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Healthequity Inc
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Welcome to HealthEquity’s First Quarter 2019 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Richard Putnam, Investor Relations. Go ahead, Mr. Putnam.
Thank you, Mark. Good afternoon to everyone. Welcome to HealthEquity’s first quarter earnings conference call. With me today, we have Jon Kessler, President and CEO; Dr. Steve Neeleman, our Founder and Vice Chair of the Company; Darcy Mott, our Executive Vice President and CFO; and Bill Otten, our Executive Vice President of Sales.
Before I turn the call over to Jon, I would like to remind those participating with us that there is a copy of today’s earnings release and accompanying financial information posted on our investor relations website at ir.healthequity.com. We also refer to you the usual Safe Harbor statements concerning the forward-looking statements included in today’s earnings release and that will also be made on this conference call with you. They include predictions, expectations, estimates and other information that might be considered forward-looking. Throughout today’s discussion, we will present some important factors relating to our business, which could affect those forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from statements made today. As a result, we caution you against placing undue reliance on these forward-looking statements. We 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 Annual Report on Form 10-K filed with the SEC on March 28, 2018 along with any other subsequent periodic or current reports filed with the SEC. We are not obligating ourselves to revise or update these forward-looking statements in light of new information or future events.
With that out of out of the way, I will turn the call over to Mr. Jon Kessler.
Thank you, Richard. Well done and thank you everyone for joining us on this beautiful late spring afternoon for a discussion of the results of our fiscal first quarter of 2019. Q1 marks the beginning of a new annual sales cycle and that is going to be the focus of our prepared remarks. I will speak to Q1 operating results against our key performance metrics, Darcy will provide a more detailed review of our financial results and guidance, and in between the two of us, Bill Otten, HealthEquity’s Executive Vice President of Sales will describe some of the things we are doing to keep our commitment to outpace market growth this year and into the future. Steve Neeleman is here and will join us during the Q&A following our prepared remarks.
Looking first to the four key metrics that drive our business, HealthEquity continued the trend of outperformance on year-over-year measures of profitability and custodial assets on top of robust revenue and HSA member growth. Revenues of $69.9 million were up 26% year-over-year, adjusted EBITDA of $29.6 million was up an even larger 32% year-over-year. Similarly, HSA members at quarters end reached $3.5 million, up 24% year-over-year and custodial assets at quarters end grew to $6.9 billion, up an even larger 31% from a year ago.
Turning to sales, the team got off to a fast start. HealthEquity opened 98,000 new HSAs in the quarter, the most it has ever opened in Q1 and up 27% over the previous record set in the same period last year. Custodial assets grew by $84 million and were hampered somewhat by declining equity and bond values during the period. These figures do not include any portfolio acquisition activity. During the quarter however, we were able to enter into an agreement to acquire an additional small portfolio from a credit union and that acquisition is on track to convert to our platform during this quarter and will be included in next quarter’s results. This is the first transaction and partnership to leverage the steps that we have taken in recent months to enable credit unions to participate in HealthEquity’s depository partner program and we are genuinely pleased to be supporting the credit union movement in a mutually beneficial way.
Custodial cash increased 24% year-over-year to $5.5 billion and custodial investments grew an even faster 75%, and again that’s despite broader market indices that declined between 6% and 8% during the fiscal quarter. So, we think that we continue to substantially outpace the market and our largest competitors and believe that we are off to a really good start for fiscal ‘19. Last year, on our first quarter call, we introduced you to Bill Otten, our EVP of Sales. Bill outlined last year our sales strategy to continue to grow and outpace the market, and he is again with us here today to provide an update on our sales initiatives and some early insight on the new selling season. Mr. Otten.
Thank you, Jon. In last year’s first quarter earnings conference call, I outlined our strategy to continue HealthEquity’s record of market share gains. It’s a three-pronged effort: number one, to play on a bigger portion of the HSA field; number two, to increase uptake rates within existing health plan and employer partners; and three, deliver the right information and messaging to our members at the right time to help them connect health and wealth. Today, I can report in HealthEquity’s results this quarter and over the past years show significant progress on each of those efforts.
First, our efforts to increase the portion of the HSA field or footprint that we can compete on required building a sales force and support infrastructure that focused on mid-market employers and building out a broader solution offering [ph] that would help us to compete for HSAs more effectively through other benefit channels to reach this segment. Our sales force has grown 45% from where it was when I started a year ago, which includes experienced representatives and leaders in the field throughout the country with more to come as we refine the model. We back them by standing up a dedicated lead generation team, a first in HealthEquity, and operating under the banner of connecting health and wealth, we are spinning up targeted digital lead marketing to keep those reps busy. Today, we have a broader solution set for this segment, one that responds to its unique needs. In addition to HSA, HealthEquity now offers FSA and HRA administration to regional employers whether through a health plan partner or not. Later this year, we expect to add other administrative services for regional employers. And of course, the launch of HealthEquity retirement services, our 401(k) plan manager for regional employers gives HealthEquity a whole new way to talk about health and wealth and a whole new audience among retirement plan advisors and consultants, an audience we are quickly learning how to reach. So, we are playing on a bigger field with a broader message than at any other time in HealthEquity’s history.
Our second front of attack on the market is to drive uptake or penetration rates within our existing partners. We stood up a dedicated team of account executives, focused on growing our largest relationships and circulating best practices throughout our partner base. In FY ’18, the team focused on HealthEquity is roughly largest – 100 largest employer partners, and as previously reported to you delivered an increase in HSA uptake rates within that group from 24% to 35% during this open enrollment cycle. During this new selling cycle, we are expanding that effort to include about 200 of our largest employer partners and sharing knowledge with the account teams of our health plan partners, so they can be experts as well. While we cannot promise the same dramatic impact, we do believe that as employers continue to fine tune their HSA offerings and education, more employees will opt in to enjoy the value and benefits of HSAs.
Our third mandate was to sharpen the message to help drive members to optimally use their HSAs. When employers select HealthEquity, they are choosing an expert that knows how to drive deep, ongoing HSA engagement and education that meaningfully increases their employees wealth and makes a meaningful impact on their healthcare costs. One recent example of the impact we can have comes from our partnership with one of the nation’s premier public institutions of higher learning. Specifically, we suggested several plan design enhancements. We deployed our plan comparison tool to provide personalized contribution and enrollment guidance and they collaborated on a year-round effort to help their members better understand and build long-term savings within their health savings accounts. The results were impressive. In less than a year, the number of investors has grown 56% and the total custodial assets invested more than doubled growing 110%. We are uniquely positioned to make a very positive impact on HSA members, their employers, and health plan providers in connecting health and wealth as never before.
One final point about this example, when members contribute more to their HealthEquity accounts to payroll, they say it but so do their employers. This is because its contribution has reduced the employers’ payroll tax base. So, the employer on this case was immediately and materially reward for its efforts. We still have a lot of work to do in broadening our market coverage, deepening our engagement and penetration rates with our partners, and helping build the number of health savings, but as Jon said, we are off to a great start.
Now, I will turn the call over to Darcy for comments on the quarter’s financial results and our outlook. Darcy?
Thanks, Bill. I will discuss our results on both a GAAP and a non-GAAP basis. A reconciliation of non-GAAP results that we discussed here to their nearest GAAP measurement is provided in the press release that was published earlier today. I will first review our first quarter financial results of FY ‘19 and then I will provide an update to our guidance for the full fiscal year ‘19.
Revenue for the first quarter grew 26% year-over-year to $69.9 million. Breaking down the revenue into our three categories, we continue to see growth in each of service, custodial and interchange revenue during the quarter. Service revenue grew 10% year-over-year to $24.8 million in the first quarter. Consistent with the strategy, we have outlined over the last 5 years, service revenue as a percent of total revenue declined to 36% in the quarter, down from 41% of total revenue that it represented in the first quarter last year as the custodial revenue stream has become more predominant. Service revenue growth was attributable to a 24% year-over-year increase in average HSAs during the quarter partially offset by an 11% decrease in service revenue per average HSA. Remember, HSA service fees are paid primarily by employers on behalf of their employees. And so by bringing these down over time, we deliver more value and help our network partners deliver more value to their customers. It’s working and we are going to keep doing it.
As we indicated last quarter, we expect the decrease in service revenue per HSA to be towards the high-end of our historical 5% to 10% guidance for FY ‘19. Custodial revenue was $28.4 million in the first quarter, representing an increase of 47% year-over-year. Driving factors for this growth were a 31% growth in total custodial assets and a higher annualized interest rate yield on custodial cash assets of 2.04% during the quarter. Interchange revenue grew 22% in the first quarter to $16.6 million compared to $13.6 million in the first quarter last year. Interchange revenue benefited from the 24% year-over-year increase in average HSAs in the quarter compared to the first quarter last year with a slight decrease in average spend per HSA.
Gross profit for the first quarter was $44.4 million compared to $33.7 million in the prior year increasing the gross margin level to 63% in the quarter from 61% in the first quarter last year. The higher gross margin was a result of increasing mix to custodial revenue. We expect that the mix shift will continue over time and will continue to drive gross margin expansion as accounts mature and their balances grow. Operating expenses were $23.8 million or 34% of revenue compared to $17.8 million or 32% of revenue in the first quarter last year. We expect to continue to invest in sales and technology throughout FY ‘19. Income from operations was $20.5 million in the first quarter, an increase of 29% year-over-year and generated an income from operations margin of 29% during the quarter.
We generated net income of $22.6 million for the first quarter of FY ‘19 compared to $14 million in the prior year. Our GAAP diluted EPS for the first quarter of FY ‘19 was $0.36 per share compared to $0.23 per share for the prior year. Excluding stock compensation net of tax and the tax impact of stock option exercises, our non-GAAP net income and net income per share for the first quarter of FY ‘19 were $19 million and $0.31 per share. Our non-GAAP adjusted EBITDA for the quarter increased 32% to $29.6 million compared to $22.4 million in the prior year. Adjusted EBITDA margin for the quarter was 42%.
Turning to the balance sheet, as of April 30, 2018, we had $270 million of cash, cash equivalents and marketable securities with no outstanding debt. Turning to guidance for FY ‘19 based on where we ended the first quarter of FY ‘19 we are raising our revenue guidance for FY ‘19 to a range between $278 million and $284 million. We expect non-GAAP net income to be between $64 million and $68 million. Non-cash diluted net income per share between $1 and $1.06 per share and adjusted EBITDA between $107 million and $111 million. Our non-GAAP diluted net income per share estimate is based on an estimated diluted weighted average shares outstanding of approximately 64 million shares for the year. The outlook for FY ‘19 assumes a projected statutory income tax rate of approximately 24%.
Before I turn the call back to Jon, I would like to highlight two items reflected in our guidance. First, now that all of the new custodial transfers are completed, we expect our interest rate on the custodial cash assets to be at or near the 2.04% reported in this quarter for the rest of FY ‘19. Second as we have done in recent reporting periods, our full year guidance includes a detailed reconciliation of GAAP and non-GAAP metrics. This includes management’s estimates of depreciation and amortization of prior capital expenditures and anticipated stock compensation expenses, but this does not include a forecast for stock option exercises for the remainder of the fiscal year.
With that, I will turn the call back over to Jon for some closing remarks.
Nailed it. Darcy, thank you. Our remarks today have focused on sales and account management and I would like to close by thanking HealthEquity team members representing us in the field as well as to thank the field teams of our network partners. Our account executives genuinely work their tails off at a difficult job with huge emotional vicissitudes, that’s right vicissitudes, every day that’s ups and downs, I had to look it up. Darcy, Steve and I, if it were up to us, they would all be sporting purple blazers every workday, it is not up to us, but all of us as investors should be and we certainly are tremendously thankful at how fortunate we are to have what we believe to be the smartest, most experienced and longest tenured team in our business at the point of the sphere. So with that I say to everyone in the field, thank you and I open up the call to your questions, so long as they are not boneheaded with uncool or dry, boring, boring is out, none of those, for those who don’t get that reference, maybe Google it. But in any event, operator, we will take questions.
[Operator Instructions] And our first question comes from the line of Greg Peters of Raymond James. Your line is now open.
Good afternoon, Team Purple. Can you hear me?
We can. Everyone else dropped off when they heard the boring thing and you are here.
So, well, I am kind of intimidated about the boneheaded uncool and dry comment, so hopefully I can kick off the – hopefully, I will be able to kick off your – alright, well, I am going to give it a shot here. So, I want to spend a minute and I will ask one question and one follow-up, because I know there is a big line of Q&A. Can you spend a minute and talk about some of the pressures that you guys have over the course of this year that will pressure your adjusted EBITDA margin, because it seems to be on a nice linear path upwards, and I know there is investments that you are making in other operational issues that create headwinds there and I thought maybe this would be a good opportunity, just walk us through some of those issues?
Darcy?
Sure. One thing that has kind of -- as we have talked about this, we have adopted ASC 606 as of February 1 the beginning of our fiscal year as most companies had to do in this current year. It really doesn’t have any impact on our revenues per se, it’s a revenue recognition standard, but it does have an impact on our sales and marketing expense and most particularly our commission expense on sales. In the past, we have paid commission expense to our sales people as the accounts come in the door and it’s on a cash basis and we accrue it when they come in, when the accounts arrive, and so we have had a little bit of unevenness in that particularly in our fourth quarter when we have recognized the large increase in sales commissions expenses, because that’s when a big portion of our annual accounts come in the door.
With the implementation of ASC 606, what we did is we went back in time as reasonably practical and we capitalized about $17.5 million of commission expenses and we put it on our balance sheet in other current assets – in other assets, a small portion of it’s in other current assets. That asset will now be amortized over the life of those HSAs relative to when they came on board, and it will be spread over a 15-year life. What that has a tendency to do is that it will smooth out our sales expense throughout the year, and so the $6.9 million that we recorded in sales and marketing expenses in the first quarter, you will see that, that will be at least at that level and then it will grow with a little bit of an upward bend as we go through the year, but it will stay pretty stable and you won’t see the big increase that we normally have had in the fourth quarter. Along with that and included in that number is the amortization of the 606 commission expenses which will be $2 million or less in the current year, but the pickup that we will get from EBITDA is probably about $4 million of the cash that we would have paid out for those commissions in the current year that now will get capitalized and spread into future periods. And so, we have a pickup there, but in addition to that and independent of that, we have determined previously as Bill has mentioned in his remarks that we have grown our – not only our sales and marketing team, but also the expenditures that we are doing to go to -- more directly to our employers and to expand our base and to be able to get more HSA sales throughout the marketplace. And so, we think that even though we’ve got some uplift from the ASC 606 adoption that we have also determined independently from that, that we are going to invest in our sales opportunities and expand it. So I think that’s one area of pressure self-imposed so to speak on our EBITDA margins. As you know, they are very healthy and we think that they long-term become even healthier if we will take some time now to spend a little bit more money, not only on our sales and marketing efforts, but also on our technology platform, we have always continued to invest in our technology platform to be able to differentiate and to have a platform that is the best in the industry for not only managing health savings accounts, but also helping our members to navigate it better and to have the tools that will help them become better savers in the future.
Greg, just I will add one comment to that, which is we felt – we have always said to you that we want to have the opportunity to increase profit margins, but we are willing to spend where -- particularly in sales and marketing where we can generate attractive returns for shareholders, and this is a case where we can. And so fortunate that, that coincident with ASC 606 that the result is we get sort of the best of both worlds, we get increased margins, and we can incrementally increase what we are spending in current cash on sales and marketing activities. And that latter point is really the result of the fact that we feel pretty excited about what we saw last year, and what we have seen in the pipeline so far this year, and that’s reflected in the Q1 results. And we feel like it’s a good bet to increase the headcount that we have out in the field. And as Bill has talked about some of the other things that we are doing both with our – with new prospects and then also on the account executive side working to share expertise with our existing customers to drive uptake. So, this is a case where you said to us and as of others if you think it’s worth it, go ahead and spend, and we think it’s worth it. So that’s what we are doing. And that again reflects a view on our part that there is incremental opportunity out there to go get and to go get in a way that’s really valuable for shareholders.
Just a follow-up on that point, especially regarding the build-out of the sales initiative, you obviously are thinking about your business more than just 1-year or 3-year outlook, but obviously you have put together a plan that I imagine is going to include a lot of investment over sales and marketing over the next several years? And I am just wondering how you think about budgeting that and how you are making sure that you are getting an appropriate return on your investment there?
Well, I will say one challenge that I think your question points to is that the good side of recurring revenue is that it recurs. The flipside is that none of it happens until you have made the sale and even then it happens in small amounts. So, for the most part, the incremental spending that we are doing in the current year will not have an impact on current year revenues. There will presumably be some impact as we get later in the year but a lot of that ramp will really come next year. So similarly what you are seeing this year in part is a result of the ramping that we began to do last year and so that’s something we have to keep in mind. But as you say within that context, we will look at these dollars sort of from an IRR perspective. Ultimately, we are looking at what’s our return over a reasonable period of time, how do we make sure we manage the business, so these are truly incremental dollars, we are not mixing inadvertently sales activities with service activities. So, that at some point, you really don’t know what your incremental profitability is and those are things we are pretty careful about. It’s the same analysis that we do in the context of M&A I suppose, but with a little less – always a little less clarity about the result. But that’s kind of how we look at it, we really try not to say well, we have to have payback this year for sales and marketing expense, but we certainly want to see payback soon and we want to see it meet the thresholds that we know that our investors have for their capital and more. So, that’s kind of how we look at it.
Okay. Thank you for that answer. And the second topic I wanted to just briefly have you comment on would be around your the custodial revenue aspect of your business and the competitive conditions in the marketplace. It seems like there was a growing number of your competitors that have earned or one that non-bank custodial designation. And I am just curious if you are thinking about that in the context of your continuing growth that there might be any pressure on the rates that you are getting from your bank partners etcetera as we think about this going forward?
Yes. Well, I will say this demand for deposits has gotten extraordinarily healthy certainly in the last 6 to 12 months and you see that in the rates that we are getting and so forth. I guess generally here is the way that I think about your question we pioneered this custodial model. It’s been more than a dozen years now and it’s now being adopted as you say by a number of our competitors and we think that’s good for the industry. We thought it was the right model then. Others have had different views over time, but it seems like people are kind of coming around, but over that period of time, Greg, we haven’t been sitting around and I know you know this sitting around doing. We have built I think really sophisticated and proprietary both technology and business process. Really, the goal of which is to deliver certainty and precision to our depository partners, clarity to the regulators involved in all this, and most importantly, security for our account members. And we have built an ecosystem of depository relationships that it includes – now includes as I mentioned in my upfront comments, credit unions as well as banks. And these are longer partnerships on which these institutions can rely and build asset portfolios around on their end. We have created liquid products for members that want higher interest rates, but with the convenience of card swipe as I think you know and of course sort of on the investment side, we have tried to really lead the industry in bringing HSA focused investment advice to members adopting low cost fund lineups being absolutely transparent about fees, while others kind of screen for exemptions from rules that would have required that. So I guess what we would look at it, Greg, is we will keep looking for ways to add more value than the next guy to the relationships that we bring to our entire ecosystem whether that’s our members on one end of that or our depository partners on the other. And I think we have done that successfully to-date. We listened very carefully to what our depository partners are looking for and we try to get it to them as much as we can. So that’s kind of going to continue to be our competitive advantage there I think.
Excellent. Can you just update what was the number of depository partners you had at the end of the first quarter?
It’s either 12 or 13 right in there.
Okay, perfect. Thank you very much for your answers.
Thanks Greg.
Thank you. And our next question comes from the line of Anne Samuel from JPMorgan. Your line is now open.
Hey, Anne.
Hi, guys. Thanks for taking my question. You spoke to the acquisition of a small credit union portfolio as we move throughout the year, how are you thinking about incremental opportunities for M&A and how that market looks?
As we have said all along, we are just kind of be opportunistic about this, we don’t have a quota or anything along those lines, but we do have an active pipeline and we genuinely believe that we are an acquirer of choice both because of we kind of know how to do this, we have done it a number of times now and also because of our record from service perspective and our ability to deliver some innovation to the members and the employers and like tends to mean that it puts the seller of the portfolio in a favorable light. The other thing that I have noted that we have kind of added here is a little more ability to be granular with regard to our deposit partner program, so that if it’s of interest that no pun intended, that our sellers of these portfolios can become participants in our depository partners program and that can meet some of their needs in many ways better than the HSA business might have. So that’s kind of like how we are looking at it. We certainly will continue to try and do these portfolio acquisitions. They work great. As you know Anne there, they deliver we think very, very nice returns to our shareholders, grow our base, leverage the technology and operational footprint we already have and we like them. We like serving more people and help more people build all savings and this is one way to expand that footprint. So we will keep doing it, but we don’t have a quota or the like and certainly our guidance doesn’t reflect incremental acquisition activity.
Great. That was giving my next question. So, thanks very much guys.
Yes, ma’am.
Thank you. And our next question comes from the line of Jamie Stockton of Wells Fargo. Your line is now open.
Hi, Jamie.
Hey, good evening. Thanks for taking my question.
Good evening.
Good evening. So the first one in Bill’s comments, I think you made a reference to HRAs and FSAs and the potential to add other services. It seemed like maybe that was a little more overt than what I have heard previously. And I am just curious if you have any color on, hey, this other stuff is no – this part of our business today, but we really think that it could grow disproportionately to become a bigger part of our time is, are we starting to hear maybe some initial hints of that from you guys?
Bill?
Sure. Yes, thanks Jamie. Really what I was referencing to my comments is we are starting to bring some of the services that we have traditionally offered on the upper end of our market, the large clients down to more of mid-market clients where we have specifically focused on smaller set of services. So, it’s too early to tell right now. We have just started doing it recently, but certainly the interest is there to bring some of those services down market as I mentioned the FSA and the HRA product.
Yes. And I mean, Jamie, I think partly where your question is going is just we certainly have – this is an area where we have been doing research for sometime and we have a view as to what the employers and benefits advisors and the like in this part of the market really want to see particularly for those employers that are not necessarily on a trajectory to go full replace HSA and we think we can do a great job of delivering that. One of the nice things about it is it allows us to meet health savers at different places on sort of that continuum of health savings. So someone using a flex account is a health saver, they are just earlier on in the office and we can help them just as we might help the person who is looking for investment advice and bring some of that same consumer focus to that product. So that’s I think is something we have done for a long time at the high end of our business, but we are now bringing that into the middle market. And then as Bill suggested we do have some other things in the pipe, but we are not going to tell you what they are today, because it’s not RWWDC, it’s Apples. We don’t want to hit that one there.
There you go. And maybe just one other question on the custodial revenue on the flipside if we think about COGS for that revenue line with obviously same rates go up a fair amount, can you just talk through how you guys think about the rate that you are going to have to pay to the accountholders on the cash and how that might evolve over time?
Yes, the way that we view this is that it will be market-driven. Remember that these are HSA balances that have an average of less than $2000 in it, so think of it for somebody who is using this actively. They are paying medical bills out of it. They might be building their savings a little bit, but it’s kind of like a interest rate you would pay on a checking account. Most what we do and all of our competitors of note have a tiered rate schedule whereas if they do become a saver and they want to keep more in cash, then they will get a little bit more yield on their cash and we will see how that goes. We will pay attention to it closely in the marketplace. And we have been in this space before 10 years ago when interest rates, when the Fed rate was over 5% or 11 years ago I guess. There was a higher interest rate. But as rates came down, I think people learn that these are fairly inelastic, but will be very cognizant of watching for any demand there which as it relates to interest that we pay.
Okay, that’s great. Thank you.
Thank you. And our next question comes from the line of Mark Marcon from R.W. Baird. Your line is now open.
Good afternoon and congratulations on a terrific start to the year. I was wondering could you provide a little bit more color with regards to the source of the account wins as they came on this was a record first quarter. How much of that was from like new employer partners versus existing accounts that basically had broader adoption, anything that you could give us there and what does that portend for the next few quarters do you think prior to the big fall selling season?
Yes. Normally, in our first, second and third quarters, Mark, as you know most of our growth in the accounts that occurs comes from our health plan channels or our partners that are bringing us access to the smaller employers. And so generally that’s what that would be. We did have one employer who normally we would get in the enrollment cycle in the December, January timeframe. They came on board for about 10,000 accounts and we got that in the quarter. So if you took all of that out then the rest of it was probably still pretty healthy, but came from our normal smaller employers and our health plans. Now as Bill said as we continue to work with these smaller employers, we probably expect to see over time that we will start getting more of those throughout the year than just always at the year end enrollment, but I don’t think that we have seen anything noteworthy in that regard this year, but we did have one employer that was probably more of a year end type employer that came on board.
And then with regards to the sales initiatives, can you talk a little bit more there with regards to what the opportunity from a nearer term perspective seems to be in terms of broadening the scope of services that you are providing to the small employers in terms of including HRAs and FSAs and some other administrative services that will be named later. How should we think about that in terms of broadening the addressable market that can immediately go after and that the sales force is capable of reaching?
Yes, a couple of thoughts. I mean, first of all as Bill said and I will put an even finer point on it, this is about reaching out a portion of the market where we just weren’t on field and Bill commented on this a year ago.
How big that field is Jon?
Yes. Well, it’s fair enough. I mean it’s the answer is obviously if it had been huge from the outset, we have been there, but what we thought was that these accounts were being or would be soaked up as these parts of the market start to grow, going to be soaked up by the health plan channels is just that the data told us otherwise. And so that’s kind of – so that’s the first point I make. And again, I think we will have to see in terms of size and so forth. The second point I’d make though is when you think about the other services we are providing, what I want you to realize is the purpose of providing those services isn’t really from our perspective to expand our TAM. We believe that the core market we are in is still in its relatively early innings and we can find no other market frankly with the same growth opportunities as our core market. But what we are very cognizant of is that it’s helpful in terms of driving our core business to offer some other services and that’s always been true. It’s just more true as we enter – have greater diversity of market segments. So I think it’s fair to think a little bit about TAM and so forth maybe some of the stuff over the next few years has an impact on service fees or what have you, but the core objective really is to put the company in a position to win when it comes to the HSA market, which is all of these related services has the largest potential is growing the quickest and we think is the most durable in terms of the relationships that you established with consumers. So that’s the way to think about all of this is it’s all about positioning to grow that core business.
Even when we think about what we are doing for example in the 401(k) space, we are not getting into the business of 401(k) plan record-keeping. We are trying to be in the business of managing an employer’s 401(k) and HSA products so that a complete picture of health and retirement savings can be presented to members, because we know if that’s the case, those members are going to use the HSA more and they are going to use it as it intended to be used. So even there while absolutely there is some revenue produced on the other side, our real goal there is we know that if you present the complete picture to the consumer, we know what the consumer does. So everything we are doing is really about I think growing the core and growing our business, our market presence within the core better than anybody else and that’s the commitment we make. So I think for those who might say oh, I suppose the bad news is I am not suggesting as a bunch of additive TAM, the good news is there isn’t a need for bunch of additive TAM, we are extremely confident in the long-term prospects for the core market brand.
When I was getting to the additional TAM was more along the lines of the smaller type accounts that you weren’t previously going after, because I do appreciate that you are focused on the core and the HSA?
And I think that’s right. There I say think of it this way if you were a small employer and we might have thought that years ago or even 3 or 4 years ago that unless we were partnered with your carrier, we couldn’t get you. And it turns out that’s just not the case that is to say that this is one area where we have done proprietary research over a long enough period of time that we now know that you as an employer can be receptive to what we are doing and in particular that is in part because you as an employer and your benefits advisor want to be able to shop that health plan relationship every year. And as you know, Mark, that the HSAs are pretty sticky in terms of how you move them from a provider to provider just the mechanics of doing it. And so in fact if you actually look at it, the smaller an employer is, the less likely they are to have purchased the HSA through their health plan. Now it’s a very counterintuitive result for us, but that really triggered our investment in this area. So fixing about the opportunity here keep in mind that these are markets that relative where as in large group certainly in the enterprise segment we start to hear people say well, about half the employer is at least offering HSA and so there isn’t as much Greenfield, etcetera, etcetera, here your penetration rates are still very low, now there are barriers to penetration, not the least of which is that it’s still the case that there is a little bit of an issue, where these products have lower premiums and to some extent, you are fully insured and so there is a little bit less of an interest on the part of the brokers and whatnot on selling them, that remains true toward the carriers, but nonetheless, they are growing. And so we think that this end of the market is last penetrated certainly than the enterprise and therefore the Greenfield opportunities are bigger. And what’s also nice is that more often than not with the smaller groups if they – though HSA – everyone is going HSA. And so you are getting full replaced. And so that’s pretty valuable for us too. So, look, I don’t have a direct answer for you in terms of what the actual result will be, because I don’t have a crystal ball about the pace of penetration by segment. But we certainly think the opportunities there and we are delighted that this is an opportunity that we can now attack from not just – from really – from three directions now. We can attack it from the perspective of the health plans as we always have. We can attack it by providing a bundle of services directly and in partnership with advisors and the like and we can attack it from the retirement and through the work that Bill talked about that we are increasingly doing with financial advisors. So, we think that’s pretty cool and we will see how it goes.
That’s great. Congratulations. One last one just on the credit unions, can you talk a little bit about the cost of like, I know it’s early but in terms of when you think about buying a portfolio or getting a portfolio transitioned over. How should we think about that?
This is one of the great things about these transactions is. And a lot of credit goes to our service and implementation teams in this regard as well as our transaction team. The process for moving these portfolios over is extremely smooth. We are able to do it in a number of months not quarters and in a way that is minimally disruptive to member certainly provides no disruption or cost to the selling provider and can make them feel good about the decisions they are making. So, the costs are really modest. I think what we haven’t heard some kind of one-time cost and making some adjustments to how we communicate things and also to the way that our sort of cash program works to accommodate the specific needs of the credit union world making sure that people understand that their deposits maybe NCUA insured and making sure that NCUA is comfortable with what we are doing, those kinds of things. But with those costs incurred, they are very similar. I think the thing that is different about CUs is that they take tremendous – I mean, I think this is true of all institutions, but particularly these, they take tremendous, tremendous pride in their relationships with not only individuals, but with local businesses. And so we are fortunate and you taught to be in a state that has a very, very large footprint. And we see that everyday. And so we think there is a real opportunity to leverage that and we will see how it goes, but we are proud to be both in the position of being acquirer there, but also in the position of being a supplier of cash for lending the credit unions as well. And so that’s something new for our industry and certainly for us it’s still accretive.
Great. Thank you.
Thanks Mark. See you tomorrow.
See you tomorrow.
Thank you. And our next question comes from the line of Stephanie Demko from Citi. Your line is now open.
Hi, Stephanie.
Hi, guys. Congrats on another quarter and thank you for taking my questions, especially Jon Kessler over there. So just given the build out that you guys have cash in your balance sheet kind of the shrinking size of portfolios that are available for purchase. I wanted to ask if you would ever consider acquiring an HSA platform competitor versus solely going up for our HSA portfolios and if so how we could think about the synergies just given a lot of these other players kind of outsource their platform and you feel leverage your in-house platform?
And who is the evil genius now, Stephanie. As my kid say, he maybe an evil genius dad, you are just evil. But I am sure he is not evil by the way in case he or anyone from the firm is listening, just because he is digging a hole at the center of the earth doesn’t mean – so I mean the answer I think it’s something, we certainly look at these kinds of businesses and I think perhaps what you are referencing is that there have been news reports that of one of the platforms that’s used by some of our competitors I suppose is on the block and I am not going to comment on specific M&A activities of course, but the way that we would look at that is can we bring incremental functionality to our existing customers and can we reach new customers as a result of that kind of a transaction. So for example, if we thought that transaction along those lines would allow us to be more valuable partner to our health plans or to employers or to reach new channels that that might have an interest, that’s certainly something that we would definitely look at and I think pursue aggressively. And certainly if we did pursue something like that, we would be in as good a position as anyone perhaps better to be able to provide value to the would-be sellers and still deliver tremendous value to our shareholders, because we do – certainly there would likely be a significant amount of synergies up on the cost side, but I think more importantly on the revenue side. A lot of these types of products that you see out there you really haven’t taken full advantage of the economics of an HSA particularly in talk about private companies where they maybe didn’t have the balance sheet to do that, that kind of thing. So, certainly that’s the kind of stuff we would look at, again, without commenting on anything particular. If we thought at added value, if you are buying a platform just for the purposes of getting the customers, there probably is someone else who would be willing to pay more for that platform, because they thought that now would be a great time to enter the business and I can’t argue with the logic that it’s a great business to be in, but that wouldn’t be as interesting to us and certainly I would imagine that there would be better acquirers for something that was solely for the purpose of just adding more customers in that circumstance.
Understood. So, I will get into specific are there any particular capabilities you could think of that would be more interesting to you?
That is a bonehead question, next. I think I am going to hold off on that. I mean, there are a lot of things that our platform does really well. I guess I will say only that there are always things that either competitors are quasi competitors do better, because they have had to focus on those things. I mean that’s sort of the nature and that’s the beauty of competition is it does really need people to specialize in particular aspects of the service and so it wouldn’t surprise me that we would find some things that would be really valuable in looking at some of the folks who sort of apply this business from more of a let’s call it services and software perspective. And ultimately, I will say this. Another point is that we expect over the long period – over the long haul that the real value of a lot of what we do from a platform perspective. And I have said this before the administrative side of this is kind of table stakes at some level. What’s really valuable is the ability to, as Bill said earlier, is to get information to consumers, the right message, the right time, the right content and to use everything you know about a consumer to make that happen and whether that information is valuable for the purposes of helping them build health savings or advance what they are doing on the retirement side or even to use their health benefits to the fullest to spend less today or stay healthier, those are – that’s a really, really valuable thing. And that is going to require investment over time in the analytics of course, but also in all the infrastructure and data infrastructure that’s around that. And so the ability to do that over a wire base of business is certainly something that we would consider valuable, along with the ability to really use that breadth to push innovation in the industry. From our perspective, what we have found is innovation is our friend, we are as a sort of a – for lack of better term specialized player. When we push innovation, it takes our competitors off their game, not because they are not innovating in their own ways, but they just aren’t quite as focused on this industry as we are. So, the ability to innovate across the wire base, all those kind of things are always valuable things we are looking for. So all those are the kinds of things that would play in, but I am not going to give you a feature one list.
Alright, understood. Thank you for the color either way. And then one quick follow-up just because we do have Bill on the line, just given the recent discounting strategy obvious as early days, but is it possible again to update how it’s kind of help the new wins in the quarter?
Price systems. Sure. Well, what I will tell you, Stephanie, thanks for the question. First of all, we are a value-add product and service. We are not out looking to be the least expensive. However, when it comes down to competing, we also don’t want to lose deals on price. So as we are looking to bring in more employers and increase the AUM we will get competitive where needed with Darcy herself in the pricing team. So, yes, it absolutely help, but we don’t always go in expecting to be the lowest priced provider.
Alright. Thank you so much Team Purple. Appreciate it.
Thank you.
Thank you. And our next question comes from Steve Halper of Cantor Fitzgerald. Your line is now open.
Hi. Just a housekeeping item, you had a tax benefit in the quarter, what drove that? And I am assuming you said 24% for the rest of the year, so I am assuming higher effective tax rate for the remaining three quarters? Is that fair?
Yes. Well, to answer the first question and then that will help answer the second question. The credit that we got on a tax for the first quarter is a result of stock option exercises that occurred in the first quarter. So, that would be from February 1 through April 30. And under the new accounting rules, we take the benefit of that into our provision that used to just go to the balance sheet now goes through our provision. And so to the extent that, those stock the gains that people got for those stock option exercises exceeded our pre-tax income, then we took the credit and they got the benefit of that. We do as I said in my comments – we do not forecast what those stock option exercises will be going forward. So, if they were zero and our pre-tax income from Q2, Q3 and Q4 were whatever it is then we would expect the normal tax rate to be 24% on that. And so that’s how we are modeling it, that’s why we do our non-GAAP EPS calculation, because it kind of backs out the necessity of trying to predict what that’s going to be, because it’s virtually impossible to predict.
Right. So, if it’s zero so for a quarter, do we assume 24% or…
Yes, but it will be blended. So, in our Q that will be filed later this week, there will be reconciliation and you will see how much of that was a result of that tax benefit and so that will – whatever we got in the first quarter, we did that for the rest the year, but if you would look at it on a quarter-by-quarter basis we are assuming the 24% tax rate for the future quarters. That’s correct.
Okay, great. That’s what I needed. Thank you.
Would it be fair to say, Darcy, just to be clear on this that when we give the guidance of 24%, that guidance is for the full year inclusive of Q1 and it is ignoring the tax effect of stock options, so…
Not a stock option, stock option exercise.
Stock option exercise, correct.
That’s correct.
So, it’s not that it’s 24% for the rest of the year, it’s 24% for the full year, but ignoring this effect.
Right. So, a normalized year would have been 24%, so we assume – since you can forecast that in the quarter as we just assume 24% and you get back credit net at the end of the year anyway. So, it will wind up being less, because you just can’t forecast it. I get it.
Yes, that’s exactly right.
It’s another victory for opaque accounting.
Thank you. And our next question comes from the line of Donald Hooker from KeyBanc. Your line is now open.
Good afternoon. So I may risk asking a boneheaded question here, but did you guys talk about how big that acquisition?
Out there is one of those short sellers, so we got through him, so you are all good.
Alright. So you mentioned you did a small tuck-in acquisition, I mean, I understand it’s small, but were there any numbers that you supplied around what that’s adding to your guidance?
No, we haven’t, go ahead.
It’s about $10 million of AUM and it will be a purchase price of around $1 million.
Okay, got it. And then as I look, I think about the interest rates are creeping up what are the scenarios that would cause and I understand you placed a lot of the money already that you have gone for this enrollment year. But are there scenarios – and what are those potential for more upward creeping of interest rates during this current fiscal year, I know that’s not normal, but in prior years there are sometimes things come up where rates can kind of trend higher during the year kind of what are some of scenarios that can drive your yields on custodial cash up during the year?
Yes. Thanks, Don. Last year, we had an unusual circumstance where we have one of our depositories who had a variable rate contract who decided to pull out of it and it did it at midyear and so that money got placed elsewhere at prevailing rates at that point in time and so we got kind of an unusual uptick midyear last year as a result of that. Generally, that’s not the case, you might see, if we got new money come in more than the capacity of what we have got right now and we entered into another contract, I mean, you could see a little bit of an uplift but that’s more of a rebalancing issue amongst our current contracts which we typically don’t do. We kind of go up pretty steady as she goes. The benefit of the rate increases or whatever will most definitely favor us when we go to enter into our new depository agreements that will come up primarily towards the end of the year in the December January timeframe. So we will get pick up there and it’s for whatever portion of the contracts roll off and get replaced with new money or just new money coming in, in and of itself getting placed newly. I haven’t looked at it recently, there maybe a couple of smaller contracts that may turn during the year, but they are not hugely significant. Most of it will occur at the end of the year.
Okay, got it.
I just want to put an emphasis on this point, because it’s in years before last, this was generally pretty steady over the course of the year. We try to manage it to steadiness over the course of the year. Granted that the total is bigger, so small amounts of variability whatever, but we have given guidance of in this call of kind of being around the 2.0 something number for the remainder of the year essentially where we were in the first quarter and we mean it. So there is definitely something to pay attention to and we would encourage someone who would want to draw lessons from last year to again keep Darcy’s comments in mind and say there were reasons why and reasons we have talked about on these calls why we have this kind of midyear significant up list in these things. Now, we are prepared for that. We would love to have that, have these circumstances again, but it’s not something we are expecting or forecasting. So hey, that’s our word on our current assessment of where rates will be.
Okay, thank you very much. Have a good night.
Thanks Don.
Thank you. And our next question comes from the line of Sandy Draper from SunTrust. Your line is now open.
Great, thanks guys. I guess I was boneheaded with some very slow fingers in getting into the queue here. So most of my questions have been asked and answered, but maybe just one quick one for Darcy, it makes sense that the gross margin is down on the service fees, is your discounting there but just thoughts in terms of the longer term trend, is that I would assume if you continue to see some longer term declines in the service fee per account you would expect to see the gross margin decline and is there a place where you think that sort of levels out?
Yes. The way we evaluated, I think I have talked about this before is that we look at that as one of the components, but we really look at the profitability of an HSA on across all sources of revenue, custodial, service and interchange. And I have always used this example if an employer comes to me and says you know what I am going to adopt HAS as I actually have some existing HSAs and we remove those dollars to your platform and I am going to make a heavy employer contribution to help fund these accounts and I am going to train my employees and help them figure out how that these are not just spending accounts, these are actually long-term savings accounts for retirement, they should be putting more money into them and they really do a good job there. I am going to give that employer a lower account fee, I just am and if that means that my “service margin for those accounts looks like it went down, yet my custodial margin and my custodial revenue goes up significantly, I will do that all day long. And so we try to evaluate it not just looking at the service revenue and the service cost component of it and look at the account as it appears in totality. Now that being said we will continue to do what we have been doing. By design, our service revenues are going to come down over time. We view this 5% to 10% target for a long period of time. And it seems to fall within that band and it’s not because we are getting priced that away in the marketplace so much as it is that’s the incentive that we have offered to our product – our trading partners, to our health plans and to our employers if you bring us more accounts, you are going to go to get a lower account fee. And we will try to be – we are always looking for better ways to service our employers in a more cost effective and beneficial way and there is some you can do there, but it does cost money to service these accounts, because of our high touch 24/7 call center and being with them if they are at the emergency room on a Saturday night and they need to figure out how they are going to pay their bill. We will have somebody answer the phone for them. And so there are service costs that are associated with that. We try to always be smarter and do a little bit better, but if a little bit of that margin sacrifices, because we are helping people build their health savings and we will continue to do that.
I just add there, Sandy, I mean, we were – I was quite pleased with fees performance in terms of certainly on a sequential basis of the sort of service COGS. And we talked about early in the year that we felt we got off to a really good start with regard to service levels during January, they were outstanding. And I think that’s something that’s probably helped, Bill, in the field sell. It’s always good when people maybe have service experience with you has been really good and we just had really good service levels in January, but that also meant that we had more people than we probably needed at that point and the team did a nice job of kind of keeping the best, but not just keep your bodies around – keep bodies around. So that reflected itself in natural service cost. And at the same time, if you look at revenues holistically, this is the second first quarter in a row where revenue on a total – in totality on a unit basis is going up. And so, the result of all that is if you look at EBITDA per unit or what have you, that number is getting wire and wire and that seems like a good thing. So, we are not going to get too hyped up over one component of revenue or cost, but it is worth noting that. One of the things that contributed to really strong margin performance this quarter was on the service side that the team followed up January with an excellent first quarter from a service perspective, but also from a cost control perspective.
Got it. That’s really helpful and that certainly makes a lot of sense looking at the account on a totality basis. So, maybe one final one and it’s maybe for you Jon or for Bill, just when I know you don’t like to call out specifically competitors, but when you think about the competitive landscape in buckets, has there been any change in terms of when you think about who you are seeing more or less in terms of the payers with their own HSA providers, other standalone players, the more broader benefits back office, is there any significant change in terms of sort of the different broad groups of who is competing more or less effectively?
You want to hit the buckets?
Sure. So, I would say we are not seeing anybody that we haven’t seen in the past before. We do see different competitors that come out from a different approach depending on what their area of expertise is, but no, I can’t say that we are seeing any additional competitor that’s doing anything that they were doing last year.
Got it. Thanks.
You bet.
Thank you. And our next question comes from the line of Mohan Naidu of Oppenheimer. Your line is now open.
Hi, Jon. Thanks for taking my questions. Maybe I will add a dry one here. For Steve, you are awfully silent, is there anything to expect from DC from the total bills that are supposed to happen, but never seem to happen?
Mohan, thanks for the question. I will say we are pleased with the discussion there [indiscernible] in at least a couple of dozen bills that these are coming from both sides of the isle that now are supportive of health savings accounts. So, I think we are kind of beyond that sort of timeline. It seems to be kind of the Republican versus the Democrat division when it came to supporting health savings accounts. And that being said, if we can’t guarantee this end up through, there is things we talked of late which we are seeing one last push for kind of the ACA reform and we know what if did that comes, but there will be a lot of expansion opportunities and those kind of focus on the 3 weeks talked about for a long time which is increasing the amount that people can put into their HSAs up to really double what they can now or even more, the out-of-pocket max and then allowing for these chronic care provisions and then also HSAs for working seniors. I mean, it’s been way too long that seniors that are still working can’t contribute to their HSAs. And so look we are positive where it’s gone, we love the fact that every piece of significant – every bill that gets out – that’s getting out there has a just expansion. Now, we are just waiting for it to occur. So, if you have got any more insight let us know, but we are following it closely.
Thanks a lot, Steve. That’s all I have.
Thank you, Mohan.
Thank you. And our next question comes from line of Allen Lutz of Bank of America. Your line is now open.
Thanks for the questions and congrats on the quarter guys.
Thanks, Allen. Welcome.
Thank you. So a question for Jon and Bill, this is a market growth question, your custodial cash is basically growing at the same rate that it was last year, but the market is expected to slow you guys are taking more share than last year. So I guess a) is that the case and b) if portfolio acquisitions are slowing, where are you guys growing faster than you were last year?
So I mean I think the first part of your question is are we taking share and the short answer is yes. One way to look at that is if you looked at them and this is using the data and so take it for what it is, but we added looking at the last calendar year, we added roughly, I don’t know, $1.7 billion or $1.8 billion assets according to that year. And our nearest competitor added $1.2 billion or $2.3 billion or something like that and it went down pretty quickly from there. So clearly, we are out there taking share whether that’s expressed in terms of accounts or assets and that’s a good thing. I don’t think we said that the pace of acquisition is going to slow either organic or accretive or acquisitive, but just that we are not going to try and price things into the business on an acquisition basis to meet some kind of quota in that regard. So, I guess I’d leave Bill to comment on where we try to take share from except I am hoping the answer is everybody. Bill, you want to…
Thanks, Jon. Allen it’s a great question and Jon is absolutely right, we are fighting the good fight everyday, but one of the areas that we are also able to get account growth is with the existing employers we have now as we have said before we have been able to spend time with those large employers and get them to rollout more education programs increase adoption. And so while we are out there fighting for all the new business we can get everyday we are also spending time with existing clients to make sure that they are getting the levels of adoption that they want and we want.
Got it. That’s helpful. And then a follow-up on rising interest rates, I think that you guys have said the average duration is in this 3-year to 4-year ballpark, I guess since year-to-date and as rates at the front end of the curve have really moved up quickly. Have you guys thought about when you are renewing these contracts getting into shorter duration contracts you could more quickly benefit from rising interest rates and if you had, have you started to do that yet?
Yes. One thing that we have tried to do from the get-go since these kinds of come in sporadically throughout the year is to and it used to be that we had a lot of fewer depositories and so it was a little bit more difficult. But we really are trying to deliver consistent steady results to the marketplace that are not only somewhat predictable, but also that they ladder out, so we don’t get spikes at one point in time and it won’t take some short-term benefit that we are going to – is going to help us in a short-term. So when we ladder it out, we are going to continually ladder it out over generally a 5-year period. And so that we don’t get hit with one duration or a short duration or a long duration in any one particular quarter or period, we just think that’s a healthy view of how to look at this and how to place funds out over a period of time and we like the steadiness of it. So we will take advantage of it when it rises, but when we placed new money we will ladder it out and we will do what we think is best for the business, but also try to deliver that consistency on the revenue line.
Yes. I mean, I just want to make sure you are thinking about this one right. Our average for a lack of better term investment policy in this regard is that we could have an average duration of between 3 and 5 years. In practice, while the latter may go out that far, our average duration tends to be right around that the shortest end of that around 3 years and in fact depending on the time of year could even be a little shorter than that just because of the fact that funds aren’t deployed evenly over the course of year. And so we have kind of done that job of coming in to the extent we can. It’s certainly something we think about that that is to say that we really want to deliver stability more than anything else in this regard. There is not, I don’t think you are looking for us to deliver that last 5 basis points in exchange for more volatility and there are lots of other ways one could play that than this. So that is kind of our goal and it is the way we think about it. But we are kind at the short end in terms of average duration of where we can be under our current policy and depending on the way we mostly think about that in terms of what our liquidity needs are and all that kind of stuff, is but certainly if stability was served by coming in even further, we have looked to amend the investment policy and we probably tell you we were doing that.
Yes. And as we go through the year as Jon said just by definition of a 3-year becomes a 2-year duration as you go through the year and so that gets shortened up on us automatically as we go through that and then we take that into account when we replaced the money.
The other thing we are trying to do more of is and this does sort of implicitly affect duration is one thing we really feel like we are uniquely able to deliver as among large sort of stable sticky deposit relationships is the level of precision to our depository partners. So, we want to be able to say, now it’s May, it’s June and our team is already out there talking with both existing and would-be depository partners about where we think our needs maybe as we get close to the end of year, you know what durations makes sense etcetera and also listening to what they have to say about what they think they can generate and that’s something that we really pride ourselves on being able to be flexible that way. And I think there are very few depositors that can really do that, where you can actually have a discussion with the bank that says listen here is kind of what we have and they can say well, listen here is kind of what we think we could go out and generate as a matching asset and that’s a very valuable discussion for both parties. It’s an unusual one and one that the team really does try to leverage. So that’s another sort of spin on this point that is an opportunity as you go out over time to basically get a little bit more for lack of a better term alpha on deposits.
Thanks guys. Congrats again.
Thank you.
Thank you. And our next question comes from the line of Steven Wardell from Chardan Capital Markets. Your line is now open.
Hi, Steve.
Hi, guys. Thanks for taking my questions. I am great. Thanks. Can you – you guys are now a few months in to the selling season can you give us a sense of what you are hearing from the buyers’ marketplace and how this year’s selling season is different from prior years and what kind of product preferences buyers are showing?
Bill?
Sure. Well I can’t speak to prior years before I got here, but the buyers are telling us that they want kind of one stop shop and they want to deal with a provider that’s going to give them service, we hear that over and over again that a high level of service is the most important thing that they are looking to buy prices always part of the equation. But as Jon mentioned before, a happy client is the best salesperson we will ever have and we are very fortunate to have many of those. So, we are hearing several things. Bundled services are important, up-market, down-market all across the segments and that high level of Purple service that we mentioned before is also extremely important.
I mean, I think the two words that really come to mind are accountability and education. So accountability is sort of what Bill is talking about. I don’t think that – I think customers are now sufficiently sophisticated that. They want to know if the people that they are dealing with actually can make decisions and if you are provider X and you are using outsouced platform Y and/or there is trust attorneys who either works for another organization or works way apart from you and can’t spell HSA and so on and there is a call center that handles this, but also handles deposit calls or enrollment calls or that’s the days when that was acceptable, I think are rapidly coming to an end. And then I think that’s the accountability part of it. And the education part is things like what can you do to educate my team members year round so that yes, during open enrollment we are trying to get new people in, but during the year, we and Bill referenced an example of this with the university system, what can we do year-round to help people really optimize the value that they say over the long-term. And I actually do think and then Bill please feel free to comment with regard to our team, I think that employers and I am thinking about our Key Partner Summit last week, 2 weeks ago, I mean, partners are really talking about this whole idea of the HSA being an absolutely critical part of how they can provide value to their employees in terms of building very flexible savings, yes, for retirement, but also for emergency needs, the kind of stuff that’s more practical for your millennials and the like that maybe the idea of putting away 10 grand a year for 40 years from now isn’t quite as appealing. So, maybe you can speak a little bit to the energy of that from our clients?
No, it’s a good point Jon and Steve. Really what you have heard us say this a few times in the call not just today, but on prior calls to this concept of connecting health and wealth is exactly what Jon is talking about right here as many of the employer groups are saying they need some help linking these two things together, because the 401(k) has been out there for a long time, people understand it, but it’s really only been recently that everyone is starting to look at the HSA like a 401(k) for your retirement and IRR rate for your retirement. And so the employers group are looking for help as Jon mentioned at Key Partner Summit, we connected with many of our largest clients and they have asked us to come in and strategically plan with them to help them increase their adoption rate, so that we can and we have several clients there that have gone for a place and even still they are looking for further education to be able to increase contribution levels from their existing employees. So I think you hit it on the head, Jon.
I mean, what’s so interesting about this Steven, I don’t mean to go crazy on it, but is that I think what our employers are telling us that their members are looking for and what we hear members looking for in dealing with members 24/7, 365 is it’s less about what we would call financial advice though we have plenty of members who reach out to us for our individualized investment advisor product and it’s more like financial planning and budgeting. And if you are trying to budget for healthcare expenses and HSA is an incredible tool and just understanding how to use that and how to talk people through that, that’s really at some level where they are looking for help. It’s not all of the highfalutin pie charts with this much in bonds and this much in stocks and so forth, it’s like to quota one of those the radio debt guys, it’s creating your snowball front, I mean, at some level. And that kind of thing that people are looking to do and frankly we are looking to improve and make more scalable, the way we approach that is it’s really actually pretty interesting and exciting to see some of the nuts and bolts of healthcare consumerism around understanding your bills and all that kind of come together with the nuts and bolts of family budgeting for real people out there. And that’s kind of where the market is really talking about this year more so than ever in the past.
Great, thank you. And building on one of the prior questions on today’s call, so if you were to go back a year ago and talk to organizations that held HSA asset and talk to them about potentially selling, a lot of them would have been reluctant, because HSAs were so much in the spotlight a year ago they would have held out for the highest price or try to figure out how they would just hold on to them for longer and that bucked the trend at the past 6 years of more consolidation in the sector. And so where would you say you are now, would you say that the sense of the year ago of a holder of these assets, who might have sold not selling, has that faded and are we back to an area of consolidation?
On net, Steve, there has been a little bit of a thought. There are two offsetting factors. As you say I think the view at the beginning of the current administration that was some, I am not sure I understand this, but I hear it in the news a lot that kind of thing. That’s definitely faded away. It’s been replaced to some extent by the flipside of all of the demand for our deposits is that, that deposits have become more valuable and so there is a little bit of a reluctance there, but I think on net, the conversations are much more now about when rather than if. And so I think we will be patient, but those transactions are going to be there.
Great. Well, thank you.
Thank you, Steve.
Thank you. And I am showing no further questions at this time. I would now like to turn the call back over to Jon Kessler for closing remarks.
Alright. I don’t have any closing remarks except thank you all very much and we will see everyone over the summer and if not we will see everyone after Labor Day. Thank you. Take care. Bye-bye.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.