Healthequity Inc (HQY) 2021 Q2 法說會逐字稿

Please go ahead.

Good afternoon, and welcome to HealthEquity's Second Quarter of Fiscal Year 2020 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 Chief Operating Officer.

Before I turn the call over to Jon, I have 3 important reminders to provide.

First, we reported our second quarter earnings after the market close this afternoon.

A copy of that -- today's press release and a recording of this webcast can be found on our Investor Relations website, which is ir.healthequity.com.

Second, our comments and responses to your questions today reflect management's view as of today, September 8, 2020, and will include forward-looking statements as defined by the SEC, which include predictions, expectations, estimates and other information that might be considered forward-looking.

There are many important factors relating to our business, which could affect the forward-looking statements made today.

These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from 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 our market price of our stock that are detailed in our annual report on Form 10-K and in 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.

Third, during this call, we will reference non-GAAP financial measures that are defined in our press release.

There, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

At the conclusion of our prepared remarks, we will turn the call over to the operator to provide instructions and to host our Q&A.

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

Thank you, Richard, nicely done.

Hello, everyone, and thanks first off to a really great effort by our teammates, we're able to deliver -- thanks to their effort, we're able to deliver to you a bit of sort of Purple normalcy today, Q2 financial results exceeding our expectations, faster progress on integration and profit margins and further indications of recovering activity and a strong selling season despite the ongoing pandemic.

I will discuss Q2 performance versus key metrics.

Ted will update on WageWorks integration.

And Tyson will be -- making his premier on these calls, will detail financial results.

And Darcy will cover our renewed full year guidance.

Steve is here to join in the Q&A.

So turning to key metrics.

Revenue of $176 million is 103% up year-over-year, reflecting organic growth and, of course, the addition of WageWorks, but tempered by lower custodial yields and our members' limited use of commuter benefits and health care cards in the midst of the pandemic.

We estimate that lower commuter benefits utilization and health care card spend reduced revenue by $16 million during the quarter.

And absent those impacts, that revenue would have risen 122% year-over-year.

Adjusted EBITDA of $60 million is up 48% year-over-year.

34% adjusted EBITDA margin is a sequential improvement despite the loss of high-margin revenue, and that reflects the team's realization of efficiencies, as Ted will discuss, as platform consolidation gets underway in earnest and our rapid response to changed circumstances.

We believe that the margin results really do speak directly to HealthEquity's long-term profit potential.

5.4 million HSAs and 12.5 million total accounts at quarter's end are plus 29% and plus 158% year-over-year.

Sequentially, HSAs are up slightly with 108,000 newly opened HSAs, a strong figure as many enrollments occurred during the darkest days of the pandemic.

New HSA openings were partially offset by closures in the context of migrating business from legacy WageWorks custodians to HealthEquity's platform, a process which is nearing its completion.

Growth of 0.2 million FSAs, HRAs and COBRA qualifiers is offset by the near-term loss of 0.5 million commuters.

Excluding the commuters, CDBs or consumer-directed benefits are up -- accounts are up 4%, and total accounts are up 2% sequentially over Q1, reflecting both a strong start to the sales year and the benefit of the extension of regulatory grace periods.

Last and certainly not least, HSA assets reached $12.2 billion, up 43% year-over-year.

$0.7 billion in sequential organic growth is the largest ever outside of a Q4 enrollment period.

And this growth in HSA assets is also net of approximately $125 million lost in the migration process from legacy WageWorks HSA platforms.

While invested asset values provided a tailwind, increased contributions from our employer associated members in response to HealthEquity's engagement and education efforts, combined with lower spend, really drove this remarkable outcome for our members.

The sales pipeline remains robust.

Overall win rates thus far are strong.

And as we have said, RFPs include total solution and cross-sell opportunities, making them more valuable.

As with baseball, it's a unique sales season.

Team Purple is getting at-bats.

It's improving its batting average and its slugging percentage, and that's good.

HealthEquity also continues to outpace HSA competitors.

According to Devenir's midyear market report released last week, the HSA market as a whole grew accounts by 12%, I think it was actually 11.6%, and assets by 19% for the year ended June 30.

As I just mentioned, we are reporting 29% account and 43% asset growth year-over-year as of the end of fiscal Q2.

Now that, of course, includes the WageWorks acquisition.

But organically, we were at 13% in accounts and 25% in assets, and that's better than the market.

And HealthEquity's total solution, market leadership and Purple service culture are the reasons for its continued outperformance.

On that positive note and with my quota of 1 summer sports [medicine force filled], here is Ted with detail on the status of WageWorks integration, its heightened pace and resulting long-term profit potential.

Ted?

Thank you, Jon.

We are excited today to report accelerated progress and to raise our goals for merger integration synergies.

This is due entirely to our team's remarkable performance despite the pandemic, and we could not be prouder of their efforts and focus during Q2.

Let me begin with an update on key integration metrics.

Recurring net synergies achieved as of the end of fiscal Q2 surpassed $50 million.

As a reminder, a year ago, we promised we would hit that number within 24 to 36 months.

We have migrated 7 duplicate platforms as of the end of Q2 against the goal of 10 migrations by fiscal year-end.

The completed migrations include 5,000 clients, 700,000 members and $1.2 billion of HSA assets moved with 96% of service fees retained.

We have invested a total of $55 million as of the end of Q2 to achieve these synergies and complete the integration.

Migrating all of our business to one go-forward operating platform will yield additional efficiencies beyond those already achieved.

We have said before that we would not report separately on integration efficiencies once that $50 million net synergy target has been reached.

However, platform consolidation continues to produce efficiencies.

So we are today raising our goal from $50 million to $80 million of recurring net synergies from the WageWorks acquisition.

We expect to achieve the additional $30 million within 18 months from today.

And to get there, we will invest at the high end of our previously stated $80 million to $100 million onetime integration expense range.

We will continue to report regularly on recurring net synergies achieved and onetime expenses incurred, as I have done today, until our raised target is met.

We believe that integration investment will also drive top line growth for years to come.

Jon talked about the emergence of total solution sales in our pipeline and wins through Q2.

Beyond sales themselves, integration increases the value HealthEquity can deliver and receive.

For example, the migration of more than $1 billion in HSA assets year-to-date from legacy custodians to HealthEquity enables us to deploy our proven member engagement capabilities to help people build HSA balances and give employers visibility to overall engagement process -- progress.

As integration continues, we will train these engagement resources on FSAs, for example, to drive members to use unspent balances, and as Jon mentioned, to COBRA, where we will help our members understand their available choices for staying covered.

Integration means delivering on our commitment to remarkable Purple service in everything we do.

Loyalty scores of WageWorks clients have risen throughout Q1 and Q2 in response to the consolidation of all service calls onshore completed as promised in June and the expansion of HealthEquity's voice of the client program to these clients.

Beyond integration itself, we continue to invest meaningful capital in the future of the HealthEquity platform, including a better client experience and interface, capacity for deeper data-driven engagement, faster innovation through a microservices infrastructure and enhanced security to keep up with emerging threats.

Despite the pandemic's near-term economic impact on our business, we have kept integration on course and are continuing to invest for the future.

These decisions have helped keep our team members energized as well.

Measures of team member engagement dramatically increased through the first half of the fiscal year.

Building Purple culture, while 97% of us continue to work from home, is an everyday challenge.

And we are fortunate to have leaders and teammates who are making it happen.

Speaking of leaders, I have the honor of the first handoff on one of these calls to Tyson Murdock, HealthEquity's newly minted deputy CFO, fellow father of 3, who -- and fellow father of 3, who will review the quarter's financial results in detail.

Tyson?

Thank you, Ted.

I will review our second 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 second quarter financial results, as you know, include the operations of WageWorks, which was acquired in Q3 of last year.

Second quarter revenue grew overall inorganically in each of our 3 categories.

Service revenue grew to $103.8 million, representing 59% of total revenue in the quarter and 295% year-over-year growth.

The increase is primarily attributable to 159% growth in average total accounts from acquisitions, including WageWorks and new sales.

As was discussed last quarter, service revenue, specifically commuter service revenue, was impacted by a large majority of our members working from home, as offices shut down in major U.S. cities.

As temporary benefit extensions expire and lay off shift to benefit-eligible workers, we are starting to see more COBRA qualifying events, which could partially offset commuter headwinds in the second half of this year.

Custodial revenue grew to $46.9 million in the second quarter, representing 27% of revenue in the quarter and 8% year-over-year growth.

The increase is primarily attributable to 31% growth in average HSA cash with yield and 41% growth in average HSA investments with yield year-over-year, partially offset by a lower annualized interest rate yield of 210 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 nearly completed migrating HSA assets and expect to complete additional migrations by the end of the fiscal year.

Interchange revenue grew to $25.3 million, representing 14% of total revenue in the quarter and 51% 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.

While we believe it will take some time before we see members reactivate commuter accounts, we are seeing health care markets provide more access for consumers as the economy reopens.

We believe many of the reimbursement accounts, FSAs and HRAs will accelerate their spend by the end of the year.

Gross profit reached $101.8 million compared to $58.4 million in the second quarter of last year.

Gross margin was 58% in the quarter versus 57% for the first quarter this year and 67% for the second quarter of last year.

Last year's premerger Q2 was a peak gross margin quarter in our history.

Beyond the change in revenue mix resulting from the WageWorks acquisition, gross margin was impacted in Q2 by the declining custodial cash yield, loss of high-margin interchange revenue and COVID-19-related expenses.

Operating expenses were $92.8 million or 53% of revenue, including amortization of acquired intangible assets and merger integration expenses, which together represented 17% of revenue.

Income from operations was $9 million.

We had a net loss for the second quarter of $0.1 million, which equates to $0.00 per share on a GAAP EPS basis.

Our non-GAAP net income was $30.1 million for the quarter compared to $28.8 million a year ago, a 5% increase.

Non-GAAP net income per share was $0.42 per share compared to $0.44 per share last year.

Adjusted EBITDA for the quarter increased 48% to $60 million.

And as Jon mentioned, adjusted EBITDA margin was 34%, up from 33% reported for the partially COVID-impacted first quarter.

So we increased margin on lower revenue quarter-over-quarter while operating through the full impact of COVID in the second quarter.

For the first 6 months of fiscal '21, revenue was $366.1 million, up 111% compared to the first 6 months of last year.

GAAP net income was $1.7 million or $0.02 per diluted share.

Non-GAAP net income was $60.9 million or $0.83 per diluted share.

And adjusted EBITDA was $123 million, up 55% from the prior year, resulting in 34% margin for the first half of this fiscal year.

On the balance sheet, as of July 31, 2020, we had $269 million in cash and cash equivalents, with $1 billion of term A debt outstanding and no outstanding amounts drawn on our line of credit.

The $287 million equity offering that we completed in July allowed us to reduce our term A debt with a $200 million debt repayment, lowering our debt-to-EBITDA ratio, resulting in a lower interest rate tier.

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

Darcy?

Thank you, Tyson.

As you know, due to the uncertain impact of the pandemic and its economic fallout at the time, in June, we withdrew guidance for full year fiscal 2021 and provided guidance for the second quarter only of fiscal 2021.

Second half results will depend on the pace of reopening and economic recovery.

However, based upon our second quarter operating results and the economic progress to date, we are resuming guidance for the full year fiscal year 2021.

Specific variables that 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 as associated distancing restrictions ease and their use of transit, parking and other commuter benefits as workplaces partially or fully reopen.

The modest pace of recovery in employment may negatively impact the number of our average total accounts, and conversely perhaps, spur uptake in COBRA and other benefit continuation products among current or new COBRA-eligible members.

Across these and other variables, there exist a wide range of possible outcomes for the remainder of fiscal 2021, resulting in a wider guidance range than we would otherwise provide.

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 $720 million and $730 million.

We expect our non-GAAP net income to be between $111 million and $119 million, resulting in non-GAAP diluted net income per share between $1.48 and $1.58 per share.

We expect HealthEquity's adjusted EBITDA to be between $226 million and $236 million for fiscal 2021.

Today's guidance includes the effect of having achieved the goal of $50 million in annualized run rate net synergies as of the end of the second quarter.

And as Ted discussed, we are increasing our estimate for net synergies to $80 million, expected to be achieved within the next 18 months.

Realization of synergies are expected to be additive to both the top line and bottom line in fiscal year 2021 and beyond.

We expect a yield of approximately 2.05% on HSA cash with yield during the full year 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%.

Our guidance includes a detailed reconciliation of GAAP to 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.

Thank you, Darcy and Ted, Tyson, nicely done.

You can rate Tyson on Yelp for his debut there.

Not the HealthEquity Yelp, just Tyson Yelp.

I'm sure there is one.

And again, I do want to thank not only our teammates but also our partner and -- our partners and clients and hundreds of HR professionals, thousands of HR professionals working in living rooms and kitchens across the country for their resiliency and focus during what was obviously an extremely unusual quarter.

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

Operator?

(Operator Instructions) Our first question comes from the line of Anne Samuel from JPMorgan.

Congrats on a nice quarter.

I had a question around -- you spoke to more COBRA qualifying events offsetting commuter in the quarter.

I was wondering maybe what that means about the employment backdrop and how you're thinking about that and if that's impacting asset growth at all.

Yes.

Well, it's a good question.

Thank you.

Appreciate it.

Just as a way of backdrop, COBRA generates pre-COVID -- or generated pre-COVID about $85 million a year in annual run rate.

70% of the fees come from employer contracts, 20% from premiums and about 10% from various activity.

And I said, by premiums, I mean, uptake of COBRA and then 10% from other activities, notices and the like.

So when the pandemic started in March and April, the job losses really did not have a material impact on COBRA.

We saw a short-lived spike in QEs around May 1. But many of those who lost jobs during that period weren't benefits-eligible or were in small businesses that are not required to offer COBRA.

And then of course, there were also furloughs, which is another way to say temporary benefits extensions.

And of course, our client base skews somewhat large with -- and also skews towards less affected industries, with only 7% of our total accounts, I should say, in exposed industries.

So what we've seen at the end of July and into August is a little different and a little bit of a greater impact as the slowdown really starts to resemble, as others have commented, a more typical demand-driven recession.

So our QEs in late July and into August are roughly 100% up year-over-year.

It sounds like a lot.

It's not a lot relative to the state of unemployment, but it's material.

And we've also seen a modest rise year-over-year in the percentage of those QEs that are uptaking qualified benefits.

And then lastly, you have the regulatory flexibility that the administration has offered in terms of COBRA deadlines.

It kind of muddies the waters a little bit, because employees have an undetermined amount of time to select COBRA.

So there may be people out there who have not uptaken, who will ultimately uptake.

So -- and then lastly, I'd say we have -- as employers have looked at this and said they wanted a comprehensive solution that provides the administrative excellence and compliance excellence, but also things like our stay covered and simply covered, which are public and then behind-the-wall efforts to help make sure that our COBRA members get and stay covered.

We have a very, very full COBRA sales pipeline.

So that's kind of where COBRA is.

And since we haven't really been through this before, we've been somewhat conservative in our thinking about this from a sort of forecast perspective.

But it is reasonable to believe that we will see some incremental benefit on the COBRA side over the course of the second half of the year.

As far as what that says about the general employment picture and/or the impact more broadly for our account business, I mean I think it says that, as I said at the beginning of the comment that this recession is starting to look like a regular, really not a pretty substantial recession, where you have reductions in demand and those reductions in demand produce efforts at cost-cutting on the part of employers, and we're seeing that.

I do think that in terms of our business and other businesses that are based on employment, that will provide a little bit more of a headwind perhaps going forward than it did in the second quarter.

And that's -- some of that conservatism is built into our guidance.

But obviously, COBRA provides some offset to that.

But in the big picture, I think, again, what I said is, if you recall, in June, on this topic, and I'm giving a longer answer than I wanted to, is that if we were getting out of the year with unemployment at a rate that was below 10%, that we could start thinking about this as a normal recession, and we're at 8.4% now.

So I'm thinking about it as a normal recession, and that will have some negatives that we'll ultimately turn into positives as the economy continues to recover.

That's really helpful.

And maybe just another one maybe on a more positive note, can you maybe provide some early comments around how the selling season has been going with the combination with Wage and how those conversations are going?

Yes.

I guess, generally, we feel like -- well, first, let me say, as Ted points out, this is our first pandemic.

So it's very hard for us to make realistic comparisons.

But when we ignore that and nonetheless make year-over-year comparisons to either the combined pro forma company or our own just experience as individuals in the marketplace, we feel very good about where we are.

We have -- as we've mentioned elsewhere, we have significant number of our existing clients that are in cross-sell discussions to add products or to add to get total solution.

And the total solution message has played very, very well from our perspective in terms of both as a reason to bring more RFPs to us as well as for those RFPs to be higher value.

So we'll see how it goes.

And again, it's a little bit hard to benchmark in light of COVID.

I mean as there are about -- this -- the feeling good is notwithstanding the fact that of all of the opportunities we see, about 1/3 are ultimately and have ultimately been deferred as a result of COVID.

But because we're seeing a lot and because we're winning a lot and because we're seeing a higher slugging percentage, that is when we win, these are valuable, we're feeling pretty optimistic about where we are as we head into sort of the home stretch of the sales season.

Our next question comes from the line of Greg Peters from Raymond James.

Tyson, you did a flawless job reading the script.

The only question I have is who wrote it.

Yes, Richard.

I -- can you help reconcile the account number data?

The HSAs, if I go sequentially from year-end, were 5.344 to 5.380 at the end of first quarter to 5.384.

And then the CDBs, we're going downward 7.437 to 7.338 to 7.090.

So for -- on the HSA numbers, I mean, you talk about organic growth, but -- and you talk about the success of new accounts, but the actual number is not increasing that much.

And then on CDBs, it's a downward trend.

So I'm just trying to get some sense directionally of what's going on there underneath the accounts.

Yes.

Why don't I start, and then I'm going to have Ted help me elaborate a little bit?

Let me start with the CDB side.

So as you say, and I'm just going to look at it quarter-over-quarter.

The main -- what basically we had was we had about 200,000 new non-HSA CDBs, offset by a loss of commuter accounts.

And the way our system works is that commuter accounts are accounted.

If they're not adding value, right, in a given -- for a given month, I should say, then we have not been including them in the account numbers.

And so obviously, you had a lot of people back in -- who added value at the beginning of March for April, right, but ceased doing so once it was clear that they were staying home.

And so that's what that reflects.

And so if I take that number out, as I said in the commentary, CDBs were actually up 4% quarter-over-quarter.

We don't control commuter or shutdowns or whatnot.

We'd rather people just be safe than report a better number.

So that's kind of what's going on there.

With regard to HSAs, we did have more closures this quarter.

And the reason primarily for that is that the bulk of our migrations occurred during the quarter and a process that's nearing completion.

And maybe I'll have Ted elaborate a little bit on the numbers as well as his thinking on the causes.

Sure.

Thanks, Jon.

Thanks, Greg.

The -- with respect to the closures that happened in HSAs kind of year-to-date, there's 2 things happening.

One is our standard close rate against the entire book, which is pretty low at around 1.5%, and that's very consistent with prior years.

Then on top of that, year-to-date, there are probably -- there have been approximately 90,000 migration-related closures, and that is really a combination of 3 factors.

One is accounts we didn't migrate, which means that they had 0 balances, they hadn't been active for a while, it didn't make sense to migrate them on to the platform.

The second is there's a fair number of duplicates, meaning someone had an HSA on a legacy Wage platform and legacy HealthEquity platform, and to increase their convenience and make their life easier, we consolidated them into one account.

And then the third is with any migration or integration, you don't expect a 100% retention.

We had some attrition that was spurred by the migration.

And those 3 factors in Q2 were about 60,000 accounts total and about 90,000 year-to-date.

So that kind of gives you a sense of sort of what's contributing to sort of more than our usual attrition rate, but I would say that relative to migrations we've experienced in the past, this is kind of right in line with our expectations.

Got it.

And the second question would be just around the revenue, the cash yields you're getting off of the HSA cash balances.

I think Tyson, you said 210 basis points in the second quarter.

Can you just give us an updated perspective on the cash yield?

Are you still -- given we're in easily a recession at this point, does that lessen the demand by banks for your cash deposits?

Is there still an expectation that you can get the 75 to 125 basis point spot over the 3-year jumbo CD rate, et cetera?

Darcy, you want to start that one and I'll offer any thoughts?

Sure.

So Greg, when we gave guidance for Q2 based on what we were seeing and what we were getting on yields at that point in time, we gave guidance to 210, and lo and behold, we came in at 210 for the quarter.

As we go through -- now as we look out for the remainder of the year, there is a little bit more uncertainty with respect to the rates out there, and it's really reliant upon what rates that we are able to place new money coming in, in December.

And so we've been fairly conservative on our forecasting of what that would be.

As rates have come down, there's 3 different things that kind of impact that overall yield.

One, as we migrate the remainder of the Wage assets, which have no yield today, on to -- adding assets on to our cash -- or HSA cash with yield, those will be at a lower rate.

And so -- but they're still better than the 0 rate they're getting today.

Secondly, the growth in cash balances, which has been fairly robust, at least in the quarter.

And if that continues, then that means more placements, which again would be at lower rates.

And then we've always said that there's a certain element of our HSA cash with yield that has a variable rate associated with that.

And those variable rates have even come down slightly in the quarter.

So we're being conservative.

With respect to the 75 to 125 premium that we've talked about in the past, we'll have to wait and see how that will play itself out.

There's a lot of things going on between now and the December placement cycle for those.

So we're trying to be conservative in our forecasting, but also acknowledging that there's some uncertainty in what those rates will ultimately be when new money is placed.

Jon, do you want to add anything to that?

No.

I think you covered the whole universe there.

Our next question comes from the line of Bob Jones from Goldman Sachs.

I guess maybe -- and Jon, you started touching on some of this in one of your previous responses.

But maybe just looking at EBITDA, both in the quarter and then in guidance, clearly, in the quarter, better than expectations.

So maybe just there, if you could share what kind of contribution maybe the net synergies had to the quarter?

Again, you guys have highlighted you're ahead of schedule, well ahead of schedule there.

And then if I just look at the kind of EBITDA versus the guidance, it does seem like it's calling for the back half at the midpoint to be down around $15 million versus the front half.

I'm just curious if that's kind of some of the things you already talked about or if there's other specific drivers you'd call out as you think about the back half versus the front half?

Yes, why don't -- I'll hit the second quarter.

And then, Tyson, why don't you talk about the back half of the year, if you wouldn't mind, as it relates to our guidance?

But during the second quarter, I mean, if you sort of look at the results relative to the guidance we offered at the end of Q1, we had about $6 million more revenue, and that was good.

And that was generally fairly high-margin revenue.

So obviously, that played a role in the EBITDA beat.

But then we beat EBITDA by more than that, and that really reflects -- and therefore, margin.

And that really reflects the benefits, which are more or less permanent of the -- it's not -- it's really accelerated realization of synergies and increased realization of synergies.

So those are good things.

Now as Tyson will say in a minute, we are certainly cognizant of the fact that we've asked our teammates to do extraordinary things in an extraordinary time.

And we've tried to reflect those in our things like bonus accruals and the like, and hopefully, we have.

But nonetheless, certainly feel like, especially given that there are COVID-related expenses and the like, really a good effort.

And I mean, I think if you go back, Bob, to the time of the transaction itself, one of the questions was, well, WageWorks doesn't look like that profitable business.

And our view was it can be if you start to run this thing on 1 platform instead of like 13.

And that's what we're doing.

And the great part is, a lot of that synergy is still to come.

If you -- the difference between 50 and 80 is really the difference between starting and finishing the job of platform consolidation.

And so we feel pretty good about the general view that we took at the outset that was when all is said and done that the ancillary side of the HSA business, which is what the CDBs are, is a profitable business.

And the fact that we were able to grow those accounts net of commuter by 4% over a quarter, I mean, is I think indicative of the opportunity that ultimately lies when all the dust clears to take market share from others on the CDB side, because we just have a more complete offering.

And so that's what we're going to trying to do.

Tyson, do you want to talk about the second half seasonality?

Perfect.

Bob, thanks for the question.

So what we're really looking forward to is a strong open enrollment season.

And given the business models, the one that we had and the one that we've now acquired and put together with ours and the migration from the different platforms and centralizing those to one platform, you'll see in these business that we lean in on expenses related to our servicing and being able to make sure we have a really good servicing season, especially with all the new customers and especially with them being on new platforms.

Ted and I've spent a lot of time and his team thinking about that and investing towards that.

And so that's one of the reasons why that's occurring, and you'll see that up in the cost of sales side.

The other thing is that we really continue to invest.

And you'll see, if you watch what we're doing, again, we're actually hiring quite a few people even in light of COVID and working from home, we're able to transition people into the business.

And also another item that we're investing in, you'll see on that as well, is that we're going to have a 100% virtual open enrollment season this year.

And so that's a pretty big investment in marketing.

But the thing about that is it actually leads to a lot of efficiencies going forward.

We wanted to do this for years and make this more virtual and not have to put people out in the field and offices, employers and things like that selling the concept of HSAs.

And so we're going to be able to do that virtually.

And we got a head start.

We started to make this investment a little early.

And then as we saw the pandemic kind of leading across the course of the second half of the year, we leaned in even more here to make that successful.

So we're looking forward to our marketing team having a successful open enrollment season.

And then I'd have to say too, just trying to put together guidance and putting out numbers so that people could follow what we're doing, there's a lot of uncertainty out there.

I know you've heard that probably in all these different calls.

But when you think about our business and what people are doing with the spend and other things, we want to make sure that we're really thoughtful about how we think that plays out.

And really what we've done is we've taken -- as you know, when we gave guidance for Q2, we took how things were kind of panning out in April and kind of rolled out [board in that] guidance.

And of course, now we've got more information coming off of Q2.

We've kind of rolled that run rate into the second half of the year, top line as well as in some of the expense areas.

And that's where we're able to land on some guidance that we could provide.

Our next question comes from the line of Donald Hooker from KeyBanc.

Great.

I just -- maybe you guys referenced this in your previous comment, but -- a little bit, but I wanted to see if I could expand on this.

We are in this virtual environment.

And is there a concern maybe for the people should bear in mind with regards to engaging and enrolling members in HSAs?

You referenced that in maybe a sentence in your last answer.

But just as we look forward, can you give us a little comfort as to what that enrollment -- you're adding members by getting them to aggressively invest and appropriately use our HSA?

I mean I think the answer is, Don, it's really more of an opportunity for us.

I mean one way we could have approached this is to say, "Okay, good, there's not going to be any travel.

Let's put that savings in our pocket and claim credit for some magic that we had done." And now that I say it, it's actually not the worst plan.

But actually what we did instead was looked at the work that Adam Hostetter and our marketing team have been doing over the last year or so in terms of -- 2 years really in terms of training some of the engagement that we do in the service experience on to the open enrollment experience and said, let's -- our clients are going to be willing to let us do more virtually here and do things that we wouldn't be able to do, and they're not only going to let us do it, they're going to see it as a service.

And so that's what we've done.

And so we've delivered both standard virtual open enrollment packages that are truly multimedia nature that include both live as well as prerecorded elements and mixed them together so that you can be looking at something that's prerecorded and then talk to somebody live, that kind of thing, as well as doing some more custom stuff for some of our clients around reaching team members, their team members.

And we see it not only as a great opportunity just in terms of the results this year, but also as a learning opportunity in an environment that is, in this respect, much freer than it otherwise would be to really figure out a little more about what's effective and what's not in driving people both to enroll as well as sort of setting the table for how they use the accounts themselves.

And so I think primarily, we're looking at it in terms of opportunity more so than risk.

We've never felt like the face-to-face, let's -- call them, open enrollment meetings where everyone's there and it's sort of like a benefits parade are terribly effective.

They can be effective to show who you are and your personality and that kind of thing.

But for one thing, the spouse who's often making these decisions isn't necessarily present.

And for another, there's a lot of information being thrown at people at one moment.

So our hope anyway is that we will have a more effective year, and our expectation is that we will learn a lot about how to use technology to make the open enrollment experience as effective as possible, both for us and for our clients and partners and ultimately, for the members themselves.

Our next question comes from the line of George Hill from Deutsche Bank.

Ted and Tyson, a fellow father of 3 here.

Jon, it sounded like some of the synergies that you discussed were revenue synergies as well as cost synergies.

So there's got to be more than the, I guess, the tech component that goes into this.

I guess, could you talk a little bit more about the top line synergy?

And then I guess I'd ask how we should think about this $30 million step-up in gross versus net?

Is there any of that you think needs to be reinvested back in the business?

Or will most of it hit the pretax line?

Yes.

I'll start on this one, and then I may ask for some help from the team.

First of all, on the top line, if you look at our original estimate of $50 million in synergies, it included about $27 million on the top line.

And that number had really kind of, let's say, 2 components.

One was about interchange, in particular interchange rate, which we have achieved entirely, notwithstanding the fact that people are spending less.

We -- the number was -- we overachieved on the rate and therefore have achieved the actual number.

And obviously, as spending picks up, we'll continue to get the benefit of that.

And then the second revenue -- and I'm using the term revenue synergy here to mean kind of not like selling more, but the kinds of things that are normally associated with near-term predictable synergies.

The second area of synergy that we anticipated was in the migration of assets from legacy WageWorks custodial partner platforms where they were not earning interest or where the interest was suboptimal relative to what we could generate on the HealthEquity platform.

And in that area, it's a little bit similar in the sense that we've been able to do a little better, but the underlying interest rate environment, obviously, has deteriorated substantially since then.

And so I'm not as happy with that one as I would be, and you'd sort of expect that.

So -- and of course, some improvements on the cost side have more than made up for any shortfall there on the interest side.

So -- and we're not quite done yet with the migrations.

We still have some room to go.

And a lot of the assets that are yet to be migrated were earning nothing for us in the legacy custodial arrangement.

So anything is better than nothing.

And so that's kind of the way I think about that one.

The second half of your question, which was about the remaining incremental synergy and reinvestment in the business.

Let me say -- let me use the question -- let me make it a more general question and comment on it.

I think a more general question might be, look, the business is clearly generating a decent level of profitability, notwithstanding a very difficult revenue environment.

So do you feel like there are opportunities to invest in the business in order to spur top line growth?

And a couple of thoughts there.

First -- and I'm sure you and others have the same challenge, right, since there are so many pieces moving at once with both COVID and an integration happening, it's -- that does muddy the picture a little bit, and our reaction to that is to be cautious in anything we do, just recognizing that the signals are imperfect and the fact that time is kind of on our side.

These items will work themselves out.

And our business is not one where -- if something was an opportunity this quarter, it will be an opportunity next quarter and the quarter after that.

The second point is that -- the short answer is yes.

That is to say that while we feel like the business we've built will be a strong organic grower as this all clears away, nonetheless, it's also, in our view, an incredible platform with both option value in terms of things like rates can go up and the like, but also I think opportunity to expand both from a reach perspective as well as from a portfolio -- product portfolio perspective.

So those are things that we are as we're getting a little bit of distance from the pandemic and a little bit of distance from the initial component of integration that we're beginning to explore very seriously, and those are areas where we would reinvest in the business.

And then I would just say, lastly, we are, again, mindful of the fact that there are certain things this year that won't repeat themselves that have produced efficiency and then certain things that are costs that, hopefully, won't repeat themselves either.

Obviously, there is no travel happening.

I'm talking to you from my living room floor that would not be typical.

But -- and you're probably listening from your living room.

And -- but -- so travel costs will return in some form, though perhaps not at the same level as they used to be as we've identified efficiencies.

But it's also true that costs we're incurring right now will not be there either.

So I guess that's sort of the way I think about it.

I guess the big picture answer is that while we will be cautious, as long as these signals are a little bit -- as long as there are a lot of signals we're trying to read, it's also true that we are very definitely looking at this and saying, "Hey, we're ahead of pace in terms of proving that we've built a profitable business, so let's be ahead of pace in thinking about how those profits will be reinvested beyond repayment of our outstanding debts and that kind of thing.

Jon, this is Darcy.

I was just going to add one thing for George.

George, when you mentioned revenue synergies versus cost synergies, I wanted to just clarify that when we spoke and continue to speak about revenue synergies, those are primarily related to uplift that we get from custodial revenue and some interchange revenue that are more contractual and moving things onto platforms.

What it does not include is real revenue synergy that you get from cross-selling and uplift by selling a bundled product versus a single product before.

Those were not previously nor are they now included in that synergy number.

So that would be additive on top of what we've already described here.

I mean from my perspective, as long as the health care consumer continues to need help, there's going to continue to be opportunity for us.

And I don't think any of us would look at it and say that the health care consumers' needs are being fully met.

Our next question comes from the line of Sandy Draper from Truist Securities.

Truist Securities.

Here we go.

I'll join in as another fellow father of 3. So the club is getting bigger.

So I guess my first question just on the commuter accounts, I think as you said, 500,000 that had been deactivated.

Those don't have to be -- I'm just trying to be clear, they don't have to be resold at some point when the economy reopens?

They just get turned back on?

Or do you actually have to resell to the employer?

No, they're not resold to the employer.

They are open for enrollment, and they remain open for enrollment.

We will do member communications around both ways they can use the accounts even when they're stuck at home and then of course as employers do return to work, we have some messaging and the like that they can use.

But no, they're not -- a way to think about it is we're still getting monthly enrollment feeds and the like from these employers.

It's just, obviously, people are not adding value, and that's understandable.

Okay.

Great.

That's helpful.

And my second question, you obviously did a very nice job on the margins, as mentioned before, better than expected.

You also mentioned there's -- you estimated about a $16 million revenue impact from COVID.

How should we think about what the incremental degradation of margins was from that?

Just to think as that business comes back on, how much of that can flow through to EBITDA versus you have to start bringing costs back on as that revenue comes back on?

Darcy or Tyson, you want to -- Tyson, why don't you get that one?

Sure.

With regards to commuters specifically, Sandy, that business -- it's a nice, high-margin business.

And so the drop of that revenue -- there's some variable costs in there that, of course, we've gone and found and taken out relative to those -- that particular servicing of those customers.

But in the long run, yes, when that comes back, that revenue will drop down at a pretty high margin.

The other thing I would mention, too, is that even though part of that business is shut down, people aren't using it.

When it does come back, we've still been selling it as part of the bundle as well.

So we've been putting new clients on there, too, that will also help margin.

And the same is true for -- when you think about spend coming back as well that's just the spend relative to their cost of the processing that's done by the issuing bank and the processor.

And so that margin, again, is a very high-margin that falls to the bottom line.

So those are kind of -- those are -- those will be some benefits, hopefully, that will happen when we get turned around as an economy.

Okay.

Great.

That's really helpful.

And then maybe the last question...

This is Darcy.

Just let me add one thing for what Tyson just said.

So relative to the expectations, yes, we lost that revenue, and we came through with some pretty good margin.

The margin related to that lost revenue was offset to a fairly significant degree by the efficiencies that we gained through this whole process.

So when Ted and Tyson were talking about the acceleration of just synergies and how much we were able to get done, that was a great offset to help mitigate that $16 million loss in revenue.

Okay.

Yes, that makes a lot of sense.

And I guess maybe my last question, probably for Jon.

When I think about the consumer employee, it's pretty -- would be pretty atypical to make a lot of benefit changes around HSA contributions within the course of the year.

So we've seen the numbers hold up pretty well.

But do you have any -- going back any data from -- in recessionary periods where -- do people tend to change in the following year -- benefit year where it's like enrollment, like, oh, I'm going to -- I've got a pretty good balance.

I didn't spend a lot this year, so next year I'm just going to -- I'm going to reduce my number or once people set it even in recessionary environments, they tend to leave the level of contribution the same.

Yes.

I mean there's actually -- let me say, the last recession was long enough ago that there wasn't a ton of HSA data out there, but there has been some analytic work on this, and the nature of the question that was asked is, do people behave with regard to their HSAs in a similar manner that they behave with regard to other savings vehicles during recessions?

And I mean the short answer is yes.

And what that means is that, in general, what you actually see, and this is a little bit counterintuitive, is that -- but it's a very well established pattern, is that people actually increase their percentage of their income that is generating savings.

So on the one hand, obviously, you have some people who don't have income, right, but among those who are associated with employers, obviously, in our world, they all have income.

So they will increase.

And in fact, if you look at the underlying macro data, you can see that since -- so if you go back to February before the pandemic started, the national savings rate was about 8.5%, meaning about 8.5% of disposable income was put in savings.

And in July, which I still -- I don't think we have the August numbers out yet, at least I haven't seen them.

That figure was closer to 12%.

And again, that just reflects that behavior.

We obviously saw that in the fact that contributions came up over the course of the second quarter and also that people didn't react to the fact that they weren't spending by not -- they didn't stop their contributions because they weren't spending.

So I guess my short answer is, no, that won't continue forever.

As the economy improves, I expect that you will not see people keep doing that, but we're going to try and take advantage of it and use it as a teachable moment during this period of time and, hopefully, that will benefit us for the long term.

So that's the member side.

And I wasn't sure if you were asking about the employer side as well, but...

Yes, no, primarily focused on the member side.

So that was really helpful.

That's what we see so far.

And I think pretty -- it's -- I don't think it's the case based on the member activity that we see that it's like, oh, people set it, and they're not thinking about it.

I mean everyone is thinking about their dollars and cents.

But I think, fortunately, they are thinking about how do I put a few more away, and we're a good place to put them away.

Our next question comes from the line of David Larsen from Verity.

Can you talk a little bit about the trend in interchange revenue sequentially?

It's my understanding that that's tied to medical volume and medical visits.

And when you look at all these various charts and you listen to, like, the publicly traded hospitals, they're saying volumes are back up like 85%, 95% of pre-COVID levels.

The polling in interchange revenue was a little bit more severe than we had been modeling.

Just -- what's the -- how do I reconcile that?

Are we going to see a pop back up in interchange revenue?

Is there like a 90-day lag or something like that?

Any thoughts there would be very helpful.

Yes.

I have seen some of those data, and I think that really -- I'd say 2 things.

One is, I think that you're seeing more spend pull-through among procedures that were truly delayed and truly had to happen.

So hospitalizations for necessary surgeries and that kind of thing and definitely among the Medicare population.

That's not our world.

Our -- the spend that you get is a little different here.

So let me kind of go through a few of the details and, hopefully, this is helpful.

Let's -- if you look at it kind of sequentially, right, you had a $6.5 million decline in interchange fees.

And let's break that out.

FSA/HRA was down the largest, about $3 million quarter-over-quarter, and that is a definite reflection of the fact that the sort of core spend on doctors' visits and the like, which is really where most of those dollars come from, has been -- as well as more I'm not going to call an elective, but elective-ish-type items, has been much lower than the stuff that's really necessary basically due to limited access.

It's also true that seasonally, the first quarter is a very strong quarter because there are folks who elect money into their FSA solely for a particular procedure.

And if they got that procedure done in January, February or March, it's like their whole year, they're done.

HSA was down about 2-point -- and I should say it before I leave FSA, we're still trailing -- even into August, we're still trailing on a month -- on a year-over-year basis where we were a year ago, although the trends have improved pretty steadily since the lows in April.

HSA for the quarter was down about $2.5 million in interchange.

HSA is -- was a little less affected from the start and has been quicker to return to pretty much near, I'm going to call it, normal as of the end of the quarter.

So we're not quite back to where we would have thought we would be, but pretty close.

And certainly, we're back positive on a year-over-year basis.

So -- and then commuter has not been good.

So commuter has about $1 million of interchange per month -- I'm sorry, generally and, obviously, was negatively impacted during the quarter, more so, obviously, as the quarter ended with some folks sort of spending down their balances and the like.

But we don't really see a change in sight there at this point until people really begin to come back to work in the cities, the commuter interchange is going to be modest.

So that's sort of the detail of it.

But the big picture, I think, relative to what you're seeing from, let's say, the hospitals or the like is that their high-ticket items are things that are truly necessary, for lack of a better -- I'm trying not to use the word voluntary, that's not fair, but -- or involuntary, but they're truly necessary, and they have some urgency to it.

That's not where this spend comes from for the most part and so that's why we're not seeing it quite to the same degree.

Okay.

That's very helpful.

And then just one more quick one.

Within service revenue, it was my understanding that the commuter sort of revenue impact was about $7 million a month within the service line item.

And if we assume, hey, there was like a $7 million headwind in fiscal 1Q, which might be, say, all of April, then if we say, okay, all of May, June and July, there was a commuter [ding] of $21 million, assuming it's $7 million a month, the decline in service revenue was not as severe as I would have expected.

It was maybe about $8 million sequentially.

Just any thoughts there would be very helpful.

Yes.

I'll talk and then ask Tyson to elaborate where I've screwed it up or not.

But commuter generates on the service fee side about $5 million a month in service fees and then another $1 million a month in interchange as I just discussed.

So a little bit less than the premise of your question.

And of that, more than 50% is gone, but there is some that does remain.

And that remains either because there is actual activity, people are ordering passes, et cetera, et cetera, but also, in some cases, just the nature of the billing arrangement, depending on which of the legacy platforms that was on, is such that there's some continuation now.

So that's why it isn't quite as bad as you're suggesting.

Tyson, do you want to elaborate on that at all?

I'll just say a few things.

I think you pretty much nailed it.

It is -- when we think about that and trying to forecast what that looks like and going back in time to, say, February and seeing what commuter looked like at that point, I think Jon gave you the numbers on a month-by-month basis, but that's largely fallen off to the tune of plus -- 50-plus percent with that kind of that underlying platform that helps us as we go forward.

So we've looked at that, we looked at the trend in July and we've essentially taken that trend out through the end of the year.

But I mean you're right to say that of the $16 million we think we didn't get in the quarter, the lion's share of that is commuter.

Our next question comes from the line of Stephanie Davis from SVB Leerink.

Congrats on the quarter and a double congrats to Tyson for taking the seat officially.

Thank you.

For Steve, he's been pretty quiet in this call.

So I'm going to have the first part of my question just be towards him.

So with the election coming up, how should we think about the impact, if any, of a change in administration?

And how would you pivot your lobbying, Steve?

Thanks, Stephanie.

Thanks for bringing me into the fray here.

Never heard you be so quiet.

Well, Jon is the maestro here, so I'm just waiting for him to [turn me about], but you did it in his place, so thank you.

Look, I mean, I think the good news is that this even predates the acquisition, but certainly, the acquisition led us down this road that we really do have a bipartisan effort.

I mean if you think about the span of products we offer, I mean, many of these predate HSAs, for example.

And so we've had a very aggressive lobbying effort to protect employee sponsored -- employer sponsored benefits and pretax benefits for employees for a very long time.

And honestly, I think that, independent of how the election goes, we're going to continue that.

And you might have some nuanced approaches depending on what would happen in the election.

But the reality is that people just need help.

They need to avoid taxes.

They need to save for retirement.

They need to save for their current health care spending.

And our suite of products allows us to do that.

And so we've got a great team both in-house and then an outsourced team that we use to kind of look after each of these needs.

And so I guess the short answer is, definitely, it's more of the same.

I mean we need -- even right now -- thankfully, Congress is back to work this week.

So they should be thinking right now about COBRA subsidy because if unemployment is over 8%, there's a lot of folks out there that need help with COBRA subsidies, and so we've been pushing for that.

We have been pleased with some of the things that have come out of the CARES Act, but we think there's more meat on the promise.

So we're going to keep going after this stuff.

And I really don't -- I almost think it's administration independent.

I mean you may have different nuances, like I said, but we're going to keep going after it.

Okay.

Understood.

That makes sense.

Now on pivoting gears a little bit maybe to Tyson.

I look at the new revenue growth guidance.

It looks like it could reflect up to a marginal decline in organic revenue growth despite what's been a relatively healthy year-to-date performance, all things considered.

So how much of this is conservative in the outlook as you guys do assume the pandemic continuing as opposed to maybe some other puts and takes?

As I was outlining before, Stephanie, the way we looked at this for Q2 guidance when we pulled the annual guidance into Q2, we looked at how April shook out kind of put that forward, the same thing is true with regards to this quarter on each one of the trends and the line items.

We looked at what those look like, and really the story there is about spend and interchange, which we've been talking a lot about on this call, which is the right place for people, I think, to be focused in that we want to be able to see that come back, but we're definitely not going to build in a massive comeback in the second half of the year until we see it.

It's just there's -- with the regulatory changes on extending FSAs out to a longer period of time and some of those other things, which have allowed people to potentially hold on to that money a little longer than they would have before, we've got to see some things break free in order to build that in.

And so I would say that's kind of the one area that you might notice that in as you look out.

And then with regards to custodial, that's pretty consistent other than the migrations that we're completing, the money we're putting to work.

And I think we've been pretty transparent about that in the releases.

And then, of course, the service fee revenue comments that we just answered as well.

I don't know, Darcy, is there anything you want to add to that?

No.

All right.

Is the same assumption as well for the synergy target time line, just given it's a lot slower than what you guys have accomplished so far, just some conservatism, a lot of moving pieces?

Yes, I can maybe speak to that one and then Ted, you can elaborate.

The work we have to do is a little harder, right?

Obviously, you -- by definition, when you find stuff later on, it tends to be a little more work.

So the way to think about it is that the timing really boils down to the timing in which we will be completing the process of getting to one platform that the entire business is operating on, no more legacy, this, that, whatever.

And that process will extend out through not this January, but next January by virtue of the fact that in some cases, it does make sense to convert people at your end.

We're not going to give out the details of the timing because as we found out, some of our competitors choose to use that information to market against us, but that's okay.

But that's -- really what that timing reflects is the amount of time it will take to get that all done.

Will we try and front load?

Of course, we'll try and front load.

So Ted, is there anything you want to add to that?

I kind of went longer than I thought l was going to, so maybe there is -- but Ted, anything to add to that?

He's on mute.

Sorry, guys.

Thanks.

As you said, you have a chance.

The order of the work and that -- mix of a little dose of trying to find timing that accommodates as many of our clients as possible with a dash of typical political conservatism gets you to that time line.

Love that conservatism.

I like how Stephanie didn't trust me to like throw the question.

She's like, screw that, I'm going to take control of the questions rather.

Well done.

Our next question comes from the line of Mark Marcon from Baird.

And Tyson, great job.

Just with regards to the platform migrations, how many have been accomplished thus far out of the wage set?

Ted?

So -- yes.

Sure.

It's 7 through the end of Q2, which I know, if you read the press release, it says 5. But the correct answer is 7, and we're on track to deliver at least 10 by year-end.

Okay.

Great.

And in terms of thinking about -- so 10 by year-end, is the incremental $30 million in savings all going to be from those platform migrations?

Or is there anything else that's factored in?

That's the biggest source.

Ted, do you want to comment beyond that?

Yes.

Sure.

Thanks, Jon.

It is absolutely the biggest source, not just of those 10, but of the ones that follow.

The significant proportion of that remaining $30 million is from those platform consolidation.

There are a few other payment things that are similar in nature, but not in scope to the Visa deal that we're working through as well, which we think will be a contributor, but the big ones are the efficiencies we realized from the platform consolidation.

Great.

And then can you talk a little bit about this fall selling season just in terms of what you think the attitude of employers is going to be particularly as it relates to being more aggressive in terms of adopting consumer-directed health care benefits as potentially a budget savings tool and how they're going to approach it this year relative to years past where the unemployment rate was so low that they were afraid of tipping the applecart?

Steve, why don't you start us off on this one?

Sure, Mark.

Yes.

So I mean, this is a little bit like 2008.

I mean we saw it then where you had -- I mean life is a lot easier for someone that leads human resources or what we would say in HealthEquity land, the people team, if they can offer choice, right, and say, look, we'll give you all these choices.

And I think that they love to do that, but the problem with choice is oftentimes you have this weird shift in risk pools where maybe the healthy people go for the HSAs and then the unhealthy people stick in the traditional plan and pretty soon your plans hemorrhaging cash.

And so there was a little bit of talk when unemployment was around 2%.

They were like, well, maybe we'll keep going down this road of choice.

We haven't heard that much at all in the last 6 months.

We're hearing more, how do we continue to get the best benefit for the best price for our teammates as we would say in HealthEquity land or employees.

And so the bottom line is that -- our sense is that when employers take a step back and say, how can we save money on taxes?

That's what the HSA does, both on the employer and the employee side, of course.

And then how can we help our folks save for the short term and avoid taxes for the short-term spend on health care and save for the long term?

There's just no better solution.

And sure, when the economy is racing hot and you're really in a competitive job market and maybe an educated target that you want to hire is saying, I really want my fully loaded, low-deductible plan, maybe you're more inclined offer choice, but that's gone for a little while.

And so our sense is that more than ever, the employers are asking us to -- I was just -- a really remarkable call I was on with a very large hospital system, have never offered HSAs ever before.

And now, not only are they doing it, they're doing like 50 webinars, have their employees, in particular, their doctors and their higher comp people realize that this is the richest benefit they can really offer.

If they do an appropriate plan design with an appropriate contribution to the account, there is no richer benefit you can offer in the HSA plan.

And so they're getting it.

And the reason why it still leads to savings is because of the tax code, which is pretty remarkable.

So I don't know, I remain bullish on it.

I think every decade we need a little kick in the gut to make us realize that this really is a truly remarkable benefit.

That's great to hear.

Yes.

I mean I'd just add to -- obviously, the focus of the question and the answer is on the HSAs.

On the [CDB] side, I think we have a lot to offer in this kind of economy.

For employers, first of all, let's start with the one piece, which is COBRA.

As I said, in the -- I think Greg Peters referred to a script.

I didn't even know you could script these things.

That's a great idea.

Sorry, that was a poor joke.

But I don't know what you're talking about really scripting.

But employers -- compliance is extremely important.

It's also important to serve people well out the door.

Those people are going to talk about you and how you serve them, and they are potentially your customers or partners in their new role.

So really trying to take care of people well on the way out the door for the same price as not feels like a really good thing.

And that's what we're offering there and that's why we have a robust pipeline there.

I think if you look at the other CDBs also, though, these are about saving money on stuff that you are going to buy.

And especially with OTC available now for the flexible spending accounts and the like, there's a lot to offer there.

And I think as a penny-saving device in a time when people are really counting their pennies, that's something we can take more advantage of both in the current cycle and then over time.

So look, it's a weird cycle market.

It's very -- again, we have no benchmarks for this.

As Ted says, this is our first pandemic.

And so I like that line so much I have used it twice.

But if I look at where we were at the start of this thing and where I see my fellow folks who sell into B2B-type environments and then ultimately consumers, we have to feel really good about the demand we have and about how that will play out both this year, but I think also into next year and the following years when we're not talking about a pandemic.

Terrific.

Can I squeeze one last one?

Just from a competitive perspective, what do you...

Since Peters only did an A and a B, I mean, there's a ton of time.

Can you just talk a little bit about the competition just in terms of how you expect them to respond to 2 dynamics: one, you having a greater level of capabilities and, therefore, having more to offer to potential clients; and B, the interest rates being lower and, therefore, they may not have as much flexibility in terms of account fees.

Yes.

I mean we -- look, let's take a step even beyond those questions.

We are in a consolidating market.

And whatever the specific facts of an industry are, it's often the case that the downward economic pressure accelerates consolidation.

And if you look at the Devenir figures that came out in the last few weeks, I don't think they publicly published their lead tables, but I can say here that we are #1 in accounts, and we're -- based on the numbers we've reported today, we're damn close to being #1 in assets.

And so we think that there is an opportunity there.

That doesn't mean that competitors won't play their own games, but -- and we'll talk about that in a second.

But absolutely, it's the case that if the folks who have been kind of hurt the most are folks who are the most reliant on net interest margin for their source of income and/or profit.

So the typical HSA provider, more than 50% of revenue, not profit, revenue comes from net interest margin, which, by its definition, net interest margin is 100% profit.

So that -- the absence of net interest margin can kind of be a problem.

And we're, I guess, in the vein of sort of like the Madagascar penguins and other plan perfectly executed.

We're in a position where we altered our pricing strategy to put less emphasis on balances and more emphasis on employers working with us and partnering with us for the total solution.

That's the way to get to get competitive fees.

And that turns out to have been a well-timed shift and something that's kind of working for us in the current situation.

Others don't have that flexibility either because they don't have those other products, or if they do have them, they're essentially just outsourced platforms and this, that, whatever.

All the economics are really going to a third party.

And so it's hard to -- you're not really getting any margin benefit by selling them.

So that's kind of the underlying dynamic.

As I said, I think we have some competitors that are very solid that will have their own game plans.

Fidelity, it's pretty clear.

Their game plan is to focus on high balance accounts.

And that's what I would do if I were them, too.

And they're going to be effective at that.

That's great.

That gives us a lot of new partners to work with, as you know.

Optum and United, they'll do their thing.

And we'll have some effectiveness at that.

And then you know where some of the other competitors are.

So -- but I really believe fundamentally that this is a market that we will look at over the course of the next 5, 6, 7 years and that HealthEquity will have continued to grow market share steadily in a market that will continue to grow with HSAs themselves maturing in terms of balance growth and with us continuing on the CDB side, on the ancillary side to take market share from weaker competitors who just cannot offer from a capital intensity perspective the same level of service or benefit that we can provide to both members and the clients.

So that's kind of my rough version of that one.

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

So before Wage, you guys talked for several years that service fees would decline by about 5% to 10% per year.

So now we're about a year into the Wage acquisition.

How should we think about that line item moving forward?

Darcy, do you want to hit this one?

Sure.

So when we talked about the 5% to 10% decrease, that was primarily on a per-HSA basis.

And so I kind of took into account the issue that we had with respect to HSAs that we were giving volume discounts for more HSAs, and that played itself out for quite some time, and it actually still continues to be true on just a peer HSA pricing for service revenue, but that's probably still the range that we would expect.

As we've made Wage acquisition, we've kind of transitioned to looking at the service revenue on a total account -- total average accounts basis.

And so we're monitoring that as we go.

We think over time that they actually will flatten out or even actually go up when -- it's hard to tell exactly because our pricing model now will offer bundled services.

And so the bundle is kind of like, well, if you buy HSAs on a stand-alone basis, you get this price, but if you bundle it all together with some FSAs and some co-brand commuter, then we'll kind of give them a blended price.

So we're looking at really how does this service revenue relate to the total offering that we are offering.

And we don't have any specific guidance as to a percentage increase or decrease, but we do believe that over time because we offer all of these services that competitively we have a lot more flexibility with respect to our offering and to win competitively.

As Jon and Ted say, get more at-bats and to hit more extra base hits.

And so that's kind of how we look at it from a per-total accounts basis and how we'll measure it going forward.

And then for my follow-up, there was an article out that Devenir put out last week talking about custodial rates for vendors what they were paying out to holders of HSAs basically that they declined from mid-25 or mid-20 basis points to below 10 basis points.

Is that something that you've seen in your book of business?

And can you kind of elaborate on that?

Yes.

We reported in the quarter that we paid out -- I think we reported this, not that I'm reporting it now, is that we paid out at about, I want to say, 19 basis points in the quarter, which was down a little bit.

In our case -- and down a little bit from the low 20s, something like that.

And in our case, we approach this, I think, in a somewhat unusual or unique way in that the rates we pay our members are really a function of -- they're actually outlined in our depository agreements -- I'm sorry, our custodial agreements, and they really are a function of what our largest competitors are doing, and we've committed to follow them in whatever direction they take.

But we think that's useful in that it -- from our perspective, it means that we're committing to our clients that we will always be in market in this regard.

And that's the way we've approached it.

And that has resulted in a bit of a decline, and that certainly is helpful from a margin perspective, but it's not a huge decline.

And importantly, we offer our members other options.

So for example, we are, if not the only one from among relatively few HSA providers that offers a non-FDIC option, which we call yield plus, which is a way for members to get more yield, it does not come with FDIC coverage because of the way that it works, but it's -- nonetheless, it's a very conservatively invested and safe product.

And then of course, we -- notwithstanding the fact that cash is historically a higher-margin per dollar basis, we encourage our members to invest because investing is, ultimately, once they reach a certain balance it's better for them and over the long term will generate higher returns.

So that's kind of the way we approach it.

So there's some -- we've seen some of that.

Certainly, other competitors have been more aggressive about it, as you might expect, as they're hunting to recover lost margin.

But nonetheless, we think that over time, we'll continue to follow the market in this regard.

Yes.

And I would just add to that, Allen, that in those surveys, I mean, we look at this every single month because our custodial agreement requires us to look at what the market is paying.

But most everybody, there might be a few exceptions to this, but most everybody pays interest on a tiered pricing schedule.

So for the lowest balance accounts kind of like pre-checking, if you have less than a couple of thousand dollars in their account or $1,000, you get a very low bps on that balance.

But as you grow your cash balances, they may scale up, which we do and others do.

And so when we talk about what we're paying out, that's a blended rate for all of our portfolio, not the lowest rate that we pay at their entry level for an HSA, which sometimes that survey information depicts.

Our next question comes from the line of Vikram Kesavabhotla from Guggenheim Securities.

I think in the past, you've talked about the mix of HSA sales opportunities that also request the consumer-directed benefit.

So I'm just curious if you can give us an update on how that mix has trended throughout this year and, in particular, how your win rates have trended among those sales opportunities in particular?

Yes.

Those are our juiciest opportunities, and we feel -- I can just tell you our -- from a win rate perspective or from a just feel of the sales force perspective, we feel great about those opportunities.

I don't think the numbers have changed substantially from what we've reported earlier in the year in terms of percentages and all that kind of stuff.

So I'm not going to add to that, but the strategic -- putting aside all the synergy -- synergy is sort of how you pay for it.

And that's great, but strategic thesis is why you did it.

And the why we did it was the view that we could -- that the market was moving and that we could take advantage of the market's move to thinking about HSA and the ancillary benefits as one product and that we did deliver more valuable -- more value to customers by thinking about it that way and by being the leader across all of these sort of both HSA as well as the various subcategories of ancillaries.

And as I think Tyson commented, even with commuter not being terribly active right now, that's still true even in commuter, where people see that convenience.

So we feel real good about the total solution sale and where we are positioned when there is a total solution opportunity, both in terms of new cases and also in terms of the cross-sell to our existing customers.

And it's obviously a great time to be building on existing relationships given COVID.

So that's -- the numbers themselves are substantially the same as they were earlier in the year just on a larger base, and the feel across all of these kinds of sales where we have the opportunity to talk about a broader solution is really, really good.

Okay.

Great.

And then maybe just a follow-up.

And I appreciate the commentary you gave before on consolidation activity in the market.

I'm curious if you can just give us some color on the time frame over which you think that activity will take place.

And in particular, if you have a sense for how meaningful those opportunities might be in the near term versus maybe just being an ongoing theme that will play out over time, any color there would be helpful.

Yes.

Sure.

I mean I think when -- in answering the question, I was sort of talking about over a multiyear period.

I think I said that in the answer.

So I think the second part of your question is really more kind of what does the near term consolidated M&A market look like.

And my view is that for the most part -- first of all, that market is active.

It's active, I think, primarily with those who are the most challenged in the context of the current rate environment.

And so we're looking at a number of specific opportunities.

And obviously, I'm not going to comment on them individually, but they're not -- they're of modest size.

We don't really see a lot of movement at the top of the league tables as it were, but when you get to the middle of the league tables, I think that's where you're going to see more movement.

And we think we're a great acquirer for a lot of different reasons, not the least of which is that we take care of customers.

And for many of these folks, these are their customers in other areas.

So -- and we're not going to sell them competing products and all that.

This is really what we do.

So we feel like when those transactions are out there, they have very good return.

And the nice thing about turning in a high level of profitability and the quarter we've just completed is it gives us a little more ammo for that kind of stuff as well as for investing in the business organically when the time is right.

At this time, I'm showing no further questions.

I would like to turn the call back over to management for closing remarks.

Nice job.

Thank you.

Well, we've already thanked everyone enough, and thank you, guys, for staying with us.

I'm imagining Vik on his patio there and Marcon is probably at his lake house somewhere and, I don't know, it sounds pretty good.

So -- but we appreciate you guys sticking with us and staying in focus despite all that's going on in the world.

And I also really appreciate the same from our investors whom we look forward to speaking with many over the course of the next few days at various conferences.

So with that, again, thank you, and we'll talk again in a couple of months.