Healthequity Inc (HQY) 2022 Q3 法說會逐字稿

Please go ahead, Mr. Putnam.

Thank you, Justin. Good afternoon. Welcome to HealthEquity's Third Quarter Fiscal Year 2022 Earnings Call. My name is Richard Putnam. I do Investor Relations here for HealthEquity. Joining me today is Jon Kessler, President and CEO; Dr. Steve Neeleman, our Vice Chair and Founder of the company; Tyson Murdock, the company's Executive Vice President and CFO; and Ted Bloomberg, our Executive Vice President and Chief Operating Officer.

Before I turn the call over to Jon, I have 2 important reminders. First, a press release announcing our financial results for the third quarter of fiscal year 2022 was issued right after the market closed this afternoon. The metrics reported in the press release include the contributions from wholly owned subsidiary WageWorks and the accounts that it administers.

The press release also includes definition of certain non-GAAP financial measures that we will reference here today. A copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures, and a recording of this webcast can be found on our Investor Relations website, which is ir.healthequity.com.

Second, our comments and responses to your questions today reflect management's view as of today, December 6, 2021, and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates or other information that might be considered forward-looking. There are many important factors relating to our business, which could affect the forward-looking statements made today. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from statements made here today.

We caution you against placing undue reliance on these forward-looking statements, and we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock that are detailed in our latest annual report on Form 10-K and subsequent periodic reports filed with the SEC.

We assume no obligation to revise or update these forward-looking statements in light of new information or future events. And at the conclusion of our prepared remarks, we will turn the call over to the operator to provide instructions and to host our Q&A.

I'll now turn the call over to our CEO, Jon Kessler. Jon?

Thank you, Richard, and hello, everyone, and thank you for joining us. Today, we are reporting results for HealthEquity's fiscal third quarter, which ended on October 31. Core HSA sales, account asset -- accounts and assets continued the strong growth pattern that we have seen throughout fiscal '22. While ancillary consumer-directed benefits, or CDD, administration slowed and weighed on operating performance. I will dive into both aspects of Q3 results, and Tyson will review the financial details of the quarter and provide updated guidance for the full fiscal year 2022. Steve and Ted will join us as we take time for your questions.

Let's start with the 5 key metrics that drive HealthEquity's business. Q3 revenue of $180.0 million was up slightly from $179.4 million in the third quarter of last year. Adjusted EBITDA of $61.1 million was flat year-over-year. 13.3 million total accounts at quarter's end were plus 6% versus a year ago. And as in recent periods, total accounts exclude commuter accounts in suspense.

HSA members at quarter's end reached 6.2 million, up 14% from a year ago, including 11% organic growth plus new HSA members from the transition of Fifth Third's portfolio just before the end of the quarter, and HSA assets at quarter's end reached $16.4 billion, up 32% from a year ago, including 28% organic growth and approximately $490 million in Fifth Third assets transition.

Spurred by total solution and cross-sells, HSA has captured a greater share of HSA growth during -- both during the pandemic impacted fiscal '21 than ever before and has now delivered record organic HSA openings and asset growth during the first 3 quarters of fiscal '22. Team Purple delivered a fiscal third quarter record of 151,000 new HSAs, up 45% from 104,000 new HSAs opened in Q3 of last year. Through 3 quarters of fiscal '22, the team has welcomed 446,000 new HSA members across its diverse sales channels. That's 41% more than in the same period in fiscal '21 and 29% more than during the same period in the pre-pandemic fiscal '20.

The migration of Fifth Third Bank's HSAs added another 160,000 HSAs on top of the strong sales results. And HSA assets grew a total of nearly $1 billion during the quarter, and that includes assets, of course, transferred from Fifth Third. Investing HSA members at quarter's end were up a remarkable 43% with 74% growth in invested assets from a year ago. HealthEquity members average HSA account balance grew a robust -- good word, robust -- 16%, evidence that members continue to catch the vision of long-term health savings and to connect health and wealth.

HealthEquity's organic and total year-over-year HSA and HSA asset growth in Q3 compared very favorably to the most recent industry data. Devenir estimates 6% account and 26% asset growth market-wide for the year ended June 30. HealthEquity delivered 14% account and 32% asset growth year-over-year in Q3.

Comparison with Q3 reports from publicly traded HSA peers tell the same story, saying that the team continues to make market share -- to take market share as we have done every year for more than a decade now. Our formula for doing this, as you know, is simple. It's a total HSA solution at scale, bundling the services that our clients want, proprietary technology delivering the ecosystem connectivity that our partners demand and Purple service and education that our members deserve.

As you know, HealthEquity acquired WageWorks' market-leading CDB capabilities and client footprint 2 years ago to drive core HSA growth, and that is precisely what's happened. However, CDBs have proven more sensitive to near-term external factors than we expected. We believe that most of these factors will recede as the pandemic effect on the economy continues to wane. But Q3 results from administration of FSAs, COBRA and commuter accounts were particularly impacted and resulted in lower-than-expected interchange and service revenue leading overall revenue down $5 million to $10 million versus our expectations as implied in prior guidance.

Let me speak about each of these. Interchange was the biggest surprise. Year-over-year interchange revenue grew just 8% in Q3, down from 23% growth in Q2. FSA spend on our debit cards and platform in Q3 slowed more than was anticipated from seasonal factors and the final user lose deadline for calendar 2020 and 2019 FSAs.

Improvement from here is going to depend on the choices of members during open enrollment and on enrollments from new sales that we've made this year. We anticipate that members who did not add to their balances for calendar '21 will do so for calendar '22, which leaves us cautiously optimistic as we head into the new fiscal year.

Service fees from COBRA administration experienced a similar reversal after Q2 gains. In addition to the end of onetime revenue from administration of the federal COBRA subsidy, which we did expect and did discuss with you last quarter, COBRA uptake itself fell off more than we expected when the subsidy ended. Tight labor markets and high-churn conditions led to more COBRA eligibility in those accounts, but not necessarily additional fees. Commuter accounts and fees had a small uptick sequentially for the first time since the start of the pandemic, and that is good and welcomed. But with employers taking only very tentative steps towards returning to office, Q3 commuter fees were still lower even than in the year-ago period.

And finally, we -- our decision to walk away from certain legacy CDB administrative engagements for one-off services that our go-forward platform will not support will ultimately help streamline and simplify the business, but hurt short-term service revenue, nonetheless.

So scaled CDB capabilities are spurring core HSA growth, which is strong in its own right. And the team looks forward to turning the page on CDB integration and the pandemics various impacts on revenue. We're going to do that first and foremost, by focusing even more on the expanding revenue generation capabilities around our fast-growing, high-margin HSAs through sales execution, through portfolio M&A and through product innovation.

I already mentioned the record sales results in the transition of Fifth Third's HSA portfolio completed in Q3. After the quarter ended, we announced the closing of our acquisition of the HSA business Further, which brings with it approximately 580,000 HSAs and $1.9 billion in HSA assets. Further, as you know, expands our HSA partnership footprint and commitment to -- with and commitment to the Blue Cross Blue Shield Association and its health plans and adds technology to help partners embed HealthEquity more deeply into their products. In fact, you're going to see -- you should expect to see real examples of deeper integration of HealthEquity HSAs with partners in the coming quarters.

This morning, we announced an agreement to acquire a portfolio of $1.3 billion in HSA assets from Health Savings Administrators, a leader in marketing HSAs to individual investors and to small employers.

I'm pleased to report that initial member uptake of our innovative enhanced rates offering is beating our expectations, which will support custodial yields going forward and the inherent profitability of HSAs. FY '23 will be the third year of the downward custodial yield cycle that began around the onset of the pandemic and of which you're all familiar, but we're cautiously optimistic that it will be the last.

While tightly focusing on the HSA core, we are streamlining elsewhere. Migration of business from duplicative legacy CDB platforms acquired with WageWorks will be completed substantially in Q4 and entirely in the new year. I mentioned earlier the decision to discontinue one-off services that won't help us grow, and we've also agreed with Further sellers to terminate our agreement to buy the Veeva accounts, which was an ancillary and severable component of the overall further acquisition. That frees up $45 million of corporate cash for core growth opportunities.

I'll now turn the call over to Tyson for additional detail on Q3 and year-to-date operating performance and updated guidance for the current fiscal year. Mr. Murdock?

Thank you, Jon. I will review our third quarter GAAP and non-GAAP financial results. A reconciliation of GAAP measures to non-GAAP measures as found in today's press release.

Third quarter revenue, as Jon indicated, was up less than 1% year-over-year with service revenue declines partially offsetting growth in custodial and interchange revenue. Service revenue declined 2% to $102.8 million, representing 57% of the total revenue in the quarter. Service revenue in the third quarter was aided by 10% growth in average HSA accounts, offset by CDB service revenue declines in FSAs, Commuter and COBRA services. Lower CDB revenue and continued success in our bundling and cross-selling efforts led to lower service revenue per account.

Custodial revenues grew 1% to $49 million in the third quarter compared to $48.5 million in the prior year second quarter. 16% growth in average HSA cash with yield more than offset a 36 basis point decline in the yield on HSA cash from the comparable quarter of last year. The annualized interest rate yield was 172 basis points on HSA cash with yield during the third quarter of this year. This yield is a blended rate for all HSA cash with yield during the quarter.

As Jon mentioned, our HSA members continue to invest their balances, which resulted in 81% growth in average HSA investments with yield. The HSA assets table of today's press release provides additional details.

Interchange revenue grew 8% to $28.2 million, representing 16% of total revenue in the quarter. As Jon indicated earlier, FSA spend decreased as 2019 and 2020 rollover FSA accounts were depleted and closed faster than we expected. Gross profit was $103.3 million compared to $104.6 million in the third quarter of last year. Gross margin was 57% in the quarter.

Operating expenses were $103.7 million or 58% of revenue. Amortization of acquired intangible assets and merger integration expenses together represented 18% of revenue.

Net loss for the third quarter was $5 million or a loss of $0.06 per share on a GAAP EPS basis. Our non-GAAP net income was $29 million for the third quarter this year compared to $32.2 million a year ago. Non-GAAP net income per share was $0.35 per share compared to $0.41 per share last year. Adjusted EBITDA for the quarter was $61.1 million, and adjusted EBITDA margin was 34% compared to $61.1 million and 34% margin in the same quarter last year. The consistency of those numbers is an indication of the HealthEquity's team's focus on improving the efficiency of our operations and carefully managing costs toward the ongoing profitability of the business.

For the first 9 months of fiscal '22, revenue was $553.3 million, up 1% compared to the first 9 months of last year. GAAP net loss was $11.5 million or $0.14 loss per diluted share. Non-GAAP net income was $93.2 million or $1.12 per diluted share, and adjusted EBITDA was $185.6 million, up 1% from the prior year, resulting in a 34% adjusted EBITDA margin for the first 3 quarters of this fiscal year.

Turning to the balance sheet. As of October 31, 2021, we had $649 million of cash and cash equivalents with $930 million of debt outstanding net of issuance costs with no outstanding amounts drawn on our line of credit. The cash balance, of course, still includes $455 million of cash that was used to close the Further acquisition on November 1.

As a result of the sale of unsecured debt and reduction and rollover of secured debt during fiscal '22, the tenor of our outstanding debt has been dramatically extended, reducing risk and giving us the flexibility to invest in growth opportunities. The new debt will obviously increase interest expense by about $4 million a quarter.

Based on where we ended the third quarter and our current view of the economic environment, we are revising our guidance for fiscal '22 to include revenue for fiscal '22 to range between $750 million and $755 million, non-GAAP net income to be between $108 million and $112 million, resulting in non-GAAP diluted net income between $1.30 and $1.35 per share based upon an estimated 83 million shares outstanding for the year, and adjusted EBITDA to be between $230 million and $235 million.

Today's guidance includes our most recent estimate of service, custodial and interchange revenue based on results to date. Our guidance includes a more conservative outlook for service and interchange revenue to reflect fewer commuter and FSA accounts and lower balances through calendar 2022 and to reflect continued conservative spend patterns that we saw in Q3 for the remainder of this year.

Guidance also includes the addition of Further which closed at the beginning of Q4 and also reflects a ramp-up in service costs associated with onboarding new clients and members for both Further and HealthEquity as a whole. Our guidance assumes a rate on HSA cash with yield of approximately 175 basis points for the full fiscal 2022 year and includes the migration of further assets to HealthEquity depository and insurance partners at prevailing rates.

Guidance also includes the benefit of $75 million of run rate synergies achieved from WageWorks to date as we finalize the placement of HSA cash assets into depository contracts, we will be able to provide initial interest rate guidance for fiscal year 2023.

This outlook also includes certain cost HealthEquity expects to incur as a result of President Biden's executive order on ensuring adequate COVID safety protocols for federal contractors, referred to as the Federal Contractor Mandate. As you may know, the Federal Contractor Mandate is more stringent than the wider OSHA mandate. The Federal Contractor Mandate brings with it significant cost for compliance assurance and for recruitment and training of team members to replace those who can either provide proof of vaccination nor eligibility for exemption under the President's order.

The outlook for fiscal '22 assumes a projected statutory income tax rate of approximately 25% and a diluted share count of 83 million as we have had fewer equity awards exercised this year than expected.

As we have done in recent reporting periods, our full year guidance includes a detailed reconciliation of GAAP to the non-GAAP metrics provided in the earnings release and a definition of all such items is included at the end of the earnings release. In addition, while the amortization of acquired intangible assets is being excluded from non-GAAP net income, the revenue generated from those acquired intangible assets is not excluded.

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

Thank you. Look, we've always tried to humanize these calls with clean thought. And today's results are mixed. And then what -- and I mean that, if not quite literally like a blender, I mean it truly. Our core HSA outcomes were very strong, and the very is written capital letters, so that's going saying it like that, but also because it's true.

Our ancillary CDB services performance was not very strong. We're taking action on both results to deliver the long-term growth, profitability and visibility that we know you rightly expect.

We truly welcome your tough questions on our results and on our plan. Let's get to it.

Operator?

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

You guys went a little faster and there was a ton of details. So I was hoping maybe you could just circle back and provide a little bit more color on what happened with the interchange. And then you said you expect the dynamic to shift, and you're cautiously optimistic for next year. So what are the dynamics that are happening there?

Tyson, do you want to get started on this one?

Yes. Anne, thanks for the question. Yes, the interchange revenue and the interchange spend was the leading lagger. Again, on the HSA side, we have a lot more accounts. I feel really good about what we've done there and especially with even interchange there.

But on the FSA side, we've seen a decline in those 2019 to 2020 accounts more quickly than we had thought. And so not only does that affect service fee, but it also affects the interchange because there's less of a balance for them to spend. And we saw the spend and the revenue related to interchange increasing pretty dramatically in the Q2, Q1 time frame. And so the thought was that, that would persist more so than it did. And so as we saw that come down in the months during Q3, that really had -- that put us in a place where we needed to shift Q4 as well because Q4 obviously is a higher spend quarter when you think about December. We usually lose it in January when the accounts are replenished. And so that's really one of the biggest challenges there on the interchange side.

Jon, any more thoughts that on that?

No, I think you hit it. Actually, I will add one thing, which is to say the cautiously optimistic part is -- it was -- what's really a way to summarize what we just said is that we had very strong impacts, particularly in Q2 that were in part the fact that you had this sort of unique situation where you were running off 2 years of unsolved balances. And so the third quarter is kind of what remains. And then in the December is what remains and of course, January will be part of the new year.

But as we look into the new fiscal year, that will be impacted by people's decisions that are being made now with regard to elections. And while we're looking at early returns on that, and we'll have more to say when we provide a fiscal '23 outlook later, we're optimistic that we're going to see some snapback there relative to the elections that people were making or not making back at the kind of -- during some of the darker days with pandemic a year ago and so forth. So that's why we -- that's the cautiously optimistic for.

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

Greg Peters from Title town?

Yes. Well, unfortunately, the stock is getting beat up in the aftermarket. And I know you just covered some of the reasons for the mixed results. Maybe you could spend a minute and just talk to us about custodial revenue and the outlook for that line item.

The 3-year jumbo CD rate just hasn't budged at all, and it doesn't seem like there's a lot of new loan demand. And so it just begs the question in your comment, you said you think this might finally trough out next year, but I have to wonder about that.

And the second part of the question, and this will be the only thing is just you spend a lot of money on Further and we're, I guess, trying to see where the positive impact of that is in the results going forward. So that's my question, sir.

Okay. Those are great. Why don't -- how about I'll hit the first one on rates and Tyson, why don't you -- and Ted, if you'd like to add into the second one on Further.

So with regard to rates, both Tyson and I comment a little bit on our thinking forward. If you recall, Greg, when this cycle began, we pointed out that we have 3 years' worth of sort of ladder. And the benefit of having that ladder is that it gave us time. And so we have, notwithstanding the fact that -- I mean, this quarter is sort of an example of that. Notwithstanding the fact that we're 35 basis points down in terms of yields, our custodial revenues, of course, were actually higher, and our overall EBITDA was flat year-over-year.

And so fiscal '23 will be the third year of that cycle. We've commented previously that our historical lows in terms of the rates we receive are the lowest that we've ever gotten. It's around 150 basis points. I think 152 after the 2008 crisis, after kind of our ladder had unwound there, and we're kind of heading into that same territory. And we've commented elsewhere that, that's likely where we would be. But I think what we're adding to that commentary today is that we feel much more comfortable than, for example, we did 3 months ago that, that's the bottom. And again, we don't -- we're not perfect predictors any better than anyone else. But I want to tell you why because, first of all, it is not because we have some magic ball or we're baking into our thinking for rate for overnight rate hikes or what have you.

We -- as you know, we do not bake those things into our thinking. It's really because of exactly what we've said over the last couple of quarters, which is that the introduction of our enhanced rates product has done -- is doing 2 things for us. The first is, it itself generates higher yields and higher spreads. And second of all, it just creates more competition for money and effectively reduces our need to place to the marginal bank, if that makes any sense.

And it's for those reasons that we think we're in a better position from a sort of what the terms of our placements are going to be going into -- both going into fiscal '23 and then at the end of fiscal '23 into '24, that we're feeling quite a bit more sure-footed and optimistic that we can meet the promises that we have more or less made to you over the course of time with regard to the likely shape of these yields.

So that's kind of my -- that's the basis for our thinking. We're not looking at -- I want to be clear, we're not looking out there and saying, "Well, economists says that there are going to be 4 rate increases next year or whatever they say. And so that's going to make it all better." That would be nice from the perspective of our business. But what we're really looking at is we're looking at the offers that we're getting from our banks as we go into -- as we're into placement season. Though obviously, we have some wood to chop there. And we're -- but we're also looking at the fact that competing against those offers, in effect, is the uptake from our members of our enhanced rate product. And that's, again, both has, as its name implies, enhanced rates and also, again, just reduces our need to hit the marginal bid and then that helps us out quite a bit. So hopefully, that was helpful.

And the second question was about Further, and Tyson, why don't you start there?

Yes, I was going to make one other comment on the rates thing as well, Greg. I think this is important to note. When you think about contracts and placements we were making earlier in the year versus now, those rates are higher, whether you're talking about FDIC or even an enhanced rates program. They're higher now than they were then. So there is that turn now. We're still working against that average in the higher placements from 2 or 3 years ago, of course, right, for FDIC. But those are different now. They're higher. So I want you to know that.

And then on the Further business. This is, again, an HSA-centric business, right? The Blue's plans are going to be very important, help our ability to be able to penetrate those plans like we've done with other health plans is really one of the ideas that I think will work very well for us over time.

The other thing what's Further is, it really gave us the jump on enhanced rates because a big part of the assets that we place got us to scale there. And scale is what matters when you think about how to put together a program like that. It's hard to do without scale, and so it gave us the scale there. So there's obviously not just the yield associated to those particular assets, but the impact that it has on the inherent profitability of the overall HealthEquity business in the long run. And I think that's a very important part of that Further deal.

When I think about its impact on the immediate quarter and right now, it doesn't have as much impact because it's going through its Q4 enrollment busy season. So of course, margins are at a low point for that business. So I can't put a bunch of margin in there for Q4 off the revenue. But we talked about earlier in the year a $60 million revenue run rate for that business on a 20% EBITDA margin business and then $15 million in synergies. I think we tracked that over the long term.

And so from a starting point of the Q4 seasonal starting point, that's not great when you do the math on the numbers. You can see that, especially based on remaining guidance. But over time, I think there's a lot of opportunity for us to create a lot of efficiencies for that business, whether it's in the technology side, how it's run. It's carved out of a much larger organization. I think we have a lot of ways to think about how to run an HSA-type business relative to how that's been run. And so there's that opportunity for us.

I don't know, Ted, do you want to comment -- make any more comments on that?

No. I think, Tyson, you have it. The only thing I would add relative to the numbers that Tyson just alluded to is we did announce today that we're not completing the Veeva portion of the transaction, which is easiest way to think about it, rough numbers is 10% of the transaction. So that should kind of help you get a sense of what we're aiming for, for next year.

But again, early days, haven't even completed a monthly close on Further yet. But I share Tyson's long-term optimism that similar to what we did with Wage, we're going to be able to take this business and integrate it, grow it, realize from synergies from it and expand margin over time.

Ted, can I just ask a clarification on what you just said? Is it the cancellation is 10%. So if you use $60 million and $20 million of EBITDA, I should take 10% off both those numbers as we think about Further going forward for the cancellation. Is that right?

Yes. I think the Veeva business was about 10% of the business, Greg, so that's -- we're paying about 10% less than we were -- than we had publicly announced we were paying, and that's what we said today in the 8-K. So I think that's a reasonable estimate with the asterisk that Q4 is always a relatively low margin quarter for both our business and Further.

And our next question comes from Sean Dodge from RBC Capital Markets.

So Jon, I guess going back to your comments around the enhanced rates product. Can you give us a sense of the yield differential you can earn on that versus the more traditional FDIC insured placements?

And then just maybe a quick kind of education on mechanically how that rollout look? Is that something that you've got to get the employers to sign off on and then the employees to opt into? And so I guess maybe some idea what the time line or the ramp looks like for the enhanced rates?

Yes. The spread there is -- it does depend a little bit. But let's just say, we've commented elsewhere, that the benefit of enhanced rates adoption in current terms is kind of in the 50 to 75 basis point neighborhood. In terms of the adoption approach, and I'd say a little bit of that gets eaten up by the fact that you were also paying enhanced rates to the members. But in terms of the adoption process, the answer depends a little bit, and this will be a multiyear process. We're still very much at the beginning of it, but very encouraged by what we're seeing.

As Tyson mentioned, with regard to the Further business, Further came over with a material amount of this already baked in. And so that just came over. And that did help us in terms of if you think back -- or if one were to think back to the earliest days of our business and negotiating with one bank with very little assets and all of it kind of on the come, we didn't have to do that here because we had money to start with.

But it is a process that's going to take time. And ultimately, it's the member that elects into the enhanced rates product. But there are a couple of ways that can happen. One is that, that is their initial election sort of for lack of a better term. Unless they take a different action, it's the default if they're new. Or it can happen when they come on to our site or what have you, they can be presented with that option and elect to it. And -- but of course, we also are -- we -- this is something where our employers have some flexibility as well.

So -- but I think what you're going to see over the course of the next 2 years is that a larger and larger percentage of our, for lack of a better term, new cash needs are getting soaked up by the election of both new money and existing money into the enhanced rate product. It's a good product. And it's -- it has some trade-offs, but it's a very good product for the members and a very good product for us and allows us to keep other costs low and deliver outstanding service.

So I hope that's kind of helpful. A way to think about it is that it's -- the pace of adoption is going to reflect sort of a soaking up of our new cash needs over the course of time.

And our next question comes from George Hill from Deutsche Bank.

Yes. I have a couple. I'll try to keep them real quick. Tyson, I guess the first one was, did you detail how much CDB revenue that you guys walked away from both in the quarter and on an annualized basis?, And then, I guess, my 2 quick follow-ups, which would be for both Jon and Tyson would be, Jon, do you have any feedback yet on what the adoption of HDHPs looked like at the end of this open enrollment season going into the next calendar year?

And then Tyson to the degree to which you're willing to talk about it, if you're able to frame how we should think about the big headwinds and tailwinds for fiscal '23 as you see them right now? I'm not going to ask you for guidance, but if you could just kind of flesh out how you see the big moving pieces, I think that would be super helpful.

Why don't we start with your last question, and we'll work our way backwards. Tyson?

Yes. The -- that's a good question, just I'm pulling something up here. I think when you think about what headwinds really do become tailwinds or vice versa, I mean we've been talking a lot. I won't regurgitate everything we've just said about enhanced rate, but really bad shift, that mix shift is the biggest tailwind that we see.

When you think about balances continue to grow, we look at the outsized balance growth that we have relative to market and just the acquired assets that we get as well. So we're really positioning ourselves to have a lot more assets and a better way to place them, and that is really going to be the long term. Again, like I said before, I mean, the profitability of the business in my mind has changed inherently with we're positioning ourselves to take advantage of what I see in the news this morning if the rates are going to shift up and they will eventually, and we've already sort of seen that as we've completed those rates against the various partners that we work with. And so we're expecting those rates to eventually rise and it sounds like they may do so even sooner.

When I think about the real headwinds for the business, I think that employment can cut both ways, when you think about how you think about how COBRA is utilized versus how you think about FSAs are utilized, and so you get the kind of swirled waters of the CDBs, which that's not necessarily the growth area of the business, but what it does do is it really helps us to cross-sell. And so the deals that I signed now are always, for the most part, multiple deals with multiple types of accounts, supporting HSA growth where we're able to provide something to HR benefit offices to where they're not managing multiple vendors. And that's really powerful for Ted and team and the sales team.

And then the other kind of headwind that we have is just trying to manage through how we think about what the pandemic does to spend and how people spend and really kind of even to go back to the first question, how we sort of are there some places where we maybe don't want a particular client, where it's not profitable and where it doesn't necessarily work for the platforms that we're going to go forward on. And those are very, very small relative to our overall base of revenue. But those are decisions that now at the end of the long WageWorks stack integration now that we're making and we feel like we're making the business healthier as a result of that.

I'll mention a couple of other ones. Obviously, you got the child care accounts that are a headwind in those type of things. But those are some of the things that I think we think of on kind of those 2 is the first and the last question.

Yes. I'll kind of hit the middle one and in a way, it builds on -- not very much so builds on Tyson's -- the first part of Tyson's answer.

When I look at our sales over the first 3 quarters and HSA openings over the first 3 quarters and look at the source of those, what I see is a market that is recovering from a tough year last year. You see more evidence of how tough last year was in the reports that have come out, which are sort of backward looking from Kaiser and others. But what I'm particularly enthusiastic about in that regard is in a tough -- it turns out, looking backwards in a tough year, we took more market share than anyone ever has before, than we have or anyone has as far as I know before.

And now this year, I mean, we'll see what the total market ends up looking like and what all the enrollment numbers that come in for the next couple of weeks here look like. But as I've always said, the best indicator of my next quarter sales is my last quarter sales. And my last quarter sales were really good and so in terms of consumer enrollment as well as overall.

And so I guess my general view, George, is we try to manage -- as you know, we try to manage the business towards the long-term opportunity. And the long-term opportunity is the same one that you and I and Darcy and Steve talked about -- I think Tyson was just a green agreeing in our eye back then and Ted. But we talked about many, many years ago, I mean, almost a decade ago, which is these accounts are going to steadily grow. We're going to end up when we're done with about as many HSAs as there are 401(k)s out there. Their balances are going to start small.

But over time, they're going to grow, and you can see that happening. And as a result of that, you end up with a business that has sustainably high margins and has a good long steady runway to it. And we are some steps that we take to make sure that we're in position to see that growth turn out to be a tough one.

So obviously, you saw that in this quarter with respect to what Tyson called some of the CDB swirl. But we're going to keep taking those steps. And whether that's building enhanced rates or solidifying our footprint in the Blue's system with further, whether it's what we've done today with HSA administrators to kind of build on some of the momentum that our individual product has had, a very small group products for some of the kind of more investment-oriented small groups, the doctors and lawyers and the like or HSA administrators-focused or whatnot, we're going to keep doing the things that position us to take market share in HSA. So that as that market expands, in revenue terms, in asset turns and account terms, we're going to look up.

And if we keep doing that year-over-year, we're going to be just fine. And our shareholders, our long-term shareholders are going to be just fine. And perhaps more importantly than all of whether we're fine or our shareholders are fine, we're going to have done a lot of good for a lot of people in terms of connecting health and wealth.

So that's kind of the way I look at it. I know that sounds like a little bit of blabber, but it actually reflects my view of both next year and the year after that and the year after that.

And our next question comes from Donald Hooker from Bank.

So I guess you guys are really seeing just an amazing growth in the percentage of HSA assets invested. That's always been a difficult to model. And is there some reason -- is that -- it almost feels like that's accelerating a little bit.

And I was wondering, can you talk a little bit about trends or are you doing anything different to drive your HSA members to invest more into stocks and bonds or -- and how should we think about that going forward?

We've worked on this for a long time. And Ted, I think this is a great one for you to hit in terms of what the our product and education teams have done over the course of the last couple of years to really accelerate this trend and drive the industry in this direction.

Sure. Happy to jump in. And I think it's this topic for sure, but it's also all of the various ways that you can, as an employee of one of our clients, optimize your benefits. And we're investing heavily in getting you to do that, right, educating you in multichannel ways, both with marketing in the actual product itself and then in member services when you call, just kind of sharing with you what the next best thing for you to be doing, whether it's spend your FSA dollars, so you don't lose them or, "Hey, we noticed you built up a little stack of cash in your HSA? Why don't you start thinking about investing? Or we noticed you're not contributing as much as you should be, why don't you contribute more."

Education has been a huge operational focus for us. I think one of the places that it's really shown up and the users identified is in the percentage of members investing. It's -- we're seeing it in other places in the number of members that are raising their contributions, in the number of members that are spending through their FSAs.

So it's -- I think we're kind of in the middle innings here. We've built a pretty strong program over the last couple of years, but there's still a lot more that we can do across the board, but notably in this industry.

So I guess my follow-up, and this is probably impossible to answer, but I'll ask it anyhow and see is there a way to think about -- is there sort of a natural threshold there? I guess any kind of updates? I know in the past, we've talked about this, but maybe in the updated thoughts. Is there some -- what is the typical sort of natural threshold sort of cash and investments?

The typical -- my dog wants to chime in a little broader on this. But we've talked about this a little bit before that -- and I think you see the same concept also when you look at the most mature accounts is that, typically, what you'll see is people will build up enough cash or liquid asset to be able to handle kind of their near-term expenses. And so it's important to note that even among our max contributors, right, they are also spenders, right? And that's -- by the way, one of the reasons that you haven't seen really any drop-off in HSA spend, by interchange that is, even as balances have grown. I commented on that a little bit in the script.

So people tend to build up enough cash to, let's say, cover their annual deductible or some number -- maybe for some folks, it's their annual out-of-pocket maximum. So if you look at our longer-term accounts that have kind of done that, what you'll see is that, that cash balance kind of pops off somewhere between $3,000 and $5,000. And then they continue to grow the investing side.

And it's not that like there's a switch flip or whatever. But that's kind of, I think, a way to think about the typical behavior of an investment is that when you look at -- and you can see this even in the Further -- I'm sorry, HSA administrators business that's been very focused on individual investors and the very small groups of folks who are like totally on to this, right, where you see your average total balance is $15,000 to $20,000, of which give or take, 3/4 is invested and 1/4 is cash with -- and so I think that's kind of where you'd expect it to end up.

And our next question comes from Scott Schoenhaus from Stephens.

I understand the moving parts around the more conservative guidance. So I just wanted to continue this conversation on HSA, what's driving the organic growth rate there. Where are you seeing the sales strength from? And can you talk about where you are in terms of the cross-selling opportunities on the Wage legacy customers? I believe there was 70,000 employer clients and roughly 20 million employees that they touch. So I guess, what's driving the organic growth, where you're seeing the sales strength from? And where do you stand on the Wage legacy acquisition?

Great. Steve, why don't I ask you -- our Steve, to start in terms of kind of what you see out in the market? You're out there. For those who don't know Steve Neeleman, he will go anywhere for a view. You call him up this afternoon and we say, "I need you in Charleston tomorrow morning, he'll figure out a way to get there." So I'm going to start with Steve Neeleman. And then, Ted, maybe you can comment on the cross-sell metrics.

Thanks, Jon. Thanks, Scott. Obviously, last year was a tough year just with COVID and everyone kind of hitting the pause button. We've been really encouraged, and I think it's been -- you've seen it in the numbers. I mean, I think it's amazing when I look at these numbers we just reported. There were some acquisitions in there but still to see $960 million during the quarter of new growth and kind of a 14% account growth. And so we think these are great leading indicators. And I can tell you in the RFP world, we felt really good about where the season started shaping up towards the end.

Some of the larger employers were still in pause mode a little bit at the very beginning of the year when COVID was still really raging if you think about the sales cycle for the real big ones. This was kind of prior to everyone getting vaccinated and things like that. And the small groups, we're still closing a lot of deals right now.

And if you were to -- we're not going to let share with you just by the way, but if you were to ever listening in on one of our sales huddles, you would get a lot of energy there and people are saying that they really do for like, especially in the small, midsize businesses that are still -- I mean one of the questions that was asked earlier was how did we finish up our open enrollment season? We haven't yet. I mean this is a very busy time for groups that are still enrolling people in.

And so a lot of energy. I think it's been -- I think it's pretty well illustrated in our numbers we reported that the HSAs are growing. There are some mixed results on the CDBs, largely because some are rolling off. But I can tell you every time that we bring on an employer and they have bundle full of CDBs, then -- and we start to do our education and really start to bring people over to the light of have a retained value account. It doesn't go away when they change employment. They can take it to retirement, all the great things about HSAs.

Sometimes we'll see initially the CDB start to go down, but the HSAs really start going up. And so I think that's one of the reasons why you're seeing some of the FSAs and things like that going down. But a lot of energy, Scott, I guess, is the way I would classify that.

Ted, how would you add to that since it's all kind of part of your world as well?

Yes. Thanks, Steve, and thank you for putting your shoulder behind our sales efforts like you do and getting on more planes than most people. I think the answer specifically to the cross-sell question, here is we're very pleased with our cross-sell progress thus far. And we don't really break out the metrics. But I think a couple of things we've shared in the past, and I would just reiterate are, number one, our close rate in a cross-sell opportunity versus de novo opportunity is 2 to 3x as high because the client knows us, and they're accustomed to our service. And that goes both directions, whether depending no matter which legacy client base the employer was a part of.

And then the second is, last year, the vast majority of our cross-sell, you can imagine banks because that's where the money is. We focused all of our cross-sell efforts on enterprise to get started. And that's where we saw some early wins. And what I've been most encouraged by this year is that we're starting to see that cross-sell capability to send down into employers -- into small- to medium-sized employers. And Steve alluded to a place where we had a lot of success this year, and it's hard to draw a straight line between cross-sell and that success. There's lots of reasons for that. Cross-sell is certainly one of them.

So I think we're getting -- this was our second selling season being able to offer kind of a credible bundle. And we're getting better at being able to do it. And we look forward to more progress. And I think the last point I would make is that there's still a ton of white space for us. We have hundreds of our top 500 enterprise clients only have one product for us, right? And thousands of our small- to medium-sized clients only have one product to us. So the opportunity should nourish us for a long time, we have to continue to unlock it. And thus far, we're experiencing a trajectory that I think makes it happen.

At the risk of piling on, I'd make one other point here, which is Ted talked about cross-sell white space. I think, again, looking both now and long term, I really could not have asked for, realistically, a better outcome in terms of how the competitive white space is shaping up.

Our largest competitors are the largest health plan in the United States, which has its kind of walled garden, and the largest investment retirement plan manager in the United States, which has its walled garden. And there are things that are good about walled garden.

But the nice thing about us is if you're an employer, we're going to work with you whomever. We are not part of their lock-in strategy. But even better, if you are a partner of ours, right, you know that -- or you're looking at both of those and you're trying to compete, and that means you want to work with the best you can, and that's us.

And I think not only is it the case that competitively, the market is shaping up for that lane to be our lane and to be a very large lane. But also, from a technology perspective, and I alluded to this in the comments, and we'll see a little more of this in the next few quarters, but the technology is continuing to evolve in such a way, and our platform is continuing to evolve in such a way that we can embed the HSA deeper and deeper and deeper into our partners' products and -- or in the language of APIs, HSAs can be consumed in so many different ways.

And that's true in the individual market. It's true in small group. It's true in large group. It's true in retirement. It's true in health plan. It's true in ben admin. And in other channels that we haven't even thought of yet as HSAs continue to mature and sort of penetrate the consciousness. So I think that's another thing that has begun to help us in this cycle, but that will be a big helper as we kind of continue to try and sustain market share growth year after year after year over the next number of years.

And our next question comes from David Larsen from BTIG.

Congratulations on the growth in a number of HSA accounts. That's great. Just a couple of quick ones. Most of my questions have already been asked and answered.

With the interchange revenue, was the Delta variant one of the reasons why like utilization may have been a bit lower than expected? And then do you have any thoughts on Omicron? Is that going to have an impact or not? Do you think just -- any color there would be helpful.

Yes. I'll take a shot at this one, and Tyson, if you'd like to add to it. I think the main challenge that we had with Delta is it made it very difficult for us to interpret results that we were seeing.

So for example, when we saw very strong results in July, which was the last month of the second quarter. And, for the most part, after your account runoff, it occurred. And during -- while Delta was going and really raging, we felt very confident about where spend trends were. And it turned out that, that was a bit of a false signal in the sense that, that wasn't followed up as this quarter began and when Q3 began.

So I think that I could not give you too complex of an answer, it's just another factor that creates variability and difficulty in interpretation, particularly for CDB spend. What I would note, though, is HSA interchange during the quarter was rock solid. And that's one of the reasons why the interchange, notwithstanding these challenges that we've talked about, was still up 8% year-over-year. And so that is to say, HSA interchange was up substantially more than that. And so I think that's an interesting dynamic that we need to continue to look at.

And so -- but I will -- but it is fair to say that as we enter Q4, certainly, we don't know any better than anyone else what the effect of Omicron is going to be. I'm not sure why they skipped Nu, but they did, and it may have some impact. But I think fundamentally, what we've tried to do is take what we have learned over the course of the pandemic and reflect that in a reasonable forecast for interchange for Q4. We'll see what we get. We'll learn and we'll refine. But we're also taking the lesson that our HSA spenders are clearly more resilient to changes in economic conditions as well as less likely to be impacted by sort of in the lead regulatory items than our FSA spenders and also that -- and other CDB spenders, but also that our HSA spenders can also -- they can top up their balances whenever they need to, that kind of thing, whereas our FSA spenders are effectively, if they didn't top up their balance last December or November during annual enrollment for most firms, they can't do it until now, and it won't have effect until January.

And so those are lessons that really reflect the point that I made in the earlier -- in the initial commentary that is we're going to spend our money growing where we know the growth is and where we know we can deliver profitability and visibility to you. And we're going to deliver to our clients what they need in order to buy those HSAs, but we're going to -- that's one way we can reduce uncertainty by growing that core faster than the ancillary business.

And our next question comes from Glen Santangelo from Jefferies.

Yes. It's good to be back. So I just wanted to follow up, Jon, on some comments that you made. It kind of sounds like the effects of the pandemic are greater than maybe what you would have thought or lasting longer to use your words on the CDB business. And I heard your comments on COBRA, maybe fell off more than expected in the FSA business.

Could you maybe put some numbers around the CDB shortfall? Because if I hear you correctly, it sounds like your HSA business is trending ahead of schedule, just listening to some of the comments to some of the previous questions. And so maybe when I put it in context of the $7.5 million revenue shortfall or I think I calculated, I don't know, an $11 million, $12 million -- $11 million shortfall in EBITDA relative to the guidance, it sounds like it's much bigger than that, maybe being offset by some of the benefit in HSA.

Well, I'll ask Tyson to add on. But I mean I think the key point to make is essentially all of the delta between our current -- or now current outlook and our outlook at the end of Q2 is a result of these factors in CDB. And the HSA business has performed, as you say, either at or slightly ahead of where we would have expected it to be. I think, particularly as we go forward, we're feeling, as I commented earlier, more sure-footed on the rate side of things. But by and large, I mean, I think the key point is that the delta that you just described really boils down to the various CDB factors. Tyson, would you like to add to that?

Yes. I mean you did some math there. So I'll just go back to that. I think that that's exactly right, the CDB conversation that we've had. And again, the largest portion of that was really related to the interchange softness that we saw and then a little bit on service fee from the falloff of those 2019, 2020 FSA accounts and obviously, Commuter still coming down year-over-year, but sequentially up just slightly. So you have that in there.

And then the other kind of big piece of that math, there is bolting on that Further business in Q4 really doesn't provide a lot of margin, but much more -- provides the revenue but not the margin, particularly in that seasonal Q4 enrollment period. So that's why you get the differential between the 2 pieces of math that you've done there.

I apologize. Maybe just one follow-up, and I'm sorry if I missed this, but the consolidated custodial yield in the quarter, did you give that?

We have 172 and then 175 guidance for the year.

Right, 172 versus 175. So if we look at 3-year CD rates sitting at about 1.5, right, and the benefits from your enhanced rates program being 50 to 75 basis points, were you kind of trying to flag that maybe as we exit fiscal '22 and head into '23, that this should be the bottom in terms of your laddering strategy?

Jon, let me comment...

I Yes. I will just say -- go ahead.

I was just going to say, as I commented before, I mean I'll just -- and I'll say it again, I think it's really important is that when I think about where we place -- we're placing things a year ago versus now because we do have assets come forward and Cordell goes in place with them, so we know the rates. Those rates are higher for FDIC. And then we -- I think we got a very good rate placement when we did our placement on November 1 with the Further assets and also sort of the real kickoff of our -- we'd already started doing enhanced rates, but the real kickoff was as we merged those Further assets in there. And so those were higher rates than they were in the first part of the year.

So that's -- part of that's good negotiation on the part of our treasury team in there doing that, competing those rates against each other. The other is that there starts to be a little bit of light at the end of the tunnel. And you see how this morning talking about moving up to a rate shift. That's pretty exciting. I wish it was in December versus March. But it is what it is, right? It's still a long-term view on those rates coming up on assets, helps from not only next year being -- will be lower still because we placed at higher rates 2 or 3 years ago. But again, you're starting to turn that corner.

And as Jon said, too, we're not going to be below sort of those all-time lows that we saw as part of the last recession, but it takes multiple years to kind of turn that around based on the way that we ladder. It helps going down. It's slow going up, but it also increases again, like I said, the inherent profitability from enhanced rates and how that works has been improved based on how we're doing that.

Yes. I mean, Glen, just one other thing on this topic or one endpoint of emphasis on this topic. I mean when we talk with investors, as you do, they would love it if we would give them a forward rate curve or the like. And the reason we don't do that, as you well know, is it'd be like asking another firm, "Could you please tell us what your price -- what price you're going to offer to customers this year and next year?" And we're not going to do that.

But, that having been said, we've heard a ton of speculation on this, I sort of go back to Greg's initial question. And over the course of the last year or 2, as CD markets have kind of stuck where they are and so forth and I -- to my mind, again, I think about I don't have to talk about, "Oh, it's going to get better later." As Tyson said, it is getting better now, right? And it's getting better in part as a function of market conditions improving and in part as a function of the team taking action and bringing innovation to this thing. And like that's what we do here. And whether it's about rates or about HSA growth or about cleaning up what to me is some variability that doesn't help us and cloud is the story. That's what we'll keep doing.

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

Going back to interchange, Tyson, I think you talked about the FSA wind-down for 2019 and 2020 vintages basically causing a shortfall in interchange. But I guess if there's more accounts that are closing, does that mean that the customers are spending more, so interchange would directly be higher? So that's question one.

And then question two, I guess we're looking forward from this level here, across the Commuter, COBRA, FSA. I mean, what would need to happen for things to deteriorate from this level here? And I guess just expectations on what to think about is embedded in 4Q?

Yes, I think you -- that's a good question because I think where we saw that spend, but I would have suspected that maybe it would have hung out a little bit longer was in that Q2 time period. And you saw that spend down, if you will, and therefore, that increase was part of that.

I think the other read on it -- it's hard to get a reading on it, right? Because I think the other read on it was that year-over-year, it was a bounce back from pandemic and people who are out doing more. So blending those 2 things together and then coming up with the second half forecast proved to be difficult, right? And so we saw that -- we still grew interchange, but it just -- we didn't get the tailwind like we thought because of those. So we saw those accounts go away, maybe a few more go away. But I think where I'm optimistic is now kind of the enrollment season where we go into January and people are reenrolled into these accounts and they're top to begin and maybe we get to more normalization, if you will, over the next year, it will be a little easier to forecast.

Okay. And then a follow-up on Glen's question about the implied 4Q guide. It seems, based on my math, that organic growth between 4Q '22 versus 4Q '21 is going to decline somewhere in the range of 25%. So just can you kind of clarify whether or not that's accurate? And then b, I know that you're spending more on technology, but what else is embedded within that decline?

Well, I think the one thing -- and I don't know, I'm not doing the math here quickly, but I'll -- I trust you've done some math to kind of get directional on that, but the thing that would drive that the most is just the fact that we're putting acquisitions in the business that are acquisitions that we think we can improve margin on, but when we buy them, they don't necessarily have the types of margins that we have. And so that's the job is to improve those, to synergize them, to get them on to a single platform, single service, a single processor, all the different things that their operational team does to improve the margin related to that.

Now I do like the deals that are portfolio acquisitions because those come in without people. They come in with just assets and yield and obviously higher margin, and so you get some of that playing through into that. And then again, you go back to the CDB businesses and the easy low-hanging fruit to talk about there is the Commuter business and the fact that there's tens of millions of dollars of missing high-margin revenue on our -- one of our highest service fee line items in that Commuter business. And so I'd like to see that come back because that will create a nice tailwind. And we did see a turning point in that. It's insignificant turning point, but at least it went sort of the other way and started to come back. So those are kind of the 2 things that I think are in there.

I mean the other one that's really there, too, I guess, you're making me think of some other things. These are -- I know, Allen, we've talked about these things before, but you think about the custodial revenue and the margin generated by that and the 36 basis points of decline on that yield year-on-year. And it's kind of mixed within all these comments that, that is fundamentally how this business is going to produce profits. And when that rate starts to turn around, we'll start to produce profits. And I think that, that -- again, we're getting to a point where that's starting to happen.

And our next question comes from Stephanie Davis from SVB Leerink.

It has been a really long year, Tyson. So talk to me about your learnings from this. Do you have any changes to your guidance philosophy? And how should we think about your forward views then on CDB account recovery? Is this going to be kind of the level set assumption for forward spend patterns remaining weak and Commuter basically getting zeroed out in these levels of return? Or is there any thought towards improvement as we go out of the funky fourth quarter?

Yes. I think I'd go back to there are a lot of crosswinds, and you see this even in a lot of the articles you read about the Fed trying to get this straight. I mean there are crosswinds that's just difficult to come up with forecast, particularly for CDBs. Not so -- I mean, again, HSA, if you think about that, that -- when I think about forecasting custodial yield on HSA, we can do that, and we can do that out and we can see what we think enhanced rates will do for that revenue stream, and we can get a pretty good idea of being able to tell you what we think that is to within a very immaterial amount. The same is true when you think about HSA service fees because they stick around. And so you don't have this ebb and flow of those and kind of these annual decisions that get made.

So to me, the answer to getting forecasting more accurate is to grow the HSA business larger than these other services that we have, which is exactly what we're doing with acquisitions, exactly what the organic business is doing as well. And so I think my learning from that is that that's what I -- Ted and I talk about to the team. That's what the team wants to do. It fits the mission, and it will solve some of these issues that we've had with some of the swirl. But given the pandemic and anything else, it's tough to kind of get there. So yes, I have learned a lot over the last year, Stephanie.

Would it then be safe to say you're going to focus most of the guidance on the HSA side of the world and then kind of use this as more of a level set run rate for CDB since it's so unpredictable, vis-à-vis there's more upside?

Well, I think there's -- when you think about CDBs, of course, you talked about some of the things you're turning but it's really just that Commuter segment, it's 4% of revenue, right? So it's not enough for us to talk a lot about here, but it's something that I think helps us sell HSAs. So I think I could say you're probably right. I'd like to focus more on how we think about HSA growth and forecasting that. And fundamentally, that's what we're trying to do.

Okay. And if I can sneak in a quick one just on EBITDA for the 4Q guidance, is there a way to tease out the deal-related impact to that fourth quarter number? And how long should it take to turn around the acquired margins? Is this something where this is going to be one quarter will be an improvement? Or is 4Q EBITDA, how we should think about run rate?

Well, there's 2 things that happened with 4Q. I mean it's really the fact that the Further business that we have doesn't drive margin, if any, in Q4 relative to the revenue numbers we put out there, which is $12-plus million essentially on something less than $1 million of EBITDA. And that's because they've got the cost going into season.

But when you think about that business in a Q1, Q2 time frame, when we think about rightsizing it, for example, for the fact that we won't have the Veeva services in there, so we know there's some costs in there associated to that part of the business that we can take out, and just the ability and all the learnings we've had from the Wage business on how to create efficiencies within the business, and we're going to be able to do those. You haven't seen those as much in Wage because of some of the degradation of some of these CDBs, but they certainly are there, and we've been able to make those improvements. And I think that kind of gives us a base to build off of. And so I'd say the same thing is true for that Further business.

And our next question comes from Mark Marcon from Baird.

Wondering with regards to the rate discussion, as we think about next year, Jon, when you were answering Peter's question, you mentioned the 152 bps and kind of the low. Wondering how do we think about that relative to the enhanced rate program because it sounds like one way of interpreting things would be, "Hey, we're going to stay steady in terms of the effective yield for '23." Another way to interpret things would be it probably still comes down a little bit because of we're still rolling off investments from 2 to 3 years ago.

However, you could provide some sort of help in terms of thinking about that because that's obviously going to be important in terms of setting '23 expectations.

Yes, I can. What we've said in the past and I would repeat here is that the '23 will be -- will still be a down cycle or part of the down cycle. It feels like it's forever and it is. But we started this process in our fiscal '21 and '22 and '23. And so it will be the third year of that cycle. And so I think when all is said and done and the smoke clears, what we -- our expectation remains that we will lose -- that we'll still have a headwind from a yield perspective. But as was the case this year, that headwind will be smaller than it was in the prior year.

And then I think what I tried to add to that is I think we're kind of particularly with the benefit of, a, the fact that the underlying sort of competitive dynamics in the deposit product market are improving and the fact that the enhanced rate uptake means that we don't have to necessarily go to the end of the rope in terms of what banks are offering. We can be a little more selective, that we can kind of see that being the end, and we kind of know where that end is going to be, which is, as I commented and you repeated, somewhere kind of near and perhaps better than the lows that we saw in the last -- the post-2008 period. So I guess that's the way I would interpret it.

I wasn't trying to suggest that we're going to do 175 next year or that we're going to improve from that. But I think for folks who have modeled this stock for a long time, as you have, knowing with a relative -- with a great degree of confidence where we think the sort of end of that cycle is and where we think it is in time as well as in rates, it seems like a pretty valuable thing.

That absolutely is valuable. And then can you just tell us what the most recent placements were in terms of the effective yield that you were getting for those?

Yes. We've been asked this question before, as you know, and we don't comment on it because it effectively reveals the price we're willing to take, and we would rather let banks compete for that price. But I will say it's -- if I think about it as in terms of premium to, as someone mentioned earlier, the 3- or 5-year CD, that premium, which was both the market was low and the premium at the low end of our historical ranges earlier in the year and at the end of last year, that premium has improved a bit over the course of the year and even though the underlying market hasn't changed very much.

And again, I think that reflects a greater competition for our kind of money and perhaps a view of on the part of the banks of what's going to happen going forward. I don't know about that. But -- so it's gotten a little better, and that should give you enough that you can kind of interpolate.

That's great. And then there was an earlier question, which I didn't get the answer to on just on how you're thinking about HDHPs for this enrollment season for a lot of companies, they've gone through it. What are you seeing in terms of that shift?

Yes. We'll talk about this a little more in January when we get to JPMorgan's conference and all of that. But as I said earlier on the call, I think to some extent, the Q3 results are an indicator there because they do reflect firms that have earlier plan year cycles and the like, the September enrollments and the like. And those were really good.

And my general view of the market, if I sort of go back a year, the question was, "Well, is the market going to grow by something closer to 3 million or something less than 2 million like it did in the pandemic period?" And I was arguing that -- well, first of all, I was acknowledging that I didn't know, but second of all, arguing that the broad forces that are leading to market growth are much more about, say, endemic than the pandemic. But they're much more -- they are long-lasting indicator in nature, and they continue.

So I guess on that basis, I'm kind of taking the view that we're seeing what looks like a more normal enrollment cycle this year. Certainly, the fact of high employment is a net helper in that regard. But in the sense that there's just more people, not as many still. We're still not back to pre -- as everyone knows, we're still not back to pre-pandemic employment levels on the whole, but we're getting closer. And the more people that join the labor force, we joined the labor force, extremely helpful in that regard.

But I guess my basic view, Mark, is I sort of look at it and say, we've said all over time that the market is going to grow at a rate of 2.5 million to 3 million accounts a year and has for a long, long time, and then we had this exception in calendar 2020, I think this year is going to look a lot more like prior reality than like that exception.

That's really helpful. And then the last one for me, just with regards to -- at the enterprise level. You've been gaining share on the whole. How would you describe the competitive dynamics at the enterprise level currently? And do you anticipate continuing your great track record of gaining share even at the largest enterprises?

Yes. Ted, do you want to hit this one?

Sure. I think that as you would expect in any industry that looks like ours, the competition intensifies first at the enterprise level, and we're no different, and we see that.

I think that our competitors are -- this has been an interesting year from an enterprise sales perspective, in large part because of the high number of stay-at-home income, right? Many people benefits teams are continuing to be sort of burdened by return to office, COVID management, et cetera. And so they've been sort of less willing to make a decision. But despite that, I think we've more than held our own in the enterprise space among those pieces of business, those cases that have moved.

And then probably similar to other people in the industry, our retention rates have been very high. I think we inundated by the fact that some people are just not leaving homes. And so I don't think we've seen anything unexpected. We haven't seen anything crazy or shocking. There -- from an enterprise competition perspective, there's not -- someone hasn't come out with the iPhone 17, and we're still trying to sell the iPhone 12.

It is sort of proceeding at pace with what we would expect. Price competition is higher in the enterprise space than in the mid-market and small market. And that's one of the reasons why that's become -- we're trying to put our chips where we expect the best return. And so to a large extent, that's in that small market, mid-market space. But with our value proposition and our brand and our reputation for service, we continue to perform or outperform in the enterprise space, even though it's been an interesting year there. Nothing crazy competitive-wise.

Steve, I don't know if you have anything to add there, if you see anything worth mentioning.

No, I think that's right. One of the things we're really excited about is with the Further acquisition, we've got another 10 Blues plans that we're going to be working with. And I think our team is getting a lot better at working through these health plan partnerships, not just to go after the small and midsized businesses, but also to go after the large employers because a lot of the Further plans plus our base plans and other 20 health plans -- or Blues plans that we brought to the table plus a bunch of other TPAs and large health plans throughout the country, I mean they also bring us to a lot of enterprise-type employers.

And so it's -- there's always been this push pull in our business. I mean going back like, oh, man 15 years.

In fact, Jon, you remember when we first started working together in 2009, I was always talking about your fantastic work with the enterprise employers, and you were talking about HealthEquity's fantastic work with the health plans, and now we're really starting to see those forces converge where we've got this national footprint. We've got the full bundle, and we have the ability to, not only deliver a full bundled solution to the health plans, but to their largest and most important clients. And so Jon, I guess, we both got our wish. We have a full stable of health plans and a full stable of large enterprise employers. So it's coming together nicely.

I was kind of -- I was having -- I don't want you to think I spend a lot of time on this, but I have to admit there's an Internet site that in my moment where I'm trying to distract myself I look at that has sort of unusual maps, and I think they call it map porn. I don't -- I think I can say that here.

And so yesterday's thing from that site was the largest employer by state. And what I'm getting at is what's enterprise. And first of all, the point the chart was trying to make was that there's one employer that is the largest employer in a lot of states, and they happen to be a client of ours, and that's great, and they're a private sector employer and so forth. But what was actually really interesting was in essentially all of the states in which they were not the large employer, the large employer was not some Fortune 500, 400 company. It wasn't Amazon. It wasn't -- it was a health system, a hospital system in something like 30 of the other states, incredible. And that's a market where we do real well.

So for us, when we think about enterprise, it's worth remembering that. We're looking at a number of employees and those kinds of factors, not just whereas other firms might be looking at size of the IT budget. And so I think particularly, when you look at it that way, Steve's comment about the relationship with more Blues plans comes into focus because those are local relationships that start from that. And or -- and it's not just Blues plans. When I think about Providence, a health care in the Northwest or St. Luke's in Idaho or Presbyterian in New Mexico or Sentara in Virginia. These are huge local employers that are also effectively our partners in other ways. And so that helps us in the enterprise book.

And I am showing no further questions. I would now like to turn the call back over to Jon Kessler for closing remarks.

Guys, thank you for your good questions and tough questions and for going through this with us. Really happy holidays to everybody.

As Tyson mentioned and Ted alluded to on this call, these are very unusual times for us at HealthEquity and for our team because, not only is it an unusual holiday with some joy at the fact that things are returning to normal, but also some trepidation with Omicron and all that, but we are -- as many employers are working through -- but certainly, as a small number of federal contractors are working through federal contractors mandate. And far be it from us to grouse about the difficulties of doing that, given the importance of the task, and no matter how one feels about these mandates, it's our job to comply with the law, and we are doing that.

And I wanted to just take a moment to both thank our team members who have kind of worked through this from the perspective of really thinking about it and dealing with the compliance side of it and also very candidly, thank our -- both wish well those who have made a different decision, but thank our team members for helping us get ahead of that as much as we can in Q4 and have the team prepared to deliver the best possible service we can under what is a really unusual circumstance for us.

We care about this a lot. We're not going to ignore it. We can't ignore the impact on our team of losing some people due to the mandate. And we're not going to.

So I think it's a special area of banks for companies like ours. Everyone in the health care sector is affected in the same way as you all know. So many of our partners are affected in the same way. And certainly, our friends in the federal government who are our client are affected in the same way. And so I very much appreciate all the work that every member of our team is doing to keep the wheels turning as we go through a most unusual busy season for us. Happy holidays. See you everyone soon.

This concludes today's conference call. Thank you for participating. You may now disconnect.