosystems we have or they don't own their technology platform or what have you.

Your second question, I think really referred to, let's say, banks that are in the business directly being able to leverage spreads. Is that the question?

Yes, that's exactly the question.

Well, an interesting fact. If you look at the Devenir work and go back to 2010, you will find that large, what I guess I'll call, money center banks, those among the top 15 or 20 had about half of the AUM in this business.

Today, that same group has about 20% of the AUM. And a specialist like ourselves have 80%, along with some other banks. So I think the numbers kind of speak for themselves in that regard, but to kind of get into the detail of it, I don't think there's any magic. Well, there is no magic about being a bank and earning increased risk adjusted spread.

We feel very comfortable with what we do in terms of deploying our deposits for the benefit of our members as well as the benefit of our shareholders.

And the second part of that was about banks cross-selling products. There's nothing that restricts us from cross-selling any product that a bank might cross-sell, so for example, there have been times in our past where we have piloted and I believe we have one going today, the selling of some consumer loan products. But fundamentally, we sell what the market asks for. And what our members are asking for really, in that area, is help in working with their providers, their hospitals, doctors, etc. to afford and schedule payments. And they want tools to spend less and they want to understand their medical bills.

People don't need another credit card or another loan and that's what the market tells us so, that's what we do and so that's kind of my sense of that. There's not any particular structural advantage and as we've discussed in past some structural disadvantages to being a dedicated bank in this space.

I would agree with that and then I guess my last question would just be around some of the comments you made on Bancorp.

Can you give us anymore color as you look at the $390 million that are on deposit today and Jon, do you see some good opportunity from a cross-sell perspective, where do you see the opportunity to improve the margins, I think I heard Darcy say the margins are below your core business but what do you see as the opportunity in this book?

Well, the gross margins will be about at our core business. That will be despite the fact that the average account fee is a little bit lower and so we feel pretty good about the margins but there are going to be opportunities.

Right now though, our real focus is on welcoming our new members and partners. And we have done this in the past and we feel like we know how to do it and we know how to do it in a way that creates lasting relationships that grow. So we aren't doing a lot of thinking about where the next nickel might come from.

We're doing a lot of thinking about making sure that as quickly as possible our new members have access to their funds, the ability to deposit, all the information they need, the brokers and employers and health plans and other partners involved, have all of the information they need. And then beginning to talk with those parties about how we can continue to improve the product they are offering by connecting into our ecosystem, parties that perhaps they partner with, that we don't have today.

So that's, honestly Lisa, kind of where our focus is at this point. We will of course find ways to increase margin just as we have in other transactions, for example, we would expect to see things like card spend which is a little bit lower than in our portfolio come up a bit, but that's not our focus today. Our focus today is on welcoming our new members and making sure they are secure and safe.

Great, thank you.

Next question comes from Greg Peters with Raymond James.

Good afternoon, congratulations on the quarter.

Thanks, Greg.

I guess more competitive landscape questions, more market questions for you. And I recognize your comments about entering the very important part of the year in terms of enrollment, but as we look out to 2017 and beyond, I'm curious if you're seeing change or hearing of any discussion about changes in the way RFPs are being put together or being talked about being put together by large employer prospects?

Well let me give you some data and then I'll throw to Steve to provide some color. It's interesting you talk about 2017 because it's very much the case that our enterprise team is on to 2017 and working on 2017 opportunities at this point and even at this early stage, our pipeline as of today is about 30% larger than it was this time a year ago. So we're already off to a great start in terms of FY17 even though of course 2016 is far from over.

Beyond that, I'm going to defer to Steve a little bit to provide a little color on what he's seeing out in the marketplace.

Thanks, Greg. You know, I think that we look at several different studies and we combine that with what we are seeing in the RFPs, and I think that if you look at the National Business Group on Health survey for example, the one that just came out last month. They talk a lot about these larger employers getting more aggressive and starting to talk about more full replace in 2018 and things like that and so the RFPs I think would near that from the perspective of, if an employer has made the decision to go full replace and let's say they are going to do it in a few years.

And they may change their mind. We see that too but if they think they are going to do it, then they have a different discussion because things like the ecosystem matter more when you have 100% of your employees looking at the ecosystem solution through the lens of a health savings account than if it's just 10% or 20% or 30% of your employees.

So I think what we are seeing are questions like, tell us how robust your investment offering is? Because it matters a lot more when you have the vast majority of your employees in. Or tell us what you can do to integrate with our wellness or telemedic center or transparency providers, because again it matters a lot more because people on a co-pay don't care about that stuff. They certainly don't care about investing.

And Steve, in that regard are you getting any pressure, are you feeling or beginning to feel any pressure from these large employers about adding additional services like FSA or HRA accounts or services?

We felt that three or four years ago. That's why we spent a long time building out what we consider to be a state-of-the-art HRA and FSA platform. And so we're one of the few that can do multi-account integrated services, so whether they want us to integrate right into an FSA or an HRA or dependent care account or on the same portal go right into their investment account, that's kind of the beauty of our integrated platform.

And believe me it's hard work and we wouldn't have done it had we not felt the pull of the market about three or four years ago and we made a big investment back then.

Just clean up with one final question.

The growth in your HSA membership is striking. And I'm just curious because of the numbers, just the sheer numbers if you've changed the way you're thinking about the potential of these new customers both in terms of deposit base longer term or simple characteristics about like, account usage?

This is Jon. I think the short answer is no, except that the more data we see the more certain we are that as these accounts age, they become on average higher balance and more profitable for our shareholders as well as for the members and the Bancorp portfolio is evidence of that.

As you can tell by doing the division, the average account balance of a Bancorp account is significantly in excess of ours. And the reason for that is simple, which is the average age of the accounts is substantially higher. Put differently, there has not been that 40% plus growth rate year over year over the last several years.

So that's something that our shareholders have to look forward to, that is to say, that as I just think about the 200,000 accounts we've added this year. And as those accounts age over time they will become extraordinarily valuable, again both to the members themselves as well as to Healthequity. So we become more convinced over time that that's happening. So that's kind of where we are, so our role here is to continue to build up that base of locked in future value.

Perfect. Thank you very much for your answers.

Thank you.

Next question comes from Peter Costello with Wells Fargo Securities.

Thanks for the question, good quarter guys.

Thanks, Pete.

You changed your revenue guidance by raising it and narrowing it some. Can you help us understand sort of the factors that might have gone into that, including the Bancorp assets revenue coming in, any change in your view relative to before, regarding January enrollment and sign ups? And then your card fee number was a little below what I was looking for so I'm wondering if your thought process is any different on card fees at this point?

Sure. So on the first point on raising the guidance and narrowing the range it's somewhat a function that we have one quarter to go so we feel like narrowing the range was appropriate. Of the revenue increase, Pete, I would say that about half of it is due to the Bancorp acquisition that will get additional revenue and the rest just because we're further along in the year and the momentum that we spoke about.

With respect to the card fees, I think Greg asked the question about any changes the card spend that we incurred in the third quarter was a little bit less than what we had. I will say historically that card spend is the lowest level in our third quarter.

It was probably just a little bit lower than what we've seen in prior years. We're not sure what to make of that. Does that mean people are getting the message they should save and spend less? Which is very positive for us from a standpoint that is then stealing AUM that we earn interest on.

It has the impact of having a short-term revenue impact because you forego the card fees in that particular quarter but then you earn them back over the next four quarters if that money is still in their accounts. So it's too early to say there's any trend there, but we did see the spend was a little bit less than it has been on a historical level. That being said, we're pleased with the AUM growth and the account growth that we incurred.

Then can you talk a little bit about the Bancorp assets, first off let me confirm there's no membership in the membership totals at the end of the third quarter from the Bancorp or no assets from that transaction, is that correct?

That is correct. They actually came on to our platform just this month.

Up until that time they were still in the Bancorp platform and the asset transfer did not happen until today. It got finalized and so none of the third quarter numbers reflect any accounts or AUM from Bancorp, that's correct.

And then as we think about the $10 million in revenues for next year from those assets, how should we think about the seasonality of that business? It wouldn't have maybe your business's seasonality but maybe it has some separate seasonality to it?

Go ahead, Jon.

From a seasonality standpoint, their book has not been growing as rapidly as ours, so we don't expect the degree of seasonality that we've had. We expect it to be a steady performing business.

The account fees are what they are, the custodial interest as Jon said, they have higher average balances by, I think almost $1000 of cash AUM and so the predictability of that, we'll try to figure out how to increase their card usage and the spend that you get from card fees which has been a little bit lower than what our average has been. But other than that, we don't expect a lot of seasonality in the performance of their business.

So more just bring it on flat through the year? I understand. Okay and then any kind of comment you want to make about the selling season in terms of next year? I know you don't give a lot of information to see if there's anything you'd give us about how that selling season is going other than just to say your book is up from last year?

I think you'll have to wait until the end of the year for that one.

Look, we said I think perhaps what you can read is the fact that we've provided in our up front commentary more information about where we are year-to-date on account openings and the fact that those numbers are well in excess of our historicals, should give you some feeling that we feel confident about where we are in the current sales cycle.

And beyond that, we'll comment further when we know how it affects our forward-looking revenue and earnings which will be after the fourth quarter.

Great, thank you very much.

Next question comes from Mark Marcon with Baird.

Good afternoon and thanks for taking my question. Congrats on a great year. Wondering if you can talk a little bit about your sales force and how its evolved over the last year, and how we should expect it to continue to evolve, just in terms of the number of people that you have, the way they are going out to market, as the opportunity continues to expand?

It's a great question, Mark, thank you. First of all, Matt Sydney who leads our Sales and Marketing organization has been at the helm for a year now. I'm kind of a believer in the numbers tell the story and on that basis, Matt has really done a spectacular job in taking the reins in leading that part of the organization, as well as really leading the company's overall commitment to sales driven growth.

As to how over that period of time in particular, what have we learned? What have we evolved? I think that there are really three things that stick out.

The first is we have deliberately chosen a path of, as we do in all of our organization, really building from the bottom up within the sales organization. So from that perspective, what it means is that instead of the immediate impulse when there's an opportunity being to add a very expensive and high end field representative in a new territory, because that's easy to do; you recruit them, hire them and they are out on their own.

We have tended to build from adding field sales support, or what we call regional sales associates, as well as our sales office in Kansas City to provide back ups so that our most successful people can be more successful. Our sales organization has on average the longest tenure of any part of the company and that's because this is the way we approach it and its really worked for us. And then we've done more of that in the last year than ever before and as we get going on the fiscal 2017 cycle are doing even more, so kind of filling in below versus always being in the position of adding at the top.

The second area I think we've made adjustments in, is really how we think about strategic partner relationships with our largest partners. Over the last year, we've made investments in talent both from within the company and from outside to help us get the most out of those relationships not only for Healthequity shareholders but also for the partners themselves. And where that's helped us, I think is, I think where that's already paid dividends is kind of like the third quarter number, you'll see in the third quarter most of the growth is not from new partners it's from existing ones. So that's very much a function of that investment and that's an area that we expect to continue.

And then lastly, I'd say having done all of that, our basic philosophy has really remained unchanged, which is, we want the sales team and the sales force to be in a position to feed itself and succeed and we make investments based on their ability to generate return to our shareholders. So, you will not find us in a position of embarking on a process of simply adding reps based on the idea that at some point in the somewhat distant future, those territories will pay for themselves.

That's not been a successful strategy for other companies, in generally the human resources, benefits, business services space, however you want to define it; and certainly our strategy has been to spend money where we know we're going to get a return but not to gamble and ask people to kind of just take it on faith that they can succeed.

So that's probably more something that hasn't changed but something we are bigger believers in today than we've ever been. That in terms of the fixed costs we incur as well as the people we put out there, we're going to put people out there who can succeed. And we're going to give them everything we can for them to succeed and help them celebrate their success.

Great, and how many people do you currently have on the sales force?

So we operate and I'm going to be approximate here, we have relatively compact teams that manage our new enterprise and new health plan sales.

These are really we think of them as kind of, like as close as we get in Healthequity to Navy seals, which isn't very close, but nonetheless, these are compact teams in the single digits in total who are out there winning new enterprise and health plan channel relationships. And then we have roughly 10 territories, and each of them staffed by a leader and several support, either in field or in our sales support office in Kansas City. And so in total, if you think about it in total, our sales team has a total of 35 people and our marketing team a total of 11, and as you might gather from all of that about a third of those are actually carrying a commission.

Got it. Great thanks for the color.

Sure.

Next question comes from Alex Paris with Barrington Research.

Hi this is Chris Howel in for Alex.

Hi, Chris.

How are you?

Great.

Just had a few questions here just kind of following up on the previous caller's questions, maybe phrased a little bit differently.

But would you be able to perhaps provide any color in regards to how much growth potential there is off the existing sales force base? Kind of maybe at what point with the new and existing accounts would it justify adding a new rep?

Well, we don't exactly think about it that way.

We will add people when those people can feed themselves and -- meaning that there's enough growth opportunity within a territory, however defined, that we're confident that they can be successful. And so it's from our perspective it's really a function of adding new network partners in particular on the health plan side. When we do that, then it makes sense to put people in new territories because they can be successful.

On the enterprise side, the large employers and the like, we've expanded that force a bit but I have to say that it's remarkably efficient. There was this joke, when I, early in my career, worked at Arthur Anderson there's only 500 Fortune 500. And it turns out that remains true today and so if you have people who know what they're doing and are efficient at what they do, they can cover a lot of ground within a given territory. So we're very focused on what we do creating market and that driving who we put in the field rather than some hypothetical calculation that if we open a new store it's just automatically going to be successful because it just doesn't work that way.

Sorry to not give you what you wanted but that's the way we think about it.

No, that makes sense, thank you, and just one more question for me. I guess I can tell there's definitely improving execution throughout the business.

Thank you.

I was kind of curious on the current process when it comes to on boarding new sales reps or developing existing reps that are already in the funnel.

Well, one of the nice things, two things to note. One is that we are, again reflecting sort of way we approach it and the tenure within the sales force.

Very often the people that we're putting in territory, are promotions from within. So I think about our two most successful reps this year, out of our regional sales directors, both of them were promoted from within the operational side of the organization at one point in time. So by the time they hit the road, their primary training was complete in terms of understanding our business and the biggest question was, could they adapt to the life of field sales which you can figure out real quick.

So that's an advantage of growing from within is that you don't spend and not having a lot of churn there as you can really, you really minimize that time that you spend kind of wondering and waiting if someone is going to succeed, so that's kind of good.

I would say though beyond that, the other thing that really is helping us is -- and I'm sure there's some folks listening who won't want to hear this but they don't work here, for once. That's a joke. But -- is that we're increasingly drawing from some of the performing reps from our competitors.

Just because we feel like we have the best product out there but that doesn't mean we have a monopoly on the best talent, and so we've made some recent hires from our competitors and we're not proud. If we see good people out there and they want to come join this team, we're here.

Thank you so much for the color.

Thank you.

Next question comes from Randy Reece with Avondale Partners.

Afternoon.

Hi, Randy.

First question, the AUM you acquired in the Bancorp deal, is there any investment AUM in that or is it all cash?

The [390] that we reported is all cash. There is a small amount of investment AUM that is coming over but it's not as clear what the exact number will be, and in any case, we felt like you would get the bulk of the idea from that. Certainly, a source of upside opportunity within this book of business is growing the number of people who invest as well as the invested AUM which clearly is a focus of ours, so there's definitely an opportunity there.

And I'm wondering -- we've been talking for a few quarters about a shifting mix in new business between how much you're getting paid through account fees versus custodial fees and looking at the way business is going to come in for the next planned year, is that change going to accelerate?

Do you want to comment on that?

We don't think it will necessarily accelerate but we think it will continue. We think that account fees will continue to decrease on a percentage basis. I think we're at what, 6% to 8% so far year-to-date but we also think that the AUM growth will tend to offset that as AUM balances grow and as the total AUM grows on the interest rates that we're earning on it. So yes, we think that trend will continue but we don't necessarily think it will accelerate.

And if I look at market interest rates right now compared with this time a year ago it's a little more favorable. How much of a positive impact is that going to have on next year for custodial revenue?

We've said consistently is that rate increases, we will get the benefit of that for new money, new custodial agreements that we enter into. We'll get the immediate impact of that and the rest of it will be spread out over our duration which is usually around three to three and a half years and so that's kind of how we look at it.

Very good. Thank you very much.

Next question comes from Steven Wardell with Leerink Partners.

Hi guys, thanks for taking my question.

Thank you, Steve.

Can you tell us about account fees, how are they trending and what's driving it and how do you see account fees trending in the future?

Just a follow-up to that last one. The account fees themselves, I think on a year-to-date basis, I think that we've said that they are off about 8%, 6% to 8% year over year, depending on if you look at the quarterly or year-to-date number. And that's consistent with what we've said, is that those will trend downward.

The factor that is causing that, however, probably is a little nuanced, in that as we bring on new business and as we bid on competitive rates, it all depends on what the customer is offering. If we are bringing on a new customer and they are making a healthy contribution to an HSA, we will offer a lower account fee, so there's the tradeoff that goes on between account fees and custodial fees.

The other thing that factors in, is our partners have incentives from our pricing to grow their number of accounts. As they get to the larger number of accounts, they get into a lower tiered pricing level.

And so that occurs every year. It has occurred every year in the past and will continue to occur this next year. So those are the factors that go into that pricing, the account fees dropping over time, which is a natural considering the fact that we expect AUM for custodial account will grow over time.

Great, thank you.

We will take a follow-up from Mark Marcon with Robert W. Baird.

Thanks for taking my follow-up. I've got a couple. First, with regards to the Bancorp assets, how would you split up that $10 million in annual revenue between account fees versus custodial versus card?

We haven't broken it down for you that way and probably won't. But you can go and figure from a starting point that their average balance is about $1000 more than ours. And overall we've said that their margins will be somewhat similar to our margins, and so to the extent that they have more custodial fees because a higher average balance that's offset by lower account fees and lower card fees.

Okay, and then with regards to the selling season, it sounds like it's going really well. Can you talk a little bit about the non-employer network partners, what the trends are there and the level of recognition that you're getting with regards to the superiority of your platform?

You mean the health plans themselves?

Yes.

And is your question about, just so I'd make sure I answer it, about new health plan wins or about the penetration of the existing plans?

Both.

Well let me answer it in terms of both. So first of all with regard to the further growth of our relationships with our existing health plan partners, as Darcy sort of alluded to, that's going extremely well. And certainly the growth year-to-date in new account openings relative to the period last year and the growth in the third quarter really speaks to that because that's where most of that comes from.

Most of the larger employers have January 1 start dates and new health plans really don't contribute in the year you sell them, so I think there we feel real good about where we are. And that does to some extent reflect the growing level of recognition of who we are and what we do and what we bring that's unique to the marketplace and that becomes easier and easier for our health plan partners to sell as their prospects understand it.

The second thing I'd say is we've had some success and we've commented on this in past quarters at also beginning to grow what there is of the addressable individual market, along with our health plan partners. We've cautioned before that the bulk of the current individual market is in that sort of subsidy eligible category for whom an HSA is probably not first thing on their mind, but among the portion that for whom an HSA makes sense because they're paying taxes, I think the team has done a really nice job of laying the plumbing for us to sell to those; and we're figuring out how to do it and how to do it well and it's modest but nonetheless steady contributor to growth.

And then the last piece is about new health plan and similar channels and while we'll talk about numbers at the end of the fourth quarter, suffice it to say that the same factors that -- we start -- let me say this. We started the year with by far the biggest channel footprint within our industry and it will be bigger at the start of next year, even more so and we feel real good about that.

There's been some tumult broadly in the healthcare business at the close of some of the healthcare co-ops and the like, but I think broadly speaking, we feel really good about those new health plan relationships that we're just starting up this year that just as today, we can look at relationships we started three or four years ago and say wow those are huge producers for us. There are relationships that will start this year that will be huge producers for us a few years out.

That's great to hear, thanks.

And there appear to be no further questions. Go ahead, sir.

Well thanks, everybody and again, happy holidays and we look forward to sharing the full results of our sales cycle when we speak after Q4.

Ladies and gentlemen, that does conclude today's conference. We do thank you for your participation and you may now disconnect. Have a great rest of your day.