Healthequity Inc (HQY) 2021 Q4 法說會逐字稿

Please go ahead, Mr. Putnam.

Good afternoon, and welcome to HealthEquity's Fiscal 2021 Earnings Conference Call. My name is Richard Putnam. I do Investor Relations for HealthEquity. And joining me today is Jon Kessler, President and CEO; Dr. Steve Neeleman, Vice Chair and Founder of the company; Darcy Mott, the company's Executive Vice President and CFO; Tyson Murdock, Executive Vice President and Deputy 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 was issued after the market closed this afternoon. The metrics reported in the press release include the contributions from our wholly owned subsidiary WageWorks and accounts it administers.

Press release also includes definitions of certain non-GAAP financial measures that we will reference today. A copy of today's press release, including reconciliations of these non-GAAP measures and comparable GAAP measures and the recording of our webcast can be found at 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, March 15, 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. And these forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the statements made here today.

As a result, we caution you against placing undue reliance on these forward-looking statements, and we 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 for future events. And at the conclusion of our prepared remarks, we will turn the call over to our operator to provide instructions and to host our Q&A.

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

Thank you, Richard and in reference to my mother's favorite TV show, you are my American Idol. Hello, everyone, and thank you for joining us this afternoon. Today we are announcing strong results for HealthEquity's fiscal fourth quarter and for the full fiscal 2021, which ended on January 31. And we're providing guidance for fiscal '22. After briefly touching on our fiscal '21 results, I will -- after I do that, Ted will review operations and touch on the recent Luum acquisition. Darcy and Tyson will tag team the financial results -- details of fiscal '21 and guidance for fiscal '22 based on the results we're reporting today. And Steve is here to join us for Q&A.

Fiscal '21 revenue of $734 million is up 38% year-over-year. And along with adjusted EBITDA of $241 million is both a record due largely to our WageWorks acquisition last fiscal year.

As reported last month, we ended FY '21 with 12.8 million total accounts, and our 5.8 million HealthEquity HSA members ended FY '21 with $14.3 billion in HSA assets. We were pleased with that growth in results, but we hadn't yet seen how those compared to the market. Devenir, our scorekeeper of sorts, reported a January addendum to its 2020 year-end report that estimates market-wide growth of 6% year-over-year in HSAs compared to our 11% organic growth and 22% market-wide HSA asset growth compared to our 26% organic HSA asset growth.

Note the organic numbers exclude losses from the WageWorks acquisition and migration. But either way, those are good. We're beating the market, and that's what we promised to do. We continue to hold #1 market share of HSAs with 19%. And we're in second place in HSA assets at 16%.

Now let's look forward. While the pandemic remains with us and could result in conditions we are not anticipating, the HealthEquity team is committed to beating fiscal 2021 results that I've just reviewed, demonstrating the strategic value of our total solution strategy. Last month, we talked about headwinds felt in fiscal '21 that might be turning into tailwinds for fiscal '22. And Ted, in addition to touching on our sales results, which -- Ted will touch on our sales results, which are an example of that, we think, so far this year. But we're also starting to see other tailwind evidence as well.

For example, we've seen a reversal in bond yields, as indicated by the 10-year treasury, moving from around 0.9% at the start of January this year to above 1.5% this week. While treasury yields are not directly related to yields that our depository partners provide, there's a high long-term correlation, particularly between 5- and 10-year treasuries and 5-year Jumbo CDs. With our HSA cash assets already placed for fiscal '22, we don't expect that we'll see much of an impact for this year's yields, but we think a steepening yield curve does bode well for next year and beyond.

We're also seeing more opportunities in M&A, and we think we're well positioned to opportunistically attract both portfolio acquisitions and to expand our capabilities to serve our partners, our clients and our members. For example, we announced the acquisition of Luum last week. Luum is a SaaS-based technology company that provides a commuter solution beyond monthly passes and that employers are looking for as they need help returning their teams to work safely.

Luum's flexible platform supports tailored policy and incentives for the post-pandemic hybrid workplace and helps employers to thoughtfully approach green initiatives to reduce the carbon footprint of community. We welcome our new teammates, as Ted will say our luminaries in Seattle, and we're excited about how they will help our partners, clients and members return to work.

And finally, from a headwinds perspective, the government passed the third stimulus bill in the last week or so, that, among other benefits, provides for COVID subsidies for 6 months and increases, more precisely doubles, the dependent care FSA spending limits for the '21 calendar year. Both of these provide relief to families who have been impacted by the pandemic and its effect on access to health care, and also indicate that legislators and regulators are listening when we talk about opportunities to do the right thing.

I'll now turn the call over to Ted to review operations. Ted?

Thanks, Jon. Hello, everybody. We are very pleased with the operating results that we delivered in Q4 and for all of fiscal '21, especially given the very challenging circumstances cover presented. We are able to make tremendous progress on integrating WageWorks, and we found efficiencies that allowed us to raise our synergy target from $50 million to $80 million, with $60 million of run rate synergies achieved through the end of FY '21. We onshored member phone calls. We completed 13 migrations with a heavy focus on HSA. We saw that our member and client experience scores improved. We unified our brand, released the first version of our integrated platform to strong reviews on both portal and mobile, and met our service-level commitments during this year's busy season.

There is more work to be done, however. We're targeting another 6 migrations this year, along with integration work to support our newest acquisition of Luum. We intend to roll out the next iteration of our integrated platform with features that our clients, members and partners are excited about.

As I mentioned in February, our sales results year-to-date remain ahead of where they were last year. We believe this performance can be attributed to market receptiveness of our total solution, the work we have done building strong distribution partnerships and the incredible work our onboarding teams did, making new clients feel the Purple love this December and January. We hope to see this positive trend continue as unemployment bottoms out, Americans get vaccinated and clients and members return to work and reengage with their benefit solutions.

Speaking of returning to work, let me share a little bit about our newest teammates or luminaries in Seattle. We are so excited to acquire Luum to help us drive our Commuter benefit beyond monthly transit passes and help solve real back-to-work challenges for our clients. The post-COVID commute environment will look very different with employers wanting to deliver flexible benefits and incent employee behaviors to manage tight parking solutions and make better use of alternative transit. Luum can also help companies take basic ESG steps as they have a proven track record of lowering drive-alone rates and reducing car trips. We believe in that mission, and we believe that Luum will fulfill our commitment to continuously innovate our services to meet the evolving needs of our clients, large and small.

We also see opportunity as legislative and regulatory relief is extended to our members and clients through the passing of a 100% COBRA subsidy that will help Americans stay covered. We will shortly roll out plans to help our clients fulfill their obligations and help our members find the coverage that is right for them. While there is a significant operational undertaking to pull this off, it is our obligation to serve our clients and members in this capacity.

There is a lot going on, and I would like to thank -- say thank you to our over 3,000 teammates who are working so hard on behalf of our members, clients and partners to deliver all the work I referenced above in Purple fashion, in challenging circumstances.

Now I will turn it over to Darcy to talk about our results.

Thank you, Ted. I will review our fourth quarter GAAP and non-GAAP financial results. A reconciliation of GAAP measures to non-GAAP measures is found in today's press release. Our fiscal fourth quarter financial results, as you know, include the operations of WageWorks, which was acquired in August of 2019, and included 5 months, including the full fourth quarter of fiscal year 2020. Fourth quarter revenue declined 6% as the economic effects of the pandemic impacted each of our 3 categories. Service revenue declined 9% to $111.3 million, representing 59% of total revenue in the quarter. The decrease is primarily attributable to a 5% decline in CDB accounts at year-end, including that an over 50% decrease in Commuter.

While the growth in HSAs helped average total accounts remain flat year-over-year, custodial revenue decreased 2% to $48.6 million in the fourth quarter, representing 26% of revenue in the quarter. The decline was primarily due to a 31 basis point decline in the annualized yield on HSA cash, with yield assets partially offset by year-over-year growth of 16% in average HSA cash with yield, and 66% growth in average HSA investments with yield. The annualized interest rate yield was 1.97% on HSA cash with yield during the fourth quarter of this year. This yield is a blended rate for all HSA cash with yield during the quarter. The HSA assets table of today's press release provides additional details.

As previously mentioned, we have migrated 97% of the HSA assets to the HealthEquity custodial platform. Interchange revenue declined 5% to $28.3 million, representing 15% of total revenue in the quarter. The interchange revenue decline was primarily due to reduced spend across our platforms in the quarter. Gross profit was $100.9 million compared to $113.7 million in the fourth quarter of last year. Gross margin was 54% in the quarter.

Operating expenses were $100.8 million or 54% of revenue, including amortization of acquired intangible assets and merger integration expenses, which together represented 17% of revenue. Income from operations was $0.1 million compared to $14.5 million in the prior year. Net income for the fourth quarter was $5.4 million or $0.07 per share on a GAAP-EPS basis compared to a loss of $0.2 million or a loss of $0.00 per share in the prior year.

Our non-GAAP net income was $33.3 million for the quarter compared to $28.4 million a year ago, a 17% increase. Non-GAAP net income per share was $0.42 per share compared to $0.40 per share last year. Adjusted EBITDA for the quarter decreased 8% to $56.6 million, and adjusted EBITDA margin was 30%, while operating through the impact of COVID.

For the full fiscal year, revenue was $733.6 million, resulting in gross profit of $415.3 million or a gross profit margin of 57%. Income from operations was $35.7 million, and adjusted EBITDA was $240.8 million.

Turning to the balance sheet. As of January 31, 2021, we had $329 million of cash and cash equivalents with $987 million of debt outstanding, net of issuance costs, with no outstanding amounts drawn on our line of credit. The cash balance, of course, does not include the roughly $460 million of additional cash from our equity offering a few weeks ago, nor the outflow of funds used in the Luum acquisition.

Since I will be turning the CFO reins over to Tyson in a couple of weeks, I will turn the time over to him to provide the guidance for his first fiscal year of responsibility.

Thanks, Darcy. It's been a pleasure serving with Darcy, and we're all glad he's sticking around to help us with other areas of the company going forward. Darcy makes everyone better when he's around.

Okay. Based on where we ended fiscal '21 and our current view of the economic environment now expected for fiscal '22, we expect to generate revenue for fiscal '22 in a range between $750 million and $760 million. We expect our non-GAAP net income to be between $115 million and $119 million resulting in non-GAAP diluted net income between $1.37 and $1.42 per share-based upon an estimated 84 million shares outstanding for the year. We expect HealthEquity's adjusted EBITDA to be between $240 million and $246 million for fiscal '22. Today's guidance includes our most recent estimate of service, custodial and interchange revenue based on early fiscal '22 results as well as modest revenue expectations from the acquisition of Luum, and COBRA uptake based on the recent stimulus bill weighted towards the latter part of the year.

Guidance also assumes a yield on HSA cash with a yield of approximately 175 basis points as well as the effect of approximately $60 million of achieved run rate synergies as discussed, which will be fully realized in fiscal '22. The outlook for fiscal '22 assumes a projected statutory income tax rate of approximately 25%. As we've 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 rate.

In addition, while the amortization of acquired intangibles is being excluded from non-GAAP net income, the revenue generated from those acquired intangible assets is not excluded.

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

Thanks, Tyson, well done. Plus 1 to Ted. Thanks to the team for a very special year under very unique circumstances. And also to Tyson's, thanks to my friend, Darcy Mott. None of you would ever have heard of HealthEquity, and Purple culture certainly would not be as strong and stable without Darcy and his 14 years of service to our team and our mission.

When Darcy joined a small team of less than 100 team members here, HealthEquity had a handful of health plan relationships, 20,000 HSA members and all of $20 million of HSA assets. He's remarkable in the truest sense of the word. His wisdom and financial talents, turned the company profitable, prepared it for our IPO, grew it to where we stand here.

But Darcy is a complicated guy, outwardly mild mannered, drives the fastest car of the lot. That's true. He's a finance guy through and through, but he's stepping out of the CFO role and signing up to continue to work just as hard at HealthEquity's mission, but for less money. Well, I don't know. But I think we've got a great bargain, and all of us truly look forward to continuing to work with Darcy for as long as we can keep him. Thank you, my friend.

With that let's open the call up to questions. Operator?

(Operator Instructions)

And we have a question from Greg Peters of Raymond James.

Well, good afternoon, everyone. And Darcy, I guess you're going to be giving up your responsibilities. But I guess, remember, the next best round of golf is right around the corner. I think it's Ben Hogan that said the most important shot in Gulf is the next one. And it looks like you're going to have a lot of opportunities going forward.

So let's -- I guess, I'm only allowed to ask one question in one part. So with that, I know you raised the capital. You've announced the one transaction. We've been hearing in the marketplace about increased interest from others who are well capitalized, well funded about interest in doing M&A in the space. So the question for you, Jon, and your management team is, do you feel like the multiples for deals is moving up? And do you feel like the competition for these deals has increased to the point where maybe some of them will not be as attractive as they once might have been?

Well, I guess I would say the way we look at -- let me back up to this. Our plan with regard to the capital that we've raised. And the capital of the business is generated, by the way, really is to deploy from an M&A perspective in 2 areas. The first is -- and I think the primary of deployment is around competitive and portfolio-type acquisitions, and I'll come back to that. The second is in areas where we can expand our capability, Luum is an example of that. I think your question is kind of about the first. I do think that there are lots of people who are interested in our market. And that should say something to those who think that -- well, to the extent anyone thinks there won't be growth here, that's a strong evidence in the opposite direction.

That having been said, our competitive advantage, when we look at the transactions that work for us, Greg, is that I think nobody knows how -- no one knows this business better than us. And no one knows how to generate synergies broadly speaking, better than us. And we've done it time and time and time again from portfolio acquisitions. And on the cost side, certainly, have already done it with WageWorks if you think about it as a part of product-extension-type acquisition.

So I think we have some real advantages in terms of deploying capital for return. I don't doubt that there are other people who will deploy capital what I think our investors are interested in is when we deploy it, are we deploying it to generate a high-return for them? And I have every confidence that we're going to identify what we have identified, and we will successfully pursue transaction activity that helps us grow, take advantage of our scale, et cetera, and do what we do well to generate return for you. So that's kind of how I feel about it.

Our next question is from Robert Jones of Goldman Sachs.

I guess the question is really just hoping to learn a little bit more about Luum. I guess, just within that, a little bit more around the type of offering, specifically the customer overlap, cross-sell opportunity. And then anything you'd be willing to share on just how the economic model is set up with the offering, would be helpful. But yes, just in general, a little bit more on Luum would be great.

Ted, why don't I throw this one to you? Is that all right?

That's great. We were doing rock, paper, scissors for who would get the Luum question and I won. Thanks for the question. We are enormously excited about Luum. Here's the way we think about it operationally, and then I'll turn it back over to Jon to see if he has anything to add strategically.

Our Commuter business is, by and large, monthly transit passes today, transit passes and parking passes. When we studied the landscape throughout the last year, as we watched what happened to the Commuter business during COVID, we realize that the needs that our critical employers and our most kind of challenging and thoughtful business partners had was for a more holistic solution, right? Someone that could help them expand the Commuter benefit to include daily parking, to include alternative modes of transportation, to include making sure their junior analysts at Goldman Sachs get home safely if they stay late at night with a connected Uber or Lyft, right? All of those types of benefits was sort of where the next-generation Commuter benefit was heading for the most discerning clients.

And so then we started going out in the marketplace to figure out whether it made more sense for us to build those incremental capabilities or to acquire them. And we found this amazing company that was like-minded, about what the demand were in the marketplace, had already signed up some of the most sort of forward-thinking and critically discerning enterprises in the U.S. as their clients and have worked with those clients to build a model that would work. And we just felt really good that Luum is where the puck is going on Commuter. And that's sort of kind of how we intend to deploy it.

We do think there are cross-sell opportunities. But really just kind of broadening the Commuter value proposition within our own Commuter base, there's no league tables like there are with HSA, but we believe we're the largest or near the largest commuter provider in the U.S. And we think this is -- we have an opportunity to take this awesome kind of incremental solution to those partners and help them kind of in a post-COVID commute environment. So that's sort of the operational answer. Jon, if you want to add -- touch on any of the strategic stuff on top.

No. I think that was well put. I'm not sure I would add much to that except to say, Rob, that we felt like -- well, I guess, there's 2 things. One is we felt like over the next -- really, the remainder of this year, it's almost as though we are, from a member's perspective, reintroducing our Commuter business. Now members still have accounts and so forth, and there's not much work for them to do, but they're busy. And at the same time, we know that our customers are reintroducing, for lack of a better term, members to work. And it's funny to think about this way, but for a lot of people, that's a big challenge. And from our perspective, the combination of Luum and our existing Commuter benefits product really is the best way to do that. It's the best way to reintroduce people to work from a commuting perspective.

There are lots of other issues out there, but on this one, we have the best solution, and we have the ability to take that to thousands and thousands of clients over time. And that's a really attractive thing. So -- and will serve us well broadly. So when we talk -- when I talked at the beginning of the conversation about tailwinds to headwinds -- no, the other way around. Headwinds to tailwinds. I always forget. Commuter is something where it will be great to have tailwinds again. And I think Luum really lets us make the most of those tailwinds.

And our next question is from George Hill of Deutsche Bank.

I guess, Jon, what I wanted to ask you is that should we think of Luum as the right playbook for deals that might happen in the health care space? And I might even ask you what you think of as the Luum of health care and talk a little bit more about where you see the M&A white space on the health care side of the business?

Well, first of all, if I've got a Luum of health care, I'm not going to announce it here. So I'm not going to answer that one. But you knew I was going to say that. But I do think that there are elements of this that are very attractive from a playbook perspective. Luum is not a large company. It is not bringing with it a bunch of sort of legacy revenue, et cetera. And it's a company that has had to kind of let's say, I'm going to say, live or die, but the right answer probably is innovate or not ever get off the ground, faced with some very, very new challenges. And so they've had to come up with some very, very new solutions.

And so I -- from a kind of the right way to bring in new talent and the right way to bring in -- if we're going to do build, buy type things as we add capabilities on the health side, it's exactly how I want to do it. I think in general, the white space on health care in my mind continues to be around the consumers' role in the financial side of the health care. So the -- basically, we have not yet cracked the code on helping consumers truly understand everything that's going on with their health care finance and making that a process that people -- that is not stress causing.

And so while that may not be the most interesting thing if you're a managed care organization or the most interesting thing if you're a health care provider or the most interesting thing, if you're a pharma, it's really interesting to us. And I think that reflects the fact that we occupy a very unique position within health care and one that we will continue to try and use to drive change in the system. So I guess my -- that's a long way to say, yes. I think it's the kind of playbook we hope to follow in health care. And yes, I do think there are opportunities in health care, and they're likely to be centered around the continued effort that we have to connect health and wealth to assure that consumers -- when consumers understand the money side, they just make the system better. We see that over and over and over again. And so where there's more opportunity there, we're going to be ready to do it.

I'll say, Jon, that's helpful. If I can have a quick follow-up. I guess one thing I would ask about is the selling season that's upcoming. We've started to hear it from some benefits consults while there wasn't a lot of movement in calendar '20, calendar '21 seems to be off of the bang. Would love any up-to-the-minute comments you'd be willing to provide around kind of the sale and selling season in RFPs?

Well, this is going to make Greg and Marco very jealous because they didn't get a second thing. So I'm not sure I can do that at Part B. But Ted, if you wouldn't mind, maybe commenting on what we're seeing kind of from a sales funnel perspective and also in our channel checks with the consultants and so forth?

Sure. And I think what we find echos your channel check as well, right, which is we've seen -- one of the reasons why, as I stated, our results year-to-date or ahead of last year-to-date is in part because some of those slipped RFPs became closed sales in the early part of this year. So I would say our findings are pretty consistent with what you're hearing from your benefits, consultant connections. And we certainly hope it continues. But thus far, we do feel a little wind at our back early from a volume perspective.

That's helpful. I appreciate it. And Jon, I guess, technically, you didn't answer the first one. So maybe that's my first question.

He didn't answer the second one either. I did.

See, Greg. It's okay. It's okay, Greg, I didn't just let you. Well played, George.

And your next question is from Sandy, Truist Securities.

And Darcy, I know you're still going to be hanging around but I'm glad. It's been great working with you, just wanted to share that. I think this is one question, Jon. I think this is one question, and I'm not sure if it goes to Darcy or if it goes to you, Jon or maybe to Tyson, but I'm going to try to wrap it up. When I think about sort of the puts and takes around impacts to cash flow over the next couple of years outside of like where rates go and what accounts you win, I feel -- I think about, one, you've got -- I think it's $26 million in your projections, the merger integration costs. I'm pretty sure that ends at the end of this year.

Then you've got Commuter is still down 50% and I think we all probably don't ever believe it's going all the way back up. But could you remind us where Commuter sort of was and sort of to think about what that lift looks like?

And then Tyson, you talked about COBRA being a lift at the end of this year, is there a potentiality that may be going into next year, the year out that, that drops off? I'm just trying to think about those puts and takes. And as we think about sort of a baseline normalized EBITDA or cash flow number, I'm just thinking about those 3 buckets. So I think that's one question, but that's my best attempt of bringing it into one.

Well done. Tyson?

Sure. That's a pretty wholesale question. I'll start with the one that was just a number in there. I mean, we talked about -- and I think we even talked about it on the last call that Commuter was about 75 -- it was [75] in run rate revenue business product, and it was profitable and still profitable even being down over 50%. So that's kind of the answer to that point of the question.

And you talked about essentially these, I'll call them tailwinds that approve EBITDA or cash flow metric. Certainly, in the long term, as Jon pointed out, and we continue to point out, the rates are one of the largest drivers of that. And so even with things like a COBRA lift, middle to latter part of this year around what we need to do as far as COBRA work on notifications and some of the fees we may get from that, if people are able to use that effectively, that will kind of be within the year. But the rate is really the thing that's going to drive that long term margin.

Also, the other thing I'd say is just the interchange and sort of normalizing that. I talked about that before as well. We're starting to see that normalize. It's still not quite like pre-COVID levels, and we still have this Q1 sort of normalized quarter to get through before the comp sort of change relative to those pandemic quarters. And I guess the last thing I would say is I've never come out of a pandemic. So I'm not sure what the timing will be as far as how everything kind of comes back together, but I certainly like seeing some of those rate indicators go up because that means a lot to our business given the amount of assets that we're able to generate in this last season.

Great. And just -- and that $26 million, just to confirm, that does, that's the last of the merger integration expenses?

Yes. Sorry, that was the other point. Yes, that is. And we're committed that we'll be on budget, and that will be gone relative to the WageWorks acquisition at the end of the year. And Ted is on track to make that happen operationally, and we're tracking it.

And your next question is from Donald Hooker of KeyBanc.

Great. Yes. So I guess maybe just a follow-up there on Sandy's question on cash flow. Just when you look into next year, just to hone our models here, obviously, the balance sheet is much better now with the equity offering. But just to [hone] our models, in terms of CapEx, I'll just kind of keep it to that. What is kind of sort of assumptions around CapEx because it's been, obviously, nearly 1 year with the 2 companies together. And are there any investments you need to make into Luum that might elevate that in the near term?

Yes. So I'll comment generally and then throw to Tyson to talk through kind of what we're expecting from a CapEx perspective this year. The things that are driving CapEx for us are primarily around the investment that Ted and his team are overseeing in the conversion of our platform to a true API-driven microservices environment. The value of doing that -- well, let me back up. The way we're paying for it in the sense of generating sort of bankable return, for lack of a better phrase, is that it's making our development activity occur faster and with less hours and, therefore, less costs.

And you can see that, to some extent, in what we've released over the last quarter, with PLUM sort of v1 or round 1, I guess. And the fact that we've committed to over a dozen new release items over the course of this year, that's what that's about. And that will be something that will pay dividends for us for a long time forward, though, not just in that cost savings, but also when we do transactions, and Luum is an example.

We -- while I think we will have a little bit of spend on Luum in the short term, we think that we can get this done a lot more effectively today than we could have gotten it done 2 years ago. And that will be a great -- if assuming we can do it, that will be a great lesson, and it will impact what else we're willing to do because we can integrate more effectively with what we already have. So that's really the bulk of where our investment is going beyond areas like securities and so forth that we all know kind of continue to have to be -- we have to be keeping up with the big boys, no matter how you want to define big boys on that one.

Tyson, you want to speak a little bit to where we -- directionally, where we see CapEx this year relative to last in that reference?

Yes. I mean it has gone (inaudible) a little bit, and it's going to be, let's say, 10% of revenue approximately in that area and all the things that Jon outlined are true. I mean we're going to -- I mean, those investments in technology are really the thing that's driving that. And so we've got our foot on the gas there to make those improvements, and also tracking what we think the returns will be as well to that. So excited to get that done and really upgrade our technology.

And your next question is from Stephanie Davis of SVB Leering.

Darcy, obviously, a very well-deserved move, but you will be so very, very missed. But since you're transitioning from the CFO seat, I think I also get to harass Tyson about my guidance question. So not a bad time to move.

He's getting used to it.

So from the press release, it sounds like you guys are executing well on Wage energies. There's $20 million more coming this year, but profitability did look a little bit soft in the guidance. Is this a function of the expectations for a strong selling season, which was talked about in the prepared remarks? Would that cost kind of offsetting the Wage savings? Is it some of the investments you've talked about before? Or is there really anything else to call out, maybe some conservatism in the back-to-work assumptions?

Tyson?

Yes. I think -- yes, sure. And Stephanie, where I would go with this is it's really -- you go back to the rates, right? And where we generate big part of our profitability is when those rates start to improve. And of course, you now see what Darcy announced. We're close to 200 bps for the quarter, but it will be 175 bps for the annual period, and you have seen that. As you track closely, you've seen that come down over the course of the decline in interest rates. And so when I think about that, that's really one of the things that tempers that margin improvement.

Now things -- can Commuter come back, if we get some of that, those dollars back up to that $75 million, I think Luum helps us potentially do that. That's not included in there because I just haven't seen that happen, and it's something that I -- if I were to think it's going to happen, it would maybe be in the latter half of the year. And when I see some movement there, we'll, of course, talk about that. And that's one of the things that's tempered that a lot.

I mean Luum won't really add anything from a margin perspective. It's a start-up with minimal revenue and really, it's reinvesting that back into the business. And so you don't get much there. And so those are kind of the top 3 things that I would think really is the reason why we're still -- we're kind of where we're at. And I think we've got a good end of the year and being consistent with that and what we're trying to push is pretty good, and gives us a good base to come off of.

All right. Understood. And then one quick follow-up, Jon. I need to hear how you definitively know that Darcy drives the fastest car in the lot? It's very important.

He's taken me in it. And if it's -- let's put it this way. If it's not the fastest car on the lot, the fastest car is very well hid. I'm pretty sure that everyone in -- and by the way, it's not the first, right? This is -- he used to have the fastest one, and he got a faster one. So we're -- so but for those who are concerned about the environment, I believe it's a hybrid of some sort. So it's not one of them Teslas. It's some kind of other car that's a hybrid of some sort. So he's running fast, but he's running clean.

Your next question is from David Larsen of BTIG.

Congratulations on a good quarter. Can you talk a little bit about how Luum is priced? Like, I mean, does the revenue coming from Luum depend on people actually commuting to work? Or is it more of a subscription sort of model. And let's say, half of your customers were to purchase Luum, what sort of revenue run rate could you get to, let's say, 5 years from now? Could it bring you up to $75 million 5 years from now? Just any color around that would be very helpful.

Yes. I'll give this one a shot and then ask Ted to add to it. Maybe he'll add the coherent part. Luum's primary business is a subscription-type business. So more -- so somewhat similar to the core of COBRA, where it's dependent on the number of team members or employees you have as opposed to who's driving or what have you. And that's because the solution has something to offer for kind of everybody. So one item, for example, that Ted hasn't touched on is or didn't touch on in this conversation is that -- is the opportunity to help employers to the extent that we see, for example, work-from-home cost reimbursement mandates coming out. Luum has some capabilities in that area. That, again, sort of like the theory is it's being there for every commute or no commute at all.

And so that's how Luum is priced. And so it does provide in the broader Commuter business, some stability related to variability in commuting. I don't know that I have done the calculation you asked for. And so I would not want to do it on the fly. But I will say that what I think is -- I'll say one other thing, which is I think what's particularly interesting also about Luum is that because we -- is that it can make a meaningful contribution to the return of this Commuter business. I mean one thing I might have said in response to Greg's question is one thing I like about this transaction from the perspective of our shareholders is, I am absolutely certain that it will yield or as certain as I can be, that it will yield material return expressed in terms of IRR or return on invested capital or what have you, for our shareholders. I'm certain of that. Whether the percentage will be big and the numbers won't, is to be seen. But the IRR is going to work here.

And I think one reason for that, as your comment suggests, is that there are a lot of clients who really never had to think about these issues and about -- or never thought about Commuter benefits because most of their people were either driving solo or driving in car pools or whatever. But now with return to work, some of the examples Ted offered, there are things to think about. And then with ESG and all of that. I mean nobody -- I don't think anyone wants the outcome of the pandemic to be that we all abandon alternative commute modes and everyone drives to work alone.

So there's that, too. I think about, for example, Luum has a solution for closed-loop car pool reservation, so that if let's say, you have a staggered work schedule and you want to do car pooling only with people on your work schedule. That's the kind of thing that you can do with Luum. And so I think those are really neat. They're the kinds of things that folks who are out there and hungry and really focused too. And we're happy to bring that solution to a much larger audience.

Okay. Great. And then just one more quick one. With the synergies from Wage, you're going to be, I think, $80 million by the end of fiscal '22. And so should we expect to see a pretty sizable increase in adjusted EBITDA in fiscal '23, assuming that there's some improvement in yield, and at a minimum, Commuter doesn't get worse. Because it's like there's very modest adjusted EBITDA growth from '21 to '22. So...

I mean we're not giving guidance here, but I would sure hope so.

And Your next question is from Mark Marcon of Baird.

And Darcy, congratulations. It's been truly a pleasure working with you since the IPO. And you will be missed, but it's been fantastic, and hope we can stay in contact.

Thank you, Mark. Thank you.

I mean what you've done has been remarkable. And I thought Jon said it incredibly well, but it really is something. Questions on Luum. I'm just wondering, as you're thinking about it -- first of all, how much of a contribution will it make for this year? And any sort of parameters that you can give us in terms of a revenue expectation and EBIT, EBITDA margin expectation. Just any sort of framing of just the current size? I know it's small.

And then strategically, what I'm wondering is to what extent is there an opportunity to sell it as a stand-alone being additive to your existing client base? And to what extent will it end up helping you in RFPs from a Commuter perspective, but also to greater differentiate all of your CDB offerings on a holistic manner where you're really showing, hey, we're really being forward-thinking in terms of being comprehensive and holistic with regards to our solutions and thinking about areas that are going to be important in the future.

Ted, why don't you take the second half of that question? And then we'll come back to Tyson for the first.

Sure. Thanks. We have high hopes for Luum's ability to, a, be added to our existing many thousands of Commuter clients. Not all of them. There will be certain types of clients that will lend themselves more to a more comprehensive solution like Luum is offering, but that's definitely one of our deal hypotheses, and we're pretty excited about it. And then we would kind of concur with your implied assessment, which is that in the RFP process as we're deepening our distribution relationships, being able to offer something as part of the benefits package that really no one else can, we think will help, right? Exactly how much it will help an HSA sale, we don't know, right? But we think it will get us into more conversations. It will make our RFP responses stand out a little bit.

Our preliminary conversations with both clients and prospective clients have definitely been a lot of sort of, I'm intrigued, tell me more, which has been excited and we're just kind of getting warmed up. The Luum team, they are exceptional. They're thoughtful go-to-market people. And they have some great ideas, and we have some great ideas, and we're looking forward to putting it together, and we feel pretty optimistic about it. I'll turn it over to Tyson to answer your economic question.

Yes. Mark, it's small and it doesn't drive margin and -- but there's upside, right? I think if you go take a look at their website and you see what kind of clients and partnerships they have, you know they've -- there's a good market check there on who they're working with. And I think there's a nice opportunity there to support us to kind of climb back through getting to -- getting the Commuter business back through because it's going to -- I think it's going to sync up nicely with that because of the way the cards integrate and those type of things, but it's small from a revenue perspective to begin with.

I'll say one other thing about this and not to tie along it, but Sohier and the team are accomplished guys. They've been -- and -- well, I'm using the term guys colloquially. It's an accomplished team. Sohier did real and his team did real stuff at Microsoft, and then really saw this area as an area that they felt passionate about. And what's really underneath it is a passion for engagement and using the employee relationship as a way to drive engagement. So they're actually underneath the covers, a lot of talent commonalities and a lot of sort of philosophical commonalities among our teams. The focus on engagement, the use of technology to drive that engagement, the opportunity to do well while doing good.

And so it really felt like a good fit and as sort of the first of this type of transaction that we've ever done as well as a public company, like something we could do that would work for investors and that would give us a lot of room to grow and explore and be successful together.

And Your next question is from Sean Dodge of RBC Capital Markets.

So Tyson, you said a couple of times now rates are one of the bigger kind of long-term swing factors for margins. And Jon, you said -- accurately noted the rise in 10 years that we've seen, you said yields probably don't impact you much this year, but maybe could, should future years. Can you just walk us through how quick, and to what extent do these moves typically flow through to you all? I know it takes some time to affect the instruments your benchmarks (inaudible). I guess, how often are you placing new cash? Is it only annually, and then you ladder it in 3, 4 years? So every year, you've got some rolling off 2 that's being replaced. But I guess, maybe just a quick reeducation just given how -- maybe for the first time in a while there's something to be encouraged about on the kind of the rate outlook.

Darcy, why don't you take this one?

Sure. I'd be happy to. We generally ladder things and most of our placements occur in the kind of the December, January time frame. So when Tyson guided that our rate for 175 is because most of the money that we anticipate this year is already -- we have depository agreements in place to take care of that. Because of the Wage migration this past year, we did enter into some newer contracts more midyear than we normally would. And so when those start rolling off in the future, there might be a little bit more midyear movement.

But on the other hand, we're always looking for opportunities of getting yield enhancement. And so some of these contracts have some ability to move between contracts because they have mins and maxes, et cetera. So if the rate environment starts increasing, that would be helpful. But as we said on the call, most of that benefit will come to next year based on placements that we do in December and January. Does that make sense?

Yes. Makes sense.

And your next question is from Allen Lutz of Bank of America.

I guess the follow-up there, the 2-year treasury is only at about 15 basis points, and the 5-year has backed up, I think, is kind of what you were mentioning at the top of the call to almost 1% or about 85 basis points. So there's a big spread between the 2-year and the 5-year. I guess when you kind of talk about the optimism that you had, is that just based off of the treasury curve movement being a potential precursor to improvements in CDs? Or are you actually having more positive conversations with depository institutions about where you could place rates?

Yes. We -- well, this is a little bit of a quiet period in terms of our conversations because -- not using that term in its legal sense, but because we've done a lot of placement over the course of December and January. But I will say, during that period, as we got into January, things did firm up quite a bit. And so what we're talking about now is really to some extent, we're previewing with our now -- I believe it's 20 partners, what our needs are going to be for next year.

And so there's been a ton of interest in that. I think that interest is bounded primarily by questions on the part of different depository partners about what loan volume is going to be, and in particular, where -- and what duration that loan volume is going to come from. So I can't say there aren't questions, but I do think that the conversations certainly relative to what we were seeing when we were having the same conversations last March and April, that was tough. This is better. So obviously, a ways to go this year, but the fact that we're talking about reflation and that we're seeing evidence of reflation that we've seen about 50% of the jobs lost have come back is -- are all good things broadly for this company and for our opportunity on placement.

Okay, great. And then the revenue increase, about $10 million since we spoke a few weeks ago. I guess what -- is there any way you can break out sort of where that improvement is coming from? Is it related to COBRA, from Luum, more confidence on the reopening? Just if you could kind of bucket that for us.

Yes, Tyson. I don't think we're going to bucket it, but I don't think we're going to break it out too much. But Tyson, why don't you give some color on it?

Yes. I mean where we started on this is we promised we'd grow top line growth if we have the opportunity here post COVID and because we raised it, we thought we did, right? And I think you did mention the things that we're talking about. I mean, there's certainly still the Q4 challenges that we faced, revenue was still down every category in Q4 -- to Q4. So we're still in these COVID quarters. We still have that Q1. It will be sort of in a similar vein. That's right. We get -- we'll work through COBRA. We're going to -- over the last part of the year, we're going to get something from that. Certainly, Luum provides a little bit, like I said before, though, it's small. But I think the upside on that is there's potential. And it's not something that we necessarily have to wait for season, like the rest of our business.

So maybe, again, in the latter half of the year, we get some upside from that. And then I think that -- I think, overall, again, it's sort of that mixing that bag up with -- we're thinking about things like an increasing Commuter maybe in the last part of the year a little bit, right, but not very much. We just -- you see some of the -- I'm watching the news like everybody else and looking forward to getting vaccinated. And maybe that changes the way people move around a little bit relative to what we've been seeing, which just hasn't moved at this point. So it is those things.

There are no further questions at this time. I would like to turn the conference over to Jon for closing remarks.

Yes. Thanks, everyone, again, for joining us. Please, I know things are getting better, but let's all just stay safe and sane. One more comment on Darcy. Darcy is a Dodgers fan. And while I'm not sure I'm as keen on bleeding blue as purple, I would note this, which is that I believe it's the case that the highest batting percentage among any Dodger, Brooklyn or Los Angeles, is Wee Willie Keeler. And I think 352, maybe 356. So Darcy is not only an inch or 2 taller than Willie Keeler. But beyond that, he is leaving this role, I believe, I may be wrong about this, but I believe he's batting 1,000 in terms of meeting your earnings expectations on a quarterly basis.

And as I suggested in my earlier remarks, that kind of stability and ability to look around corners and to make promises that you can deliver on is something that is Darcy's unique and strong contribution to our culture. And though he will not be in this role, that part of his legacy is going -- I want to assure you that, that part of his legacy will be part of Purple culture going forward to the extent that anyone on this call has anything to say about it.

So we look forward to meeting and beating in a quarter and a quarter after that and a quarter after that. And with that, thank you guys very much.

Thank you, Jon. That was very kind.

Okay. Bye-bye, everybody. Well, go ahead.

And this concludes today's conference.

Thank you, everyone.