Healthequity Inc (HQY) 2021 Q3 法說會逐字稿

Go ahead, Mr. Putnam.

Thank you. Good afternoon, and welcome, everybody, to HealthEquity's Third quarter of Fiscal Year 2021 Earnings Conference Call. My name is Richard Putnam, Investor Relations for HealthEquity. Joining me today is Jon Kessler, President and CEO; Dr. Steve Neeleman, Vice Chair and Founder of the company; Darcy Mott, the company's EVP and CFO; Tyson Murdock, our EVP and Deputy CFO; and Ted Bloomberg, our EVP and Chief Operating Officer.

Before I turn the call over to Jon, I have 2 important reminders. First, the press release announcing our third quarter earnings, including definitions of certain non-GAAP financial measures that we'll reference today was issued after the market closed this afternoon. 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 reflects management's view as of today, December 7, 2020, 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 the actual results to differ materially from 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 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 conclusion of our prepared remarks, we will turn the call over to Jimmy, our operator, to provide instructions and to host our Q&A. With that, I'll now turn the mic over to our CEO, Jon Kessler.

Thanks, Richard, and hi, everyone. I've got a whole script here, but I'll just start by saying COVID's a tough backdrop, but the team is really firing on all cylinders right now to deliver the profitable and growing and visible business that you all expect from us.

During the fiscal third quarter, team Purple delivered sequentially improved financial results and exceeded our expectations given the difficult backdrop of the pandemic. More progress on integration and strong sales driven by our total solution strategy. We're raising our full year outlook and feel confident enough to offer a very early look at key drivers for fiscal '22.

I'm going to discuss Q3 performance, including key metrics, our perspective on FY '21 sales heading into January and WageWorks integration. Steve's going to offer a perspective on what the outgoing and incoming administrations in Congress can do to support health care consumers. Tyson's going to detail financial results, and then Darcy will cover revised guidance. We've got Ted here with us for Q&A. So we've got a full basketball team -- the full starting team, plus I'm kind of like 6th man, as you might expect.

Let's start always as we always do with key metrics. Revenue of $179 million is up 14% year-over-year, reflecting organic growth and the lapping of WageWorks in August, which was tempered by the pandemic's continued impact on custodial yields and our members' use of commuter benefits and health care cards during the pandemic. We estimate that lower commuter benefits utilization and health care card spend on their own, excluding interest rates, created about $10 million of headwind during the quarter.

Adjusted EBITDA of $61 million is up 10% year-over-year, and adjusted EBITDA margin of 34% was steady sequentially despite the beginning of the enrollment season ramp. As I will discuss in a moment, we believe there is more to come over time. 5.5 million HSAs at quarter end are plus 9% year-over-year, plus 11% organically, that is excluding the impact of migration-related closures that we talked about last quarter, 104,000 newly opened HSAs is, we believe, a solid figure given the dearth of newly hired benefits eligibles throughout the economy during the quarter. 12.5 million total accounts were flat year-over-year with growth in HSA, FSA and COBRA, offsetting the decline of about $0.6 million in commuter accounts that are currently in suspense.

Last, but definitely not least, HSA assets reached $12.4 billion, up 19% year-over-year and up $229 million sequentially. While investment asset values provided some tailwind, continued contribution from members in response to HealthEquity's engagement and education efforts we believe really is what drove this growth.

As you know, Q4 and particularly January will truly reveal the results of sales activity in FY '21. And I want to minimize the growth challenges that we face as many HR departments have pushed off initiatives, some really do remain in crisis mode, and of course, work from home drags on for nearly all of us.

That having been -- and additionally, new hiring by our clients, which normally provides a base of new account growth is slow. All that having been said, the team is excitedly preparing for what we believe will be our busiest January ever. And here are a few of the reasons why we are excited.

First, relationship executives Managing HealthEquity's 500 largest employer clients, achieved a 97% retention rate in FY '21 and that's despite all of our platform migration activity, because platform migration has proven to be less a source of attrition and more an opportunity to demonstrate to clients what remarkable purpose mean -- I'm sorry, what remarkable service means and Purple in action.

The enterprise sales team appears to have delivered its best performance in several years, driven by impressive win rates in cross-selling to existing clients, but helped along too by some strong new logo wins. In fact, Thanksgiving week was the first since the summer that the enterprise team didn't have a win. That's pretty late. So that's good.

We've talked previously about the growth in bundled RFPs from our total solution strategy. It's translated into steady growth in the average number of HealthEquity services used by managed clients over the course of FY '21. That same trend in the third quarter began appearing in our midsized commercial clients. And with 12 of our network partners having added HealthEquity services to what is already on their shelf so far this year, we hope to extend the trend to our smaller employers in FY '22.

And finally, open enrollment interactions with members and importantly, prospective members have already more than doubled year-over-year as clients have embraced the 100% virtual open enrollment tool set that Ted mentioned last quarter. And this includes live and on-demand content, interactive tools, social media and, of course, 24/7 live support for our members and prospective members during open enrollment.

The team continues to close and implement FY '21 business and the enterprise and new partner sales pipeline for FY '22 is already starting to take shape with some nice wins for employers with benefit years beginning in March and April already signed. So that's key metrics and sales.

Let's talk about integration. Progress on integration also continues. As of the end of the third quarter, HealthEquity had achieved approximately $55 million of ongoing annual synergies against $63 million of cumulative onetime integration expense, that's a pretty good return. And the team is on track to achieve a total of $80 million of ongoing annual synergies against cumulative onetime expenses of approximately $100 million by the end of fiscal '22 as legacy platforms are retired. Indeed, the team reached its FY '21 goal of 10 platform migrations, with more untapped before fiscal year-end. So that indeed really adds to the strength of that.

Of note, 97% of all HealthEquity HSAs and HSA assets are now on the HealthEquity custodial platform. In Q4, we'll deliver the first installment of HealthEquity's unified portal experience to our clients and then a dozen major new portal features over the next 12 months.

With change afoot in Washington, we think most Americans want practical steps to control the pandemic and help families manage its fallout. Steve is here to describe some of the opportunities for HSAs and CDBs, to contribute that Congress is considering. Steve?

Thank you, Jon. Last year, before the pandemic, approximately 82,000 of our current and potential members attended HealthEquity open enrollment events, including in-person and live online sessions. This year, over 350,000 have attended our live and on-demand events with live support. We think Americans are starting to understand that HSAs and other consumer-directed benefit accounts are part of the solution to health care affordability and long-term savings through this pandemic and beyond. And there is evidence that Congress and the incoming administration may come to the same conclusion.

For example, we have been reporting since the pandemic began that consumer spending in health care is down year-over-year. Consumers have billions of dollars in FSAs with use or lose provisions. Many have been unable or unwilling to get care during the pandemic. And under current rules, and in most cases, they must use their funds by the end of the year to avoid forfeitures. This means consumers and the health care system could lose billions of dollars.

As access to care improves, consumers will need that money. The return this week of shelter in place orders in California and elsewhere worsened the problem. Regulators can, and in our view, should immediately extend the use or lose period for expiring FSAs through the pandemic emergency period similar to the extension that was passed for pain for telehealth services within high deductible plans during the pandemic. Extending the use or lose deadline for FSAs would have little or no cost to taxpayers as unused FSA funds revert to sponsoring employers and not the treasury.

We believe these rules should apply not only to health care FSAS, but for childcare FSAs as well. Because Americans have not been able to go to work, and therefore, they should not lose the funds they have set aside for their childcare. Rules around how childcare FSAs can be used during the pandemic emergency period should also be relaxed to allow consumers to have more flexibility to keep working and take care of their kids.

Also, incredibly, while we must all use sanitizers, masks and other PPE to prevent the spread of COVID-19, their cost isn't FSA or HSA qualified without a doctor's authorization. Dr. Fauchi's advice apparently isn't enough for the tax man. HR 8450, sponsored by 3 Republicans and 3 Democrats would change this. However, this is a commonsense measure that shouldn't require an act of congress. We need to help unemployed Americans pay for their health care premiums until they're unable to get back to work.

During the global financial crisis in 2008, Congress acted quickly to make COBRA premiums more affordable. We agree with many in Congress who have signed on to support doing so during the pandemic emergency period.

Now turning to HSAs. The Commonwealth Fund and the Employer Benefits Research Institute estimate that 7.7 American workers lost employer-sponsored coverage at the start of the pandemic. Coverage under the ACA exchanges or COBRA cost money. HSAs are part of the solution to affordability since they can be used to pay these premiums on a pretax basis. But since none of us anticipated this crisis, Congress and our regulators should act to permit catch up contributions to fund these costs by extending the HSA contribution deadline for tax years 2019, 2020 and 2021 until the end of the pandemic emergency period. Congress can also expand consumers' ability to use HSAs for ACA qualifying insurance premiums by dropping the current requirement that links disability to eligibility for unemployment insurance, which as we all know, has run out for many Americans. Finally, there are many consumers who can't make use of HSAs because they weren't in a qualified HSA plan prepandemic or are unable to choose a qualified HSA plan now.

Without a pocket cost continuing to rise and deductibles across all plan types, generally higher than HSA minimum deductibles, any health plan coverage should allow consumers to use an HSA to pay for their out-of-pocket health care expenses on a tax-free basis. Democrats and Republicans have proposed widening HSA eligibility to include more of these plans. We should fix this issue now for the future by permanently allowing individuals with any ACA qualifying coverage, VA or TRICARE, traditional Medicare, Medicare Advantage, Medicaid, health care sharing ministries or Indian tribal health services to make and/or receive contributions to an HSA. You can call us naive, but we believe that the nearly 50-50 results in November in the house, the Senate and in the presidential election, create an environment where moderate voices could have more sway and practical measures have a greater chance for adoption. Our teams in Washington are engaged and working hard to make this happen.

I will now like Tyson walk us through the numbers. Tyson?

Thank you, Steve. I will review our third 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 third quarter financial results, as you know, include the operations of WageWorks, which was acquired in August of last year. So while we have officially lapped the acquisition, keep in mind that Q3 last year had 2 months of WageWorks in the results, while this year reflects combined results for the full quarter.

Third quarter revenue grew overall inorganically in each of our 3 categories. Service revenue grew to $104.6 million, representing 58% of total revenue in the quarter and 19% year-over-year growth. The increase is primarily attributable to 21% growth in average total accounts, including those from the WageWorks acquisition and new sales. Custodial revenue grew to $48.5 million in the third quarter, representing 27% of revenue in the quarter and 3% year-over-year growth despite a 35 basis point decline in the annualized yield on HSA cash with yield assets.

Average HSA cash with yield grew 21% and average HSA investments with yields grew 57% year-over-year. The annualized interest rate yield was 208 basis points on HSA cash with yield. 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 grew to $26.2 million, representing 15% of total revenue in the quarter and 17% year-over-year growth. The increase is primarily attributable to growth in average total accounts and a negotiated more favorable interchange share, partially offset by reduced spend across our platforms in the quarter.

Gross profit reached $104.6 million compared to $96 million in the third quarter of last year. Gross margin was steady sequentially at 58% in the quarter. Operating expenses were $93.1 million or 52% of revenue, including amortization of acquired intangible assets and merger integration expenses, which together represent 15% of revenue. Income from operations was $11.5 million compared to $9.9 million in the prior year. Net income for the third quarter was $1.8 million or $0.02 per share on a GAAP EPS basis compared to a loss of $21.3 million or a loss of $0.30 per share in the prior year.

Our non-GAAP net income was $32.2 million for the quarter compared to $30.3 million a year ago, a 6% increase. Non-GAAP net income per share was $0.41 per share compared to $0.43 per share last year. Adjusted EBITDA for the quarter increased 10% to $61.1 million, and adjusted EBITDA margin was steady sequentially at 34%, while operating through the impact of COVID.

For the first 9 months of fiscal '21, revenue was $545.4 million, up 65% compared to the first 9 months of last year. GAAP net income was $3.5 million or $0.05 per diluted share. Non-GAAP net income was $93.1 million or $1.25 per diluted share. And adjusted EBITDA was $184.1 million, up 36% from the prior year, resulting in 34% margin for the first 9 months of the fiscal year.

On the balance sheet, as of October 31, 2020, we had $299 million of cash and cash equivalents with $1 billion of Term A debt outstanding and no outstanding amounts drawn on our line of credit.

I will now pass the mic to Darcy to review our updated guidance. Darcy?

Thank you, Tyson. As you know, our results and guidance for FY '21 remains sensitive to the COVID-19 pandemic and the timing of economic recovery. As Tyson just discussed, we continue to see improving economic trends, but remain cautious about the impact of a surge in COVID and how quickly employers will open the doors to their businesses, especially in large cities.

Based upon our third quarter operating results and the economic progress to date, we are increasing our guidance for full fiscal year 2021. Specific variables will impact our performance through the remainder of fiscal year 2021, include, but are not limited to, members' access to and spending on health care and their use of transit, parking and other commuter benefits. The modest pace of recovery and employment may negatively impact the number of our average total accounts and conversely perhaps spur uptake in COBRA and other benefit continuation products.

Across these and other variables, there exists a wide range -- wide range of plausible outcomes for the remainder of fiscal 2021. Importantly, however, our guidance for fiscal 2021 assumes that current trends across these and other variables continue through the remainder of the year. Under these assumptions, we expect HealthEquity will generate revenue for fiscal 2021 in a range between $725 million and $731 million. We expect our non-GAAP net income to be between $116 million and $121 million, resulting in non-GAAP diluted net income per share between $1.55 and $1.61 per share.

We expect HealthEquity's adjusted EBITDA to be between $232 million and $238 million for fiscal 2021. Our non-GAAP diluted net income per share estimate is based on an estimated diluted weighted average shares outstanding of approximately 75 million shares for the year. The outlook for fiscal 2021 assumes a projected statutory income tax rate of approximately 25%.

Today's guidance includes the effect of having achieved approximately $55 million in annualized run rate net synergies as of the end of the third quarter, with estimated net synergies of $80 million expected to be achieved by the end of FY '22. Given the current interest rate environment and recent discussions with our depository partners, we are maintaining our yield guidance of approximately 2.05% on HSA cash with yield during full year fiscal 2021. We also feel confident to provide a yield outlook at this time for FY '22. Based on anticipated new HSA cash, expiring rate contracts and current market rates, we expect our yield for HSA cash with yield to be between 1.70% and 1.80% for FY '22.

Our above 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 included.

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

Thanks, Darcy. Before we go to Q&A, I'd like to just take a moment to thank our 3,000-plus team members who are continuing, as I'm sure, as everyone listening on this call to work in living rooms and kitchens and foyers, in my case, in a full corner of the floor behind the Christmas tree/Hanukkah bush. And have been doing so for months and months. And at the same time, as I said at the outset, have made, I think, tremendous progress towards delivering our members -- towards helping our members collect -- connect health and wealth, but I think also towards delivering the kind of business that you, shareholders, want to see from us.

So again, thank you to the team. And with that, operator, take it away.

(Operator Instructions) Our first question comes from Anne Samuel with JPMorgan.

You spoke about strong cross selling. I was hoping maybe you could provide a little bit more color there. And then what does the overlap look like between existing wage customers and HealthEquity customers?

Ted, why don't you give a little color on the cross-sell activity and what we're seeing. Only if you're not on mute, though. All right. Well, he won't, I will. You can still hear me, though, can't you Anne?

Jon, can you hear me?

I can hear you.

Now we can hear you. There you go.

All right. Good. I had a great answer and no one heard it except my -- where I work, which is the corner of my bedroom. But luckily, I got to practice. So yes, let me -- we're -- we are really pleased with the quality of conversations that we're having with our existing enterprise clients. And the kind of pace with which they are excited to hear more about buying new services from us. And I think you heard kind of some high-level remarks from Jon, and I'll probably get zapped by Tyson, if I go into too much detail. But basically, what we're seeing is a much higher close rate on sales opportunities that are cross sold, which isn't a surprise. I think we were surprised a little bit at the magnitude of how successful we can be adding new products to our existing clients.

We're seeing quarter-over-quarter the average number of products used by our enterprise clients march upward. And I think more importantly than anything else, we have kind of done some math on the size of the opportunity. When we look at our top 500 and then, again, 1,500 clients at the products they don't currently hold today, and we feel like the opportunity will persist for quite some time for us to kind of continue to make progress there. So I want to -- Tyson, jump in if you want to get a little more specific, but I think the punch line is, we see significant success. We see the numbers, the penetration of our products kept going up, but we also see a lot of runway and in probably years' worth of cross-sell opportunity to come.

In terms of overlap, I don't think we would share specific numbers, but I think what we're finding just a little anecdotal is, there were places where our overlap saved us a little, meaning that, like, if an enterprise was a client of both legacy HealthEquity and legacy WageWorks, the opportunity to say, is all this going to come under HealthEquity service model and having the answer be yes, probably helped inform that 97% retention rate, which Jon alluded to earlier, because people were kind of like, okay, we had some problems with wage service, as long as you guys are going to address that, we're fine and thus far, we've been able to do so. So I don't think we reveal the exact overlap statistics, but I think that it's been a good guide for us in terms of consolidating services for our enterprise clients.

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

I guess, yes, I'll be the bearer of market news. Last I checked aftermarket after hours, your stock was down about 5%. And I know you don't get hung up on daily or hourly movements. But I guess, in that performance, so at least aftermarket, I guess, I'm looking at a couple of things that might be spooking some investors. First of all, the guidance for the full year. If you look at it, not that we have the -- our estimates are the final arbiter of what The Street looks like. It does look like the implied fourth quarter guide might be a little bit lighter than where The Street is.

And then secondly, the HSA balances, I think you said in the press release only added $46 million of new cash in the quarter. That I just -- I'm trying to reconcile that number. I mean, you have 5.5 million accounts, that's, what, $8 account in the quarter, and that's all they can add when backing up the maximum number of the dollar contributions are substantially higher, and I don't understand that. And then I'll have one other area that I don't understand to follow-up with.

Why don't you throw that one out so we can hit them all at the same time?

Okay. Then just the accounts, the actual account numbers, the CDB, obviously, the rate is -- the rate of deceleration sequentially is beginning to moderate, but still we're seeing the CDB account numbers decline sequentially. And I think your previous guidance or suggestion would be that, that would stabilize and grow in the fourth quarter.

And then the HSA numbers, you throw in the gross numbers, but if you take out the net with -- it's not as strong. So just -- this is the age-old discussion that we always have every quarter, it seems like, about the accounts that you're closing at the same time you're opening new accounts. That's it.

Yes. I'll take a couple of those, and then I'm going to throw the guidance question over to Darcy. But let me kind of -- and as you might imagine, I'm not really -- I don't try -- I try not to look at after hours, much less talk about it. Whether -- in whatever direction it goes. But if I look at -- I'm going to just take your questions from end to beginning and if I miss something, please tell me.

On accounts -- on HSAs, in particular, the net growth in HSAs approached 100,000, and we had 104,000 gross new. So I'm not sure where you are there, but wasn't quite 100,000, but it was getting up there. So for a third quarter, that's not shabby. And as I said in my prepared remarks, one of the issues that is challenging for us in this environment is that normally, there's a sort of base of accounts that we'll see in any given quarter that's happening because our -- basically, because employment grows, our clients are hiring new people. And obviously, there was -- if you think about the timing of hiring and then the person becomes benefits eligible a month or 2 later, this quarter did not represent a period where there was a lot of hiring going on. There may have been some rehiring, that's good. But you know that, and I know it. So you can judge whether you think that number is good or bad, but it's -- there isn't a huge difference between the open and net increase numbers.

In addition, on CDBs, the primary issue that we're battling there is commuter. So we had about 100,000 more commuter accounts in suspense this quarter than last. And that was roughly made up by the increase in HSA and some more modest increases elsewhere. So that's where we are.

With regard to the asset side of things, the answer is that people took $170 million and turned it into investment. And investment -- market growth during the quarter actually wasn't that helpful, given the timing of beginning and end. And Tyson will go through the math if anyone would really like, but the big reason is because they deposited cash and they turn it into investments to the tune of $170-odd billion. So that seems kind of, okay, that's what we want people to do over the long term. That's how you grow your balances, and that's how they become sticky account holders.

So by and large, again, it's -- as I commented at the beginning, COVID's not a great backdrop for us. But our job is to control the things we can control. And what we can control is, building a more profitable and growing business. So that, as those headwinds turn to tailwinds, that we can do more. As far as guidance and the implications for Q4. I'm going to throw that one to Darcy and have him get a start on it. And if I want to add something else. He might be on mute though. Everyone's on mute now.

Can you hear me?

All right. Now we can hear you.

Yes, I tapped the mute button but it didn't take or the unmute button. So the midpoint of our guidance, Greg, would imply like $183 million. We think there's possibly some upside in there, but we're also cautious. It's up from what we just did in this quarter. We'll see how the spend comes back. That's a variable for us in how much -- Steve talked about getting relief on people being able to spend their FSA dollars. And so we're cautiously optimistic about that. But that's kind of where the midpoint of our guidance comes from, that we gave.

I mean, I would just add, Greg, we had this same exact discussion. I don't think it was you that asked the question. But last quarter, where people were kind of doing the math and dividing by the rest of the year and so forth. And they were like, oh, you're going to have -- and I understand why people do that. But given our approach to guidance and given some of the uncertainties, you can imagine why we're going to want to be conservative. That's how we -- that's how we roll. That's how we've always rolled. And so -- but then we try to over deliver. And certainly, I think for the quarter, relative, broadly speaking, to analyst expectations, we were able to do so. And certainly, in certain areas relative to our own expectation to be able to do so.

Got it. Well, I realize I maxed out my 1 question and follow-up, but I sincerely appreciate your answers. And thanks for the guidance on custodial revenue.

Our next question comes from Robert T. Jones with Goldman Sachs.

Great. I guess maybe just to follow-up there on the guidance. I know you just touched on the revenue side. But I think similar question on the implied EBITDA guide for 4Q looks to be down a bit compared to what you've been doing. It might be a similar answer, but just curious if there's anything worth calling out there as far as what might be driving the sequential EBITDA or at least the expectation for sequential EBITDA to maybe be a little bit lower than some were expecting.

Yes. Darcy, do you want to get this one?

Sure. I mean, historically, we've always -- and you go back and look at our history, even premerger and post-merger, Q4 has a lot of expenditures getting ready for our January enrollments that will come in. And so we've been hiring people. We've been training them. We've been getting them on the phones. And those expenses will hit in -- both in service delivery and in some of our operating expenses in Q4. And so what we're most pleased about, actually, is that as we've gone through this transition and migration that we've done what we feel is a pretty good job of maintaining EBITDA margin with the efficiencies and the benefits that we've got from synergies, despite, you could argue, $20 million of revenue impact per quarter from COVID. And so -- and to be able to get margin out of that and still get through all of these shortfalls in the revenue that we've had with respect to the Commuter business we've talked about in the spend in interchange, that's what's factored into all of that, and it flows down to the EBITDA line also, notwithstanding the fact that we're striving to get more efficient and to maintain margin as best we can.

No, that's super helpful. And then maybe if I could just ask 1 follow-up. I was kind of curious on some of Steve's comments around the potential for extending the use it or lose it clause with the FSAs, not being as familiar with it. Just was wondering if maybe you could share a little bit more of what actually does need to happen for that to come to fruition? Does it need an act of Congress? Is it up to employers? And then probably, most importantly, like what would that mean to the model for HealthEquity if we find ourselves somehow going into next year with larger FSA balances than we would have otherwise expected to see?

Well, I'll take that one and then ask if Steve wants to comment further. As you may recall, the regulators felt they had the authority to extend some other deadlines as they approached earlier in the year, an example being the deadline that people had to enroll in COBRA, which has been extended to the end of the quarantine period. But -- I'm sorry, the end of the pandemic emergency period. But -- but now I'm thinking most people at the time did not think we would still be here at this point in the year, and yet we are.

So from our perspective, this is something that the regulators can do. It's certainly something that's being talked about actively, whether they can get their act together or it requires an act of Congress to get their act together, that's, to some extent, above our pay grade. But I think similar to some of those other actions, the practical effect is, really is -- is I think the reason to do it from a public policy perspective is it leaves billions of dollars in the health care system that will otherwise come out of the system and leave those in consumers' hands that will otherwise come out of them.

So that's good for us. Of course, it's good for us in the sense that people have more money to spend and so forth. But we just think it's -- and we're working our butts off to make sure people know this, and that they don't assume that's going to occur. And instead, spend the dollars where they can. But as you know, and particularly with the new shutdowns, there are people who are -- just don't have access to spending those dollars usefully. And so this seems like a very commonsense thing to do. We're hopeful that it does get done, because it's the right thing to do. And would there be some benefits in terms of people having more money in those accounts to spend as they can get back outside and whatnot? Of course, there would be.

That makes a ton of sense.

Robert, the only thing I'd add, Jon's got it right. I mean, he knows this is cold. But René issued this notice 2020-29 in the spring, they just kind of said in the language. We think everything will be back to normal in the fall. So we're going to give -- we're going to extend the deadline for the 2019 plan years because we had the same issue in the spring, right? They didn't have time to use their grace period and they said, we'll extend to 2019 through the end of the year, but otherwise, we're going to go back to normal. Because we think it will be back at normal then. We're not back at normal. And so they -- we do think that the regulators can act on this, and we think they will. I mean, we know that both the outgoing administration and the incoming administration are very pro-consumer, which is what this is all about, it's helping the consumers on.

So I think we're a good spot. There's a bunch of momentum. I can tell you, there's all kinds of sponsors that have been signing on letters and things like that. And it's a wide group of people, everyone from the American Benefits Council to the AFL-CIO and the National Education Association, they're all asking for this leniency not only around when you can use your FSA dollars and your HRA dollars and things like that, but also for things like COBRA extension. So we're pushing hard.

Our next question comes from George Hill with Deutsche Bank.

No, things are not back to normal yet, Steve. I kind of have 3 questions. I'll lump them all out at the same time as well. I guess, my first one is Darcy, on the rate guidance for calendar '21 of 170 to 180 basis points. As we think about the calendar year, do we expect that to be a linear kind of progression down towards the low end? Or do we expect that to be kind of a flat line number as we go through the year? And then, Jon and Steve, I guess, 2 questions for you guys. On the strategic side. One is in the most recent benefit selling season as a result of COVID, do you guys feel like you saw any new trends that are important or worth calling out? And then the other one is, United appears to be stepping up their focus on health care finance banking. Did you guys see anything different competitively out of them in this most recent kind of end of the selling season?

Yes. I'll take the second half. And then if you don't mind, Steve, I'm going to throw back to you in terms of employer trends. First of all, on the competitive side, yes, I was actually really pleased to see in United's Investor Day, them talk about this since, as I recall, George, it was see, the last year or the year before when somebody asked me if -- it was in December as well, when someone said, well, they didn't mention it or they threw it off. And I said great. They've got our number if they want to sell their business. So to my mind, it validates that there's a lot of growth opportunity here given all the irons in the fire for United in the regulated and nonregulated segments of the business.

So -- but I think probably the main way we see that is in M&A activity, where they've always been competitive for different assets. Depends on the asset and so forth. As an example, I think it's been widely reported, although I've never seen a press release on it, but it has occurred that they acquired a platform called Connector Care that's a little more FSA, HRA-focused. And I think that's to try and match what we've done in broadening the offering. So that seems like, from my perspective, if you're in a market with no competitors, that's not so good. But they're a good competitor. And so that's the main thing we've seen. We haven't really seen any particularly different behavior in the actual like offering of products or pricing or that kind of thing. Steve, you want to touch on the question about, and I suppose, Ted, if you have anything, touch on the question of employer behavior during the selling season?

Yes, I think Ted spoke to a lot of this, but generally, employers are under a lot of duress, and they just want simplicity. And I think that's one of the reasons why the bundled product has done so well because it just gives them less meetings, less partners to have to manage. And frankly, we can help them out on pricing when we put it all together. And then I think George had a question about -- for the finance team. What was your first question? Or you had a question for?

Yes, Darcy.

Go ahead, Darcy.

Yes. So George, you asked about the linearity of the yield. We always start off the year based on the placements that we do in December and January. And usually, we're pretty good on that, about it being linear until we get to the end of the year. In this case, that is generally true. It will start a little bit higher in the first part of the year.

The delta that will occur this year that maybe you won't see as much as in prior years, is in August, when we started -- when we did the acquisition, and we're starting to build capacity for Wage, then we had some contracts that will get reset kind of more in the late -- in the Q3 and Q4 earlier than they normally would. So there may be a little bit of a decrement that will happen kind of in the second half of the year. And then we always have a resetting in the December, January, in the fourth quarter.

So it's probably a little less linear than we would normally expect, but kind of going chunks quarter-by-quarter throughout the year, if that makes any sense.

Our next question comes from Sean Dodge with RBC Capital Markets.

So maybe on open enrollment. This is the first year you've approached that at 100% virtually. Jon, you mentioned a doubling in the number of interactions that have taken place thus far. Do you have any better sense now how effective those virtual interactions are being or going to be in converting people versus your kind of more traditional in-person approach?

Ted, you want to start on that one?

Sure. Is my mute button off? Everyone hear me?

Yes.

Okay. Excellent. And luckily, I'm not being evaluated on mute button management. We are really bullish about virtual OE for a couple of reasons that I'd like to share. The first one is, live OE is often standing around gripping and grinning at a benefits fair. And for those of you who've been in a benefits fair, you know that it doesn't get hit very hard. Oftentimes, people just wander through it. And it is difficult to have a meaningful conversation in room with a bunch of your colleagues. Our model this year is virtual, but with live 24/7 online support. And that adds value in a couple of ways.

The first one is, I can tell you for sure that I'm not the benefits decision-maker in my household. That would be Dr. Bloomberg. And when she is now able to watch the webinars and attend because it's virtual. And then second, if we have a question, we can chat it into the chat box and one of our talented Purple member services agents can answer it on the spot. And we are really bullish about that model. We've gotten tremendous feedback from employers that their folks are more engaged. We're seeing visits to our various learn sites up significantly. But unfortunately, we won't know exactly how that translates into new accounts until mid- to late January. But I think the -- you think about the whole funnel, the top couple of steps in the funnel we're pretty positive on. Steve, I don't know if you have any other thing -- anything to add on that?

Well, I mean, we have a little bit of a proxy in our tech sector. Businesses that were a little more out there for the last couple of years. And I would say, generally, Ted, that when we've been able to engage people this way, unfortunately, in previous years, it was more limited because kind of the thing they've been doing for 40 years, come sit in the cafeteria and talk to us, which is totally inefficient. It drives me crazy. But for the -- if you think about it, Ted, some of our employers, I'm not going to name them for obvious reasons, that are more techy and have been doing this for the last couple of years, we do have higher penetration adoption rates within those populations, approaching 50%, 60% in some cases, whereas the ones that have had less. And so it could be selection bias, right? Yes, they're more techy, they get this stuff faster and all that stuff, but I see -- I hope that what's happened in other sectors is now having more broadband. That's what I would have. But I tend to be an optimist. And that's why sometimes I run out of gas, as Ted told me earlier today.

To your point on efficiency, I know you increased your marketing spend a little this year, just to kind of get the momentum up. If this works like you think and we look ahead to next year, how big of a cost saver or kind of efficiency contributor could this be if you do say, maybe not 100% virtual, but something closer than you had done in the past?

Sure. I can take that. I think a couple of different answers. The first one is, it's a moderate savings. I mean, it's probably a 7-digit number, but not a massive 7-digit number. But we're trying to reinvest that back into the quality of the experience and the interaction and working really hard to show the types of results that Steve just alluded to with some of our early adopters to other clients, so that we get more partnerships through more access. And that's been working pretty well. One example is to be able to communicate thoughtfully with both existing account holders at an employer and also prospective account holders at an employer. And we've been able to demonstrate the effectiveness of that. So we've been able to partner with our employers to drive that further. And so we think that there is -- there are some modest cost efficiencies that we're excited to take, but what we're mostly trying to do is reinvest those into a better experience so people can engage more fully.

Yes. I mean I think that last point's really -- that's really important. At the end of the day, the purpose of pushing towards virtual education is not to save money here. It's to grow the business. And that's really what we're aiming at here.

Our next question comes from Sandy Draper with Truist Securities.

And just maybe the first one, I heard 2 different numbers. I heard Darcy mentioned maybe about $20 million of revenue impact from COVID. You could look at it that way, but I thought I heard Jon say something about $10 million this quarter. If I remember correctly, I think it was $16 million last quarter. I'm just trying to, one, sort of make sure I -- think about (inaudible) on...

The $10 million is x interest rate impact, the $20 million is inclusive of interest rate impact. That's all.

Okay. Okay, got it. That helps. And then -- and in that $10 million, is that comparable with the $16 million last quarter? So we should think about there actually was a little bit of a sequential improvement, but the guidance may reflect with spiking, that there may be -- that we may see some reversal of that?

Yes, I want to make sure we answer that correctly. So Darcy, you want to take that one?

Yes, that's correct. The $10 million and the $16 million are similar numbers, Sandy. That's correct.

It's difficult. We want to be -- when we're talking about this impact, we do want to be careful about it. We're trying to give you as accurate as we can, a sense of where the business would be in a more normal environment. And that's why we've kind of provided the detail of impact with regard to Commuter and most of that either number, most of that number is Commuter and spend. Spend came back a little bit, obviously, but frankly, not as far back as we would like it to. We got some benefits in other areas. Commuter obviously, has not sort of, it is where it is.

Got it. That's helpful. And then my follow-up is -- I can't remember what -- if you'd given guidance on when you think the integration expenses sort of wind down. Obviously, it's working. The model's working. You're converting on the technology platforms, the customer likes it. So it's clearly money well spent. But just trying to think about in terms of longer-term cash flow, when that number winds down.

Yes. So a very important question. I can take this one. We have committed, I think you'll recall, Sandy, from the -- actually, at the beginning, I think we said that we would have these expenses running through fiscal '23, but with the acceleration of synergies, it's also true that we are confident that this sort of carve-out for integration expense is going to end in fiscal '22. And the fiscal '22 number, in terms of aggregate, you can sort of do the math to get up to $100 million will be substantially lower than the fiscal '21. We are starting to wind this down. And the primary expenses in fiscal '22 are really around the actual kind of shutting down of platforms and the remaining migrations and that kind of thing, whereas in -- and then what's going to be left after that or with that, where the timing is a little uncertain, but we're going to operate as though we're going to get it done in '22, is that fiscal '22 is, there's some sort of residual shareholder litigation-related stuff and real estate stuff from the Wage side, that -- the timing of which is a little bit out of our hands. But have been included in the number that we've quoted in terms of cost all along. And if we can get those done in '22, great, if not, we'll think about how we want to kind of talk about those on the income statement. But there's not going to be a onetime integration adjustment on the income statement after fiscal '22.

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

Congrats on the quarter.

Thank you.

So Jon, I have a strategic question for you. You guys have done a raise. We've been talking about some assets out in the market. You've talked about a competitor buying a platform. Where are you on your M&A priorities? And how narrowly focused are we on the idea of buying books of business as opposed to maybe adjacencies?

It's a really good question. Thank you for asking. Let me first say that investors should understand that one of the things that has occurred this quarter in practices that we've added more gun powder to the depot or whatever the right metaphor is. You can show how much I know about gun powder. I don't know where you keep gun powder, right? I had a gun once, not anymore. I'm from Miami, everyone's got a gun, but not anymore. And so -- and so we're looking at nearly $300 million of cash on the balance sheet. Obviously, we're adding cash every quarter. And the ratio, the debt ratio is now well under control. And I think importantly, and I mean, there aren't that many businesses out there that I'm aware of that take some of these body blows with COVID and are delivering not just profits but good profits. I mean, we didn't -- I know I'm riffing a little bit. But there are a lot of companies out there that some of their profit is like, well, employees -- the health plan is -- has got a surplus, and we're taking that into income. We didn't do that. We rebated that to our employees in Q3. And I shouldn't even say employees, our teammates in Q3. And so bottom line is -- that's all to say that I think the opportunity we have is substantial.

The question that you're asking is how we're thinking about deployment of that ammo or gun powder or whatever. And let me say first that our primary focus remains on competitive assets. We are looking at those very carefully. So for example, the item I referenced in an earlier question about an asset that you and H bought. I mean, that's not an asset we needed and an asset that we would have had to look at that in terms of what does it add to the growth opportunity of the business, and they were looking at it a little differently in terms of being an alternative to a buy -- to a build. So that's something that we're not going to do. And even with portfolio assets, we have a model and we follow it and when it works, it works.

So I guess, I would say, generally, we remain focused on -- for significant deployment, we remain focused on competitive assets, particularly those that create real growth channels where there's relationships with third parties that we can see growing the business, where the employer business is relatively young so that there can be growth there, that kind of thing. We are looking at adjacencies, but we look at adjacencies from the following perspective.

One is in terms of strengthening the core. In the same way that we looked at Wage, right? So ultimately, our mission is to help consumers connect health and wealth. And as Steve commented, everyone's kind of got a high -- what we used to call a high deductible, everyone's got one of those now. And so really, we look at it in terms of how to serve that population well in any number of different ways. So we're not thinking about like, well, there's one leg of the stool, and then we need another leg of the school -- stool.

And then secondly, I would say, with regard to adjacencies, while we're comfortable with the idea that there may be some kind of tuck-in items that make a ton of sense, we're not throwing out the build option in those areas because, as you know, asset prices are what they are. They're pretty -- they're well elevated, and they're particularly elevated in some of these private market environments. So we're not -- we're certainly not shying away from the opportunity to build or partner in some of these areas, too. So I guess, that's a long way to say, our primary focus remains competitive assets. It's going to be competitive assets where we think we can really create value for our shareholders with the purchase. And we have a well-developed model to use that. We're going to use it. And then we are looking at adjacencies, but there are adjacencies that feed the core. And we're just as happy to build or partner as we are to buy something in those areas.

I'm exploring those adjacencies a little bit, I mean, you probably have a better view than we do as we benefit (inaudible).

I knew whatever I said, I was going to be asked about exploring. So it's a chocolate pudding, I would still get the same thing.

Jon, you could have gone on to those gun things for a while. I'd still be like, all right, cool. So the adjacencies -- but you've been talking about benefit managers, right? I mean you're in your selling season. So what sort of adjacencies are they looking to consolidate under 1 vendor?

It's really interesting. We just completed some research on this topic, and I'm not going to tell you all about it because some of the findings are ones that we want to remain proprietary. But what I will say is that, what's really interesting for me is, and I think hopeful for the business is that, employers -- it's 2 things. One is the drive -- it's interesting, there's a drive, obviously, for simplicity, along the lines that Steve talked about. And in addition to that, employers want -- they don't just want engagements, they want effective engagement. And I think that we're beginning to see a little bit of a discernment between like, okay, there's engagement on stuff, people expect us as employers to deliver. And then there's engagement on stuff that maybe they go elsewhere for it and we're not the natural place. And one thing people expect of their employers is the financial side of health care, right? They are buying their health insurance from employers, and they expect their employers to provide assistance in helping them navigate the financial side. And so I see that as a really interesting positive trend. And kind of maybe points the way a little bit to where we think about the product adjacencies being.

And importantly, that thought is not limited to their people in HSAs, right? Employers have begun to do the math, and they recognize at this point that the only distinction between an HSA plan and a comparable PPO plan is plan design. It's not out-of-pocket exposure, maybe a little different, right? But they want to get to the place where people are comfortable managing their portion of the cost responsibility for care. And they know they're not there yet. And they know that the solutions that are out there are not -- don't fully cut the mustard, and they continue to want to see more in that area.

Last year was yellow shots, and this year, it's guns. So, who knows? It could be trouble.

I forgot the worst thing, Jon.

Could be trouble.

Our next question comes from Don Hooker with KeyBanc.

One area that hasn't been touched on as you guys are -- and it does affect your P&L, I guess, negatively in the near term, but positive in the long term, is just to shift to investments. It's hard to discern the trend there. But clearly, it's because I know you're trading off empty accounts and you're cleaning up your HCA account base. But it looks like the percent of HSAs with investments is certainly up very sizably for several quarters in a row now. I'm just trying to think about how you -- is there a way to think about what that trend might look like going forward? Because obviously, in the near term, it would maybe hurt your P&L a little bit long term, obviously, it helps you. But near term, I just want to make sure kind of help us how to think about that.

Yes. I mean I'll answer and then invite Darcy or Tyson to speak further. But you have it exactly right. Invested assets -- I can't remember whether it's assets or account holders with investments, grew by 50% year-over-year, one or the other. And continue to grow, although there's still a very small percentage of total account holders. And for Greg's question from before, we are seeing, and frankly, we want to see our members invest. So I guess we don't spend a lot of time thinking about the short-term impact of that to the income statement. In fact, I'd say we spend no time thinking about it. We think about the long-term and the long-term is, investors are great customers. And they're great. And they're doing the right thing by themselves. There are people who, given their risk preferences and so forth, shouldn't be investing, and we have some great product options for them. But for most people, given the long-term nature of this product -- the long-term opportunities with the product, they should be investing. So that's kind of our overall mindset about it.

Darcy or Tyson, to add anything to that?

Yes. I'd like to add just 1 thing and then Tyson can jump in. When we went public, the percentage of HSAs that were investors was 2%, and that was pretty much an industry-wide statistic that was true for not only us, but for everybody out there. And I think that other people may have paid attention to this, but I think that the efforts of HealthEquity have actually grown this so that we are now up over 5%. And you go, well, that's still not that much. But you know what, every month, I look at that number. When we close the books, I look at that number and it grows every single month. And you're right, the first thing that has to happen is that they did it and they actually become an investor. Once they become an investor, then they start treating their HSA instead of as a spending account and into a savings account and a long-term retirement savings account. So it takes a long time, but it's what we've been about and will continue to do. And the P&L will follow accordingly, and we're in this for the long haul. And people should have more than $3,000 in their HSA. They just should. They should have more than $5,000. And they should have way more than that, because it will pay for their health care expenses for the rest of their life. And in retirement, when they'll have significant health care expenses, and you should be able to pay for those tax-free instead of pulling that money out of your K. I mean, I've pontificated on that numerous times.

But yes, we're going to stick that course and it will -- the accounts grow and the assets grow much faster than the other cash balances do.

Yes. The only 2 cents I would add is just when you see someone start to utilize investments, and I was talking to someone this morning about that. They really get what we're trying to do. And so when I think about this, based on my background, I think about this, is it is a little bit of an investment because you don't earn as much revenue from this. So maybe it's like offering free shipping or prime. But you know when people do that, and they're sort of hooked into this, right? And they get it. And by the time they've gone through the next 25 years of their life, they're going to have a significant amount of dollars in here to fend off the next pandemic or whatever it might be. It's a great savings tool to really create stability for someone in a financial way.

Our next question comes from Mark Marcon with Baird.

I'm wondering, can you talk a little bit about how you're thinking about calendar '21? I know what the normal cadence is in terms of giving guidance and fully appreciate the rate commentary. But just as we're in the middle of the sales season, what are some of the general things that people should think about and consider, with regards to how the selling season's going. You mentioned the cross-selling is going well. How should we think about like new logos? How should we think about the differences between large enterprises versus some of the small employers that are out there? And also, just from an asset composition, how should we think about that trend where people are getting it and shifting more and more of the assets to investments as opposed to cash? How would that end up impacting the cash balances as we go through the year?

So there was a lot in there. Darcy, you want to take a shot at this one?

Yes. I'll start with the last part and then maybe Tyson can gear up a little bit and talk about what we're thinking. And Jon, some of the things we've talked about as what we expect with respect to relationships and so on and so forth going into calendar '21. I know we have a list of some of those things.

And so with respect to the cash balances, I would note, Mark, that notwithstanding the fact that the investment balances have continued to grow. People are moving money from cash. But in spite of that, our cash balances are still growing. And that's just a tribute to the model of what this is all about. People, even investors, still maintain a cash balance. And they get there by contributing more than they spend, and they can grow it to a certain whatever balance they feel like they want to maintain in cash. And then put the rest of it into investments. And so we are very encouraged by both items. One, the amount of people that are getting and moving money into investments and starting to investment -- to invest, but also, we still continue to have positive growth in our cash balances. And that comes from contributions. It comes from them putting a little bit more aside every year than when they go through open enrollment. Generally, they have opportunity to tell their employer how much to take out of their paycheck, starting in January. And we see a big uplift in January and then it moves forward throughout the year. So that's how we really view this movement.

How accurately we can always predict about the movement from cash to investments? We obviously grow our investments a little bit faster than the cash, but we still anticipate cash balances will grow.

Hey Mark, I'm just going to -- so I -- since that was a long question, I want to make sure I give you a more direct answer. Is there a second part in there that Darcy didn't touch on?

No, he hit it, and I fully appreciate that the cash is continuing to grow and that we obviously want the investments to grow at a faster rate because that proves the long-term value. So fully appreciate both parts.

I think that the other question that I was referring to a little bit, and Jon, maybe you even want to talk about this longer term. We're not giving FY '22 guidance, obviously. But there are some things that we think about going forward. We think that we're going to still grow accounts. We think that we're going to still grow assets as we talked about. And at some time, we think that some -- this pandemic will be over, we don't know exactly when. But when it does, maybe the vaccine and people start coming back to work and that we see a little bit more, what we would call normality in our business, right?

Yes. I mean, look, I guess this is where we, I think, philosophically, Mark, is it's funny. I mean, we've had this pandemic, but if you look at what we said we were going to be focused on a year ago and what we are focused on, it's exactly the same things. And in truth, if you look at what we said, we'd be focused on, at the time of the WageWorks acquisition, or for that matter, at the time of the IPO, it's exactly the same thing. And that's because we have the same beef in the long-term opportunity in the business. And so what we are trying to do is rather than there are obviously things we could do and that maybe others are, maybe they're not, to try and chase around anything. Even -- we could be spending all day and night, trying to figure out well, what should we do with our commuter business? Well, the answer is, we should be ready when people are ready to come back to work. And if it turns out that at the end, 5% less come back to work, okay, fine, then we'll deal with that. But for the moment, the answer is we should be ready when 95% of them are ready to come back to work, right?

And similarly, with regard to rates, there was a lot of discussion, well, is there some change in the model, et cetera, et cetera, the answer is we should be focused on helping people grow their balances and on building strong relationships and diverse relationships with the places we can deploy those deposits, right? And that's what we've been doing. And the result of that, I'm kind of actually funny, as some of you know, Steve and his brother, David, have a history in the airline business. And one thing that I've heard from David in the past is that if you can make money as an airline when oil prices are skyrocketing, then you can do really -- if you can break even then, you can do real well when they're not. And I always feel that way about our business. If we can deliver -- we turned in 34% EBITDA margins last quarter. And that was despite really missing effectively, as we talked about an earlier question, $20 million of very high-margin revenue. And if we can be a good, strong, profitable business with improving customer metrics and all those kinds of things, in an environment like this, then we can be a great business in a better environment. And some people will dig that and some people will want to bet on what the next quarter is or isn't going to be like with regard to the pandemic. That's not a bet I know how to make, so I'm not making it.

And our next question comes from Allen Lutz with Bank of America.

Jon, I guess, given the lack of spending year-to-date, does the 4Q guide assume an elevated FSA spend versus normal years? Or is there a headwind expected from lockdown?

Yes. So we were very -- this is an area we were somewhat cautious, honestly, Allen. We -- and I probably should have just thrown it to Tyson, but since I started, I'll just keep going. Especially seeing the shutdown activity that's occurring and whatnot, we just don't know the answer. Normally, what we would expect is, as we talked about elsewhere, people got to use their balances. And notwithstanding the possibility of some relief along the line Steve talked about, one, that message may not get to everybody. And two, folks shouldn't be waiting around and hoping it happens. And as I said, we're doing our best there, but we do recognize that as of today, anyway, those of us in the Golden State and perhaps elsewhere are not making just casual trips to the doctor's office. We're just not. And so we've been somewhat cautious about that in our guidance. And so -- and I think that's appropriate. So that's kind of my answer. Tyson, do you want to elaborate on that at all? Now, I guess I will say one other thing, I'm sorry, and then I'll throw it to -- obviously in January, people's balances will get topped up just because they have contributions, their employers that contribute at the beginning of the year. And in the case of FSAs and the like, the balances are all available at the end of the year. So we are anticipating increased spending in January but nonetheless, we're remaining somewhat cautious relative to typical trends in light of -- and certainly relative to what's remaining in people's accounts for the current year in light of the current environment and the surge in cases and so forth.

I mean you -- that was the last point I was going to add is just January, obviously, when you think about that, there's a large amount of spend that occurs there. And of course, it's because people get topped up and they have use it or lose it. So I think the way that this works out, people have that muscle memory. They do that, that's used it or lose it, but still, given the unprecedented nature of the year, there's always a little bit of caution built in there about how that will play out and whether it will look like it has historically.

And then going back to the $10 million Commuter headwind, a couple of questions. What percent of the costs in that business are variable? And then I know that you're obviously not guiding to it, but just conceptually, what type of incremental margin would that business have if and when it comes back?

Yes. So thank you for asking that. The -- it's actually interesting. So that -- just first of all, you've got that $10 million includes Commuter and then some health care spend, but the Commuter is the biggest component of it. And the answer is surprisingly that it's a business where there's a material fixed cost component, and relative to our average gross margins, let's say, the incremental gross margins in this business are pretty high. And so it's -- I mean, they're not quite as high as custodial, but quite -- certainly, a majority of those dollars and a good majority flows down on the flip side as they come back, will flow down to the bottom line. Tyson, do you want to elaborate on that at all?

Yes. I just want to make sure we definitely don't provide those numbers because we don't want to create a segment in that business. And for -- fact of the matter is, we service it with our teammates across the Board, and we gain efficiency by that. So that's an important thing. So that's why we wouldn't necessarily throw out numbers, particularly to that. But I would say that as that business has declined. And I think we've shared a little bit the size of that relative to the business from a revenue perspective, it's about 10% or whatever. It has come down significantly, and we've taken costs out as that's come down relative to that decline.

And as Jon said, I think this is a place where we want to -- the business is still a good business. It still generates cash flow. We want to be in a position for when the market comes back, that we are the ones there ready to take on the business as it comes through. And I do think another positive is just that it's not like we haven't been able to sell this as part of the bundle, even though people aren't utilizing it. Companies still need to have this as part of the offering that they give to their employees. So I think there's been some success in selling this. And so there's potentially some upside when people come back, the fact that we actually have more customers who will have commuter because of that.

Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Jon Kessler for any closing remarks.

Thanks, everyone. Have safe and happy, but mostly safe holidays.

Thanks, everybody. See you. Bye.

Ladies and gentlemen, this concludes today's conference for today. Thank you for your participation. You may now disconnect.